Exhibit 10.1

Execution Version

AMENDMENT NO. 1 AND CONSENT

This Amendment No. 1 and Consent dated as of February 28, 2012 (this
“Agreement”) is among Stone Energy Corporation, a Delaware corporation (the
“Borrower”), Stone Energy Offshore, L.L.C., a Delaware limited liability company
(the “Guarantor”), the financial institutions party to the Credit Agreement
described below as Banks (the “Banks”), and Bank of America, N.A., as Agent for
the Banks (the “Agent”) and as Issuing Bank (the “Issuing Bank”).

INTRODUCTION

A. The Borrower, the Banks, the Issuing Bank, and the Agent have entered into
the Third Amended and Restated Credit Agreement dated as of April 26, 2011 (the
“Credit Agreement”).

B. The Guarantor entered into that certain Amended and Restated Guaranty dated
as of April 26, 2011 (the “Stone Offshore Guaranty”).

C. The Borrower intends to issue unsecured convertible senior notes due 2017
pursuant to an indenture to be entered into by the Borrower, the Guarantor, and
a trustee to be determined (the “2012 Notes”).

D. The Borrower intends to enter into the Options and Warrants (as defined in
Section 3(b)).

E. The Guarantor wishes to reaffirm its guarantee of the Obligations as amended
by this Agreement.

THEREFORE, in fulfillment of the foregoing, the Borrower, the Guarantor, the
Agent, the Issuing Bank, and the Banks hereby agree as follows:

Section 1. Definitions; References. Unless otherwise defined in this Agreement,
each term used in this Agreement which is defined in the Credit Agreement has
the meaning assigned to such term in the Credit Agreement.

Section 2. Amendments. Upon the satisfaction of the conditions specified in
Section 7 of this Agreement, and, unless otherwise specified, effective as of
the date set forth above, the Credit Agreement is amended as follows:

(a) A new definition of “2012 Indenture Documents” and “Amendment No. 1” shall
be added in Section 1.1 of the Credit Agreement to read in its entirety as
follows:

“2012 Indenture Documents” means the Indenture to be entered into by the
Borrower, the Guarantor, and a trustee, relating to the issuance of unsecured
convertible senior notes due 2017 pursuant to documentation containing terms
substantially similar to the description of notes attached as Exhibit A to the
Amendment No. 1 with such changes and deviations therefrom as the Agent shall
approve (such approval not to be unreasonably withheld, conditioned or delayed),
and any additional supplemental indenture that is substantially similar thereto,
relating to the issuance of unsecured convertible senior notes due 2017.

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“Amendment No. 1” means the Amendment No. 1 and Consent dated as of February 28,
2012 among Borrower, Stone Energy Offshore, L.L.C., a Delaware limited liability
company, the financial institutions party thereto as Banks, the Agent and the
Issuing Bank.

(b) The definitions of “Permitted Notes” and “Permitted Notes Documents” shall
be amended and restated in their entirety as follows:

“Permitted Notes” means any unsecured Debt issued pursuant to the 2004 Indenture
Documents, the 2010 Indenture Documents, the 2012 Indenture Documents or other
Approved Indenture Documents.

“Permitted Notes Documents” means the 2004 Indenture Documents, the 2010
Indenture Documents, the 2012 Indenture Documents and any other Approved
Indenture Documents.

(c) Section 6.2(j) of the Credit Agreement shall be amended to replace
“$800,000,000” with “$900,000,000”.

Section 3. Consents.

(a) Notwithstanding anything to the contrary contained in the Credit Agreement
or any other Credit Document (other than Sections 2.2(a) and 6.2(j) of the
Credit Agreement, as amended by this Agreement), the Secured Parties hereby
consent to the issuance by the Borrower of the 2012 Notes and the guaranty
thereof by the Guarantors, pursuant to documentation containing terms
substantially similar to the description of notes attached hereto as Exhibit A,
with such changes and deviations therefrom as the Agent shall approve (such
approval not to be unreasonably withheld, conditioned or delayed); provided that
if the Borrower elects, upon the conversion of any 2012 Notes, (x) to settle
such converted 2012 Notes with cash in lieu of Equity Interests, or (y) to
settle such converted 2012 Notes with Equity Interests repurchased by the
Borrower with cash, such cash payment or cash repurchase may be made from the
proceeds of the Options, and any cash payment or cash repurchase in excess of
such proceeds shall be subject to and comply with the requirements of clauses
(i) and (ii) of Section 6.5(c) of the Credit Agreement relating to prepayments,
redemptions, or defeasances of Debt. In furtherance of the foregoing consent, it
is understood and agreed by the Secured Parties, that the 2012 Notes will be
priced at market terms at the time of issuance thereof.

(b) Notwithstanding anything to the contrary contained in the Credit Agreement
or any other Credit Document, the Secured Parties hereby consent to the
execution and delivery by the Borrower of, and performance by the Borrower of
all its obligations and exercise of its rights under, one or more bond hedge
call options entered into in connection with the issuance of the 2012 Notes (the
“Options”) and separate warrant transactions (the “Warrants”) pursuant to
documentation in form and substance substantially similar to the documentation
provided to the Agent prior to the date of this Agreement, with such changes and

 

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deviations therefrom as Agent shall approve, such approval not to be
unreasonably withheld, conditioned or delayed; provided that the premiums paid
by the Borrower in respect of the Options on the closing date for the initial
issuance of the 2012 Notes shall not exceed the premiums received by the
Borrower for the Warrants on the Premium Payment Date (as defined in the
documentation relating to such Warrants) by more than $50,000,000. For the
avoidance of doubt, (i) the execution, delivery and performance of the Options
and the Warrants including the repurchase of shares to satisfy obligations under
the Warrant shall not constitute Restricted Payments, provided that any
repurchase of shares to satisfy obligations under the Warrants shall be subject
to and comply with the requirements of clauses (i) and (ii) of Section 6.5(c) of
the Credit Agreement and (ii) neither the Options nor the Warrants shall
constitute “Debt.”

Section 4. Reaffirmation of Liens.

(a) Each of the Borrower and the Guarantor (i) is party to certain Security
Documents securing and supporting the Borrower’s and Guarantor’s obligations
under the Credit Documents, (ii) represents and warrants that it has no defenses
to the enforcement of the Security Documents and that according to their terms
the Security Documents will continue in full force and effect to secure the
Borrower’s and Guarantor’s obligations under the Credit Documents, as the same
may be amended, supplemented, or otherwise modified, and (iii) acknowledges,
represents, and warrants that the liens and security interests created by the
Security Documents are valid and subsisting and create an Acceptable Security
Interest in the Collateral to secure the Borrower’s and Guarantor’s obligations
under the Credit Documents, as the same may be amended, supplemented, or
otherwise modified.

(b) The delivery of this Agreement does not indicate or establish a requirement
that any Guaranty or Security Document requires the Borrower’s or any
Guarantor’s approval of amendments to the Credit Agreement.

Section 5. Representations and Warranties. Each of the Borrower and the
Guarantor represents and warrants to the Agent and the Banks that:

(a) the representations and warranties set forth in the Credit Agreement and in
the other Credit Documents are true and correct in all material respects as of
the date of this Agreement (except to the extent such representations and
warranties relate to an earlier date, in which case such representations and
warranties shall be true and correct in all material respects as of such earlier
date); provided that such materiality qualifier shall not apply if such
representation or warranty is already subject to a materiality qualifier in the
Credit Agreement or such other Credit Document;

(b) (i) the execution, delivery, and performance of this Agreement are within
the corporate or limited liability company power, as appropriate, and authority
of the Borrower and Guarantor and have been duly authorized by appropriate
proceedings and (ii) this Agreement constitutes a legal, valid, and binding
obligation of the Borrower and Guarantor, enforceable against the Borrower and
Guarantor in accordance with its terms, except as limited by applicable
bankruptcy, insolvency, reorganization, moratorium, or similar laws affecting
the rights of creditors generally and general principles of equity; and

 

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(c) as of the effectiveness of this Agreement and after giving effect thereto,
no Default or Event of Default has occurred and is continuing.

Section 6. Reaffirmation of Guaranty. The Guarantor hereby ratifies, confirms,
and acknowledges that its obligations under the Stone Offshore Guaranty are in
full force and effect and that the Guarantor continues to unconditionally and
irrevocably guarantee the full and punctual payment, when due, whether at stated
maturity or earlier by acceleration or otherwise, of all of the Obligations
(subject to the terms of the Stone Offshore Guaranty), as such Obligations may
have been amended by this Agreement. The Guarantor hereby acknowledges that its
execution and delivery of this Agreement do not indicate or establish an
approval or consent requirement by the Guarantor under the Stone Offshore
Guaranty in connection with the execution and delivery of amendments,
modifications or waivers to the Credit Agreement, the Notes or any of the other
Credit Documents.

Section 7. Effectiveness. This Agreement shall become effective as of the date
hereof, and the Credit Agreement shall be amended as provided herein, upon the
occurrence of all of the following: (a) the Majority Banks’, the Borrower’s, and
the Guarantor’s duly and validly executing originals of this Agreement and
delivery thereof to the Agent, (b) the representations and warranties in this
Agreement being true and correct in all material respects before and after
giving effect to this Agreement, and (c) the Borrower’s having paid all costs,
expenses, and fees which have been invoiced and are payable pursuant to
Section 9.4 of the Credit Agreement or any other written agreement.

Section 8. Post-Closing Obligation. No later than the date of issuance of the
2012 Notes, or such later date as shall be agreed to by the Agent in its sole
discretion, the Borrower shall deliver to the Agent a favorable opinion of
Vinson & Elkins LLP, counsel to the Credit Parties, regarding the absence of a
conflict under the 2012 Indenture Documents with the Credit Documents in form
and substance satisfactory to the Agent. Failure to deliver such opinion shall
be an Event of Default as of the date specified in the foregoing sentence
without giving effect to any grace period.

Section 9. Effect on Credit Documents. Except as amended herein, the Credit
Agreement and the Credit Documents remain in full force and effect as originally
executed, and nothing herein shall act as a waiver of any of the Agent’s or
Banks’ rights under the Credit Documents, as amended. This Agreement is a Credit
Document for the purposes of the provisions of the other Credit Documents.
Without limiting the foregoing, any breach of representations, warranties, and
covenants under this Agreement may be a Default or Event of Default under other
Credit Documents.

Section 10. Choice of Law. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of New York.

Section 11. Counterparts. This Agreement may be signed in any number of
counterparts, each of which shall be an original.

[The remainder of this page has been left blank intentionally.]

 

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THIS WRITTEN AGREEMENT AND THE CREDIT DOCUMENTS, AS DEFINED IN THE CREDIT
AGREEMENT, REPRESENT THE FINAL AGREEMENT AMONG 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.

EXECUTED as of the date first set forth above.

 

BORROWER: STONE ENERGY CORPORATION By:   /s/ David H. Welch Name:   David H.
Welch Title:   President and Chief Executive Officer By:   /s/ Kenneth H. Beer
Name:   Kenneth H. Beer Title:   Senior Vice President and
Chief Financial Officer

 

GUARANTOR: STONE ENERGY OFFSHORE, L.L.C. By:   /s/ David H. Welch Name:   David
H. Welch Title:   President and Chief Executive Officer By:   /s/ Kenneth H.
Beer Name:   Kenneth H. Beer Title:   Senior Vice President and
Chief Financial Officer

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AGENT AND ISSUING BANK: BANK OF AMERICA, N.A., as Agent and Issuing Bank By:  
/s/ Ronald E. McKaig Name:   Ronald E. McKaig Title:   Managing Director BANKS:
BANK OF AMERICA, N.A. By:   /s/ Ronald E. McKaig Name:   Ronald E. McKaig Title:
  Managing Director

 

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NATIXIS By:   /s/ Liana Tchernysheva Name:   Liana Tchernysheva Title:  
Managing Director By:   /s/ Donovan C. Broussard Name:   Donovan C. Broussard
Title:   Managing Director

 

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THE BANK OF NOVA SCOTIA By:   /s/ Marc Graham Name:   Marc Graham Title:  
Director

 

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CAPITAL ONE, NATIONAL ASSOCIATION By:   /s/ Nancy G. Moragas Name:   Nancy G.
Moragas Title:   Sr. Vice President

 

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TORONTO DOMINION (NEW YORK) LLC By:   /s/ Bebi Yasin Name:   Bebi Yasin Title:  
Authorized Signatory

 

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BARCLAYS BANK PLC By:   /s/ Vanessa A. Kurbatskiy Name:   Vanessa A. Kurbatskiy
Title:   Vice President

 

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U.S. BANK NATIONAL ASSOCIATION By:   /s/ Daria Mahoney Name:   Daria Mahoney
Title:   Vice President

 

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IBERIABANK By:   /s/ Cameron D. Jones Name:   Cameron D. Jones Title:   Vice
President

 

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EXHIBIT A

DESCRIPTION OF NOTES

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DESCRIPTION OF THE NOTES

The Notes will be issued under an indenture to entered into between Stone Energy
Corporation, as issuer, and The Bank of New York Mellon Trust Company, N.A., as
trustee, in a transaction not registered under the Securities Act.

