1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED JUNE 30, 2001 COMMISSION FILE NUMBER 0-25192
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
--------------------------
(Address of principal executive offices)(Zip code)
(601) 442-1601
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(Registrant's telephone number,
including area code)
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 [ ]
As of August 6, 2001, there were 13,379,587 shares of the Registrant's Common
Stock, par value $0.01 per share, outstanding.
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CALLON PETROLEUM COMPANY
TABLE OF CONTENTS
<Table>
<Caption>
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Consolidated Balance Sheets as of June 30, 2001
and December 31, 2000 3
Consolidated Statements of Operations for Each of the
Three and Six Months in the Periods Ended June 30, 2001
and June 30, 2000 4
Consolidated Statements of Cash Flows for Each of the
Three and Six Months in the Periods Ended June 30, 2001 and
June 30, 2000 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Quantitative and Qualitative Disclosures about Market Risk 14
PART II. OTHER INFORMATION 14
</Table>
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CALLON PETROLEUM COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2001 2000
------------- -------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 7,933 $ 11,876
Accounts receivable 7,924 9,244
Advance to operators 1,452 1,131
Other current assets 5,379 207
------------- -------------
Total current assets 22,688 22,458
------------- -------------
Oil and gas properties, full cost accounting method:
Evaluated properties 635,233 589,549
Less accumulated depreciation, depletion and amortization (388,478) (378,589)
------------- -------------
246,755 210,960
Unevaluated properties excluded from amortization 54,257 47,653
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Total oil and gas properties 301,012 258,613
------------- -------------
Pipeline and other facilities 5,533 5,537
Other property and equipment, net 2,554 1,790
Deferred tax asset 920 8,573
Other assets, net 7,158 4,598
------------- -------------
Total assets $ 339,865 $ 301,569
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 13,384 $ 17,842
Undistributed oil and gas revenues 3,892 3,557
------------- -------------
Total current liabilities 17,276 21,399
------------- -------------
Accounts payable and accrued liabilities to be refinanced 8,900 0
Long-term debt 155,000 134,000
Deferred revenue on sale of production payment interest 4,841 7,236
Other long-term liabilities 3,291 2,606
------------- -------------
Total liabilities 189,308 165,241
------------- -------------
Stockholders' equity:
Preferred stock, $0.01 par value, 2,500,000 shares authorized; 600,861 shares of
Convertible Exchangeable Preferred Stock, Series A, issued and outstanding
with a liquidation preference of $15,021,525 6 6
Common stock, $0.01 par value, 20,000,000 shares authorized; 13,359,551 and
13,327,675 shares outstanding at June 30, 2001 and at December 31, 2000,
respectively 133 133
Treasury stock (99,078 shares at cost) (1,183) (1,183)
Capital in excess of par value 151,876 151,223
Other comprehensive income (loss) 4,586 0
Retained earnings (deficit) (4,861) (13,851)
------------- -------------
Total stockholders' equity 150,557 136,328
------------- -------------
Total liabilities and stockholders' equity $ 339,865 $ 301,569
============= =============
</Table>
The accompanying notes are an integral part of these financial statements.
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CALLON PETROLEUM COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Revenues:
Oil and gas sales $ 17,066 $ 14,312 $ 37,243 $ 23,760
Interest and other 646 404 1,281 1,074
------------ ------------ ------------ ------------
Total revenues 17,712 14,716 38,524 24,834
------------ ------------ ------------ ------------
Costs and expenses:
Lease operating expenses 3,052 2,334 5,725 4,154
Depreciation, depletion and amortization 5,154 4,600 10,051 8,317
General and administrative 1,579 930 2,702 1,972
Interest 2,613 2,071 5,234 3,846
------------ ------------ ------------ ------------
Total costs and expenses 12,398 9,935 23,712 18,289
------------ ------------ ------------ ------------
Income from operations 5,314 4,781 14,812 6,545
Income tax expense 1,860 1,626 5,184 2,226
------------ ------------ ------------ ------------
Net income 3,454 3,155 9,628 4,319
Preferred stock dividends 319 552 638 1,105
------------ ------------ ------------ ------------
Net income available to common shares $ 3,135 $ 2,603 $ 8,990 $ 3,214
============ ============ ============ ============
Net income per common share:
Basic $ 0.24 $ 0.21 $ 0.68 $ 0.26
============ ============ ============ ============
Diluted $ 0.23 $ 0.21 $ 0.65 $ 0.26
============ ============ ============ ============
Shares used in computing net income
per common share:
Basic 13,258 12,171 13,255 12,163
============ ============ ============ ============
Diluted 13,427 12,445 14,853 12,398
============ ============ ============ ============
</Table>
The accompanying notes are an integral part of these financial statements.
