UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1999
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Commission File Number 0-20872
ST. MARY LAND & EXPLORATION COMPANY
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(Exact name of Registrant as specified in its charter)
Delaware 41-0518430
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(State or other Jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1776 Lincoln Street, Suite 1100, Denver, Colorado 80203
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(Address of principal executive offices) (Zip Code)
(303) 861-8140
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(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock as of the latest practicable date.
As of May 13, 1999 the registrant had 10,827,067 shares of Common Stock, $.01
par value, outstanding.
<PAGE>
ST. MARY LAND & EXPLORATION COMPANY
INDEX
Part I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements (Unaudited)
Consolidated Balance
Sheets - March 31, 1999 and
December 31, 1998 ........................................ 3
Consolidated Statements of
Operations - Three Months Ended
March 31, 1999 and 1998................................... 4
Consolidated Statements of
Cash Flows - Three Months Ended
March 31, 1999 and 1998 ....... .......................... 5
Notes to Consolidated Financial
Statements - March 31, 1999 .............................. 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations............................................. 9
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ........................ 22
Exhibits
10.1 St. Mary Land & Exploration Company Incentive Stock
Option Plan, As Amended on March 25, 1999
10.2 St. Mary Land & Exploration Company Stock Option
Plan, As Amended on March 25, 1999
10.3 Net Profits Interest Bonus Plan, As Amended on
September 19, 1996 and July 24, 1997 and
January 28, 1999
27.1 Financial Data Schedule
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<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ST. MARY LAND & EXPLORATION COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except share amounts)
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
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1999 1998
-------------- --------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 5,727 $ 7,821
Accounts receivable 14,388 17,937
Prepaid expenses and other 564 795
Refundable income taxes 322 391
Deferred income taxes 125 125
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Total current assets 21,126 27,069
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Property and equipment (successful efforts method), at cost:
Proved oil and gas properties 245,334 241,021
Unproved oil and gas properties, net of impairment
allowance of $4,155 in 1999 and $5,987 in 1998 28,422 25,588
Other property and equipment 4,081 4,051
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277,837 270,660
Less accumulated depletion, depreciation, amortization and impairment (131,546) (126,835)
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146,291 143,825
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Other assets:
Khanty Mansiysk Oil Corporation receivable and stock 6,839 6,839
Summo Minerals Corporation investment and receivable 3,012 2,869
Restricted cash - 720
Other assets 3,471 3,175
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13,322 13,603
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$ 180,739 $ 184,497
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 15,183 $ 16,926
Current portion of stock appreciation rights 358 358
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Total current liabilities 15,541 17,284
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Long-term liabilities:
Long-term debt 17,898 19,398
Deferred income taxes 11,153 11,158
Stock appreciation rights 279 422
Other noncurrent liabilities 1,690 1,493
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31,020 32,471
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Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value: authorized - 50,000,000 shares: issued and
outstanding - 11,009,867 shares in 1999 and 10,992,447 shares in 1998 110 110
Additional paid-in capital 67,856 67,761
Treasury stock - at cost: 182,800 shares in 1999 and 147,800 shares in 1998 (2,995) (2,470)
Retained earnings 69,207 69,341
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Total stockholders' equity 134,178 134,742
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$ 180,739 $ 184,497
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</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
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<PAGE>
ST. MARY LAND & EXPLORATION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
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1999 1998
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<S> <C> <C>
Operating revenues:
Oil and gas production $ 13,769 $ 19,025
Gain on sale of proved properties 195 -
Other revenues 146 114
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Total operating revenues 14,110 19,139
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Operating expenses:
Oil and gas production 3,994 3,943
Depletion, depreciation and amortization 5,402 5,377
Impairment of proved properties - 368
Exploration 1,739 3,421
Abandonment and impairment of unproved properties 464 303
General and administrative 1,608 2,947
Loss in equity investees 45 61
Other 125 35
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Total operating expenses 13,377 16,455
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Income from operations 733 2,684
Nonoperating income and (expense):
Interest income 96 155
Interest expense (241) (394)
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Income before income taxes 588 2,445
Income tax expense 179 775
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Net income $ 409 $ 1,670
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Basic net income per common share $ .04 $ .15
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Diluted net income per common share $ .04 $ .15
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Basic weighted average common shares outstanding 10,846 10,983
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Diluted weighted average common shares outstanding 10,858 11,125
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Cash dividend declared per share $ 0.05 $ 0.05
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</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
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<PAGE>
ST. MARY LAND & EXPLORATION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
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1999 1998
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<S> <C> <C>
Reconciliation of net income to net cash provided by operating activities:
Net income $ 409 $ 1,670
Adjustments to reconcile net income to net
cash provided by operating activities:
Gain on sale of proved properties (195) -
Depletion, depreciation and amortization 5,402 5,377
Impairment of proved properties - 368
Exploration (95) 916
Abandonment and impairment of unproved properties 464 303
Loss in equity investees 45 61
Deferred income taxes (5) 285
Other 166 97
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6,191 9,077
Changes in current assets and liabilities:
Accounts receivable 3,549 2,300
Prepaid expenses and other 1,050 73
Accounts payable and accrued expenses (2,738) 6,169
Stock appreciation rights - (351)
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Net cash provided by operating activities 8,052 17,268
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Cash flows from investing activities:
Proceeds from sale of oil and gas properties 804 52
Capital expenditures (7,159) (18,108)
Acquisition of oil and gas properties (1,475) (1,189)
Investment in and loans to Summo Minerals Corporation (188) (235)
Receipts from restricted cash 720 -
Other (297) 618
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Net cash used in investing activities (7,595) (18,862)
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Cash flows from financing activities:
Proceeds from long-term debt 4,175 11,700
Repayment of long-term debt (5,675) (12,917)
Proceeds from sale of common stock 17 -
Repurchase of common stock (525) -
Dividends paid (543) (549)
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Net cash used in financing activities (2,551) (1,766)
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Net decrease in cash and cash equivalents (2,094) (3,360)
Cash and cash equivalents at beginning of period 7,821 7,112
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Cash and cash equivalents at end of period $ 5,727 $ 3,752
============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
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<PAGE>
ST. MARY LAND & EXPLORATION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Continued)
Supplemental schedule of additional cash flow information and noncash
activities:
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
--------------------------
1999 1998
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(In thousands)
<S> <C> <C>
Cash paid for interest $ 270 $ 326
Cash paid for income taxes 115 30
Cash paid for exploration expenses 1,485 3,266
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
-6-
<PAGE>
ST. MARY LAND & EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
March 31, 1999
Note 1 - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information. They do not include all information and notes
required by generally accepted accounting principles for complete financial
statements. However, except as disclosed herein, there has been no material
change in the information disclosed in the notes to consolidated financial
statements included in the Annual Report on Form 10-K of St. Mary Land &
Exploration Company and Subsidiaries (the "Company") for the year ended December
31, 1998. In the opinion of Management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the periods presented are not necessarily
indicative of the results that may be expected for the full year.
The accounting policies followed by the Company are set forth in Note 1
to the Company's financial statements in Form 10-K for the year ended December
31, 1998. It is suggested that these financial statements be read in conjunction
with the financial statements and notes included in the Form 10-K.
Note 2 - Investments
The Company accounts for its 37% ownership interest in Summo Minerals
Corporation ("Summo") under the equity method of accounting. For the three
months ended March 31, 1999, the Company recorded a loss of $45,000 as its
equity in the losses of Summo. The Company has entered into agreements to
provide interim financing of up to $3,471,000 for Summo's Lisbon Valley Copper
Project (the "Project") in the form of a loan due in June 1999 bearing interest
at the prime rate plus 1%. As security for this loan, Summo has pledged its
interest in the Project. As of March 31, 1999, $3,057,000 was outstanding under
this loan. Additional amounts totaling $32,000 have been advanced to Summo under
this loan since March 31, 1999. The principal amount of advances made by the
Company to Summo are convertible into shares of Summo common stock at a defined
conversion price.
The Company has analyzed its net investment in Summo and the effect of
persistent depressed copper prices and increased worldwide copper inventory
levels on Summo's stock price. Management believes Summo's stock price decline
is not temporary and that its value is impaired. Consequently, the Company wrote
down its net investment in Summo to net realizable value in the fourth quarter
of 1998. Management believes the recorded net investment is recoverable.
-7-
<PAGE>
Note 3 - Capital Stock
In August 1998, the Company's Board of Directors approved a stock
repurchase program whereby the Company may purchase from time to time, in open
market purchases or negotiated sales, up to one million shares of its common
stock. During the first quarter of 1999 the Company repurchased 35,000 shares of
its common stock under the program at a weighted average price of $15.00 per
share, bringing the total number of shares repurchased under the program to
182,800 at a weighted-average price of $16.38 per share. Management anticipates
that additional purchases of shares by the Company may occur as market
conditions warrant. Such purchases will be funded with internal cash flow and
borrowings under the Company's credit facility.
Note 4 - Income Taxes
Federal income tax expense for 1999 and 1998 differ from the amounts
that would be provided by applying the statutory U.S. Federal income tax rate to
income before income taxes primarily due to Section 29 credits, percentage
depletion, and the effect of state income taxes.
-8-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
St. Mary Land & Exploration Company ("St. Mary" or the "Company") was
founded in 1908 and incorporated in Delaware in 1915. The Company is engaged in
the exploration, development, acquisition and production of natural gas and
crude oil with operations focused in five core operating areas in the United
States: the Mid-Continent region; the ArkLaTex region; south Louisiana; the
Williston Basin; and the Permian Basin.
The Company's objective is to build value per share by focusing its
resources within selected basins in the United States where management believes
established acreage positions, long-standing industry relationships and
specialized geotechnical and engineering expertise provide a significant
competitive advantage. The Company's ongoing development and exploration
programs are complemented by less predictable opportunities to acquire producing
properties having significant exploitation potential, to monetize assets at a
premium and to repurchase shares of its common stock at attractive values.
Internal exploration, drilling and production personnel conduct the
Company's activities in the Mid-Continent and ArkLaTex regions and in south
Louisiana. Activities in the Williston Basin are conducted through Panterra
Petroleum ("Panterra"), a general partnership in which the Company owns a 74%
interest. The Company proportionally consolidates its interest in Panterra.
Activities in the Permian Basin are primarily contracted through an oil and gas
property management company with extensive experience in the basin.
The Company's presence in south Louisiana includes active management of
its fee lands from which significant royalty income is derived. St. Mary has
encouraged development drilling by its lessees, facilitated the origination of
new prospects on acreage not held by production and stimulated exploration
interest in deeper, untested horizons. The Company's discovery on its fee lands
at South Horseshoe Bayou in early 1997 and the successful confirmation well in
early 1998 proved that significant accumulations of gas are sourced and trapped
at depths below 16,000 feet. In August 1998 one of the wells in the South
Horseshoe Bayou project experienced shut-in production due to mechanical
problems. These mechanical problems and premature water encroachment caused the
Company to reduce the project's proved reserves by 38.8 BCFE, of which 23.7 BCFE
were reclassified to the probable reserve category and 15.1 BCFE were written
off. An untested fault block to the north of the existing production is expected
to spud at South Horseshoe Bayou in the third quarter of 1999.
-9-
<PAGE>
St. Mary seeks to make selective niche acquisitions of oil and gas
properties that complement its existing operations, offer economies of scale and
provide further development and exploration opportunities based on proprietary
geologic concepts. Management believes that the Company's focus on smaller
negotiated transactions where it has specialized geologic knowledge or operating
experience has enabled it to acquire attractively-priced and under-exploited
properties.
