-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OtpvunEwJhLFmTWV/IZWsNNP9Wz80h1ySJ0T2vni9OG0Z2Z1wmyXdAqD/v2yoNzU hFc0pcatOJYOTypwCPjwHQ== 0000950129-97-000412.txt : 19970221 0000950129-97-000412.hdr.sgml : 19970221 ACCESSION NUMBER: 0000950129-97-000412 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970211 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: PLAINS RESOURCES INC CENTRAL INDEX KEY: 0000350426 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-PETROLEUM & PETROLEUM PRODUCTS (NO BULK STATIONS) [5172] IRS NUMBER: 132898764 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-09808 FILM NUMBER: 97523453 BUSINESS ADDRESS: STREET 1: 1600 SMITH ST STE 1500 CITY: HOUSTON STATE: TX ZIP: 77002 BUSINESS PHONE: 7136541414 MAIL ADDRESS: STREET 1: 1600 SMITH STREET STREET 2: SUITE 1500 CITY: HOUSTON STATE: TX ZIP: 77002 10-K 1 FORM 10-K FOR PLAINS RESOURCES, INC. 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to _____________ Commission file number: 0-9808 PLAINS RESOURCES INC. (Exact name of registrant as specified in its charter) Delaware 13-2898764 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 1600 Smith Street Houston, Texas 77002 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (713) 654-1414 Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of each exchange on which registered: Common Stock, par value $.10 per share American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None 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 the filing requirements for the past 90 days. Yes X No ------- ------- The aggregate value of the Common Stock held by non-affiliates of the registrant (treating all executive officers and directors of the registrant, for this purpose, as if they may be affiliates of the registrant) was approximately $246,133,643 on February 7, 1997 (based on $15 1/4 per share, the last sale price of the Common Stock as reported on the American Stock Exchange Composite Tape on such date). 16,537,324 shares of the registrant's Common Stock were outstanding as of February 7, 1997. DOCUMENTS INCORPORATED BY REFERENCE. The information required in Part III of this Annual Report on Form 10-K is incorporated by reference to the Registrant's definitive proxy statement to be filed pursuant to Regulation 14A for the Registrant's Annual Meeting of Stockholders. 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. [ ] =============================================================================== 2 PART I Item 1. BUSINESS Plains Resources Inc. (the "Company") is an independent energy company engaged in the acquisition, exploitation, development, exploration and production of crude oil and natural gas and the marketing, transportation, terminalling and storage of crude oil. The Company's upstream oil and natural gas activities are focused in the Los Angeles Basin of California (the "LA Basin"), the Sunniland Trend of South Florida (the "Sunniland Trend"), the Illinois Basin in southern Illinois (the "Illinois Basin") and the Gulf Coast area of Louisiana. The Company's downstream marketing, terminalling and storage activities are concentrated in Oklahoma, Texas and the Gulf Coast area of Louisiana. Plains' upstream operations contributed approximately 90% of the Company's Earnings before interest, taxes, depreciation, depletion and amortization ("EBITDA") for the fiscal year ending December 31, 1996, while the Company's downstream activities accounted for the remainder. References to the Company in this Annual Report on Form 10-K (the "Report") include Plains Resources Inc. and its subsidiaries, except as the context may otherwise require.(1) The Company's business strategy is to increase its proved reserves and cash flow by exploiting and producing oil and natural gas from its existing properties, acquiring additional underdeveloped oil properties and exploring for significant new sources of reserves. The Company concentrates its exploitation efforts on mature but underdeveloped crude oil producing properties that meet the Company's targeted criteria. Generally, such properties were previously owned by major integrated or large independent oil and natural gas companies, have produced significant volumes since initial discovery and have significant estimated remaining reserves in place. Management believes that it has developed a proven record in acquiring and exploiting underdeveloped crude oil properties where it believes substantial reserve additions and cash flow increases can be made through improved production practices and recovery techniques and relatively low risk development drilling. An integral component of the Company's exploitation effort is to increase unit operating margins, and therefore cash flow, by reducing unit production expenses and increasing wellhead price realizations. The Company seeks to complement these exploitation efforts by pursuing certain higher risk exploration opportunities which offer potentially higher rewards. In 1996, the Company formed a joint venture and five year strategic alliance with 3DX Technologies Inc. ("3DX"), a publicly held company that specializes in the application of 3-D seismic imaging, to pursue exploration projects. The Company also seeks to capitalize on downstream opportunities that exist as a result of inefficiencies within the crude oil markets and the U.S. pipeline and transportation infrastructure. The Company's marketing of its own crude oil production takes advantage of the marketing expertise attributable to its downstream activities. As part of its business strategy, the Company periodically evaluates, and from time to time has elected to sell, certain of its mature producing properties that it considers to be nonstrategic or fully valued. Such sales enable the Company to focus on its core properties, maintain financial flexibility, control overhead and redeploy the sales proceeds to activities that have potentially higher financial returns. During the five-year period ended December 31, 1996, the Company incurred aggregate acquisition, exploration, development and exploitation costs of approximately $306.1 million, resulting in proved oil and natural gas reserve additions (including revisions of estimates but excluding production) of approximately 136.4 million BOE, or $2.24 BOE, through implementation of its business strategy. See Item 2, "Properties--Oil and Natural Gas Reserves". Approximately 87% of these expenditures were directed toward the acquisition, exploitation and development of proved reserves while approximately 13% were incurred on exploration activities. - ---------------- (1) As used in this Report, "Mcf" means thousand cubic feet, "MMcf" means million cubic feet, "Bcf" means billion cubic feet, "Bbl" means barrel, "MBbl" means thousand barrels, "MMBbl" means million barrels, "Btu" means British Thermal Unit, "MBtus" means thousand Btus, "BOE" means net barrel of oil equivalent and "MCFE" means Mcf of natural gas equivalent. Natural gas equivalents and crude oil equivalents are determined using the ratio of six Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids. A "gross acre" is an acre in which an interest is owned. The number of "net acres" is the sum of the fractional working interests owned in gross acres. "Net" oil and natural gas wells are obtained by multiplying "gross" oil and natural gas wells by the Company's working interest in the applicable properties. "Present Value of Proved Reserves" means the present value (discounted at 10%) of estimated future cash flows from proved oil and natural gas reserves reduced by estimated future operating expenses, development expenditures and abandonment costs (net of salvage value) associated therewith (before income taxes), calculated using product prices in effect on the date of determination, and "Standardized Measure" is such amount further reduced by the present value (discounted at 10%) of estimated future income taxes on such cash flows. "NYMEX" means New York Mercantile Exchange. 2 3 In order to manage its exposure to commodity price risk, the Company routinely hedges a portion of its crude oil production. For 1997, the Company has entered into various fixed price and floating price collar arrangements. Such arrangements generally provide the Company with downside price protection on approximately 14,000 barrels of oil per day at a NYMEX crude oil spot price ("NYMEX Crude Oil Price") of approximately $19.00 per barrel, but permit the Company to receive the benefit of increases in the NYMEX Crude Oil Price up to $24.00 per barrel on 4,000 of such barrels. Thus, based on the Company's average fourth quarter 1996 oil production rate, these arrangements generally provide the Company with downside price protection for 80% of its production and upside price participation for 43% of its production up to $24.00 per barrel, while 20% of such production and excess volumes, if any, remain unhedged. In addition, the Company also has a fixed price arrangement on 4,500 barrels per day in 1998 at a NYMEX Crude Oil Price of $19.24 per barrel. On February 7, 1997, the NYMEX Crude Oil Price was $22.23 per barrel. The following table sets forth certain information with respect to the Company's reserves over the last five years. Such reserve volumes and values were determined under the method prescribed by the Securities and Exchange Commission (the " SEC"), which requires the application of year-end oil and natural gas prices for each year, held constant throughout the projected reserve life. See Item 2 "Properties--Oil and Natural Gas Reserves" and Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations".
