SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-7667
------------------------
SANTA FE ENERGY RESOURCES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 36-2722169
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
1616 SOUTH VOSS, SUITE 1000
HOUSTON, TEXAS 77057
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES,
INCLUDING ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 507-5000
------------------------
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 [ ]
Shares of Common Stock outstanding at April 15, 1996 -- 90,542,795
<PAGE>
PART I - FINANCIAL STATEMENTS
PAGE
----
Consolidated Statement of Operations
Three Months Ended March 31, 1996
and 1995........................... 2
Consolidated Balance Sheet
March 31, 1996 and December 31,
1995............................... 3
Consolidated Statement of Cash Flows
Three Months Ended March 31, 1996
and 1995........................... 4
Consolidated Statement of
Shareholders' Equity
Three Months Ended March 31, 1996
and 1995........................... 5
Notes to Consolidated Financial
Statements......................... 6
Management's Discussion and Analysis
of Financial Condition
and Results of Operations.......... 10
1
SANTA FE ENERGY RESOURCES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
(IN MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
MARCH 31,
--------------------
1996 1995
--------- ---------
Revenues
Crude oil and liquids........... $ 94.5 $ 79.0
Natural gas..................... 24.9 15.0
Crude oil marketing and
trading........................ 4.1 2.9
Other........................... -- 1.7
--------- ---------
123.5 98.6
--------- ---------
Costs and Expenses
Production and operating........ 43.8 38.6
Exploration, including dry hole
costs.......................... 5.6 6.0
Depletion, depreciation and
amortization................... 32.3 31.3
General and administrative...... 6.0 5.9
Taxes (other than income)....... 6.1 4.3
Loss (gain) on disposition of
oil and gas properties......... 0.2 --
--------- ---------
94.0 86.1
--------- ---------
Income from Operations............... 29.5 12.5
Interest income................. 0.5 0.8
Interest expense................ (9.6) (10.1)
Interest capitalized............ 1.3 0.9
Other income (expense).......... (0.3) 2.2
--------- ---------
Income Before Income Taxes........... 21.4 6.3
Income tax expense.............. (8.8) (2.7)
--------- ---------
Net Income........................... 12.6 3.6
Preferred dividend
requirement.................... (3.7) (3.7)
--------- ---------
Earnings (Loss) Attributable to
Common Shares...................... $ 8.9 $ (0.1)
========= =========
Earnings (Loss) Attributable to
Common Shares Per Share............ $ 0.10 $ --
========= =========
Weighted Average Number of Shares
Outstanding (in millions).......... 90.4 90.1
========= =========
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
SANTA FE ENERGY RESOURCES, INC.
CONSOLIDATED BALANCE SHEET
(IN MILLIONS OF DOLLARS)
MARCH 31, DECEMBER 31,
1996 1995
----------- ------------
(UNAUDITED)
ASSETS
Current Assets
Cash and cash equivalents....... $ 50.4 $ 42.6
Accounts receivable............. 93.0 89.0
Inventories..................... 9.7 10.5
Other current assets............ 18.4 17.2
----------- ------------
171.5 159.3
----------- ------------
Properties and Equipment, at cost
Oil and gas (on the basis of
successful efforts
accounting).................... 2,386.3 2,336.3
Other........................... 36.2 35.6
----------- ------------
2,422.5 2,371.9
Accumulated depletion,
depreciation, amortization and
impairment..................... (1,513.5) (1,482.4)
----------- ------------
909.0 889.5
----------- ------------
Other Assets
Receivable under gas balancing
arrangements................... 5.7 5.8
Other........................... 8.1 10.2
----------- ------------
13.8 16.0
----------- ------------
$ 1,094.3 $ 1,064.8
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable................ $ 75.6 $ 73.1
Interest payable................ 17.1 7.9
Current portion of long-term
debt........................... 35.0 --
Other current liabilities....... 27.9 28.6
----------- ------------
155.6 109.6
----------- ------------
Long-Term Debt....................... 309.4 344.4
----------- ------------
Deferred Revenues.................... 5.5 4.9
----------- ------------
Other Long-Term Obligations.......... 24.4 24.2
----------- ------------
Deferred Income Taxes................ 70.7 64.0
----------- ------------
Commitments and Contingencies (Note
3)................................. -- --
----------- ------------
Convertible Preferred Stock.......... 80.0 80.0
----------- ------------
Shareholders' Equity
Preferred stock................. -- --
$.732 Series A preferred
stock.......................... 91.4 91.4
Common stock.................... 0.9 0.9
Paid-in capital................. 503.5 501.4
Accumulated deficit............. (146.8) (155.7)
Foreign currency translation
adjustment..................... (0.3) (0.3)
----------- ------------
448.7 437.7
----------- ------------
$ 1,094.3 $ 1,064.8
=========== ============
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
SANTA FE ENERGY RESOURCES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(IN MILLIONS OF DOLLARS)
THREE MONTHS ENDED
MARCH 31,
--------------------
1996 1995
--------- ---------
Operating Activities:
Net income...................... $ 12.6 $ 3.6
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities:
Depletion, depreciation and
amortization............. 32.3 31.3
Deferred income taxes...... 6.7 1.8
Net loss (gain) on
disposition of
properties............... 0.2 --
Exploratory dry hole
costs.................... 0.3 2.8
Other...................... 0.5 (1.5)
Changes in operating assets and
liabilities:
Decrease (increase) in
accounts receivable...... 4.0 7.0
Decrease (increase) in
inventories.............. 0.8 (0.9)
Increase (decrease) in
accounts payable......... 14.0 (14.3)
Increase (decrease) in
interest payable......... 9.2 (4.2)
Increase (decrease) in
income taxes payable..... 0.1 0.2
Net change in other assets
and liabilities.......... (13.4) (5.6)
--------- ---------
Net Cash Provided by Operating
Activities......................... 67.3 20.2
--------- ---------
Investing Activities:
Capital expenditures, including
exploratory dry hole costs..... (39.1) (45.6)
Acquisitions of producing
properties..................... (17.0) (0.2)
Net proceeds from sales of
properties..................... 0.3 4.1
--------- ---------
Net Cash Used in Investing
Activities......................... (55.8) (41.7)
--------- ---------
Financing Activities:
Principal payments on long-term
borrowings..................... -- (10.0)
Cash dividends paid............. (3.7) (3.7)
--------- ---------
Net Cash Used in Financing
Activities......................... (3.7) (13.7)
--------- ---------
Net Cash Provided (Used) in
the Period......................... 7.8 (35.2)
Cash and Cash Equivalents at
Beginning of Period................ 42.6 53.7
--------- ---------
Cash and Cash Equivalents at End of
Period............................. $ 50.4 $ 18.5
========= =========
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
SANTA FE ENERGY RESOURCES, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
(SHARES AND DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
$.732
SERIES A
CONVERTIBLE FOREIGN
PREFERRED STOCK COMMON STOCK CURRENCY TOTAL
--------------- --------------- PAID-IN ACCUMULATED TRANSLATION SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT EQUITY
------ ------ ------ ------ -------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995......... 10.7 $91.4 90.3 $0.9 $ 501.4 $(155.7) $(0.3) $437.7
Issuance of common stock........... -- -- 0.2 -- 2.1 -- -- 2.1
Net income......................... -- -- -- -- -- 12.6 -- 12.6
Dividends declared................. -- -- -- -- -- (3.7) -- (3.7)
------ ------ ------ ------ -------- ----------- ----------- --------------
Balance at March 31, 1996............ 10.7 $91.4 90.5 $0.9 $ 503.5 $(146.8) $(0.3) $448.7
====== ====== ====== ====== ======== =========== =========== ==============
Balance at December 31, 1994......... 10.7 $91.4 90.0 $0.9 $ 498.9 $(167.5) $(0.4) $423.3
Issuance of common stock........... -- -- 0.1 -- 1.8 -- -- 1.8
Foreign currency translation
adjustment........................ -- -- -- -- -- -- 0.1 0.1
Net income......................... -- -- -- -- -- 3.6 -- 3.6
Dividends declared................. -- -- -- -- -- (3.7) -- (3.7)
------ ------ ------ ------ -------- ----------- ----------- --------------
Balance at March 31, 1995............ 10.7 $91.4 90.1 $0.9 $ 500.7 $(167.6) $(0.3) $425.1
====== ====== ====== ====== ======== =========== =========== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
SANTA FE ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) ACCOUNTING POLICIES
The unaudited consolidated financial statements of Santa Fe Energy
Resources, Inc. ("Santa Fe" or the "Company") reflect, in the opinion of
management, all adjustments, consisting only of normal and recurring
adjustments, necessary to present fairly the Company's financial
position at March 31, 1996 and the Company's results of operations and
cash flows for the three-month periods ended March 31, 1996 and 1995.
Interim period results are not necessarily indicative of results of
operations or cash flows for a full- year period.
These financial statements and the notes thereto should be read in
conjunction with the Company's annual report on Form 10-K for the year
ended December 31, 1995.
(2) STATEMENT OF CASH FLOWS
The Company made interest and income tax payments as follows during
the three months ended March 31, 1996 and 1995 (in millions of dollars):
1996 1995
----- --------
Interest payments............... -- 13.7
Income tax payments............. 0.2 0.5
In addition, during the three months ended March 31, 1995 the Company
received a $1.0 million income tax refund.
(3) COMMITMENTS AND CONTINGENCIES
OIL AND GAS HEDGING
The Company hedges a portion of its oil and gas sales to provide a
certain minimum level of cash flow from its sales of oil and gas. While
the hedges are generally intended to reduce the Company's exposure to
declines in market price, the Company's gain from increases in market
price may be limited. The Company uses various financial instruments
whereby monthly settlements are based on differences between the prices
specified in the instruments and the settlement prices of certain
futures contracts quoted on the New York Mercantile Exchange ("NYMEX")
or certain other indices. Generally, in instances where the applicable
settlement price is less than the price specified in the contract, the
Company receives a settlement based on the difference; in instances
where the applicable settlement price is higher than the specified
price, the Company pays an amount based on the difference. The
instruments utilized by the Company differ from futures contracts in
that there is no contractual obligation which requires or allows for the
future delivery of the product. Gains or losses on hedging activities
are recognized in oil and gas revenues in the period in which the hedged
production is sold.
The Company currently has open crude hedges on (i) an average of
7,800 barrels per day for the period April to September 1996 at an
average NYMEX WTI price of $18.84 per barrel and (ii) provided that the
NYMEX WTI price is greater than approximately $17.00 per barrel, up to
an additional 8,000 barrels per day for the period April through
September 1996 at an average NYMEX WTI price of $18.68 per barrel. The
"break-even price" (the average of the daily settlement prices which
result in no settlement being due to or from the Company) with respect
to all such contracts is approximately $18.75 per barrel. During the
first quarter of 1996 crude oil hedges resulted in a $3.5 million
decrease in revenues.
