<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ x ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 1998.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
Commission File Number 0-20872
ST. MARY LAND & EXPLORATION COMPANY
(Exact name of Registrant as specified in its charter)
Delaware 41-0518430
(State or other Jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1776 Lincoln Street, Suite 1100, Denver, Colorado 80203
(Address of principal executive offices) (Zip Code)
(303) 861-8140
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ x ] No [ ]
Indicate by check mark if disclosure of delinquent filer pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ x ]
The aggregate market value of 10,599,514 shares of voting stock held
by non-affiliates of the Registrant, based upon the closing sale price of the
Common Stock on March 15, 1999 of $18.75 per share as reported on the Nasdaq
National Market System, was $198,740,888. Shares of Common Stock held by each
director and executive officer and by each person who owns 10% or more of the
outstanding Common Stock or who is otherwise believed by the Company to be in a
control position have been excluded. This determination of affiliate status is
not necessarily a conclusive determination for other purposes.
As of March 15, 1999, the Registrant had 10,827,067 shares of Common
Stock outstanding.
DOCUMENT INCORPORATED BY REFERENCE
The information required by Part III (Items 10, 11, 12 and 13) is
incorporated by reference from Registrant's definitive Proxy Statement relating
to its 1999 Annual Meeting of Stockholders.
<PAGE>
TABLE OF CONTENTS
-----------------
ITEM PAGE
PART I
ITEM 1 BUSINESS.............................................................. 4
Background....................................................... 4
Business Strategy................................................ 4
Significant Developments Since December 31, 1997................. 7
ITEM 2. PROPERTIES........................................................... 8
Domestic Operations.............................................. 8
International Operations......................................... 14
Key Relationships................................................ 14
Acquisitions..................................................... 15
Reserves......................................................... 16
Production....................................................... 17
Productive Wells................................................. 17
Drilling Activity................................................ 18
Domestic Acreage................................................. 19
Non-Oil and Gas Activities....................................... 19
Competition...................................................... 20
Markets and Major Customers...................................... 20
Government Regulations........................................... 20
Title to Properties.............................................. 21
Operational Hazards and Insurance................................ 21
Employees and Office Space....................................... 22
Glossary......................................................... 22
ITEM 3. LEGAL PROCEEDINGS.................................................... 24
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................. 24
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED SECURITY HOLDERS MATTERS..................................... 25
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA................................. 26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................................. 28
Overview......................................................... 28
Results of Operations............................................ 31
Liquidity and Capital Resources.................................. 35
Accounting Matters............................................... 41
Effects of Inflation and Changing Prices......................... 42
Financial Instrument Market Risk................................. 42
<PAGE>
TABLE OF CONTENTS
-----------------
(Continued)
ITEM PAGE
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(Included within the content of ITEM 7.)
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................... 44
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.................................. 44
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.................. 44
ITEM 11. EXECUTIVE COMPENSATION.............................................. 44
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT...................................................... 44
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................... 44
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K................................................. 45
<PAGE>
PART I
ITEM 1. BUSINESS
Background
St. Mary Land & Exploration Company ("St. Mary" or the "Company") is an
independent energy company engaged in the exploration, development, acquisition
and production of natural gas and crude oil. St. Mary's operations are 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. As
of December 31, 1998, the Company had estimated net proved reserves of
approximately 8.6 MMBbls of oil and 132.6 Bcf of natural gas, or an aggregate of
184.3 BCFE (86% proved developed, 72% gas) with a PV-10 value before tax of
$125.1 million.
From January 1, 1994, through December 31, 1998, the Company added
estimated net proved reserves of 270.0 BCFE at an average finding cost of $5.84
per BOE. The Company's average annual production replacement was 220% during
this five-year period.
In 1998 production increased 10% to a total of 33.1 BCFE, or average
daily production of 90.6 MMcf per day. The Company's 1999 capital budget of
approximately $71.0 million includes $37.0 million for ongoing development and
exploration programs in the core operating areas, $25.0 million for niche
acquisitions of oil and gas properties and $9.0 million for higher-risk,
large-target exploration prospects.
The principal offices of the Company are located at 1776 Lincoln
Street, Suite 1100, Denver, Colorado 80203, and its telephone number is (303)
861-8140.
Business Strategy
St. Mary's objective is to build stockholder value through consistent
economic growth in reserves and production and the resulting increase in net
asset value per share, cash flow per share and earnings per share. A focused and
balanced program of low to medium-risk exploration and development and niche
acquisitions in each of its core operating areas is designed to provide the
foundation for steady growth while the Company's portfolio of higher-risk,
large-target exploration prospects has the potential to significantly increase
the Company's reserves and production. All investment decisions are measured and
ranked by their risk-adjusted impact on per share value. The Company does not
pursue growth for the sake of growth.
St. Mary's long-term corporate strategy focuses on growing value per
share, and not necessarily the absolute size of the Company. Management believes
that independents with equity market capitalizations between $250 and $600
million are best positioned to capitalize on opportunities in the domestic E&P
sector and therefore to realize superior returns for their stockholders.
Companies in this size range have critical mass and are able to sustain quality
exploration, development and niche acquisition programs that have a significant
impact on stockholder value.
-4-
<PAGE>
The Company will pursue opportunities to monetize selected assets at a
premium and to repurchase shares at attractive values in order to enhance the
growth in St. Mary's per share value while maintaining the market capitalization
of the Company within an optimal size range. St. Mary also will continue to
focus its resources within selected basins in the U.S. where the Company's
expertise in geology, geophysics and drilling and completion techniques provides
competitive advantages.
Principal elements of the Company's strategy are as follows:
Focused Geographic Operations. The Company focuses its exploration,
development and acquisition activities in five core operating areas where it has
built a balanced portfolio of proved reserves, development drilling
opportunities and higher-risk large-target exploration prospects. The Company
believes that its extensive leasehold position is a strategic asset. Since 1992
St. Mary has expanded its technical and operating staff and increased its
drilling, production and operating capabilities. Senior technical managers, each
possessing over 20 years of experience, head up regional technical offices
located near core properties and are supported by centralized administration in
the Company's Denver office. St. Mary has knowledgeable and experienced
professionals at every level of the organization. St. Mary believes that its
long-standing presence, its established networks of local industry relationships
and its extensive acreage holdings in its core operating areas provide a
significant competitive advantage. Additionally, the Company believes that it
can continue to expand its operations without the need to proportionately
increase the number of employees.
Exploitation and Development of Existing Properties. The Company uses
its comprehensive base of geological, geophysical, engineering and production
experience in each of its core operating areas to source prospects for its
ongoing, low to medium-risk development and exploration programs. St. Mary
conducts detailed geologic studies and uses an array of technologies and tools
including 3-D seismic imaging, hydraulic fracturing and reservoir stimulation
techniques, and specialized logging tools to maximize the potential of its
existing properties. During 1998, the Company participated in 137 gross wells
with an 87% success rate and 52 recompletions with an 85% success rate.
Large-Target Prospects. The Company generally invests approximately 15%
of its annual capital budget in higher-risk, large-target exploration projects.
The Company's strategy is to test four or more of these large exploration
prospects each year which in total have the potential, if successful, to
increase the Company's net reserves by 25% or more. St. Mary seeks to invest in
a diversified mix of large-target exploration projects and generally limits its
capital exposure by participating with other experienced industry partners. St.
Mary plans to test several large-target prospects in south Louisiana and Texas
during 1999, including prospects at its Stallion, South Horseshoe Bayou,
Edgerly, Patterson, North Parcperdue and Carrier projects.
-5-
<PAGE>
Selective Acquisitions. The Company 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 focus on smaller, negotiated transactions where the Company has specialized
geologic knowledge or operating experience has enabled it to acquire
attractively priced and under-exploited properties.
St. Mary's strong balance sheet positions the Company in 1999 to exploit
acquisition opportunities arising from dislocations occurring throughout the
upstream oil and gas sector. Many over-leveraged companies are expected to
divest assets during the year in order to reduce their debt levels in the
adverse climate of low prices and severely limited access to new capital. St.
Mary will continue to emphasize smaller niche acquisitions utilizing the
Company's technical expertise, financial flexibility and structuring experience.
Many attractive acquisition candidates are sourced in cooperation with St.
Mary's regional offices where the local personnel have a detailed insight into
emerging opportunities. Additionally, the Company is also actively seeking
larger acquisitions of assets or companies that would afford opportunities to
expand the Company's existing core areas, acquire additional geoscientists or
gain a significant acreage and production foothold in a new basin within the
United States.
Strategic Relationships. The Company cultivates strategic partnerships
with independent oil and gas operators having focused regional experience and
specialized technical skills. The Company's strategy is to serve as operator or,
alternatively, to maintain a majority interest in such ventures to ensure that
it can exercise significant influence over development and exploration
activities. In addition the Company seeks industry partners who are willing to
co-invest on substantially the same basis as the Company. For example, the
Company's operations in the Williston Basin are conducted through Panterra
Petroleum ("Panterra") in which St. Mary holds a 74% general partnership
interest. The managing partner of Panterra is Nance Petroleum Corporation
("Nance Petroleum"), the principal of which has over 25 years of experience in
the Williston Basin.
Financial Flexibility. A conservative use of financial leverage has
long been a cornerstone of St. Mary's strategy. St. Mary believes that the
preservation of a strong balance sheet is a competitive advantage because it
enables the Company to act quickly and decisively to capture opportunities and
provides the financial resources to weather periods of volatile commodity prices
or escalating costs.
-6-
<PAGE>
Significant Developments Since December 31, 1997
Oil and Gas Property Sales. In order to continue to focus and
rationalize its operations, the Company sold certain non-strategic interests in
Oklahoma for net proceeds of approximately $22 million and various minor
interests in Canada for net proceeds of $1.2 million. Both of these sales
occurred in December 1998. The Company realized a pre-tax gain on the sale of
these properties of approximately $7.7 million. To accelerate the receipt of
proceeds from the Canadian property sale, the Company obtained a letter of
credit ("LOC") guaranteeing the payment of Canadian federal income tax
liabilities for the Company and its joint venture partners in the Canadian
properties. The Company expects the LOC to expire unused in 1999.
Stock Repurchase Plan. 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 purchases or negotiated sales, up to 1,000,000 of
its own common shares. The Company repurchased a total of 147,800 of its common
shares during 1998 and an additional 35,000 shares to date in 1999.
Acquisitions of Oil and Gas Properties. In 1998 the Company completed 6
acquisitions of oil and gas properties for $4.2 million comprised of
supplemental acquisitions of $3.4 million in the Permian and Williston basins
and acquisitions of producing properties in Louisiana and the Anadarko Basin of
$800,000.
Reserve Revisions and Writedowns. The Company's year-end 1998 reserves
reflect property dispositions of 39.6 BCFE which includes 2.8 BCFE of current
year production, discoveries and extensions of 40.8 BCFE, acquisitions of 5.3
BCFE, negative price-related revisions of 18.2 BCFE and a write-down of 38.8
BCFE of proved reserves at South Horseshoe Bayou, of which 23.7 BCFE were
reclassified to the probable category.
Writedown of Russian Joint Venture Receivable. The Company reduced the
carrying amount of the receivable from Khanty Mansiysk Oil Corporation to its
minimum conversion value, incurring a charge to operations of $4.6 million for
the year ended December 31, 1998 (see Item 2, International Operations).
Writedown of Investment in Summo Minerals Corporation. The Company
wrote down its net investment in Summo Minerals Corporation to its net
realizable value in the fourth quarter of 1998 (see Item 2, Non-Oil and Gas
Activities).
-7-
<PAGE>
ITEM 2. PROPERTIES
Domestic Operations
The Company's exploration, development and acquisition activities are
focused in five core operating areas: the Mid-Continent region; south Louisiana;
the ArkLaTex region; the Williston Basin in North Dakota and Montana; and the
Permian Basin in west Texas and New Mexico. Information concerning each of the
Company's major areas of operations, based on the Company's estimated net proved
reserves as of December 31, 1998, is set forth below.
<TABLE>
<CAPTION>
Oil Gas MMCFE PV-10 Value
-------- ------ ----------------- -------------------------
(MBbls) (MMcf) Amount Percent (In thousands) Percent
-------- ------ ------ ------- ------------- -------
<S> <C> <C> <C> <C> <C> <C>
Mid-Continent Region........ 577 75,186 78,648 42.7% $ 62,659 50.1%
ArkLaTex Region............. 578 40,061 43,529 23.6% 27,676 22.1%
South Louisiana............. 745 7,662 12,132 6.6% 12,628 10.1%
Williston Basin............. 3,821 3,094 26,020 14.1% 10,739 8.6%
Permian Basin............... 2,791 5,112 21,858 11.9% 10,162 8.1%
Other (1)................... 102 1,490 2,102 1.1% 1,262 1.0%
------- --------- --------- ------- ----------- -------
Total ...................... 8,614 132,605 184,289 100.0% $ 125,126 100.0%
======= ========= ========= ======= =========== =======
</TABLE>
- -----------
(1) Includes reserves associated with properties in Colorado, Kansas,
Mississippi, New Mexico, Texas, Utah and Wyoming.
Mid-Continent Region. The Company has been active in the Mid-Continent
region since 1973 where the Company's operations are managed by its 25-person,
Tulsa, Oklahoma office. The Company has ongoing exploration and development
programs in the Anadarko Basin of Oklahoma and the Sherman-Marietta Basin of
southern Oklahoma and northern Texas. The Mid-Continent region accounted for 43%
of the Company's estimated net proved reserves as of December 31, 1998 or 78.6
BCFE (77% proved developed and 96% gas). The Company participated in 67 gross
wells and recompletions in this region in 1998, including 21 Company-operated
wells.
The Company's development and exploration budget in the Mid-Continent
region for 1999 totals $22 million. The Company plans to operate 29 drilling
wells in the Mid-Continent region during 1999 and to utilize two to three
drilling rigs throughout the year. St. Mary also expects to participate in an
additional 10 to 20 wells to be operated by other entities.
Anadarko Basin. The Company's long history of operations and
proprietary geologic knowledge enable the Company to sustain economic
development and exploration programs despite periods of adverse industry
conditions. The Company is applying state of the art technology in hydraulic
fracturing and innovative well completion techniques to accelerate production
and associated cash flow from the region's tight gas reservoirs. St. Mary also
continues to benefit from a continuing consolidation and rationalization of
operators in the basin. The Company periodically seizes attractive opportunities
to acquire properties from companies that have elected to discontinue operations
in the basin. This trend is expected to accelerate during 1999 and to offer St.
Mary new opportunities as a result of the acute cost and capital pressures in
the exploration and production sector.
-8-
<PAGE>
The Company works aggressively to control its operating costs and to
enhance its full cycle economics. In December 1998 the Company realized net
proceeds of $22 million on the sale of its interests in eight fields in the
Anadarko Basin. This sale was part of the Company's ongoing strategy to enhance
the return on its portfolio of assets through the opportunistic sale of
non-strategic properties during periods in the market when such properties
command premium valuations.
Drilling activities will focus on lower to medium-risk prospects in the
Granite Wash and Red Fork formations. In addition, the Company will devote
approximately 23% of its Mid-Continent capital budget to deeper, higher
potential development wells in the lower Morrow formation below 19,000 feet at
the NE Mayfield Field and in the Hunton and Arbuckle formations at depths
between 16,000 and 18,000 at the SW Mayfield Field.
Carrier Prospect. Within its inventory of large-target prospects, the
Company holds an aggregate 11.2% working interest in 25,800 acres in Leon
County, Texas in the Cotton Valley reef play. The Company's Carrier Prospect
acreage is located approximately nine miles east of the trend of the industry's
initial prolific reef discoveries, and targets potentially larger reefs that are
postulated to have developed in the deeper waters of the basin during the
Jurassic period. The Company and its partners completed a 52 square mile 3-D
seismic survey in 1997. St. Mary holds a 22% working interest in the first
prospect that will test a large 3-D anomaly that has been interpreted to be a
platform reef situated in the deeper portion of the East Texas Basin to the east
of the industry's existing pinnacle reef discoveries. St. Mary and its partners
plan to spud the initial test well during the second half of 1999.
South Louisiana Region. St. Mary's presence in south Louisiana dates to
the turn of the century when the Company's founders acquired a franchise
property in St. Mary Parish on the shoreline of the Gulf of Mexico. These 24,900
acres of fee lands constitute one of the Company's most valuable assets and
yielded more than $6.9 million of gross oil and gas royalty revenue in 1998. The
south Louisiana region accounted for 6.6% of the Company's estimated net proved
reserves as of December 31, 1998, or 12.1 BCFE (86% proved developed and 63%
gas).
The Company's diverse activities in south Louisiana are managed by its
regional 3-person office in Lafayette, Louisiana, and include ongoing
development and exploration programs in St. Mary, Cameron, Lafourche, Jefferson
Davis, Vermilion and Calcasieu parishes. Advanced 3-D seismic imaging and
interpretation techniques are revitalizing exploration and development
activities in the Miocene trend of south Louisiana. St. Mary is applying the
latest technologies to unravel the region's complex geology and to extend
exploratory drilling into deeper untested formations.
St. Mary's historical presence in southern Louisiana, its established
network of industry relationships and its extensive technical database on the
area have enabled the Company to assemble an inventory of large-target prospects
in the south Louisiana region.
The 1998 disappointments at South Horseshoe Bayou and at Atchafalaya
Bay discussed below underscore the risks inherent in the exploration for deep
gas reserves in south Louisiana. St. Mary evaluates the results of its
exploration efforts based on full cycle economic returns over a multi-year
period and believes that exploration decisions should not be based solely on any
single year's results.
-9-
<PAGE>
Fee Lands. The Company owns 24,900 acres of fee lands and associated
mineral rights in St. Mary Parish located approximately 85 miles southwest of
New Orleans. St. Mary also owns a 25% working interest in approximately 300
acres located offshore and immediately south of the Company's fee lands. Since
the initial discovery on the Company's fee lands in 1938, cumulative oil and gas
revenues, primarily landowners' royalties, to the Company from the Bayou Sale,
Horseshoe Bayou and Belle Isle fields on its fee lands have exceeded $223
million. St. Mary currently leases 14,419 acres of its fee lands and has an
additional 10,481 acres that are presently unleased. The Company's principal
lessees are Texaco, Vastar, Cabot, Mobil and Sam Gary Jr. and Associates, a
private exploration company headquartered in Denver.
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
major discovery on its fee lands at South Horseshoe Bayou in early 1997 and a
subsequent successful confirmation well in early 1998 proved that significant
accumulations of gas are sourced and trapped at depths below 16,000 feet.
South Horseshoe Bayou Project. In October 1995 the Company began
participation as a working interest owner in its fee lands in St. Mary Parish
with a 25% working interest in this project; resulting in a net revenue interest
ranging from 36% to 40% due to its previously existing royalty position. The St.
Mary Land & Exploration No. 1 well, under a turn-key contract, commenced
drilling toward a target depth of 19,000 feet. In February 1996 this well began
encountering severe pressure and mechanical problems that could not be corrected
and in July 1996 the well was plugged without reaching total depth. The drilling
rig was skid and the drilling of a new well commenced on the same site. In
February 1997 the Company announced a significant deep gas discovery at the St.
Mary Land & Exploration No. 2 well. This well was completed in the 17,300 foot
sand, and in January 1998 a confirmation well, the St. Mary Land & Exploration
No. 3, was completed in the same interval. In April 1998 the No. 2 well was
recompleted in the 17,900 foot sand and is currently producing. In August 1998
the No. 3 well was shut-in as the result of mechanical problems while it was
producing approximately 33 MMcf per day. Management is currently evaluating
whether to sidetrack or abandon the No. 3 well.
At year-end the Company reclassified 23.7 BCFE of reserves to the
probable category and wrote off 15.1 BCFE of reserves due to premature water
encroachment and mechanical problems. Despite these disappointments, South
Horseshoe Bayou has generated solid economic returns for the Company and still
has significant remaining potential. The two wells have produced 6.0 Bcf of gas
and 45 MBbls of oil, net to the Company's interest, through December 31, 1998.
An untested fault block to the north of the existing production will be
drilled in 1999 as part of the Company's continuing management and exploitation
of its fee lands. Permitting of the St. Mary Land & Exploration 24-1 well (25%
working interest and approximately 36% net revenue interest) is scheduled to be
completed by April, and drilling operations are expected to commence in May
1999. (see "Large-Target Exploration Projects").
Atchafalaya Bay Prospect. In March 1997 the Company and its partner
acquired seven tracts (2,845 gross acres) in a Louisiana state lease sale in
Atchafalaya Bay. A 19,000-foot test of a large 3-D prospect during 1998 was
unsuccessful and the well was completed in a small secondary zone at 12,300
feet. The costs associated with the drilling of this deep exploratory well were
expensed in 1998.
Stallion Prospect. The Company's Stallion prospect (31.25% working
interest) was spud in January 1999 and is currently drilling below 15,300 feet
toward a targeted total depth of approximately 17,800 feet. This 3-D prospect in
Cameron Parish, Louisiana is scheduled to test a series of MA sands along a
major east-west growth fault that produces from the same interval to the east at
the Little Pecan Lake, Lac Blanc and North Freshwater Bayou fields.
(see "Large-Target Exploration Projects").
-10-
<PAGE>
Edgerly Prospect. St. Mary and its partners have completed a 30 square mile
3-D survey on the western and northern flanks of the Edgerly salt dome in
Calcasieu Parish, Louisiana where a 16,000 acre leasehold position was assembled
during 1998. The Company has identified a number of promising anomalies on the
3-D survey and in 1999 expects to test several Hackberry prospects at shallow
depths between 10,000 and 13,000 feet. The Company has an approximate 35%
working interest in the Edgerly prospect. (see "Large-Target Exploration
Projects").
Patterson Prospect. The Company's Patterson prospect is located
approximately 20 miles north of the Company's fee lands in St. Mary Parish
within the lower Miocene producing trend of south Louisiana. St. Mary holds a
25% working interest in leases and options totaling approximately 5,573 acres in
the prospect area which lies within a major east-west producing trend between
the Garden City and Patterson fields. An unsuccessful 19,000-foot test was
drilled in 1995 based on 2-D seismic data and existing well control. In order to
further evaluate this prospect, in 1997 St. Mary and its partners purchased 20
square miles of a regional 3-D seismic survey. The project was delayed during
1998 due to the financial constraints of certain partners. However, the partner
group is exploring alternatives with other parties and hopes to proceed with the
drilling of the 19,500-foot MA sand test by mid 1999.
(see "Large-Target Exploration Projects").
North Parcperdue Prospect. The Company has a 25% working interest in
the North Parcperdue prospect located in Vermilion Parish. The prospect is
targeting Marg Tex sands in a fault block with other productive shallow sands. A
re-entry and sidetrack of the Phillips Sweezy No. 1 well is scheduled to begin
in May 1999. (see "Large-Target Exploration Projects").
ArkLaTex Region. The Company's operations in the ArkLaTex area are
managed by its 12-person office in Shreveport, Louisiana. The ArkLaTex region
accounted for 24% of the Company's estimated net proved reserves as of December
31, 1998, or 43.5 BCFE (92% proved developed and 92% gas). The Company's 1999
capital budget for the ArkLaTex region is $6.5 million.
In 1992 the Company acquired the ArkLaTex oil and gas properties of T.
L. James & Company, Inc. as well as rights to over 6,000 miles of proprietary
2-D seismic data in the region. The Shreveport office's successful development
and exploration programs have derived from a series of niche acquisitions
completed since 1992 totaling $10.8 million. These acquisitions have provided
access to strategic holdings of undeveloped acreage and proprietary packages of
geologic and seismic data, resulting in an active program of additional
development and exploration.
St. Mary's holdings in the ArkLaTex region are comprised of interests
in approximately 445 producing wells, including 68 Company-operated wells, and
interests in leases totaling approximately 54,900 gross acres and mineral
servitudes totaling approximately 15,800 gross acres.
Activities in the ArkLaTex region during 1998 focused on the phased
development of several important field discoveries made by the Company's
geoscientists since 1994. At the Box Church Field in Limestone County, Texas,
the Company completed an additional eight wells in 1998, bringing the field
total to 26 wells. Four additional locations are planned for 1999. Gross
production from the field has increased from 2.5 MMcf per day, when acquired in
1995, to the current rate of 18 MMcf per day. In 1999 the Company plans to
install additional gathering systems, compression and artificial lift upgrades
that are designed to sustain field production at approximately 20 MMcf per day.
The Company operates the field and holds an average 58% working interest. Total
cumulative gross field reserves are expected to exceed 100 Bcf of gas.
-11-
<PAGE>
Development around the Company's 1995 discovery at the Haynesville
Field also continued in 1998 with St. Mary participating in the drilling of 14
new wells. St. Mary and others have drilled a total of 38 wells since the 1995
discovery. The Company operates 12 wells in the field and owns interests in an
additional 13 wells.
In 1999 the Company is focused on the search for new opportunities and
potential analog fields in which to apply its proprietary geologic models and
production techniques. St. Mary believes that it is especially well positioned
to secure additional acquisitions in the ArkLaTex region during 1999 in the wake
of the dislocations and capital shortages being experienced by many of its
competitors.
Williston Basin Region. The Company's operations in the Williston Basin
are conducted through Panterra Petroleum, a general partnership formed in June
1991. The Company holds a 74% interest in Panterra, and the managing partner,
Nance Petroleum, owns a 26% interest. Nance Petroleum's principal activity is
the management of Panterra's interests in the Williston Basin. Panterra
currently owns interests in 62 fields within the basin's core producing area
including 134,000 gross acres, 78 Panterra-operated wells and 161 wells operated
by other parties.
The Williston Basin region accounted for 14% of the Company's estimated
net proved reserves as of December 31, 1998, or 26.0 BCFE (97% proved developed
and 88% oil). St. Mary has budgeted approximately $2.0 million as its share of
Panterra's 1999 development and exploration program.
Panterra's operations are directed by senior geoscientists who have
devoted their careers to the development of oil and gas reserves in the
Williston Basin. The Company's long-term strategy is to employ advanced
technologies to improve drilling results and production in order to maximize
full cycle economics. For instance, Panterra has successfully used 3-D seismic
imaging to delineate structural and subtle stratigraphic features not previously
discernable using conventional exploration methods. This utilization of advanced
technologies by experienced geoscientists has helped Panterra achieve a 100%
success rate in its operated exploration and development program since 1991.
During periods of depressed oil prices or inflated costs the
partnership has the financial resources to capitalize on dislocations
experienced by other operators. Panterra uses these periods to replenish its
prospect inventory, to secure attractively priced acquisitions and to conduct
additional 3-D seismic work and technical studies in anticipation of cyclical
recovery in the industry.
Panterra plans to conduct six additional or extended 3-D surveys in
1999 over existing fields in the search for bypassed pay zones. In addition a
detailed reservoir simulation of the Bainville Field is scheduled for completion
and will be used to evaluate secondary recovery opportunities in this existing
field.
Permian Basin Region. The Permian Basin of New Mexico and west Texas is
the Company's newest area of concentration. The Permian Basin area covers a
significant portion of eastern New Mexico and western Texas and is one of the
major producing basins in the United States. The basin includes hundreds of oil
fields undergoing secondary and enhanced recovery projects. 3-D seismic imaging
of existing fields and state-of-the-art secondary recovery programs are
substantially increasing oil recoveries in the Permian Basin. The optimization
of production and the careful control of operating costs are especially critical
in the prevailing low oil price environment.
-12-
<PAGE>
St. Mary's holdings in the Permian Basin derive from a series of niche
property acquisitions that date back to 1995. Management believes that its
Permian Basin operations provide St. Mary with a solid base of long lived oil
reserves, promising longer-term exploration and development prospects and the
potential for secondary recovery projects. The Permian Basin region accounted
for 12% of the Company's estimated net proved reserves as of December 31, 1998,
or 21.9 BCFE (91% proved developed and 77% oil).
The Company's reservoir engineers have identified a number of
properties where the project economics of secondary recovery plans are still
acceptable under current prices. St. Mary's geoscientists have also warehoused a
number of high quality prospects for which future drilling is contingent upon a
stabilization of oil prices above $15 per barrel.
St. Mary initiated a full-scale multi-year waterflood in 1998 at its
Parkway (Delaware) Unit in Eddy County, New Mexico. The initial response to the
first phase of this waterflood has been excellent. The Company's operations in
the Permian Basin during 1999 will focus on the expansion of the waterflood
project at Parkway and additional secondary recovery work at the Shugart and
Zuni fields.
St. Mary also holds a 21.2% working interest in an unusual 30,450-acre
top lease in the North Ward Estes Field in Ward County, Texas. In August 2000,
all production and future development and exploration rights on this 50 square
mile property will revert to the ownership and control of St. Mary and its
partners.
Large-Target Exploration Projects. The Company generally invests
approximately 15% of its annual capital budget in longer-term, higher-risk,
high-potential exploration projects. During the past several years the Company
has assembled an inventory of large potential projects in various stages of
development which have the potential to materially increase the Company's
reserves. The Company's strategy is to maintain a pipeline of seven to ten of
these high-potential prospects and to test four or more targets each year, while
furthering the development of early-stage projects and continuing the evaluation
of potential new exploration prospects.
The Company seeks to develop large-target prospects by using its
comprehensive base of geological, geophysical, engineering and production
experience in each of its focus areas. The large-target projects typically
require relatively long lead times before a well is commenced in order to
develop proprietary geologic concepts, assemble leasehold positions and acquire
and fully evaluate 3-D seismic or other data. The Company seeks to apply the
latest technology wherever appropriate, including 3-D seismic imaging, in its
prospect development and evaluation to mitigate a portion of the inherently
higher risk of these exploration projects. In addition, the Company seeks to
invest in a diversified mix of exploration projects and generally limits its
capital exposure by participating with other experienced industry partners.
-13-
<PAGE>
The following table summarizes the Company's active large-target
exploration projects. (see also "Properties").
<TABLE>
<CAPTION>
St. Mary St. Mary Expected
Working Royalty Test
Project Name Objective Location Interest(1) Interest(2) Date(3)
- ------------ --------- -------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Stallion MA Sands Cameron Parish, LA 31.2% - early 1999
South Horseshoe Rob, Operc St. Mary Parish, LA 25.0% 25.0% mid 1999
Edgerly Hackberry Calcasieu Parish, LA 35.0% - mid 1999
North Parcperdue Marg Tex Vermilion Parish, LA 25.0% - mid 1999
Patterson MA-3 , MA-7 St. Mary Parish, LA 25.0% - late 1999
Carrier Cotton Valley Reef Leon County, TX 22.0% - late 1999
</TABLE>
- ------------
(1) Working interests differ from net revenue interests due to royalty
interest burdens.
(2) Royalty interests are approximate and are subject to adjustment. St.
Mary has no capital at risk with respect to its royalty interests.
(3) Expected Test Date refers to the period during which the Company
anticipates the completion of an exploratory well.
International Operations
In 1997 the Company completed the sale or disposition of the majority of
its international investments. In 1998 the Company sold its remaining properties
in Canada.
Russian Joint Venture. In February 1997, the Company sold its interest in
The Limited Liability Company Chernogorskoye (the "Russian joint venture") to
Khanty Mansiysk Oil Corporation ("KMOC"), formerly known as Ural Petroleum
Corporation, for consideration totaling $17.6 million. The Company received $5.6
million in cash, before transaction costs, $1.9 million of KMOC common stock and
a convertible 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 and the Company
has the right, subject to certain conditions, to require KMOC to purchase the
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 realizability of the convertible receivable. As a result, the
Company has reduced the carrying amount of the receivable to its minimum
conversion value, incurring a charge to operations of $4.6 million for the year
ended December 31, 1998.
Trinidad and Tobago. In 1997 the Company relinquished its 7.47%
reversionary interest in a 281,506-acre onshore exploration and production
license in the Caroni Basin of Trinidad and Tobago.
-14-
<PAGE>
Key Relationships
The Company cultivates strategic partnerships with independent oil and
gas operators having region-specific experience and specialized technical
skills. The Company's strategy is to either serve as operator or maintain a
majority interest in such ventures to ensure that it can exercise significant
influence over development and exploration activities. In addition the Company
seeks industry partners who are willing to co-invest on substantially the same
basis as the Company. For example, the Company's operations in the Williston
Basin are conducted through Panterra in which St. Mary holds a 74% general
partnership interest. The managing partner of Panterra is Nance Petroleum, the
principal of which has over 25 years of experience in the Williston Basin.
Acquisitions
The Company's strategy is to make selective niche acquisitions of oil
and gas properties within its core operating areas in the United States. The
Company seeks to acquire properties that complement its existing operations,
offer economies of scale and provide further development and exploration
opportunities based on proprietary geologic concepts or advanced well completion
techniques. Management believes that the Company's success in acquiring
attractively priced and under-exploited properties has resulted from its focus
on smaller, negotiated transactions where the Company has specialized geologic
knowledge or operating experience.
Although the Company periodically evaluates large acquisition packages
offered in competitive bid or auction formats, the Company has continued to
emphasize acquisitions having values of less than $10 million. This size of
acquisition package generally attracts less competition and is where the
Company's technical expertise, financial flexibility and structuring experience
affords a competitive advantage.
Faced with an overheated acquisition market where demand exceeded the
supply of economically sound opportunities, St. Mary chose to conserve its
capital resources in 1998 and completed only $4.2 million of property
acquisitions. During the last five years the Company has closed over $85 million
of niche acquisitions where proprietary geologic knowledge or operating
expertise have afforded the Company a competitive advantage.
The economic success of the Company's historical acquisitions has
resulted from a focus on smaller, negotiated transactions where St. Mary has
clearly identified opportunities that maximize their value. St. Mary's teams of
geoscientists and engineers evaluate each acquisition to quantify potential
opportunities arising from proprietary geologic concepts or advanced production
technologies. In addition, the acquired production is hedged for periods up to
two years to protect the Company's return on its investment.
In 1999 St. Mary has reserved $25 million of its capital program for
property acquisitions. However, the Company has the financial capacity to commit
substantially greater resources to purchases should additional opportunities be
identified.
Weak commodity prices and depressed oil and gas stock prices have
precipitated an important change in the acquisition market in early 1999. St.
Mary expects that quality acquisitions will always command premium prices given
the inherent costs and risks associated with developing new reserves. However,
the market in 1999 is expected to offer favorable opportunities for the
relatively few financially strong companies able to capitalize on this depressed
market.
-15-
<PAGE>
Reserves
At December 31, 1998, Ryder Scott Company, independent petroleum
engineers, evaluated properties representing approximately 80% of the Company's
total PV-10 value and the Company evaluated the remainder. The PV-10 values
shown in the following table are not intended to represent the current market
value of the estimated net proved oil and gas reserves owned by the Company.
Neither prices nor costs have been escalated, but prices include the effects of
hedging contracts.
The following table sets forth summary information with respect to the
estimates of the Company's net proved oil and gas reserves for each of the years
in the three-year period ended December 31, 1998, as prepared by Ryder Scott
Company and St. Mary:
<TABLE>
<CAPTION>
As of December 31,
------------------------------
1998 (2) 1997 1996
-------- ---- ----
<S> <C> <C> <C>
Proved Reserves Data: (1)
Oil (MBbls).............................. 8,614 11,493 10,691
Gas (MMcf)............................... 132,605 196,230 127,057
MMCFE.................................... 184,289 265,188 191,202
PV-10 value (in thousands)............... $ 125,126 $ 262,006 $ 296,461
Proved developed reserves................ 86% 87% 84%
Production replacement................... (25%) 358% 422%
Reserve life (years)..................... 6.5 7.3 7.2
</TABLE>
- ------------
(1) Reserve data attributable to the Company's Russian joint venture have
been excluded from this table. Effective February 12, 1997, the
Company sold its Russian joint venture. See "International
Operations."
(2) The Company's year-end 1998 reserves reflect property dispositions of
39.6 BCFE, discoveries and extensions of 40.8 BCFE, acquisitions of
5.3 BCFE, negative price-related revisions of 18.2 BCFE and a
write-down of 38.8 BCFE of proved reserves at South Horseshoe Bayou,
of which 23.7 BCFE were reclassified to the probable category.
The present value of estimated future net revenues before income taxes
of the Company's reserves was $125.1 million as of December 31, 1998. This
present value is based on a benchmark of prices in effect at that date of $12.05
per barrel of oil (NYMEX) and $1.855 per million MMBtu of gas (Gulf Coast spot
price), both of which are adjusted for transportation and basis differential.
These prices were 34 percent and 20 percent lower, respectively, than prices in
effect at the end of 1997. Had the December 31, 1997, pricing assumptions been
applied, the PV-10 value and net reserves would have been $193.2 million and
202.5 BCFE, respectively.
-16-
<PAGE>
Production
The following table summarizes the average volumes of oil and gas
produced from properties in which the Company held an interest during the
periods indicated:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Operating Data:
Net production (1):
Oil (MBbls).......................................... 1,275 1,188 1,186
Gas (MMcf)........................................... 25,440 22,900 15,563
MMCFE................................................ 33,090 30,024 22,680
Average net daily production (1):
Oil (Bbls)........................................... 3,493 3,254 3,240
Gas (Mcf)............................................ 69,698 62,739 42,522
MCFE................................................. 90,656 82,263 61,962
Average sales price (2):
Oil (per Bbl)........................................ $ 12.98 $ 18.87 $ 18.64
Gas (per Mcf)........................................ $ 2.13 $ 2.33 $ 2.23
Additional per BOE data:
Lease operating expense.............................. $ 2.34 $ 2.09 $ 2.28
Production taxes..................................... $ 0.74 $ 0.96 $ 1.13
</TABLE>
-------------
(1) Production from South Horseshoe Bayou and sold Oklahoma properties
represented 18.1% and 6.5% respectively, or a total of 24.6% of the
1998 production total. Management expects that the 1999 capital
investment program will partially offset this production loss.
(2) Includes the effects of the Company's hedging activities. (see
"Management's Discussion and Analysis of Financial Condition and
Results of Operations--Overview").
