<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- ACT OF 1934
For The Fiscal Year Ended October 31, 1997
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF SECURITIES
- --- EXCHANGE ACT OF 1934
For the transition period to
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Commission File Number 0-8877
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CREDO PETROLEUM CORPORATION
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(Exact name of registrant as specified in charter)
Colorado 84-0772991
(State of incorporation) (I.R.S. employer identification number)
1801 Broadway, Suite 900, Denver, Colorado 80202-3837
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code:
(303) 297-2200
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.10 Par Value
3,042,447 Shares Outstanding, Net of Treasury Stock,
at the Close of Business on December 31, 1997
(Title of class and shares outstanding)
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
-----
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
As of December 31, 1997, the aggregate market value of common
stock held by non-affiliates of the registrant was approximately
$6,930,000.
DOCUMENTS INCORPORATED BY REFERENCE into Part III hereof - Proxy
Statement to be filed with the Commission in connection with the
company's 1998 Annual Meeting.
<PAGE>
PART I.
ITEM 1. BUSINESS
General
CREDO Petroleum Corporation ("CREDO") was incorporated in
Colorado in 1978. CREDO and its wholly owned subsidiaries, SECO
Energy Corporation and United Oil Corporation ("SECO", "United"
and collectively "the company"), are Denver, Colorado based
independent oil and gas companies which engage in oil and gas
acquisition, exploration, development and production activities
mostly in the Mid-Continent and Rocky Mountain regions of the
United States. The company operates in eight states and has nine
employees. CREDO is an active operator in the Rocky Mountain
Region and in Kansas. United is an active operator doing
business exclusively in Oklahoma, and SECO primarily owns royalty
interests primarily in the Rocky Mountain region. References to
years as used in this report indicate fiscal years ended October
31.
The company's primary business activities are (i) oil and gas
production, (ii) operation of oil and gas properties for the
company's interest and for the interests of third parties,
(iii) purchasing producing oil and gas properties, and
(iv) exploration for and development of oil and gas reserves.
Oil and Gas Operations
Operations are conducted primarily in the Mid-Continent and Rocky
Mountain regions of the United States. The company owns
producing and non-producing property interests in eight states.
The company's staff oversees the operations of existing
properties, evaluates property acquisition opportunities and
drilling prospects, and oversees drilling and completion of new
wells. Operations are concentrated on shallow to medium depth
properties generally ranging from 5,000 to 9,500 feet. A portion
of the funds necessary for acquisition, exploration or
development of properties is raised through farmouts, joint
ventures, or other similar types of cost sharing arrangements.
Involvement of outside participants reduces the company's return
on individual successful ventures. However, it limits the
company's risk from unsuccessful ventures and provides exposure
to a larger volume of activities than would otherwise be
possible.
The company acts as "operator" of 85 wells pursuant to standard
industry Operating Agreements. In addition, the company is
general partner of three private limited partnerships. The
Partnerships are in the production stage of operations.
Markets and Customers
Marketing of the company's oil and gas production is influenced
by many factors which are beyond the company's control and the
exact effect of which cannot be accurately predicted. These
factors include changes in supply and demand, changes in market
prices, regulatory changes, and actions of major foreign
producers.
The company sells its oil production to crude oil purchasing
companies at competitive field prices. Crude oil and condensate
production are readily marketable. Crude oil is cost efficiently
transportable from production centers to demand centers and is,
therefore, subject to world-wide supply and demand. Oil prices
are primarily dependent upon available oil supplies which can
vary significantly depending on production and pricing policies
of OPEC and other major producing countries and on significant
events in major producing regions such as the Persian Gulf War in
1991.
<PAGE>
Deregulation of natural gas pricing and transportation have
resulted in far-reaching and fundamental changes in the
producing, transportation and marketing segments of the natural
gas industry. Gas price decontrol and the advent of an active
spot market for natural gas have resulted in prices received by
the company being subject to significant fluctuations. Prices
tend to rise in peak demand periods such as fall and winter and
to decline during lower demand periods. The company presently
sells most of its gas through short-term contracts with terms of
one year or less which are designed to obtain the best available
prices and deliverabilities. Virtually all of the company's gas
contracts provide for prices based on monthly spot prices for the
applicable market area. These prices are reduced ("netted") by
the costs of gathering and transporting the gas.
The company periodically hedges the price of a portion of its
natural gas and crude oil production by forward selling in the
futures markets. Information concerning hedging activities is
contained in Note (1) to the Consolidated Financial Statements.
Information concerning the company's major customers is included
in Note (5) to the Consolidated Financial Statements. The
company's ability to market its oil and gas is generally not
dependent on a single purchaser.
Refer to "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for further information
regarding oil and gas markets and prices.
Competition and Regulation
The oil and gas industry is intensely competitive. The company
competes with larger more well established oil and gas companies
including, on occasion, major companies. The significant areas
of competition are in acquiring oil and gas reserves, acquiring
leases for drilling or development, and selling natural gas. The
primary competitive factors for acquisitions are the price the
company is willing to pay and the financial resources readily
available to the company to fund acquisitions. The primary
factors which affect the company's ability to sell its natural
gas include proximity to markets, proximity to and capacity of
natural gas pipelines and transportation and processing
facilities, and quantities of gas which can be aggregated for
sale. Although both oil and gas are generally readily saleable
at market prices, they compete for market share with each other
and with other energy sources such as coal and nuclear power.
Oil and gas drilling and production operations are regulated by
various Federal, state and local agencies. These agencies issue
binding rules and regulations which increase the company's cost
of doing business and which carry penalties, often substantial,
for failure to comply. It is anticipated that the aggregate
burden on the company of Federal, state and local regulation will
continue to increase particularly in the area of rapidly changing
environmental laws and regulations. The company believes that
its present operations substantially comply with applicable
regulations. To date, such regulations have not had a material
effect on the company's operations, or the costs thereof. There
are no known environmental or other regulatory matters related to
the company's operations which are reasonably expected to
result in material liability to the company. The company does
not believe that capital expenditures related to environmental
control facilities or other regulatory matters will be material
in fiscal 1998.
No prediction can be made as to what legislation or regulations
may be enacted or what additional legislation or regulations may
be proposed.
<PAGE>
ITEM 2. PROPERTIES
General
During 1997, the company participated for an average 41% interest
in three gas wells drilled in Oklahoma and Wyoming. Two of the
wells have been successfully completed and the third is cased and
awaiting completion. In addition, the company participated for a
20% interest in installation of a new waterflood in southern
Oklahoma which is in the initial stages of responding. Peak
production is expected in 18 to 24 months. The company also
expanded its producing property base by purchasing interests in
30 wells located in Oklahoma and Wyoming, and purchased
undeveloped acreage mostly in gas-prone areas of Wyoming and
Oklahoma. Capital expenditures for oil and gas activities
totaled $1,236,000 in 1997. Refer to "Management's Discussion
and Analysis of Financial Condition and Results of
Operations--Oil and Gas Activities" for information concerning
loss of production from the company's largest producing well
during the year.
During 1996, the company participated in drilling and new zone
completions on three oil wells and three gas wells located in
Oklahoma and Wyoming of which four were successful and two were
dry holes. The company also expanded its producing property base
by purchasing new or additional interests in 44 wells located in
Oklahoma and Wyoming. These activities added nine wells to the
operated properties managed by the company. Undeveloped acreage
was acquired mostly in gas-prone areas of Southwest Wyoming.
Capital expenditures for oil and gas activities totaled $817,000
in 1996.
During 1995, the company participated in drilling and new zone
recompletions on six gas wells and three oil wells located in
Oklahoma and Wyoming of which seven were successful and two
resulted in dry holes. The company purchased new or additional
interests in 48 wells located mostly in areas of Oklahoma where
it has existing operations. Undeveloped acreage was acquired
mostly in areas of Wyoming and Utah which are known for natural
gas reserve potential. Total 1995 property expenditures were
$710,000. During the year, the company sold its interest in 34
marginally economic wells all of which were company operated. In
addition, the company sold, or farmed out for drilling, its
interest in several undeveloped leases. Sales proceeds received
totaled $191,000.
At October 31, 1997 approximately 75% of the value of the
company's estimated reserves were represented by 54 producing
properties which are located in 36 separate fields in six states.
Estimated Proved Oil and Gas Reserves and Future Net Revenues
In 1997, 1996 and 1995, McCartney Engineering, Inc., an
independent petroleum engineering firm, estimated proved reserves
for the company's significant properties which represented 60% in
each year of the total estimated future value of estimated
reserves. Remaining reserves were estimated by the company in
all years. At October 31, 1997, oil represented 27% and natural
gas represented 73% of total reserves denominated in equivalent
barrels using a six Mcf of gas to one barrel of oil conversion
ratio.
<PAGE>
The following table sets forth, as of October 31 of the indicated
year, information regarding the company's proved reserves which
is based on the assumptions set forth in Note (5) to the
Consolidated Financial Statements where additional reserve
information is provided. The average price used to calculate
estimated future net revenues was $19.97, $23.96, and $16.31 per
barrel for oil and $2.69, $2.39, and $1.34 per Mcf for gas as of
October 31, 1997, 1996 and 1995, respectively. Amounts do not
include estimates of future Federal and state income taxes.
<TABLE>
<CAPTION>
Estimated Future
Oil Gas Estimated Future Net Revenues
Year (bbls)* (Mcf)* Net Revenues Discounted at 10%
- -----------------------------------------------------------------
<S> <C> <C> <C> <C>
1997 368,000 5,868,000 $14,212,000 $8,518,000
1996 364,000 5,816,000 $14,562,000 $8,776,000
1995 363,000 5,364,000 $ 7,781,000 $4,842,000
</TABLE>
* Of 1997, 1996 and 1995 amounts, proved developed reserves were
335,000, 334,000, and 363,000 barrels of oil and 4,874,000,
5,048,000, and 5,112,000 Mcf of gas, respectively.
Production, Average Sales Prices and Average Production Costs
The company's net production quantities and average sales price
per unit for the indicated years are set forth below.
<TABLE>
<CAPTION>
1997 1996 1995
- -----------------------------------------------------------------
Product Volume Price Volume Price Volume Price
- -----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Gas (Mcf) 545,000 $ 2.21 550,000 $ 1.59 458,000 $ 1.65
Oil (bbls) 39,000 $20.31 42,000 $19.77 45,000 $16.43
</TABLE>
Average production costs, including production taxes, per unit of
production (using a six to one conversion ratio of Mcfs to
barrels) were $5.90, $5.17 and $5.13 per barrel in 1997, 1996 and
1995, respectively.
Productive Wells and Developed Acreage
Developed acreage at October 31, 1997 totaled 16,700 net and
88,600 gross acres. At October 31, 1997, the company owned
working interests in 48.77 net (153 gross) wells consisting of
20.49 net (51 gross) oil wells and 28.28 net (102 gross) gas
wells. In addition, the company owned royalty and production
payment interests in approximately 171 oil and gas wells. In
1997, the company divested of 5.69 net (14 gross) wells. In the
same period, the company acquired interests in 2.95 net (7 gross)
wells in which it did not previously own an interest and 1.21 net
(23 gross) wells where the company previously owned an interest.
Undeveloped Acreage
The following table sets forth the number of undeveloped acres
which will expire during the next five fiscal years (and
thereafter) unless production is established in the interim.
Undeveloped acres "held-by-production" represent the undeveloped
portions of producing leases which will not expire until
commercial production ceases. A "Net Royalty Acre" is the
equivalent of a 12.5% royalty or production payment interest in
one net working interest acre under lease.
