<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly period ended September 30, 1996
------------------
OR
_____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition period ____________ to ____________
Commission File Number 0-22650
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PETROCORP INCORPORATED
(Exact name of registrant as specified in its charter)
Texas 76-0380430
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
16800 Greenspoint Park Drive 77060-2391
Suite 300, North Atrium (Zip Code)
Houston, Texas
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (281) 875-2500
Not Applicable
(Former Name, Former Address and Former Fiscal Year, if changed since last
report)
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 such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No _____
-----
Indicate the number of shares outstanding of each of the Registrant's classes of
stock, as of October 31, 1996:
Common Stock, $.01 per value 8,584,519
---------------------------- ---------
(Title of Class) (Number of Shares Outstanding)
<PAGE>
PETROCORP INCORPORATED
INDEX
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<TABLE>
<CAPTION>
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
<S> <C>
Consolidated Balance Sheet at September 30, 1996 and December 31, 1995 1
Consolidated Statement of Operations for the quarters and nine months
ended September 30, 1996 and 1995 2
Consolidated Statement of Cash Flows for the nine months ended
September 30, 1996 and 1995 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and 6
Results of Operations
PART II. OTHER INFORMATION 12
SIGNATURES 13
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
PETROCORP INCORPORATED
----------------------
CONSOLIDATED BALANCE SHEET
--------------------------
(dollar amounts in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
(Unaudited)
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 27,707 $ 11,764
Accounts receivable, net 4,809 7,632
Other current assets 285 1,433
------------- ------------
Total current assets 32,801 20,829
------------- ------------
Property, plant and equipment:
Oil and gas properties, at cost, full cost method, net of
accumulated depreciation, depletion and amortization 74,924 79,667
Unproved properties not subject to depletion 4,298 4,406
Plant and related facilities, net 4,755 6,389
Other, net 2,126 3,128
------------- ------------
86,103 93,590
------------- ------------
Other assets, net 305 420
------------- ------------
Total assets $ 119,209 $ 114,839
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 4,901 $ 5,259
Accrued liabilities 7,244 3,370
Current portion of long-term debt 5,607 5,856
------------- ------------
Total current liabilities 17,752 14,485
------------- ------------
Long-term debt 32,358 36,513
------------- ------------
Deferred revenue 1,686 -
------------- ------------
Deferred income taxes 3,449 2,320
------------- ------------
Commitments and contingencies (Note 4)
Shareholder's equity:
Preferred stock, $0.01 par value, 1,000,000 shares authorized,
none issued - -
Common stock, $0.01 par value, 25,000,000 shares authorized,
8,616,216 shares issued and 8,584,519 shares outstanding 86 86
Additional paid-in capital 71,170 71,170
Retained deficit, since October 1, 1992 (3,639) (6,043)
Foreign currency translation adjustment (3,336) (3,375)
Treasury stock, at cost (31,697 shares) (317) (317)
------------- ------------
Total shareholders' equity 63,964 61,521
------------- ------------
Total liabilities and shareholders' equity $ 119,209 $ 114,839
============= ============
</TABLE>
The accompanying notes are an integral part of this statement.
1
<PAGE>
PETROCORP INCORPORATED
----------------------
CONSOLIDATED STATEMENT OF OPERATIONS
------------------------------------
(amounts in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
For the three months For the nine months
ended September 30, ended September 30,
-------------------------- ------------------------------------
1996 1995 1996 1995
---------- ---------- ------------- ------------
<S> <C> <C> <C> <C>
REVENUES:
Oil and gas $ 6,947 $ 5,696 $ 20,761 $ 18,033
Plant processing 360 473 1,286 1,405
Other (1) 247 178 795
---------- ---------- ------------- ------------
7,306 6,416 22,225 20,233
---------- ---------- ------------- ------------
EXPENSES:
Production costs 1,714 1,776 4,997 5,576
Depreciation, depletion and amortization 3,011 3,172 9,165 10,004
Oil and gas property valuation adjustment - - - 8,500
General and administrative 1,013 1,343 3,470 4,252
Other operating expenses 31 69 135 203
---------- ---------- ------------- ------------
5,769 6,360 17,767 28,535
---------- ---------- ------------- ------------
INCOME (LOSS) FROM OPERATIONS 1,537 56 4,458 (8,302)
---------- ---------- ------------- ------------
OTHER INCOME (EXPENSES):
Investment and other income 252 149 1,685 567
Interest expense (795) (982) (2,595) (2,953)
Other expense (10) (57) (17) (165)
---------- ---------- ------------- ------------
(553) (890) (927) (2,551)
---------- ---------- ------------- ------------
INCOME (LOSS) BEFORE INCOME TAXES 984 (834) 3,531 (10,853)
Income tax provision (benefit) 349 (377) 1,127 (901)
---------- ---------- ------------- ------------
NET INCOME (LOSS) $ 635 $ (457) $ 2,404 $ (9,952)
========== ========== ============= ============
NET INCOME (LOSS) PER COMMON SHARE $ 0.07 $ (0.05) $ 0.28 $ (1.14)
========== ========== ============= ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES 8,698 8,698 8,698 8,698
========== ========== ============= ============
</TABLE>
The accompanying notes are an integral part of this statement.
2
<PAGE>
PETROCORP INCORPORATED
----------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------
(amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the nine months
ended September 30,
-----------------------------------
1996 1995
------------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 2,404 $ (9,952)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation, depletion and amortization 9,165 10,004
Oil and gas property valuation adjustment - 8,500
Gain on sale of gas gathering system (999) -
Deferred income tax provision (benefit) 1,127 (901)
----------- ----------
11,697 7,651
Change in operating assets and liabilities:
Accounts receivable 2,823 2,232
Other current assets 1,148 284
Accounts payable (358) (1,847)
Accrued liabilities 3,874 983
Other (403) 126
----------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 18,781 9,429
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of oil and gas properties 6,317 111
Proceeds from sale of interest in plant and related facilities 1,211 -
Proceeds from sale of other property, plant and equipment 3,838 -
Additions to oil and gas properties (9,339) (10,940)
Additions to plant and related facilities (212) (369)
Additions to other property, plant and equipment (240) (712)
Additions to other assets - (9)
Proceeds from sale of short-term investment - 6,682
----------- ----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 1,575 (5,237)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 86 472
Repayment of long-term debt (4,493) (1,436)
----------- ----------
NET CASH USED IN FINANCING ACTIVITIES (4,407) (964)
----------- ----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (6) 260
----------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 15,943 3,488
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 11,764 10,127
----------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 27,707 $ 13,615
=========== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
3
<PAGE>
PETROCORP INCORPORATED
----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION:
The unaudited consolidated financial statements of PetroCorp Incorporated
(the "Company" or "PetroCorp") have been prepared in accordance with generally
accepted accounting principles for interim financial information and with
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments, consisting of normal and recurring adjustments
necessary for a fair presentation, have been included. For further information,
refer to the consolidated financial statements and footnotes thereto for the
year ended December 31, 1995, included in the Company's 1995 Annual Report on
Form 10-K pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934. Interim period results are not necessarily indicative of results of
operations or cash flows for a full-year period.