The Company uses financial hedging instruments, primarily
fixed-for-floating price swap agreements and no-cost collar agreements with
financial counterparties, to manage its exposure to fluctuations in commodity
prices. The Company also employs the use of exchange-listed financial futures
and options as part of its hedging program for crude oil.
Productive Wells
The following table sets forth information regarding the number of
productive wells in which the Company held a working interest at December 31,
1998. Productive wells are either producing wells or wells capable of commercial
production although currently shut in. One or more completions in the same
borehole are counted as one well. A well is categorized under state reporting
regulations as an oil well or a gas well based upon the ratio of gas to oil
produced when it first commenced production, and such designation may not be
indicative of current production.
<TABLE>
<CAPTION>
Gross Net
----- ---
<S> <C> <C>
Oil 585 162
Gas 822 128
----- ---
Total 1,407 290
===== ===
</TABLE>
-17-
<PAGE>
Drilling Activity
The following table sets forth the wells in which the Company
participated during each of the three years indicated:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1998 1997 1996
---------------- ---------------- ---------------
Gross Net Gross Net Gross Net
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Domestic:
Development:
Oil............................ 6 .28 10 3.06 17 3.91
Gas............................ 109 26.04 92 19.64 74 13.29
Non-productive................. 12 3.98 15 4.35 11 2.70
------ ------- ------ ------- ------ -------
Total...................... 127 30.30 117 27.05 102 19.90
------ ------- ------ ------- ------ -------
Exploratory:
Oil............................ 1 .50 4 1.21 - -
Gas............................ 3 .95 7 2.04 5 1.25
Non-productive................. 6 1.05 5 1.93 10 3.10
------ ------- ------ ------- ------ -------
Total...................... 10 2.50 16 5.18 15 4.35
------ ------- ------ ------- ------ -------
Farmout or non-consent 4 - 4 - 9 -
------ ------- ------ ------- ------ -------
International:
Development:
Oil........................... - - - - 22 3.96
Gas........................... - - - - - -
Non-productive................ - - - - - -
------ ------- ------ ------- ------ -------
Total................... - - - - 22 3.96
------ ------- ------ ------- ------ -------
Grand Total(1) ................ 141 32.80 137 32.23 148 28.21
====== ======= ====== ======= ====== =======
</TABLE>
---------------
(1) Does not include 1, 4 and 3 gross wells completed on The Company's fee
lands during 1998, 1997 and 1996, respectively.
All of the Company's drilling activities are conducted on a contract basis
with independent drilling contractors. The Company owns no drilling equipment.
-18-
<PAGE>
Domestic Acreage
The following table sets forth the gross and net acres of developed and
undeveloped oil and gas leases, fee properties, mineral servitudes and lease
options held by the Company as of December 31, 1998. Undeveloped acreage
includes leasehold interests that may already have been classified as containing
proved undeveloped reserves.
<TABLE>
<CAPTION>
Developed Undeveloped
Acreage (1) Acreage (2) Total
Gross Net Gross Net Gross Net
------- ------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Arkansas.................................. 4,202 806 166 54 4,368 860
Louisiana................................. 26,854 10,930 14,977 4,754 41,831 15,684
Montana................................... 15,053 8,577 52,437 27,708 67,490 36,285
New Mexico................................ 7,840 1,999 4,159 1,624 11,999 3,623
North Dakota.............................. 28,516 9,329 43,111 23,065 71,627 32,394
Oklahoma.................................. 111,345 23,725 46,835 12,720 158,180 36,445
Texas..................................... 39,651 11,021 58,341 12,122 97,992 23,143
Other (3) ................................ 15,934 5,740 51,720 26,678 67,654 32,418
------- ------ ------- ------- ------- -------
Subtotal............................ 249,395 72,127 271,746 108,725 521,141 180,852
------- ------ ------- ------- ------- -------
Louisiana Fee Properties................... 13,084 13,084 11,830 11,830 24,914 24,914
Louisiana Mineral Servitudes............... 10,045 5,464 5,780 5,259 15,825 10,723
------- ------ ------- ------- ------- -------
Subtotal.............................. 23,129 18,548 17,610 17,089 40,739 35,637
------- ------ ------- ------- ------- -------
GRAND TOTAL .......................... 272,524 90,675 289,356 125,814 561,880 216,489
======= ====== ======= ======= ======= =======
</TABLE>
- ------------
(1) Developed acreage is acreage assigned to producing wells for the
spacing unit of the producing formation. Developed acreage in certain
of the Company's properties that include multiple formations with
different well spacing requirements may be considered undeveloped for
certain formations, but have only been included as developed acreage
in the presentation above.
(2) Undeveloped acreage is lease acreage on which wells have not been
drilled or completed to a point that would permit the production of
commercial quantities of oil and gas regardless of whether such
acreage contains estimated net proved reserves.
(3) Includes interests in Alabama, Colorado, Kansas, Mississippi, Utah and
Wyoming. St. Mary also holds an override interest in an additional
44,388 gross acres in Utah
Non-Oil and Gas Activities
Summo Minerals. The Company, through a subsidiary, owns 9.9 million shares
or 37% of Summo Minerals Corporation ("Summo"), a North American copper mining
company focusing on finding late exploration stage, low to medium-sized copper
deposits in the United States amenable to the SX-EW extraction process. Summo's
common shares are listed on the Toronto Stock Exchange under the symbol "SMA."
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.
-19-
<PAGE>
In May 1997, the Company entered into an agreement to receive a 55%
interest in Summo's Lisbon Valley Copper Project (the "Project") in return for
the Company contributing $4.0 million in cash, all of its outstanding stock in
Summo, and $8.6 million in letters of credit to a single purpose company, Lisbon
Valley Mining Company LLC ("LVMC"), formed to own and operate the Project. Summo
will contribute the property, all project permits and contracts, $3.2 million in
cash, and a commitment for $45 million senior debt financing in return for a 45%
interest in LVMC. The agreement is subject to certain conditions including the
finalization of the necessary project financing.
The Company has agreed to provide Summo with interim financing of up to
$3.5 million for 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 LVMC to the Company in November 1998. As of December 31, 1998, $2.9
million was outstanding under the note, and additional amounts totaling $188,000
have been advanced to Summo under this loan to date in 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.
Upon finalization of the necessary project financing for LVMC, the Company may
elect to deem the outstanding principal amount of the note as a capital
contribution in partial satisfaction of its capital commitments as set forth in
the May 1997 agreement. Accrued interest on the loan will be forgiven if the
Company makes this election.
In September 1998 Summo received final regulatory approval to develop the
Project. 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. Current copper prices have declined
to ten-year lows and do not justify construction and development of the Project
at this time. 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 do recover. However, there can be no
assurance that the Company will realize a return on its investment in Summo or
the Project.
Competition
Competition in the oil and gas business is intense, particularly with
respect to the acquisition of producing properties, proved undeveloped acreage
and leases. Major and independent oil and gas companies actively bid for
desirable oil and gas properties and for the equipment and labor required for
their operation and development. The Company believes that the locations of its
leasehold acreage, its exploration, drilling and production capabilities and the
experience of its management and that of its industry partners generally enable
the Company to compete effectively. Many of the Company's competitors, however,
have financial resources and exploration, development and acquisition budgets
that are substantially greater than those of the Company, and these may
adversely affect the Company's ability to compete, particularly in regions
outside of the Company's principal producing areas. Because of this competition,
there can be no assurance that the Company will be successful in finding and
acquiring producing properties and development and exploration prospects at its
planned capital funding levels.
Markets and Major Customers
During 1998 no individual customer accounted for 10% or more of the
Company's total oil and gas production revenue. During 1997 two customers
individually accounted for 10.6% and 10.2% of the Company's total oil and gas
production revenue.
-20-
<PAGE>
Government Regulations
The Company's business is subject to various federal, state and local laws
and governmental regulations that may be changed from time to time in response
to economic or political conditions. Matters subject to regulation include
discharge permits for drilling operations, drilling bonds, reports concerning
operations, the spacing of wells, unitization and pooling of properties,
taxation and environmental protection. From time to time, regulatory agencies
have imposed price controls and limitations on production by restricting the
rate of flow of oil and gas wells below actual production capacity in order to
conserve supplies of oil and gas.
The Company's operations could result in liability for personal injuries,
property damage, oil spills, discharge of hazardous materials, remediation and
clean-up costs and other environmental damages. The Company could be liable for
environmental damages caused by previous property owners. As a result,
substantial liabilities to third parties or governmental entities may be
incurred, and the payment of such liabilities could have a material adverse
effect on the Company's financial condition and results of operations. The
Company maintains insurance coverage for its operations, including limited
coverage for sudden environmental damages, but does not believe that insurance
coverage for environmental damages that occur over time is available at a
reasonable cost. Moreover, the Company does not believe that insurance coverage
for the full potential liability that could be caused by sudden environmental
damages is available at a reasonable cost. Accordingly, the Company may be
subject to liability or may lose substantial portions of its properties in the
event of certain environmental damages. The Company could incur substantial
costs to comply with environmental laws and regulations.
The Oil Pollution Act of 1990 imposes a variety of regulations on
"responsible parties" related to the prevention of oil spills. The
implementation of new, or the modification of existing, environmental laws or
regulations, including regulations promulgated pursuant to the Oil Pollution Act
of 1990, could have a material adverse impact on the Company.
The recent trend toward stricter standards in environmental legislation and
regulation is likely to continue. Initiatives to further regulate the disposal
of oil and gas wastes at the federal, state and local level could have a
material impact on the Company.
Title to Properties
Substantially all of the Company's working interests are held pursuant to
leases from third parties. A title opinion is usually obtained prior to the
commencement of drilling operations on properties. The Company has obtained
title opinions or conducted a thorough title review on substantially all of its
producing properties and believes that it has satisfactory title to such
properties in accordance with standards generally accepted in the oil and gas
industry. The Company's properties are subject to customary royalty interests,
liens for current taxes and other burdens which the Company believes do not
materially interfere with the use of or affect the value of such properties. The
Company performs only a minimal title investigation before acquiring undeveloped
properties.
-21-
<PAGE>
Operational Hazards and Insurance
The oil and gas business involves a variety of operating risks, including
fire, explosions, blow-outs, pipe failure, casing collapse, abnormally pressured
formations and environmental hazards such as oil spills, gas leaks, ruptures and
discharges of toxic gases. The occurrence of any such event could result in
substantial losses to the Company due to injury and loss of life; severe damage
to and destruction of property, natural resources and equipment; pollution and
other environmental damage; clean-up responsibilities; regulatory investigation
and penalties and suspension of operations. The Company and the operators of
properties in which it has an interest maintain insurance against some, but not
all, potential risks. However, there can be no assurance that such insurance
will be adequate to cover any losses or exposure for liability. The occurrence
of a significant unfavorable event not fully covered by insurance could have a
material adverse affect on the Company's financial condition and results of
operations. Furthermore, the Company cannot predict whether insurance will
continue to be available at a reasonable cost or at all.
Employees and Office Space
As of December 31, 1998, the Company had 110 full-time employees. None of
the Company's employees is subject to a collective bargaining agreement. The
Company considers its relations with its employees to be good. The Company
leases approximately 34,500 square feet of office space in Denver, Colorado, for
its executive and administrative offices, of which 7,200 square feet is
subleased. The Company also leases approximately 15,000 square feet of office
space in Tulsa, Oklahoma, approximately 7,300 square feet of office space in
Shreveport, Louisiana and approximately 1,100 square feet in Lafayette,
Louisiana. The Company believes that its current facilities are adequate.
Glossary
The terms defined in this section are used throughout this Form 10-K.
2-D seismic or 2-D data. Seismic data that are acquired and processed to yield a
two-dimensional cross-section of the subsurface.
3-D seismic or 3-D data. Seismic data that are acquired and processed to yield a
three-dimensional picture of the subsurface.
Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume, used herein in
reference to oil or other liquid hydrocarbons.
Bcf. Billion cubic feet, used herein in reference to natural gas.
BCFE. Billion cubic feet of gas equivalent. Gas equivalents are determined using
the ratio of six Mcf of gas (including gas liquids) to one Bbl of oil.
Behind pipe reserves. Estimated net proved reserves in a formation in which
production casing has already been set in the wellbore but has not been
perforated and production tested.
BOE. Barrels of oil equivalent. Oil equivalents are determined using the ratio
of six Mcf of gas (including gas liquids) to one Bbl of oil.
-22-
<PAGE>
Development well. A well drilled within the proved area of an oil or gas
reservoir to the depth of a stratigraphic horizon known to be productive in an
attempt to recover proved undeveloped reserves.
Dry hole. A well found to be incapable of producing either oil or gas in
sufficient quantities to justify completion as an oil or gas well.
Estimated net proved reserves. The estimated quantities of oil, gas and gas
liquids which geological and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known reservoirs under existing
economic and operating conditions.
Exploratory well. A well drilled to find and produce oil or gas in an unproved
area, to find a new reservoir in a field previously found to be productive of
oil or gas in another reservoir, or to extend a known reservoir.
Fee land. The most extensive interest which can be owned in land, including
surface and mineral (including oil and gas) rights.
Finding cost. Expressed in dollars per BOE. Finding costs are calculated by
dividing the amount of total capital expenditures for oil and gas activities by
the amount of estimated net proved reserves added during the same period
(including the effect on proved reserves of reserve revisions).
Gross acres. An acre in which a working interest is owned.
Gross well. A well in which a working interest is owned.
Hydraulic fracturing. A procedure to stimulate production by forcing a mixture
of fluid and proppant (usually sand) into the formation under high pressure.
This creates artificial fractures in the reservoir rock which increases
permeability and porosity.
MBbl. One thousand barrels of oil or other liquid hydrocarbons.
MMBbl. One million barrels of oil or other liquid hydrocarbons.
MBOE. One thousand barrels of oil equivalent.
MMBOE. One million barrels of oil equivalent.
Mcf. One thousand cubic feet.
MCFE. One thousand cubic feet of gas equivalent. Gas equivalents are determined
using the ratio of six Mcf of gas (including gas liquids) to one Bbl of oil.
MMcf. One million cubic feet.
MMCFE. One million cubic feet of gas equivalent. Gas equivalents are determined
using the ratio of six Mcf of gas (including gas liquids) to one Bbl of oil.
MBtu. One million British Thermal Units. A British Thermal Unit is the heat
required to raise the temperature of a one-pound mass of water one degree
Fahrenheit.
-23-
<PAGE>
Net acres or net wells. The sum of the fractional working interests owned in
gross acres or gross wells.
Net asset value per share. The result of the fair market value of total assets
less total liabilities, divided by the total number of outstanding shares of
common stock.
PV-10 value. The present value of estimated future gross revenue to be generated
from the production of estimated net proved reserves, net of estimated
production and future development costs, using prices and costs in effect as of
the date indicated (unless such prices or costs are subject to change pursuant
to contractual provisions), without giving effect to non-property related
expenses such as general and administrative expenses, debt service and future
income tax expenses or to depreciation, depletion and amortization, discounted
using an annual discount rate of 10%.
Productive well. A well that is producing oil or gas or that is capable of
production.
Proved developed reserves. Reserves that can be expected to be recovered through
existing wells with existing equipment and operating methods.
Proved undeveloped reserves. Reserves that are expected to be recovered from new
wells on undrilled acreage, or from existing wells where a relatively major
expenditure is required for recompletion.
Recompletion. The completion for production of an existing wellbore in another
formation from that in which the well has previously been completed.
Reserve life. Expressed in years, represents the estimated net proved reserves
at a specified date divided by forecasted production for the following 12-month
period.
Royalty. The interest paid to the owner of mineral rights expressed as a
percentage of gross income from oil and gas produced and sold unencumbered by
expenses.
Royalty interest. An interest in an oil and gas property entitling the owner to
shares of oil and gas production free of costs of exploration, development and
production. Royalty interests are approximate and are subject to adjustment.
Undeveloped acreage. Lease acreage on which wells have not been drilled or
completed to a point that would permit the production of commercial quantities
of oil and gas, regardless of whether such acreage contains estimated net proved
reserves.
Working interest. The operating interest that gives the owner the right to
drill, produce and conduct operating activities on the property and to share in
the production.
ITEM 3. LEGAL PROCEEDINGS
To the knowledge of management, no claims are pending or threatened against
the Company or any of its subsidiaries which individually or collectively could
have a material adverse effect upon the Company's financial condition or results
of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of 1998.
-24-
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDERS
MATTERS
Market Information. The Company's common stock is traded on the Nasdaq
National Market System under the symbol MARY. Prior to the commencement of
trading on December 16, 1992, no market for the stock existed. The range of high
and low bid prices for the quarterly periods in 1998 and 1997, as reported by
the Nasdaq National Market System, is set forth below:
<TABLE>
<CAPTION>
Quarter Ended High Low
---- ---
<S> <C> <C>
March 31, 1998 $39.375 $26.250
June 30, 1998 39.625 21.625
September 30, 1998 25.000 15.000
December 31, 1998 23.875 15.500
March 31, 1997 $31.000 $24.000
June 30, 1997 35.750 24.000
September 30, 1997 45.375 32.000
December 31, 1997 46.000 32.250
</TABLE>
On March 15, 1999, the closing sale price for the Company's common stock
was $18.75 per share.
Holders. As of March 15, 1999, the number of record holders of the
Company's common stock was 152. Management believes, after inquiry, that the
number of beneficial owners of the Company's common stock is in excess of 1,600.
Dividends. The Company has paid cash dividends to stockholders every year
since 1940. Annual dividends of $0.16 per share have been paid quarterly in each
of the years 1987 through 1996. The Company increased its quarterly dividend 25%
to $.05 per share effective with the quarterly dividend declared in January 1997
and paid in February 1997. Dividends paid totaled $1,402,000 in each of the
years 1994 through 1996, $2,084,000 in 1997 and $2,190,000 in 1998.
-25-
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data for the
Company as of the dates and for the periods indicated. The financial data for
the five years ended December 31, 1998, were derived from the Consolidated
Financial Statements of the Company. The following data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," which includes a discussion of factors materially
affecting the comparability of the information presented, and the Company's
financial statements included elsewhere in this report.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Operating revenues:
Oil production $ 16,545 $ 22,415 $ 22,100 $ 17,090 $ 14,006
Gas production 54,103 53,349 34,674 19,479 24,233
Gain on sale of Russian joint venture - 9,671 - - -
Gain on sale of proved properties 7,685 4,220 2,254 1,292 418
Gas contract settlements and other 411 1,391 523 789 6,128
--------- --------- --------- --------- ---------
Total operating revenues 78,744 91,046 59,551 38,650 44,785
--------- --------- --------- --------- ---------
Operating expenses:
Oil and gas production 17,005 15,258 12,897 10,646 10,496
Depletion, depreciation & amortization 24,912 18,366 12,732 10,227 10,134
Impairment of proved properties 17,483 5,202 408 2,676 4,219
Exploration 11,705 6,847 8,185 5,073 8,104
Abandonment and impairment of
unproved properties 4,457 2,077 1,469 2,359 1,023
General and administrative 7,097 7,645 7,603 5,328 5,261
Writedown of Russian convertible
receivable 4,553 - - - -
Writedown of investment
in Summo Minerals 3,949 - - - -
Other 141 281 78 152 493
(Income) loss in equity investees 661 325 (1,272) 579 348
--------- --------- --------- --------- ---------
Total operating expenses 91,963 56,001 42,100 37,040 40,078
--------- --------- --------- --------- ---------
Income (loss) from operations (13,219) 35,045 17,451 1,610 4,707
Non-operating expense 1,027 99 1,951 896 525
Income tax expense (benefit) (5,415) 12,325 5,333 (723) 445
--------- --------- --------- --------- ---------
Income (loss) from continuing operations (8,831) 22,621 10,167 1,437 3,737
Gain on sale of discontinued operations,
net of income taxes 34 488 159 306 -
--------- --------- --------- --------- ---------
Net income (loss) $ (8,797) $ 23,109 $ 10,326 $ 1,743 $ 3,737
========= ========= ========= ========= =========
</TABLE>
-26-
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Income Statement Data (continued):
Basic net income (loss) per common share:
Income (loss) from continuing operations $ (0.81) $ 2.13 $ 1.16 $ 0.17 $ 0.43
Gain on sale of discontinued operations - 0.05 0.02 0.03 -
-------- -------- -------- -------- --------
Basic net income (loss) per share $ (0.81) $ 2.18 $ 1.18 $ 0.20 $ 0.43
======== ======== ======== ======== ========
Diluted net income (loss) per common share:
Income (loss) from continuing operations $ (0.81) $ 2.10 $ 1.15 $ 0.17 $ 0.43
Gain on sale of discontinued operations - 0.05 0.02 0.03 -
-------- -------- -------- -------- --------
Diluted net income (loss) per share $ (0.81) $ 2.15 $ 1.17 $ 0.20 $ 0.43
======== ======== ======== ======== ========
Cash dividends per share $ 0.20 $ 0.20 $ 0.16 $ 0.16 $ 0.16
Basic weighted average common shares
outstanding 10,937 10,620 8,759 8,760 8,763
Diluted weighted average common shares
outstanding 10,937 10,753 8,826 8,801 8,803
Other Data:
EBITDA (1) $ 8,363 $ 53,411 $ 30,183 $ 11,837 $ 14,841
Net cash provided by operating activities 45,388 43,111 24,205 17,713 20,271
Capital and exploration expenditures 57,855 89,213 52,601 32,307 31,811
Balance Sheet Data (end of period):
Working capital $ 9,785 $ 9,618 $ 13,926 $ 3,102 $ 9,444
Net property and equipment 143,825 157,481 101,510 71,645 59,655
Total assets 184,497 212,135 144,271 96,126 89,392
Long-term debt 19,398 22,607 43,589 19,602 11,130
Total stockholders' equity 134,742 147,932 75,160 66,282 66,034
</TABLE>
- ------------
(1) EBITDA is defined as earnings before interest income and expense,
income taxes, depreciation, depletion, amortization, and gain on sale
of discontinued operations. EBITDA is a financial measure commonly
used for the Company's industry and should not be considered in
isolation or as a substitute for net income, cash flow provided by
operating activities or other income or cash flow data prepared in
accordance with generally accepted accounting principles or as a
measure of a company's profitability or liquidity. Because EBITDA
excludes some, but not all, items that affect net income and may vary
among companies, the EBITDA presented above may not be comparable to
similarly titled measures of other companies.
-27-
<PAGE>
ITEM 7. 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. Royalty revenues
from the fee lands were $6.9, $8.8 and $8.1 million for the years 1998, 1997 and
1996, respectively. 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 will be drilled at South Horseshoe Bayou in 1999.
-28-
<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 the Company purchased a 90% interest in the producing properties of Siete
Oil & Gas Corporation for $10.0 million. A series of follow-on acquisitions of
smaller interests in these properties during 1997 and 1998 totaled $5.8 million.
The properties purchased from Siete solidified a new core area of focus in the
Permian Basin of New Mexico and west Texas. St. Mary purchased additional
interests in its Elk City Field located in Oklahoma in 1996 from Sonat
Exploration Company for $5.7 million. In 1997 the Company acquired an 85%
working interest in certain Louisiana properties of Henry Production Company for
$3.9 million. Also in 1997 the Company purchased the interests of Conoco, Inc.
in the Southwest Mayfield area in Oklahoma for $20.6 million. In late 1998 St.
Mary, through Panterra, acquired the interests of Texaco, Inc. in several fields
in the Williston Basin for $2.1 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 1996 and 1997 the Company sold its interests in Wyoming for $2.9 million and
its non-operated interests in south Texas for $5.4 million, respectively. In
late 1998 St. Mary sold a package of non-strategic properties in Oklahoma to
ONEOK Resources Company ("ONEOK") for $22.2 million and sold its remaining minor
interests in Canada for $1.2 million.
St. Mary has two principal equity investments, Summo Minerals Corporation
("Summo") and, until early 1997, the Company's Russian joint venture. The
Company accounts for its investments in Summo and The Limited Liability Company
Chernogorskoye ("the Russian joint venture") under the equity method and
includes its share of the income or loss from these entities in its consolidated
results of operations. In February 1997, the Company sold its interest in the
Russian joint venture to Khanty Mansiysk Oil Corporation ("KMOC"), formerly
known as Ural Petroleum Corporation, for $17.6 million.
In February 1997 the Company closed the sale of 2,000,000 shares of common
stock at $25.00 per share and closed the sale of an additional 180,000 shares in
March 1997, pursuant to the underwriters' exercise of the over-allotment option.
These transactions resulted in aggregate net proceeds of $51.2 million.
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.
-29-
<PAGE>
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 stock under this plan in 1998 and 1999.
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 45% of its estimated 1999 gas
production at an average fixed price of $2.10 per MMBtu, approximately 9% of its
estimated 1999 oil production at an average fixed price of $15.11 per Bbl and
approximately 8% of its estimated 2000 oil production at an average fixed price
of $14.76 per Bbl. The Company has also purchased options resulting in price
collars on approximately 7% of the Company's estimated 1999 gas production with
price ceilings between $2.00 and $2.63 per MMBtu and price floors between $1.50
and $1.90 per MMBtu.
This Annual Report on Form 10-K 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-K 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.
-30-
<PAGE>
Results of Operations
<TABLE>
<CAPTION>
The following table sets forth selected operating data for the periods indicated:
Years Ended December 31,
----------------------------
1998 1997 1996
------- ------- -------
(In thousands, except BOE data)
<S> <C> <C> <C>
Oil and gas production revenues:
Working interests............................ $63,771 $66,957 $48,685
Louisiana royalties.......................... 6,877 8,807 8,089
------- ------- -------
Total................................... $70,648 $75,764 $56,774
======= ======= =======
Net production:
Oil (MBbls).................................. 1,275 1,188 1,186
Gas (MMcf)................................... 25,440 22,900 15,563
------- ------- -------
MBOE......................................... 5,515 5,005 3,780
======= ======= =======
Average sales price (1):
Oil (per Bbl)................................ $12.98 $18.87 $18.64
Gas (per Mcf)................................ $ 2.13 $ 2.33 $ 2.23
Oil and gas production costs:
Lease operating expenses..................... $12,929 $10,463 $8,615
Production taxes............................. 4,076 4,795 4,282
------- ------- -------
Total................................... $17,005 $15,258 $12,897
======= ======= =======
Additional per BOE data:
Sales price................................... $12.81 $15.14 $15.02
Lease operating expenses...................... 2.34 2.09 2.28
Production taxes.............................. .74 .96 1.13
------- ------- -------
Operating margin......................... $ 9.73 $12.09 $11.61
Depletion, depreciation and amortization...... $ 4.52 $ 3.67 $ 3.37
Impairment of proved properties............... $ 3.17 $ 1.04 $ .11
General and administrative.................... $ 1.29 $ 1.53 $ 2.01
</TABLE>
- ----------
(1) Includes the effects of the Company's hedging activities.
Oil and Gas Production Revenues. Oil and gas production revenues
decreased $5.1 million, or 7% to $70.6 million in 1998 compared to $75.8 million
in 1997. Oil production volumes increased 7% and gas production volumes
increased 11% in 1998 compared to 1997. Average net daily production reached
15.1 MBOE in 1998 compared to 13.7 MBOE in 1997. This production increase
resulted from new properties acquired and drilled during 1998 and late 1997.
Major acquisitions affecting the production increase included the Southwest
Mayfield properties in Oklahoma purchased from Conoco and the Louisiana
properties purchased from Henry Production Company in 1997, the acquisition of
certain producing properties in Texas from Stroud Exploration in 1998, and the
additional interests purchased in the Siete properties during 1997 and 1998.
Successful drilling results in the South Horseshoe Bayou and Haynesville fields
in Louisiana, the Box Church Field in Texas and the Company's Oklahoma drilling
program also contributed to the 1998 production increase. These production
increases were only slightly offset by the sale of certain Oklahoma properties
to ONEOK Resources Company in late 1998.
-31-
<PAGE>
The average realized oil price for 1998 decreased 31% to $12.98 per
Bbl, while average realized gas prices decreased 9% to $2.13 per Mcf, from their
respective 1997 levels. The Company hedged approximately 20.1% of its oil
production for 1998 or 257 MBbls at an average NYMEX price of $19.423. The
Company realized a $435,000 increase in oil revenue or $.34 per Bbl for 1998 on
these contracts compared to a $293,000 decrease or $.25 per Bbl in 1997. The
Company also hedged 45.3% of its 1998 gas production or 11,520 MMBtu at an
average indexed price of $2.343. The Company realized a $1.4 million increase in
gas revenues or $.06 per Mcf for 1998 from these hedge contracts compared to a
$2.9 million decrease in gas revenues or $.13 per Mcf in 1997.
Oil and gas production revenues increased $19.0 million, or 33% to
$75.8 million in 1997 compared to $56.8 million in 1996. Oil production volumes
remained constant between 1997 and 1996 while gas production volumes increased
47% in 1997 compared to 1996. Average net daily production reached 13.7 MBOE in
1997 compared to 10.3 MBOE in 1996. This production increase resulted from new
properties acquired and drilled during 1997. Major acquisitions included the
Southwest Mayfield properties purchased from Conoco, the acquisition of
Louisiana properties from Henry Production Company, and the additional interests
purchased in the Siete properties. Successful drilling results in the Box Church
Field in Texas and the South Horseshoe Bayou prospect in south Louisiana also
contributed to the 1997 production increase. These production increases were
partially offset by the sale of the Company's south Texas non-operated
properties. The average realized oil price for 1997 increased 1% to $18.87 per
Bbl, while realized gas prices increased 4% to $2.33 per Mcf, from their
respective 1996 levels. The Company hedged approximately 16% of its oil
production for 1997 or 185 MBbls at an average NYMEX price of $18.36. The
Company realized a $293,000 decrease in oil revenue or $.25 per Bbl for 1997 on
these contracts compared to a $2.6 million decrease or $2.20 per Bbl in 1996.
The Company also hedged 27% of its 1997 gas production or 6,687 MMBtu at an
average indexed price of $2.06. The Company realized a $2.9 million decrease in
gas revenues or $.13 per Mcf for 1997 from these hedge contracts compared to a
$1.65 million decrease or $.11 per Mcf in 1996.
Oil and Gas Production Costs. Oil and gas production costs consist of
lease operating expense and production taxes. Total production costs increased
$1.7 million, or 11% in 1998 to $17.0 million compared with $15.3 million in
1997, while total oil and gas production costs per BOE increased only 1% to
$3.08 in 1998 compared with $3.05 in 1997. Total production costs increased $2.4
million, or 18% in 1997 to $15.3 million compared with $12.9 million in 1996.
However, total oil and gas production costs per BOE declined 11% to $3.05 in
1997 compared to $3.41 per BOE in 1996.
Depreciation, Depletion, Amortization and Impairment. Depreciation,
depletion and amortization expense ("DD&A") increased $6.5 million or 36% to
$24.9 million in 1998 compared with $18.4 million in 1997. This increase
resulted from increased production volumes of new properties acquired and
drilled in 1998 and late 1997. Significant contributors were the Southwest
Mayfield properties acquired from Conoco in the fourth quarter of 1997 and the
reduction of proved reserves at South Horseshoe Bayou. Decreases in reserve
volumes caused by the adverse impact of low oil prices in the Williston Basin
and mechanical problems at South Horseshoe Bayou also contributed to the DD&A
increase. DD&A expense per BOE increased 23% to $4.52 in 1998 compared to $3.67
in 1997 due to higher drilling and acquisition costs per BOE and the factors
mentioned above. Impairment of proved oil and gas properties increased $12.3
million to $17.5 million in 1998 compared with $5.2 million in 1997. These
charges mainly resulted from a decline in the value of the Company's oil and gas
reserves brought about by lower prices at December 31, 1998, the reduction of
proved reserves at South Horseshoe Bayou, a $6.2 million charge associated with
the unsuccessful deep test at the Company's Atchafalaya prospect in south
Louisiana and marginal and unsuccessful development wells drilled in Oklahoma,
Texas and Louisiana.
-32-
<PAGE>
Depreciation, depletion and amortization expense increased $5.7
million, or 44% to $18.4 million in 1997 compared with $12.7 million in 1996.
This increase resulted from new properties acquired and drilled in 1997. DD&A
expense per BOE increased 9% to $3.67 in 1997 compared to $3.37 in 1996 due to
higher drilling and acquisition costs per BOE. Impairment of proved oil and gas
properties increased $4.8 million to $5.2 million in 1997 compared with $408,000
in 1996. These charges resulted from a decline in the value of the Company's oil
properties in the Williston Basin due to lower oil prices at year-end 1997 and
the under-performance of a marginal field, as well as the under-performance of
several gas fields in the Mid-Continent region.
Abandonment and impairment of unproved properties increased $2.4
million or 115% to $4.5 million in 1998 compared to $2.1 million in 1997 due to
additional impairments taken during 1998. Abandonment and impairment of unproved
properties increased $608,000 or 41% to $2.1 million in 1997 compared to $1.5
million in 1996 due to additional impairments taken during 1997, partially
offset by fewer abandonments of expired leases.
Exploration. Exploration expense increased $4.9 million or 71% to $11.7
million for 1998 compared with $6.8 million in 1997 primarily due to higher
geological and geophysical costs and the drilling of ten exploratory dry holes
during 1998 in the Mid-Continent and south Louisiana regions, compared to better
exploratory drilling results in 1997. The payment of $795,000 in delay rentals
for the Company's Atachafalaya prospect area during 1998 also contributed to the
increase in exploration expense. Exploration expense decreased $1.3 million or
16% to $6.8 million for 1997 compared with $8.2 million in 1996 primarily as a
result of better exploratory drilling results in 1997 compared to 1996.
General and Administrative. General and administrative expenses
decreased $548,000 or 7% in 1998 compared to 1997 primarily due to the reduction
of expenses related to the Company's Stock Appreciation Rights ("SAR") plan and
a reduction in charitable contributions which is based on pre-tax income.
General and administrative expenses were unchanged at $7.6 million for 1997 from
1996. Increased compensation costs, charitable contributions and insurance
premium costs in 1997 were offset by a $1.4 million decrease in the expense
associated with the SAR plan.
Other operating expenses primarily consist of legal expenses in
connection with ongoing oil and gas activities and oversight of the Company's
mining investments. This expense decreased $140,000 or 50% in 1998 compared with
1997, primarily due to decreased 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. Other operating expense
increased $203,000 to $281,000 in 1997 compared with 1996, primarily due to
legal expenses associated with the pending litigation for the St. Mary Land &
Exploration No. 1 well.
Equity in Income of Russian Joint Venture. The Company accounted for
its investment in the Russian joint venture under the equity method and included
its share of income or loss from the venture in its results of operations up to
the point of sale. The equity in the net income of the Russian joint venture was
$201,000 in 1997 and $1.7 million in 1996. As discussed under Outlook, the
Company sold this investment in February 1997 resulting in a partial year of
equity income recorded in 1997.
-33-
<PAGE>
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 $661,000 in 1998, $526,000 in 1997, and $457,000 in 1996. Increased
losses are due to general and administrative expenses associated with the
expansion of Summo's Denver office beginning in 1996 and with the appeals
process for permitting of the Lisbon Valley Copper Project. The Company's
ownership in Summo was 37% in 1998 and 1997 and was 49% in 1996.
Non-Operating Income and Expense. Net interest and other non-operating
expense increased $928,000 to $1.0 million in 1998 compared to $99,000 in 1997
due primarily to increased borrowings in 1998 to fund capital expenditures, and
to lower borrowings in 1997 resulting from cash received from the sale of common
stock. Net interest and other non-operating expense decreased $1.9 million to
$99,000 in 1997 due to the reduction of the Company's debt with the proceeds of
the sale of common stock in the first quarter of 1997.
Income Taxes. Income taxes provided a net benefit of $5.4 million for
1998 resulting in an effective tax rate of 38%. The benefit reflects the effect
of the book net operating loss and the compounded effect of Section 29 credits
incurred in years when the Company reports a book loss. Income tax expense was
$12.3 million in 1997 and $5.3 million in 1996, resulting in effective tax rates
of 35% and 34%, respectively. The expense amounts in 1997 and 1996 reflect
higher net income from continuing operations before income taxes for each year
compared to the previous year, offset partially by the utilization of Section 29
tax credits.
State tax expense was $24,000 in 1998, $1.6 million in 1997, and
$700,000 in 1996. The significant decrease in state taxes in 1998 was caused by
the book net operating loss which resulted from Louisiana activity in the South
Horseshoe Bayou and Atchafalaya Bay prospects plus the effects on Colorado and
other states of the Russian and Summo writedowns. Louisiana taxes for 1997
increased significantly as a result of higher Louisiana net income, primarily
from royalty income, and working interest income from South Horseshoe Bayou and
the Henry Production Company acquisition during 1997.
Net Income. Net loss for 1998 was $8.8 million compared to net income
of $23.1 million for 1997. A 9% reduction in gas prices and a 31% reduction in
oil prices were only partially offset by an 11% percent increase in gas
production volumes and a 7% increase in oil production volumes for the year.
This resulted in a $5.1 million or 7% reduction in oil & gas production
revenues. Gains on sales of proved properties of $7.7 million were offset by
impairments of proved and unproved properties and increased DD&A expense
resulting from lower reserve values; writedowns of the Russian convertible
receivable and the Company's investment in Summo Minerals; and increased
exploration expense brought about by unsuccessful exploration projects.
Net income for 1997 increased $12.8 million or 124% to $23.1 million
compared to $10.3 million in 1996. A 47% increase in gas volumes and modest
increases in oil and gas prices resulted in a $19.0 million increase in oil and
gas production revenues. A $9.7 million gain on the sale of the Company's
Russian joint venture, a $4.2 million gain on the sale of the Company's south
Texas properties and a $700,000 lease bonus received for exploration on the
Company's fee lands contributed to total operating revenues of $91.0 million.
These revenues were partially offset by the higher production expenses and DD&A
associated with increased production volumes, a $4.8 million increase in
impairment of proved properties and a $325,000 loss from equity investees.
The Company also realized gains net of income taxes from the sale of
discontinued real estate of $34,000 in 1998, $488,000 in 1997 and $159,000 in
1996, respectively.
