1
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 (Fee Required)
For the fiscal year ended December 31, 1995
[ ] Transition Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934 (No Fee Required)
For the transition period from ______ to ______.
Commission File Number: 0 - 13305
PARALLEL PETROLEUM CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware 75-1971716
(State or Other Jurisdiction of (I.R.S.Employer
Incorporation or Organization) Identification No.)
110 North Marienfeld Street
One Marienfeld Place, Suite 465
Midland, Texas 79701
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, Including Area Code: (915) 684-3727
Securities Registered Pursuant to Section 12(b) of the Exchange Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Common Stock Purchase Warrants
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the]
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes x No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates of
the Registrant as of March 1, 1996 was approximately $28,404,000, based on the
last sale price of the Company's Common Stock on the same date.
At March 1, 1996 there were 14,854,108 shares of Common Stock
outstanding.
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FORM 10-K
PARALLEL PETROLEUM CORPORATION
TABLE OF CONTENTS
Item No. Page
PART I
Item 1. Business . . . . . . ... . . . . . . . . . . . . . . . . . 3
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . 17
Item 4. Submission of Matters to a Vote
of Security Holders . . . . . .. . . . . . . . . . . . . 17
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters . . . . .. . . . . . . . . . 18
Item 6. Selected Financial Data. . . . . . . . . . . . . . . . . . 19
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . .. . . . . . . . 20
Item 8. Financial Statements and Supplementary Data. . . . . . . . 26
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure. . . 26
PART III
Item 10. Directors and Executive Officers of the Registrant . . . . 27
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . 30
Item 12. Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . . . . 37
Item 13. Certain Relationships and Related Transactions . . . . . . 39
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K . . . . . .. . . . . . . . . . . . . . . . . 42
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PART I
ITEM 1. BUSINESS
General
Parallel Petroleum Corporation (the "Company"), a Delaware corporation, is
primarily engaged in, and its only industry segment is, the acquisition of, and
the exploration for, development, production and sale of, crude oil and natural
gas. The Company's business activities are carried out primarily in Texas and,
to a lesser extent, in Oklahoma. The Company's activities in Texas are focused
in the onshore Gulf Coast area of Jackson and Wharton Counties, Texas, and in
the Permian Basin of West Texas. The Company's activities in Oklahoma are
conducted in Custer County, Oklahoma.
During 1995, the Company participated in the drilling of 26 gross (3.9 net)
exploratory wells, of which 19 gross (2.71 net) wells were productive and 7
gross (1.19 net) were dry holes.
At December 31, 1995, the Company had net proved reserves of approximately
26.1 billion cubic feet of natural gas and 1.5 million barrels of oil.
Approximately 74% of the Company's proved reserves are natural gas and
approximately 81% are proved developed.
In conducting its oil and gas activities, the Company continually screens,
reviews and evaluates potential producing property acquisitions and undeveloped
leases and prospects presented by independent landmen, geologists and engineers,
as well as properties available for purchase from major oil companies and other
independent oil and gas operators. If the review of a producing property or
undeveloped lease or prospect indicates that it may be geologically and
economically viable, the Company then attempts to acquire a significant working
interest in the property which would enable the Company to serve as operator.
To reduce the Company's financial exposure in any one prospect and to enable it
to participate in an increased number of prospects, the Company typically enters
into co-ownership arrangements with third parties under standard industry form
operating agreements. Such arrangements are common in the industry and enable
the Company to share the drilling and related costs and dry-hole risks with
other participants which, in turn, also enables the Company to participate in
the drilling of more wells. From time to time, the Company may sell prospects
to third parties or farm-out prospects, retaining an interest in revenues from
such prospects.
Strategy
The Company seeks to continue to increase its reserves and production
through a strategy that emphasizes:
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* Reserve growth through exploratory drilling
* Disciplined use of three-dimensional ("3-D") seismic and other advanced
exploration technology
* Acquisition of producing properties which are candidates for enhancement
and/or exploration
* Control of costs
Exploration. The Company seeks to increase its reserves and production
through exploration. The Company primarily seeks exploration prospects which
(1) have known geological and reservoir characteristics, (2) are located near
existing wells that can be correlated with seismic data for the prospect and (3)
could have a meaningful impact on the Company's reserves.
Technology. The Company uses advanced technology in its exploration and
development activities in order to reduce risks, lower costs and more
efficiently produce gas and oil from its properties. The Company evaluates many
of its exploratory prospects with 3-D seismic surveys. The Company believes
that the availability of 3-D seismic surveys at a reasonable cost makes its use
in exploration and development activities attractive from a risk management
perspective in certain areas and that 3-D seismic surveys provide substantially
more accurate and comprehensive information for the evaluation of drilling
prospects than 2-D seismic and traditional evaluation methods. In evaluating
certain of its exploratory prospects, the Company also uses amplitude versus
offset ("AVO") technology. The Company believes that its use of 3-D seismic and
AVO exploration technology provides it with a competitive advantage over other
companies that do not regularly use such technology by increasing the Company's
likelihood of exploration success. Nevertheless, in evaluating exploratory
prospects in areas in which the Company believes that using 3-D seismic is not
advantageous, the Company uses traditional evaluation methods.
The Company retains experienced third-party consultants or participates with
experienced joint working interest owners to acquire, process and interpret 3-D
seismic surveys. When 3-D surveys are to be conducted over prospects located
in the Permian Basin, the Company prefers to serve as geophysical operator of
such projects because of the Company's experience in using 3-D seismic
technology in this area. The Company attempts to ensure the integrity of the
3-D seismic analysis in each of its projects by emphasizing quality control
throughout the data acquisition, processing and interpretation. Whenever
possible, the Company also attempts to correlate or "model" the
interpretations of 3-D seismic surveys with wells previously drilled on or near
the prospect being evaluated.
Acquisitions. The Company supplements its exploration efforts with
acquisitions of producing properties. The Company seeks to acquire producing
properties that either are underperforming relative to their potential or are
candidates for 3-D seismic analysis. The Company seeks to acquire working
interests in producing properties for which it can act as operator to allow the
Company to control decisions regarding operations. The Company then seeks to
reduce operating costs and increase reserves and production. Enhancement
activities include recompletions of existing wellbores, restimulations of
producing reservoirs, identifying potential infill drilling locations as well
as mechanical improvements to surface facilities and downhole equipment. The
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Company may also renegotiate gas purchase contracts or reconfigure gathering
lines. In connection with its enhancement operations, the Company routinely
monitors the performance and economics of its gas and oil properties and, when
necessary, takes corrective action, such as the shutting-in of temporarily
uneconomic properties, the plugging of wells deemed to be permanently impaired
or depleted, the termination of gas and oil leases deemed uneconomic in the then
existing operating conditions and/or the sale of properties to third parties.
The Company has focused its efforts to acquire producing properties in the
Permian Basin of Texas, where it has extensive expertise.
Control of Costs. Throughout its operations, the Company strives to
maintain low general and administrative expenses. The geographic focus of the
Company's operations allows it to manage its assets with a small number of
employees. This base of operations enables the Company to add exploratory
prospects and acquire producing properties at relatively low incremental costs.
The Company also pursues cost savings through the use of outside geological and
geophysical consultants for its exploration and development efforts and uses
contractors for much of its field operations.
Principal Activities in 1995
During 1995, the Company's principal exploration activities were focused in
the onshore Gulf Coast area of Jackson and Wharton Counties in south Texas. The
Company participated in the drilling of 24 wells in this area in 1995, of which
5 were dry holes and 19 are producing. Under its agreements with the operator
and other third party participants in the Yegua and Frio gas trends in Jackson
and Wharton Counties, the Company participates in the acquisition and ownership
of (i) 3-D seismic surveys, (ii) options to acquire gas and oil leasehold
interests and (iii) working interests in gas and oil leases determined to have
drillable features. Approximately 92% of 1995 capital expenditures, or $3.5
million, was expended in the south Texas operating area. Since the Company's
initial investment in this area in 1994, the Company has participated in the
acquisition and ownership of three-dimensional seismic survey data covering a
total of approximately 97,000 gross acres. While seismic operations are
conducted on large blocks of acreage, the Company's actual working interest
ownership in such acreage is less than the total area surveyed. At March 1,
1996, the Company owned non-operated working interests ranging from 11.8% to 20%
in approximately 15,070 gross acres in Jackson and Wharton Counties. The Company
has participated in the drilling of a total of 34 wells in the Gulf Coast area,
of which 26 are producing and 8 of which have been dry holes. Of the 26
producing wells, 13 have been drilled to the Frio formation at a depth of
approximately 4,000 feet and 13 have been drilled to the Yegua formation at a
depth of approximately 9,000 feet. At March 1, 1996, the 26 producing wells in
which the Company owned an interest were producing, net to the Company's
interests, approximately 6,000 Mcf of natural gas per day and approximately 300
barrels of oil and condensate per day.
Substantially all of the lands covered by the exploration agreements are
subject to "area of mutual interest" provisions which, generally, means an
agreed upon area of land, varying in areal extent, included and described in an
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oil and gas exploration agreement which participants agree will be subject to
rights of first refusal as among themselves, such that any participant acquiring
any minerals, royalty, overriding royalty, oil and gas leasehold estates or
similar interests in the designated area, is obligated to offer the other
participants the opportunity to purchase their agreed upon percentage share of
the interest so acquired on the same basis and cost as purchased by the
acquiring participant. If the other participants, after a specific time
period, elect not to acquire their pro-rata share, the acquiring participant is
typically then free to retain or sell such interests.
Acquisition and Enhancement Activities
The Company continually screens, reviews and evaluates potential producing
property acquisitions and, when prospects fall within the Company's acquisition
parameters, will offer to purchase specific properties.
Although the Company did not purchase any significant producing properties
in 1995, the Company continued its production and enhancement activities on
properties acquired in prior years, including the Page Field in Schleicher
County, Texas, the West World Strawn Field in Crockett County, Texas and the
Hulldale Penn Reef Field in Schleicher County, Texas.
Page Field - The Company owns an 89% working interest in approximately 4,500
gross (4,005 net) acres in the Page Field of Schleicher County, Texas. When the
Page Field was acquired by the Company in 1989, twenty-one wells were producing
approximately 300 thousand cubic feet ("Mcf") of natural gas and 30 barrels
("Bbls") of oil per day. The Company's remedial and enhancement activities in
the Page Field have resulted in gross production rates at December 31, 1995 of
approximately 1,100 MMcf of natural gas and 30 Bbls of oil per day.
West World Strawn Field - The Company owns an 87.5% working interest in
approximately 5,538 gross (4,846 net) acres in the West World Strawn Field of
Crockett County, Texas. The West World Field was producing approximately 160
Mcf of natural gas and 20 Bbls of oil per day when the Company purchased its
initial interest. Immediately after the acquisition, the Company renegotiated
its gas sales contract and commenced remedial and production enhancement work,
including the installation of additional compression equipment. At December 31,
1995, the gross production in the West World Strawn Field was approximately 700
Mcf of natural gas and 50 Bbls of oil per day.
Hulldale Penn Reef Field - The Company owns an 84% working interest in
approximately 7,493 gross (6,294 net) acres in the Hulldale Penn Reef Field of
Schleicher County, Texas. At December 31, 1995, the gross production in the
field was approximately 180 Mcf of natural gas and 60 Bbls of oil per day,
compared to 100 Mcf of natural gas and 50 Bbls of oil per day at the time of the
Company's acquisition.
North Nena Lucia Unit - The Company owns a 35.46% non-operated working
interest in approximately 6,440 gross (2,284 net) acres in the North Nena Lucia
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Unit located in Nolan County, Texas. At December 31, 1995, the gross production
in the field was approximately 1,100 Mcf of natural gas and 165 Bbls of oil per
day.
Chenot Gas Field - The Company owns a 97.5% working interest in approxi-
mately gross (624 net) acres and a 70% working interest (60% net revenue
interest) in approximately 400 gross (280 net) acres in the Chenot Gas Field in
Pecos County, Texas. When the Company acquired its interests, gross production
from the three wells totalled approximately 450 Mcf of natural gas per day,
which, through the Company's efforts, had increased to approximately 600 Mcf of
natural gas per day as of December 31, 1995. The Company recently conducted a
3-D seismic survey on the property which is currently being interpreted.
Texas Panhandle Properties - The Company owns working interests in 15
producing wells located on 7,100 gross (1,269 net) acres in Hemphill County,
Texas; 2 producing wells located on 1,133 gross (381 net) acres in Ochiltree
County, Texas; 1 producing well located on 640 gross (86 net) acres in Roberts
County, Texas; and 1 producing well located on 640 gross (160 net) acres in
Wheeler County, Texas.
Drilling and Acquisition Costs
The following table reflects costs incurred by the Company in its gas and
oil property acquisition, and exploration and development activities for each
of the years in the five-year period ended December 31, 1995.
Year Ended December 31,
----------------------------------------------------
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
(In thousands)
Transfer from
undeveloped leases
held for sale $ 197 $ 339 $ 705 $ 365 $ 203
Proved property
acquisition costs 372 238 546 1,385 1,507
Unproved property
acquisition costs 841 2,542 720 - -
Exploration 1,519 3,400 2,225 280 -
Development 889 1,226 1,173 1,881 1,654
------ ------ ------ ------ ------
$3,818 $7,745 $5,369 $3,911 $3,364
====== ====== ====== ====== ======
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Except for its oil and gas leases with third parties, the Company has no
material patents, licenses, franchises, or concessions which it considers
significant to its oil and gas operations.
The nature of the Company's business is such that it does not maintain or
require a "backlog" of products, customer orders, or inventory.
The Company's oil and gas operations are not subject to renegotiation of
profits or termination of contracts at the election of the federal government.
The Company is not currently a party to any litigation, nor is it aware of
any threatened litigation. The Company has not been a party to any bankruptcy,
receivership, reorganization, adjustment, or similar proceeding.
The Company was originally incorporated under the laws of the State of Texas
on Novmber 26, 1979. On December 18, 1984, the Company was reincorporated in
the State of Delaware.
The executive offices of the Company are located at One Marienfeld Place,
Suite 465, Midland, Texas 79701 and its telephone number at that address is
(915) 684-3727.
Industry Conditions
During the past few years there has been an excess supply of, and reduced
demand for, crude oil worldwide and natural gas in the United States. This
excess supply has placed heavy pressures on prices for oil and gas and has
reduced marketability, particularly for gas. There is substantial uncertainty
regarding future prices and, accordingly, there can be no assurance that prices
will not decline in the future. Although the Company believes that current
economic conditions are favorable for acquiring producing oil and gas properties
and for development drilling, no assurance can be given that these conditions
will continue or that prices ultimately realized by the Company for sales of
its oil and gas will be favorable in relation to drilling and related expenses.
Seasonal Nature of Business
Generally, the Company's business activities are not seasonal in nature.
However, weather conditions affect the demand for natural gas and can hinder
drilling activities. Demand for natural gas is typically higher during winter
months.
Risk of Company Operations
Oil and gas drilling and production operations are highly speculative and
involve a high degree of risk, and are marked by unprofitable efforts, not only
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from dry holes but from wells that, though productive, do not produce oil or gas
in sufficient quantities to return a profit on the amounts expended. Further,
the success of the Company's operations depends, in part, upon the ability of
its management and technical personnel. Accordingly, there is no assurance that
the Company's oil and gas drilling or acquisition activities will be successful,
that any production will be obtained, or that any such production, if obtained,
will be profitable.
The Company's operations are subject to all of the operating hazards and
risks normally incident to drilling for and producing oil and gas, such as
encountering unusual or unexpected formations and pressures, blowouts,
environmental pollution and personal injury. The Company maintains general
liability insurance, and obtains insurance against blowouts on a well-by-well
basis, but it has not obtained insurance against such operating hazards as
pollution risks. If the Company sustains an uninsured loss or liability, its
ability to operate may be materially adversely affected.
Executive Officers
At March 1, 1996, the executive officers of the Company were Thomas R.
Cambridge and Larry C. Oldham.
Mr. Cambridge, age 60, is the Chief Executive Officer and Chairman of the
Board of Directors of the Company. Mr. Cambridge is an independent petroleum
geologist engaged in the exploration for, development and production of oil and
natural gas. From 1970 until 1990, such activities were carried out primarily
through Cambridge & Nail Partnership, a Texas general partnership. Since 1990,
such activities have been carried out through Cambridge Production, Inc., a
Texas corporation. Mr. Cambridge has served as a Director of the Company since
February, 1985 and as President since October, 1985. He received a Bachelors
degree and a Masters of Science degree in Geology from the University of
Nebraska in 1958 and 1960, respectively.
Mr. Oldham, age 42, is President, Treasurer, Director and founder of the
Company. Mr. Oldham has been employed by the Company for in excess of the past
five years. He received a Bachelor of Business Administration degree from West
Texas State University in 1975. Mr. Oldham is a member of the American
Institute of Certified Public Accountants and a member of the Permian Basin
Landman's Association.
The term of both officers expires at the Company's annual meeting of
directors or such other time as their respective successors are duly elected
and qualified. There is no family relationship between the executive officers
of the Company.
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Employees
At March 1, 1996, the Company had five full time employees. The Company
also retains, from time to time, independent land, geological, geophysical and
engineering consultants and expects to continue to do so in the future. Mr.
Thomas R. Cambridge, the Chief Executive Officer and Chairman of the Board of
Directors of the Company, serves the Company in the capacity of a consultant,
and not as a full-time employee. Additionally, the Company retains seven
contract pumpers on a month-to-month basis. The Company considers its employee
relations to be satisfactory. None of the Company's employees are represented
by a union. The Company has never experienced work stoppages or strikes as a
result of labor disputes.
Wells Drilled
Information concerning the number of gross and net wells drilled by the
Company during the three years ended December 31, 1995 is as follows:
Exploratory Wells(1) Development Wells(2)
--------------------------------- ---------------------------------
Productive Dry Productive Dry
-------------- -------------- -------------- --------------
Gross Net Gross Net Gross Net Gross Net
----- --- ----- --- ----- --- ----- ---
1995 19.0 2.71 7.0 1.19 2.0 .40 - -
1994 6.0 1.74 6.0 1.99 1.0 .81 - -
1993 5.0 3.05 3.0 .65 - - - -
__________________
(1) An exploratory well is 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.
(2) A development well is a well drilled within the proved area of an oil or gas
reservoir to the depth of a stratigraphic horizon known to be productive.
All of the Company's drilling is performed on a contract basis by third-
party drilling contractors. The Company owns no drilling equipment.
At March 1, 1996, the Company was participating in the drilling of one gross
(.20 net) gas well in Wharton County, Texas.
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Volumes, Prices and Lifting Costs
The following table sets forth certain information regarding volumes of the
Company's net production of natural gas and oil, the average sales prices per
Bbl of oil and per Mcf of natural gas produced, and the average production
(lifting) cost per equivalent barrel of oil ("EBO") for the three years ended
December 31, 1995.
Year Ended December 31,
---------------------------------------------
1995 1994 1993
---------- ---------- ----------
Net Production:
Oil (Bbls) 132,579 149,308 106,312
Gas (Mcf) 1,616,105 1,391,846 888,577
Average Sales Price:
Oil (per Bbl) $17.26 $15.81 $16.86
Gas (per Mcf) $ 1.50 $ 1.68 $ 1.86
Average Production
Cost per EBO(1) $ 3.65 $ 3.74 $ 5.13
- --------------------
(1) An EBO means one barrel of oil equivalent using the ratio of six Mcf of gas
to one barrel of oil.
The Company's 1995 gas sales represented approximately 52% of the Company's
combined gas and oil sales for the year ended December 31, 1995.
Markets and Customers
Substantially all of the Company's oil and gas production is sold at the
well site on an "as produced" basis. During the year ended December 31, 1995,
Enron Oil Transportation & Trading Company, Cox & Perkins Exploration, Inc.,
Texaco, Inc. and Patterson Petroleum Corporation, purchasers of the Company's
oil and natural gas, accounted for 28%, 16%, 10% and 10%, respectively, of the
Company's operating revenues for such period. The Company believes the loss of
any one of such purchasers would not materially affect its ability to sell oil
or natural gas, due to the availability of other purchasers in the Company's
areas of operations.
Office Facilities
The Company leases its home office facilities in Midland, Texas, which
consists of approximately 4,673 square feet of office space, at a rental rate of
$2,725 per month. The lease agreement expires by its own terms in June, 1999.
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Competition
The principal means of competition for the acquisition of oil and gas
properties are the amount and terms of the consideration offered. The oil and
gas industry is highly competitive, particularly with respect to the acquisition
of development prospects and producing properties. Competitors include the
major oil companies, independent oil and gas concerns and individual producers
and operators, many of which have financial resources, staffs and facilities
substantially greater than those of the Company.
The principal raw materials and resources necessary for the exploration for,
and the acquisition, development, production and sale of, crude oil and natural
gas are leasehold prospects under which oil and gas reserves may be discovered,
drilling rigs and related equipment to explore for such reserves, and
knowledgeable personnel to conduct all phases of oil and gas operations. The
Company must compete for such raw materials and resources with both major
companies and independent oil operators. Although the Company believes its
current inventories of raw materials are adequate to preclude any significant
disruption of operations in the immediate future, the continued availability of
such materials and resources to the Company cannot be assured. The nature of
the Company's business is such that it does not maintain or require a "backlog"
of products, customer orders or inventory.
Regulation
Regulation of Oil and Gas Production. The Company's operations are affected
in various degrees by political developments, federal and state laws and
regulations. In particular, oil and gas production operations and economics are
affected by price controls, tax and other laws relating to the petroleum
industry, by changes in such laws and by changing administrative regulations and
the interpretation and application of such rules and regulations.
Legislation affecting the oil and gas industry is under constant review for
amendment or expansion. Numerous departments and agencies, both federal and
state, are authorized by statute to issue and have issued rules and regulations
binding on the oil and gas industry and its individual members, some of which
carry substantial penalties for failure to comply. The regulatory burden on the
oil and gas industry increases the Company's cost of doing business and,
consequently, affects its profitability.
Price Controls on Liquid Hydrocarbons. Sales of oil, condensate and gas
liquids by the Company are not regulated and may be made at uncontrolled market
prices.
Federal Regulation of Sales of Natural Gas. Historically, the transporta-
tion and sale for resale of natural gas in interstate commerce have been
regulated pursuant to the Natural Gas Act of 1938 (the "NGA") and the Natural
Gas Policy Act of 1978 (the "NGPA"). These statutes are administered by the
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Federal Energy Regulatory Commission ("FERC"). Several major regulatory changes
have been implemented by the FERC that have affected the economics of natural
gas production, transportation and sales. In the past, the federal government
has regulated the prices at which oil and gas could be sold. However, as a
result of the enactment of the Natural Gas Wellhead Decontrol Act of 1989 (the
"Decontrol Act"), all price controls under the NGPA and all certificate and
abandonment requirements applicable to producers under the NGA were phased out
effective as of January 1, 1993.