AS OF OR FOR THE YEAR ENDED DECEMBER 31, ----------------------------------------------------------- 1992 1993 1994 1995 1996 -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT RATIOS AND PER UNIT AMOUNTS) Present Value of Proved Reserves ................. $155,360 $134,539 $229,371 $366,780 $764,774(1) Proved Reserves Crude oil and natural gas liquids (Bbls) ................................ 33,390 38,810 61,459 94,408 115,996 Natural gas (Mcf) .............................. 39,861 49,397 51,009 43,110 37,273 Oil equivalent (BOE) ........................... 40,034 47,043 69,960 101,593 122,208(1) Reserve Replacement Ratio(2) ..................... 1,105% 269% 619% 647%(3) 454% Reserve Replacement Cost per BOE ................. $ 2.35 $ 5.39 $ 1.49 $ 2.14 $ 1.76 Total upstream capital costs incurred ............ $ 68,209 $ 61,769 $ 40,849 $ 84,012 $ 51,255 Percentage of total upstream capital costs attributable to: Acquisition .................................... 56% 40% 48% 71% 7% Development .................................... 17% 43% 38% 27% 88% Exploration .................................... 27% 17% 14% 2% 5% NYMEX Crude Oil Price at December 31, ................................ $ 19.50 $ 14.17 $ 17.76 $ 19.55 $ 25.92
(1) By comparison, calculating these amounts using the NYMEX Crude Oil Price in effect at December 31, 1995 ($19.55 per barrel) would result in a Present Value of Proved Reserves of $452 million and estimated net proved reserves of 112 million BOE. (2) The Reserve Replacement Ratio is calculated by dividing (a) the sum of reserves added during each respective year through purchases of reserves in place, extensions, discoveries and other additions and the effects of revisions, if any ("Reserve Additions"), by (b) each respective year's production. (3) Pro forma as if the acquisition of the Illinois Basin Properties occurred on January 1, 1995. Such acquisition closed in December 1995 with an effective date of November 1, 1995. (4) Reserve Replacement Cost per BOE for a year is calculated by dividing upstream costs incurred for such year by such year's Reserve Additions. ACQUISITION AND EXPLOITATION Acquisition and Exploitation Strategy The Company is continually engaged in the exploitation and development of its existing property base and the evaluation and pursuit of additional underdeveloped properties for acquisition. The Company focuses on mature but underdeveloped producing crude oil properties in areas where the Company believes substantial reserve additions and cash flow increases can be made through relatively low-risk drilling, improved production practices and recovery techniques and improved operating margins. Generally, the Company seeks to increase production rates and improve a property's operating margin by reducing unit production costs and enhancing the marketing arrangements of the oil production. Once the Company identifies a prospective property for acquisition, it conducts a technical review of existing production and operating practices in an effort to identify any previously unrecognized value. If the initial studies 3 4 indicate undeveloped potential, the various producing and potentially productive formations in the area are mapped in detail. Historical production data is evaluated to determine if additional wells or other capital expenditures appear necessary to optimize the recovery of reserves from the property. Geologic and engineering information and operating practices utilized by operators on offsetting leases are analyzed to identify potential additional exploitation and development opportunities. A market study is also performed analyzing product markets, available pipeline connections, access to trading locations and existing contractual arrangements with the goal of maximizing sales and profit margins from the area. See "--Product Markets and Major Customers". A comprehensive plan of exploitation is then prepared and used as a basis for the Company's offer to purchase. The Company typically seeks to acquire a majority interest in the properties it has identified and to act as operator of those properties. The Company has in the past and may in the future hedge a significant portion of the acquired production, thereby partially mitigating product price volatility which could have an adverse impact on exploitation opportunities. If the Company is successful in purchasing such properties, it then implements its exploitation plan by modifying production practices, realigning existing waterflood patterns, drilling wells and performing workovers, recompletions and other production and reserve enhancements. After the initial acquisition, the Company may also seek to increase its interest in the properties through acquisitions of offsetting acreage, farmout drilling arrangements and the purchase of minority interests in the properties. By modifying production practices, realigning existing waterflood patterns, drilling wells and performing workovers, recompletions and other production enhancements, the Company seeks to increase volumes and expand its reserve base. The results of such activities are reflected in additions and revisions to proved reserves. During the five year period ending December 31, 1996, net additions and revisions to proved reserves totaled 76.2 million BOE or approximately 338% of cumulative net production for such period. Such reserves were added at an aggregate average cost of $2.11 per BOE. This activity excludes reserves added as a result of the Company's acquisition activities. Reserve additions related solely to the Company's acquisition activities totaled 60.2 million BOE and were added at an aggregate average cost of $2.42 per BOE. The Company's properties in its three core areas represent approximately 98% of total proved reserves at December 31, 1996. Such properties were previously owned and operated by major integrated oil and natural gas companies and are comprised of underdeveloped crude oil properties believed by the Company to have significant upside potential that can be evaluated through development and exploitation activities. During 1997, the Company estimates it will spend approximately $48 million on the development and exploitation of its LA Basin, Sunniland Trend and Illinois Basin Properties. Set forth below is a discussion of such properties: Current Exploitation Projects LA Basin Properties. Prior to its acquisition by the Company in May 1992, Stocker was a sole purpose company formed in 1990 to acquire substantially all of Chevron's producing oil properties in the LA Basin. Including transaction costs, the aggregate purchase price paid by the Company for Stocker was approximately $23 million, consisting of a combination of cash, Common Stock and warrants. Following the initial acquisition, the Company expanded its holdings in this area by acquiring additional interests within the existing fields. In late 1993, the Company acquired all of Texaco Exploration and Production, Inc.'s interest in the Vickers Lease for approximately $5 million. The Vickers Lease was located immediately adjacent to one of the Company's existing properties and was subsequently consolidated into Stocker's existing operations. All of the Company's properties in the LA Basin are collectively referred to herein as the "LA Basin Properties". The LA Basin Properties consist of long-life reserves discovered at various times between 1924 and 1966, and through December 31, 1996, the LA Basin Properties have produced over 400 MMBbls of oil and 350 Bcf of natural gas. Since mid-1992, the Company has performed various exploitation activities, including drilling additional wells, returning previously marginal wells to economic production, optimizing waterflood operations, improving artificial lift and facility equipment, reducing unit production expenses and improving marketing margins. Through these acquisition and exploitation activities, average daily production from this area, net to the Company's interest, has increased from approximately 6,650 BOE per day in May 1992 to an average of 9,200 BOE per day during 1996. The Company has expended approximately $78.9 million in direct acquisition, development and exploitation capital on the LA Basin Properties. From the effective dates of acquisition through December 31, 1996, net production 4 5 from such properties totaled 14.5 million BOE, generating cumulative net margin (oil and natural gas revenue less production expenses) and proceeds from minor property sales of approximately $109.6 million. Total estimated proved reserves attributable to the LA Basin Properties have increased from 17.7 million BOE at initial acquisition to approximately 74.2 million BOE at December 31, 1996. As a result, the Company's aggregate reserve addition cost to date for the LA Basin Properties is approximately $.89 per BOE. During 1996, the unit gross margin for this area averaged $9.05 per BOE. Estimated future net revenues and the Present Value of Proved Reserves at December 31, 1996, were estimated at $1.0 billion and $447.7 million, respectively. The Company estimates it will spend approximately $24 million during 1997 on the further development and exploitation of the LA Basin Properties. Sunniland Trend Properties. During the first quarter of 1993, the Company acquired all of the capital stock of Calumet Florida, Inc. ("Calumet") for approximately $5 million. Calumet was organized in February 1993 to purchase and operate a 50% working interest in six producing fields in South Florida located in the Sunniland Trend previously owned and operated by Exxon. During 1994, Calumet acquired the remaining 50% working interest in the Sunniland Trend Properties, increasing its working interest to approximately 100% and adding approximately five million barrels of oil to its proved reserve base at the acquisition date. The Company's aggregate interest in such properties is referred to as the "Sunniland Trend Properties". The aggregate purchase price for the additional 50% interest was approximately $13.6 million, including the issuance of a five-year warrant valued at $2 million to purchase 750,000 shares of Common Stock at an exercise price of $6.00 per share. The Sunniland Trend was discovered by Exxon in 1943 and the properties have produced approximately 90 MMBbls of oil through December 31, 1996. At the time of acquisition, production from the properties was about 900 barrels of oil per day net to the Company. As a result of development drilling on the property, the implementation of exploitation activities designed primarily to repair failed wells and to increase