-34-
<PAGE>
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. In 1997
the Company financed a large portion of its exploration and development programs
with the proceeds from the sale of common stock. 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
increased $2.3 million or 5% to $45.4 million in 1998 compared to $43.1 million
in 1997. A significant decrease in accounts receivable resulting from lower oil
and gas prices and reduced drilling activity was partially offset by increases
in prepaid expenses and cash paid for interest. Net cash provided by operating
activities increased 78% to $43.1 million in 1997 compared to $24.2 million in
1996. The significant increase in receipts for oil and gas revenues were
partially offset by higher production costs and increased exploration expenses.
The Company made cash payments of approximately $363,000 in 1998 and $1.6
million in 1997 in satisfaction of liabilities previously accrued under the SAR
plan.
Net cash used in investing activities decreased $30.5 million or 45% in
1998 to $37.0 million compared to $67.5 million in 1997. The decrease is
primarily due to a $10.1 million increase in proceeds from sales of oil and gas
properties in 1998, including the sale of the Russian joint venture in 1997, and
a decrease of $23.1 million in cash paid for acquisitions of oil and gas
properties in 1998. Total 1998 capital expenditures, including acquisitions of
oil and gas properties, decreased $22.9 million or 28% to $58.6 million in 1998
compared to $81.5 million in 1997.
Net cash used in investing activities increased $22.3 million or 49% in
1997 to $67.5 million compared to $45.2 million in 1996. This increase was
primarily due to significantly increased capital expenditures for the Company's
drilling programs, increased expenditures for acquisitions of oil and gas
properties and additional investment in and loans to Summo, partially offset by
$7.7 million of proceeds from the sale of oil and gas properties and $ 5.6
million in cash received from the sale of the Company's Russian joint venture.
Total 1997 capital expenditures, including acquisitions of oil and gas
properties, increased $33.0 million or 68% to $81.5 million in 1997 compared to
$48.5 million in 1996.
The Company was able to apply the majority of the proceeds from the
sales of oil and gas properties in 1997 and 1996 to acquisitions of oil and gas
properties in 1997 allowing tax-free exchanges of these properties for income
tax purposes. A portion of the proceeds from sales of oil and gas properties in
1998 were also 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.
Net cash provided by (used in) financing activities decreased $35.8
million to net cash used of $7.7 million compared to net cash provided of $28.1
million in 1997. The decrease in cash provided was due to the $51.2 million
received in 1997 from the sale of common stock compared to only $173,000 in
1998. This change was partially offset by a $3.2 million decrease in long-term
debt in 1998 compared to a $21.0 million decrease in 1997. The Company also
spent $2.5 million in 1998 to repurchase shares of its own common stock.
-35-
<PAGE>
Net cash provided by financing activities increased $5.5 million to
$28.1 million in 1997 compared to $22.6 million in 1996. The Company received
$51.2 million from the sale of common stock in the first quarter of 1997 and had
a net reduction of borrowings of $21.0 million in 1997. The Company borrowed
funds in 1996 for the expanded capital expenditure programs and reserve
acquisitions. The Company increased its quarterly dividend 25% to $.05 per share
effective with the quarterly dividend declared in January 1997 and paid in
February 1997, resulting in dividends paid in 1997 of $2.1 million compared to
$1.4 million in 1996.
The Company had $7.8 million in cash and cash equivalents and had
working capital of $9.8 million as of December 31, 1998 compared to $7.1 million
in cash and cash equivalents and working capital of $9.6 million as of December
31, 1997. A decrease in accounts receivable was offset by an decrease in
accounts payable and a slight increase in cash and cash equivalents.
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 and had an initial aggregate borrowing base of
$115.0 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 December 1998 the borrowing base was reduced by the lender to $105.0
million as a result of the sale of certain producing properties in Oklahoma to
ONEOK. 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 December 31, 1998 and 1997, $10.5 million and $14.5 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 and $11.0 million outstanding as of
December 31, 1998 and 1997, respectively. 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 February 1997 the Company closed the sale of 2,000,000
shares of common stock at $25.00 per share and closed the sale of an additional
180,000 shares in March 1997 pursuant to the underwriters' exercise of the
over-allotment option. These transactions resulted in aggregate net proceeds of
$51.2 million. The proceeds of these sales were used to fund the Company's
exploration, development and acquisition programs, and pending such use were
used to repay borrowings under its credit facility.
-36-
<PAGE>
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. In early 1999 the Company repurchased an additional 35,000 shares for
$15.00 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.
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. The following table sets forth certain
information regarding the costs incurred by the Company in its oil and gas
activities during the periods indicated.
<TABLE>
Capital and Exploration Expenditures
--------------------------------------
For the Years Ended
December 31,
--------------------------------------
1998 1997 1996
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Development $32,191 $39,030 $16,709
Exploration:
Domestic 17,767 15,311 11,910
International - 16 84
Acquisitions:
Proved 4,204 27,291 20,957
Unproved 3,693 7,565 2,941
--------- --------- --------
Total $57,855 $89,213 $52,601
========= ========= =========
Russian joint venture (a) $ - $ - $ 3,881
========= ========= =========
</TABLE>
- ------------
(a) In February 1997, the Company sold its interest in the Russian joint
venture.
The Company's total costs incurred in 1998 decreased $31.4 million or
35% compared to 1997. Proved property acquisitions decreased $23.1 million in
1998. In December 1998 Panterra acquired certain properties in the Williston
Basin for $2.8 million, of which the Company's share was $2.1 million. Follow-on
acquisitions relating to interests purchased in the Permian Basin in 1996
amounted to $1.2 million in 1998, and certain properties were acquired in Texas
for $510,000. Several smaller acquisitions were also completed during 1998
totaling $390,000. The Company spent $53.7 million in 1998 for unproved property
acquisitions and domestic exploration and development compared to $61.9 million
in 1997.
-37-
<PAGE>
The Company's total costs incurred in 1997 increased $36.6 million or
70% to $89.2 million compared to $52.6 million in 1996. Proved property
acquisitions increased $6.3 million to $27.3 million in 1997 compared to $21.0
million in 1996. In May 1997, the Company acquired an 85% working interest in
certain Louisiana properties of Henry Production Company for $3.8 million. In
November 1997, the Company acquired the interests of Conoco, Inc. in the
Southwest Mayfield area in Oklahoma for $20.3 million. Several smaller
acquisitions were also completed during 1997 totaling $560,000 in addition to
follow-on acquisitions relating to interests purchased in 1996. The Company
spent $61.9 million in 1997 for unproved property acquisitions and domestic
exploration and development compared to $31.6 million in 1996 as a result of the
Company's expanded drilling programs.
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 and expects to commence the drilling of six significant tests
in 1999 at its Stallion, South Horseshoe Bayou, Edgerly, 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.
-38-
<PAGE>
The Company, through a subsidiary, owns 9.9 million shares or 37% of
Summo, a North American copper mining company focusing on finding late
exploration stage, low to medium-sized copper deposits in the United States
amenable to the SX-EW extraction process. Summo's common shares are listed on
the Toronto stock exchange under the symbol "SMA". 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.
In May 1997 the Company entered into an agreement to receive a 55%
interest in Summo's Lisbon Valley Copper Project (the "Project") in return for
the Company contributing $4.0 million in cash, all of its outstanding stock in
Summo, and $8.6 million in letters of credit to a single purpose company, Lisbon
Valley Mining Company LLC ("LVMC"), formed to own and operate the Project. Summo
will contribute the property, all project permits and contracts, $3.2 million in
cash, and a commitment for $45 million senior debt financing in return for a 45%
interest in LVMC. The agreement is subject to certain conditions including the
finalization of the necessary project financing.
The Company has agreed to provide Summo with interim financing of up to
$3.5 million for 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 LVMC to the Company in November 1998. As of December 31, 1998, $2.9
million was outstanding under the loan, and additional amounts totaling $188,000
have been advanced to Summo under this loan to date in 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.
Upon finalization of the necessary project financing for LVMC, the Company may
elect to deem the outstanding principal amount of the note as a capital
contribution in partial satisfaction of its capital commitments as set forth in
the May 1997 agreement. Accrued interest on the loan will be forgiven if the
Company makes this election.
In September 1998 Summo received final regulatory approval to develop
the Project. 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. Current copper prices have declined
to ten-year lows and do not justify construction and development of the Project
at this time. 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 do 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 March 10, 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.
-39-
<PAGE>
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.
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.
-40-
<PAGE>
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 40% 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.
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 December 31, 1998, 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 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about
Segments of an Enterprise and Related Information," effective for financial
statements for periods beginning after December 15, 1997. The Statement requires
the Company to report certain information about operating segments in its
financial statements and certain information about its products and services,
the geographic areas in which it operates and its major customers. The Company
operates predominantly in one industry segment, which is the exploration,
development and production of natural gas and crude oil, and the Company's
operations are conducted entirely in the United States
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.
-41-
<PAGE>
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.
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.
During the first half of 1998 the Company experienced an increase in
the cost of drilling and related services resulting from shortages in available
drilling rigs, drilling and technical personnel, supplies and services. However,
service costs stabilized about mid-year 1998 and have begun to decline. The last
half of 1998 was characterized by historically low oil prices and weakening gas
markets. Capital has left the oil and gas industry and has caused a significant
drop 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. If oil and gas prices 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.
-42-
<PAGE>
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 year-end market
prices of commodity-based swaps and futures contracts on a notional amount of
11,250 MMBtu would have caused a potential $1.9 million change in net loss
before income taxes for the Company for contracts in place on December 31, 1998.
Results of operations for Panterra (a non-taxable entity) would have changed by
$48,000 on a notional amount of 39 MBbls. These changes were not discounted to
present value since the latest expected maturity date of all of the swaps and
futures contracts is less 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 year end. The fair values of the futures are based on quoted market
prices obtained from the New York Mercantile Exchange.
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. The sensitivity analysis presents the
hypothetical change in fair value of those financial instruments held by the
Company at December 31, 1998, 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 December 31, 1998, the Company had floating rate
debt of $19.4 million and had no fixed rate debt. Assuming constant debt levels,
the results of operations and cash flows impact for the next year resulting from
a one percentage point change in interest rates would be approximately $190,000
before taxes.
-43-
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements that constitute Item 8 follow the
text of this report. An index to the Consolidated Financial Statements and
Schedules appears in Item 14(a) of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference from
the Company's Proxy Statement for the 1999 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference from
the Company's Proxy Statement for the 1999 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this Item is incorporated by reference from
the Company's Proxy Statement for the 1999 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference from
the Company's Proxy Statement for the 1999 Annual Meeting of Stockholders.
-44-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) and (a)(2) Financial Statements and Financial Statement Schedules:
Report of Independent Public Accountants (Arthur Andersen LLP)......... F-1
Report of Independent Accountants (PricewaterhouseCoopers LLP)......... F-2
Consolidated Balance Sheets............................................ F-3
Consolidated Statements of Operations.................................. F-4
Consolidated Statements of Stockholders' Equity........................ F-5
Consolidated Statements of Cash Flows.................................. F-6
Notes to Consolidated Financial Statements............................. F-8
All other schedules are omitted because the required information is not
applicable or is not present in amounts sufficient to require submission of the
schedule or because the information required is included in the Consolidated
Financial Statements and Notes thereto.
(b) Reports on Form 8-K. One report on Form 8-K dated December 30, 1998
regarding the sale of certain Oklahoma properties to ONEOK Resources Company was
filed during the last quarter of 1998.
(c) Exhibits. The following exhibits are filed with or incorporated into
this report on Form 10-K:
Exhibit
Number Description
3.1* Restated Certificate of Incorporation of the Registrant, as
amended
3.1A* Restated Certificate of Incorporation of the Registrant (as of
November 17, 1992)
3.2* Restated Bylaws of the Registrant
10.3* Stock Option Plan
10.4* Stock Appreciation Rights Plan
10.5* Cash Bonus Plan
10.6* Net Profits Interest Bonus Plan
10.7* Summary Plan Description/Pension Plan dated January 1, 1985
10.8* Non-qualified Unfunded Supplemental Retirement Plan, as amended
10.10* Summary Plan Description Custom 401(k) Plan and Trust
10.11* Stock Option Agreement - Mark A. Hellerstein
10.12* Stock Option Agreement - Ronald D. Boone
10.13* Employment Agreement between Registrant and Mark A. Hellerstein
10.14 Summary Plan Description 401(k) Profit Sharing Plan filed as
Exhibit 10.34 on Registrant's Annual Report on Form 10-K (File
No. 0-20872) for the year ended December 31, 1994
10.15 Summary Plan Description/Pension Plan dated December 30, 1994
filed as Exhibit 10.35 on Registrant's Annual Report on Form
10-K (File No. 0-20872) for the year ended December 31, 1994
-45-
<PAGE>
10.16 Second Restated Partnership Agreement - Panterra Petroleum
filed as Exhibit 10.41 on Registrant's Annual Report on Form
10-K (File No. 0-20872) for the year ended December 31, 1995
10.17 Purchase and Sale Agreement between Siete Oil & Gas
Corporation and Registrant incorporated by reference from the
Exhibit 10.42 filed on Registrant's Current Report on Form 8-K
(File No. 0-20872) dated June 28, 1996, as amended by
Registrant's Current Report on Form 8-K/A (File No.
0-20872) dated June 28, 1996
10.18 Acquisition Agreement regarding the sale of the Company's
interest in the Russian joint venture incorporated by
reference from the Exhibit 10.43 filed on Registrant's Current
Report on Form 8-K (File No. 0-20872) dated December 16, 1996
10.19 Employment Agreement between Registrant and Ralph H. Smith,
effective October 1, 1995, incorporated by reference from the
Exhibit 99 filed on Registrant's Current Report on Form 8-K
(File No.
0-20872) dated January 28, 1997
10.20 St. Mary Land & Exploration Company Stock Option Plan dated
November 21, 1996, incorporated by reference from the Exhibit
10.47 filed on Registrant's Annual Report on Form 10-K (File
No. 0-20872) for the year ended December 31, 1996
10.21 St. Mary Land & Exploration Company Incentive Stock Option
Plan incorporated by reference from the Exhibit 10.48 filed on
Registrants Annual Report on Form 10-K (File No. 0-20872) for
the year ended December 31, 1996
10.22 St. Mary Land & Exploration Company Employee Stock Purchase
Plan incorporated by reference from the Exhibit 10.48 filed on
Registrants Annual Report on Form 10-K (File No. 0-20872) for
the year ended December 31, 1997
10.23 Credit Agreement dated June 30, 1998, incorporated by reference
from the Exhibit 10.52 filed on Form 10-Q dated June 30, 1998
10.24 Purchase and Sale Agreement dated November 12, 1998 between
ONEOK Resources Company, incorporated by reference from the
Exhibit 10.53 filed on Registrant's Current Report on Form 8-K
(File No.
0-20872) dated December 30, 1998
10.25 Credit Agreement between Panterra Petroleum and Colorado
National Bank dated June 17, 1997
10.26 Agreement between Summo Minerals Corporation, Summo USA Corpora-
tion, St. Mary Land & Exploration Company, and St. Mary Minerals
Inc. re the formation of Lisbon Valley Mining Company dated May
15, 1997
10.27 Pledge and Security Agreement From Summo USA Corporation and
Lisbon Valley Mining Co. LLC to St. Mary Minerals Inc. dated
November 23, 1998
10.28 Deed of Trust, Assignment of Rents and Security Agreement by
Lisbon Valley Mining Co. LLC and Stewart Title Guaranty Company
for the benefit of St. Mary Minerals Inc.dated November 23, 1998
21.1* Subsidiaries of Registrant
23.3 Consent of Arthur Andersen LLP
23.4 Consent of PricewaterhouseCoopers LLP
24.1 Power of Attorney (included on signature page of this document)
27.1 Financial Data Schedule
* Incorporated by reference from Registrant's Registration Statement
on Form S-1 (File No. 33-53512).
(d) Financial Statement Schedules. See Item 14(a) above.
-46-
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
St. Mary Land & Exploration Company and Subsidiaries:
We have audited the accompanying consolidated balance sheets of St. Mary Land &
Exploration Company (a Delaware corporation) and subsidiaries as of December 31,
1998 and 1997, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the two years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of St. Mary Land &
Exploration Company and subsidiaries as of December 31, 1998 and 1997, and the
consolidated results of its operations and its cash flows for each of the two
years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
February 17, 1999.
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Stockholders
St. Mary Land & Exploration Company and Subsidiaries:
We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows of St. Mary Land & Exploration Company and
Subsidiaries for the year ended December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of operations and cash flows of
St. Mary Land & Exploration Company and Subsidiaries for the year ended December
31, 1996, in conformity with generally accepted accounting principles.
PricewaterhouseCoopers LLP
Denver, Colorado March 3, 1997, except for the effects of adopting Statement of
Financial Accounting Standards No. 128, "Earnings Per Share," as discussed in
Note 1, as to which the date is March 19, 1998.
F-2
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPLEMENTARY DATA
ST. MARY LAND & EXPLORATION COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
ASSETS
December 31,
--------------------------
1998 1997
--------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 7,821 $ 7,112
Accounts receivable 17,937 24,320
Prepaid expenses and other 795 112
Refundable income taxes 391 246
Deferred income taxes 125 122
--------- ---------
Total current assets 27,069 31,912
--------- ---------
Property and equipment (successful efforts method), at cost:
Proved oil and gas properties 241,021 246,468
Unproved oil and gas properties, net of impairment
allowance of $5,987 in 1998 and $3,032 in 1997 25,588 28,615
Other 4,051 3,386
--------- ---------
270,660 278,469
Less accumulated depletion, depreciation, amortization and impairment (126,835) (120,988)
--------- ---------
143,825 157,481
--------- ---------
Other assets:
Khanty Mansiysk Oil Corporation receivable and stock 6,839 12,003
Summo Minerals Corporation investment and receivable 2,869 6,691
Restricted cash 720 -
Other assets 3,175 4,048
--------- ---------
13,603 22,742
--------- ---------
$184,497 $212,135
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 16,926 $ 21,817
Accrued expenses - 126
Current portion of stock appreciation rights 358 351
--------- ---------
Total current liabilities 17,284 22,294
--------- ---------
Long-term liabilities:
Long-term debt 19,398 22,607
Deferred income taxes 11,158 16,589
Stock appreciation rights 422 989
Other noncurrent liabilities 1,493 1,724
--------- ---------
32,471 41,909
--------- ---------
Commitments and contingencies (Notes 1,3,6,7,8)
Stockholders' equity:
Common stock, $.01 par value: authorized - 50,000,000 shares in 1998 and
15,000,000 shares in 1997; issued and outstanding - 10,992,447
shares in 1998 and 10,980,423 shares in 1997 110 110
Additional paid-in capital 67,761 67,494
Treasury stock - 147,800 shares, at cost (2,470) -
Retained earnings 69,341 80,328
--------- ---------
Total stockholders' equity 134,742 147,932
--------- ---------
$184,497 $212,135
========= =========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-3
<PAGE>
<TABLE>
ST. MARY LAND & EXPORATION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<CAPTION>
For the Years Ended December 31,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Operating revenues:
Oil and gas production $ 70,648 $ 75,764 $ 56,774
Gain on sale of Russian joint venture - 9,671 -
Gain on sale of proved properties 7,685 4,220 2,254
Other revenues 411 1,391 523
----------- ----------- -----------
Total operating revenues 78,744 91,046 59,551
----------- ----------- -----------
Operating expenses:
Oil and gas production 17,005 15,258 12,897
Depletion, depreciation and amortization 24,912 18,366 12,732
Impairment of proved properties 17,483 5,202 408
Exploration 11,705 6,847 8,185
Abandonment and impairment of unproved properties 4,457 2,077 1,469
General and administrative 7,097 7,645 7,603
Writedown of Russian convertible receivable 4,553 - -
Writedown of investment in Summo Minerals Corporation 3,949 - -
(Income) loss in equity investees 661 325 (1,272)
Other 141 281 78
----------- ----------- -----------
Total operating expenses 91,963 56,001 42,100
----------- ----------- -----------
Income (loss) from operations (13,219) 35,045 17,451
Nonoperating income and (expense):
Interest income 638 1,043 186
Interest expense (1,665) (1,142) (2,137)
----------- ----------- -----------
Income (loss) from continuing operations before income taxes (14,246) 34,946 15,500
Income tax expense (benefit) (5,415) 12,325 5,333
----------- ----------- -----------
Income (loss) from continuing operations (8,831) 22,621 10,167
Gain on sale of discontinued operations, net of taxes
of $17 in 1998, $252 in 1997 and $82 in 1996 34 488 159
----------- ----------- -----------
Net income (loss) $ (8,797) $ 23,109 $ 10,326
=========== =========== ===========
Basic earnings per common share:
Income (loss) from continuing operations $ (.81) $ 2.13 $ 1.16
Gain on sale of discontinued operations - .05 .02
=========== =========== ===========
Basic net income (loss) per common share $ (.81) $ 2.18 $ 1.18
=========== =========== ===========
Diluted earnings per common share:
Income (loss) from continuing operations $ (.81) $ 2.10 $ 1.15
Gain on sale of discontinued operations - .05 .02
=========== =========== ===========
Diluted net income (loss) per common share $ (.81) $ 2.15 $ 1.17
=========== =========== ===========
Basic weighted average shares outstanding 10,937 10,620 8,759
=========== =========== ===========
Diluted weighted average shares outstanding 10,937 10,753 8,826
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-4
<PAGE>
ST. MARY LAND & EXPLORATION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Treasury Stock Other Total
-------------------- Paid-in Retained -------------------- Comprehensive Stockholders'
Shares Amount Capital Earnings Shares Amount Income Equity
----------- ------ --------- --------- --------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 8,761,855 $ 88 $ 15,835 $ 50,378 (2,572) $ (34) $ 15 66,282
Comprehensive income:
Net income - - - 10,326 - - - 10,326
Unrealized loss on marketable
equity securities available
for sale - - - - - - (47) (47)
-------------
Total comprehensive income 10,279
-------------
Cash dividends, $ .16 per share - - - (1,401) - - - (1,401)
Purchase and retirement of
common stock (69) - - - - - - -
Retirement of treasury stock (2,572) - (34) - 2,572 34 - -
----------- ------ --------- -------- --------- -------- ------------- -------------
Balance, December 31, 1996 8,759,214 88 15,801 59,303 - - (32) 75,160
Comprehensive income:
Net income - - - 23,109 - - - 23,109
Unrealized gain on marketable
equity securities available
for sale - - - - - - 32 32
-------------
Total comprehensive income 23,141
-------------
Cash dividends, $ .20 per share - - - (2,084) - - - (2,084)
Purchase and retirement of
common stock (55) - (2) - - - - (2)
Sale of common stock, net of
income tax benefit of stock
option exercises 2,217,664 22 51,627 - - - - 51,649
Directors' stock compensation 3,600 - 68 - - - - 68
----------- ------ --------- -------- --------- -------- ------------- -------------
Balance, December 31, 1997 10,980,423 110 67,494 80,328 - - - 147,932
Comprehensive income:
Net loss - - - (8,797) - - - (8,797)
-------------
Total comprehensive income (8,797)
-------------
Cash dividends, $ .20 per share - - - (2,190) - - - (2,190)
Treasury stock purchases - - - - (147,800) (2,470) - (2,470)
Issuance for Employee Stock
Purchase Plan 8,424 - 172 - - - - 172
Directors' stock compensation 3,600 - 95 - - - - 95
----------- ------ --------- -------- --------- -------- ------------- -------------
Balance, December 31, 1998 10,992,447 $ 110 $ 67,761 $ 69,341 (147,800) $(2,470) $ - $ 134,742
=========== ====== ========= ========= ========= ======== ============= =============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-5
<PAGE>
ST. MARY LAND & EXPLORATION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------------------
1998 1997 1996
--------- ---------- ----------
<S> <C> <C> <C>
Reconciliation of net income to net cash provided by operating activities:
Net income (loss) $ (8,797) $ 23,109 $ 10,326
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Gain on sale of Russian Joint Venture - (9,671) -
Writedown of Russian convertible receivable 4,553 - -
Writedown of investment in Summo Minerals Corporation 3,949 - -
Gain on sale of proved properties (7,685) (4,220) (2,254)
Depletion, depreciation and amortization 24,912 18,366 12,732
Impairment of proved properties 17,483 5,202 408
Exploratory dry hole costs 4,892 1,638 3,048
Abandonment and impairment of unproved properties 4,457 2,077 1,469
Loss (income) in equity investees 661 325 (1,272)
Deferred income taxes (5,431) 10,799 4,634
Other 378 428 17
--------- ---------- ----------
39,372 48,053 29,108
Changes in current assets and liabilities:
Accounts receivable 6,502 (3,235) (8,810)
Prepaid expenses (2,109) 2,162 (478)
Refundable income taxes (145) (189) 119
Accounts payable and accrued expenses 1,762 (2,359) 2,788
Stock appreciation rights 7 (1,199) 1,550
Deferred income taxes (3) (122) (72)
--------- ---------- ----------
Net cash provided by operating activities 45,386 43,111 24,205
--------- ---------- ----------
Cash flows from investing activities:
Proceeds from sale of oil and gas properties 23,380 7,723 3,082
Capital expenditures (54,375) (54,164) (27,504)
Acquisition of oil and gas properties (4,204) (27,291) (20,957)
Purchase of interest in St. Mary Operating Company - - 3,059
Sale of Russian joint venture 75 5,608 (209)
Investment in and loans to Summo Minerals Corporation (788) (2,332) (500)
Receipts from restricted cash 7,275 9,747 -
Deposits to restricted cash (7,995) (6,829) (2,918)
Other (350) 61 772
--------- ---------- ----------
Net cash used in investing activities (36,982) (67,477) (45,175)
--------- ---------- ----------
Cash flows from financing activities:
Proceeds from long-term debt 54,579 22,837 42,996
Repayment of long-term debt (57,787) (43,819) (19,009)
Proceeds from sale of common stock, net of offering costs 173 51,207 -
Repurchase of common stock (2,470) - -
Dividends paid (2,190) (2,084) (1,402)
Other - (1) -
--------- ---------- ----------
Net cash (used in) provided by financing activities (7,695) 28,140 22,585
--------- ---------- ----------
Net increase in cash and cash equivalents 709 3,774 1,615
Cash and cash equivalents at beginning of period 7,112 3,338 1,723
--------- ---------- ----------
Cash and cash equivalents at end of period $ 7,821 $ 7,112 $ 3,338
========= ========== ==========
</TABLE>
F-6
<PAGE>
ST. MARY LAND & EXPLORATION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Supplemental schedule of additional cash flow information and noncash
activities:
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------
1998 1997 1996
-------- --------- ---------
(in thousands)
<S> <C> <C> <C>
Cash paid for interest $ 1,650 $ 1,248 $ 1,953
Cash paid for income taxes 307 1,864 (305)
Cash paid for exploration expenses 11,873 6,462 4,843
</TABLE>
In March 1996, the Company acquired the remaining 35% shareholder interest in
St. Mary Operating Company for $234,000 and assumed net liabilities of $339,000,
resulting in acquired cash of $3.1 million.
In February 1997, the Company sold its interest in the Russian joint venture for
$17,609,000, receiving $5,608,000 of cash, $1,869,000 of Khanty Mansiysk Oil
Corporation common stock, and a $10,134,000 receivable in a form equivalent to a
retained production payment.
In February 1997, the Company issued 3,600 shares of common stock to its
directors and recorded compensation expense of $68,175.
In June 1997, an officer of the Company exercised 14,072 options to buy common
stock at $20.50 per share. As payment of the exercise price and taxes due, the
Company accepted 11,022 of the exercised shares, resulting in an increase in
shares outstanding of 3,050.
In January 1998, the Company issued 3.600 shares of common stock to its
directors and recorded compensation expense of $94,500.
The accompanying notes are an integral part
of these consolidated financial statements.
F-7
<PAGE>
ST. MARY LAND & EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. Summary of Significant Accounting Policies:
Description of Operations:
St. Mary Land & Exploration Company (the "Company") is an independent
energy company engaged in the exploration, development, acquisition and
production of natural gas and crude oil. In December 1998 the Company sold its
remaining interests in properties located in Canada. The Company's operations
are conducted entirely in the United States. In February 1997 the Company
completed the sale of its interest in the Russian joint venture.
Basis of Presentation:
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated.
The Company accounts for its investment in Summo Minerals Corporation
("Summo") under the equity method of accounting. The Company accounted for its
investment in The Limited Liability Company Chernogorskoye (the "Russian joint
venture") under the equity method until February 1997, when the Russian joint
venture investment was sold. In March 1996 the Company completed its purchase of
the remaining stock of St. Mary Operating Company ("SMOC"). The purchase
increased the Company's ownership in SMOC from 65% to 100%. Through March 31,
1996, the Company accounted for its investment in SMOC using the equity method
of accounting. The Company's interests in other oil and gas ventures and
partnerships are proportionately consolidated, including its 74% investment in
Panterra Petroleum ("Panterra").
Cash and Cash Equivalents:
The Company considers all highly liquid investments purchased with an
initial maturity of three months or less to be cash equivalents. The carrying
value of cash and cash equivalents approximates fair value because the
instruments have maturity dates of three months or less.
Concentration of Credit Risk:
Substantially all of the Company's receivables are within the oil and
gas industry, primarily from purchasers of oil and gas and from joint interest
owners. Although diversified within many companies, collectibility is dependent
upon the general economic conditions of the industry. The receivables are not
collateralized and to date, the Company has had minimal bad debts.
The Company has accounts with separate banks in Denver, Colorado and
Shreveport, Louisiana. At December 31, 1998 and 1997, the Company had $4,697,000
and $7,295,000, respectively, invested in money market funds consisting of
corporate commercial paper, repurchase agreements and U.S. Treasury obligations.
The Company's policy is to invest in conservative, highly rated instruments and
to limit the amount of credit exposure to any one institution.
F-8
<PAGE>
Oil and Gas Producing Activities:
The Company follows the successful efforts method of accounting for its
oil and gas properties. Under this method of accounting, all property
acquisition costs and costs of exploratory and development wells are capitalized
when incurred, pending determination of whether the well has found proved
reserves. If an exploratory well has not found proved reserves, the costs of
drilling the well are charged to expense. The costs of development wells are
capitalized whether productive or nonproductive.
Geological and geophysical costs on exploratory prospects and the costs
of carrying and retaining unproved properties are expensed as incurred. An
impairment allowance is provided to the extent that capitalized costs of
unproved properties, on a field-by-field basis, are not considered to be
realizable. Depletion, depreciation and amortization ("DD&A") of capitalized
costs of proved oil and gas properties is provided on a field-by-field basis
using the units of production method based upon proved reserves. The computation
of DD&A takes into consideration restoration, dismantlement and abandonment
costs and the anticipated proceeds from equipment salvage. The estimated
restoration, dismantlement and abandonment costs are expected to be offset by
the estimated residual value of lease and well equipment.
The Company reviews its long-lived assets for impairments when events
or changes in circumstances indicate that an impairment may have occurred. The
impairment test compares the expected undiscounted future net revenues on a
field-by-field basis with the related net capitalized costs at the end of each
period. When the net capitalized costs exceed the undiscounted future net
revenues, the cost of the property is written down to "fair value," which is
determined using discounted future net revenues from the producing property.
During 1998, 1997 and 1996 the Company recorded impairment charges for proved
properties of $17,483,000, $5,202,000 and $408,000, respectively.
Gains and losses are recognized on sales of entire interests in proved
and unproved properties. Sales of partial interests are generally treated as
recoveries of costs.
Other Property and Equipment:
Other property and equipment is recorded at cost. Costs of renewals and
improvements that substantially extend the useful lives of the assets are
capitalized. Maintenance and repairs are expensed when incurred. Depreciation is
provided using the straight-line method over the estimated useful lives of the
assets from 3 to 15 years. Gains and losses on dispositions are included in
operations.
Restricted Cash:
Proceeds from the sales of certain oil and gas producing properties are
held in escrow and restricted for future acquisitions under a tax-free exchange
agreement. These funds have been invested in money market funds consisting of
corporate commercial paper, repurchase agreements and U.S. Treasury obligations
and are carried at cost, which approximates market.
Gas Balancing:
The Company uses the sales method to account for gas imbalances. Under
this method, revenue is recorded on the basis of gas actually sold by the
Company. The Company records revenue for its share of gas sold by other owners
that cannot be balanced in the future due to insufficient remaining reserves.
Related receivables totaling $1,928,000 at December 31, 1998 and $1,955,000 at
December 31, 1997 are included in other assets in the accompanying balance
sheets. The Company also reduces revenue for gas sold by the Company that cannot
be balanced in the future due to insufficient remaining reserves. Related
payables totaling $872,000 at December 31, 1998 and $1,105,000 at December 31,
1997 are included in other liabilities in the accompanying balance sheets. The
Company's remaining underproduced gas balancing position is included in the
Company's proved oil and gas reserves (see Note 12).
F-9
<PAGE>
Financial Instruments:
The Company periodically uses commodity contracts to hedge or otherwise
reduce the impact of oil and gas price fluctuations. Gains and losses on
commodity hedge contracts are recognized as an adjustment to revenues when the
related oil or gas is sold. Cash flows from such transactions are included in
oil and gas operations. The Company realized a net gain of $1,873,000 on these
contracts for the year ended December 31, 1998 and realized net losses of
$3,242,000 and $4,253,000 on these contracts for the years ended December 31,
1997 and 1996, respectively.
In connection with these hedging transactions, the Company may be
exposed to nonperformance by other parties to such agreements, thereby
subjecting the Company to current oil and gas prices. However, the Company only
enters into hedging contracts with large financial institutions and does not
anticipate nonperformance.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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.
Income Taxes:
Deferred income taxes are provided on the difference between the tax
basis of an asset or liability and its carrying amount in the financial
statements. This difference will result in taxable income or deductions in
future years when the reported amount of the asset or liability is recovered or
settled, respectively.
Earnings Per Share:
Basic net income per share of common stock is calculated by dividing
net income by the weighted average of common shares outstanding during each
year. Diluted net income per common share of stock is calculated by dividing net
income by the weighted average of outstanding common shares and other dilutive
securities. Dilutive securities of the Company consist entirely of outstanding
options to purchase the Company's common stock. As of December 31, 1998, there
were 66,748 securities that would normally be considered dilutive. However, as
the Company was in a net loss position for the year ended December 31, 1998, all
of the outstanding options were considered anti-dilutive and were therefore
excluded from the diluted earnings per share calculation. The outstanding
dilutive securities for the years ended December 31, 1997 and 1996 were 132,666
and 66,326, respectively. All net income of the Company is available to common
stockholders.
F-10
<PAGE>
Stock-Based Compensation:
The Company accounts for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25"). Compensation expense
for stock options, if any, is measured as the excess of the quoted market price
of the Company's stock at the date of grant over the amount an employee must pay
to acquire the stock.
SFAS No. 123, "Accounting for Stock-Based Compensation," established
accounting and disclosure requirements using a fair-value-based method of
accounting for stock-based employee compensation plans. The Company has elected
to remain on its current method of accounting as described above, and has
adopted the disclosure requirements of SFAS No. 123.
Comprehensive Income:
In 1998 the Company adopted SFAS No. 130, "Reporting Comprehensive
Income." This statement establishes rules for the reporting of comprehensive
income and its components. Comprehensive income consists of net income and
unrealized gains and losses on marketable equity securities held for sale and is
presented in the consolidated statements of stockholders' equity. The adoption
of SFAS No. 130 had no impact on total stockholders' equity. Prior year
financial statements have been reclassified to conform to the requirements of
SFAS No. 130.
Major Customers:
During 1998 no individual customer accounted for 10% or more of the
Company's total oil and gas production revenue. During 1997 two customers
individually accounted for 10.6% and 10.2% of the Company's total oil and gas
production revenue.
Industry Segment and Geographic Information:
The Company operates predominantly in one industry segment, which is
the exploration, development and production of natural gas and crude oil, and
all of the Company's operations are conducted in the United States.Consequently,
the Company currently reports as a single industry segment.
Use of Estimates in the Preparation of Financial Statements:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications:
Certain amounts in the 1997 and 1996 consolidated financial statements
have been reclassified to correspond to the 1998 presentation.
F-11
<PAGE>
2. Accounts Receivable:
Accounts receivable are composed of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1997
------------- ------------
(In thousands)
<S> <C> <C>
Accrued oil and gas sales $ 7,170 $ 13,373
Due from joint interest owners 7,868 8,360
Other 2,899 2,587
============= ============
$ 17,937 $ 24,320
============= ============
</TABLE>
3. Summo Minerals Corporation Investment and Receivable:
As of December 31, 1998 and 1997, the Company owned 9,924,093 shares
(37% of total shares outstanding) of Summo, a North American mining company,
with a total cost of $5,859,000. The Company also owned warrants to acquire an
additional 616,090 shares of Summo common stock as of December 31, 1998 and
1997. These warrants expired January 12, 1999. The market value of this
investment declined to $705,000 at December 31, 1998. For the years ended
December 31, 1998, 1997 and 1996 the Company reported equity in losses from
Summo of $661,000, $526,000 and $457,000, respectively.
In May 1997 the Company entered into an agreement to receive a 55%
interest in Summo's Lisbon Valley Copper Project (the "Project") in return for
the Company contributing $4,000,000 in cash, all of its outstanding stock in
Summo, and $8,600,000 in letters of credit to a single purpose company, Lisbon
Valley Mining Company LLC ("LVMC"), formed to own and operate the Project. Summo
will contribute the property, all project permits and contracts, $3,200,000 in
cash, and a commitment for $45,000,000 of senior debt financing in return for a
45% interest in LVMC. The agreement is subject to certain conditions, including
finalization of the necessary project financing. In September 1998, Summo
received final regulatory approval to develop the Project.
The Company has agreed to provide Summo with interim financing of up to
$3,471,000 for 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 LVMC to the Company by entering into a pledge and security
agreement, a deed of trust, and an assignment of rents and security agreement.