The results of operations include several significant acquisitions made
during recent years and their subsequent further development by the Company. In
1996, 1997 and 1998 the Company purchased a series of interests totaling $15.8
million that formed a new core area of focus in the Permian Basin of New Mexico
and west Texas. In late 1998 St. Mary, through Panterra, acquired the interests
of Texaco, Inc. in several fields in the Williston Basin for $2.1 million. In
1997 the Company acquired an 85% working interest in certain Louisiana
properties of Henry Production Company for $3.9 million, and the remaining 15%
working interest in these properties was acquired in the first quarter of 1999.
Also in the first quarter of 1999 St. Mary acquired additional interests in the
West Cameron Block 39 property located offshore Louisiana and other properties
in Louisiana totaling $1.2 million.
The Company pursues opportunities to monetize selected assets at a
premium and as part of its continuing strategy to focus and rationalize its
operations. In late 1998 St. Mary sold a package of non-strategic properties in
Oklahoma to ONEOK Resources Company for $22.2 million and sold its remaining
minor interests in Canada for $1.2 million, realizing a pre-tax gain of
$7.7 million.
St. Mary has one principal equity investment, Summo Minerals
Corporation ("Summo"). The Company accounts for its investments in Summo under
the equity method and includes its share of the income or loss from this entity
in its consolidated results of operations.
In June 1998 the Company's stockholders approved an increase in the
number of authorized shares of the Company's common stock from 15,000,000 to
50,000,000 shares.
In August 1998 the Company's Board of Directors authorized a stock
repurchase program whereby St. Mary may purchase from time-to-time, in open
market transactions or negotiated sales, up to 1,000,000 of its own common
shares. The Company has repurchased a total of 182,800 shares of common stock
under this plan in 1998 and the first quarter of 1999.
-10-
<PAGE>
The Company seeks to protect its rate of return on acquisitions of
producing properties by hedging up to the first 24 months of an acquisition's
production at prices approximately equal to those used in the Company's
acquisition evaluation and pricing model. The Company also periodically uses
hedging contracts to hedge or otherwise reduce the impact of oil and gas price
fluctuations on production from each of its core operating areas. The Company's
strategy is to ensure certain minimum levels of operating cash flow and to take
advantage of windows of favorable commodity prices. The Company generally limits
its aggregate hedge position to no more than 50% of its total production. The
Company seeks to minimize basis risk and indexes the majority of its oil hedges
to NYMEX prices and the majority of its gas hedges to various regional index
prices associated with pipelines in proximity to the Company's areas of gas
production. The Company has hedged approximately 41% of its remaining estimated
1999 gas production at an average fixed price of $2.09 per MMBtu, approximately
30% of its remaining estimated 1999 oil production at an average fixed price of
$16.16 per Bbl, approximately 15% of its estimated 2000 oil production at an
average fixed price of $15.54 per Bbl and less than 1% of its estimated 2001 oil
production at an average fixed price of $15.76. The Company has also purchased
options resulting in price collars on approximately 10% of the Company's
remaining estimated 1999 gas production with price ceilings between $2.00 and
$3.00 per MMBtu and price floors between $1.50 and $2.00 per MMBtu and price
collars on approximately 6% of its remaining estimated 1999 oil production with
a price floor of $15.00 and a price ceiling of $16.85. In 2000 the Company has
price collars on approximately 16% of its estimated gas production with price
ceilings between $2.50 and $2.65 and a price floor of $2.00 and approximately 6%
of its estimated oil production with a price floor of $15.00 and price ceilings
between $16.85 and $17.75.
This Quarterly Report on Form 10-Q includes certain statements that may
be deemed to be "forward-looking statements" within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. All statements, other than statements of
historical facts, included in this Form 10-Q that address activities, events or
developments that the Company expects, believes or anticipates will or may occur
in the future, including such matters as future capital, development and
exploration expenditures (including the amount and nature thereof), drilling of
wells, reserve estimates (including estimates of future net revenues associated
with such reserves and the present value of such future net revenues), future
production of oil and gas, repayment of debt, business strategies, expansion and
growth of the Company's operations, Year 2000 readiness and other such matters
are forward-looking statements. These statements are based on certain
assumptions and analyses made by the Company in light of its experience and its
perception of historical trends, current conditions, expected future
developments and other factors it believes are appropriate in the circumstances.
Such statements are subject to a number of assumptions, risks and uncertainties,
general economic and business conditions, the business opportunities (or lack
thereof) that may be presented to and pursued by the Company, changes in laws or
regulations and other factors, many of which are beyond the control of the
Company. Readers are cautioned that any such statements are not guarantees of
future performance and that actual results or developments may differ materially
from those projected in the forward-looking statements.
-11-
<PAGE>
Results of Operations
The following table sets forth selected operating data for the periods
indicated:
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------------------
1999 1998
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(In thousands, except BOE data)
<S> <C> <C>
Oil and gas production
revenues:
Working interests $ 13,139 $ 17,010
Louisiana royalties 630 2,015
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Total $ 13,769 $ 19,025
============= =============
Net production:
Oil (MBbls) 283 321
Gas (MMcf) 5,340 6,359
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MBOE 1,173 1,381
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Average sales price (1):
Oil (per Bbl) $ 11.51 $ 14.90
Gas (per Mcf) 1.97 2.24
Oil and gas production costs:
Lease operating expense $ 3,096 $ 2,841
Production taxes 897 1,102
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Total $ 3,993 $ 3,943
============= =============
Additional per BOE data:
Sales price $ 11.74 $ 13.78
Lease operating expense 2.64 2.06
Production taxes .77 .80
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Operating margin $ 8.33 $ 10.92
Depletion, depreciation and
amortization $ 4.61 $ 3.89
Impairment of proved
Properties - .27
General and administrative 1.37 2.13
</TABLE>
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(1) Includes the effects of the Company's hedging activities.
Oil and Gas Production Revenues. Oil and gas production revenues
decreased $5.2 million, or 28% to $13.8 million for the first quarter of 1999
compared to $19.0 million for the first quarter of 1998. Oil production volumes
decreased 12% and gas production volumes decreased 16% for the first quarter of
1999 compared to 1998. Average net daily production declined to 13.0 MBOE in
1999 compared to 15.3 MBOE in the comparable quarter of 1998. The decline
resulted from the significant loss of production at the South Horseshoe Bayou
Field in 1998 and 1999 and the sale of certain Oklahoma properties which
occurred in late 1998.
-12-
<PAGE>
The average realized oil price for the first quarter of 1999 decreased
23% to $11.51 per Bbl, while average realized gas prices decreased 12% to $1.97
per Mcf, from their respective 1998 levels. The Company hedged approximately 6%
of its oil production for the first quarter of 1999 or 18.0 MBbls at an average
NYMEX price of $16.05 and realized a $51,000 increase in oil revenue or $.18 per
Bbl for the first quarter of 1999 on these contracts compared to a $200,000
increase or $.62 per Bbl in 1998. The Company also hedged 51% of its 1999 first
quarter gas production or 3.1 million MMBtu at an average indexed price of
$2.096 and realized a $1.4 million increase in gas revenues or $.25 per Mcf for
the first quarter of 1999 from these hedge contracts compared to a $78,000
increase in gas revenues or $.01 per Mcf in 1998.
Oil and Gas Production Costs. Oil and gas production costs consist of
lease operating expense and production taxes. Total production costs increased
$51,000 or 1% for the first quarter of 1999 from comparable levels in 1998.
Total oil and gas production costs per BOE increased 19% to $3.41 in 1999
compared with $2.86 for the 1998 first quarter due to increased workover costs
and the December 1998 sale of producing properties in Oklahoma with lower
production costs per BOE.
Depreciation, Depletion, Amortization and Impairment. Depreciation,
depletion and amortization expense ("DD&A") increased $25,000 or less than 1%
for the first quarter of 1999 from comparable levels in 1998. DD&A expense per
BOE increased 18% to $4.61 in the first quarter of 1999 compared to $3.89 in
1998 due to the reduction in volumes produced at South Horseshoe Bayou,
decreased royalty production from the Fee Lands, the effect of continued low
prices on the Company's oil and gas reserves at March 31, 1999 and the December
1998 sale of producing properties in Oklahoma with lower DD&A expense per BOE.
The Company recorded no impairments of proved oil and gas properties for the
first quarter of 1999 compared with $368,000 in 1998.
Abandonment and impairment of unproved properties increased $160,000 or
53% to $463,000 for the first quarter of 1999 compared to $303,000 in 1998 due
to additional abandonments of expired leases in 1999.
Exploration. Exploration expense decreased $1.7 million or 49% to $1.7
million for the first quarter of 1999 compared with $3.4 million in 1998. The
decrease results from lower delay rental payments and improved exploratory
drilling results.
General and Administrative. General and administrative expenses
decreased $1.3 million or 45% in the first quarter of 1999 compared to 1998
primarily due to a decrease in compensation expense related to decreases in
bonus and stock appreciation rights expenses. This decrease in compensation
expense was partially offset by an increase in rent expense and a reduction in
overhead reimbursements from outside interest owners in properties operated by
the Company.
Other operating expenses primarily consist of legal expenses in
connection with ongoing oil and gas activities. This expense increased $90,000
or 257% for the first quarter of 1999 compared with 1998, primarily due to
increased activity in the pending litigation that seeks to recover damages from
the drilling contractor for the St. Mary Land & Exploration No. 1 well at South
Horseshoe Bayou.
Equity in Loss of Summo Minerals Corporation. The Company accounts for
its investment in Summo under the equity method and includes its share of
Summo's income or loss in its results of operations. The equity in the net loss
of Summo was $45,000 for the first quarter of 1999 and $61,000 in 1998.
-13-
<PAGE>
Non-Operating Income and Expense. Net interest and other non-operating
expense decreased $94,000 to $145,000 in the first quarter of 1999 compared to
$239,000 in 1998 due to decreased borrowings resulting from cash received from
the sale of Oklahoma properties in late 1998.
Income Taxes. Income tax expense was $179,000 in the first quarter of
1999 and $775,000 in 1998, resulting in effective tax rates of 30% and 32%,
respectively. The reduced expense reflects lower net income from operations
before income taxes for 1999 due primarily to lower oil and gas production and
prices. The reduced rate reflects a higher impact on lower net income from
Section 29 credits and percentage depletion in 1999.
Net Income. Net income for the first quarter of 1999 decreased $1.3
million or 76% to $409,000 compared to $1.7 million in 1998. The 28% decrease in
oil and gas revenues caused by reductions in both price and produced volumes in
the first quarter of 1999 was partially offset by significant decreases in
exploration expense, general and administrative expense and income tax expense.
Liquidity and Capital Resources
The Company's primary sources of liquidity are the cash provided by
operating activities, debt financing, sales of non-strategic properties and
access to the capital markets. The Company's cash needs are for the acquisition,
exploration and development of oil and gas properties and for the payment of
debt obligations, trade payables and stockholder dividends. The Company
generally finances its exploration and development programs from internally
generated cash flow, bank debt and cash and cash equivalents on hand. The
Company continually reviews its capital expenditure budget based on changes in
cash flow and other factors.
Cash Flow. The Company's net cash provided by operating activities
decreased $9.2 million or 53% to $8.1 million in the first quarter 1999 compared
to $17.3 million in the first quarter 1998. Revenues decreased significantly due
to decreased production at South Horseshoe Bayou and in Oklahoma from the sale
of producing properties and due to lower prices. Additionally, accounts payable
and accrued expenses decreased significantly in the first quarter 1999 compared
to a significant increase in the first quarter 1998 due to lower drilling
activity in 1999. These factors were only partially offset by decreases in
general and administrative expenses and exploration expense.