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CALLON PETROLEUM COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<Table>
<Caption>
SIX MONTHS ENDED
------------------------------
JUNE 30, JUNE 30,
2001 2000
------------- -------------
Cash flows from operating activities:
Net income $ 9,628 $ 4,319
Adjustments to reconcile net income to cash provided by operating
activities:
Depreciation, depletion and amortization 10,341 8,532
Amortization of deferred costs 814 463
Amortization of deferred production payment revenue (2,395) (2,409)
Non-cash derivative income (446) --
Deferred income tax expense 5,184 2,223
Non-cash charge related to compensation plans 474 260
Changes in current assets and liabilities:
Accounts receivable 1,320 (2,333)
Advance to operators (321) --
Other current assets (21) 55
Current liabilities (4,123) (1,773)
Change in gas balancing receivable 15 (100)
Change in gas balancing payable 686 58
Change in other long-term liabilities (1) (111)
Change in other assets, net (1,039) (234)
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Cash provided (used) by operating activities 20,116 8,950
------------- -------------
Cash flows from investing activities:
Capital expenditures (54,427) (55,684)
Cash proceeds from sale of mineral interests 927 366
------------- -------------
Cash provided (used) by investing activities (53,500) (55,318)
------------- -------------
Cash flows from financing activities:
Increase in accounts payable and accrued liabilities to be refinanced 8,900 --
Increase in debt 21,000 22,000
Equity issued related to employee stock plans 179 132
Cash dividends on preferred stock (638) (1,105)
------------- -------------
Cash provided (used) by financing activities 29,441 21,027
------------- -------------
Net increase (decrease) in cash and cash equivalents (3,943) (25,341)
Cash and cash equivalents:
Balance, beginning of period 11,876 34,671
------------- -------------
Balance, end of period $ 7,933 $ 9,930
============= =============
</Table>
The accompanying notes are an integral part of these financial statements.
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CALLON PETROLEUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
1. BASIS OF PRESENTATION
The financial information presented as of any date other than December 31,
has been prepared from the Company's books and records without audit.
Financial information as of December 31, has been derived from the audited
financial statements of the Company, but does not include all disclosures
required by generally accepted accounting principles. In the opinion of
management, all adjustments, consisting only of normal recurring
adjustments, necessary for the fair presentation of the financial
information for the period indicated, have been included. For further
information regarding the Company's accounting policies, refer to the
Consolidated Financial Statements and related notes for the year ended
December 31, 2000 included in the Company's Annual Report on Form 10-K
dated March 30, 2001.
Effective January 1, 2001, the Company adopted Statement of Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended ("SFAS 133"). SFAS 133 establishes accounting and
reporting standards requiring that derivative instruments, including
certain derivative instruments embedded in other contracts, be recorded in
the balance sheet as either an asset or a liability measured at its fair
value. Changes in the value of derivatives that qualify as cash flow
hedges, to the extent effective, are reported in other comprehensive
income, a component of stockholders' equity, until realized. See Note 3.
In July 2001, the Financial Accounting Standards Board approved Statement
of Accounting Standards No. 143, Asset Retirement Obligations ("SFAS 143").
