FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM ________ TO ________
COMMISSION FILE NUMBER: 0-10156
CAIRN ENERGY USA, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 23-2169839
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8115 PRESTON ROAD, SUITE 500
DALLAS, TEXAS 75225
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 369-0316
Securities Registered Pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
As of February 28, 1997, 17,564,561 shares of common stock of the
registrant were issued and outstanding. The aggregate market value of the voting
stock held by non-affiliates of the registrant as of February 28, 1997, was
$145.5 million, based upon the closing sales price of the registrant's common
stock on such date of $ 9 3/4 per share on the Nasdaq National Market as
reported by The Wall Street Journal. For purposes of this computation, all
executive officers, directors and 10% stockholders are deemed to be affiliates.
Such a determination should not be deemed an admission that such executive
officers, directors or 10% stockholders are affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant's definitive proxy statement in connection with the
Annual Meeting of Stockholders scheduled to be held May 21, 1997, to be filed
with the Commission pursuant to Regulation 14A, is incorporated by reference to
Part III of this report.
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CAIRN ENERGY USA, INC.
INDEX TO FORM 10-K
PART I.........................................................................1
ITEMS 1 AND 2. BUSINESS AND PROPERTIES.....................................1
The Company............................................................1
Business...............................................................1
General................................................................1
Principal Areas of Operations..........................................1
Oil and Gas Reserves...................................................2
Ryder Scott............................................................4
Offshore Properties....................................................4
Onshore Properties.....................................................5
1996 Exploration Activity..............................................6
1997 Exploration Activity..............................................7
Drilling Activities....................................................8
Productive Well Summary................................................8
Volumes, Prices and Production Costs...................................9
Development, Exploration and Acquisition Expenditures..................9
Acreage...............................................................10
Markets...............................................................10
Competition...........................................................10
Regulation............................................................11
Operational Hazards and Insurance.....................................12
Executive Officers of the Registrant..................................12
Employees.............................................................13
Title to Properties...................................................13
Offices...............................................................13
ITEM 3. LEGAL PROCEEDINGS..............................................13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............13
PART II.......................................................................14
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS....................................14
ITEM 6. SELECTED FINANCIAL DATA........................................15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL .............16
General...............................................................16
Results of Operations.................................................16
1996 Compared with 1995...............................................16
1995 Compared with 1994...............................................17
Capital Resources and Liquidity.......................................17
Changes in Prices and Inflation.......................................19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......................20
ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE...........................................20
PART III......................................................................20
ITEMS 10 through 13.......................................................20
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K....................................................45
GLOSSARY......................................................................48
SIGNATURES....................................................................50
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See the Glossary included on page 48 for definitions of certain
oil and gas terms.
PART I
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
THE COMPANY
The registrant, Cairn Energy USA, Inc., a Delaware corporation (the
"Company"), was incorporated on May 5, 1981 in Delaware as "Omni Exploration,
Inc." On September 29, 1992, Cairn Energy USA, Inc., an oil and gas exploration
and development company, merged with and into the registrant with the registrant
being the survivor (the "Merger"). Pursuant to the Merger, the registrant
changed its name to "Cairn Energy USA, Inc."
The Company's principal executive offices are located at 8115 Preston
Road, Suite 500, Dallas, Texas 75225 and its telephone number is (214) 369-0316.
BUSINESS
GENERAL
The Company explores for, develops and produces natural gas and oil
reserves, principally on the Outer Continental Shelf ("OCS") of the Gulf of
Mexico. The Company also has interests in properties in onshore areas,
principally in the Appalachian region. At January 1, 1997, the Company's proved
reserves, as reviewed by the Ryder Scott Company, independent petroleum
engineers ("Ryder Scott"), were estimated to be approximately 111.4 BCFE,
consisting of 82.0 Bcf of natural gas and 4.9 MMBbls of oil. At the same date,
the present value of estimated future net cash flows, before income taxes and
discounted at 10%, from the Company's estimated proved reserves ("Discounted
Present Value") was $248.1 million, with approximately 97% attributable to its
Gulf of Mexico proved reserves. For a further discussion of the Discounted
Present Value reserve valuation method, see the section captioned "Oil and Gas
Reserves."
The Company's strategy is to expand its reserve base and production
principally through exploration and associated development drilling. The OCS of
the Gulf of Mexico is a well-established area of oil and gas production where
the Company's management and staff have both experience and expertise and where
the application of advances in 3-D and 2-D seismic and computer-aided
exploration technology is particularly suited. Exploration and development
activities are directed by a small, experienced technical team which makes use
of extensive in-house computer capabilities.
The Company identifies exploratory prospects by (i) integrating 3-D and
2-D seismic technology with information about surrounding geological features
and (ii) high-grading prospects that exhibit "bright spot" seismic anomalies by
using extensive computer-aided geophysical modeling and amplitude versus offset
analysis.
The Company generally limits exploration expenditures to amounts that
can be financed through cash flows from operations and borrowings under the
Company's credit facility. The Company's Board of Directors must expressly
approve expenditures exceeding $1,500,000 for any single well. The Company's
strategy with respect to the development of its proved reserves is to
concentrate available resources on those prospects with the greatest potential
to add to the Company's cash flows from operations while maintaining a diversity
of development projects.
PRINCIPAL AREAS OF OPERATIONS
All of the Company's properties are located in the United States,
mainly in the OCS of the Gulf of Mexico. The Company also has properties
onshore, principally in the Appalachian region.
The focus of the Company's current activity is in the Gulf of Mexico.
The Company's total daily production in 1996 averaged 27,910 Mcf of gas and 747
Bbls of oil, of which about 96% was from wells located in the Gulf of Mexico. Of
the Company's total proved reserves of 111.4 BCFE at January 1, 1997, 104.9
BCFE, or approximately
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94%, were attributable to properties in the Gulf of Mexico. The Company's total
capital expenditures on oil and gas properties in 1996 were $49.0 million,
virtually all of which were on properties in the Gulf of Mexico.
OIL AND GAS RESERVES
Ryder Scott reviewed as of January 1, 1997 a report prepared by the
Company of the net reserves attributable to the Company's oil and gas
properties. The Company used the results from the Ryder Scott reserve review
letter (the "Ryder Scott Reserve Review Letter") as the Company's reserves
estimates. The average prices used in the computations were $3.99 per Mcf for
gas and $23.63 per Bbl of oil. The results of the Ryder Scott Reserve Review
Letter conform to the definition of proved reserves required by the Securities
and Exchange Commission (the "Commission"), which assumes no change in economic
conditions will occur in the future.
The estimates as of January 1, 1997 of proved reserves, future net
revenues from proved reserves and the Discounted Present Value of estimated
future net revenues from such proved reserves set forth in this annual report
were prepared by the Company and reviewed by Ryder Scott. For purposes of
reviewing such estimates, Ryder Scott reviewed production data through December
1996 for properties representing 96.2% of the Company's estimated proved net gas
reserves and 99.7% of the Company's estimated proved net oil and condensate
reserves and through earlier dates for the balance of the Company's properties.
In order to calculate the proved reserve estimates as of January 1, 1997, the
Company and Ryder Scott assumed that production for each of the Company's
properties since the date of the last production data reviewed was in accordance
with the production decline curve previously established for such property.
There are numerous uncertainties inherent in estimating quantities of
proved reserves, including many factors beyond the control of the Company. The
reserve data set forth in this annual report represents only estimates.
Reservoir engineering is a subjective process of estimating underground
accumulations of crude oil and natural gas that cannot be measured in an exact
manner, and the accuracy of any reserve estimate is a function of the quality of
available data and of engineering and geological interpretation and judgment. As
a result, estimates of different engineers often vary. In addition, results of
drilling, testing and production subsequent to the date of an estimate may
justify revision of such estimate. Accordingly, reserve estimates are often
different from the quantities of crude oil and natural gas that are ultimately
recovered. The meaningfulness of such estimates is highly dependent upon the
accuracy of the assumptions upon which they were based. In general, the volume
of production from oil and gas properties owned by the Company declines as
reserves are depleted. Except to the extent the Company conducts successful
exploration and development activities or acquires additional properties
containing proved reserves, or both, the proved reserves of the Company will
decline as reserves are produced.
In accordance with Commission guidelines, the estimates of the
Company's proved reserves and Discounted Present Value of revenues therefrom are
made using current lease and well operating costs estimated by the Company.
Lease operating expenses for wells owned by the Company were estimated using a
combination of fixed and variable- by-volume costs consistent with the Company's
experience in the areas of such wells. For purposes of calculating future net
revenues and the Discounted Present Value thereof, operating costs exclude
accounting and administrative overhead expenses attributable to the Company's
working interest in wells operated under joint operating agreements, but include
administrative costs associated with production offices. The Discounted Present
Value of proved reserves set forth herein should not be construed as the current
market value of the estimated proved oil and gas reserves attributable to the
Company's properties.
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The following table sets forth certain information regarding the
Company's proved oil and gas reserves. The following information is based on the
Company's estimated reserves as of January 1, 1997 as reviewed by Ryder Scott.
<TABLE>
<CAPTION>
PROVED RESERVES
-----------------------------------------------------------------------------------
% OF
TOTAL
NATURAL OIL AND DISCOUNTED DISCOUNTED
GROSS GAS CONDENSATE TOTAL PRESENT PRESENT
FIELD WELLS (MMCF) (MBBLS) (MMCFE) VALUE VALUE
----- ----- -------- --------- ------- ------- ------
OFFSHORE: (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
East Cameron Blocks 331/332......... 14 24,533 1,677 34,595 $ 87,839 35.4%
Galveston Blocks 343/363............ 17 3,262 11 3,328 8,968 3.6
Ship Shoal Block 261................ 1 3,100 59 3,454 8,522 3.5
Matagorda Block 710................. 3 3,941 14 4,025 6,974 2.8
Main Pass Blocks 300/301............ 9 839 92 1,391 2,552 1.0
East Cameron Blocks 349/350/355/356. 3 4,203 1,163 11,181 21,117 8.5
Vermilion Block 203................. 7 10,602 72 11,034 24,611 9.9
Main Pass Block 262................. 2 4,256 -- 4,256 11,248 4.5
Mustang Island Block 858............ 3 6,189 81 6,675 15,247 6.2
West Cameron Block 263.............. 1 2,157 26 2,313 4,840 2.0
South Timbalier Blocks 290/291...... 1 10,641 1,682 20,733 45,720 18.4
Other offshore...................... 11 1,869 15 1,959 4,057 1.6
---------- ---------- ------------ ------------- --------------- ----------
Total offshore................... 72 75,592 4,892 104,944 241,695 97.4
ONSHORE:
Appalachian region.................. 238 3,277 -- 3,277 3,899 1.6
Other onshore....................... 4 3,169 -- 3,169 2,508 1.0
---------- ---------- ------------ ------------- --------------- ----------
Total onshore.................... 242 6,446 -- 6,446 6,407 2.6
---------- ---------- ------------ ------------- --------------- ----------
Total......................... 314 82,038 4,892 111,390 $ 248,102 100%
========== ========== ============ ============= =============== ===========
</TABLE>
The following table sets forth certain information as of January 1,
1997 (based on the Company's estimated reserves as of January 1, 1997 as
reviewed by Ryder Scott) with respect to the Company's proved oil and gas
reserves and the Discounted Present Value of estimated future net revenues from
such reserves before income taxes as of the date indicated.
<TABLE>
<CAPTION>
OIL AND
NATURAL CONDENSATE DISCOUNTED
GAS (MMCF) (MBBLS) PRESENT VALUE
(IN THOUSANDS)
<S> <C> <C> <C>
Proved developed............................... 56,734 1,656 $ 158,471
Proved undeveloped............................. 25,304 3,236 89,631
----------------- -------------------- ------------------
Total.................................... 82,038 4,892 $ 248,102
================= ==================== ==================
</TABLE>
Since January 1, 1996, the Company has not filed any estimates of
proved oil and gas reserves with any federal authority or agency other than with
the Commission.
Part I of this document includes "forwarding looking" statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Although the
Company believes that the expectations reflected in such forward looking
statements are based upon reasonable assumptions, it can give no assurance that
its expectations will be achieved. Important factors ("Cautionary Disclosures")
that could cause the actual results to differ materially from the Company's
expectations are set forth under the caption "Risk Factors" in the Company's
Prospectus, dated September 14, 1995 and under the caption "Oil and Gas
Reserves" in this Form 10-K and under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and are disclosed in
conjunction with the forward looking statements included herein. Subsequent
written and oral forward looking statements attributable to the Company or
persons acting on its behalf are
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expressly qualified in their entirety by the Cautionary Disclosures, including
without limitation the President's Letter contained in the Annual Report to
Stockholders.
RYDER SCOTT
Ryder Scott has delivered the Ryder Scott Reserve Review Letter
relating to the Company's oil and gas reserves. Ryder Scott is a nationally
recognized firm of petroleum engineers specializing in evaluations of oil and
gas reserves. No limitations were imposed by the Company upon Ryder Scott with
respect to the investigations made or procedures followed by Ryder Scott in
rendering such report, except that Ryder Scott was requested to review the
estimate of the Company's proved reserves in compliance with the definition of
proved reserves required by the Commission, which assumes no change in economic
conditions will occur in the future. For reviewing certain of the Company's oil
and gas reserves, Ryder Scott has been paid a fee of approximately $23,000.
OFFSHORE PROPERTIES
East Cameron Blocks 331/332. These blocks are located 98 miles offshore
Louisiana in 240 feet of water. The Company owns a 40% interest in the shallower
horizons of Block 331 and a 20% interest in the deeper horizons of both blocks.
The Company purchased an interest in these blocks in 1991 for $100,000, and in
1992 proposed the first exploratory well, which proved to be the discovery well
for the field. The field commenced production in October 1994, and a total of
eleven wells have now been completed. During 1996, East Cameron Blocks 331/332
produced an average of 9.4 MMcf of gas per day and 504 Bbls of oil per day net
to the Company's interest, accounting for approximately 38% of the Company's
production for the period. During 1996, three exploration wells were drilled,
two successful and one dry hole. The two successful wells were completed and
commenced production in late December 1996. Work planned for 1997 will include
the drilling of one exploration well and sidetracking two existing wells. In
addition to the drilling operations, two wells will undergo major recompletions.
At January 1, 1997, the Company's net proved reserves in East Cameron Blocks
331/332 were 34.6 BCFE, with a discounted present value of approximately $87.8
million. Samedan Oil Company ("Samedan"), a subsidiary of Noble Affiliates,
Inc., is the operator of East Cameron Blocks 331/332.
East Cameron Blocks 349/350/355/356. The East Cameron Blocks
349/350/355/356 prospect area is located 110 miles offshore Louisiana in 300
feet of water. The Company's interests in Blocks 349 and 355 were acquired in
the 1994 Gulf of Mexico Central Area Lease Sale while the Company's interest in
Block 356 was acquired in a property swap by the Company in 1994. The Company's
interest in Block 350 was acquired in the 1995 Gulf of Mexico Central Area Lease
Sale. In May 1995, the Company participated in a new field discovery on East
Cameron Block 356. The field is located 6 miles south of the Company's East
Cameron Block 331/332 complex and was identified on the Company's 3-D seismic,
which covers both areas. The discovery well, East Cameron 356 #1, was drilled
directionally from a surface location on East Cameron Block 349 to a depth of
7,669 feet and encountered two hydrocarbon bearing Pleistocene sands based on
wireline log analysis. The well has been suspended pending completion
operations. An exploration well drilled from the same surface location as the
356 #1, East Cameron 350 #1, was spud on January 23, 1996. Based on wireline log
analysis, this well encountered approximately 270 net feet of oil and gas pay.
Platform installation is scheduled for early April 1997 following which
completion of the two existing wells and the drilling of three further wells
will take place. Full production from this complex is expected in the late third
quarter 1997. The Company owns a 37.5% working interest in this block, which is
operated by Enserch Exploration, Inc. ("Enserch").
Galveston Blocks 343/363. Galveston 343/363 field is located 13 miles
offshore Texas in 65 feet of water. The field is comprised of two adjacent
federal lease blocks operated by an affiliate of Seagull Energy Corporation
("Seagull"). Production began in 1990. Natural gas and condensate are produced
from 15 well completions on Blocks 343 and 363, from sands at depths of 7,100
feet to 8,500 feet. The wells on Block 343 produce through a four pile drilling
and production platform. The well on Block 363 produces through a separate
satellite platform that is tied by flowline to the Block 343 platform. Gas and
condensate flow from Block 343 to shore through a 16-inch pipeline. During 1996,
the average daily production net to the Company from this field was 2.9 MMcf of
gas and 8 Bbls of condensate. In July 1996, the A-2 well was worked over and
completed as a dual gas producer. The Company owns a 12% working interest in
Block 343 and an 11.26% working interest in Block 363.
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Main Pass Block 262. This block is located 60 miles offshore Louisiana
in 280 feet of water. Two wells were drilled in 1995 and 1996. First production
from the wells began in March 1996 and averaged 3.5 Mmcfd net to the Company
during 1996. In late 1996, a third well was drilled and subsea completed. It
began producing in February 1997. The Company owns a 33% working interest in
this block which is operated by CXY Energy, Inc.
Main Pass Blocks 300/301. These blocks are located 22 miles offshore
Louisiana in 200 feet of water. In April, 1996 an exploratory well was drilled
into a new fault block. This well, the A-5, established new oil and gas reserves
and is now producing. The Company owns a 15.3% working interest in Main Pass
Blocks 300/301, which are operated by Walter Oil & Gas Corporation ("Walter
Oil").
Matagorda Block 710. This block is located 28 miles offshore Texas in
150 feet of water. In September 1993, the Company participated in a successful
exploratory well on the block. Production commenced from two wells on the block
in December 1994. Because of low reservoir pressure, production was erratic in
1996. Production averaged 1.4 MMcf per day net to the Company's interest. A
compressor was added to the production platform in late 1996. The Company owns a
30% working interest in this block, which is operated by Murphy Exploration and
Production Company.
Mustang Island Block 858. This block is located 12 miles offshore Texas
in approximately 90 feet of water. First production from the field commenced in
July, 1997. Three wells are currently producing about 1.5 MMcf and 33 Bbl
condensate per day net to the Company. An exploration well to target a separate
structure on the block is being considered for drilling in the second half of
1997. The Company owns a 17.5% working interest in this block, which is operated
by The Houston Exploration Company ("Houston Exploration").
Ship Shoal Block 251. This block is located 54 miles offshore Louisiana
in 160 feet of water. Production commenced from this field on February 13, 1995.
In September 1996 production ceased from the second of two wells. No other
production opportunities exist on this tract so the wells will be plugged and
the platform removed in the summer of 1997. The Company owns a 25% working
interest in this block which is operated by Union Pacific Resources Group Inc.
("UPRC").
South Timbalier Blocks 290/291. The South Timbalier Block 290 Field is
located 60 miles offshore in 395 feet of water. The prospect area is part of the
four-block complex comprised of South Timbalier Blocks 290/291 and Ewing Bank
Blocks 782/783. The Company acquired its interest in all four blocks in the 1996
Gulf of Mexico Central Area Lease Sale. The discovery well, South Timbalier 290
#1, was drilled directionally from a surface location on South Timbalier Block
291 to a bottom hole location on Block 290. This well, based on wireline log
analysis, encountered over 150 feet of net true vertical thickness oil and gas
pay. The well was temporarily abandoned in November 1996 pending completion once
the production platform is in place. The Company and partners are currently
evaluating several development scenarios for this field. Tentative plans are to
set a drilling and production platform capable of handling 5,000 BOPD and 50
MMCFGPD. The Company operates this four-block complex and owns a 40% working
interest.
Vermilion Block 203. This block is located 56 miles offshore Louisiana
in 100 feet of water. Five wells have been drilled and completed on the block.
First production from this block was achieved on February 19, 1996 and
production is now approximately 6.0 MMcf of gas per day net to the Company's
interest. The Company owns a 50% working interest in this block, which is
operated by Houston Exploration.
Other Offshore Properties. The Company currently holds interest in 45
additional lease blocks offshore Texas and Louisiana, of which 10 are producing
leases.
ONSHORE PROPERTIES
Appalachian Region Properties. The Company holds interests in 238 wells
producing natural gas primarily in Venango, Mercer and Crawford Counties in
Pennsylvania. These wells, operated by Lomak Petroleum, Inc., produce from
multiple completions in Silurian-aged Medina and other sands at depths of
approximately 5,500 feet to 6,000 feet. The Company's working interests in these
wells range from 4% to 100%, with an average of approximately 28%. The
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Company also holds a 20% interest in the local field gathering system and the
pipeline that takes production from the wells in this area.
Other Onshore Properties. The Company holds minor working and royalty
interests in four additional wells in Texas and Oklahoma.