the fluid lift capacity of certain wells and the acquisition of the remaining 50% working interest, the Company's net production increased to an average of 4,700 barrels of oil per day during 1996. The Company has expended approximately $48.8 million in direct acquisition, development and exploitation capital on the Sunniland Trend Properties. From the effective dates of acquisition through December 31, 1996, net production from such properties totaled 4.4 million BOE, generating cumulative net margin of approximately $31.9 million. Total estimated proved reserves attributable to the Sunniland Trend Properties have increased from approximately 5 million BOE at initial acquisition to approximately 23.9 million BOE at December 31, 1996. As a result, the Company's aggregate reserve addition cost to date for the Sunniland Trend Properties is approximately $1.72 per BOE. During 1996, the unit gross margin for this area averaged $8.69 per BOE. At December 31, 1996, estimated future net revenues and the Present Value of Proved Reserves were estimated at $254.9 million and $166.9 million, respectively. During 1997, the Company estimates it will spend approximately $15 million on the further development and exploitation of the Sunniland Trend Properties. In addition, the Company intends to conduct exploration activities in this trend during 1997. See "--Exploration--Current Exploration and Higher Risk Exploitation Projects--Sunniland Trend". Illinois Basin Properties. In December 1995, the Company acquired all of Marathon's producing and nonproducing upstream oil and natural gas assets in the Illinois Basin (the "Illinois Basin Properties"). This acquisition was effective as of November 1, 1995. As a result of such acquisition, the Company added approximately 17.3 MMBbls 5 6 of oil to its proved reserve base. The aggregate purchase price, including associated closing costs, was $51.5 million, comprised of 798,143 shares of the Common Stock valued at $6.5 million and $45.0 million cash. The majority of the cash portion was funded with the proceeds of a $42 million bank facility. The Illinois Basin Properties consist of long-life oil reserves. The largest field included in the Illinois Basin Properties was discovered in 1905 and has produced over 400 MMBbls of oil through December 31, 1996. The Company has expended approximately $57.2 million in direct acquisition, development and exploitation capital on the Illinois Basin Properties. From the effective date of acquisition through December 31, 1996, net production from such properties totaled 1.5 million BOE, generating cumulative net margin of approximately $14.3 million. The Company intends to aggressively exploit these properties to evaluate additional reserve potential identified during its acquisition analysis. The Company's exploitation plan for the Illinois Basin Properties includes improving the unit gross margin by decreasing unit production expenses and increasing price realizations as well as increasing production volumes. During 1996, production averaged 3,500 BOE per day, unit production expenses decreased 30% from prior levels and the historical discount from the NYMEX benchmark crude oil price was decreased approximately 70%, thereby increasing price realizations. The Company also began implementing projects designed to increase production volumes through activities similar to those employed in its LA Basin Properties. Unit production expenses for these properties, which averaged $12.00 per BOE in the fourth quarter of 1995 averaged approximately $8.42 per BOE during 1996. As a result of these operating expense reductions, reduced location price differentials and higher average oil prices, this area's unit gross margin increased to $10.34 per BOE during 1996 as compared to $5.37 per BOE at the time of acquisition. Total estimated proved reserves attributable to the Illinois Basin Properties have increased from 17.3 million BOE at initial acquisition to approximately 22.1 million BOE at December 31, 1996. As a result, the Company's aggregate reserve addition cost to date for the Illinois Basin Properties is approximately $2.42 per BOE. Estimated future net revenues and the Present Value of Proved Reserves at December 31, 1996, were estimated at $287.4 million and $136.7 million respectively. During 1997, the Company estimates it will spend approximately $9 million implementing its exploitation plan on the Illinois Basin Properties. General. The Company believes that its properties in its three core areas hold potential for additional increases in production, reserves and cash flow. However, the ability of the Company to achieve such increases could be adversely affected by future decreases in the demand for oil and natural gas, impediments in marketing production, operating risks, unavailability of capital, adverse changes in governmental regulations or other currently unforeseen developments. Accordingly, there can be no assurance that such increases will be achieved. The Company believes that attractive acquisition opportunities which fit the Company's criteria will continue to be available as a result of sales of domestic oil properties by both major and independent oil companies. While the Company is continually evaluating acquisition opportunities, there can be no assurance that any of these efforts will be successful. The Company's ability to continue to acquire attractive properties may be adversely affected by a reduction in the number of attractive properties offered for sale, increased competition for properties from other independent oil companies, unavailability of capital, incorrect estimates of reserves, exploitation potential or environmental liabilities or other factors. Although the Company has historically acquired producing properties located only in the continental United States, it from time to time evaluates, and may in the future seek to acquire, properties located outside the continental United States. EXPLORATION Exploration Strategy The Company seeks to complement its strategy of acquiring and exploiting mature but underdeveloped oil properties by dedicating a substantially smaller portion of its annual capital expenditures to higher risk but potentially higher reward exploration opportunities. The Company focuses on exploration opportunities that, if successful, could have a substantial positive impact on production, cash flow and ultimately proved reserves. However, there can be no assurance that any of its exploration projects will be successful. In 1996, the Company and 3DX formed a joint venture to pursue the Company's existing exploration projects and a five year strategic alliance to jointly pursue new exploration and exploitation opportunities that are candidates for the application of 3-D seismic technology. The joint venture covers exploration activities in the Sunniland Trend, the Illinois Basin and the LA Basin as well as the Company's current 3-D seismic project at the Four Isle Dome Field in 6 7 Terrebonne Parish, Louisiana. 3DX bears principal responsibility for the geological and geophysical oversight and project technical management of such projects. In connection with the joint venture, 3DX acquired 15% to 20% of the Company's working interests in certain projects, excluding designated productive areas within each field. 3DX will have the right to participate for up to 20% in the Company's new exploration and exploitation projects. Current Exploration and Higher Risk Exploitation Projects Sunniland Trend. The focus of the Company's exploration effort in the Sunniland Trend is to identify and evaluate prospects that are analogous to the existing producing fields in this trend. Although this trend was discovered around 1940, the Company and its partners are attempting to integrate historical exploration methods with recent advancements in seismic technology to evaluate the exploration potential of the Sunniland Trend. The Company formed a 50/50 joint venture with Meridian Oil Company to conduct exploration activities in the Sunniland Trend in addition to its relationship with 3DX. The Company is the operator of this joint venture. During 1996, the Company drilled one exploratory dry hole in this effort. Preliminary plans for 1997 include shooting 2-D and/or 3-D seismic on identified leads and drilling up to two exploratory wells. Four Isle Dome. The Company, Phillips Petroleum Company ("Phillips") and Nuevo Energy Company ("Nuevo") entered into an agreement to explore approximately 20,000 acres in Terrebonne Parish, Louisiana currently held under seismic option. During 1995, the joint venture conducted a 3-D seismic survey covering approximately 52 square miles. The area, known as Four Isle Dome, was discovered in 1934 and has produced to date over 540 Bcf of natural gas and 20 MMBbls of oil. The Company and 3DX hold a 26% and 7% interest, respectively, while Phillips and Nuevo each hold a 33.3% interest in the project. All of such interests are subject to a proportionate 25% reduction if the mineral owner, Louisiana Land and Exploration, elects to participate in a given prospect. During 1996, the Company drilled one exploratory dry hole in this project. The Company is the operator of the joint venture and intends to drill up to two wells in this project during 1997, the first of which was commenced in late 1996. LA Basin. The Company intends to undertake a pilot drilling program to evaluate future infill exploitation potential of five distinct reservoirs that have produced below the primary producing formation in its Inglewood field. These deeper reservoirs have produced approximately 75 MMbls of oil and 100 Bcf of gas from approximately 58 wells completed in certain of these reservoirs at depths ranging from 4,000 to 9,500 feet. Depending on the results of current technical evaluations and studies, the Company may drill up to five wells to evaluate the remaining potential of these reservoirs. General. During 1997, the Company estimates it will spend approximately $14 million on exploration and higher risk exploitation activities, principally in the Sunniland Trend, the LA