SFAS 143 will require that the fair value of abandonment obligations be
reflected as a liability, resulting in a corresponding increase to the
historical cost of the related assets and potentially an adjustment for the
cumulative effect of a change in accounting principle. This standard will
be effective for the Company beginning January 1, 2003. The Company has not
yet determined the impact of the adoption of SFAS 143.
2. PER SHARE AMOUNTS
Basic earnings per common share were computed by dividing net income by the
weighted average number of shares of common stock outstanding during the
quarter. Diluted earnings or loss per common share were determined on a
weighted average basis using common shares issued and outstanding adjusted
for the effect of stock options considered common stock equivalents
computed using the treasury stock method and the effect of the convertible
preferred stock (if dilutive). The earnings per share computation for the
six-month period ended June 30, 2001 includes the conversion of preferred
stock in the computation of diluted income per share because the preferred
stock was dilutive. The conversion of the preferred stock was not included
in the calculation for the quarter ended June 30, 2001 and for the quarter
and the six months ended June 30, 2000 due to the preferred stock's
antidilutive effect on diluted income or loss per share.
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A reconciliation of the basic and diluted earnings per share computation is as
follows (in thousands, except per share amounts):
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
(a) Net income available
for common stock $ 3,135 $ 2,603 $ 8,990 $ 3,214
Preferred dividends assuming
conversion of preferred stock
(if dilutive) $ -- $ -- $ 638 $ --
(b) Income available for common stock
assuming conversion of preferred
stock (if dilutive) $ 3,135 $ 2,603 $ 9,628 $ 3,214
(c) Weighted average shares outstanding 13,258 12,171 13,255 12,163
Dilutive impact of stock options 169 274 232 235
Convertible preferred stock
(if dilutive) -- -- 1,366 --
(d) Total diluted shares 13,427 12,445 14,853 12,398
Basic income per share (a/c) $ 0.24 $ 0.21 $ 0.68 $ 0.26
Diluted income per share (b/d) $ 0.23 $ 0.21 $ 0.65 $ 0.26
</Table>
3. DERIVATIVES
The Company uses derivative financial instruments to manage oil and gas
price risks. Settlements of gains and losses on commodity price swap
contracts are generally based upon the difference between the contract
price or prices specified in the derivative instrument and a NYMEX price
and are reported as a component of oil and gas revenues. Approximately
$1,394,000 related to these financial instruments was recognized as a
reduction of oil and gas revenue in the first six months of 2001 and
$886,000 was recognized as a reduction in the first half of 2000.
These 2001 contracts, in effect at June 30, 2001, are for average gas
volumes of 400,000 Mcf per month from July 2001 through October 2001 at (on
average) a ceiling price of $5.50 and floor price of $4.44. The Company had
no open crude oil contracts at June 30, 2001.
The Company also has natural gas collar contracts, in effect, for January
2002 through December 2002. These agreements are for average gas volumes of
600,000 Mcf per month with a weighted average ceiling price of $6.09 and
floor price of $4.11.
As discussed in Note 1, 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 $3,764,000. In the first six months of
2001, this amount was offset by an increase in the fair value of
derivatives recorded as other comprehensive income, net of tax, of
$8,350,000. As a result of SFAS 133, the Company recorded $4,586,000 as
other comprehensive income and $446,000 as an increase in revenue for the
six months ended June 30, 2001. Recorded in the balance sheet is $7.5
million in assets representing the fair market value of the derivative
financial instruments at June 30, 2001, of which approximately $5.2 million
is classified as a current asset. Included in other
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comprehensive income at June 30, 2001 is $270,000, net of tax, which will
be recorded as a reduction in revenue in the second half of 2001.
4. LONG-TERM DEBT
In July 2001,the Company entered into a $95 million multiple advance term
loan with a private lender. The company issued $45 million of 12% senior
notes upon closing of the loan and will issue the remaining $50 million of
senior notes prior to June 30, 2002. Under the terms of the agreement
Callon also issued warrants to purchase, at a nominal exercise price,
265,210 shares of its common stock and conveyed an overriding royalty
interest equal to 2% of the company's net interest in four deepwater
discoveries. The senior notes will mature March 31, 2005 and contain
restrictions on certain types of future indebtedness.