The following description is only a summary of the material provisions of the
Notes and the indenture. We urge you to read the indenture in its entirety
because it, and not this description, define your rights as a holder of the
Notes. You may request copies of this document as set forth under the caption
“Where You Can Find More Information.”

When we refer to “Stone Energy Corporation,” “Stone Energy,” “we,” “our” or “us”
in this section, we refer only to Stone Energy Corporation and not its
subsidiaries (unless the context otherwise requires). In addition, all
references to interest in this offering memorandum include additional interest,
if any, payable pursuant to the provisions set forth below under the heading
“—No Registration Rights; Additional Interest,” and additional interest, if any,
payable at our election as the sole remedy relating to the failure to comply
with our reporting obligations pursuant to the provisions set forth below under
the heading “—Events of Default; Notice and Waiver.”

Brief Description of the Notes

The Notes will:

 

  •  

initially be limited to $250.0 million aggregate principal amount ($275.0
million aggregate principal amount if the initial purchasers exercise in full
their option to purchase additional Notes);

 

  •  

bear interest at a rate of % per year, payable semi-annually in arrears, on
March 1 and September 1 of each year, commencing on September 1, 2012;

 

  •  

be general unsecured obligations, ranking equally with all of our other
unsecured senior indebtedness and senior in right of payment to any subordinated
indebtedness;

 

  •  

be convertible by you at any time prior to the close of business on the second
scheduled trading day immediately preceding the maturity date, only during
certain periods or upon satisfaction of one of the conditions for conversion, as
described under “—Conversion Rights,” into cash, shares of our common stock or a
combination of cash and shares of our common stock, at our election, based on an
initial conversion rate of shares of our common stock per $1,000 principal
amount of Notes (subject to adjustment as set forth in this offering
memorandum), which represents an initial conversion price of approximately $ per
share of our common stock;

 

  •  

not be subject to redemption at our option prior to maturity;

 

  •  

be subject to repurchase by us at your option if a fundamental change occurs, at
a cash repurchase price equal to 100% of the principal amount of the Notes, plus
accrued and unpaid interest to, but excluding, the fundamental change repurchase
date, as set forth under “—Fundamental Change Put”; and

 

  •  

be due on March 1, 2017, unless earlier converted or repurchased by us at your
option.

Neither we nor any of our subsidiaries will be subject to any financial
covenants under the indenture. In addition, neither we nor any of our
subsidiaries will be restricted under the indenture from paying dividends,
incurring debt or issuing or repurchasing our securities. You are not afforded
protection under the indenture in the event of a highly leveraged transaction,
certain significant changes in the composition of our board or a change in
control of us, except to the extent described below under “—Conversion
Rights—Adjustment to Conversion Rate Upon a Make-Whole Fundamental Change” and
“—Fundamental Change Put.”

The Notes will not be redeemable at our option prior to their maturity. No
sinking fund is provided for the Notes, and the Notes will not be subject to
defeasance.

 

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The Notes initially will be issued in book-entry form only in denominations of
$1,000 principal amount and whole multiples thereof. Beneficial interests in the
Notes will be shown on, and transfers of beneficial interests in the Notes will
be effected only through, records maintained by The Depository Trust Company, or
DTC, or its nominee, and any such interests may not be exchanged for
certificated Notes except in limited circumstances. For information regarding
conversion, registration of transfer and exchange of global Notes held in DTC,
see “—Form, Denomination and Registration—Global Notes, Book-Entry Form.”

If certificated Notes are issued, you may present them for conversion,
registration of transfer and exchange, without service charge, at our office or
agency in New York City, which will initially be the office or agency of the
trustee in New York City.

A holder of the Notes may not sell or otherwise transfer the Notes or any shares
of our common stock issuable upon conversion of the Notes except in compliance
with the provisions set forth below under “—No Registration Rights; Additional
Interest” and “Transfer Restrictions.”

Additional Notes

We may, without the consent of the holders of the Notes, increase the aggregate
principal amount of the Notes by issuing additional Notes in the future on the
same terms and conditions, except for any differences in the issue price and
interest accrued prior to the issue date of the additional Notes; provided that
if any such additional Notes are not fungible with the Notes initially offered
hereby for U.S. federal income tax purposes, such additional Notes will have a
separate CUSIP number. The Notes offered by this offering memorandum and any
additional Notes would rank equally and ratably and would be treated as a single
class for all purposes under the indenture. No additional Notes may be issued if
any event of default has occurred and is continuing with respect to the Notes.

Payment at Maturity

On the maturity date, each holder will be entitled to receive on such date
$1,000 in cash for each $1,000 in principal amount of Notes, together with any
accrued and unpaid interest to, but excluding, the maturity date. With respect
to global Notes, principal and any interest will be paid to DTC in immediately
available funds. With respect to any certificated Notes, principal and any
interest will be payable at our office or agency in New York City, which
initially will be the office or agency of the trustee in New York City.

Interest

The Notes will bear interest at a rate of % per year. Interest will accrue from
the date of original issuance of the Notes or from the most recent date to which
interest has been paid or duly provided for. We will pay interest semi-annually,
in arrears on March 1 and September 1 of each year, commencing on September 1,
2012, to holders of record at the close of business on the preceding February 15
and August 15, respectively. However, there are two exceptions to the preceding
sentence:

 

  •  

we will not pay in cash accrued interest (excluding any additional interest) on
any Notes when they are converted, except as described under “—Conversion
Rights;” and

 

  •  

on the interest payment date that falls on the maturity date, we will pay any
accrued and unpaid interest to the person to whom we pay the principal amount
(rather than the record holder on the corresponding record date).

We will pay interest on:

 

  •  

global Notes to DTC in immediately available funds;

 

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  •  

any certificated Notes having a principal amount of less than $2,000,000, by
check mailed to the holders of those Notes; and

 

  •  

any certificated Notes having a principal amount of $2,000,000 or more, by wire
transfer in immediately available funds at the election of the holders of these
Notes duly delivered to the trustee at least five business days prior to the
relevant interest payment date.

Interest will be calculated on the basis of a 360-day year consisting of twelve
30-day months. If a payment date is not a business day, payment will be made on
the next succeeding business day, and no additional interest will accrue
thereon. The term “business day” means any day other than a Saturday, a Sunday
or a day on which the Federal Reserve Bank of New York or banks in the State of
Texas are authorized or required by law or executive order to close or be
closed.

To the extent lawful, payments of principal or interest (including additional
interest, if any) on the Notes that are not made when due will accrue interest
at the then applicable interest rate on the Notes from the required payment
date.

Ranking

The Notes will be our senior unsecured obligations and will rank equal in right
of payment with all of our existing and future senior unsecured indebtedness.
The Notes will be effectively subordinated to our secured indebtedness to the
extent of the value of the related collateral and structurally subordinated to
indebtedness and other liabilities of our subsidiaries. In the event of our
bankruptcy, liquidation, reorganization or other winding up, our assets that
secure secured debt will be available to pay obligations on the Notes only after
all indebtedness under such secured debt has been repaid in full from the
proceeds of such assets. We advise you that there may not be sufficient assets
remaining to pay amounts due on any or all the Notes then outstanding.

As of December 31, 2011, our total consolidated indebtedness was $620 million,
of which approximately $45 million was secured indebtedness of ours and all of
which was guaranteed by Stone Offshore. After giving effect to the issuance of
the Notes (assuming no exercise of the initial purchasers’ option to purchase
additional Notes) and the use of proceeds therefrom, our total consolidated
indebtedness would have been $              million.

Conversion Rights

Holders may convert all or part of their Notes, in integral multiples of $1,000,
based on an initial conversion rate of shares of common stock per $1,000
principal amount of Notes (equivalent to an initial conversion price of
approximately $ per share of our common stock), only during certain periods or
upon the satisfaction of certain conditions as described below. The conversion
rate will be subject to adjustment as described below. As described under
“—Conversion Procedures—Settlement Upon Conversion,” upon conversion, we will
satisfy our conversion obligation by paying or delivering, as the case may be,
cash, shares of our common stock or a combination of cash and shares of our
common stock, at our election. You will have the right to convert Notes only
under the following circumstances:

 

  (1) prior to December 1, 2016, on any date during any calendar quarter
beginning after June 30, 2012 (and only during such calendar quarter) if the
closing sale price of our common stock was more than 130% of the then current
conversion price for at least 20 trading days in the period of the 30
consecutive trading days ending on the last trading day of the previous calendar
quarter;

 

  (2) prior to December 1, 2016, if we distribute to all or substantially all
holders of our common stock rights, options or warrants entitling them to
purchase, for a period of 45 calendar days or less from the declaration date for
such distribution, shares of our common stock at a price per share less than the
average closing sale price of our common stock for the ten consecutive trading
days immediately preceding, but excluding, the declaration date for such
distribution, as described below in more detail under “—Conversion Upon
Specified Corporate Transactions;”

 

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  (3) prior to December 1, 2016, if we distribute to all or substantially all
holders of our common stock cash, other assets, securities or rights to purchase
our securities, which distribution has a per share value exceeding 10% of the
closing sale price of our common stock on the trading day immediately preceding
the declaration date for such distribution, or if we engage in certain corporate
transactions as described herein, each as described below in more detail under
“—Conversion Upon Specified Corporate Transactions;”

 

  (4) prior to December 1, 2016, during the five consecutive business-day period
following any five consecutive trading-day period in which the trading price per
$1,000 principal amount of Notes for each trading day during such five
trading-day period was less than 98% of the closing sale price of our common
stock for each trading day during such five trading-day period multiplied by the
then current conversion rate, as described in more detail below under
“—Conversion Upon Satisfaction of Trading Price Condition;” or

 

  (5) on or after December 1, 2016, and prior to close of business on the second
scheduled trading day immediately preceding the maturity date, without regard to
the foregoing conditions.

The “closing sale price” of any share of our common stock on any trading day
means the closing sale price of such security (or if no closing sale price is
reported, the average of the closing bid and closing ask prices or, if more than
one in either case, the average of the average closing bid and the average
closing ask prices) on such day as reported in composite transactions for the
principal U.S. securities exchange on which our common stock is traded or, if
our common stock is not listed on a U.S. national or regional securities
exchange, as reported by OTC Markets Group Inc. In the absence of such a
quotation, the closing sale price will be determined by a nationally recognized
securities dealer retained by us for that purpose. The closing sale price will
be determined without reference to extended or after hours trading. The
“conversion price” on any day will equal $1,000, divided by the conversion rate
in effect on that day.

“Trading day” means a day on which (i) trading in our common stock (or other
security for which a closing sale price must be determined) generally occurs on
The New York Stock Exchange or, if our common stock (or such other security) is
not then listed on The New York Stock Exchange, on the principal other U.S.
national or regional securities exchange on which our common stock (or such
other security) is then listed or, if our common stock (or such other security)
is not then listed on a U.S. national or regional securities exchange, on the
principal other market on which our common stock (or such other security) is
then traded, and (ii) a closing sale price for our common stock (or closing sale
price for such other security) is available on such securities exchange or
market. If our common stock (or such other security) is not so listed or traded,
“trading day” means a “business day.”