Basin and Four Isle Dome. While all drilling activities are subject to numerous risks, the risks associated with exploration activities and these higher risk exploitation activities are significantly greater than those associated with the Company's other exploitation and development activities. There can be no assurance that any of the Company's current exploration or higher risk exploitation projects will result in the discovery of proved reserves or the establishment of commercially viable oil or natural gas production. The Company has historically conducted a portion of its exploration activities with outside partners. When deemed appropriate, the Company will continue to solicit industry and financial partners to participate in exploration projects on negotiated terms. The level of the Company's capital expenditures for these projects, and its working and revenue interests, will vary depending on the amount and terms of such outside participation. DISPOSITION OF PROPERTIES The Company periodically evaluates, and from time to time has elected to sell, certain of its mature producing properties that it considers to be nonstrategic or fully valued. Such sales enable the Company to focus on its core properties, maintain financial flexibility, reduce overhead and redeploy the proceeds therefrom to activities that the Company believes potentially have a higher financial return. During 1995 and 1996, the Company sold nonstrategic oil and natural gas properties located primarily in the Gulf Coast areas of Texas and Louisiana and in Utah for proceeds of $7.4 million and $3.1 million, respectively. As a result, approximately 98% of the Company's 1996 year-end proved 7 8 reserve volumes and proved reserve value were associated with its properties in the LA Basin, Sunniland Trend and Illinois Basin. DOWNSTREAM ACTIVITIES The Company's marketing effort involves purchasing crude oil from other producers and marketing it to the refining sector. The Company aggregates these purchased volumes with its own production at major crude oil interchanges and trading locations, which enables it to obtain higher prices for its own production while realizing profits on the production purchased from others. The Company owns and operates a two million barrel, above ground crude oil storage and terminalling facility in Cushing, Oklahoma (the "Cushing Terminal"), the United States' largest inland crude oil interchange and trading location. This facility enhances the ability of the Company to profit from its marketing activities by allowing the Company to take advantage of certain time and quality arbitrage opportunities and make or take physical delivery of crude oil at Cushing, the NYMEX designated delivery location. The Company's downstream activities have expanded significantly, with downstream gross margin (revenues less direct expenses of purchases, transportation, storage and terminalling) having increased approximately 672% from $1.2 million in 1991 to $9.5 million in 1996. The Company estimates that approximately 40% to 50% of the tankage capacity available at the Cushing Terminal was used in 1996; accordingly, substantial additional capacity is available without the expenditure of additional capital. Crude oil is purchased at the wellhead and transported by Company-owned trucks or third-party transporters to a trading location where the Company sells the crude oil to a refiner or other purchaser. The Company also purchases crude oil in the spot market at trading locations. The Company's policy is to purchase only crude oil for which it has a market and to structure its sales contracts so that crude oil price fluctuations do not materially affect the gross margin which it receives. The crude oil marketing business is characterized by a large volume of transactions with low margins. The Company has generally maintained a gross margin of approximately 2% in its marketing activities for each of the years 1992 through 1996. The Company also routinely analyzes opportunities for possible purchase or construction of gathering and pipeline systems, processing and storage facilities and various other related capital investment projects to enhance its profitability in the markets in which it operates. The Cushing Terminal was completed in December 1993. The facility was designed to accommodate the numerous grades of crude oil used by refiners and consists of two million barrels (fourteen 100,000 barrel tanks and four 150,000 barrel tanks) of above ground shell storage capacity. The Cushing Terminal was built at a total cost through December 31, 1996, of approximately $31.1 million, which includes the cost of land acquisition, engineering and environmental studies, construction-phase interest, pipeline interconnects and an oversized manifold and pumping system that was designed and constructed to accommodate expansion up to an aggregate ten million barrels of storage capacity. The Company estimates that its storage tanks have a useful life in excess of 60 years. The facility is connected to major pipelines into and out of the Cushing interchange and can operate at a daily throughput rate of approximately 800,000 Bbls. Cushing is the largest wet barrel trading hub in the United States and the delivery point for crude oil futures contracts traded on the NYMEX. The Cushing Terminal has been designated by the NYMEX as an approved delivery location for crude oil delivered under the NYMEX "light" sweet crude oil futures contract. The Cushing Terminal was constructed to capitalize on the crude oil supply and demand imbalance in the Midwest caused by the continued decline of traditional regional supplies, increasing imports and an inadequate pipeline and terminal infrastructure. Based upon the Company's analysis of existing storage facilities at Cushing and the anticipated increase in crude oil volumes to be transported through Cushing, the Company believes that there will be an increasing demand for additional storage capacity at Cushing; however, there can be no assurance that such demand will increase. Because of its initial investment in land, engineering and environmental studies, pipeline interconnects and the manifold and pumping system, the cost to construct incremental storage capacity is estimated at $7.50 to $8.00 per Bbl of shell capacity. The Company generates revenue from the Cushing Terminal through a combination of storage, reservation and throughput fees from customers such as (i) refiners and gatherers seeking to segregate or custom blend crudes for refining feedstocks, (ii) pipelines requiring segregated tankage for foreign cargoes, (iii) traders who make or take 8 9 delivery under the NYMEX contract, (iv) producers seeking to increase their marketing alternatives and (v) contango market crude oil trading activities. OPERATING ACTIVITIES The following table presents certain information with respect to the Company's upstream oil and natural gas producing activities and its downstream marketing, transportation and storage activities during the three years ended December 31, 1994, 1995 and 1996:
YEAR ENDED DECEMBER 31, ------------------------------ 1994 1995 1996 -------- -------- -------- (IN THOUSANDS) Sales to unaffiliated customers: Oil and natural gas ..................... $ 57,234 $ 64,080 $ 97,601 Marketing, transportation and storage ... 199,239 339,826 531,698 Operating profits: Oil and natural gas (1) ................. $ 30,122 $ 34,029 $ 59,085 Marketing, transportation and storage (2) 6,305 6,480 9,621 Identifiable assets: Oil and natural gas ..................... $204,778 $271,248 $309,107 Marketing, transportation and storage ... 62,126 80,798 121,142
- ----------------- (1) Consists of primarily oil and natural gas sales less production expenses. (2) Consists of primarily marketing, transportation and storage sales less purchases, transportation and storage expenses. Includes approximately $1.5 million and $.1 million during 1994 and 1995, respectively, of operating profit attributed to contango market transactions. Operating profits as a percentage of sales are significantly lower for the Company's marketing, transportation and storage activities than for its oil and natural gas producing activities because the cost of oil and natural gas purchased for resale is higher, as a percentage of sales price, than the Company's cost to produce oil and natural gas. See "--Downstream Activities". 9 10 General The Company was incorporated under the laws of the State of Delaware in 1976. The Company's executive offices are located at 1600 Smith Street, Suite 1500, Houston, Texas 77002, and its telephone number is (713) 654-1414. Product Markets and Major Customers The revenues generated by the Company's operations are highly dependent upon the prices of, and demand for, oil and natural gas. Historically, the markets for oil and natural gas have been volatile and are likely to continue to be volatile in the future. The price received by the Company for its oil and natural gas production and the level of such production are subject to wide fluctuations and depend on numerous factors beyond the Company's control, including seasonality, the condition of the United States economy (particularly the manufacturing sector), foreign imports, political conditions in other oil-producing and natural gas-producing countries, the actions of the Organization of Petroleum Exporting Countries and domestic government regulation, legislation and policies. Decreases in the prices of oil and natural gas have had, and could have in the future, an adverse effect on the carrying value of the Company's proved reserves and the Company's revenues, profitability and cash flow. In this regard, it should be noted that oil prices at December 31, 1996, upon which proved reserve volumes, the Present Value of Proved Reserves and the Standardized Measure as of such date are based, were at the highest year-end level since 1990. In order to manage its exposure to price risks in the marketing of its oil and natural gas, the Company from time to time enters into fixed price delivery contracts, floating price collar