5. COMPREHENSIVE INCOME
The first six months of 2000 did not include any items of other
comprehensive income. A recap of the Company's 2001 comprehensive income is
shown below (in thousands):
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2001 JUNE 30, 2001
----------------- ---------------
Net Income $ 3,454 $ 9,628
Other comprehensive income (loss):
Cumulative effect of change in
accounting principle -- (3,764)
Change in unrealized derivatives'
fair value 5,151 8,350
--------------- ---------------
5,151 4,586
--------------- ---------------
Total Comprehensive Income $ 8,605 $ 14,214
=============== ===============
</Table>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This report includes "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. All statements other than statements of historical facts included in
this report, including statements regarding the Company's financial position,
adequacy of resources, estimated reserve quantities, business strategies, plans,
objectives and expectations for future operations and covenant compliance, are
forward-looking statements. The Company can give no assurances that the
assumptions upon which such forward-looking statements are based will prove to
have been correct. Important factors that could cause actual results to differ
materially from the Company's expectations ("Cautionary Statements") are
disclosed below, in the section "Risk Factors" included in the Company's Form
10-K, elsewhere in this report and from time to time in other filings made by
the Company with the Securities and Exchange Commission. All subsequent written
and oral forward-looking statements attributable to the Company or persons
acting on its behalf are expressly qualified by the Cautionary Statements.
GENERAL
The Company's revenues, profitability, future growth and the carrying value of
its oil and gas properties are substantially dependent on prevailing prices of
oil and gas and its ability to find, develop and acquire additional oil and gas
reserves that are economically recoverable. The Company's ability to maintain or
increase its borrowing capacity and to obtain additional capital on attractive
terms is also influenced by oil and gas prices. Prices for oil and gas are
subject to large fluctuations in response to relatively minor changes in the
supply of and demand for oil and gas, market uncertainty and a variety of
additional factors beyond the control of the Company. These factors include
weather conditions in the United States, the condition of the United States
economy, the actions of the Organization of Petroleum Exporting Countries,
governmental regulations, political stability in the Middle East and elsewhere,
the foreign supply of oil and gas, the price of foreign imports and the
availability of alternate fuel sources. Any substantial and extended decline in
the price of oil or gas would have an adverse effect on the Company's carrying
value of its proved reserves, borrowing capacity, revenues, profitability and
cash flows from operations. The Company uses derivative financial instruments
for price protection purposes on a limited amount of its future production but,
does not use derivative financial instruments for trading purposes.
The following discussion is intended to assist in an understanding of the
Company's historical financial positions and results of operations. The
Company's historical financial statements and notes thereto included elsewhere
in this quarterly report contains detailed information that should be referred
to in conjunction with the following discussion.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of capital are its cash flows from operations,
borrowings from financial institutions and the sale of debt and equity
securities. Net cash and cash equivalents during the six months ended June 30,
2001 decreased by $3.9 million and net cash flows from operations before working
capital changes totaled $26.0 million. Net capital expenditures from the cash
flow statement for the period totaled $53.5 million. These funds were primarily
expended in exploration, drilling and completion of oil and gas properties.
At June 30, 2001, the Company had working capital of $5.4 million.
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In May 2001, the Company initiated a combination of offerings of equity and
senior notes to investors with proceeds to be used to call certain of the
Company's subordinated debt, repay borrowings under its senior secured credit
facility and to finance capital expenditures. Subsequently, the Company withdrew
its offer to sell the senior notes and the equity sale was terminated.
Approximately $358,000 of costs associated with the withdrawn offering were
expensed during the quarter.
In early July of 2001, the Company closed a $95 million multiple advance term
loan with a private lender. The Company drew $45 million on July 3, 2001 and
paid down its revolving Credit Facility. The Company plans to draw the remaining
$50 million as capital expenditures (primarily on the deepwater Medusa
construction and completion project) are incurred. Under the terms of the
agreement, Callon also issued warrants for the purchase, at a nominal exercise
price, of 265,210 shares of its common stock to the lender and conveyed an
overriding royalty interest equal to 2% of the company's net interest in four of
its deepwater discoveries. All amounts under the loan must be drawn before June
30, 2002. This senior debt will mature March 31, 2005 and contains restrictions
on certain types of future indebtedness and dividends on common stock.