Except as provided in the next paragraph, upon conversion, you will not receive
any separate cash payment of accrued and unpaid interest (excluding any
additional interest) on the Notes. Accrued and unpaid interest (excluding any
additional interest) and accrued tax original issue discount, if any, to the
conversion date is deemed to be paid in full with the payment or delivery, as
the case may be, of the cash, shares of our common stock or a combination
thereof, as the case may be, upon conversion, rather than cancelled,
extinguished or forfeited. With respect to any conversion of the Notes into a
combination of cash and shares of our common stock, accrued and unpaid interest
will be deemed to be paid first out of the cash paid upon such conversion.

If you convert after the close of business on the record date for an interest
payment but prior to the open of business on the corresponding interest payment
date, the record holder on the relevant record date will receive on the
corresponding interest payment date the full amount of interest accrued and
unpaid on your Notes, notwithstanding your conversion of those Notes prior to
the interest payment date. However, except as provided in the next sentence, if
you surrender your Notes for conversion after the close of business on a regular
record date but prior to the open of business on the corresponding interest
payment date, at the time you surrender your Notes for conversion, you must pay
us an amount equal to the interest that has accrued and will be paid on the
Notes being converted on the corresponding interest payment date. You are not
required to make such payment:

 

  •  

if you convert your Notes following the close of business on the regular record
date immediately preceding the maturity date;

 

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  •  

if you convert your Notes in connection with a fundamental change and we have
specified a fundamental change repurchase date that is after a regular record
date and on or prior to the corresponding interest payment date; or

 

  •  

to the extent of any overdue interest, if overdue interest exists at the time of
conversion with respect to your Notes.

Except as described under “—Conversion Rate Adjustments,” we will not make any
payment or other adjustment for dividends on any common stock issued upon
conversion of the Notes.

Conversion Upon Satisfaction of Sale Price Condition

Prior to December 1, 2016, you may surrender your Notes for conversion on any
date during any calendar quarter beginning after June 30, 2012 (and only during
such calendar quarter) if the closing sale price of our common stock was more
than 130% of the then current conversion price for at least 20 trading days in
the period of the 30 consecutive trading days ending on the last trading day of
the previous calendar quarter.

Conversion Upon Specified Corporate Transactions

Prior to December 1, 2016, you will have the right to convert your Notes if we:

 

  •  

distribute to all or substantially all holders of our common stock rights,
options or warrants entitling them to purchase, for a period of 45 calendar days
or less from the declaration date for such distribution, shares of our common
stock at a price per share less than the average closing sale price of our
common stock for the ten consecutive trading days immediately preceding, but
excluding, the declaration date for such distribution; or

 

  •  

make a distribution to all or substantially all holders of our common stock
cash, other assets, securities or rights to purchase our securities (other than
pursuant to a rights plan), which distribution has a per share value exceeding
10% of the closing sale price of our common stock on the trading day immediately
preceding the declaration date for such distribution.

We will notify holders at least 30 business days (or 10 business days if we
elect physical settlement for related conversions as described under
“—Conversion Procedures—Settlement Upon Conversion”) prior to the ex-date for
any such distribution. Once we have given such notice, you may surrender your
Notes for conversion at any time until the earlier of close of business on the
business day preceding the relevant ex-date or any public announcement by us
that such distribution will not take place. You may not convert any of your
Notes based on this conversion contingency if you will otherwise participate in
the distribution, without converting your Notes, at the same time and on the
same terms as holders of our common stock as if you held a number of shares of
our common stock per $1,000 principal amount of Notes equal to the applicable
conversion rate, as a result of holding the Notes.

You will also have the right to convert your Notes if a fundamental change
occurs. We will, to the extent practicable, notify holders at least 30 business
days prior to the anticipated effective date for any such transaction. In such
event, you will have the right to convert your Notes at any time beginning 30
business days prior to the date we notify holders as being the anticipated
effective date of the transaction until the close of business on the business
day immediately preceding the relevant fundamental change repurchase date.

 

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If you have submitted any or all of your Notes for repurchase in connection with
a fundamental change, unless you have withdrawn such Notes in a timely fashion,
your conversion rights on the Notes so subject to repurchase will expire at the
close of business on the business day preceding the fundamental change
repurchase date, unless we default in the payment of the repurchase price. If
you have submitted any Notes for repurchase, such Notes may be converted only if
you properly submit a withdrawal notice, and if the Notes submitted are
evidenced by a global Note, you comply with appropriate DTC procedures.

Conversion Upon Satisfaction of Trading Price Condition

Prior to December 1, 2016, you may surrender your Notes for conversion during
the five business-day period following any five consecutive trading-day period
in which the “trading price” per $1,000 principal amount of Notes, as determined
following a request by a holder of Notes in accordance with the procedures
described below, for each trading day of such five trading-day period was less
than 98% of the product of the closing sale price of our common stock for each
trading day during such five trading-day period and the then current conversion
rate.

The “trading price” per $1,000 principal amount of Notes on any date of
determination means the average of the secondary market bid quotations per
$1,000 principal amount of Notes obtained by us for $5,000,000 principal amount
of the Notes at approximately 3:30 p.m., New York City time, on such
determination date from two independent nationally recognized securities dealers
we select, which may include one or more of the initial purchasers; provided
that if at least two such bids cannot reasonably be obtained by us, but one such
bid can reasonably be obtained by us, this one bid will be used. If we cannot
reasonably obtain at least one bid for $5,000,000 principal amount of the Notes
from a nationally recognized securities dealer or, in our reasonable judgment,
the bid quotations are not indicative of the secondary market value of the
Notes, then, for purposes of this conversion contingency only, the trading price
per $1,000 principal amount of Notes will be deemed to be less than 98% of the
applicable conversion rate of the Notes multiplied by the closing sale price of
our common stock on such determination date.

We will determine the trading price per $1,000 principal amount of Notes. We
will have no obligation to make that determination unless a holder of Notes
requests that we do so and provides reasonable evidence that the then current
trading price of the Notes is less than the minimum trading price threshold. If
a holder provides such request, we will, within two business days thereafter,
determine the trading price per $1,000 principal amount of Notes for each
trading day until the minimum trading price threshold is exceeded. If we do not
so obtain bids when required, the trading price per $1,000 principal amount of
Notes will be deemed to be less than 98% of the product of the closing sale
price of our common stock and the applicable conversion rate on each trading day
such failure occurs.

Conversion on or after December 1, 2016

On or after December 1, 2016, and prior to the close of business on the second
scheduled trading day immediately preceding the maturity date, you may surrender
your Notes for conversion at any time without regard to the foregoing
conditions.

Conversion Procedures

Procedures to be Followed by a Holder

If you hold a beneficial interest in a global Note, to convert you must deliver
to DTC the appropriate instruction form for conversion pursuant to DTC’s
conversion program and, if required, pay funds equal to interest payable on the
next interest payment date to which you are not entitled and, if required, pay
all transfer or similar taxes, if any, described below.

 

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If you hold a certificated Note, to convert you must:

 

  •  

complete and manually sign the conversion notice on the back of the Notes or a
facsimile of the conversion notice;

 

  •  

deliver the completed conversion notice and the Notes to be converted to the
conversion agent;

 

  •  

if required, furnish appropriate endorsements and transfer documents;

 

  •  

if required, pay funds equal to interest payable on the next interest payment
date to which you are not entitled; and

 

  •  

if required, pay all transfer or similar taxes, if any, described below.

The conversion date will be the business day on which you have satisfied all of
the foregoing requirements. The Notes will be deemed to have been converted
immediately prior to the close of business on the conversion date; provided,
however, that the person in whose name any shares of our common stock shall be
issuable upon such conversion will become the holder of record of such shares as
of the close of business on the conversion date, in the case of physical
settlement (as defined below), or the last trading day of the relevant
conversion period, in the case of combination settlement (as defined below).

You will not be required to pay any transfer or similar taxes due upon
conversion other than any tax or duty that may be payable relating to any
transfer involved in the issuance or delivery of common stock, if any, due upon
conversion in a name other than that of the converting holder. Certificates
representing common stock will be issued and delivered only after all applicable
transfer or similar taxes, if any, payable by you have been paid in full.

Settlement Upon Conversion

Upon conversion, we will pay or deliver, as the case may be, to converting
holders in respect of each $1,000 principal amount of Notes being converted a
“conversion settlement amount” in either solely cash (“cash settlement”), solely
shares of our common stock (other than cash in lieu of any fractional shares)
(“physical settlement”) or a combination of cash and shares of our common stock
(“combination settlement”) as described below. We refer to each of these
settlement methods as a “settlement method.”

All conversions occurring on or after December 1, 2016 will be settled using the
same settlement method. Except for any conversions that occur on or after
December 1, 2016, we will use the same settlement method for all conversions
occurring on the same conversion date, but we will not have any obligation to
use the same settlement method with respect to conversions that occur on
different conversion dates. That is, we may choose for Notes converted on one
conversion date to settle conversions in physical settlement, and choose for
Notes converted on another conversion date cash settlement or combination
settlement.

If we elect a settlement method, we will inform holders so converting through
the trustee of the settlement method we have selected no later than the close of
business on the scheduled trading day immediately following the related
conversion date (or in the case of any conversions occurring on or after
December 1, 2016, no later than the close of business on the scheduled trading
day immediately preceding December 1, 2016). If we do not timely elect a
settlement method, we will no longer have the right to elect cash settlement or
physical settlement and we will be deemed to have elected combination settlement
in respect of our conversion obligation, as described below, and the specified
dollar amount (as defined below) per $1,000 principal amount of Notes will be
equal to $1,000. If we elect combination settlement, but we do not concurrently
notify converting holders of the specified dollar amount per $1,000 principal
amount of Notes, such specified dollar amount will be deemed to be $1,000. It is
our current intent and policy to settle conversions through combination
settlement with a specified dollar amount of at least $1,000.

 

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The type and amount of consideration due upon conversion will be computed as
follows:

 

  •  

if we elect physical settlement, we will deliver to converting holders in
respect of each $1,000 principal amount of Notes being converted a number of
shares of our common stock equal to the conversion rate (and cash in lieu of any
fractional share as described below);

 

  •  

if we elect cash settlement, we will pay to converting holders in respect of
each $1,000 principal amount of Notes being converted cash in an amount equal to
the sum of the daily conversion values for each of the 25 consecutive trading
days in the relevant conversion period; and

 

  •  

if we elect (or are deemed to have elected) combination settlement, we will pay
or deliver, as the case may be, to converting holders in respect of each $1,000
principal amount of Notes being converted a conversion settlement amount equal
to the sum of the daily settlement amounts for each of the 25 consecutive
trading days in the relevant conversion period (and cash in lieu of any
fractional share as described below).

The “conversion period” means the 25 consecutive trading-day period:

 

  •  

with respect to conversion notices received on or after December 1, 2016,
beginning on, and including, the 27th scheduled trading day immediately
preceding the maturity date; and

 

  •  

in all other cases, beginning on, and including, the third trading day following
our receipt of your conversion notice.

The “daily settlement amount,” for each $1,000 principal amount of Notes, for
each of the 25 consecutive trading days in the relevant conversion period, shall
consist of:

 

  •  

cash equal to the lesser of (1) the maximum cash amount per $1,000 principal
amount of Notes being converted to be received upon conversion as specified in
the notice specifying our chosen settlement method (the “specified dollar
amount”), if any, divided by 25 (such quotient the “daily measurement value”)
and (2) the daily conversion value; and

 

  •  

to the extent the daily conversion value exceeds the daily measurement value, a
number of shares of our common stock equal to (1) the difference between the
daily conversion value and the daily measurement value, divided by (2) the
volume-weighted average price of our common stock on such trading day.

The “daily conversion value” for any trading day in the applicable conversion
period equals 1/25th of:

 

  •  

the conversion rate in effect on that trading day, multiplied by

 

  •  

the volume-weighted average price of our common stock on that trading day.

For the purposes of determining amounts due upon conversion only, “trading day”
means a day on which (i) there is no “market disruption event” and (ii) trading
in our common stock generally occurs on The New York Stock Exchange or, if our
common stock is not then listed on The New York Stock Exchange, on the principal
other U.S. national or regional securities exchange on which our common stock is
then listed or, if our common stock is not then listed on a U.S. national or
regional securities exchange, on the principal other market on which our common
stock is then listed or admitted for trading. If our common stock is not so
listed or admitted for trading, “trading day” means a “business day.”