arrangements, financial swaps and oil and natural gas futures contracts as hedging devices. To ensure a fixed price for future production, the Company may sell a futures contract and thereafter either (i) make physical delivery of its product to comply with such contract or (ii) buy a matching futures contract to unwind its futures position and sell its production to a customer. These same techniques are also utilized to manage price risk for certain production purchased from customers of Plains Marketing. Such contracts may expose the Company to the risk of financial loss in certain circumstances, including instances where production is less than expected, the Company's customers fail to purchase or deliver the contracted quantities of oil or natural gas, or a sudden, unexpected event materially impacts oil or natural gas prices. Such contracts may also restrict the ability of the Company to benefit from unexpected increases in oil and natural gas prices. See Item 2, "Properties--Oil and Natural Gas Reserves". Substantially all of the Company's LA Basin crude oil and natural gas production and its Sunniland Trend and Illinois Basin oil production are transported by pipelines owned by third parties. The inability or unwillingness of these pipelines to provide transportation services to the Company for a reasonable fee could result in the Company having to find transportation alternatives, increased transportation costs to the Company or involuntary curtailment of a significant portion of its crude oil and natural gas production. The Company is currently in dispute with the third party pipeline company that transports its Sunniland Trend oil production. See Item 3, "Legal Proceedings". Certain of the Company's natural gas production has been in the past, and may be in the future, curtailed from time to time depending on the quality of the natural gas produced and transportation alternatives. In addition, market, economic and regulatory factors, including issues regarding the quality of certain of the Company's natural gas, may in the future adversely affect the Company's ability to sell its natural gas production. Before 1985, substantially all of the Company's natural gas production was sold directly to pipeline companies which were responsible for resale and transportation of the natural gas to end-users. Since that time, however, with the adoption of various orders by the Federal Energy Regulatory Commission ("FERC") (see "--Regulation--Transportation and Sale of Natural Gas") and the deregulation of natural gas pursuant to the Natural Gas Policy Act of 1978 ("NGPA") and the Natural Gas Wellhead Decontrol Act of 1989 (the "Decontrol Act"), the FERC has actively promoted competition in the nationwide market for natural gas and has encouraged pipelines to significantly reduce their role as merchants of natural gas and to make transportation services available on an "open-access", nondiscriminatory basis. Since these regulatory initiatives were begun, natural gas producers such as the Company have been able to sell their natural gas supplies directly to utilities and other end-users. In addition to the regulatory changes discussed above, deregulation of natural gas prices under the NGPA and the Decontrol Act has increased competition and volatility of natural gas prices. Since demand for natural gas is generally highest during winter months, prices received for the Company's natural gas are subject to seasonal variations and other fluctuations. All of the Company's natural gas production is currently sold under various arrangements at spot indexed prices. In certain instances, the Company enters into financial arrangements to hedge its exposure to spot price fluctuations. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations--Changing Oil and Natural Gas Prices" and Item 2, "Properties--Production and Sales". Koch Oil Company and Basis Petroleum, Inc. ("Basis"), formerly Phibro Energy USA, Inc., accounted for 16% and 11%, respectively, of the Company's total revenue (exclusive of interest and other income) during 1996. Customers accounting for more than 10% of total revenue for 1995 and 1994 were as follows: 1995 -- Phibro Inc. ("Phibro") -- 10 11 16% and Basis -- 12%; 1994 -- Phibro -- 19% and Chevron -- 16%. No other single purchaser of the Company's products accounted for as much as 10% of total sales during 1996, 1995 or 1994. Basis and Phibro Inc. are both subsidiaries of Salomon Inc. Additionally during 1996, Unocal, Marathon Oil Company and Basis accounted for approximately 51%, 24% and 20%, respectively, of the Company's oil and natural gas sales. During 1996, Unocal, Marathon Oil Company and Basis purchased the crude oil from the LA Basin Properties, Illinois Basin Properties and the Sunniland Trend Properties, respectively. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations". COMPETITION Oil and Natural Gas Producing Activities The Company's competitors include major integrated oil and natural gas companies and numerous independent oil and natural gas companies, individuals and drilling and income programs. Many of the Company's larger competitors possess and employ financial and personnel resources substantially greater than those available to the Company. Such companies are able to pay more for productive oil and natural gas properties and exploratory prospects and to define, evaluate, bid for and purchase a greater number of properties and prospects than the Company's financial or human resources permit. The Company's ability to acquire additional properties and to discover reserves in the future will be dependent upon its ability to evaluate and select suitable properties and to consummate transactions in a highly competitive environment. In addition, there is substantial competition for capital available for investment in the oil and natural gas industry. Downstream Activities The Company faces intense competition in purchasing and marketing crude oil and in the crude oil storage business. Its competitors include the major integrated oil companies, their marketing affiliates and independent gatherers, brokers and marketers of widely varying sizes, financial resources and experience. Some of these competitors have capital resources many times greater than the Company's and control substantially greater supplies of crude oil. Although the Company believes that the environmental safeguards and operating capabilities of the Cushing Terminal are superior to other existing facilities in Cushing, the Company competes with larger companies that possess superior financial resources and have an established business presence. Such advantages could inhibit the development of the Company's business for the Cushing Terminal. REGULATION The Company's operations are subject to extensive and continually changing regulation, as legislation affecting the oil and natural gas industry is under constant review for amendment and expansion. Many departments and agencies, both federal and state, are authorized by statute to issue and have issued rules and regulations binding on the oil and natural gas industry and its individual participants. The failure to comply with such rules and regulations can result in substantial penalties. The regulatory burden on the oil and natural gas industry increases the Company's cost of doing business and, consequently, affects its profitability. However, the Company does not believe that it is affected in a significantly different manner by these regulations than are its competitors in the oil and natural gas industry. Due to the myriad and complex federal and state statutes and regulations which may affect the Company, directly or indirectly, the following discussion of certain statutes and regulations should not be relied upon as an exhaustive review of all matters affecting the Company's operations. Transportation and Sale of Crude Oil Sales of crude oil and condensate can be made by the Company at market prices not subject at this time to price controls. However, the price that the Company receives from the sale of these products is affected by the cost of transporting the products to market. Commencing in October 1993, the FERC issued a series of orders (Order No . 561 and 561-A) in which it revised its regulations governing the rates that may be charged by oil pipelines. The new rules, which became effective January 1, 1995, provide a simplified, generally applicable method for regulating such rates by use of an index for setting rate ceilings. In certain circumstances, the new rules permit oil pipelines to establish rates using traditional cost of service and other methods of ratemaking. These rules could increase the cost of transporting 11 12 crude oil and condensate by pipeline. On October 28, 1994, the FERC issued two separate Orders (Nos. 571 and 572), which adopt additional regulations governing rates that an oil pipeline may be authorized to charge. Order No. 571 authorizes a pipeline to implement cost-of-service based rates, provided it can demonstrate that there is a substantial divergence between the actual costs experienced by the carrier and the indexed rate that the pipeline is directed to charge under Order No. 561. In Order No. 572, the FERC adopted regulations that authorize a pipeline to charge market-based rates, provided it can demonstrate that it lacks significant market power in the market(s) in which it proposes to charge such rates. These rules have been affirmed by the reviewing courts. Transportation and Sale of Natural Gas Prior to January 1, 1993, various aspects of the Company's natural gas operations were subject to regulation by the FERC under the Natural Gas Act of 1938 (the "NGA") and the NGPA with respect to "first sales" of natural gas, including price controls and certificate and abandonment authority regulations. However, as a result of the enactment of the Decontrol Act, the remaining "first sales" restrictions imposed by the NGA and the NGPA terminated on January 1, 1993. The FERC regulates interstate natural gas pipeline transportation rates and service conditions, which affect the marketing of natural