NOTE 2 - HEDGING PROGRAM:
From time to time, the Company has utilized hedging transactions to manage
its exposure to price fluctuations on its sales of oil and natural gas. Realized
gains and losses from the Company's hedging activities are included in oil and
gas revenues in the period of the hedged production. Normally, any realized and
unrealized gains and losses prior to the period when the hedged production
occurs are deferred. To-date, the Company has used oil and natural gas futures
contracts or natural gas option contracts traded on the NYMEX to hedge its oil
and gas sales.
As a result of hedging transactions, oil and gas revenues were reduced by
$918,000 during the first nine months of 1996 while oil and gas revenues were
increased by $133,000 during the first nine months of 1995. As of September 30,
1996, the Company had no material deferred hedging gains or losses.
In connection with its oil and gas hedging program, the Company may be
exposed to the risk of financial loss in certain circumstances including
instances where production is less than expected, the Company's customers fail
to purchase or take delivery of the contracted sales quantities, or a sudden,
unexpected event materially impacts product prices. The Company attempts to
reduce these risks by limiting, at any point in time, its U.S. hedged oil and
natural gas sales volumes to approximately 85% of total U.S. sales volumes and
limiting its Canadian hedged natural gas sales volumes to approximately 65% of
total Canadian natural gas sales volumes. The Company had no oil or natural gas
futures contracts open as of November 11, 1996.
4
<PAGE>
NOTE 3 - DEFERRED REVENUE:
In March 1996, the Company's wholly-owned subsidiary, Fidelity Gas Systems,
Inc., sold its Southwest Oklahoma City Field gas gathering system for $3.8
million. The Company's total gain on the sale was $3.1 million, with $1.0
million being recognized in the first quarter of 1996 in "investment and other
income" on the consolidated statement of operations while the remaining $2.1
million of the gain was deferred. The $2.1 million deferred revenue will be
recognized in future periods as a component of gas revenues by partially
offsetting the gas gathering fees paid by the Company over the productive life
of the Company's Southwest Oklahoma City Field. Through September 30, 1996,
$403,000 has been recognized, leaving a balance of $1.7 million in "deferred
revenue" on the consolidated balance sheet as of September 30, 1996.
NOTE 4 - COMMITMENTS AND CONTINGENCIES:
There are claims and actions pending against the Company. In the opinion of
management, the amounts, if any, which may be awarded in connection with any of
these claims and actions would not be material to the Company's consolidated
financial position or results of operations.
5
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
The Company's principal line of business is the production and sale of its
oil and natural gas reserves. Results of operations are dependent upon the
quantity of production and the price obtained for such production. Prices
received by the Company for the sale of its oil and natural gas have fluctuated
significantly from period to period. Such fluctuations affect the Company's
ability to maintain or increase its production from existing oil and gas
properties and to explore, develop or acquire new properties.
The following table reflects certain operating data for the periods
presented:
<TABLE>
<CAPTION>
For the quarter For the nine
ended months ended
September 30, September 30,
--------------- -------------------------
1996 1995 1996 1995
------- ------ ------------ -----------
<S> <C> <C> <C> <C>
PRODUCTION:
United States:
Oil (Mbbls) 163 154 499 495
Gas (MMcf) 1,312 1,530 4,036 4,590
Oil equivalents (MBOE) 382 409 1,172 1,260
Canada:
Oil (Mbbls) --- --- --- 1
Gas (MMcf) 684 867 2,299 2,421
Oil equivalents (MBOE) 114 145 383 405
Total:
Oil (Mbbls) 163 154 499 496
Gas (MMcf) 1,996 2,397 6,335 7,011
Oil equivalents (MBOE) 496 554 1,555 1,665
AVERAGE SALES PRICES (including
the effects of hedging):
United States:
Oil (per Bbl) $20.21 $17.56 $18.60 $17.68
Gas (Mcf) 2.15 1.46 2.15 1.54
Canada:
Oil (per Bbl) --- --- --- 18.04
Gas (per Mcf) 1.22 .88 1.22 .90
Weighted average:
Oil (per Bbl) 20.21 17.56 18.60 17.68
Gas (per Mcf) 1.83 1.25 1.81 1.32
SELECTED DATA PER BOE:
Average sales price $14.01 $11.00 $13.35 $10.83
Production costs 3.46 3.21 3.21 3.35
General and administrative
expenses 2.04 2.42 2.23 2.55
Oil and gas depreciation,
depletion and amortization 5.31 4.92 5.09 5.21
</TABLE>
6
<PAGE>
RESULTS OF OPERATIONS
Comparison of Three Months Ended September 30, 1996 and Three Months Ended
September 30, 1995
Overview. The Company recorded $1.5 million in income from operations in the
third quarter of 1996 compared to income from operations of $56,000 in the third
quarter of 1995. The improvement between quarters is primarily the result of a
46% and a 15% increase in the Company's weighted average natural gas and oil
prices, respectively, coupled with a 9% decrease in operating expenses. The
Company recorded net income of $635,000, or $0.07 per share, during the third
quarter of 1996 compared to a net loss of $457,000, or $0.05 per share, for the
same period in 1995.
Revenues. Total revenues increased 14% to $7.3 million in the third quarter
of 1996 from $6.4 million in the third quarter of 1995. Oil production
increased 6% to 163 Mbbls from 154 Mbbls. Natural gas production decreased 17%
to 1,996 MMcf in the third quarter of 1996 from 2,397 MMcf in the third quarter
of 1995, resulting in an overall production decrease of 10% to 496 MBOE from
554 MBOE. The decline in natural gas production is primarily the result of (1)
the sale of a portion of the Company's reserves in the Canadian Hanlan Swan
Hills Unit in May 1996, (2) also in Canada, the annual Hanlan-Robb gas
processing plant turn-around occurred in the third quarter of 1996 while plant
turn-around took place in the second quarter of 1995 and (3) the sale of certain
U.S. producing reserves along with the sale of the Company's non-producing
mineral fee interests in the fourth quarter of 1995. The Company's third
quarter average U.S. natural gas price increased 47% to $2.15 per Mcf in 1996
from $1.46 per Mcf in 1995 while the Company's third quarter average Canadian
natural gas price increased 39% to $1.22 from $0.88. As a result of hedging
transactions, the Company's third quarter 1995 U.S. average natural gas price
was increased by $0.03 per Mcf from the average price that would have otherwise
been received. The Company's average oil price increased 15% to $20.21 per
barrel for the third quarter of 1996 from $17.56 per barrel for the third
quarter of 1995. As a result of hedging transactions, the Company's third
quarter 1996 average oil price was reduced by $1.01 per barrel from the average
price that would have otherwise been received while the third quarter of 1995
average price was increased by $0.82 per barrel. As a result of the increases
in natural gas and oil prices, partially offset by the decline in production,
oil and gas revenues increased 22% to $6.9 million for the third quarter of 1996
from $5.7 million for the third quarter of 1995. Plant processing revenues
decreased to $360,000 from $473,000 primarily as a result of the Company's sale
of a portion of its interest in the Canadian Hanlan-Robb plant in May 1996.
Other revenues were almost zero compared to $247,000 in the prior year quarter.
Other revenues declined due to reduced gas gathering fees, resulting from the
March 1996 sale of the Company's Oklahoma gas gathering system, and lower
average sulfur prices, $6.54 per long-ton compared to $31.00 per long-ton.