“Scheduled trading day” means a day that is scheduled to be a trading day on the
principal U.S. national or regional securities exchange or market on which our
common stock is listed or admitted for trading. If our common stock is not so
listed or admitted for trading, “scheduled trading day” means a “business day.”

 

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“Market disruption event” means (i) a failure by the primary U.S. national or
regional securities exchange or market on which our common stock is listed or
admitted for trading to open for trading during its regular trading session or
(ii) the occurrence or existence prior to 1:00 p.m., New York City time, on any
scheduled trading day for our common stock for more than one half-hour period in
the aggregate during regular trading hours of any suspension or limitation
imposed on trading (by reason of movements in price exceeding limits permitted
by the relevant stock exchange or otherwise) in our common stock or in any
options, contracts or futures contracts relating to our common stock.

The “volume-weighted average price” or “VWAP” per share of our common stock on
any trading day means such price as displayed on Bloomberg (or any successor
service) page SGY <EQUITY> AQR in respect of the period from 9:30 a.m. to 4:00
p.m., New York City time, on such trading day; or, if such price is not
available, the volume-weighted average price means the market value per share of
our common stock on such day as determined by a nationally recognized
independent investment banking firm retained for this purpose by us. The
“volume-weighted average price” or “VWAP” will be determined without regard to
after hours trading or any other trading outside of the regular trading session
trading hours.

Except as described under “—Adjustment to Conversion Rate Upon a Make-Whole
Fundamental Change” and “—Change in the Conversion Rights Upon Certain
Reclassifications, Business Combinations, Asset Sales and Corporate Events”, if
cash settlement or combination settlement is applicable, we will pay and/or
deliver the consideration due upon conversion on the third business day
immediately following the final trading day of the related conversion period (as
defined above). If physical settlement is applicable, we will deliver the
consideration due upon conversion on the third business day immediately
following the related conversion date; provided that with respect to any
conversion date occurring after February 15, 2017, settlement will occur on the
maturity date.

We will not issue fractional shares of our common stock upon conversion of the
Notes. Instead, we will pay cash in lieu of any fractional share based on the
closing sale price of our common stock on the relevant conversion date, in the
case of physical settlement, or on the final trading day of the relevant
conversion period, in the case of combination settlement.

Conversion Rate Adjustments

We will adjust the conversion rate for the following events:

(1) If we issue shares of our common stock as a dividend or distribution on
shares of our common stock, or if we effect a share split or share combination,
the conversion rate will be adjusted based on the following formula:

 

CR1 = CR0 × 

   OS1       OS0   

where,

 

CR1 =

  the conversion rate in effect immediately after the open of business on the
ex-date for such dividend or distribution or the effective date of such share
split or combination, as the case may be;

CR0 =

  the conversion rate in effect immediately prior to the open of business on the
ex-date for such dividend or distribution or the effective date of such share
split or combination, as the case may be;

OS0 =

  the number of shares of our common stock outstanding immediately prior to the
open of business on the ex-date for such dividend or distribution or the
effective date of such share split or combination, as the case may be; and

OS1 =

  the number of shares of our common stock that would be outstanding immediately
after, and solely as a result of, such dividend, distribution, share split or
combination, as the case may be.

Any adjustment made under this clause (1) shall become effective immediately
after the open of business on the ex-date for such dividend or distribution, or
immediately after the open of business on the effective date for such share
split or share combination, as applicable. If any dividend or distribution of
the type described in this

 

36

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clause (1) is declared but not so paid or made, the conversion rate shall be
immediately readjusted, effective as of the date our board of directors or a
committee thereof determines not to pay such dividend or distribution, to the
conversion rate that would then be in effect if such dividend or distribution
had not been declared.

(2) If we distribute to all or substantially all holders of our common stock any
rights, options or warrants entitling them to purchase, for a period of 45
calendar days or less from the declaration date for such distribution, shares of
our common stock at a price per share less than the average closing sale price
of our common stock for the ten consecutive trading days immediately preceding,
but excluding, the declaration date for such distribution, the conversion rate
will be increased based on the following formula:

 

CR1 = CR0 × 

   OS0 + X       OS0 + Y   

where,

 

CR1 =

  the conversion rate in effect immediately after the open of business on the
ex-date for such distribution;

CR0 =

  the conversion rate in effect immediately prior to the open of business on the
ex-date for such distribution;

OS0 =

  the number of shares of our common stock outstanding immediately prior to the
open of business on the ex-date for such distribution;

X =

  the total number of shares of our common stock issuable pursuant to such
rights, options or warrants; and

Y =

  the number of shares of our common stock equal to the aggregate price payable
to exercise such rights, options or warrants, divided by the average closing
sale price of our common stock for the ten consecutive trading days immediately
preceding, but excluding, the declaration date for such distribution.

Any increase made under this clause (2) will be made successively whenever any
such rights, options or warrants are distributed and shall become effective
immediately after the open of business on the ex-date for such distribution. To
the extent that shares of our common stock are not delivered after the
expiration of such rights, options or warrants, the conversion rate shall be
decreased to the conversion rate that would then be in effect had the increase
with respect to the distribution of such rights, options or warrants been made
on the basis of delivery of only the number of shares of our common stock
actually delivered. If such rights, options or warrants are not so distributed,
the conversion rate shall be decreased to the conversion rate that would then be
in effect if such ex-date for such distribution had not occurred.

For the purpose of this clause (2) and for the purpose of the first bullet point
under “—Conversion Upon Specified Corporate Transactions,” in determining
whether any rights, options or warrants entitle the holders to purchase shares
of our common stock at a price per share less than such average closing sale
price for the ten consecutive trading days immediately preceding, but excluding,
the declaration date for such distribution, and in determining the aggregate
offering price of such shares of our common stock, there shall be taken into
account any consideration received by us for such rights, options or warrants
and any amount payable upon exercise or conversion thereof, the value of such
consideration, if other than cash, to be determined by our board of directors or
a committee thereof.

(3) If we distribute shares of our capital stock, evidences of our indebtedness,
or other of our securities, assets or property to all or substantially all
holders of our common stock, excluding:

 

  •  

dividends or distributions as to which adjustment is required to be effected in
clause (1) or (2) above;

 

  •  

rights issued to all holders of our common stock pursuant to a rights plan,
where such rights are not presently exercisable, trade with our common stock and
the plan provides that holders of Notes will receive such rights along with any
common stock received upon conversion of Notes;

 

37

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  •  

dividends or distributions paid exclusively in cash, as to which an adjustment
is required to be effected in clause (4) below; and

 

  •  

spin-offs described below in the fourth paragraph of this clause (3); then

the conversion rate will be increased based on the following formula:

 

CR1 = CR0 ×     SP0       SP0 – FMV   

where,

 

CR1 =

  the conversion rate in effect immediately after the open of business on the
ex-date for such distribution;

CR0 =

  the conversion rate in effect immediately prior to the open of business on the
ex-date for such distribution;

SP0 =

  the average closing sale price of our common stock for the ten consecutive
trading days immediately preceding, but excluding, the ex-date for such
distribution; and

FMV =

  the fair market value (as determined by our board of directors or a committee
thereof) of the shares of capital stock, evidences of indebtedness, securities,
assets or property distributed with respect to each outstanding share of our
common stock immediately prior to the open of business on the ex-date for such
distribution.

Any increase made under the portion of this clause (3) above will become
effective immediately after the open of business on the ex-date for such
distribution. If such distribution is not so paid or made, the conversion rate
shall be decreased to be the conversion rate that would then be in effect if
such distribution had not been declared.

Notwithstanding the foregoing, if “FMV” (as defined above) is equal to or
greater than “SP0” (as defined above), or if the difference between “SP0” and
“FMV” is less than $1.00, in lieu of the foregoing increase, each holder of a
Note shall receive, in respect of each $1,000 principal amount thereof, at the
same time and upon the same terms as holders of our common stock without having
to convert its Notes, the amount and kind of our capital stock, evidences of our
indebtedness or other of our securities, assets or property that such holder
would have received as if such holder owned a number of shares of common stock
equal to the conversion rate in effect on the ex-date for the distribution.

 

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With respect to an adjustment pursuant to this clause (3) where there has been a
payment of a dividend or other distribution on our common stock in shares of
capital stock of any class or series, or similar equity interests, of or
relating to a subsidiary or other business unit of ours that will be, upon
distribution, listed on a U.S. national or regional securities exchange, which
is referred to in this offering memorandum as a “spin-off,” the conversion rate
will be increased based on the following formula:

 

CR1 = CR0 × 

   FMV + MP0       MP0   

where,

 

CR1 =

  the conversion rate in effect immediately after the open of business on the
ex-date for the spin-off;

CR0 =

  the conversion rate in effect immediately prior to the open of business on the
ex-date for the spinoff;

FMV =

  the average closing sale price of the capital stock or similar equity interest
distributed to holders of our common stock applicable to one share of our common
stock for the ten consecutive trading days immediately following the ex-date for
such spin-off (such period, the “valuation period”); and

MP0 =

  the average of the closing sale prices of our common stock over the valuation
period.

Any adjustment to the conversion rate under the preceding paragraph of this
clause (3) will be made immediately after the close of business on the last day
of the valuation period, but will be given effect as of the open of business on
the ex-date for the spin-off. Because we will make the adjustment to the
conversion rate at the end of the valuation period with retroactive effect, we
will delay the settlement of any Notes, in the case of cash settlement or
combination settlement, where the final day of the related conversion period
occurs during the valuation period. In such event, we will pay or deliver, as
the case may be, any cash and shares of our common stock due upon conversion
(based on the adjusted conversion rate as described above) on the third business
day immediately following the last trading day of the valuation period.

(4) If we pay any cash dividends or distributions exclusively in cash to all or
substantially all holders of our common stock (other than dividends or
distributions made in connection with our liquidation, dissolution or
winding-up), the conversion rate will be increased based on the following
formula:

 

CR1 = CR0 × 

   SP0       SP0 – C   

where,

 

CR1 =

  the conversion rate in effect immediately after the open of business on the
ex-date for such dividend or distribution;

CR0 =

  the conversion rate in effect immediately prior to the open of business on the
ex-date for such dividend or distribution;

SP0 =

  the average closing sale price of our common stock for the ten consecutive
trading days immediately preceding, but excluding, the ex-date for such dividend
or distribution; and

C =

  the amount in cash per share we distribute to holders of our common stock.

Any increase made under this clause (4) shall become effective immediately after
the open of business on the ex-date for such dividend or distribution. If such
dividend or distribution is not so paid, the conversion rate shall be decreased,
effective as of the date our board of directors or a committee thereof
determines not to make or pay such dividend or distribution, to be the
conversion rate that would then be in effect if such dividend or distribution
had not been declared.

 

39

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Notwithstanding the foregoing, if “C” (as defined above) is equal to or greater
than “SP0” (as defined above), or if the difference between “SP0” and “C” is
less than $1.00, in lieu of the foregoing increase, each holder of a Note shall
receive, in respect of each $1,000 principal amount thereof, at the same time
and upon the same terms as holders of shares of our common stock without having
to convert its Notes, the amount of cash that such holder would have received as
if such holder owned a number of shares of our common stock equal to the
conversion rate on the ex-date for such cash dividend or distribution.

(5) If we or any of our subsidiaries makes a payment in respect of a tender
offer or exchange offer for our common stock, to the extent that the cash and
value of any other consideration included in the payment per share of our common
stock exceeds the closing sale price of our common stock on the trading day next
succeeding the last date on which tenders or exchanges may be made pursuant to
such tender or exchange offer, the conversion rate will be increased based on
the following formula:

 

CR1 = CR0 × 

   AC + (SP1 × OS1)       OS0 × SP1   

where,

 

CR1 =

  the conversion rate in effect immediately after the close of business on the
trading day immediately following the day such tender offer or exchange offer
expires;

CR0 =

  the conversion rate in effect immediately prior to the close of business on
the trading day immediately following the day such tender offer or exchange
offer expires;

AC =

  the aggregate value of all cash and any other consideration (as determined by
our board of directors or a committee thereof) paid or payable for shares
purchased in such tender or exchange offer;

SP1 =

  the average closing sale price of our common stock for the ten consecutive
trading days next succeeding the date such tender or exchange offer expires (the
“averaging period”);

OS1 =

  the number of shares of our common stock outstanding immediately after the
close of business on the date such tender or exchange offer expires (adjusted to
give effect to the purchase or exchange of all shares accepted for purchase in
such tender offer or exchange offer); and

OS0 =

  the number of shares of our common stock outstanding immediately prior to the
close of business on the date such tender or exchange offer expires (prior to
giving effect to such tender offer or exchange offer).