The Company currently has open natural gas hedges on (i) an average
of approximately 53.3 MMcf per day of its Gulf Coast production for the
period April to December 1996 at an approximate break-even price of
$1.68 per Mcf and (ii) an average of approximately 30 MMcf per day of
its Permian Basin production for the period April to December 1996 at an
approximate break-even price of $1.51 per Mcf, based on index
6
SANTA FE ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
prices at certain settlement points. Due to its location, Permian Basin
gas sells at a discount to Gulf Coast gas. Natural gas sales hedges
resulted in a decrease in revenues of $5.7 million in the first quarter
of 1996.
In addition to its oil and gas sales hedges, for the second quarter
of 1996 the Company has hedged 20 MMcf per day of the natural gas it
purchases for use in its steam generation operations in the San Joaquin
Valley of California. Monthly settlements are based on the difference
between the settlement price quoted on the NYMEX and the index price for
San Juan Basin natural gas. Gains or losses are recognized in production
and operating costs in the period in which the hedged gas is consumed in
operations.
In instances where the difference between the NYMEX price and the
San Juan Basin index price is greater than $0.53, the Company pays an
amount based on the difference and in instances where the difference is
less than $0.53, the Company receives a payment based on the difference.
Each $0.10 per Mcf change in the spread between the NYMEX price and the
San Juan Basin index price results in a monthly increase or decrease in
production and operating costs of $60,000. Such hedges resulted in a
$1.7 million increase in production and operating costs in the first
quarter of 1996.
Based on the settlement prices of the applicable NYMEX futures
contracts or the estimated prices with respect to certain other indices
in effect at the end of the first quarter of 1996, the loss to the
Company with respect to the currently open oil and gas hedges during the
last nine months of 1996 would be approximately $12.5 million. The
actual gains or losses realized by the Company from such hedges may vary
significantly from the foregoing amount due to the volatility of the
futures markets and other indices.
INDEMNITY AGREEMENT WITH SANTA FE PACIFIC CORPORATION ("SFP")
In December 1990 SFP distributed all of the shares of the Company
it held to its shareholders (the "Spin-Off"). At the time of the
Spin-Off, the Company and SFP entered into an agreement to protect SFP
from federal and state income taxes, penalties and interest that would
be incurred by SFP if the Spin-off were determined to be a taxable event
resulting primarily from actions taken by the Company during a one-year
period that ended December 4, 1991. If the Company were required to make
payments pursuant to the agreement, such payments could have a material
adverse effect on its financial condition; however, the Company does not
believe that it took any actions during such one-year period that would
have such an effect on the Spin-Off.
ENVIRONMENTAL REGULATION
Federal, state and local laws and regulations relating to
environmental quality control affect the Company in all of its oil and
gas operations.
The Company has been identified as one of over 250 potentially
responsible parties ("PRPs") at a superfund site in Los Angeles County,
California. The site was operated by a third party as a waste disposal
facility from 1948 until 1983. The Environmental Protection Agency
("EPA") is requiring the PRPs to undertake remediation of the site in
several phases, which include site monitoring and leachate control, gas
control and final remediation. In November 1988 the EPA and a group of
PRPs that includes the Company entered into a consent decree covering
the site monitoring and leachate control phases of remediation. The
Company was a member of the group Coalition Undertaking Remediation
Efforts ("CURE") which was responsible for constructing and operating
the leachate treatment plant. This phase is now complete and the
Company's share of costs with respect to this phase was $1.6 million
($0.9 million after recoveries from working interest participants in the
unit in which the wastes were generated). Another consent decree
provides for the predesign, design and construction of a gas plant to
harness and market methane gas emissions. The Company is a member of the
New CURE group which is responsible for the gas plant construction and
operation and landfill cover. Currently, New CURE is in the design stage
of the gas plant. The Company's share of costs of this phase is expected
to be $3.0 million (based on an agreement with the other working
interest participants in the unit to assume $1.3 million of the original
settlement amount, the Company's net share of such costs is $1.7
million) and such costs have been provided for in the financial
7
SANTA FE ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
statements. The Company cannot currently estimate the cost of any
subsequent phases of work or final remediation which may be required by
the EPA. Another consent decree is currently being executed by the PRPs
and will be logged with the court for approval. This consent decree
allows for the settlement of the pending lawsuits against the
municipalities and transporters not named by the EPA. The settlement
payment by such municipalities and transporters totals approximately
$70.0 million of which approximately $55.0 million will be credited
against future expenses. The Company has entered into a Joint Defense
Agreement with the other PRPs to defend against a lawsuit filed
September 7, 1994 by ninety-five homeowners alleging, among other
things, nuisance, trespass, strict liability and infliction of emotional
distress. At this stage of the lawsuit the Company is not able to
estimate costs or potential liability.
On April 4, 1994 the Company received a request from the EPA for
information pursuant to Section 104(e) of CERCLA and a letter ordering
the Company and seven other PRPs to negotiate with the EPA regarding
implementation of a remedial plan for a site located in Santa Fe
Springs, California. The Company owned the property on which the site is
located from 1921 to 1932. During that time the property was leased to
another company and in 1932 the property was sold to that company.
During the time the other company leased or owned the property,
hazardous wastes were allegedly disposed at the site. The EPA estimates
that the total past and future costs for remediation will approximate
$9.4 million. The Company filed its response to the Section 104(e) order
setting forth its position and defenses based on the fact that the other
company was the lessee and operator of the site during the time the
Company was the owner of the property. However, the Company has also
given its Notice of Intent to comply with the EPA's order to prepare a
remediation design plan. Six of the other PRPs have also notified the
EPA of their intent to comply. The cost of such a remediation design
plan is estimated to be $1.0 million. To date there has been no
agreement on how to allocate costs among the PRPs. The Company has
provided for such costs in the financial statements, assuming that the
costs will be equally divided among the PRPs.
On March 23, 1995 the Company and twelve other companies received
notice that they have been identified as PRPs by the California
Department of Toxic Substances Control (the "DTSC") as having generated
and/or transported hazardous waste to the Environmental Protection
Corporation ("EPC") Eastside Landfill during its fourteen-year operation
from 1971 to 1985. EPC has since liquidated all assets and placed the
proceeds in trust for closure and post-closure activities. However,
these monies will not be sufficient to close the site. The PRPs have
entered into an enforceable agreement with the DTSC to characterize the
contamination at the site and prepare a focused remedial investigation
and feasibility study. The DTSC has agreed to implement reasonable
measures to bring new PRPs into the agreement. The DTSC will address
subsequent phases of the cleanup, including remedial design and
implementation in a separate order agreement. The cost of the remedial
investigation and feasibility study is estimated to be $1.0 million and
the Company has provided $80,000 in the financial statements as its
estimated share of such costs. The costs of subsequent phases cannot be
estimated until the remedial investigation and feasibility study is
completed.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with eight key
employees. The initial term of seven of the agreements expired on
December 31, 1990 and, on January 1, 1991 and beginning on each January
1 thereafter, is automatically extended for one-year periods, unless by
September 30 of any year the Company gives notice that the agreement
will not be extended. The term of the agreements is automatically
extended for a minimum of 24 months following a change of control. The
consummation of the the Company's merger with Adobe in 1992 constituted
a change of control as defined in the agreements. The initial term of
the other agreement will expire December 31, 1996 and beginning on each
January 1 thereafter, is automatically extended for one-year periods,
unless by September 30 of any year the Company gives notice that the
agreement will not be extended. The agreement is automatically extended
for a minimum of 24 months following a change of control.
8
SANTA FE ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
In the event that following a change of control employment is
terminated for reasons specified in the agreements, the employee would
receive: (i) a lump sum payment equal to two years' base salary; (ii)
the maximum possible bonus under the terms of the Company's incentive
compensation plan; (iii) a lapse of restrictions on any outstanding
restricted stock grants and full payout of any outstanding Phantom
Units; (iv) cash payment for each outstanding stock option equal to the
amount by which the fair market value of the common stock exceeds the
exercise price of the option; and, (v) life, disability and health
benefits for a period of up to two years. In addition, payments and
benefits under certain employment agreements are subject to further
limitations based on certain provisions of the Internal Revenue Code.
OTHER MATTERS
The Company has certain long-term contracts ranging up to twelve
years for the supply and transportation of approximately 20 million
cubic feet per day of natural gas to the Company's operations in Kern
County, California. In the aggregate, these contracts involve a minimum
commitment on the part of the Company of approximately $9.6 million per
year (based on prices and transportation charges in effect for March
1996). In connection with the development of a gas field in Argentina in
which the Company has a 19.9% working interest, a gas contract for 106
million cubic feet of gas per day with "take-or-pay" and
"delivery-or-pay" obligations was executed in 1994 with a gas
distribution company.
There are other claims and actions, including certain other
environmental matters, pending against the Company. In the opinion of
management, the amounts, if any, which may be awarded in connection with
any of these claims and actions could be significant to the results of
operations of any period but would not be material to the Company's
consolidated financial position.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company reported earnings to common shares for the first
quarter of 1996 of $8.9 million, or $0.10 per share, compared to a loss
of $0.1 million, or breakeven per share, in the first quarter of 1995.
The increased earnings resulted from higher prices and increased
production, combined with lower costs per barrel of oil equivalent
("BOE") produced. Crude oil and liquids production of 70,400 barrels per
day in the first quarter of 1996 represents the highest quarterly
average in the Company's history. Natural gas production averaged 154.0
MMcf per day in the first quarter of 1996 compared to 130.5 MMcf per day
in the first quarter of 1995. The Company's average hedged sales price
for crude oil and liquids of $14.93 per barrel in the first quarter of
1996 was $1.08 per barrel higher than the first quarter of 1995.
Similarly, the Company's average hedged sales price for natural gas
increased $0.52 per Mcf from the prior year to $1.83 in the first
quarter of 1996. The Company's total costs and expenses per BOE produced
declined $0.38 in the first quarter of 1996 as compared with the first
quarter of 1995.
GENERAL
As an independent oil and gas producer, the Company's results of
operations are dependent upon the difference between the prices received
for oil and gas and the costs of finding and producing such resources. A
material portion of the Company's crude oil production is from
long-lived fields in the San Joaquin Valley of California where EOR
methods are being utilized. The market price of the heavy (i.e., low
gravity, high viscosity) and sour (i.e., high sulfur content) crude oils
produced in these fields is lower than sweeter, light (i.e., low sulfur
and low viscosity) crude oils, reflecting higher transportation and
refining costs. In addition, the lifting costs of heavy crude oils are
generally higher than the lifting costs of light crude oils. As a result
of these narrower margins, even relatively modest changes in crude oil
prices may significantly affect the Company's revenues, results of
operations, cash flows and proved reserves. In addition, prolonged
periods of high or low oil prices may have a material effect on the
Company's financial position.
The lower price received for the Company's domestic heavy and sour
crude oil is reflected in the average sales price of the Company's
domestic crude oil and liquids (excluding the effect of hedging
transactions) for the first quarter of 1996 of $15.29 per barrel,
compared to $18.04 per barrel for West Texas Intermediate ("WTI") crude
oil (an industry posted price generally indicative of prices for sweeter
light crude oil). In the first quarter of 1996 the Company's average
sales price for California heavy crude oil was $14.97 per barrel,
approximately 83% of the average posted price for WTI.