The FERC continues to promulgate revisions to various aspects of the rules
and regulations affecting those segments of the natural gas industry which
remain subject to the FERC's jurisdiction. The stated purpose of many of these
regulatory changes is to promote competition among the various sectors of the
gas industry. Beginning in 1992, FERC issued Order Nos. 636, 636-A and 636-B
("Order No. 636") for the purpose of restructuring the gas pipeline sales and
transportation services in the United States. These rules require interstate
pipelines to "unbundle" transportation and sales services by separately stating
the price of each service and by providing customers only the particular service
desired, without regard to the source for purchase of the gas. The rule also
requires pipelines to (i) provide non-discriminatory "no-notice" service
allowing firm commitment shippers to receive delivery of gas on demand up to
certain limits without penalties, (ii) establish a basis for release and
reallocation of capacity, and (iii) provide non-discriminatory access to
capacity by firm transportation shippers on a downstream pipeline. Although
Order No. 636 does not directly regulate the Company's activities, the intended
purpose of Order No. 636 is to increase competition in the natural gas industry.
The impact of these FERC Orders significantly alters the traditional way natural
gas has been purchased, transported and sold. However, because the restructuring
requirements that emerge from the administrative and judicial review process may
vary significantly from those presently in effect, and because implementation of
the restructuring may vary by pipeline, it is not possible to predict the
ultimate effects of the restructuring on the Company.
In addition, many aspects of these regulatory developments have not become
final but are still pending judicial and FERC final decisions.
The price at which the Company's natural gas may be sold will continue to be
affected by a number of factors, including the price of alternate fuels such as
oil and coal and competition among various natural gas producers and marketer.
State Regulation. Oil and gas operations are subject to a wide variety of
state regulations. Administrative agencies in such jurisdictions may promulgate
and enforce rules and regulations relating to virtually all aspects of the oil
and gas business.
The State of Texas and many other states require permits for drilling
operations, drilling bonds and reports concerning operations and impose other
requirements relating to the exploration and production of oil and gas. Such
states also have statutes or regulations addressing conversation matters,
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including provisions for the unitization or pooling of oil and gas properties,
the establishment of maximum rates of production from oil and gas wells and the
regulation of spacing, plugging and abandonment of such wells. The statutes and
regulations of the State of Texas and certain other states limit the rate at
which oil and gas can be produced from the Company's properties.
Environmental Regulation. Various federal, state and local laws and
regulations covering the discharge of materials into the environment, or
otherwise relating to the protection of the environment, affect the Company's
operations and costs as a result of their effect on oil and gas exploration,
development and production operations. At present, substantially all the
Company's production of oil, condensate and gas is in states having conservation
laws and regulations. It is not anticipated that the Company will be required
in the near future to expend amounts that are material in relation to its total
capital expenditures program by reason of environmental laws and regulations,
but inasmuch as such laws and regulations are frequently changed, the Company is
unable to predict the ultimate cost of compliance. The Company is able to
control directly the operations of only those wells for which it acts as
operator. Notwithstanding the Company's lack of control over wells operated by
others, the failure of the operator to comply with applicable environmental
regulations may, in certain circumstances, be attributed to the Company. The
Company believes that the oil and gas industry may experience increasing
liabilities and risks under the Comprehensive Environmental Response,
Compensation and Liability Act, as well as other federal, state and local
environmental laws, as a result of increased enforcement of environmental laws
by various regulatory agencies. As an "owner" or "operator" of property where
hazardous materials may exist or be present, the Company, like all others
engaged in the petroleum industry, could be liable for fines and/or "clean-up"
costs, regardless of whether the Company was responsible for the release of any
hazardous substances. Although the Company has not been subject to the
imposition of "clean-up" orders by the government, the potential for sudden and
unpredictable liability attributable to the Company and the petroleum industry
as a whole to environmental problems is a consideration of increasing importance
to the Company and the petroleum industry as a whole.
15
ITEM 2. PROPERTIES
General
The principal properties of the Company consist of developed and undeveloped
gas and oil leases and the gas and oil reserves associated with such leases.
Generally, the terms of developed gas and oil leaseholds are continuing and such
leases remain in force by virtue of, and so long as, production from lands under
lease is maintained. Undeveloped gas and oil leaseholds are generally for a
primary term, such as five or ten years, subject to maintenance with the payment
of specified minimum delay rentals or extension by production.
Producing Wells and Acreage
The following table summarizes the gross and net producing gas and oil wells
and the gross and net developed and undeveloped acreage in which the Company
owned an interest at December 31, 1995. Excluded is acreage in which the
Company's interest is limited to royalty or similar interests.
Producing Wells Acreage
------------------------------- --------------------------------
Oil Gas Developed Undeveloped
-------------- -------------- --------------- ---------------
Gross Net(1) Gross Net(1) Gross Net(2) Gross Net(2)
New Mexico - - - - - - 11,357 354
Texas 93 59.64 56 20.17 42,062 24,088 32,444 4,700
Oklahoma - - 1 .25 320 80 - -
--- ----- --- ----- ------ ------ ------ -----
Total 93 59.64 57 20.42 42,382 24,168 43,801 5,054
=== ===== === ===== ====== ====== ====== =====
- --------------
(1) Net wells are computed by multiplying the number of gross wells by the
Company's working interest in the gross wells.
(2) Net acres are computed by multiplying the number of gross acres by the
Company's working interest in the gross acres.
At December 31, 1995, the Company was serving as operator of 85 wells in
which it owned interests. Approximately 35% of the discounted present value of
the Company's gas and oil reserves at December 31, 1995 is attributable to wells
operated by the Company. As operator, the Company supervises the drilling and
completion of wells and production therefrom and the further development of
surrounding properties. The operator of a well has significant control over its
location and the timing of its drilling. In addition, the operator of a well
receives fees from other working interest owners as reimbursement for the
general and administrative expenses attendant to the operation of the wells.
16
Title to Properties
As is customary in the oil and gas industry, the Company makes only a
cursory review of title to undeveloped gas and oil leases at the time they are
acquired by the Company. Such reviews, while consistent with industry practices,
are inherently incomplete. It generally is not feasible to review in depth
every individual property that the Company acquires, especially in the case of
producing property acquisitions covering a large number of leases. Ordinarily,
when the Company acquires producing properties, it will focus its review efforts
on the higher-valued properties and will sample the remainder. However, even an
in-depth review of all properties and records may not necessarily reveal
existing or potential problems nor will it permit a buyer to become sufficiently
familiar with the properties to assess fully their deficiencies and
capabilities. In the case of producing property acquisitions, inspections may
not always be performed on every well, and environmental problems, such as
ground water contamination, are not necessarily observable even when an
inspection is undertaken. In the case of undeveloped leases or prospects
acquired by the Company, the Company will, however, before drilling is
commenced, cause a thorough title search to be conducted, and any material
defects in title are remedied prior to the time actual drilling of a well on the
lease is commenced. The Company believes that it has good title to its oil and
gas properties, some of which are subject to immaterial encumbrances, easements
and restrictions. The oil and gas properties owned by the Company are also
typically subject to royalty and other similar non-cost bearing interests
customary in the industry. The Company does not believe that any of these
encumbrances or burdens will materially affect the Company's ownership or use of
its properties.
Gas and Oil Reserves
Information concerning the Company's estimated proved gas and oil reserves
at December 31, 1995 is included in Note 13 of the notes to financial statements
contained herein under Item 8. - Financial Statements and Supplementary Data.
During January and February, 1996, the Company participated in the
completion of three gas wells in the Yegua gas trend of Wharton County, Texas.
The Company owns a 20% working interest in each well. Although the Company is
presently unable to accurately estimate the gas reserves attributable to these
three wells, primarily as a result of their limited production history and
performance, the Company believes, based on initial production tests and other
available data, that these three wells could significantly increase the
estimates of the Company's oil and gas reserves as reported at December 31,
1995. No other major discovery or other favorable or adverse event has occurred
since January 1, 1996 which is believed to have caused a significant change in
the estimated proved oil and gas reserves of the Company as reported at December
31, 1995.
Estimates of the Company's proved reserves at December 31, 1995, 1994 and
1993 were made by Joe C. Neal & Associates, Midland, Texas, independent
17
petroleum engineers, in accordance with guidelines established by the Securities
and Exchange Commission. There are numerous uncertainties inherent in estimating
natural gas and oil reserves and their estimated values, including many factors
beyond the control of the producer. The reserve data set forth herein represent
only estimates. Reservoir engineering is a subjective process of estimating
underground accumulations of natural gas and oil that cannot be measured in an
exact manner. The accuracy of any reserve estimate is a function of the quality
of available data and of engineering and geological interpretation and judgment.
As a result, estimates of different engineers often vary. In addition,
estimates of reserves are subject to revision by the results of drilling,
testing and production subsequent to the date of such estimates.
Accordingly, reserve estimates are often different from the quantities of
natural gas and oil that are ultimately recovered. The meaningfulness of
such estimates is highly dependent upon the accuracy of the assumptions upon
which they were based.
In general, the volume of production from natural gas and oil properties
decline as reserves are depleted. Except to the extent the Company acquires
properties containing proved reserves or conducts successful exploration and
development activities, or both, the proved reserves of the Company will decline
as reserves are produced. The Company's future natural gas and oil production
is therefore highly dependent upon its level of success in acquiring or finding
additional reserves.
The Company has no reserves outside the United States.
The Company's gas and oil reserves and production are not subject to any
long-term supply or similar agreements with foreign governments or authorities.
The Company's estimate of reserves has not been filed with or included in
reports to any federal agency other than the Securities and Exchange Commission.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The registrant did not submit any matter to a vote of its security holders
during the fourth quarter of its fiscal year ended December 31, 1995.
18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock commenced trading on the Nasdaq National Market
System on June 1, 1994 and, prior to that time, was traded on the Nasdaq Small
Cap Market. The Common Stock trades under the symbol "PLLL." The following
table sets forth, on a per share basis for the periods indicated, the high and
low bid quotations for the Common Stock prior to June 1, 1994 and the high and
low last reported sales prices thereafter as reported by Nasdaq. The bid
quotations represent inter-dealer prices, without retail mark-up, mark-down or
commission, and do not necessarily represent actual transactions.
Price
1993 -----------------------------
High Low
First quarter $1.56 $ .75
Second quarter $2.19 $1.41
Third quarter $3.94 $1.88
Fourth quarter $4.06 $2.75
1994
First quarter $4.88 $2.75
Second quarter $4.75 $3.75
Third quarter $3.88 $3.44
Fourth quarter $3.63 $2.88
1995
First quarter $3.19 $2.00
Second quarter $2.13 $1.38
Third quarter $2.50 $1.69
Fourth quarter $2.00 $1.44
The last sale price of the Company's Common Stock on March 1, 1996 was $2.25
per share, as reported on the Nasdaq National Market System.
As of March 1, 1996, there were approximately 2,532 stockholders of record
of the Company's Common Stock.
The Company has never declared or paid any cash dividends on shares of its
Common Stock and plans to continue the policy of not paying cash dividends. The
Company's loan agreement with its bank lender prohibits the payment of cash
dividends without the written consent of the bank.
19
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected historical financial data for each
of the years in the five-year period ended December 31, 1995. This data should
be read in conjunction with the Company's Financial Statements and related notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" under Item 7 below. The selected financial data provided
below are not necessarily indicative of the future results of operations or
financial performance of the Company:
Years Ended December 31,
------------------------------------------------------------
1995 1994 1993 1992 1991
----------- ---------- ---------- ---------- ----------
Operating
revenues . . .$4,713,748 $4,692,706 $3,466,003 $3,075,069 $2,708,695
Operating
expenses . . .$3,518,163 $3,339,478 $2,522,002 $2,213,700 $1,963,684
Income before
extraordinary item and
cumulative effect of accounting
change. . . . $ 137,080 $ 444,360 $ 376,547 $ 379,240 $ 266,559
Net income . . $ 137,080 $ 444,360 $ 328,495(1) $ 579,247(2) $ 411,930(2)
Income before
extraordinary item and
cumulative effect of
accounting change per
common share. .$ .01 $ .03 $ .03 $ .03 $ .02
Net income per
common share. .$ .01 $ .03 $ .02 $ .05 $ .03
Cash dividends -
Common Stock . $ - $ - $ - $ - $ -
Weighted average common
shares and common
stock equivalents
outstanding . .15,556,949 14,815,498 13,466,663 12,013,777 11,772,288
Present value of
proved oil and gas
reserves discounted at
10% (before estimated
federal income
taxes) . . . .$25,890,050 $20,462,420 $21,137,370 $20,765,388 $16,010,845
Working
capital. . . $ 639,299 $ (233,460)$ (355,029) $ 592,008 $ 1,004,075
Total assets . $23,914,698 $22,760,729 $16,180,298 $12,316,768 $10,145,428
Total
liabilities. .$13,079,285 $13,431,823 $ 7,528,776 $ 6,976,356 $ 5,384,263
Long-term debt, less current
maturities. . $11,674,625 $11,000,000 $ 5,809,000 $ 6,220,000 $ 5,006,721
Total stockholders'
equity . . . .$10,835,413 $ 9,328,906 $ 8,717,074 $ 5,340,412 $ 4,761,165
- ------------------
(1) In February 1992, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes (FAS
109)". The Company adopted FAS 109 in the first quarter of 1993. Upon
adoption of FAS 109, a net deferred tax liability of $48,052 was recognized
at January 1, 1993 reflecting the effects of a net book over tax basis and
limited utilization of the net operating loss carryforwards.
(2) Represents a tax benefit from utilization of loss carryforward of $200,007
in 1992 and $145,371 in 1991.
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
Historically, the Company concentrated most of its drilling activities
onshore in Texas in exploratory prospects. However, during the period 1988
through 1991, the Company deemphasized exploratory drilling and committed most
of its available funds to the acquisition and enhancement of producing gas and
oil properties and development drilling. In 1992, the Company returned its
primary focus to exploratory drilling through the use of three-dimensional
seismic technology.
The Company's gas and oil producing activities are accounted for using the
full cost method of accounting. Accordingly, the Company capitalizes all costs
incurred in connection with the acquisition of gas and oil properties and with
the exploration for and development of gas and oil reserves. Normal
dispositions of gas and oil properties are accounted for as adjustments to
capitalized costs, with no gain or loss recognized. Certain directly
identifiable internal costs of property acquisition, exploration and development
activities are capitalized. Such costs capitalized in 1995, 1994 and 1993
totaled approximately $512,000, $527,000 and $376,000, respectively. Depletion
of such costs is provided using the units-of-production method based upon
estimates of proved gas and oil reserves with gas and oil production being
converted to a common unit of measure based upon their relative energy content.
Depletion per equivalent unit of production (EBO) was $3.97, $4.07 and $3.55 for
1995, 1994 and 1993, respectively. Costs from unproved properties are excluded
from depletion until evaluated. In accordance with the full cost method of
accounting, the net capitalized costs of gas and oil properties (full cost
ceiling limitation) are not to exceed their related estimated future net
revenues discounted at 10%, and lower of cost or estimated fair value of
unproved properties, net of tax considerations.
21
Results of Operations
The Company's business activities are characterized by frequent, and
sometimes significant, changes in reserve base, sources of production, product
mix (gas versus oil volumes) and prices received by the Company for its gas and
oil. Consequently, year to year or other periodic comparisons of the Company's
results of operations can be difficult and may not fully and accurately describe
the Company's condition. The following table sets forth selected operating data
for the three years ended December 31, 1995:
Year Ended December 31,
------------------------------------------------
1995 1994 1993
-------- --------- --------
Production and Prices:
Oil (Bbls) 132,579 149,308 106,312
Natural gas (Mcf) 1,616,105 1,391,846 888,577
Oil price (per Bbl) $ 17.26 $ 15.81 $ 16.86
Gas price (per Mcf) $ 1.50 $ 1.68 $ 1.86
Ratio of oil to gas price 11.51/1 9.41/1 9.06/1
Equivalent barrels of oil
(EBO)(1) 401,929 381,282 254,408
======== ======== ========
Increase in production
volumes over prior year 5% 50% 14%
Results of Operations per EBO:
Oil and gas revenues $11.72 $12.31 $13.54
Costs and expenses:
Lease operating expense 3.65 3.74 5.13
General and administrative .57 .54 .71
Public reporting, auditing
and legal .51 .36 .46
Depreciation, depletion and
amortization 4.02 4.12 3.61
------ ------ ------
Total Costs and Expenses 8.75 8.76 9.91
------ ------ ------
Operating income 2.97 3.55 3.63
Other income (expense):
Interest expense (2.58) (1.87) (1.68)
Other income (expense) .12 .17 .30
------ ------ ------
Income before income taxes and
cumulative effect of accounting
change per EBO $ .51 $ 1.85 $ 2.25
====== ====== ======
___________________
(1) An EBO (equivalent barrel of oil) means one barrel of oil equivalent using
the ratio of six Mcf of gas to one barrel of oil.
22
Comparison of Year Ended December 31, 1995 to Year Ended December 31, 1994
Net income decreased $307,280 (69%) to $137,080 primarily due to a $503,197
decrease in income before income taxes and cumulative effect of accounting
change, which was primarily due to a $323,574 increase in interest expense and a
decrease of $157,643 in operating income.
Oil and gas revenues increased $21,042 to $4,713,748 primarily due to the
equivalent barrels of oil sold in 1995 increasing by 20,647 (5%) to 401,929
compared to 1994. The average sales price per EBO decreased 5% to $11.72 in
1995 compared to $12.31 in 1994.
Costs and expenses increased $178,685 (5%) to $3,518,163 due to the
following:
1. Lease operating expense increased $40,584 (3%) to $1,467,893. The
operating cost per EBO was $3.65 in 1995 compared to $3.74 in 1994. The lease
operating expense per EBO is expected to decrease in fiscal 1996 as production
increases disproportionately to lease operating expense on certain of the
Company's recent completions which are flowing and have an estimated operating
expense of less than $2.00 per EBO.
2. General and administrative expense increased $23,356 (11%) to $227,448
primarily due to the increasing of staff by one employee and overall increases
in general corporate legal expense, travel costs, consulting services and
advertising costs.
3. Public reporting, auditing and legal expense increased $68,518 (50%) to
$204,893 primarily due to general increases in legal fees, director meeting
expenses and postage expenses related to shareholder communication. Such costs
are expected to decrease in fiscal 1996.
4. Depreciation, depletion and amortization expense ("DD&A") increased
$46,227 (3%) to $1,617,929 primarily due to the 5% increase in EBO sold in
1995. The DD&A rate per EBO in 1995 is $4.02 compared to $4.12 in 1994.
Interest expense increased $323,574 (45%) to $1,035,093 because of the
Company's increased borrowings to finance its enhancements, development drilling
and three dimensional seismic technology activities. Interest expense is
expected to stabilize or decrease in 1996 as the Company's activities are
expected to be financed primarily with internal operating cash flow.
The effective federal income tax rates for both 1994 and 1995 were 34%.
23
Comparison of Year Ended December 31, 1994 to Year Ended December 31, 1993
Net income increased $115,865 (35%) to $444,360 primarily due to a $135,236
increase in income before income taxes and cumulative effect of accounting
change. In 1993, the Company incurred a $48,052 charge associated with an
accounting change for income taxes.
Oil and gas revenues increased $1,246,703 (36%) to $4,692,706 primarily due
to the equivalent barrels of oil sold in 1994 increasing by 126,874 (50%) to
381,282 compared to 1993. The average sales price per EBO decreased 9% to
$12.31 in 1994 compared to $13.54 in 1993.
Costs and expenses increased $817,476 (32%) to $3,339,478 due to the
following:
1. Lease operating expense increased $121,832 (9%) to $1,427,309 primarily
due to the aforementioned 50% increase in EBO sold during fiscal 1994. The
operating cost per EBO was $3.74 in 1994 compared to $5.13 in 1993. As
anticipated, lease operating expenses per EBO have decreased as production
increases disproportionately to lease operating expense on certain of the
Company's recent completions which are flowing and have an estimated operating
expense of less than $2.00 per EBO.
2. General and administrative expense increased $22,306 (12%) to $204,092
primarily due to the increasing of staff by one employee and overall increases
in general corporate legal expense, travel costs, consulting services and
advertising costs.
3. Public reporting, auditing and legal expense increased $20,610 (18%) to
$136,375 primarily due to general increases in legal fees, director meeting
expenses and postage expenses related to shareholder communication.
4. Depreciation, depletion and amortization expense ("DD&A") increased
$652,728 (71%) to $1,571,702 primarily due to the 50% increase in EBO sold in
1994. The DD&A rate per EBO in 1994 is $4.12 compared to $3.61 in 1993.
Interest expense increased $284,499 (67%) to $711,519 because of the
Company's increased borrowings to finance its producing property acquisitions,
enhancements, development drilling and three dimensional seismic technology
activities.
The effective federal income tax rates for both 1993 and 1994 were 34%.
24
Liquidity and Capital Resources
Working capital increased $872,759 as of December 31, 1995 compared to
December 31, 1994. Current assets exceeded current liabilities by $639,299 at
December 31, 1995 compared to a deficit of $233,460 at December 31, 1994.
Current assets decreased primarily due to a decrease in undeveloped leases held
for sale of $403,509, offset by an increase of $51,015 in accounts receivable.
Current liabilities decreased because of a decrease in accounts payables of
$1,147,018, resulting from the Company's payment of its vendors.
In July, 1995, the Company and its bank lender amended and restated the
Company's revolving credit facility and renewed and extended the Company's
outstanding indebtedness under the facility. Interest only is payable on the
outstanding principal balance of the revolving facility on the last day of each
month through and including May 31, 1997. Under the restated credit facility,
the revolving loan will automatically convert to a four-year term loan on
June 1, 1997, payable in 48 equal installments of principal plus accrued and
unpaid interest, with the final payment being due and payable on May 31, 2001.
The aggregate principal amount of the Company's borrowings outstanding at any
one time are limited to the lesser of $25,000,000 or the borrowing base then in
effect. At March 7, 1996, the borrowing base was $14,250,000 and the aggregate
principal amount outstanding at the same date was approximately $11,725,000.