1996 EXPLORATION ACTIVITY
In 1996 the Company participated in the drilling of 21 exploration
wells, all in the OCS of the Gulf of Mexico. Eleven of the 21 wells were
successful in finding commercial quantities of hydrocarbons and have been or
will be completed for production.
On the four-block area which comprises East Cameron Blocks
349/350/355/356, the Company participated in a successful exploration well, East
Cameron 356 #1, in May 1995. A well targeting a separate structure on East
Cameron Block 356 was spud on December 25, 1995 but was plugged and abandoned in
February 1996 after encountering a low gas saturated sand. A third exploration
well, East Cameron 350 #1, was spud on January 23, 1996. Based on wireline log
analysis, this well encountered a total of 270 net feet of oil and gas pay in
four sands. The Company has a 37.5% working interest in all four blocks, which
are operated by Enserch.
On South Timbalier Block 249 an exploration well was spud in December
1995. Despite promising shows in South Timbalier 249 #1, a sidetrack found the
target sands wet. The Company operated this well and owns a 50% working interest
in this block.
An exploration well to test certain deeper sands on Vermilion Block 203
was spud on November 28, 1995. The Vermilion 203 A-2 well encountered no
reservoir sands below 15,000 feet and has been temporarily abandoned. In April
1996, an exploration well to test certain shallow sands on this block
encountered over 100 feet of net gas pay. The Vermilion 203 A-5 well was
completed and brought on production in May 1996. The Company owns a 50% working
interest in this block, which is operated by Houston Exploration.
In January 1996, an exploration well was spud on Ship Shoal Block 251.
This well was plugged and abandoned in February. The Company owns a 25% interest
in Ship Shoal Block 251, which is operated by UPRC.
In January, an exploration well was drilled on Ship Shoal Block 261.
After encountering the target sands non- hydrocarbon bearing, this well was
plugged back and sidetracked to a location higher on the geologic structure.
This well encountered 76 feet of net gas pay in a single sand body. A production
platform is scheduled for installation in early April 1997. At this time, the
well will be completed and is expected to begin producing in May 1997. The
Company owns a 50% working interest in and operates this development.
In April 1996, the Company participated in an exploration well on Main
Pass Block 301. This well discovered oil and gas in a separate fault block
adjacent to the existing producing field. This well was completed and commenced
production in May 1996. The Company owns a 15.3% working interest in this Walter
Oil operated well.
In July 1996, the Company participated in a discovery on West Cameron
Block 263. This well encountered 51 feet of net gas pay in a single sand.
Installation of a production facility is scheduled for the third quarter 1997. A
second exploration well targeting a separate geologic feature was drilled in
August 1996. This well was plugged and abandoned. The Company is the operator of
West Cameron Block 263 and owns a 50% working interest.
In July the Company participated in an exploration well on Brazos Block
377. Although this well discovered hydrocarbons, the Company elected not to
participate in the completion. The Company owns a 33% working interest in Brazos
Block 377.
The Company participated in three exploration wells on East Cameron
Blocks 331/332, which is operated by Samedan. The first well (A-11) was spud in
April 1996 from the East Cameron Block 332 platform and drilled to a bottom hole
location on an adjacent farm-in block (East Cameron Block 337.) This well
reached total depth in July after several sidetracks and found the target sands
non-productive. This well bore was suspended for a future sidetrack to
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a location on East Cameron Block 332 as a development well. The Company
participated in this well at a 13% working interest and will participate in the
sidetrack of the well with a 20% working interest. In August 1996, the Company
participated in further exploratory well, the A-12. This well discovered 52 feet
of net pay in two sands and commenced production in late December 1996. The
Company owns a 40% working interest in this well. In September 1996, the Company
participated in the drilling of a combination development/exploratory well, the
A-13. This well encountered 165 feet of net oil and gas pay in four sands. The
fourth sand, the deeper exploratory objective, had 70 feet of net pay in a
single sand. This well was completed and commenced production in late December
1996. The Company owns a 20% working interest in this well.
In September 1996, the Company participated in an exploratory well on
Brazos Block 501. This well encountered the target sands water bearing and the
well was plugged and abandoned. The Company owned a 33% working interest in this
well.
The Company participated in an exploratory well on South Timbalier
Block 290 which was spud in October. This well was drilled directionally to a
measured depth of 15,830 feet and discovered over 150 feet of true vertical
thickness oil and natural gas pay in several sands. Development plans for this
discovery including the sizing of the platform are being prepared. The Company
operates South Timbalier Block 290 and owns a 40% working interest in the
discovery and the four-block complex which is comprised of South Timbalier
Blocks 290/291 and Ewing Bank Blocks 782/783.
In November 1996, the Company participated in an exploration well on
West Cameron Block 588. This well encountered low gas saturated sands and was
subsequently plugged and abandoned. The Company had a 25% working interest in
this well which was operated by Samedan.
Also in November 1996, the Company participated in an exploratory well
in Main Pass Block 262. This well encountered 49 feet of net gas pay in a single
sand body. This well has been contemplated via a subsea well head and flowline
and tied back to the main production platform on the block. This well commenced
production in February 1997. The Company owns a 33% working interest in this
field.
In December 1996, the Company participated in an unsuccessful
exploration well on West Cameron Block 610. Further exploration potential
remains on the block. The Company owns a 37.5% working interest in and operates
this block.
Two minor working interest exploration wells, West Cameron Block 60 B-1
(CEUS W.I. 4.38%) and West Cameron 290 A-3 (CEUS W.I. 2.25%), drilled during the
year, were successful in finding commercial quantities of hydrocarbons. Both
wells were drilled from existing platforms with one well currently producing
with the other waiting for additional production equipment.
1997 EXPLORATION ACTIVITY
The Company's current drilling plans for 1997 include the drilling of
ten exploration and six development wells. Three further exploration wells may
be drilled and additional wells may be brought forward for drilling throughout
the course of the year.
The Company plans to continue to pursue new lease acquisitions at
Federal lease sales and through farm-in opportunities in the Gulf of Mexico.
The Company has over 150,000 miles of 2-D seismic data covering the
Gulf of Mexico and had 3-D seismic data with coverage exceeding 100 offshore
blocks. All of the Company's seismic data is continually used for prospect
generation and enhancing existing Company owned leaseholds.
CORPDAL:61486.5 15467-00006
7
<PAGE>
DRILLING ACTIVITIES
The Company drilled, or participated in the drilling of, the following
numbers of total wells during the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------
1994 1995 1996
--------------------- -------------------- -------------------
GROSS NET GROSS NET GROSS NET
Total Wells
<S> <C> <C> <C> <C> <C> <C>
Gas........................................ 9 1.85 8 2.58 10 3.28
Oil........................................ 1 .15 -- -- 1 .15
Dry........................................ -- -- 5 1.35 10 3.55
---------- --------- --------- --------- --------- --------
Total................................... 10 2.00 13 3.93 21 6.98
========== ========== ========= ========== ========= ========
Development Wells
Gas........................................ 3 .61 -- -- -- --
Oil........................................ -- -- -- -- -- --
Dry........................................ -- -- -- -- -- --
---------- ---------- --------- ---------- --------- --------
Total................................... 3 .61 -- -- -- --
========== ========== ========= ========== ========= ========
Exploratory Wells
Gas........................................ 6 1.24 8 2.58 10 3.26
Oil........................................ 1 .15 -- -- 1 .15
Dry........................................ -- -- 5 1.35 10 3.55
---------- ---------- --------- ---------- --------- --------
Total................................... 7 1.39 13 3.93 21 6.98
========== ========== ========= ========== ========= ========
</TABLE>
The information contained in the foregoing table should not be
considered indicative of future drilling performance, nor should it be assumed
that there is any necessary correlation between the number of productive wells
drilled and the amount of oil and gas that may ultimately be recovered by the
Company. From 1994 through 1996, the Company has drilled and completed 29 gross
(8.01 net) productive wells.
The Company owns no drilling rigs. All of the Company's drilling
activities are conducted by independent contractors on a day-rate basis or under
standard drilling contracts.
PRODUCTIVE WELL SUMMARY
The following table sets forth certain information regarding the
Company's ownership as of December 31, 1996 of productive wells in the areas
indicated.
<TABLE>
<CAPTION>
PRODUCTIVE WELLS
-------------------------------------------------------------------------------------
GAS OIL TOTAL
------------------------ ----------------------- -------------------------
GROSS NET GROSS NET GROSS NET
<S> <C> <C> <C> <C> <C> <C>
Gulf of Mexico(1)...................... 85 17.99 7 1.52 92 19.51
Appalachian region..................... 238 65.93 -- -- 238 65.93
Other onshore.......................... 4 1.39 -- -- 4 1.39
------------ ----------- ------------ ---------- ------------- -----------
Total......................... 327 85.31 7 1.52 334 86.83
============ =========== ============ ========== ============= ===========
<FN>
(1) A majority of these wells have completions in multiple pay zones.
</FN>
</TABLE>
CORPDAL:61486.5 15467-00006
8
<PAGE>
VOLUMES, PRICES AND PRODUCTION COSTS
The following table sets forth certain information regarding the
production volumes of, average sales prices received for, and average production
costs associated with, the Company's sales of oil and gas for the periods
indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1994 1995 1996
-------------- ------------ ---------
Net Production:
<S> <C> <C> <C>
Gas (MMcf)............................................................ 3,940 10,403 10,215
Oil (MBbls)........................................................... 100.1 430.8 273.5
Total (MMCFE)...................................................... 4,541 12,988 11,856
Average Sales Price:
Gas ($/Mcf)(1)(2)..................................................... $ 1.99 $ 1.70 $ 2.35
Oil ($/Bbl)........................................................... $ 14.35 $ 18.14 $ 21.41
Average Production Cost:
($/MCFE)(3)........................................................... $ 0.50 $ 0.24 $ 0.31
Depletion Rate: ($/MCFE) $ 0.94 $ 1.04 $ 1.33
<FN>
(1) Includes natural gas liquids.
(2) $2.35 per Mcf in 1996 is the price net of hedging transactions. The average price per Mcf excluding hedging
transactions was $2.58 per Mcf.
(3) Includes direct lifting costs (labor, repairs and maintenance, materials
and supplies) and the administrative costs of production offices,
insurance and property and severance taxes.
</FN>
</TABLE>
DEVELOPMENT, EXPLORATION AND ACQUISITION EXPENDITURES
The following table sets forth certain information regarding the costs
incurred by the Company in its development, exploration and acquisition
activities during the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1994 1995 1996
------------------ ------------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Development Costs.......................................... $ 11,683 $ 14,105 $ 9,184
Exploration Costs.......................................... 7,827 16,529 32,566
Acquisition Costs:
Proved Properties....................................... 1,405 -- --
Unevaluated Properties.................................. 24,984 (1,372)* 7,197
------------------ ------------------ ------------------
Total Capital Expenditures........................... $ 45,899 $ 29,262 $ 48,947
================== ================== ==================
<FN>
* This $1.372 million is net of an adjustment of $3.9 million to the consideration paid for an acquisition in 1994.
</FN>
</TABLE>
CORPDAL:61486.5 15467-00006
9
<PAGE>
ACREAGE
The following table sets forth certain information regarding the
Company's developed and undeveloped leasehold acreage as of December 31, 1996.
Acreage in which the Company's interest is limited to royalty, overriding
royalty and similar interests is insignificant and, therefore, excluded.
<TABLE>
<CAPTION>
DEVELOPED UNDEVELOPED TOTAL
---------------------- ------------------------ -------------------------
GROSS NET GROSS NET GROSS NET
<S> <C> <C> <C> <C> <C> <C>
Gulf of Mexico..................... 121,573 28,115 239,611 90,694 361,184 118,809
Appalachian region................. 8,590 2,288 -- -- 8,590 2,288
Other onshore...................... 2,560 915 -- -- 2,560 915
---------- ---------- ----------- ----------- ----------- ------------
Total..................... 132,723 31,318 239,611 90,694 372,334 122,012
========== ========== =========== =========== =========== ============
</TABLE>
MARKETS
General. The revenues generated from the Company's oil and gas
operations are highly dependent upon the prices of and the demand for its oil
and gas production. The prices received by the Company for its oil and gas
production depend upon numerous factors beyond the Company's control. Future
decreases in the prices of oil and gas would have an adverse effect on the
Company's proved reserves, revenues, profitability and cash flow.
Gas Sales. The Company sells substantially all of its gas production on
the spot market. Generally, the Company's gas production is sold under
short-term contracts. Total sales of gas accounted for 68.2% and 78.9% of the
Company's revenues during 1995 and 1996, respectively. The weighted average
prices of the gas sold by the Company under the various month-to-month spot gas
contracts were $1.70 and $2.35 per Mcf of natural gas during 1995 and 1996,
respectively.
The following table lists purchasers of the Company's natural gas that
accounted for more than 10% of total revenues for the years indicated:
<TABLE>
<CAPTION>
Year ended December 31,
1995 1996
<S> <C> <C>
Coastal Corporation..................................... 22% 39%
Enron Capital and Trade Resources....................... -- 10%
Penn Union Energy Services.............................. -- 16%
Samedan Oil Corporation................................. 12% --
</TABLE>
Oil Sales. Generally, the Company's oil production is sold to various
purchasers under short-term arrangements at prices negotiated by third parties,
but at prices no less than such purchasers' posted prices for the respective
areas less standard deductions. Total sales of oil accounted for 30.1% and 19.3%
of the Company's revenues during 1995 and 1996, respectively. Samedan Oil
Corporation purchased oil production from the Company in 1995 and 1996 that
amounted to 20% and 14%, respectively, of the Company's total revenues. The
Company believes that the loss of a purchaser of its oil would not have a
material adverse effect on its results of operations due to the availability of
other purchasers for its oil.
COMPETITION
The exploration for and production of oil and natural gas is highly
competitive. In seeking to obtain desirable properties, leases and exploration
prospects, the Company faces competition from both major and independent oil and
natural gas companies, as well as from numerous individuals and drilling
programs. Extensive competition also exists in the market for natural gas
produced by the Company. Many of these competitors have financial and other
resources substantially in excess of those available to the Company and,
accordingly, may be better positioned to acquire and exploit prospects, hire
personnel and market production. In addition, many of the Company's larger
competitors may be better able to respond to factors that affect the demand for
oil and natural gas production such as changes in worldwide oil and natural gas
prices and levels of production, the cost and availability of alternative fuels
and the application of government regulations.
CORPDAL:61486.5 15467-00006
10
<PAGE>
REGULATION
Oil and Gas Production. The Company's oil and gas exploration,
production and related operations are subject to extensive rules and regulations
promulgated by federal and state agencies. Failure to comply with such rules and
regulations can result in substantial penalties. The regulatory burden on the
oil and gas industry increases the Company's cost of doing business and affects
its profitability. Because such rules and regulations are frequently amended or
interpreted, the Company is unable to predict the future cost or impact of
complying with such laws.
All of the Company's offshore oil and gas leases are granted by the
federal government and are administered by the Mineral Management Service (the
"MMS"). Such leases require compliance with detailed federal regulations and
orders that regulate, among other matters, drilling and operations and the
calculation of royalty payments to the federal government. Ownership interests
in these leases are generally restricted to United States citizens and domestic
corporations. Assignments of these leases or interests therein are subject to
approval by the MMS.
The federal authorities, as well as many state authorities, require
permits for drilling operations, drilling bonds and reports concerning
operations and impose other requirements relating to the exploration and
production of oil and gas. Such states also have statutes or regulations
addressing conservation matters, including provisions for the unitization or
pooling of oil and gas properties, the establishment of maximum rates of
production from oil and gas wells and the regulation of spacing, plugging and
abandonment of such wells. The statutes and regulations of the federal
authorities, as well as many state authorities, limit the rates at which oil and
gas can be produced from the Company's properties.
Prior to January 1, 1993, the sale for resale of certain categories of
natural gas production was price regulated pursuant to the Natural Gas Act of
1938, the Natural Gas Policy Act of 1978 (the "NGPA") and the regulations
promulgated thereunder by the Federal Energy Regulatory Commission ("FERC").
However, under the Natural Gas Wellhead Decontrol Act of 1989, all price
controls of natural gas under the NGPA were phased out effective as of January
1, 1993.
Several major regulatory changes have been implemented by the FERC from
1985 to the present that affect the economics of natural gas production,
transportation and sales. In addition, the FERC continues to promulgate
revisions to various aspects of the rules and regulations affecting those
segments of the natural gas industry that remain subject to the FERC's
jurisdiction. The stated purpose of many of these regulatory changes is to
promote competition among the various sectors of the gas industry. The ultimate
impact of the complex and overlapping rules and regulations issued by the FERC
since 1985 cannot be predicted. In addition, many aspects of these regulatory
developments have not become final but are still pending judicial and FERC final
decisions.
Environmental. The Company is subject to numerous laws and regulations
governing the discharge of materials into the environment or otherwise relating
to environmental protection. These laws and regulations may require the
acquisition of a permit before drilling commences, restrict the types,
quantities and concentration of various substances that can be released into the
environment in connection with drilling and production activities, limit or
prohibit drilling activities on certain lands lying within wilderness, wetlands
and other protected areas and impose substantial liabilities for pollution
resulting from the Company's operations. Moreover, the recent trend toward
stricter standards in environmental legislation and regulation is likely to
continue. For instance, legislation has been proposed in Congress from time to
time that would reclassify certain oil and gas production wastes as "hazardous
wastes," which reclassification would make such wastes subject to much more
stringent handling, disposal and clean-up requirements. If such legislation were
to be enacted, it could have a significant impact on the operating costs of the
Company, as well as the oil and gas industry in general. It is not anticipated
that the Company will be required in the near future to expend amounts that are
material in relation to its total capital expenditure program by reason of
environmental laws and regulations, but because such laws and regulations are
frequently changed, the Company is unable to predict the ultimate cost of such
compliance.
The Oil Pollution Act of 1990 (the "OPA") and regulations thereunder
impose a variety of regulations on "responsible parties" related to the
prevention of oil spills and liability for damages resulting from such spills in
United States waters. A "responsible party" includes the owner or operator of a
CORPDAL:61486.5 15467-00006
11
<PAGE>
facility or vessel, or the lessee or permittee of the area in which an offshore
facility is located. The OPA assigns liability to each responsible party for oil
removal costs and a variety of public and private damages. While liability
limits apply in some circumstances, a party cannot take advantage of liability
limits if the spill was caused by gross negligence or willful misconduct or
resulted from violation of a federal safety, construction or operating
regulation. If the party fails to report a spill or to cooperate fully in the
cleanup, liability limits likewise do not apply. Few defenses exist to the
liability imposed by the OPA.
The OPA also imposes ongoing requirements on a responsible party,
including proof of financial responsibility to cover at least some costs in a
potential spill. On August 25, 1993, the MMS published an advance notice of its
intention to adopt a rule under the OPA that would require owners and operators
of offshore oil and gas facilities to establish $150 million in financial
responsibility. Under the proposed rule, financial responsibility could be
established through insurance, guaranty, indemnity, surety bond, letter of
credit, qualification as a self-insurer or a combination thereof. There is
substantial uncertainty as to whether insurance companies or underwriters will
be willing to provide coverage under the OPA because the statute provides for
direct lawsuits against insurers who provide financial responsibility coverage,
and most insurers have strongly protested this requirement. The financial tests
or other criteria that will be used to judge self-insurance are also uncertain.
The Company cannot predict the final form of the financial responsibility rule
that will be adopted by the MMS, but such rule has the potential to result in
the imposition of substantial additional annual costs on the Company or
otherwise materially adversely affect the Company. The impact of the rule should
not be any more adverse to the Company than it will be to other similarly
situated or less capitalized owners or operators in the Gulf of Mexico.
The OPA also imposes other requirements, such as the preparation of an
oil spill contingency plan. The Company has such a plan in place. Failure to
comply with ongoing requirements or inadequate cooperation during a spill event
may subject a responsible party to civil or criminal enforcement actions.
The Comprehensive Environmental Response, Compensation and Liability
Act ("CERCLA"), also known as the "Superfund" law, imposes liability, without
regard to fault or the legality of the original conduct, on certain classes of
persons who are considered to have contributed to the release of a "hazardous
substance" into the environment. These persons include the owner or operator of
the disposal site or sites where the release occurred and companies that
disposed or arranged for the disposal of the hazardous substances and under
CERCLA such persons or companies would be subject to joint and several liability
for the costs of cleaning up the hazardous substances that have been released
into the environment and for damages to natural resources. It is not uncommon
for neighboring landowners and other third parties to file claims for personal
injury and property damage allegedly caused by the hazardous substances released
into the environment.