Production Costs. Production costs declined 3% to $1.7 million in the third
quarter of 1996 compared to $1.8 million in the third quarter of 1995, while
production costs per BOE increased 8% to $3.46 per BOE from $3.21 per BOE.
Absent increased costs related to the annual Hanlan-Robb plant turn-around,
production costs in absolute dollars would have declined further while
production costs per BOE would have declined slightly.
Depreciation, Depletion & Amortization (DD&A). Total DD&A decreased 5% to
$3.0 million in the third quarter of 1996 from $3.2 million in the third quarter
of 1995, primarily as a result of the decrease in production partially offset
by an increase in the oil and gas DD&A rate. On a BOE basis, the oil and gas
DD&A rate increased 8% to $5.31 per BOE from $4.92 per BOE.
General and Administrative Expenses. General and administrative expenses
decreased 25% to $1.0 million in the third quarter of 1996 from $1.3 million in
the third quarter of 1995 primarily due to a reduction in personnel.
7
<PAGE>
Interest Expense. Interest expense decreased 19% to $795,000 in the third
quarter of 1996 from $982,000 in 1995, due to reductions in the Series A and B
Senior Notes and the Nonrecourse Notes Payable. The average interest rates, a
combination of adjustable and fixed rates, on the Series A and Series B Senior
Notes averaged 7.4% and 7.3% for the third quarter of 1996 and 1995,
respectively.
Income Taxes. The Company recorded a $349,000 income tax provision on pre-
tax income of $984,000 in the third quarter of 1996 compared to an income tax
benefit of $377,000 on a pre-tax loss of $834,000 in the third quarter of 1995.
Comparison of Nine Months Ended September 30, 1996 and Nine Months Ended
September 30, 1995
Overview. The Company recorded $4.5 million in income from operations in the
first nine months of 1996 compared to a loss from operations of $8.3 million in
the first nine months of 1995. Excluding an $8.5 million oil and gas property
valuation adjustment recorded in 1995, the improvement between periods is
primarily the result of a 37% increase in the Company's weighted average natural
gas price coupled with a 11% decrease in operating expenses. During the first
nine months of 1996, the Company recorded net income of $2.4 million, or $0.28
per share, which includes $629,000, or $0.07 per share, related to the after-tax
gain on the sale of the gas gathering system in Oklahoma. During the first nine
months of 1995 the Company recorded a net loss of $10.0 million, or $1.14 per
share.
Revenues. Total revenues increased 10% to $22.2 million in the first nine
months of 1996 from $20.2 million in the first nine months of 1995. Oil
production increased slightly to 499 Mbbls from 496 Mbbls. Natural gas
production decreased 10% to 6,335 MMcf in the first nine months of 1996 from
7,011 MMcf in the first nine months of 1995, resulting in an overall production
decrease of 7% to 1,555 MBOE from 1,665 MBOE. The decline in natural gas
production is primarily the result of (1) the sale of a portion of the
Company's reserves in the Canadian Hanlan Swan Hills Unit in May 1996, (2) the
sale of certain producing reserves along with the sale of the Company's non-
producing mineral fee interests in the fourth quarter of 1995 and (3) normal
production declines. The Company's first nine months of 1996 average U.S.
natural gas price increased 40% to $2.15 per Mcf in 1996 from $1.54 per Mcf in
1995 while the Company's average Canadian natural gas price increased 36% to
$1.22 from $0.90. As a result of hedging transactions, the U.S. average natural
gas price the Company would have otherwise received during the first nine months
of 1996 was reduced by $0.04 per Mcf. The Canadian natural gas price for the
first nine months of 1995 was reduced by $0.02 per Mcf. The Company's average
U.S. oil price increased 5% to $18.60 per barrel for the first nine months of
1996 from $17.68 per barrel for the first nine months of 1995. As a result of
hedging transactions, the Company's average oil price for the first nine months
of 1996 was reduced by $1.54 per barrel from the average price that would have
otherwise been received while the third quarter of 1995 average price was
increased by $0.82 per barrel. As a result of the increases in natural gas and
oil prices, partially offset by a decline in production, oil and gas revenues
increased 15% to $20.8 million for the first nine months of 1996 from $18.0
million for the first nine months of 1995. Plant processing revenues declined
to $1.3 million from $1.4 million primarily as a result of the Company's sale of
a portion of its interest in the Canadian Hanlan-Robb plant in May 1996. Other
revenues declined 78% to $178,000 from $795,000 due to reduced gas gathering
fees, resulting from the March 1996 sale of the Company's Oklahoma gas gathering
system, and lower average sulfur prices, $6.41 per long-ton compared to $31.00
per long-ton.
Production Costs. Production costs declined 10% to $5.0 million in the first
nine months of 1996 compared to $5.6 million in the first nine months of 1995,
while production costs per BOE decreased 4% to $3.21 per BOE from $3.35 per BOE.
The decrease in production costs in absolute dollars and on a BOE basis results
from the Company's continued focus on reducing costs.
Depreciation, Depletion & Amortization (DD&A). Total DD&A decreased 8% to
$9.2 million in the first nine months of 1996 from $10.0 million in the first
nine months of 1995, primarily as a result of the
8
<PAGE>
decrease in production volumes coupled with a decrease in the oil and gas DD&A
rate. On a BOE basis, the oil and gas DD&A rate decreased 2% to $5.09 per BOE
from $5.21 per BOE.
Oil and Gas Property Valuation Adjustment. The Company follows the full cost
method of accounting for its oil and gas properties. Under this method, all
productive and non-productive exploration and development costs, incurred for
the purpose of finding oil and gas reserves, are capitalized and may not exceed
a calculated ceiling computed on a country-by-country basis. The ceiling is
calculated on a quarterly basis as the sum of (i) the present value (discounted
at 10%) of future net revenues from estimated production of proved oil and gas
reserves plus (ii) the lower of cost or estimated fair market value of the
unproved properties, less (iii) the related income tax effects. At June 30,
1995, primarily as a result of the impairment of the Company's valuation of its
unproved fee mineral interests and a decline in oil and gas prices, the
Company's net capitalized costs for its U.S. oil and gas properties exceeded the
ceiling by $8.5 million, resulting in the corresponding valuation adjustment.
The ceiling was calculated using $16.00 per barrel of oil and $1.52 per Mcf of
natural gas, the prices in effect as of June 30, 1995.
General and Administrative Expenses. General and administrative expenses
decreased 18% to $3.5 million in the first nine months of 1996 from $4.3 million
in the first nine months of 1995 primarily due to a reduction in personnel.
Investment and Other Income. Investment and other income increased to $1.7
million in the first nine months of 1996 from $567,000 in the first nine months
of 1995 as a result of a $1.0 million gain on the sale of the Company's Oklahoma
City gas gathering system.
Interest Expense. Interest expense decreased 12% to $2.6 million in the
first nine months of 1996 from $3.0 million in 1995, due to reductions in the
Series A and B Senior Notes and the Nonrecourse Notes Payable. The average
interest rates, a combination of adjustable and fixed rates, on the Series A and
Series B Senior Notes averaged 7.4% for the first nine months of 1996 and 1995.