Net cash used in investing activities decreased $11.3 million or 60% to
$7.6 million in the first quarter 1999 compared to $18.9 million in the first
quarter 1998. The decrease is primarily due to a $10.9 million decrease in
capital expenditures in the first quarter 1999. Total first quarter 1999 capital
expenditures, including acquisitions of oil and gas properties, decreased $10.9
million or 60% to $7.2 million in the first quarter 1999 compared to $18.1
million in the first quarter 1998.
A portion of the proceeds from sales of oil and gas properties in 1998
were applied to acquisitions of oil and gas properties in 1999 under tax-free
exchanges. In a tax-free exchange of properties the tax basis of the sold
property carries over to the acquired property for tax purposes. Gains or losses
for tax purposes are recognized by amortization of the lower tax basis of the
property throughout its remaining life or when the acquired property is sold or
abandoned.
-14-
<PAGE>
Net cash used in financing activities increased $785,000 or 44% to $2.6
million in the first quarter 1999 compared to $1.8 million in the first quarter
1998. The increase was primarily due to the repurchase of the Company's common
stock for $525,000 in the first quarter of 1999. No such repurchases were made
in the first quarter 1998.
The Company had $5.7 million in cash and cash equivalents and had
working capital of $5.6 million as of March 31, 1999 compared to $7.8 million in
cash and cash equivalents and working capital of $9.8 million as of December 31,
1998. Decreases in accounts receivable and in cash and cash equivalents were
partially offset by a decrease in accounts payable.
Credit Facility. On June 30, 1998, the Company entered into a new
long-term revolving credit agreement that replaced the agreement dated March 1,
1993 and amended in April 1996. The new credit agreement specifies a maximum
loan amount of $200.0 million. The lender may periodically re-determine the
aggregate borrowing base depending upon the value of the Company's oil and gas
properties and other assets. In May 1999 the borrowing base was reduced $25.0
million by the lender to $80.0 million as a result of reduced reserve pricing
and the write down of South Horseshoe Bayou. The accepted borrowing base was
$40.0 million at December 31, 1998. The credit agreement has a maturity date of
December 31, 2005, and includes a revolving period that matures on December 31,
2000. The Company can elect to allocate up to 50% of available borrowings to a
short-term tranche due in 364 days. The Company must comply with certain
covenants including maintenance of stockholders' equity at a specified level and
limitations on additional indebtedness. As of March 31, 1999, and December 31,
1998, $9.0 million and $10.5 million, respectively, was outstanding under this
credit agreement. These outstanding balances accrue interest at rates determined
by the Company's debt to total capitalization ratio. During the revolving period
of the loan, loan balances accrue interest at the Company's option of either (a)
the higher of the Federal Funds Rate plus 1/2% or the prime rate, or (b) LIBOR
plus 1/2% when the Company's debt to total capitalization is less than 30%, up
to a maximum of either (a) the higher of the Federal Funds Rate plus 5/8% or the
prime rate plus 1/8%, or (b) LIBOR plus 1-1/4% when the Company's debt to total
capitalization is equal to or greater than 50%.
Panterra, in which the Company has a 74% general partnership interest,
has a separate credit facility with a $21.0 million borrowing base as of
December 31, 1998, and $12.0 million outstanding as of March 31, 1999 and
December 31, 1998. In June 1997, Panterra entered into this credit agreement
replacing a previous agreement due March 31, 1999. The new credit agreement
includes a revolving period converting to a five-year amortizing loan on June
30, 2000. During the revolving period of the loan, loan balances accrue interest
at Panterra's option of either the bank's prime rate or LIBOR plus 3/4% when the
Partnership's debt to partners' capital ratio is less than 30%, up to a maximum
of either the bank's prime rate or LIBOR plus 1-1/4% when the Partnership's debt
to partners' capital ratio is greater than 100%.
Common Stock. In June 1998 the Company's stockholders approved an
increase in the number of authorized shares of the Company's common stock from
15,000,000 to 50,000,000 shares.
In August 1998 the Company's Board of Directors authorized a stock
repurchase program whereby St. Mary may purchase from time-to-time, in open
market transactions or negotiated sales, up to 1,000,000 of its common shares.
During 1998 the Company repurchased a total of 147,800 shares of its common
stock under the program for $2.5 million at a weighted-average price of $16.71
per share. The Company repurchased an additional 35,000 shares for $15.00 per
share during the first quarter of 1999. Management anticipates that additional
purchases of shares by the Company may occur as market conditions warrant. Such
purchases will be funded with internal cash flow and borrowings under the
Company's credit facility.
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<PAGE>
Capital and Exploration Expenditures. The Company's expenditures for
exploration and development of oil and gas properties and acquisitions are the
primary use of its capital resources.
Outlook. The Company believes that its existing capital resources, cash
flows from operations and available borrowings are sufficient to meet its
anticipated capital and operating requirements for 1999.
The Company generally allocates approximately 85% of its capital budget
to low to moderate-risk exploration, development and niche acquisition programs
in its core operating areas. The remaining portion of the Company's capital
budget is directed to higher-risk, large exploration ideas that have the
potential to increase the Company's reserves by 25% or more in any single year.
The Company anticipates spending approximately $71.0 million for
capital and exploration expenditures in 1999 with $37.0 million allocated for
ongoing exploration and development in its core operating areas, $25.0 million
for niche acquisitions of producing properties and $9.0 million for
large-target, higher-risk exploration and development.
Anticipated ongoing exploration and development expenditures for each
of the Company's core areas include $22.0 million in the Mid-Continent region,
$6.5 million in the ArkLaTex region, $2.0 million in the Williston Basin and
$6.5 million allocated within the Permian Basin and south Louisiana regions.
The Company has several prospects in its pipeline of large-target
exploration ideas. Tests are currently being drilled at the Stallion, West
Cameron Block 39 and Edgerly projects, and the Company expects to commence the
drilling of four additional significant tests in 1999 at its South Horseshoe
Bayou, North Parcperdue and Patterson projects in south Louisiana, and at its
Carrier project in east Texas.
The amount and allocation of future capital and exploration
expenditures will depend upon a number of factors including the number of
available acquisition opportunities, the Company's ability to assimilate such
acquisitions, the impact of oil and gas prices on investment opportunities, the
availability of capital and borrowing capability and the success of its
development and exploratory activity which could lead to funding requirements
for further development.
The Company continuously evaluates opportunities in the marketplace for
oil and gas properties and, accordingly, may be a buyer or a seller of
properties at various times. St. Mary will continue to emphasize smaller niche
acquisitions utilizing the Company's technical expertise, financial flexibility
and structuring experience. In addition, the Company is also actively seeking
larger acquisitions of assets or companies that would afford opportunities to
expand the Company's existing core areas, to acquire additional geoscientists or
to gain a significant acreage and production foothold in a new basin within the
United States.
The Company, through a subsidiary, owns 9.9 million shares or 37% of
Summo. The persistence of depressed commodity prices and increased worldwide
inventory levels of copper have caused Summo's stock price to decline.
Management believes that this stock price decline is not temporary and that its
value is impaired. Consequently, the Company wrote down its net investment in
Summo to net realizable value in the fourth quarter of 1998. Management believes
the recorded net investment is recoverable.
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The Company has agreed to provide Summo with interim financing of up to
$3.5 million for Summo's Lisbon Valley Copper Project (the "Project") in the
form of a loan bearing interest at the prime rate plus 1% due in June 1999. As
security for this loan, Summo pledged its interest in the Project. As of
December 31, 1998 and March 31, 1999, $2.9 million and $3.1 million,
respectively, were outstanding under the loan. Additional amounts totaling
$32,000 have been advanced to Summo under this loan since March 31, 1999. At the
Company's option, the principal amounts advanced by the Company under the note
are convertible into shares of Summo common stock at a defined conversion price.
Future development and financial success of the Project are largely
dependent on the market price of copper, which is determined in world markets
and is subject to significant fluctuations. Management believes that copper
prices will recover and that the Project will have considerable value at that
time. The Company has the ability to fund the carrying costs of the property and
the intent to retain its interest in the Project until copper prices recover.
However, there can be no assurance that the Company will realize a return on its
investment in Summo or the Project.
In February 1997 the Company sold its interest in the Russian joint
venture to KMOC. The Company received cash consideration of approximately $5.6
million before transaction costs, KMOC common stock valued at approximately $1.9
million, and a receivable in a form equivalent to a retained production payment
of approximately $10.1 million plus interest at 10% per annum from the limited
liability company formed to hold the Russian joint venture. The Company's
receivable is collateralized by the partnership interest sold. The Company has
the right, subject to certain conditions, to require KMOC to purchase the
Company's receivable from the net proceeds of an initial public offering of KMOC
common stock. Alternatively, the Company may elect to convert all or a portion
of its receivable into KMOC common stock immediately prior to an initial public
offering of KMOC common stock or on or after February 11, 2000, whichever occurs
first. Uncertain economic conditions in Russia and lower oil prices have
affected the carrying value of the convertible receivable. Consequently, the
Company reduced the carrying amount of the receivable to its minimum conversion
value during 1998, incurring a pre-tax charge to operations of $4.6 million.
Impact of the Year 2000 Issue. The following Year 2000 statements
constitute a Year 2000 Readiness Disclosure within the meaning of the Year 2000
Information and Readiness Disclosure Act of 1998.
The Year 2000 Issue is the result of computer programs and embedded
computer chips being written or manufactured using two digits rather than four,
or other methods, to define the applicable year. Computer programs and embedded
chips that are date-sensitive may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, operate equipment or
engage in normal business activities. Failure to correct a material Year 2000
compliance problem could result in an interruption in, or inability to conduct
normal business activities or operations. Such failures could materially and
adversely affect the Company's results of operations, cash flow and financial
condition.
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The Company's approach to determining and mitigating the impact on the
Company of Year 2000 compliance issues is comprised of five phases:
i) Review and assessment of all internal information technology (IT)
systems and significant non-IT systems for Year 2000 compliance;
ii) Identify and prioritize systems with Year 2000 compliance issues;
iii) Repair or replace and test non-Year 2000 compliant systems;
iv) Survey and assess the Year 2000 readiness of the Company's significant
vendors, suppliers, purchasers and transporters of oil and natural gas;
and,
v) Design and implement contingency plans for those systems, if any, that
cannot be made Year 2000 compliant before December 31, 1999.
The Company completed phases i) and ii) of its plan by August 1998, and
identified the systems requiring repair or replacement in order to be Year 2000
compliant. This review and assessment was completed using outside consultants as
well as Company personnel. The Company determined that of its major systems, the
software it uses for reservoir engineering, its telephone system, a significant
number of the personal computers used by Company personnel and the computer
system used by Panterra should be updated or replaced.
Phase iii) of the Company's plan of repair and replacement of non-Year
2000 compliant systems is approximately 90% complete. The telephone system and
personal computers have been replaced with Year 2000 compliant hardware and
software as part of the Company's ongoing upgrade program. The Company purchased
a Year 2000 compliant release of the reservoir engineering system and
anticipates conversion to and testing of the new system in the second quarter of
1999. In the fourth quarter of 1998 Panterra licensed a Year 2000 compliant
system and converted to the new system in January 1999. The systems that have
been either upgraded or replaced will be further tested to confirm their Year
2000 compliance. This testing is planned for completion in the second quarter of
1999. The Company presently believes that other less significant IT and non-IT
systems can be upgraded to mitigate any Year 2000 issues with modifications to
existing software or conversions to new systems. Modifications or conversions to
new systems for the less significant systems, if not completed timely, would
have neither a material impact on the operations of the Company nor on its
results of operations.
Under phase iv) of the plan, the Company initiated formal
communications with its significant vendors, suppliers and purchasers and
transporters of oil and natural gas to determine the extent to which the Company
is vulnerable to those third parties' failures to remediate their own Year 2000
issues. The process of collecting information from these third parties is
approximately 45% complete. All of the responses received to date are positive
in assuring that the respondents will be Year 2000 compliant on a timely basis.