gas produced by the Company, as well as the revenues received by the Company for sales of such natural gas. Since the latter part of 1985, the FERC has adopted policies intended to make natural gas transportation more accessible to natural gas buyers and sellers on an open and non-discriminatory basis. The FERC's most recent action in this area, Order No. 636, reflected the FERC's finding that, under the then-existing regulatory structure, interstate pipelines and other natural gas merchants, including producers, did not compete on a "level playing field" in selling natural gas. Order No. 636 instituted individual pipeline service restructuring proceedings, designed specifically to "unbundle" those services (e.g., transportation, sales and storage) provided by many interstate pipelines so that buyers of natural gas may secure natural gas supplies and delivery services from the most economical source, whether interstate pipelines or other parties. The FERC has issued final orders in all of the restructuring proceedings and has announced its intention to reexamine certain of its transportation-related policies, including the appropriate manner in which interstate pipelines release capacity under Order No. 636 and, more recently, the price which shippers can charge for their released capacity. The FERC has also adopted a new policy regarding the use of non-traditional methods of setting rates for interstate natural gas pipelines in certain circumstances as alternatives to cost of service based rates. A number of pipelines have obtained FERC authorization to charge negotiated rates as one such alternative. The Company cannot predict what action the FERC will take in the reexamination of its transportation-related policies, nor can it accurately predict whether the FERC's actions will achieve its stated goal of increasing competition in domestic natural gas markets. However, the Company does not believe that it will be treated materially differently than other natural gas producers and marketers with which it competes. Although the FERC's actions, such as Order No. 636, do not regulate natural gas producers such as the Company, these actions are intended to foster increased competition within all phases of the natural gas industry. To date, the FERC's pro-competition policies have not materially affected the Company's business or operations. On a prospective basis, however, such orders may substantially increase the burden on the producers and transporters to nominate and deliver on a daily basis a specified volume of natural gas. Producers and transporters which deliver deficient volumes or volumes in excess of such daily nominations could be subject to additional charges by the pipeline carriers. The United States Court of Appeals for the District of Columbia Circuit has affirmed the FERC's Order No. 636 restructuring rule and remanded certain issues for further explanation or clarification. Numerous petitions seeking judicial review of the individual pipeline restructuring orders are currently pending in that Court. Although it is difficult to predict when all appeals of pipeline restructuring orders will be completed or their impact on the Company, the Company does not believe that it will be affected by the restructuring rule and orders any differently than other natural gas producers and marketers with which it competes. 12 13 Additional proposals and proceedings that might affect the natural gas industry are considered from time to time by Congress, the FERC, state regulatory bodies and the courts. The Company cannot predict when or if any such proposals might become effective or their effect, if any, on the Company's operations. The natural gas industry has historically been very heavily regulated; thus there is no assurance that the less stringent regulatory approach recently pursued by the FERC and Congress will continue indefinitely into the future. The regulatory burden on the oil and natural gas industry increases the Company's cost of doing business and, consequently, affects its profitability and cash flow. Inasmuch as laws and regulations are frequently expanded, amended or reinterpreted, the Company is unable to predict the future cost or impact of complying with such regulations. Regulation of Production The production of oil and natural gas is subject to regulation under a wide range of federal and state statutes, rules, orders and regulations. State and federal statutes and regulations require permits for drilling operations, drilling bonds and reports concerning operations. Most states in which the Company owns and operates properties have regulations governing conservation matters, including provisions for the unitization or pooling of oil and natural gas properties, the establishment of maximum rates of production from oil and natural gas wells and the regulation of the spacing, plugging and abandonment of wells. Many states also restrict production to the market demand for oil and natural gas and several states have indicated interest in revising applicable regulations. The effect of these regulations is to limit the amount of oil and natural gas the Company can produce from its wells and to limit the number of wells or the locations at which the Company can drill. Moreover, each state generally imposes an ad valorem, production or severance tax with respect to production and sale of crude oil, natural gas and natural gas liquids within its jurisdiction. Environmental Regulation General. Various federal, state and local laws and regulations governing the discharge of materials into the environment, or otherwise relating to the protection of the environment, affect the Company's operations and costs. In particular, the Company's exploration, exploitation and production operations, its activities in connection with storage and transportation of crude oil and other liquid hydrocarbons and its use of facilities for treating, processing or otherwise handling hydrocarbons and wastes therefrom are subject to stringent environmental regulation. As with the industry generally, compliance with existing and anticipated regulations increases the Company's overall cost of business. Such areas affected include unit production expenses primarily related to the control and limitation of air emissions and the disposal of produced water, capital costs to drill exploration and development wells due to solids control and capital costs to construct, maintain and upgrade equipment and facilities. While these regulations affect the Company's capital expenditures and earnings, the Company believes that such regulations do not affect its competitive position in that the operations of its competitors that comply with such regulations are similarly affected. Environmental regulations have historically been subject to frequent change by regulatory authorities, and the Company is unable to predict the ongoing cost to it of complying with these laws and regulations or the future impact of such regulations on its operation. A discharge of hydrocarbons or hazardous substances into the environment could, to the extent such event is not insured, subject the Company to substantial expense, including both the cost to comply with applicable regulations and claims by neighboring landowners and other third parties for personal injury and property damage. A significant portion of the Miami Fee acreage in Cameron Parish, Louisiana, is within the Sabine National Wildlife Refuge (the "Refuge"), and operations therein are subject to the National Wildlife Refuge Administration Act and the regulations promulgated thereunder (the "Wildlife Refuge Act"). The Wildlife Refuge Act states that no person may use, occupy, conduct any activity on or remove property from any area located within a wildlife refuge unless a permit has been granted for such use, occupation, conduct, activity or removal of property. The Company currently is obligated to plug and abandon wells drilled on the Miami Fee acreage in prior years. Such obligations must comply with the requirements established by the Regional Director to ensure that the plugging and abandonment of such wells are compatible with the Wildlife Refuge Act. Although the Company obtained environmental studies on its properties in the LA Basin, Sunniland Trend and Illinois Basin, and the Company believes that such properties have been operated in accordance with standard oil field practices, certain of the fields have been in operation for more than approximately 90 years, and current or future local, state and federal environmental laws and regulations may require substantial expenditures to comply with such rules and regulations. In December 1995, the Company negotiated an agreement with Chevron, a prior owner of the LA 13 14 Basin Properties, to remediate sections of the properties impacted by prior drilling and production operations. Under this agreement, Chevron agreed to investigate and potentially remediate specific areas contaminated with volatile organic substances and heavy metals, and the Company agreed to excavate and remediate crude oil contaminated soils. The Company is obligated to construct and operate (for the next 14 years) two five-acre bioremediation cells for crude oil contaminated soils designated for excavation and treatment by Chevron. While the Company believes that it does not have any material obligations for operations conducted prior to Stocker's acquisition of the properties from Chevron, other than its obligation to plug existing wells and those normally associated with customary oil field operations of similarly situated properties (such as the Chevron agreement described above), there can be no assurance that current or future local, state or federal rules and regulations will not require it to spend material amounts to comply with such rules and regulations or that any portion of such amounts will be recoverable from Chevron, either under the December 1995 agreement or the limited indemnity from Chevron contained in the original purchase agreement. A portion of the Sunniland Trend Properties is located within the Big