Income Taxes. The Company recorded a $1.1 million income tax provision on
pre-tax income of $3.5 million in the first nine months of 1996 compared to an
income tax benefit of $901,000 on a pre-tax loss of $2.4 million in the first
nine months of 1995 (excluding the effect of the oil and gas property valuation
adjustment of $8.5 million which is calculated on after-tax basis and has no
effect on the income tax benefit).
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically funded its capital expenditures and working
capital requirements with its cash flow from operations, debt and equity capital
and participation by institutional investors. As of September 30, 1996, the
Company had working capital of $15.0 million as compared to $6.3 million at
December 31, 1995. The increase in working capital was primarily due to net
cash provided by operating activities plus the sales of the Company's partial
interest in the Canadian Hanlan Swan Hills Unit , certain non-strategic
properties at auction and the Oklahoma City gas gathering system, partially
offset by capital expenditures and reduction in long-term debt. Net cash
provided by operating activities was $18.8 million and $9.4 million for the nine
months ended September 30, 1996 and 1995, respectively, while net cash provided
by operating activities before changes in operating assets and liabilities for
the same periods was $11.2 million and $7.7 million, respectively.
The Company spent $9.3 million during the nine months ended September 30,
1996 primarily related to exploration and development and the purchase of
producing properties. For the same period in 1995, the Company spent $10.9
million primarily related to exploration and development.
9
<PAGE>
The Company's Canadian subsidiary redeemed its redeemable preferred stock on
August 9, 1994 for $7.0 million and simultaneously issued $7.0 million in
nonrecourse long-term notes payable with similar financial terms. At September
30, 1996, the nonrecourse long-term notes payable balance was $4.8 million, of
which $907,000 was classified as current.
In July 1993, PetroCorp refinanced its long-term debt through the issuance of
$40.0 million in senior notes. The Note Purchase Agreement established $10.0
million of Senior Adjustable Rate Notes Series A, due June 30, 1999 (the Series
A Notes), payable to a subsidiary of USF&G Corporation, and $30.0 million of
7.55% Senior Notes Series B, due June 30, 2008 (the Series B Notes), payable to
two wholly-owned subsidiaries of CIGNA Corporation and to four unaffiliated
institutional investors in amounts totaling $20.0 million and $10.0 million,
respectively. Mandatory redemptions commenced on December 31, 1994 for the
Series A Notes and commenced on December 31, 1995 for the Series B Notes. As of
September 30, 1996, the remaining principal balances for the Series A and B
Notes were $5.8 million and $27.4 million, respectively, for a total of $33.2
million ($4.7 million is classified as current).
Interest on the Series A Notes is adjustable, based on a spread of 115 basis
points over the London Interbank Offered Rate (LIBOR). The Company may select a
rate which may be applicable for a one-, three-or six-month period. Interest is
payable in arrears at the end of the selected period. Interest on the Series B
Notes is fixed at a rate of 7.55% and is payable semiannually in arrears.
From time to time, the Company has utilized hedging transactions to manage
its exposure to price fluctuations on its sales of oil and natural gas. Realized
gains and losses from the Company's hedging activities are included in oil and
gas revenues in the period of the hedged production. Normally, any realized and
unrealized gains and losses prior to the period when the hedged production
occurs are deferred. To-date, the Company has used oil and natural gas futures
contracts or natural gas option contracts traded on the NYMEX to hedge its oil
and gas sales.
As a result of hedging transactions, oil and gas revenues were reduced by
$918,000 during the first nine months of 1996 while oil and gas revenues were
increased by $133,000 during the first nine months of 1995. As of September 30,
1996, the Company had no material deferred hedging gains or losses.
In connection with its oil and gas hedging program, the Company may be
exposed to the risk of financial loss in certain circumstances including
instances where production is less than expected, the Company's customers fail
to purchase or take delivery of the contracted sales quantities, or a sudden,
unexpected event materially impacts product prices. The Company attempts to
reduce these risks by limiting, at any point in time, its U.S. hedged oil and
natural gas sales volumes to approximately 85% of total U.S. sales volumes and
limiting its Canadian hedged natural gas sales volumes to approximately 65% of
total Canadian natural gas sales volumes. The Company had no oil or natural gas
futures contracts open as of November 11, 1996.
In March 1996, the Company's wholly-owned subsidiary, Fidelity Gas Systems,
Inc., sold its Southwest Oklahoma City Field gas gathering system for $3.8
million. The Company's total gain on the sale was $3.1 million, with $1.0
million being recognized in the first quarter of 1996 in "investment and other
income" on the consolidated statement of operations while the remaining $2.1
million of the gain was deferred. The $2.1 million deferred revenue will be
recognized in future periods as a component of gas revenues by partially
offsetting the gas gathering fees paid by the Company over the productive life
of the Company's Southwest Oklahoma City Field. Through September 30, 1996,
$403,000 has been recognized, leaving a balance of $1.7 million in "deferred
revenue" on the consolidated balance sheet as of September 30, 1996.
In August 1996, the Company's Board of Directors increased the Company's
exploration and development capital budget by $3.0 million, or 33%. The
currently approved capital budget of $24.0
10
<PAGE>
million for 1996, now includes $12.0 million for exploration and development and
$10.0 million for producing property acquisitions. However, actual levels of
expenditures for planned exploration and development projects and producing
property acquisitions may vary significantly due to many factors, including
drilling results, oil and gas prices, industry conditions and acquisition
opportunities, among others.
The Company plans to finance its 1996 exploration and development
expenditures with existing working capital and cash flow from operations while
it may finance a portion of its 1996 producing property acquisitions with new
borrowings. If the Company increases its exploration, development and
acquisition activities in the future, capital expenditures may require
additional funding obtained through borrowings from commercial banks and other
institutional sources, public offerings of equity or debt securities and
existing and future relationships with institutional investment partners.
Except for the historical information contained herein, the matters discussed
in this management's discussion and analysis are forward-looking statements that
involve risks and uncertainties, and actual results could differ materially from
these expectations. Among the factors that could cause actual results to differ
materially are the timing and success of the Company's drilling activities, the
volatility of the prices and supply and demand for oil and gas, the numerous
uncertainties inherent in estimating quantities of oil and gas reserves and
actual future production rates and associated costs, the usual hazards
associated with the oil and gas industry (including blowouts, cratering, pipe
failure, spills, explosions and other unforeseen hazards), and increases in
regulatory requirements, as well as other risks described from time to time in
the company's periodic reports filed with the Securities and Exchange
Commission.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-based
Compensation" (SFAS 123), which established financial accounting and reporting
standards for stock-based employee compensation plans. SFAS 123 encourages
companies to adopt a fair value based method of accounting for such plans but
continues to allow the use of the intrinsic value based method prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (Opinion 25). Companies electing to continue accounting in
accordance with Opinion 25 must make pro forma disclosures of net income and
earnings per share as if the fair value based method defined in SFAS 123 had
been applied. With respect to any new awards issued, the Company will continue
to account for its stock-based compensation in accordance with Opinion 25 and
will make pro forma disclosures in accordance with the provisions of SFAS 123
beginning in its financial statements for the year ending December 31, 1996.