Completion of phase iv) of the plan is anticipated in the third quarter of 1999.
Until this phase of the plan is complete, management cannot currently predict if
third party compliance issues will materially affect the Company's operations.
There can be no assurance that the systems of these third parties will be
converted timely, or that a failure to remediate Year 2000 compliance issues by
another company would not have a material adverse effect on the Company.
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<PAGE>
Phase v) of the Company's Year 2000 plan, the design and implementation
of contingency plans for those systems, if any, that cannot be made Year 2000
compliant before December 31, 1999, will be addressed in the last half of 1999.
Through March 31, 1999, the Company has spent approximately $450,000 on
its Year 2000 efforts. This includes the costs of consultants as well as the
cost of repair or replacement of non-compliant hardware and software systems.
Additional costs to complete the Company's plan are estimated at approximately
$50,000. The Company has not specifically tracked its internal costs of
addressing the Year 2000 issue. However, management does not believe these costs
to be material.
The Company has not completed a comprehensive analysis of the
operational problems and costs that would be reasonably likely to result from
the Company or its significant third parties' failure to timely complete efforts
to remediate Year 2000 issues. Potential "worst case" impacts could include the
inability of the Company to deliver its production to, or receive payment from,
third parties purchasing or transporting the Company's production; the inability
of third party vendors to provide needed materials or services to the Company
for ongoing or future exploration, development or producing operations; and the
inability of the Company to execute financial transactions with its banks or
third parties whose systems fail or malfunction.
The Company currently has no reason to believe that any of these
contingencies will occur or that its principal vendors, customers and business
partners will not be Year 2000 compliant. However, there can be no assurance
that the Company will be able to identify and correct all Year 2000 problems or
implement a satisfactory contingency plan. Therefore, there can be no assurance
that the Year 2000 issue will not materially impact the Company's results of
operations or adversely affect its relationships with vendors, customers and
other business partners.
Accounting Matters
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. The Statement requires companies to report
all derivatives at fair value as either assets or liabilities and bases the
accounting treatment of the derivatives on the reasons an entity holds the
instrument. The Company is currently reviewing the effects this Statement will
have on the financial statements in relation to the Company's hedging
activities.
Effects of Inflation and Changing Prices
Within the United States inflation has had a minimal effect on the
Company. The Company cannot predict the future extent of any such effect.
The Company's results of operations and cash flows are affected by
material changes in oil and gas prices. Oil and gas prices are strongly impacted
by global influences on the supply and demand for petroleum products. Oil and
gas prices are further impacted by the quality of the oil and gas to be sold and
the location of the Company's producing properties in relation to markets for
the products. Oil and gas price increases or decreases have a corresponding
effect on the Company's revenues from oil and gas sales. Oil and gas prices also
affect the prices charged for drilling and related services. If oil and gas
prices increase, there could be a corresponding increase in the cost to the
Company for drilling and related services, although offset by an increase in
revenues. Also, as oil and gas prices increase, the cost of acquisitions of
producing properties increases, which could limit the number and accessibility
of quality properties on the market.
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Material changes in oil and gas prices affect the current and future
value of the Company's estimated proved reserves and the borrowing capability of
the Company, which is largely based on the value of such proved reserves. Oil
and gas price changes have a corresponding effect on the value of the Company's
estimated proved reserves and the available borrowings under the Company's
credit facility.
The last half of 1998 and most of the first quarter of 1999 were
characterized by historically low oil prices and weakening gas markets. Capital
has left the oil and gas industry and has caused a significant decrease in the
number of working drilling rigs. Consequently, in early 1999 there is an
abundance of available drilling rigs, personnel, supplies and services with a
corresponding reduction of costs. Oil and gas prices have begun to increase from
December 31, 1998 levels. If prices continue to increase, there could be a
return to shortages and corresponding increases in the cost to the Company of
exploration, drilling and production of oil and gas.
Financial Instrument Market Risk
Directly, and through its 74% investment in Panterra, the Company holds
derivative contracts and financial instruments that have cash flow and net
income exposure to changes in commodity prices or interest rates. Financial and
commodity-based derivative contracts are used to limit the risks inherent in
some crude oil and natural gas price changes that have an effect on the Company.
In prior years the Company has occasionally hedged interest rates, and may do so
in the future should circumstances warrant.
The Company's Board of Directors has adopted a policy regarding the use
of derivative instruments. This policy requires every derivative used by the
Company to relate to underlying offsetting positions, anticipated transactions
or firm commitments. It prohibits the use of speculative, highly complex or
leveraged derivatives. Under the policy, the Chief Executive Officer and Vice
President of Finance must review and approve all risk management programs that
use derivatives. The Audit Committee of the Company's Board of Directors also
periodically reviews these programs.
Commodity Price Risk. The Company uses various hedging arrangements to
manage the Company's exposure to price risk from its natural gas and crude oil
production. These hedging arrangements have the effect of locking in for
specified periods, at predetermined prices or ranges of prices, the prices the
Company will receive for the volumes to which the hedge relates. Consequently,
while these hedging arrangements are structured to reduce the Company's exposure
to decreases in prices associated with the hedged commodity, they also limit the
benefit the Company might otherwise receive from any price increases associated
with the hedged commodity. A hypothetical 10% change in the quarter-end market
prices of commodity-based swaps and futures contracts on a notional amount of
13.0 million MMBtu would have caused a potential $1.4 million change in net
income before income taxes for the Company for gas contracts in place on March
31, 1999. A 10% change in the quarter-end market prices of commodity-based swaps
and future contracts on a notional amount of 505 MBbls would have caused a
potential $615,000 change in net income before income taxes for the Company for
oil contracts in place on March 31, 1999. Results of operations for Panterra (a
non-taxable entity) would have changed by $337,000 on a notional amount of 216
MBbls. These changes were discounted to present value using a 7.5% discount rate
since the latest expected maturity date of some of the swaps and futures
contracts is greater than one year from the reporting date. The derivative gain
or loss effectively offsets the loss or gain on the underlying commodity
exposures that have been hedged. The fair values of the swaps are estimated
based on quoted market prices of comparable contracts and approximate the net
gains or losses that would have been realized if the contracts had been closed
out at quarter end. The fair values of the futures are based on quoted market
prices obtained from the New York Mercantile Exchange.
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Interest Rate Risk. Market risk is estimated as the potential change in
fair value resulting from an immediate hypothetical one percentage point
parallel shift in the yield curve. A sensitivity analysis presents the
hypothetical change in fair value of those financial instruments held by the
Company at March 31, 1999, which are sensitive to changes in interest rates. For
fixed-rate debt, interest rate changes affect the fair market value but do not
impact results of operations or cash flows. Conversely for floating rate debt,
interest rate changes generally do not affect the fair market value but do
impact future results of operations and cash flows, assuming other factors are
held constant. The carrying amount of the Company's floating rate debt
approximates its fair value. At March 31, 1999, the Company had floating rate
debt of $17.9 million and had no fixed rate debt. Assuming constant debt levels,
the results of operations and cash flows impact for the remainder of the year
resulting from a one percentage point change in interest rates would be
approximately $134,000 before taxes.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Description
10.1 St. Mary Land & Exploration Company Incentive Stock
Option Plan, As Amended on March 25, 1999
10.2 St. Mary Land & Exploration Company Stock Option
Plan, As Amended on March 25, 1999
10.3 Net Profits Interest Bonus Plan, As Amended on
September 19, 1996 and July 24, 1997 and
January 28, 1999
27.1 Financial Data Schedule
(b) There were no reports on Form 8-K filed during the quarter
ended March 31, 1999.
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
St. Mary Land & Exploration Company
May 14, 1999 By /s/ MARK A. HELLERSTEIN
-----------------------------------
Mark A. Hellerstein
President and Chief Executive Officer
May 14, 1999 By /s/ RICHARD C. NORRIS
-----------------------------------
Richard C. Norris
Vice President - Finance, Secretary
and Treasurer
May 14, 1999 By /s/ GARRY A. WILKENING
-----------------------------------
Garry A. Wilkening
Vice President - Administration and
Controller
EXHIBIT 10.1
As Amended on March 25, 1999
ST. MARY LAND & EXPLORATION COMPANY
-----------------------------------
INCENTIVE STOCK OPTION PLAN
---------------------------
ARTICLE I
ESTABLISHMENT AND PURPOSE
-------------------------
1.1 Establishment. St. Mary Land & Exploration Company, a Delaware
corporation (the "Company"), hereby establishes a stock option plan for key
employees providing material services to the Company or any subsidiary of the
Company as described herein, which shall be known as the "ST. MARY LAND &
EXPLORATION COMPANY INCENTIVE STOCK OPTION PLAN" (the "Plan"). It is intended
that the options issued to employees pursuant to the Plan constitute incentive
stock options within the meaning of Section 422 of the Internal Revenue Code.
The Company shall enter into stock option agreements with recipients of options
pursuant to the Plan.
1.2 Purpose. The purpose of the Plan is to enhance shareholder value by
attracting, retaining and motivating key employees of the Company and of any
subsidiary of the Company by providing them with a means to acquire a
proprietary interest in the Company's success.
ARTICLE II
DEFINITIONS
-----------
2.1 Definitions. Whenever used herein, the following terms shall have
the respective meanings set forth below, unless the context clearly requires
otherwise, and when such meaning is intended, the term shall be capitalized.
(a) "Board" means the Board of Directors of the Company.
(b) "Code" means the Internal Revenue Code of 1986, as
amended.
(c) "Committee" shall mean the Committee provided for by
Article IV hereof, which may be created at the discretion of the Board.
(d) "Company" means St. Mary Land & Exploration Company, a
Delaware corporation.
(e) "Date of Exercise" means the date the Company receives
notice, by an Optionee, of the exercise of an Option pursuant to
Section 8.1 of the Plan. Such notice shall indicate the number of
shares of Stock the Optionee intends to acquire pursuant to exercise of
the Option.
(f) "Employee" means any person, including an officer or
director of the Company or a Subsidiary Corporation, who is employed by
the Company or a Subsidiary Corporation.
(g) "Fair Market Value" means the fair market value of Stock
upon which an option is granted under the Plan, determined as follows:
(i) If the Stock is listed on a national securities
exchange or admitted to unlisted trading privileges on such
exchange, the Fair Market Value shall be the last reported
sale price of the Stock on the composite tape of such exchange
on the date of issuance of this option, or if such day is not
a normal trading day, the last trading day prior to the date
of issuance of this option, and if no such sale is made on
such day, the Fair Market Value shall be the average closing
bid and asked prices for such day on the composite tape of
such exchange; or
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(ii) If the Stock is not so listed or admitted to
unlisted trading privileges, the Fair Market Value shall be
the mean of the last reported bid and asked prices reported by
the National Association of Securities Dealers Quotation
System (or, if not so quoted on NASDAQ, by the National
Quotation Bureau, Inc.) on the last trading day prior to the
date of issuance of the option.
(h) "Incentive Stock Option" means an Option granted under the
Plan which is intended to qualify as an "incentive stock option" within
the meaning of Section 422 of the Code.
(i) "Option" means the right, granted under the Plan, to
purchase Stock of the Company at the option price for a specified
period of time.
(j) "Optionee" means an Employee holding an Option under the
Plan.
(k) "Parent Corporation" shall have the meaning set forth in
Section 424(e) of the Code with the Company being treated as the
employer corporation for purposes of this definition.
(l) "Subsidiary Corporation" shall have the meaning set forth
in Section 424(f) of the Code with the Company being treated as the
employer corporation for purposes of this definition.