Commitment fees of 0.5% per annum on the difference between the loan commitment
amount and the average daily amount of the loan are due quarterly. The
borrowing base is redetermined by the Bank semi-annually on or about May 1 and
November 1 of each year. The note bears interest at the bank's prime rate and
is secured by substantially all of the Company's oil and gas properties. The
restated loan agreement contains various restrictive covenants and compliance
requirements, including maintenance of certain financial ratios, limitations on
additional indebtedness and restrictions on the payment of dividends.
The Company incurred costs of $5,041,265 in its oil and gas property
acquisition and development activities, including undeveloped leases held for
sale, for the year ended December 31, 1995. Such costs were financed by the
utilization of working capital in addition to the sale of selected properties
for $1,327,233, net cash provided by operating activities of $370,963 and net
cash provided by financing activities of $2,179,910, which was attributable to
net bank borrowings in the amount of $674,625 and net proceeds of $1,505,285
from the issuance of common stock.
Historically, the Company concentrated most of its drilling activities
onshore in Texas in exploratory prospects. However, from 1988 through 1991 the
Company followed a policy of deemphasizing exploratory drilling and committing
most of its available funds to the acquisition and enhancement of producing oil
and gas properties and development drilling. Beginning in 1992, the Company
again emphasized exploratory activities, primarily through the use of
three-dimensional seismic technology. Based on the Company's projected oil and
gas revenues and related expenses, management believes that its internally
25
generated cash flow, coupled with proceeds from the Company's recent private
placement of common stock and borrowings under the Company's lending facility,
will be sufficient to fund its current operations. In addition, the Company
continually reviews and considers alternative methods of financing.
Trends and Prices
The Company's revenues, cash flows and borrowing capacity are affected by
changes in oil and gas prices. The markets for oil and gas have historically
been, and will continue to be, volatile. Prices for oil and gas typically
fluctuate in response to relatively minor changes in supply and demand, market
uncertainty, seasonal, political and other factors beyond the control of the
Company. The Company is unable to accurately predict domestic or worldwide
political events or the effects of such other factors on the prices received by
the Company for its gas and oil. The Company historically has not entered into
transactions to hedge against changes in oil and gas prices, but may elect to
enter into hedging transactions in the future to protect against fluctuations in
oil and gas prices.
During 1995, the average sales price received by the Company for its oil was
approximately $17.26 per Bbl, as compared to $15.81 in 1994, while the average
sales prices for the Company's gas was approximately $1.50 per Mcf in 1995, as
compared to $1.68 per Mcf in 1994. At March 1, 1996, the price received by the
Company for its oil production ranged from $18.00 to $19.00 per Bbl, while the
price received by the Company, at that same date, for its gas production ranged
from $1.60 to $2.00 per Mcf.
26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements and supplementary financial data,
which begin on page F-1, are included elsewhere herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
27
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Directors, officers and key employees of the Company at March 1, 1996
are as follows:
Director
Name Age Since Position with Company
---- --- ------- ---------------------
Thomas R. Cambridge 60 1985 Chairman of the Board of Directors
and Chief Executive Officer
Larry C. Oldham 42 1979 President, Treasurer and Director
Danny H. Conklin(1) 61 1985 Director
Ernest R. Duke(1) 68 1980 Director
Myrle Greathouse(2) 73 1993 Director
Charles R. Pannill(2) 69 1982 Director
John S. Rutherford 35 - Manager of Land/Administration
Eric A. Bayley 47 - Manager of Engineering
Rebecca A. Burrell 41 - Manager of Accounting
Thomas W. Ortloff 47 - Secretary
______________________
(1) Member of Audit Committee
(2) Member of Compensation Committee
Mr. Cambridge is an independent petroleum geologist engaged in the
exploration for, development and production of oil and natural gas. From 1970
until 1990, such activities were carried out primarily through Cambridge & Nail
Partnership, a Texas general partnership. Since 1990, such oil and gas
activities have been carried out through Cambridge Production, Inc., a Texas
corporation. He received a Bachelors degree and a Master of Science degree in
Geology from the University of Nebraska in 1958 and 1960, respectively.
Mr. Oldham, a founder of the Company, has served as an officer and Director
of the Company since its formation in 1979. Prior to the Company's formation,
28
Mr. Oldham was employed by Dorchester Gas Corporation during the period 1976 to
1979 and by KPMG Peat Marwick during 1975 to 1976. He received a Bachelor of
Business Administration degree from West Texas State University in 1975. Mr.
Oldham is a member of the American Institute of Certified Public Accountants and
the Permian Basin Landman's Association.
Mr. Conklin is an independent petroleum geologist and a principal partner
in Philcon Development Co., a privately held oil and gas exploration partner-
ship. Mr. Conklin is a director of Boatmens' First National Bank of Amarillo,
Amarillo, Texas, a director of Southwestern Public Service Company, Amarillo,
Texas, and former Chairman of the Independent Petroleum Association of America.
Mr. Conklin received a Bachelor of Science degree in Geology from Oklahoma State
University in 1957.
Mr. Duke is the president and majority shareholder of Mustang Mud, Inc., a
privately held oil field service company. He received a Bachelor of Science
degree in Geology from Southern Methodist University in 1950.
Mr. Greathouse is the chairman of the board of directors and sole share-
holder of Wes-Tex Drilling Company, a corporation engaged in contract drilling
of oil and gas wells and, to a lesser extent, oil and gas exploration and
production. Mr. Greathouse graduated from the University of Oklahoma in 1949
with a degree in Business Administration.
Mr. Pannill was employed by The Western Company of North America for over
thirty years until his retirement in February, 1982. During his employment with
The Western Company of North America, Mr. Pannill served in various capacities,
including those of an executive officer and director. He received a Bachelor
of Science degree in Geology from Texas A&M University in 1950.
Mr. Rutherford has been a full-time employee of the Company since October,
1993. From May, 1991 to October, 1993, Mr. Rutherford served as a consultant to
the Company, devoting substantially all of his time to the Company's business.
Mr. Rutherford graduated from Oral Roberts University in 1982 with a degree in
Education and in 1986, he graduated from Baylor University with a Master's
degree in Business Administration. From April, 1988 to April, 1991, Mr.
Rutherford was a Vice President in the energy lending division of Texas Commerce
Bank, National Association, Midland, Texas.
Mr. Bayley has been a full-time employee of the Company since October,
1993. From December, 1990 to October, 1993, Mr. Bayley was an independent
consulting engineer and devoted substantially all of his time to the Company.
Mr. Bayley graduated from Texas A&M University in 1978 with a B.S. degree in
Petroleum Engineering, and in 1984, Mr. Bayley graduated from the University
of Texas of the Permian Basin with a Master's of Business Administration
degree.
Mrs. Burrell has been a full-time employee of the Company since January,
1985. Mrs. Burrell graduated from Jacksonville College in 1974 with a degree in
accounting and has worked in oil and gas accounting since 1978.
29
Mr. Ortloff has been a shareholder in the law firm of Lynch, Chappell &
Alsup, a professional corporation, Midland, Texas, for in excess of the past
five years.
Directors of the Company hold office until the annual meeting of stock-
holders following their election or appointment and until their respective
successors have been duly elected or appointed. Officers of the Company are
appointed annually by the Company's Board of Directors to serve at the Board's
discretion and until their respective successors in office are duly appointed.
There are no family relationships between any of the Directors or officers of
the Company.
Consulting Arrangements
In furtherance of its overall business strategy, the Company continually
attempts to maintain and control its general and administrative expenses within
parameters the Company believes to be compatible with the size of the Company,
its level of activities and projected future activities, but without impairing
the quality of services and organizational structure necessary for the efficient
administration of the Company's business. In addition to the services provided
by Messrs. Cambridge and Oldham, the Company also relies extensively on its key
employees and outside advisors and consultants to provide technical and
administrative services and support in the operation of the Company's business.
30
ITEM 11. EXECUTIVE COMPENSATION
Summary of Annual Compensation
The Summary Compensation Table below sets forth for each of the three fiscal
years ended December 31, 1995, a summary of the types and amounts of compensa-
tion paid to the executive officers of the Company.
Summary Compensation Table
Long-Term Compensation
-------------------------------
Annual Compensation Awards Payouts
------------------- ---------------------- -------
Other All
Annual Restricted Securities LTIP Other
Name Compen- Stock Underlying Pay- Compen-
and Principal Year Salary Bonus sation Awards Options/ outs sation
Position ($) ($) ($) ($) SARs(#) ($) ($)
T.R. Cambridge 1995 $62,475 $3,560 $ 900 0 0 0 0
Chief Executive
Officer and 1994 $52,500 $ 500 $ 900 0 0 0 0
Chairman of
the Board of 1993 $51,500 $1,000 $ 900 0 100,000 0 0
Directors
L.C. Oldham 1995 $92,181 $5,015 $11,521(1) 0 0 0 $2,765(2)
President,
Treasurer 1994 $87,792 $4,800 $10,809(1) 0 0 0 $1,129(2)
and Director
1993 $85,571 $1,000 $10,317(1) 0 100,000 0 0
(1) Such amount includes insurance premiums for nondiscriminatory group life,
medical, disability and dental insurance as follows: $9,171 for 1995;
$8,445 for 1994; and $7,779 for 1993.
(2) Such amount represents contributions made by the Company to Mr. Oldham's
individual retirement account maintained under the Company's 408(k)
simplified employee pension plan/individual retirement account as follows:
$2,765 for 1995; and $1,129 for 1994.
31
Stock Options
The Company has in the past utilized stock options as part of its overall
compensation of Directors, officers and employees. Narrative descriptions of
the Company's stock option plans and outstanding stock options are set forth
under the caption "Stock Option Plans" below. No stock options were granted in
1995 to any of the Company's executive officers.
The following table sets forth certain information with respect to stock
option exercises during the fiscal year ended December 31, 1995 by the executive
officers of the Company and the value of each such executive officer's
unexercised stock options at December 31, 1995.
Aggregated Option/SAR Exercises in
Last Fiscal Year and Fiscal Year - End Option/SAR Values
Value of
Unexercised
Number of in-the-Money
Securities Underlying Options
Shares Unexercised Options at Fiscal Year-End
Acquired at Fiscal Year-End (#) ($)(2)
on Value ---------------------- --------------------
Exercise Realized Exercis- Unexercis- Exercis- Unexerci-
Name (#) ($)(1) able able able able
- -------------- -------- -------- ---------- ---------- -------- ----------
T.R. Cambridge 35,000 $14,350 200,000 50,000 $172,500 - (3)
L.C. Oldham - - 587,000 50,000 $666,720 - (3)
_______________
(1) The value realized is equal to the fair market value of a share of Common
Stock on the date of exercise ($1.44 per share), based on the last sale
price of the Company's Common Stock, less the exercise price.
(2) Value of in-the-money options is equal to the fair market value of a share
of Common Stock at fiscal year-end ($1.79 per share), based on the last
sale price of the Company's Common Stock, less the exercise price.
(3) The unexercisable portion of a stock option held by the named executive
officer was not "in-the-money" at year-end, as the exercise price of such
option ($3.94) exceeded the fair market value ($1.79) of the Company's
Common Stock on such date.
Change of Control Arrangements
The Company's outstanding stock options and stop option plans contain
certain "change of control" provisions which are applicable to the Company's
32
outstanding stock options, including the options held by Messrs. Cambridge and
Oldham, and other Directors of the Company. Such provisions include the
following: if (i) the Company is not the surviving entity in any merger or
consolidation, (ii) the Company sells, leases or exchanges all or substantially
all of its assets, (iii) the Company is to be dissolved and liquidated, (iv) any
person or group acquires beneficial ownership of more than 50% of the Company's
outstanding Common Stock, or (v) in connection with a contested election of
directors, the persons who were directors of the Company before such election
cease to constitute a majority of the Board of Directors (each such event, a
"Corporate Change"), then within (a) ten days after approval by the stockholders
of the Company of such merger, consolidation, sale, lease or exchange of assets
or dissolution or election of directors or (b) thirty days of such change of
control, the Compensation Committee (the "Committee") of the Board of Directors
shall effect one or more of the following alternatives: (1) accelerate the time
at which options may be exercised, (2) require the mandatory surrender to the
Company by optionees of some or all of such options, in which event the
Committee shall cancel such options and pay to each the "Change of Control
Value", (3) make such adjustments to such options as the Committee deems
appropriate to reflect such Corporate Change or (4) provide that thereafter upon
any exercise of an option theretofore granted the optionee shall be entitled to
purchase under such option, in lieu of the number of shares of Common Stock as
to which such option shall then be exercisable, the number and class of shares
of stock or other securities or property to which the optionee would have been
entitled pursuant to the terms of the agreement of merger, consolidation or sale
of assets and dissolution if, immediately prior to such merger, consolidation
or sale of assets and dissolution the optionee had been the holder of record of
the number of shares of Common Stock as to which such option is then
exercisable. In the event of a Corporate Change, any then outstanding options
held by non-employee Directors shall become fully exercisable on the fifth day
following the approval by the stockholders of the Company of such Corporate
Change. The "Change of Control Value" is an amount equal to, whichever is
applicable, (i) the per share price offered to stockholders of the Company in
any merger, consolidation, sale of assets or dissolution transaction, (ii) the
price per share offered to stockholders of the Company in any tender offer or
exchange offer whereby a Corporate Change takes place, or (iii) if such
Corporate Change occurs other than pursuant to a tender or exchange offer, the
fair market value per share of the shares into which such options being
surrendered are exercisable, as determined by the Committee as of the date
determined by the Committee to be the date of cancellation and surrender of such
options.
Compensation of Directors
Danny H. Conklin, Ernest R. Duke, Myrle Greathouse and Charles R. Pannill,
non-employee Directors of the Company, each receive $1,000 for attendance at
meetings of the Board of Directors and $500 for attendance at meetings of Board
committees of which they are members. All Directors are reimbursed for expenses
incurred in connection with attending meetings.
The Company's 1992 Stock Option Plan provides for the granting of a one-time
option to purchase 25,000 shares of the Company's Common Stock to each
individual who was a non-employee director of the Company on March 1, 1992 and
33
to each individual who becomes a non-employee director following March 1, 1992.
No options were granted in 1995 pursuant to this arrangement.
Stock Option Plans
1981 Non-Qualified Stock Option Plan. In May, 1981, the Company's stock-
holders approved and adopted a Non-Qualified Stock Option Plan (the "1981 Plan")
for its officers and employees. Although the 1981 Plan expired by its own terms
on March 31, 1991, one non-qualified stock option to purchase 35,000 shares of
Common Stock, which was granted prior to March 31, 1991, remained outstanding
and subject to the terms of the 1981 Plan until such option was exercised in
June, 1995. The 1981 Plan authorized the granting of options to purchase a
total of 300,000 shares of the Company's Common Stock. All stock options
granted under the 1981 Plan were granted with exercise prices equal to the fair
market value of the Company's Common Stock on the date of grant. Subject to
the right of accumulation, options granted under the 1981 Plan became exercis-
able as to 20% of the shares one year after the date of grant, with an
additional 20% becoming exercisable at the end of each year thereafter. All
options expired, unless earlier exercised, five years after the date of grant.
Options were not permitted to be granted to an optionee if, immediately after
the grant, the total number of shares of Common Stock beneficially owned,
directly or indirectly, or subject to options held by such employee, whether
then exercisable or not, exceeded 10% of the total combined voting power of all
classes of shares of the Company. The 1981 Plan was administered by the
Compensation Committee of the Company's Board of Directors. Members of the
Compensation Committee did not participate in the 1981 Plan.
1983 Incentive Stock Option Plan. In May, 1984, the Company's stockholders
approved and adopted the Company's 1983 Incentive Stock Option Plan (the "1983
Plan"). Options granted under the 1983 Plan are intended to be "incentive stock
options" within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code"), which, generally, provides the holder of an "incentive"
option with certain favorable tax benefits. Under the terms of the 1983 Plan,
all employees of the Company were eligible to participate. The 1983 Plan
authorized the granting of options to purchase a total of 750,000 shares of the
Company's Common Stock. The exercise price of options granted under the 1983
Plan must be at least equal to the fair market value of the Company's Common
Stock on the date of grant. Options under the 1983 Plan may not be exercised
until one year from the date of grant. Subject to the right of accumulation,
each option is exercisable as to one-third of the shares optioned one year after
the date of grant, with an additional one-third of the shares becoming exercis-
able at the end of each year thereafter. Options are cumulative and, to the
extent not exercised in each annual period, may be exercised in whole or in part
three years after the date of grant. All options expire, in any event, ten
years after the date of grant. Although the 1983 Plan expired by its own terms
on May 19, 1993, incentive stock options to purchase 537,000 shares of Common
Stock, which were granted prior to May 19, 1993, remain outstanding and subject
to all terms and conditions of the 1983 Plan. The 1983 Plan is administered by
the Compensation Committee of the Company's Board of Directors. Members of the
Compensation Committee are not eligible to participate in the 1983 Plan.
34
1992 Stock Option Plan. In May, 1992, the Company's stockholders approved
and adopted the Company's 1992 Stock Option Plan (the "1992 Plan"). The 1992
Plan provides for the granting to key employees (including officers and
Directors who are also key employees) of the Company and Directors who are not
employees of the Company of options to purchase up to an aggregate of 750,000
shares of Common Stock. Options granted under the 1992 Plan to employees may be
either incentive stock options within the meaning of Section 422 of the Code, or
options which do not constitute incentive stock options. Options granted to
non-employee Directors will not be incentive stock options.
The 1992 Plan is administered by the Board's Compensation Committee, none of
whom are eligible to participate in the 1992 Plan except to receive a one-time
option to purchase 25,000 shares at the time he becomes a Director. The
Compensation Committee has the sole authority to select the employees who are to
be granted options, to establish the number of shares issuable under each option
and to establish such terms and conditions as may be approved by the Compensa-
tion Committee, except that the purchase price of Common Stock issued under each
option shall not be less than the fair market value of the stock subject to the
option at the time of grant.
The 1992 Plan provides for the granting of an option to purchase 25,000
shares of Common Stock to each individual who was a non-employee Director of the
Company on March 1, 1992 and to each individual who becomes a non-employee
Director following March 1, 1992. Members of the Compensation Committee are not
eligible, and shall not have been eligible at any time within one year prior to
their appointment to the Compensation Committee, to participate in a Company
stock plan, other than the eligibility of non-employee Directors to receive a
non-qualified stock option to purchase 25,000 shares of Common Stock as
described above, or to participate in any other Company stock plan which would
not cause such members to cease to be "disinterested persons" within the
meaning of Rule 16b-3 under the Securities Exchange Act of 1934.
An option may be granted in exchange for an individual's right and option to
purchase shares of Common Stock pursuant to the terms of an agreement that
existed prior to the date such option is granted ("Prior Option"). An option
agreement that grants an option in exchange for a Prior Option must provide for
the surrender and cancellation of the Prior Option. The purchase price of
Common Stock issued under an option granted in exchange for a Prior Option shall
be determined by the Compensation Committee and, such purchase price may,
without limitation, be equal to the price for which the optionee could have
purchased Common Stock under the Prior Option.
The Board of Directors of the Company may amend or terminate the 1992 Plan
at any time, but may not in any way terminate or restrict the rights of a
participant under an outstanding option without the consent of such participant.
The Board of Directors may not make any alteration or amendment which would
materially increase the benefits accruing to participants under the 1992 Plan,
increase the aggregate number of shares which may be issued pursuant to the
provisions of the 1992 Plan, change the class of individuals eligible to
receive options under the 1992 Plan, or extend the term of the 1992 Plan,
without theapproval of the stockholders of the Company.
35
The 1992 Plan will terminate upon and no further options may be granted
thereunder after the expiration of ten years from the date of its adoption by
the Board of Directors.
Other Option Grants. In addition to the stock options granted pursuant to
the Company's 1981, 1983 and 1992 stock option plans, the Company has, on two
occasions, granted stock options to Mr. Cambridge pursuant to the general
corporate powers of the Company, rather than pursuant to such plans. Upon
recommendation of the Company's Compensation Committee, the Board of Directors
of the Company granted a non-qualified stock option to Mr. Cambridge to purchase
150,000 shares of Common Stock at an exercise price of $.64 per share, the fair
market value of the Common Stock on December 11, 1991, the date of grant. The
option became exercisable as to 50,000 shares on each of December 11, 1992, 1993
and 1994. On October 18, 1993, and upon further recommendation of the Company's
Compensation Committee, the Board of Directors granted a non-qualified stock
option to Mr. Cambridge to purchase 100,000 shares of Common Stock at an
exercise price of $3.9375 per share, the fair market value of the Common Stock
on the date of grant. The option is exercisable in four equal annual increments
of 25,000 shares, commencing on October 18, 1994. Neither option is
transferable other than by will or the laws of descent and distribution and both
options terminate ten years from the date of grant.
Retirement Plan
The Company maintains under Section 408(k) of the Code a combination
simplified employee pension ("SEP") and individual retirement account ("IRA")
plan (the "SEP/IRA") for eligible employees. Generally, eligible employees
include all employees who are at least twenty-one years of age.
Company contributions to employee SEP accounts may be made from time to time
at the discretion of the Company, as authorized from time to time by the
Compensation Committee of the Board of Directors, and the percentage of such
contributions may also vary from time to time. However, the same percentage
contribution must be made for all participating employees. The Company is not
required to make annual contributions to the employees SEP accounts. The
Company may make tax-deductible contributions for each employee participant of
up to 15% of such participant's compensation or $30,000, whichever is less.
Under the prototype simplified employee pension plan adopted by the Company, all
of the Company's SEP contributions must be made to SEP/IRAs maintained with the
sponsor of the plan, a national investment banking firm. All contributions to
employees' accounts are immediately 100% vested and become the property of each
employee at the time of contribution, including employer contributions, income-
deferral contributions and IRA contributions. Generally, earnings on contribu-
tions to an employee's SEP/IRA account are not subject to federal income tax
until withdrawn.
In addition to receiving SEP contributions by the Company, employees may
make individual annual IRA contributions of up to the lesser of $2,000 or 100%
36
of compensation. Each employee is responsible for the investment of funds in
his or her own SEP/IRA and can select investments offered through the sponsor of
the plan.
Distributions may be taken by employees at any time and must commence by
April 1st following the year in which the employee attains age 70 1/2.
The Company presently makes matching contributions to employee accounts in
an amount equal to the contribution made by each employee, not to exceed,
however, 3% of each such employee's salary during any calendar year. During the
fiscal year ended December 31, 1995, the Company contributed an aggregate of
$6,739 to the accounts of four employee participants, of which $2,765 was
allocated to the account of Mr. Oldham, the President and a Director of the
Company.