The proceeds from this financing, when combined with cash flow and current
availability under the senior secured credit facility, is anticipated to fund
our capital budgets for the balance of this year, and into next year. This would
include completion of the Medusa deepwater discovery, currently scheduled to
begin production in the fourth quarter of 2002. It also includes ongoing
delineation and development drilling programs at three additional deepwater
discoveries, and an ongoing exploration program in both the shelf and deepwater
regions of the Gulf of Mexico. However, additional capital requirements may
result from greater than anticipated success rates from the Company's ongoing
shelf and deepwater exploration programs and the refinancing of our senior
subordinated notes due 2002.
CAPITAL EXPENDITURES
Capital expenditures for exploration and development costs related to oil and
gas properties totaled approximately $53.5 million in the first six months of
2001. The Company incurred approximately $36.1 million in the Gulf of Mexico
Shelf area. These expenditures included exploration costs of approximately $24.6
million related to four successful and five unsuccessful Gulf of Mexico Shelf
prospects evaluated during the first half of 2001. Three successful development
wells and other production facility costs accounted for the remainder of the
expenditures in the Gulf of Mexico Shelf area in the first six months of 2001.
The Gulf of Mexico Deepwater area expenditures and other capitalized costs
accounted for the remainder of the total capital expended. The Company had one
unsuccessful deepwater exploration project in the first quarter of 2001 and the
balance totaling $6.0 million for additional development costs for production
facilities at the Company's Medusa discovery. Interest and general and
administrative costs allocable directly to exploration and development projects
were approximately $6.0 million for the first six months of 2001.
For the remainder of the year, the Company will continue evaluating property
acquisitions and drilling opportunities. The Company has budgeted up to $41.0
million in capital expenditures for the remainder of 2001. The major portion of
the capital expenditure budget will be used to drill development and exploratory
wells to increase total proved reserves and increase production for the Company.
The capital budget includes $10.7 million of additional development costs for
production facilities at the Company's Medusa discovery.
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RESULTS OF OPERATIONS
The following table sets forth certain unaudited operating information with
respect to the Company's oil and gas operations for the periods indicated.
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- -----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Production volumes: (b)
Oil (MBbls) 69 70 120 130
Gas (MMcf) 3,536 3,899 6,980 7,005
Total production (MMcfe) 3,950 4,316 7,701 7,788
Average daily production (MMcfe) 43.4 47.4 42.5 42.8
Average sales price: (a)(b)
Oil (Bbls) $ 24.70 $ 26.74 $ 25.52 $ 26.58
Gas (Mcf) 4.34 3.19 4.90 2.90
Total (Mcfe) 4.32 3.32 4.84 3.05
Average costs (per Mcfe):
Lease operating (excluding severance taxes) $ 0.70 $ 0.49 $ 0.67 $ 0.47
Severance taxes 0.08 0.05 0.08 0.06
Depletion 1.28 1.05 1.28 1.05
General and administrative (net of management fees) 0.40 0.22 0.35 0.25
</Table>
(a) Includes hedging gains and losses.
(b) Includes volumes of 580 MMcf for both three month periods ended June 30,
2001 and 2000 and 1,160 MMcf and 1,154 MMcf for the six month periods ended
June 30, 2001 and 2000, respectively, at an average price of $2.08 per Mcf
associated with a volumetric production payment.
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COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2001 AND
THE THREE MONTHS ENDED JUNE 30, 2000.
Oil and Gas Production and Revenues
Total oil and gas revenues increased 19% from $14.3 million in the second
quarter of 2000 to $17.1 million in the second quarter of 2001. Gas prices were
higher while oil prices declined slightly when compared to the same period in
2000. Total production for the second quarter of 2001 decreased by 8% versus the
second quarter of 2000.