<TABLE>
<CAPTION>
Working
Royalty Interest Acreage Interest Acreage
- ---------------------------------------------------------------
Expiration Net
Year Ending Royalty
October 31 Gross Net Acres Gross Net
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<S> <C> <C> <C> <C> <C> <C>
1998 - - - 2,300 800
1999 7,000 7,000 100 8,100 2,800
2000 700 600 - 3,800 1,500
2001 - - - 1,200 1,000
2002 5,300 5,300 100 1,300 300
Thereafter 6,500 6,500 100 47,100 14,800
Held-By-Production 107,200 86,200 7,700 11,800 2,600
- -----------------------------------------------------------------
126,700 105,600 8,000 75,600 23,800
=================================================================
</TABLE>
<PAGE>
The acreage in the above table is located in eight states
including Oklahoma, Colorado, Wyoming, North Dakota and Utah.
Royalty and production payment interests are referred to
collectively as royalty interests. In general, "royalty" and
"production payment" interests are non-operated interests which
are not burdened by costs of exploration or lease operations,
while "working interests" have operating rights and participate
in such costs. Operating rights in leases underlying the
company's royalties are held by others and, therefore, the
company cannot compel exploration or development of the leases
nor can it control costs of operations.
Drilling and New Zone Recompletions
The following tables set forth the number of gross and net oil
and gas wells in which the company has participated in drilling
or new zone recompletions and the results thereof for the periods
indicated.
<TABLE>
<CAPTION>
Gross Wells
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Year Ended Total Gross Exploratory Development
------------------- ---------------
October 31 Wells Oil Gas Dry Oil Gas Dry
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<S> <C> <C> <C> <C> <C> <C> <C>
1997 3 - 2 - - 1 -
1996 6 2 1 2 - 1 -
1995 9 2 2 2 - 3 -
1978-1994 123 7 25 67 15 5 4
- -----------------------------------------------------------------
141 11 30 71 15 10 4
=================================================================
</TABLE>
<TABLE>
<CAPTION>
Net Wells
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Year Ended Total Net Exploratory Development
----------------- ----------------
October 31 Wells Oil Gas Dry Oil Gas Dry
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<S> <C> <C> <C> <C> <C> <C> <C>
1997 1.250 - .750 - - .500 -
1996 1.381 .460 .472 .213 - .235 -
1995 2.168 .150 .475 .975 - .568 -
1978-1994 19.757 .791 3.276 9.505 4.350 .351 1.485
- -----------------------------------------------------------------
24,556 1.401 4.973 10.693 4.350 1.654 1.485
=================================================================
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
The company is not a party to any material pending legal
proceedings. No such proceedings have been threatened and none
are contemplated by the company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during
the fourth quarter of fiscal 1997.
<PAGE>
PART II.
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The company's common stock is traded on the National Association
of Securities Dealers Automated Quotation System under the symbol
"CRED". Market quotations shown below were reported by the
National Association of Securities Dealers, Inc. and represent
prices between dealers excluding retail mark-up or commissions.
<TABLE>
<CAPTION>
1997 1996
- ----------------------------------------------------------------
Fiscal Quarter Ended High Low High Low
- ----------------------------------------------------------------
<S> <C> <C> <C> <C>
January 31 $2.06 $1.63 $1.75 $1.50
April 30 2.13 1.75 1.88 1.63
July 31 2.13 1.94 2.06 1.63
October 31 4.00 1.94 2.00 1.50
</TABLE>
At December 31, 1997, the company had 4,993 shareholders of
record. The company has never paid a dividend and does not
expect to pay any dividends in the foreseeable future. Earnings
are reinvested in business activities.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
October 31 1997 1996 1995 1994 1993
- -------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $2,690,000 $2,287,000 $2,129,000 $1,931,000 $2,123,000
Net income
(loss) before
accounting
change and
extraordinary
item 439,000 260,000 251,000 150,000 (375,000)*
Net income
(loss) 439,000 260,000 251,000 150,000 (576,000)**
Per share amounts:
Before tax
accounting
change $.14 $.08 $.08 $.05 $(.11)*
After tax
accounting
change .14 .08 .08 .05 (.17)**
Total
assets $10,546,000 $9,187,000 $8,718,000 $9,150,000 $8,447,000
Long-term debt - - - - -
Stockholders'
equity 8,185,000 7,789,000 7,688,000 7,615,000 7,577,000
</TABLE>
* Includes a $556,000, net of tax, non-cash write-down in the
carrying value of oil and gas properties.
** In addition to the non-cash write-down discussed above,
includes a one time, non-cash accounting charge of $201,000
for the effect of adopting Statement of Financial Standards
No. 109, Accounting for Income Taxes.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
The company's working capital and cash flow represent a
significant capital resource and source of liquidity. At fiscal
year-end, October 31, 1997, working capital was $2,575,000. Cash
generated by operating activities totaled $1,743,000 in 1997.
Working capital and cash flow were used primarily to fund oil and
gas acquisition and development expenditures totaling $1,236,000
and to purchase 23,000 shares of treasury stock for $43,000.
<PAGE>
Existing working capital and anticipated cash flow are expected
to be sufficient to fund fiscal 1998 operations. However, if the
company were to make one or more major acquisitions during the
coming year, issuance of additional stock, bank borrowings or
other forms of debt financing might be considered. At fiscal
year-end, the company had no lines of credit or other bank
financing arrangements. Because earnings are anticipated to be
reinvested in operations, cash dividends are not expected to be
paid in the foreseeable future. Commitments for future capital
expenditures were not material at fiscal year-end. The timing of
most capital expenditures for exploration and development is
relatively discretionary. Therefore, the company can normally
plan expenditures to coincide with available funds.
The company has no defined benefit plans and no obligations for
post retirement employee benefits. The company has evaluated its
computer hardware and software systems and does not anticipate
any material issues as a result of modifications related to the
year 2000.
Product Prices, Production and Interest Rates
Numerous uncertainties exist in the oil and gas industry which
could adversely affect the company and which are beyond the
company's ability to predict with reasonable accuracy.
Deregulation of natural gas pricing and transportation have
resulted in far-reaching and fundamental changes in the
producing, transportation and marketing segments of the natural
gas industry. Gas price decontrol and the advent of an active
spot market for natural gas have resulted in gas prices received
by the company being subject to significant fluctuations. Prices
tend to rise in peak demand periods such as the fall and winter,
and to decline during lower demand periods.
Uncertainties also exist with respect to the supply of oil
available to world markets. OPEC and world events such as the
Persian Gulf War significantly influence world-wide supply and
prices for petroleum products.
Volatile gas and oil prices have increasingly become a reality
for the energy business. Although product prices are key to the
company's ability to operate profitably and to budget capital
expenditures, they are beyond the company's control and are
difficult to predict. Since 1991, the company has occasionally
hedged product prices by forward selling a portion of its
production in the NYMEX futures market. This is done when the
price relationship (the "basis") between the futures markets and
the cash markets where the company sells its gas is stable within
historical ranges, and when, in the company's opinion, the
current price of a product is adequate to insure reasonable
returns and downside price risks appear to be substantial. The
company closes its hedges by purchasing offsetting "long"
positions in the futures market at then prevailing prices.
Accordingly, the gain or loss on the hedge position will depend
on futures prices at the time offsetting "long" positions are
purchased. Hedging gains and losses are included in revenues
from oil and gas sales.
During 1995 and 1997, the company hedged substantial portions of
its gas production. Hedge positions in fiscal 1996 were not
significant. Hedging losses were immaterial in 1997 and 1996.
Hedging gains were $161,000 in 1995.
Oil and gas sales volume and price comparisons for the indicated
years ended October 31 are set forth below.
<TABLE>
<CAPTION>
1997 1996 1995
- -----------------------------------------------------------------
Product Volume Price Volume Price Volume Price
- -----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Gas (Mcf) 545,000 $ 2.21 550,000 $ 1.59 458,000 $ 1.65
Oil (bbls) 39,000 $20.31 42,000 $19.77 45,000 $16.43
</TABLE>
The average interest rate earned on short-term investments was
5.8% in 1997, 5.8% in 1996, and 6.4% in 1995. Current interest
rates available to the company have not changed significantly.
<PAGE>
Oil and Gas Activities
During 1997, the company participated for an average 41% interest
in three gas wells drilled in Oklahoma and Wyoming. Two of the
wells have been successfully completed and the third is cased and
awaiting completion. In addition, the company participated for a
20% interest in installation of a new waterflood in southern
Oklahoma which is in the initial stages of responding. Peak
production is expected in 18 to 24 months. The company also
expanded its producing property base by purchasing interests in
30 wells located in Oklahoma and Wyoming, and purchased
undeveloped acreage mostly in gas-prone areas of Wyoming and
Oklahoma. Capital expenditures for oil and gas activities
totaled $1,236,000 in 1997.
Historically, the company's most significant producing property
has been the 13,800 foot Tracy Federal #1 well for which the
company serves as operator and owns a 52% interest. The well is
located in Converse County, Wyoming and has recently accounted
for 9% of the company's production and 10% of reserves. The well
is primarily a gas well with associated condensate production.
It is a mature property having produced over six billion cubic
feet of gas and 500,000 barrels of oil over its thirty year life.
In July 1997, production from the Tracy Federal well dropped
precipitously due to "loading" caused by insufficient bottom hole
pressures to generate adequate gas velocities in 2-7/8" tubing to
lift fluids out of the wellbore. During August 1997, the company
installed 1-3/4" coil tubing in the well. After several
unanticipated mechanical difficulties, the well responded as
expected during September and October of 1997 with production
steadily increasing as fluids were unloaded from the wellbore.
However, in November 1997, the well suddenly ceased producing.
Tests have indicated that a substance consisting mostly of iron
minerals has filled the bottom of the wellbore and plugged the
perforations and possibly the near-wellbore portion of the
producing formation. The company believes that the substance
seeped from the casing annulus through a possible leak in the
packer.
The company is presently evaluating the options, costs and
economics to remove the packer from the well, clean out the
substance plugging the perforations, and reperforate the
producing formation. These are complex issues, particularly in a
deep, under-pressured well, and they involve high costs and high
risks.
After consultation with its independent reservoir engineer, the
company concluded that reserves related to the Tracy Federal well
no longer qualify as "proved" reserves which are reported in its
financial statements. Accordingly, the company wrote-off the
reserves as of its fiscal October 31 year-end. The reserves are
currently classified in the "probable" category pending a
decision on whether to attempt to revive production from the
well.
During 1996, the company participated in drilling and new zone
completions on three oil wells and three gas wells located in
Oklahoma and Wyoming of which four were successful and two were
dry holes. The company also expanded its producing property base
by purchasing new or additional interests in 44 wells located in
Oklahoma and Wyoming. These activities added nine wells to the
operated properties managed by the company. Undeveloped acreage
was acquired mostly in gas-prone areas of Southwest Wyoming.
Capital expenditures for oil and gas activities totaled $817,000
in 1996.
<PAGE>
Results of Operations
In 1997, total revenues rose 18% to $2,690,000 compared to
$2,287,000 in 1996. As the above oil and gas price/volume table
shows, total gas price realizations, which reflect the effect of
hedging transactions, increased to $2.21 per Mcf and oil price
realizations rose 3% to $20.31 per barrel. The net effect of
these price changes was to increase oil and gas sales by
$364,000. Net "wellhead" gas prices received rose 36% to $2.21
per Mcf compared to $1.63 per Mcf last year. Gas hedging
activities generated losses of $.04 per Mcf in 1996.