<PAGE 37>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information as of March 1, 1996 with
respect to the beneficial ownership of Common Stock by (i) each person known to
the Company to own beneficially more than five percent of the outstanding Common
Stock, (ii) the executive officers named in the Summary Compensation Table under
Item 11, "Executive Compensation", (iii) each Director of the Company, and (iv)
all executive officers and Directors of the Company as a group:
Percent
Name and Address Amount and Nature of of
of Beneficial Owner Beneficial Ownership (1) Class (2)
- ------------------- ------------------------ ---------
Thomas R. Cambridge 887,045 (3) 5.89%
216 Texas Commerce Bank Building
Amarillo, Texas 79109
Danny H. Conklin 120,624 (4) *
730 First National Place I
Amarillo, Texas 79101
Ernest R. Duke 199,973 (5) 1.35%
408 West Wall Street
Midland, Texas 79701
Myrle Greathouse 1,020,304 (6) 6.86%
401 Cypress, Suite 519
Abilene, Texas 79601
Larry C. Oldham 781,090 (7) 5.10%
One Marienfeld Place, Suite 465
Midland, Texas 79701
Charles R. Pannill 95,495 (8) *
3416 Acorn Run
Fort Worth, Texas 76019
Wes-Tex Drilling Company 972,488 (9) 6.55%
519 First National Bank Building West
Abilene, Texas 79601
All Executive Officers and Directors 3,104,531 (10) 19.74%
as a Group (6 persons)
___________________
* Less than one percent.
38
(1) Unless otherwise indicated, all shares of Common Stock are held directly
with sole voting and investment powers.
(2) Securities not outstanding, but included in the beneficial ownership of
each such person are deemed to be outstanding for the purpose of computing
the percentage of outstanding securities of the class owned by such person,
but are not deemed to be outstanding for the purpose of computing the
percentage of the class owned by any other person.
(3) Includes 200,000 shares of Common Stock underlying presently exercisable
stock options.
(4) Includes 25,000 shares of Common Stock underlying a presently exercisable
stock option.
(5) Includes 12,500 shares of Common Stock underlying a presently exercisable
stock option. Also included are 74,395 shares held by Duke and Cain
Partnership, a general partnership in which Mr. Duke is a partner, and
10,000 shares held in the name of Mr. Duke's wife. Mr. Duke has shared
voting and investment powers with respect to such shares.
(6) Includes 972,488 shares of Common Stock held directly by Wes-Tex Drilling
Company ("Wes-Tex"), a Texas corporation. Mr. Greathouse is the chairman of
the board of directors and sole shareholder of Wes-Tex and, accordingly,
has shared voting and investment powers with respect to such shares. Also
included are 25,000 shares of Common Stock underlying a presently exercis-
able stock option, and 816 shares held by a twenty-two member investment
club, of which Mr. Greathouse is a member, and as to which Mr. Greathouse
has shared voting and investment powers. See note 9 below.
(7) Includes 587,000 shares of Common Stock underlying presently exercisable
stock options.
(8) Includes 25,000 shares of Common Stock underlying a presently exercisable
stock option. Also included are 1,300 shares held by Mr. Pannill as
custodian for the benefit of two minor grandchildren and as to which Mr.
Pannill disclaims beneficial ownership.
(9) Mr. Greathouse, a Director of the Company, is the chairman of the board of
directors and sole shareholder of Wes-Tex Drilling Company. Wes-Tex has
shared voting and investment powers with respect to such shares. See note
6 above.
(10)Includes 874,500 shares of Common Stock underlying presently exercisable
stock options.
39
Beneficial Ownership Reports
Section 16(a) of the Securities Exchange Act of 1934 requires, among other
things, that the Company's Directors and officers file at specified times
reports of beneficial ownership and changes in beneficial ownership of the
Company's Common Stock and other equity securities. To the Company's
knowledge, all Section 16(a) filing requirements have been complied with.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Historically, Wes-Tex Drilling Company ("Wes-Tex"), a Texas corporation,
has provided contract drilling and other related oil and gas services to the
Company in connection with the Company's oil and gas exploration and development
activities, and it is anticipated that Wes-Tex will continue to perform contract
drilling services for the Company in the future. Myrle Greathouse, a director
and the sole shareholder of Wes-Tex, has served as a Director of the Company
since December, 1993. During the year ended December 31, 1995, the Company
paid approximately $234,800 to Wes-Tex for contract drilling services provided
by Wes-Tex during 1994. The largest aggregate amount outstanding and owed by
the Company to Wes-Tex at one time during the fiscal year ended December 31,
1995 was approximately $234,800. At December 31, 1995, the Company was not
indebted to Wes-Tex.
From time to time, Wes-Tex acquires undivided interests in oil and gas
leasehold acreage from the Company and participates with the Company and other
interest owners in the drilling and development of such acreage. Wes-Tex
participates in such operations under standard form operating agreements on
the same or similar terms afforded by the Company to nonaffiliated third
parties. The Company invoices all working interest owners, including Wes-Tex,
on a monthly basis, without interest, for their pro rata share of lease
acquisition, drilling and operating expenses. During the year ended December
31, 1995, the Company billed Wes-Tex the aggregate amount of approximately
$26,400 for Wes-Tex's proportionate share of lease operating expenses incurred
on properties operated by the Company. The largest amount owed to the Company
by Wes-Tex at any one time during the year ended December 31, 1995 for its share
of lease operating expenses was approximately $12,000, and at December 31, 1995,
Wes-Tex owed the Company approximately $1,600 for such expenses. During the
fiscal year ended December 31, 1995, the Company disbursed approximately $93,800
to Wes-Tex in payment of revenues attributable to Wes-Tex's pro rata share of
the proceeds from sales of gas and oil produced from properties in which Wes-Tex
and the Company owned interests.
40
In February, 1995, the Company privately placed 644,150 shares of its Common
Stock for the purpose of repaying a portion of the Company's bank debt. Wes-Tex
purchased 40,000 shares of Common Stock for $100,000 and Barbara Duke, the wife
of E. R. Duke, a Director of the Company, purchased 10,000 shares for $25,000.
The shares were purchased on the same terms as all other investors in the
offering.
E. R. Duke, a Director of the Company, is the sole shareholder and director
of Mustang Mud, Inc. ("Mustang"), an oil field service company primarily engaged
in the sale and application of drilling fluids and chemicals used in the
drilling of wells. The Company has, in the past, purchased supplies and
services from Mustang in connection with the Company's drilling activities.
Although the Company did not purchase any supplies or services from Mustang in
1995, the Company paid approximately $2,500 to Mustang in 1995 for supplies and
services provided by Mustang in 1994. The Company was not indebted to Mustang
at December 31 1995.
Mr. Duke and Mustang each own interests in three oil properties in which the
Company also owns interests, two of which are operated by the Company. In 1995,
the Company billed Mr. Duke and Mustang the aggregate amount of approximately
$12,100 and $2,300, respectively, for lease operating expenses. During the
same period, Mr. Duke and Mustang paid the Company approximately $11,500 and
$2,300, respectively. At December 31, 1995, Mr. Duke and Mustang owed the
Company approximately $1,200 and $120, respectively, for their pro rata share of
lease operating expenses. During 1995, the Company disbursed approximately
$69,600 and $3,500, respectively, to Mr. Duke and Mustang in payment of their
pro rata share of the proceeds from sales of oil produced from properties in
which Mr. Duke, Mustang and the Company owned interests.
During the year ended December 31, 1995, Cambridge Production, Inc. ("CPI"),
a corporation owned by Mr. Cambridge, served as operator of 18 wells on oil and
gas leases in which the Company owned an interest. Generally, the operator of a
well is responsible for the day to day operations on the lease, overseeing of
production, employment of field personnel, maintenance of production and other
records, determining the location and timing of drilling of wells, gas contract
administration, joint interest billings, revenue distribution, making various
regulatory filings, reporting to working interest owners and other matters.
During 1995, CPI billed the Company approximately $348,000, which included
$201,000 for the Company's pro rata share of lease operating expenses and
$147,000 for the Company's pro rata share of drilling expenses. Of the total
amount billed to the Company, approximately $330,000 was paid by the Company
to CPI during 1995. The largest amount owed by the Company to CPI at any one
time during 1995 was approximately $59,800, and at December 31, 1995, the
Company owed CPI approximately $20,600. CPI's billings to the Company are made
monthly on the same basis as made to all other working interest owners in the
wells. The Company's pro rata share of oil and gas sales during 1995 from the
wells operated by CPI was approximately $130,000.
41
The Company owns a 25% working interest in the Southeast Leedey Prospect in
Custer County, Oklahoma, which is operated by Philcon Development Co.
("Philcon"), a privately owned partnership engaged in the exploration for,
development and production of oil and gas. Danny H. Conklin, a Director of
the Company, is a principal partner of Philcon. During 1995, the Company paid
Philcon approximately $74,700 for the Company's pro rata share of lease costs
and related drilling and operating expenses, of which $4,124 was billed by
Philcon to the Company in 1995 and the remainder of which was billed to the
Company in 1994. The Company was not indebted to Philcon at December 31, 1995.
The largest aggregate amount outstanding and owed by the Company to Philcon at
any one time during 1995 was approximately $70,300.
Management of the Company believes that each of the above referenced trans-
actions was made on terms no less favorable than if such transactions had been
entered into with an unrelated party.
42
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
For a list of Financial Statements and Schedules, see
"Index to the Financial Statements and Schedules" on
page F-1, and incorporated herein by reference.
(b) No reports on Form 8-K were filed by the Company during the last
quarter of its fiscal year ended December 31, 1995.
(c) Exhibits:
Exhibit
No. Description of Exhibit
------- ----------------------
3.1 Certificate of Incorporation of Registrant (Incorporated
by reference to Exhibit 3.1 to Form 10-K of the Registrant
for the fiscal year ended December 31, 1988.)
* 3.2 Bylaws of Registrant
4.1 Certificate of Merger merging Parallel Petroleum
Corporation, a Texas corporation, into Registrant
(Incorporated by reference to Exhibit 4.1 to Form 10-K of
the Registrant as filed with the Securities and Exchange
Commission on April 1, 1985.)
4.2 Agreement and Plan of Merger Dated July 17, 1984 between
Parallel Petroleum Corporation, a Texas corporation, and
the Registrant (Incorporated by reference to Exhibit 2.1
to Form S-l of the Registrant (File No. 2-92397) as filed
with the Securities and Exchange Commission on July 26,
1984, as amended by Amendments No. 1 and 2 on October 5,
1984 and October 25, 1984, respectively.)
43
Executive Compensation Plans and Arrangements (Exhibit
No.'s 10.1 through 10.6):
10.1 1981 Non-Qualified Stock Option Plan (Incorporated by
reference to Exhibit 10.1 to Form S-l of the Registrant
(File No. 2-92397) as filed with the Securities and
Exchange Commission on July 26, 1984, as amended by
Amendments No. 1 and 2 on October 5, 1984 and October 25,
1984, respectively.)
10.2 1983 Incentive Stock Option Plan (Incorporated by
reference to Exhibit 10.2 to Form S-l of the Registrant
(File No. 2-92397) as filed with the Securities and
Exchange Commission on July 26, 1984, as amended by
Amendments No. 1 and 2 on October 5, 1984, and October 25,
1984, respectively.)
10.3 1992 Stock Option Plan (Incorporated by reference to
Exhibit 28.1 to Form S-8 of the Registrant (File No.
33-57348) as filed with the Securities and Exchange
Commission on January 25, 1993.)
10.4 Stock Option Agreement between Parallel Petroleum
Corporation and Thomas R. Cambridge dated December 11,
1991 (Incorporated by reference to Exhibit 10.4 of Form
10-K of the Registrant for the fiscal year ended December
31, 1992.)
10.5 Stock Option Agreement between Parallel Petroleum
Corporation and Thomas R. Cambridge dated October 18, 1993
(Incorporated by reference to Exhibit 10.4(e) of Form 10-K
of the Registrant for the fiscal year ended December 31,
1993.)
* 10.6 Merrill Lynch, Pierce, Fenner & Smith Incorporated Proto-
type Simplified Employee Pension Plan
10.7 Restated Loan Agreement dated July 31, 1995 between
Parallel Petroleum Corporation and NationsBank of Texas,
N.A. (Incorporated by reference to Exhibit 10.1 of Form
10-Q of the Registrant for the fiscal quarter ended June
30, 1995.)
* 24.1 Consent of Independent Auditors
* 24.2 Consent of Independent Petroleum Engineers
* 27 Financial Data Schedule
_________________________
* Filed herewith.
F-1
PARALLEL PETROLEUM CORPORATION
Index to the Financial Statements and Schedules
Page
Independent Auditors' Report F-2
Financial Statements:
Balance Sheets at December 31, 1995 and 1994 F-3
Statements of Income for the years ended
December 31, 1995, 1994 and 1993 F-4
Statements of Stockholders' Equity for the
years ended December 31, 1995, 1994 and 1993 F-5
Statements of Cash Flows for the years ended
December 31, 1995, 1994 and 1993 F-6
Notes to Financial Statements F-7
All schedules are omitted, as the required information is inapplicable or the
information is presented in the financial statements or related notes.
F-2
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Parallel Petroleum Corporation:
We have audited the financial statements of Parallel Petroleum Corporation as
listed in the accompanying index. 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 financial position of Parallel Petroleum Corporation
as of December 31, 1995 and 1994, and the results of its operations and its
cash flows for each of the years in the three-year period ended December 31,
1995, in conformity with generally accepted accounting principles.
As discussed in notes 1 and 5 to the financial statements, the Company changed
its method of accounting for income taxes in 1993 to adopt the provisions of
the Financial Accounting Standards Board's Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes".
KPMG PEAT MARWICK LLP
Midland, Texas
February 2, 1996
F-3
PARALLEL PETROLEUM CORPORATION
Balance Sheets
December 31, 1995 and 1994
Assets 1995 1994
- ------ ------ ------
Current assets:
Cash and cash equivalents $ 558,748 598,465
Accounts Receivable:
Oil & Gas 648,000 470,000
Others, net of allowance for doubtful
accounts of $28,130 in 1995 and
$28,094 in 1994 115,318 242,886
Affiliate 2,932 2,349
------------ ----------
766,250 715,235
Prepaid expenses and other 16,293 12,581
Undeveloped leases held for sale 60,413 463,922
Deferred income taxes 114,240 --
------------ ----------
Total current assets 1,515,944 1,790,203
------------ ----------
Property and equipment, at cost:
Oil and gas properties, full cost method 30,879,615 27,657,884
Other 315,983 298,040
------------ ----------
31,195,598 27,955,924
Less accumulated depreciation and depletion 8,837,838 7,232,197
------------ ----------
Net property and equipment 22,357,760 20,723,727
------------ ----------
Other assets, net of accumulated amortization of
$24,500 in 1995 and $20,000 in 1994 40,994 246,799
------------ ----------
$ 23,914,698 22,760,729
============ ==========
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Accounts payable and accrued liabilities:
Trade $ 856,088 1,696,338
Affiliate 20,557 327,325
------------ ----------
Total current liabilities 876,645 2,023,663
------------ ----------
Long-term debt 11,674,625 11,000,000
Deferred revenue -- 49,632
Deferred income taxes 528,015 358,528
Stockholders' equity:
Preferred stock - par value of $.10 per share,
authorized 40,000,000 shares, none issued -- --
Common stock- par value of $.01 per share,
authorized 100,000,000 shares, issued
and outstanding 14,854,108 in 1995 and
14,174,888 in 1994 148,540 141,749
Additional paid-in surplus 11,662,897 10,300,261
Accumulated deficit (976,024) (1,113,104)
------------ ----------
Total stockholders' equity 10,835,413 9,328,906
Contingencies -- --
------------ ----------
$ 23,914,698 22,760,729
============ ==========
See accompanying notes to financial statements.
F-4
PARALLEL PETROLEUM CORPORATION
Statements of Income
Years ended December 31, 1995, 1994 and 1993
1995 1994 1993
------ ------ ------
Oil and gas revenues $ 4,713,748 4,692,706 3,446,003
------------ ------------ ------------
Costs and expenses:
Lease operating expense 1,467,893 1,427,309 1,305,477
General and administrative 227,448 204,092 181,786
Public reporting, auditing and legal 204,893 136,375 115,765
Depreciation, depletion
and amortization 1,617,929 1,571,702 918,974
------------ ------------ ------------
Total costs and expenses 3,518,163 3,339,478 2,522,002
------------ ------------ ------------
Operating income 1,195,585 1,353,228 924,001
------------ ------------ ------------
Other income (expense), net:
Interest income 316 322 407
Other income 51,313 69,216 83,328
Interest expense (1,035,093) (711,519) (427,020)
Other expense (7,537) (3,466) (8,171)
------------ ------------ ------------
Total other expense, net (991,001) (645,447) (351,456)
------------ ------------ ------------
Income before income taxes and cumulative
effect of accounting change 204,584 707,781 572,545
------------ ------------ ------------
Income tax expense - deferred 67,504 263,421 195,998
------------ ------------ ------------
Income before cumulative effect of
accounting change 137,080 444,360 376,547
Cumulative effect of accounting change -- -- (48,052)
------------ ------------ ------------
Net income $ 137,080 444,360 328,495
============ ============ ============
Income per common share:
Income before cumulative effect of
accounting change $ 0.01 0.03 0.03
Cumulative effect of accounting change -- -- (0.01)
------ ------ ------
Net income per common share $ 0.01 0.03 0.02
====== ====== ======
Weighted average common shares and common
stock equivalents outstanding 15,556,949 14,815,498 13,466,663
============ ============ ============
See accompanying notes to financial statements.
F-5
PARALLEL PETROLEUM CORPORATION
Statements of Stockholders' Equity
Years ended December 31, 1995, 1994 and 1993
<CATION>
Common Stock
-------------------- Additional Total
Number of paid-in Accumulated stockholders'
shares Amount capital (deficit) equity
---------- -------- ---------- ----------- -------------
Balance,
January 1, 1993 11,772,388 $ 117,724 7,108,647 (1,885,959) 5,340,412
Issuance of stock 2,200,000 22,000 2,917,965 -- 2,939,965
Options exercised 95,000 950 41,700 -- 42,650
Tax benefits related
to options -- -- 65,552 -- 65,552
Net income -- -- -- 328,495 328,495
---------- --------- ---------- ---------- ----------
Balance,
December 31, 1993 14,067,388 140,674 10,133,864 (1,557,464) 8,717,074
Options exercised 107,500 1,075 83,006 -- 84,081
Tax benefits related
to options -- -- 83,391 -- 83,391
Net income -- -- -- 444,360 444,360
---------- --------- ---------- ----------- ----------
Balance,
December 31, 1994 14,174,888 141,749 10,300,261 (1,113,104) 9,328,906
Issuance of stock 644,220 6,441 1,314,679 -- 1,321,120
Options exercised 35,000 350 35,700 -- 36,050
Tax benefits related
to options -- -- 12,257 -- 12,257
Net income -- -- -- 137,080 137,080
---------- --------- ---------- ---------- ----------
Balance,
December 31, 1995 14,854,108 $ 148,540 11,662,897 (976,024) 10,835,413
========== ========= ========== ========== ==========
See accompanying notes to financial statements.
F-6
PARALLEL PETROLEUM CORPORATION
Statements of Cash Flows
Years ended December 31, 1995, 1994 and 1993
1995 1994 1993
------ ------ ------
Cash flows from operating activities:
Net income $ 137,080 444,360 328,495
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation, depletion and amortization 1,617,929 1,571,702 918,974
Cumulative effect of accounting change -- -- 48,052
Income taxes 67,504 263,421 195,998
Other, net 8,058 (77,088) (7,683)
Changes in assets and liabilities:
Decrease (increase) in trade receivables (51,015) 175,147 (138,671)
Decrease (increase) in prepaid expenses
and other (3,712) (5,163) 15,306
Increase (decrease) in accounts payable
and accrued liabilities (281,439) (518,844) 727,053
----------- ---------- ----------
Net cash provided by
operating activities 1,494,405 1,853,535 2,087,524
----------- ---------- ----------
Cash flows from investing activities:
Additions to property and equipment (4,517,692)(6,317,107) (4,700,225)
Proceeds from disposition of property
and equipment 596,733 571,578 402,522
Acquisition of undeveloped leases held
for sale (523,573) (771,905) (1,004,540)
Proceeds from disposition of undeveloped
leases held for sale 730,500 12,105 380,777
----------- ---------- ----------
Net cash used in investing activities (3,714,032)(6,505,329) (4,921,466)
----------- ---------- ----------
Cash flows from financing activities:
Proceeds from the issuance of long-term debt 2,285,000 5,191,000 2,625,000
Payments of long-term debt (1,610,375) -- (3,036,000)
Proceeds from exercise of options 36,050 84,081 42,650
Stock offering costs (141,785) (148,115) --
Proceeds from common stock issuance 1,611,020 -- 2,939,965
----------- ---------- ----------
Net cash provided by
financing activities 2,179,910 5,126,966 2,571,615
----------- ---------- ----------
Net increase (decrease) in cash
and cash equivalents (39,717) 475,172 (262,327)
Beginning cash and cash equivalents 598,465 123,293 385,620
----------- ---------- ----------
Ending cash and cash equivalents $ 558,748 598,465 123,293
=========== ========== ==========
See accompanying notes to financial statements.
F-7
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements
December 31, 1995, 1994 and 1993
(1) Summary of Significant Accounting Policies
------------------------------------------
Nature of Operations
--------------------
Parallel Petroleum Corporation (the Company), a Delaware corporation,
is primarily engaged in, and its only industry segment is, the
acquisition of, and the exploration for, development, production
and sale of, crude oil and natural gas. The Company's business
activities are carried out primarily in Texas and, to a lesser extent,
in Oklahoma. The Company's activities in Texas are focused in the
onshore Gulf Coast area of Jackson and Wharton Counties, Texas, and
in the Permian Basin of West Texas. The Company's activities in
Oklahoma are conducted in Custer County, Oklahoma.
Property and Equipment
----------------------
The Company's oil and gas producing activities are accounted for using
the full cost method of accounting. Accordingly, the Company
capitalizes all costs incurred in connection with the acquisition of
oil and gas properties and with the exploration for and development
of oil and gas reserves. Normal dispositions of oil and gas
properties are accounted for as adjustments to capitalized costs,
with no gain or loss recognized.
Certain directly identifiable internal costs of property acquisition,
exploration and development activities are capitalized. Such costs
capitalized in 1995, 1994 and 1993 totaled $512,000, $527,000, and
$375,898 respectively.
Depletion of such costs is provided using the units-of-production method
based upon estimates of proved oil and gas reserves with oil and gas
production being converted to a common unit of measure based upon
their relative energy content. Depletion per equivalent unit of
production (BBL) was $3.97, $4.07 and $3.55 for 1995, 1994 and 1993,
respectively. Costs from unproved properties are excluded from
depletion until evaluated.