Gas production during the second quarter of 2001 totaled 3.5 billion cubic feet
and generated $15.3 million in revenues compared to 3.9 billion cubic feet and
$12.5 million in revenues during the same period in 2000. The average sales
price for the second quarter of 2001 averaged $4.34 per thousand cubic feet
compared to $3.19 per thousand cubic feet at this time last year. The Company's
gas production decreased when compared to the same quarter last year as a result
of production declines at East Cameron 275 and South Marsh Island 261, offset by
increases in production at Mobile Block 864. The production declines at East
Cameron 275 and South Marsh Island 261 were normal and expected as the 2000
rates were indicative of higher initial production. Mobile Block 864 Area
increased production due to a well stimulation program as well as additions to
production through exploratory and developmental drilling on the property.
Oil production during the second quarter of 2001 totaled 69,000 barrels and
generated $1.7 million in revenues compared to 70,000 barrels and $1.9 million
in revenues for the same period in 2000. Average oil prices received in the
second quarter of 2001 were $24.70 compared to $26.74 in 2000. The decline in
production was primarily due to expected production declines in some of the
Company's older producing properties.
Lease Operating Expenses
Lease operating expenses, including severance taxes, for the three-month period
ending June 30, 2001 were $3.1 million compared to $2.3 million for the same
period in 2000. Part of the increase was due to South Marsh Island 261 initial
production beginning in May 2000, whereas 2001 incurred a full quarter of lease
operating expenses. Also, production declines related to older properties that
have relatively fixed operating costs contributed to the higher per Mcf costs
with lower production levels for those properties in the three months ended June
30, 2001.
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization for the three months ending June 30,
2001 and 2000 were $5.2 million and $4.6 million, respectively. This increase is
primarily due to a higher average rate in the second quarter of 2001.
General and Administrative
General and administrative expense increased to $1.6 million for the three
months ended June 30, 2001 as compared to $0.9 million for the three months
ended June 30, 2000. This increase was due primarily to costs incurred related
to the Company's withdrawn debt and equity offering in May of 2001.
Interest Expense
Interest expense increased from $2.1 million during the three months ended June
30, 2000 to $2.6 million during the three months ended June 30, 2001. An
increase in the Company's long-term debt contributed to the greater interest
expense.
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COMPARISON OF RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND
THE SIX MONTHS ENDED JUNE 30, 2000.
Oil and Gas Production and Revenues
Total oil and gas revenues increased 57% from $23.8 million in the first six
months of 2000 to $37.2 million in the first six months of 2001. Gas prices were
substantially higher while oil prices declined when compared to the same period
in 2000. Total production for the first six months of 2001 decreased by 1%
versus the first six months of 2000.
Gas production during the first six months of 2001 totaled 7.0 billion cubic
feet and generated $34.2 million in revenues compared to 7.0 billion cubic feet
and $20.3 million in revenues during the same period in 2000. The average sales
price for the first six months of 2001 averaged $4.90 per thousand cubic feet
compared to $2.90 per thousand cubic feet at this time last year. The Company's
gas production remained constant when compared to the same period last year as a
result of expected and normal declines in maturing properties along with
increased production in the Mobile Block 864 Area due to a well stimulation
program as well as additions to production through exploratory and developmental
drilling on the property.
Oil production during the first six months of 2001 totaled 120,000 barrels and
generated $3.1 million in revenues compared to 130,000 barrels and $3.5 million
in revenues for the same period in 2000. Average oil prices received in the
first six months of 2001 were $25.52 compared to $26.58 in 2000. The decline in
production was primarily due to expected production declines in some of the
Company's older producing properties.
Lease Operating Expenses
Lease operating expenses, including severance taxes, for the six months period
ending June 30, 2001 were $5.7 million compared to $4.2 million for the same
period in 2000. The increase was due primarily to South Marsh Island 261 initial
production beginning in May 2000, whereas 2001 incurred a full six months of
lease operating expenses. Also, production declines related to older properties
that have relatively fixed operating costs contributed to the higher per Mcf
costs with lower production levels for those properties in the six months ended
June 30, 2001.