Accordingly, total gas price realizations, which include the
effect of hedging transactions, increased 39% to $2.21 in 1997
per Mcf compared to $1.59 per Mcf last year. Gas volumes
produced declined less than 1% and oil volumes produced declined
7%. The net effect of these volume changes was to decrease oil
and gas sales by $75,000. The decline in production resulted
from loss of production from the company's largest producing well
about mid-year 1997 (as more fully discussed above) and from sale
of a non-core waterflood property. The loss of gas production
was substantially offset by increased production from new wells
added during the year and at the end of last year. Operating
income increased 9% as a result of operated wells added through
drilling and acquisitions. Interest and other income increased
due to improved performance on certain of the company's managed
investments.
In 1996, total revenues rose 7% to $2,287,000 compared to
$2,129,000 in 1995 with oil and gas sales accounting for
virtually all of the increase. As the above oil and gas
price/volume table shows, total gas price realizations, which
reflect the effect of hedging transactions, fell slightly to
$1.59 Mcf and oil price realizations rose 20% to $19.77 per
barrel. The net effect of these price changes was to increase
oil and gas sales by $113,000. Net "wellhead" gas prices
received rose 25% to $1.63 per Mcf compared to $1.30 per Mcf last
year. Gas hedging activities generated losses of $.04 per Mcf in
1996 compared to gains totaling $.35 per Mcf in 1995.
Accordingly, total gas price realizations, which include the
effect of hedging transactions, fell slightly to $1.59 in 1996
per Mcf compared to $1.65 per Mcf last year. Gas volumes
produced increased 20% and oil volumes produced declined 7%. The
net effect of these volume changes was to increase oil and gas
sales by $97,000. The gas volume increase was primarily due to
wells placed on stream late in fiscal 1995, production from new
acquisitions, and periodic shut-in of some large gas properties
last year due primarily to low gas prices. The decline in oil
volumes is mostly due to normal production declines. Operating
income increased slightly. Interest and other income declined
due to lower yields on cash investments and lower net returns on
the company's bond investments.
In 1997, total costs and expenses increased 7% to $2,014,000
compared to $1,886,000 in 1996. Depreciation, depletion and
amortization ("DD&A") increased 6% compared to 1996 due to
reclassification of the reserves attributed to the company's
largest producing well from the "proved" category of reserves
reported for financial purposes to the "probable" category when
the well ceased producing as discussed above. Oil and gas
production expenses increased 11% due to a full year of operating
costs associated with the interests in 19 new wells and in 25
existing wells purchased during fiscal 1996, and higher
production taxes as a result of the higher oil and gas revenues.
General and administrative expenses increased 2% primarily as a
result of inflationary pressures on administrative costs. The
effective tax rate was approximately 35% in both years.
In 1996, total costs and expenses increased 8% to $1,886,000
compared to $1,751,000 in 1995. Depreciation, depletion and
amortization ("DD&A") for 1996 increased 9% compared to 1995 due
primarily to a 10% increase in oil and gas production. Oil and
gas production expenses increased 11% due mostly to additions of
interests in 19 new wells and in 25 wells where the company
already owned an interest. General and administrative expenses
increased 3% primarily as a result of inflationary pressures on
administrative costs. The effective tax rate was approximately
35% in 1996 and 34% in 1995.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS
Index to Consolidated Financial Statements
Consolidated Balance Sheets, October 31, 1997 and 199
Consolidated Statements of Operations for the Three Years
Ended October 31, 1997
Consolidated Statements of Stockholders' Equity for
the Three Years Ended October 31, 1997
Consolidated Statements of Cash Flows for the Three Years
Ended October 31, 1997
Notes to Consolidated Financial Statements
Independent Auditors' Report
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
October 31, 1997 and 1996
CREDO PETROLEUM CORPORATION AND SUBSIDIARIES
- ----------------------------------------------------------------
Assets 1997 1996
- ----------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 635,000 $ 344,000
Temporary cash investments 2,698,000 2,529,000
Receivables:
Trade 318,000 143,000
Accrued oil and gas sales 324,000 235,000
Accrued interest 3,000 6,000
Other 55,000 30,000
- ----------------------------------------------------------------
4,033,000 3,287,000
- ----------------------------------------------------------------
Oil and gas properties, net, at cost,
using full cost method:
Unevaluated 867,000 733,000
Evaluated 5,477,000 4,903,000
- ----------------------------------------------------------------
6,344,000 5,636,000
- ----------------------------------------------------------------
Long-term assets:
Operating rights and other
intangible assets, net 140,000 226,000
Other, net 29,000 38,000
- ----------------------------------------------------------------
169,000 264,000
- ----------------------------------------------------------------
$10,546,000 $9,187,000
================================================================
Liabilities and Stockholders' Equity
- ----------------------------------------------------------------
Current liabilities:
Accounts payable $1,442,000 $ 711,000
Income taxes payable 16,000 6,000
- ----------------------------------------------------------------
1,458,000 717,000
- ----------------------------------------------------------------
Deferred income taxes, net 903,000 681,000
- ----------------------------------------------------------------
Stockholders' equity:
Preferred stock, without par value, 5,000,000
shares authorized, none issued - -
Common stock, $.10 par value, 20,000,000
shares authorized, 3,666,000 shares issued 366,000 366,000
Capital in excess of par value 6,236,000 6,236,000
Retained earnings 2,639,000 2,200,000
Treasury stock, at cost, 624,000 shares in
1997 and 601,000 shares in 1996 (1,056,000)(1,013,000)
- ----------------------------------------------------------------
8,185,000 7,789,000
- ----------------------------------------------------------------
Commitments
- ----------------------------------------------------------------
$10,546,000 $9,187,000
================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Years Ended October 31, 1997
CREDO PETROLEUM CORPORATION AND SUBSIDIARIES
- ----------------------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Oil and gas sales $1,992,000 $1,703,000 $1,493,000
Operating 458,000 421,000 416,000
Interest and other 240,000 163,000 220,000
- ----------------------------------------------------------------
2,690,000 2,287,000 2,129,000
- ----------------------------------------------------------------
Costs and expenses:
General and
administrative 633,000 618,000 600,000
Depreciation, depletion and
amortization 614,000 577,000 529,000
Oil and gas production 767,000 691,000 622,000
- ----------------------------------------------------------------
2,014,000 1,886,000 1,751,000
- ----------------------------------------------------------------
Income before income taxes 676,000 401,000 378,000
Income taxes (237,000) (141,000) (127,000)
- ----------------------------------------------------------------
Net income $ 439,000 $ 260,000 $ 251,000
================================================================
Net income per share $.14 $.08 $.08
================================================================
Weighted average
common and equivalent shares
outstanding during the
period 3,050,000 3,104,000 3,203,000
================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Three Years Ended October 31, 1997
CREDO PETROLEUM CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------
Common Stock Capital In Total
---------------- Excess Of Retained Treasury Stockholders'
Shares Amount Par Value Earnings Stock Equity
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances, November
1, 1994 3,666,000 $366,000 $6,236,000 $1,689,000 $(676,000) $7,615,000
Purchase of treasury
stock - - - - (178,000) (178,000)
Net income - - - 251,000 - 251,000
- --------------------------------------------------------------------------------
Balances, October
31, 1995 3,666,000 366,000 6,236,000 1,940,000 (854,000) 7,688,000
Purchase of treasury
stock - - - - (159,000) (159,000)
Net income - - - 260,000 - 260,000
- --------------------------------------------------------------------------------
Balances, October
31, 1996 3,666,000 366,000 6,236,000 2,200,000 (1,013,000) 7,789,000
Purchase of treasury
stock - - - - (43,000) (43,000)
Net income - - - 439,000 - 439,000
- ---------------------------------------------------------------------------------
Balances, October
31, 1997 3,666,000 $366,000 $6,236,000 $2,639,000 $(1,056,000) $8,185,000
=================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Years Ended October 31, 1997
CREDO PETROLEUM CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating
activities:
Net income $ 439,000 $ 260,000 $ 251,000
Noncash expenses included in
net income:
Depreciation, depletion and
amortization 614,000 577,000 529,000
Deferred income taxes 222,000 124,000 127,000
Other 13,000 14,000 18,000
Changes in assets and liabilities:
Trade receivables (175,000) (14,000) 16,000
Accrued oil and gas sales (89,000) (66,000) 27,000
Accrued interest 3,000 - 7,000
Other current assets (25,000) 4,000 29,000
Accounts payable 731,000 238,000 (177,000)
Income taxes payable 10,000 6,000 -
- --------------------------------------------------------------------
Net cash provided by
operating activities 1,743,000 1,143,000 827,000
- --------------------------------------------------------------------
Cash flows from investing activities:
Increase in oil and gas
properties (1,236,000) (817,000) (519,000)
Purchases of certificates of
deposit and other investments (2,333,000) (1,791,000) (1,475,000)
Proceeds from certificates of
deposit and other investments 2,138,000 2,106,000 1,966,000
Investments in managed funds 26,000 (264,000) (340,000)
Other (4,000) (4,000) (27,000)
- --------------------------------------------------------------------
Net cash used in investing
activities (1,409,000) (770,000) (395,000)
- --------------------------------------------------------------------
Cash flows from financing activities:
Purchase of treasury stock (43,000) (159,000) (178,000)
Proceeds from (payment of)
short-term note payable - - (455,000)
- --------------------------------------------------------------------
Net cash provided by (used in)
financing activities (43,000) (159,000) (633,000)
- --------------------------------------------------------------------
Increase (decrease) in cash
and cash equivalents 291,000 214,000 (201,000)
Cash and cash equivalents:
Beginning of year 344,000 130,000 331,000
- --------------------------------------------------------------------
End of year $ 635,000 $ 344,000 $ 130,000
====================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1997
CREDO PETROLEUM CORPORATION AND SUBSIDIARIES
- -----------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Basis of Presentation
The consolidated financial statements include the accounts of
CREDO Petroleum Corporation and its wholly owned subsidiaries
(the "company"). The company engages in oil and gas acquisition,
exploration, development and production activities in the United
States. Certain operations are conducted through three private
limited partnerships (the "Partnerships") which, as general
partner, the company manages and controls. The company's general
and limited partner interests in the Partnerships are combined on
the proportionate share basis in accordance with accepted
industry practice. All significant intercompany transactions
have been eliminated. Certain reclassifications have been made
to prior year amounts with no effect on net income. All
references to years in these Notes refer to the company's fiscal
October 31 year.
Cash and Cash Equivalents
Cash equivalents include highly liquid investments with original
maturities of three months or less. Temporary cash investments
include certificates of deposit and other short-term investments
which are reasonably expected to mature, or to be liquidated,
within twelve months.
Oil and Gas Properties
The company follows the full cost method of accounting for its
oil and gas operations. Under this method all costs incurred in
the acquisition, exploration, and development of oil and gas
properties are capitalized in one cost center, including certain
internal costs directly associated with such activities which
totaled $108,000 in 1997, 1996 and 1995. Proceeds from sales of
oil and gas properties are credited to the cost center with no
gain or loss recognized unless such adjustments would
significantly alter the relationship between capitalized costs
and proved oil and gas reserves. Estimated dismantlement,
restoration, and abandonment costs are approximately offset by
estimated residual values of lease and well equipment.
Accordingly, no accrual for such costs has been recorded.