In accordance with the full cost method of accounting, the net
capitalized costs of oil and gas properties (full cost ceiling
limitation) are not to exceed their related estimated future net
revenues discounted at 10%, and lower of cost or estimated fair value
of unproved properties, net of tax considerations.
Maintenance and repairs are charged to operations; renewals and
betterments are charged to the appropriate property and equipment
accounts.
Upon retirement or disposition of assets other than oil and gas
properties, the cost and related accumulated depreciation are removed
from the accounts with the resulting gains or losses, if any,
reflected in results of operations. Depreciation of other property
and equipment is computed using the straight-line method based on
their estimated useful lives.
F-8
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements - (Continued)
Undeveloped Leases Held for Sale
--------------------------------
Undeveloped leases held for sale represent unproven oil and gas
properties which the Company expects to sell within one year. Such
properties are carried at the lower of cost or net realizable value
and are excluded from amortization. Gains or losses upon disposition
or impairment of such properties are treated as an adjustment to the
full cost pool with no gain or loss recognized.
Income Taxes
------------
The Company accounts for federal income taxes using Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("FAS 109"), which required a change from the deferred method of
accounting for income taxes under Accounting Principles Board ("APB")
Opinion 11 to the asset and liability method of accounting for income
taxes. Under the asset and liability method of Statement 109,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income
in the years in which those temporary differences are expected to be
recovered or settled. Under FAS 109, the effect on previously
recorded deferred tax assets and liabilities resulting from a change
in tax rates is recognized in earnings in the period in which the
change is enacted.
Pursuant to the deferred method of accounting for income taxes under APB
Opinion 11, which applied to 1992 and prior years, deferred income
taxes were recognized for income and expense items that are reported
in different years for financial and income tax reporting purposes
using the tax rates applicable for the year of the calculation. Under
the deferred method, deferred taxes were not adjusted for subsequent
tax rate changes.
Environmental
-------------
The Company is subject to extensive Federal, state and local
environmental laws and regulations. These laws, which are constantly
changing, regulate the discharge of materials into the environment and
may require the Company to remove or mitigate the environmental
effects of the disposal or release of petroleum or chemical substances
at various sites. Environmental expenditures are expensed or
capitalized depending on their future economic benefit. Expenditures
that relate to an existing condition caused by past operations and
that have no future economic benefits are expensed. Liabilities for
expenditures of a noncapital nature are recorded when environmental
assessment and/or remediation is probable, and the costs can be
reasonably estimated.
F-9
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements - (Continued)
Revenue Recognition
-------------------
The Company uses the sales method of accounting for crude oil revenues.
To the extent that crude oil is produced but not sold, the oil in
tanks is not recorded as inventory on the financial statements. The
oil in tanks at December 31, 1995 and 1994 was not material.
The Company uses the sales method of accounting for natural gas
revenues. Under this method, revenues are recognized based on actual
volumes of gas sold to purchasers.
Gas Balancing
-------------
Deferred income associated with gas balancing is accounted for on the
entitlements method and represents amounts received for gas sold under
gas balancing arrangements in excess of the Company's interest in
properties covered by such agreements. The Company currently has no
significant amounts outstanding under gas balancing arrangements.
Net Income Per Common Share
---------------------------
Net income per common share has been computed by dividing net earnings
by the weighted average number of shares and share equivalents, if
more than 3% dilutive, outstanding during the period. There was no
significant difference between the primary and fully dilutive earnings
per share.
Use of Estimates in the Preparation of Financial Statements
-----------------------------------------------------------
Preparation of the accompanying 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.
Cash Equivalents
----------------
For purposes of the statements of cash flows, the Company considers
all demand deposits, money market accounts and certificates of
deposit purchased with an original maturity of three months or less
to be cash equivalents.
Reclassifications
-----------------
Certain reclassifications have been made to the 1994 and 1993 amounts
to conform to the 1995 presentation.
(2) Disclosures About Fair Value of Financial Instruments
-----------------------------------------------------
The carrying amount of cash, accounts receivable, accounts payable, and
accrued liabilities approximates fair value because of the short
maturity of these instruments.
F-10
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements - (Continued)
The carrying amount of long-term debt approximates fair value because
the Company's current borrowing rate does not differ from the existing
rate on the Company's long-term debt balance.
(3) Long-Term Debt
--------------
Long-term debt consists of the following at December 31, 1995 and 1994:
1995 1994
------ ------
Note payable to bank, at the bank's
prime rate plus .75% (9.25% at
December 31, 1995), secured by
substantially all of the Company's
oil and gas properties, due in
forty-eight monthly payments
commencing June 1997 $ 11,674,625 11,000,000
Less: current maturities -- --
------------ ----------
$ 11,674,625 11,000,000
============ ==========
On July 31, 1995 the Company amended and renewed its loan agreement.
The note provides for a two-year revolving line of credit of
$25,000,000 with a borrowing base of $12,000,000, followed by a four-
year term loan requiring forty-eight monthly principal payments
beginning June 1997. The borrowing base is subject to redetermination
every six months with the latest redetermination date on November 30,
1995. The note is secured by substantially all of the Company's oil
and gas properties. Commitment fees of .5% per annum on the difference
between the commitment and the average daily amount outstanding are
due quarterly.
The amended and renewed loan agreement contains various restrictive
covenants and compliance requirements, which include (1) maintenance
of certain financial ratios, (2) limiting the incurrence of additional
indebtedness and (3) no payment of dividends.
Maturities of long-term debt are as follows:
1996 $ --
1997 1,702,549
1998 2,918,656
1999 2,918,656
2000 2,918,656
Thereafter 1,216,108
(4) Stock Options and Warrants
--------------------------
F-11
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements - (Continued)
During 1995, the Company granted incentive stock options covering a
total of 70,000 shares of common stock to certain key employees of
the Company. The exercise price of $1.75 per share was not less than
the estimated fair market value of the shares at the date of the
grant. The options are exercisable at various times over periods
commencing May 31, 1996 and extending through May 31, 2005. The
same employees canceled incentive stock options during 1995 covering
70,000 shares of common stock at an exercise price of $3.94 per share,
and 70,000 shares at $3.44 per share for a total of 140,000 shares.
Also during 1995, a certain executive officer exercised options to
purchase 35,000 shares of common stock at $1.03 per share. Exercise
of the nonqualified stock options resulted in a deferred tax effect
of $12,257.
During 1994, the Company granted incentive stock options covering a
total of 115,000 shares of common stock to certain key employees
of the Company. The exercise price of $3.44 per share was not less
than the estimated fair market value of the shares at the date of
the grant. The options are exercisable at various times over periods
commencing October 6, 1995 and extending through October 6, 2004.
Also during 1994, certain executive officers exercised options to
purchase 20,000 shares of common stock at $.34 per share; 37,500
shares of common stock at $.68 per share; and 50,000 shares at $1.03
per share for a total of 107,500 shares. Exercise of the nonqualified
stock options resulted in a deferred tax effect of $83,391.
During 1993, the Company granted nonqualified and incentive stock
options covering a total of 340,000 shares of common stock to
certain executive officers/key employees of the Company. The
exercise prices of $3.19 and $3.94 per share were not less than
the estimated fair market value of the shares at the date of the
grant. The options are exercisable at various times over periods
commencing October 18, 1994 and extending through October 18, 2003.
Also during 1993, a certain executive officer exercised the option to
purchase 80,000 shares of common stock at $.34 per share and 15,000
shares at $1.03 per share for a total of 95,000 shares. Exercise of
the nonqualified stock options resulted in a deferred tax effect of
$65,552.
F-12
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements - (Continued)
Number of Option price
shares per share
--------- ------------
Balance at January 1, 1993 987,000 $ .34 to $1.03
Options granted 340,000 $3.19 to $3.94
Options exercised (95,000) $ .34 to $1.03
---------
Balance at December 31, 1993 1,232,000 $ .34 to $3.94
Options granted 115,000 $3.44
Options exercised (107,500) $ .34 to $1.03
---------
Balance at December 31, 1994 1,239,500 $ .34 to $3.94
Options granted 70,000 $1.75
Options exercised (35,000) $1.03
Options canceled (140,000) $3.44 to $3.94
---------
Balance at December 31, 1995 1,134,500 $ .34 to $3.94
=========
Options exercisable at December 31, 1995 1,112,000 $ .34 to $3.94
=========
In connection with the private placement offering (See Note 9), a
broker-dealer responsible for introducing the Company to the Company's
principal placement agent received a five-year warrant to purchase
64,415 shares of common stock at a price of $2.75 per share.
The Company has outstanding at December 31, 1995 and 1994 300,000
warrants. Each warrant allows the holder to buy one share of common
stock for $6.00. The warrants were issued as part of the Company's
initial public offering in 1980 and are exercisable for a 30 day
period commencing on the date a registration statement covering
exercise is declared effective. The warrants contain antidilution
provisions and in the event of liquidation, dissolution, or winding
up of the Company, the holders are not entitled to participate in the
assets of the Company.
F-13
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements - (Continued)
(5) Income Taxes
------------
As discussed in Note 1, effective January 1, 1993, the Company adopted
FAS 109. The cumulative effective of this accounting change was a
charge of $48,052 as of January 1, 1993 and is reported separately in
the accompanying statement of income for the year ended December 31,
1993. Prior years financial statements have not been restated to
apply the provisions of FAS 109.
Federal income tax expense differs from the amount computed at the
Federal statutory rate as follows:
Year ended
December 31,
---------------------------
1995 1994 1993
------ ------ ------
Income tax expense at statutory rate $ 69,559 240,646 194,665
Nondeductible expenses and other (2,055) 22,775 1,333
-------- ------- -------
Income tax expense $ 67,504 263,421 195,998
======== ======= =======
F-14
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements - (Continued)
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31 are as follows:
1995 1994
------ ------
Current
-------
Deferred income tax assets:
Net operating loss carryforwards
expected to be utilized in 1996 $ 114,240 --
----------- ----------
Total current deferred tax assets $ 114,240 --
=========== ==========
Noncurrent
----------
Deferred income tax assets:
Net operating loss carryforwards $ 3,375,760 3,537,668
Statutory depletion carryforwards 186,608 178,114
----------- ----------
Total noncurrent deferred
income tax assets 3,562,368 3,715,782
----------- ----------
Deferred income tax liabilities:
Property and equipment, principally
due to differences in basis,
expensing of intangible drilling
costs for tax purposes and depletion 4,090,383 4,066,490
Other -- 7,820
---------- ----------
Total deferred income tax
liabilities 4,090,383 4,074,310
---------- ----------
Net noncurrent deferred
income tax liability $ 528,015 358,528
=========== ==========
A valuation allowance is provided when it is more likely than not that
some portion of the deferred tax assets will not be realized. Based
on expectations for the future and the availability of certain tax
planning strategies that would generate taxable income to realize the
net tax benefits, if implemented, management has determined that
taxable income of the Company will more likely than not be sufficient
to fully utilize available carryforwards prior to their ultimate
expiration.
F-15
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements - (Continued)
As of December 31, 1995, the Company had investment tax credit and net
operating loss carryforwards for regular and alternative minimum tax
purposes available to reduce future taxable income and tax liability,
respectively. These carryforwards expire as follows:
Alternative
Net operating Investment tax minimum tax net
loss credit operating loss
------------- -------------- ----------------
1996 $ 336,000 14,000 --
1997 779,000 37,000 --
1998 598,000 -- --
1999 852,000 -- --
2000 562,000 -- --
2001 684,000 -- 2,794,000
2002 421,000 -- 291,000
2003 138,000 -- 82,000
2004 257,000 -- 48,000
2005 69,000 -- --
2006 1,011,000 -- --
2007 792,000 -- --
2008 1,596,000 -- 1,920,000
2009 2,170,000 -- 1,974,000
------------ --------- ----------
$ 10,265,000 51,000 7,109,000
============ ========= ==========
(6) Major Customers
---------------
The following purchasers accounted for 10% or more of the Company's oil
and gas sales for the years ended December 31, 1995, 1994 and 1993 as
follows:
1995 1994 1993
------ ------ ------
Purchaser A 28% 31% 31%
Purchaser B -- -- 17%
Purchaser C 10% 10% --
Purchaser D 10% -- --
Purchaser E -- -- 12%
Purchaser F -- -- 11%
Purchaser G 16% -- --
F-16
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements - (Continued)
(7) Employee Pension Plan
---------------------
Effective September 1, 1988, the Company established a simplified
employee pension plan covering all salaried employees of the Company.
The employees voluntarily contribute a portion of their eligible
compensation, not to exceed $7,000, adjusted for inflation beginning
in 1988, to the plan. The Company's contribution, including the
employees contribution, cannot exceed the lesser of $30,000 or 15%
of compensation. During 1995 and 1994, the Company contributed an
aggregate of $6,739 and $2,626, respectively, of which $2,765 and
$1,129, respectively, was allocated to a Director of the Company.
There were no Company contributions during 1993. The Company has
no obligation to make contributions to the plan.
(8) Statements of Cash Flows
------------------------
During 1995, 1994 and 1993, $196,582, $338,821 and $704,785 were
transferred from leases held for resale to oil and gas properties,
respectively. These transfers are considered non-cash transactions.
No Federal taxes were paid in 1995, 1994 and 1993, as a result of net
operating losses or loss carryforwards. Payments of interest were
$1,027,461, $703,775 and $427,020 in 1995, 1994 and 1993, respectively.
At December 31, 1995 and 1994, there were $257,863 and $1,123,442,
respectively, of property additions accrued in accounts payable.
(9) Common Stock Offering
---------------------
On February 7, 1995, the Company closed on a private placement
offering dated November 7, 1994. The Company sold 644,150 shares
of its common stock at $2.50 per share of which 50,000 shares were
beneficially purchased by certain Directors of the Company.
Proceeds received, net of related expenses, were approximately
$1,321,000.
(10) Related Party Transactions
--------------------------
During 1995 and 1994, the Company was charged $4,200 and $757,000,
respectively for drilling services and lease operating expenses
by entities in which certain Directors are majority owners.
These Directors and their companies own interests in certain wells
operated by the Company. During 1995 and 1994, the Company charged
$40,800 and $213,000, respectively, for the lease operating expenses
and drilling costs and paid $167,000 and $184,000, respectively, in
oil and gas revenues to these related parties related to these wells.
An entity in which the Chief Executive Officer and Chairman of the
Board is the owner acted as the Company's agent in performing the
routine day to day operations of certain wells. In 1995 and 1994,
the Company was billed $348,000 and $189,000, respectively, for the
Company's pro rata share of lease operating and drilling expenses
and received $130,000 and $287,000 in 1995 and 1994, respectively, in
oil and gas revenues related to these wells.
F-17
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements - (Continued)
(11) Oil and Gas Expenditures
------------------------
The following table reflects capitalized costs related to the oil and
gas producing activities as of December 31:
1995 1994
------ ------
Capitalized costs:
Proved properties $ 29,171,917 24,037,600
Unproved properties 1,707,698 3,620,284
------------ ------------
30,879,615 27,657,884
Accumulated depletion 8,590,903 6,993,937
------------ ------------
$ 22,288,712 20,663,947
============ ============
Costs of unproved properties are not being depleted at December 31, 1995
and were incurred primarily during 1994 and are expected to be
evaluated in the next two years.
The following table reflects costs incurred in oil and gas property
acquisition, exploration and development activities for each of the
years in the three-year period ended December 31, 1995:
1995 1994 1993
------ ------ ------
Transfers from undeveloped
leases held for sale $ 196,582 338,821 704,785
Proved property acquisition costs 372,204 238,288 545,824
Unproved property acquisition costs 841,321 2,541,929 720,447
Exploration 1,519,202 3,400,145 2,225,178
Development 889,155 1,225,436 1,173,437
----------- ---------- ----------
$ 3,818,464 7,744,619 5,369,671
=========== ========== ==========
F-18
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements - (Continued)
(12) Fourth Quarter Adjustment
-------------------------
During the fourth quarter of 1995 and 1994, $157,000 and $155,000,
respectively, of depreciation, depletion, and amortization related
to prior quarters was recorded based on the December 31, 1995 and
1994 reserve study.
(13) Supplemental Oil and Gas Reserve Data (Unaudited)
------------------------------------------------
The estimates of the Company's proved oil and gas reserves, which are
all located in the United States are prepared by independent petroleum
engineers. Reserves were estimated in accordance with guidelines
established by the U.S. Securities and Exchange Commission and the
Financial Accounting Standards Board, which require that reserve
estimates be prepared under existing economic and operating conditions
with no provision for price and cost escalations except by contractual
arrangements. Information for oil is presented in barrels (BBL) and
for gas in thousands of cubic feet (MCF).
F-19
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements - (Continued)
A summary of changes in reserve balances is presented below:
Total Proved Proved Developed
------------ ----------------
BBL MCF BBL MCF
--- --- --- ---
Reserves as of January 1, 1993 1,296,643 17,119,886 1,062,743 11,665,833
Purchase of reserves in place -- 1,418,448 -- 1,418,448
Extensions and discoveries 637,457 2,433,979 637,457 2,433,979
Revisions of previous estimates(196,994) (961,074) (202,576) (918,196)
Sales of reserves in place (11,821) (26,322) (11,821) (26,322)
Production (106,312) (888,577) (106,312) (888,577)
--------- ---------- --------- ----------
Reserves as of December 31,
1993 1,618,973 19,096,340 1,379,491 13,685,165
Extensions and discoveries 133,810 2,919,935 133,810 2,919,935
Revisions of previous
estimates (31,654) 986,231 (34,124) 1,173,427
Production (149,308) (1,391,846) (149,308)(1,391,846)
---------- ---------- --------- ----------
Reserves as of December 31,
1994 1,571,821 21,610,660 1,329,869 16,386,681
Purchase of reserves in
place 5,044 147,328 5,044 147,328
Extensions and discoveries 147,079 7,097,216 147,079 7,097,216
Revisions of previous
estimates (87,964) (1,115,199) (94,570)(1,161,290)
Production (132,579) (1,616,105) (132,579)(1,616,105)
---------- ---------- --------- ----------
Reserves as of December 31,
1995 1,503,401 26,123,900 1,254,843 20,853,830
========== ========== ========= ==========
The following is a standardized measure of the discounted net future cash
flows and changes applicable to proved oil and gas reserves required by
SFAS No.69. The future cash flows are based on estimated oil and gas
reserves utilizing prices and costs in effect as of year end discounted
at 10% per year and assuming continuation of existing economic
conditions.
The standardized measure of discounted future net cash flows, in
management's opinion, should be examined with caution. The basis for
this table are the reserve studies prepared by independent petroleum
consultants, which contain imprecise estimates of quantities and rates
of production of reserves. Revisions of previous year estimates can
have a significant impact on these results. Also, exploration costs
in one year may lead to significant discoveries in later years and may
significantly change previous estimates of proved reserves and their
valuation. Therefore, the standardized measure of discounted future
net cash flow is not necessarily a "best estimate" of the fair value
of the Company's proved oil and gas properties.
F-20
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements - (Continued)
Standardized Measure of Discounted Future Net Cash Flows
Relating to Proved Oil and Gas Reserves
(In Thousands)
December 31,
---------------------------------
1995 1994 1993
------ ------ ------
Future cash flows $ 75,044 63,288 56,693
Future costs:
Production (25,356) (23,559) (17,943)
Development (2,853) (2,375) (2,093)
-------- -------- --------
Future net cash flows
before income taxes 46,835 37,354 36,657
Future income taxes (7,242) (4,322) (5,547)
Future net cash flows 39,593 33,032 31,110
10% annual discount for
estimated timing of
cash flows (14,428) (12,570) (11,037)
-------- -------- --------
Standardized measure of
discounted net cash
flows $ 25,165 20,462 20,073
======== ======== ========
F-21
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements
Changes in Standardized Measure of
Discounted Future Net Cash Flows From Proved Reserves
(In Thousands)
Years ended December 31,
------------------------------
1995 1994 1993
------ ------ ------
Increase (decrease):
Purchase of minerals in place $ 182 -- 876
Extensions and discoveries
and improved recovery, net
of future production and
development costs 9,222 3,514 7,586
Accretion of discount 2,050 2,114 2,077
Net change in sales prices net
of production costs 35 (1,418) (3,884)
Changes in estimated future
development costs (323) (137) 224
Revisions of quantity estimates (1,151) 574 (1,568)
Net change in income taxes 725 1,063 714
Sales, net of production costs (3,246) (3,202) (2,093)
Sales of minerals-in-place -- -- (227)
Changes of production rates
(timing) and other (2,791) (2,119) (2,619)
-------- -------- --------
Net increase 4,703 389 1,086
-------- -------- --------
Standardized measure of
discounted future net cash
flows:
Beginning of year 20,462 20,073 18,987
-------- -------- --------
End of year $ 25,165 20,462 20,073
======== ======== ========
Subsequent Event (Unaudited)
----------------------------
During January and February, 1996, the Company participated in the
completion of three gas wells for which the Company owns a 20% working
interest in each well. Although the Company is presently unable to
accurately estimate the gas reserves attributable to these three wells,
primarily as a result of their limited production history and
performance, the Company believes, based on initial production tests
and other available data, that these three wells could significantly
increase the estimates of the Company's oil and gas reserves as reported
at December 31, 1995.
S-1
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
PARALLEL PETROLEUM CORPORATION
March 7, 1996 By: /s/ Thomas R. Cambridge
----------------------------------------
Thomas R. Cambridge, Chief Executive
Officer and Chairman of the Board of
Directors
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Thomas R. Cambridge Chief Executive Officer and Chairman March 7, 1996
- ----------------------- of the Board of Directors (Principal
Thomas R. Cambridge Executive Officer)
/s/ Larry C. Oldham President and Treasurer March 7, 1996
- ----------------------- (Principal Financial Officer)
Larry C. Oldham
/s/ Danny H. Conklin Director March 7, 1996
- -----------------------
Danny H. Conklin
/s/ Ernest R. Duke Director March 7, 1996
- -----------------------
Ernest R. Duke
/s/ Myrle Greathouse Director March 7, 1996
- -----------------------
Myrle Greathouse
/s/ Charles R. Pannill Director March 7, 1996
- -----------------------
Charles R. Pannill
1
INDEX TO EXHIBITS
Exhibit
No. Description of Exhibit
- ------- ----------------------
3.1 Certificate of Incorporation of Registrant
(Incorporated by reference to Exhibit 3.1 to Form
10-K of the Registrant for the fiscal year ended
December 31, 1988.)