Any adjustment to the conversion rate under this clause (5) will be made
immediately after the close of business on the last day of the averaging period,
but will be given effect as of the open of business on the trading day next
succeeding the date such tender offer or exchange offer expires. Because we will
make the adjustment to the conversion rate at the end of the averaging period
with retroactive effect, we will delay the settlement of any Notes, in the case
of cash settlement or combination settlement, where the final day of the related
conversion period occurs during the averaging period. In such event, we will pay
or deliver, as the case may be, any cash and shares of our common stock due upon
conversion (based on the adjusted conversion rate as described above) on the
third business day immediately following the last day of the averaging period.

Notwithstanding the above, certain listing standards of the New York Stock
Exchange may limit the amount by which we may increase the conversion rate
pursuant to the events described in this section and as described in the section
captioned “—Adjustment to Conversion Rate Upon a Make-Whole Fundamental Change.”
These standards generally require us to obtain the approval of our stockholders
before entering into certain transactions that potentially result in the
issuance of 20% or more of our common stock outstanding at the time the Notes
are issued unless we obtain stockholder approval of issuances in excess of such
limitations. In accordance with these listing standards, these restrictions will
apply at any time when the Notes are outstanding, regardless of whether we then
have a class of securities listed on the New York Stock Exchange. Accordingly,
in the event of an

 

40

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increase in the conversion rate above that which would result in the Notes, in
the aggregate, becoming convertible into shares in excess of such limitations,
we will, at our option, either obtain stockholder approval of such issuances or
deliver cash in lieu of any shares otherwise deliverable upon conversions in
excess of such limitations based on the closing sale price of our common stock
on the relevant conversion date, in the case of physical settlement, or on the
volume-weighted average price of our common stock on each trading day of the
relevant conversion period in respect of which, in lieu of delivering shares of
our common stock, we deliver cash pursuant to this paragraph, in the case of
combination settlement.

To the extent that any stockholders’ rights plan (i.e., a poison pill) adopted
by us is in effect upon conversion of the Notes, you will receive, in addition
to any common stock due upon conversion, the rights under the applicable rights
agreement. However, if, prior to any conversion, the rights have separated from
the shares of our common stock in accordance with the provisions of the
applicable stockholders’ rights plan, the conversion rate will be adjusted at
the time of separation as if we distributed to all holders of our common stock,
shares of our capital stock, evidences of indebtedness, securities, assets or
property as described in clause (3) above, subject to readjustment in the event
of the expiration, termination or redemption of such rights.

We will not make any adjustments to the conversion rate if you participate
(other than in the case of a share split or share combination), without having
to convert your Notes, at the same time and upon the same terms as holders of
our common stock and as a result of holding the Notes, in any of the
transactions described above as if you held a number of shares of common stock
equal to the applicable conversion rate, multiplied by the principal amount
(expressed in thousands) of Notes held by you.

Except as stated above, we will not adjust the conversion rate for the issuance
of our common stock or any securities convertible into or exchangeable for our
common stock or carrying the right to purchase any of the foregoing.

“Ex-date” means the first date on which the shares of our common stock trade on
the applicable exchange or in the applicable market, regular way, without the
right to receive the issuance, dividend or distribution in question, from us or,
if applicable, from the seller of our common stock on such exchange or market
(in the form of due bills or otherwise) as determined by such exchange or
market, and “effective date” means the first date on which the shares of our
common stock trade on the applicable exchange or in the applicable market,
regular way, reflecting the relevant share split or share combination, as
applicable.

Notwithstanding the foregoing, if a conversion rate adjustment becomes effective
on any ex-date as described above, and a holder that has converted its Notes on
or after such ex-date and on or prior to the related record date would be
treated as the record holder of shares of our common stock as of the related
conversion date as described under “—Conversion Procedures—Settlement Upon
Conversion” based on an adjusted conversion rate for such ex-date, then,
notwithstanding the foregoing conversion rate adjustment provisions, the
conversion rate adjustment relating to such ex-date will not be made for such
converting holder. Instead, such holder will be treated as if such holder were
the record owner of the shares of our common stock on an unadjusted basis and
participate in the related dividend, distribution or other event giving rise to
such adjustment.

If a taxable distribution to holders of our common stock or other transaction
occurs that results in any adjustment of the conversion rate (including an
adjustment at our option), you may, in certain circumstances, be deemed to have
received a distribution subject to U.S. income tax as a dividend. In certain
other circumstances, the absence of an adjustment may result in a taxable
dividend to the holders of our common stock. See “Certain United States Federal
Income and Estate Tax Considerations.”

We will not be required to make an adjustment to the conversion rate unless the
adjustment would require a change of at least 1% to the conversion rate.
However, we will carry forward any adjustment that is less than 1% of the
conversion rate, we will take such carried-forward adjustments into account in
any subsequent adjustment, and we will make such carried forward adjustments,
regardless of whether the aggregate adjustment is less than

 

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1%, (a) annually on the anniversary of the first date of original issuance of
the Notes and otherwise (b)(1) upon conversion of any Notes, (2) with respect to
any converted Notes, on each trading day in any relevant conversion period and
(3) immediately prior to any fundamental change repurchase date.

We are permitted to increase the conversion rate of the Notes by any amount for
a period of at least 20 business days if our board of directors or a committee
thereof determines that such increase would be in our best interest. We may also
(but are not required to) increase the conversion rate to avoid or diminish
income tax to holders of our common stock or rights to purchase shares of our
common stock in connection with a dividend or distribution of shares (or rights
to acquire shares) or similar event.

If we adjust the conversion rate pursuant to the above provisions, we will
deliver a notice to the trustee and record holders of the Notes containing the
relevant information.

Change in the Conversion Rights Upon Certain Reclassifications, Business
Combinations, Asset Sales and Corporate Events

In the case of:

 

  •  

any recapitalization, reclassification or change of our common stock (other than
changes resulting from a subdivision or combination),

 

  •  

any consolidation, merger or combination involving us,

 

  •  

any sale, lease or other transfer to a third party of the consolidated assets of
us and our subsidiaries substantially as an entirety, or

 

  •  

any statutory share exchange,

in each case, as a result of which our common stock would be converted into, or
exchanged for, stock, other securities, other property or assets (including cash
or any combination thereof), then, at and after the effective time of the
transaction, the right to convert each $1,000 principal amount of Notes will be
changed into a right to convert such principal amount of Notes into the kind and
amount of shares of stock, other securities or other property or assets
(including cash or any combination thereof) that a holder of a number of shares
of common stock equal to the conversion rate immediately prior to such
transaction would have owned or been entitled to receive (the “reference
property”) upon such transaction. However, at and after the effective time of
the transaction (i) we will continue to have the right to determine the form of
consideration to be paid or delivered, as the case may be, upon conversion of
the Notes as set forth under “—Conversion Procedures—Settlement Upon Conversion”
above and (ii)(x) any amount otherwise payable in cash upon conversion of the
Notes as set forth under “—Conversion Procedures—Settlement Upon Conversion”
above will continue to be payable in cash, (y) the number of shares of our
common stock, if any, otherwise deliverable upon conversion of the Notes as set
forth under “—Conversion Procedures—Settlement Upon Conversion” above will
instead be deliverable in the amount and type of reference property that a
holder of that number of shares of our common stock would have received in such
transaction and (z) the volume-weighted average price will be calculated based
on the value (determined in a reasonable manner selected in good faith by the
Company) of a unit of reference property that a holder of one share of our
common stock would have received in such transaction. If the transaction causes
our common stock to be converted into, or exchanged for, the right to receive
more than a single type of consideration (determined based in part upon any form
of stockholder election), the reference property into which the Notes will
become convertible will be deemed to be the kind and amount of consideration
actually received by holders of a majority of our common stock that voted for
such an election (if electing between two types of consideration) or holders of
a plurality of our common stock that voted for such an election (if electing
between more than two types of consideration), as the case may be. If the
holders of our common stock receive only cash in such transaction, then for all
conversions that occur after the effective date of such transaction (i) the
consideration due upon conversion of each $1,000 principal amount of Notes shall
be solely cash in an amount equal to the conversion rate in effect on the
conversion date (as may be increased by any additional shares as described under
“—Adjustment to Conversion Rate Upon a Make-Whole Fundamental Change”),
multiplied by the price paid per share of common stock in such transaction and
(ii) we will satisfy our conversion obligation by paying cash to converting
holders on the third business day immediately following the conversion date. We
will agree in the indenture not to become a party to any such transaction unless
its terms are consistent with the foregoing.

 

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Adjustments ofPrices

Whenever any provision of the indenture requires us to calculate the closing
sale prices, the volume-weighted average price, the daily conversion values or
the daily settlement amounts over, or based on, a span of multiple days
(including a conversion period, valuation period or averaging period), we will
make appropriate adjustments to each to account for any adjustment to the
conversion rate that becomes effective, or any event requiring an adjustment to
the conversion rate where the ex-date of the event occurs, at any time during
the period when the closing sale prices, the volume-weighted average prices, the
daily conversion values or the daily settlement amounts are to be calculated.

Adjustment to Conversion Rate Upon a Make-Whole Fundamental Change

If and only to the extent you elect to convert your Notes in connection with a
fundamental change described in clause (1), (2) (without giving effect to the
proviso in such clause (2)) or (4) under the definition of a fundamental change
described below under “—Fundamental Change Put,” which we refer to as a
“make-whole fundamental change,” we will increase the conversion rate as
described below. The number of additional shares by which the conversion is
increased (the “additional shares”) will be determined by reference to the table
below, based on the date on which the make-whole fundamental change becomes
effective (the “effective date”) and the price (the “stock price”) paid (or
deemed paid) per share for our common stock in such make-whole fundamental
change. If holders of our common stock receive only cash in any transaction
described in clause (2) of the definition of fundamental change, the price paid
per share will be the cash amount paid per share. Otherwise, the price paid per
share will be equal to the average of the closing sale prices of our common
stock on the five trading days prior to, but excluding, the effective date of
such make-whole fundamental change. We will notify holders of the anticipated
effective date of any make-whole fundamental change at least 10 business days
prior to such anticipated effective date, to the extent practicable.

A conversion of the Notes by a holder will be deemed for these purposes to be
“in connection with” a make-whole fundamental change if the conversion date
occurs on or following the effective date of the make-whole fundamental change
but before the close of business on the business day immediately preceding the
related fundamental change repurchase date (as specified in the notice of a
fundamental change described under “—Fundamental Change Put”).

Upon surrender of Notes for conversion in connection with a make-whole
fundamental change, we will, at our option, satisfy our conversion obligation by
physical settlement, cash settlement or combination settlement, as described
under “—Conversion Procedures—Settlement Upon Conversion.” However, if the
consideration received by holders of our common stock in any make-whole
fundamental change described in clause (2) of the definition of fundamental
change is composed entirely of cash, for any conversion of Notes following the
effective date of such make-whole fundamental change, the conversion settlement
amount will be calculated based solely on the “stock price” (as defined above)
for the transaction and will be deemed to be an amount of cash per $1,000
principal amount of converted Notes equal to the conversion rate (including any
adjustment as described in this section), multiplied by such stock price. In
such event, we will satisfy our conversion obligation by paying cash to
converting holders on the third business day immediately following the
conversion date.

The number of additional shares will be adjusted in the same manner and at the
same time as any adjustment to the conversion rate as described above under
“—Conversion Rate Adjustments.” The stock prices set forth in the first row of
the table below (i.e., the column headers) will be simultaneously adjusted to
equal the stock prices immediately prior to such adjustment, multiplied by a
fraction, the numerator of which is the conversion rate immediately prior to the
adjustment and the denominator of which is the conversion rate as so adjusted.