All of these agreements are dated November 23, 1998. As of December 31, 1998 and
1997, the amounts outstanding under this loan were $2,869,000 and $2,081,000,
respectively. Additional amounts totaling $188,000 have been advanced to Summo
under this loan to date in 1999.
F-12
<PAGE>
The principal amount of the note outstanding at December 31, 1998 is
convertible into shares of Summo common stock at a conversion price equal to the
weighted-average trading price of the common stock on the Toronto Stock Exchange
for the twenty trading days immediately prior to and including December 31,
1998. The principal amount of advances made by the Company to Summo during 1999
are convertible into shares of Summo common stock at a conversion price equal to
the weighted-average trading price of the common stock on the Toronto Stock
Exchange for the twenty trading days immediately prior to and including June 12,
2000. Upon capitalization of LVMC the outstanding loan principal shall
constitute a capital contribution in partial satisfaction of the Company's
capital commitments set out in the May 1997 agreement, and any accrued interest
on the loan shall be forgiven.
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. Current copper prices have declined
to ten-year lows and do not justify construction and development of the Project
at this time. 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 do recover.
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.
4. Income Taxes:
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
For the Years Ended
December 31,
--------------------------------
1998 1997 1996
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Current taxes:
Federal $ 213 $ 485 $ 81
State 141 972 700
Deferred taxes (5,752) 10,677 4,634
Benefit of deduction for stock
option exercises - 443 -
--------- --------- ---------
Total income tax expense (benefit) $ (5,398) $ 12,577 $ 5,415
========= ========= =========
Continuing operations $ (5,415) $ 12,325 $ 5,333
Discontinued operations 17 252 82
--------- --------- ---------
Total income tax expense (benefit) $ (5,398) $ 12,577 $ 5,415
========= ========= =========
</TABLE>
The above taxes from continuing operations are net of alternative fuels
credits (Internal Revenue Code Section 29) of $315,000 in 1998, $525,000 in 1997
and $551,000 in 1996.
F-13
<PAGE>
The components of the net deferred tax liability are as follows:
<TABLE>
<CAPTION>
December 31,
---------------------
1998 1997
--------- ---------
(In thousands)
<S> <C> <C>
Deferred tax liabilities:
Oil and gas properties $ 13,194 $ 18,279
Other 833 2,478
--------- ---------
Total deferred tax liabilities 14,027 20,757
--------- ---------
Deferred tax assets:
Other, primarily employee benefits 696 1,496
State tax net operating loss carryforward 1,255 1,989
State and federal income tax benefit 930 1,320
Alternative minimum tax credit carryforward 1,123 784
--------- ---------
Total deferred tax assets 4,004 5,589
Valuation allowance (1,010) (1,299)
--------- ---------
Net deferred tax assets 2,994 4,290
--------- ---------
Total net deferred tax liabilities 11,033 16,467
Current deferred income tax assets 125 122
--------- ---------
Non-current net deferred tax liabilities $ 11,158 $ 16,589
========= =========
</TABLE>
At December 31, 1998, the Company had state net operating loss
carryforwards of approximately $25,800,000 which expire between 1999 and 2012
and alternative minimum tax credit carryforwards of $1,123,000 which may be
carried forward indefinitely. The Company's valuation allowance relates in part
to its state net operating loss carryforwards, since the Company anticipates
that a portion of the carryovers from prior years will expire before they can be
utilized, and in part to a portion of the anticipated state benefit from federal
income tax expense incurred as the Company's existing taxable temporary
differences reverse. The net change in valuation allowance in 1998 results from
the current year calculation of deferred state income tax for Oklahoma and the
state benefit of federal income tax which is not offset by reversing state
temporary differences.
Federal income tax expense and benefit differs from the amount that
would be provided by applying the statutory U.S. Federal income tax rate to
income before income taxes for the following items:
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------
1998 1997 1996
-------- ---------- ---------
(In thousands)
<S> <C> <C> <C>
Federal statutory taxes $(4,843) $ 11,881 $ 5,270
Increase (reduction) in taxes resulting from:
State taxes (net of Federal benefit) 191 758 1,212
Statutory depletion (119) (174) (173)
Alternative fuels credits (Section 29) (315) (525) (551)
Change in valuation allowance (289) 401 (504)
Other (40) (16) 79
-------- ---------- ---------
Income tax expense (benefit) from
continuing operations $(5,415) $ 12,325 $ 5,333
======== ========== =========
</TABLE>
F-14
<PAGE>
5. Long-term Debt and Notes Payable:
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
$200,000,000, and the initial aggregate borrowing base was $115,000,000. The
lender may periodically re-determine the aggregate borrowing base. In December
1998 the borrowing base was reduced by the lender to $105,000,000 as a result of
the sale of certain producing properties in Oklahoma. The accepted borrowing
base was $40,000,000 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 December 31, 1998 and
1997, $10,500,000 and $14,450,000, respectively, was outstanding under this
credit agreement.
Effective June 30, 1998, interest on borrowings during the revolving
period and commitment fees on the unused portion of the accepted borrowing base
are calculated as follows:
INTEREST RATES:
Debt to Capitalization Ratio Interest Rate
- ---------------------------- -------------
Less than 0.3 to 1.0 The Company's option of
(a) LIBOR + 0.50% or
(b) the higher of the Federal Funds
Rate + 0.5% or the Prime Rate
Greater than or equal
to 0.3 to 1.0 The Company's option of
but less than 0.4 to 1.0 (a) LIBOR + 0.75% or
(b) the higher of the Federal Funds
Rate + 0.5% or the Prime Rate
Greater than or equal The Company's option of
to 0.4 to 1.0 (a) LIBOR + 1.00% or
but less than 0.5 to 1.0 (b) the higher of the Federal Funds
Rate + 0.5% or the Prime Rate
Greater than or equal The Company's option of
to 0.5 to 1.0 (a) LIBOR + 1.25% or
(b) the higher of the Federal Funds
Rate + 0.625% or
the Prime Rate + 0.125%
COMMITMENT FEES:
Debt to Capitalization Ratio Short-Term Tranche Long-Term Tranche
- ---------------------------- ------------------ -----------------
Less than 0.5 to 1.0 0.125% 0.25%
Greater than or equal to 0.5 to 1.0 0.375% 0.50%
At December 31, 1998, the Company's debt to capitalization ratio as
defined under the credit agreement was 0.13 to 1.0.
Panterra, in which the Company has a 74% general partnership ownership
interest, has a separate credit facility with a $21,000,000 borrowing base as of
December 31, 1998, and $12,000,000 and $11,000,000 outstanding as of December
31, 1998 and 1997, respectively. In June 1997, Panterra entered into this credit
agreement replacing a previous agreement, which was 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 0.75% 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 1.25%
when the Partnership's debt to partners' capital ratio is greater than 100%. At
December 31, 1998, Panterra's debt to partners' capital ratio as defined was
66%.
F-15
<PAGE>
The carrying value of long-term debt approximates fair value because
the debt is variable rate and reprices in the short term.
The Company's liability for estimated annual principal payments for the
next five years under both notes payable are as follows:
<TABLE>
<CAPTION>
Years Ending
December 31, (In thousands)
---------------------- --------------
<S> <C>
1999 $ -
2000 1,173
2001 3,670
2002 3,229
2003 2,959
Thereafter 8,367
-------------
$ 19,398
=============
</TABLE>
6. Commitments and Contingencies:
The Company leases office space under various operating leases with terms
extending as far as June 30, 2003. The Company has noncancelable annual
subleases with affiliates of approximately $75,000 for the same term as the
Company's primary office lease. Rent expense, net of sublease income, was
$484,000, $447,000 and $426,000 in 1998, 1997 and 1996, respectively. The
Company also leases various office equipment under operating leases. The annual
minimum lease payments for the next five years are presented below:
<TABLE>
<CAPTION>
Years Ending
December 31, (In thousands)
----------------------- --------------
<S> <C>
1999 $ 626
2000 637
2001 633
2002 369
2003 133
</TABLE>
On January 29, 1999, the Company obtained a commitment for a letter of
credit ("LOC") from an U.S. bank. The beneficiary of the LOC is a Canadian bank,
and the LOC is used as collateral for an irrevocable letter of guarantee ("ILG")
which was furnished to the Canadian federal taxing authority. The ILG was
provided on behalf of the Company and its joint venture partners securing
possible Canadian federal tax liabilities resulting from the sale of assets in
Canada.
F-16
<PAGE>
The Company had the following commodity contracts in place as of
December 31, 1998, to hedge or otherwise reduce the impact of oil and gas price
fluctuations:
Product Volumes/month Fixed Price Duration
----------- ------------- ----------- -----------
Natural Gas 100,000 MMBtu $2.3450 1/99 - 3/99
Natural Gas 100,000 MMBtu $2.1900 1/99 - 4/99
Natural Gas 100,000 MMBtu $2.1200 1/99 - 10/99
Natural Gas 170,000 MMBtu $2.0900 1/99 - 10/99
Natural Gas 330,000 MMBtu month $1.9450 1/99 - 12/99
Natural Gas 220,000 MMBtu $2.3100 1/99 - 12/99
Natural Gas 50,000 MMBtu $2.0350 2/99 - 4/99
Natural Gas 220,000 MMBtu $2.6300 (a) 5/99 - 9/99
- ----------
(a) Price collar contract. Price ceiling shown, price floor equals
$1.90 per MMbtu.
The fair value of the Company's commodity hedging contracts based on
year-end futures pricing would have caused the Company to receive approximately
$776,000 if these contracts had been terminated on December 31, 1998.
At December 31, 1998, Panterra, in which the Company owns a 74%
interest, held various hedge contracts covering 39,000 Bbls of future crude oil
production. These contracts expire at various dates through May 1999. Panterra
will receive fixed prices ranging from 15.68 per Bbl to 16.80 per Bbl. If the
open hedging contracts had been liquidated at December 31, 1998, Panterra would
have recognized a gain of approximately $152,000.
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 or greater than 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 attempts to limit 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. Including hedges entered
into since December 31, 1998, and those detailed above, the Company has hedged
approximately 45% of its estimated 1999 gas production at an average fixed price
of $2.10 per MMBtu, approximately 9% of its estimated 1999 oil production at an
average fixed price of $15.11 per Bbl and approximately 8% of its estimated 2000
oil production at an average fixed price of $14.76 per Bbl. The Company has also
purchased options resulting in price collars on approximately 7% of the
Company's estimated 1999 gas production with price ceilings between $2.00 and
$2.63 per MMBtu and price floors between $1.50 and $1.90 per MMBtu.
7. Compensation Plans:
In January 1992, the Company adopted two compensation plans for key
employees. A cash bonus plan not to exceed 50% of the participants' aggregate
base salaries was adopted, and any awards are based on performance. A net
profits interest bonus plan allows participants to receive an aggregate 10% net
profits interest after the Company has recovered 100% of its investment in
various pools of oil and gas wells completed or acquired during the year. This
interest is increased to 20% after the Company recovers 200% of its investment.
The Company records compensation expense once it recovers its investment and net
profits attributable to the properties are payable to the employees. The Company
recorded compensation expense of $229,000 in 1998 and $416,000 in 1997 relating
to net profits attributable to these properties.
F-17
<PAGE>
Through September 1992 the Company had a restricted stock bonus plan
("Plan") covering officers and key employees. Participants have the option at
any time to sell shares acquired under the Plan to the Company at their fair
market values. At December 31, 1998, there were 28,455 shares issued and
outstanding under the Plan.
In March 1992 the Company adopted a stock appreciation rights ("SAR")
plan for officers and directors. SARs vest over a four-year period, with payment
occurring five years after the date of grant. The SAR plan replaced the
restricted stock bonus plan. Between 1993 and 1996 the Company awarded a total
of 171,412 share rights with values ranging from $11.50 to $14.00 per share.
Compensation expense was reduced by $197,000 in 1998 under the SAR plan.
Compensation expense recognized under the SAR plan was $161,000 and $1,567,000
in 1997 and 1996, respectively. In November 1996 the Company terminated future
awards under the Company's SAR plan and capped the value of the share rights
under the SAR plan at the then fair market value of the Company's common stock
of $20.50 per share. The resulting liability is classified as current and
long-term in the consolidated balance sheets, based on expected payment dates.
SAR compensation expense recorded after the termination of future awards relates
to the vesting of SARs outstanding at the time of the termination of future
awards and to the fluctuation of the stock price below the capped price of
$20.50.
The Company has a defined contribution pension plan ("401(k) Plan")
qualified under the Employee Retirement Income Security Act of 1974. This 401(k)
Plan allows eligible employees to contribute up to 9% of their base salaries.
The Company matches each employee's contributions up to 6% of the employee's
base salary and also may make additional contributions at its discretion. The
Company's contributions to the 401(k) Plan amounted to $269,000, $231,000 and
$199,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
During 1996 the Company established the St. Mary Land & Exploration
Company Stock Option Plan and the St. Mary Land & Exploration Company Incentive
Stock Option Plan (collectively, the "Option Plans"). The Option Plans grant
options to purchase shares of the Company's common stock to eligible employees,
contractors, and current and former members of the Board of Directors. The
Company has reserved 700,000 shares of its own common stock for issuance under
the Option Plans. The Company intends to increase the number of shares of common
stock available for issuance under the Option Plans and to seek shareholder
approval of such increase in 1999. During 1996 options to purchase 256,598
shares of the Company's common stock were granted under the Option Plans at an
exercise price of $20.50 in connection with the termination of future awards
under the Company's SAR plan. Also during 1996, options to purchase 42,880
shares were granted under the Option Plans at an exercise price $24.875. The
vesting periods of these options vary from 0 to 3 years, and the options are
exercisable for the period from five to ten years after the date of grant. No
options under the Option Plans were exercised during the year ended December 31,
1996. In 1997 14,072 options under the Option Plans were exercised at $20.50 per
share, and an additional 74,057 and 107,423 options were granted at $29.375 and
$35.00 per share, respectively. During the year ended December 31, 1998, 251,774
options were granted and no options were exercised under the Option Plans. All
options granted to date under the Option Plans have been granted at exercise
prices equal to the respective market prices of the Company's common stock on
the grant dates.
F-18
<PAGE>
In 1990 and 1991 the Company granted certain officers options to
acquire 54,614 shares of common stock at an exercise price of $3.30 per share.
The options are now fully vested and expire ten years from the respective dates
of grant. In 1997 34,614 of these options were exercised, leaving 20,000 options
outstanding. None of these options were exercised in 1998.
A summary of the status of the Company's Stock Option Plan, including the
1990 and 1991 options, and changes during the last three years follows:
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------------------------------------------
1998 1997 1996
-------------------------- ------------------------- -------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 479,343 $ 24.80 354,092 $ 18.38 $ 3.30
54,614
Granted 251,774 18.50 181,480 32.70 299,478 21.13
Exercised - - - -
48,686 8.27
Forfeited 9,899 28.63 20.50 - -
7,543
------------- ------------ ------------ ------------ ------------ ------------
Outstanding at end of year 721,218 $ 22.55 479,343 $ 24.80 354,092 $ 18.38
============= ============ ============ ============ ============ ============
Options exercisable at year end 164,670 $ 18.41 129,173 $ 17.84 145,576 $ 14.05
============= ============ ============ ============ ============ ============
Weighted average fair value of
options granted during the year $ 8.16 $ 15.05 $ 8.06
============= ============ ============
</TABLE>
A summary of additional information related to the options outstanding
as of December 31, 1998 follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------- ------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- ------------------------------ ----------------- ---------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
$ 3.30 - $ 3.30 20,000 2.0 years $ 3.30 20,000 $ 3.30
-
18.50 18.50 251,774 10.0 years 18.50 - -
-
20.50 24.88 273,558 5.4 years 21.15 144,670 20.50
-
29.38 35.00 175,886 8.6 years 32.69 - -
----------------- ---------------
Total
721,218 7.7 years 22.55 164,670 18.41
================= ===============
</TABLE>
F-19
<PAGE>
SFAS No. 123 establishes a fair value method of accounting for
stock-based compensation plans either through recognition or disclosure. The
Company has elected to continue following APB No. 25 and has elected to adopt
SFAS No. 123 through compliance with the disclosure requirements set forth in
the Statement. Because the exercise price of the Company's employee stock
options equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized under APB No. 25. Pro forma information
regarding net income and earnings per share is required by SFAS No. 123 and has
been determined as if the Company had accounted for its employee stock options
under the fair value method of that Statement.
The fair value of options is measured at the date of grant using the
Black-Scholes option-pricing model. The fair value of options granted in 1998
was estimated using the following weighted-average assumptions: risk-free
interest rate of 4.6%; dividend yield of 1.08%; volatility factor of the
expected market price of the Company's common stock of 40.16%; and expected life
of the options of 7.5 years. The fair value of options granted in 1997 was
estimated using the following weighted-average assumptions: risk-free interest
rate of 5.7%; dividend yield of .49%; volatility factor of the expected market
price of the Company's common stock of 37.29%; and expected life of the options
of 7.1 years. The fair value of the options granted in 1996 was estimated using
the following weighted-average assumptions: risk-free interest rate of 6.2%;
dividend yield of .76%; volatility factor of the expected market price of the
Company's common stock of 37.88%; and expected life of the options of 4.8 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, it
is management's opinion that the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Had
compensation cost been determined based on the fair value at grant dates for
stock option awards consistent with SFAS No. 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
Pro Forma for the Years
Ended December 31,
------------------------------------
1998 1997 1996
--------- -------- --------
(In thousands, except per share amounts)
<S> <C> <C> <C>
Net income (loss) applicable As reported $ (8,797) $ 23,109 $ 10,326
to common stock Pro forma $ (9,682) $ 22,443 $ 9,607
Basic earnings (loss) per share As reported $ (.81) $ 2.18 $ 1.18
Pro forma $ (.89) $ 2.11 $ 1.10
Diluted earnings (loss) per share As reported $ (.81) $ 2.15 $ 1.17
Pro forma $ (.89) $ 2.09 $ 1.09
</TABLE>
F-20
<PAGE>
The effects of applying SFAS No. 123 in the pro forma disclosure are not
necessarily indicative of actual future amounts, and SFAS No. 123 does not apply
to awards granted prior to 1995. Additional awards in future years are
anticipated.
On September 18, 1997, the Board of Directors approved the St. Mary
Land & Exploration Company Employee Stock Purchase Plan ("Stock Purchase Plan"),
which became effective January 1, 1998. Under the Stock Purchase Plan eligible
employees may purchase shares of the Company's common stock through payroll
deductions of up to 15% of eligible compensation. The purchase price of the
stock is 85% of the lower of the fair market value of the stock on the first or
last day of the purchase period. The Company has set aside 500,000 shares of its
common stock to be available for issuance under the Stock Purchase Plan, and
8,424 shares were sold under the Stock Purchase Plan in 1998. No compensation
expense was recorded in 1998 related to the plan.
8. Pension and Other Postretirement Benefits
The Company's employees participate in a non-contributory pension plan
covering substantially all employees who meet age and service requirements (the
qualified plan). The Company also has a supplemental non-contributory pension
plan covering certain management employees ( the nonqualified plan) and a
postretirement non-contributory health care plan. The Company's disclosures
about pension and other postretirement benefits is as follows:
<TABLE>
<CAPTION>
Pension Plans Other Benefits
--------------------- ---------------------
December 31, December 31,
--------------------- ---------------------
1998 1997 1998 1997
-------- -------- -------- -------
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
Change in benefit obligations:
Benefit obligation at beginning of year $ 1,926 $ 1,330 $ 141 $ 110
Service Cost 201 192 24 19
Interest Cost 151 100 11 9
Actuarial gain 472 330 9 3
Benefits paid (280) (26) - -
-------- -------- -------- -------
Benefit obligation at end of year $ 2,470 $ 1,926 $ 185 $ 141
======== ======== ======== =======
Change in plan assets:
Fair value of plan assets at beginning of year $ 932 $ 874 - -
Actual return on plan assets 179 84 - -
Employer contribution 381 - - -
Benefits paid (280) (26) - (4)
-------- -------- -------- -------
Fair value of plan assets at end of year $ 1,212 $ 932 $ - $ (4)
======== ======== ======== =======
Funded Status $(1,258) $ (994) $ (185) $ (145)
Unrecognized net actuarial loss 867 576 64 57
Unrecognized prior service cost (43) (50) - -
-------- -------- -------- -------
Prepaid (accrued) benefit cost $ (434) $ (468) $ (121) $ (88)
======== ======== ======== =======
</TABLE>
F-21
<PAGE>
The Company's nonqualified pension plan was the only pension plan with
an accumulated benefit obligation in excess of plan assets. The plan's
accumulated benefit obligation was $274,000 at December 31, 1998, and $271,000
at December 31, 1997. There are no plan assets in the nonqualified plan due to
the nature of the plan. The Company's other plan for postretirement benefits
also has no plan assets. The aggregate benefit obligation for that plan is
$121,000 as of December 31, 1998, and $88,000 as of December 31, 1997.
Assumptions used in the measurement of the Company's benefit obligation
are as follows:
<TABLE>
<CAPTION>
Pension Plans Other Benefits
------------------- -------------------
December 31, December 31,
------------------- -------------------
1998 1997 1998 1997
----- ----- ----- -----
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
Weighted-average assumptions:
Discount rate 6.50% 7.00% 7.00% 7.00%
Expected return on plan assets 5.00% 5.00% N/A N/A
Rate of compensation increase 8.00% 8.00% N/A N/A
</TABLE>
For measurement purposes, an 8% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 2000. The rate was assumed
to decrease gradually to 6 percent for 2003 and remain at that level thereafter.
<TABLE>
<CAPTION>
Pension Plans Other Benefits
----------------- --------------
December 31, December 31,
----------------- --------------
1998 1997 1998 1997
------- ------- ----- ------
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
Components of net periodic benefit cost:
Service cost $ 201 $ 192 $ 24 $ 19
Interest cost 151 100 11 9
Expected return on plan assets (179) (84) - -
Amortization of prior service cost 174 21 - -
Recognized net actuarial loss - - 2 2
------- ------- ----- ------
Net periodic benefit cost $ 347 $ 229 $ 37 $ 30
======= ======= ===== ======
</TABLE>
Prior service costs are amortized on a straight-line basis over the
average remaining service period of active participants. Gains and losses in
excess of 10% of the greater of the benefit obligation and the market-related
value of assets are amortized over the average remaining service period of
active participants.
The Company has one nonpension postretirement benefit plan; a
noncontributory health care plan.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plan. A 1% change in assumed health care
cost trend rates would have the following effects (in thousands):
<TABLE>
<CAPTION>
1% Increase 1% Decrease
----------- -----------
<S> <C> <C>
Effect on total of service and interest cost components
of net periodic postretirement health care benefit cost $ 11 $ 4
Effect on the health care component of the accumulated
postretirement benefit obligation $ (37) $ 29
</TABLE>
F-22
<PAGE>
9. Sale of Oklahoma Properties:
On December 15, 1998, the Company closed the sale of a package of
non-strategic properties to ONEOK Resources Company for a purchase price of
$22,201,000. The Company received $22,117,000 in cash proceeds, net of
transaction costs and customary closing adjustments made to reflect
post-effective date revenues and expenses. The transaction was consummated
pursuant to a Purchase and Sale Agreement dated November 12, 1998, effective as
of September 1, 1998. The assets sold consist of producing oil and gas wells and
undeveloped leasehold acreage within eight fields located in Beckham and Roger
Mills counties, Oklahoma.
The majority of the proceeds from this property sale were used to
reduce the Company's outstanding bank debt in anticipation of re-deploying this
capital in the Company's drilling, exploration and acquisition programs in 1999.
10. Investment in Russian Joint Venture:
In September 1991 the Company, through an affiliate, acquired a 22%
interest in The Limited Liability Company Chernogorskoye (the "Russian joint
venture"). The Company's interest in the Russian joint venture was reduced to
18% in 1993. The Russian joint venture is developing the Chernogorskoye field in
western Siberia. On December 16, 1996, the Company executed an Acquisition
Agreement to sell its interest in the Russian joint venture to Khanty Mansiysk
Oil Corporation ("KMOC"), formerly Ural Petroleum Corporation. In accordance
with the terms of the Acquisition Agreement, the Company received cash
consideration of $5,608,000 before transaction costs, KMOC common stock valued
at $1,869,000, and a receivable in a form equivalent to a retained production
payment of approximately $10,134,000 plus interest at 10% per annum from the
limited liability company formed to hold the Russian joint venture interest. 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 March 10, 2000,
whichever occurs first. The transaction closed on February 12, 1997, and the
Company recorded a gain on the sale of $9,671,000. The Company's equity in
income for the Russian joint venture for 1997 through the date of sale was
$203,000. Uncertain economic conditions in Russia and lower oil prices have
affected the realizability of the convertible receivable. As a result, the
Company has reduced the carrying amount of the receivable to its minimum
conversion value, incurring a charge to operations of $4,553,000 for the year
ended December 31, 1998.
Summarized financial information of the Russian joint venture for the
last full year owned by the Company is shown below:
<TABLE>
<CAPTION>
For the Year Ended
December 31, 1996
-------------------------
(Unaudited, in thousands)
<S> <C>
Income Statement:
Oil and gas revenues $ 60,367
Operating expenses (44,752)
Interest and other expenses (9,199)
---------
Net income $ 6,416
=========
</TABLE>
F-23
<PAGE>
11. Real Estate Assets:
In a prior year the Company made the decision to sell its remaining
real estate projects. Accordingly, the Company's real estate activities since
that time have been presented as discontinued operations in the consolidated
statements of income. The Company's remaining real estate assets consist of land
held for sale with a carrying cost of $1,095,000 and $1,149,000 as of December
31, 1998 and 1997, respectively, which in the opinion of management is less than
the estimated net realizable values.
12. Disclosures About Oil and Gas Producing Activities:
Costs Incurred in Oil and Gas Producing Activities:
Costs incurred in oil and gas property acquisition, exploration and
development activities, whether capitalized or expensed, are summarized as
follows:
<TABLE>
<CAPTION>
For the Years Ended
December 31,
-------------------------------------
1998 1997 1996
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Development costs $ 32,191 $ 39,030 $ 16,709
Exploration costs:
Domestic 17,767 15,311 11,910
International - 16 84
Acquisitions:
Proved 4,204 27,291 20,957
Unproved 3,693 7,565 2,941
--------- --------- ---------
Total $ 57,855 $ 89,213 $ 52,601
========= ========= =========
Russian joint venture,
equity method (a) $ - $ - $ 3,881
========= ========= =========
</TABLE>
- --------------
(a) In February 1997, the Company sold its interest in the
Russian joint venture (see note 10).
F-24
<PAGE>
Oil and Gas Reserve Quantities (Unaudited):
The reserve information as of December 31, 1998, 1997, 1996 and 1995
was prepared by the Company and Ryder Scott Company. The Company emphasizes that
reserve estimates are inherently imprecise and that estimates of new discoveries
are more imprecise than those of proved producing oil and gas properties.
Accordingly, these estimates are expected to change as future information
becomes available.
Proved oil and gas reserves are the estimated quantities of crude oil,
natural gas and natural gas liquids which geological and engineering data
demonstrate with reasonable certainty to be recoverable in future years from
known reservoirs under existing economic and operating conditions. Proved
developed oil and gas reserves are those expected to be recovered through
existing wells with existing equipment and operating methods.
Presented below is a summary of the changes in estimated domestic
reserves of the Company and its share of the Russian joint venture reserves:
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------------------------------
1998 1997 1996
-------------------- --------------------- --------------------
Oil or Oil or Oil or
Condensate Gas Condensate Gas Condensate Gas
---------- -------- ---------- -------- ---------- --------
(MBbl) (MMcf) (MBbl) (MMcf) (MBbl) (MMcf)
<S> <C> <C> <C> <C> <C> <C>
Total proved U.S. reserves:
Developed and undeveloped:
Beginning of year 11,493 196,230 10,691 127,057 7,509 75,705
Revisions of previous estimates (2,437) (42,430) (502) (7,486) 706 6,706
Discoveries and extensions 336 38,744 1,203 77,876 1,343 44,018
Purchases of minerals in place 679 1,225 1,328 24,809 2,625 16,894
Sales of reserves (182) (35,724) (39) (3,126) (306) (703)
Production (1,275) (25,440) (1,188) (22,900) (1,186) (15,563)
---------- -------- ---------- -------- ---------- --------
End of year (a) 8,614 132,605 11,493 196,230 10,691 127,057
========== ======== ========== ======== ========== ========
Proved developed U.S. reserves:
Beginning of year 10,268 168,229 10,015 100,027 6,829 66,230
========== ======== ========== ======== ========== ========
End of year 7,723 112,189 10,268 168,229 10,015 100,027
========== ======== ========== ======== ========== ========
Russian joint venture reserves:
End of year (b) - - - - 7,146 2,444
========== ======== ========== ======== ========== ========
</TABLE>
- -------------
(a) At December 31, 1998, 1997 and 1996, includes approximately 2,022,
1,982 and 1,622 MMcf, respectively representing the Company's
underproduced gas balancing position.
(b) In February 1997, the Company sold its interest in the Russian
joint venture (see note 10).
F-25
<PAGE>
Standardized Measure of Discounted Future Net Cash Flows (Unaudited):
SFAS No. 69, "Disclosures About Oil and Gas Producing Activities,"
prescribes guidelines for computing a standardized measure of future net cash
flows and changes therein relating to estimated proved reserves. The Company has
followed these guidelines which are briefly discussed below.
Future cash inflows and future production and development costs are
determined by applying benchmark prices and costs, including transportation and
basis differential, in effect at year-end to the estimated quantities of oil and
gas to be produced in the future. Estimated future income taxes are computed
using current statutory income tax rates, including consideration for estimated
future statutory depletion and alternative fuels tax credits. The resulting
future net cash flows are reduced to present value amounts by applying a 10%
annual discount factor.
The assumptions used to compute the standardized measure are those
prescribed by the FASB and, as such, do not necessarily reflect the Company's
expectations of actual revenues to be derived from those reserves, nor their
present worth. The limitations inherent in the reserve quantity estimation
process, as discussed previously, are equally applicable to the standardized
measure computations since these estimates are the basis for the valuation
process.
The following summary sets forth the Company's future net cash flows
relating to proved oil and gas reserves based on the standardized measure
prescribed in SFAS No. 69:
<TABLE>
<CAPTION>
As of December 31,
-----------------------------------
1998 1997 1996
--------- --------- ---------
(In Thousands)
<S> <C> <C> <C>
Future cash inflows $328,630 $629,001 $691,945
Future production and
development costs (128,120) (202,503) (196,677)
Future income taxes (39,471) (120,742) (155,805)
--------- --------- ---------
Future net cash flows 161,039 305,756 339,463
10% annual discount (59,093) (118,409) (136,233)
--------- --------- ---------
Standardized measure of
discounted future net cash flows $101,946 $187,347 $203,230
========= ========= =========
Russian joint venture standardized
measure of discounted future net
cash flows (a) $ - $ - $ 23,681
========= ========= =========
</TABLE>
- -------------
(a) In February 1997, the Company sold its interest in the Russian joint
venture (see note 10).
F-26
<PAGE>
The principle sources of change in the standardized measure of
discounted future net cash flows are as follows:
<TABLE>
<CAPTION>
For the Years Ended
December 31,
-----------------------------------
1998(a) 1997 1996
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Standardized measure,
beginning of year $187,347 $203,230 $ 87,699
Sales of oil and gas produced,
net of production costs (53,643) (60,506) (43,877)
Net changes in prices and
production costs (78,974) (132,465) 71,882
Extensions, discoveries and other,
net of production costs 36,495 112,698 90,974
Purchase of minerals in place 5,548 40,647 26,241
Development costs incurred
during the year 12,964 11,305 6,833
Changes in estimated future
development costs 1,641 (2,998) (1,166)
Revisions of previous quantity estimates (39,303) (8,885) 19,350
Accretion of discount 26,152 29,646 12,019
Sales of reserves in place (26,435) (5,493) (1,224)
Net change in income taxes 50,994 19,089 (61,459)
Other (20,840) (18,921) (4,042)
--------- --------- ---------
Standardized measure, end of year $101,946 $187,347 $203,230
========= ========= =========
</TABLE>
- -------------
(a) The standardized measure for the year ended December 31, 1998, was
based on a year-end gas price of $1.86 per MMBtu and a year-end
oil price of $12.05 per BbL. Using these prices the present value
of future net revenues discounted at 10% before tax is
$125,126,000.
F-27
<PAGE>
EXHIBIT 10.25
CREDIT AGREEMENT
THIS CREDIT AGREEMENT is made and entered into as of June 17,
1997, by and between PANTERRA PETROLEUM, a Montana general partnership
("Borrower"), and COLORADO NATIONAL BANK, a national banking association (the
"Bank").
RECITALS
A. Borrower and the Bank wish to enter into this Credit
Agreement in order to provide for the terms upon which the Bank will make
advances to Borrower and by which such advances will be governed.
B. The advances will be secured by encumbrances on certain of
Borrower's oil and gas properties.
AGREEMENT
IN CONSIDERATION of the following covenants, Borrower and the
Bank agree as follows:
ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS
Section 1.01. Certain Defined Terms. As used in this Agreement,
the following terms shall have the following meanings (such meanings to be
equally applicable to both the singular and plural forms of the terms defined):
"Advance" means any advance made to Borrower pursuant to Section
2.01 hereof.
"Agreement" means this Credit Agreement, as the same may be
amended, extended, modified and/or restated from time to time.
"Amortization Period" means the time period commencing on the
day after the Conversion Date and ending on the fifth anniversary of the
Conversion Date.
"Base Rate" means the fluctuating interest rate per annum
announced from time to time by the Bank as its base rate, which may not be the
lowest interest rate charged by the Bank.
"Base Rate Portion" means any portion of the unpaid principal
balance of the Loan which is not a Fixed Rate Portion.
"Borrowing Base" means, at any time, the aggregate loan value of
the Oil and Gas Properties, as determined in accordance with the provisions of
Section 3.03 below; provided that the Borrowing Base for the Borrowing Base
Period from the date of this Agreement through December 31, 1997 shall be
$26,000,000, unless Borrower and the Bank hereafter mutually agree upon a
different amount or unless the Borrowing Base is redetermined or reduced
pursuant to Section 3.03 below prior to such date.
"Borrowing Base Period" means: (a) the period from the date of
this Agreement through December 31, 1997; (b) thereafter, each six-month period
beginning on January 1 or July 1 of each year, until the January 1 or July 1
most nearly preceding the Maturity Date; and (c) the period from the January 1
or July 1 most nearly preceding the Maturity Date through the Maturity Date.
"Business Day" means any day other than a Saturday, Sunday or
legal holiday in the State of Colorado on which banks are not required to be
open for business in Denver, Colorado. Any Business Day in any way relating to
any Fixed Rate Portion (such as the day on which an Interest Period begins or
ends) must also be a day on which, in the judgment of the Bank, significant
transactions in dollars are carried out in the interbank eurocurrency market.
"Collateral" means any and all oil or gas properties, oil or gas
interests and related assets and properties covered by any of the Collateral
Documents.
"Collateral Documents" means the deeds of trust, mortgages,
chattel mortgages, assignments of proceeds, security agreements, financing
statements, pledge agreements, assignments of and/or amendments to any of the
foregoing and other instruments in form and substance satisfactory to the Bank
executed by Borrower as provided in Section 5.01, granting to and perfecting in
favor of the Bank first and prior liens on or security interests in any portion
of the Oil and Gas Properties required by the Bank to be covered thereby.
"Commitment Amount" means, at any time, the lesser of: (a) the
Borrowing Base, or (b)(1) during the Revolving Period, $40,000,000, or (2)
during the Amortization Period, the principal balance of all outstanding
Advances as of the close of business on the Conversion Date, plus the face
amount of all Letters of Credit outstanding as of the close of business on the
Conversion Date, minus the aggregate amount of all principal payments required
to be made on the Loan pursuant to the terms of Sections 2.04(a) and/or 3.02
below prior to the date as of which the determination of the "Commitment Amount"
is being made.
"Commitment Fee Rate" means 0.25 percentage point per annum.
"Conversion Date" means: (a) June 30, 1999, or (b) such earlier
date as may be elected by Borrower pursuant to Section 3.03 below.
"Current Ratio" means, at any time and from time to time, the
ratio of: (a) Borrower's current assets; to (b) Borrower's current liabilities
(excluding current maturities of the Loan), all determined in accordance with
GAAP.
"Debt" means (a) indebtedness for borrowed money or for the
deferred purchase price of property or services; (b) obligations as lessee under
leases which shall have been or should be, in accordance with GAAP, regarded as
capital leases; (c) obligations under direct or indirect guarantees in respect
of, and obligations (contingent or otherwise) to assure a creditor against loss
in respect of, indebtedness or obligations of others of the kinds referred to in
clause (a) or (b) above; and (d) liabilities in respect of unfunded vested
benefits under plans covered by Title IV of ERISA.
"Deductible Lease Expenses" means, for any calendar month, the
following costs and expenses, to the extent such costs and expenses are actually
paid by Borrower in respect of the Oil and Gas Properties (and not reimbursed to
Borrower by others owning interests in said properties) during that calendar
month: (a) costs (other than depreciation, depletion or amortization costs)
incurred to operate and maintain, or, to the extent not a capital cost, to work
over, wells and related equipment and facilities, including applicable operating
costs of support equipment and facilities, incurred pursuant to a joint
operating agreement (excluding delay rentals); (b) all royalty payments and
other leasehold burdens payable out of production, except any such burdens
created by, through or under Borrower after January 1, 1997; (c) all severance,
ad valorem and similar taxes (excluding income taxes) assessed against either
the proceeds of production or the value of remaining reserves and related
personal property; and (d) all reasonable out-of-pocket costs incurred to
deliver the product to the purchaser or to make it marketable (including payment
of COPAS overhead but not including capital expenditures relating to the
delivery of the product or making it marketable). Unless otherwise provided,
Deductible Lease Expenses shall not include expenses associated with any
amortization or impairment of capitalized costs.