* 3.2 Bylaws of Registrant
4.1 Certificate of Merger merging Parallel Petroleum
Corporation, a Texas corporation, into Registrant
(Incorporated by reference to Exhibit 4.1 to Form
10-K of the Registrant as filed with the Securities
and Exchange Commission on April 1, 1985.)
4.2 Agreement and Plan of Merger Dated July 17,
1984 between Parallel Petroleum Corporation, a
Texas corporation, and the Registrant
(Incorporated by reference to Exhibit 2.1 to Form
S-l of the Registrant (File No. 2-92397) as filed
with the Securities and Exchange Commission on
July 26, 1984, as amended by Amendments No. 1
and 2 on October 5, 1984 and October 25, 1984,
respectively.)
Executive Compensation Plans and Arrangements
---------------------------------------------
(Exhibit No.'s 10.1 through 10.6):
----------------------------------
10.1 1981 Non-Qualified Stock Option Plan
(Incorporated by reference to Exhibit 10.1 to Form
S-l of the Registrant (File No. 2-92397) as filed
with the Securities and Exchange Commission on
July 26, 1984, as amended by Amendments No. 1
and 2 on October 5, 1984 and October 25, 1984,
respectively.)
2
10.2 1983 Incentive Stock Option Plan (Incorporated by
reference to Exhibit 10.2 to Form S-l of the Regis-
trant (File No. 2-92397) as filed with the Securities
and Exchange Commission on July 26, 1984, as
amended by Amendments No. 1 and 2 on October
5, 1984, and October 25, 1984, respectively.)
10.3 1992 Stock Option Plan (Incorporated by
reference to Exhibit 28.1 to Form S-8 of the
Registrant (File No. 33-57348) as filed with the
Securities and Exchange Commission on January
25, 1993.)
10.4 Stock Option Agreement between Parallel
Petroleum Corporation and Thomas R. Cambridge
dated December 11, 1991 (Incorporated by
reference to Exhibit 10.4 of Form 10-K of the
Registrant for the fiscal year ended December 31,
1992.)
10.5 Stock Option Agreement between Parallel
Petroleum Corporation and Thomas R. Cambridge
dated October 18, 1993 (Incorporated by reference
to Exhibit 10.4(e) of Form 10-K of the Registrant
for the fiscal year ended December 31, 1993.)
* 10.6 Merrill Lynch, Pierce, Fenner & Smith
Incorporated Prototype Simplified Employee
Pension Plan
10.7 Restated Loan Agreement dated July 31, 1995
between Parallel Petroleum Corporation and
NationsBank of Texas, N.A. (Incorporated by
reference to Exhibit 10.1 of Form 10-Q of the
Registrant for the fiscal quarter ended June 30,
1995.)
* 24.1 Consent of Independent Auditors
* 24.2 Consent of Independent Petroleum Engineers
* 27 Financial Data Schedule
___________
* Filed herewith.
1 Exhibit 3.2
BYLAWS
OF
PARALLEL PETROLEUM CORPORATION
(As Amended On May 15, 1986 and May 4, 1994)
ARTICLE I
OFFICES
Section 1.1 Registered Office. The registered office of the
corporation in the State of Delaware shall be in the City of
Wilmington, County of New Castle, and the name of its registered
agent shall be The Corporation Trust Company.
Section 1.2 Other Offices. The corporation may also have
offices at such other places both within and without the State of
Delaware as the Board of Directors may from time to time determine
or the business of the corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 2.1 Place of Meeting. All meetings of stockholders
for the election of directors shall be held at such place, either
within or without the State of Delaware, as shall be designated
from time to time by the Board of Directors and stated in the
notice of the meeting.
Section 2.2 Annual Meeting. The annual meeting of
stockholders shall be held at such date and time as shall be
designated from time to time by the Board of Directors and stated
in the notice of the meeting.
Section 2.3 Notice of Meeting. Written notice of the annual
meeting shall be served upon or mailed to each stockholder entitled
to vote thereat at such address as appears on the books of the
corporation, at least ten (10) days prior to the meeting.
Section 2.4 Voting List. The officer who has charge of the
stock ledger of the corporation shall prepare and make, at least
ten (10) days before every meeting of stockholders, a complete list
of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and
the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for
any purpose germane to the meeting, during ordinary business hours,
for a period of at least ten (10) days prior to the meeting, either
at a place within the city where the meeting is to be held, which
place shall be specified in the notice of the meeting, or, if not
so specified, at the place where the meeting is to be held. The
2
list shall also be produced and kept at the time and place of the
meeting during the whole time thereof, and may be inspected by any
stockholder who is present. The stock ledger shall be the only
evidence as to who are the stockholders entitled to examine the
stock ledger, the list required by this Section 2.4 or the books of
the corporation, or to vote in person or by proxy at any meeting of
stockholders.
Section 2.5 Special Meeting. Special meetings of the
stockholders, for any purpose or purposes, unless otherwise
prescribed by statute or by the Certificate of Incorporation, may
be called by the Chairman of the Board, the President or by the
Board of Directors or by written order of a majority of the
directors, and shall be called by the Chairman of the Board, by the
President or the Secretary upon the written request therefor,
stating the purpose or purposes of the meeting, delivered to such
officer, signed by the holder(s) of at least ten percent (10%) of
the issued and outstanding stock entitled to vote at such meeting.
The President or directors so calling any such meeting shall fix
the time and any place, either within or without the State of
Delaware, as the place for holding such meeting. (As amended May 4,
1994).
Section 2.6 Notice of Special Meeting. Written notice of a
special meeting of stockholders, stating the time and place and
object thereof, shall be served upon or mailed to each stockholder
entitled to vote thereat at such address as appears on the books of
the corporation, at least ten (10) days before such meeting.
Section 2.7 Scope of Special Meeting. Business transacted at
all special meetings shall be confined to the objects stated in the
call.
Section 2.8 Quorum. The holders of a majority of the shares
of capital stock issued and outstanding and entitled to vote
thereat, present in person or represented by proxy, shall
constitute a quorum at any meeting of stockholders for the
transaction of business, except as otherwise provided by statute or
by the Certificate of Incorporation or by these Bylaws. Notwith-
standing the other provisions of these Bylaws, the holders of a
majority of the shares of capital stock entitled to vote thereat,
present in person or represented by proxy, whether or not a quorum
is present, shall have power to adjourn the meeting from time to
time, without notice other than announcement at the meeting, until
a quorum shall be present or represented. If the adjournment is
for more than thirty (30) days, or if after the adjournment a new
record date is fixed for the adjourned meeting, a notice of the
adjourned meeting shall be given to each stockholder of record
entitled to vote at the meeting. At such adjourned meeting at which
a quorum shall be present or represented, any business may be
transacted which might have been transacted at the original
meeting.
3
Section 2.9 Voting. When a quorum is present at any meeting
of the stockholders, the vote of the holders of a majority of the
shares of capital stock entitled to vote thereon, present in person
or represented by proxy,, shall decide any question brought before
such meeting, unless the question is one upon which, by express
provision of the statutes, of the Certificate of Incorporation or
of these Bylaws, a different vote is required, in which case such
express provision shall govern and control the decision of such
question.
Section 2.10 Right to Vote. At any meeting of the
stockholders, every stockholder having the right to vote shall be
entitled to vote in person, or by proxy appointed by an instrument
in writing subscribed by such stockholder and bearing a date not
more than three years prior to said meeting, unless said instrument
provides for a longer period, and filed with the Secretary of the
corporation before or at the time of the meeting. If such
instrument shall designate two or more persons to act as proxies,
unless such instrument shall provide to the contrary, a majority of
such persons present at any meeting at which their powers
thereunder are to be exercised shall have and may exercise all the
powers of voting or giving consents thereby conferred, or if only
one be present, then such powers may be exercised by that one; or,
if an even number attend and a majority do not agree on any
particular issue, each proxy so attending shall be entitled to
exercise such powers in respect of the shares proportionately.
Section 2.11 Consent of Stockholders. Any action required by
statute to be taken at any annual or special meeting of
stockholders, or any action which may be taken at any annual or
special meeting of stockholders, may be taken without a meeting,
without prior notice and without a vote, if a consent in writing,
setting forth the action so taken, shall be signed by the holders
of all of the outstanding stock of the corporation.
Section 2.12 Voting of Stock of Certain Holders. Shares
standing in the name of another corporation, domestic or foreign,
may be voted by such officer, agent or proxy as the Bylaws of such
corporation may prescribe, or in the absence of such provision, as
the Board of Directors or a duly authorized managing director of
such corporation may determine. Shares standing in the name of a
deceased person may be voted by the executor or administrator of
such deceased person, either in person or by proxy. Shares
standing in the name of a guardian, conservator or trustee may be
voted by such fiduciary, either in person or by proxy, but no such
fiduciary shall be entitled to vote shares held in such fiduciary
capacity without a transfer of such shares into the name of such
fiduciary. Shares standing in the name of a receiver may be voted
by such receiver. A stockholder whose shares are pledged shall be
entitled to vote such shares, unless in the transfer by the pledgor
on the books of the corporation he has expressly empowered the
4
pledgee to vote thereon, in which case only the pledgee, or his
proxy, may represent the stock and vote thereon.
Section 2.13 Treasury Stock. The corporation shall not vote,
directly or indirectly, shares of its own stock owned by it; and
such shares shall not be counted in determining the total number of
issued and outstanding shares for the purposes of determining the
presence of a quorum at any meeting of stockholders.
Section 2.14 Fixing Record Date. In order that the
corporation may determine the stockholders entitled to notice of or
to vote at any meeting of stockholders or any adjournment thereof,
or to express consent to corporate action in writing without a
meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise
any rights in respect of any change, conversion or exchange of
stock or for the purpose of any other lawful action, the Board of
Directors may fix, in advance, a record date, which shall not be
more than sixty (60) nor less than ten (10) days before the date of
such meeting, no more than sixty (60) days prior to any other
action, for the determination of the stockholders entitled to
notice of, and to vote at, any such meeting or any adjournment
thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend
or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or ex-
change of stock or for the purpose of any other lawful action. If
the Board of Directors fix, in advance, a record date as herein
provided, then, in such case, such stockholders, and only such
stockholders, as shall be stockholders of record on the date so
fixed shall be entitled to such notice of, and to vote at, any such
meeting or any adjournment thereof, or to express consent to
corporate action in writing without a meeting, or entitled to
receive payment of any dividend or other distribution or allotment
of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock, or for the purpose of any
other lawful action, as the case may be, notwithstanding any
transfer of any stock on the books of the corporation after any
such record date is fixed as aforesaid.
ARTICLE III
BOARD OF DIRECTORS
Section 3.1 Powers. The property and business of the
corporation shall be managed by or under the direction of its Board
of Directors, which may exercise all such powers of the corporation
and do all such lawful acts and things as are not by statute or by
the Certificate of Incorporation or by these Bylaws directed or
required to be exercised or done by the stockholders.
5
Section 3.2 Number, Selection and Term. The number of
directors which shall constitute the whole Board shall from time to
time be fixed and determined by resolution adopted by the Board of
Directors. The number to be elected at any meeting of stockholders
shall be set forth in the notice of any meeting of stockholders
held for such purpose. The directors shall be elected at the
annual meeting of stockholders, except as provided in Section 3.3,
and each director elected shall hold office until his successor
shall be elected and shall qualify, or until his earlier death,
resignation, retirement, disqualification or removal. Directors
need not be residents of Delaware or stockholders of the
corporation.
Section 3.3 Vacancies, Additional Directors and Removal From
Office. If any vacancy occurs in the Board of Directors caused by
the death, resignation, retirement, disqualification or removal
from office of any director, or otherwise, or if any new
directorship is created by an increase in the authorized number of
directors, a majority of the directors then in office, though less
than a quorum, or a sole remaining director, may choose a successor
to fill such vacancy or the newly-created directorship; and a
director so chosen shall hold office until the term of the director
whose vacancy is filled expires and until his successor shall be
duly elected and shall qualify, or until his earlier death,
resignation, retirement, disqualification or removal, or until the
next annual meeting of stockholders, whichever shall first occur.
Any director may be removed, with or without cause, by the holders
of a majority of the shares then entitled to vote for an election
of directors at any special meeting of stockholders duly called and
held for such purpose.
Section 3.4 Resignation. Any director may resign at any time
by written notice to the corporation. Any such resignation shall
take effect at the date of receipt of such notice or at any other
time specified therein, and, unless otherwise specified therein,
the acceptance of such resignation shall not be necessary to make
it effective. Any director who does not, for any reason
whatsoever, stand for election at any meeting of stockholders
called for such purpose shall be conclusively deemed to have
resigned, effective as of the date of such meeting, for the
purposes of these Bylaws, and the corporation need not receive any
written notice to evidence such resignation.
Section 3.5 Meetings of the Board. The directors of the
corporation may hold their meetings, both regular and special,
either within or without the State of Delaware.
Section 3.6 Regular Meetings. A regular meeting of each newly
elected board shall be held immediately following the annual
meeting of stockholders, and no notice of such meeting shall be
necessary to the newly elected directors in order legally to
constitute the meeting provided a quorum shall be present. Other
6
regular meetings of the board may be held without notice at such
time and place as the Board of Directors may provide by resolution.
Section 3.7 Special Meetings. A special meeting of the Board
of Directors may be called by the Chairman of the Board or by the
President. The Chairman or President so calling any such meeting
shall fix the time and any place, either within or without the
State of Delaware, as the place for holding such meeting.
Section 3.8 Notice of Special Meeting. Written notice of
special meetings of the Board of Directors shall be given to each
director at least forty-eight (48) hours prior to the time of such
meeting. Any director may waive notice of any meeting. The
attendance of a director at any meeting shall constitute a waiver
of notice of such meeting, except where a director attends a
meeting solely for the purpose of objecting to the transaction of
any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the
purpose of, any special meeting of the Board of Directors need be
specified in the notice or waiver of notice of such meeting, except
that notice shall be given with respect to any matter to be acted
upon at such special meeting where notice is required by statute.
Section 3.9 Quorum. A majority of the Board of Directors
shall constitute a quorum for the transaction of business at any
meeting of the Board of Directors, and the act of a majority of the
directors present at any meeting at which there is a quorum shall
be the act of the Board of Directors, except as may be otherwise
specifically provided by statute, by the Certificate of
Incorporation or by these Bylaws. If a quorum shall not be present
at any meeting of the Board of Directors, a majority of the
directors present thereat, though less than a quorum, may adjourn
the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present.
Section 3.10 Action Without Meeting. Unless otherwise
restricted by the Certificate of Incorporation or these Bylaws, any
action required or permitted to be taken at any meeting of the
Board of Directors, or of any committee thereof as provided in
Article IV of these Bylaws, may be taken without a meeting, if a
written consent thereto is signed by all members of the Board or of
such committee, as the case may be, and such written consent is
filed with the minutes of proceedings of the Board or committee.
Section 3.11 Compensation. Directors, as such, shall not be
entitled to any stated salary for their services unless voted by
the stockholders or the Board of Directors; but by resolution of
the Board of Directors, a fixed sum and expenses of attendance, if
any, may be allowed for attendance at each regular or special
meeting of the Board of Directors or any meeting of a committee or
directors. No provision of these Bylaws shall be construed to
7
preclude any director from serving the corporation in any other
capacity and receiving compensation therefor.
ARTICLE IV
Committee of Directors
Section 4.1 Designations, Powers and Name. The Board of
Directors may, by resolution passed by a majority of the whole
Board, designate one or more committees, including, if they shall
so determine, an Executive Committee, each such committee to
consist of two or more of the directors of the corporation. The
committee shall have and may exercise such of the powers of the
Board of Directors in the management of the business and affairs of
the corporation as may be provided in such resolution; provided,
however, that no such committee shall have the power or authority
in reference to amending the Certificate of Incorporation (except
that a committee may, to the extent authorized in the resolution or
resolutions providing for the issuance of shares of stock adopted
by the Board of Directors, fix any of the preferences or rights of
such shares relating to dividends, redemption, dissolution, any
distribution of assets of the corporation or the conversion into,
or the exchange of such shares for, shares of any other class or
classes or any other series of the same or any other class or
classes of stock in the corporation), adopting an agreement of
merger or consolidation, recommending to the stockholders the sale,
lease or exchange of all or substantially all of the corporation's
property and assets, recommending to the stockholders a dissolution
of the corporation or a revocation of a dissolution, or amending
the Bylaws of the corporation; and, provided further, that, unless
the resolution establishing the committee expressly so provides, no
such committee shall have the power or authority to declare a
dividend or to authorize the issuance of stock. The committee may
authorize the seal of the corporation to be affixed to all papers
which may require it. The Board of Directors may designate one or
more directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting. Such
committee or committees shall have such name or names as may be
determined from time to time by resolution adopted by the Board of
Directors.
Section 4.2 Minutes. Each committee of directors shall keep
regular minutes of its proceedings and report the same to the Board
of Directors when required.
Section 4.3 Compensation. Members of special or standing
committees may be allowed compensation for attending committee
meetings, if the Board of Directors shall so determine.
8
ARTICLE V
NOTICE
Section 5.1 Methods of Giving Notice. Whenever under the
provisions of any statute, the Certificate of Incorporation or
these Bylaws notice is required to be given to any director, member
of any committee or stockholder, such notice shall be in writing
and delivered personally or mailed to such director, member or
stockholder; provided, however, that in the case of a director or
a member of any committee, such notice, unless required by statute,
the Certificate of Incorporation or these Bylaws to be in writing,
may be given orally or by telephone or telegram. If mailed,
notices to a director, member of a committee or stockholder shall
be deemed to be given when deposited in the United States mail
first class in a sealed envelope, with postage thereon prepaid,
addressed, in the case of a stockholder, to the stockholder at the
stockholder's address as it appears on the records of the
corporation or, in the case of a director or a member of a
committee, to such person at his business address. If sent by
telegraph, notice to a director or member of a committee shall be
deemed to be given when the telegram, so addressed, is delivered to
the telegraph company.
Section 5.2 Written Waiver. Whenever any notice is required
to be given under the provisions of any statute, the Certificate of
Incorporation or these Bylaws, a waiver thereof in writing, signed
by the person or persons entitled to said notice, whether before or
after the time stated therein, shall be deemed equivalent thereto.
ARTICLE VI
OFFICERS
Section 6.1 Officers. The officers of the corporation shall
be a president, vice president, a secretary and a treasurer. The
board may appoint such other officers and agents as it shall deem
necessary, who shall hold their offices for such terms and shall
exercise such powers and perform such duties as shall be determined
from time to time by the board. Two or more offices may be held by
the same person, except that the offices of president and secretary
shall not be held by the same person. No officer shall execute,
acknowledge, verify or countersign any instrument on behalf of the
corporation in more than one capacity, if such instrument is
required by law, by these Bylaws or by any act of the corporation
to be executed, acknowledged, verified or countersigned by two or
more officers.
Section 6.2 Election and Term of Office. The Board of
Directors at its first meeting after each annual meeting of
stockholders shall choose a president from its members, and shall
9
choose one or more vice-presidents, a secretary and a treasurer.
None of the officers need be a director, and none of the officers
need be a stockholder of the corporation. The officers of the
corporation shall hold office until their successors are chosen and
qualify in their stead.
Section 6.3 Removal and Resignation. Any officer or agent
elected or appointed by the Board of Directors may be removed
without cause by the affirmative vote of a majority of the Board of
Directors whenever, in its judgment, the best interests of the
corporation shall be served thereby, but such removal shall be
without prejudice to the contractual rights, if any, of the person
so removed. Any officer may resign at any time by giving written
notice to the corporation. Any such resignation shall take effect
at the date of the receipt of such notice or at any later time
specified therein, and unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it
effective.
Section 6.4 Vacancies. Any vacancy occurring in any office of
the corporation by death, resignation, removal or otherwise, may be
filled by the Board of Directors for the unexpired portion of the
term.
Section 6.5 Salaries. The salaries of all officers and agents
of the corporation shall be fixed by the Board of Directors or
pursuant to its direction; and no officer shall be prevented from
receiving such salary by reason of his also being a director.
Section 6.6 President. The president shall be the chief
executive officer of the corporation; he shall preside at all
meetings of the stockholders and directors, shall be ex officio a
member of all standing committees, shall have general and active
management of the business of the corporation, and shall see that
all orders and resolutions of the board are carried into effect.
He shall execute contracts, sales agreements, licensing and royalty
agreements, bonds, mortgages, deeds of trust, deeds, leases,
agreements and instruments necessary or desired in the transaction
of the authorized business of the corporation and, if requiring a
seal, under the seal of the corporation, except where required or
permitted by law to be otherwise signed and executed and except
where the signing and execution thereof shall be expressly
delegated by the Board of Directors to some other officer or agent
of the corporation.
Section 6.7 Vice President. The vice presidents in the order
of their seniority shall, in the absence or disability of the
president, perform the duties and exercise the powers of the
president, and shall perform such other duties as the Board of
Directors shall prescribe.
10
Section 6.8 Secretary and Assistant Secretaries. The
secretary shall attend all sessions of the board and all meetings
of the stockholders and record all votes and the minutes of all
proceedings in a book to be kept for that purpose and shall perform
like duties for the standing committees when required. He shall
give, or cause to be given, notice of all meetings of the
stockholders and special meetings of the Board of Directors, and
shall perform such other duties as may be prescribed by the Board
of Directors or president, under whose supervision he shall be. He
shall keep in safe custody the seal of the corporation and, when
authorized by the board, affix the same to any instrument requiring
it and, when so fixed, it shall be attested by his signature or by
the signature of the treasurer or an assistant secretary. The
assistant secretaries in order of their seniority shall, in the
absence or disability of the secretary, perform the duties and
exercise the powers of the secretary and shall perform such other
duties as the Board of Directors shall prescribe.
Section 6.9 Treasurer and Assistant Treasurers. The treasurer
shall have the custody of the corporate funds and securities and
shall keep full and accurate accounts of receipts and disbursements
in books belonging to the corporation and shall deposit all moneys
and other valuable effects in the name and to the credit of the
corporation in such depositories as may be designated by the Board
of Directors. He shall disburse the funds of the corporation as
may be ordered by the board, taking proper vouchers for such
disbursements, and shall render to the president and directors, at
the regular meetings of the board, or whenever they may require it,
an account of all his transactions as treasurer and of the
financial condition of the corporation. If required by the Board
of Directors, he shall give the corporation a bond (which shall be
renewed every six years) in such sum and with such surety or
sureties as shall be satisfactory to the board for the faithful
performance of the duties of his office and for the restoration to
the corporation, in case of his death, resignation, retirement or
removal from office, of all books, papers, vouchers, money and
other property of whatever kind in his possession or under his
control, belonging to the corporation. The assistant treasurers in
the order of their seniority shall, in the absence or disability of
the treasurer, perform the duties and exercise the powers of the
treasurer and shall perform such other duties as the Board of
Directors shall prescribe.