(m) "Significant Shareholder" means an individual who, within
the meaning of Section 422(b)(6) of the Code, owns stock possessing
more than ten percent of the total combined voting power of all classes
of stock of the Company or of any Parent Corporation or Subsidiary
Corporation of the Company. In determining whether an individual is a
Significant Shareholder, an individual shall be treated as owning stock
owned by certain relatives of the individual and certain stock owned by
corporations in which the individual is a shareholder, partnerships in
which the individual is a partner, and estates or trusts of which the
individual is a beneficiary, all as provided in Section 424(d) of the
Code.
(n) "Stock" means the $.01 par value common stock of the
Company.
2.2 Gender and Number. Except when otherwise indicated by the context,
any masculine terminology when used in the Plan also shall include the feminine
gender, and the definition of any term herein in the singular also shall include
the plural.
ARTICLE III
ELIGIBILITY AND PARTICIPATION
-----------------------------
All Employees are eligible to participate in the Plan and receive
Incentive Stock Options under the Plan. Optionees in the Plan shall be selected
by the Board, in its sole discretion, from among those Employees who, in the
opinion of the Board, are in a position to contribute materially to the
Company's continued growth and development and to its long-term financial
success.
ARTICLE IV
ADMINISTRATION
--------------
The Board shall be responsible for administering the Plan.
(a) The Board is authorized to interpret the Plan; to
prescribe, amend, and rescind rules and regulations relating to the
Plan; to provide for conditions and assurances deemed necessary or
advisable to protect the interests of the Company; and to make all
other determinations necessary or advisable for the administration of
the Plan. Determinations, interpretations, or other actions made or
taken by the Board with respect to the Plan and Options granted under
the Plan shall be final and binding and conclusive for all purposes and
upon all persons.
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<PAGE>
(b) At the discretion of the Board the Plan may be
administered by a Committee of two or more non-employee Directors
appointed by the Board (the "Committee"). The Committee shall have full
power and authority, subject to the limitations of the Plan and any
limitations imposed by the Board, to construe, interpret and administer
the Plan and to make determinations which shall be final, conclusive
and binding upon all persons, including any persons having any
interests in any Options which may be granted under the Plan, and, by
resolution or resolutions to provide for the creation and issuance of
any Option, to fix the terms upon which, the time or times at or within
which, and the price or prices at which any shares of Stock may be
purchased from the Company upon the exercise of an Option. Such terms,
time or times and price or prices shall, in every case, be set forth or
incorporated by reference in the instrument or instruments evidencing
an Option, and shall be consistent with the provisions of the Plan.
(c) Where a Committee has been created by the Board pursuant
to this Article IV, references in the Plan to actions to be taken by
the Board shall be deemed to refer to the Committee as well, except
where limited by the Plan or by the Board.
(d) No member of the Board or the Committee shall be liable
for any action or determination made in good faith with respect to the
Plan or any Option granted under it.
ARTICLE V
STOCK SUBJECT TO THE PLAN
-------------------------
5.1 Number. The total number of shares of Stock hereby made available
and reserved for issuance under the Plan upon exercise of Options shall be
1,650,000 shares. Notwithstanding anything to the contrary contained in the
foregoing, to the extent that options are issued under any other current Stock
Option Plan adopted by the Company, the shares of Stock reserved for issuance
pursuant to Options granted under the Plan shall be reduced. The aggregate
number of shares of Stock available under the Plan shall be subject to
adjustment as provided in Section 5.3.
5.2 Unused Stock. If an Option shall expire or terminate for any reason
without having been exercised in full, the unpurchased shares of Stock subject
thereto shall (unless the Plan shall have terminated) become available for other
Options under the Plan.
5.3 Adjustment in Capitalization. In the event of any change in the
outstanding shares of Stock by reason of a stock dividend or split,
recapitalization, reclassification, or other similar capital change, the
aggregate number of shares of Stock set forth in Section 5.1 shall be
appropriately adjusted by the Board, whose determination shall be conclusive. In
any such case, the number and kind of shares of Stock that are subject to any
Option and the Option price per share shall be proportionately and appropriately
adjusted without any change in the aggregate Option price to be paid therefor
upon exercise of the Option.
ARTICLE VI
DURATION OF THE PLAN
--------------------
Subject to approval of shareholders, the Plan shall be in effect for
ten years from the date of its adoption by the Board. Any Options outstanding at
the end of such period shall remain in effect in accordance with their terms.
The Plan shall terminate before the end of such period if all Stock subject to
it has been purchased pursuant to the exercise of Options granted under the
Plan.
ARTICLE VII
TERMS OF STOCK OPTIONS
----------------------
7.1 Grant of Options. Subject to Section 5.1, Options may be granted to
Employees at any time and from time to time as determined by the Board. The
Board shall have complete discretion in determining the terms and conditions and
number of Options granted to each Optionee. In making such determinations, the
Board may take into account the nature of services rendered by such Employees,
their present and potential contributions to the Company and its Subsidiary
Corporations, and such other factors as the Board in its discretion shall deem
relevant.
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(a) The total Fair Market Value (determined at the date of
grant) of shares of Stock with respect to which incentive stock options
granted are exercisable for the first time by the Optionee during any
calendar year under all plans of the Company under which incentive
stock options may be granted (and all such plans of any Parent
Corporations and any Subsidiary Corporations of the Company) shall not
exceed $100,000. Hereinafter, this requirement is sometimes referred to
as the "$100,000 Limitation".
(b) The Board is expressly given the authority to issue
amended or replacement Options with respect to shares of Stock subject
to an Option previously granted hereunder. An amended Option amends the
terms of an Option previously granted and thereby supersedes the
previous Option. A replacement Option is similar to a new Option
granted hereunder except that it provides that it shall be forfeited to
the extent that a previously granted Option is exercised, or except
that its issuance is conditioned upon the termination of a previously
granted Option.
7.2 No Tandem Options. Where an Option granted under the Plan is
intended to be an Incentive Stock Option, the Option shall not contain terms
pursuant to which the exercise of the Option would affect the Optionee's right
to exercise another Option, or vice versa, such that the Option intended to be
an Incentive Stock Option would be deemed a tandem stock option within the
meaning of the regulations under Section 422 of the Code.
7.3 Option Agreement; Terms and Conditions to Apply Unless Otherwise
Specified. As determined by the Board on the date of grant, each Option shall be
evidenced by an Option agreement (the "Option Agreement") that includes the
non-transferability provisions required by Section 10.2 hereof and that
specifies: the Option price; the duration of the Option; the number of shares of
Stock to which the Option applies; such vesting or exercisability restrictions
which the Board may impose; a provision implementing the $100,000 Limitation;
and any other terms or conditions which the Board may impose. All such terms and
conditions shall be determined by the Board at the time of grant of the Option.
(a) If not otherwise specified by the Board, the following
terms and conditions shall apply to Options granted under the Plan:
(i) Term. The duration of the Option shall be for ten
years from the date of grant.
(ii) Exercise of Option. Unless an Option is
terminated as provided hereunder, an Optionee may exercise an
Option pursuant to a vesting and exercisability schedule as
determined by the Board, which vesting and exercisability
schedule shall provide that an Option held by an Optionee who
terminates his employment with the Company for reasons other
than death, permanent and total disability, or termination of
employment by the Company for cause shall upon such
termination become exercisable to the extent vested
immediately prior to such termination.
(iii) Termination. Each Option granted pursuant to
the Plan shall expire upon the earliest to occur of:
(A) The date set forth in such Option, not
to exceed ten years from the date of grant (five
years in the case of a Significant Shareholder);
(B) The completion of the merger or sale of
substantially all of the Stock or assets of the
Company with or to another company in a transaction
in which the Company is not the survivor, except for
the merger of the Company into a wholly-owned
subsidiary and, provided that the Company shall have
given the Optionee at least thirty days' prior
written notice of its intent to enter into such
merger or sale (and the Company shall not be
considered the surviving corporation for purposes
hereof if the Company is the survivor of a reverse
triangular merger);
-4A-
<PAGE>
(C) Ninety days following the termination of
the employment of an Optionee, except for termination
for cause by the Company or termination because of
the Optionee's death or disability (in which event of
termination of employment due to the Optionee's death
or disability, the Option shall expire one year
following the termination of employment of an
Optionee); or
(D) Immediately upon the termination of the
employment of an Optionee by the Company for cause.
(iv) Acceleration. An Option shall become fully
vested and exercisable irrespective of its other provisions
(A) immediately prior to the completion of the merger or sale
of substantially all of the stock or assets of Company in a
transaction in which the Company is not the survivor, except
for the merger of the Company into a wholly-owned subsidiary
(and the Company shall not be considered the surviving
corporation for purposes hereof if the Company is the survivor
of a reverse triangular merger); or (B) upon termination of
the Optionee's employment with the Company or a Subsidiary
Corporation because of death, disability or normal retirement
upon reaching the age of sixty-five.
(v) Nontransferability. All Options granted under the
Plan shall be nontransferable by the Optionee, other than by
will or the laws of descent and distribution, and shall be
exercisable during the Optionee's lifetime only by the
Optionee.
(b) The Board shall be free to specify terms and conditions
other than and in addition to those set forth above, in its discretion.
(c) All Option Agreements shall incorporate the provisions of
the Plan by reference.
7.4 Option Price. No Option granted pursuant to the Plan shall have an
Option price that is less than the Fair Market Value of Stock on the date the
Option is granted. Incentive Stock Options granted to Significant Shareholders
shall have an Option price of not less than 110% of the Fair Market Value of
Stock on the date of grant. The Option exercise price shall be subject to
adjustment as provided in Section 5.3 above.
7.5 Payment. Payment for all shares of Stock shall be made at the time
that an Option, or any part thereof, is exercised, and no shares shall be issued
until full payment therefor has been made. Payment shall be made (i) in cash, or
ARTICLE VIII
WRITTEN NOTICE, ISSUANCE OF STOCK
---------------------------------
CERTIFICATES, SHAREHOLDER PRIVILEGES
------------------------------------
8.1 Written Notice. An Optionee wishing to exercise an Option shall
give written notice to the Company, in the form and manner prescribed by the
Board. Full payment for the shares of Stock to be acquired pursuant to the
exercise of the Option must accompany the written notice.
8.2 Issuance of Stock Certificates. As soon as practicable after the
receipt of written notice and payment, the Company shall deliver to the Optionee
a certificate or certificates for the requisite number of shares of Stock.
8.3 Privileges of a Shareholder. An Optionee or any other person
entitled to exercise an Option under the Option Agreement shall not have
shareholder privileges with respect to any Stock covered by the Option until the
date of issuance of a stock certificate for such Stock.
-5A-
<PAGE>
ARTICLE IX
TERMINATION OF EMPLOYMENT OR SERVICES
-------------------------------------
9.1 Death or Disability. Subject to any prior partial exercise of the
Option, if an Optionee's employment terminates by reason of Optionee's death or
permanent and total disability, the Option may be exercised up to one hundred
percent of the shares originally subject to the Option at any time prior to the
expiration date of the Option or within 12 months after the date of such death
or disability, whichever period is the shorter, by the person or persons
entitled to do so under the Optionee's will or, if the Optionee shall fail to
make a testamentary disposition of an Option or shall die intestate, the
Optionee's legal representative or representatives.
9.2 Termination other than for Cause or Due to Death. In the event of
an Optionee's termination of employment other than by reason of death or
permanent and total disability, the Optionee may exercise such portion of his
Option as was vested and exercisable by him at the date of such termination (the
"Termination Date") at any time within ninety days of the Termination Date. In
any event, the Option cannot be exercised after the expiration of the term of
the Option. Options not exercised within the applicable period specified above
shall terminate.