Crude oil prices are subject to significant changes in response to
fluctuations in the domestic and world supply and demand and other
market conditions as well as the world political situation as it affects
OPEC, the Middle East and other producing countries. During 1995 and
1996 the actual average sales price (unhedged) received by the Company
ranged from a high of $15.48 per barrel in the first quarter of 1996 to
a low of $13.53 per barrel for the fourth quarter of 1995. Based on
operating results for the first quarter of 1996, the Company estimates
that, on an annualized basis, a $1.00 per barrel increase or decrease in
its average domestic crude oil sales prices would result in a
corresponding $22.7 million change in income from operations and a $17.0
million change in cash flow from operating activities. The foregoing
estimates do not give effect to changes in any other factors, such as
the effect of the Company's hedging program or depreciation and
depletion, that would result from a change in oil prices.
The price of natural gas fluctuates due to weather conditions, the
level of natural gas in storage, the relative balance between supply and
demand and other economic factors. The actual average sales price
(unhedged) received by the Company in 1995 and 1996 for its natural gas
ranged from a high of $2.23 per Mcf in the first quarter of 1996 to a
low of $1.31 per Mcf in the first quarter of 1995. Based on operating
results for the first quarter of 1996, the Company estimates that, on an
annualized basis, a $0.10 per Mcf increase or decrease in its average
domestic natural gas sales price would result in a corresponding $4.8
million change in income from operations and a $3.6 million change in
cash flow from operating activities. The foregoing estimates do not give
effect to changes in any other factors, such as the effect of
10
the Company's hedging program or depletion and depreciation, that would
result from a change in natural gas prices.
From time to time the Company hedges a portion of its oil and gas
sales to provide a certain minimum level of cash flow from its sales of
oil and gas. While the hedges are generally intended to reduce the
Company's exposure to declines in market price, the Company's gain from
increases in market price may be limited. The Company uses various
financial instruments whereby monthly settlements are based on
differences between the prices specified in the instruments and the
settlement prices of certain futures contracts quoted on the New York
Mercantile Exchange ("NYMEX") or certain other indices. Generally, in
instances where the applicable settlement price is less than the price
specified in the contract, the Company receives a settlement based on
the difference; in instances where the applicable settlement price is
higher than the specified price, the Company pays an amount based on the
difference. The instruments utilized by the Company differ from futures
contracts in that there is no contractual obligation which requires or
allows for the future delivery of the product. Gains or losses on
hedging activities are recognized in oil and gas revenues in the period
in which the hedged production is sold.
The Company currently has open crude hedges on (i) an average of
7,800 barrels per day for the period April through September 1996 at an
average NYMEX WTI price of $18.84 per barrel and (ii) provided that the
NYMEX WTI price is greater than approximately $17.00 per barrel, up to
an additional 8,000 barrels per day for the period April through
September 1996 at an average NYMEX WTI price of $18.68 per barrel. The
"break-even price" (the average of the settlement prices which result in
no settlement being due to or from the Company) with respect to all such
contracts is approximately $18.75 per barrel. The following table
reflects estimated amounts due to or from the Company assuming the
stated settlement prices are in effect for the entire period the
aforementioned hedges are in effect.
SETTLEMENT PRICE DUE TO (FROM) COMPANY
(DOLLARS PER BARREL) (MILLIONS OF DOLLARS)
-------------------- ---------------------
22.00 (9.4)
21.00 (6.5)
20.00 (3.6)
19.00 (0.7)
18.00 2.2
During the first quarter of 1996 crude oil hedges resulted in a $3.5
million decrease in revenues.
The Company currently has open natural gas hedges on (i) an average
of approximately 53.3 MMcf per day of its Gulf Coast production for the
period April through December 1996 at an approximate break-even price of
$1.68 per Mcf and (ii) an average of approximately 30.0 MMcf per day of
its Permian Basin production for the period April through December 1996
at an approximate break-even price of $1.51 per Mcf, based on index
prices at certain settlement points. Due to its location, Permian Basin
gas sells at a discount to Gulf Coast gas. Natural gas sales hedges
resulted in a decrease in revenues of $5.7 million in the first quarter
of 1996.
With respect to the Gulf Coast production hedges, a $0.10 per Mcf
decrease or increase in the average settlement price for a month results
in a $163,000 increase or decrease in revenues, respectively. With
respect to the Permian Basin production hedges, a $0.10 per Mcf decrease
or increase in the average settlement price for a month results in a
$92,000 increase or decrease in revenues, respectively.
In addition to its oil and gas sales hedges for the second quarter
of 1996 the Company has hedged 20.0 MMcf per day of the natural gas it
purchases for use in its steam generation operations in the San Joaquin
Valley of California. Monthly settlements are based on the difference
between the settlement price quoted on the NYMEX and the index price for
San Juan Basin natural gas. Gains or losses are recognized in production
and operating costs in the period in which the hedged gas is consumed in
operations.
In instances where the difference between the NYMEX price and the
San Juan Basin index price is greater than $0.53, the Company pays an
amount based on the difference and in instances where the
11
difference is less than $0.53, the Company receives a payment based on
the difference. Each $0.10 per Mcf change in the spread between the
NYMEX price and the San Juan Basin index price results in a monthly
increase or decrease in production and operating costs of $60,000. Such
hedges resulted in a $1.7 million increase in production and operating
costs in the first quarter of 1996.
RESULTS OF OPERATIONS
REVENUES
The following table reflects the components of the Company's crude
oil and liquids and natural gas revenues:
THREE MONTHS
ENDED MARCH 31,
--------------------
1996 1995
--------- ---------
CRUDE OIL AND LIQUIDS
REVENUES ($MILLIONS)
Sales
Domestic
California Heavy........... 56.0 43.6
Other...................... 31.7 24.8
--------- ---------
87.7 68.4
Argentina.................. 4.3 3.4
Indonesia.................. 7.1 8.3
Hedging....................... (3.5) --
Net Profits Payments.......... (1.1) (1.1)
--------- ---------
94.5 79.0
========= =========
VOLUMES (MBBLS/DAY)
Domestic
California Heavy.............. 41.1 37.9
Other......................... 22.0 18.2
--------- ---------
63.1 56.1
Argentina....................... 2.9 2.5
Indonesia....................... 4.4 5.6
--------- ---------
70.4 64.2
========= =========
SALES PRICES ($/BBL)
Unhedged
Domestic
California Heavy........... 14.97 12.80
Other...................... 15.87 15.02
Total...................... 15.29 13.52
Argentina..................... 16.13 15.04
Indonesia..................... 17.79 16.64
Total......................... 15.48 13.85
Hedged.......................... 14.93 13.85
NATURAL GAS
REVENUES ($MILLIONS)
Sales........................... 31.3 15.4
Hedging......................... (5.7) --
Net Profits Payments............ (0.7) (0.4)
--------- ---------
24.9 15.0
========= =========
VOLUMES (MMCF/DAY)................. 154.0 130.5
SALES PRICES ($/MCF)
Unhedged........................ 2.23 1.31
Hedged.......................... 1.83 1.31
Total revenues increased 25% from $98.6 million in the first
quarter of 1995 to $123.5 million in the first quarter of 1996. Crude
oil and liquids revenues increased from $79.0 million in the first
quarter of 1995
12
to $94.5 million in the first quarter of 1996 reflecting improved market
conditions which resulted in an increase in the Company's unhedged
average sales price from $13.85 per barrel in 1995 to $15.48 per barrel
in 1996 and an increase in oil and liquids production from 64,200
barrels per day in the first quarter of 1995 to 70,400 barrels per day
in the first quarter of 1996. Crude oil and liquids revenues for the
first quarter of 1996 include a $3.5 million loss on hedging
transactions. Natural gas revenues increased from $15.0 million in the
first quarter of 1995 to $24.9 million in the first quarter of 1996 as
the Company's average sales price (unhedged) increased from $1.31 per
Mcf in 1995 to $2.23 per Mcf in 1996 and sales volumes increased from
130.5 MMcf per day in 1995 to 154.0 MMcf per day in 1996. The increase
in sales volumes primarily reflects production from the Company's Sierra
Chata field in Argentina (17.3 MMcf per day in the first quarter of
1996) which began production in the second quarter of 1995. Natural gas
revenues for the first quarter of 1996 include a $5.7 million loss on
hedging transactions.
COSTS AND EXPENSES
The following table sets forth certain of the Company's costs and
expenses, expressed in dollars per barrel of oil equivalent ("BOE")
produced by the Company during the period:
THREE MONTHS ENDED
MARCH 31,
--------------------
1996 1995
--------- ---------
Production and operating costs (a)... 5.00 4.99
Exploration, including dry hole...... 0.64 0.78
Depletion, depreciation and
amortization....................... 3.70 4.04
General and administrative costs..... 0.69 0.76
Taxes other than income (b).......... 0.70 0.56
Interest, net (c).................... 0.89 1.07
- ------------
(a) Excluding related production, severance and ad valorem taxes.
(b) Includes production, severance and ad valorem taxes.
(c) Reflects interest expense less amounts capitalized and interest income.
Costs and expenses for the first quarter of 1996 totalled $94.0
million compared to $86.1 million in the first quarter of 1995.
Production and operating costs for the first quarter of 1996 are $5.2
million higher than the first quarter of 1995 primarily reflecting
higher production volumes and $1.7 million in expenses related to hedges
of natural gas purchased in connection with steam generation operations
in California (See -- General). Taxes other than income in the first
quarter of 1995 includes benefits of $1.0 million related to an
adjustment to ad valorem taxes recorded in prior periods and $0.7
million related to the settlement of certain disputed sales and use
taxes.
Other income (expense) for the first quarter of 1995 includes a
$2.3 million gain on the sale of the Company's interest in Cherokee
Resources Incorporated, a privately-held oil and gas company.
In October 1995 the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 "Accounting for
Stock-Based Compensation" ("FAS 123"), which established financial
accounting and reporting standards for stock-based employee compensation
plans. FAS 123 encourages companies to adopt a fair value based method
of accounting for such plans but continues to allow the use of the
intrinsic value based method prescribed by Accounting Principles Board
Opinion No. 25 "Accounting for Stock Issued to Employees" ("Opinion
25"). Companies electing to continue accounting in accordance with
Opinion 25 must make pro forma disclosures of net income and earnings
per share as if the fair value based method defined in FAS 123 had been
applied. The Company will continue to account for stock-based
compensation in accordance with Opinion 25 and will make pro forma
disclosures in accordance with the provisions of FAS 123 beginning in
its 1996 annual financial statements.