ARTICLE VII
CONTRACTS, CHECKS AND DEPOSITS
Section 7.1 Contracts. Subject to the provisions of Section
6.1, the Board of Directors may authorize any officer, officers,
agent or agents to enter into any contract or execute and deliver
any instrument for and in the name of and on behalf of the
10
corporation, and such authority may be general or confined to
specific instances.
Section 7.2 Checks, etc. All checks, demands, drafts or other
orders for the payment of money, notes or other evidences of
indebtedness issued in the name of the corporation shall be signed
by such officer or officers or such agent or agents of the
corporation, and in such manner, as shall be determined by the
Board of Directors.
Section 7.3 Deposits. All funds of the corporation not
otherwise employed shall be deposited from time to time to the
credit of the corporation in such banks, trust companies or other
depositories as the Board of Directors may select.
ARTICLE VIII
CERTIFICATES OF STOCK
Section 8.1 Issuance. Each stockholder of this corporation
shall be entitled to a certificate or certificates showing the
number of shares of stock registered in such stockholder's name on
the books of the corporation. The certificates shall be in such
form as may be determined by the Board of Directors, shall be
issued in numerical order and shall be entered in the books of the
corporation as they are issued. They shall exhibit the holder's
name and number of shares and shall be signed by the President or
Vice President and by the Secretary or an Assistant Secretary. Any
or all of the signatures on the certificate may be a facsimile. If
the corporation shall be authorized to issue more than one class of
stock or more than one series of any class, the powers,
designations, preferences and relative, participating, optional or
other special rights of each class of stock or series thereof and
the qualifications, limitations or restrictions of such preferences
and rights shall be set forth in full or summarized on the face or
back of the certificate which the corporation shall issue to
represent such class or series of stock; provided, however, that
except as otherwise provided by statute, in lieu of the foregoing
requirements, there may be set forth on the face or back of the
certificate which the corporation shall issue to represent such
class or series of stock, a statement that the corporation will
furnish without charge to each stockholder who so requests a copy
of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of
stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights. All certificates
surrendered to the corporation for transfer shall be cancelled and
no new certificate shall be issued until the former certificate for
a like number of shares shall have been surrendered and cancelled,
except that in the case of a lost, stolen, destroyed or mutilated
certificate a new one may be issued therefor upon such terms and
with such indemnity, if any, to the corporation as the Board of
12
Directors may prescribe. Certificates shall not be issued
representing fractional shares of stock. If any stock certificate
is signed (1) by a transfer agent or an assistant transfer agent or
(2) by a transfer clerk acting on behalf of the corporation and a
registrar, the signature of any such officer may be facsimile.
Section 8.2 Lost Certificates. The corporation may issue a
new certificate or certificates in place of any certificate or
certificates heretofore issued by the corporation alleged to have
been lost, stolen or destroyed, upon the making of an affidavit of
that fact by the person claiming the certificate of stock to be
lost, stolen or destroyed. The corporation may, in its discretion
and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed certificates, or his legal
representative, to advertise the same in such manner as it shall
require or to give the corporation a bond sufficient to indemnify
it against any claim that may be made against the corporation with
respect to the certificate or certificates alleged to have been
lost, stolen or destroyed or the issuance of such new certificate.
Section 8.3 Transfers. Upon surrender to the corporation or
the transfer agent of the corporation of a certificate for shares
duly endorsed or accompanied by proper evidence of succession,
assignment or authority to transfer, it shall be the duty of the
corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon
its books. Transfer of shares shall be made only on the books of
the corporation by the registered holder thereof, or by such
holder's attorney thereunto authorized by power of attorney and
filed with the Secretary of the corporation or the transfer agent.
Section 8.4 Registered Stockholders. The corporation shall be
entitled to treat the holder of record of any share or shares of
stock as the holder in fact thereof and, accordingly, shall not be
bound to recognize any equitable or other claim to or interest in
such share or shares on the part of any other person, whether or
not it shall have express or other notice thereof, except as
otherwise provided by the laws of the State of Delaware.
ARTICLE IX
DIVIDENDS
Section 9.1 Declaration. Dividends upon the capital stock of
the corporation, subject to the provisions of the Certificate of
Incorporation, if any, may be declared by the Board of Directors at
any regular or special meeting, pursuant to law. Dividends may be
paid in cash, in property or in shares of capital stock, subject to
the provisions of the Certificate of Incorporation.
Section 9.2 Reserve. Before payment of any dividend, there
may be set aside out of any funds of the corporation available for
13
dividends such sum or sums as the Board of Directors from time to
time, in its absolute discretion, thinks proper as a reserve or
reserves to meet contingencies or for equalizing dividends, or for
repairing or maintaining any property of the corporation, or for
such other purpose as the Board of Directors shall think conducive
to the interests of the corporation, and the Directors may modify
or abolish any such reserve in the manner in which it was created.
ARTICLE X
INDEMNIFICATION
(As Amended May 15, 1986)
Section 10.1. Indemnification of Directors, Officers and
Employees. The corporation shall indemnify to the full extent
authorized by law any person who may be or is involved, as a party
or otherwise, in an action, suit or proceeding, whether criminal,
civil, administrative or investigative, by reason of the fact that
he, his testator or intestate is or was a director, officer or em-
ployee of the corporation or any predecessor of the corporation or
serves or served any other enterprise as a director, officer or
employee at the request of the corporation or any predecessor of
the corporation. In addition to the foregoing, the corporation
shall, upon request of any such person described above and to the
fullest extent permitted by law, pay or reimburse the reasonable
expenses incurred by such person in any action, suit, or proceeding
described above in advance of the final disposition of such action,
suit, or proceeding.
Section 10.2. Insurance. The corporation shall have the
power to purchase and maintain insurance on behalf of any person
who is or was a director, trustee, officer, employee or agent of
the corporation, or is or was serving at the request of the
corporation as a director, trustee, officer, employee or agent of
another corporation, partnership, joint venture, trust or other
enterprise, against any liability asserted against such person and
incurred by such person in any such capacity or arising out of such
person's status as such, whether or not the corporation would have
the power to indemnify such person against such liability.
ARTICLE XI
MISCELLANEOUS
Section 11.1 Fiscal Year. The fiscal year of the corporation
shall be fixed by the resolution of the Board of Directors.
Section 11.2 Books. The books of the corporation may be kept
(subject to any provision contained in the statutes) outside the
State of Delaware at the offices of the corporation at Midland,
Texas, or at such other place or places as may be designated from
time to time by the Board of Directors.
14
Section 11.3 Annual Statement. The Board of Directors shall
present at each annual meeting and when called for by vote of the
stockholders at any special meeting of the stockholders, a full and
clear statement of the business and conditions of the corporation.
Section 11.4 Seal. The corporate seal shall have ascribed
thereon the name of the corporation, and the words "Corporate Seal,
Delaware." The seal may be used by causing it or a facsimile
thereof to be impressed or affixed or otherwise reproduced.
ARTICLE XII
AMENDMENT
These Bylaws may be altered, amended or repealed at any
regular or special meeting of the Board of Directors, without prior
notice, by resolution adopted thereat.
1 Exhibit 10.6
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED PROTOTYPE SIMPLIFIED
EMPLOYEE PENSION PLAN
Article I: Definitions
As used in this Prototype SEP and Employer's Adoption Agreement, each of the
following terms shall have the meaning for that term set forth in this
Article I:
1.1 "Employer's Adoption Agreement" means a document so designated with
respect to this Prototype SEP and executed by the Employer, as amended from time
to time.
1.2 "Affiliate" means any corporation or unincorporated business (other
than the Employer): (a) which is controlled by, or under common control with,
the Employer within the meaning of sections 414(b) and (c) of the Code, (b)
which is a member of an "affiliated service group" (as defined in section 414(m)
of the Code) which includes the Employer, or (c) which is required to be
aggregated with the Employer under section 414(o) of the Code and the regula-
tions thereunder; provided that for purposes of Article V, "Affiliate" status
shall be determined in accordance with section 415(h) of the Code.
1.3 "Business" means in the case of an Employer that is a sole proprietor-
ship or partnership, the trade or business of the Employer with respect to which
this Plan is adopted, and in the case of an Employer that is a corporation, each
trade or business of the corporation.
1.4 "Code" means the Internal Revenue Code of 1986, as now in effect or as
amended from time to time. A reference to a provision of the Code shall be to
such provision and any valid regulations pertaining thereto as well as to the
corresponding provision of any legislation which amends, supplements or
supersedes that provision and any valid regulations pertaining thereto.
1.5 "Compensation" means:
(a) For an Employee other than a Self-Employed Individual, wages (as
defined in Code section 3401(a)) and all other payments of compensation by the
Employer to the Employee included in the "Wages, Tips and Other Compensation"
box on the Internal Revenue Service Form W-2 furnished to the Employee, which
information is required to be reported by the Employer under Code sections 6041
and 6051. In determining Compensation, the Employer must include wages without
regard to rules under Code section 3401(a) that contain limitations with respect
to wages based on the nature or location of the Employee's employment or
services performed.
(b) For a Self-Employed Individual, his Earned Income for the Plan Year
involved.
2
(c) For any Employee (including a Self-Employed Individual),
Compensation shall include any amount which is contributed by the Employer
pursuant to a salary reduction agreement and which is not includable in the
gross income of the Employee under Code sections 125, 402(e)(3), 402(h) or
403(b).
(d) For any Employee (including a Self-Employed Individual), the annual
Compensation taken into account for determining all benefits provided under the
Plan for any Plan Year shall not exceed $235,840 for 1993 (as indexed for cost-
of-living pursuant to Code section 408(k)(8)); provided, however, that the
dollar increase in effect on January 1 of any calendar year is effective for
Plan Years beginning in such calendar year. If Compensation is to be determined
based on a period of time that contains fewer than 12 months, then the annual
compensation limit is an amount equal to the annual compensation limit for the
calendar year in which the compensation period begins multiplied by the ratio
obtained by dividing the number of full months in the period by 12.
(e) For purposes of defining compensation for the $385 (for 1993)
compensation limit under Code section 408(k)(2)(C), the foregoing provisions of
this Section 1.5 shall apply by virtue of these provisions meeting the
definition of compensation set forth under Code section 414(q)(7).
1.6 "Salary Reduction Contribution Agreement" means an agreement entered
into between an Employee and the Employer to reduce the Compensation otherwise
payable directly to the Participant in cash, as further described in Article IV
of this Prototype SEP.
1.7 "Deferral Percentage" means the ratio (expressed as a percentage) of an
Employee's Salary Reduction Contributions to the Employee's Compensation for the
Plan Year. For purposes of determining such ratio with respect to an Employee
participating in the Plan who is a 5-percent owner or one of the ten most
"highly-paid" Highly Compensated Employees, the Salary Reduction Contributions
and Compensation of such Employee shall include the Salary Reduction Contribu-
tions and Compensation for the Plan Year of "family members," which shall
include the Employee's spouse, lineal ascendants (such as parents or grand-
parents) and descendant's (such as children or grandchildren) or spouses of
individuals in either of those categories, in accordance with Code section
414(q) and the regulations thereunder, and such "family members" shall not be
considered as separate Employees in determining Deferral Percentages, both for
Employees who are Non-Highly Compensated Employees and for Employees who are
Highly Compensated Employees.
1.8 "Defined Benefit Plan" means a plan of the type defined in Code section
414(j) maintained by the Employer or an Affiliate, as applicable.
1.9 "Defined Contribution Plan" means a plan of the type defined in Code
section 414(i) maintained by the Employer or an Affiliate, as applicable.
1.10 "Earned Income" means the "net earnings from self-employment" (within
the meaning of Code section 401(c)(2)) of a Self-Employed Individual from the
Business, but only if the personal services of the Self-Employed Individual are
3
a material income-producing factor with respect to the Business. Net earnings
will be determined (a) without regard to items not included in gross income and
the deductions properly allocable to or chargeable against such items and are to
be reduced by contributions by the Employer to a retirement plan to the extent
deductible under Code section 404 and (b) with regard to the deduction allowed
to the Self-Employed Individual by Code section 164(f).
1.11 "Eligible Employee" means any Employee of an Employer other than an
Employee in either or both of the following categories of Employees:
(a) Employees included in a unit of Employees covered by a collective
bargaining agreement between the Employer or any Affiliate and "employee
representatives," if retirement benefits were the subject of good faith
bargaining and two percent or less of the Employees who are covered pursuant to
that agreement are professionals as defined in proposed Treasury Regulation
1.410(b)-9(g). For this purpose, the term "employee representatives" does not
include any organization more than half of whose members are Employees who are
owners, officers or executives of the Employer or any Affiliate.
(b) Non-resident aliens within the meaning of Code section
7701(b)(1)(B) who receive no earned income within the meaning of Code section
911(d)(2) from the Employer or any Affiliate which constitutes income from
sources within the United States within the meaning of Code section 861(a)(3).
Notwithstanding the foregoing, the Employer's Adoption Agreement may provide
for inclusion of either or both categories of Employees as Eligible Employees.
1.12 "Employee" means a Self-Employed Individual, any individual who is
employed by the Employer in the Business and any individual who is employed by
an Affiliate. Each Leased Employee shall also be treated as an Employee of the
recipient Employer.
1.13 "Employer" means the corporation, proprietorship, partnership or other
organization which adopts the Plan by execution of an Employer's Adoption Agree-
ment. Each Affiliate shall also adopt this Plan, and each of such adopting
Affiliates shall be deemed an "Employer" with respect to the Plan; provided,
that the Employer signing the Employer's Adoption Agreement shall (a) be the
Plan sponsor within the meaning of ERISA section 3(16)(B), and (b) have the
authority to act for all participating Employers with respect to Plan
administration and the execution and amendment of the Plan.
1.14 "Employer Contributions" means the contributions made on a
Participant's behalf described in Article III.
1.15 "ERISA" means the Employee Retirement Income Security Act of 1974, as
now in effect or as amended from time to time. A reference to a provision of
ERISA shall be to such provision and any valid regulations pertaining thereto as
4
well as to the corresponding provision of any legislation which amends,
supplements or supersedes that provision and any valid regulations pertaining
thereto.
1.16 "Excess Contributions" means, with respect to any Plan Year, the
excess of:
(i) the aggregate amount of Salary Reduction Contributions actually
taken into account in computing the Deferral Percentage of a
Highly Compensated Employee for such Plan Year, over
(ii) the maximum amount of such Salary Reduction Contributions
permitted under Code section 408(k)(6).
1.17 "Highly Compensated Employee" means:
(a) Any Employee who performs service for the Employer during the
"determination year" and who during the "determination year" or "look-back year"
(i) was at any time a 5-percent owner; (ii) received compensation from the
Employer in excess of either (A) $64,245 (for 1993) and was in the group of
Employees consisting of the top 20% of the Employees when ranked on the basis
of compensation paid during the year ("top-paid group") or (B) $96,368 (for
1993) (as both of the amounts specified in (A) and (B) are indexed for cost-of-
living pursuant to Code section 414(q)); or (iii) was an officer of the Employer
and received compensation in excess of 50% of the dollar limitation in effect
under Code section 415(b)(1)(A); and
(b) If during the "determination year" or "look-back year" no officer
received compensation in excess of 50% of the dollar limitation in effect under
Code section 415(b)(1)(A), then the highest-paid officer for such year.
The determination of who is a Highly Compensated Employee, including the
determinations of the number and identity of Employees in the "top-paid group,"
the number of employees treated as officers and the compensation that is
considered, will be made in accordance with Code section 414(q) and the
regulations thereunder. The determination of who is a 5-percent owner shall be
made in accordance with section 416(i) of the Code and the regulations
thereunder.
1.18 "Leased Employee" means any individual (other than an Employee) who,
pursuant to an agreement between the recipient Employer and any other person
(the "leasing organization"), has performed services for the recipient Employer
(or for the recipient Employer and "related persons" determined in accordance
with Code section 414(n)(6)) on a substantially full-time basis for a period
of at least one year, which services are of a type historically performed, in
the business field of the recipient Employer, by employees and any other
individuals who must be treated as a "leased employee" under regulations adopted
pursuant to Code section 414(o).
5
1.19 "Non-Highly Compensated Employee" means an Employee who is not a Highly
Compensated Employee.
1.20 "Participant" means an Eligible Employee who satisfies the eligibility
requirements of Article II with respect to the Plan Year involved.
1.21 "Plan" means the simplified employee pension plan of the Employer in
the form of this Prototype SEP and the applicable Employer's Adoption Agreement
executed by the Employer.
1.22 "Plan Year" means as specified in the Employer's Adoption Agreement
either the calendar year or the Employer's tax year ending on the date specified
in the Employer's Adoption Agreement. If the Plan Year is modified by an
amendment to the Employer's Adoption Agreement, the term "Plan Year" means the
Plan Year in effect prior to the amendment, the short period commencing on the
first day in which the modification is effective and ending on the day before
the first day of the first Plan Year as so modified, and each consecutive twelve
month period thereafter ending on the date specified in the Employer's Adoption
Agreement. In the event of such a change in Plan Year, for purposes of any
service requirement specified in the Employer's Adoption Agreement, (a) an
Employee who has any service with the Employer during the short period must be
given credit for that service in determining whether he or she has satisfied
that requirement, and (b) each Employee who but for such change would have been
entitled to a contribution for the calendar year in which the short period
begins shall be entitled to share in any Employer contribution made pursuant
to Article III for the short period.
1.23 "Prototype SEP" means Merrill Lynch's SEP Plus Prototype Simplified
Employee Pension Plan as set forth in this document, as amended from time to
time.
1.24 "Salary Reduction Contributions" means the contributions made on a
Participant's behalf described in Article IV.
1.25 "Self-Employed Individual" means an individual who has Earned Income
for the Plan Year involved, or who would have had such Earned Income but for
the fact that the Business had no net earnings for that Plan Year.
1.26 "SEP/IRA" means the Merrill Lynch Individual Retirement Custodial
Account established by or on behalf of an Employee for investment of contribu-
tions made on behalf of the Employee under the Plan.
1.27 "Taxable Wage Base" means the contribution and benefit base in effect
under Section 230 of the Social Security Act at the beginning of the Plan Year
involved.
6
Article II: Eligibility to Participate
Each individual who at any time during a Plan Year was an Eligible Employee
who met the eligibility and any age and/or service requirements set forth in the
Employer's Adoption Agreement shall be a Participant eligible to receive an
allocation to his SEP/IRA for the Plan Year and otherwise participate in the
Plan. Notwithstanding the foregoing, an Employee who does not receive Compensa-
tion from the Employer for a Plan Year of at least $385 for 1993 (as indexed for
cost-of-living pursuant to Code section 408(k)(8)) shall not be a Participant
in the Plan for the Plan Year.
Article III: Employer Contributions
A. Allocation Formula Not Providing for Permitted Disparity
If the Employer elects in the Employer's Adoption Agreement that Employer
Contributions are not calculated using "permitted disparity," the Employer will
decide how much, if anything, to contribute for each Plan Year to the SEP/IRAs
of Participants. The allocation will be based on the same percentage of each
Participant's Compensation, provided that the contribution for any Employee
shall not exceed the lesser of 15% of the Participant's Compensation from the
Employer for the Plan Year involved or $30,000 (or such higher amount as may be
permissible under applicable Treasury Department regulations). If this limit is
exceeded on behalf of any Participant for a particular Plan Year, any Salary
Reduction Contributions made on behalf of the Participant shall be reduced to
the extent of the excess.
B. Allocation Formula Providing for Permitted Disparity
If the Employer so elects in the Employer's Adoption Agreement, the Employer
Contributions to the SEP/IRA of each Participant shall be calculated using
"permitted disparity," often referred to as the contributions being "integrated"
with Social Security, in the following manner:
1) First, the Employer will decide on how much to contribute to each
Participant's SEP/IRA as a uniform percentage (the "Base Percentage") of
Participants' Compensation. The Base Percentage shall not be less than 3%
unless either (a) the Plan is not a "top-heavy" plan as described in Article VI
or (b) the Employer has designated in the Employer's Adoption Agreement that
"top-heavy" minimum contributions will be provided under another Defined
Contribution Plan.
2) After the contribution has been allocated pursuant to paragraph 1 above,
an additional allocation shall be made to the SEP/IRA of each Participant,
taking into consideration only that amount of such Participant's Compensation
in excess of the Integration Level designated by the Employer in the Employer's
Adoption Agreement for the Plan Year involved. The percentage of Compensation
for any additional allocation under this paragraph shall not exceed the lesser
of:
7
(i) the contribution percentage used under paragraph 1; or
(ii) the applicable percentage determined in accordance with the table
below.
________________________________________________________________________________
If the Integration Level is: the applicable
percentage is:
1) equal to the Taxable Wage Base 5.7%
more than: but not more than:
2) $0 20% of the Taxable Wage Base 5.7%
3) 20% of the Taxable Wage Base 80% of the Taxable Wage Base 4.3%
4) 80% of the Taxable Wage Base up to the Taxable Wage Base 5.4%
For 1993, the Taxable Wage Base is $57,600, 20% of the Taxable Wage Base is
$11,520 and 80% of the Taxable Wage Base is $46,080.
________________________________________________________________________________
For purposes of the above allocation, in no event can the amount allocated
to a Participant's SEP/IRA exceed the lesser of 15% of the Employee's Compensa-
tion or $30,000 (or such higher amount as may be permissible under applicable
Treasury Department regulations). If this limit is exceeded on behalf of any
Participant for a particular Plan Year, any Salary Reduction Contributions made
on behalf of the Participant shall be reduced to the extent of the excess.
C. Deductibility of Employer Contributions
The Employer may, subject to limitations contained in the Code, deduct
contributions made to the Plan in the taxable year within which the Plan Year
ends. Contributions made for a particular taxable year of the Employer which
are contributed by the due date of the Employer's income tax return (including
extensions) are deemed made in such taxable year. The otherwise applicable
deduction limitation under Code section 404(a)(3)(A) (with respect to allowable
deductions for contributions made under any stock bonus or profit-sharing plan
maintained by the Employer) shall be reduced by the amount of SEP contributions
deductible by the Employer for the taxable year involved.