(a) In the case of an Employee, a change of duties or position
within the Company or an assignment of employment in a Subsidiary
Corporation or Parent Corporation of the Company, if any, or from such
a Corporation to the Company, shall not be considered a termination of
employment for purposes of the Plan.
(b) The Option Agreements may contain such provisions as the
Board shall approve with reference to the effect of approved leaves of
absence upon termination of employment.
9.3 Termination for Cause. In the event of an Optionee's termination of
employment, which termination is by the Company or a Subsidiary Corporation for
cause, any Option or Options held by him under the Plan, to the extent not
exercised before such termination, shall terminate upon notice of termination
for cause.
ARTICLE X
RIGHTS OF OPTIONEES
-------------------
10.1 Service. Nothing in the Plan shall interfere with or limit in any
way the right of the Company or a Subsidiary Corporation to terminate any
Employee's employment at any time, nor confer upon any Employee any right to
continue in the employ of the Company or a Subsidiary Corporation.
10.2 Non-transferability. All Options granted under the Plan shall be
nontransferable by the Optionee, other than by will or the laws of descent and
distribution, and shall be exercisable during the Optionee's lifetime only by
the Optionee.
ARTICLE XI
OPTIONEE-EMPLOYEE'S TRANSFER
----------------------------
OR LEAVE OF ABSENCE
-------------------
For purposes of the Plan:
(a) A transfer of an Optionee who is an Employee from the
Company to a Subsidiary Corporation or Parent Corporation, or from one
such Corporation to another, or
(b) A leave of absence for such an Optionee (i) which is duly
authorized in writing by the Company or a Subsidiary Corporation, and
(ii) if the Optionee holds an Incentive Stock Option, which qualifies
under the applicable regulations under the Code which apply in the case
of incentive stock options,
shall not be deemed a termination of employment. However, under no circumstances
may an Optionee exercise an Option during any leave of absence, unless
authorized by the Board.
-6A-
<PAGE>
ARTICLE XII
AMENDMENT, MODIFICATION, AND
----------------------------
TERMINATION OF THE PLAN
-----------------------
(a) The Board may at any time terminate and from time to time
may amend or modify the Plan, provided, however, that no such action of
the Board, without approval of the shareholders, may:
(i) increase the total amount of Stock which may
be purchased through Options granted under the Plan, except as
provided in Article V;
(ii) change the class of Employees eligible to
receive Options; or
(iii) otherwise amend or modify the Plan where
approval of the shareholders is required by any law or
regulation governing the Company.
(b) No amendment, modification, or termination of the Plan
shall in any manner adversely affect any outstanding Option under the
Plan without the consent of the Optionee holding the Option.
ARTICLE XIII
ACQUISITION, MERGER OR LIQUIDATION
----------------------------------
13.1 Acquisition.
(a) In the event that an acquisition occurs with respect to
the Company, the Company shall have the option, but not the obligation,
to cancel Options outstanding as of the effective date of such
acquisition, whether or not such Options are then exercisable, in
return for payment to the Optionees of an amount equal to a reasonable
estimate of an amount (hereinafter the "Spread"), determined by the
Board, equal to the difference between the net amount per share payable
in the acquisition or as a result of the acquisition, less the exercise
price of the Option. In estimating the Spread, appropriate adjustments
to give effect to the existence of the Options shall be made, such as
deeming the Options to have been exercised, with the Company receiving
the exercise price payable thereunder, and treating the shares
receivable upon exercise of the Options as being outstanding in
determining the net amount per share.
(b) For purposes of this section, an "acquisition" shall mean
any transaction in which substantially all of the Company's assets are
acquired or in which a controlling amount of the Company's outstanding
shares are acquired, in each case by a single person or entity or an
affiliated group of persons and entities. For purposes of this section,
a controlling amount shall mean more than 50% of the issued and
outstanding shares of Stock of the Company. The Company shall have the
above option to cancel Options regardless of how the acquisition is
effectuated, whether by direct purchase, through a merger or similar
corporate transaction, or otherwise. In cases where the acquisition
consists of the acquisition of assets of the Company, the net amount
per share shall be calculated on the basis of the net amount receivable
with respect to shares upon a distribution and liquidation by the
Company after giving effect to expenses and charges, including but not
limited to taxes, payable by the Company before the liquidation can be
completed.
(c) Where the Company does not exercise its option under this
Section 13.1 the remaining provisions of this Article XIII shall apply,
to the extent applicable.
13.2 Merger or Consolidation. If the Company shall be the surviving
corporation in any merger or consolidation, any Option granted hereunder shall
pertain to and apply to the securities to which a holder of the number of shares
of Stock subject to the Option would have been entitled in such merger or
consolidation, provided that the Company shall not be considered the surviving
corporation for purposes hereof if the Company is the survivor of a reverse
triangular merger.
-7A-
<PAGE>
13.3 Other Transactions. A dissolution or a liquidation of the Company
or a merger and consolidation in which the Company is not the surviving
corporation (the Company shall not be considered the surviving corporation for
purposes hereof if the Company is the survivor of a reverse triangular merger)
shall cause every Option outstanding hereunder to terminate as of the effective
date of such dissolution, liquidation, merger or consolidation. However, the
Optionee either (i) shall be offered a firm commitment whereby the resulting or
surviving corporation in a merger or consolidation will tender to the Optionee
an option (the "Substitute Option") to purchase its shares on terms and
conditions both as to number of shares and otherwise, which will substantially
preserve to the Optionee the rights and benefits of the Option outstanding
hereunder granted by the Company, or (ii) shall have the right immediately prior
to such dissolution, liquidation, merger, or consolidation to exercise any
unexercised Options whether or not then vested, subject to the provisions of the
Plan. The Board shall have absolute and uncontrolled discretion to determine
whether the Optionee has been offered a firm commitment and whether the tendered
Substitute Option will substantially preserve to the Optionee the rights and
benefits of the Option outstanding hereunder. In any event, any Substitute
Option for an Incentive Stock Option shall comply with the requirements of Code
Section 424(a).
ARTICLE XIV
SECURITIES REGISTRATION
-----------------------
14.1 Securities Registration. In the event that the Company shall deem
it necessary or desirable to register under the Securities Act of 1933, as
amended, or any other applicable statute, any Options or any Stock with respect
to which an Option may be or shall have been granted or exercised, or to qualify
any such Options or Stock under the Securities Act of 1933, as amended, or any
other statute, then the Optionee shall cooperate with the Company and take such
action as is necessary to permit registration or qualification of such Options
or Stock.
14.2 Representations. Unless the Company has determined that the
following representation is unnecessary, each person exercising an Option under
the Plan may be required by the Company, as a condition to the issuance of the
shares pursuant to exercise of the Option, to make a representation in writing
(i) that he is acquiring such shares for his own account for investment and not
with a view to, or for sale in connection with, the distribution of any part
thereof within the meaning of the Securities Act of 1933, (ii) that before any
transfer in connection with the resale of such shares, he will obtain the
written opinion of counsel for the Company, or other counsel acceptable to the
Company, that such shares may be transferred without registration thereof. The
Company may also require that the certificates representing such shares contain
legends reflecting the foregoing. To the extent permitted by law, including the
Securities Act of 1933, nothing herein shall restrict the right of a person
exercising an Option to sell the shares received in an open market transaction.
ARTICLE XV
TAX WITHHOLDING
---------------
Whenever shares of Stock are to be issued in satisfaction of Options
exercised under the Plan, the Company shall have the power to require the
recipient of the Stock to remit to the Company an amount sufficient to satisfy
federal, state, and local withholding tax requirements, if any.
-8A-
<PAGE>
ARTICLE XVI
INDEMNIFICATION
---------------
To the extent permitted by law, each person who is or shall have been a
member of the Board or the Committee shall be indemnified and held harmless by
the Company against and from any loss, cost, liability, or expense that may be
imposed upon or reasonably incurred by him in connection with or resulting from
any claim, action, suit, or proceeding to which he may be a party or in which he
may be involved by reason of any action taken or failure to act under the Plan
and against and from any and all amounts paid by him in settlement thereof, with
the Company's approval, or paid by him in satisfaction of judgment in any such
action, suit, or proceeding against him, provided he shall give the Company an
opportunity, at its own expense, to handle and defend the same before he
undertakes to handle and defend it on his own behalf. The foregoing right of
indemnification shall not be exclusive of any other rights of indemnification to
which such persons may be entitled under the Company's certificate of
incorporation or bylaws, as a matter of law, or otherwise, or any power that the
Company or any Subsidiary Corporation may have to indemnify them or hold them
harmless.
ARTICLE XVII
REQUIREMENTS OF LAW
-------------------
17.1 Requirements of Law. The granting of Options and the issuance of
shares of Stock upon the exercise of an Option shall be subject to all
applicable laws, rules, and regulations, and to such approvals by any
governmental agencies or national securities exchanges as may be required.
17.2 Governing Law. The Plan, and all agreements hereunder, shall be
construed in accordance with and governed by the laws of the State of Colorado.
ARTICLE XVIII
EFFECTIVE DATE OF PLAN
----------------------
The Plan shall be effective on March 27, 1997.
ARTICLE XIX
COMPLIANCE WITH CODE
--------------------
Incentive Stock Options granted hereunder are intended to qualify as
"incentive stock options" under Code ss. 422. If any provision of the Plan is
susceptible to more than one interpretation, such interpretation shall be given
thereto as is consistent with Incentive Stock Options granted under the Plan
being treated as incentive stock options under the Code.
ARTICLE XX
NO OBLIGATION TO EXERCISE OPTION
--------------------------------
The granting of an Option shall impose no obligation upon the holder
thereof to exercise such Option.
ARTICLE XXI
SHAREHOLDER APPROVAL
--------------------
The Plan was approved by a vote of the majority of the shares of common
stock of the Company on May 21, 1997.
THIS INCENTIVE STOCK OPTION PLAN was adopted by the Board of Directors
of St. Mary Land & Exploration Company on March 27, 1997, to be effective upon
adoption, and was amended by the Board of Directors on July 24, 1997 and on
March 25, 1999 to increase the number of shares available for issuance under
Article V to 1,650,000.
-9A-
<PAGE>
ST. MARY LAND & EXPLORATION COMPANY
By: /s/ RICHARD C. NORRIS
-----------------------------------------------
Richard C. Norris
Title: Vice President-Finance, Secretary and Treasurer
-10A-
EXHIBIT 10.2
As Amended on March 25, 1999
ST. MARY LAND & EXPLORATION COMPANY
-----------------------------------
STOCK OPTION PLAN
-----------------
ARTICLE I
ESTABLISHMENT AND PURPOSE
-------------------------
1.1 Establishment. St. Mary Land & Exploration Company, a Delaware
corporation (the "Company"), hereby establishes a stock option plan for key
employees, consultants and members of the Board of Directors of the Company or
of a subsidiary of the Company, providing material services to the Company,
which shall be known as the ST. MARY LAND & EXPLORATION COMPANY STOCK OPTION
PLAN (the "Plan"). The Company shall enter into Option agreements with Optionees
pursuant to the Plan.
1.2 Purpose. The purpose of the Plan is to enhance shareholder value by
attracting, retaining and motivating key employees, consultants and members of
the Board of Directors of the Company and of a subsidiary of the Company by
providing them with a means to acquire a proprietary interest in the Company's
success.
ARTICLE II
ELIGIBILITY AND PARTICIPATION
-----------------------------
All current and former employees, consultants and members of the Board
of Directors of the Company (the "Board"), and of any subsidiary of the Company,
are eligible to participate in the Plan and receive Options under the Plan.
Optionees under the Plan shall be selected by the Board, in its sole discretion,
from among those current and former employees, consultants and members of the
Board of the Company, and of any subsidiary of the Company, who, in the opinion
of the Board, are or were in a position to contribute materially to the
Company's continued growth and development and to its long-term success.