OPERATIONAL HAZARDS AND INSURANCE
The Company maintains insurance of various types to cover its
operations. Ultimate limits provided under such liability policies are $75
million. In addition, the Company maintains operator's extra expense coverage
that provides for care, custody and control of wells drilled or completed by the
Company. The occurrence of a significant adverse event, the risks of which are
not fully covered by insurance, could have a material adverse affect on the
Company's financial condition and results of operations. Moreover, no assurance
can be given that the Company will be able to maintain adequate insurance in the
future at rates it considers reasonable.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
NAME AGE POSITION
Michael R, Gilbert 47 President, Chief Executive Officer and Director
J. Munro M. Sutherland 42 Senior Vice President, Chief Financial Officer,
Treasurer and Director
Robert P. Murphy 38 Vice President--Exploration and Director
A. Allen Paul 54 Vice President--Marketing & Administration
Susan H. Rader 45 Secretary and Land Manager
CORPDAL:61486.5 15467-00006
12
<PAGE>
No family relationship exists among any of the Company's executive
officers or directors. The Company's executive officers are elected to hold
office until the next annual meeting of directors.
Michael R. Gilbert has served as the President, Chief Executive Officer
and a Director of the Company since February 27, 1992. Mr. Gilbert was the
President of Cairn USA from its inception in March 1989 until the Merger in
September 1992. From 1982 to 1989, Mr. Gilbert served as Executive Vice
President of Canyon Oil and Gas Company, an oil and gas acquisition company and
a subsidiary of Slawson Companies, Inc., an oil and gas company.
J. Munro M. Sutherland has served as Senior Vice President, Chief Financial
Officer and Treasurer of the Company since November 1993. Mr. Sutherland has
been a director of the Company since June 1993. From 1988 to October 1993, Mr.
Sutherland was the Finance Director of Cairn Energy PLC, formerly the Company's
majority stockholder and an independent oil and gas exploration and production
company ("Cairn PLC"). He was a nonexecutive director of Cairn PLC from November
1, 1993 until August 31, 1994. Mr. Sutherland is a member of the Institute of
Chartered Accountants of Scotland.
Robert P. Murphy joined Cairn USA in 1990 as an exploration geologist and
became the Company's Vice President--Exploration in March 1993. Mr. Murphy was
elected a director of the Company in May 1996. From 1984 to 1990, Mr. Murphy
served as an exploration geologist for Enserch, an oil and gas company. Mr.
Murphy holds a M.S. in geology from The University of Texas at Dallas.
A. Allen Paul has served as Vice President-Marketing & Administration since
May 1996. Mr. Paul was Vice President-Finance of the Company from September 1992
to May 1996. From September 1992 to November 1993 Mr. Paul was Treasurer of the
Company. From April 1990 to August 1992 Mr. Paul was Vice President-Finance for
Rosco Wallcovering, Inc., a company specializing in the wholesale distribution
of wallpaper. Mr. Paul is a Certified Public Accountant.
Susan H. Rader has served as Secretary of the Company and as a
Petroleum Land Manager since September 1992. From Cairn USA's inception in March
1989 until the Merger in September 1992, Ms. Rader served as Assistant Secretary
and as a petroleum land manager for Cairn USA.
EMPLOYEES
At December 31, 1996, the Company had 19 employees. None of the
Company's employees is subject to a collective bargaining agreement. The Company
considers its relations with its employees to be good.
TITLE TO PROPERTIES
As is customary in the oil and gas industry, the Company performs a
minimal title investigation before acquiring undeveloped properties. The Company
has obtained title opinions on substantially all of its producing properties and
believes that it has satisfactory title to such properties in accordance with
standards generally accepted in the oil and gas industry. The Company's
properties are subject to customary royalty interests, liens incident to
operating agreements, liens for current taxes and other burdens that the Company
believes do not materially interfere with the use of or affect the value of such
properties. Substantially all of the Company's oil and gas properties are and
will continue to be mortgaged to secure borrowings under the Company's credit
facility. See "Management's Discussion and Analysis of Financial Conditions and
Results of Operations -- Capital Resources and Liquidity."
OFFICES
The Company leases approximately 11,000 square feet of office space in
Dallas, Texas under a lease that expires in July 2001.
ITEM 3. LEGAL PROCEEDINGS
CORPDAL:61486.5 15467-00006
13
<PAGE>
The Company is involved in routine litigation from time to time. Such
litigation in which the Company is currently involved is not material to the
Company's consolidated financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders, through the solicitation
of proxies or otherwise.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Common Stock is traded on the Nasdaq National Market tier of the
Nasdaq Stock Market ("NNM") under the symbol "CEUS." The following table sets
forth the high and low sales prices for the Common Stock from January 1, 1995 to
February 28, 1997.
<TABLE>
<CAPTION>
YEAR HIGH LOW
1995
<S> <C> <C> <C> <C>
First Quarter................................................................... 8 3/4 7 3/8
Second Quarter.................................................................. 11 8 1/2
Third Quarter................................................................... 12 3/4 10 3/8
Fourth Quarter.................................................................. 14 1/8 11 3/8
1996
First Quarter................................................................... 14 1/8 10
Second Quarter.................................................................. 14 3/4 10 1/4
Third Quarter................................................................... 14 3/4 9 1/4
Fourth Quarter.................................................................. 12 5/8 9 3/8
1997
First Quarter (through February 28, 1997)....................................... 12 1/8 9 7/16
</TABLE>
The high and low sales prices for the Common Stock were reported by the NNM.
As of February 28, 1997, the Company had 17,564,561 outstanding shares
of Common Stock held by approximately 611 stockholders of record.
The Company's policy is to retain its earnings to support the growth of
the Company's business. Accordingly, the Board of Directors has never declared
dividends on the Common Stock and does not plan to do so in the foreseeable
future. Pursuant to the terms of the Company's credit facility (the "INCC Credit
Agreement") with ING (U.S.) Capital Corporation ("INCC"), MeesPierson, N.V.
("MeesPierson") and Credit Lyonnais (Credit Lyonnais), the Company is not
permitted to pay or declare any cash or property dividends or otherwise make any
distribution of capital. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 3 of Notes to Consolidated
Financial Statements.
CORPDAL:61486.5 15467-00006
14
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data as of and for the
years December 31, 1992, 1993, 1994, 1995, and 1996 have been derived from the
audited Consolidated Financial Statements of the Company. The data should be
read in conjunction with Management's Discussion and Analysis of Financial
Condition and Results of Operations of the Company, the Company's Consolidated
Financial Statements, related notes thereto, schedules and other financial
information of the Company included elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1992 1993 1994 1995 1996
(in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Revenues:
<S> <C> <C> <C> <C> <C>
Crude oil and natural gas..................... $ 14,035 $ 13,490 $ 9,494 $ 25,742 $ 30,016
Other revenue................................. 59 59 206 217 331
------------- ---------- ------------ ----------- ------------
Total revenues............................ 14,095 13,549 9,700 25,959 30,347
Expenses:
Lease operating expenses and production taxes. 3,766 3,826 2,274 3,101 3,731
Depreciation, depletion and amortization...... 6,792 5,654 4,328 13,616 15,973
Administrative expenses....................... 774 1,266 1,330 1,507 1,482
Interest...................................... 1,193 1,045 1,114 2,500 2,523
------------- ---------- ------------ ----------- ------------
Total expenses............................ 12,525 11,791 9,046 20,724 23,709
------------- ---------- ------------ ----------- ------------
Income (loss) before minority interest and
extraordinary item................................. 1,570 1,758 654 5,235 6,638
Minority interest in net loss of Omni.............. 245 -- -- -- --
Extraordinary item--loss on early extinguishment of
debt............................................... -- (248) -- -- --
------------- ----------- ------------ ----------- ------------
Net income (loss).................................. $ 1,815 $ 1,474 $ 654 $ 5,235 $ 6,638
============== =========== ============= ============ ============
Net income (loss) per common and common equivalent
share.............................................. $ 0.18 $ 0.13 $ 0.05 $ 0.32 $ 0.38
============== =========== ============= ============ ============
Weighted average common and common equivalent
shares outstanding................................. 10,048 11,260 13,259 16,422 17,559
============== =========== ============= ============ ============
STATEMENTS OF CASH FLOWS DATA:
Net income (loss).................................. $ 1,815 $ 1,474 $ 654 $ 5,235 $ 6,638
Depreciation, depletion and amortization........... 6,792 5,654 4,328 13,616 16,019
Other non-cash charges (credits)................... (137) 414 223 355 367
Net change in operating assets and liabilities..... 2 841 1,148 (3,361) 3,999
Net cash provided by operating activities.......... 8,472 8,383 6,353 15,845 27,023
Net cash used in investing activities.............. (7,574) (9,519) (17,208) (23,080) (49,922)
Net cash provided by (used in) financing activities (212) 564 12,694 8,606 25,784
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
1992 1993 1994 1995 1996
-------------- ----------- ------------- ------------ --------
(in thousands)
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C>
Total assets....................................... $ 46,100 $ 49,629 $ 89,181 $ 106,811 $ 143,358
Working capital (deficit).......................... (1,029) 877 514 815 1,004
Advances from Cairn Energy PLC..................... 2,609 -- -- -- --
Long-term debt, less current maturities............ 15,917 9,600 23,500 15,500 42,000
Stockholders' equity............................... 22,893 37,890 61,798 83,786 90,538
</TABLE>
CORPDAL:61486.5 15467-00006
15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion of the consolidated results of operation and
financial condition of the company for each of the years in the three-year
period ended December 31, 1996 should be read in conjunction with the Company's
Consolidated Financial Statements and related notes thereto included elsewhere
herein.
GENERAL
The Company follows the full-cost method of accounting for its
investments in oil and gas properties. The Company capitalizes all acquisition,
exploration, and development costs incurred. Proceeds from sales of oil and gas
properties are credited to the full-cost pool. Capitalized costs of oil and gas
properties are amortized on an overall unit-of-production method using proved
oil and gas reserves as determined by independent petroleum engineers. Costs
amortized include all capitalized costs (less accumulated amortization); the
estimated future expenditures (based on current costs) to be incurred in
developing proved reserves; and estimated dismantlement, restoration, and
abandonment costs. See Note 2 of Notes to Consolidated Financial Statements.
RESULTS OF OPERATIONS
The following table sets forth certain information regarding the
production volumes of, average sales prices received for, and average production
costs associated with, and depletion rate associated with the Company's sales of
oil and gas for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1994 1995 1996
------------- ----------- ----------
Net Production:
<S> <C> <C> <C>
Gas (MMcf)...................................... $ 3,940 10,403 10,215
Oil (MBbls)..................................... 100.1 430.8 273.5
Average Sales Price:
Gas (per Mcf)(1)(2)............................. $ 1.99 $ 1.70 $ 2.35
Oil (per Bbl)................................... $ 14.35 $ 18.14 $ 21.41
Average Production Cost:
(per MCFE)(3)................................... $ 0.50 $ 0.24 $ 0.31
Depletion Rate:
(per MCFE)...................................... $ 0.94 $ 1.04 $ 1.33
<FN>
(1) Includes natural gas liquids.
(2) $2.35 per Mcf in 1996 is the price net of hedging transactions. The
average price per Mcf excluding hedging transactions was $2.58 per Mcf.
(3) Includes direct lifting costs (labor, repairs and maintenance, materials
and supplies) and the administrative costs of production offices,
insurance and property and severance taxes.
</FN>
</TABLE>
1996 COMPARED WITH 1995
Revenues. Total revenues increased $4.3 million (17%) to $30.3 million for
1996 from $26.0 million for 1995. The increase in revenues was due to higher
average oil and gas prices in 1996, partially offset by decreases in production.
The decreases in production resulted from the natural production rate decline in
the Company's properties developed prior to 1996 exceeding new production from
wells brought online in 1996.
CORPDAL:61486.5 15467-00006
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<PAGE>
Expenses. Total expenses increased $3.0 million (14%) to $23.7 million for
1996 from $20.7 million for 1995. An increase in depreciation, depletion and
amortization ("DD&A") is the primary source for the increase in expenses. DD&A
increased $2.4 million (17%) to $16.0 million for 1996 from $13.6 million in
1995 due to an increase in the depletion rate partially offset by the decrease
in production. Lease operating costs and production taxes increased $630,000
(20%) to $3.7 million for 1996 compared with $3.1 million for 1995 due primarily
to pipeline transportation fees related to the production from Mustang Island
Block 858, Vermilion Block 203 and Main Pass Block 262. Changes in
administrative costs and interest expense were insignificant.
Net Income. Net income increased $1.4 million (27%) to $6.6 million for
1996 from $5.2 million in 1995. The primary reason for the increase in net
income was increased oil and gas prices.
1995 COMPARED WITH 1994
Revenues. Total revenues increased $16.3 million (168%) to $26.0 million for
1995 from $9.7 million for 1994. The increase in revenues was due primarily to
the new production from the Company's interest in East Cameron Blocks 331/332,
Matagorda Block 710 and Ship Shoal Block 251 coupled with higher average oil
prices in 1995 partially offset by lower average gas prices in 1995.
Expenses. Total expenses increased $11.6 million (129%) to $20.7 million for
1995 from $9.1 million for 1994. An increase in depreciation, depletion and
amortization ("DD&A") is the primary source for the increase in expenses. DD&A
increased $9.3 million (215%) to $13.6 million for 1995 from $4.3 million in
1994 due to increased production coupled with an increase in the depletion rate.
Interest expense increased $1.4 million (124%) to $2.5 million for 1995 from
$1.1 million for 1994 because of an increase in average outstanding debt and
higher average interest rates. Lease operating costs and production taxes
increased $827,000 (36%) to $3.1 million for 1995 compared with $2.3 million for
1994. Lease operating expenses increased because of increased production.
Reflected in the 1994 lease operating expense amount are expenses related to the
Texas Panhandle properties that were sold in August 1994. Production costs on a
per unit basis decreased significantly because East Cameron Blocks 331/332,
Matagorda Block 710 and Ship Shoal Block 251 all have a low per unit operating
cost, while the Texas Panhandle properties sold in August 1994 had a high per
unit operating cost. Administrative expenses increased $177,000 (13%) to $1.5
million in 1995 from $1.3 million in 1994 principally due to an increase in
legal, salary and printing expenses partially offset by increased overhead
capitalization relating to technical staff associated with exploration activity.
Net Income. Net income increased $4.6 million (700%) to $5.2 million for
1995 from $654,000 in 1994. The primary reason for the increase in net income
was the increase in production.
CAPITAL RESOURCES AND LIQUIDITY
At December 31, 1996, the Company had existing cash and cash investments of
$6.4 million. Net cash provided by operating activities was $27.0 million for
1996, compared with $15.8 million for 1995. The primary reason for this increase
in cash provided by operating activities was higher results of operations (or
earnings before depreciation, depletion and amortization) coupled with decreased
working capital requirements. Net cash used in investing activities for 1996 was
$49.9 million compared with $23.1 million in 1995. This increase was principally
due to expenditures for exploration and development prospects.
Net cash provided by financing activities for 1996 was $25.8 million compared
with $8.6 million in 1995. The cash provided by financing activities during 1996
was from net borrowings under the Company's revolving credit facility.
In general, because the Company's oil and gas reserves are depleted by
production, the success of its business strategy is dependent on a continuous
exploration and development program. Therefore, the Company's capital
requirements relate primarily to the acquisition of undeveloped leasehold
acreage and exploration and development activities. The Company is currently
pursuing a number of existing exploration prospects and plans to participate in
Gulf of Mexico lease sales during 1997.
CORPDAL:61486.5 15467-00006
17
<PAGE>
The Company's operating needs and capital spending programs have been funded
by borrowing under its bank credit facilities, proceeds from public offerings of
its Common Stock and cash flow from operations. The Company expects to continue
with an active exploration program and plans to drill ten additional exploration
wells and six development wells in 1997. The Company expects capital
expenditures during 1997 to total approximately $47 million. At December 31,
1996, the Company's capital resources consisted primarily of cash flow from
operations and available borrowing capacity under the INCC Credit Agreement.
Management believes that cash flow from operations along with the amount
available under the INCC Credit Agreement will be sufficient to finance the
currently planned capital expenditures through December 1997.
If the Company is successful in substantially all of its currently scheduled
exploration prospects, additional funds may be required in order to conduct the
necessary development activities. Additionally, if the Company is unsuccessful
in its currently scheduled exploration program, additional funds may be required
in order to continue the exploration and development program. If necessary, the
Company may seek to raise additional capital in public or private equity or debt
markets. No assurance can be given that the Company will be able to raise such
capital if needed or on terms that are favorable to the Company. Any resulting
lack of sufficient capital may require the Company to reduce its interest in
such properties or to forego developing such reserves and may require the
Company to curtail its exploration and development program. In addition, the
Company does not act as operator with respect to a majority of its properties.
The Company may not be able to control the exploration or development activities
or the associated costs with respect to properties operated by other parties.
Credit Facility. The Company has a credit agreement as amended (the INCC
Credit Agreement) with ING (U.S.) Capital Corporation, f/k/a Internationale
Nederlanden (U.S.) Capital Corporation (INCC), Mees Pierson, N.V. (Mees Pierson)
and Credit Lyonnais (Credit Lyonnais) (together, the bank group). The INCC
Credit Agreement is secured by substantially all of the Company's assets. It
contains financial covenants which require the Company to maintain a ratio of
current assets to current liabilities (excluding the current portion of related
debt) of no less than 1.0 to 1.0 and a tangible net worth of not less than $40
million. The Company is currently in compliance with such financial covenants.
Prior to June 28, 1996, outstanding borrowings accrued interest at either INCC's
fluctuating base rate or INCC's reserve adjusted Eurodollar rate plus 1.5% at
the Company's option. On June 28, 1996, the INCC Credit Agreement was amended
(the Third Amendment) to decrease the addition to the INCC reserve adjusted
Eurodollar rate from 1.5% to 1.25% as long as outstanding borrowings are less
than 75% of the borrowing base. The borrowing base was also increased from $45
million to $50 million.
On November 7, 1996 the Company further amended (the Fourth Amendment) the
INCC Credit Agreement. Under the Fourth Amendment, Credit Lyonnais joined as a
lender under the INCC Credit Agreement. Also under the Fourth Amendment, the
original facility under the INCC Credit Agreement was designated as Facility A
and the maximum amount of the facility was increased in amount from $50 million
to $75 million; provided, however, that the maximum amount available to the
Company cannot exceed the borrowing base of its properties as determined from
time to time by the lenders. The borrowing base under Facility A was reconfirmed
as of November 7, 1996 as $50 million. The revolving period of borrowings under
Facility A was extended from March 31, 1997 to September 30, 1997. On September
30, 1997 the borrowings outstanding under Facility A will be converted to a term
loan that requires quarterly repayments of principal on a revised schedule
through March 31, 2001. The Company's ability to borrow under Facility A is
dependent upon the reserve value of its oil and gas properties. If the reserve
value of the Company's borrowing base declines, the amount available to the
Company under Facility A will be reduced and, to the extent that the borrowing
base is less than the amount then outstanding under Facility A, the Company will
be obligated to repay such excess amount on 30-days notice from INCC or to
provide additional collateral. INCC, Mees Pierson, N.V., and Credit Lyonnais
have substantial discretion in determining the reserve value of the borrowing
base.
In addition, a second facility was created under the Fourth Amendment. This
new standby credit facility, Facility B, is for the amount of $14 million.
Facility B provides for three levels of borrowings by the Company, two of $5
million each and one of $4 million. There are no restrictions on the Company's
ability to borrow the first $5 million under Facility B and the amount borrowed
may be used for general corporate purposes. The Company's ability to borrow
under the further two levels of borrowings of $5 million and $4 million,
respectively, under Facility B is dependent upon the Company establishing total
proved reserves at certain levels and appropriate ratios between the Company's
outstanding debt and the value of its proved reserves. The Company must also
CORPDAL:61486.5 15467-00006
18
<PAGE>
submit detailed proposals, acceptable to its lenders, outlining the manner in
which the second two levels of borrowings under Facility B will be used in the
development of the Company's oil and gas properties. Facility B is repayable on
December 31, 1997. The interest margin over INCC reserve adjusted Eurodollar
rate for Facility B varies from 3.25% to 3.75%, depending upon the ratio of the
amount of the outstanding loans to the value of the Company's proved reserves.
Under the INCC Credit Agreement, interest is payable quarterly on any base rate
borrowings and payable on maturity of any Eurodollar borrowings or at the end of
three months if the maturity of the Eurodollar borrowing is in excess of three
months.
The Company is currently negotiating with the bank group regarding a further
amendment to the INCC Credit Agreement. The Company has requested that the
borrowing base under Facility A of the INCC Credit Agreement be increased from
$50 million to $65 million. At the same time, the amount of Facility B would be
reduced from $14 million to $10 million and certain changes would be made to the
conditions attaching to Facility B. No assurance can be given that the bank
group will agree to such requests and any such agreement with respect to such
request will be subject to the negotiation and execution of a definitive
amendment to the INCC Credit Agreement.