13
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash flow from operating activities is a function of
the volumes of oil and gas produced from the Company's properties and
the sales prices received therefor. Since crude oil and natural gas are
depleting assets, unless the Company replaces the oil and gas produced
from its properties, the Company's assets will be depleted over time and
its ability to incur debt at constant or declining prices will be
reduced. The Company increased its proved reserves (net of production
and sales) by approximately 26% over the five years ended December 31,
1995; however, no assurances can be given that such increase will occur
in the future. Historically, the Company has generally funded
development and exploration expenditures and working capital
requirements from cash provided by operating activities. Depending upon
the future levels of operating cash flows, which are significantly
affected by oil and gas prices, the restrictions on additional
borrowings included in certain of the Company's debt agreements,
together with debt service requirements and dividends, may limit the
cash available for future exploration, development and acquisition
activities. Net cash provided by operating activities and net proceeds
from sales of properties totalled $67.6 million in the first quarter of
1996; net cash used for capital expenditures and producing property
acquisitions in such period totalled $56.1 million.
The Company's 1995 capital program totalled approximately $204.6
million, a level which allowed the Company to more than replace its 1995
production. The Company expects to spend approximately $208.6 million on
its 1996 program. However, the actual amount expended by the Company in
1996 will be based upon numerous factors, the majority of which are
outside its control, including, without limitation, prevailing oil and
natural gas prices and the outlook therefor and the availability of
funds. Through March 31, 1996 the Company had expended $48.9 million
(including $17.0 million on acquisitions of producing properties in its
Central and Gulf Coast divisions) on its 1996 program.
Effective April 1, 1995 the Company entered into the Second Amended
and Restated Revolving Credit Agreement (the "Credit Agreement"), an
unsecured revolving credit agreement which matures December 31, 1998.
The maximum borrowing limits under the Credit Agreement are currently
$105.0 million, $65.0 million beginning February 28, 1997 and $30.0
million beginning February 28, 1998. Interest rates under the Credit
Agreement are tied to LIBOR or the bank's prime rate with the actual
interest rate based upon certain ratios and the value and projected
timing of production of the Company's oil and gas reserves. At March 31,
1996, $6.3 million in letters of credit were outstanding under the terms
of the Credit Agreement.
The Company has three short-term uncommitted lines of credit
totalling $50.0 million which are used to meet short-term cash needs.
Interest rates on borrowings under these lines of credit are typically
lower than rates paid under the Bank Facility. At March 31, 1996 no
amounts were outstanding under these lines of credit.
Certain of the Company's credit agreements and the indenture for
the Debentures include covenants that restrict the Company's ability to
take certain actions, including the ability to incur additional
indebtedness and to pay dividends on capital stock. Under the most
restrictive of these covenants, at March 31, 1996 the Company could
incur up to $203.4 million of additional indebtedness and pay dividends
of up to $121.4 million on its aggregate capital stock (including its
common stock, 7% Convertible Preferred Stock and Series A Preferred)
with the amount payable on its common stock limited to $54.5 million.
ENVIRONMENTAL MATTERS
Almost all phases of the Company's oil and gas operations are
subject to stringent environmental regulation by governmental
authorities. Such regulation has increased the costs of planning,
designing, drilling, installing, operating and abandoning oil and gas
wells and other facilities. The Company has expended significant
financial and managerial resources to comply with such regulations.
Although the Company believes its operations and facilities are in
general compliance with applicable environmental regulations, risks of
substantial costs and liabilities are inherent in oil and gas
operations. It is possible that other developments, such as increasingly
strict environmental laws, regulations and enforcement policies or
14
claims for damages to property, employees, other persons and the
environment resulting from the Company's operations, could result in
significant costs and liabilities in the future. As it has done in the
past, the Company intends to fund its cost of environmental compliance
from operating cash flows.
DIVIDENDS
Dividends on the Company's 7% Convertible Preferred Stock and
Series A Preferred Stock are cumulative at an annual rate of $1.40 per
share and $0.732 per share, respectively. No dividends may be declared
or paid with respect to the Company's common stock if any dividends with
respect to the 7% Convertible Preferred Stock or Series A Preferred
Stock are in arrears. None of the dividends with respect to the
Company's 7% Convertible Preferred Stock and Series A Preferred Stock
are in arrears. The determination of the amount of future cash
dividends, if any, to be declared and paid on the Company's common stock
is at the sole discretion of the Company's Board of Directors and will
depend on dividend requirements with respect to the preferred stock, the
Company's financial condition, earnings and funds from operations, the
level of capital and exploration expenditures, dividend restrictions in
financing agreements, future business prospects and other matters the
Board of Directors deems relevant.
15
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10(a) -- Santa Fe Energy Resources, Inc. 1990 Incentive Stock
Compensation Plan, Third Amendment and Restatement.
(b) Reports on Form 8-K
None
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
SANTA FE ENERGY RESOURCES, INC.
(Registrant)
By /s/ R. GRAHAM WHALING
R. Graham Whaling
Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Houston, Texas
May 14, 1996
17
SANTA FE ENERGY RESOURCES, INC.
1990 INCENTIVE STOCK COMPENSATION PLAN
(THIRD AMENDMENT AND RESTATEMENT)
STATEMENT OF PURPOSE
One purpose of the Santa Fe Energy Resources, Inc. 1990 Incentive Stock
Compensation Plan (the "Plan") is to encourage superior performance by
employees, by allowing the Board of Directors of Santa Fe Energy Resources, Inc.
("SFER") to award several forms of incentive compensation to employees of the
Company. By providing incentive compensation commensurate and competitive with
that provided by other companies, the Plan should also assist SFER in attracting
and retaining the services of qualified and capable employees.
In order to further the identity of interest of employees with the
stockholders of SFER, all of the forms of compensation under the Plan relate to
SFER Common Stock. Employees' success in enhancing stockholder value will
translate directly into an enhanced benefit for the employee.
An additional purpose of the Plan is to encourage the Directors to own
shares of the Company's stock and thereby to align their interests more closely
with the interests of the other stockholders of SFER, to encourage the highest
level of Director performance by providing the Directors with a direct interest
in SFER's attainment of its financial goals, and to provide a financial
incentive that will help attract and retain the most qualified Directors.
I. DEFINITIONS
Unless the context indicates otherwise, the following terms have the
meanings set forth below:
"Acceleration Date" means the earliest date on which any of the
following events shall first have occurred: (i) the acquisition described
in clause (a) of the definition of "Change in Control" contained in this
Section I, (ii) the change in the composition of the Board of Directors
described in clause (b) of such definition or (iii) the stockholder
approval or adoption described in clause (c) or (d) of such definition.
"Award" means a grant of Options, Director Options, Restricted Stock,
Phantom Units, Bonus Stock or Stock Appreciation Rights pursuant to the
Plan.
"Board" means the Board of Directors of SFER.
"Bonus Stock" means Common Stock, which is not subject to a Restricted
Period, awarded by the Committee pursuant to the Plan.
"Cause" means (a) the willful and continued failure by the Participant
(other than a Director) to substantially perform his duties with the
Company (other than any such failure resulting from his incapacity due to
physical or mental illness), or (b) the willful engaging by the Participant
(other than a Director) in conduct which is demonstrably and materially
injurious to the Company, monetarily or otherwise. For purposes of this
definition, no act, or failure to act, shall be deemed "willful" unless
done, or omitted to be done, by the Participant not in good faith and
without reasonable belief that his action or omission was in the best
interest of the Company.
A "Change in Control" shall be deemed to have occurred if:
(a) any "person," as such term is used in Section 13(d) and 14(d)
of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), other than any trustee or other fiduciary
holding securities under an employee benefit plan of SFER or
any company owned, directly or indirectly, by the stockholders
of SFER in substantially the same proportions as their
ownership of stock of SFER, is or becomes the "beneficial
owner" (as defined in Rule
A-1
13d-3 under the Exchange Act), directly or indirectly, of
securities of SFER representing 25% or more of the combined
voting power of SFER's then outstanding securities;
(b) during any period of two consecutive years (not including any
period prior to the effective date of this provision),
individuals who at the beginning of such period constitute the
Board of Directors of SFER, and any new director (other than a
director designated by a person who has entered into an
agreement with SFER to effect a transaction described in clause
(a), (c) or (d) of this definition) whose election by the Board
of Directors of SFER or nomination for election by SFER's
stockholders was approved by a vote of at least two-thirds
( 2/3) of the directors then still in office who either were
directors at the beginning of the period or whose election or
nomination for election was previously so approved, cease for
any reason to constitute at least a majority thereof;
(c) the stockholders of SFER approve a merger or consolidation of
SFER with any other company other than (i) a merger or
consolidation which would result in the voting securities of
SFER outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity) more
than 65% of the combined voting power of the voting securities
of SFER (or such surviving entity) outstanding immediately
after such merger or consolidation, or (ii) a merger or
consolidation effected to implement a recapitalization of SFER
(or similar transaction) in which no "person" (as hereinabove
defined) acquires more than 25% of the combined voting power of
SFER's then outstanding securities; or
(d) the stockholders of SFER adopt a plan of complete liquidation
of SFER or approve an agreement for the sale or disposition by
SFER of all or substantially all of SFER's assets. For purposes
of this clause (d), the term "the sale or disposition by SFER
of all or substantially all of SFER's assets" shall mean a sale
or other disposition transaction or series of related
transactions involving assets of SFER or of any direct or
indirect subsidiary of SFER (including the stock of any direct
or indirect subsidiary of SFER) in which the value of the
assets or stock being sold or otherwise disposed of (as
measured by the purchase price being paid therefor or by such
other method as the Board of Directors of SFER determines is
appropriate in a case where there is no readily ascertainable
purchase price) constitutes more than two-thirds of the fair
market value of SFER (as hereinafter defined). For purposes of
the preceding sentence, the "fair market value of SFER" shall
be the aggregate market value of the outstanding shares of
common stock of SFER (on a fully diluted basis) plus the
aggregate market value of SFER's other outstanding equity
securities. The aggregate market value of the shares of common
stock of SFER shall be determined by multiplying the number of
shares of SFER's common stock (on a fully diluted basis)
outstanding on the date of the execution and delivery of a
definitive agreement with respect to the transaction or series
of related transactions (the "Transaction Date") by the average
closing price of the shares of common stock of SFER for the ten
trading days immediately preceding the Transaction Date. The
aggregate market value of any other equity securities of SFER
shall be determined in a manner similar to that prescribed in
the immediately preceding sentence for determining the
aggregate market value of the shares of common stock of SFER or
by such other method as the Board shall determine is
appropriate.
"Code" means the Internal Revenue Code of 1986, as amended.
"Committee" means the Compensation and Benefits Committee of the
Board.
"Common Stock" means the common stock, $0.01 par value, of SFER.
"Company" means collectively SFER and all companies in which SFER
owns, directly or indirectly, more than 50% of the voting stock.
"Director" means a member of the Board who is not also an employee of
the Company.
A-2
"Director Option" means an option to purchase shares of Common Stock
granted pursuant to Section XVIII.
"Disability" means the inability of a Participant to continue to
perform the duties of his or her employment with the Company or as a member
of the Board, as the case may be, as determined by the Committee.