ARTICLE III
ADMINISTRATION
--------------
Administration. The Board shall be responsible for administering
the Plan.
(a) The Board is authorized to interpret the Plan; to
prescribe, amend, and rescind rules and regulations relating to the
Plan; to provide for conditions and assurances deemed necessary or
advisable to protect the interests of the Company with respect to the
Plan; and to make all other determinations necessary or advisable for
the administration of the Plan. Determinations, interpretations, or
other actions made or taken by the Board with respect to the Plan and
Options granted under the Plan shall be final and binding and
conclusive for all purposes and upon all persons.
(b) At the discretion of the Board the Plan may be
administered by a Committee of two or more non-employee Directors
appointed by the Board (the "Committee"). The members of the Committee
may be Directors who are eligible to receive Options under the Plan,
but Options may be granted to such persons only by action of the full
Board and not by action of the Committee. The Committee shall have full
power and authority, subject to the limitations of the Plan and any
limitations imposed by the Board, to construe, interpret and administer
the Plan and to make determinations which shall be final, conclusive
and binding upon all persons, including any persons having any
interests in any Options which may be granted under the Plan, and, by
resolution or resolutions to provide for the creation and issuance of
any Option, to fix the terms upon which and the time or times at or
within which, and the price or prices at which any shares may be
purchased from the Company upon the exercise of an Option. Such terms,
time or times and price or prices shall, in every case, be set forth or
incorporated by reference in the instrument or instruments evidencing
an Option, and shall be consistent with the provisions of the Plan.
-1B-
<PAGE>
(c) Where a Committee has been created by the Board pursuant
to this Article III, references in the Plan to actions to be taken by
the Board shall be deemed to refer to the Committee as well, except
where limited by the Plan or by the Board.
(d) No member of the Board or the Committee shall be liable
for any action or determination made in good faith with respect to the
Plan or any Option granted under it.
ARTICLE IV
STOCK SUBJECT TO THE PLAN
-------------------------
4.1 Number. The total number of shares of common stock of the Company
(the "Stock") hereby made available and reserved for issuance under the Plan
upon exercise of Options shall be 1,650,000 shares. Notwithstanding anything to
the contrary contained in the foregoing, to the extent that options are issued
under any Incentive Stock Option Plan adopted by the Company, the shares of
common stock reserved for issuance pursuant to Options granted under this Plan
shall be reduced. The aggregate number of shares of Stock available under the
Plan shall be subject to adjustment as provided in Section 4.3.
4.2 Unused Stock. If an Option shall expire or terminate for any reason
without having been exercised in full, or if an "immaculate cashless exercise"
(as described in Section 5.4) results in the issuance of a reduced number of
shares in satisfaction of an option grant, the unpurchased shares of Stock
subject thereto shall (unless the Plan shall have terminated) become available
for other Options under the Plan.
4.3 Adjustment in Capitalization. In the event of any change in the
outstanding shares of Stock of the Company by reason of a stock dividend or
split, recapitalization, reclassification, or other similar capital change, the
aggregate number of shares of Stock set forth in Section 4.1 shall be
appropriately adjusted by the Board, whose determination shall be conclusive. In
any such case, the number and kind of shares of Stock that are subject to any
Option and the Option price per share shall be proportionately and appropriately
adjusted without any change in the aggregate Option price to be paid therefor
upon exercise of the Option.
ARTICLE V
TERMS OF STOCK OPTIONS
----------------------
5.1 Grant of Options. Subject to Section 4.1, Options may be granted to
current and former employees, consultants and members of the Board of the
Company and of any subsidiary of the Company at any time and from time to time
as determined by the Board. The Board shall have complete discretion in
determining the terms and conditions and number of Options granted to each
Optionee. In making such determinations, the Board may take into account the
nature of services rendered by such current and former employees, consultants
and members of the Board, their present and potential contributions to the
Company and such other factors as the Board in its discretion shall deem
relevant.
5.2 Option Agreement; Terms and Conditions to Apply Unless Otherwise
Specified. As determined by the Board on the date of grant, each Option shall be
evidenced by an option agreement (the "Option Agreement") that specifies: the
Option price; the duration of the Option; the number of shares of Stock to which
the Option applies; such vesting or exercisability restrictions which the Board
may impose; and any other terms or conditions which the Board may impose. All
such terms and conditions shall be determined by the Board at the time of grant
of the Option.
(a) If not otherwise specified by the Board, the following
terms and conditions shall apply to Options granted under the Plan:
(i) Term. The duration of the Option shall be for
ten years from the date of grant.
-2B-
<PAGE>
(ii) Exercise of Option. Unless an Option is
terminated as provided hereunder, an Optionee may exercise an
Option pursuant to a vesting and exercisability schedule as
determined by the Board, which vesting and exercisability
schedule shall provide that (A) an Option held by an Optionee
who retires from employment with the Company after having both
reached the age of sixty and completed twelve years of service
with the Company shall continue to vest in accordance with the
vesting schedule set forth in the applicable Option Agreement
notwithstanding the termination of the Optionee's employment
with the Company, provided that prior to the exercise of the
Option such Optionee does not after such retirement become
employed on a full-time basis by a competitor of the Company
prior to reaching age sixty-five, and (B) an Option held by a
non-employee Director of the Company who retires from the
Board after completing at least five years of service to the
Company shall become fully vested. An Option may however not
be exercised prior to five years following the date of its
grant.
(iii) Termination. Each Option granted pursuant to
the Plan shall expire upon the earliest to occur of:
(A) The date set forth in such Option, not
to exceed ten years from the date of grant;
(B) The completion of the merger or sale of
substantially all of the Stock or assets of the
Company with or to another company in a transaction
in which the Company is not the survivor, except for
the merger of the Company into a wholly-owned
subsidiary (and the Company shall not be considered
the surviving corporation for purposes hereof if the
Company is the survivor of a reverse triangular
merger), provided that the Company shall have given
the Optionee at least thirty days' prior written
notice of its intent to enter into such merger or
sale; or
(C) The termination of the employment of an
Optionee for cause by the Company.
(iv) Acceleration. An Option shall become fully
vested and exercisable irrespective of its other provisions
(A) immediately prior to the completion of the merger or sale
of substantially all of the stock or assets of the Company in
a transaction in which the Company is not the survivor, except
for the merger of the Company into a wholly-owned subsidiary
(and the Company shall not be considered the surviving
corporation for purposes hereof if the Company is the survivor
of a reverse triangular merger); (B) upon termination of the
Optionee's employment with the Company or a subsidiary thereof
because of death, disability or normal retirement upon
reaching the age of sixty-five; or (C) in the event that the
Optionee is a non-employee member of the Company's Board of
Directors, upon retirement from the Company's Board of
Directors after reaching the age of seventy.
(v) Transferability. In addition to the Optionee,
the Option may be exercised, to the extent exercisable by the
Optionee, by the person or persons to whom the Optionee's
rights under the Option pass by will or the laws of descent
and distribution, by the spouse or the descendants of the
Optionee or by trusts for such persons, to whom or which the
Optionee may have transferred the Option, or by legal
representative of any of the foregoing. Any such transfer
shall be made only in compliance with the Securities Act of
1933, as amended, and the requirements therefor as set forth
by the Company.
(b) The Board shall be free to specify terms and conditions
other than and in addition to those set forth above, in its
discretion.
(c) All Option Agreements shall incorporate the provisions of
the Plan by reference.
-3B-
<PAGE>
5.3 Option Price. No Option granted pursuant to the Plan shall have
an Option price that is less than the fair market value of Stock on the date the
Option is granted, as determined by the Board. The Option exercise price shall
be subject to adjustment as provided in Section 4.3 above.
5.4 Payment. Payment for all shares of Stock shall be made at the time
that an Option, or any part thereof, is exercised, and no shares shall be issued
until full payment therefor has been made. Payment shall be made (i) in cash, or
(ii) if acceptable to the Board, in Stock, by the surrender of Option rights
hereunder valued at the difference between the Option exercise price plus income
taxes to be withheld, if any, and the fair market value of the common stock
(referred to as "immaculate cashless exercise"), or in some other form.
ARTICLE VI
WRITTEN NOTICE, ISSUANCE OF STOCK
---------------------------------
CERTIFICATES, SHAREHOLDER PRIVILEGES
------------------------------------
6.1 Written Notice. An Optionee wishing to exercise an Option shall
give written notice to the Company, in the form and manner prescribed by the
Board. Full payment for the shares of Stock acquired pursuant to the Option must
accompany the written notice.
6.2 Issuance of Stock Certificates. As soon as practicable after the
receipt of written notice and payment, the Company shall deliver to the Optionee
a certificate or certificates for the requisite number of shares of Stock.
6.3 Privileges of a Shareholder. An Optionee or any other person
entitled to exercise an Option under the Option Agreement shall not have
shareholder privileges with respect to any Stock covered by the Option until the
date of issuance of a stock certificate for such Stock.
ARTICLE VII
RIGHTS OF OPTIONEES
-------------------
Nothing in the Plan shall interfere with or limit in any way the right
of the Company or a subsidiary corporation to terminate any employee's or
consultant's employment at any time, nor confer upon any employee or consultant
any right to continue in the employ of the Company or a subsidiary corporation.
ARTICLE VIII
AMENDMENT, MODIFICATION, AND
----------------------------
TERMINATION OF THE PLAN
-----------------------
The Board may at any time terminate and from time to time may amend or
modify the Plan. Any amendment or modification of the Plan by the Board may be
accomplished without approval of the shareholders of the Company, except in the
event that shareholder approval of such amendment or modification is required by
any law or regulation governing the Company.
No amendment, modification, or termination of the Plan shall in any
manner adversely affect any outstanding Option under the Plan without the
consent of the Optionee holding the Option.
ARTICLE IX
ACQUISITION, MERGER OR LIQUIDATION
----------------------------------
9.1 Acquisition.
(a) In the event that an acquisition occurs with respect to
the Company, the Company shall have the option, but not the obligation,
to cancel Options outstanding as of the effective date of such
acquisition, whether or not such Options are then exercisable, in
return for payment to the Optionees of an amount equal to a reasonable
estimate of an amount (hereinafter the "Spread"), determined by the
Board, equal to the difference between the net amount per share payable
in the acquisition or as a result of the acquisition, less the exercise
price of the Option. In estimating the Spread, appropriate adjustments
to give effect to the existence of the Options shall be made, such as
deeming the Options to have been exercised, with the Company receiving
the exercise price payable thereunder, and treating the Stock
receivable upon exercise of the Options as being outstanding in
determining the net amount per share.
-4B-
<PAGE>
(b) For purposes of this section, an "acquisition" shall mean
any transaction in which substantially all of the Company's assets are
acquired or in which a controlling amount of the Company's outstanding
shares are acquired, in each case by a single person or entity or an
affiliated group of persons and entities. For purposes of this section,
a controlling amount shall mean more than fifty percent of the issued
and outstanding shares of Stock of the Company. The Company shall have
the above option to cancel Options regardless of how the acquisition is
effectuated, whether by direct purchase, through a merger or similar
corporate transaction, or otherwise. In cases where the acquisition
consists of the acquisition of assets of the Company, the net amount
per share shall be calculated on the basis of the net amount receivable
with respect to shares upon a distribution and liquidation by the
Company after giving effect to expenses and charges, including but not
limited to taxes, payable by the Company before the liquidation can be
completed.
(c) Where the Company does not exercise its option under this
Section 9.1 the remaining provisions of this Article IX shall apply, to
the extent applicable.