If capitalized costs, less related accumulated amortization and
deferred income taxes, exceed the "full cost ceiling", the excess
is expensed in the period such excess occurs. The full cost
ceiling includes an estimated discounted value of future net
revenues attributable to proved reserves using current product
prices and operating costs, and an estimate of the value of
unproved properties which are included in the cost center. Cost
of oil and gas properties are amortized using the units of
production method. The company's composite depreciation,
depletion and amortization ("DD&A") rate per equivalent barrel
produced was $4.07 in 1997, $3.66 in 1996 and $3.66 in 1995.
Unevaluated properties consist primarily of lease acquisition and
maintenance costs. Evaluation normally takes three to five
years. Of the unevaluated property costs, $228,000 and $108,000
were incurred in 1997 and 1996, respectively.
<PAGE>
Operating Rights and Other Intangible Assets
Operating rights represent contractual agreements designating the
company to conduct and supervise the day to day operations of a
well in return for a specified monthly fee. Amortization of
purchased operating rights is based on the relationship of the
number of months of operations to the estimated economic lives of
the wells. Amortization was $86,000 in each of the three years
ended October 31, 1997. Accumulated amortization was $767,000
and $681,000 at October 31, 1997 and 1996, respectively.
Natural Gas and Crude Oil Price Hedging
The company periodically hedges the price of its oil and gas
production when the potential for significant downward price
movement is anticipated. Hedging transactions take the form of
forward, or "short", selling in the NYMEX futures market, and are
closed by purchasing offsetting "long" positions. Such hedges do
not exceed anticipated production volumes, are expected to have
reasonable correlation between price movements in the futures
market and the cash markets where the company's production is
located, and are authorized by the company's Board of Directors.
All other futures transactions are accounted for as speculative
transactions and gains and losses are immediately recognized.
Hedges are expected to be closed as related production occurs but
may be closed earlier if the anticipated downward price movement
occurs or if the company believes that the potential for such
movement has abated. The company's most significant hedging risk
is that expected correlations in price movements as discussed
above do not occur, and thus, that gains or losses in one market
are not fully offset to opposite moves in the other market. The
company had approximately 20% of its expected 1998 natural gas
production hedged at October 31, 1997. The hedges were
subsequently closed in the first quarter of fiscal 1998 at a
slight profit. Hedging gains and losses are recognized as
adjustments to oil and gas sales as the hedged product is
produced. Hedging losses were immaterial in 1997 and 1996.
Hedging gains were $161,000 in 1995. Gains and losses on
speculative transactions were immaterial in all years.
Accounting Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Per Share Amounts
Per share amounts are computed on the basis of the weighted
average number of common shares and equivalents outstanding
during the year.
Statements of Financial Accounting Standard ("SFAS") 128
requiring a change in the calculation of earnings per share and
SFAS 130 requiring disclosure of "comprehensive income" are
required to be adopted by the company for its years ending 1998
and 1999, respectively. The company has not fully evaluated the
impact of these SFASs but does not expect it to be material.
<PAGE>
(2) COMMON STOCK AND PREFERRED STOCK
During 1997 and 1996, the company acquired 23,000 and 94,000
shares of its common stock at a total cost of $43,000 and
$159,000, respectively. These transactions have been recorded as
treasury stock.
The company has authorized 5,000,000 shares of preferred stock
which may be issued in series and with preferences as determined
by the company's Board of Directors. Approximately 100,000
shares of the company's authorized but unissued preferred stock
have been reserved for issuance pursuant to the provisions of the
company's Shareholders' Rights Plan.
Options to purchase 50,000 shares which were outstanding under a
stock plan which expired in 1997 and were not exercised and
expired. During 1997, a new stock option plan was approved which
provides for granting of up to 450,000 incentive and
non-statutory stock options. Under the new plan, option exercise
prices, vesting provisions, option terms, and other provisions
are generally left to the discretion of the company's Board of
Directors.
During 1997, incentive options to purchase 240,000 shares and
non-statutory options to purchase 175,000 shares were granted
primarily to officers and directors at $1.94, the fair market
value of the company's stock on the date of grant. At
October 31, 1997, options to purchase 83,000 shares were
exercisable and options become exercisable in the future as
follows: 125,000 in 1998 and 1999, and 41,000 in 2000 and 2001.
The options expire in 2002. Incentive stock options granted
under the plan are subject to shareholder approval of the plan at
the 1998 Annual Meeting of Shareholders. If the plan is not
approved by shareholders, all incentive options will become
non-statutory options.
Under current accounting rules the company has elected not to
record compensation costs for options granted to employees and
directors since the exercise price is equal to the fair market
value at date of grant. Had compensation cost been recorded, net
income and net income per share for 1997 would have been
$420,000, or $.14 per share, compared to $439,000, or $.14 per
share, and for 1996 would have been unchanged. For the purpose
of this disclosure, the fair value of each option granted in 1997
was estimated on the date of grant using the Black-Scholes
option-pricing model with an expected volatility of 40.0%, a
risk-free interest rate of 6%, no expected dividends and an
expected term of 5 years.
(3) COMMITMENTS
The company leases office facilities under a five year lease
agreement effective January 1, 1996. The lease agreement
requires payments of $40,000 in 1998 escalating ratably over
three years to $45,000 in 2001. Total rental expense in fiscal
1997, 1996, and 1995 was approximately $42,000. The company has
no capital leases and no other operating lease commitments.
<PAGE>
(4) INCOME TAXES
The company follows the asset and liability method of accounting
for deferred income taxes. Deferred tax assets and liabilities
are determined based on the temporary differences between the
financial statement and tax basis of assets and liabilities.
The income tax expense recorded in the Consolidated Statements of
Operations consists of the following:
<TABLE>
<CAPTION>
Years Ended October 31 1997 1996 1995
- ---------------------------------------------------------------
<S> <C> <C> <C>
Current $ 15,000 $ 17,000 $ -
Deferred 222,000 124,000 127,000
- ----------------------------------------------------------------
$ 237,000 $ 141,000 $ 127,000
================================================================
</TABLE>
The effective income tax rate differs from the U.S. Federal
statutory income tax rate due to the following:
<TABLE>
<CAPTION>
Years Ended October 31 1997 1996 1995
- ---------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory income tax rate 34% 34% 34%
Effect of graduated tax rates 7 (4) 2
State income taxes 2 4 2
Percentage depletion (8) 1 (5)
Other, net - - 1
- ----------------------------------------------------------------
35% 35% 34%
================================================================
</TABLE>
The principal sources of temporary differences resulting in
deferred tax assets and tax liabilities at October 31, 1997 and
1996 are as follows:
<TABLE>
<CAPTION>
October 31 1997 1996
- ---------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Percentage depletion carryforwards $ 287,000 $226,000
Alternative minimum tax carryforwards 68,000 56,000
Investment tax credit carryforwards 13,000 16,000
- ---------------------------------------------------------------
Total deferred tax assets 368,000 298,000
- ---------------------------------------------------------------
Deferred tax liabilities:
Intangible drilling, leasehold and
other exploration costs capitalized
for financial reporting purposes but
deducted for tax purposes (1,184,000) (906,000)
State taxes and other (87,000) (73,000)
- ---------------------------------------------------------------
Total gross deferred tax liabilities (1,271,000) (979,000)
- ---------------------------------------------------------------
Net deferred tax liability $ (903,000)$(681,000)
===============================================================
</TABLE>
At October 31, 1997, the company has investment tax credit
carryforwards of $13,000 which expire in varying amounts through
2001, and has statutory depletion carryforwards of $933,000.
<PAGE>
(5) SUPPLEMENTARY OIL AND GAS INFORMATION
<TABLE>
<CAPTION>
Capitalized Costs
October 31 1997 1996 1995
- --------------------------------------------------------------
<S> <C> <C> <C>
Unproved properties not
being amortized $ 867,000 $ 733,000 $ 709,000
Properties being amortized 11,895,000 10,793,000 10,000,000
Accumulated depreciation,
depletion and amortization (6,418,000) (5,890,000) (5,399,000)
- ---------------------------------------------------------------
Total capitalized costs $ 6,344,000 $ 5,636,000 $ 5,310,000
===============================================================
</TABLE>
<TABLE>
<CAPTION>
Acquisition, Exploration and Development Costs Incurred
Years Ended October 31 1997 1996 1995
- ---------------------------------------------------------------
<S> <C> <C> <C>
Property acquisition costs,
net of sales proceeds:
Proved $ 145,000 $ 303,000 $ 37,000
Unproved - 28,000 (5,000)
Exploration costs 860,000 421,000 184,000
Development costs 231,000 65,000 303,000
- ---------------------------------------------------------------
Total cost incurred $ 1,236,000 $ 817,000 $ 519,000
===============================================================
</TABLE>
Major Customers and Operating Region
The company operates exclusively within the United States.
Except for cash investments, all of the company's assets are
employed in, and all its revenues are derived from, the oil and
gas industry. The company had sales in excess of 10% of total
revenues to oil and gas purchasers as follows: Total Petroleum,
Inc. 20% in 1997 and 19% in 1996; and GPM Gas Corporation 12% in
1997.
Oil and Gas Reserve Data (Unaudited)
In 1997, 1996 and 1995, independent petroleum engineers estimated
proved reserves for the company's significant properties which
represented 60% in each year of total estimated future net
revenues. The remaining reserves were estimated by the company.
Reserve definitions and pricing requirements prescribed by the
Securities and Exchange Commission were used. The determination
of oil and gas reserve quantities involves numerous estimates
which are highly complex and interpretive. The estimates are
subject to continuing re-evaluation and reserve quantities may
change as additional information becomes available. Estimated
values of proved reserves were computed by applying prices in
effect at October 31 of the indicated year. The average price
used was $19.97, $23.96 and $16.31 per barrel for oil and $2.69,
$2.39 and $1.34 per Mcf for gas in 1997, 1996 and 1995,
respectively. Estimated future costs were calculated assuming
continuation of costs and economic conditions at the reporting
date.
<PAGE>
Total estimated proved reserves and the changes therein are set forth
below for the indicated fiscal year.
<TABLE>
<CAPTION>
1997 1996 1995
- -----------------------------------------------------------------------------
Gas(Mcf) Oil(bbls) Gas(Mcf) Oil(bbls) Gas(Mcf) Oil(bbls)
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Proved reserves:
Balance, November 1 5,816,000 364,000 5,364,000 363,000 5,188,000 363,000
Revisions of
previous estimates (109,000) 11,000 (96,000) 16,000 116,000 37,000
Extensions and
discoveries 462,000 32,000 302,000 4,000 459,000 3,000
Purchases of
reserves in place 248,000 4,000 796,000 23,000 97,000 29,000
Sales of reserves
in place (4,000) (4,000) - - (38,000) (24,000)
Production (545,000)(39,000) (550,000)(42,000) (458,000) (45,000)
- -----------------------------------------------------------------------------
Balance, October 31 5,868,000 368,000 5,816,000 364,000 5,364,000 363,000
=============================================================================
Proved developed reserves:
Beginning of period 5,048,000 334,000 5,112,000 363,000 4,936,000 363,000
=============================================================================
End of period 4,874,000 335,000 5,048,000 334,000 5,112,000 363,000
=============================================================================
</TABLE>
The standardized measure of discounted future net cash flows from
reserves is set forth below as of October 31 of the indicated fiscal
year.
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------
<S> <C> <C> <C>
Future cash inflows $23,112,000 $22,609,000 $13,102,000
Future production and
development costs (8,899,000) (8,047,000) (5,322,000)
Future income tax expense (1,848,000) (1,893,000) (1,050,000)
- ---------------------------------------------------------------------
Future net cash flows 12,365,000 12,669,000 6,730,000
10% discount factor (4,953,000) (5,068,000) (2,557,000)
- ---------------------------------------------------------------------
Standardized measure of discounted
future net cash flows $ 7,412,000 $ 7,601,000 $ 4,173,000
=====================================================================
</TABLE>
The principal sources of change in the standardized measure of
discounted future cash flows from reserves are set forth below for the
indicated fiscal year.