"Default" means any Event of Default and any default, event or
condition which would, with the giving of any requisite notice and/or the
passage of time, constitute an Event of Default.
"Environmental Laws" means any federal, state or local statute,
law, rule, regulation, ordinance, code, policy or rule of common law now or
hereafter in effect and in each case as amended, and any judicial or
administrative interpretation thereof, including any judicial or administrative
order, consent, decree or judgment, relating to the environment, health, safety
or Hazardous Materials, including, without limitation, the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, 42 U.S.C. Sec.
9601 et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Sec. 6901 et
seq., the Hazardous Materials Transportation Act, 49 U.S.C. Sec. 1801 et seq.,
the Clean Water Act, 33 U.S.C. Sec. 1251 et seq., the Toxic Substances Control
Act, 15 U.S.C. Sec. 2601 et seq., the Clean Air Act, 42 U.S.C. Sec. 7401 et
seq., the Safe Drinking Water Act, 42 U.S.C. Sec. 300f et seq., the Atomic
Energy Act, 42 U.S.C. Sec. 2011 et seq., the Federal Insecticide, Fungicide and
Rodenticide Act, 7 U.S.C. Sec. 136 et seq. and the Occupational Safety and
Health Act, 29 U.S.C. Sec. 651 et seq.
"ERISA" means the Employee Retirement Income Security Act of
1974, as now in effect or as hereafter amended from time to time.
"Event of Default" means any of the events described in Section
8.01 hereof.
"Eurodollar Rate" means, with respect to each particular Fixed
Rate Portion and the related Interest Period, the rate of interest per annum
(expressed as a percentage) determined by the Bank, in accordance with its
customary practices, to be representative of the rates at which deposits of U.S.
dollars are offered to the Bank at approximately 9:00 a.m., Denver, Colorado
time, two Business Days prior to the first day of such Interest Period (by prime
banks in the interbank eurocurrency market which have been selected by the Bank
in accordance with its customary practices) for delivery on the first day of
such Interest Period in an amount equal or comparable to the amount of such
Fixed Rate Portion and for a period of time equal or comparable to the length of
such Interest Period. The Eurodollar Rate determined by the Bank with respect to
a particular Fixed Rate Portion shall be fixed at such rate for the duration of
the associated Interest Period. If the Bank is unable so to determine the
Eurodollar Rate for any Fixed Rate Portion, Borrower shall be deemed not to have
elected such Fixed Rate Portion.
"Fixed Rate" means, with respect to each particular Fixed Rate
Portion and the associated Eurodollar Rate and Reserve Requirement, the rate of
interest per annum calculated by the Bank (rounded upward, if necessary, to the
next higher 0.01 percent) determined pursuant to the following formula:
Fixed = Eurodollar Rate + Fixed Rate
Rate 1.00 - Reserve Requirement Spread
If the Reserve Requirement changes during the Interest Period for a Fixed Rate
Portion, the Bank may, at its option, either change the Fixed Rate for such
Fixed Rate Portion or leave it unchanged for the duration of such Interest
Period.
"Fixed Rate Portion" means any portion of the outstanding
principal balance of Advances made hereunder which Borrower designates as such
in a Rate Election.
"Fixed Rate Spread" means: (a) for any and all Rate
Determination Periods as to which the Funded Debt/Partners' Capital Ratio is
less than or equal to 30 percent, 0.75 percentage point per annum; (b) for any
and all Rate Determination Periods as to which the Funded Debt/Partners' Capital
Ratio is greater than 30 percent but less than or equal to 100 percent, 1.00
percentage points per annum; and (c) for any and all Rate Determination Periods
as to which the Funded Debt/Partners' Capital Ratio is greater than 100 percent,
1.25 percentage points per annum.
"Funded Debt/Partners' Capital Ratio" means, for any Rate
Determination Period, the ratio, determined as of the end of the preceding
Quarter, of: (a) the sum of: (1) Borrower's indebtedness for borrowed money
(including without limitation the outstanding principal balance of the Loan plus
the face amount of all outstanding Letters of Credit plus the outstanding
principal balance of any and all Subordinated Debt), determined in accordance
with GAAP, plus (2) Borrower's contingent liabilities, determined in accordance
with GAAP, to (b)(1) Borrower's partners' equity, determined in accordance with
GAAP, minus (2) Borrower's intangible assets, determined in accordance with
GAAP. For example, the Funded Debt/Partners' Capital Ratio in effect for the
Rate Determination Period commencing June 17, 1997 and ending August 15, 1997
will be calculated from Borrower's financial data as of the end of the Quarter
ending March 31, 1997. The Funded Debt/Partners' Capital Ratio shall be
increased or decreased in accordance with this definition only if Borrower
notifies the Bank of such increase or decrease pursuant to Section 7.01(b)(7);
provided, however, that the Bank may make such change without receiving notice
from Borrower based upon information then available to the Bank, but the Bank
will have no obligation to do so.
"GAAP" means generally accepted accounting principles
consistently applied, as determined by the Financial Accounting Standards Board
from time to time, except that the cost basis of Borrower's oil and gas
properties shall be based upon St. Mary Land & Exploration Company's cost basis
in Borrower rather than upon the historic cost basis of such properties.
"Gross Revenues" means, for any calendar month: (a) all proceeds
of sales of oil, gas and other products actually received during that calendar
month by Borrower from any of the Oil and Gas Properties, (b) any and all
amounts actually received during that calendar month by Borrower as compensation
or reimbursement for operating any of the Oil and Gas Properties, and (c) any
and all other amounts actually received during that calendar month by Borrower
that are attributable to any of the Oil and Gas Properties. Gross Revenues shall
include, without limitation, all proceeds of sales of oil, gas and other
products received by Borrower in connection with oil and/or gas wells included
in the Oil and Gas Properties, whether drilled before or after the date hereof.
"Hazardous Materials" means (a) crude oil, petroleum or
petroleum products or natural gas, in each case after the capture and production
thereof and to the extent so defined by an Environmental Law; (b) asbestos in
any form that is or could become friable, urea formaldehyde foam insulation, and
radon gas; and (c) any substances defined as or included in the definition of
"hazardous substances," "hazardous wastes," "hazardous materials," "extremely
hazardous wastes," "restricted hazardous wastes," "toxic substances," "toxic
pollutants," "contaminants" or "pollutants" under any applicable Environmental
Law.
"Hedging Obligations" means, with respect to Borrower, all
liabilities of Borrower under: (a) interest rate swap agreements, interest rate
cap agreements, interest rate collar agreements and all other agreements and
arrangements designed to protect Borrower against fluctuations in interest
rates, or (b) commodity hedge, commodity swap, exchange, collar or cap
agreements, fixed price agreements and all other agreements and arrangements
designed to protect Borrower against fluctuations in the price of oil, gas or
other hydrocarbons owned by Borrower.
"Interest Period" means, with respect to each particular Fixed
Rate Portion, a period of one, two, three or six months, as specified in the
Rate Election applicable thereto, beginning on and including the date specified
in such Rate Election (which must be a Business Day) and ending on but not
including the date which corresponds numerically to such beginning date one,
two, three or six months thereafter (or if such month has no numerically
corresponding date, on the last Business Day of such month); provided that each
Interest Period which would otherwise end on a day which is not a Business Day
shall end on the next succeeding Business Day unless such next succeeding
Business Day is the first Business Day of a calendar month, in which case such
Interest Period shall end on the Business Day next preceding such numerically
corresponding day. No Interest Period may be elected which would end after the
Maturity Date.
"Letter of Credit" means a standby letter of credit requested by
Borrower and issued by the Bank pursuant to Article II below.
"Loan" means the funds advanced to Borrower by the Bank
hereunder and the Letters of Credit issued by the Bank at the request of
Borrower as provided herein.
"Loan Documents" shall mean this Agreement, the Note, the
Letters of Credit, applications for Letters of Credit, the Collateral Documents
and any other documents executed by any Obligated Person pursuant hereto.
"Maturity Date" means the earlier of: (a) the fifth anniversary
of the Conversion Date, or (b) such date on which the Loan is payable in full by
reason of the occurrence of an Event of Default, as established pursuant to
Section 8.01 below.
"Minimum Payment" means: (a) with respect to any Payment Date
during the Revolving Period and the first Payment Date during the Amortization
Period, the amount of interest accrued through such Payment Date; (b) with
respect to the next 12 Payment Dates during the Amortization Period: (1) 2.00
percent of the sum of the outstanding principal balance of all Advances as of
the close of business on the Conversion Date, plus (2) the amount of interest
accrued through such Payment Date; (c) with respect to the next 12 Payment Dates
during the Amortization Period: (1) 1.75 percent of the sum of the outstanding
principal balance of all Advances as of the close of business on the Conversion
Date, plus (2) the amount of interest accrued through such Payment Date; (d)
with respect to the next 12 Payment Dates during the Amortization Period: (1)
1.6 percent of the sum of the outstanding principal balance of all Advances as
of the close of business on the Conversion Date, plus (2) the amount of interest
accrued through such Payment Date; (e) with respect to the next 12 Payment Dates
during the Amortization Period: (1) 1.5 percent of the sum of the outstanding
principal balance of all Advances as of the close of business on the Conversion
Date, plus (2) the amount of interest accrued through such Payment Date; (f)
with respect to the next 11 Payment Dates during the Amortization Period: (1)
1.4 percent of the sum of the outstanding principal balance of all Advances as
of the close of business on the Conversion Date, plus (2) the amount of interest
accrued through such Payment Date; and (g) with respect to the Maturity Date,
the outstanding principal balance of the Loan plus interest accrued through the
Maturity Date.
"Net Revenues" means, for any calendar month, Gross Revenues for
that calendar month less Deductible Lease Expenses for that calendar month.
"Note" means the Promissory Note of even date herewith, made by
Borrower, payable to the order of the Bank, in the form of Exhibit A attached
hereto and made a part hereof, which Note shall evidence the Loan.
"Obligated Persons" means Borrower and/or any other Person who
hereafter guaranties or otherwise becomes liable in any way for the obligations
of Borrower hereunder.
"Oil and Gas Properties" means from time to time, all oil and/or
gas properties, pipelines, gathering systems, gas plants and related interests
owned by Borrower.
"Payment Date" means the last Business Day of each month,
commencing June 30, 1997.
"Permitted Investment" means:
(a) Any evidence of indebtedness issued or guaranteed
by the United StatesGovernment, maturing not more than one year after the date
of acquisition by Borrower; or
(b) Commercial paper, maturing not more than nine
months from the date of issuance thereof, which is issued by: (i) a corporation
(other than an affiliate of Borrower) organized under the laws of any state of
the United States or of the District of Columbia and rated A-1 by Standard &
Poor's Corporation or P-1 by Moody's Investors Service, Inc., or (ii) the Bank
or its parent company; or
(c) Any certificate of deposit, maturing not more than
one year from the date of issuance thereof, which is issued by a commercial
banking institution that is a member of the Federal Reserve System and has a
combined capital and surplus and undivided profits of not less than U.S.
$500,000,000; or
(d Any repurchase agreement entered into with a
commercial banking institution that is a member of the Federal Reserve System
and has a combined capital and surplus and undivided profits of not less than
U.S. $500,000,000, which: (i) is secured by a fully perfected security interest
in any obligation of the type described in any of clauses (a) through (c) above,
and (ii) has a market value at the time such repurchase agreement is entered
into of not less than 100 percent of the repurchase obligation of such
commercial banking institution thereunder; or
(e) Any deposit account at a commercial banking
institution that is a member of the Federal Reserve System and has a combined
capital and surplus and undivided profits of not less than U.S. $500,000,000; or
(f) Hedging Obligations of Borrower; or
(g) Any investment involving the exploration,
development, drilling or re-working of Borrower's oil and/or gas properties or
the acquisition of additional oil and/or gas properties by Borrower;
(h) Any other investment owned by Borrower as of
the date of this Agreement, so long as Borrower does not increase such
investment after the date hereof.
"Person" means an individual, partnership, corporation
(including a business trust), limited liability company, joint stock company,
trust, unincorporated association, joint venture or other entity, or a foreign
state or political subdivision thereof or any agency of such state or
subdivision.
"Quarter" shall mean each three-month period ending on any March
31, June 30, September 30 or December 31 during the term hereof.
"Rate Determination Period" means the time period from June 17,
1997 through August 15, 1997, and each subsequent three-month period, commencing
on the day after the end of the prior period and ending three months thereafter,
e.g., August 16, 1997 through November 15, 1997, November 16, 1997 through
February 15, 1998, etc.
"Rate Election" has the meaning given such term in Section 2.09
below.
"Reserve Requirement" means, on any day with respect to each
particular Fixed Rate Portion, the maximum reserve requirement, as determined by
the Bank (including without limitation any basic, emergency, supplemental,
marginal or similar reserves), expressed as a decimal and rounded to the next
higher 0.0001, which would then apply to the Bank under Regulation D with
respect to "Eurocurrency liabilities" (as such term is defined in Regulation D)
equal in amount to such Fixed Rate Portion, were the Bank to have any such
"Eurocurrency liabilities". If such reserve requirement shall change after the
date hereof, the Reserve Requirement shall be automatically increased or
decreased, as the case may be, from time to time as of the effective time of
each such change in such reserve requirement.
"Revolving Period" means the time period from the date of this
Agreement through the Conversion Date.
"St. Mary" means St. Mary Land & Exploration Company, a Delaware
corporation.
"Subordinated Debt" means the indebtedness and other obligations
of Borrower to any third party, to the extent that the rights of any such third
party to enforce the indebtedness and other obligations of Borrower thereunder
have been subordinated to the rights of the Bank hereunder or in connection
herewith by subordination agreements executed by the holders of the Subordinated
Debt and satisfactory in form and substance to the Bank.
"Working Capital" means: (a) the aggregate current assets of
Borrower, minus (b) the aggregate current liabilities of Borrower (excluding
current maturities of the Loan), all determined in accordance with GAAP.
"Year" means the calendar year.
Section 1.02. Computation of Time Periods. In this Agreement, in
the computation of periods of time from a specified date to a later specified
date, the word "from" means "from and including," the words "to" and "until"
each means "to but excluding" and the word "through" means "to and including."
Section 1.03. Accounting Terms. All accounting terms not
specifically defined herein shall be construed in accordance with GAAP.
ARTICLE II
AMOUNT AND TERMS OF THE LOAN
Section 2.01. The Loan. (a) Subject to the terms and conditions
hereof, the Bank agrees to: (1) make advances to Borrower from time to time at
the request of Borrower upon at least one Business Day's notice to the Bank from
Borrower; and (2) issue Letters of Credit from time to time requested upon
written notice to the Bank from Borrower no later than five days prior to the
requested date of issuance of each such Letter of Credit; provided that the Bank
shall not have any obligation to: (A) make any Advance (except Advances made
pursuant to Section 2.01(c) below) or issue any new Letter of Credit after the
Conversion Date; (B) make any Advance in an amount less than $50,000; (C) make
any Advance or issue or renew any Letter of Credit, if, after the making of such
Advance or the issuance or renewal of such Letter of Credit, the aggregate
amount of all Advances outstanding hereunder plus the face amount of all Letters
of Credit outstanding hereunder would exceed the Commitment Amount; or (D) issue
or renew a Letter of Credit which does not expire prior to the Maturity Date.
Within the limitation of the Commitment Amount and subject to the other terms
and provisions hereof, Borrower may borrow, repay and reborrow hereunder.
(b) Each request by Borrower for the issuance of a
Letter of Credit shall be in the form of Exhibit D attached hereto and made a
part hereof, sent by Borrower to the Bank, and accompanied by an application for
issuance of a letter of credit on the Bank's then-standard form, duly executed
by Borrower.
(c) Each payment by the Bank under or in connection
with a Letter of Credit shall be deemed to be an Advance bearing interest from
the date of such payment, shall be entitled to all benefits of the Collateral
Documents and shall be subject to all terms of this Agreement and any and all
other applicable Loan Documents.
Section 2.02. Conditions. Notwithstanding any other provision of
this Agreement, the Bank shall not be required to make the initial Advance or
any subsequent Advance hereunder or to issue any Letter of Credit hereunder if
the conditions precedent to the making of the Loan specified in Article IV
hereof have not been satisfied.
Section 2.03. Interest Rates. Borrower shall pay interest on the
outstanding unpaid principal amount of the Loan, from the date of the initial
Advance until all principal amounts hereunder have been repaid in full, all
Letters of Credit have been cancelled and this Agreement has been terminated, at
an interest rate per annum equal to: (a) up to and including the Maturity Date:
(1) as to the Base Rate Portion, at a fluctuating annual rate, adjustable as of
the day of any change, equal to the Base Rate; and (2) as to each Fixed Rate
Portion, at an annual rate equal to the Fixed Rate for that Fixed Rate Portion;
and (b) from and after the Maturity Date, at the Base Rate plus four percentage
points, but in no event less than the Base Rate in effect on the Maturity Date
plus four percentage points.
Section 2.04. Payments and Computations.
(a) On each Payment Date, Borrower shall make a payment
to the Bank in the amount of the Minimum Payment, subject to adjustment as
otherwise set forth in this Agreement, including without limitation as described
in Section 3.02 below.
(b) Borrower shall make each payment hereunder and
under the Note not later than 12:00 noon (Denver, Colorado time) on the day when
due in lawful money of the United States of America to the Bank at its office at
633 Seventeenth Street, Denver, Colorado 80202 or at any other location
designated by the Bank.
(c) All computations of interest shall be made by
the Bank on the basis of a year of 365 or 366 days, as applicable, for the
actual number of days (including the first day but excluding the last day)
occurring in the period for which such interest is payable; provided that, as to
any and all Fixed Rate Portions, computations of interest shall be made by the
Bank on the basis of a year of 360 days and the actual number of days elapsed.
(d) Except as otherwise provided in this Agreement with
respect to Fixed Rate Portions, should any such payment become due and payable
on a day other than a Business Day, the maturity of such payment shall be
extended to the next succeeding Business Day, and, in the case of a payment of
principal or past due interest, interest shall accrue and be payable thereon for
the period of such extension.
Section 2.05. Termination of Agreement. Borrower shall have the
right at any time and from time to time, upon not less than three business days'
prior written or telegraphic notice to the Bank, to terminate this Agreement.
Upon any termination of this Agreement, Borrower shall, at the time of such
termination, prepay the Note in full and cause all Letters of Credit to be
terminated. Except as otherwise provided in this Agreement with respect to Fixed
Rate Portions, any such prepayment shall be without penalty or premium.
Section 2.06. Use of Proceeds. Proceeds of the Loan shall be
used by Borrower exclusively for: (a) the repayment of Borrower's existing loan
from Wells Fargo Bank (Texas), N.A., and (b) the financing of Borrower's working
capital requirements and capital expenditures relating to (including without
limitation the issuance of Letters of Credit in connection with) the
acquisition, exploration and development of oil and gas properties. In no event
shall the funds from the Loan be used directly or indirectly for the purpose of
purchasing, acquiring or carrying any "margin stock" (as defined in Regulation U
promulgated by the Board of Governors of the Federal Reserve System) or to
extend credit to others directly or indirectly for the purpose of purchasing or
carrying any margin stock.
Section 2.07. Prepayment of the Loan. (a) During the Revolving
Period, Borrower shall have the right to prepay the principal amount of the Loan
at any time as provided herein; provided that Borrower will not reduce the
unpaid principal balance of the Loan to an amount less than $10,000. Partial
prepayments shall be in the amount of $50,000 or integral multiples thereof.
Except as set forth in Section 2.05 above or as set forth elsewhere in this
Agreement with respect to Fixed Rate Portions, each prepayment shall be without
premium or penalty. All prepayments shall first be applied to any and all
accrued interest and unpaid fees and then to unpaid principal.
(b) During the Amortization Period, Borrower shall have
the right to prepay the principal amount of the Loan at any time as provided
herein, upon at least two Business Days' prior notice to the Bank. Partial
prepayments shall be in the amount of $50,000 or integral multiples thereof.
Except as set forth in Section 2.05 above and except as otherwise provided in
this Agreement with respect to Fixed Rate Portions, each prepayment shall be
without premium or penalty. All prepayments shall first be applied to any and
all accrued interest and unpaid fees and then to unpaid principal. Prepayments
will be applied to installment payments of principal in the inverse order of
approaching maturities, unless otherwise agreed between Borrower and the Bank.
Section 2.08. Fees. (a) Borrower shall pay to the Bank, within
15 days after the end of: (1) each Quarter through the Quarter prior to the
Quarter in which the Conversion Date occurs, and (2) the period beginning on the
first day of the Quarter in which the Conversion Date occurs and ending on the
Conversion Date, a commitment fee in an amount equal to: (A) the applicable
Commitment Fee Rate, times (B) the excess of the Commitment Amount over the
aggregate outstanding principal balance of all Advances plus the face amount of
all outstanding Letters of Credit, computed on a daily basis for such Quarter
(or other period) for which such commitment fee is being paid.
(b) Borrower shall pay to the Bank, with respect to
each Letter of Credit a fee in an amount equal to the greater of: (i) one
percent per annum times the face amount of such Letter of Credit, or (ii)
$500.00, which fee shall be payable at the time of issuance (and again at the
time of any renewal) of such Letter of Credit.
Section 2.09. Rate Elections. Borrower may from time to time
designate all or any portion of the outstanding principal balance of all
Advances (including any yet-to-be-made Advances which are to be made prior to or
at the beginning of the designated Interest Period but excluding any portion of
such Advances required to be repaid prior to the end of the designated Interest
Period) as a Fixed Rate Portion; provided that, without the consent of the Bank,
Borrower may make no such election during the continuance of a Default and
Borrower may make such an election with respect to an already existing Fixed
Rate Portion only if such election will take effect at or after the termination
of the Interest Period applicable to such already existing Fixed Rate Portion.
Each election by Borrower of a Fixed Rate Portion shall:
(a) Be made in writing in the form and substance of the "Rate
Election" attached hereto as Exhibit E, duly completed;
(b) Specify the amount of the outstanding principal balance of
all Advances which Borrower desires to designate as a Fixed Rate
Portion, the first day of the Interest Period which is to apply thereto,
and the length of such Interest Period; and
(c) Be received by the Bank not later than 10:00 a.m., Denver,
Colorado time, on the second Business Day preceding the first day of the
specified Interest Period.
Each election which meets the requirements of this Section 2.09 (herein called a
"Rate Election") shall be irrevocable. Borrower may make no Rate Election which
does not specify an Interest Period complying with the definition of "Interest
Period" in Section 1.01, and the amount of the Fixed Rate Portion elected in any
Rate Election must be an integral multiple of $100,000. Upon the termination of
each Interest Period, the portion of the Loan theretofore constituting the
related Fixed Rate Portion shall, unless the subject of a new Rate Election then
taking effect, automatically become a part of the Base Rate Portion and become
subject to all provisions of the Loan Documents governing the Base Rate Portion.
Borrower shall have no more than five Fixed Rate Portions in effect at any time.
Section 2.10. Increased Cost of Fixed Rate Portions. If any
applicable domestic or foreign law, treaty, rule or regulation (whether now in
effect or hereafter enacted or promulgated, including Regulation D) or any
interpretation or administration thereof by any governmental authority charged
with the interpretation or administration thereof (whether or not having the
force of law):
(a) Shall change the basis of taxation of payments
to the Bank of any principal, interest, or other amounts attributable to any
Fixed Rate Portion or otherwise due under this Agreement in respect of any Fixed
Rate Portion (other than taxes imposed on the overall net income of the Bank or
any lending office of the Bank by any jurisdiction in which the Bank or any such
lending office is located); or
(b) Shall change, impose, modify, apply or deem
applicable any reserve, special deposit or similar requirements in respect of
any Fixed Rate Portion (excluding those for which the Bank is fully compensated
pursuant to adjustments made in the definition of Fixed Rate) or against assets
of, deposits with or for the account of, or credit extended by, the Bank to the
extent the same relate to a Fixed Rate Portion; or
(c) Shall impose on the Bank or the interbank
eurocurrency deposit market any other condition affecting any Fixed Rate
Portion, the result of which is to increase the cost to the Bank of funding or
maintaining any Fixed Rate Portion or to reduce the amount of any sum receivable
by the Bank in respect of any Fixed Rate Portion by an amount deemed by the Bank
to be material;
then: (x) the Bank shall promptly notify Borrower in writing of the happening of
such event, (y) Borrower shall upon demand pay to the Bank such additional
amount or amounts as will compensate the Bank for any such event (on an
after-tax basis), and (z) Borrower may elect, by giving to the Bank not less
than three Business Days' notice, to convert all (but not less than all) of any
such Fixed Rate Portion into a part of the Base Rate Portion.
Section 2.11 Availability. If the Bank shall determine
(which determination shall, upon notice thereof to Borrower, be conclusive and
binding on Borrower and the Bank) that: (a) the introduction of or any change in
or in the interpretation of any law, treaty, rule or regulation makes it
unlawful or impracticable, or any central bank or other governmental authority
asserts that it is unlawful, for the Bank to make, continue or maintain any
Fixed Rate Portion or shall materially restrict the authority of the Bank to
purchase or take offshore deposits of dollars (i.e., "eurodollars"), or (b)
matching deposits appropriate to fund or maintain any Fixed Rate Portion are not
available to it, or (c) the formula for calculating the Eurodollar Rate does not
fairly reflect the cost to the Bank of making or maintaining loans based on such
rate, then Borrower's right to elect Fixed Rate Portions shall be suspended to
the extent and for the duration of such illegality, impracticability or
restriction and all Fixed Rate Portions (or portions thereof) which are then
outstanding or are then the subject of any Rate Election and which cannot
lawfully or practicably be maintained or funded shall immediately become or
remain part of the Base Rate Portion. Borrower agrees to indemnify the Bank and
hold it harmless against all costs, expenses, claims, penalties, liabilities and
damages which may result from any such change in law, treaty, rule, regulation,
interpretation or administration.
Section 2.12. Reimbursable Taxes. Borrower covenants and agrees that:
(a) Borrower will indemnify the Bank against, and reimburse
the Bank for, all present and future income, excise, stamp or franchise taxes
and other taxes, fees, duties, withholdings or other charges of any nature
whatsoever imposed, assessed, levied or collected on or in respect of this
Agreement insofar as it pertains to a Fixed Rate Portion or any Fixed Rate
Portions (whether or not legally imposed, assessed, levied or collected), but
excluding taxes imposed on or measured by the Bank's net income or receipts
(such non-excluded items being called "Reimbursable Taxes"). Such
indemnification shall be on an after-tax basis, taking into account any income
taxes imposed on the amounts paid as indemnity.
(b) All payments by Borrower on account of principal
of, and interest on, the Loan and all other amounts payable by Borrower to the
Bank hereunder shall be made in full without set-off or counterclaim and shall
be made free and clear of and without deduction or withholding for any
Reimbursable Taxes, all of which shall be for the account of Borrower. In the
event that any withholding or deduction from any payment to be made by Borrower
hereunder is required in respect of any Reimbursable Taxes pursuant to any
applicable law, rule or regulation, Borrower shall pay on the due date of such
payment, by way of additional interest, such additional amounts as are needed to
ensure that the amount actually received by the Bank will equal the full amount
the Bank would have received had no such withholding or deduction been required.
If Borrower shall make any deduction or withholding as aforesaid, Borrower shall
within 60 days thereafter forward to the Bank an official receipt or other
official document evidencing payment of such deduction or withholding.
(c) If Borrower is ever required to pay any
Reimbursable Tax with respect to any Fixed Rate Portion, Borrower may elect, by
giving to the Bank not less than three Business Days' notice, to convert all
(but not less than all) of any such Fixed Rate Portion into a part of the Base
Rate Portion, but such election shall not diminish Borrower's obligation to pay
all Reimbursable Taxes.
Section 2.13. Funding Losses. In addition to its other
obligations hereunder, Borrower will indemnify the Bank against, and reimburse
the Bank on demand for, any loss or expense (including any loss or expense
incurred by reason of the liquidation or reemployment of deposits or other funds
acquired by the Bank to make, continue or maintain any Fixed Rate Portion or any
Advance) as a result of: (a) any payment or prepayment (whether authorized or
required hereunder or otherwise) of all or any portion of a Fixed Rate Portion
on a date other than the scheduled last day of the Interest Period applicable
thereto; (b) any payment or prepayment, whether required hereunder or otherwise,
of the Loan made after the delivery, but before the effective date, of a Rate
Election, if such payment or prepayment prevents such Rate Election from
becoming fully effective; (c) the failure of any Advance to be made or of any
Rate Election to become effective due to any condition precedent not being
satisfied or due to any other action or inaction of any Obligated Person; or (d)
any conversion (whether authorized or required hereunder or otherwise) of all or
any portion of any Fixed Rate Portion into the Base Rate Portion or into a
different Fixed Rate Portion on a day other than the day on which the applicable
Interest Period ends.
Section 2.14. Capital Reimbursement. If either (a) the
introduction or implementation of or the compliance with or any change in or in
the interpretation of any law, rule or regulation, or (b) the introduction or
implementation of or the compliance with any request, directive or guideline
from any central bank or other governmental authority (whether or not having the
force of law) affects or would affect the amount of capital required or expected
to be maintained by the Bank or any corporation controlling the Bank, then, upon
demand by the Bank, Borrower will pay to the Bank, from time to time as
specified by the Bank, such additional amount or amounts which the Bank shall
determine to be appropriate to compensate the Bank or any corporation
controlling the Bank in light of such circumstances, to the extent that the Bank
reasonably determines that the amount of any such capital would be increased or
the rate of return on any such capital would be reduced by or in whole or in
part based upon the existence of the Loan or the Bank's commitments under this
Agreement or the existence of the Letters of Credit issued hereunder.
ARTICLE III
OFFSET; INCREASED PAYMENTS
Section 3.01. Bank Accounts and Offset. To secure the repayment
of the Loan, Borrower hereby grants to the Bank a security interest, a lien, and
a right of offset, each of which shall be upon and against: (a) any and all
moneys, securities or other property (and the proceeds therefrom) of Borrower
now or hereafter held or received by or in transit to the Bank from or for the
account of Borrower, whether for safekeeping, custody, pledge, transmission,
collection or otherwise, (b) any and all deposits (general or special, time or
demand, provisional or final) of Borrower with the Bank, and (c) any other
credits and claims of Borrower at any time existing against the Bank, including
without limitation claims under certificates of deposit; provided that the
foregoing shall not apply to amounts which Borrower is holding as trustee for
the benefit of any third party. Upon the occurrence of any Event of Default, the
Bank is hereby authorized to foreclose upon, offset, appropriate, and apply, at
any time and from time to time, without notice to Borrower, any and all items
hereinabove referred to against the Loan (whether or not the Loan is then due
and payable).
Section 3.02. Increased Payments. At any time after the
occurrence of an Event of Default, the Bank shall have the right, in its sole
discretion, upon written notice to Borrower, to require that future monthly
payments of principal and interest made by Borrower pursuant to this Agreement
be in an amount equal to the greatest of: (a) the amount set forth in Section
2.04, (b) up to 70 percent of Gross Revenues for the calendar month two months
prior to the calendar month in which such payment is due, or (c) up to 100
percent of Net Revenues for the calendar month two months prior to the calendar
month in which such payment is due; provided that any such payments shall be in
addition to any amounts payable pursuant to Section 3.03 below.
Section 3.03. Periodic Reviews and Borrowing Base
Determinations. As of approximately January 1 and July 1 of each year,
commencing January 1, 1998, through the Maturity Date, and at such other times
as the Bank may determine, the Bank will perform a review of the Oil and Gas
Properties and will determine the Borrowing Base, taking into account such
factors as the Bank in its reasonable discretion deems appropriate. The Bank
will give notice to Borrower (as of approximately 10 days prior to the effective
date of any new determination of the Borrowing Base pursuant hereto), of the
amount of the new Borrowing Base; provided that Borrower shall have the right,
by giving notice to the Bank, to make an election to reduce the Borrowing Base
to an amount less than the amount so determined by the Bank; provided further
that, as to any Borrowing Base Period for which Borrower has so elected to
reduce the Borrowing Base, not more than once during such Borrowing Base Period,
Borrower shall have the right, by giving notice to the Bank, to elect to
increase the Borrowing Base to an amount not greater than the Borrowing Base
originally determined by the Bank for such Borrowing Base Period, so long as no
Default has occurred and is continuing at the time of such election and Borrower
pays to the Bank at that time the additional amount of the commitment fee
payable pursuant to Section 2.08(a) above as if the increased Borrowing Base
elected by Borrower had been in effect at all times from and after the first day
of such Borrowing Base Period.
If, at the time of any determination of the Borrowing Base
or at any other time, the then-outstanding principal balance of all Advances
plus the face amount of all Letters of Credit outstanding hereunder exceeds the
Commitment Amount, Borrower shall, within 30 days of any such determination: (a)
mortgage, by instruments satisfactory in form and substance to the Bank,
sufficient additional available assets or properties owned by Borrower and
satisfactory to the Bank to induce the Bank to make a re-determination of the
Borrowing Base which causes the Commitment Amount to be increased by an amount
sufficient to eliminate such excess; or (b) prepay the outstanding principal
balance of the Loan in an amount at least equal to the amount of such excess; or
(c) commence (and thereafter continue) an amortization schedule under which
Borrower repays the Loan in an amount at least equal to the excess in six equal
monthly principal installments on the last Business Day of each calendar month,
which amounts shall be in addition to the monthly interest payments and any
other principal payments otherwise due, such that the entire excess is paid
within six months; or (d) if the Conversion Date has not yet occurred, elect to
have the Conversion Date occur immediately. Failure by Borrower to comply with
the foregoing shall be deemed an Event of Default hereunder.
ARTICLE IV
CONDITIONS OF LENDING
Section 4.01. Conditions Precedent to the Initial Advance. The
obligation of the Bank to make the initial Advance is subject to the receipt by
the Bank of the following in form, substance and date satisfactory to the Bank:
(a) The Note, duly executed by Borrower;
(b) A certificate of the general partners of Borrower
in the form of Exhibit B
attached hereto and made a part hereof, which shall contain the names and
signatures of the persons entitled to execute the Loan Documents on behalf of
Borrower and which shall certify to the truth, correctness and completeness of a
copy of the partnership agreement of Borrower and all amendments thereto;
(c) To the extent not heretofore executed and
delivered, the Collateral Documents, duly executed by Borrower, and recorded or
filed by the Bank or at the Bank's direction;
(d) A compliance certificate in the form of Exhibit C
attached hereto and made a
part hereof;
(e) Evidence satisfactory to the Bank of Borrower's
title to the properties
subject to the Collateral Documents, which title shall be free and clear of
liens, encumbrances and defects, except for liens and encumbrances in favor of
the Bank; and
(f) Any other documents and instruments which the Bank
shall have reasonably requested including, without limitation: partnership and
corporate documents and records; documents evidencing governmental
authorizations, consents, approvals, licenses and exemptions; and certificates
of public officials and of officers and representatives of the Obligated Persons
and other persons as to: (1) the accuracy and validity of or compliance with all
representations, warranties and covenants made by Borrower in this Agreement,
(2) the satisfaction of all conditions contained herein or therein, and (3) all
other matters pertaining hereto.
Section 4.02. Additional Conditions Precedent to the Advances.
The obligation of the Bank to make the initial Advance and any and all
subsequent Advances and to issue any and all Letters of Credit is subject to the
satisfaction of the following conditions precedent:
(a) Any and all representations and warranties made
by Borrower in this Agreement or in any of the other Loan Documents shall be
true on and as of the date of the requested Advance as if such representations
and warranties had been made on such date;
(b) There shall not exist on the date of the requested
Advance or the date of issuance of the Letter of Credit any Event of Default
under this Agreement or any event or condition that, with the giving of notice,
the lapse of time, or both, would be an Event of Default under this Agreement;
and
(c) Borrower shall have performed and complied with
all agreements and conditions herein required to be performed or complied with
on or prior to the date of the requested Advance or the date of issuance of the
requested Letter of Credit.
ARTICLE V
SECURITY Section 5.01. Security. Payment of the Note and all other
obligations of Borrower hereunder shall be secured by liens on and security
interests in the Collateral, as created pursuant to the Collateral Documents. To
the extent the Collateral Documents have not heretofore been recorded or filed,
the Bank will record or file (or cause to be recorded or filed) the Collateral
Documents at Borrower's expense promptly after execution and delivery thereof.
Borrower agrees that, at any time, at the Bank's request, Borrower will promptly
execute and deliver any mortgages, deeds of trust, assignments, financing
statements or any other documents as may be necessary to create and perfect
enforceable liens or security interests in favor of the Bank on any or all of
the Oil or Gas Properties owned by Borrower as to which the Bank requests that
such liens and security interests be created and perfected.
Section 5.02. Perfection and Protection of Security Interests
and Liens. Borrower will cause to be delivered to the Bank from time to time any
financing statements, continuation statements, extension agreements and other
documents, properly completed and executed (and acknowledged when required) by
Borrower, in form and substance satisfactory to the Bank for the purpose of
creating, perfecting or protecting liens, pledges, security interests and
assignments in favor of the Bank in and to any of the Oil and Gas Properties
identified by the Bank.
Section 5.03. Security Opinions. From time to time during the
term hereof, Borrower will deliver such opinions regarding the Collateral, from
counsel and in form and content reasonably satisfactory to the Bank, as the Bank
may reasonably request, including without limitation opinions confirming that
the nature and extent of Borrower's title to the Collateral covered by the
Collateral Documents as provided in Section 5.01 (expressly including the
Borrower's working and net revenue interests therein) conform to the assumptions
used by the Bank in evaluating the Collateral and that, pursuant to the
Collateral Documents, first enforceable liens thereon have been duly created and
perfected in favor of the Bank.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES
Section 6.01. Representations and Warranties of Borrower. To
induce the Bank to enter into this Agreement and to make the Loan, Borrower
represents and warrants to the Bank (which representations and warranties shall
survive the delivery of the Note and shall be deemed to be continuing
representations and warranties until repayment in full of the Note and
termination of this Agreement) that:
(a) Existence; Standing. Borrower is a general
partnership duly organized, validly existing and in good standing under the laws
of the State of Montana.