 

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The following table sets forth the number of additional shares by which the
conversion rate shall be increased upon conversion in connection with a
make-whole fundamental change:

 

     Stock Price

Effective Date

       $            $            $            $            $            $       
    $            $            $            $            $    

              , 2012

                                

March 1, 2013

                                

March 1, 2014

                                

March 1, 2015

                                

March 1, 2016

                                

March 1, 2017

                                

The exact stock price and effective date may not be set forth on the table, in
which case, if the stock price is:

 

  •  

between two stock prices on the table or the effective date is between two
effective dates on the table, the number of additional shares will be determined
by straight-line interpolation between the number of additional shares set forth
for the higher and lower stock prices and the earlier and later effective dates,
as applicable, based on a 360-day year;

 

  •  

greater than $          per share (subject to adjustment in the same manner and
at the same time as the stock prices in the table above), the conversion rate
will not be increased; or

 

  •  

less than $          per share (subject to adjustment in the same manner and at
the same time as the stock prices in the table above), the conversion rate will
not be increased.

Notwithstanding the foregoing, in no event will the total number of shares of
common stock issuable upon conversion exceed          per $1,000 principal
amount of Notes, subject to adjustment in the same manner as the conversion
rate.

Our obligation to deliver additional shares as described above could be
considered a penalty, in which case the enforceability thereof would be subject
to general principles of reasonableness and equitable remedies.

Notwithstanding the above, certain listing standards of the New York Stock
Exchange may limit the amount by which we may increase the conversion rate
pursuant to a make-whole fundamental change as described in this section. These
standards generally require us to obtain the approval of our stockholders before
entering into certain transactions that potentially result in the issuance of
20% or more of our common stock outstanding at the time the Notes are issued
unless we obtain stockholder approval of issuances in excess of such
limitations. In accordance with these listing standards, these restrictions will
apply at any time when the Notes are outstanding, regardless of whether we then
have a class of securities listed on the New York Stock Exchange. Accordingly,
in the event of an increase in the conversion rate above that which would result
in the Notes, in the aggregate, becoming convertible into shares in excess of
such limitations, we will, at our option, either obtain stockholder approval of
such issuances or deliver cash in lieu of any shares otherwise deliverable upon
conversions in excess of such limitations based on the closing sale price of our
common stock on the relevant conversion date, in the case of physical
settlement, or on the volume-weighted average price of our common stock on each
trading day of the relevant conversion period in respect of which, in lieu of
delivering shares of our common stock, we deliver cash pursuant to this
paragraph, in the case of combination settlement.

Fundamental Change Put

If a fundamental change (as defined below) occurs at any time prior to the
maturity of the Notes, you will have the right to require us to repurchase, at
the repurchase price described below, all or part of your Notes for which you
have properly delivered, and not withdrawn, a written repurchase notice. The
Notes submitted for repurchase must be $1,000 in principal amount or whole
multiples thereof.

 

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The fundamental change repurchase price will be payable in cash and will equal
100% of the principal amount of the Notes being repurchased, plus accrued and
unpaid interest to, but excluding, the fundamental change repurchase date.
However, if the fundamental change repurchase date is after a record date and on
or prior to the corresponding interest payment date, the full amount of interest
due will be paid on the interest payment date to the holder of record on the
record date, and the fundamental change repurchase price will be equal to 100%
of the principal amount of Notes to be repurchased.

We may be unable to repurchase your Notes for cash upon a fundamental change.
Our ability to repurchase the Notes with cash in the future may be limited by
the terms of our then-existing borrowing agreements. In addition, the occurrence
of a fundamental change could cause an event of default under the terms of our
then-existing borrowing agreements. We cannot assure you that we would have the
financial resources, or would be able to arrange financing, to pay the
repurchase price in cash.

A “fundamental change” will be deemed to have occurred when any of the following
has occurred:

 

  (1) the consummation of any transaction (other than any transaction described
in clause (2) below whether or not the proviso therein applies) the result of
which is that any “person” or “group” becomes the “beneficial owner” (as these
terms are defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act), directly
or indirectly, of more than 50% of our capital stock that is at the time
entitled to vote by the holder thereof in the election of our board of directors
(or comparable body); or

 

  (2) the consummation of (A) any recapitalization, reclassification or change
of our common stock (other than changes resulting from a subdivision or
combination) as a result of which our common stock is converted into, or
exchanged for, stock, other securities, other property or assets; (B) any share
exchange, consolidation or merger of us pursuant to which our common stock will
be converted into cash, securities or other property; or (C) any sale, lease or
other transfer in one transaction or a series of transactions of all or
substantially all of the consolidated assets of us and our subsidiaries, taken
as a whole, to any person or group other than any of our subsidiaries; provided,
however, that none of the transactions described in clauses (A), (B) or
(C) shall constitute a fundamental change if the holders of more than 50% of our
common stock immediately prior to such transaction own, directly or indirectly,
more than 50% of the common equity of the continuing or surviving or transferee
entity or any direct or indirect parent thereof immediately after the
consummation of such transaction; or

 

  (3) the adoption of a plan relating to our liquidation or dissolution; or

 

  (4) our common stock (or other common stock or depositary shares or receipts
in respect thereof underlying the Notes) ceases to be listed or quoted on any of
The New York Stock Exchange, The NASDAQ Global Select Market, The NASDAQ Global
Market or any other national securities exchange or automated quotation system
(or any of their respective successors).

Notwithstanding the foregoing, any transaction or event described in clause
(1) or (2) above will not constitute a fundamental change if, in connection with
such transaction or event, or as a result thereof, at least 90% of the
consideration paid or exchanged for our common stock (excluding cash payments
for fractional shares and cash payments made pursuant to dissenters’ appraisal
rights) consists of shares of common stock or depositary shares or receipts in
respect thereof traded on any of The New York Stock Exchange, The NASDAQ Global
Market, The NASDAQ Global Select Market or any other national securities
exchange or automated quotation system (or any of their respective successors)
(or will be so traded or quoted immediately following the completion of the
relevant transaction) and, as a result of such transaction, the Notes become
convertible into cash, reference property comprised of such consideration or a
combination of cash and such reference property as described under “—Conversion
Rights—Change in the Conversion Rights Upon Certain Reclassifications, Business
Combinations, Asset Sales and Corporate Events” above.

The definition of “fundamental change” includes a phrase relating to the sale,
lease or other transfer in one transaction or a series of transactions of all or
substantially all of the consolidated assets of us and our subsidiaries, taken
as a whole. Although there is a developing body of case law interpreting the
phrase

 

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“substantially all,” there is no precise established definition of the phrase
under applicable law. Accordingly, the ability of a holder of Notes to require
us to repurchase the Notes as a result of a sale, lease or other transfer of
less than all of our assets and those of our subsidiaries, taken as a whole, to
another person may be uncertain.

On or before the 10th calendar day after the occurrence of a fundamental change,
we will provide to all record holders of the Notes on the date of the
fundamental change at their addresses shown in the register of the registrar,
the trustee and the paying agent, a written notice of the occurrence of the
fundamental change and the resulting repurchase right. Such notice shall state,
among other things, the event causing the fundamental change and the procedures
you must follow to require us to repurchase your Notes.

The fundamental change repurchase date will be a date specified by us in the
notice of a fundamental change that is not less than 20 nor more than 35
calendar days after the date of such notice of a fundamental change.

To exercise your repurchase right, you must deliver, prior to the close of
business, on the business day immediately preceding the fundamental change
repurchase date, a written notice to the trustee or paying agent of your
exercise of your repurchase right (together with the Notes to be repurchased, if
certificated Notes have been issued). The repurchase notice must state:

 

  •  

if you hold a beneficial interest in a global Note, your repurchase notice must
comply with appropriate DTC procedures; if you hold certificated Notes, the
certificate numbers of the Notes to be repurchased;

 

  •  

the portion of the principal amount of the Notes to be repurchased, which must
be $1,000 or whole multiples thereof; and

 

  •  

that the Notes are to be repurchased by us pursuant to the applicable provisions
of the Notes and the indenture.

You may withdraw your repurchase notice at any time prior to the close of
business on the business day immediately preceding the fundamental change
repurchase date by delivering a written notice of withdrawal to the trustee or
paying agent. If a repurchase notice is given and withdrawn during that period,
we will not be obligated to repurchase the Notes listed in the repurchase
notice. The withdrawal notice must state:

 

  •  

if you hold a beneficial interest in a global Note, your withdrawal notice must
comply with appropriate DTC procedures; if you hold certificated Notes, the
certificate numbers of the withdrawn Notes;

 

  •  

the principal amount of the withdrawn Notes; and

 

  •  

the principal amount, if any, which remains subject to the repurchase notice.

Payment of the fundamental change repurchase price for Notes for which a
repurchase notice has been delivered and not withdrawn is conditioned upon
book-entry transfer or delivery of the Notes, together with necessary
endorsements, to the trustee or paying agent, as the case may be. Payment of the
fundamental change repurchase price for the Notes will be made on the later of
the fundamental change repurchase date and the time of book-entry transfer or
delivery of the Notes, as the case may be.

If the trustee or paying agent holds on the fundamental change repurchase date
cash sufficient to pay the fundamental change repurchase price of the Notes that
holders have elected to require us to repurchase, then, as of the fundamental
change repurchase date:

 

  •  

the Notes being repurchased will cease to be outstanding and interest will cease
to accrue, whether or not book-entry transfer of the Notes has been made or the
Notes have been delivered to the paying agent, as the case may be; and

 

  •  

all other rights of the holders of the repurchased Notes will terminate, other
than the right to receive the fundamental change repurchase price upon delivery
or transfer of such Notes.

 

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In connection with any repurchase, we will, to the extent applicable:

 

  •  

comply with the provisions of Rule 13e-4, Rule 14e-1 and any other tender offer
rules under the Exchange Act that may be applicable at the time of the offer to
repurchase the Notes, and any such compliance that conflicts with the
requirements of the indenture will be deemed to comply with the indenture;

 

  •  

file a Schedule TO or any other schedule required under the Exchange Act; and

 

  •  

comply with all other federal and state securities laws in connection with our
repurchase of the Notes.

No Notes may be repurchased at your option upon a fundamental change if the
principal amount of the Notes has been accelerated, and such acceleration has
not been rescinded, on or prior to the fundamental change repurchase date
(except in the case of an acceleration resulting from a default by us in the
payment of the fundamental change repurchase price with respect to such Notes).

This fundamental change repurchase right could discourage a potential acquirer
of Stone Energy. However, this fundamental change repurchase feature is not the
result of management’s knowledge of any specific effort to obtain control of us
by means of a merger, tender offer, solicitation or otherwise, or part of a plan
by management to adopt a series of anti-takeover provisions.

Our obligation to repurchase the Notes upon a fundamental change would not
necessarily afford you protection in the event of a highly leveraged or other
transaction involving us that may adversely affect holders. We also could, in
the future, enter into certain transactions, including certain
recapitalizations, that would not constitute a fundamental change but would
increase the amount of our (or our subsidiaries’) outstanding debt. The
incurrence of significant amounts of additional debt could adversely affect our
ability to service our then existing debt, including the Notes.

Consolidation, Merger and Sale of Assets by Stone Energy

The indenture will provide that we may not, in a single transaction or a series
of related transactions, consolidate with or merge with or into any other person
or sell, convey, transfer or lease our property and assets substantially as an
entirety to another person, unless:

 

  •  

either (a) we are the surviving or continuing corporation or (b) the resulting,
surviving or transferee person (if other than us) is a corporation organized and
existing under the laws of the United States, any state thereof or the District
of Columbia and such person assumes, by a supplemental indenture in a form
reasonably satisfactory to the trustee, all of our obligations under the Notes
and the indenture;

 

  •  

immediately after giving effect to such transaction, no default or event of
default has occurred and is continuing under the indenture; and

 

  •  

we have delivered to the trustee certain certificates and opinions of counsel if
so requested by the trustee.

In the event of any transaction described in and complying with the conditions
listed in the immediately preceding paragraph in which Stone Energy is not the
continuing corporation, the successor person formed or remaining shall succeed,
and be substituted for, and may exercise every right and power of, Stone Energy,
and, except in the case of a lease, Stone Energy shall be discharged from its
obligations under the Notes and the indenture.