The INCC Credit Agreement does not permit the Company to pay or declare any
cash or property dividends or otherwise make any distribution of capital. On
Facility A the Company is obligated to pay a quarterly fee equal to 0.5% per
annum of the unused portion of the borrowing base under the facility and a
Letter of Credit fee for each Letter of Credit in the amount of 1.5% per annum
of the face amount of such Letter of Credit. On Facility B the Company is
obligated to pay a drawdown fee for each $5 million borrowed equal to 0.3% for
the first $5 million, 1.15% for the second $5 million and 1.6% for the last $4
million. Also, the Company must pay 0.5% per annum on the undrawn portion of
Facility B.
The Company expects to have to negotiate an extension of the revolving nature
of the credit facility or to negotiate a new credit facility before the end of
the year.
The carrying value of the Company's long-term debt approximates fair value.
The following table illustrates the borrowing base, the outstanding
borrowings and the available borrowings under the INCC Credit Agreement at
December 31, 1996.
<TABLE>
<CAPTION>
BORROWING OUTSTANDING AVAILABLE
BASE BORROWINGS BORROWINGS
Credit Facility
<S> <C> <C> <C>
Facility A......................................... $ 50,000,000 $ 42,000,000 $ 8,000,000
Facility B......................................... 14,000,000 -- 14,000,000
---------------- ---------------- --------------
$ 64,000,000 $ 42,000,000 $ 22,000,000
================ ================ ==============
</TABLE>
The Company believes that available borrowings under the INCC Credit
Agreement combined with cash flows from the operations will be sufficient to
fund its currently anticipated development and exploration expenses. If the
Company is successful in substantially all of its currently scheduled
exploration prospects, additional funds will be required in order to conduct the
necessary development activities. Any resulting lack of sufficient capital may
require the Company to reduce its interest in such properties or to forego
developing such reserves. In addition, the Company does not act as operator with
respect to most of its properties. Therefore, the Company may not be able to
control the development activities or the associated costs with respect to
properties operated by other parties.
Net Operating Losses. At December 31, 1996, the Company had net
operating loss carryforwards for federal income tax purposes of approximately
$48 million. The net operating losses will expire principally in 2005 through
2010, if not previously utilized. Utilization of approximately $26 million of
net operating loss is subject to limitations because of previous changes in
ownership of the Company, as defined in the Internal Revenue Code. Additional
net operating loss limitations may be imposed because of subsequent changes in
stock ownership of the Company.
CHANGES IN PRICES AND INFLATION
The Company's revenues and the value of its oil and gas properties have
CORPDAL:61486.5 15467-00006
19
<PAGE>
been and will continue to be affected by changes in oil and gas prices. The
Company's ability to maintain its current borrowing capacity and to obtain
additional capital on attractive terms is also substantially dependent on oil
and gas prices. Oil and gas prices are subject to significant seasonal and other
fluctuations that are beyond the Company's ability to control or predict.
Although certain of the Company's costs and expenses are affected by the level
of inflation, inflation has not had a significant effect on the Company's
results of operations during 1994, 1995 or 1996.
In an effort to reduce the effects of the volatility of the price of
oil and gas on the Company's operations, management has adopted a policy of
hedging oil and gas prices, usually when such prices are at or in excess of the
prices anticipated in the Company's operating budget, through the use of
commodity futures, options, forward contracts and swap agreements. Hedging
transactions are limited by the Board of Directors such that no transaction may
fix an oil and gas price for a term of more than 12 months, and the aggregate
oil and gas production covered by all transactions may not exceed 50% of the
Company's budgeted production for any 12-month period from the date of the
transaction or 75% of the Company's budgeted production for any single month
from the date of the transaction. By hedging its oil and gas prices, the Company
intends to mitigate the risk of future declines in oil and gas prices. Under
certain contracts should oil or gas prices increase above the contract rate, the
Company will not participate in the higher prices for the production.
The Company has entered into a number of gas price swap transactions
under which the Company receives a fixed price per MMBtu and pays a floating
price based on the settlement prices for the NYMEX Natural Gas futures contract
for the delivery month. In total under these contracts the Company fixed the
price of 4,065,000 MMBtu of gas for 1996 at an average price of $2.018 per
MMBtu. Gas revenues were reduced $2.4 million and increased $323,000 in 1996 and
1995, respectively, as a result of hedging transactions. The Company has fixed
the price of 630,000 MMBtu of gas for the period January to March 1997 at an
average price of $3.32 per MMBtu.
The Company may enter into certain interest rate hedging contracts. By
hedging its interest rate under its credit facility, the Company would intend to
mitigate the risk of future increases in interest rates. Should interest rates
decrease below the contract rate, the Company will not participate in the lower
interest rate for the portion of the credit facility under the hedging contract.
The Company currently has no interest rate hedging contracts in place.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements included on page 21
herein.
ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEMS 10 THROUGH 13.
The information for these items has been omitted inasmuch as the
registrant will file a definitive proxy statement with the Commission pursuant
to Regulation 14A within 120 days of the close of the fiscal year ended December
31, 1996, except for the information regarding executive officers that is
provided in a separated caption, "Executive Officers of the Registrant," and is
included in Item 1 and 2 in Part I of this Form 10-K.
CORPDAL:61486.5 15467-00006
20
<PAGE>
Cairn Energy USA, Inc.
Index to Consolidated Financial Statements
Page
Report of Independent Auditors......................................... 22
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1995 and 1996......... 23
Consolidated Statements of Operations for the years ended
December 31, 1994, 1995, and 1996.................................. 24
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1994, 1995, and 1996............................ 25
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1995, and 1996.................................. 26
Notes to Consolidated Financial Statements........................... 27
21
<PAGE>
Report of Independent Auditors
Board of Directors
Cairn Energy USA, Inc.
We have audited the accompanying consolidated balance sheets of Cairn Energy
USA, Inc. (the Company), as of December 31, 1995 and 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Cairn
Energy USA, Inc., at December 31, 1995 and 1996, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Dallas, Texas
February 21, 1997
22
<PAGE>
Cairn Energy USA, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1995 1996
------------ ------------
(in thousands)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents.............................................................$ 3,553 $ 6,438
Accounts receivable................................................................... 4,340 4,904
Prepaid expenses...................................................................... 447 482
------------ ------------
Total current assets................................................................ 8,340 11,824
Property and equipment, at cost:
Oil and gas properties, based on full-cost accounting................................. 157,100 205,544
Other equipment....................................................................... 712 958
------------ ------------
157,812 206,502
Less accumulated depletion, depreciation, and amortization............................ 59,905 75,877
------------ ------------
97,907 130,625
Deferred charges, net of amortization.................................................... 564 909
============ ============
Total assets........................................................................ $106,811 $143,358
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................................................$ 499 $ 6,303
Accrued lease operating expenses...................................................... 578 492
Accrued well costs.................................................................... 6,194 3,803
Other accrued liabilities............................................................. 254 222
------------ ------------
Total current liabilities........................................................... 7,525 10,820
Long-term debt........................................................................... 15,500 42,000
Contingencies (Notes 3, 7, and 8) - -
Stockholders' equity:
Preferred stock, $.01 par value: 5,000,000 shares authorized; none issued - -
Common stock, $.01 par value: 30,000,000 shares authorized;
shares issued and outstanding: December 31, 1995 - 17,550,480
and December 31, 1996 - 17,564,128.................................................. 176 176
Additional paid-in capital............................................................ 94,720 94,834
Accumulated deficit................................................................... (11,110) (4,472)
------------ ------------
Total stockholders' equity.......................................................... 83,786 90,538
------------ ------------
Total liabilities and stockholders' equity..........................................$ 106,811 $ 143,358
============ ============
</TABLE>
See accompanying notes.
23
<PAGE>
Cairn Energy USA, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1994 1995 1996
-------------- -------------- --------------
(in thousands, except per share amounts)
Revenues:
<S> <C> <C> <C>
Oil and gas .................................................... $ 9,494 $ 25,742 $ 30,016
Other .......................................................... 398 221 330
-------------- -------------- --------------
Total revenues.................................................... 9,892 25,963 30,346
Expenses:
Lease operating expenses............................................ 2,274 3,101 3,731
Depletion, depreciation, and amortization........................... 4,328 13,616 15,973
Administrative expense.............................................. 1,522 1,511 1,481
Interest............................................................ 1,114 2,500 2,523
-------------- -------------- --------------
Total expenses.................................................... 9,238 20,728 23,708
-------------- -------------- --------------
Net income............................................................. $ 654 $ 5,235 $ 6,638
============== ============== ==============
Net income per common and common equivalent share $ .05 $ .32 $ .38
============== ============== ==============
Weighted average common and common equivalent shares
used in per share computations 13,259 16,422 17,559
============== ============== ==============
</TABLE>
See accompanying notes.
24
<PAGE>
Cairn Energy USA, Inc.
Consolidated Statements of Stockholders' Equity
(in thousands)
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
PREFERRED STOCK COMMON STOCK PAID-IN ACCUMULATED STOCKHOLDERS'
-------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT EQUITY
----------- ------------- ----------- ------------- ------------- ---------------- -------------
Balance at
<S> <C> <C> <C> <C> <C> <C> <C>
December 31, - $ - 12,463 $125 $54,764 $(16,999) $37,890
1993.........
Common stock
issued for
oil and - - 3,500 35 23,219 - 23,254
gas assets
of Smith...
Net income... - - - - - 654 654
----------- ------------- ----------- ------------- ------------- --------------- -------------
Balance at
December 31, - - 15,963 160 77,983 (16,345) 61,798
1994.........
Common stock
issued for - - 1,562 16 16,573 - 16,589
cash, net..
Exercise of
stock - - 20 - 102 - 102
options....
Other........ - - 5 - 62 - 62
Net income... - - - - - 5,235 5,235
----------- ------------- ----------- ------------- ------------- --------------- -------------
Balance at
December 31, - - 17,550 176 94,720 (11,110) 83,786
1995.........
Exercise of
stock - - 7 - 42 - 42
options....
Other........ - - 7 - 72 - 72
Net income... - - - - - 6,638 6,638
----------- ------------- ----------- ------------- ------------- --------------- -------------
Balance at
December 31, - $ - 17,564 $176 $94,834 $(4,472) $90,538
1996......... =========== ============= =========== ============= ============= =============== =============
</TABLE>
See accompanying notes.
25
<PAGE>
Cairn Energy USA, Inc.
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1994 1995 1996
-------------- --------------- -------------
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income .........................................................$ 654 $ 5,235 $ 6,638
Adjustments to reconcile net income
to net cash provided by operating activities:
Depletion, depreciation, and amortization...................... 4,328 13,616 16,019
Amortization of loan costs..................................... 188 355 367
Loss on disposal of other equipment............................ 35 - -
Changes in operating assets and liabilities:
Accounts receivable.......................................... 473 (2,309) (564)
Prepaid expenses............................................. 32 (311) (35)
Accounts payable............................................. 763 (740) 4,638
Accrued liabilities.......................................... (272) 151 (40)
Deferred revenue............................................. 152 (152) -
-------------- --------------- -------------
Net cash provided by operating activities........................... 6,353 15,845 27,023
INVESTING ACTIVITIES
Exploration and development expenditures............................ (20,501) (28,668) (50,178)
Acquisition of oil and gas assets of Smith ......................... (281) 3,900 -
Proceeds from sale of oil and gas properties........................ 3,727 1,920 502
Additions to other equipment........................................ (157) (234) (246)
Proceeds from disposal of other equipment........................... 4 2 -
-------------- --------------- -------------
Net cash used in investing activities............................... (17,208) (23,080) (49,922)
FINANCING ACTIVITIES
Issuance of common stock............................................ - 16,588 -
Proceeds from long-term debt........................................ 14,000 11,000 26,500
Reductions of long-term debt........................................ (100) (19,000) -
Financing costs and other........................................... (1,206) 18 (716)
-------------- --------------- -------------
Net cash provided by financing activities........................... 12,694 8,606 25,784
Increase in cash and cash equivalents............................... 1,839 1,371 2,885
Cash and cash equivalents at beginning of year...................... 343 2,182 3,553
-------------- --------------- -------------
Cash and cash equivalents at end of year............................ $ 2,182 $ 3,553 $ 6,438
============== =============== =============
Supplemental cash flow information -
interest paid in cash............................................$ 943 $ 2,143 $ 2,163
============== =============== =============
</TABLE>
See accompanying notes.
26
<PAGE>
Cairn Energy USA, Inc.
Notes to Consolidated Financial Statements
December 31, 1995 and 1996
1. SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
Principles of Consolidation and Basis of Financial Statement Presentation
The consolidated financial statements include the accounts of Cairn Energy USA,
Inc. (the Company) and its wholly owned subsidiary. All intercompany accounts
and transactions have been eliminated in consolidation.
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 these estimates.
The Company is engaged in the exploration for and production of oil and gas.
Property and Equipment
The Company follows the full-cost method of accounting for its investments in
oil and gas properties. The Company capitalizes all direct and certain indirect
costs associated with acquisition, exploration, and development costs of oil and
gas properties. Proceeds from sales of oil and gas properties are credited to
the full-cost pool. Capitalized costs of proved oil and gas properties are
amortized on a unit-of-production method using proved oil and gas reserves as
determined by independent petroleum engineers. Costs amortized include all
capitalized costs (less accumulated amortization); the estimated future
expenditures (based on current costs) to be incurred in developing proved
reserves; and estimated dismantlement, restoration, and abandonment costs.
Estimated future abandonment, dismantlement, and site restoration costs include
costs to dismantle, relocate, and dispose of the Company's offshore production
platforms, gathering systems, wells, and related structures. Such costs related
to onshore properties, net of estimated salvage values, are not expected to be
significant.
The Company capitalized approximately $866,000, $1,200,000, and $1,500,000 of
internal costs during the years ended December 31, 1994, 1995, and 1996,
respectively. Such capitalized costs include salaries and related benefits of
individuals directly involved in the Company's acquisition, exploration, and
development activities, based on a percentage of their time devoted to such
activities.
Under rules of the Securities and Exchange Commission ("SEC") for the full-cost
method of accounting, the net carrying value of oil and gas properties is
limited to the sum of the present value (10% discount rate) of estimated future
net cash flows from proved reserves, based on period-end prices and costs, plus
the lower of cost or estimated fair value of unproved properties.
27
<PAGE>
Cairn Energy USA, Inc.
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONTINUED)
Furniture and equipment are depreciated on a straight-line basis based on the
estimated useful lives of the respective assets.
Cash and Cash Equivalents
Cash and cash equivalents include certificates of deposit or other highly liquid
investments with maturities of three months or less when purchased.
Deferred Charges
Deferred charges include prepaid pipeline charges that are recognized on a unit
of throughput basis, and loan costs that are amortized on a straight-line basis
over the terms of the respective loans.
Concentrations of Credit Risk
The Company operates exclusively in the oil and gas industry in the United
States. Accounts receivable terms are generally for 30 days. The Company does
not require collateral. Management periodically performs reviews as to the
creditworthiness of their customers. The Company has not sustained any
significant credit losses on sales of oil and gas.
Gas Imbalances
The Company follows the sales method of accounting for gas imbalances, which
recognizes over and under lifts of gas when sold, to the extent sufficient gas
reserves or balancing agreements are in place. Gas revenues are not
significantly different from the Company's share of production.
Oil and Gas Hedging Activities
In an effort to reduce the effects of the volatility of the price of oil and gas
on the Company's operations, management has adopted a policy of hedging oil and
gas prices whenever such prices are in excess of the prices anticipated in the
Company's operating budget and profit plan through the use of commodity swap
agreements with major financial institutions. These agreements involve the
receipt of fixed priced amounts in exchange for variable payments based on NYMEX
prices and specific volumes. The
28
<PAGE>
Cairn Energy USA, Inc.
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONTINUED)
differential to be paid or received is recorded in the month of the related
production and recognized as a component of oil and gas revenues. Hedging
transactions are limited by the Board of Directors to 50% of budgeted production
for the succeeding 12 months and no more than 75% of budgeted production in any
one month. The Company does not hold or issue financial instruments for trading
purposes.
Stock Options
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) in accounting for its
employee stock options. Under APB 25, if the exercise price of an employee's
stock option equals or exceeds the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
Earnings (Loss) Per Common Share
Earnings (loss) per common share data is computed using the weighted average
number of common shares and dilutive common equivalent shares outstanding. Fully
diluted earnings per share data is not presented because it would not differ
from the amounts shown.
2. ACQUISITION OF OIL AND GAS ASSETS OF SMITH OFFSHORE EXPLORATION II
On October 10, 1994, the Company purchased substantially all of the oil and gas
assets (the Assets) of Smith Offshore Exploration II (Smith) from Phemus
Corporation (Phemus), a subsidiary of the President and Fellows of Harvard
College and sole stockholder of Smith, in exchange for 4,500,000 shares of the
Company's common stock, subject to adjustment pursuant to the terms of the
Agreement, and the assumption of certain liabilities related to the Smith
Assets. The acquisition gave the Company interests in 22 additional blocks in
the Outer Continental Shelf of the Gulf of Mexico. The Agreement provided that
1,000,000 of the shares issued be placed in escrow (the Escrow Shares) at the
closing and, thereafter, the Escrow Shares and certain warrants to acquire up to
a maximum of 800,000 shares of Common Stock would be issued to Phemus or
returned to the Company based on a valuation of oil and gas reserves
attributable to the Assets at a date to be selected prior to June 30, 1995, but
could be extended under certain circumstances until December 31, 1995. If such
valuation was less than $26,250,000, Smith and Phemus, jointly and severally,
would be obligated to pay the Company the amount by which $26,250,000 exceeded
the valuation, up to a maximum of $3,900,000. The acquisition of Smith did not
have a material effect on the results of operations of the Company for 1994.
On the basis of a valuation of the Smith properties as of June 30, 1995, by
independent petroleum engineers reflecting a range of values below the Minimum
Valuation, Phemus and the Company entered into an agreement regarding the
purchase price adjustment under the Smith Acquisition Agreement pursuant to
which Phemus returned the Escrow Shares and paid $3.9 million to the Company.
The $3.9 million payment to the Company is reflected as a reduction of the cost
of the Smith properties. There was no adjustment in the Company's financial
statements for the return of the Escrow Shares because for financial accounting
purposes, the Escrow Shares were never recorded as having been issued.
29
<PAGE>
Cairn Energy USA, Inc.
Notes to Consolidated Financial Statements (continued)
3. LONG-TERM DEBT
The Company has a credit agreement as amended (the INCC Credit Agreement) with
ING (U.S.) Capital Corporation, f/k/a Internationale Nederlanden (U.S.) Capital
Corporation (INCC), Mees Pierson, N.V. (Mees Pierson) and Credit Lyonnais
(Credit Lyonnais). The INCC Credit Agreement is secured by substantially all of
the Company's assets. It contains financial covenants which require the Company
to maintain a ratio of current assets to current liabilities (excluding the
current portion of related debt) of no less than 1.0 to 1.0 and a tangible net
worth of not less than $40 million. The Company is currently in compliance with
such financial covenants. Prior to June 28, 1996, outstanding borrowings accrued
interest at either INCC's fluctuating base rate or INCC's reserve adjusted
Eurodollar rate plus 1.5% at the Company's option. On June 28, 1996, the INCC
Credit Agreement was amended (the Third Amendment) to decrease the addition to
the INC reserve adjusted Eurodollar rate from 1.5% to 1.25% as long as
outstanding borrowings are less than 75% of the borrowing base. The borrowing
base was also increased from $45 million to $50 million.
On November 7, 1996, the Company further amended (the Fourth Amendment) the INCC
Credit Agreement. Under the Fourth Amendment, Credit Lyonnais joined as a lender
under the INCC Credit Agreement. Also under the Fourth Amendment, the original
facility under the INCC Credit Agreement was designated as Facility A and the
maximum amount of the facility was increased in amount from $50 million to $75
million; provided, however, that the maximum amount available to the Company
cannot exceed the borrowing base of its properties as determined from time to
time by the lenders. The borrowing base under Facility A was reconfirmed as of
November 7, 1996, as $50 million. The revolving period of borrowings under
Facility A was extended from March 31, 1997 to September 30, 1997. On September
30, 1997, the borrowings outstanding under Facility A will be converted to a
term loan that requires quarterly repayments of principal on a revised schedule
through March 31, 2001. The Company's ability to borrow under Facility A is
dependent upon the reserve value of its oil and gas properties. If the reserve
value of the Company's borrowing base declines, the amount available to the
Company under Facility A will be reduced and, to the extent that the borrowing
base is less than the amount then outstanding under Facility A, the Company will
be obligated to repay such excess amount on 30-days notice from INCC or to
provide additional collateral. INCC, Mees Pierson, N.V., and Credit Lyonnais
have substantial discretion in determining the reserve value of the borrowing
base. At December 31, 1995 and 1996, the Company had outstanding borrowings of
$15.5 million and $42.0 million, respectively, under this facility.