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization for the six months ending June 30, 2001
and 2000 were $10.1 million and $8.3 million, respectively. This increase is
primarily due to a higher average rate in the first six months of 2001.
General and Administrative
General and administrative expense increased to $2.7 million for the six months
ended June 30, 2001 as compared to $2.0 million for the six months ended June
30, 2000. This increase was, in part, due to the cost incurred in May 2001
related to the Company's withdrawn debt and equity offering.
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Interest Expense
Interest expense increased from $3.8 million during the six months ended June
30, 2000 to $5.2 million during the six months ended June 30, 2001. An increase
in the Company's long-term debt contributed to the greater interest expense.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 decreased;
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 3 to the Consolidated Financial Statements for a description of the
Company's hedged position at June 30, 2001. There have been no significant
changes in market risks faced by the Company since the end of 2000.
CALLON PETROLEUM COMPANY
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY HOLDERS
The Company held its annual meeting on May 4, 2001. At the annual meeting, the
Class I directors of the board of directors of the Company were elected. The
votes cast for each of the directors proposed by the Company's definitive proxy
statement on Schedule 14A, out of a total of 13,353,223 shares outstanding, were
as follows:
<Table>
<Caption>
AGAINST or
FOR WITHHELD ABSTAIN
----------- ----------- -------
Robert A Stanger 10,843,137 36,964 --
John C. Wallace 10,843,119 36,982 --
Richard O. Wilson 10,843,270 36,831 --
</Table>
The shareholders of the Company also approved the appointment of Arthur
Andersen, LLP as the Company's independent accountants for 2001. There were
10,862,439 votes in favor of approving the appointment of Arthur Andersen, LLP
as the Company's independent accountants, 11,732 votes against or withheld, and
5,930 abstentions.
14
15
16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a.) Exhibits
2. Plan of acquisition, reorganization, arrangement, liquidation or
succession*
3. Articles of Incorporation and By-Laws
3.1 Certificate of Incorporation of the Company, as amended
(incorporated by reference from Exhibit 3.1 of the Company's
Registration Statement on Form S-4, filed August 4, 1994,
Reg. No. 33-82408)
3.2 Certificate of Merger of Callon Consolidated Partners, L. P.
with and into the Company dated September 16, 1994
(incorporated by reference from Exhibit 3.2 of the Company's
Annual Report on Form 10-K for the period ended December 31,
1994, File No. 001-14039)
3.3 Bylaws of the Company (incorporated by reference from
Exhibit 3.2 of the Company's Registration Statement on Form
S-4, filed August 4, 1994, Reg. No. 33-82408)
4. Instruments defining the rights of security holders, including
indentures
4.1 Specimen stock certificate (incorporated by reference from
Exhibit 4.1 of the Company's Registration Statement on Form
S-4, filed August 4, 1994, Reg. No. 33-82408)
4.2 Specimen Preferred Stock Certificate (incorporated by
reference from Exhibit 4.2 of the Company's Registration
Statement on Form S-1, Reg. No. 33-96700)
4.3 Designation for Convertible Exchangeable Preferred Stock,
Series A (incorporated by reference from Exhibit 4.3 of the
Company's Registration Statement on Form S-1/A, filed
November 13, 1995, Reg. No. 33-96700)
15
17
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 Certificate of Correction on Designation of Series A
Preferred Stock (incorporated by reference from Exhibit 4.4
of the Company's Registration Statement on Form S-1, filed
November 22, 1996, Reg. No. 333-15501)
4.6 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)
4.7 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)
4.8 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)
4.9 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)
4.10 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)
4.11 Warrant dated as of June 29, 2001 entitling Duke Capital
Partners, LLC to purchase common stock from the Company.