This covenant includes a phrase relating to the sale, conveyance, transfer or
lease of the property and assets of Stone Energy “substantially as an entirety”.
There is no precise, established definition of the phrase “substantially as an
entirety” under New York law, which governs the indenture and the Notes, or
under the laws of Delaware, Stone Energy’s state of incorporation. Accordingly,
the ability of a holder of the Notes to require us to repurchase the Notes as a
result of a sale, conveyance, transfer or lease of less than all of the property
and assets of Stone Energy may be uncertain.

 

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An assumption by any person of Stone Energy’s obligations under the Notes and
the indenture might be deemed for U.S. federal income tax purposes to be an
exchange of the Notes for new Notes by the holders thereof, resulting in
recognition of gain or loss for such purposes and possibly other adverse tax
consequences to the holders. Holders should consult their own tax advisors
regarding the tax consequences of such an assumption.

Events of Default; Notice and Waiver

The following will be events of default under the indenture:

 

  •  

we fail to pay any interest on the Notes when due and such failure continues for
a period of 30 calendar days;

 

  •  

we fail to pay principal of the Notes when due at maturity, or we fail to pay
the fundamental change repurchase price payable in respect of any Notes when
due;

 

  •  

we fail to pay or deliver, as the case may be, cash, shares of our common stock
or a combination of cash and shares of our common stock, as the case may be,
upon the conversion of any Notes and such failure continues for five days
following the scheduled settlement date for such conversion;

 

  •  

we fail to comply with the covenant set forth above under “—Consolidation,
Merger and Sale of Assets by Stone Energy;

 

  •  

we fail to provide any required notice of any transaction described above under
“—Conversion Rights— Conversion Upon Specified Corporate Transactions” and such
failure continues for five calendar days;

 

  •  

we fail to provide any required notice of the anticipated effective date or
actual effective date of a fundamental change on a timely basis as required in
the indenture and such failure continues for five calendar days;

 

  •  

we fail to perform or observe any other term, covenant or agreement in the Notes
or the indenture for a period of 60 calendar days after written notice of such
failure is given to us by the trustee or to us and the trustee by the holders of
at least 25% in aggregate principal amount of the Notes then outstanding;

 

  •  

a failure to pay when due (whether at stated maturity or otherwise) or a default
that results in the acceleration of maturity, of any indebtedness for borrowed
money of Stone Energy or any of our “significant subsidiaries” (which term shall
have the meaning specified in Rule 1-02(w) of Regulation S-X) in an aggregate
amount in excess of $20,000,000 (or its foreign currency equivalent), unless
such indebtedness is discharged, or such acceleration is rescinded, stayed or
annulled, within a period of 30 calendar days after written notice of such
failure is given to us by the trustee or to us and the trustee by the holders of
at least 25% in aggregate principal amount of the Notes then outstanding;

 

  •  

a final judgment for the payment in excess of $20,000,000 (or its foreign
currency equivalent), excluding any amounts covered by insurance, rendered
against us or any of our subsidiaries, which judgment is not discharged or
stayed within 30 calendar days after (i) the date on which the right to appeal
or petition for review thereof has expired if no such appeal or review has
commenced, or (ii) the date on which all rights to appeal or petition for review
have been extinguished; or

 

  •  

certain events involving our bankruptcy, insolvency or reorganization or the
bankruptcy, insolvency or reorganization of any of our “significant
subsidiaries” (which term shall have the meaning specified in Rule 1-02(w) of
Regulation S-X).

 

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We are required to notify the trustee promptly upon becoming aware of the
occurrence of any default under the indenture known to us. The trustee is then
required within 90 calendar days of becoming aware of the occurrence of any
default to give to the registered holders of the Notes notice of all uncured
defaults known to it. However, the trustee may withhold notice to the holders of
the Notes of any default, except defaults in payment of principal or interest on
the Notes or defaults in the failure to deliver the consideration due upon
conversion, if the trustee, in good faith, determines that the withholding of
such notice is in the interests of the holders. We are also required to deliver
to the trustee, on or before a date not more than 120 calendar days after the
end of each fiscal year, a written statement as to compliance with the
indenture, including whether or not any default has occurred.

If an event of default specified in the last bullet point listed above occurs
and continues with respect to us, the principal amount of the Notes and accrued
and unpaid interest on the outstanding Notes will automatically become due and
payable. If any other event of default occurs and is continuing, the trustee or
the holders of at least 25% in aggregate principal amount of the outstanding
Notes may declare the principal amount of the Notes and accrued and unpaid
interest on the outstanding Notes to be due and payable. Thereupon, the trustee
may, in its discretion, proceed to protect and enforce the rights of the holders
of the Notes by appropriate judicial proceedings.

After a declaration of acceleration, but before a judgment or decree for payment
of the money due has been obtained by the trustee, the holders of a majority in
aggregate principal amount of the Notes outstanding, by written notice to us and
the trustee, may rescind and annul such declaration if:

 

  •  

we have paid (or deposited with the trustee a sum sufficient to pay) (1) all
overdue interest on all Notes; (2) the principal amount of any Notes that have
become due otherwise than by such declaration of acceleration; (3) to the extent
that payment of such interest is lawful, interest upon overdue interest; and
(4) all sums paid or advanced by the trustee under the indenture and the
reasonable compensation, expenses, disbursements and advances of the trustee,
its agents and counsel; and

 

  •  

all events of default, other than the non-payment of the principal amount and
any accrued and unpaid interest that have become due solely by such declaration
of acceleration, have been cured or waived.

The holders of a majority in aggregate principal amount of the outstanding Notes
will have the right to direct the time, method and place of any proceedings for
any remedy available to the trustee, subject to limitations specified in the
indenture.

If any portion of the amount payable on the Notes upon such acceleration thereof
as described above is considered by a court to be unearned interest (through the
allocation of the value of the instrument to the embedded equity component or
otherwise), the court could disallow recovery of any such portion.

No holder of the Notes may pursue any remedy under the indenture, except in the
case of a default in the payment of principal or interest on the Notes, unless:

 

  •  

the holder has given the trustee written notice of an event of default;

 

  •  

the holders of at least 25% in aggregate principal amount of the outstanding
Notes make a written request to the trustee to pursue the remedy, and offer
reasonable security or indemnity against any cost, liability or expense of the
trustee;

 

  •  

the trustee fails to comply with the request within 60 calendar days after
receipt of the request and offer of indemnity; and

 

  •  

the trustee does not receive an inconsistent direction from the holders of a
majority in aggregate principal amount of the outstanding Notes.

Notwithstanding the foregoing, the indenture will provide, if we so elect, that
the sole remedy for an event of default relating to the failure to comply with
the reporting obligations in the indenture, which are described below under the
caption “—Reports,” will, at our option, for the 90 days after the occurrence of
such an event of

 

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default, consist exclusively of the right to receive additional interest on the
Notes at an annual rate equal to 0.50% of the principal amount of the Notes. In
the event we do not elect to pay the additional interest upon an event of
default in accordance with this paragraph, the Notes will be subject to
acceleration as provided above. This additional interest will be in addition to
any additional interest that may accrue as a result of a registration default as
described below under the caption “—No Registration Rights; Additional Interest”
and will be payable in the same manner as additional interest accruing as a
result of a registration default. The additional interest will accrue on all
outstanding Notes from and including the date on which an event of default
relating to a failure to comply with the reporting obligations in the indenture
first occurs to, but not including, the 90th day thereafter (or such earlier
date on which the event of default relating to the reporting obligations shall
have been cured or waived). On such 90th day, if such event of default is
continuing, such additional interest will cease to accrue and the Notes will be
subject to acceleration as provided above. The provisions of the indenture
described in this paragraph will not affect the rights of holders of Notes in
the event of the occurrence of any other event of default.

Waiver

The holders of a majority in aggregate principal amount of the Notes outstanding
may, on behalf of the holders of all the Notes, if certain requirements are
satisfied, waive any past default or event of default under the indenture and
its consequences, except:

 

  •  

our failure to pay principal of or interest on any Notes when due;

 

  •  

our failure to convert any Notes into cash, shares of our common stock or a
combination of cash and shares of our common stock, as the case may be, as
required by the indenture;

 

  •  

our failure to pay the fundamental change repurchase price on the fundamental
change repurchase date in connection with a holder exercising its repurchase
rights; or

 

  •  

our failure to comply with any of the provisions of the indenture that would
require the consent of the holder of each outstanding Note affected.

Modification

Changes Requiring Approval of Each Affected Holder

The indenture (including the terms and conditions of the Notes) may not be
modified or amended without the written consent or the affirmative vote of the
holder of each Note affected by such change to:

 

  •  

change the maturity date of any Notes;

 

  •  

reduce the rate or extend the time for payment of interest on any Notes;

 

  •  

reduce the principal amount of any Notes;

 

  •  

reduce any amount payable upon repurchase of any Notes upon a fundamental
change;

 

  •  

impair the right of a holder to receive payment with respect to any Notes or
institute suit for payment of any Notes;

 

  •  

change the currency in which any Note is payable;

 

  •  

change our obligation to repurchase any Notes upon a fundamental change in a
manner adverse to the holders;

 

  •  

affect the right of a holder to convert any Notes into cash, shares of our
common stock or a combination of cash and shares of our common stock, as the
case may be, or reduce the number of shares of our common stock or amount of
property, including cash, receivable upon conversion pursuant to the terms of
the indenture; or

 

  •  

reduce the percentage of the Notes required for consent to any modification or
waiver of the indenture.

 

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Changes Requiring Majority Approval

The indenture (including the terms and conditions of the Notes) may be modified
or amended, except as described above, with the consent or affirmative vote of
the holders of a majority in aggregate principal amount of the Notes then
outstanding.

Changes Requiring No Approval

The indenture (including the terms and conditions of the Notes) may be modified
or amended by us and the trustee, without the consent of the holder of any
Notes, to, among other things:

 

  •  

provide for conversion rights of holders of the Notes and our repurchase
obligations in connection with a fundamental change and/or in the event of any
events described under “—Conversion Rights—Change in the Conversion Rights Upon
Certain Reclassifications, Business Combinations, Asset Sales and Corporate
Events”;

 

  •  

secure the Notes;

 

  •  

provide for the assumption of our obligations to the holders of the Notes in the
event of a merger or consolidation, or sale, conveyance, transfer or lease of
our property and assets substantially as an entirety;

 

  •  

surrender any right or power conferred upon us;

 

  •  

add to our covenants for the benefit of the holders of the Notes;

 

  •  

cure any ambiguity or correct or supplement any inconsistent or otherwise
defective provision contained in the indenture; provided that such modification
or amendment does not adversely affect the interests of the holders of the Notes
in any material respect; provided, further, that any amendment made solely to
conform the provisions of the indenture to the description of the Notes
contained in this offering memorandum, as supplemented by the related pricing
term sheet, will be deemed not to adversely affect the interests of the holders
of the Notes;

 

  •  

make any provision with respect to matters or questions arising under the
indenture that we may deem necessary or desirable and that shall not be
inconsistent with provisions of the indenture; provided that such change or
modification does not adversely affect the interests of the holders of the Notes
in any material respect;

 

  •  

increase the conversion rate;

 

  •  

add guarantees of obligations under the Notes; and

 

  •  

provide for a successor trustee.

Other

The consent of the holders of Notes is not necessary under the indenture to
approve the particular form of any proposed modification or amendment. It is
sufficient if such consent approves the substance of the proposed modification
or amendment. After a modification or amendment under the indenture becomes
effective, we are required to provide to the holders a notice briefly describing
such modification or amendment. However, the failure to give such notice to all
the holders, or any defect in the notice, will not impair or affect the validity
of the modification or amendment.

Notes Not Entitled to Consent

Any Notes held by us or by any person directly or indirectly controlling or
controlled by or under direct or indirect common control with us shall be
disregarded, to the extent known by a responsible officer of the trustee, (from
both the numerator and the denominator) for purposes of determining whether the
holders of the requisite aggregate principal amount of the outstanding Notes
have consented to a modification, amendment or waiver of the terms of the
indenture.