In addition, a second facility was created under the Fourth Amendment. This new
standby credit facility, Facility B, is for the amount of $14 million. Facility
B provides for three levels of borrowings by the Company, two of $5 million each
and one of $4 million. There are no restrictions on the Company's ability to
borrow the first $5 million under Facility B and the amount borrowed may be used
for general corporate purposes. The Company's ability to borrow under the
further two levels of borrowings of $5 million and $4 million, respectively,
under Facility B is dependent upon the Company establishing total proved
reserves at certain levels and appropriate ratios between the Company's
outstanding debt and the value of its proved reserves. The Company must also
submit detailed proposals, acceptable to its lenders, outlining the manner in
which the second two levels of borrowings under Facility B will be used in the
development of the Company's oil and gas properties. Facility B is repayable on
December 31, 1997. The interest margin over INCC reserve adjusted Eurodollar
rate for Facility B varies from 3.25% to 3.75%, depending upon the ratio of the
amount of the outstanding loans to
30
<PAGE>
Cairn Energy USA, Inc.
Notes to Consolidated Financial Statements (continued)
3. LONG-TERM DEBT (CONTINUED)
the value of the Company's proved reserves. Under the INCC Credit Agreement,
interest is payable quarterly on any base rate borrowings and payable on
maturity of any Eurodollar borrowings or at the end of three months if the
maturity of the Eurodollar borrowing is in excess of three months. At December
31, 1995 and 1996, there were no borrowings under Facility B.
The INCC Credit Agreement does not permit the Company to pay or declare any cash
or property dividends or otherwise make any distribution of capital. On Facility
A, the Company is obligated to pay a quarterly fee equal to 0.5% per annum of
the unused portion of the borrowing base under the facility and a Letter of
Credit fee for each Letter of Credit in the amount of 1.5% per annum of the face
amount of such Letter of Credit. On Facility B the Company is obligated to pay a
drawdown fee for each $5 million borrowed equal to 0.3% for the first $5
million, 1.15% for the second $5 million and 1.6% for the last $4 million. Also,
the Company must pay 0.5% per annum on the undrawn portion of Facility B.
At December 31, 1996, the future minimum principal payments on the Company's
long-term debt subsequent to December 31, 1997 were as follows based on
borrowings outstanding at December 31, 1996: $16.8 million in 1998, $15.1
million in 1999, $6.7 million in 2000, and $3.4 million in 2001.
The carrying value of the Company's long-term debt approximates fair value.
4. STOCKHOLDERS' EQUITY
On October 10, 1994, the Company purchased substantially all of the oil and gas
assets of Smith in exchange for 4,500,000 shares of the Company's common stock,
subject to adjustment pursuant to the terms of the Agreement and the assumption
of certain liabilities (Note 2). For accounting purposes, the 1,000,000 Escrow
Shares were not recorded as issued as a result of the June 30, 1995 valuation.
At the time of the Smith acquisition, the Company's then majority shareholder,
Cairn Energy PLC, sold 2,000,000 shares of the Company's common stock to Phemus
at a price of $7.50 per share. Cairn Energy PLC also sold 2,500,000 shares of
Company common stock resulting in Cairn Energy PLC reducing its ownership to
approximately 17.5% of the Company's common stock in 1994.
A public offering of 1,562,500 shares of Common Stock at an offering price of
$11.25 per share was closed on September 18, 1995. The net proceeds, aggregating
approximately $16.6 million, were used to reduce borrowings under the Company's
credit agreement (Note 3). In conjunction with this offering, the Company's
principal shareholder, Phemus, sold 2,750,000 shares of the Company's common
stock.
In April and June 1995, Cairn Energy PLC sold its remaining 2,792,260 shares of
Company common stock.
31
<PAGE>
Cairn Energy USA, Inc.
Notes to Consolidated Financial Statements (continued)
5. INCOME TAXES
The reconciliation of income taxes computed at the U.S. federal statutory tax
rates to income tax expense for the years ended December 31, 1994, 1995, and
1996, is as follows (in thousands):
<TABLE>
<CAPTION>
LIABILITY METHOD
----------------------------------------
1994 1995 1996
------------ ----------- -----------
Income tax expense at
<S> <C> <C> <C>
statutory rate........................................... $ 222 $ 1,780 $ 2,257
Benefit of net operating loss carryforwards................. (222) (1,780) (2,257)
============ =========== ===========
$ - $ - $ -
============ =========== ===========
</TABLE>
The computation of the net deferred tax asset (liability) at December 31, 1995
and 1996, follows (in thousands):
<TABLE>
<CAPTION>
1995 1996
-------------- -------------
<S> <C> <C>
Deferred tax liabilities:
Property and equipment................................................. $ (8,702) $(12,780)
Deferred tax assets:
Net operating loss carryforward........................................ 14,383 16,200
-------------- -------------
5,681 3,420
Less valuation allowance................................................... 5,681 3,420
============== =============
$ - $ -
============== =============
</TABLE>
At December 31, 1996, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $48 million. The net operating
losses will expire principally in 2005 through 2010, if not previously utilized.
Utilization of approximately $26 million of the net operating loss carryforwards
is subject to various limitations because of previous changes in ownership of
the Company, as defined in the Internal Revenue Code. Additional net operating
loss limitations may be imposed because of subsequent changes in stock ownership
of the Company.
32
<PAGE>
Cairn Energy USA, Inc.
Notes to Consolidated Financial Statements (continued)
6. EMPLOYEE BENEFIT PLANS
The Company sponsors a plan to provide retirement benefits under the provisions
of Section 401(k) of the Internal Revenue Code (the 401(k) Plan) for all
full-time employees. Employees may elect to contribute up to 15% of their
compensation. The Company matches 100% of the employee's contributions, up to 5%
of the employee's compensation. Beginning in 1995, at the end of each year, the
Company contributes Company common stock to each eligible employee's account
valued at the equivalent of 5% of each such employee's compensation. Benefits
under the 401(k) Plan are limited to the assets of the 401(k) Plan. The
Company's contributions in cash to the 401(k) Plan were $98,385, $62,678, and
$67,663 for the years ended December 31, 1994, 1995, and 1996, respectively. The
Company's contributions in Company common stock to the 401(k) Plan were 0,
4,864, and 6,669 shares for the years ended December 31, 1994, 1995, and 1996,
respectively.
The Company's Employee Incentive Bonus Plan was adopted in 1993 and revised in
1994. The Employee Incentive Bonus Plan rewards those employees when the Company
has added proved reserves for the year in excess of its production for the year,
but only when such additional reserves have a finding and development cost less
than $1.00 per Mcf. Under the Employee Incentive Bonus Plan, the bonus cannot
exceed $250,000 in the aggregate and is allocated among the specified employees
based upon preset percentages except that individual bonuses can not exceed 50%
of salary. Any bonus earned for the year vests and is paid out to the employees
in three equal annual installments, subject to continued employment with the
Company. Based on reserve additions, the Company's employees were awarded
bonuses in the aggregate amount of $242,028 for the year ended December 31, 1994
under the Employee Incentive Bonus Plan. Such bonuses are being accrued over the
respective vesting periods. No incentive bonuses were awarded in 1995 or 1996.
In May 1993, the Company's stockholders ratified the adoption of the 1993 Stock
Option Plan and the 1993 Directors' Stock Option Plan. The 1993 Stock Option
Plan authorizes the granting of incentive stock options and nonstatutory stock
options to key employees, including executive officers and directors of the
Company. The Company's Compensation Committee administers the 1993 Stock Option
Plan. Options granted under the 1993 Stock Option Plan may be either incentive
stock options or nonstatutory stock options, as determined in the discretion of
the Compensation Committee. The exercise price per share for an option shall be
any price determined by the Compensation Committee; provided, however, that the
exercise price per share of incentive stock options shall not be less than the
fair market value of the Common Stock on the date of the grant of the option.
Each option is exercisable in such amounts, at such intervals, and on such terms
as the Compensation Committee determines in its sole discretion. However, no
option shall be exercisable during the six-month period following the date of
its grant, and no option shall be exercisable more than 10 years after the date
of its grant. The Company's stockholders approved an increase in the number of
shares reserved for issuance under the 1993 Stock Option Plan from 400,000
shares to 650,000 shares in May 1995 and another increase from 650,000 shares to
1,150,000 shares in May 1996. Also in May 1996, the stockholders approved an
amendment to the 1993 Stock Option Plan that provides that all options held by
an employee granted under the 1993 Stock Option Plan will vest upon death of
such employee and provides that the exercise period for such options will be
twenty-four months following death or termination of an employee.
33
<PAGE>
Cairn Energy USA, Inc.
Notes to Consolidated Financial Statements (continued)
6. EMPLOYEE BENEFIT PLANS (CONTINUED)
The 1993 Directors' Stock Option Plan authorizes the granting of nonstatutory
stock options to directors of the Company who are not and have not been
employees of the Company or any affiliated corporations except Cairn Energy PLC
(a Nonemployee Director). On the date a Nonemployee Director begins each term
that he serves as a member of the Board of Directors, such Nonemployee Director
will automatically receive an option to purchase 10,000 shares of Common Stock.
The exercise price per share for an option granted under the 1993 Directors'
Stock Option Plan shall be the fair market value of the Common Stock on the date
of the grant. Each option is fully exercisable six months after the date of its
grant. However, no option may be exercised more than five years after the date
of its grant. In May 1996, the Company's stockholders approved an increase in
the number of shares reserved for issuance under the 1993 Directors' Stock
Option Plan from 150,000 shares to 270,000 shares.
A summary of the Company's stock option activity, and related information for
the years ended December 31, 1994, 1995, and 1996 follows:
<TABLE>
<CAPTION>
1994 1995 1996
------------------------ ------------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
---------- ----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 260,000 $ 5.38 460,000 $ 5.92 730,000 $ 8.42
Granted 200,000 6.61 290,000 12.16 260,000 10.53
Exercised - - (20,000) 5.13 (7,000) 6.00
Canceled - - - - (4,500) 11.67
---------- ---------- ----------
Outstanding at end of
year 460,000 $ 5.92 730,000 $ 8.42 978,500 $ 8.92
========== ========== ==========
Exercisable at end of
year 171,000 $ 5.52 324,500 $ 6.39 588,168 $ 7.95
========== ========== ==========
Weighted-average fair
value of options
granted during the
year $2.28 $2.14
========== ==========
</TABLE>
34
<PAGE>
Cairn Energy USA, Inc.
Notes to Consolidated Financial Statements (continued)
6. EMPLOYEE BENEFIT PLANS (CONTINUED)
Information related to options outstanding at December 31, 1996, is summarized
below:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------- ----------------------------
WEIGHTED
OUTSTANDING AVERAGE WEIGHTED EXERCISABLE WEIGHTED
AT REMAINING AVERAGE AT AVERAGE
RANGE OF DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
EXERCISABLE PRICES 1996 LIFE (YEARS) PRICE 1996 PRICE
- ------------------------------ ------------ ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
$5.125 - $6.875 433,000 6.7 $ 5.95 376,000 $ 6.03
$10.00 - $12.50 545,500 6.5 11.27 212,168 11.35
------------ -------------
978,500 $ 8.92 588,168 $ 7.95
============ =============
</TABLE>
Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation," (SFAS 123) requires the disclosure of pro forma net income and
earnings per share information computed as if the Company had accounted for its
employee stock options granted subsequent to December 31, 1994, under the fair
value method set forth in SFAS 123. The fair value for these options was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions for 1995 and 1996, respectively: a
risk-free interest rate of 5.9%, a dividend yield of 0%, and a volatility factor
of 38.3%. The fair value of these options was estimated based on an expected
life of one year from the vesting date.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options. In addition, because
SFAS 123 is applicable only to options granted subsequent to December 31, 1994,
the pro forma information does not reflect the pro forma effect of all previous
stock option grants of the Company.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows (in thousands except for earnings per share
information):
1995 1996
------------ --------
Pro forma net income $ 5,032 $ 6,100
Pro forma earnings per share $ .31 $ .35
35
<PAGE>
Cairn Energy USA, Inc.
Notes to Consolidated Financial Statements (continued)
7. OIL AND GAS HEDGING ACTIVITIES AND COMMITMENTS
While the use of hedging arrangements limits the downside risk of adverse price
movements, it may also limit future gains from favorable movements. All hedging
is accomplished pursuant to exchange-traded contracts or master swap agreements
based upon standard forms. The Company addresses market risk by selecting
instruments whose value fluctuations correlate strongly with the underlying
commodity being hedged. Credit risk related to hedging activities, which is
minimal, is managed by requiring minimum credit standards for counterparties,
periodic settlements, and mark to market valuations. The Company has not
historically been required to provide any significant amount of collateral
relating to its hedging activities.
At December 31, 1996, the Company had entered into various swap agreements to
fix selling prices for 630,000 MMBtus of natural gas during January through
March 1997 at a weighted average NYMEX price of $3.32 per MMBtu. While these
contracts have no carrying value, their fair value (the estimated amount that
would have been received by the Company upon termination of the swaps at
December 31, 1996) was approximately $198,000.
During the years ended December 31, 1994, 1995, and 1996, oil and gas revenues
were reduced by $54,000, increased by $323,000 and reduced by $2,449,000
respectively, as a result of hedging transactions.
8. LEGAL PROCEEDINGS AND CLAIMS
The Company is subject to certain legal proceedings and claims that arise in the
ordinary conduct of its business. In the opinion of management, the amount of
ultimate liability, if any, with respect to these actions, will not materially
affect the consolidated financial condition or results of operations of the
Company.
9. OPERATIONS
Nature of Operations
The Company, explores for, develops and produces oil and gas, principally in the
shallow waters of the Outer Continental Shelf ("OCS") of the Gulf of Mexico. The
Company's strategy is to expand its reserve base and production principally
through exploration and associated development drilling.
36
<PAGE>
Cairn Energy USA, Inc.
Notes to Consolidated Financial Statements (continued)
9. OPERATIONS (CONTINUED)
The Company's principal producing properties are located in the Gulf of Mexico
and consist of East Cameron Blocks 331/332, which began production in the fourth
quarter of 1994, Matagorda Block 710, which began production in the first
quarter of 1995, Galveston 343/363 Field which began production in 1990,
Vermilion Block 203 and Main Pass Block 262, which began production in the first
quarter of 1996 and Mustang Island Block 858 which began production in the third
quarter of 1996. Revenues from these six properties comprised approximately
74.1% of the Company's total revenues for the year ended December 31, 1996.
10. SUPPLEMENTARY INFORMATION
Capitalized Costs Related to Oil and Gas Producing Activities
The following table summarizes capitalized costs related to oil and gas
producing activities and the related amounts of accumulated depletion,
depreciation, and amortization at December 31, 1995 and 1996 (in thousands):
<TABLE>
<CAPTION>
1995 1996
----------------- ---------------
<S> <C> <C>
Proved oil and gas properties.................................... $ 126,898 $180,808
Unproven properties.............................................. 30,202 24,736
Accumulated depletion, depreciation, and amortization............ (59,502) (75,278)
================= ================
Net capitalized costs............................................ $ 97,598 $130,266
================= ================
</TABLE>
The unproven properties are excluded from the amortization base and consist
primarily of acreage acquisition costs, related geological and geophysical costs
and exploration drilling costs in progress or awaiting evaluation. The majority
of these costs are expected to be evaluated during the Company's 1997 and 1998
drilling programs.
Costs Incurred in Property Acquisition, Exploration, and Development Activities
The table below represents costs incurred in oil and gas producing activities
(in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1994 1995 1996
---------- --------- ----------
Acquisition of properties:
<S> <C> <C> <C>
Proved....................................................... $ 1,405 $ - $ -
Unproved..................................................... 24,984 (1,372) (1) 7,197
Development costs................................................ 11,683 14,105 9,184
Exploration costs................................................ 7,827 16,529 32,566
========== ========= ==========
$ 45,899 $29,262 $48,947
========== ========= ==========
<FN>
(1) Includes $3.9 million purchase price adjustment under the Smith Acquisition
Agreement. See Note 2.
</FN>
</TABLE>
37
<PAGE>
Cairn Energy USA, Inc.
Notes to Consolidated Financial Statements (continued)
10. SUPPLEMENTARY INFORMATION (CONTINUED)
Results of Operations from Oil and Gas Producing Activities
The table below presents revenue and expenses related to oil and gas producing
activities (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1994 1995 1996
---------- --------- ----------
<S> <C> <C> <C>
Oil and gas sales............................................... $ 9,494 $ 25,742 $ 30,016
Expenses:
Operating costs............................................. 2,159 3,063 3,722
Production taxes............................................ 115 38 9
Depletion, depreciation, and amortization................... 4,255 13,490 15,973
---------- --------- ----------
6,529 16,591 19,704
---------- --------- ----------
Income from oil and gas producing activities.................... $ 2,965 $ 9,151 $10,312
========== ========= ==========
Depletion rate per equivalent Mcf $ .94 $ 1.04 $ 1.33
========== ========= ==========
</TABLE>
The Company's oil and gas production is sold to various purchasers. The
following table lists purchasers of the Company's natural gas which accounted
for more than 10% of total revenues for the years indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1994 1995 1996
----------- --------- -----------
<S> <C> <C> <C>
Amoco Production Co. 20% - -
Coastal Corporation - 22% 39%
Dow Hydrocarbons and Resources, Inc. 21% - -
Enron Capital & Trade Resources - - 10%
Mark Resources Corporation 11% - -
Penn Union Energy Services - - 16%
Samedan Oil Corporation - 12% -
Walter Oil and Gas Corporation 11% - -
</TABLE>
During 1995 and 1996, Samedan Oil Corporation also purchased oil from the
Company representing approximately 20% and 14%, respectively, of the Company's
total revenues. Management believes that the loss of these purchasers would not
have a material impact on the Company's consolidated financial condition or
consolidated results of operations.
38
<PAGE>
Cairn Energy USA, Inc.
Notes to Consolidated Financial Statements (continued)
10. SUPPLEMENTARY INFORMATION (CONTINUED)
Reserve Quantity Information (Unaudited)
All of the Company's reserves are located in the continental United States. The
Company's proved reserves at December 31, 1995 and 1996 were prepared by the
Company and reviewed by Ryder Scott Company, an independent petroleum
engineering firm.
Proved reserves (developed and undeveloped) are estimated quantities of oil and
gas that geological and engineering data demonstrate with reasonable certainty
to be recoverable in future years from known reservoirs under current economic
and operating conditions. The estimation of reserves is an interpretive process
that is subject to continuing revision as additional information becomes
available.
The Company's proved developed reserves are categorized as such based on the
availability of current production data, open-hole and cased-hole logs analyses,
and other productivity indications.
The estimation of proved undeveloped reserves was limited to direct offset
locations to existing wellbores and to geological formations that have shown to
be productive in the area.
Reserve estimates are imprecise and may be expected to change as additional
information becomes available. Furthermore, estimates of oil and gas reserves,
of necessity, are projections based on engineering data, and there are
uncertainties inherent in the interpretation of such data as well as the
projection of future rates of production and the timing of development
expenditures. Reserve engineering is a subjective process of estimating
underground accumulations of oil and gas that cannot be measured in an exact
way, and the accuracy of any reserve estimate is a function of the quality of
available data and of engineering and geological interpretation and judgment.
Accordingly, there can be no assurance that the reserves set forth herein will
ultimately be produced nor can there be assurance that the proved undeveloped
reserves will be developed within the periods anticipated. The Company
emphasizes with respect to the estimates prepared by independent petroleum
engineers that the discounted future net cash inflows should not be construed as
representative of the fair market value of the proved oil and gas properties
belonging to the Company, since discounted future net cash inflows are based
upon projected cash inflows which do not provide for changes in oil and gas
prices nor for escalation of expenses and capital costs. The meaningfulness of
such estimates is highly dependent upon the accuracy of the assumptions upon
which they are based.
39
<PAGE>
Cairn Energy USA, Inc.