(b) Qualification to Do Business. Each Obligated
Person is duly qualified to do business in each jurisdiction in which a failure
so to qualify would have a material adverse effect on its business.
(c) Due Authorization. The execution, delivery and
performance by Borrower of this Agreement, the Note and the other Loan Documents
to which it is a party are within its powers, have been duly authorized by all
necessary action, and do not contravene Borrower's organizational documents or
any law or any contractual restriction binding on or affecting Borrower.
(d) Approvals. No authorization or approval or other
action by, and no notice to or filing with, any governmental authority or
regulatory body is required for the due execution, delivery and performance by
any Obligated Person of the Loan Documents to which each is a party.
(e) Binding Obligations. This Agreement is, and the
Note, the Collateral Documents and all other Loan Documents to which Borrower is
a party, when executed and delivered hereunder, will be, legal, valid and
binding obligations of Borrower, enforceable against Borrower in accordance with
their respective terms.
(f) Financial Statements.The balance sheet of Borrower
as of March 31, 1997, and the related statements of income, retained earnings
and cash flows of Borrower for the fiscal period then ended, copies of which
have been furnished to the Bank, fairly present the financial condition of
Borrower as at such date and the results of the operations of Borrower for the
period ended on such date, all in accordance with GAAP. Since the date of said
financial statements, there has been no material adverse change in the financial
condition or operations of Borrower which has not been disclosed to the Bank in
writing.
(g) Use of Proceeds. None of the proceeds of the Loan
will be used to acquire any security in any transaction which is subject to
Sections 13 and 14 of the Securities and Exchange Act of 1934.
(h) Regulation U. No Obligated Person is engaged in
the business of extending credit for the purpose of purchasing or carrying
margin stock (within the meaning of Regulation U issued by the Board of
Governors of the Federal Reserve System), and none of the proceeds of the Loan
will be used to purchase or carry any margin stock or to extend credit to others
for the purpose of purchasing or carrying any margin stock.
(i) Other Obligations. No Obligated Person has with
respect to the Collateral any outstanding indebtedness, obligations, liabilities
(including contingent, indirect and secondary liabilities and obligations), tax
assessments against it, or unusual forward or long-term commitments, or, with
respect to its other properties which are, in the aggregate, material (defined
as being in excess of $10,000) with respect to the financial condition of such
Obligated Person and, in either case, not shown in the financial statements
referred to in Section 6.01(f) above or in other writings heretofore delivered
by Borrower or such Obligated Person to the Bank.
(j) Full Disclosure. No certificate, statement or
other information delivered herewith or heretofore by any Obligated Person to
the Bank in connection with the negotiation of this Agreement or in connection
with any transaction contemplated hereby contains any untrue statement of a
material fact or omits to state any material fact known to any Obligated Person
necessary to make the statements contained herein or therein not misleading as
of the date presented. There is no fact known to any Obligated Person that such
Obligated Person has not disclosed to the Bank in writing which could materially
and adversely affect the properties, business, prospects or condition (financial
or otherwise) of such Obligated Person.
(k) No Litigation. Except as heretofore disclosed
to the Bank in writing, there are no actions, suits or legal, equitable,
arbitrative or administrative proceedings pending or, to the knowledge of
Borrower, threatened against any Obligated Person at law or in equity or before
any federal, state, municipal or other governmental department, commission,
body, board, bureau, agency, or instrumentality, domestic or foreign, and there
are no outstanding judgments, injunctions, writs, rulings or orders by any court
or governmental body against any Obligated Person, any of their respective
partners, shareholders, directors or officers, which relate to the Collateral,
or, with respect to any Obligated Person generally, which do or may materially
and adversely (defined as being in excess of $10,000) affect any Obligated
Person, their respective ownership or use of any of their respective assets or
properties, their respective businesses or financial condition or prospects, or
the right or ability of any Obligated Person to enter into any of the Loan
Documents to which it is a party or to consummate the transactions contemplated
hereby or to perform their respective obligations hereunder or in connection
herewith.
(l) No ERISA Liability. Borrower has no knowledge
of the occurrence of any event with respect to any ERISA Plan which could result
in a liability of any Obligated Person to the Pension Benefit Guaranty
Corporation, other than the payment of premiums (but no late payment charge)
pursuant to Section 4007 of ERISA.
(m) Title to Properties. Borrower has good and
defensible title to the interests in oil and gas wells, properties and assets
which are subject to the Collateral Documents, free and clear of all liens,
encumbrances, options, charges and assessments other than those disclosed to the
Bank in writing prior to the actual execution hereof by Borrower, except minor
irregularities and defects of title which are not such as to cause: (1)
Borrower's use or enjoyment of the Collateral to be diminished, or (2) the
marketability of Borrower's title to the Collateral to be limited or impaired.
(n) Drilling and Operations. To the best of
Borrower's knowledge, except as heretofore disclosed to the Bank in writing, the
oil and gas wells identified in the Collateral Documents have been drilled and
operated in all material respects in accordance with the terms of relevant
leases and agreements and applicable federal, state and local laws and
regulations and are bottomed on and producing from the drilling and spacing
units or blocks therefor.
(o) Environmental Matters. To the best of Borrower's
knowledge, except as previously disclosed by Borrower to the Bank in writing:
(1) The Oil and Gas Properties do not contain, and have
not previously contained, in, on, or under, including, without limitation, the
soil and groundwater thereunder, any Hazardous Materials which would interfere
with the continued operation of any of the Oil and Gas Properties or impair the
fair saleable value thereof;
(2) The Oil and Gas Properties and all operations and
facilities located at the Oil and Gas Properties are in compliance with all
Environmental Laws, and there are no Hazardous Materials located on, in or under
the Oil and Gas Properties which would interfere with the continued operation of
any of the Oil and Gas Properties or impair the fair saleable value of any
thereof;
(3) Borrower has not received any complaint, judgment,
notice of violation, alleged violation, investigation or advisory action of
potential liability or of potential responsibility regarding environmental
protection matters or permit compliance under the Environmental Laws with regard
to the Oil and Gas Properties, nor is Borrower aware that any governmental
authority is contemplating delivering to Borrower any such notice. Borrower is
not aware of any condition or occurrence on the Oil and Gas Properties that
could form the basis of any complaint, judgment, notice of violation, alleged
violation, investigation or advisory action of potential liability or of
potential responsibility regarding environmental protection matters or permit
compliance under the Environmental Laws with regard to the Oil and Gas
Properties;
(4) Hazardous Materials have not been generated, used,
treated, stored, handled, released or disposed of, as defined under the
Environmental Laws, at, on or under any of the Oil and Gas Properties, nor have
any Hazardous Materials been transported from the Oil and Gas Properties to any
other location, nor have any Hazardous Materials from the Oil and Gas Properties
been used, treated, stored, handled, released or arranged for disposal of or
disposed of at any other location, other than crude oil and natural gas produced
on and transported from the Oil and Gas Properties and Hazardous Materials
customarily used in oil and gas operations which would not interfere with the
continued operation of any of the Oil and Gas Properties or impair the fair
saleable value of any thereof; and
(5) There are no governmental, administrative actions
or judicial proceedings, including private party actions, pending or
contemplated under any Environmental Laws to which Borrower is or, to Borrower's
best knowledge, will be named as a party with respect to the Oil and Gas
Properties, nor are there any consent decrees or other decrees, consent orders,
administrative orders or other orders, or other administrative or judicial
requirements outstanding under any Environmental Law with respect to any of the
Oil and Gas Properties.
ARTICLE VII
COVENANTS OF BORROWER
Section 7.01. Affirmative Covenants. So long as the Note or any
other amounts due the Bank hereunder shall remain unpaid or any Letters of
Credit remain outstanding, Borrower will, unless the Bank shall otherwise
consent in writing:
(a) Payment and Performance. Pay all amounts due under
the Loan Documents in accordance with the terms thereof and observe, perform and
comply with every covenant, term and condition therein, express or implied.
(b) Books, Financial Statements and Reports. Maintain
a standard system of accounting and furnish or cause to be furnished to the Bank
the following statements and reports at Borrower's expense:
(1) As soon as available, and in any event
within 120 days after the end of each fiscal year of Borrower, complete
financial statements for Borrower, prepared in reasonable detail in accordance
with GAAP. These financial statements shall contain balance sheets as of the end
of such fiscal year and statements of earnings, of changes in financial
position, and of changes in stockholders' or members' equity for such fiscal
year, setting forth in comparative form the corresponding figures for the
preceding fiscal year. Borrower's annual financial statements shall be
accompanied by a report of the chief financial officer of Borrower or an
authorized officer of the managing general partner of Borrower attesting to the
authenticity of such financial statements, showing the calculation of (and
Borrower's compliance with) all applicable financial covenants, and confirming
that there existed no condition or event, at the end of such fiscal year or at
the time of the report, which constituted an Event of Default, or, if any such
condition or event existed, specifying the nature and period of existence of any
such condition or event. The annual financial statements of Borrower shall be
audited by an independent certified public accountant acceptable to the Bank
(and a copy of an unqualified audit opinion by such certified public accountant
shall be delivered to the Bank with such financial statements).
(2) As soon as available, and in any event
within 60 days after the end of each Quarter (except the last Quarter of each
Year), complete financial statements for Borrower, prepared in reasonable detail
in accordance with GAAP, and signed by the chief financial officer of Borrower
or an authorized officer of the managing general partner of Borrower and
consisting of at least a balance sheet as at the close of such Quarter, and
statements of earnings, cash flow, changes in financial position and changes in
stockholders' equity for such Quarter and for the period from the beginning of
the Year to the close of such Quarter. Borrower's quarterly financial statements
shall be accompanied by a report of the chief financial officer of Borrower or
an authorized officer of the managing general partner of Borrower attesting to
the authenticity of such financial statements, showing the calculation of (and
Borrower's compliance with) all applicable financial covenants, and confirming
that there existed no condition or event, at the end of such Quarter or at the
time of the report, which constituted an Event of Default, or, if any such
condition or event existed, specifying the nature and period of existence of any
such condition or event.
(3) Within 90 days after the end of each
Year, an estimate of the cash flow of Borrower for the then-current Year, giving
details as to anticipated revenues, expenses and cash receipts and disbursements
for such Year.
(4) By November 15 of each Year,commencing
November 15, 1997, an engineering report and economic evaluation prepared by one
or more petroleum engineers chosen by Borrower and acceptable to the Bank,
prepared as of the subsequent December 31, in form and substance satisfactory to
the Bank, covering all Oil and Gas Properties and setting forth the estimated
proven and producing and proven and nonproducing oil and gas reserves
attributable thereto, and accompanied by Borrower's projection of the rate of
production therefrom for the life thereof.
(5) Within 90 days after the end of each
Quarter, commencing with the Quarter ending March 31, 1997, a production report
for each calendar month during such Quarter, on a well-by-well basis,
indicating, for all oil or gas properties included in the Collateral or
otherwise owned by Borrower, amounts and types of production sold, the unit sale
price and gross proceeds of such sales, and the amounts of operating expenses,
capital expenditures and other amounts expended on such properties.
(6) Promptly upon their becoming available,
copies of all financial statements, material reports, material notices, proxy
statements and other material information sent by any Obligated Person to their
respective shareholders and all registration statements, material periodic
reports and other material statements and schedules filed by any Obligated
Person with any securities exchange, the Securities and Exchange Commission or
any similar governmental authority.
(7) As soon as available, and in any event
within 45 days after the end of each Quarter, a certificate signed by the chief
financial officer of Borrower showing, in detail satisfactory to the Bank,
Borrower's calculation of the Funded Debt/Partners' Capital Ratio as of the end
of such Quarter.
(c) Other Information and Inspections. Furnish to
the Bank any information which the Bank may from time to time reasonably request
concerning any covenant, provision or condition of the Loan Documents or any
matter in connection with the business and operations of Borrower. In addition,
Borrower will permit representatives appointed by the Bank, including
independent accountants, agents, attorneys, appraisers and any other persons,
upon prior notice, to visit and inspect during normal business hours any of the
properties of Borrower, including its books of account, other books and records,
and any facilities or other business assets, and to make copies therefrom,
photocopies thereof and photographs thereof, and to write down and record any
information such representatives obtain. Borrower shall permit the Bank or its
representatives to investigate and verify the accuracy of the information
furnished to the Bank under or in connection with the Loan Documents and to
discuss all such matters with Borrower's officers, employees and
representatives.
(d) Notice of Material Events. Promptly notify the
Bank: (1) of any material adverse change in the financial condition of any
Obligated Person, (2) of the occurrence of an Event of Default hereunder, (3) of
the occurrence of any acceleration of the maturity of any indebtedness owed by
any Obligated Person, or of any default under any indenture, mortgage,
agreement, contract or other instrument to which any Obligated Person is a party
or by which any of them is bound, if such acceleration or default might result
in a material adverse claim (which shall include, without limitation, any claim
of $100,000 or more) asserted against any Obligated Person or with respect to
any of their respective properties, (4) of the occurrence of a Reportable Event
(as such term is defined in Title IV of ERISA) with respect to any ERISA Plan,
and (5) of the filing of any suit or proceeding against any Obligated Person in
which an adverse decision could have a material adverse effect upon its
financial condition or upon its business and operations. Without limitation, any
suit involving a claim of $100,000 or more against Borrower (which is not
covered by effective insurance) shall be considered a suit or proceeding in
which an adverse decision could have a material adverse effect upon the
financial condition of such Obligated Person. Borrower will also notify the Bank
in writing at least 30 Business Days prior to the date that any Obligated Person
changes its name or the location of its chief executive office or principal
place of business or the place where it keeps its books and records concerning
the Collateral. Borrower hereby advises the Bank that the address of Borrower's
chief executive office and principal place of business is as shown in Section
9.02 below.
(e) Maintenance of Existence and Qualifications.
Maintain and preserve Borrower's existence as a partnership, and Borrower's
rights and franchises which pertain to the Collateral in full force and effect
and qualify to do business, if required, in all states or jurisdictions in which
the Collateral is located.
(f) Maintenance of Properties. Preserve, operate
and maintain, or cause to be preserved, operated and maintained, the Oil and Gas
Properties in a good and workmanlike manner as a prudent operator in accordance
with good oil and gas industry practices; maintain, preserve, protect and keep
all property used or useful in the conduct of Borrower's business with respect
to the Oil and Gas Properties, and cause to be maintained, preserved, protected
and kept, all property used or useful in the conduct of Borrower's business
relating to the Oil and Gas Properties in good condition and in compliance with
all applicable laws, rules and regulations, and will from time to time make or
cause to be made all repairs, renewals and replacements needed to enable the
business and operations carried on in connection therewith to be promptly and
advantageously conducted at all times; and cause the Oil and Gas Properties to
be kept free and clear of liens, charges, security interests, encumbrances,
adverse claims and title defects of every character other than: (1) the liens
and security interests created by the Collateral Documents, (2) taxes
constituting a lien but not due and payable, (3) defects or irregularities in
title which are not such as to interfere materially with the development,
operation or value of the Collateral and not such as to materially affect title
thereto, (4) those set forth or referred to in the Collateral Documents, (5)
those being contested in good faith by Borrower and which do not, in the
judgment of the Bank, jeopardize the Bank's rights in and to the Collateral, and
(6) those consented to in writing by the Bank.
(g) Payment of Taxes, Etc. File or cause to be filed
all required tax returns and pay or cause to be paid all taxes and other
governmental charges or levies imposed upon any Obligated Person or upon any
Obligated Person's income, profits or property before the same shall become in
default; and pay or cause to be paid all lawful claims for labor, materials and
supplies which, if unpaid, might become a lien or charge upon any Obligated
Person's property or any part thereof; and pay and discharge when due all
material debts, accounts, liabilities and charges now or hereafter owed by any
Obligated Person; and maintain, or cause to be maintained, appropriate accruals
and reserves for all such liabilities in a timely fashion in accordance with
GAAP; provided, however, that Borrower may delay paying or discharging, or
causing to be paid or discharged, any such taxes, charges, claims or liabilities
so long as the validity thereof is being contested in good faith by appropriate
proceedings and Borrower shall have set aside on their books adequate reserves
therefor.
(h) Insurance. Maintain insurance reasonably acceptable
to the Bank against liability on account of damages to persons or property.
(i) Books and Records. Maintain complete and accurate
books of account and records.
(j) Payment of Expenses. Pay all reasonable costs and
expenses of the Bank (including, without limitation as to type of expense,
reasonable attorneys' fees) in connection with: (1) any and all amendments,
modifications, supplements, consents, waivers or other documents or instruments
relating hereto or to any of the Loan Documents (it being understood that the
Bank will pay for its own legal costs in connection with the preparation,
execution and delivery of this Agreement and the Loan Documents to be delivered
prior to the initial Advance), (2) the filing, recording, refiling and
rerecording of any Collateral Documents and all amendments, supplements or
modifications thereto, and any and all amendments, supplements or modifications
thereto, and any and all other documents or instruments or further assurances
required to be filed or recorded or refiled or rerecorded by the terms hereof or
of any Collateral Document, (3) the evaluation and confirmation of Borrower's
title to the Collateral as requested by the Bank, and (4) the enforcement, after
the occurrence of an Event of Default, of the Loan Documents.
(k) Performance on Borrower's Behalf. If any Obligated
Person fails to pay any taxes, insurance premiums or other amounts required to
be paid under any Loan Documents, the Bank may pay the same and shall be
entitled to immediate reimbursement by Borrower therefor, and each amount paid
shall constitute a part of Borrower's indebtedness to the Bank, shall be secured
by the Collateral Documents and shall bear interest from the date such amount is
paid by the Bank until the date such amount is repaid to the Bank at the Base
Rate plus four percentage points per annum.
(l) Compliance with Agreements and Law. Perform all
material obligations required to be performed by any Obligated Person under the
terms of each indenture, mortgage, deed of trust, security agreement, lease,
franchise, agreement, contract or other instrument or obligation relating to the
Collateral to which any Obligated Person is a party or by which any of them or
any of the Collateral is bound, and conduct, and cause to be conducted, the
businesses and affairs of each Obligated Person in compliance with the laws and
regulations applicable thereto (including but not limited to those relating to
ecology, pollution and environmental matters).
(m) Evidence of Compliance. Furnish to the Bank at
Borrower's expense all evidence which the Bank may from time to time reasonably
request, as to the accuracy and validity of or compliance with all
representations, warranties and covenants made by any Obligated Person in the
Loan Documents, the satisfaction of all conditions contained therein, and all
other matters pertaining thereto.
(n) Accounts. Upon request by the Bank, establish
or maintain with, or, promptly after the date hereof, transfer to, the Bank, all
checking and savings accounts of Borrower, including without limitation the
general operating accounts and payroll accounts of Borrower, and deposit any and
all proceeds of production received by Borrower from the Collateral into one or
more of said accounts.
(o) Environmental Laws. Comply with all Environmental
Laws and obtain and comply with and maintain any and all licenses, approvals,
registrations or permits required by the Environmental Laws.
(p) Indemnity. Defend, indemnify and hold harmless
the Bank and its employees, agents, officers and directors, from and against any
claims, demands, penalties, fines, liabilities, settlements, damages, costs and
expenses of whatever kind or nature known or unknown, contingent or otherwise,
arising out of, or in any way relating to the violation of or noncompliance with
any Environmental Laws applicable to the Oil and Gas Properties or any other
property owned or operated by Borrower, or any orders, requirements or demands
of governmental authorities related thereto, including, without limitation,
attorney's and consultant's fees, investigation and laboratory fees,
environmental response and cleanup costs, court costs and litigation expenses,
except to the extent that any of the foregoing arise out of the gross negligence
or willful misconduct of the party seeking indemnification therefor.
(q) Production Purchasers. Upon request by the Bank,
keep the Bank currently advised of the names and addresses of all purchasers of
production from the Collateral.
(r) Further Assurances. Do, or cause to be done, such
further acts and execute such further instruments as the Bank may reasonably
determine to be necessary or desirable to carry out the purposes of this
Agreement, and maintain and perfect the liens and security interests created by
the Collateral Documents.
Section 7.02. Negative Covenants. So long as the Note and any
other amounts due hereunder shall remain unpaid, Borrower will not, without the
prior written consent of the Bank (which consent will not be unreasonably
withheld):
(a) Limitation on Distributions and Redemptions. Except
for the repayment of advances made in the ordinary course of business, make any
distribution or payment (including without limitation the payment of any salary,
bonus or other compensation) to any of Borrower's partners or in respect of any
partnership interest in Borrower; or directly or indirectly make any capital
contribution to or purchase, redeem, acquire or retire any partnership interest
in Borrower (whether any such interest is now or hereafter issued, outstanding
or created); or cause or permit any reduction or retirement of the partnership
interests in Borrower; provided that, at the times when taxes (or estimated
taxes) are payable by the partners of Borrower (up to and including April 15 of
the succeeding calendar year), if no Event of Default has occurred and is
continuing (or would result from such distribution), Borrower may make
distributions in an aggregate amount not greater than the product of: (1) the
highest tax rate payable by a corporation on ordinary taxable income under the
tax laws of the United States and of the State of Montana, the State of North
Dakota or the State of Colorado (whichever state has the higher tax rate), times
(2) the taxable income of Borrower for the Quarter as to which the distribution
is being made (or, if such taxable income is not known at such time, the
then-current estimate of such taxable income); provided that when the actual
taxable income of Borrower is determined for any Year, Borrower shall cause the
partners of Borrower to repay to Borrower any excess distributions made by
reason of their being based upon the estimated taxable income of Borrower for
the Quarters included in such Year.
(b) Limitation on Indebtedness. Create, incur, assume,
guarantee, endorse, become or be liable in any manner with respect to, or suffer
to exist, any Debt, liability or obligation (including, without limitation, all
Debt and all contingent or secondary, or direct or indirect, debts, liabilities
or obligations whatsoever), except:
(1) Borrower's indebtedness to the Bank;
(2) current debts, obligations and
liabilities to pay vendors, suppliers, and persons providing goods and services
normally required in the ordinary course of business (including forward sales)
and on ordinary trade terms which are not delinquent or which are being
contested in good faith;
(3) taxes, assessments and governmental
charges or levies which are not delinquent or which are being contested in good
faith;
(4) contingent liabilities arising out of
the endorsement in the ordinary course of business of negotiable instruments in
the course of collection;
(5) Subordinated Debt; and
(6) Debt shown on the financial statements
of Borrower dated as of March 31, 1997, as heretofore furnished to the Bank.
(c) Limitation on Liens. Create, assume or permit
to exist any mortgage, deed of trust, pledge, encumbrance, lien or charge of any
kind (including any security interest in or vendor's lien on property purchased
under conditional sales or other title retention agreements and including any
lease in the nature of a title retention agreement) upon any of the Collateral
or any of Borrower's other assets, except:
(1) liens and security interests at any time
existing in favor of the Bank;
(2) statutory liens for taxes and other sums
which are not delinquent or which are being contested in good faith; and
(3) mechanics' and materialmen's liens with
respect to obligations which are not delinquent or which are being
contested in good faith.
(d) Limitation on Combinations. Combine or consolidate
with or into any other entity, or permit any change in the ownership of
Borrower, without the prior written consent of the Bank, which consent may be
conditioned upon satisfaction of such conditions as the Bank may specify to
insure continuing liability and obligation for payment of the Loan and continued
perfection and priority of the liens and security interests securing the Loan.
(e) Limitation on Sales of Property. Sell, transfer,
lease, exchange, alienate or dispose of any material portion of the Oil and Gas
Properties or any other material assets now or hereafter owned by Borrower,
except sales of oil and gas production in the ordinary course of business.
(f) Fiscal Year. Change the fiscal year currently in
effect for Borrower, which is a calendar year.
(g) Working Capital. Permit Borrower's Working Capital
to be less than $1.00 as of the end of any Quarter after the date hereof.
(h) Current Ratio. Permit the Current Ratio of Borrower
to be less than 1.0:1.0 as of the end of any Quarter after the date hereof.
(i) Partners' Capital Accounts. Permit the aggregate
capital accounts of Borrower's partners, determined in accordance with GAAP, to
be less than $15,000,000 as of the end of any Quarter after the date hereof.
(j) Amendment of Contracts. Amend or permit any
amendment to any contract which releases, qualifies, limits, makes contingent or
otherwise detrimentally affects the rights and benefits pledged and assigned to
or acquired by the Bank pursuant to any of the Collateral Documents.
(k) Limitation on Investments, New Businesses and
Changes in Ownership.
(1) Make any expenditure or commitment or incur any
obligation or enter into or engage in any transaction except in the ordinary
course of business; (2) engage directly or indirectly in any business or conduct
any operations except in connection with or incidental to the present businesses
and operations conducted by Borrower; (3) make any acquisitions of, capital
contributions to, or other investments in, any business entities; (4) make any
significant acquisitions or investments in any properties other than actual or
prospective oil and gas properties; (5) purchase, acquire, hold or otherwise
invest in, or deposit any money into, any stock, bond, evidence of indebtedness,
deposit account or other security or investment other than any Permitted
Investment; or (6) permit any changes in the ownership of partnership interests
in Borrower by the present owners thereof, which, in the aggregate, cause
either: (A) the aggregate partnership interests owned by the present owners of
Borrower to decrease by more than ten percentage points from those in effect on
the date hereof; or (B) the partnership interest owned by any present owner of
Borrower to decrease by more than ten percentage points from that in effect on
the date hereof (such present ownership being St. Mary Land & Exploration
Company - 74.15 percent, and Nance Petroleum Corporation - 25.85 percent).
(l) Limitation on Credit Extensions. Extend credit,
make advances or make loans to any person or entity other than: (1) normal and
prudent extensions of credit to customers buying goods and services in the
ordinary course of business, which extensions shall not be for longer periods
than those extended by similar businesses operated in a normal and prudent
manner, (2) business expense advances to employees of Borrower in the ordinary
course of business, (3) other loans in an amount of not more than $100,000 in
the aggregate at any time, (4) advances to partners of Borrower for payment of
income taxes attributable to Borrower's net income, pending reclassification of
such advances as distributions permitted under Section 7.02(a) above, and (5)
loans to St. Mary upon terms and conditions (including without limitation
interest rates) no more favorable to St. Mary than the Loan provided for herein,
so long as each such loan is evidenced by a promissory note satisfactory in form
and substance to the Bank, made by St. Mary, payable to the order of Borrower,
and assigned by Borrower to the Bank by an assignment satisfactory in form and
substance to the Bank, and so long as the outstanding principal balance of all
such loans at any time is not greater than the excess of the Commitment Amount
over the sum of the aggregate outstanding principal balance of all Advances plus
the face amount of all outstanding Letters of Credit at that time.
(m) ERISA Compliance. Permit any plan maintained by it
to: (1) engage in any "prohibited transaction," as such term is defined in
Section 4975 of the Internal Revenue Code of 1986, as amended, or (2) incur any
"accumulated funding deficiency" (as defined in Section 302 of ERISA, or (3)
terminate in a manner which could result in the imposition of a lien on the
property of Borrower pursuant to Section 4068 of ERISA.
(n) Guaranties. Assume, guaranty, endorse or otherwise
be or become directly or contingently liable for, or obligated to purchase, pay
or provide funds for payment of, any obligations or indebtedness of any other
Person, except for amounts not in excess of $100,000 at any time.
ARTICLE VIII
EVENTS OF DEFAULT AND THEIR EFFECT
Section 8.01. Events of Default. Each of the following events
shall constitute an Event of Default under this Agreement:
(a) Borrower shall fail to pay any principal amount
of, or interest on, the Note within five Business Days of the due date; or
(b) A default shall occur under the terms of any of
the Loan Documents; or
(c) Any written representation or warranty made by
Borrower herein or in connection with this Agreement shall prove to have been
incorrect in any material respect when made; or
(d) Borrower shall fail to perform or observe any
term, covenant or obligation set forth in Section 7.01 (o); or Section 7.02(a),
(b), (c), (d), (e), (j), (k), (l) or (n) of this Agreement; or
(e) Borrower shall fail to perform or observe any
other term, covenant or agreement contained in this Agreement on its part to be
performed or observed and any such failure shall remain unremedied for 30 days
after written notice thereof shall have been given to Borrower by the Bank; or
(f) Any Obligated Person shall fail to pay any Debt
or any interest or premium thereon when due (whether by scheduled maturity,
required prepayment, acceleration, demand or otherwise), and such failure shall
continue after the applicable grace period, if any, specified in the agreement
or instrument relating to such Debt; or any other default under any agreement or
instrument relating to any such Debt, or any other event, shall occur and shall
continue after the acceleration of the maturity of such Debt; or any such Debt
shall be declared to be due and payable, or required to be prepaid (other than
by a regularly scheduled required prepayment), prior to the stated maturity
thereof; or
(g) Any Obligated Person shall: (1) generally not
pay its debts as such debts became due; or (2) admit in writing its inability to
pay its debts generally, or shall made a general assignment for the benefit of
creditors; or (3) institute any proceeding seeking to adjudicate it a bankrupt
or insolvent, or seeking liquidation, winding up, reorganization, arrangement,
adjustment, protection, relief, or composition of itself or its debts under any
law relating to bankruptcy, insolvency, reorganization or relief of debtors, or
seeking the entry of an order for relief or the appointment of a receiver,
trustee, or other similar official for itself or for any substantial part of its
property; or (4) suffer any proceeding to be instituted against it for the
purposes specified in the foregoing clause (3) which shall continue for more
than 60 days without discharge or dismissal thereof; or (5) take any action to
authorize any of the actions set forth above in this Section 8.01(g); or
(h) Any judgment or order for the payment of money
in excess of $100,000 shall be rendered against any Obligated Person and either:
(1) enforcement proceedings shall have been commenced by any creditor upon such
judgment or order, or (2) there shall be any period of 10 consecutive days
during which a stay of enforcement of such judgment or order, by reason of a
pending appeal or otherwise, shall not be in effect, provided, in either case,
that Borrower shall not have made bonding, surety or other arrangements
acceptable to the Bank.
Section 8.02. Effect of the Occurrence of any Event of Default.
If any Event of Default described in Section 8.01 shall occur, in addition to
any other remedies available at law or in equity, the Bank may, by notice to
Borrower, declare the Loan and the Note, all interest thereon and all other
amounts payable under this Agreement to be forthwith due and payable, whereupon
the Loan and the Note, all such interest and all such amounts shall become and
be forthwith due and payable, without presentment, demand, protest, or further
notice of any kind, all of which are hereby expressly waived by Borrower.
ARTICLE IX
MISCELLANEOUS
Section 9.01. Amendments, Etc. No amendment or waiver of any
provision of the Loan Documents, nor consent to any departure by any Obligated
Person therefrom, shall in any event be effective unless the same shall be in
writing and signed by the Bank and then such waiver or consent shall be
effective only in the specific instance and for the specific purpose for which
given.
Section 9.02. Notices, Etc. All notices and other communications
provided for hereunder shall be in writing in mail, telegraphic communication or
personal delivery,
if to Borrower at:
Panterra Petroleum
550 North 31st Street, Suite 500
Billings, MT 59101
Attn: Robert T. Hanley
if to the Bank at:
Colorado National Bank
950 Seventeenth Street
Denver, CO 80202
Attn: Mark E. Thompson
or, as to each of the parties, at such other address as shall be designated by
such party in a written notice to the other party. All such notices and
communications shall be effective when received or actually so delivered
addressed as aforesaid.
Section 9.03. The Bank's Damage Limitation. The Bank shall not
be liable to any Obligated Person for consequential damages, whatever the nature
of a breach by the Bank in its obligations relating to the transactions governed
or contemplated by this Agreement.
Section 9.04. Arbitration. Subject to the provisions of the next
paragraph below, the Bank and Borrower agree to submit to binding arbitration
any and all claims, disputes and controversies between or among them (and their
respective employees, officers, directors, attorneys and other agents) relating
to the Loan and its negotiation, execution, collateralization, administration,
repayment, modification, extension or collection. Such arbitration shall proceed
in Denver, Colorado, shall be governed by Colorado law (including without
limitation the provisions of CRS 13-21-102(5)) and shall be conducted in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association ("AAA"). Any award entered in an arbitration, whether on motions or
at a hearing, with or without testimony from witnesses, shall be made by a
written opinion stating the reasons for the award made. The decision of any
arbitration pursuant to this Agreement shall be made based on Colorado law
without reference to any choice of law rules. Judgment on any award hereunder
may be entered in any court having jurisdiction.
Nothing in the preceding paragraph, nor the exercise of any
right to arbitrate thereunder, shall limit the right of any party hereto: (a) to
foreclose against any real or personal property collateral by the exercise of
the power of sale under a deed of trust, mortgage, or other security agreement
or instrument or applicable law; (b) to exercise self-help remedies such as
setoff or repossession; or (c) to obtain provisional or ancillary remedies such
as replevin, injunctive relief, attachment or appointment of a receiver from a
court having jurisdiction, before, during or after the pendency of any
arbitration proceeding. The institution and maintenance of any action for such
judicial relief, or pursuit of provisional or ancillary remedies, or exercise of
self-help remedies shall not constitute a waiver of the right or obligation of
any party to submit any claim or dispute to arbitration, including those claims
or disputes arising from exercise of any judicial relief, or pursuit of
provisional or ancillary remedies or exercise of self-help remedies.
Arbitration hereunder shall be before a three-person panel of
neutral arbitrators, consisting of one person from each of the following
categories: (1) an attorney who has practiced in the area of commercial law for
at least 10 years or a retired judge at the Colorado or United States District
Court or an appellate court level: (2) a person with at least 10 years
experience in commercial lending: and (3) a person with at least 5 years
experience in the petroleum industry. The AAA shall submit a list of persons
meeting the criteria outlined above for each category of arbitrator, and the
parties shall select one person from each category in the manner established by
the AAA.
Section 9.05. Release. Upon full payment and satisfaction of the
Loan and all other amounts due in connection therewith as provided herein, the
parties shall thereupon automatically each be fully, finally, and forever
released and discharged from any further claim, liability or obligation in
connection with the Loan.
Section 9.06. No Waiver; Remedies. No failure on the part of the
Bank to exercise, and no delay in exercising, any right under the Loan Documents
shall operate as a waiver thereof; nor shall any single or partial exercise of
any right under the Loan Documents preclude any other or further exercise
thereof or the exercise of any other right. The remedies herein provided are
cumulative and not exclusive of any remedies provided by law.
Section 9.07. Binding Effect. This Agreement shall be binding
upon and inure to the benefit of Borrower and the Bank and their respective
successors and assigns, except that Borrower shall not have the right to assign
its rights hereunder or any interest herein without the prior written consent of
the Bank. The Bank may assign to one or more banks or other entities all or any
part of, or may grant participations to one or more banks or other entities in
or to all or any part of, the Loan and the Note and, to the extent of any such
assignment or participation (unless otherwise stated therein), the assignee or
participant of such assignment or participation shall have the same rights and
benefits hereunder and under the Note as it would have if it were the Bank
hereunder.
Section 9.08. GOVERNING LAW AND SUBMISSION TO JURISDICTION. THE
SUBSTANTIVE LAW OF COLORADO SHALL GOVERN ALL THE TERMS AND CONDITIONS AND
INTERPRETATIONS OF THE LOAN, THIS AGREEMENT, THE NOTE AND, EXCEPT AS OTHERWISE
PROVIDED IN THE LOAN DOCUMENTS, ALL OTHER LOAN DOCUMENTS. IN THE EVENT OF
LITIGATION CONCERNING THE LOAN, THIS AGREEMENT, THE NOTE, OR THE OTHER LOAN
DOCUMENTS, THE PARTIES HERETO AGREE THAT THE EXCLUSIVE VENUE AND PLACE OF
JURISDICTION SHALL BE THE STATE OF COLORADO, CITY AND COUNTY OF DENVER,
INCLUDING THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO.
FURTHER, BORROWER CONSENTS TO AND AGREES TO FILE A GENERAL APPEARANCE IN THE
EVENT IT RECEIVES A SERVICE OF PROCESS.
Section 9.09. Relationship to Other Documents. In the event any
provision hereof is in conflict with any provision of the Collateral Documents,
the provisions hereof shall be controlling.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed as of the date first above written.
PANTERRA PETROLEUM
By: St. Mary Land & Exploration
Company, General Partner
By: /s/ MARK A. HELLERSTEIN
Mark A. Hellerstein,
President
By: Nance Petroleum Corporation,
General Partner
By: /s/ ROBERT L. NANCE
Robert L. Nance,
President
COLORADO NATIONAL BANK
By: /s/ MARK E. THOMPSON
Mark E. Thompson,
Vice President
EXHIBIT 10.26
SUMMO MINERALS CORPORATION
900 DENVER CENTER BUILDING
1776 LINCOLN STREET, DENVER, COLORADO 80203
TELEPHONE: 303/861-5400 FAX: 303/863-1736
May 15, 1997
Mr. Mark Hellerstein
President and CEO
St. Mary Land & Exploration Company
1776 Lincoln Street, Suite 1100
Denver, Colorado 80203
Dear Mark:
The purpose of this letter is to outline the basic terms and conditions, agreed
to as of May 1, 1997, whereby Summo Minerals Corporation ("SMC") and its
wholly-owned subsidiary, Summo USA Corp. ("SUSA") and St. Mary Land &
Exploration Company and St. Mary Minerals Inc. ("St. Mary") propose to
restructure the ownership and finalize financing of the Lisbon Valley Copper
Project (the "Project") as described below (collectively the "Proposed
Transaction").
(I) Formation of Lisbon Valley Mining Company ("LVM")
1. LVM will be formed as a special purpose, U.S. domiciled, limited
liability company to own and operate the Project.
(II) SUSA Contributions to LVM
1. SMC will complete a private placement of equity and/or
subordinated convertible debt for at least US$6.2 million and SUSA
will contribute US$3.2 million in cash to LVM.
2. SUSA will contribute all rights to the Project to LVM, including
the associated Mining Contract, the Construction Contract, the
Acid Contract, the Power Contract, all Project permits, and
commitments from ING Capital Corporation and Heller Financial Inc.