8
Article IV: Salary Reduction Contribution Option
A. Conditions and Restrictions Pertaining to the Salary Reduction Contribution
Option
If the Employer so elects in the Employer's Adoption Agreement, for each
Plan Year in which such election is available, each Participant may, pursuant
to a Compensation Reduction Agreement, elect to have Compensation that is
earned subsequent to the election reduced, through either a single sum or
continuing contributions, or both, by an amount not in excess of the lesser of
(i) $8,994 per year for 1993 (as indexed for cost-of-living pursuant to Code
section 402(g)) taking into account the Salary Reduction Contributions made
under the Plan in addition to all other elective deferrals made under all of the
plans of the Employer or an Affiliate and (ii) 15% of the Participant's
Compensation for the Plan Year, and the Employer or an Affiliate will contribute
these amounts as Salary Reduction Contributions to the Participant's SEP/IRA as
an additional Employer contribution for the Plan Year. No Salary Reduction
Contributions may be made by a Participant on the basis of Compensation that
the Participant received or had a right to receive before the later of the
Effective Date of this Plan, as specified in the Employer's Adoption Agreement,
and the execution by the Participant of a Compensation Reduction Agreement.
1) The Employer's election shall not be effective for any Plan Year unless
at least fifty percent (50%) of the Participants elect to have Salary Reduction
Contributions contributed to the Plan. In the event that this requirement is
not satisfied as of the end of any Plan Year, all Salary Reduction Contribution
amounts contributed on behalf of Participants shall be considered "disallowed
deferrals," i.e. IRA contributions that are not Plan contributions.
2) Disallowed deferrals are includable in the Participant's taxable income
in the calendar year which contains the earliest date that any Salary Reduction
Contributions made on behalf of the Participant during the Plan Year of the
disallowed deferrals would instead have been received in cash by the Participant
had the Participant not elected to have Salary Reduction Contributions made on
his behalf. Income allocable to the disallowed deferrals shall be includable
in the Participant's taxable income in the year such amounts are withdrawn from
the Participant's SEP/IRA.
3) The Employer shall notify each affected Participant, within 2-1/2 months
following the end of the Plan Year to which the disallowed deferrals relate, of
the status of such contributions, which notification shall specify (a) the
amount of the disallowed deferrals, (b) the calendar year in which they are
includable in income, and (c) that unless the Participant withdraws the
disallowed deferrals (and allocable income) from the SEP/IRA by April 15
following the calendar year of notification by the Employer, (i) such
disallowed deferrals will be subject to the IRA contribution limitations
contained in Code sections 219 and 408, (ii) IRA contributions which exceed
such limitations are subject to a 6% tax pursuant to Code section 4973 and (iii)
income allocable to a disallowed deferral, unless timely withdrawn, is subject
to a 10% tax on early distributions pursuant to Code section 72(t) when
withdrawn.
9
B. Excess Contributions
1) The Deferral Percentage, in any Plan Year, of each Highly Compensated
Employee participating shall be adjusted so that it is not more than the product
derived by multiplying the average of the Deferral Percentages for such year of
Non-Highly Compensated Employees by 1.25.
2) The Employer shall notify each affected Highly Compensated Employee,
within 2-1/2 months following the end of the year to which the Excess
Contributions relate, of any Excess Contributions to the Highly Compensated
Employee's SEP/IRA for the applicable year. Such notification shall specify
(a) the amount of the Excess Contributions, (b) the calendar year in which
the contributions are includable in income, and (c) that unless the
Participant withdraws the Excess Contributions (and allocable income) from
the SEP/IRA by April 15 following the calendar year of notification by the
Employer, (i) such Excess Contributions will be subject to the IRA
contribution limitations contained in Code sections 219 and 408 for the
preceding year, (ii) IRA contributions which exceed such limitations are
subject to a 6% tax pursuant to Code section 4973 and (iii) income allocable
to an Excess Contribution, unless timely withdrawn, is subject to a 10% tax
on early distributions pursuant to Code section 72(t) when withdrawn.
3) For purposes of making the determination required by paragraph 2)(b), Excess
Contributions are includable in the affected Highly Compensated Employee's
taxable income in the calendar year which contains the earliest date that any
Salary Reduction Contributions made on behalf of the Participant during the Plan
Year in which the Excess Contributions were made would instead have been
received in cash by the Participant had the Participant not elected to have
Salary Reduction Contributions made on his behalf. If, however, the Excess
Contributions made on a Participant's behalf are less than $100 (excluding
allocable income), such Excess Contributions are includable in the affected
Participant's taxable income in the calendar year that the Employer notifies the
Participant of such contributions. Income allocable to the Excess Contributions
shall be includable in the Participant's taxable income in the year such amounts
are withdrawn from the Participant's SEP/IRA.
4) An Employer which fails to timely notify an affected Participant of an
Excess Contribution shall be liable for a tax equal to 10% of the amount of the
Excess Contribution. An Employer which fails to notify an affected Participant
prior to the end of the Plan Year following the Plan Year in which the Excess
Contribution arose, shall no longer maintain a plan which satisfies the
requirements of Code section 408(k)(b) and any contributions to an Employee's
SEP/IRA will be subject to IRA contribution limitations contained in Code
sections 219 and 408.
5) The Employer shall notify each Eligible Employee who elects to have
Salary Reduction Contributions made on his or her behalf to the Plan that, until
2-1/2 months after the end of a particular Plan Year, any transfer or
distribution from that employee's SEP/IRA of Plan contributions (or income on
these contributions) attributable to Salary Reduction Contributions made
10
during that Plan Year will be includable in income for purposes of Code
sections 72(t) and 408(d)(1).
Article V: Limitations on Contributions
If the Employer currently maintains another Defined Contribution Plan,
contributions under the Defined Contribution Plan shall first be limited to
the extent necessary to satisfy the maximum contribution limitations under Code
section 415(c)(1). An Employer who has ever maintained a Defined Benefit Plan
which is now terminated may not participate in this Prototype SEP. If,
subsequent to adopting this Plan, any Defined Benefit Plan of the Employer
terminates, the Employer will no longer participate in this Prototype SEP and
will be considered to have an individually designed plan.
Article VI: Top-Heavy Provisions
A. Top-Heavy Rules
In any Plan Year that this Plan is a "top-heavy" plan, the provisions of
this Article VI will automatically supersede any conflicting provision of the
Plan.
B. Top-Heavy Plan
The determination of whether the Plan is a "top-heavy" plan for any Plan
Year shall be made in accordance with Code section 416(g) and the regulations
thereunder, provided, however, that, unless otherwise provided in the Employer's
Adoption Agreement, a Participant's "account balance" under this Plan shall be
deemed to be the sum of all Employer Contributions and Salary Reduction
Contributions made on his or her behalf.
C. Top-Heavy Benefits
For any Plan Year that this Plan is a "top-heavy" plan, unless otherwise
provided in the Employer's Adoption Agreement, the Employer contribution for
such Plan Year to the SEP/IRA of each Participant (other than a "key employee"
under Code section 416(i)(1), shall not be less than an amount which, in
combination with all other contributions (except for Salary Reduction
Contributions), if any, is equal to the lesser of (a) three percent (3%)
of the Participant's Compensation and (b) a percentage of Compensation equal to
the percentage of Compensation at which all contributions, including Salary
Reduction Contributions, are made under the Plan for the Plan Year for the
"key employee" for whom such percentage is the highest for the Plan Year.
Under Code section 416(i)(1), a "key employee" is an Employee or former
Employee (and any beneficiary thereof) who, at any time during a Plan Year, was
(i) an officer of the Employer (if the Employee's compensation exceeds 50% of
the limit under Code section 415(b)(1)(A); (ii) an owner of one of the ten
largest interests in the Employer (if the Employee's Compensation exceeds 100%
of the limit under Code section 415(c)(1)(A); (iii) a 5% owner of the Employer,
11
as defined in Code section 416(i)(1)(B)(i); or (iv) a 1% owner of the Employer
(if the Employee has Compensation in excess of $150,000).
Your employer's Merrill Lynch Prototype Simplified Employee Pension Plan
("Prototype SEP") allows for potentially significant employer contributions to
provide retirement benefits through a Merrill Lynch individual retirement
account ("SEP/IRA") for each participant. Your employer may also be permitted
to allow you to make elective salary deferrals to your SEP/IRA for a given plan
year if certain requirements for that plan year are met. Through your own
SEP/IRA, you have available a wide array of choice and flexibility available
to individually structure an investment program depending on your retirement
goals and preferences.
The terms and conditions of your Merrill Lynch SEP/IRA and certain tax and
legal considerations are described in the Merrill Lynch Individual Retirement
Account Disclosure Statement ("IRA Disclosure Statement"). That statement is
included in the booklet containing a copy of the Merrill Lynch Individual
Retirement Account Custodial Agreement (the legal document governing your
SEP/IRA). You should have received a copy of that booklet along with copies
of your Prototype SEP Employer's Adoption Agreement.
This Prototype Disclosure Statement is in two parts: the main text that we
believe is most descriptive of your employer's Prototype SEP plan and the text
prescribed by the IRS that your employer is required to provide to you. You
should read this Prototype Disclosure Statement in connection with your
Prototype Employer's Adoption Agreement. It describes the eligibility rules
for a SEP, the manner in which SEP contributions are calculated and limited and
other important information relating to SEPs.
I. Eligibility Requirements for Participation
Your employer must include you as a Prototype SEP participant if you meet
the age and service requirements specified in the Employer's Adoption Agreement.
Your employer may not require you to be older than age 21 or work either full or
part time for your employer in more than 3 years of the past 5 plan years.
In the Prototype Employer's Adoption Agreement, your employer chose as the
plan year either its tax year or the calendar year. The plan year is used not
only for determining whether you are eligible to participate, but also for
measuring your compensation on which your employer's SEP contribution is based
as described in Section III below.
In addition, in order to participate, you must receive at least $385* in
compensation from your employer during the plan year. (Compensation for this
purpose is determined without regard to any "elective deferrals," discussed in
Section IV below, which you make under the Prototype SEP, or salary reduction
contributions which you make under a "cafeteria plan" or similar arrangement).
*For 1993, adjusted annually for inflation.
12
Generally, employees who are nonresident aliens with no U.S. source income
and/or covered by a collective bargaining agreement are excluded from
participation in the Prototype SEP unless your employer specifically includes
them on the Employer's Adoption Agreement.
II. Contributions to and Withdrawals from Your SEP/IRA
You or your employer must establish a Merrill Lynch SEP/IRA for you if you
are eligible to participate in your employer's Prototype SEP. In addition to
receiving any SEP contributions, you may use your SEP/IRA to make annual IRA
contributions of up to $2,000 or 100% of compensation, whichever is less, and/or
to transfer or roll over assets from other retirement plans as described in the
IRA Disclosure Statement.
Your employer's SEP contributions under the Prototype SEP and any salary
reduction contributions made on your behalf are tax-deferred.
If you are eligible to participate under your employer's plan for a plan
year and your employer makes an employer contribution for the year, you are
entitled to have a contribution made to your SEP/IRA if you worked for the
employer at any time during the year even if you are no longer working for the
employer at the end of the plan year or at the time the contribution is made for
that year. In that case, your employer must deposit the contribution in your
SEP/IRA and send notice of the contribution to your last address shown on your
employer's records.
Both employer contributions and elective deferrals, discussed in Sections
III and IV below, made under a Prototype SEP, can be made to your SEP/IRA if
you are eligible to receive them, even after you attain age 70-1/2. However, as
described in the IRA Disclosure Statement you are not permitted to make annual
IRA contributions to your SEP/IRA starting in the year in which you attain age
70-1/2. (Note, however, that distributions from your SEP/IRA must begin by
April 1 following the year in which you reach 70-1/2, whether or not you are
employed and are receiving contributions).
All contributions to your SEP/IRA are nonforfeitable, that is, the assets in
a SEPIRA belong to you and withdrawals can be made by you at any time, subject
to income tax (to the extent income tax has not previously been assessed) and,
possibly, to a penalty tax for distributions made prior to your attaining age
59-1/2 (unless you are permanently and totally disabled or another penalty
exception applies). You may generally avoid the income and penalty taxes,
however, by "rolling over" the withdrawn amount to another IRA within 60 days
after you receive the withdrawal. Please refer to the IRA Disclosure Statement
for discussion about rules on rollovers. You should note, however, that you may
not roll over withdrawals of "excess" or "disallowed" contributions discussed
below, nor may you arrange to have those amounts transferred directly to another
trustee or custodian.
13
III. Employer Contributions
Employer SEP contributions are discretionary, that is, your employer is not
required to make anannual contribution to your SEP/IRA under a SEP plan.
If your employer chooses to make a SEP contribution for a plan year, the
contribution must be based on one of two types of definite written allocation
formulas, both of which are described below.
A. Definition of Compensation
"Compensation" generally means wages and all other payments of compensation
to you by your employer included in the "Wages, Tips and Other Compensation" box
on the Internal Revenue Service Form W-2.
If you are self-employed, i.e., a partner or sole proprietorship, your
compensation is your reported "net earnings from self-employment," after taking
into account your deductions for retirement plan contributions (including
employer SEP contributions to your SEP/IRA) and for one-half of your self-
employment tax.
Whether you are an employee or a self-employed individual, your compensation
is calculated by adding in any elective deferral amounts excluded from your
income under the salary reduction option, or salary reductions under a cafeteria
plan or a similar arrangement. Additionally not more than $235,840 (for 1993,
adjusted annually for inflation) of your compensation is used in determining
the amount of contributions to your SEP/IRA for a plan year.
B. Allocation Formulas
On the Employer's Adoption Agreement, the employer may choose between two
allocation formulas. The simpler formula requires that the employer contribu-
tion to the SEP/IRA of each participant be a uniform percentage of the
participant's compensation.
Under the other method, employer contributions are calculated using
"permitted disparity," which is often referred to as the contributions being
"integrated with Social Security" since under old law the employer was permitted
to take its portion of the Old-Age, Survivors and Disability Insurance portion
of the social security tax into consideration in computing the uniform
percentage of compensation required of employer contributions under a SEP.
If the employer elects the "integrated" allocation method, the employer
chooses a "base contribution percentage" and contributes that percentage of your
total compensation (not in excess of the upper compensation limit described in
Section III.A above) to your SEP/IRA. The employer then chooses another
percentage, which is not in excess of the lesser of (a) the "base contribution
14
percentage" or (b) the percentage determined using a table in the Prototype
Plan. This second percentage is applied to your compensation, if any, in excess
of the "integration level" that your employer has chosen on the Employer's
Adoption Agreement up to that compensation limit. The integration level is
either the Social Security taxable wage base ($57,600 for 1993, adjusted
annually for inflation) or a specified portion of that wage base.
Whether the uniform percentage method or the integrated method is chosen,
the employer contribution to your SEP/IRA cannot exceed the lesser of 15% of
your compensation or $30,000. If in any plan year your employer's Prototype
SEP plan is considered "top-heavy" (i.e., the aggregate contributions under the
plan are heavily weighted to "key employees"), your employer may be required to
make a minimum contribution under the plan of up to 3% of your compensation.
Your employer is required to inform you in writing of all employer
contributions to your SEP/IRA by January 31 of the year after which the
contribution is made, or within 30 days after the contribution is made,
whichever is later. Your employer's contribution to your SEP/IRA must be made
by the employer's federal income tax filing deadline, including any extensions,
for the employer's tax year in which the plan year ends.
IV. Salary Reduction Option
The salary reduction option is a SEP feature available to many employers.
If your employer is a qualifying employer and has elected this feature, you will
be permitted to have your compensation reduced by up to $8,994 (for 1993 and
adjusted for inflation in subsequent years) and have the "elective deferral"
amount deposited into your SEP/IRA by your employer. That contribution, like
all other SEP contributions, will be excluded from your gross income for federal
income tax purposes, but, unlike other SEP contributions, is considered wages
subject to Social Security taxes paid by you and your employer and federal
unemployment tax paid by your employer.
A. Method of Making Salary Reduction Contributions
You may elect to have elective deferrals made under the Prototype SEP
through a single-sum or continuing contributions, or both, pursuant to a salary
reduction agreement with your employer.
. You may have your compensation reduced by a specified percentage
or an amount per pay period, or for a specified pay period or
periods, as designated in writing.
. You may base elective deferrals on cash bonuses you would otherwise
receive during the year.
15
Deferrals cannot be made by you based on compensation you received, or had a
right to receive, before execution of a salary reduction agreement between you
and your employer.
B. Limitation on Amounts of Salary Reduction
If the salary reduction option is available to you, you will be permitted to
defer up to the lesser of 15% of your current year compensation or $8,994 (for
1993, adjusted annually for inflation). The deferred amounts are then deposited
by your employer in your SEP/IRA. The $8,994 amount is an overall limit that
applies each calendar year to all of your salary deferrals under all salary
reduction SEP and 401(k) arrangements whether or not they are plans of your
employer maintaining the Prototype SEP plan. Any salary reduction contributions
you make under a 403(b) (tax-sheltered annuity) arrangement are also taken into
account, but the limit may be increased (up to $9,500) by the amount of
those salary reduction contributions. You are responsible for determining
whether you have exceeded the limit and taking the required corrective action.
(Your employers sponsoring those arrangements separately identify your salary
reductions for those arrangements on your Form W-2 for the year of the salary
reduction).
Note: The salary reduction contributions, when added to your employer's
contribution, cannot exceed the 15% of compensation or $30,000 limit above. If
these limits are exceeded for a plan year, your elective deferrals for that plan
year must be reduced to the extent of the excess amount and that excess amount,
plus all earnings attributable thereto, must be returned to you no later than
April 15 following the year of deferral to avoid incurring the 6% excise tax on
excess IRA contributions. (Any returned income will be subject to the 10% tax
on early distributions unless an exception to the 10% penalty applies, for
example, you are over age 59-1/2.) The returned amount is to be included on
your income tax return in the year of the deferral.
There is an additional limitation on the elective deferrals of "highly
compensated employees" (i.e., certain owners of the employer, officers and
employees having compensation in excess of certain prescribed amounts). The
"deferral percentage" (the percentage of compensation that may be deferred) of
a highly compensated employee is limited under a formulation which takes into
account the average deferral percentages of other eligible employees. Your
employer will notify you if you are affected by that limitation.
If you are a highly compensated employee who has made excess deferrals under
the deferral percentage limitation, your employer must notify you within 2-1/2
months following the end of the plan year to which the excess SEP contributions
relate. Your employer's notice will specify the amount of your excess SEP
contributions, the calendar year in which your excess SEP contributions are
includable in income, and that if you do not withdraw your excess SEP
contributions by April 15 following the year of notification by your employer,
they will be considered excess IRA contributions.
16
Excess SEP contributions are includable in your gross income on the earliest
dates any elective deferrals made on your behalf during the plan year would have
been received by you had you originally elected to receive the amounts in cash.
However, if the excess SEP contributions (not including allocable income) total
less than $100, then the excess contributions are includable in your gross
income in the year of notification. Income allocable to the excess SEP
contributions is includable in the year withdrawn from your SEP/IRA.
Please refer to the IRA Disclosure Statement for more information concerning
excess IRA contributions.
You may not withdraw or transfer from your SEP/IRA contributions (or income
on these contributions) attributable to elective deferrals made during the plan
year until 2-1/2 months after the end of the plan year or, if sooner, when you
employer notifies you that the deferral percentage limitation test (described
above) has been completed for that year. In general, any transfer of
distribution made before this time will be includable in you gross income and
may also be subject to a 10% penalty tax for early withdrawal. You may,
however, remove excess elective deferrals from your SEP/IRA before this time,
but you may not roll over or transfer these amount to another IRA.
C. Disallowed Deferrals
Even if you employer is eligible to offer the salary reduction option for
a plan year, the option may not be effective for the plan year if less than 50%
of the employees eligible to participate elect to make elective deferrals for
the plan year. If this requirement is not satisfied as of the end of a plan
year, all of the elective deferrals made by participants for the year are
considered "disallowed deferrals," that is, IRA contributions that are not
SEP/IRA contributions.
If there are disallowed deferrals, your employer must within 2-1/2 months
after the end of the plan year to which the disallowed deferrals relate,
notify you that the elective deferrals are no longer considered SEP/IRA
contributions. The notice will state specifically:
1) the amount of the disallowed deferrals;
2) that the disallowed deferrals are includable in your gross income for
the calendar year in which the amounts deferred would have been received
by you in cash had you not made an election to defer and that the income
allocable to such disallowed deferrals is includable in the year
withdrawn from the IRA; and
3) that you must withdraw the disallowed deferrals (and allocable income)
from your SEP/IRA by April 15 following the calendar year of
notification by your employer.
17
Those disallowed deferrals not withdrawn by the April 15 time period will be
subject to the IRA contributions limitations and then may be considered an
excess contribution to your IRA. Disallowed deferrals may be subject to the 6%
penalty tax on excess IRA contributions, and any income allocable to a
disallowed deferral when withdrawn may be subject to the 10% tax on early
distributions.
V. Fees for your SEP/IRA
A custodial fee is charged each year on your SEP/IRA. In addition,
investment in certain assets will result in additional fees. Please refer to
your IRA Disclosure Statement for further information.
VI. Amendments to the Prototype SEP Plan
Merrill Lynch will inform your employer of any amendments to the Prototype
SEP Plan or if it has decided to terminate the SEP Plus Program.
1 EXHIBIT 24.1
Consent of Independent Auditors
The Board of Directors and Stockholders
Parallel Petroleum Corporation:
We consent to incorporation by reference in the registration statements
(No. 33-46959 and No. 33-57348) on Forms S-8, and the registration statements
(No. 33-77402 and No. 33-90296) on Forms S-3, of Parallel Petroleum Corporation
of our report dated February 2, 1996, relating to the balance sheets of Parallel
Petroleum Corporation as of December 31, 1995 and 1994, and the related
statements of income, stockholders' equity, and cash flows for each of the years
in the three-year period ended December 31, 1995, which appears in the December
31, 1995 annual report on Form 10-K of Parallel Petroleum Corporation. Our
report on the financial statements of Parallel Petroleum Corporation refers to
a change in the method of accounting for income taxes.
KPMG PEAT MARWICK LLP
Midland, Texas
March 7, 1996
1 EXHIBIT 24.2
Consent of Independent Petroleum Engineers
As independent petroleum engineers, we hereby consent to the incorporation
by reference in the registration statements (No. 33-46959 and No. 33-57348) on
Forms S-8, and the registration statements (No. 33-77402 and No. 33-90296) on
Forms S-3 of Parallel Petroleum Corporation of our estimates of reserves,
included in the Annual Report on Form 10-K of Parallel Petroleum Corporation for
the fiscal year ended December 31, 1995, and to all references to our firm.
JOE C. NEAL & ASSOCIATES
Midland, Texas
March 7, 1996