"Fair Market Value" shall mean, other than with respect to a Director
Option, the value per share equal to the Market Price as of the date of
determination unless, with respect to an Award to a key employee, the Board
or the Committee shall, in good faith and using any fair and reasonable
means selected in its discretion, determine another value to be used for
such purpose. With respect to a Director Option, Fair Market Value shall
mean the average of the highest and lowest prices of the Common Stock as
reported by the consolidated tape of the New York Stock Exchange on the
applicable date (or if there are no transactions on that date, the last
preceding date on which there were transactions).
"Grant Date" as used with respect to a particular Award means the date
as of which such Award is granted pursuant to the Plan.
"Option" means an option, other than a Director Option to purchase
shares of Common Stock granted by the Committee pursuant to the Plan, which
may be designated as either an "Incentive Stock Option" or a "Non-Qualified
Stock Option."
"Incentive Stock Option" means an Option that is intended to qualify
as an Incentive Stock Option as described in Section 422 of the Code.
"Limited Right" means a Stock Appreciation Right that is exercisable
only as set forth in Section XIV of the Plan.
"Market Price" means the average of the daily closing prices per share
of the Common Stock for the 10 consecutive trading days immediately
preceding the day as of which "Market Price" is being determined. The
closing price for each day shall be the last sale price regular way or, in
case no such sale takes place on such day, the average of the closing bid
and asked prices regular way, in either case on the New York Stock
Exchange, or, if shares of the Common Stock are not listed or admitted to
trading on the New York Stock Exchange, on the principal national
securities exchange on which the shares are listed or admitted to trading,
or if the shares are not so listed or admitted to trading, the average of
the highest reported bid and lowest reported asked prices as furnished by
the National Association of Securities Dealers, Inc., through NASDAQ, or
through a similar organization if NASDAQ is no longer reporting such
information. If shares of Common Stock are not listed or admitted to
trading on any exchange or quoted through NASDAQ or any similar
organization, the "Market Price" shall be determined by the Board in good
faith using any fair and reasonable means selected in its discretion.
"Non-Qualified Stock Option" means an Option granted pursuant to the
Plan, other than an Incentive Stock Option.
"Participant" means any key employee of the Company or Director who
has an Award outstanding under the Plan.
"Phantom Unit" means a right to receive upon the achievement of
specified performance goals a payment from the Company in an amount equal
to a specified percentage of the Fair Market Value of a share of Common
Stock on the date on which such right becomes payable.
"Plan" means the Santa Fe Energy Resources, Inc. 1990 Incentive Stock
Compensation Plan as set forth herein and as may be amended from time to
time.
"Related LSAR Option" means an Option or Director Option outstanding
under the Plan with respect to which a Limited Right is granted pursuant to
Section XIV.
A-3
"Restricted Period" means the period of time for which Restricted
Stock and/or Phantom Units are subject to forfeiture pursuant to the Plan
or during which Options and Stock Appreciation Rights are not exercisable.
"Restricted Stock" means Common Stock subject to a Restricted Period
which is granted pursuant to the Plan.
"Retirement" means an Employee's leaving the employment of the
Company, other than for Cause, after his early retirement date as defined
in the Company's tax-qualified retirement plan, or predecessor plan, under
which the Participant is entitled to the immediate receipt of a benefit
thereunder. With respect to a Director, "Retirement" means ceasing to be a
member of the Board on or after reaching age 65.
"Stock Appreciation Right" means the right, granted by the Committee
pursuant to the Plan, to receive a payment equal to the increase in the
Fair Market Value of a share of Common Stock subsequent to the Grant Date
of such Award.
II. STOCK AND PHANTOM UNITS SUBJECT TO THE PLAN
Subject to adjustment as provided in the Plan, the maximum aggregate number
of shares of Common Stock with respect to which Options, Director Options
Restricted Stock, Bonus Stock, Phantom Units and Stock Appreciation Rights may
be granted from time to time under the Plan is 7,500,000; provided, however, no
more than 500,000 shares of Common Stock shall be issued after January 1, 1995
as Restricted Stock. The Common Stock issued under the Plan may be either
previously authorized but unissued shares or treasury shares acquired by SFER.
In the event that any Award expires, lapses, is forfeited or otherwise
terminates, any shares of Common Stock allocable to the terminated portion of
such Award may again be made subject to an Award under the Plan. Further, to the
extent an Award is paid in cash, rather than in Common Stock, or shares of
Common Stock are tendered to the Company, or withheld by the Company from an
Award, as payment of the exercise price of an Award or in satisfaction of any
Company tax withholding obligation, such shares of Common Stock may again be
made subject to an Award (other than Incentive Stock Options) under the Plan.
III. ADMINISTRATION OF THE PLAN
The Plan shall be administered by the Committee. The members of the
Committee shall not be eligible to participate in the Plan, except as provided
in Section XVIII. The Committee shall select from time to time those employees
to be granted Awards under the Plan. The Committee shall also determine the
terms and provisions of Awards, which need not be identical. The Committee shall
grant all Awards. The Committee shall construe the Plan, prescribe and rescind
rules and regulations relating to the Plan and make all other determinations
deemed necessary or advisable for the administration of the Plan, subject to the
limitations of Section XXII.
IV. ELIGIBILITY
Subject to the discretion of the Committee, all officers and other key
employees of the Company who have responsibility for the growth and
profitability of the Company are eligible to receive Awards under the Plan;
provided, however, no employee may receive in any calendar year an Award or
Awards of Options and/or Stock Appreciation Rights with respect to more than
1,000,000 shares of Common Stock. Directors shall automatically participate in
the Plan as provided in Section XVIII.
V. OPTIONS
The Committee may, from time to time and subject to the provisions of the
Plan, grant Awards of Options to employees of the Company to purchase shares of
Common Stock. Any Options granted may be designated as either Incentive Stock
Options or as Non-Qualified Stock Options, or the Committee may designate a
portion of an Award as "Incentive Stock Options" and the remaining portion as
"Non-Qualified
A-4
Stock Options." Any portion of an Award that is not designated as "Incentive
Stock Options" shall be "Non-Qualified Stock Options" and shall not be subject
to the requirements of Section VI of the Plan.
The purchase price of the Common Stock subject to any Options shall be
determined by the Committee, but, with respect to a Non-Qualified Stock Option,
may not be less than 100% of the Fair Market Value of the Common Stock on the
Grant Date. Such price shall be subject to adjustment as provided in Section
XIII of the Plan.
Options shall not be exercisable prior to the date that is six months after
the Grant Date. In addition, the Committee may include in each agreement
evidencing the Option grant a provision stating that the Option granted therein
may not be exercised in whole or in part for an additional period(s) of time
specified in such agreement, and may further limit the exercisability of the
Option in such manner as the Committee deems appropriate, including, without
limitation, the achievement of performance goals. The Committee may, in its
discretion, at any time and from time-to-time accelerate the exercisability of
all or part of any Option.
The period of any Option, which is the time period during which the Option
may be exercised, shall be determined by the Committee and shall not extend more
than ten years after the Grant Date.
Options shall not be transferable other than by will or the laws of descent
and distribution and during the Participant's lifetime shall be exercisable only
by the Participant.
Termination for Cause, as defined in Section I, shall result in forfeiture
of all outstanding Options. Termination by the Company for any reason other than
Cause (including terminations pursuant to formal severance programs sponsored by
the Company or an affiliate), or terminations by reason of death, Disability or
Retirement, shall result in a lapse of all or a proportion of the Restricted
Period applicable to any outstanding Award as set forth in Section XI.
A person electing to exercise an Option shall give written notice of such
election to the Company in such form as the Committee may require. Upon exercise
of an Option, the full option purchase price for the shares with respect to
which the Option is being exercised shall be payable to the Company (i) in cash
or by check payable and acceptable to the Company or (ii) subject to the
approval of the Committee, (a) by tendering to the Company shares of Common
Stock owned by such person having an aggregate Fair Market Value as of the date
of exercise and tender that is not greater than the full option purchase price
for the shares with respect to which the Option is being exercised and by paying
any remaining amount of the option purchase price as provided in (i) above
(provided that the Committee may, upon confirming that such person owns the
number of additional shares being tendered, authorize the issuance of a new
certificate for the number of shares being acquired pursuant to the exercise of
the Option less the number of shares being tendered upon the exercise and return
to such person (or not require surrender of) the certificate for the shares
being tendered upon the exercise) or (b) by such person delivering to the
Company a properly executed exercise notice together with irrevocable
instructions to a broker to promptly deliver to the Company cash or a check
payable and acceptable to the Company to pay the option purchase price and any
withholding taxes; provided that in the event such person chooses to pay the
option purchase price and withholding taxes as provided in (ii)(b) above, such
person and the broker shall comply with such procedures and enter into such
agreements of indemnity and other agreements as the Committee shall prescribe as
a condition of such payment procedure. Payment instruments will be received
subject to collection.
Notwithstanding any other provision in the Plan, if a Change in Control
occurs while unexercised Options, and Stock Appreciation Rights relating
thereto, remain outstanding under the Plan, then from and after the Acceleration
Date, all Options and Stock Appreciation Rights shall be exercisable in full,
whether or not otherwise exercisable; provided, however, that no Option or Stock
Appreciation Right shall become exercisable by reason of this paragraph to the
extent that such acceleration of exercisability, when aggregated with other
payments or benefits to the Participant pursuant to this Plan or any other plan,
arrangement or agreement with the Company, any person whose actions result in a
Change in Control or any person affiliated with the Company or such person,
would, as determined by tax counsel selected by the Company, result in "Excess
Parachute Payments" (as defined below) equal to or greater than three times the
"base amount" as defined in Section 280G of the Code. "Excess Parachute
Payments" shall mean "parachute payments" as
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defined in Section 280G of the Code other than (1) health and life insurance
benefits and (2) payments attributable to any award, benefit or other
compensation plan or program based upon the number of full or fractional months
of any restricted period (relating thereto) which has elapsed prior to the date
of the Change in Control. Furthermore, such payments or benefits provided to a
Participant under this Plan shall be reduced to the extent necessary so that no
portion thereof shall be subject to the excise tax imposed by Section 4999 of
the Code, but only if, by reason of such reduction, the Participant's net after
tax benefit shall exceed the net after tax benefit if such reduction were not
made. "Net after tax benefit" shall mean the sum of (i) all payments and
benefits which a Participant receives or is then entitled to receive from the
Company that would constitute a "parachute payment" within the meaning of
Section 280G of the Code, less (ii) the amount of federal income taxes payable
with respect to the payments and benefits described in (i) above calculated at
the maximum marginal income tax rate for each year in which such payments and
benefits shall be paid to the Participant (based upon the rate for such year as
set forth in the Code at the time of the first payment of the foregoing), less
(iii) the amount of excise taxes imposed with respect to the payments and
benefits described in (i) above by Section 4999 of the Code.
VI. INCENTIVE STOCK OPTIONS
An Option designated by the Committee as an "Incentive Stock Option" is
intended to qualify as an "incentive stock option" within the meaning of Section
422 of the Code and shall satisfy, in addition to the conditions of Section V,
the conditions set forth in this Section VI.
The purchase price of the Common Stock subject to an Incentive Stock Option
shall be the greater of the Fair Market Value of the Common Stock on the Grant
Date or the "fair market value" of the Common Stock as such term is used for
purposes for Section 422(b)(4) of the Code.