10. Material contracts
10.1 Credit Agreement dated as of June 29, 2001 between the
Company and Duke Capital Partners, LLC, as Administrative
Agent
10.2 Second Amendment to Credit Agreement by and among the
Company and First Union National Bank, as Administrative
Agent, effective as of June 29, 2001
10.3 Conveyance of Overriding Royalty Interest from the Company
to Duke Capital Partners, LLC, dated June 29, 2001
16
18
11. Statement re computation of per share earnings*
15. Letter re unaudited interim financial information*
18. Letter re change in accounting principles*
19. Report furnished to security holders*
22. Published report regarding matters submitted to vote of
security holders*
23. Consents of experts and counsel*
24. Power of attorney*
99. Additional exhibits*
*Inapplicable to this filing
(b) Reports on Form 8-K
Current Report dated July 5, 2001, reporting Item 5. Other Events
Current Report dated May 15, 2001, reporting Item 5. Other Events
Current Report dated April 23, 2001, reporting Item 9. Regulation
FD Disclosure
Current Report dated April 23, 2001, reporting Item 5. Other
Events
Current Report dated April 20, 2001, reporting Item 9. Regulation
FD Disclosure
17
19
SIGNATURES
Pursuant to the requirements 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: August 9, 2001 By: /s/ John S. Weatherly
---------------- ---------------------------------------------
John S. Weatherly, Senior Vice President and
Chief Financial Officer
(on behalf of the registrant and as the
principal financial officer)
18
20
INDEX TO EXHIBITS
<Table>
2. Plan of acquisition, reorganization, arrangement, liquidation or
succession*
3. Articles of Incorporation and By-Laws
3.1 Certificate of Incorporation of the Company, as amended
(incorporated by reference from Exhibit 3.1 of the Company's
Registration Statement on Form S-4, filed August 4, 1994,
Reg. No. 33-82408)
3.2 Certificate of Merger of Callon Consolidated Partners, L. P.
with and into the Company dated September 16, 1994
(incorporated by reference from Exhibit 3.2 of the Company's
Annual Report on Form 10-K for the period ended December 31,
1994, File No. 001-14039)
3.3 Bylaws of the Company (incorporated by reference from
Exhibit 3.2 of the Company's Registration Statement on Form
S-4, filed August 4, 1994, Reg. No. 33-82408)
4. Instruments defining the rights of security holders, including
indentures
4.1 Specimen stock certificate (incorporated by reference from
Exhibit 4.1 of the Company's Registration Statement on Form
S-4, filed August 4, 1994, Reg. No. 33-82408)
4.2 Specimen Preferred Stock Certificate (incorporated by
reference from Exhibit 4.2 of the Company's Registration
Statement on Form S-1, Reg. No. 33-96700)
4.3 Designation for Convertible Exchangeable Preferred Stock,
Series A (incorporated by reference from Exhibit 4.3 of the
Company's Registration Statement on Form S-1/A, filed
November 13, 1995, Reg. No. 33-96700)
4.4 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 Certificate of Correction on Designation of Series A
Preferred Stock (incorporated by reference from Exhibit 4.4
of the Company's Registration Statement on Form S-1, filed
November 22, 1996, Reg. No. 333-15501)
4.6 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)
4.7 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)
4.8 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)
4.9 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)
4.10 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)
4.11 Warrant dated as of June 29, 2001 entitling Duke Capital
Partners, LLC to purchase common stock from the Company.
10. Material contracts
10.1 Credit Agreement dated as of June 29, 2001 between the
Company and Duke Capital Partners, LLC, as Administrative
Agent
10.2 Second Amendment to Credit Agreement by and among the
Company and First Union National Bank, as Administrative
Agent, effective as of June 29, 2001
10.3 Conveyance of Overriding Royalty Interest from the Company
to Duke Capital Partners, LLC, dated June 29, 2001
11. Statement re computation of per share earnings*
15. Letter re unaudited interim financial information*
18. Letter re change in accounting principles*
19. Report furnished to security holders*
22. Published report regarding matters submitted to vote of
security holders*
23. Consents of experts and counsel*
24. Power of attorney*
99. Additional exhibits*
</Table>
*Inapplicable to this filing