11
<PAGE>
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings
- --------------------------
Not Applicable
Item 2 - Changes in Securities
- ------------------------------
Not Applicable
Item 3 - Defaults upon Senior Securities
- ----------------------------------------
Not Applicable
Item 4 - Submission of Matters to Vote of Security Holders
- -----------------------------------------------------------
Not Applicable
Item 5 - Other Information
- --------------------------
Not Applicable
Item 6 -
- ---------
(a) Exhibits
--------
3.1* Amended and Restated Articles of Incorporation of PetroCorp
Incorporated. Incorporated by reference to Exhibit 3.2 to
the Registration Statement on Form S-1 (Registration No. 33-
36972) initially filed with the Securities and Exchange
Commission on August 26, 1993 (the "Registration
Statement").
3.2* Amended and Restated Bylaws of PetroCorp Incorporated.
Incorporated by reference to Exhibit 3.2 to the Form 10-Q
for the quarterly period ended June 30, 1996.
10.1 Amended and restated 1992 PetroCorp Stock Option Plan
(replaces incorrect copy previously filed).
27 Financial Data Schedule
______________________________
* Incorporated by reference.
(b) Reports on Form 8-K
-------------------
Report dated July 26, 1996 relating to acquisition by a
stockholder of 29.2% of the Company's outstanding common stock.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PETROCORP INCORPORATED
----------------------
(Registrant)
Date: November 13, 1996 /s/ CRAIG K. TOWNSEND
------------------------ ------------------------
Craig K. Townsend
Vice President - Finance, Secretary
and Treasurer
(On behalf of the Registrant and as the
Principal Financial Officer)
13
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ----------- -------
<C> <S>
3.1* Amended and Restated Articles of Incorporation of PetroCorp
Incorporated. Incorporated by reference to Exhibit 3.2 to
the Registration Statement on Form S-1 (Registration No. 33-
36972) initially filed with the Securities and Exchange
Commission on August 26, 1993 (the "Registration
Statement").
3.2* Amended and Restated Bylaws of PetroCorp Incorporated.
Incorporated by reference to Exhibit 3.2 to the Form 10-Q
for the quarterly period ended June 30, 1996.
10.1 Amended and restated 1992 PetroCorp Stock Option Plan
(replaces incorrect copy previously filed).
27 Financial Data Schedule
</TABLE>
______________________________
* Incorporated by reference.
<PAGE>
EXHIBIT 10.1
AMENDED AND RESTATED
1992 PETROCORP STOCK OPTION PLAN
1. PURPOSE. The purpose of the Amended and Restated 1992 PetroCorp Stock
Option Plan (the "Plan") is to provide an additional incentive to eligible key
employees, upon whom rest major responsibilities for the successful operation,
administration, and management of PetroCorp Incorporated, a Texas corporation
(the "Company"). It is recognized that the present and potential contributions
of the key employees are important to the continued success of the Company. The
Plan is also intended to be used to retain highly qualified persons for the
successful conduct of the business of the Company. It is intended that these
purposes will be enhanced through the awarding of Stock Options.
2. DEFINITIONS. As used herein the words and phrases below shall have the
following meanings:
(a) "Board" shall mean the Board of Directors of the Company.
(b) "Change in Control" shall mean any of the events described in
Section 8.
(c) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(d) "Committee" shall mean the committee, which shall be comprised of
three members who are disinterested persons as defined under rules and
regulations promulgated under Section 16(b) of the Exchange Act and who
shall be members of the Board, appointed by the Board to administer the
Plan, which Board shall have the power to fill vacancies on the Committee
arising by resignation, death, removal or otherwise.
(e) "Common Stock" shall mean the common stock of the Company, $.01
par value per share, regardless of the series or class.
(f) "Company" shall mean PetroCorp Incorporated, a Texas corporation.
(g) "Disability" shall mean the person so affected is unable to engage
in substantial gainful activity by reason of any medically determinable
physical or mental impairment which can be expected to result in death or
which has lasted or can be expected to last for a continuous period of not
less than 12 months. The Committee's determination as to whether a
Participant has incurred a Disability shall be final and conclusive as to
all interested parties.
(h) "Eligible Employee" shall mean a key employee of the Company as
determined pursuant to Section 4.
(i) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
<PAGE>
(j) "Fair Market Value" shall mean, with respect to a share of Common
Stock on any date herein specified the amount determined pursuant to the
formula set forth in Exhibit A or if sales of Common Stock are reported on
the NASDAQ National Market System, the closing sales price for the Common
Stock as reported on such system or if the Common Stock is listed on any
national securities exchange, the closing sales price as reported by such
exchange on any relevant date for valuation, or, if there is no such sale
on such date, the applicable price as so reported on the nearest preceding
date upon which such sale took place.
(k) "Incentive Stock Option" shall mean a stock option granted by the
Committee to an Eligible Employee under the Plan which is designated by the
Committee as an Incentive Stock Option and intended to qualify as an
Incentive Stock Option under Section 422 of the Code.
(l) "Liquidation Event" shall mean the decision of the Company's
shareholders to dissolve the Company.
(m) "Nonqualified Stock Option" shall mean a stock option granted by
the Committee to an Eligible Employee under the Plan which is not
designated by the Committee as an Incentive Stock Option.
(n) "Participant" shall mean any individual who has received an award
of a Stock Option and has not exercised the Stock Option and received the
Common Stock subject to the Stock Option.
(o) "Plan" shall mean the Amended and Restated 1992 PetroCorp Stock
Option Plan, as herein set forth and as amended from time to time.
(p) "Replacement Option" shall mean a Stock Option which is granted to
replace units granted under the 1989 PetroCorp Equity Interest Plan of
PetroCorp, a Texas general partnership.
(q) "Retirement" shall mean the termination of employment from the
Company constituting retirement as determined by the Committee.
(r) "Securities Act" shall mean the Securities Act of 1933, as
amended.
(s) "Stock Option" shall mean an Incentive Stock Option or
Nonqualified Stock Option pursuant to which a Participant is eligible to
acquire Common Stock pursuant to the terms and conditions of the Plan and
the Stock Option Agreement.
(t) "Stock Option Agreement" shall mean the agreement described in
Section 7.
2
<PAGE>
(u) "Terminated For Cause" shall mean that a Participant's employment
is terminated as a result of a breach of his or her written employment
agreement, if the Participant is subject to a written employment agreement,
or if the Committee determines that such Participant is being terminated as
a result of misconduct, dishonesty, disloyalty, disobedience or action that
might reasonably injure the Company or its business interests or
reputation.
3. ADMINISTRATION OF THE PLAN. The Plan shall be administered by the
Committee appointed by the Board. The Committee shall have authority to adopt
rules and regulations for carrying out the Plan, determine the Eligible
Employees, determine the number of Stock Options, if any, to be awarded to each
Eligible Employee, determine whether a Stock Option shall be an Incentive Stock
Option or a Nonqualified Stock Option, determine the exercise price of each
Stock Option, determine the vesting period for Stock Options, determine the
series or class of Common Stock to be subject to the Stock Option, determine the
Fair Market Value, if necessary, of Common Stock, and interpret, construe, and
implement the provisions of the Plan. Decisions of the Committee shall be
binding on the Company and on all Participants and other interested parties.