An Incentive Stock Option shall not be granted to an employee who, on the
Grant Date, owns stock possessing more than ten percent of the total combined
voting power of all classes of stock of SFER, or of its parent or subsidiary
corporations.
VII. RESTRICTED STOCK
The Committee may, from time to time and subject to the provisions of the
Plan, grant Awards of Restricted Stock to employees of the Company; provided,
however, no employee may receive in any calendar year Restricted Stock Awards
with respect to more than 500,000 shares of Common Stock.
The Committee shall, at the time shares of Restricted Stock are granted,
designate the Restricted Period and the performance goals, if any, of the
Company with respect to such Award. Such goals must be achieved (and certified
by the Committee) in order for a Participant to receive the unrestricted shares
of Common Stock at the designated time.
With respect to any Restricted Stock Award that is intended to meet the
requirements of Section 162(m) of the Code, the performance goal or goals for
such Award shall be with respect to one or more of the following: earnings per
share; earnings before interest, taxes, depreciation and amortization expenses
("EBITDA"); earnings before interest and taxes ("EBIT"); EBITDA, EBIT or
earnings before taxes and unusual or nonrecurring items as measured either
against the annual budget or as a ratio to revenue; market share; sales; costs;
return on equity; operating cash flow; production volumes compared to plan or
prior years; reserves added; discretionary cash flow; return on net capital
employed and/or stock price performance. The goals can be applied, where
appropriate, with respect to an individual, a business unit or the Company as a
whole and need not be based on increases or positive results, but can be based
on maintaining the status quo or limiting economic losses, for example. Which
goals to use with respect to such Award, the weighting of the goals if more than
one is used, and whether the goal is to be measured against a
Company-established budget or target, an index or a peer group of companies,
shall also be determined by the Committee at the time of grant of the Award.
Each certificate representing Restricted Stock awarded under the Plan shall
be registered in the name of the Participant and, during the Restricted Period,
shall be left on deposit with the Company with a stock
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power endorsed in blank. Participants shall have the right to receive dividends
paid on their Restricted Stock and to vote such shares. Restricted Stock may not
be sold, pledged, assigned, transferred or encumbered during the Restricted
Period other than by will or the laws of descent and distribution.
Termination for Cause, as defined in Section I, shall result in forfeiture
of all outstanding Restricted Stock. Termination by the Company for any reason
other than Cause (including terminations pursuant to formal severance programs
sponsored by the Company or an affiliate), or termination by reason of death,
Disability or Retirement, shall result in a lapse on all or a portion of the
Restricted Period applicable to any outstanding Award as set forth in Section
XI.
Notwithstanding any other provisions in the Plan, if a Change in Control
occurs while any shares of Restricted Stock remain subject to restrictions
relating thereto, then from and after the Acceleration Date, (1) all such
restrictions and all Restricted Periods shall lapse and (2) no later than the
fifth day following the Acceleration Date, any Restricted Stock theretofore
granted a Participant shall be delivered to the Participant; provided, however,
that no restriction or Restricted Period shall lapse or payment or benefit shall
be made by reason of this paragraph to the extent that such lapse or payment or
benefit, when aggregated with other payments or benefits to the Participant
pursuant to this Plan or any other plan, arrangement or agreement with the
Company, any person whose actions result in a Change in Control or any person
affiliated with the Company or such person, would, as determined by tax counsel
selected by the Company, result in Excess Parachute Payments equal to or greater
than three times the "base amount" as defined in Section 280G of the Code.
"Excess Parachute Payments" shall mean "parachute payments" as defined in
Section 280G of the Code other than (1) health and life insurance benefits and
(2) payments attributable to any award, benefit or other compensation plan or
program based upon the number of full or fractional months of any restricted
period (relating thereto) which has elapsed prior to the date of the Change in
Control. Furthermore, such payments or benefit provided to a Participant under
this Plan shall be reduced to the extent necessary so that no portion thereof
shall be subject to the excise tax imposed by Section 4999 of the Code, but only
if, by reason of such reduction, the Participant's net after tax benefit shall
exceed the net after tax benefit if such reduction were not made. "Net after tax
benefit" shall have the meaning prescribed in Section V.
VIII. STOCK APPRECIATION RIGHTS
The Committee may, from time to time and subject to the provisions of the
Plan, grant Awards of Stock Appreciation Rights to employees of the Company
subject to the limitation in Section II. An Award of Stock Appreciation Rights,
in the Committee's discretion, may or may not be made in tandem with the grant
of an Option, and need not be granted at the same time as the Option grant to be
made in tandem with the Option grant.
The period of any Stock Appreciation Right, which is the time period during
which the Stock Appreciation Right may be exercised, shall be determined by the
Committee and shall not extend more than ten years after the Grant Date or, if
in tandem with an Option, the period of such Option.
Stock Appreciation Rights shall not be transferable other than by will or
the laws of descent and distribution and during the Participant's lifetime shall
be exercisable only by the Participant.
Termination for Cause, as defined in Section I, shall result in forfeiture
of all outstanding Stock Appreciation Rights. Termination by the Company for any
reason other than Cause (including terminations pursuant to formal severance
programs sponsored by the Company or an affiliated company), or termination by
reason of death, Disability or Retirement, shall result in a lapse on all or a
portion of the Restricted Period applicable to any outstanding Award as set
forth in Section XI.
Subject to any restrictions or conditions imposed by the Committee, upon
the exercise of a Stock Appreciation Right, the Company shall pay the amount, if
any, by which the Fair Market Value of a share of Common Stock on the date of
exercise exceeds the Fair Market Value of a share of Common Stock on the Grant
Date. The amount payable by the Company upon the exercise of a Stock
Appreciation Right may be paid in cash or in shares of Common Stock or in any
combination thereof as the Committee, in its sole
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discretion, shall determine, but no fractional shares shall be issuable pursuant
to any Stock Appreciation Right.
A person electing to exercise a Stock Appreciation Right shall give written
notice of such election to the Company in such form as the Committee may
require. The exercise of Stock Appreciation Rights or Options granted in tandem
will result in an equal reduction in the number of corresponding Options or
Stock Appreciation Rights which were granted in tandem with such Stock
Appreciation Rights and Options.
The Change in Control provisions in Section V, concerning Options and Stock
Appreciation Rights granted in tandem with an Option, shall also apply to Stock
Appreciation Rights that are not granted in tandem with Options.
IX. PHANTOM UNITS
The Committee may, from time to time and subject to the provisions of the
Plan, grant Awards of Phantom Units to employees of the Company; provided,
however, no employee may receive in any calendar year Phantom Unit Awards with
respect to more than 500,000 shares of Common Stock. Phantom Units may not be
sold, pledged, assigned, transferred or encumbered during the Restricted Period,
other than by will or the laws of descent and distribution.
The Committee shall, at the time Phantom Units are granted, designate the
Restricted Period and the performance goals, if any, of the Company with respect
to such Award. Such goals must be achieved (and certified by the Committee) in
order for a Participant to receive the value of the Phantom Units at the
designated time. To the extent earned in accordance with this Section and the
grant of such Award, all such Phantom Units must be paid as soon as practicable
following the end of the Restricted Period in cash or in shares of Common Stock
or in any combination thereof as the Committee, in its sole discretion shall
determine, but no fractional shares shall be issuable pursuant to any Phantom
Unit.
With respect to any Phantom Unit Award that is intended to meet the
requirements of Section 162(m) of the Code, the performance goal or goals for
such Award shall be with respect to one or more of the following: earnings per
share; earnings before interest, taxes, depreciation and amortization expenses
("EBITDA"); earnings before interest and taxes ("EBIT"); EBITDA, EBIT or
earnings before taxes and unusual or nonrecurring items as measured either
against the annual budget or as a ratio to revenue; market share; sales; costs;
return on equity; operating cash flow; production volumes compared to plan or
prior years; reserves added; discretionary cash flow; return on net capital
employed and/or stock price performance. The goals can be applied, where
appropriate, with respect to an individual, a business unit or the Company as a
whole and need not be based on increases or positive results, but can be based
on maintaining the status quo or limiting economic losses, for example. Which
goals to use with respect to such Award, the weighting of the goals if more than
one is used, and whether the goal is to be measured against a
Company-established budget or target, an index or a peer group of companies,
shall also be determined by the Committee at the time of grant of the Award.
At the discretion of the Committee, Phantom Units (other than those
intended to meet the requirements of Section 162(m) of the Code) may at any time
be converted into Non-Qualified Stock Options, Bonus Stock or shares of
Restricted Stock or any combination thereof having a value, as determined in the
good faith judgment of the Committee, substantially equal to the value of the
Phantom Units so converted.
Termination for Cause, as defined in Section I, shall result in forfeiture
of all outstanding Phantom Units. Termination by the Company for any reason
other than Cause (including terminations pursuant to formal severance programs
sponsored by the Company or an affiliate), or termination by reason of death,
Disability or Retirement, shall result in a lapse on all or a proportion of the
Restricted Period applicable to any outstanding Award as set forth in Section
XI.
Notwithstanding any other provisions in the Plan, if a Change in Control
occurs while any Phantom Units remain outstanding, then from and after the
Acceleration Date, (1) all designated goals shall be deemed to have been met and
(2) no later than the fifth day following the Acceleration Date, the full value
of all such Phantom Units shall be paid to the Participant in cash; provided,
however, that no payment or benefit shall be
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made by reason of this paragraph to the extent that such payment or benefit,
when aggregated with other payments or benefits to the Participant pursuant to
this Plan or any other plan, arrangement or agreement with the Company, any
person whose actions result in a Change in Control or any person affiliated with
the Company or such person, would, as determined by tax counsel selected by the
Company, result in Excess Parachute Payments equal to or greater than three
times the "base amount" as defined in Section 280G of the Code. "Excess
Parachute Payments" shall mean "parachute payments" as defined in Section 280G
of the Code other than (1) health and life insurance benefits and (2) payments
attributable to any award, benefit or other compensation plan or program based
upon the number of full or fractional months of any restricted period (relating
thereto) which has elapsed prior to the date of the Change in Control.
Furthermore, such payments or benefit provided to a Participant under this Plan
shall be reduced to the extent necessary so that no portion thereof shall be
subject to the excise tax imposed by Section 4999 of the Code, but only if, by
reason of such reduction, the Participant's net after tax benefit shall exceed
the net after tax benefit if such reduction were not made. "Net after tax
benefit" shall have the meaning prescribed in Section V.
X. CONTINUED EMPLOYMENT
Participation in the Plan shall confer no rights to continued employment
with the Company, nor shall it restrict the rights of the Company to terminate a
Participant's employment relationship at any time.
XI. TERMINATION OF EMPLOYMENT
In the event of a Participant's termination of employment with the Company
by reason of death, the Restricted Period shall lapse on all of the
Participant's outstanding Awards.