Notes to Consolidated Financial Statements (continued)
10. SUPPLEMENTARY INFORMATION (CONTINUED)
The following is a reconciliation of the Company's estimated net quantities of
proved developed and undeveloped oil and gas reserves for the years ended
December 31, 1994, 1995, and 1996:
<TABLE>
<CAPTION>
GAS OIL
(MMCF) (MBBL)
------------ -------------
<S> <C> <C>
Balance at December 31, 1993............................................... 52,882 2,143
Acquisitions of reserves in-place...................................... 3,018 32
Sales of reserves in-place............................................. (2,902) (256)
Revisions of previous estimates........................................ (1,690) (34)
Extensions and discoveries............................................. 13,515 527
Production............................................................. (3,940) (100)
------------ -------------
Balance at December 31, 1994............................................... 60,883 2,312
Sales of reserves in-place............................................. (2,060) (111)
Revisions of previous estimates........................................ (4,596) (277)
Extensions and discoveries............................................. 23,079 790
Production............................................................. (10,403) (431)
------------ -------------
Balance at December 31, 1995............................................... 66,903 2,283
Revisions of previous estimates........................................ (2,777) 226
Extensions and discoveries............................................. 28,127 2,656
Production............................................................. (10,215) (273)
------------ -------------
Balance at December 31, 1996............................................... 82,038 4,892
============ =============
Proved developed reserves:
December 31, 1993...................................................... 20,637 525
December 31, 1994...................................................... 44,893 1,813
December 31, 1995...................................................... 52,996 1,292
December 31, 1996...................................................... 56,734 1,656
</TABLE>
40
<PAGE>
Cairn Energy USA, Inc.
Notes to Consolidated Financial Statements (continued)
10. SUPPLEMENTARY INFORMATION (CONTINUED)
The Company's principal developed properties are located in the Gulf of Mexico,
and are East Cameron Blocks 331/332, Vermilion Block 203, Main Pass Block 262,
Mustang Island Block 858, Matagorda Block 710, and Galveston 343/363 Field. As
of December 31, 1995 and 1996, the Company's net interest in the proved reserves
of these properties was approximately 61.2 Bcfe and 63.9 Bcfe, respectively.
The Company's capital expenditures for 1997 are anticipated to be approximately
$47 million.
Standardized Measure of Discounted Future Net Cash Flows from Estimated
Production of Proved Oil and Gas Reserves After Income Taxes (Unaudited)
In the opinion of the Company's management, no major discovery or adverse event
has occurred since December 31, 1996, that would cause a significant change in
proved reserve quantities as estimated at December 31, 1996. Reserves cannot be
measured exactly because reserve estimates involve subjective judgments. The
estimates must be reviewed periodically and adjusted to reflect additional
information gained from reservoir performance, new geological and geophysical
data, and economic changes. The values expressed are estimates only and may not
reflect realizable values or fair market values of the oil and gas ultimately
extracted and recovered. The estimated future net revenues may not accurately
reflect proceeds of production to be received in the future from the sale of
crude oil, condensate, and natural gas currently owned. The present value of
estimated future net revenues does not necessarily reflect the actual costs that
would be incurred to acquire equivalent oil and gas reserves.
The following table sets forth a standardized measure of the discounted future
net cash flows attributable to the Company's proved oil and gas reserves. Future
cash inflows were computed by applying year-end oil and gas prices to the
estimated future production of proved reserves. The future production and
development costs represent the estimated future expenditures (based on current
costs) to be incurred in developing and producing the proved reserves, assuming
continuation of existing economic conditions. The timing of future development
costs is based on management's evaluation of the Company's projected
41
<PAGE>
Cairn Energy USA, Inc.
Notes to Consolidated Financial Statements (continued)
10. SUPPLEMENTARY INFORMATION (CONTINUED)
cash flows and financing resources. Future income tax expenses were computed by
applying statutory income tax rates to the difference between pretax net cash
flows relating to the Company's proved oil and gas reserves and the tax basis of
proved oil and gas properties and available net operating loss carryforwards and
statutory depletion, reduced by investment tax credits. Discounting the annual
net cash inflows at 10% illustrates the impact of timing on these future cash
inflows.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1996
----------- ------------
(in thousands)
<S> <C> <C>
Future cash inflows........................................................... $204,357 $444,698
Future production costs....................................................... 27,261 39,129
Future development costs...................................................... 18,884 37,910
----------- ------------
Future net cash inflows before future income taxes............................ 158,212 367,659
Future income taxes........................................................... 16,378 70,138
----------- ------------
Future net cash inflows....................................................... 141,834 297,521
Adjustments to discount future annual inflows
at 10%..................................................................... 38,272 94,908
----------- ------------
Standardized measure of discounted future
net cash inflows........................................................... $103,562 $202,613
=========== ============
</TABLE>
The average price for natural gas in the above computations was $2.40 and $3.99
per Mcf at December 31, 1995 and 1996, respectively. The average price used for
crude oil in the above computations was $18.27 and $23.63 per barrel at December
31, 1995 and 1996, respectively.
42
<PAGE>
Cairn Energy USA, Inc.
Notes to Consolidated Financial Statements (continued)
10. SUPPLEMENTARY INFORMATION (CONTINUED)
Summary of Changes in the Standardized Measure of Discounted Future Net Cash
Flows from Estimated Production of Proved Oil and Gas Reserves After Income
Taxes (Unaudited)
The following table summarizes the principal factors comprising the changes in
the standardized measure of discounted future cash inflows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1994 1995 1996
------------ ------------ --------------
<S> <C> <C> <C>
Standardized measure at beginning
of year................................................... $ 67,593 $ 74,635 $ 103,562
Sales and transfers, net of
production costs.......................................... (7,220) (22,641) (26,285)
Net change in sales prices and
production costs.......................................... (16,683) 15,078 67,559
Acquisitions of reserves in-place............................ 1,531 - -
Extensions, discoveries, and improved recovery,
net of future production and development costs............ 19,495 46,251 100,001
Changes in estimated future
development costs......................................... (7,085) (16,719) (6,293)
Development costs incurred
during the period......................................... 11,683 14,105 9,184
Revisions of quantity estimates.............................. (2,028) (8,803) (3,464)
Sales of reserves in place................................... (6,119) (3,262) -
Accretion of discount........................................ 7,834 7,870 11,552
Net change in income taxes................................... 7,354 (8,630) (32,650)
Changes in production rates
(timing) and other........................................ (1,720) 5,678 (20,553)
============ ============ ==============
Standardized measure at end of year.......................... $ 74,635 $103,562 $202,613
============ ============ ==============
</TABLE>
43
<PAGE>
Cairn Energy USA, Inc.
Notes to Consolidated Financial Statements (continued)
11. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for 1995 and 1996 is as follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
--------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
1995:
Revenues......................... $ 5,034 $ 7,850 $ 7,206 $ 5,869
Net income....................... 807 1,564 1,297 1,567
Net income per common and common
equivalent share............... $ .05 $ .10 $ .08 $ .09
1996:
Revenues......................... $ 7,287 $ 7,516 $ 7,554 $7,990
Net income....................... 2,590 871 893 2,284
Net income per common and common
equivalent share............... $ .15 $ .05 $ .05 $ .13
</TABLE>
44
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A)(1) and (2) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES:
See Index to Financial Statements and Financial Statement
Schedules on page F-1 herein. All other schedules have been
omitted because the required information is either
inapplicable, insignificant or included in the financial
statements and notes thereto.
(A)(3) EXHIBITS:
2.1 Purchase and Sale dated July 12, 1994, by and among Smith
Offshore Exploration Company, II, Phemus Corporation, and
Cairn Energy USA, Inc. (without exhibits) (the exhibits
and schedules to the Agreement have been omitted pursuant
to Item 601(b)(2) of Regulation S-K). (Incorporated by
reference from the Company's Current Report on Form 8-K
dated July 12, 1994 filed with the Commission on July 27,
1994).
2.2 Common Stock Purchase Agreement dated July 12, 1994 by
and between Cairn Energy PLC and Phemus Corporation.
(Incorporated by reference from the Company's Current
Report on Form 8-K dated July 12, 1994 filed with the
Commission on July 27, 1994).
3.1 First Amended and Restated Certificate of Incorporation
of the Company, as amended to date (Incorporated by
reference to Exhibit 3.1 of the Company's Annual Report
on Form 10-K for the fiscal year ended December 31,
1993).
3.2 Bylaws of the Company (Incorporated by reference to
Exhibit 3.2 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1992).
3.3* Amendment No. 1 to Bylaws.
9.1 Voting Agreement by and between Cairn Energy PLC and
Phemus Corporation (to be entered into pursuant to the
Stock Purchase Agreement). (Incorporated by reference
from the Company's Current Report on Form 8-K dated July
12, 1994 filed with the Commission on July 27, 1994).
10.1 Agreement and Plan of Merger, dated June 29, 1992, by and
between Cairn Energy USA, Inc. and Omni Exploration, Inc.
(Incorporated by reference to Exhibit 2.1 of the
Company's Current Report on Form 8-K filed with the
Commission on July 14, 1992).
10.2+ Cairn Energy USA, Inc. 1993 Stock Option Plan, as amended
(Incorporated by reference to Exhibit 10.9 to the
Company's Annual Report on Form 10-K for Fiscal Year
Ended December 31, 1993).
10.3+ Cairn Energy USA, Inc. 1993 Directors Stock Option Plan
(Incorporated by reference to Exhibit 10.6 to the
Company's 1993 Registration Statement on Form S-1,
registration no. 33-64646).
10.4+ Form of Stock Option Agreement under the Cairn Energy
USA, Inc. 1993 Directors Stock Option Plan (Incorporated
by reference to Exhibit 10.7 to the Company's 1993
Registration Statement on Form S-1, registration
no. 33-64646).
10.5+ Incentive Bonus Plan, as amended (Incorporated by
reference to Exhibit 10.9 of the Company's Annual Report
on Form 10-K for the fiscal year ended December 31,
1993).
10.6+ Form of Incentive Stock Option Agreement. (Incorporated
by reference to Exhibit 10.5 to the Registration
Statement on Form S-3, Registration No. 33-80526; filed
with the Commission on June 21, 1994).
CORPDAL:61486.5 15467-00006
45
<PAGE>
10.7 Form of Nonstatutory Stock Option Agreement.
(Incorporated by reference to Exhibit 10.6 to the
Registration Statement on Form S-3, Registration
No.33-80526; filed with the Commission on June 21, 1994).
10.8 Registration Rights Agreement by and between Cairn Energy
USA, Inc. and Phemus Corporation (to be entered into
pursuant to the Agreement). (Incorporated by reference
from the Company's Current Report on Form 8-K dated July
12, 1994 filed with the Commission on July 27, 1994).
10.9+ Amended and Restated Employment Agreement, dated as of
May 24, 1995, between the Company and Michael R. Gilbert.
10.10+ Amended and Restated Employment Agreement, dated as of
May 24, 1995, between the Company and Robert P. Murphy.
10.11+ Amended and Restated Employment Agreement, dated as of
May 24, 1995, between the Company and
J. Munro M. Sutherland.
10.12+ Amended and Restated Credit Agreement, dated
December 20, 1994, between the Company and
Internationale Nederlanden (U.S.) Capital Corporation.
10.13+ Cairn Energy USA, Inc. Separate Phemus Stock Option Plan.
10.14+ Form of Nonstatutory Stock Option Agreement under the
Cairn Energy USA, Inc. Separate Phemus Stock Option Plan.
10.15+ Cairn Energy USA, Inc. eparate PLC Stock Option Plan.
10.16+ Form of Nonstatutory Stock Option Agreement under the
Cairn Energy USA, Inc. Separate PLC Stock Option Plan.
10.17 First Amendment to First Amended and Restated Credit
Agreement, dated December 12, 1995, among the Company,
Internationale (U.S.) Capital Corporation and
Meespierson N.V.
10.18 Second Amendment to First Amended and Restated Credit
Agreement, dated January 15, 1996, among the Company,
Internationale (U.S.) Capital Corporation and
Meespierson N.V.
10.19 Third Amendment to First Amended and Restated Credit
Agreement, dated as of June 28, 1996, by and among Cairn
Energy USA, Inc., Internationale Nederlanden (U.S.)
Capital Corporation, as agent, and Internationale
Nederlanden (U.S.) Capital Corporation and Meespierson
N.V., as lenders (with exhibits omitted pursuant to Item
601(b)(2) of Regulation S-K). (Incorporated by reference
from the Company's Form 10-Q for the period ended
September 30, 1996 and Filed with the Commission on
November 8, 1996).
10.20 Fourth Amendment to First Amended and Restated Credit
Agreement, dated as of November 7, 1996, by and among
Cairn Energy USA, Inc., ING (U.S.) Capital Corporation,
f/k/a Internationale Nederlanden (U.S.) Capital
Corporation, as agent, and ING (U.S.) Capital
Corporation, Meespierson N.V., and Credit Lyonnais New
York Branch, as lenders (with certain exhibits omitted
pursuant to Item 601(b)(2) of Regulation S-K).
(Incorporated by reference from the Company's Form 10-Q
for the period ended September 30, 1996 and Filed with
the Commission on November 8, 1996).
10.21+* Amendment No. 2 to the Cairn Energy USA, Inc. 1993 Stock
Option Plan.
10.22+* Amendment No. 3 to the Cairn Energy USA, Inc. 1993 Stock
Option Plan.
CORPDAL:61486.5 15467-00006
46
<PAGE>
10.23+* Form of Incentive Stock Option Agreement.
10.24+* Form of Nonstatutory Stock Option Agreement.
10.25+ Amendment No. 1 to the Cairn Energy USA, Inc. 1993
Directors Stock Option Plan.
10.26+* Amendment No. 2 to the Cairn Energy USA, Inc. 1993
Director Stock Option Plan.
21.1 Subsidiary of the Company. (Incorporated by reference to
Exhibit 22.1 to the Company's Annual Report on Form 10-K
of the fiscal year ended December 31, 1992).
23.1* Consent of Ernst & Young LLP, independent auditors.
23.2* Consent of Ryder Scott Company, petroleum engineers.
------------------------
* Filed herewith.
+ Stock option plan, management contract or compensatory arrangement.
CORPDAL:61486.5 15467-00006
47
<PAGE>
GLOSSARY
The terms defined in this glossary are used throughout this annual
report.
2-D SEISMIC. The method by which an image of the earth's subsurface is
created through the interpretation of collected seismic data.
3-D SEISMIC. The method by which a three dimensional image of the
earth's subsurface is created through the interpretation of collected seismic
data. 3-D surveys allow for a more detailed understanding of the subsurface than
do conventional surveys and contribute significantly to field appraisal,
development and production.
AVO ANALYSIS. A geophysical technique that when applied under certain
conditions allows interpreters to distinguish gas bearing sands from other
bright spot causes such as hard streaks, wet sands and lignite.
BBL. One stock tank barrel, or 42 U.S. gallons liquid volume, used
herein in reference to crude oil or other liquid hydrocarbons.
BCF. One billion cubic feet.
BCFE. One billion cubic feet of natural gas equivalents using a
conversion rate of six thousand cubic feet of natural gas for each barrel of
oil.
DEVELOPED ACREAGE. The number of acres which are allocated or
assignable to producing wells or wells capable of production.
DEVELOPMENT WELL. A well drilled within the proved area of an oil or
gas reservoir to the depth of a stratigraphic horizon known to be productive.
DISCOUNTED PRESENT VALUE. A method of determining the present value of
proved reserves. Under the SEC method, the future net revenues before income
taxes from proved reserves are estimated assuming that oil and natural gas
prices and production costs remain constant. The resulting stream of revenues is
then discounted at the rate of 10% per year to obtain the present value.
DRY WELL. A well found to be incapable of producing either oil or gas
in sufficient quantities to justify completion as an oil or gas well.
EXPLORATORY WELL. A well drilled to find and produce oil or gas in an
unproved area, to find a new reservoir in a field previously found to be
productive of oil or gas in another reservoir, or to extend a known reservoir.
FARM-OUT/FARM-IN. An agreement pursuant to which the owner of a working
interest in an oil and gas lease delivers the contractual right to earn the
working interest or a portion thereof to another party who desires to drill on
the leased acreage. Generally, the assignee is required to drill one or more
wells in order to earn a working interest in the acreage. The assignor usually
retains a royalty or a working interest in the lease after payout. The assignor
is said to have "farmed-out" the acreage. The assignee is said to have
"farmed-in" the acreage.
FINDING COSTS. Expressed in dollars per MCFE, is calculated by dividing
the amount of total capital expenditures by the amount of total reserves added
during the same period as a result of drilling activities, property
acquisitions, reserve revisions and improved recovery.
GROSS ACRES OR GROSS WELLS. The total acres or wells, as the case may
be, in which a working interest is owned.
MBBL. One thousand barrels of crude oil or other liquid hydrocarbons.
MCF. One thousand cubic feet.
CORPDAL:61486.5 15467-00006
48
<PAGE>
MCFE. One thousand cubic feet of natural gas equivalents using a
conversion rate of six thousand cubic feet of natural gas for each barrel of
oil.
MMBBL. One million barrels of crude oil or other liquid hydrocarbons.
MMCF. One million cubic feet.
MMCFE. One million cubic feet of natural gas equivalents using a
conversion rate of six thousand cubic feet of natural gas for each barrel of
oil.
NET ACRES OR NET WELLS. The sum of the fractional working interests
owned in gross acres or gross wells.
PAY. An industry term used to describe reservoirs in the subsurface
that contain hydrocarbons.
PRODUCTIVE WELL. A well that is producing oil or gas or that is
capable of production.
PROVED DEVELOPED RESERVES. Reserves that can be expected to be
recovered through existing wells with existing equipment and operating methods.
PROVED RESERVES. The estimated quantities of crude oil, natural gas and
natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions.
PROVED UNDEVELOPED RESERVES. Reserves that are expected to be recovered
from new wells on undrilled acreage, or from existing wells where a relatively
major expenditure is required for recompletion.
ROYALTY INTEREST. An interest in an oil and gas property entitling the
owner to a share of oil and gas production free of costs of production.
UNDEVELOPED ACREAGE. Lease acreage on which wells have not been drilled
or completed to a point that would permit the production of commercial
quantities of oil and gas regardless of whether such acreage contains proved
reserves.
WORKING INTEREST. The operating interest which gives the owner the
right to drill, produce and conduct operating activities on the property and a
share of production, subject to all royalties, overriding royalties and other
burdens and to all costs of exploration, development and operations and all
risks in connection therewith.
CORPDAL:61486.5 15467-00006
49
<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 Annual Report on Form
10-K to be signed on its behalf by the undersigned thereunto duly authorized.
CAIRN ENERGY USA, INC.
(Registrant)
Date: March 4, 1997 By:/s/ Michael R. Gilbert
----------------------
Michael R. Gilbert,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Annual Report on Form 10-K has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Office Date
/s/ Michael R. Gilbert President and Chief Executive March 4, 1997
- ---------------------- Officer and Director (Principal
Michael R. Gilbert Executive Officer)
/s/ J. M. M. Sutherland Senior Vice President, Chief March 4, 1997
- ---------------------- Financial Officer, Treasurer and
J. M. M. Sutherland Director (Principal Financial
Officer)
/s/ Robert P. Murphy Vice President--Exploration and March 4, 1997
- ---------------------- Director
Robert P. Murphy
/s/ A. Allen Paul Vice President--Finance March 4, 1997
- ---------------------- (Principal Accounting Officer)
A. Allen Paul
/s/ Jack O. Nutter, II Director March 4, 1997
- ----------------------
Jack O. Nutter, II
/s/ John C. Halsted Director March 4, 1997
- ----------------------
John C. Halsted
/s/ R. Daniel Robins Director March 4, 1997
- ----------------------
R. Daniel Robins
/s/ James M. Alexander Director March 4, 1997
- ----------------------
James M. Alexander
/s/ Thomas R. Hix Director March 4, 1997
- ----------------------
Thomas R. Hix
CORPDAL:61486.5 15467-00006
50
AMENDMENT NO. 1
TO THE
CAIRN ENERGY USA, INC.
BYLAWS
The Board of Directors of Cairn Energy USA, Inc., a Delaware
corporation (the "Corporation"), amended as of January 10, 1996, the Cairn
Energy USA, Inc. Bylaws in the following respects only:
Section 7.5 of the Bylaws was amended and restated to read in
its entirely as follows:
SECTION 7.5. Advance of Expenses. Expenses incurred
in defending a civil or criminal action, suit or proceeding
shall be paid by the corporation on behalf of a director,
officer, employee or agent in advance of the final disposition
of such action, suit or proceeding as authorized by the board
of directors in the specific case upon receipt of an
undertaking by or on behalf of the director, officer, employee
or agent to repay such amount unless it shall ultimately be
determined that such person is entitled to be indemnified by
the corporation as authorized in this ARTICLE 7.
The foregoing amendment to the Bylaws was effective as of January 10, 1996.
CAIRN ENERGY USA, INC.
By:/s/ Susan H. Rader
-------------------------
Susan H. Rader, Secretary
CORPDAL:62435.1 15467-00006
AMENDMENT NO. 2
TO THE
CAIRN ENERGY USA, INC.