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Balance, November 1 $ 7,601,000 $ 4,173,000 $ 4,294,000
Sales of oil and gas produced,
net of production costs (1,225,000) (1,039,000) (709,000)
Net changes in prices, production
and development costs (328,000) 2,641,000 (590,000)
Revisions of quantity
estimates and other (44,000) 87,000 363,000
Purchases of reserves in place 269,000 1,347,000 243,000
Sales of reserves in place (37,000) - (151,000)
Extensions and discoveries, net of future
development and production costs 389,000 483,000 329,000
Accretion of discount 760,000 417,000 429,000
Net change in income taxes 27,000 (508,000) (35,000)
- ---------------------------------------------------------------------
Balance, October 31 $ 7,412,000 $ 7,601,000 $ 4,173,000
=====================================================================
</TABLE>
<PAGE>
<Audit-Report>
INDEPENDENT AUDITORS' REPORT
CREDO PETROLEUM CORPORATION AND SUBSIDIARIES
The Board of Directors and Stockholders
CREDO Petroleum Corporation
Denver, Colorado
We have audited the accompanying consolidated balance sheets of
CREDO Petroleum Corporation and subsidiaries as of October 31,
1997 and 1996, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the
years in the three year period ended October 31, 1997. These
consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of CREDO Petroleum Corporation and subsidiaries as of
October 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the years in the three year
period ended October 31, 1997, in conformity with generally
accepted accounting principles.
HEIN + ASSOCIATES LLP
Denver, Colorado
January 7, 1998
</Audit-Report>
<PAGE>
PART III.
ITEM 9. EXECUTIVE COMPENSATION
Incorporated by reference to the company's Proxy Statement to be
filed with the Commission pursuant to Regulation 14A within 120
days of the end of the company's fiscal year 1997.
ITEM 10. MANAGEMENT REMUNERATION AND TRANSACTIONS
Incorporated by reference to the company's Proxy Statement to be
filed with the Commission pursuant to Regulation 14A within 120
days of the end of the company's fiscal year 1997.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Incorporated by reference to the company's Proxy Statement to be
filed with the Commission pursuant to Regulation 14A within 120
days of the end of the company's fiscal year 1997.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the company's Proxy Statement to be
filed with the Commission pursuant to Regulation 14A within 120
days of the end of the company's fiscal year 1997.
PART IV.
ITEM 13. FINANCIAL STATEMENTS AND SCHEDULES, EXHIBITS AND
REPORTS ON FORM 8-K
(a) The Index to Financial Statements is set forth under
Item 8.
(c) Exhibits
3(a)(i) Articles of Incorporation of CREDO Petroleum Corporation
& 4(a) (incorporated by reference to Form 10-K dated
October 31, 1982).
3(a)(ii) Articles of Amendment of Articles of Incorporation,
dated March 9, 1982 (incorporated by reference to
Form 10-K dated October 31, 1982).
3(a)(iii) Articles of Amendment of Articles of Incorporation,
dated October 28, 1982 (incorporated by reference to
Form 10-K dated October 31, 1982).
3(a)(iv) Articles of Amendment of Articles of Incorporation
dated April 18, 1984 (incorporated by reference to
Form 10-K dated October 31, 1984).
3(a)(v) Articles of Amendment of Articles of Incorporation
dated April 18, 1984 (incorporated by reference to
Form 10-K dated October 31, 1984).
3(a)(vi) Articles of Amendment of Articles of Incorporation
dated April 2, 1985 (incorporated by reference to
Form 10-K dated October 31, 1985).
3(a)(vii) Articles of Amendment of Articles of Incorporation
dated March 25, 1986 (incorporated by reference to
Form 10-K dated October 31, 1986).
<PAGE>
3(a)
(viii) Articles of Amendment of Articles of Incorporation
dated March 24, 1988 (incorporated by reference to
Form 10-K dated October 31, 1989).
3(a)(ix) Articles of Amendment to Articles of Incorporation
dated May 11, 1990.
(b)(i) By-Laws of CREDO Petroleum Corporation, as amended
May 27, 1981 (incorporated by reference to Form
10-K dated October 31, 1981).
3(b)(ii) By-Laws of CREDO Petroleum Corporation, as amended
May 27, 1981 and January 30, 1985 (incorporated by
reference to Form 10-K dated October 31, 1985).
3(b)
(iii) By-Laws of CREDO Petroleum Corporation, as amended
October 30, 1986 (incorporated by reference to
Form 10-K dated October 31, 1986).
3(b)(iv) Amendment to Article X of CREDO Petroleum
Corporation's By-Laws dated March 24, 1988
(incorporated by reference to the company's
definitive proxy dated February 5, 1988).
4(i) Shareholders' Rights Plan, dated April 11, 1989.
10(a) CREDO Petroleum Corporation Non-qualified Stock
Option Plan, dated January 13, 1981 (incorporated by
reference to Amendment No. 1 to Form S-1 dated
February 2, 1981).
10(b) CREDO Petroleum Corporation Incentive Stock Option
Plan, dated October 2, 1981 (incorporated by
reference to the company's definitive proxy
statement, dated January 22, 1982).
10(b) CREDO Petroleum Corporation 1997 Incentive Stock
Option Plan.
10(c) Model of Director and Officer Indemnification Agreement
provided for by Article X of CREDO Petroleum
Corporation's By-Laws (incorporated by reference to
Form 10-K dated October 31, 1987).
22 CREDO Petroleum Corporation (a Colorado corporation)
and its subsidiaries SECO Energy Corporation (a
Nevada corporation) and United Oil Corporation (an
Oklahoma corporation) are located at 1801 Broadway,
Suite 900, Denver, CO 80202-3837.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CREDO PETROLEUM CORPORATION
By:/s/ James T. Huffman
----------------------------
James T. Huffman,
Chief Executive Officer
By:/s/ Byron J. Sullivan
----------------------------
Byron J. Sullivan,
Vice President-Finance
Date: January 7, 1998
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the date
indicated.
Date Signature Title
--------------- --------------------- --------------------
January 7, 1998 /s/ William N. Beach Director
----------------------
William N. Beach
January 7, 1998 /s/ Otto P. Butterly Director
----------------------
Otto P. Butterly
January 7, 1998 /s/ William D. Howell Director
----------------------
William D. Howell
January 7, 1998 /s/ James T. Huffman Chairman of the
---------------------- Board, President,
James T. Huffman Treasurer
January 7, 1998 /s/ William F. Skewes Director, Corporate
---------------------- Secretary, General
William F. Skewes Counsel
January 7, 1998 /s/ Richard B. Stevens Director
----------------------
Richard B. Stevens
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND
IN THE COMPANY'S 10-K FOR THE FISCAL YEAR ENDED OCTOBER 31, 1997, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND
ACCOMPANYING FOOTNOTES.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<CASH> 635,000
<SECURITIES> 2,698,000
<RECEIVABLES> 318,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,033,000
<PP&E> 12,762,000<F1>
<DEPRECIATION> 6,418,000
<TOTAL-ASSETS> 10,546,000
<CURRENT-LIABILITIES> 1,458,000
<BONDS> 0
0
0
<COMMON> 366,000
<OTHER-SE> 7,819,000
<TOTAL-LIABILITY-AND-EQUITY> 10,546,000
<SALES> 1,992,000
<TOTAL-REVENUES> 2,690,000
<CGS> 767,000
<TOTAL-COSTS> 1,381,000
<OTHER-EXPENSES> 633,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 676,000
<INCOME-TAX> 237,000
<INCOME-CONTINUING> 439,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 439,000
<EPS-PRIMARY> .14
<EPS-DILUTED> .14
<FN>
<F1>OIL AND GAS PROPERTIES, AT COST, USING FULL COST METHOD.
</FN>
</TABLE>
<PAGE>
- ----------------------------------------------------------------
CREDO PETROLEUM CORPORATION
1997 INCENTIVE STOCK OPTION PLAN
(July 30, 1997)
- ----------------------------------------------------------------
SECTION 1
INTRODUCTION
1.1 Establishment. CREDO Petroleum Corporation
(hereinafter referred to as the -Company- except where the
context otherwise requires), hereby establishes the CREDO
Petroleum Corporation Stock Option Plan (the -Plan-) for certain
key people providing Services to the Company.
1.2 Purposes. The purposes of the Plan are to provide the
key people providing Services to the Company who are selected for
participation in the Plan with added incentives to continue in
the long-term Service of the Company and to create in such people
a more direct interest in the future success of the operations of
the Company by relating compensation to increases in stockholder
value, so that the income of the key people is more closely
aligned with the income of the Company's stockholders. The Plan
is also designed to attract key people and to retain and motivate
such key people by providing an opportunity for investment in the
Company.
SECTION 2
DEFINITIONS
2.1 Definitions. The following terms shall have the
meanings set forth below:
(a) -Affiliate- means, with respect to any Person, any
other Person directly or indirectly controlling, controlled by or
under direct or indirect common control with such Person. A
Person shall be deemed to control another Person for purposes of
this definition if such Person possesses, directly or indirectly,
the power (i) to vote the securities or other ownership interests
having ordinary voting power to elect a majority of the board of
directors of a corporation or other Persons performing similar
functions for any other type of Person, or (ii) to direct or
cause the direction of the management and policies of such
Person, whether through the ownership of voting securities, by
contract, as general partner, as trustee or otherwise.
(b) -Award- means a grant made under the Plan in the
form of Non-Statutory Options and/or Incentive Stock Options.
(c) -Board- means the Board of Directors of the
Company prior to any reorganization or liquidation described in
Section 5 hereof.
(d) -Effective Date- means the effective date of the
Plan, July 30, 1997.
(e) -Eligible Persons- means full-time key employees
<PAGE>
(including, without limitation, officers and directors who are
also employees) of, non-employee directors of, and consultants
to, the Company or any division thereof, upon whose judgement,
initiative and efforts the Company is, or will be, important to
the successful conduct of its business.
(f) -Fair Market Value- means the officially quoted
last trade price of the Stock on the national exchange on which
the Stock is traded on the date immediately prior to a
transaction requiring valuation of the Stock under this
Agreement. If there is no such Stock transaction on such date,
the Fair Market Value shall be determined as of the immediately
preceding date on which there was a Stock transaction. If no
such prices are reported on the national exchange on which the
Stock is traded, then Fair Market Value shall mean the most
recent ten day average of the high and low sale prices for the
Stock (or if no sales prices are reported, the average of the
preceding ten day high and low bid prices) as reported by the
principal regional stock exchange, or if not so reported, as
reported by a quotation system of general circulation to brokers
and dealers.
(g) -Incentive Stock Option- means any Option
designated as such and granted in accordance with the
requirements of Section 422 of the Internal Revenue Code. Among
other things, Stock purchased pursuant to exercise of Incentive
Stock Options must be held for one year in order to qualify for
Section 422 treatment.
(h) -Non-Statutory Stock Option- means any Option
other than an Incentive Stock Option.
(i) -Internal Revenue Code- means the Internal Revenue
Code of 1986, as it may be amended from time to time.
(j) -Option- means a right to purchase Stock at a
stated price for a specified period of time.
(k) -Option Price- means the price at which shares of
Stock subject to an Option may be purchased, determined in
accordance with subsection 7.2(b).