Cypress National Preserve and the Company's operations therein are subject to regulations administered by the National Park Service ("NPS"). Under such regulations, a Master Plan of Operations has been approved by the Regional Director of the NPS. The Master Plan of Operations is a comprehensive plan of practices and procedures for the Company's drilling and production operations designed to minimize the effect of such operations on the environment. The Master Plan of Operations must be modified and permits must be secured from the NPS for new wells which require the use of additional land for drilling operations. The Master Plan of Operations also requires that the Company restore the surface property affected by its drilling and production operations upon cessation of these activities. The Company does not anticipate that expenditures required to comply with such regulations will have a material adverse effect on its current operations. Water. The Oil Pollution Act ("OPA") was enacted in 1990 and amends provisions of the Federal Water Pollution Control Act of 1972 ("FWPCA") and other statutes as they pertain to prevention and response to oil spills. The OPA subjects owners of facilities to strict, joint and potentially unlimited liability for removal costs and certain other consequences of an oil spill, where such spill is into navigable waters, along shorelines or in the exclusive economic zone of the United States. In the event of an oil spill into such waters, substantial liabilities could be imposed upon the Company. States in which the Company operates have also enacted similar laws. Regulations are currently being developed under OPA and state laws that may also impose additional regulatory burdens on the Company. The FWPCA imposes restrictions and strict controls regarding the discharge of produced waters and other oil and natural gas wastes into navigable waters. Permits must be obtained to discharge pollutants to state and federal waters. The FWPCA provides for civil, criminal and administrative penalties for any unauthorized discharges of oil and other hazardous substances in reportable quantities and, along with the OPA, imposes substantial potential liability for the costs of removal, remediation and damages. State laws for the control of water pollution also provide varying civil, criminal and administrative penalties and liabilities in the case of a discharge of petroleum or its derivatives into state waters. The EPA has promulgated regulations that require many oil and natural gas production operations to obtain permits to discharge storm water runoff. At some facilities, such as the Sunniland Trend Properties, the Company eliminated this permit requirement by collecting all potentially contaminated storm water and disposing of it through the Company's underground injection control ("UIC") disposal wells. At other facilities, the Company has applied for and obtained any necessary storm water discharge permits, and is currently in substantial compliance with applicable 14 15 permit conditions. The Company believes that compliance with existing permits and compliance with foreseeable new permit requirements will not have a material adverse effect on the Company's financial condition or results of operations. Air Emissions. The operations of the Company are subject to the Federal Clean Air Act and comparable state and local statutes. The Company believes that its operations are in substantial compliance with such statutes in all states in which they operate. Amendments to the Federal Clean Air Act enacted in late 1990 (the "1990 Federal Clean Air Act Amendments") require or will require most industrial operations in the United States to incur capital expenditures in order to meet air emission control standards developed by the Environmental Protection Agency (the "EPA") and state environmental agencies. In particular, the Company's LA Basin properties are located in an "extreme" non-attainment area for ozone. This classification will force the local air quality regulatory authority, the South Coast Air Quality Management District, to adopt stringent controls on all emissions of nitrogen oxide and volatile organic compounds. As a result of these future regulations, the Company may incur future capital expenditures to reduce air emissions from the LA Basin production facilities. In addition, the 1990 Federal Clean Air Act Amendments include a new operating permit for major sources ("Title V permits"), and several of the Company's facilities may require permits under this new program. Although no assurances can be given, the Company believes implementation of the 1990 Federal Clean Air Act Amendments will not have a material adverse effect on the Company's financial condition or results of operations. Solid Waste. The Company generates non-hazardous solid wastes that are subject to the requirements of the Federal Resource Conservation and Recovery Act ("RCRA") and comparable state statutes. The EPA is considering the adoption of stricter disposal standards for non-hazardous wastes. RCRA also governs the disposal of hazardous wastes. At present, the Company is not required to comply with a substantial portion of the RCRA requirements because the Company's operations generate minimal quantities of hazardous wastes. However, it is anticipated that additional wastes, which could include wastes currently generated during operations, will in the future be designated as "hazardous wastes". Hazardous wastes are subject to more rigorous and costly disposal requirements than are non-hazardous wastes. Such changes in the regulations may result in additional capital expenditures or operating expenses by the Company. Superfund. The Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), also known as "Superfund", imposes liability, without regard to fault or the legality of the original act, on certain classes of persons that contributed to the release of a "hazardous substance" into the environment. These persons include the owner or operator of the site and companies that disposed or arranged for the disposal of the hazardous substances found at the site. CERCLA also authorizes the EPA and, in some instances, third parties to act in response to threats to the public health or the environment and to seek to recover from the responsible classes of persons the costs they incur. In the course of its ordinary operations, the Company may generate waste that may fall within CERCLA's definition of a "hazardous substance". The Company may be jointly and severally liable under CERCLA for all or part of the costs required to clean up sites at which such hazardous substances have been disposed or released into the environment. The Company currently owns or leases, and has in the past owned or leased, numerous properties that for many years have been used for the exploration and production of oil and natural gas. Although the Company has utilized operating and disposal practices that were standard in the industry at the time, hydrocarbons or other wastes may have been disposed of or released on or under the properties owned or leased by the Company or on or under other locations where such wastes have been taken for disposal. In addition, many of these properties have been operated by third parties whose treatment and disposal or release of hydrocarbons or other wastes was not under the Company's control. These properties and wastes disposed thereon may be subject to CERCLA, RCRA and analogous state laws. Under such laws, the Company could be required to remove or remediate previously disposed wastes (including wastes disposed of or released by prior owners or operators), to clean up contaminated property (including contaminated groundwater) or to perform remedial plugging operations to prevent future contamination. FEDERAL TAXATION At December 31, 1996, the Company and its subsidiaries, which together file a consolidated federal income tax return, had federal income tax NOL carryforwards of approximately $183 million. Of that amount, approximately $16 million is subject to separate return limitation year restrictions and may only be utilized to the extent certain 15 16 subsidiaries which generated the NOLs have taxable income. At December 31, 1996, the Company had approximately $169 million of alternative minimum tax ("AMT") net operating loss carryforwards available as a deduction against future AMT income. In addition, the Company had approximately $.7 million of investment tax credit carryforwards and $7.0 million of percentage depletion carryforwards at December 31, 1996. The NOL carryforwards expire from 1997 through 2011. The value of these carryforwards depends on the ability of the Company to generate federal taxable income. In addition, for AMT purposes, only 90% of AMT income in any given year may be offset by AMT NOLs. The ability of the Company to utilize NOL and investment tax credit carryforwards to reduce future federal taxable income and federal income tax of the Company is subject to various limitations under the Internal Revenue Code of 1986, as amended (the "Code"). The utilization of such carryforwards may be limited upon the occurrence of certain ownership changes, including the issuance or exercise of rights to acquire stock, the purchase or sale of stock by 5% stockholders, as defined in the Treasury Regulations, and the offering of stock by the Company during any three-year period resulting in an aggregate change of more than 50% ("Ownership Change") in the beneficial ownership of the Company. In the event of an Ownership Change, Section 382 of the Code imposes an annual limitation on the amount of a corporation's taxable income that can be offset by these carryforwards. The limitation is generally equal to the product of (i) the fair market value of the equity of the Company multiplied by (ii) a percentage approximately equivalent to the yield on long-term tax exempt bonds during the month in which an Ownership Change occurs. In addition, the limitation is increased if there are recognized built-in gains during any post-change year, but only to the extent of any net unrealized built-in gains (as defined in the Code) inherent in the assets sold. Although no assurances can be made, the Company does not believe that an Ownership Change has occurred as of December 31, 1996. Equity transactions after the date hereof by the Company or by 5% stockholders (including relatively small transactions and transactions beyond the Company's control) could cause an Ownership Change and therefore a limitation in the annual limitation of NOLs. The Company does not expect to report any regular taxable income in the near future because it expects to utilize its carryforwards and other tax deductions and credits. However, there is no assurance that the Internal Revenue Service will not challenge these carryforwards or their utilization. 