9.2 Merger or Consolidation. If the Company shall be the surviving
corporation in any merger or consolidation, any Option granted hereunder shall
pertain to and apply to the securities to which a holder of the number of shares
of Stock subject to the Option would have been entitled in such merger or
consolidation, provided that the Company shall not be considered the surviving
corporation for purposes hereof if the Company is the survivor of a reverse
triangular merger.
9.3 Other Transactions. A dissolution or a liquidation of the Company
or a merger and consolidation in which the Company is not the surviving
corporation (the Company shall not be considered the surviving corporation for
purposes hereof if the Company is the survivor of a reverse triangular merger)
shall cause every Option outstanding hereunder to terminate as of the effective
date of such dissolution, liquidation, merger or consolidation. However, the
Optionee either (i) shall be offered a firm commitment whereby the resulting or
surviving corporation in a merger or consolidation will tender to the Optionee
an option (the "Substitute Option") to purchase its shares on terms and
conditions both as to number of shares and otherwise, which will substantially
preserve to the Optionee the rights and benefits of the Option outstanding
hereunder granted by the Company, or (ii) shall have the right immediately prior
to such dissolution, liquidation, merger, or consolidation to exercise any
unexercised Options whether or not then vested, subject to the other provisions
of the Plan. The Board shall have absolute and uncontrolled discretion to
determine whether the Optionee has been offered a firm commitment and whether
the tendered Substitute Option will substantially preserve to the Optionee the
rights and benefits of the Option outstanding hereunder.
ARTICLE X
SECURITIES REGISTRATION
-----------------------
10.1 Securities Registration. In the event that the Company shall deem
it necessary or desirable to register under the Securities Act of 1933, as
amended, or any other applicable statute, any Options or any Stock with respect
to which an Option may be or shall have been granted or exercised, or to qualify
any such Options or Stock under the Securities Act of 1933, as amended, or any
other statute, then the Optionee shall cooperate with the Company and take such
action as is necessary to permit registration or qualification of such Options
or Stock.
10.2 Representations. Unless the Company has determined that the
following representation is unnecessary, each person exercising an Option under
the Plan may be required by the Company, as a condition to the issuance of the
shares of Stock pursuant to exercise of the Option, to make a representation in
writing (i) that he is acquiring such shares for his own account for investment
and not with a view to, or for sale in connection with, the distribution of any
part thereof within the meaning of the Securities Act of 1933, and (ii) that
before any transfer in connection with the resale of such shares, he will obtain
the written opinion of counsel for the Company, or other counsel acceptable to
the Company, that such shares may be transferred without registration thereof.
The Company may also require that the certificates representing such shares
contain legends reflecting the foregoing. To the extent permitted by law,
including the Securities Act of 1933, nothing herein shall restrict the right of
a person exercising an Option to sell the shares received in an open market
transaction.
-5B-
<PAGE>
ARTICLE XI
TAX WITHHOLDING
---------------
Whenever shares of Stock are to be issued in satisfaction of Options
exercised under the Plan, the Company shall have the power to require the
recipient of the Stock to remit to the Company an amount sufficient to satisfy
federal, state, and local withholding tax requirements, if any.
ARTICLE XII
INDEMNIFICATION
---------------
To the extent permitted by law, each person who is or shall have been a
member of the Board or the Committee shall be indemnified and held harmless by
the Company against and from any loss, cost, liability, or expense that may be
imposed upon or reasonably incurred by him in connection with or resulting from
any claim, action, suit, or proceeding to which he may be a party or in which he
may be involved by reason of any action taken or failure to act under the Plan
and against and from any and all amounts paid by him in settlement thereof, with
the Company's approval, or paid by him in satisfaction of judgment in any such
action, suit, or proceeding against him, provided he shall give the Company an
opportunity, at its own expense, to handle and defend the same before he
undertakes to handle and defend it on his own behalf. The foregoing right of
indemnification shall not be exclusive of any other rights of indemnification to
which such persons may be entitled under the Company's certificate of
incorporation or bylaws, as a matter of law, or otherwise, or any power that the
Company or a Subsidiary Corporation may have to indemnify them or hold them
harmless.
ARTICLE XIII
REQUIREMENTS OF LAW
-------------------
13.1 Requirements of Law. The granting of Options and the issuance of
shares of Stock upon the exercise of an Option shall be subject to all
applicable laws, rules, and regulations, and to such approvals by any
governmental agencies or national securities exchanges as may be required.
13.2 Governing Law. The Plan, and all agreements hereunder, shall be
construed in accordance with and governed by the laws of the State of Colorado.
ARTICLE XIV
EFFECTIVE DATE OF PLAN
----------------------
The Plan shall be effective on November 21, 1996.
ARTICLE XV
NO OBLIGATION TO EXERCISE OPTION
--------------------------------
The granting of an Option shall impose no obligation upon the holder
thereof to exercise such Option.
-6B-
<PAGE>
THIS STOCK OPTION PLAN was adopted by the Board of Directors of St.
Mary Land & Exploration Company on November 21, 1996, to be effective upon
adoption, and was amended by the Board of Directors on January 31, 1997 and on
March 25, 1999 to increase the number of shares available for issuance under
Article IV to 1,650,000.
ST. MARY LAND & EXPLORATION COMPANY
By: /s/ RICHARD C. NORRIS
-----------------------------------------------
Richard C. Norris
Title: Vice President-Finance, Secretary and Treasurer
-7B-
EXHIBIT 10.3
NET PROFITS INTEREST BONUS PLAN
-------------------------------
As Amended on
9/19/96, 7/24/97
and 1/28/99
The Net Profits Interest Bonus Plan of St. Mary Parish Land Company
shall function as follows:
1. Each year the Board of Directors of the Company shall designate the
key employees of the Company eligible to participate in the Net Profits Interest
Bonus Plan with respect to that calendar year. It is anticipated that such
participants shall be more senior employees and fewer in number than the
designated participants in the Company's Cash Bonus Plan.
2. Participants in the Net Profits Interest Bonus Plan shall receive a
net profits interest in the Company's interest in oil and gas wells completed,
plugged or abandoned or acquired by the Company during the calendar year (the
"Plan Year"). The aggregate amount of such net profits interest of all
participants for such Plan Year shall be ten percent which interest shall apply
after recovery by the Company from such wells of one hundred percent of all
costs incurred by it with respect thereto, including but not limited to land,
geological and geophysical costs but excluding (except as described in paragraph
4 below) interest, and such net profits interest shall increase to an aggregate
of twenty percent from and after such time as the Company has recovered two
hundred percent of all such costs. For purposes of the foregoing calculations,
such wells shall be accounted for as a single pool (effective January 1, 1999
except as described in paragraph 4 below). In determining net profits, any
recompletion, workover or similar expenditures for wells shall be charged
against the revenues of such wells, as well as direct lease operating expenses,
production taxes and overhead as determined solely by COPAS charges in the
relative areas.
3. Each key employee participating in the Net Profits Interest Bonus
Plan with respect to a Plan Year shall be allocated a portion of the net profits
interest for such Plan Year in proportion to his or her weighted base salary
received during such Year relative to the weighted base salary received by all
participants during such Plan Year. The weighted base salary of the President
and of the Executive Vice-Presidents of the Company shall be one hundred percent
of their base salaries received during such Plan Year and of all other
participants shall be two-thirds thereof; provided, however, that a reduced
participation rate may be established by the Board of Directors for certain key
employees whose duties involve them in only a portion of the Company's
activities.
-1C-
<PAGE>
4. The Board of Directors, in its discretion, may consider a
significant acquisition or a multi-year project to be accounted for as a
separate pool with respect to the Net Profits Interest Bonus Plan as follows:
(a) If the total costs incurred is greater than 75% of the
average annual aggregate cost during the current year and the preceding
two calendar years, the net profits interest of the participants with
respect to such large acquisition or multi-year project shall be a
portion of the ten percent and twenty percent amounts set forth in
paragraph 2 above equal to such percentages multiplied by a fraction of
which the numerator is 75 percent and the denominator is the percentage
which the cost of such acquisition or multi-year project is of the
average annual aggregate costs expended by the Company for all other
oil and gas wells during such year and during the preceding two
calendar years (but exclusive of the foregoing and any other projects
designated as separate pools); and
(b) Recovery of the Company's costs of such large acquisition
or multi-year project shall include interest thereon calculated at the
prime rate in effect from time to time;
(c) Notwithstanding the provisions of paragraph 3 above,
participants in the Net Profits Interest Bonus Plan with respect to
such large acquisition shall be allocated a portion of the net profits
interest with respect thereto based upon their weighted base salaries
for the calendar year such large acquisition closed. The net profits
interest in a multi-year project shall be allocated among the
participants in the Net Profits Interest Bonus Plan for the calendar
years in which the costs for such project are incurred until the
project is deemed to be substantially complete on the basis of their
weighted base salaries during such years;
(d) A transaction in which the Company acquires another
company, or is acquired or merges, or otherwise acquires what is
considered by the Compensation Committee of the Board of Directors of
the Company another oil and gas business (in which event the
Compensation Committee shall determine what other incentive
compensation is appropriate, if any), as contrasted with what is
considered a more customary acquisition of oil and gas properties,
shall not constitute the acquisition of an oil and gas well project
subject to the Net Profits Interest Bonus Plan.
-2C-
<PAGE>
5. Subject to the Plan Year buyout provision of paragraph 9, the right
to a portion of a net profits interest of a designated participant in the Net
Profits Interest Bonus Plan shall vest in full in such participant on December
31 of the calendar year for which his or her participation is designated,
provided that the participant's employment by the Company did not terminate
prior to that date for reasons other than retirement or death. Termination of a
participant's employment by the Company subsequent to that time shall not affect
his or her right to a portion of such net profits interest.
6. Mining projects of the Company shall be accounted for as a separate
pool for purposes of the Net Profits Interest Bonus Plan and the net profits
interests with respect thereto. The Board of Directors of the Company may
determine that employees of the Company whose time is primarily devoted to
mining projects shall not participate under the Net Profits Interest Bonus Plan
in net profits interests in oil and gas project pools and conversely with
respect to employees whose time is primarily devoted to oil and gas projects and
net profits interests in mining projects.
7. Allocations or payments to participants under the Net Profits
Interest Bonus Plan shall not be deemed to constitute compensation of any nature
for purposes of any other compensation, retirement or other benefit plan of the
Company. To the extent that any such other plan contains provisions contrary to
the foregoing sentence, such other plan shall be deemed to be amended to conform
to the foregoing sentence.
8. Net profits interests allocated under the Net Profits Interest Bonus
Plan shall not constitute for the participants therein the ownership of real
property interests in the mineral properties of the Company. Rather such net
profits interests shall constitute solely a right to receive payments from the
Company, or from a fund or trust established by the Company for that purpose,
the amount of which shall be determined by such net profits interests and the
Net Profits Interest Bonus Plan.
-3C-
<PAGE>
9. Payments to participants under the Net Profits Interest Bonus Plan
shall be made annually, or more frequently as determined by the Company. The
right to payments under the Net Profits Interest Bonus Plan shall not be subject
to voluntary or involuntary assignment by any participant thereunder other than
upon death pursuant to the laws of descent and distribution. The Company shall
have the right at any time or from time to time to acquire the rights of all
participants in any Plan Year if the participants holding no less than
two-thirds of that Plan Year's interests have agreed in writing to the terms and
conditions of a buy-out of that Plan Year.
10. All matters with respect to the interpretation and application of
the Net Profits Interest Bonus Plan shall be conclusively determined by the
Compensation Committee of the Board of Directors of the Company.
11. The Net Profits Interest Bonus Plan may be terminated or modified
prospectively at any time by the Board of Directors. Nothing contained in the
Net Profits Interest Bonus Plan shall constitute a contract, express or implied,
or any other type of obligation with respect to the employment or the continued
employment by the Company of any person.
-4C-
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