(l) -Total Option Price- means the number of shares
with respect to which an Option is exercised multiplied by the
Option Price.
(m) -Participant- means an Eligible Person designated
by the Board time to time during the term of the Plan to receive
one or more Awards under the Plan.
(n) -Person- means any individual, partnership, joint
venture, firm, company, corporation, association, trust or other
enterprise or any government or political subdivision or any
agent, department or instrumentality thereof.
<PAGE>
(o) -Plan Year- means each 12-month period beginning
January 1st and ending the following December 31st, except that
for the first year of the Plan it shall begin on the Effective
Date and extend to December 31st of the adoption year.
(p) -Repurchase Agreement- means an agreement between
the Participant and the Company permitting the Company to have
the right, but not the obligation, to reacquire any Shares of
Stock acquired by a Participant under the terms of this Plan as
determined by the Board.
(q) -Share- means a share of Stock.
(r) -Stock- means the common stock, $0.10 par value,
of the Company.
(s) -Stock Option Agreement- means an agreement
between a Participant and the Company in such form as the Board
shall deem appropriate and which is consistent with the
provisions of this Plan, specifying the terms, conditions, rights
and duties of any Option granted pursuant to this Plan.
(t) -Option Holder- means a Participant to whom an
Option is granted by the Board.
(u) -Service- means a relationship or association with
the Company as an employee, consultant, director, representative,
associate, or other capacity in which services are rendered to
the Company.
2.2 Gender and Number. Except when otherwise indicated by
the context, the masculine gender shall also include the feminine
gender, and the definition of any term herein in the singular
shall also include the plural.
SECTION 3
PLAN ADMINISTRATION
The Plan shall be administered by the Board. Except as
might otherwise be set forth in an Eligible Person's Service
agreement with the Company, in accordance with the provisions of
the Plan, the Board shall, in its sole discretion, select
Participants from among the Eligible Persons to whom Awards will
be granted, the form of each Award, the amount of each Award and
any other terms and conditions of each Award as the Board may
deem necessary or desirable and consistent with the terms of the
Plan. The Board shall determine the form or forms of the
agreements with Participants which shall evidence the particular
provisions, terms, conditions, rights and duties of the Company
and the Participants with respect to Awards granted pursuant to
the Plan, which provisions need not be identical except as may be
provided herein.
The Board may from time to time adopt such rules and
<PAGE>
regulations for carrying out the purposes of the Plan as it may
deem proper and in the best interests of the Company. The Board
may correct any defect, supply any omission or reconcile any
inconsistency in the Plan or in any agreement entered into
hereunder in the manner and to the extent it shall deem expedient
and it shall be the sole and final judge of such expediency. No
member of the Board shall be liable for any action or
determination made in good faith, and all members of the Board
shall, in addition to their rights as directors, be fully
protected by the Company with respect to any such action,
determination or interpretation. The determination,
interpretations and other actions of the Board pursuant to the
provisions of the Plan shall be binding and conclusive for all
purposes and on all Participants and Eligible Persons.
SECTION 4
STOCK SUBJECT TO THE PLAN
4.1 Number of Shares. Initially, 450,000 Shares are
authorized for issuance under the Plan in accordance with the
provisions of the Plan and subject to such restrictions or other
provisions as the Board may from time to time deem necessary.
The Shares may be divided among the various Plan components as
the Board shall determine, except that no more than 270,000
shares shall be cumulatively available for the grant of Incentive
Stock Options under the Plan. Shares which may be issued upon
the exercise of Options shall be applied to reduce the maximum
number of Shares remaining available for use under the Plan. The
Company shall at all times during the term of the Plan and while
any Options are outstanding retain as authorized and unissued
Stock, or as treasury Stock, at least the number of Shares from
time to time required under the provisions of the Plan, or
otherwise assure itself of its ability to perform its obligations
hereunder. In no event will the sum of the number of Shares
issued under the Plan and the number of Shares subject to option
under the Plan exceed fifteen percent (15%) of the outstanding
Stock of the Company (including treasury shares) as of the date
of grant of any Option.
4.2 Unused and Forfeited Stock. Any Shares that are
subject to an Award under the Plan which are not used because the
terms and conditions of the Award are not met, including any
Shares that are subject to an Option which expires or is
terminated for any reason, any Shares which are used for full or
partial payment of the purchase price of Shares with respect to
which an Option is exercised and any Shares retained by the
Company pursuant to Section 16.2 shall automatically become
available for use under the Plan. Notwithstanding the foregoing,
any Shares used for full or partial payment of the purchase price
of the Shares with respect to which an Option is exercised and
any Shares retained by the Company pursuant to Section 16.2 that
were originally Incentive Stock Option Shares must still be
considered as having been granted for purposes of determining
whether the Share limitation on Incentive Stock Option grants
<PAGE>
provided for in Section 4.1 has been reached.
4.3 Adjustments for Stock Split, Stock Dividend, etc.
Except through purchase or issuance of Treasury Stock and except
as otherwise provided in Section 5 below, if the Company shall at
any time increase or decrease the number of its outstanding
Shares of Stock or change in any way the rights and privileges of
such Stock by means of the payment of a stock dividend or any
other distribution payable in Stock, or through a stock split,
subdivision, consolidation, combination, reclassification or
recapitalization involving the Stock, then in relation to the
Stock that is affected by one or more of the above events, the
numbers, rights and privileges of the following shall be
increased, decreased or changed in like manner as if they had
been issued and outstanding, fully paid and nonassessable at the
time of such occurrence: (i) the Shares of Stock as to which
Awards may be granted under the Plan; and (ii) the Shares of
Stock then included in each outstanding Option granted hereunder.
4.4 Other Changes in Stock. Except as otherwise provided
in Section 5, in the event there shall be any change, other than
as specified in Section 4.3, in the number or kind of outstanding
shares of Stock or of any stock or other securities into which
the Stock shall be changed or for which it shall have been
exchanged, and if the Board shall in its discretion determine
that such change equitably requires an adjustment in the number
or kind of Shares subject to outstanding Awards or which have
been reserved for issuance pursuant to the Plan but are not then
subject to an Award, then such adjustments shall be made by the
Board and shall be effective for all purposes of the Plan and on
each outstanding Award that involves the particular type of stock
for which a change was effected.
4.5 Rights to Subscribe. If the Company shall at any time
grant to the holders of its Stock rights to subscribe pro rata
for additional Shares thereof or for any other securities of the
Company or of any other corporation, there shall be reserved with
respect to the Shares then subject to an Award held by any
Participant of the particular class of Stock involved, the Stock
or other securities which the Participant would have been
entitled to subscribe for if immediately prior to such grant the
participant had exercise his entire Option, or otherwise vested
in his entire Award. If, upon exercise of any such Option or the
vesting of any other Award, the Participant subscribes for the
additional Stock or other securities pursuant to such agreement,
the Participant shall pay to the Company the price for such Stock
or other securities based on the price that is payable by all
those shareholders who participate in the grant.
4.6 General Adjustment Rules. If any adjustment or
substitution provided for in this Section 4 shall result in the
creation of a fractional Share under any Award, the Company
shall, in lieu of selling or otherwise issuing such fractional
<PAGE>
Share, pay to the Participant a cash sum in an amount equal to
the product of such fraction multiplied by the Fair Market Value
of a Share on the date the fractional Share would otherwise have
been issued. In the case of any such substitution or adjustment
affecting an Option, the Total Option Price for the Shares of
Stock then subject to an Option shall remain unchanged but the
Option Price per share under each such Option shall be equitably
adjusted by the Board to reflect the greater or lesser number of
shares of Stock or other securities into which the Stock subject
to the Option may have been changed.
4.7 Determination by Board, Etc. Adjustments under this
Section 4 shall be made by the Board, whose determinations with
regard thereto shall be final and binding upon all parties
thereto.
SECTION 5
CHANGE IN CONTROL OF THE COMPANY
Unless otherwise specified in writing by the Board, in the
event of a Change of Control of the Company, all Options granted
hereunder shall, to the extent not vested or otherwise
exercisable, become immediately vested and fully exercisable, and
any Stock restrictions pursuant to Sections 14.1.c. and 14.2.
shall become null and void. In addition, the Board and the
Company shall immediately take whatever steps are necessary to
make any Shares of Stock subject to outstanding Options salable
and transferable, including but not limited to, taking such
actions as are necessary under the applicable state and Federal
securities laws referred to in Section 14.1. to make the Shares
of Stock subject to outstanding Options salable and transferable.
In the event that a Change of Control becomes effective prior to
the date that the Board can reasonably accomplish the above
requirements, the board of directors or other authorized
representative(s) of any Person assuming control of the Company,
or a reconstituted Board of Directors of the Company (see d.
below) not meeting the definition of Board contained herein,
shall be obligated to fulfill the requirements of this Section 5
in an expeditious manner and always acting in good faith to
fulfill the intent of this Section 5. For purposes hereof, a
Change in Control shall be deemed to have occurred if any one of
the events set forth below occurs:
a. Any -person- or -group- (within the meaning of
Sections 13(d) and 14(d)(2) of the 1934 Act) is or becomes
the -beneficial owner- (as defined in rule 13-d-3 under the
1934 Act), directly or indirectly, of 30% or more of the
then outstanding voting stock of the Company.
b. The stockholders of the Company approve a merger,
combination, or consolidation of the Company with any other
entity resulting in the voting securities of the Company
immediately prior to such event representing less than 51%
of the merged, combined, or consolidated company's voting
<PAGE>
securities.
c. Any transaction (or combination of transactions) is
consummated for the sale, disposition, or liquidation of at
least 50% of the Company's net assets provided, however,
that this provision shall not apply if the sale,
disposition, or liquidation results in a transfer of at
least 50% of the net assets to a majority owned subsidiary
of the Company. Net assets are total assets less
liabilities.
d. Election of one-third of the members of the Board proposed
by any party or group nominating directors in opposition to
the directors nominated for election by the company's then
existing Board.
It is expected that the date of any Change of Control will
be fixed by the occurrence of certain events, however, in the
event of uncertainty, the Board may clarify the date as of which
a Change of Control shall be deemed to have occurred.
In the event that a Change of Control will result in the
Company's Stock being redeemed or exchanged for stock of another
company, any Options which become immediately exercisable and any
pre-existing exercisable Options shall be exercised by the
Participant prior to the redemption or exchange of the Stock and,
if not so exercised, such Options will expire on the date of the
final date of redemption or exchange. Any Stock issued pursuant
to this paragraph shall be immediately salable or transferable by
the holder.
In the event of a Change in Control, the Board shall have
the power and discretion to prescribe terms and conditions other
than those set forth above in this Section 5 for the exercise of,
or modification of, any outstanding Options. By way of
illustration, and not by way of limitation, the Board may provide
for any one, or combination of, the following: (i) the complete
or partial acceleration of the dates of exercise of the Options,
(ii) that such Options will be exchanged or converted into
options to acquire securities of the surviving or acquiring
corporation, (iii) for a payment or distribution in respect of
outstanding Options, (or the portion thereof that is currently
exercisable) in cancellation thereof, (iv) for modification of
the performance requirements for any Options. Any such
determination by the Board may be made generally with respect to
all Participants, or may be made on a case-by-case basis with
respect to particular Participants.
The board of directors or other authorized representative(s)
of any Person, or a reconstituted Board of Directors of the
Company not meeting the definition of Board contained herein,
assuming control of the Company or its assets or obligations
shall not have the power and discretion to modify the terms of
any Options granted hereunder, including but not limited to, any
<PAGE>
provisions prescribed pursuant to the authority of the Board
under this Section 5.