The Committee shall hold its meetings at such times and places as it deems
advisable. All members of the Committee shall constitute a quorum for a
meeting. All determinations of the Committee shall be made by a majority of its
members attending the meeting. Furthermore, any decision or determination
reduced to writing and signed by a majority of the members of the Committee
shall be as effective as if it had been made by a majority vote at a meeting
properly called and held.
4. ELIGIBLE EMPLOYEES. Only employees of the Company or any subsidiary
of the Company who are members of a select group of management and highly
compensated employees are Eligible Employees. As among the Eligible Employees,
the individuals chosen to participate in the Plan shall be those Eligible
Employees as the Committee shall determine from time to time. No person will be
eligible for the grant of any Incentive Stock Option who owns or would own
immediately before the grant of such Incentive Stock Option, directly or
indirectly, stock possessing more than ten percent of the total combined voting
power of all classes of stock of the Company, a subsidiary or a parent
corporation. This restriction does not apply if, at the time such Incentive
Stock Option is granted, the Incentive Stock Option exercise price is at least
110% of the Fair Market Value on the date of grant and the Incentive Stock
Option by its terms is not exercisable after the expiration of five years from
the date of grant. For the purpose of this Section 4, the attribution rules of
Section 424(d) of the Code shall apply for the purpose of determining an
Eligible Employee's percentage ownership.
5. SHARES OF COMMON STOCK SUBJECT TO THE PLAN. 957,357 shares of Common
Stock shall be available for granting Stock Options under the Plan. The shares
of Common Stock available under the Plan may consist of shares of any series of
Common Stock provided that the rights of such shares to dividends, to
liquidation proceeds and to share in the appreciation in the value of the
Company shall be not less than the rights of any other series of Common Stock.
If any Stock Option shall expire or terminate for any reason, without being
exercised, shares of Common Stock subject to such Stock Option shall again be
available for
3
<PAGE>
grant in connection with grants of subsequent Stock Options, provided that if
any Replacement Option shall expire or terminate for any reason, without being
exercised, shares of Common Stock subject to such Replacement Option shall not
be available for grant in connection with any subsequent Stock Option.
6. STOCK OPTION TERMS.
(a) Exercise Price. The exercise price per share of Common Stock
under each Stock Option shall be determined by the Committee; provided,
however, that such exercise price shall not be less than 100 percent of the
Fair Market Value per share of such Common Stock on the date the Stock
Option is granted, as determined by the Committee, except that the exercise
price for any Replacement Option shall be $5.00 per share of Common Stock.
(b) Term. The Committee shall fix the term of each Stock Option which
shall be not more than ten years from the date of grant. In the event no
term is fixed, such term shall be ten years from the date of grant.
(c) Exercise. The Committee shall determine the time or times at
which an Stock Option may be exercised in whole or in part; provided,
however, that other than as provided in Section 8 or with respect to a
Replacement Option, in no event shall a Stock Option be exercisable before
the expiration of six months from the date of its grant or after ten years
from the date of its grant. Only the Participant or his guardian (if the
Participant becomes disabled) or in the event of his death, his legal
representative or beneficiary, may exercise Stock Options, receive shares
of Common Stock or otherwise exercise rights under the Plan.
(d) Incentive Stock Options. Anything in the Plan notwithstanding,
the aggregate Fair Market Value (determined as of the time the Incentive
Stock Option is granted) of the shares of Common Stock with respect to
which Incentive Stock Options are exercisable for the first time by any
Participant during any single calendar year (under the Plan and any other
incentive stock option plans of the Company and its subsidiaries or any
parent corporation) shall not exceed the sum of $100,000 (or such other
limits as may be required by the Code).
(e) Method of Exercise. Stock Options shall be exercised by the
delivery of written notice to the Company setting forth the number of
shares of Common Stock with respect to which the Stock Option is to be
exercised and, subject to the subsequent provisions hereof, the address to
which the certificates representing shares of the Common Stock issuable
upon the exercise of such Stock Option shall be mailed. In order to be
effective, such written notice shall be accompanied at the time of its
delivery to the Company by payment of the exercise price of such shares of
Common Stock, which payment shall be made in cash or by cashier's check,
certified check, or postal or express money order payable to the order of
the Company in an amount (in United States
4
<PAGE>
dollars) equal to the exercise price of such shares of Common Stock. Such
notice shall be delivered in person to the Secretary of the Company, or
shall be sent by registered mail, return receipt requested, to the
Secretary of the Company, in which case, delivery shall be deemed made on
the date such notice is deposited in the mail.
(f) Withholding. Whenever shares of Common Stock are to be issued or
delivered pursuant to the Plan, the Company shall require the Participant
to remit to the Company an amount sufficient to satisfy federal, state, and
local withholding tax requirements prior to the delivery of any certificate
or certificates for such shares. With respect to shares received by a
Participant pursuant to the exercise of an Incentive Stock Option, if such
Participant disposes of any such shares within two years from the date of
grant of such option or within one year after the transfer of such shares
to the Participant, the Company shall have the right to withhold from any
salary, wages or other compensation payable by the Company to the
Participant an amount sufficient to satisfy federal, state and local
withholding tax requirements attributable to such disposition.
(g) Alternative Payment for Stock. Alternatively, payment of the
exercise price may be made, in whole or in part, by delivery of shares of
Common Stock previously issued to the Participant. Unless otherwise
permitted by the Committee, payment of the exercise price with shares of
Common Stock shall be made only with shares owned by the Participant for at
least six (6) months. If payment is made in whole or in part in shares of
Common Stock owned by the Participant, then the Participant shall deliver
to the Company, in payment of the option price of the shares of Common
Stock with respect to which such Stock Option is exercised, (i)
certificates registered in the name of such Participant representing a
number of shares of Common Stock legally and beneficially owned by such
Participant, free of all liens, claims and encumbrances of every kind and
having a Fair Market Value as of the date of delivery of such notice that
is not greater than the exercise price of the shares of Common Stock with
respect to which such Stock Option is to be exercised, such certificates to
be accompanied by stock powers duly endorsed in blank by the record holder
of the shares represented by such certificates; and (ii), if the exercise
price of the shares of Common Stock with respect to which such Stock Option
is to be exercised exceeds such Fair Market Value, cash or a cashier's
check, certified check, or postal or express money order payable to the
order of the Company in an amount (in United States dollars) equal to the
amount of such excess.
The Company may extend and maintain, or arrange for the extension and
maintenance of, financing to any Participant to purchase shares pursuant to
exercise of a Stock Option and/or to pay withholding taxes on such terms as
may be approved by the Committee in its sole discretion. In considering
the terms for extension or maintenance of credit by the Company, the
Committee shall, among other factors, consider the cost to the Company of
any financing extended by the Company.
5
<PAGE>
(h) Notification with Respect to Incentive Stock Options. Any
Participant who disposes of shares of Common Stock acquired on the exercise
of an Incentive Stock Option by sale or exchange either (i) within two
years after the date of the grant of the Incentive Stock Option under which
the stock was acquired or (ii) within one year after the transfer of such
shares to such Participant pursuant to exercise shall notify the Company of
such disposition and of the amount realized and of the adjusted basis in
such shares.