(the "Banks") for a US$45 million senior debt facility (the
"Project Loan").
3. SMC/SUSA will provide a corporate guarantee of the Project Loan.
4. SUSA will contribute all rights to the Champion property to LVM.
(III) St. Mary Contributions to LVM
1. St. Mary will contribute 9,924,093 SMC common shares to LVM.
2. St. Mary will contribute US$4.0 million in cash to LVM.
3. St. Mary will contribute a US$5.0 million letter of credit for the
benefit of the Banks in satisfaction of the Bank's requirement
that LVM maintain a US$5.0 million Cash Reserve Account for the
life of the Project Loan. St. Mary will also provide a US$3.6
million letter of credit for the benefit of the Banks in
satisfaction of the Bank's requirement that LVM maintain a US$3.6
million Project Construction Cost Overrun Reserve account through
completion of the Project. If a letter of credit provided by St.
Mary is drawn upon by the Banks, the amount of any such draw shall
be treated as a capital contribution by St. Mary to LVM and will
be subject to the provisions of Section VI-3 below.
4. St. Mary will contribute its 1.5% NSR in the Champion property to
LVM.
(IV) LVM Capital Calls
1. If LVM requires additional capital, for example to fund Project
construction cost overruns or for Project working capital
requirements, LVM will notify SUSA and St. Mary of the amount of
the required capital contribution (a "LVM Capital Call") and their
respective share of the LVM Capital Call, which shall be
calculated in accordance with the sharing ratios described in
Section VI below. It is the expectation of SUSA and St. Mary that
each party will fund its respective share of any LVM Capital Call.
2. SMC and SUSA agree, if necessary, to arrange to fund their
proportionate share of any LVM Capital call through the issuance
of a subordinated convertible note to TIC in a maximum principal
amount of $1.5 million (the"TIC Note"). The TIC Note will be
convertible into SMC common stock and repayment of the TIC Note
will be the sole responsibility of SMC/SUSA.
3. If SMC/SUSA is unable to fund its proportionate share of the first
US$8.6 million of LVM Capital Calls pursuant to the provisions of
Section IV-2 above, or otherwise, St. Mary agrees to loan SMC/SUSA
its respective share of such capital call(s) for a period not to
exceed 60 days at an annual interest rate equal to the prime rate
plus one percent (A "Capital Call Loan"). Capital Call Loans will
be subordinated to the Project Loan, SMC's US$3.0 million note
obligation to Brown & Root, the TIC Note and pari-passu with any
other senior indebtedness of SMC.
If SUSA does not repay a Capital Call Loan within 60 days, St.Mary
and SMC agree that such loan will be extended (an "Extended
Capital Call Loan") as follows:
(a) SMC will grant St. Mary with a two-year warrant to acquire one
common share of SMC for each Cdn$2.00 of unpaid principal and
accrued interest converted to an Extended Capital Call Loan.
Such common stock purchase warrants shall have an exercise
price equal to Cdn$1.25 (subject to customary anti-dilution
provisions).
(b) An Extended Capital Call Loan shall have a maximum term of two
years, shall accrue interest at an annual rate equal to 12%
and principal and interest shall be payable monthly.
(c) At St. Mary's option, for a period of two years, the principal
amount of the Extended Capital Call Loan plus accrued interest
shall be (i) convertible (in whole or in part) into SMC's
common stock at a conversion price equal to Cdn$1.25 (subject
to customary anti-dilution provisions), or alternatively, (ii)
exchangeable (in whole or in part) into an additional interest
in LVM which will increase St. Mary's ownership in the
profits, losses and operating cash flows of LVM in accordance
with Section VI-3 below.
(d) SMC agrees to provide St. Mary, during the period in which an
Extended Capital Loan is outstanding, with a security interest
in SUSA's ownership interest in LVM as well as SMC's other
assets in an amount equal to the outstanding principal and
accrued interest under an Extended Capital Call Loan.
4. The principal amount of St. Mary's letters of credit will be
reduced by the amount of any LVM Capital Call, with exception of a
LVM Capital Call arising from an expansion of the Project.
(V) Distribution of SMC Shares
1. The SMC common shares contributed to LVM by St. Mary will be
distributed by LVM to SUSA.
2. SUSA will in turn distribute the SMC common shares to SMC.
(VI) LVM Sharing Ratios
1. In consideration for its contributions to LVM, St. Mary will
receive a 55% interest ("St. Mary Sharing Ratio") in the profits
and losses, distributions of earnings and profits from operations,
and voting rights of LVM.
2. In consideration for its contributions to LVM, SUSA will receive a
45% interest ("SUSA Sharing Ratio") in the profits and losses,
distributions of earnings and profits from operations, and voting
rights of LVM.
3. Additional contributions to LVM by St. Mary or SUSA which are
disproportionate to the original Sharing Ratios set forth in
Section VI-1 and 2 above will receive credit equal to 125% of each
such disproportionate contribution for purposes of calculating
adjusted Sharing Ratios for SUSA and St. Mary.
4. The beginning stated capital positions of St. Mary and SUSA which
will be used as the base line for calculating adjusted Sharing
Ratios in Section VI-3 above are calculated as follows:
<PAGE>
SMC common stock US$ 5,858,531
Property US$ 5,423,233
Cash St. Mary US$ 4,000,000
Cash SUSA US$ 3,200,000
Total US$18,481,764
St. Mary Beginning Capital Position: US$10,164,970 (55%)
SUSA Beginning Capital Position: US$ 8,316,794 (45%)
Total US$18,481,764
(VII) LVM Operating Agreement
1. SUSA and St. Mary agree to enter into a mutually acceptable
operating agreement (the "Operating Agreement") which shall
appoint SUSA to serve as operator of the Project. LVM will
reimburse SUSA for its overhead expenses incurred as operator of
the Project. Such reimbursement will be a fixed amount mutually
agreed to in advance, subject to an annual increase based on the
CPI index, and will be payable monthly. SUSA and St. Mary agree
that disputes or an inability to resolve issues requiring a 65%
majority vote under the Operating Agreement pursuant to Section
VII-2 below will be resolved through arbitration in accordance
with a mutually acceptable mechanism to be specified in the
Operating Agreement.
2. The Operating Agreement will provide that affirmative votes
representing at least 65% of the ownership of LVM will be required
to (i) approve LVM's annual budgets, (ii) commence, suspend or
terminate operations of the Project, (iii) authorize the sale or
disposition of the Project (concurrence not to be unreasonably
withheld), (iv) remove the Project operator or appoint a new
operator, (v) incur additional senior indebtedness, or (vi) pledge
LVM's assets.
(VII) Other Matters
1. St. Mary and SUSA agree to enter into a mutually acceptable
agreement (the "Option Agreement") whereby St. Mary will grant
SUSA a non-transferable, one-year option to acquire up to a
maximum 5.1% interest in LVM from St. Mary for a cash payment
equal to US$450,000 per each one percent interest in LVM acquired
by SUSA, up to a maximum of 5.1% interest in LVM for US$2,295,000.
2. SUSA agrees to pay an annual cash fee to St. Mary equal to 1% of
the outstanding principal amount of the letters of credit
contributed by St. Mary to LVM for the benefit of the Banks. SUSA
further agrees to reimburse St. Mary for any legal or
administrative costs incurred by St. Mary in arranging such
letters of credit.
This letter does not constitute a binding obligation to proceed with or to
complete the Proposed Transaction. The Proposed Transaction is subject to (i)
the issuance of all required Project permits and resolution of the outstanding
appeal of the Project's permits in a manner satisfactory to both SUSA and St.
Mary, (ii) the consent of the Banks, (iii) the written agreement of a majority
of the minority of SMC's shareholders to vote in favor of the Proposed
Transaction, (iv) approval of the Proposed Transaction by all necessary
regulatory and tax agencies including the British Columbia Court, the Ontario
Securities Commission, Revenue Canada and the TSE, (v) approval of the Proposed
Transaction by the necessary majority of SMC's minority shareholders at a
Special General Meeting of such shareholders (vi) SMC's receipt of a
satisfactory opinion as to the fairness of the Proposed Transaction, (vii) St,.
Mary's receipt of a satisfactory independent valuation of its SMC common stock
contributed to LVM, and, (viii) the final approval of the Proposed Transaction
by the respective Boards of SMC and St. Mary.
If the foregoing correctly sets forth your understanding, please so indicate by
signing and returning to us an executed copy of this letter. We look forward to
working with you towards the successful completion of the Proposed Transaction.
Sincerely,
SUMMO MINERALS CORPORATION
James D. Frank
V.P. Finance and CFO
Accepted and agreed as of the date of this letter agreement:
ST. MARY LAND & EXPLORATION COMPANY
- -------------------------------------
Mark A. Hellerstein
President and CEO
<PAGE>
EXHIBIT 10.27
PLEDGE AND SECURITY AGREEMENT
From ("Debtors"): SUMMO USA CORPORATION, a Colorado
corporation ("SUMMO"), whose chief executive office
is at 1776 Lincoln Street, Suite 900, Denver,
Colorado 80203 and LISBON VALLEY MINING CO. LLC, a
Utah limited liability company (the "LLC"), whose
chief executive office is at 1776 Lincoln Street,
Suite 900, Denver, Colorado 80203.
To ("Secured Party"): ST. MARY MINERALS INC., a Colorado corporation, whose
address is 1776 Lincoln Street, Suite 1100, Denver,
Colorado 80203.
(A) Grant of Security Interest.
In consideration of financial accommodations given or to be given or
continued by Secured Party to Debtors and Summo Minerals Corporation, Debtors
hereby pledge, assign and grant to Secured Party a security interest in the
following collateral ("Collateral"):
1. All of Summo's right, title and interest (whether certificated or
uncertificated and whether now existing or hereafter acquired and
wherever located) in and to the LLC (including, without
limitation, Summo's membership interest in the LLC) and all
dividends and distributions on and all rights to payments and all
other rights in connection with such LLC interest and all
proceeds thereof (collectively, the "LLC Interest"); and
2. All of the LLC's right, title and interest (whether now existing
or hereafter acquired and wherever located) in and to (a) all
leasehold, possessory, exploration, development, oil, gas,
mineral and mining rights and claims and all leases and other
interests, rights and claims of any kind or nature whatsoever of
the LLC with respect to the properties located in San Juan
County, Utah (the "Utah Properties") which are described on
Exhibit A attached hereto and by this reference incorporated
herein, (b) all of the LLC's accounts, accounts receivable,
equipment, fixtures, leasehold rights and improvements, contract
rights and agreements, general intangibles, chattel paper,
instruments, documents and documents of title with respect to,
located at, used in connection with or in way related to the Utah
Properties, (c) all insurance proceeds of or relating to any of
the foregoing, (d) all books, records, computer programs and data
relating to any of the foregoing, and (e) all accessories and
additions to, substitutions for and replacements, products and
proceeds of, any of the foregoing; to secure payment and
performance of all of Summo's and Summo Minerals Corporation's
present and future debts and obligations ("Debt") to Secured
Party under that certain Convertible Promissory Note dated
effective as of October 1, 1997 ("Note") payable to Secured Party
in the principal amount
K:\COMMON\STMARY\SUMMO\Pledge and Security Agt.02.wpd
1
<PAGE>
of $2,950,000 by Summo and Summo Minerals Corporation. Unless
otherwise defined herein, words used in this Agreement shall have
the meanings given them in the Uniform Commercial Code.
(B) Debtors' Representations and Agreements. Debtors warrant, represent and
agree that:
1. Summo will immediately pay: (a) any Debt when due; (b) Secured
Party's costs of collecting the Debt, of realization on any
Collateral, and any expenditure of Secured Party pursuant hereto,
including attorneys' fees and expenses, with interest from date
of expenditure at the maximum rate provided for by the Note; and
(c) any deficiency after realization on Collateral with interest
from date of expenditure at the maximum rate provided for by the
Note.
2. Subject to (a)the rights of Lisbon Copper Ltd. under that certain
Second Amendment of Option Agreement dated December 4, 1997, (b)
the rights of the lessors of the leases included in the
Collateral and (c) the paramount rights of the United States, one
or both of the Debtors own all Collateral absolutely and there
are no other liens or encumbrances on the Collateral and no other
person has or claims any interest in any Collateral except as
previously approved in writing by Secured Party. Nothing in this
Section (B)(2), however, shall be deemed to be a representation
or a warranty that any of the unpatented mining claims contains a
discovery of minerals. Debtors will defend any proceeding which
may affect title to or Secured Party's security interest in any
Collateral, and will indemnify Secured Party for all costs and
expenses of Secured Party's defense. The Collateral will not be
used in violation of any applicable statutes, regulations,
ordinances or laws.
3. Summo shall promptly endorse, in blank, each and every instrument
constituting the LLC Interest by signing a separate assignment or
other document of transfer, if and when required by Secured
Party, and will at any time or times hereafter perform such other
acts as Secured Party may request to establish, maintain, perfect
and enforce its security interest in the Collateral.
4. Debtors will keep the tangible Collateral, or cause it to be kept
at the Utah Properties or at their address set forth above.
Debtors will give Secured Party prompt written notice of any
change of location of the Collateral and of any change of any
Debtor's chief executive office or name. The Collateral is used
or bought primarily for use in business.
5. Debtors will pay when due all existing and future charges, liens
and encumbrances on and all taxes and assessments now or
hereafter levied or imposed on or affecting the Collateral.
6. Debtors at their expense at all times shall insure the Collateral
against loss or damage from such casualties as Secured Party may
require, with such insurance company or companies as may be
satisfactory to Secured Party, with loss payable to Secured
Party. Secured Party may apply any such insurance proceeds to any
of the Debt, whether or not then due and payable.
K:\COMMON\STMARY\SUMMO\Pledge and Security Agt.02.wpd
2
<PAGE>
7. Debtors will provide Secured Party with any information regarding
the Collateral or Debtors which Secured Party may request from
time to time. All information at any time supplied to Secured
Party by Debtors (including, but not limited to, the value and
condition of Collateral, financial statements, financing
statements, and statements made in documentary Collateral), is
and shall be correct and complete when given, and Debtors will
notify Secured Party of any adverse change in such information.
8. Secured Party is irrevocably appointed each Debtor's attorney-in-
fact to do any act which either Debtor is obligated hereby to do,
to exercise such rights as either Debtor might exercise, to use
such equipment as either Debtor might use, to enter either
Debtor's premises to give notice of Secured Party's security
interest in, and to collect Collateral and proceeds and to
execute and file in each Debtor's name any financing statements
and amendments thereto required to perfect Secured Party's
security interest hereunder, all to protect and preserve the
Collateral and Secured Party's rights hereunder. Secured Party
may: (a) Endorse, collect and receive delivery or payment of
instruments and documents constituting Collateral; (b) Make
extension agreements with respect to or affecting Collateral,
exchange it for other Collateral, release persons liable thereon
or take security for the payment thereof, and compromise disputes
in connection therewith; (c) Use or operate Collateral for the
purpose of preserving Collateral or its value and for preserving
or liquidating Collateral.
9. Discharge of any Debtor or other obligor of the Debt ("Obligor")
except for full payment, or any extension or forbearance for the
benefit of any Debtor or Obligor, or any impairment or suspension
of Secured Party's rights against a Debtor or Obligor, shall not
affect the liability of or Secured Party's rights or remedies
against any other Debtor or Obligor or the Collateral. Until the
Debt shall have been paid or performed in full, Secured Party's
rights shall continue notwithstanding any change of rate of
interest, or acceptance, release or substitution of Collateral or
any transfer of a Debtor's interest to another, or any bar of
rights or remedies by statutes of limitation or otherwise.
Debtors waive (a) any right to require Secured Party to pursue
any remedy; (b) presentment, protest and notice of protest, sale,
and advertisement of sale; (c) any right to the benefit of or to
direct the application of any Collateral until the Debt shall
have been paid; and (d) any right of subrogation to Secured Party
until all Debt shall have been paid or performed in full.
(C) Defaults and Remedies; Non-waiver.
1. Each of the following shall constitute a default: (a) Any "Event
of Default" as defined in the Note; (b) Failure of any Debtor or
Summo Minerals Corporation to perform or comply with any
agreement, condition or provision in this agreement, the Note or
any other instrument or document between either Debtor, Summo
Minerals Corporation, Secured Party or St. Mary Land &
Exploration Company; (c) Any adverse change in any Debtor's or
Obligor's financial condition which in Secured Party's judgment
impairs the prospect of payment or performance; (d) Any actual or
K:\COMMON\STMARY\SUMMO\Pledge and Security Agt.02.wpd
3
<PAGE>
reasonably anticipated deterioration of the Collateral or in the
market price thereof which causes it in Secured Party's judgment
to become unsatisfactory as security.
2. Upon any default hereof, at Secured Party's sole option, without
demand or notice, all or any part of the Debt shall immediately
become due. Secured Party shall have all rights provided by this
agreement or provided by law, including the Uniform Commercial
Code, and may sell Collateral in one or more sales or exercise
its self- help right to repossess the Collateral. At Secured
Party's option, any such sale may be conducted in any locality
where Secured Party or any Debtor has an office. Sales for cash
or on credit to a wholesaler, retailer or user of the Collateral,
or at public or private auction, shall all be deemed commercially
reasonable. Secured Party may require either Debtor to assemble
the Collateral and make it available to Secured Party at a place
designated by Secured Party which is reasonably convenient to the
parties. Secured Party's acceptance of partial or delinquent
payments or failure of Secured Party to exercise any right or
remedy at any time shall not waive any obligation of any Debtor
or Obligor, or any right or remedy of Secured Party, or modify
this agreement, or waive any other similar default.
(D) General Provisions.
1. On transfer of all or any part of the Debt, Secured Party may
transfer all or any part of the security interest in the
Collateral. Secured Party may deliver all or any part of the
Collateral to any Debtor at any time. Any such transfer or
delivery shall discharge Secured Party from all liability and
responsibility with respect to such Collateral transferred or
delivered. This agreement benefits Secured Party's successors and
assigns and binds each Debtor's successors and assigns. Each
Debtor agrees not to assert against any assignee of Secured Party
any claim or defense it may have against Secured Party. Time is
of the essence. Debtors will execute any additional agreements,
assignments or documents which Secured Party reasonably may
request to effectuate this agreement or perfect any rights or
interests, including, without limitation, any mortgage or deed of
trust with respect to the Utah Property.
2. Captions, titles and section and paragraph divisions and
arrangements in this agreement and in any instruments and
documents heretofore or hereafter made or executed are for
convenience and for reference only, and shall not affect the
meaning, interpretation or construction thereof. Whenever the
context so requires the singular number shall include the plural
and the plural shall include the singular, as applicable.
3. This agreement shall be governed by and construed in accordance
with the laws of the State of Colorado.
K:\COMMON\STMARY\SUMMO\Pledge and Security Agt.02.wpd
4
<PAGE>
Dated this 23rd day of November, 1998.
DEBTORS: SUMMO MINERALS CORPORATION,
a British Columbia corporation
By: /s/ GREGORY A. HAHN
--------------------
Gregory A. Hahn, President and CEO
LISBON VALLEY MINING CO. LLC,
a Utah limited liability company
By: Summo USA Corporation,
its Managing member
By: ___________________________________
Gregory A. Hahn, President and CEO
K:\COMMON\STMARY\SUMMO\Pledge and Security Agt.02.wpd
5
<PAGE>
EXHIBIT 10.28
DEED OF TRUST, ASSIGNMENT OF RENTS
AND SECURITY AGREEMENT
THIS DEED OF TRUST, ASSIGNMENT OF RENTS AND SECURITY AGREEMENT
(hereinafter referred to as the "Deed of Trust") made and entered into as of
this 23rd day of November, 1998, by and between LISBON VALLEY MINING CO. LLC, a
Utah limited liability company (hereinafter referred to as "Grantor") whose
mailing address is 1776 Lincoln Street, Suite 900, Denver, Colorado 80203 and
STEWART TITLE GUARANTY COMPANY, a Texas corporation (hereinafter referred to as
"Trustee") whose address is 455 East, 500 South, Salt Lake City, Utah 84111, for
the benefit of ST. MARY MINERALS INC., a Colorado corporation (hereinafter
referred to as "Beneficiary") whose address is 1776 Lincoln Street, Suite 1100,
Denver, Colorado 80203.
ARTICLE I.
GRANT
Section 1.1. Grant. Grantor, in consideration of the indebtedness
herein recited and the trust herein created, does hereby unconditionally and
irrevocably grant, assign and convey unto Trustee, with power of sale and right
of entry and possession, the real estate, minerals and water rights located in
San Juan County, State of Utah, and more particularly described in Exhibit A
attached hereto and incorporated herein, which, with the property hereinafter
described, is referred to herein as the "Property."
TOGETHER WITH:
a. All buildings and improvements, now or hereafter located thereon,
all privileges and other rights now or hereafter made appurtenant thereto
including, without limitation, all right, title and interest of Grantor in and
to all streets, roads and public places, opened or proposed, and all easements,
rights-of-way, public or private, now or hereafter used in connection with the
Property, including all rights of ingress and egress to and from adjoining
property, all strips or gores of land, alleys, passages, and all estates,
rights, titles, interests, privileges, tenements, hereditaments, and
appurtenances, and all oil, gas, minerals, water, surface and subsurface rights
whatsoever in any way belonging, relating or appertaining to the Property or
which hereafter shall in any way belong, relate or be appurtenant thereto,
whether now owned or hereafter acquired by Grantor, and the reversion and
reversions, remainder and remainders, rents, issues and profits thereof, and all
the estate, right, title, interest, property, possession, claim and demand
whatsoever, at law and in equity, of Grantor of, in and to the same; and all
proceeds of any sales or other dispositions of the Property, and also all the
estate, right, title and interest of Grantor, either at law or in equity, of, in
and to the Property and every part thereof; and
K:\COMMON\STMARY\SUMMO\Deed of Trust.01.wpd
1
<PAGE>
b. All right, title and interest of Grantor in and to all fixtures,
fittings, furnishings, apparatus, equipment and machinery, and all renewals or
replacements thereof or articles in substitution thereof; and all proceeds and
profits thereof; it being understood and agreed that all of the estate, right,
title and interest of Grantor in and to all property of any nature whatsoever,
now or hereafter situated on the Property or intended to be used in connection
with the operation thereof, shall be deemed to be fixtures and an accession to
the freehold and a part of the realty as between the parties hereto, and all
persons claiming by, through or under them, and shall be deemed to be a portion
of the security for the indebtedness herein mentioned and secured by this Deed
of Trust. If the lien of this Deed of Trust on any fixtures or personal property
be subject to a lease agreement, conditional sale agreement or chattel mortgage
covering such property, then in the event of any default hereunder all the
rights, title and interest of Grantor in and to any and all deposits made
thereon or therefor are hereby assigned to Trustee, together with the benefit of
any payments now or hereafter made thereon. There is also transferred, set over
and assigned by Grantor to Trustee hereby all leases and use agreements of
machinery, equipment and other personal property of Grantor in the categories
hereinabove set forth, under which Grantor is the lessee of, or entitled to use,
such items, and Grantor agrees to execute and deliver to Beneficiary specific
separate assignments to Beneficiary of such leases and agreements when requested
by Beneficiary; but nothing herein shall obligate Beneficiary to perform any
obligations of Grantor under such leases or agreements unless it so chooses,
which obligations Grantor hereby covenants and agrees to well and punctually
perform. The items set forth in this Subsection are sometimes hereinafter
separately referred to as the "Collateral"; and
c. All rents, income, profits, revenues, royalties, bonuses, rights,
accounts, contract rights, general intangibles and benefits under any and all
leases or tenancies now existing or hereafter created on or in any way related
to the Property or any part thereof, with the right, after an Event of Default
(as hereinafter defined), to receive and apply the same to such indebtedness,
and, after an Event of Default, Beneficiary may demand, sue for and recover such
payments but shall not be required to do so; and
d. All interest which Grantor has or may hereafter have in the proceeds
of insurance in effect with respect to the Property; and
e. Any judgments, awards of damages, payments, and settlements,
including interest thereon, hereafter made as a result of or in lieu of any
taking of the Property or any part thereof or interest therein under the power
of eminent domain, or for any damage (whether caused by such taking or
otherwise), including interest thereon, to the Property or the improvements
thereon or any part thereof or interest therein, including any award for change
of grade of streets; and
f. All proceeds of the conversion, voluntary or involuntary, of any of
the foregoing into cash or liquidated claims; and
g. All leases and leasehold rights of any kind or nature whatsoever
affecting the Property or in any way related thereto; and
h. All oil, gas and minerals, and all water, ditch, well and reservoir
rights which are appurtenant to or which have been or may be used in connection
with the Property; and
K:\COMMON\STMARY\SUMMO\Deed of Trust.01.wpd
2
<PAGE>
i. All oil, gas, minerals, crops, timber, trees and landscaping
features now or hereafter located on, in, under or above the Property; and
j. All surface, subsurface, development and mining rights associated
with the Property, whether now or hereafter created; and
k. All other or greater rights and interests of every nature in, with
respect to or related to the Property or in the possession or use thereof and in
the income therefrom, whether now owned or subsequently acquired by Grantor.
TO HAVE AND TO HOLD such Property unto Trustee, subject only to (a) the
rights of Lisbon Copper Ltd. under that certain Second Amendment of Option
Agreement dated December 4, 1997, (b) the rights of the lessors of the leases
included in the Property, (c) the paramount rights of the United States and (d)
the liens and encumbrances of Beneficiary and liens and encumbrances of record
on the date hereof (hereinafter referred to as the "Permitted Exceptions"); and
Grantor does hereby bind itself, its successors and assigns to warrant and
forever defend, all and singular, such Property unto Trustee, its successors,
substitutes and assigns, against all persons whomsoever claiming or to claim the
same or any part thereof.
Section 1.2. Security Agreement. Grantor makes the foregoing grant to
Trustee to hold the Property in trust for the benefit of Beneficiary and for the
purposes and upon the terms and conditions hereinafter set forth. This
instrument is and shall be construed as both a Deed of Trust and Security
Agreement and to the extent that any of the Property, including but without
limitation, the Collateral, is deemed to be personal property or fixtures, or
property not subject to an encumbrance upon real estate, Grantor hereby grants
unto Beneficiary a security interest in and to such property.
Section 1.3. Release. If Grantor shall pay or cause to be paid to the
holder of the Note (defined below) the principal and interest to become due
thereupon at the time and in the manner stipulated therein, and shall pay or
cause to be paid all other sums payable hereunder and all indebtedness hereby
secured, then, in such case, the estate, right, title and interest of Trustee
and Beneficiary in the Property shall cease, terminate and become void, and upon
proof being given to the satisfaction of Beneficiary that the Note, together
with interest thereon have been paid or satisfied, and upon payment of all fees,
costs, charges, expenses and liabilities chargeable or incurred or to be
incurred by Trustee or Beneficiary, and of any other sums as herein provided,
this conveyance shall be released in due form at the expense of Grantor,
otherwise it shall remain in full force and effect.
ARTICLE II.
OBLIGATIONS SECURED
This Deed of Trust is given to secure to Beneficiary the following:
K:\COMMON\STMARY\SUMMO\Deed of Trust.01.wpd
3
<PAGE>
a. That certain convertible promissory note dated effective as of
October 1, 1997 payable jointly and severally by Summo Minerals Corporation and
Summo USA Corporation to the order of Beneficiary in the original principal
amount of $2,950,000 or, if greater or less, the aggregate principal amount of
all loans made by Beneficiary to either Summo Minerals Corporation or Summo USA
Corporation, together with any extensions, modifications, or renewals thereof
(herein referred to as the "Note", the terms and provisions of which are
expressly incorporated herein by this reference);
b. Any other indebtedness by Grantor, Summo Minerals Corporation or
Summo USA Corporation to Beneficiary, now or hereafter arising under the terms
hereof or in any other instrument constituting additional security for the Note;
and
c. The performance by Grantor, Summo Minerals Corporation or Summo USA
Corporation of all the terms, covenants and agreements on their part to be
performed under the Note, this Deed of Trust, the Pledge and Security Agreement
of even date executed by Grantor concurrently herewith and any other instrument
now or hereafter executed by Grantor, Summo Minerals Corporation or Summo USA
Corporation as security for payment of the indebtedness secured hereby
(hereafter collectively called the "Security Documents").
ARTICLE III.
TITLE AND AUTHORITY
Section 3.1. Title.
a. Grantor hereby covenants, represents and warrants that
Grantor owns and has good and indefeasible title to an indefeasible fee simple
estate in the real estate described in Exhibit A hereto subject to no liens,
charges, or encumbrances except for the Permitted Exceptions; that Grantor has
full power and authority to grant, bargain, sell and convey the Property in the
manner and form herein done or intended hereafter to be done; that this Deed of
Trust is and shall remain a valid and enforceable first lien on the Property
subject only to the Permitted Exceptions; that Grantor and its successors and
assigns warrant and agree to defend the same forever against the lawful claims
and demands of all persons or entities whatsoever; and that this covenant shall
not be extinguished by any exercise of power of sale, foreclosure or sale hereof
but shall run with the land. Nothing in this Section 3.1(a), however, shall be
deemed to be a representation or a warranty that any of the unpatented mining
claims contains a discovery of minerals.
b. Subject to the Permitted Exceptions, Grantor has and shall
maintain title to the Collateral, including any additions or replacements
thereto, free of all security interests, liens and encumbrances other than the
security interest granted to Beneficiary and other than as disclosed to and
accepted by Beneficiary in writing and Grantor has the right to subject the
Collateral to the security interest hereunder.
K:\COMMON\STMARY\SUMMO\Deed of Trust.01.wpd
4
<PAGE>
Section 3.2. Further Acts. Grantor shall, at Grantor's sole cost and
without expense to Beneficiary, execute, acknowledge and deliver all and every
such further acts, deeds, documents, agreements, conveyances, deeds of trust,
assignments, notices of assignments, transfers and assurances as Beneficiary
shall from time to time require for assuring, conveying, assigning, transferring
and confirming unto Trustee or Beneficiary the Property and rights hereby
conveyed or assigned or intended now or hereafter so to be or which Grantor may
be or may hereafter become bound to convey or assign to Trustee or Beneficiary,
or for carrying out the intention of facilitating the performance of the terms
of the Security Documents or for filing, registering or recording the Security
Documents and, on demand, shall execute and deliver, and hereby authorizes
Beneficiary to execute in the name of Grantor, to the extent it may lawfully do
so, one or more financing statements, chattel mortgages or comparable security
instruments to evidence more effectively the lien hereof upon the Collateral.
Grantor shall give advance notice in writing to Beneficiary of any proposed
change in Grantor's name, identity, or structure and shall execute and deliver
to Beneficiary, prior to or concurrently with the occurrence of any such change,
all additional financing statements that Beneficiary may require to establish
and maintain the validity and priority of Beneficiary's security interest with
respect to any of the Property, including the Collateral.
Section 3.3. Fees. Grantor shall pay all filing or recording fees and
all reasonable expenses incident to the preparation, execution and
acknowledgment of this Deed of Trust, any deed of trust supplemental hereto, any
Security Document and other security instrument with respect to the Collateral,
and any instrument of additional security, and all federal, state, county and
municipal stamp taxes and other taxes, duties, imposts, assessments and charges
arising out of or in connection with the execution and delivery of the Note,
this Deed of Trust, any deed of trust supplemental hereto, any Security Document
and other security instrument with respect to the Collateral, or any instrument
of further assurance.
Section 3.4. Due Authorization. Each individual who executes this
document on behalf of Grantor represents and warrants to Beneficiary that such
execution has been duly authorized by all necessary corporate, partnership, or
other action on the part of Grantor.
ARTICLE IV.
TAXES AND ASSESSMENTS
Section 4.1. Payment. Grantor shall pay, prior to delinquency, all real
property taxes and assessments, general and special, and all other taxes and
assessments of any kind or nature whatsoever affecting or relating to the
Property. Grantor shall also pay when due all non-governmental levies or
assessments such as maintenance charges or fees and charges resulting from
covenants, conditions, or restrictions affecting the Property which are assessed
or imposed upon the Property, or become due and payable, and which create, may
create, or appear to create a lien prior and superior to the lien of this Deed
of Trust upon the Property or any part thereof. Grantor shall furnish
Beneficiary with official receipts of the appropriate taxing authority, or other
proof satisfactory to Beneficiary, evidencing payment thereof.
K:\COMMON\STMARY\SUMMO\Deed of Trust.01.wpd
5
<PAGE>
Section 4.2. Contest of Validity. Notwithstanding Section 4.1 above,
Grantor may contest the validity of any tax or assessment which it is obligated
to pay under the terms of this Deed of Trust by appropriate legal and
administrative proceedings. No default shall be declared hereunder as long as
Grantor, in good faith, and by appropriate proceedings, is contesting the amount
or validity of such tax, assessment or charge; provided that Grantor, before
instituting any such contest, gives Beneficiary notice of its intention to do so
and so long as the proceedings maintained by Grantor at all times effectively
stay or prevent any official or judicial sale of the Property under execution or
otherwise. Upon conclusion of any such proceedings, Grantor shall forthwith
discharge any liability for taxes and assessments and all penalties, interest
and costs in connection therewith.
ARTICLE V.
MAINTENANCE; COMPLIANCE WITH LAW
Section 5.1. Maintenance, Repair, Waste. Grantor shall at all times
maintain and keep the Property in good operating order and condition and shall
promptly make, from time to time, all repairs, renewals, restorations,
replacements, additions and improvements in connection therewith which are or
may be reasonably required. Any improvements on the Property shall not be
removed, demolished or substantially altered without the prior written consent
of Beneficiary. Grantor shall pay all claims for labor performed and for
materials furnished for any such improvements when due. Grantor shall not commit
any waste or permit impairment or deterioration of the Property. Grantor shall
not make any change in the use of the Property without the prior written consent
of Beneficiary. Grantor shall permit Trustee or Beneficiary or its agents the
opportunity to inspect the Property, including the interior of any structures,
at any reasonable time.
Section 5.2. Compliance with Law. Grantor shall comply with all
requirements of all regulations, rules, ordinances, statutes, orders and decrees
of any governmental authority or court, covenants, conditions and restrictions
applicable to Grantor or to the Property or any part thereof or to the use
thereof, including, but not limited to, environmental laws, municipal
ordinances, building and zoning regulations, and restrictions and covenants of
record, and shall pay all fees or charges of any kind in connection therewith.
ARTICLE VI.
INSURANCE
Section 6.1 Fire and Extended Coverage; Liability. Grantor shall keep
all buildings, improvements and Collateral now or hereafter situated on the
Property insured against loss or damage by fire and other hazards as may be
required by Beneficiary. Grantor shall also provide liability insurance with
such limits for personal injury and death and property damage as Beneficiary may
require.
K:\COMMON\STMARY\SUMMO\Deed of Trust.01.wpd
6
<PAGE>
Section 6.2. Waiver of Subrogation. The policy must contain a provision
to the effect that any waiver of subrogation rights by the insured does not void
the coverage and any other special endorsements as may be required by the terms
of any leases assigned as security for the indebtedness secured by this Deed of
Trust.
Section 6.3. Delivery of Policies. Grantor shall deliver all policies
and certificates, including additional and renewal policies, to Beneficiary or
other evidence of the existence of such insurance which is satisfactory to
Beneficiary and, in the case of insurance about to expire, shall deliver renewal
policies not less than thirty (30) days prior to their respective dates of
expiration. A certificate as to liability coverage, as distinguished from
submission of original policies, will be acceptable.
Section 6.4. Additional Insurance. Any provision herein to the contrary
notwithstanding, Beneficiary may require such other or additional insurance as
it shall from time to time deem neces sary or advisable in its sole discretion.
Section 6.5. Restriction on Separate Insurance. Grantor shall not take
out separate insurance concurrent in form or contributing in the event of loss
with that required to be maintained hereunder unless Beneficiary is included
thereon under a Standard Mortgagee Clause acceptable to Beneficiary. Grantor
shall immediately notify Beneficiary whenever any such separate insurance is
taken out and shall promptly deliver to Beneficiary true and complete copies of
the policy or policies of such insur ance. In the event of a foreclosure or
other transfer of title to the Property in lieu of foreclosure, or by purchase
at the foreclosure sale, all interest in any insurance policies in force shall
pass to Beneficiary, transferee or purchaser as the case may be.
ARTICLE VII.
CASUALTY OR CONDEMNATION
Section 7.1. Casualty. Grantor shall promptly notify Beneficiary of any
loss whether covered by insurance or not. In case of loss or damage by fire or
other casualty, Beneficiary is authorized (i) to settle and adjust any claim
under insurance policies which insure against such risks or (ii) to allow
Grantor to agree with the insurance company or companies on the amount to be
paid in regard to such loss. In either case, Beneficiary is authorized to
collect and receipt for any such insurance money. Such insurance proceeds may,
at the option of Beneficiary, in the event of a total loss be applied in the
reduction of the indebtedness secured hereby, whether due or not; if less than a
total loss, such proceeds shall be held by Beneficiary without any allowance of
interest and, if an Event of Default does not then exist and if no condition
then exists which will, with the passage of time, the giving of notice, or both,
constitute an Event of Default, shall be used to reimburse Grantor for the cost
of re building or restoration of the buildings or improvements on the Property.
Section 7.2. Loss During Foreclosure. In case of loss after foreclosure
proceedings have been instituted and not cured or redeemed, the proceeds of any
such insurance policy or policies, if not applied as aforesaid in rebuilding or
restoring the buildings or improvements, shall be used to pay the
K:\COMMON\STMARY\SUMMO\Deed of Trust.01.wpd
7
<PAGE>
amount due Beneficiary and the balance, if any, shall be paid to the owner of
the equity of redemption if he shall then be entitled to the same. In case of a
judicial foreclosure of this Deed of Trust, the court in its decree may provide
that the mortgagee's clause attached to each of said insurance policies may be
canceled and that the decree creditor may cause a new loss clause to be attached
to each of said policies making the loss thereunder payable to said decree
creditor; and any such foreclosure decree may further provide that in case of
one or more redemptions under said decree, pursuant to the statute in such case
made and provided, then and in every such case, each successive redemptory may
cause the preceding loss clause attached to each insurance policy to be canceled
and a new loss clause to be attached hereto, making the loss thereunder payable
to such redemptory. In the event of foreclosure sale, Beneficiary is hereby
authorized, without consent of Grantor, to assign any and all insurance policies
to the purchaser at the sale, or to take such other steps as Beneficiary may
deem advisable, to cause the interest of such purchaser to be protected by any
of the said insurance policies.