SECTION 6
PARTICIPATION
Participants in the Plan shall be those Eligible Persons
who, in the judgment of the Board are performing, or during the
term of their Service with the Company will perform, important
Services in the management, operation or development of the
Company, and significantly contribute or are expected to
significantly contribute, to the achievement of long-term
corporate economic objectives. Participants may be granted from
time to time one or more Awards; provided, however, that the
grant of each such Award shall be separately approved by the
Board, and receipt of one such Award shall not result in
automatic receipt of any other Award. Awards shall be deemed to
be granted as of the date specified in the grant resolution of
the Board which date shall be the date of any related agreement
with the Participant. In the event of any such inconsistency
between the provisions of the Plan and any such agreement entered
into hereunder, the provisions of the Plan shall govern.
SECTION 7
STOCK OPTIONS
7.1 Grant of Options. Coincident with the following
designation for participation in the Plan, a Participant may be
granted one or more Options. The Board in its sole discretion
shall designate whether an Option is to be considered an
Incentive Stock Option or a Non-Statutory Option. The Board may
grant both an Incentive Stock Option and a Non-Statutory Stock
Option to the same Participant at the same time or at different
times. Incentive Stock Options and Non-Statutory Stock Options,
whether granted at the same or different times, shall be deemed
to have been awarded in separate grants, shall be clearly
identified, and in no event shall the exercise of one Option
affect the right to exercise any other Option or affect the
number of Shares for which any other option may be exercised.
7.2 Stock Option Agreements. Each Option granted under the
Plan shall be evidenced by a written Stock Option Agreement which
shall be entered into by the Company and the Option Holder, and
which shall contain the following terms and conditions, as well
as such other terms and conditions not inconsistent therewith, as
the Board may consider appropriate in each case.
(a) Number of Shares. Each Stock Option Agreement
shall state that it covers a specified number of Shares, as
determined by the Board.
(b) Price. The price at which each Share covered by
an Option may be purchased shall be determined in each case by
the Board and set forth in the Stock Option Agreement, but in no
<PAGE>
event shall the Option Price for each Share covered by an
Incentive Stock Option be less than the Fair Market Value of the
Stock on the date the Option is granted; provided that the Option
Price for each Share covered by a Non-Statutory Option may be
granted at any price less than Fair Market Value, in the sole
discretion of the Board. In addition, the Option Price for each
Share covered by an Incentive Stock Option granted to an Eligible
Person who then owns stock possessing more than 10% of the total
combined voting power of all classes of stock of the Company or
any parent or subsidiary corporation of the Company must be at
least 110% of the Fair Market Value of the Stock subject to the
Incentive Stock Option on the date the Option is granted.
(c) Duration of Options. Each Stock Option Agreement
shall state the period of time, determined by the Board, within
which the Option may be exercised by the Option Holder (the
- -Option Period-). The Option Period must expire, in all cases,
not more than ten years from the date an Option is granted;
provided however, that the Option Period of an Incentive Stock
Option granted to an Eligible Person who then owns stock
possessing more than 10% of the total combined voting power of
all classes of stock of the Company or any parent or subsidiary
corporation of the Company must expire not more than five years
from the date such an Incentive Stock Option is granted. Each
stock option agreement shall also state the periods of time, if
any, as determined by the Board, when incremental portions of
each Option shall vest.
(d) Termination of Service with the Company, Death,
Disability, etc. Except as otherwise determined by the Board,
each Stock Option Agreement shall provide as follows with respect
to the exercise of the Option upon termination of Service to the
Company or the death of the Option Holder:
(i) Termination by the Company for Cause. If the
Service of the Option Holder is terminated within the Option
Period for cause, as determined by the Company, the Option shall
thereafter be void for all purposes. As used in this subsection
7.2(d), -cause- shall mean willful dishonesty towards, fraud upon
or deliberate injury or attempted deliberate injury to the
Company, misrepresentation or concealment of a material fact or
circumstance for the purpose of or otherwise in connection with
securing Service with the Company, conviction for a felony or a
material breach of the Option Holder's Service agreement, if any,
with the Company. The effect of this sub-section 7.2(d)(i) shall
be limited to determining the consequences of a termination, and
nothing in this subsection 7.2(d)(i) shall restrict or otherwise
interfere with the Company's discretion with respect to such
termination.
(ii) Retirement. If the Option Holder terminates
his Service with the Company in a manner determined by the Board,
in its sole discretion, to constitute retirement (which
determination shall be communicated to the Option Holder within
<PAGE>
10 days of such termination), the Option may be exercised by the
Option Holder (or in the case of death, by the representative(s)
of the Option Holder specified in subsection (iii) of this
subsection 7.2(d)) within three months following his or her
retirement if the Option is an Incentive Stock Option or within
twelve months following his or her retirement if the Option is a
Non-Statutory Stock Option (provided in each case that such
exercise must occur within the Option Period), but not
thereafter. In any such case, the Option may be exercised only
as to the Shares as to which the Option has become exercisable on
or before the date of such termination for retirement.
(iii) Death or Disability. If the Option
Holder dies, or if the Option Holder becomes disabled (within the
meaning of Section 22(e) of the Internal Revenue Code), during
the Option Period while still employed, or within the three-month
period referred to in (iv) below, or within the three or
twelve-month period referred to in (ii) above, the Option may be
exercised within twelve months following the Option Holder's
death or disability, but not thereafter. In any such case, the
Option may be exercised only as to the Shares as to which the
Option has become exercisable on or before the date of the Option
Holder's death or disability. In the event of the Option
Holder's death, his or her rights and interest in the Option
shall, to the extent provided above, be transferable by
testamentary will or the laws of descent and distribution, and
payment of any amounts due under this Plan shall be made to, and
exercise of the Option may be made by, the Option Holder's legal
representatives, heirs or legatees. If, in the opinion of the
Board, the Option Holder is entitled to exercise rights with
respect to the Option and is disabled from caring for his or her
affairs because of mental condition, physical condition or age,
such rights shall be exercised by, the Option Holder's guardian,
conservator or other legal personal representative upon
furnishing the Board with evidence satisfactory to the Board of
such status.
(iv) Termination Other Than For Cause. If the
Service of the Option Holder by the Company is terminated (which
for this purpose means that the Option Holder no longer provides
services for which he or she is compensated by the Company or by
an Affiliate) within the Option Period for any reason other than
cause (Section 7.1.(d)(i) above), retirement (Section 7.1.(d)(ii)
above), or death or disability (Section 7.1.(d)(iii) above), the
Option may be exercised by the Option Holder within three months
following the date of such termination (provided that such
exercise must occur within the Option Period), but not
thereafter. In any such case, the Option may be exercised only
as to the Shares as to which the Option has become exercisable on
or before the date of termination of such Service.
(e) Exercise, Payments, Etc.
(i) Fair Market Value Limitation on Incentive
<PAGE>
Stock Options. Notwith-standing any other provision of the Plan,
the aggregate Fair Market Value of the Shares with respect to
which Incentive Stock Options are exercisable for the first time
by an Option Holder in any calendar year, under the Plan or
otherwise, shall not exceed $100,000. To the extent that the
Fair Market Value exceeds this limitation, the balance of the
Options shall be treated as non-statutory stock options for
federal income tax purposes. For this purpose, the Fair Market
Value of the Shares shall be determined as of the time an Option
is granted.
(ii) Notice of Exercise and Payment. Each Stock
Option Agreement shall provide that the method for exercising the
Option granted therein shall be by delivery to the Corporate
Secretary of the Company of written notice specifying the number
of Shares with respect to which such Option is exercised (which
must be in an amount evenly divisible by 100) and payment of the
Option Price. Such notice shall be in a form satisfactory to the
Board and shall specify the particular Option (or portion
thereof) which is being exercised and the number of Shares with
respect to which the Option is being exercised. So long as
payment is made within 15 days of the notice, the exercise of the
Option shall be deemed effective upon receipt of such notice by
the Corporate Secretary. Upon delivery of such notice, the
purchase of such Stock shall take place at the principal offices
of the Company, at which time the Total Option Price shall be
timely paid in full by any of the methods or any combination of
the methods set forth in (iii) below. Upon receipt of proper
payment, the Company shall proceed expeditiously to issue a
properly executed certificate representing the Stock and to
deliver the certificate to the Option Holder.
(iii) Methods of Payment of Total Option
Price. The Total Option Price shall be paid by any of the
following methods or any combination of the following methods:
- in cash;
- by cashier's check payable to the order of the
Company;
- by delivery to the Company of certificates
representing a number of Shares then owned by
the Option Holder, the Fair Market Value of
which equals the Total Option Price, properly
endorsed for transfer to the Company; provided
however, that Shares used for this purpose must
have been held by the Option Holder for such
minimum period of time as may be established
from time to time by the Board for purposes of
the Plan. The Fair Market Value of any Shares
delivered in payment of the Total
<PAGE>
Option Price shall be the Fair Market Value
as of the notice date specified in Section
7.1.(e)(ii) above; or
- if the Stock is publicly traded, by delivery
to the Company of a properly executed
notice of exercise together with irrevocable
instructions to a broker to deliver to the
Company promptly the amount of the proceeds of
the sale of all or a portion of the Stock or
of a loan from the broker to the Option Holder
necessary to pay the Total Option Price.
(iv) Loan of Total Option Price. In the sole
discretion of the Board and on a case-by-case basis if requested
in writing by the Option Holder, a loan may be provided to the
Option Holder covering all or a portion of the Total Option Price
as described in Section 12.
(f) Date of Grant. An Option shall be considered as
having been granted on the date specified in the grant resolution
of the Board.
(g) Withholding.
(i) Non-Statutory Options. Each Stock Option
Agreement covering Non-Statutory Options shall provide that, upon
exercise of the Option, the Option Holder shall make arrangements
satisfactory to the Company to provide for the amount of
additional withholding required by applicable federal and state
income tax laws, including payment of such taxes through deliver
of Stock or by withholding Stock to be issued under the Option,
as provided in Section 17.
(ii) Incentive Options. In the event that a
Participant makes a disposition (as defined in Section 424(c) of
the Internal Revenue Code) of any Stock acquired pursuant to the
exercise of an Incentive Stock Option prior to the expiration of
two years from the date on which the Incentive Stock Option was
granted or prior to the expiration of one year from the date on
which the Option was exercised, the Participant shall send
written notice to the Company at its principal office (Attention:
Corporate Secretary) of the date of such disposition, the number
of shares disposed of, the amount of proceeds received from such
disposition, and any other information relating to such
disposition as the Company may reasonably request. The
Participant shall, in the event of such a disposition, make
appropriate arrangements with the Company to provide for the
amount of additional withholding, if any, required by applicable
federal and state income laws.
(h) Adjustment of Option Terms. Subject to the
<PAGE>
limitations contained in this Plan, the Board may make any
adjustment in the Option Price, the number of shares subject to,
or the terms of, an outstanding Option and a subsequent granting
of an Option by amendment or by substitution of an outstanding
Option. Each Non-Statutory Option granted hereunder shall
provide for a formula reduction in the exercise price should cash
dividends be declared and paid in respect of the Stock during the
time that an Option is unexercised. Such amendment,
substitution, reduction, or re-grant may result in terms and
conditions (including Option Price, number of shares covered,
vesting schedule or exercise period) that differ from the terms
and conditions of the original Option. The Board may not,
however, adversely affect the rights of any Participant to
previously granted Options without the consent of such
Participant. If such action is affected by amendment, the
effective date of such amendment shall be the date of the
original grant.