7. STOCK OPTION AGREEMENT. The Stock Options awarded to an Eligible
Employee shall be evidenced by a separate written agreement (the "Stock Option
Agreement") which shall be subject to the terms and provisions of the Plan, and
which shall be signed by the Participant and by the President or a Vice-
President of the Company, other than the Participant, in the name of and on
behalf of the Company. The Stock Option Agreement shall contain such provisions
as the Committee in its discretion deems advisable. In the event of any
inconsistency or conflict between the terms of the Plan and a Stock Option
Agreement, the terms of the Plan shall govern.
8. ACCELERATION OF VESTING. In the event of a Change in Control or a
Liquidation Event, all Stock Options then outstanding shall become vested and
immediately and fully exercisable, notwithstanding any provision in the Plan or
the Stock Option Agreement.
For purposes of this Section 8, a "Change in Control" shall be deemed to
have occurred at such time as:
(a) any "person" (as such term is used in Sections 13(d) and Schedule
14(d)(2) of the Exchange Act), other than L.S. Holding Company, a Delaware
corporation (or any other entity all of the outstanding voting securities
of which are owned directly or indirectly by CIGNA Corporation, a Delaware
corporation), or Park Avenue Exploration Corporation, an Oklahoma
corporation (or any other entity all of the outstanding voting securities
of which are owned directly or indirectly by USF&G Corporation, a Maryland
corporation), is or becomes, directly or indirectly, the "beneficial owner"
(as defined in Rule 13d-3 under the Exchange Act) of securities
representing 30% or more of the combined voting power (excluding any shares
deemed beneficially owned by such person because of the power to vote or
dispose of securities being shared with any of the aforementioned entities)
of the then outstanding voting securities of the Company or any successor
of the Company for election of directors; or
(b) the shareholders of the Company approve any merger or
consolidation to which the Company is a party as a result of which the
persons who were shareholders of the Company immediately prior to the
effective date of the merger or consolidation (excluding, however, any
shares held by any party to such merger or consolidation and their
affiliates) shall have beneficial ownership of less than 50% of the
combined voting power of the outstanding voting securities of the surviving
corporation for election of
6
<PAGE>
directors of the surviving corporation immediately following the effective
date of such merger of consolidation; or
(c) the shareholders of the Company approve any sale or other
disposition of 50% or more of the assets or earning power of the Company.
With respect to any Participant for whom the acceleration of vesting of
Stock Options would result in the imposition of the excise tax imposed by
Section 4999 of the Code, the number of Stock Options for which accelerated
vesting shall be permitted shall only be that number of Stock Options the
accelerated vesting for which would not result in the imposition of the excise
tax imposed by Section 4999 of the Code. If acceleration of vesting of all the
unvested Stock Options of a Participant is not permitted by the preceding
sentence, the Participant shall designate from among his unvested Stock Options
which Stock Options shall not be subject to accelerated vesting.
9. TERMINATION OF EMPLOYMENT, DEATH, DISABILITY AND RETIREMENT.
(a) Termination of Employment. If a Participant's employment is
terminated for any reason whatsoever other than death, Disability or
Retirement, with respect to any Stock Option granted pursuant to the Plan
outstanding at the time, unless otherwise established by the Committee, no
further vesting shall occur and the Participant shall be entitled to
exercise his or her rights with respect to the portion of the Stock Option
vested as of the date of termination for a period expiring on the earlier
of (i) the expiration date set forth in the Stock Option Agreement or (ii)
thirty (30) calendar days after such termination date and, thereafter, the
Stock Option and the Participant's rights thereunder shall be completely
terminated; provided, however, that if a Participant is Terminated for
Cause, such Participant's right to exercise the vested portion of his or
her Stock Option shall terminate as of 12:01 a.m. on the date of
termination of employment.
(b) Retirement. Unless otherwise approved by the Committee, upon the
Retirement of a Participant:
(i) any nonvested portion of any outstanding Stock Option shall
immediately terminate and no further vesting shall occur; and
(ii) any vested Stock Option shall expire on the earlier of (A)
the expiration date set forth in the Stock Option Agreement with
respect to such Stock Option; or (B) the expiration of one year after
the date of Retirement.
(c) Death or Disability. Upon termination of employment as a result
of death or Disability:
(i) all outstanding grants of Stock Option shall immediately and
fully vest notwithstanding the original vesting schedule; and
7
<PAGE>
(ii) any vested Stock Option (including those vested pursuant to
Section 9(c)(i)) shall expire upon the earlier of (A) the expiration
date set forth in the Stock Option Agreement with respect to such
Stock Option or (B) the first anniversary of such termination of
employment as a result of death or Disability.
10. REQUIREMENTS OF LAW. The Company shall not be required to sell or
issue any shares of Common Stock under any Stock Option if the issuance of such
shares shall constitute a violation by the Participant or the Company of any
provision of any law, statute, or regulation of any governmental authority
whether it be Federal or State. Specifically, in connection with the Securities
Act, upon exercise of any Stock Option, unless a registration statement under
the Securities Act is in effect with respect to the shares of Common Stock
covered by such Stock Option, the Company shall not be required to issue such
shares unless the Committee has received evidence satisfactory to it to the
effect that the holder of such Stock Option is acquiring such shares of Common
Stock for investment and not with a view to the distribution thereof, and that
such shares of Common Stock may otherwise be issued without registration under
the Securities Act or State securities laws. Any determination in this
connection by the Committee shall be final, binding and conclusive. The Company
may, but shall in no event be obligated to, register any securities covered
hereby pursuant to the Securities Act. The Company shall not be obligated to
take any affirmative action in order to cause the exercise of a Stock Option, or
the issuance of shares pursuant thereto, to comply with any law or regulation of
any governmental authority.
11. CHANGE IN STOCK AND ADJUSTMENTS. Except as provided in Section 8, in
the event the outstanding shares of the Common Stock, as constituted from time
to time, shall be changed as a result of a change in capitalization of the
Company or a combination, merger, or reorganization of the Company into or with
any other corporation or any other transaction with similar effects, there then
shall be substituted (at no additional cost to any Participant) for each share
of Common Stock theretofore subject, or which may become subject, to issuance or
transfer under the Plan, the number and kind of shares of Common Stock or other
securities or other property into which each outstanding share of Common Stock
shall be changed or for which each such share shall be exchanged and the
Committee may make other equitable adjustments which it deems to be warranted at
no additional cost to any Participant but subject to any required stockholder
approval.
In the event of any change in applicable laws or any change in
circumstances which results in or would result in any dilution of the rights
granted under the Plan, or which otherwise warrants equitable adjustment because
it interferes with the intended operation of the Plan, then, if the Committee
shall, in its sole discretion, determine that such change equitably requires an
adjustment in the number or kind of shares of stock or other securities or other
property theretofore subject, or which may become subject, to issuance or
transfer under the Plan or in the terms and conditions of outstanding Stock
Options, such adjustment shall be made in accordance with such determination,
subject to any required shareholder approval. Such adjustments may include
changes with respect to (i) the aggregate number of shares that may be
8
<PAGE>
issued under the Plan, (ii) the number of shares subject to Stock Options and
(iii) the exercise price per share for outstanding Stock Options.
12. NO RIGHTS AS STOCKHOLDER. A holder of a Stock Option shall have no
rights as a stockholder with respect to any shares of Common Stock until the
issuance of a stock certificate for such shares. Except as otherwise provided
in Section 11, no adjustment shall be made for dividends (ordinary or
extraordinary, whether in cash, securities, or other property) or distributions
or other rights for which the record date is prior to the date such stock
certificate is issued.