In the event of a Participant's termination of employment with the Company
by reason of Disability, Retirement or by the Company for any reason other than
Cause, a portion of all of the Participant's outstanding Awards shall be
immediately forfeited to the extent not then otherwise vested. The portion of an
Award forfeited shall be a fraction, the denominator of which is the total
number of months of any Restricted Period applicable to the Award (rounded up to
the nearest whole month) and the numerator of which is the number of months
remaining in such Restricted Period (rounded up to the nearest whole month) as
of the termination of employment.
Unless the Committee directs the acceleration of the payment of that
portion of an Award of Phantom Units or Restricted Stock that is not
automatically forfeited as provided above upon the Participant's termination of
employment, such Phantom Units and Restricted Stock shall be payable or issued,
as the case may be, at the end of the Restricted Period applicable to such
Awards, but only to the extent otherwise payable pursuant to the Award Agreement
evidencing such Phantom Units or Restricted Stock, e.g., the goals, if any, for
such Award are achieved. However, the Committee shall not accelerate the payment
of any Award intended to qualify under Section 162(m). Any such Awards not
payable or earned at the end of such Restricted Period, as provided above, shall
be forfeited at such time.
Phantom Units and Restricted Stock upon which the Restricted Period lapse
as provided above shall be paid or issued to the Participant or, in the case of
death prior to such payment or issuance, to the Participant's designated
beneficiary, or in the absence of such designation, to the person to whom the
Participant's rights pass by will or the laws of descent and distribution.
Options and Stock Appreciation Rights which are or become exercisable at
the time of a Participant's termination of employment with the Company (i) by
reason of Disability or Retirement or by the Company for any reason other than
Cause, may be exercised by the Participant within three years following such
termination of employment and (ii) for any reason other than Cause, death or a
reason specified in (i), may be exercised by the Participant within three months
following such termination but, in either event, not after the expiration of the
period of the Option or Stock Appreciation Right. Options and Stock Appreciation
Rights which are or become exercisable at the time of a Participant's
termination of employment with the Company by reason of death, may be exercised
by the Participant's designated beneficiary, or in the absence of such
designation, by the person to whom the Participant's rights pass by will or the
laws of descent and distribution at any time within three years after the
Participant's death but not after the expiration of the
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period of the Option or Stock Appreciation Right. Options and Stock Appreciation
Rights that do not become exercisable as provided above, or that are not
otherwise vested, shall be forfeited on termination.
In the event of a Participant's termination of employment with the Company
for any reason other than as provided above, all Awards not otherwise vested or
earned as of the date of such termination of employment shall be immediately
forfeited on termination.
If a Participant's employer ceases to be a part of the Company as defined
in Section I, such Participant shall be deemed to have been involuntarily
terminated by the Company (other than for Cause) as of the date the
Participant's employer so ceased to be a company of which more than 50% of the
voting stock is owned directly or indirectly by SFER.
Notwithstanding the foregoing however, the Committee may determine that
termination of employment by reasons of any other special circumstances not set
forth above shall not terminate an Award or a portion thereof.
XII. AWARD AGREEMENT
Each person granted an Award pursuant to the Plan shall sign an Award
Agreement which signifies the offer of the Award by the Company and the
acceptance of the Award by the person in accordance with the terms of the Award
and the provisions of the Plan. Each Award Agreement shall reflect the terms and
conditions of the Award.
XIII. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION
In the event of a change in the capitalization of SFER due to a stock
split, stock dividend, recapitalization, merger, consolidation, combination, or
similar event, the aggregate shares subject to the Plan and the terms of any
existing Awards shall be adjusted by the Committee to reflect such change.
XIV. LIMITED STOCK APPRECIATION RIGHTS
(a) The Committee shall have authority to grant a Limited Right to the
holder of any Option with respect to all or some of the shares of Common Stock
covered by such Option. A Limited Right may be granted either at the time of
grant of the Related LSAR Option or any time thereafter during its term. A
Limited Right may be exercised only during the sixty-day period beginning on an
Acceleration Date. Each Limited Right shall be exercisable only if, and to the
extent that, the Related LSAR Option or Director Option is exercisable.
Notwithstanding the provisions of the two immediately preceding sentences, if a
Limited Right becomes exercisable by a holder who is subject to Section 16 of
the Exchange Act within six months of its date of grant, such Limited Right
shall remain exercisable until the expiration of eight months from the date of
grant of the Limited Right. Upon the exercise of a Limited Right, the Related
LSAR Option (and any tandem Stock Appreciation Right) shall cease to be
exercisable to the extent of the shares of Common Stock with respect to which
such Limited Right is exercised, but shall be considered to have been exercised
to that extent for purposes of determining the number of shares of Common Stock
available for the grant of further Options, Stock Appreciation Rights and
Limited Rights pursuant to this Plan. Upon the exercise or termination of a
Related LSAR Option, the Limited Right with respect to such Related LSAR Options
shall terminate to the extent of the shares of Common Stock with respect to
which the Related LSAR Option was exercised or terminated.
(b) Upon the exercise of a Limited Right, the holder thereof shall receive
in cash whichever of the following amounts is applicable:
(i) in the case of an exercise of Limited Rights by reason of an
acquisition of Common Stock described in clause (a) of the
definition of Change in Control contained in Section I hereof, an
amount equal to the Acquisition Spread (as defined in Subsection
(d) hereof);
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(ii) in the case of an exercise of Limited Rights by reason of the
change in composition of the Board of Directors described in
clause (b) of the definition of Change in Control contained in
Section I hereof, an amount equal to the Spread (as defined in
Subsection (g) hereof); or
(iii) in the case of an exercise of Limited Rights by reason of
stockholder approval of an agreement or adoption of a plan
described in clause (c) or (d) of the definition of Change in
Control contained in Section I hereof, an amount equal to the
Merger Spread (as defined in Subsection (f) hereof).
Notwithstanding the foregoing provisions of this Section XIV(b), (i) in the
case of a Limited Right granted in respect of an Incentive Stock Option, the
holder may not receive an amount in excess of the maximum amount that will
enable such option to continue to qualify as an Incentive Stock Option, and (ii)
no payment shall occur by reason of this Section XIV(b) to the extent that such
payment, when aggregated with other payments or benefits to the Participant,
would as determined by tax counsel selected by the Company, result in an Excess
Parachute Payment equal to or greater than three times the "base amount" as
defined in Section 280G of the Code. Furthermore, such payments or benefits
provided to a Participant under this Plan shall be reduced to the extent
necessary so that no portion thereof shall be subject to the excise tax imposed
by Section 4999 of the Code, but only if, by reason of such reduction, the
Participant's net after tax benefit shall exceed the net after tax benefit if
such reduction were not made. "Net after tax benefit" shall have the meaning
prescribed in Section V.
(c) The term "Acquisition Price Per Share" as used in this Section XIV
shall mean, with respect to the exercise of any Limited Right by reason of an
acquisition of Common Stock described in clause (a) of the definition of Change
in Control contained in Section I, the highest Fair Market Value per share of
Common Stock during the sixty-day period ending on the date the Limited Right is
exercised.
(d) The term "Acquisition Spread" as used in this Section XIV shall mean an
amount equal to the product obtained by multiplying (i) the excess of (A) the
Acquisition Price Per Share over (B) the price per share of Common Stock at
which the Related LSAR Option is exercisable, by (ii) the number of shares of
Common Stock with respect to which such Limited Right is being exercised.
(e) The term "Merger Price Per Share" as used in this Section XIV shall
mean, with respect to the exercise of any Limited Right by reason of stockholder
approval of an agreement or adoption of a plan described in clause (c) or (d) of
the definition of Change in Control contained in Section I, the greater of (i)
the fixed or formula price for the acquisition of shares of Common Stock
specified in such agreement or adoption, if such fixed or formula price is
determinable on the date on which such Limited Right is exercised, and (ii) the
highest Fair Market Value per share of Common Stock during the sixty-day period
ending on the date on which such Limited Right is exercised.
(f) The term "Merger Spread" as used in this Section XIV shall mean an
amount equal to the product obtained by multiplying (i) the excess of (A) the
Merger Price Per Share over (B) the price per share of Common Stock at which the
Related LSAR Option is exercisable, by (ii) the number of shares of Common Stock
with respect to which such Limited Right is being exercised.
(g) The term "Spread" as used in this Section XIV shall mean, with respect
to the exercise of any Limited Right by reason of a change in the composition of
the Board described in clause (b) of the definition of Change in Control
contained in Section I, an amount equal to the product obtained by multiplying
(i) the excess of (A) the highest Fair Market Value per share of Common Stock
during the sixty-day period ending on the date the Limited Right is exercised
over (B) the price per share of Common Stock at which the Related LSAR Option is
exercisable, by (ii) the number of shares of Common Stock with respect to which
the Limited Right is being exercised.
(h) A Limited Right shall not be transferable except by will or by the laws
of descent and distribution. During the lifetime of a Participant, the Limited
Right shall be exercisable only by such Participant or by the Participant's
guardian or legal representative.
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(i) Each Limited Right shall be granted on such terms and conditions not
inconsistent with the Plan as the Committee may determine.
(j) To exercise a Limited Right, the Participant shall (i) give written
notice thereof to the Committee in form satisfactory to the Committee specifying
the number of shares of Common Stock with respect to which the Limited Right is
being exercised, and (ii) if requested by the Committee, deliver the option
agreement to the Committee, who shall endorse thereon a notation of such
exercise and return the option agreement to the Participant. The date of
exercise of a Limited Right that is validly exercised shall be deemed to be the
date on which there shall have been delivered the instruments referred to in the
first sentence of this paragraph (j).
(k) The Company intends that this Section XIV shall comply with the
requirements of Rule 16b-3 and any future rules promulgated in substitution
therefor ("the Rule") under the Exchange Act during the term of the Plan. Should
any provision of this Section XIV not be necessary to comply with the
requirements of the Rule or should any additional provisions be necessary for
this Section XIV to comply with the requirements of the Rule, the Board may
amend the Plan to add to or modify the provisions of the Plan accordingly.
XV. BONUS STOCK
The Committee may, from time to time and subject to the provision of the
Plan, grant Awards of Bonus Stock to employees of the Company. In addition, the
Committee shall have the authority to pay in shares of Common Stock all or any
portion of the cash amounts payable under any other compensation program of the
Company, but not exceeding $2 million with respect to any employee during any
calendar year.
XVI. SECURITIES LAW AGREEMENT
If, at the time of the exercise of any Option, Director Option, or Stock
Appreciation Right or Award of Restricted Stock or Bonus Stock, in the opinion
of counsel for the Company, it is necessary or desirable, in order to comply
with any then applicable laws or regulations relating to the sale of securities,
for the individual exercising the Option, Director Option, or Stock Appreciation
Right or receiving the Restricted Stock or Bonus Stock to agree to hold any
shares issued to the individual for investment and without intention to resell
or distribute the same and for the individual to agree to dispose of such shares
only in compliance with such laws and regulations, the individual will, upon the
request of the Company, execute and deliver to the Company a further agreement
to such effect.