1993 STOCK OPTION PLAN
The Board of Directors of Cairn Energy USA, Inc., a Delaware
corporation (the "Corporation"), voted on February 1, 1995 to amend the Cairn
Energy USA, Inc. 1993 Stock Option Plan (the "Plan") in the following respects
only:
FIRST: Section 2.1 of the Plan was amended to increase from 400,000 to
650,000 the number of shares issuable pursuant to the exercise of all Options
granted under the Plan, and to read in its entirety as follows:
2.1. DESCRIPTION OF STOCK AND MAXIMUM SHARES
ALLOCATED. The Stock which may be issued upon the exercise of
an Option may either be unissued or reacquired shares of
Stock, as the Board of Directors may, in its sole and absolute
discretion, from time to time determine.
Subject to the adjustments provided in PARAGRAPH 6.6,
the aggregate number of shares of Stock to be issued pursuant
to the exercise of all Options granted under the Plan may
equal but shall not exceed 650,000 shares of Stock.
SECOND: The foregoing amendments to the Plan were effective as of
May 24, 1995.
CAIRN ENERGY USA, INC.
By:/s/Susan H. Rader
------------------------
Susan H. Rader, Secretary
DII0BCA2 15467.6
A-1
AMENDMENT NO. 3
TO THE
CAIRN ENERGY USA, INC.
1993 STOCK OPTION PLAN
This Amendment No. 3 to the Cairn Energy USA, Inc. 1993 Stock Option Plan
(the "Amendment") is hereby adopted by Cairn Energy USA, Inc. on the 29th day of
May , 1996 pursuant to the terms of Section 9 of the Cairn Energy USA, Inc. 1993
Stock Option Plan (the "Plan").
W I T N E S S E T H:
WHEREAS, Cairn Energy USA, Inc., a Delaware corporation (the
"Corporation"), established the Plan as approved and ratified by stockholders
effective April 8, 1993;
WHEREAS, the Corporation subsequently adopted amendments to the Plan;
WHEREAS, pursuant to Section 9 of the Plan, the Corporation, acting
through its Board of Directors, has the right to amend the Plan subject to
stockholder approval;
WHEREAS, the Compensation Committee of the Board of Directors (the
"Committee") has recommended to the Board of Directors of the Corporation that
the Plan be amended to extend the exercise period upon termination of employment
and provide for full vesting on death, effective only for options granted after
the effective date of this Amendment, unless a holder of a granted option
consents to either or both of these changes for his or her granted option, to
increase the maximum number of shares of stock to be granted under the Plan, and
to correct certain typographical errors in a previous amendment;
WHEREAS, the Board of Directors has accepted the recommendation of the
Committee, has obtained the approval of the stockholders of the Corporation, and
has delegated to the Committee the preparation, adoption, and execution of this
Amendment within constraints it established;
NOW THEREFORE, pursuant to its authority under Section 9 of the Plan,
the Corporation hereby amends the Plan, effective May 22, 1996 unless otherwise
indicated below, as follows:
1. Existing Paragraph 2.1 is hereby deleted in its entirety and
replaced with the following new Paragraph 2.1:
"2.1 DESCRIPTION OF STOCK AND MAXIMUM SHARES ALLOCATED. The Stock which
may be issued upon the exercise of an Option may either be unissued or
reacquired shares of Stock, as the Board of Directors may, in its sole
and absolute discretion, from time to time determine.
LABDAL:49082.1 15467-6
1
<PAGE>
Subject to the adjustments provided in PARAGRAPH 6.6, the
aggregate number of shares of Stock to be issued pursuant to the
exercise of all Options granted under the Plan may equal but shall not
exceed 1,150,000 shares of Stock."
2. Effective as of February 23, 1994, Paragraph 6.4 is hereby
deleted in its entirety and the following new paragraph 6.4 is added in its
place:
"6.4. TERM, TIME OF EXERCISE AND TRANSFERABILITY OF OPTIONS.
In addition to such other terms and conditions as may be included in a
particular Agreement granting an Option, an Option shall be exercisable
during a Holder's lifetime only by the Holder or by the Holder's
guardian or legal representative.
An Option shall not be transferrable other than by will or the
laws of descent and distribution or pursuant to a qualified domestic
relations order as defined by the Code or Title I of the Employee
Retirement Income Security Act or the rules thereunder.
The provisions of the remainder of this Paragraph shall apply
to the extent a Holder's Agreement does not expressly provide
otherwise. If a Holder ceases to be an Eligible Individual, the
portion, if any, of the Option that is exercisable but remains
unexercised on the date the Holder stops being an Eligible Individual
shall terminate ninety (90) days after such Holder ceases to be an
Eligible Individual. Notwithstanding the foregoing, if a Holder ceases
to be an Eligible Individual by reason of (a) disability (as defined in
section 105(d)(4) of the Code immediately prior to its repeal) or (b)
death, the Holder shall have the right for twelve months after the date
of disability or death to exercise an Option to the extent such Option
is exercisable on the date of his disability or death.
The portion of the Option that is not exercisable on the date
the Holder ceases to be an Eligible Individual shall terminate and be
forfeited to the Corporation on the date of such cessation.
Notwithstanding the previous sentence, if a Change in Control of the
Corporation occurs and, within twenty-four months from the date of the
Change in Control of the Corporation, a Holder ceases to be an Eligible
Individual either because (i) the Corporation terminates the Holder's
employment with the Corporation for a reason other than Due Cause or
(ii) the Holder terminates his employment with the Corporation due to a
Severance Termination by the Holder of the Holder's Employment
Agreement, then any Options held by such Holder shall be exercisable in
full on the date such Holder ceases to be an Eligible Individual and no
portion of an Option held by such Holder shall terminate or forfeit on
the date such holder ceases to be an Eligible Person.
Notwithstanding any other provision of this Plan, no Option
shall be exercisable after the expiration of ten (10) years from the
date it is granted, or the period specified in PARAGRAPH 4.1 if
applicable.
LABDAL:49082.1 15467-6
2
<PAGE>
The Committee shall have the authority to prescribe in any
Agreement that the Option evidenced by the Agreement may be exercised
in full or in part as to any number of shares subject to the Option at
any time or from time to time during the term of the Option, or in such
installments at such times during said term as the Committee may
prescribe; provided, however, that no part of an Option may be made
exercisable during the six (6) month period beginning on the date the
Option was granted. Except as provided above and unless otherwise
provided in any Agreement, an Option may be exercised at any time or
from time to time during the term of the Option. Such exercise may be
as to any or all whole (but no fractional) shares which have become
purchasable under the Option.
Within a reasonable time (or such time as may be permitted by
law) after the Corporation receives written notice that the Holder has
elected to exercise all or a portion of an Option, such notice to be
accompanied by payment in full of the aggregate Option exercise price
of the number of shares of Stock purchased, the Corporation shall issue
and deliver a certificate representing the shares acquired in
consequence of the exercise and any other amounts payable in
consequence of such exercise. In the event that a Holder exercises both
an Incentive Option, or portion of one, and a Nonstatutory Stock
Option, or a portion of one, separate Stock certificates shall be
issued, one for the Stock subject to the Incentive Option and one for
the Stock subject to the Nonstatutory Stock Option. The number of the
shares of Stock transferrable due to an exercise of an Option under
this Plan shall not be increased due to the passage of time, except as
may be provided in an Agreement; provided, however, the number of such
shares of Stock which are transferrable may increase due to the
occurrence of certain events which are fully described in PARAGRAPH
6.5.
Nothing in the Plan or in any Option granted under the Plan
shall require the Corporation to issue any shares upon exercise of any
Option if such issuance would, in the opinion of counsel for the
Corporation, constitute a violation of the Securities Act or any other
applicable statute or regulation, as then in effect. At the time of any
exercise of an Option, the Corporation may, as a condition precedent to
the exercise of such Option, require from the Holder (or in the event
of his death, his legal representatives, heirs, legatees, or
distributees) such written representations, if any, concerning his
sophistication, financial means, access to information about the
Corporation, and intentions with regard to the retention or disposition
of the shares being acquired by exercise of such Option and such
written covenants and agreements, if any, as to the manner of disposal
of such shares as, in the opinion of counsel to the Corporation, may be
necessary to ensure that any disposition by such Holder (or in the
event of his death, his legal representatives, heirs, legatees, or
distributees), will not involve a violation of the Securities Act or
any other applicable state or federal statute or regulation, as then in
effect. Certificates for shares of Stock, when issued, may have the
following or similar legend, or statements of other applicable
restrictions, endorsed on them, and may not be immediately
transferable:
LABDAL:49082.1 15467-6
3
<PAGE>
The shares of stock evidenced by this certificate have been
issued to the registered owner in reliance upon written
representations that these shares have been purchased for
investment. These shares have not been registered under the
Securities Act of 1933, as amended, or any applicable state
securities laws, in reliance upon an exemption from
registration. Without such registration, these shares may not
be sold, transferred, assigned or otherwise disposed of
unless, in the opinion of the Corporation and its legal
counsel, such sale, transfer, assignment or disposition will
not be in violation of the Securities Act of 1933, as amended,
applicable rules and regulations of the Securities and
Exchange Commission, and any applicable state securities
laws."
3. Paragraph 6.4 is hereby amended to delete the third and fourth
paragraphs of Paragraph 6.4 in their entirety and to replace them with the
following new language:
"The provisions of the remainder of this Paragraph shall apply
to the extent a Holder's Agreement does not expressly provide
otherwise. If a Holder ceases to be an Eligible Individual, the
portion, if any, of the Option that is exercisable but remains
unexercised on the date the Holder stops being an Eligible Individual
shall terminate twenty-four (24) months after such Holder ceases to be
an Eligible Individual.
The portion of the Option that is not exercisable on the date
the Holder ceases to be an Eligible Individual shall terminate and be
forfeited to the Corporation on the date of such cessation.
Notwithstanding the previous sentence, if (i) a Change in Control of
the Corporation occurs and, within twenty-four months from the date of
the Change in Control of the Corporation, a Holder ceases to be an
Eligible Individual either because (A) the Corporation terminates the
Holder's employment with the Corporation for a reason other than Due
Cause or (B) the Holder terminates his employment with the Corporation
due to a Severance Termination by the Holder of the Holder's Employment
Agreement, or (ii) a Holder ceases to be an Eligible Individual by
reason of death, any Options held by such Holder shall be exercisable
in full on the date such Holder ceases to be an Eligible Individual,
and no portion of an Option held by such Holder shall terminate or
forfeit on the date such Holder ceases to be an Eligible Individual.
The provisions of this paragraph of PARAGRAPH 6.4 shall be applied
before the provisions of the immediately preceding paragraph of
PARAGRAPH 6.4."
LABDAL:49082.1 15467-6
4
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this instrument to be
executed by its duly authorized officer on the date first written above.
CAIRN ENERGY USA, INC.
By:/s/Michael R. Gilbert
---------------------
Michael R. Gilbert
President
LABDAL:49082.1 15467-6
5
CAIRN ENERGY USA, INC.
1993 STOCK OPTION PLAN
INCENTIVE STOCK OPTION AGREEMENT
THIS AGREEMENT is made and entered into this day of , 199 ,
between Cairn Energy USA, Inc., a Delaware corporation (the "Corporation"), and
(the "Holder") in connection with the grant of an Incentive
Option (defined below) under the Cairn Energy USA, Inc. 1993 Stock Option Plan
(the "Plan"), as amended.
W I T N E S S E T H:
WHEREAS, the Holder is employed by the Corporation or one of its
Affiliates (defined below) in a key position; and
WHEREAS, the Corporation desires to encourage the Holder to own Stock
(defined below) and to give him added incentive to advance the interests of the
Corporation through the Plan; and
WHEREAS, the Corporation adopted the Plan, as approved and ratified by
stockholders, effective April 8, 1993, and subsequently adopted amendments to
the Plan; and
WHEREAS, on , 19 (the "Date of Grant"), the Corporation granted the
Holder an Incentive Option to purchase shares of Stock of the Corporation under
terms and conditions established by the Board of Directors (defined below);
NOW, THEREFORE, in consideration of these premises, the parties agree
that the following shall constitute the Agreement between the Corporation and
the Holder:
1. DEFINITIONS. For purposes of this Agreement, defined terms
shall have the meanings given to them by the Plan except as specified below:
1.1 "AFFILIATE" shall mean (a) any corporation, other than the
Corporation, in an unbroken chain of corporations ending with the Corporation if
each of the corporations, other than the Corporation, owns stock possessing
fifty percent (50%) or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain and (b) any corporation,
other than the Corporation, in an unbroken chain of corporations beginning with
the Corporation if each of the corporations, other than the last corporation in
the unbroken chain, owns stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.
LABDAL:49156.2 15467-6
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<PAGE>
1.2 "AGREEMENT" shall mean this document as executed by the Corporation
and the Holder, and as it may be subsequently amended.
1.3 "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended, or any similar or superseding statute or statutes.
1.4 "INCENTIVE OPTION" and "OPTION" shall mean a stock option granted
pursuant to this Agreement that is intended to satisfy the requirements of
section 422 of the Code.
1.5 "SECURITIES ACT" shall mean the Securities Act of 1933, as amended,
or any similar or superseding statute or statutes.
2. GRANT OF INCENTIVE OPTION. Subject to the terms and conditions set
forth in this Agreement, the Corporation grants to the Holder an Incentive
Option to purchase from the Corporation during the period ending ten (10) years
from the Date of Grant shares of Stock at a price of $ per share, subject to
adjustment, if any, as provided in this Agreement. In no event shall the
exercise price per share of this Option be less than the greater of (a) the par
value per share of Stock or (b) 100% of the Fair Market Value per share of Stock
on the date of grant of this Option.
This Incentive Option is exercisable with respect to the shares of
Stock indicated above on or after the following dates:
----------------- --------------------shares of Stock
----------------- --------------------additional shares of Stock
----------------- --------------------additional shares of Stock
In no event shall the Option be exercisable within the first six months of its
Date of Grant. In addition, the number of shares exercisable under this Option
shall be reduced to the extent necessary so that the sum of:
(a) the aggregate Fair Market Value of shares of Stock subject to
this Incentive Option that first become purchasable in a
calendar year under this Incentive Option, and
(b) the aggregate Fair Market Value of shares of Stock or stock of
any Affiliate (or a predecessor of the Corporation or an
Affiliate) subject to any other incentive stock option (within
the meaning of section 422 of the Code) of the Corporation or
its Affiliates (or a predecessor corporation of any such
corporation), that first become purchasable in a calendar year
under such incentive stock option
does not (with respect to the Holder) exceed $100,000, with such Fair Market
Value to be determined as of the date this Incentive Option or such other
incentive stock option is granted.
LABDAL:49156.2 15467-6
2
<PAGE>
For purposes of this Paragraph, "predecessor corporation" means (i) a
corporation that was a party to a transaction described in section 425(a) of the
Code (or that would be so described if a substitution or assumption under such
section had been effected) with the Corporation, (ii) a corporation that at the
time the new incentive stock option (within the meaning of section 422 of the
Code) is granted, is an Affiliate of the Corporation or a predecessor
corporation of any such corporations, or (iii) a predecessor corporation of any
such corporations.
3. NOTICE OF EXERCISE. This Incentive Option may be exercised in
whole or in part, from time to time, in accordance with PARAGRAPH 2, by written
notice to the Corporation at the address provided in this Agreement, which
notice shall:
(a) specify the number of whole shares of Stock to be
purchased and the exercise price to be paid for such shares;
(b) if the person exercising this Incentive Option is not the
Holder himself, contain or be accompanied by evidence satisfactory to the
Committee of such person's right to exercise this Incentive Option; and
(c) be accompanied by payment in full of the purchase price in
the form of cash, a certified or cashier's check to the order of the
Corporation, or a wire transfer of immediately available funds.
This Incentive Option may be exercised only in increments at least
equal to the lesser of one hundred (100) shares or ten percent (10%) of the
number of whole shares as to which it is exercisable.
4. INVESTMENT LETTER. The Holder agrees that the shares of
Stock acquired on exercise of this Incentive Option shall be acquired for his
own account for investment only and not with a view to, or for resale in
connection with, any distribution or public offering thereof within the meaning
of the Securities Act or other applicable securities laws. If the Committee so
determines, any Stock certificates issued upon exercise of this Incentive Option
shall bear a legend to the effect that the shares have been so acquired. The
Corporation may, but in no event shall be required to, bear any expenses of
complying with the Securities Act, other applicable securities laws or the rules
and regulations of any national securities exchange or other regulatory
authority in connection with the registration, qualification, or transfer, as
the case may be, of this Incentive Option or any shares of Stock acquired upon
the exercise thereof. The foregoing restrictions on the transfer of the shares
of Stock shall be inoperative if (a) the Corporation previously shall have been
furnished with an opinion of counsel, satisfactory to it, to the effect that
such transfer will not require registration under the Securities Act or other
applicable securities laws or (b) the shares of Stock shall have been duly
registered in compliance with the Securities Act and other applicable securities
laws.
5. TRANSFER AND EXERCISE OF INCENTIVE OPTION. This Incentive Option
shall not be transferable except by will or by the laws of descent and
distribution or pursuant to a qualified domestic relations order as defined in
the Code or Title I of the Employee Retirement Income
LABDAL:49156.2 15467-6
3
<PAGE>
Security Act ("ERISA") or the rules thereunder. No assignment or transfer of
this Incentive Option, whether voluntary or involuntary, by operation of law or
otherwise, except a transfer by will or by the laws of descent or distribution
or pursuant to a qualified domestic relations order as defined in the Code or
Title I of ERISA or the rules thereunder, shall vest in the assignee or
transferee any interest or right whatsoever in this Incentive Option.
During the Holder's lifetime, this Incentive Option may be exercised
only by him, his guardian or legal representative or the recipient of this
Incentive Option pursuant to a qualified domestic relations order as defined in
the Code or Title I of ERISA or the rules thereunder.
6. STATUS OF HOLDER. The Holder shall not be deemed a stockholder of
the Corporation with respect to any of the shares of Stock subject to this
Incentive Option, except to the extent that such shares shall have been
purchased and transferred to him. The Corporation shall not be required to issue
or transfer any certificates for shares of Stock purchased upon exercise of this
Incentive Option until all applicable requirements of law have been complied
with and such shares shall have been duly listed on any securities exchange on
which the Stock may then be listed.
7. NO EFFECT ON CAPITAL STRUCTURE. This Incentive Option shall not
affect the right of the Corporation or any Affiliate to reclassify, recapitalize
or otherwise change its capital or debt structure or to merge, consolidate,
convey any or all of its assets, dissolve, liquidate, windup, or otherwise
reorganize.
8. EXPIRATION OF INCENTIVE OPTION UPON TERMINATION OF EMPLOYMENT.
Except as otherwise specifically provided in this Agreement, if a
Holder ceases to be an Eligible Individual, the portion, if any, of the Option
that is exercisable but remains unexercised on the date the Holder stops being
an Eligible Individual shall terminate twenty-four (24) months after such Holder
ceases to be an Eligible Individual.
The portion of the Option that is not exercisable on the date the
Holder ceases to be an Eligible Individual shall terminate and be forfeited to
the Corporation on the date of such cessation. Notwithstanding the previous
sentence, if (i) a Change in Control of the Corporation occurs and, within
twenty-four months from the date of the Change in Control of the Corporation, a
Holder ceases to be an Eligible Individual either because (A) the Corporation
terminates the Holder's employment with the Corporation for a reason other than
Due Cause or (B) the Holder terminates his employment with the Corporation due
to a Severance Termination by the Holder of the Holder's Employment Agreement,
or (ii) a Holder ceases to be an Eligible Individual by reason of death, then
any Options held by such Holder shall be exercisable in full on the date such
Holder ceases to be an Eligible Individual, and no portion of an Option held by
such Holder shall terminate or forfeit on the date such Holder ceases to be an
Eligible Individual. The provisions of this paragraph of PARAGRAPH 8 shall be
applied before the provisions of the immediately preceding paragraph of
PARAGRAPH 8.
LABDAL:49156.2 15467-6
4
<PAGE>
9. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, MERGER, ETC.
Notwithstanding any other provision of this Agreement, in the event of any
change in the number of outstanding shares of Stock
(a) effected without receipt of consideration by the Corporation,
by reason of a stock dividend, or split, combination, exchange
of shares or other recapitalization, merger, or otherwise, in
which the Corporation is the surviving corporation, or
(b) by reason of a spin-off of a part of the Corporation into a
separate entity, or assumptions and conversions of outstanding
grants due to an acquisition by the Corporation of a separate
entity,
(1) the aggregate number and class of shares subject to this Incentive Option
and (2) the exercise price of this Incentive Option shall be automatically
adjusted to accurately and equitably reflect the effect of such changes. In the
event of a dispute concerning such adjustment, the Committee shall have full
discretion to resolve the dispute. The number of shares subject to this
Incentive Option shall be automatically reduced by any fraction which results
from any adjustment made pursuant to this Paragraph.