13. NO EFFECT ON EMPLOYMENT RELATIONSHIP. Participation in the Plan shall
not confer upon any employee any right to continue in the employ of the Company
or interfere in any way with the right of the Company to terminate any
employee's employment at any time.
14. NO FUND ESTABLISHED. It is not intended that awards under this Plan
be set aside in a trust which would qualify as an employee's trust within the
meaning of sections 401 or 402 of the Internal Revenue Code of 1986, as amended,
or in any other type of trust, fund, or separate account. The rights of any
Participant and any person claiming under such Participant shall not rise above
or exceed those of an unsecured creditor of the Company.
15. NO ASSIGNMENT OR ALIENATION OF BENEFITS. Except as contemplated by
Section 6(c) of the Plan, no right or benefit under this Plan shall be subject
to anticipation, alienation, sale, assignment, pledge, encumbrance, or charge,
and any attempt to anticipate, alienate, sell, assign, pledge, encumber, or
charge the same shall be void, except for any transfer pursuant to the
Participant's will or under the laws of descent and distribution. No right or
benefit hereunder shall in any manner be liable for or subject to any debts,
contracts, liabilities, or torts of the person entitled to such benefits.
16. LIABILITY AND INDEMNIFICATION OF COMMITTEE. No member of the
Committee shall be liable for any act or omission of any other member of the
Committee or for any act or omission on his own part, including but not limited
to the exercise of any power or discretion given to him under the Plan, except
those resulting from his own gross negligence or willful misconduct. The
Company shall indemnify each present and future member of the Committee against,
and each member of the Committee shall be entitled without further act on his
part to indemnity from the Company for all expenses (including the amount of
judgments and the amount of approved settlements made with a view to the
curtailment of costs of litigation) reasonably incurred by him in connection
with or arising out of any action, suit or proceeding in which he may be
involved by reason of his being or having been a member of the Committee,
whether or not he continues to be a member of the Committee at the time of
incurring such expenses; provided, however, that such indemnity shall not
include any expense incurred by any such member of the Committee (a) in respect
of matters as to which he shall be finally adjudged in any such action, suit, or
proceeding to have been guilty of gross negligence or willful misconduct in the
performance of his duty as such member of the Committee, or (b) in respect of
matters in which any settlement is effected in an amount in excess of the amount
approved
9
<PAGE>
by the Company on the advice of its legal counsel; and provided further, that no
right of indemnification under the provisions set forth herein shall be
available to or enforceable by any such member of the Committee unless, within
30 days after institution of any such action, suit, or proceeding, he shall have
offered the Company, in writing, the opportunity to handle and defend same at
its own expense. This indemnity expressly includes any claims arising out of or
based upon the negligence of the member of the Committee. The foregoing right
of indemnification shall inure to the benefit of the heirs, executors, or
administrators of each such member of the Committee and shall be in addition to
all other rights to which such member of the Committee may be entitled as a
matter of law, contract, or otherwise.
17. GENDER, TENSE AND HEADINGS. Whenever the context requires such, words
of the masculine gender used herein shall include the feminine and neuter, and
words used in the singular shall include the plural. Section headings as used
herein are inserted solely for convenience and reference and constitute no part
of the construction of this Plan.
18. AMENDMENT AND TERMINATION. The Plan may be amended or terminated at
any time by the Board. The Plan, however, shall not be amended, without prior
approval of the holders of at least a majority of the outstanding shares of
Common Stock, (a) to materially increase the number of shares which may be
issued or transferred to Eligible Employees under the Plan, (b) to materially
modify the eligibility requirements of the Plan, (c) to materially increase the
benefits accruing to participants under the Plan or (d) to cause the Plan to not
comply with the rules and regulations promulgated under Section 16(b) of the
Exchange Act. No amendment or termination may adversely affect any vested right
of a Participant without the written consent of such Participant.
19. NO GUARANTEE OF TAX CONSEQUENCES. Neither the Company nor the
Committee makes any commitment or guarantee that any federal, state or local tax
treatment will apply or be available to any person participating or eligible to
participate hereunder.
20. SEVERABILITY. In the event that any provision of this Plan shall be
held illegal, invalid or unenforceable for any reason, such provision shall be
fully severable, but shall not affect the remaining provisions of the Plan, and
the Plan shall be construed and enforced as if the illegal, invalid, or
unenforceable provision had never been included herein.
21. GOVERNING LAW. The provisions of the Plan shall be construed,
administered, and governed by the laws of the State of Texas, without giving
effect to principles of conflicts of laws, and, to the extent applicable, the
laws of the United States.
22. EFFECTIVE DATE. The Plan shall be effective as of October 1, 1992 and
shall continue in effect until the expiration of its term or its earlier
termination by the Board pursuant to Section 18.
10
<PAGE>
EXHIBIT A
VALUATION FORMULA
-----------------
FOR
---
FAIR MARKET VALUE
-----------------
With respect to the determination of the Fair Market Value of any Common
Stock, the Fair Market Value shall be determined with reference to the Company's
net assets on the December 31 immediately preceding the determination date
divided by the number of shares of Common Stock outstanding on such December 31.
The value of the Company's net assets shall be computed pursuant to the
following formula:
1) Oil and gas properties shall be valued at the value determined in
accordance with Regulation S-X promulgated by the Securities and Exchange
Commission, as in effect on the effective date of the Plan ("SEC Value") and
then adjusted to reflect the multiple at which the shares of stock of publicly
traded energy companies similar to the Company sell relative to the SEC Value of
their assets, provided the adjustment upward or downward shall not exceed 25% of
the SEC value. The determination of the Committee as to this adjustment shall
be final and binding on the Company, the Participant and all other interested
parties.
2) Marketable securities shall be valued at their fair market value.
3) All other assets and liabilities shall be reflected at their net book
value as determined in accordance with generally accepted accounting principles.
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996, AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> JUL-01-1996 JAN-01-1996
<PERIOD-END> SEP-30-1996 SEP-30-1996
<CASH> 27,707 27,707
<SECURITIES> 0 0
<RECEIVABLES> 4,809 4,809
<ALLOWANCES> (50) (50)
<INVENTORY> 0 0
<CURRENT-ASSETS> 32,801 32,801
<PP&E> 170,283 170,283
<DEPRECIATION> (84,180) (84,180)
<TOTAL-ASSETS> 119,209 119,209
<CURRENT-LIABILITIES> 17,752 17,752
<BONDS> 0 0
0 0
0 0
<COMMON> 86 86
<OTHER-SE> 63,878 63,878
<TOTAL-LIABILITY-AND-EQUITY> 119,209 119,209
<SALES> 6,947 20,761
<TOTAL-REVENUES> 7,306 22,225
<CGS> 0 0
<TOTAL-COSTS> 5,769 17,767
<OTHER-EXPENSES> 10 17
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 795 2,595
<INCOME-PRETAX> 984 3,531
<INCOME-TAX> 349 1,127
<INCOME-CONTINUING> 984 3,531
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 635 2,404
<EPS-PRIMARY> .07 .28
<EPS-DILUTED> .07 .28
</TABLE>