 

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Repurchase and Cancellation

We may, to the extent permitted by law, repurchase any Notes in the open market
or by tender offer at any price or by private agreement. Any Notes repurchased
by us may be surrendered to the trustee for cancellation, but may not be
reissued or resold by us. Any Notes surrendered for cancellation to the trustee
may not be reissued or resold and will be promptly cancelled.

Rule 144A Information

We will, so long as any of the Notes or any shares of our common stock issuable
upon conversion thereof will, at such time, constitute “restricted securities”
within the meaning of Rule 144(a)(3) under the Securities Act, promptly provide
to the trustee and we will, upon written request, provide to any holder,
beneficial owner or prospective purchaser of such Notes or any shares of our
common stock issuable upon conversion of such Notes the information required to
be delivered pursuant to Rule 144A(d)(4) under the Securities Act to facilitate
the resale of such Notes or shares of our common stock pursuant to Rule 144A
under the Securities Act (“Rule 144A”).

Reports

We shall deliver to the trustee, within 15 days after we are required to file
the same with the SEC, copies of the annual reports and of the information,
documents and other reports (or copies of such portions of any of the foregoing
as the SEC may by rules and regulations prescribe) that we are required to file
with the SEC pursuant to Section 13 or 15(d) of the Exchange Act. The filing of
these reports with the SEC through its EDGAR database within the time periods
for filing the same under the Exchange Act (taking into account any applicable
grace periods provided thereunder) will satisfy our obligation to furnish those
reports to the trustee.

Delivery of these reports, information and documents to the trustee is for
informational purposes only and the trustee’s receipt of them will not
constitute constructive notice of any information contained therein or
determinable from information contained therein, including Stone Energy’s
compliance with any of its covenants in this Indenture (as to which the trustee
is entitled to rely exclusively on an officers’ certificate).

Information Concerning the Trustee and Common Stock Transfer Agent and Registrar

We have appointed The Bank of New York Mellon Trust Company, N.A., the trustee
under the indenture, as paying agent, conversion agent, Notes registrar and
custodian for the Notes. The trustee or its affiliates may also provide other
services to us in the ordinary course of their business. The indenture contains
certain limitations on the rights of the trustee, if it or any of its affiliates
is then our creditor, to obtain payment of claims in certain cases or to realize
on certain property received on any claim as security or otherwise. The trustee
and its affiliates will be permitted to engage in other transactions with us.
However, if the trustee or any affiliate continues to have any conflicting
interest and a default occurs with respect to the Notes, the trustee must
eliminate such conflict or resign. The Bank of New York Mellon Trust Company,
N.A. acts as trustee for certain of our outstanding debt securities.

Computershare Trust Company, N.A., is the transfer agent and registrar for our
common stock.

Governing Law

The Notes and the indenture shall be governed by, and construed in accordance
with, the laws of the State of New York.

No Stockholder Rights for Holders of Notes

Holders of Notes, as such, will not have any rights as stockholders of Stone
Energy (including, without limitation, voting rights and rights to receive any
dividends or other distributions on our common stock).

 

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Notices

Except as otherwise provided in the indenture, notices to holders of the Notes
will be given by mail to the addresses of holders of the Notes as they appear in
the Notes register, or, with respect to global Notes, to DTC in accordance with
its rules and procedures.

No Personal Liability of Directors, Officers, Employees and Stockholders

No director, officer, employee, incorporator, stockholder or partner of Stone
Energy, as such, will have any liability for any obligations of Stone Energy
under the Notes or the indenture for any claim based on, in respect of, or by
reason of, such obligations or their creation. Each holder of Notes, by
accepting a Note, waives and releases all such liability. The waiver and release
are part of the consideration for issuance of the Notes.

Calculations in Respect of the Notes

Except as otherwise provided herein, we will be responsible for making all
calculations called for under the Notes. These calculations include, but are not
limited to, determinations of the closing sale price or volume-weighted average
price of our common stock, daily settlement amounts, daily conversion values,
accrued interest payable on the Notes and the conversion rate and conversion
price. We or our agents will make all these calculations in good faith and,
absent manifest error, such calculations will be final and binding on holders of
the Notes. We will provide a schedule of these calculations to each of the
trustee and the conversion agent, and each of the trustee and the conversion
agent is entitled to rely upon the accuracy of our calculations without
independent verification. The trustee will forward these calculations to any
holder of the Notes upon the request of that holder.

Form, Denomination and Registration

The Notes will be issued:

 

  •  

in fully registered form;

 

  •  

without interest coupons; and

 

  •  

in denominations of $1,000 principal amount and integral multiples of $1,000.

Global Notes, Book-Entry Form

The Notes will be evidenced by one or more global Notes. We will deposit the
global Notes with DTC and register the global Notes in the name of Cede & Co.,
as DTC’s nominee. Except as set forth below, a global Note may be transferred,
in whole or in part, only to another nominee of DTC or to a successor of DTC or
its nominee.

Beneficial interests in a global Note may be held through organizations that are
participants in DTC (called “participants”). Transfers between participants will
be effected in the ordinary way in accordance with DTC rules and will be settled
in clearing house funds. The laws of some states require that certain persons
take physical delivery of securities in definitive form. As a result, the
ability to transfer beneficial interests in the global Notes to such persons may
be limited.

Beneficial interests in a global Note held by DTC may be held only through
participants or certain banks, brokers, dealers, trust companies and other
parties that clear through or maintain a custodial relationship with a
participant, either directly or indirectly (called “indirect participants”). So
long as Cede & Co., as the nominee of DTC, is the registered owner of a global
Note, Cede & Co. for all purposes will be considered the sole holder of such
global Note. Except as provided below, owners of beneficial interests in a
global Note will:

 

  •  

not be entitled to have certificates registered in their names;

 

  •  

not receive physical delivery of certificates in definitive registered form; and

 

  •  

not be considered holders of the global Note.

 

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We will pay principal of and interest on, and the fundamental change repurchase
price of, a global Note to Cede & Co., as the registered owner of the global
Note, by wire transfer of immediately available funds on the maturity date, each
interest payment date or fundamental change repurchase date, as the case may be.
Neither we, the trustee nor any paying agent will be responsible or liable:

 

  •  

for any aspect of the records relating to, or payments made on account of,
beneficial ownership interests in a global Note; or

 

  •  

for maintaining, supervising or reviewing any records relating to the beneficial
ownership interests.

DTC has advised us that it will take any action permitted to be taken by a
holder of the Notes, including the presentation of the Notes for conversion,
only at the direction of one or more participants to whose account with DTC
interests in the global Notes are credited, and only in respect of the principal
amount of the Notes represented by the global Notes as to which the participant
or participants has or have given such direction.

DTC has advised us that it is:

 

  •  

a limited purpose trust company organized under the laws of the State of New
York, and a member of the Federal Reserve System;

 

  •  

a “clearing corporation” within the meaning of the Uniform Commercial Code; and

 

  •  

a “clearing agency” registered pursuant to the provisions of Section 17A of the
Exchange Act.

DTC was created to hold securities for its participants and to facilitate the
clearance and settlement of securities transactions between participants through
electronic book-entry changes to the accounts of its participants. Participants
include securities brokers, dealers, banks, trust companies and clearing
corporations and other organizations. Some of the participants or their
representatives, together with other entities, own DTC. Indirect access to the
DTC system is available to others such as banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship with a
participant, either directly or indirectly.

DTC has agreed to the foregoing procedures to facilitate transfers of interests
in a global Note among participants. However, DTC is under no obligation to
perform or continue to perform these procedures and may discontinue these
procedures at any time. Notes in physical, fully-registered certificated form
will be issued and delivered to each person that DTC identifies as a beneficial
owner of the related Notes only if (i) DTC notifies us at any time that it is
unwilling or unable to continue as depositary for the global Notes and a
successor depositary is not appointed within 60 days; (ii) DTC ceases to be
registered as a clearing agency under the Exchange Act and a successor
depositary is not appointed within 60 days; or (iii) an event of default with
respect to the Notes has occurred and is continuing and DTC requests that the
Notes be issued in physical, certificated form.

Neither we, the trustee, registrar, paying agent nor conversion agent will have
any responsibility or liability for the performance by DTC or its participants
or indirect participants of their respective obligations under the rules and
procedures governing their operations.

Restrictions on Transfer, Legends

The Notes and any shares of common stock that are issued upon conversion will be
subject to certain restrictions on transfer, as described below under “Transfer
Restrictions.” The Notes and share certificates will bear a legend regarding
such transfer restrictions.

No Registration Rights; Additional Interest

We will not file a shelf registration statement for the resale of the Notes or
any shares of common stock issuable upon conversion of the Notes. As a result,
you may only resell your Notes or such common stock pursuant to an exemption
from, or in a transaction not subject to, the registration requirements of the
Securities Act.

 

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Under Rule 144 as currently in effect, a person who acquired Notes from us or
our affiliate and who has beneficially owned Notes or shares of our common stock
issued upon conversion of the Notes for at least one year is entitled to sell
such Notes or shares of our common stock without registration, but only if such
person is not deemed to have been our affiliate at the time of, or at any time
during three months preceding, the sale. Furthermore, under Rule 144, a person
who acquired Notes from us or our affiliate and who has beneficially owned Notes
or shares of our common stock issued upon conversion of the Notes for at least
six months is entitled to sell such Notes or shares of our common stock without
registration, so long as (i) such person is not deemed to have been our
affiliate at the time of, or at any time during three months preceding, the sale
and (ii) we have filed all required reports under Section 13 or 15(d) of the
Exchange Act, as applicable, during the twelve months preceding such sale (other
than current reports on Form 8-K). If we are not current in filing our Exchange
Act reports, a person who acquires from us or our affiliate Notes or shares of
our common stock issued upon conversion of the Notes could be required to hold
such Notes or shares of our common stock for up to one year following such
acquisition. If we are not current in filing our Exchange Act reports, a person
who is our affiliate and who owns Notes or shares of our common stock issued
upon conversion of the Notes could be required to hold such Notes or shares of
our common stock indefinitely.

If, at any time during the six-month period beginning on, and including, the
date that is six months after the last date of original issuance of the Notes,
we fail to timely file any document or report that we are required to file with
the SEC pursuant to Section 13 or 15(d) of the Exchange Act, as applicable
(after giving effect to all applicable grace periods thereunder and other than
reports on Form 8-K), or the Notes are not otherwise freely tradable by holders
other than our affiliates or persons that were our affiliates during the
immediately preceding three months as a result of restrictions pursuant to U.S.
securities law or the terms of the indenture or the Notes, we will pay
additional interest on the Notes. Additional interest will accrue on the Notes
at the rate of 0.50% per annum of the principal amount of Notes outstanding for
each day during such period for which our failure to file has occurred and is
continuing.

Further, if, and for so long as, the restrictive legend on the Notes has not
been removed or otherwise made inapplicable or the Notes are not freely tradable
by holders other than our affiliates or persons that were our affiliates during
the immediately preceding three months (without restrictions pursuant to U.S.
securities law or the terms of the indenture or the Notes) as of the 366th day
after the last date of original issuance of the Notes, we will pay additional
interest on the Notes at a rate equal to 0.50% per annum of the principal amount
of Notes outstanding until the Notes are freely tradable as described above. We
will agree to use our reasonable best efforts to get the Notes assigned an
unrestricted CUSIP as of the 366th day after the last date of original issuance
of the Notes.

We cannot assure you that we will be able to remove the restrictive legend from
the Notes or from any shares of our common stock issued upon conversion of the
Notes.

Any Note or common stock issued upon the conversion or exchange of a Note that
is repurchased or owned by any affiliate of us may not be resold by such
affiliate unless registered under the Securities Act or resold pursuant to an
exemption from the registration requirements of the Securities Act in a
transaction that results in such Note or common stock, as the case may be, no
longer being a “restricted security” (as defined in Rule 144). We will cause any
Note that is repurchased or owned by us to be surrendered to the trustee for
cancellation as described under “—Repurchase and Cancellation” above.

The Notes will be issued with a restricted CUSIP number.

Additional interest pursuant to the foregoing provisions will be payable in
arrears on each interest payment date following accrual in the same manner as
regular interest on the Notes and will be in addition to any additional interest
that may accrue at our election as the sole remedy relating to the failure to
comply with our reporting obligations as described under “—Events of Default;
Notice and Waiver.”

 

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