SECTION 8
TRANSFERABILITY OF STOCK OPTIONS
8.1. General. Except as provided in this Section 8, no
right or interest of any Participant in an Option granted
pursuant to the Plan shall be assignable or transferable during
the lifetime of the Participant, either voluntarily or
involuntarily, or be subjected to any lien, directly or
indirectly, by operation of law, or otherwise, including
execution, levy, garnishment, attachment, pledge or bankruptcy.
8.2 Incentive Stock Option. During the lifetime of the
Option Holder, Incentive Stock Options shall be exercisable only
by the Option Holder and shall not be assignable or transferable.
8.3 Non-Statutory Stock Options. Upon the prior written
consent of the Board, which may be withheld in the Board's sole
discretion, and subject to any conditions associated with such
consent, a Non-Statutory Option may be assigned in whole or in
part during the Optionee's lifetime to one or more members of the
Optionee's immediate family, a family limited partnership, a
family limited liability company, or to a family trust. In
addition, the Board, in its sole discretion, may allow a
Non-Statutory Option to be assigned in other circumstances deemed
appropriate. The terms applicable to the assigned portion shall
be the same as those in effect for the Stock Option immediately
prior to such assignment and shall be set forth in such documents
issued to the assignee as the Board may deem appropriate.
Notwithstanding any assignment or transfer of a Stock Option, in
no event may any Stock Option remain exercisable after the
expiration of the Term of the Stock Option.
8.4 Security Law Restrictions. Reference is made to
Section 14 regarding certain restrictions, including but not
limited to, securities law restrictions, which may affect
transferability of Stock Options.
<PAGE>
SECTION 9
STOCKHOLDER RIGHTS
The Option Holder shall have no stockholder rights with
respect to the Shares subject to the Option until such Option
Holder shall have exercised the Option, paid the Option price and
become a holder of record of the purchased Stock. Except as
provided in Section 4, no adjustments shall be made for dividends
or other distributions or other rights as to which there is a
record date preceding the date such Option Holder becomes the
holder of record of such Stock.
SECTION 10
ACCELERATION OF VESTING
The Board may, at any time in its sole discretion,
accelerate the vesting of any Award made pursuant to this Plan by
giving written notice to the Participant. Upon receipt of such
notice, the Participant and the Company shall amend the Stock
Option Agreement or agreement relating to the Award to reflect
the new vesting schedule. The acceleration of the exercise
period of an Option or Award shall not affect the expiration date
of such Option or Award.
SECTION 11
CANCELLATION AND REGRANT OF OPTIONS
The Board shall have the authority to effect, at any and
from time to time, with the consent of the affected Optionees,
the cancellation of any or all outstanding Stock Options and/or
any Restricted Stock Awards and grant in substitution new Stock
Options and/or Restricted Stock Awards covering the same or
different number of shares of Stock with an Option price set, in
accordance with Section 7, on the new Date of Grant.
SECTION 12
FINANCING
The Board may, in its sole discretion, authorize the Company
to make a loan to a Participant in connection with the exercise
of a Stock Option or a Stock purchase, and may authorize the
Company to arrange or guaranty loans to a Participant by a third
party in connection with the exercise of a Stock Option or a
Stock purchase. The loan by the Company may be nonrecourse
except as to the collateral.
SECTION 13
PARTICIPANT RIGHTS
13.1 No Contract. Nothing contained in the Plan or in any
Award granted under the Plan shall confer upon any Participant
any right with respect to the continuation of his or her Service
to the Company, or interfere in any way with the right of the
Company at any time to terminate such Service or to increase or
<PAGE>
decrease the compensation of the Participant from the rate in
existence at the time of the grant of an Award. Whether an
authorized leave of absence, or absence in military or government
service, shall constitute a termination of such relationship or
association shall be determined by the Board at the time.
13.2 No Effect on Other Benefit Plans. The amount of any
compensation deemed to be received by a Participant as a result
of the exercise of any Option or the grant or vesting of any
other Award shall not constitute -earnings- with respect to which
any other benefits of the Participant are determined, including
without limitation benefits under any 401K, pension, profit
sharing, life insurance or salary continuation plan.
SECTION 14
GENERAL RESTRICTIONS AND OPTION BUYBACK PROVISIONS
14.1 Compliance with Securities Laws. Neither Awards
granted hereunder nor the Shares authorized for issuance pursuant
to such Awards have been listed, registered or qualified under
the Securities Act of 1933, as amended (the -Act-), or under any
Blue Sky or other state or Federal securities laws. Accordingly
the following provisions shall apply:
a. No Effective Registration Statement or Blue Sky
Qualification. Awards and Options shall not be exercisable
(i) unless the purchase of Stock upon the exercise of such Awards
and Options is pursuant to an applicable effective registration
statement under the Securities Act of 1933, as amended, and is in
compliance with all applicable Federal and state laws, or
(ii) unless, in the opinion of counsel for the Company, the
proposed purchase of such Stock would be exempt from the
registration requirements of the Act, and from the qualification
requirements of any Federal or state securities laws;
b. Possible Investor Qualification Requirements. The
Board may require any Participant to whom an Option or other
Award is granted, as a condition of exercising such Option or
receiving Stock under the Award, to give written assurances in
substance and form satisfactory to the Board and its counsel to
the effect that such Participant is acquiring the Stock subject
to the Option or the Award for his or her own account for
investment and not with any present intention of selling or
otherwise distributing the same, and to such other effects as the
company deems necessary or appropriate in order to comply with
federal and applicable state securities law;
c. Certain Sale and Transfer Restrictions. The
Participant will not sell or transfer the Award or Stock unless
it is registered under the Act, except in a transaction that is
exempt from registration under the Act, and each certificate
issued to represent such Stock shall bear a legend calling
attention to the foregoing restrictions. The Board may require,
as a condition of the exercise of an Option or Award, that the
<PAGE>
Participant sign such further representations and agreements as
it reasonably determines to be necessary or appropriate to assure
and to evidence compliance with the requirements of the Act.
Legends evidencing such restrictions may be placed on the
certificates evidencing the Stock;
d. No Requirement for Company to List, Qualify or
Register Stock. Except as provided in Section 5, nothing herein
shall be deemed to require the Company to apply for or to obtain
such listing, registration or qualification.
14.2 Stock Restriction Provisions. The Board may provide
that Shares of Stock issuable upon the exercise of an Option
shall, under certain conditions, be subject to restrictions
whereby the Company has a right to prohibit the transfer of such
Shares, a right of first refusal with respect to such shares
and/or a right or obligation to repurchase all or a portion of
such Shares, which restrictions may survive a Participant's term
of Service with the Company. The acceleration of time or times
at which an Option becomes exercisable may be conditioned upon
the Participant's agreement to such restrictions.
14.3 Repurchase of Options. In lieu of the Company issuing
Stock upon exercise of an Option by an Option Holder, upon
agreement between the Board and the Option Holder, the Company
may repurchase the Option for an amount equal to the difference
between the Total Option Price and the Fair Market Value as of
the date of any such agreement. In such event, the Shares
subject to the Option repurchased shall automatically become
available for use under the Plan.
SECTION 15
PLAN AMENDMENT, MODIFICATION AND TERMINATION
The Board may at any time terminate, and from time-to-time
may amend or modify, the Plan provided, however, that no
amendment or modification may become effective without approval
of the amendment or modification by the stockholders if
stockholder approval is required to enable the Plan to satisfy
any applicable statutory or regulatory requirements, or if the
Company, on the advice of counsel, determines that either
stockholder and/or Board approval is otherwise necessary or
desirable.
No amendment, modification or termination of the Plan shall
in any manner adversely affect any Awards theretofore granted
under the Plan, without the consent of the Participant holding
such Awards.
SECTION 16
WITHHOLDING
16.1 Withholding Requirement. The Company's obligations to
deliver Shares upon the exercise of an Option, or upon the
<PAGE>
vesting of any other Award, shall be subject to the Participant's
satisfaction of all applicable federal, state and local income
and other tax withholding requirements.
16.2 Withholding With Stock. At the time the Board grants
an Award, it may, in its sole discretion, grant the Participant
an election to pay all such amounts of tax withholding, or any
part thereof, by having the Company withhold from Shares
otherwise issuable to the Participant, Shares having a value
equal to the amount required to be withheld or such lesser amount
as may be elected by the Participant. All elections shall be
subject to the approval or disapproval of the Board. The value
of Shares to be withheld shall be based on the Fair Market Value
of the Stock on the notice date specified in Section 7.1.(e).
Any such elections by Participants to have Shares withheld for
this purpose will be subject to the following restriction:
(i) all elections must be made prior to the notice date; and
(ii) all elections shall be irrevocable.
SECTION 17
BROKERAGE ARRANGEMENTS
The Board in its discretion, may enter into arrangements
with one or more banks, brokers or other financial institutions
to facilitate the disposition of shares acquired upon exercise of
Stock Options, including, without limitation, arrangements for
the simultaneous exercise of Stock Options and sale of the Shares
acquired upon such exercise.
SECTION 18
NONEXCLUSIVITY OF THE PLAN
Neither the adoption of the Plan by the Board nor the
submission of the Plan to stockholders of the Company for
approval shall be construed as creating any limitations on the
power or authority of the Board to adopt such other or additional
incentive or other compensation arrangements of whatever nature
as the Board may deem necessary or desirable or preclude or limit
the continuation of any other plan, practice or arrangement for
the payment of compensation or fringe benefits to Eligible
Persons generally, or to any class or group of Eligible Persons,
which the Company now has lawfully put into effect, including,
without limitation, any retirement, pension, savings and stock
purchase plan, insurance, death and disability benefits.
SECTION 19
REQUIREMENTS OF LAW
19.1 Requirements of Law. The issuance of stock and the
payment of cash pursuant to the Plan shall be subject to all
applicable laws, rules and regulations.
19.2 Federal Securities Law Requirements. If, and to the
extent, required by law, if a Participant is an officer or
<PAGE>
director of the Company within the meaning of Section 16 of the
1934 Act, Awards granted hereunder shall be subject to all
conditions required under Rule 16b-3, or any successor rule
promulgated under the 1934 Act, to qualify the Award for any
exception from the provisions of Section 16(b) of the 1934 Act
available under that Rule. Such conditions are hereby
incorporated herein by reference and shall be set forth in the
agreement with the Participant which describes the Award.
19.3 Governing Law. The Plan and all agreements hereunder
shall be construed in accordance with and governed by the law of
the State of Colorado.
SECTION 20
APPROVAL BY SHAREHOLDERS AND DURATION OF THE PLAN
The Board of Directors of the Company has directed that the
Plan be submitted to the stockholders of the Company for their
approval to meet requirements of the Internal Revenue Code so
that options granted to employees under the Plan will qualify as
incentive stock options for Federal income tax purposes. If the
Plan is not approved by the Company's stockholders, any incentive
stock options granted under the Plan will become non-statutory
stock options, and the Plan will remain in effect to authorize
future grants of non-statutory stock options. If not sooner
terminated under the preceding sentence, the Plan shall fully
cease and expire at midnight on July 29, 2007. Awards
outstanding at the time of the Plan termination may continue to
be exercised or earned in accordance with their terms.
SECTION 21
CONFLICT IN TERMS
In the event that there is a conflict between the terms of
the Plan and any Stock Option Agreement granted pursuant to the
Plan and/or any Repurchase Agreement executed in connection with
the Plan, the terms of the Plan shall control.
FOR THE BOARD OF DIRECTORS
OF
CREDO PETROLEUM CORPORATION
By ------------------------
James T. Huffman
Chairman