In the event of:
(a) a dissolution or liquidation of the Corporation,
(b) a merger or consolidation (other than a merger effecting a reincorporation
of the Corporation in another state or any other merger or a consolidation
in which the stockholders of the surviving corporation and their
proportionate interests in the surviving corporation immediately after the
merger or consolidation are substantially identical to the stockholders of
the Corporation and their proportionate interests in the Corporation
immediately prior to the merger or consolidation) in which the Corporation
is not the surviving corporation (or survives only as a subsidiary of
another corporation in a transaction in which the stockholders of the
parent of the Corporation and their proportionate interests in the parent
immediately after the transaction are not substantially identical to the
stockholders of the Corporation and their proportionate interests therein
immediately prior to the transaction; provided that the Board of Directors
may at any time prior to such a merger or consolidation provide by
resolution that the foregoing provisions of this parenthetical shall not
apply if a majority of the board of directors of such parent immediately
after the transaction consists of individuals who constituted a majority of
the Board of Directors immediately prior to the transaction), or
(c) a transaction in which any person (other than Cairn Energy PLC) becomes the
owner of 50% or more of the total combined voting power of all classes of
stock of the Corporation (provided, however, that the Board of Directors
LABDAL:49156.2 15467-6
5
<PAGE>
may at any time prior to such transaction provide by resolution that this
Subparagraph (c) shall not apply if such acquiring person is a corporation
and a majority of the board of directors of the acquiring corporation
immediately after the transaction consists of individuals who constituted a
majority of the Board of Directors immediately prior to the acquisition of
such 50% or more total combined voting power)
the Board of Directors may, at its election, as of the effective time of such
transaction, either (1) change the number and kind of shares of stock (including
substitution of shares of another corporation) and exercise price in the manner
it deems appropriate, provided, however, that in no event may any change be made
under this Paragraph which would constitute a "modification" within the meaning
of section 425(h)(3) of the Code, or (2) purchase the Option from the Holder by
tendering cash equal to the Fair Market Value of the Stock represented by the
Option less the exercise price of the Option specified in this Agreement,
without regard to the determination as to the periods and installments of
exercisability made pursuant to this Agreement, if (and only if) the Option has
not at that time expired or been terminated.
10. COMMITTEE AUTHORITY. Any question concerning the interpretation
of this Agreement, any adjustments required to be made under this
Agreement, and any controversy which may arise under this Agreement shall
be determined by the Committee in its sole discretion.
11. NOTICE OF DISQUALIFYING DISPOSITION. In order to enable the
Corporation to avail itself of any income tax deduction to which it may be
entitled, the Holder shall notify the Corporation of his intent to dispose of
any of the shares of Stock purchased pursuant to this Incentive Option within
two (2) years from the date of the grant of the Incentive Option and one (1)
year from the date of exercise of the Incentive Option, and promptly after such
disposition the Holder shall notify the Corporation of the number of shares of
Stock disposed of, the dates of acquisition and disposition of such shares, and
the consideration, if any, received on such disposition. Nothing in this
Paragraph, however, shall give the Holder any right to dispose of shares of
Stock in a manner that is inconsistent with any provision of the Plan or any
Paragraph of this Agreement. If in connection with any such disposition the
Corporation becomes liable for withholding taxes and has no amounts owing the
Holder with which to discharge its withholding obligation, the Holder shall
provide the Corporation with the amount needed to discharge the Corporation's
withholding obligation and shall indemnify the Corporation against any penalties
it may incur through its inability to apply amounts owing the Holder in
discharge of its withholding obligation.
12. INCENTIVE OPTION QUALIFICATION. This Incentive Option is intended
to qualify as an "incentive stock option" within the meaning of section 422 of
the Internal Revenue Code of 1986, as amended, and shall be so construed;
provided, however, that nothing in this Agreement shall be interpreted as a
representation, guarantee or other undertaking on the part of the Corporation
that this Incentive Option is or will be determined to be an "incentive stock
option" within such section or any other section of the Internal Revenue Code.
LABDAL:49156.2 15467-6
6
<PAGE>
13. PLAN CONTROLS. The terms of this Agreement are governed by the
terms of the Plan, a copy of which is attached as Exhibit A and made a part of
this Agreement as if fully set forth in this Agreement, and in the case of any
inconsistency between the terms of this Agreement and the terms of the Plan, the
terms of the Plan shall control.
14. NOTICE. Whenever any notice is required or permitted under the Plan
or this Agreement, such notice must be in writing and personally delivered,
telecopied (if confirmed), or sent by mail. Any notice required or permitted to
be delivered under the Plan or this Agreement shall be deemed to be delivered on
the date which it is personally delivered, or, whether actually received or not,
on the third business day after it is deposited in the United States mail,
certified or registered, postage prepaid, addressed to the person who is to
receive it at the address which such person has previously specified by written
notice delivered in accordance with this Paragraph. The Corporation or Holder
may change, at any time and from time to time, by written notice to the other,
the address previously specified for receiving notices. Until changed in
accordance with this paragraph, the Corporation and the Holder specify their
respective addresses as set forth below:
Corporation: Cairn Energy USA, Inc.
8115 Preston Road, Suite 500
Dallas, Texas 75225
Attention: Secretary
Holder: -----------------------
-----------------------
-----------------------
15. INFORMATION CONFIDENTIAL. As partial consideration for the granting
of this Incentive Option, the Holder agrees that he will keep confidential all
information and knowledge that he has relating to the manner and amount of his
participation in the Plan; provided, however, that such information may be
disclosed as required by law and may be given in confidence to the Holder's
spouse, tax and financial advisors, or to a financial institution to the extent
that such information is necessary to secure a loan.
IN WITNESS WHEREOF, the Corporation has caused this Agreement to be
executed and the Holder has executed this Agreement on the day and year first
above written.
"CORPORATION"
CAIRN ENERGY USA, INC.
By:
-----------------------
-----------------------
"HOLDER"
-----------------------
-----------------------
LABDAL:49156.2 15467-6
7
CAIRN ENERGY USA, INC.
1993 STOCK OPTION PLAN
NONSTATUTORY STOCK OPTION AGREEMENT
THIS AGREEMENT is made and entered into this day of , 199 ,
between Cairn Energy USA, Inc., a Delaware corporation (the "Corporation"), and
(the "Holder") in connection with the grant of a Nonstatutory Option
(defined below) under the Cairn Energy USA, Inc. 1993 Stock Option Plan (the
"Plan"), as amended.
W I T N E S S E T H:
WHEREAS, the Holder is either an employee of the Corporation or one of
its Affiliates (defined below) in a key position; and
WHEREAS, the Corporation desires to encourage the Holder to own Stock
(defined below) and to give him added incentive to advance the interests of the
Corporation through the Plan; and
WHEREAS, the Corporation adopted the Plan, as approved and ratified by
stockholders, effective April 8, 1993, and subsequently adopted amendments to
the Plan; and
WHEREAS, on , 19 (the "Date of Grant"), the Corporation granted the
Holder a Nonstatutory Option to purchase shares of Stock of the Corporation
under terms and conditions established by the Board of Directors (defined
below);
NOW, THEREFORE, in consideration of these premises, the parties agree
that the following shall constitute the Agreement between the Corporation and
the Holder:
1. DEFINITIONS. For purposes of this Agreement, defined terms shall
have the meanings given to them by the Plan except as specified below:
1.1 "AGREEMENT" shall mean this document as executed by the Corporation
and the Holder, and as it may be subsequently amended.
1.2 "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended, or any similar or superseding statute or statutes.
1.3 "NONSTATUTORY OPTION" and "OPTION" shall mean a stock option
granted pursuant to this Agreement that does not satisfy the requirements of
section 422 of the Code.
LABDAL:49157.2 15467-6
1
<PAGE>
1.4 "SECURITIES ACT" shall mean the Securities Act of 1933, as amended,
or any similar or superseding statute or statutes.
2. GRANT OF NONSTATUTORY OPTION. Subject to the terms and conditions
set forth in this Agreement, the Corporation grants to the Holder a Nonstatutory
Option to purchase from the Corporation during the period ending ten (10) years
from the Date of Grant shares of Stock at a price of $ per share, subject to
adjustment, if any, as provided in this Agreement. In no event shall the
exercise price per share of this Option be less than the par value per share of
Stock.
This Nonstatutory Option is exercisable with respect to the shares of
Stock indicated above on or after the following dates:
- ----------------------- -------------------shares of Stock
- ----------------------- -------------------additional shares of Stock
In no event shall the Option be exercisable within the first six months of its
Date of Grant.
3. NOTICE OF EXERCISE. This Nonstatutory Option may be exercised
in whole or in part, from time to time, in accordance with PARAGRAPH 2, by
written notice to the Corporation at the address provided in this
Agreement, which notice shall:
(a)specify the number of whole shares of Stock to be purchased
and the exercise price to be paid for such shares;
(b) if the person exercising this Nonstatutory Option is not
the Holder himself, contain or be accompanied by evidence satisfactory to the
Committee of such person's right to exercise this Nonstatutory Option; and
(c) be accompanied by payment in full of the purchase price in
the form of cash, a certified or cashier's check to the order of the Corporation
or a wire transfer of immediately available funds.
This Nonstatutory Option may be exercised only in increments at least
equal to the lesser of one hundred (100) shares or ten percent (10%) of the
number of whole shares as to which it is exercisable.
4. INVESTMENT LETTER. The Holder agrees that the shares of Stock
acquired on exercise of this Nonstatutory Option shall be acquired for his own
account for investment only and not with a view to, or for resale in connection
with, any distribution or public offering thereof within the meaning of the
Securities Act or other applicable securities laws. If the Committee so
determines, any Stock certificates issued upon exercise of this Nonstatutory
Option shall bear a legend to the effect that the shares have been so acquired.
The Corporation may, but in no event shall be required to, bear any expenses of
complying with the Securities Act, other applicable
LABDAL:49157.2 15467-6
2
<PAGE>
securities laws or the rules and regulations of any national securities exchange
or other regulatory authority in connection with the registration,
qualification, or transfer, as the case may be, of this Nonstatutory Option or
any shares of Stock acquired upon the exercise of this Nonstatutory Option. The
foregoing restrictions on the transfer of the shares of Stock shall be
inoperative if (a) the Corporation previously shall have been furnished with an
opinion of counsel, satisfactory to it, to the effect that such transfer will
not require registration under the Securities Act or other applicable securities
laws, or (b) the shares of Stock shall have been duly registered in compliance
with the Securities Act and other applicable securities laws.
5. TRANSFER AND EXERCISE OF NONSTATUTORY OPTION. This Nonstatutory
Option shall not be transferable except by will or by the laws of descent and
distribution or pursuant to a qualified domestic relations order as defined in
the Code or Title I of the Employee Retirement Income Security Act ("ERISA") or
the rules thereunder. No assignment or transfer of this Nonstatutory Option,
whether voluntary or involuntary, by operation of law or otherwise, except a
transfer by will or by the laws of descent or distribution or pursuant to a
qualified domestic relations order as defined in the Code or Title I of ERISA or
the rules thereunder, shall vest in the assignee or transferee any interest or
right whatsoever in this Nonstatutory Option.
During the Holder's lifetime, this Nonstatutory Option may be exercised
only by him, his guardian or legal representative or the recipient of the
Nonstatutory Option pursuant to a qualified domestic relations order as defined
in the Code or Title I of ERISA or the rules thereunder.
6. STATUS OF HOLDER. The Holder shall not be deemed a stockholder of
the Corporation with respect to any of the shares of Stock subject to this
Nonstatutory Option, except to the extent that such shares shall have been
purchased and transferred to him. The Corporation shall not be required to issue
or transfer any certificates for shares of Stock purchased upon exercise of this
Nonstatutory Option until all applicable requirements of law have been satisfied
and such shares shall have been duly listed on any securities exchange on which
the Stock may then be listed.
7. NO EFFECT ON CAPITAL STRUCTURE. This Nonstatutory Option shall not
affect the right of the Corporation or any Affiliate to reclassify, recapitalize
or otherwise change its capital or debt structure or to merge, consolidate,
convey any or all of its assets, dissolve, liquidate, windup, or otherwise
reorganize.
8. EXPIRATION OF NONSTATUTORY OPTION UPON TERMINATION OF EMPLOYMENT.
Except as otherwise specifically provided in this Agreement, if a
Holder ceases to be an Eligible Individual, the portion, if any, of the Option
that is exercisable but remains unexercised on the date the Holder stops being
an Eligible Individual shall terminate twenty-four (24) months after such Holder
ceases to be an Eligible Individual.
The portion of the Option that is not exercisable on the date the
Holder ceases to be an Eligible Individual shall terminate and be forfeited to
the Corporation on the date of such cessation. Notwithstanding the previous
sentence, if (i) a Change in Control of the Corporation
LABDAL:49157.2 15467-6
3
<PAGE>
occurs and, within twenty-four months from the date of the Change in Control of
the Corporation, a Holder ceases to be an Eligible Individual either because (A)
the Corporation terminates the Holder's employment with the Corporation for a
reason other than Due Cause or (B) the Holder terminates his employment with the
Corporation due to a Severance Termination by the Holder of the Holder's
Employment Agreement, or (ii) a Holder ceases to be an Eligible Individual by
reason of death, then any Options held by such Holder shall be exercisable in
full on the date such Holder ceases to be an Eligible Individual, and no portion
of an Option held by such Holder shall terminate or forfeit on the date such
Holder ceases to be an Eligible Individual. The provisions of this paragraph of
PARAGRAPH 8 shall be applied before the provisions of the immediately preceding
paragraph of PARAGRAPH 8.
9. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, MERGER, ETC.
Notwithstanding any other provision of this Agreement, in the event of any
change in the number of outstanding shares of Stock
(a) effected without receipt of consideration by the Corporation,
by reason of a stock dividend, split, combination, exchange or
other recapitalization, merger, or otherwise, in which the
Corporation is the surviving corporation, or
(b) by reason of a spin-off of a part of the Corporation into a
separate entity, or assumptions and conversions of outstanding
grants due to an acquisition by the Corporation of a separate
entity,
(1) the aggregate number and class of shares subject to this Nonstatutory Option
and (2) the exercise price of this Nonstatutory Option shall be automatically
adjusted to accurately and equitably reflect the effect of such changes. In the
event of a dispute concerning such adjustment, the Committee shall have full
discretion to resolve the dispute. The number of shares subject to this
Nonstatutory Option shall be automatically reduced by any fraction which results
from any adjustment made pursuant to this Paragraph.
In the event of:
(a) a dissolution or liquidation of the Corporation,
(b) a merger or consolidation (other than a merger effecting a
reincorporation of the Corporation in another state or any other merger or
consolidation in which the stockholders of the surviving corporation and
their proportionate interests in the surviving corporation immediately
after the merger or consolidation are substantially identical to the
stockholders of the Corporation and their proportionate interests in the
Corporation immediately prior to the merger or consolidation) in which the
Corporation is not the surviving corporation (or survives only as a
subsidiary of another corporation in a transaction in which the
stockholders of the parent of the Corporation and their proportionate
interests in the parent immediately after the transaction are not
substantially identical to the stockholders of the Corporation and their
proportionate interests therein
LABDAL:49157.2 15467-6
4
<PAGE>
immediately prior to the transaction; provided, however, that the Board of
Directors may at any time prior to such a merger or consolidation provide
by resolution that the foregoing provisions of this parenthetical shall not
apply if a majority of the board of directors of such parent immediately
after the transaction consists of individuals who constituted a majority of
the Board of Directors immediately prior to the transaction), or
(c) a transaction in which any person (other than Cairn Energy PLC) becomes
the owner of 50% or more of the total combined voting power of all classes
of stock of the Corporation (provided, however, that the Board of Directors
may at any time prior to such transaction provide by resolution that this
Subparagraph (c) shall not apply if such acquiring person is a corporation
and a majority of the board of directors of the acquiring corporation
immediately after the transaction consists of individuals who constituted a
majority of the Board of Directors immediately prior to the acquisition of
such 50% or more total combined voting power)
the Board of Directors may, at its election, as of the effective time of such
transaction, either (1) change the number and kind of shares of stock (including
substitution of shares of another corporation) and exercise price in the manner
it deems appropriate, or (2) purchase the Option from the Holder by tendering
cash equal to the Fair Market Value of the Stock represented by the Option less
the exercise price of the Option specified in this Agreement, without regard to
the determination as to the periods and installments of exercisability made
pursuant to this Agreement, if (and only if) the Option has not at that time
expired or been terminated.
10. COMMITTEE AUTHORITY. Any question concerning the interpretation
of this Agreement, any adjustments required to be made under this Agreement, and
any controversy which may arise under this Agreement shall be determined by the
Committee in its sole discretion.
11. PLAN CONTROLS. The terms of this Agreement are governed by the
terms of the Plan, a copy of which is attached as Exhibit A and made a part of
this Agreement as if fully set forth in this Agreement, and in the case of any
inconsistency between the terms of this Agreement and the terms of the Plan, the
terms of the Plan shall control.
12. NOTICE. Whenever any notice is required or permitted under this
Agreement, such notice must be in writing and personally delivered, telecopied
(if confirmed), or sent by mail. Any notice required or permitted to be
delivered under this Agreement shall be deemed to be delivered on the date which
it is personally delivered, or, whether actually received or not, on the third
business day after it is deposited in the United States mail, certified or
registered, postage prepaid, addressed to the person who is to receive it at the
address which such person has previously specified by written notice delivered
in accordance with this Agreement. The Corporation or Holder may change, at any
time and from time to time, by written notice to the other, the address
previously specified for receiving notices. Until changed in accordance with
this Agreement, the Corporation and the Holder specify their respective
addresses as set forth below:
LABDAL:49157.2 15467-6
5
<PAGE>
Corporation: Cairn Energy USA, Inc.
8115 Preston Road, Suite 500
Dallas, Texas 75225
Attention: Secretary
Holder: -----------------------
-----------------------
13. INFORMATION CONFIDENTIAL. As partial consideration for the granting
of this Nonstatutory Option, the Holder agrees that he will keep confidential
all information and knowledge that he has relating to the manner and amount of
participation in the Plan; provided, however, that such information may be
disclosed as required by law and may be given in confidence to the Holder's
spouse, tax and financial advisors, or to a financial institution to the extent
that such information is necessary to secure a loan.
IN WITNESS WHEREOF, the Corporation has caused this Agreement to be
executed and the Holder has executed this Agreement on the day and year first
above written.
"CORPORATION"
CAIRN ENERGY USA, INC.
By:
-----------------------
-----------------------
"HOLDER"
-----------------------
LABDAL:49157.2 15467-6
6
AMENDMENT NO. 2
TO THE
CAIRN ENERGY USA, INC.
1993 DIRECTORS STOCK OPTION PLAN
The Board of Directors and Stockholders Cairn Energy USA, Inc., a
Delaware corporation (the "Corporation"), have voted to amend the Cairn Energy
USA, Inc. Directors 1993 Stock Option Plan (the "Plan") in the following
respects only:
FIRST: Section 2.1 of the Plan was amended to increase from 150,000 to
270,000 the number of shares issuable pursuant to the exercise of all
Options granted under the Plan, and to read in its entirety as follows:
2.1. DESCRIPTION OF STOCK AND MAXIMUM SHARES
ALLOCATED. The Stock which may be issued upon the exercise of
an Option may either be unissued or reacquired shares of
Stock, as the Board of Directors may, in its sole and absolute
discretion, from time to time determine.
Subject to the adjustments provided in PARAGRAPH 6.4,
the aggregate number of shares of Stock to be issued pursuant
to the exercise of all Options granted under the Plan may
equal but shall not exceed 270,000 shares of Stock.
SECOND: The foregoing amendments to the Plan were effective as of May 22,
1996.
CAIRN ENERGY USA, INC.
By:/s/ Susan H. Rader
-------------------
Susan H. Rader, Secretary
CORPDAL:62511.1 15467-00006
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 33-77102 and Form S-8 No. 333-05165) of Cairn Energy USA, Inc. of
our report dated February 21, 1997, with respect to the consolidated financial
statements of Cairn Energy USA, Inc. included in this Annual Report (Form 10-K)
for the year ended December 31, 1996.
ERNST & YOUNG LLP
Dallas, Texas
March 4, 1997
CONSENT OF RYDER SCOTT COMPANY
We hereby consent to the reference to our firm under the caption
"Experts" and the reference to the results of our reserve review letter, dated
February 11, 1997 (the "Reserve Review Letter"), in the Registration Statements
on Form S-8 (Nos. 33-77102 and 333-05165) and related Prospectuses of Cairn
Energy USA, Inc. (the "Company") and to the incorporation by reference therein
of references to our firm and the Reserve Review Letter in the Company's Form
10-K for the year ended December 31, 1996, filed with the Securities and
Exchange Commission.
By:/s/ Ryder Scott Company
-----------------------
Petroleum Engineers
RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
Houston, Texas
March 3, 1997
CORPDAL:62324.1 15467-00006
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