7.3. Condemnation. Grantor, immediately upon obtaining knowledge of the
institution of any proceeding for the condemnation of the Property or any
portion thereof, shall notify Beneficiary of the pendency thereof. Grantor
hereby assigns, transfers and sets over unto Beneficiary all compensation,
rights of action, the entire proceeds of any award and any claim for damages for
any of the Property taken or damaged under the power of eminent domain or by
condemnation or by sale in lieu thereof. Beneficiary may, at its option,
commence, appear in and prosecute, in its own name or in the name of Grantor,
any action or proceeding, or make any compromise or settlement in connection
with such condemnation, taking under the power of eminent domain, or sale in
lieu thereof. After deducting therefrom all of its expenses, including
attorneys' fees, Beneficiary may elect to apply the proceeds of the award upon
or in reduction of the indebtedness secured hereby, whether due or not, or hold
such proceeds without any allowance of interest and make such proceeds available
for restoration or re building of the Property. If the proceeds are made
available by Beneficiary to reimburse Grantor for the cost of such rebuilding or
restoration, any surplus which may remain out of such award after payment of
such cost of rebuilding or restoration shall at the option of Beneficiary be
applied on account of the indebtedness secured hereby or be paid to Grantor.
Grantor agrees to execute such further assignments of any compensation, awards,
damages, rights of action and proceeds as Beneficiary may require.
ARTICLE VIII.
MECHANICS' OR OTHER LIENS AND ENCUMBRANCES
Section 8.1. No Liens. Grantor shall pay when due all obligations,
lawful claims or demands of any person which, if unpaid, might result in, or
permit the creation of, a lien or encumbrance on the Property, the Collateral or
on the rents, issues, income and profits arising therefrom, whether such lien
would be senior or subordinate hereto, including, but without limiting the
generality of the foregoing, all claims of mechanics, materialmen, laborers and
others for work or labor performed, or materials or supplies furnished in
connection with any work of demolition, alteration, improvement of or
construction upon the Property. Grantor shall not mortgage, pledge, assign or
otherwise create, or
K:\COMMON\STMARY\SUMMO\Deed of Trust.01.wpd
8
<PAGE>
permit the creation of, any security interest in the Property or the Collateral
other than created hereby, whether superior or subordinate, without the express
prior written permission of Beneficiary.
Section 8.2. Right to Contest. Grantor shall have the right to contest
in good faith the validity of any such lien or encumbrance provided Grantor
shall first deposit with Beneficiary a bond or other security satisfactory to
Beneficiary in such amount as Beneficiary shall reasonably require but not more
than one hundred fifty percent (150%) of the amount of the claim and provided
further that Grantor shall thereafter diligently proceed to cause such lien to
be removed and discharged. If Grantor shall fail to discharge any such lien,
then, in addition to any other right or remedy of Beneficiary, Beneficiary may,
but shall not be obligated to, discharge the same either by paying the amount
claimed to be due or by depositing in court a bond in the amount required by
statute, or otherwise giving security for such claim, or by taking such action
as may be prescribed by law. Grantor shall guard every part of the Property and
Collateral from removal, destruction and damage and shall not do or suffer to be
done any act whereby the value of any part of the Property may be lessened.
Section 8.3. Beneficiary Right to Intervene. If the interest of
Beneficiary in the Property or the superiority of such interest is endangered or
attacked, directly or indirectly, Grantor hereby authorizes Beneficiary, at
Grantor's expense, to take all necessary and proper steps for the defense of
such interest or the superiority thereof, including the employment of counsel,
the prosecution or defense of litigation, and the compromise or discharge of
claims made against such interest or the superiority thereof.
ARTICLE IX.
ASSIGNMENT OF RENTS
Section 9.1. Assignment. Grantor hereby absolutely assigns and
transfers to Beneficiary all of the rents, royalties, issues, profits, revenues,
income and other benefits ("Rents and Profits") of the Property or arising from
the use and enjoyment of all or any portion thereof. Grantor irrevocably
appoints Beneficiary its special attorney-in-fact to demand, receive, and
enforce payment, to give receipt, release, and satisfaction, and to sue, in the
name of Grantor or Beneficiary, for all such Rents and Profits and to apply the
same to the indebtedness secured hereby.
Section 9.2. Collection. Notwithstanding the above, Grantor shall have
the right to collect, use and enjoy such Rents and Profits prior to an Event of
Default under this Deed of Trust or the Note. Upon any Event of Default under
this Deed of Trust or the Note, Beneficiary may enter upon and take possession
of the Property and collect such Rents and Profits, including those past due and
unpaid, and apply the same, less costs and expenses, upon any indebtedness
secured hereby, and in such order and to such notes as Beneficiary may
determine. Grantor shall not execute, without the prior written consent of
Beneficiary, an assignment or transfer of any of its right, title and interest
in the Rents and Profits.
K:\COMMON\STMARY\SUMMO\Deed of Trust.01.wpd
9
<PAGE>
ARTICLE X.
SALE OF PROPERTY OR COLLATERAL
Section 10.1. Due on Sale. If the Property or any part thereof or
interest therein, whether legal or equitable, is sold, assigned, transferred,
conveyed, mortgaged, or otherwise alienated by Grantor, whether voluntarily or
involuntarily or by operation of law, or that if the management thereof is
changed in either or any case without the prior written consent of Beneficiary,
Beneficiary, at its option, may declare the Note and all other obligations
secured hereunder to be forthwith due and payable. Any change in the beneficial
ownership of Grantor or in the legal or equitable title of the Property or in
the beneficial ownership of the Property, whether or not of record and whether
or not for consideration or sale, shall be deemed a transfer of an interest in
the Property.
Section 10.2. Beneficiary Right to Deal with Transferee; No Release of
Grantor. In the event ownership of the Property or any part thereof becomes
vested in a person or persons other than Grantor, without the prior written
approval of Beneficiary, Beneficiary may, without notice to Grantor, waive such
default and deal with such successor or successors in interest with reference to
this Deed of Trust and the Note in the same manner as with Grantor, without in
any way releasing, discharging or otherwise affecting the liability of Grantor
hereunder or under the indebtedness hereby secured. No sale of the Property, no
forbearance on the part of Beneficiary, no extension of the time for the payment
of the indebtedness hereby secured or any change in the terms thereof consented
to by Beneficiary shall in any way whatsoever operate to release, discharge,
modify, change or affect the original liability of Grantor herein, either in
whole or in part. Any deed conveying the Property or any part thereof, if
approved by Beneficiary in writing, shall provide that the grantee thereunder
assumes all of Grantor's obligations under this Deed of Trust, the Note and all
other Security Documents. In the event such deed shall not contain such
assumption, Beneficiary shall have all rights reserved to it hereunder in the
event of a default or if Beneficiary shall not elect to exercise such rights and
remedies, the grantee under such deed shall nevertheless be deemed to have
assumed such obligations by acquiring the Property or such portion thereof
subject to this Deed of Trust.
Section 10.3. Collateral. Grantor shall not voluntarily, involuntarily
or by operation of law sell, assign, transfer or otherwise dispose of the
Collateral or any interest therein and shall not otherwise do or permit anything
to be done or occur that may impair the Collateral as security hereunder except
that so long as this Deed of Trust is not in default, Grantor shall be permitted
to sell or otherwise dispose of the Collateral when absolutely worn out,
inadequate, unserviceable or unnecessary for use in the operation of the
Property in the conduct of the business of Grantor, upon replacing the same or
substituting for the same other Collateral at least equal in value to the
initial value of that disposed of and in such a manner so that such Collateral
shall be subject to the security interest created hereby and so that the
security interest of Beneficiary hereunder shall be the first priority security
interest in the Collateral. Nothing in this Section 10.3, however, shall prevent
Grantor from abandoning any unpatented mining claims when Grantor reasonably
determines that such claims are no longer necessary for the operation of the
Property. In the event the Collateral is sold in connection with the sale of the
Property, Grantor shall require, as a condition of the sale, that the buyer
specifically agree to assume Grantor's obligations as to the security interest
herein granted and to
K:\COMMON\STMARY\SUMMO\Deed of Trust.01.wpd
10
<PAGE>
execute whatever agreements and filings deemed necessary by Beneficiary to
maintain its perfected security interest in the Collateral.
ARTICLE XI.
INDEMNIFICATION
Grantor shall appear in and defend any suit, action or proceeding
arising out of or in connection with the Property, the Collateral, the Note,
this Deed of Trust or the other Security Documents that might in any way, in the
sole judgment of Beneficiary, affect the value of the Property, the title to the
Property, the validity, lien or priority of any of the Security Documents, or
the rights and powers of Trustee or Beneficiary. Grantor shall, at all times,
indemnify, hold harmless and on demand, reimburse Beneficiary for any and all
liability, loss, damage, expense or cost, including cost of evidence of title
and attorneys' fees, arising out of or incurred in connection with any such
suit, action or proceeding. Grantor shall pay the cost of collection of any
indebtedness secured hereby, including reasonable attorneys' fees, whether or
not suit is brought and shall pay reasonable cost of suit, cost of evidence of
title and reasonable attorneys' fees in any proceeding or suit brought by
Trustee or Beneficiary to foreclose this Deed of Trust. Grantor shall further
pay all cost and expense, including attorneys' fees, which Beneficiary may incur
in connection with any other effort or action (whether or not litigation or
foreclosure is involved) to enforce or defend Beneficiary's rights and remedies
under each and every one of the Security Documents. The sum of any such
expenditures shall be secured by this Deed of Trust and the other Security
Documents and shall bear interest at the Default Rate provided in the Note and
shall be due and payable on demand.
ARTICLE XII.
PRESERVATION OF PROPERTY
If Grantor fails to make any payment or do any act required by this
Deed of Trust or the Note or by any prior encumbrance, lien, reservation,
restriction, condition, or covenant affecting the Property, then Beneficiary
may, without obligation or notice, make any payment or do any act to the extent
necessary to protect the Property. In so doing, Grantor shall not be released
from any obligation created under this Deed of Trust. Any payments made by
Beneficiary and the costs and expenses, including attorneys' fees, incurred by
Beneficiary by doing any act as provided in this article shall become additional
principal under the Note and shall bear interest at the Default Rate and shall
be immediately due and payable from Grantor to Beneficiary. Nothing herein
contained shall prevent any such failure to perform on the part of Grantor from
constituting an Event of Default (as hereinafter defined).
ARTICLE XIII.
PERFORMANCE UNDER SECURITY DOCUMENTS
K:\COMMON\STMARY\SUMMO\Deed of Trust.01.wpd
11
<PAGE>
Grantor will promptly and strictly perform and comply with all
agreements, covenants, conditions and prohibitions required of, made by, or
imposed upon Grantor under the terms of each and every one of the Security
Documents. In the event Grantor suffers or permits to occur any breach or
default under the provisions of any of the Security Documents, such breach or
default shall con stitute an Event of Default hereunder and at the option of
Beneficiary, and without notice to Grantor, all unpaid indebtedness secured by
this Deed of Trust shall become due and payable as in the case of other Events
of Default. Grantor will further, from time to time at the request of
Beneficiary, supply Beneficiary with a current inventory of the Collateral in
such detail as Beneficiary may require.
ARTICLE XIV.
EVENTS OF DEFAULT
Any one or more of the following events shall be deemed to be an Event
of Default hereunder as well as under the Note and the Security Documents:
Section 14.1. Default Under Note. Any "Event of Default" as defined in
the Note.
Section 14.2. Failure to Perform. The failure by Grantor to properly
and timely perform, comply with, or observe any of the non-monetary terms,
covenants, conditions or agreements in the Note, this Deed of Trust or any other
Security Documents and such failure continues for more than ten days after
notice thereof from Beneficiary.
Section 14.3. Condemnation. The taking of the Property or any portion
thereof through condemnation (which term when used herein shall include any
damage or taking by any governmental authority or any other authority authorized
by the laws of the state where the land is located or the United States of
America) either temporarily or for a period in excess of thirty (30) days, or
permanently.
Section 14.4. Priority Lien Claim. The assertion (except by the owner
of an encumbrance expressly excepted from Grantor's warranty of title herein) of
any claim of priority over this Deed of Trust, by title, lien, or otherwise,
unless within thirty (30) days after such assertion either Grantor causes the
assertion to be withdrawn or Beneficiary approves of such claim of priority in
writing.
Section 14.5. Dissolution. The dissolution, termination, or liquidation
of Grantor or of any other person or entity directly or indirectly liable for
the payment of the Note.
Section 14.6. Other. The occurrence of any other event designated as a
default or an Event of Default under any other provision of this Deed of Trust
or in any of the Security Documents.
K:\COMMON\STMARY\SUMMO\Deed of Trust.01.wpd
12
<PAGE>
ARTICLE XV.
REMEDIES
Immediately upon or at any time after the occurrence of any of the
Events of Default as defined in Article XIV of this Deed of Trust, Beneficiary
may exercise any one or more of the cumulative, concurrent, and nonexclusive
remedies which are listed below or which are listed in any other Security
Document or which are otherwise available at law or in equity whether like or
unlike the remedies so listed, and Beneficiary may exercise such remedy or
remedies in such sequence or combination as Beneficiary may determine in
Beneficiary's sole discretion:
Section 15.1. Performance of Defaulted Obligations. Although
Beneficiary shall not be required to do so, Beneficiary may make any payment or
perform any other obligation under the Note, this Deed of Trust or any of the
Security Documents which Grantor has failed to make or perform, and Grantor
hereby irrevocably appoints Beneficiary as a true and lawful attorney-in-fact
for Grantor with authority to make any such payment and perform any such
obligation in the name of Grantor and on behalf of Grantor. All payments made
and expenses (including attorneys' fees) incurred by Beneficiary pursuant to
this section, together with interest thereon at the Default Rate (as defined in
the Note) from the date paid or incurred until repaid, will be part of Grantor's
indebtedness to Beneficiary and will be immediately due and payable by Grantor
to Beneficiary or, at Beneficiary's election, may be added to the unpaid
principal balance of the Note and shall be secured by this Deed of Trust and the
other Security Documents. In lieu of advancing Beneficiary's own funds for such
purposes, Beneficiary may use any funds of Grantor which may be in Beneficiary's
possession, including but not limited to undisbursed loan proceeds, insurance or
condemnation proceeds, and amounts deposited for other purposes. Any payment by
Beneficiary made pursuant to this section or in any other section of this Deed
of Trust or of the Note or any other Security Document shall not excuse or
constitute a waiver by Beneficiary of any default by Grantor.
Section 15.2. Specific Performance and Injunctive Relief.
Notwithstanding the availability of legal remedies, Beneficiary shall be
entitled to obtain specific performance, mandatory or prohibitory injunctive
relief, or other equitable relief requiring Grantor to cure or refrain from
repeating any default.
Section 15.3. Acceleration of Secured Obligations. Beneficiary may,
without notice or demand, declare all of Grantor's indebtedness to Beneficiary
secured hereunder or by any of the Security Documents immediately due and
payable in full, including, but not limited to, the entire unpaid principal
balance of the Note and all unpaid interest accrued thereon.
Section 15.4. Possession of Property. In the case of any Event of
Default or upon the abandonment thereof by Grantor, Beneficiary may enter and
take possession of the Property without seeking or obtaining the appointment of
a receiver, may employ a managing agent for the Property, and may operate, lease
or rent all or any part of the Property, either in Beneficiary's name or in the
name of Grantor, and may collect the rents, issues, and profits of the Property.
Any revenues collected
K:\COMMON\STMARY\SUMMO\Deed of Trust.01.wpd
13
<PAGE>
by Beneficiary under this section will be applied first toward payment of all
costs and expenses (in cluding attorneys' fees) incurred by Beneficiary,
together with interest thereon at the Default Rate (as defined in the Note) from
the date paid or incurred until repaid, then to late charges, if any, then to
accrued interest and the balance, if any, will be applied against Grantor's
indebtedness to Beneficiary and principal under the Note until it has been paid
in full.
Section 15.5. Enforcement of Security Interests. Beneficiary may
exercise all rights of a secured party under the Utah Uniform Commercial Code
with respect to all or any part of the Collateral, including, but not limited
to, taking possession of, holding, and selling the Collateral and enforcing or
otherwise realizing upon any other property in which Beneficiary has a security
interest. Any requirement for reasonable notice of the time and place of any
public sale or of the time after which any private sale or other disposition is
to be made will be satisfied by Beneficiary's giving of such notice to Grantor
at least five days prior to the time of any public sale or the time after which
any private sale or other intended disposition is to be made.
Section 15.6. Foreclosure Against Property. Beneficiary may foreclose
this Deed of Trust, insofar as it encumbers the Property, including Collateral,
either by judicial action or through Trustee. Foreclosure through Trustee will
be initiated by the filing with Trustee of a Notice of Election and Demand for
Sale. Trustee shall then comply with such notice requirements of the laws of
Utah as then apply with respect to such sale and shall file the required notice
for record in each county wherein the Property or any portion thereof is
situated. Beneficiary shall also deposit with Trustee the Note and all documents
evidencing the indebtedness and expenditures secured hereby. Trustee shall then
proceed to foreclosure and shall sell and dispose of the Property, including the
Collateral (en masse or in separate parcels, as Trustee may think best), in the
manner then provided by applicable law. Any sale conducted by Trustee pursuant
to this section may be conducted at any door or entrance to, or room within, any
building temporarily or permanently being used as a courthouse in the county in
which the real property described in Exhibit A hereto is located or at or within
any building in which the office of the clerk and recorder of said county is
then located or at any other location then permitted by applicable law;
provided, however, that the actual place of sale shall be designated in the
Notice of Sale. Beneficiary may purchase the Property, including the Collateral,
or any part thereof, and may bid in any part or all of the indebtedness secured
hereby and it shall not be obligatory upon the purchaser(s) at any such sale to
see to the application of the purchase money. The person conducting the sale
may, for any cause he deems expedient, postpone the sale from to time until it
shall be completed and, in every case notice of postponement shall be given by
public declaration thereof by such person at the time and place last appointed
for the sale; provided, if the sale is postponed for longer than one day beyond
the date designated in the Notice of Sale, notice thereof shall be given in the
same manner as the original Notice of Sale. Nothing in this section dealing with
foreclosure procedures or specifying particular actions to be taken by
Beneficiary or by Trustee shall be deemed to conflict with the minimum
requirements or procedures now or hereafter specified or provided by Utah law
and any such conflict shall be resolved in favor of the requirements of Utah law
applicable at the time of foreclosure.
K:\COMMON\STMARY\SUMMO\Deed of Trust.01.wpd
14
<PAGE>
Section 15.7. Expenses of Trustee's Sale or Foreclosure. In the event
all or any part of the Property shall be sold by Trustee pursuant to the
provisions of this article or in the event that this Deed of Trust shall be
foreclosed by appropriate proceedings in a court of competent jurisdiction,
there shall be allocated and included as part of the obligations secured hereby,
together with interest thereon at the Default Rate (as defined in the Note), all
expenses which may be paid or incurred by or on behalf of Trustee or Beneficiary
as court costs, filing fees, attorneys' fees, appraisers' fees, outlays for
documentary and expert evidence, stenographers' charges, mailing and publication
costs, costs for service of process, and costs (which may be estimates as to
items to be expended after entry of the decree) of procuring all such abstracts
of title, foreclosure certificates, title searches and examinations, title
insurance policies, and similar data and assurances with respect to title as
Beneficiary may deem reasonably necessary either to prosecute such suit or to
evidence to bidders at the sale which may be had pursuant to such proceedings
the true condition of the title to or the value of the Property, together with
and including a reasonable compensation to Trustee. All expenditures and
expenses of the nature mentioned in this section, and such expenses and fees as
may be incurred in the protection of the Property and the maintenance of the
lien of this Deed of Trust, including the fees of any attorney employed by
Beneficiary or Trustee in any litigation or proceedings affecting this Deed of
Trust, the Note or the Property, including but not limited to foreclosure,
probate and bankruptcy proceedings or in preparation for the commencement or
defense of any such litigation or proceeding or threatened litigation or
proceeding, shall be immediately due and payable by Grantor to Beneficiary or
Trustee, whoever or whichever will pay, has paid, or is owed the same.
Section 15.8. Proceeds of Trustee's or Foreclosure Sale. The purchase
money, proceeds or avails of any sale made under or by virtue of this Deed of
Trust, together with any other sums which then may be held by Trustee or
Beneficiary under this Deed of Trust, shall be applied as follows:
First: To the payment of the costs and expenses of such sale, including
reasonable compensation to Trustee, its agents and counsel, and of all expenses,
liabilities and advances made or incurred by Trustee or Beneficiary under this
Deed of Trust or respect to such sale, and of all other advances made by
Beneficiary and all taxes or assessments, except any taxes, assessments or other
charges subject to which the Property shall have been sold, together with
interest at the Default Rate (as defined in the Note).
Second: To the payment of the whole amount then due, owing or unpaid
upon the Note for accrued interest.
Third: To the payment of the whole amount then due, owing or unpaid
upon the Note for unpaid principal.
Fourth: To the payment of any other sums required to be paid pursuant
to any provisions of the Note or the Security Documents.
Fifth: To the payment of the surplus, if any, to the party entitled
thereto.
K:\COMMON\STMARY\SUMMO\Deed of Trust.01.wpd
15
<PAGE>
Section 15.9. Appointment of Receiver. Beneficiary shall be entitled,
as a matter of right and without regard to the value of any security for the
indebtedness secured hereunder or by any of the other Security Documents, or the
solvency of any person or entity liable therefor, to the appointment of a
receiver for the Property upon ex parte application to any court of competent
jurisdiction, or otherwise. Grantor freely and knowingly waives any right to any
hearing or notice of hearing prior to the appointment of a receiver. Such
receiver and his/her agents shall be empowered: (a) to take possession of the
Property and any and all assets used in connection therewith; (b) to exclude
Grantor and Grantor's agents, servants, and employees from the Property; (c) to
collect the rents, issues, profits, and income therefrom; (d) to operate the
Property and complete any construction which may be in progress; (e) to do such
maintenance and make such repairs and alterations as the receiver deems
necessary; (f) to use all stores of materials, supplies, and maintenance
equipment on the Property and replace such items at the expense of the
receivership estate; (g) to pay all taxes and assessments against the Property,
all premiums for insurance thereon, all utility and other operating expenses,
and all sums due under any prior or subsequent encumbrance; and (h) generally do
anything which Grantor could legally do if Grantor were in possession of the
Property. All expenses incurred by the receiver or his/her agents shall
constitute a part of the indebtedness secured hereunder or by any of the other
Security Documents. Any revenues collected by the receiver shall be applied
first to the expenses of the receivership, including attorneys' fees incurred by
the receiver and by Beneficiary, together with interest thereon at the Default
Rate (as defined in the Note) from the date first paid or incurred until repaid,
and the balance shall be applied toward the indebtedness secured hereunder or by
any of the other Security Documents or in such other manner as the receivership
court may direct. Unless sooner terminated with the express consent of
Beneficiary, any such receivership shall continue until the indebtedness secured
hereunder or by any of the other Security Documents has been discharged in full
or until title to the Property has passed after foreclosure sale and all
applicable periods of redemption have expired.
Section 15.10. Effect of Sale. Upon the completion of any sale or sales
made by Trustee under or by virtue of this Deed of Trust, Trustee shall execute
and deliver to the accepted purchaser or purchasers a good and sufficient deed
or deeds, conveying, assigning and transferring the Property, but without any
covenant or warranty, express or implied. The recitals in such deed of any
matters or facts shall be conclusive proof of the truthfulness thereof. After
the expiration of any appropriate statutory period of redemption, any such sale
or sales made under or by virtue of this Deed of Trust whether made under the
power of sale herein granted or under or by virtue of judicial proceedings or of
a judgment or decree of foreclosure and sale, shall operate to divest all the
estate, right, title, interest, claim and demand whatsoever, whether at law or
in equity, of Grantor in and to the properties and rights so sold, and shall be
a perpetual bar both at law and in equity against Grantor and against any and
all persons claiming or who may claim the same or any part thereof from, through
or under Grantor.
Section 15.11. Waiver and Release. Grantor hereby irrevocably and
unconditionally waives and releases, to the extent permitted by law: (a) all
benefits that might accrue to Grantor by virtue of any present or future law
exempting the Property from attachment, levy or sale on execution or providing
for any appraisement, valuation, stay of execution, redemption, exemption from
civil
K:\COMMON\STMARY\SUMMO\Deed of Trust.01.wpd
16
<PAGE>
process or extension of time for payment; (b) all notices of any Event of
Default or of Trustee's exercise of any right, remedy, or recourse provided
under the Security Documents; and (c) any right to a marshalling of assets or a
sale in inverse order of alienation.
Section 15.12. Acquisition of Property by Beneficiary. Upon any sale
made under or by virtue of this Deed of Trust, whether made under the power of
sale herein granted or under or by virtue of judicial proceedings or of a
judgment or decree of foreclosure and sale, Beneficiary may bid for and acquire
the Property or any part thereof and in lieu of paying cash therefor may make
settlement for the purchase price by crediting upon the indebtedness secured by
this Deed of Trust the net sales price after deducting therefrom the expenses of
the sale and the cost of the action and any other sums which Beneficiary is
authorized to deduct under this Deed of Trust. Beneficiary upon so acquiring the
Property, or any part thereof, shall be entitled to hold, lease, rent, operate,
manage and sell the same in any manner provided by applicable laws.
ARTICLE XVI.
NOTICES
Notices. Any notice or demand in connection with this Deed of Trust
shall be in writing and shall be deemed to have been duly given when (a)
delivered by hand, (b) sent by facsimile (with receipt confirmed), provided that
a copy is promptly thereafter mailed by first-class prepaid certified mail,
return receipt requested, (c) received by the addressee, if sent with delivery
receipt requested by Express Mail, Federal Express, or other express delivery
service or first-class prepaid certified mail, in each case to the appropriate
addresses and facsimile numbers as a party may designate as to itself by notice
to the other parties.
ARTICLE XVII.
MISCELLANEOUS TERMS AND CONDITIONS
Section 17.1. Future Consent. The granting of consent by Beneficiary to
any transaction where such consent is required by the terms hereof shall not be
deemed a waiver of the right to require consent to future or successive
transactions.
Section 17.2. Gender. As used herein, the singular shall include the
plural, the plural includes the singular, words of one gender shall include
another gender.
Section 17.3. Powers of Trustee. From time to time upon written request
of Beneficiary and presentation of this Deed of Trust for endorsement and
without affecting the personal liability of any person for payment of any
indebtedness or performance of the obligations secured hereby, Trustee may,
without liability therefor and without notice: release or reconvey all or any
part of the Property; consent to the making of any map or plat thereof; join in
granting any easement thereon; join in any declaration of covenants and
restrictions; or join in any extension agreement or any agreement subordinating
the lien or charge hereof. Trustee or Beneficiary may from time to time apply in
any
K:\COMMON\STMARY\SUMMO\Deed of Trust.01.wpd
17
<PAGE>
court of competent jurisdiction for aid and direction in the execution of the
trusts hereunder and the enforcement of the rights and remedies available
hereunder, and Trustee or Beneficiary may obtain orders or decrees directing or
confirming or approving acts in the execution of such trusts and the enforcement
of such remedies. Trustee has no obligation to notify any party of any pending
sale or any action or proceeding unless held or commenced and maintained by
Trustee under this Deed of Trust. Grantor shall pay to Trustee reasonable
compensation and reimbursement for services and expenses in the enforcement of
the trusts created hereunder, including reasonable attorneys' fees. Grantor
shall indemnify Trustee and Beneficiary against all losses, claims, demands and
liabilities which either may incur, suffer or sustain in the execution of the
trusts created hereunder or in the performance of any act required or permitted
hereunder or by law.
Section 17.4. Marshalling of Assets. Grantor on its own behalf and on
behalf of its successors and assigns hereby expressly waives all rights to
require a marshalling of assets by Trustee or Beneficiary or to require Trustee
or Beneficiary to first resort to the sale of any portion of the Property which
might have been retained by Grantor before foreclosing upon and selling any
other portion as may be conveyed by Grantor subject to this Deed of Trust.
Section 17.5. Partial Release. Without affecting the liability of any
other person for the payment of any indebtedness herein mentioned (including
Grantor should it convey such Property) and without affecting the lien or
priority hereof upon any property not released, Beneficiary may, without notice,
release any person so liable, extend the maturity or modify the terms of any
such obligation, or grant other indulgences, release or reconvey or cause to be
released or reconveyed at any time all or any part of the Property, take or
release any other security or make compositions or other arrangements with
debtors. Beneficiary may also accept additional security, either concurrently
herewith or hereafter, and sell the same or otherwise realize thereon either
before, concurrently with, or after sale hereunder.
Section 17.6. Beneficiary's Consent. Except as otherwise expressly
provided herein, in any instance hereunder where Beneficiary's approval or
consent is required or the exercise of Beneficiary's judgment is required, the
granting or denial of such approval or consent and the exercise of such judgment
shall be within the sole discretion of Beneficiary, and Beneficiary shall not
for any reason or to any extent be required to grant such approval or consent or
exercise such judgment in any particular manner regardless of the reasonableness
of either the request or Beneficiary's judgment.
Section 17.7. Non-Waiver.
a. By accepting payment of any sum secured hereby after its
due date or late performance of any obligation secured hereby, Beneficiary shall
not waive its right against any person obligated directly or indirectly
hereunder or on any indebtedness hereby secured either to require prompt payment
when due of all other sums so secured or to declare default for failure to make
such prompt payment. No exercise of any right or remedy by Trustee or
Beneficiary hereunder shall constitute a waiver of any other right or remedy
herein contained or provided by law.
K:\COMMON\STMARY\SUMMO\Deed of Trust.01.wpd
18
<PAGE>
b. No delay or omission of Trustee or Beneficiary in the
exercise of any right, power or remedy accruing hereunder or arising otherwise
shall impair any such right, power, or remedy or be construed to be a waiver of
any default or acquiescence therein.
c. Receipts of rents, awards and any other monies or evidences
thereof pursuant to the provisions of this Deed of Trust and any disposition of
the same by Trustee or Beneficiary shall not constitute a waiver of the power of
sale or right of foreclosure by Trustee or Beneficiary in an Event of Default or
failure of performance by Grantor of any covenant or agreement contained in this
Deed of Trust, the Note or the Security Documents.
Section 17.8. Paragraph Headings. The headings of each paragraph are
for information and convenience only and do not limit or construe the contents
of any provision hereof.
Section 17.9. Severability. In the event any one or more of the
provisions contained in this Deed of Trust or the application thereof to any
person or circumstances shall to any extent be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provision of this Deed of Trust, but the remainder of
this Deed of Trust or the application of such term to persons or circumstances
other than those as to which it is invalid, illegal or unenforceable shall not
be affected thereby and shall be valid and enforceable to the fullest extent
permitted by law.
Section 17.10. Successors-in-Interest. This Deed of Trust applies to,
inures to the benefit of, and is binding not only on the parties hereto, but
also on their successors and assigns. Nothing herein contained shall be deemed
as the consent of Beneficiary to any assignment, conveyance or other transfer of
Grantor's interest in the Property. The term "Beneficiary" shall mean the holder
and owner, including pledgees, of the Note, whether or not named as Beneficiary
herein.
Section 17.11. Modifications. This Deed of Trust may not be amended,
modified or changed nor shall any waiver of any provisions hereof be effective
except only by an instrument in writing and signed by the party against whom
enforcement of any waiver, amendment, change, modification or discharge is
sought. However, in the event any provision hereunder conflicts with applicable
laws, such provision shall be deemed to conform thereto.
Section 17.12. Governing Law. This Deed of Trust shall be construed
according to and governed by the laws of the State of Utah.
Section 17.13. Future Advances. Upon request by Grantor, at
Beneficiary's option and in Beneficiary's sole discretion, Beneficiary may make
future advances to Grantor. Such future advances, with interest thereon, shall
be secured by this Deed of Trust and all of the Security Documents when such
advances are evidenced by promissory notes stating that said notes are secured
hereby; however, nothing contained herein shall in any way obligate Beneficiary
to make any such future advances as mentioned herein.
K:\COMMON\STMARY\SUMMO\Deed of Trust.01.wpd
19
<PAGE>
Section 17.14. Rights Cumulative, Concurrent and Nonexclusive.
Beneficiary shall have all rights, remedies and recourses granted in the
Security Documents and available at law or in equity (including, without
limitation, those granted by the Uniform Commercial Code as adopted in the State
of Utah and applicable to the Property, or any portion thereto) and the same (a)
shall be cumulative and concurrent, (b) may be pursued separately, successively
or concurrently against Grantor or others obligated for the indebtedness, or any
part thereof or against any one or more of them, or against the Property, at the
sole discretion of Beneficiary, (c) may be exercised as often as occasion
therefor shall arise, it being agreed by Grantor that the exercise or failure to
exercise any of the same shall in no event be construed as a waiver or release
thereof or of any other right, remedy or recourse, and (d) are intended to be,
and shall be, nonexclusive.
Section 17.15. No Third Party Rights. No person shall be a third party
beneficiary of any provision of the Note, this Deed of Trust, or any other
Security Document. All such provisions favoring Beneficiary are intended solely
for the benefit of Beneficiary, and no third party shall be entitled to assume
or expect that Beneficiary will waive or consent to modification of any such
provision.
Section 17.16. Inspections. Beneficiary and its agents, representatives
and workmen are authorized to enter at any reasonable time upon or on any part
of the Property for the purpose of inspecting the same and for the purpose of
performing any of the acts it or Grantor is authorized to perform under the
terms of this Deed of Trust or any other instrument which secures the Note.
Section 17.17. Priority of Leases. To the extent Grantor has the right
under the terms of any existing lease of all or any part of the Property to make
such lease subordinate to the lien of this Deed of Trust, Grantor will, at
Beneficiary's request and Grantor's expense, take such action as may be required
to effect such subordination.
Section 17.18. Successor Trustee. Beneficiary may appoint a successor
trustee at any time by filing of record in the office of the county recorder of
each county in which the Property or any part thereof is situated, a
substitution of trustee. From the time the substitution is filed for record, the
new trustee shall succeed to all the powers, duties, authority and title of the
trustee named herein or of any successor trustee. Each substitution shall be
executed and acknowledged, and notice thereof shall be given and proof thereof
made, in the manner provided by law.
Section 17.19. Authority of Signatories. The individuals executing this
Deed of Trust and all other Security Documents represent and warrant that they
are fully authorized to and legally capable of executing this Deed of Trust and
all other Security Documents on behalf of Grantor and that the execution of such
documents is binding upon all parties holding an ownership interest in the
Property.
Section 17.20. Power of Attorney. Whenever a power of attorney is
conferred upon Beneficiary hereunder, it is understood and agreed that such
power of attorney is conferred with full power of substitution and Beneficiary
may elect in its sole discretion to exercise such power itself or to delegate
such power or any part thereof to one or more sub-agents.
K:\COMMON\STMARY\SUMMO\Deed of Trust.01.wpd
20
<PAGE>
Section 17.21. Statute of Limitations. Grantor hereby waives the
pleading of any statute of limitations as a defense to any obligation secured by
this Deed of Trust or any of the Security Documents to the full extent permitted
by law.
Section 17.22. Time of Essence. Time is of the essence hereof in
connection with all obligations of Grantor herein or in the Note or any other
Security Document constituting additional security for the Note.
IN WITNESS WHEREOF, this instrument has been executed by Grantor as of
the date first above written.
GRANTOR:
LISBON VALLEY MINING CO. LLC,
a Utah limited liability company
Tax I.D. #84-1422662
By: Summo USA Corporation, its
Managing Member
By:______________________________
Gregory A. Hahn, President and CEO
STATE OF COLORADO )
) ss.
CITY AND COUNTY OF DENVER )
Subscribed and sworn to before me this _____ day of November, 1998.
WITNESS my hand and official seal.
My commission expires:
------------------------------------
Notary Public
K:\COMMON\STMARY\SUMMO\Deed of Trust.01.wpd
21
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K into St. Mary Land & Exploration Company's
previously filed Form S-8 Registration Statement No. 333-61850 and Form S-8
Registration Statement No. 333-58273.
ARTHUR ANDERSEN LLP
Denver, Colorado,
March 23, 1999.
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
St. Mary Land & Exploration Company and Subsidiaries on Form S-8 (File No.
333-61850 and File No. 333-58273) of our report dated March 3, 1997, except for
the effects of adopting Statement of Financial Accounting Standards No. 128,
"Earnings Per Share," as discussed in Note 1, as to which the date is March 19,
1998, on our audit of the financial statements of St. Mary Land & Exploration
Company and Subsidiaries for the year ended December 31, 1996, which report is
included in this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
Denver, Colorado
March 22, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 7,821
<SECURITIES> 0
<RECEIVABLES> 17,937
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 27,069
<PP&E> 270,660
<DEPRECIATION> 126,835
<TOTAL-ASSETS> 184,497
<CURRENT-LIABILITIES> 17,284
<BONDS> 19,398
0
0
<COMMON> 110
<OTHER-SE> 134,632
<TOTAL-LIABILITY-AND-EQUITY> 184,497
<SALES> 70,648
<TOTAL-REVENUES> 78,744
<CGS> 17,005
<TOTAL-COSTS> 17,005
<OTHER-EXPENSES> 141
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,665
<INCOME-PRETAX> (14,246)
<INCOME-TAX> (5,415)
<INCOME-CONTINUING> (8,831)
<DISCONTINUED> 34
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,797)
<EPS-PRIMARY> (0.810)
<EPS-DILUTED> (0.810)
</TABLE>