XVII. WITHHOLDING FOR TAXES
Any cash payment under the Plan shall be reduced by any amounts required to
be withheld or paid with respect thereto under all present or future federal,
state and local taxes and other laws and regulations that may be in effect as of
the date of each such payment ("Tax Amounts"). Any issuance of Common Stock
pursuant to the exercise of an Option or other distribution of Common Stock
under the Plan shall not be made until appropriate arrangements have been made
for the payment of any amounts that may be required to be withheld or paid with
respect thereto. Such arrangements may, at the discretion of the Committee,
include allowing the Participant to tender to the Company shares of Common Stock
owned by the Participant, being part of the broker-cash less exercise procedure;
or to request the Company to withhold a portion of the shares of Common Stock
being acquired pursuant to the exercise or otherwise distributed to the
Participant, which have a Fair Market Value per share as of the date of such
Award exercise, tender or withholding that is not greater than the sum of all
Tax Amounts, together with payment of any remaining portion of all Tax Amounts
in cash or by check payable and acceptable to the Company.
XVIII. AUTOMATIC DIRECTOR AWARDS
Each Director who served in such capacity the date this Third Amendment and
Restatement of the Plan was approved by the Board shall automatically receive on
the first of the month following such date, a Director Option for 10,000 shares
of Common Stock. Each Director who is elected or appointed to the Board for the
first time after that initial grant date shall automatically receive, on the
date of his or her election or appointment, a Director Option for 10,000 shares
of Common Stock.
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On the date of the regular Annual Meeting of Stockholders of the Company in
each year that this Plan is in effect (commencing with the 1996 Annual Meeting
of Stockholders), each Director who is serving on that day, including a Director
who was elected for the first time at such annual meeting, shall automatically
receive the following:
1. Director Options. A Director Option grant for 5,000 shares of
Common Stock. Each Director Option will be subject to all of the
limitations contained in the following provisions:
(a) Each Director Option shall become exercisable (vested) on the
earlier of (i) the first day that is more than six months following its
Grant Date or (ii) an Acceleration Date occurring after the Grant Date,
provided that in no event shall any Director Option be exercisable prior
to the approval of this Plan by the Company's stockholders.
(b) The option purchase price of each Director Option shall be the
Fair Market Value of the Common Stock on its effective Grant Date.
(c) Each Director Option shall automatically include a Limited
Right, as if granted pursuant to Section XIV.
(d) Each Director Option that is vested may be exercised in full at
one time or in part from time to time by giving written notice to the
Company, stating the number of shares of Common Stock with respect to
which the Director Option is being exercised, accompanied by payment in
full of the option purchase price for such shares, which payment may be
(i) in cash by check acceptable to the Company, (ii) by the transfer to
the Company of shares of Common Stock already owned by the optionee
having an aggregate Fair Market Value at the date of exercise equal to
the aggregate option purchase price, (iii) from the proceeds of a sale
through a broker of some or all of the shares to which such exercise
relates, or (iv) by a combination of such methods of payment.
(e) Each Director Option shall expire 10 years from the Grant Date
thereof, but shall be subject to earlier termination as follows: (1) to
the extent exercisable as of the date a Director ceases to serve as a
director of the Company (the "Resignation Date"), the Director Option
may be exercised only within three years of such Resignation Date by the
optionee or the optionee's legal representative or the person to whom
the Nonemployee Director's rights shall pass by will or the laws of
descent and distribution, as the case may be, and to the extent not so
exercised shall terminate on the third anniversary of the Resignation
Date and (2) to the extent not exercisable as of the Resignation Date,
the Director Option shall terminate on such Resignation Date.
2. Restricted Stock. A Restricted Stock Award for 1,000 shares of
Common Stock.
(a) The Restricted Period shall lapse on an Award of Restricted
Stock granted pursuant to this Section XVIII upon the earlier of the
date that is six months and one day after the Grant Date, the Director's
death, Retirement, or Disability or the occurrence of a Change in
Control. If a Director ceases to be a member of the Board during a
Restricted Period for any reason other than death, Disability or
Retirement, the Restricted Stock subject to such Restricted Period shall
be forfeited.
(b) Each certificate representing Restricted Stock awarded
hereunder shall be registered in the name of the Director and, during
the Restricted Period, shall be left on deposit with SFER with a stock
power endorsed in blank. Directors shall have the right to receive
dividends paid on their Restricted Stock and to vote such shares.
Restricted Stock may not be sold, pledged, assigned, transferred or
encumbered during the Restricted Period other than by will or the laws
of descent and distribution.
In the event that the number of shares of Common Stock available for
Director Awards under this Plan is insufficient to make all automatic Awards
provided for in this Section XVIII on the applicable date, then all Directors
who are entitled to a grant on such date shall share ratably in the number of
shares then available for grant under this Plan (Restricted Stock Awards shall
be made first, then the Director Options), and shall have
A-13
no right to receive a grant with respect to the deficiencies in the number of
available shares and all future grants under this Section XVIII shall terminate.
Grants made pursuant to this Section XVIII shall be subject to all of the
terms and conditions of this Plan; however, if there is a conflict between the
terms and conditions of this Section XVIII and the terms and conditions of any
other Section, then the terms and conditions of this Section XVIII shall
control. The Committee may not exercise any discretion with respect to this
Section XVIII which would be inconsistent with the intent that this Plan meet
the requirements of Rule 16b-3.
XIX. DESIGNATION OF BENEFICIARY
Each Participant to whom an Award has been made under this Plan may
designate a beneficiary or beneficiaries (which beneficiary may be an entity
other than a natural person) to exercise any rights or receive any payment that
under the terms of such Award may become exercisable or payable on or after the
Participant's death. At any time, and from time to time, any such designation
may be changed or canceled by the Participant without the consent of any such
beneficiary. Any such designation, change or cancellation must be on a form
provided for that purpose by the Committee and shall not be effective until
received by the Committee. If no beneficiary has been named by a deceased
Participant, or the designated beneficiaries have predeceased the Participant,
the beneficiary shall be the Participant's estate. If a Participant designates
more than one beneficiary, any such exercise or payment under this Plan shall be
made in equal shares unless the Participant has designated otherwise, in which
case the exercise or payment shall be made in the shares designated by the
Participant.
XX. PREEMPTION BY APPLICABLE LAWS AND REGULATIONS
Anything in the Plan or any agreement entered into pursuant to the Plan to
the contrary notwithstanding, if, at any time specified herein or therein for
the making of any determination, the issuance or other distribution of shares of
Common Stock, the payment of consideration to an employee as a result of the
exercise of any Stock Appreciation Right or Limited Right, or the payment of any
Phantom Units, as the case may be, any law, regulation or requirement of any
governmental authority having jurisdiction in the premises shall require either
the Company or the Participant (or the Participant's beneficiary), as the case
may be, to take any action in connection with any such determination, the shares
then to be issued or distributed, or such payment, the issue or distribution of
such shares or the making of such determination or payment, as the case may be,
shall be deferred until such action shall have been taken.
XXI. EFFECTIVE DATE AND DURATION OF PLAN
This Plan amendment and restatement shall become effective upon its
approval by the stockholders of SFER. Unless previously terminated by the Board,
the Plan shall terminate on the tenth anniversary of its approval by the
stockholders; provided, however, that such termination shall not terminate any
Award then outstanding. No Awards shall be made pursuant to this Plan after
December 31, 1999.
XXII. TERMINATION AND AMENDMENT
The Board may suspend, terminate, modify or amend the Plan, provided that
any amendment that would increase the aggregate number of shares which may be
issued under the Plan or materially modify the requirements as to eligibility
for participation in the Plan, shall be subject to the approval of SFER's
stockholders, except that any such increase or modification that may result from
adjustments authorized by Section XIII does not require such approval; provided,
further, that no amendment or modification shall be made to Section XVIII more
than once every six months, other than to comport with changes in the Code or
the Employee Retirement Income Security Act of 1974, as amended, or rules
promulgated thereunder. No suspension, termination, modification or amendment of
the Plan may terminate a Participant's existing Award or materially adversely
affect a Participant's rights under such Award.
A-14
XXIII. MISCELLANEOUS
(a) Nothing contained in the Plan shall be construed as conferring upon any
employee the right to continue in the employ of the Company.
(b) No person shall have any rights as a stockholder with respect to shares
covered by such person's Option, Director Option, Stock Appreciation Rights or
Restricted Stock award until the date of the issuance of shares pursuant
thereto. No adjustment will be made for dividends or other distributions or
rights for which the record date is prior to the date of such issuance. An
employee shall have no rights as a stockholder with respect to any award of
Phantom Units under the Plan.
(c) Nothing contained in the Plan shall be construed as giving any person,
such person's beneficiaries or any other person any equity or other interest of
any kind in any assets of the Company or creating a trust of any kind or a
fiduciary relationship of any kind between the Company and any such person.
(d) Nothing contained in the Plan shall be construed to prevent the Company
from taking any corporate action that is deemed by the Company to be appropriate
or in its best interest, whether or not such action would have an adverse effect
on the Plan or any award made under the Plan. No employee, beneficiary or other
person shall have any claim against the Company as a result of any such action.
(e) No grantee nor any beneficiary thereof shall have the power or right to
sell, exchange, pledge, transfer, assign or otherwise encumber or dispose of any
such grantee's or beneficiary's interest arising under the Plan or in any Award
received under the Plan; nor shall such interest be subject to seizure for the
payment of any grantee's or beneficiary's debts, judgments, alimony, or separate
maintenance or be transferable by operation of law in the event of a grantee's
or beneficiary's bankruptcy or insolvency and to the extent any such interest
arising under the Plan or Award received under the Plan is awarded to a spouse
pursuant to any divorce proceeding, such interest shall be deemed to be
terminated and forfeited notwithstanding any vesting provisions or other terms
herein or in the agreement evidencing such award.
(f) All rights and obligations under the Plan shall be governed by, and the
Plan shall be construed in accordance with, the laws of the State of Texas
without regard to the principles of conflicts of laws. Titles and headings to
Sections herein are for purposes of reference only, and shall in no way limit,
define or otherwise affect the meaning or interpretation of any provisions of
the Plan.
A-15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF MARCH 31, 1996 AND THE INCOME STATEMENT FOR THE THREE MONTHS ENDED
MARCH 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 50,400
<SECURITIES> 0
<RECEIVABLES> 95,000
<ALLOWANCES> 2,000
<INVENTORY> 9,700
<CURRENT-ASSETS> 171,500
<PP&E> 2,422,500
<DEPRECIATION> 1,513,500
<TOTAL-ASSETS> 1,094,300
<CURRENT-LIABILITIES> 155,600
<BONDS> 0
171,400
0
<COMMON> 900
<OTHER-SE> 356,400
<TOTAL-LIABILITY-AND-EQUITY> 1,094,300
<SALES> 123,500
<TOTAL-REVENUES> 123,500
<CGS> 94,000
<TOTAL-COSTS> 94,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,300
<INCOME-PRETAX> 21,400
<INCOME-TAX> 8,800
<INCOME-CONTINUING> 12,600
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,600
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0.10
</TABLE>