16 17 Other Business Matters The Company must continually acquire, explore for, develop or exploit new oil and natural gas reserves to replace those produced or sold. Without successful drilling, acquisition or exploitation operations, the Company's oil and natural gas reserves and revenues will decline. Drilling activities are subject to numerous risks, including the risk that no commercially viable oil or natural gas production will be obtained. The decision to purchase, explore, exploit or develop an interest or property will depend in part on the evaluation of data obtained through geophysical and geological analyses and engineering studies, the results of which are often inconclusive or subject to varying interpretations. See Item 2, "Properties--Oil and Natural Gas Reserves". The cost of drilling, completing and operating wells is often uncertain. Drilling may be curtailed, delayed or canceled as a result of many factors, including title problems, weather conditions, compliance with government permitting requirements, shortages of or delays in obtaining equipment, reductions in product prices or limitations in the market for products. The availability of a ready market for the Company's oil and natural gas production also depends on a number of factors, including the demand for and supply of oil and natural gas and the proximity of reserves to pipelines or trucking and terminal facilities. Natural gas wells may be shut in for lack of a market or due to inadequacy or unavailability of natural gas pipeline or gathering system capacity. Substantially all of the Company's LA Basin crude oil and natural gas production and its Sunniland Trend and Illinois Basin oil production are transported by pipelines owned by third parties. The inability or unwillingness of these pipelines to provide transportation services to the Company for a reasonable fee could cause the Company to seek transportation alternatives, which in turn could result in increased transportation costs to the Company or involuntary curtailment of a significant portion of its crude oil and natural gas production. The Company is currently in dispute with the third party pipeline company that transports its Sunniland Trend oil production. See Item 3, "Legal Proceedings". The Company's operations are subject to all of the risks normally incident to the exploration for and the production of oil and natural gas, including blowouts, cratering, oil spills and fires, each of which could result in damage to or destruction of oil and natural gas wells, production facilities or other property, or injury to persons. The relatively deep drilling conducted by the Company from time to time involves increased drilling risks of high pressures and mechanical difficulties, including stuck pipe, collapsed casing and separated cable. The Company's operations in the LA Basin, including transportation of crude oil by pipelines within the city of Los Angeles, are especially susceptible to damage from earthquakes and involve increased risks of personal injury, property damage and marketing interruptions because of the population density of the area. Although the Company maintains insurance coverage considered to be customary in the industry, it is not fully insured against certain of these risks, including, in certain instances, earthquake risk in the LA Basin, either because such insurance is not available or because of high premium costs. The occurrence of a significant event that is not fully insured against could have a material adverse effect on the Company's financial position. The revenues generated by the Company's operations are highly dependent upon the prices of, and demand for, oil and natural gas. Historically, the prices for oil and natural gas have been volatile and are likely to continue to be volatile in the future. The price received by the Company for its oil and natural gas production and the level of such production are subject to wide fluctuations and depend on numerous factors beyond the Company's control, including seasonality, the condition of the United States economy (particularly the manufacturing sector), foreign imports, political conditions in other oil-producing and natural gas-producing countries, the actions of the Organization of Petroleum Exporting Countries and domestic government regulation, legislation and policies. Decreases in the prices of oil and natural gas have had, and could have in the future, an adverse effect on the carrying value of the Company's proved reserves and the Company's revenues, profitability and cash flow. In this regard, it should be noted that oil prices at December 31, 1996, upon which estimated proved reserve volumes, the Present Value of Proved Reserves and the Standardized Measure as of such date are based, were at the highest year-end level since 1990. At December 31, 1996, the NYMEX Crude Oil Price was $25.92 per barrel, 33% higher than the $19.55 per barrel at December 31, 1995. Although the Company is not currently experiencing any significant involuntary curtailment of its crude oil or natural gas production, market, logistic, economic and regulatory factors may in the future materially affect the Company's ability to sell its natural gas production. In order to manage its exposure to price risks in the marketing of its oil and natural gas, the Company from time to time enters into fixed price delivery contracts, floating price collar arrangements, financial swaps and oil and natural gas futures contracts as hedging devices. To ensure a fixed price for future production, the Company may sell a futures contract and thereafter either (i) make physical delivery of its product to comply with such contract or (ii) buy a matching futures contract to unwind its futures position and sell its production to a customer. These same techniques are also utilized to manage price risk for certain production purchased from customers of the Company's marketing subsidiary, Plains Marketing & Transportation Inc. ("Plains Marketing"). Such contracts may expose the Company to the risk of financial loss in certain circumstances, including instances where production is less than expected, the Company's customers fail to purchase or deliver the contracted quantities of oil or natural gas, or a sudden, unexpected event materially impacts oil or natural gas prices. Such contracts may also restrict the ability of the Company to benefit from unexpected increases in oil and natural gas prices. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations--Capital Resources, Liquidity and Financial Condition--Changing Oil and Natural Gas Prices". 17 18 Forward-Looking Statements and Associated Risks. This Report includes "forward-looking statements" within the meaning of various provisions of the Securities Act and the Exchange Act. All statements, other than statements of historical facts, included in this Report which address activities, events or developments that the Company expects or anticipates will or may occur in the future, including such things as estimated future net revenues from oil and natural gas reserves and the present value thereof, future capital expenditures (including the amount and nature thereof), business strategy and measures to implement strategy, competitive strengths, goals, expansion and growth of the Company's business and operations, plans, references to future success, references to intentions as to future matters and other such matters are forward-looking statements. These statements are based on certain assumptions and analyses made by the Company in light of its experience and its perception of historical trends, current conditions and expected future developments as well as other factors it believes are appropriate in the circumstances. However, whether actual results and developments will conform with the Company's expectations and predictions is subject to a number of risks and uncertainties, including general economic, market or business conditions, the opportunities (or lack thereof) that may be presented to and pursued by the Company, competitive actions by other oil and natural gas companies, changes in laws or regulations, and other factors, many of which are beyond the control of the Company. Consequently, all of the forward-looking statements made in this Report are qualified by these cautionary statements and there can be no assurance that the actual results or developments anticipated by the Company will be realized or, even if substantially realized, that they will have the expected consequences to or effects on the Company or its business or operations. Title to Properties The Company's properties are subject to customary royalty interests, liens incident to operating agreements, liens for current taxes and other burdens, including other mineral encumbrances and restrictions. The Company does not believe that any of these burdens materially interferes with the use of such properties in the operation of its business. The Company believes that it has generally satisfactory title to or rights in all of its producing properties. As is customary in the oil and natural gas industry, minimal investigation of title is made at the time of acquisition of undeveloped properties. Title investigation is made and title opinions of local counsel are generally obtained only before commencement of drilling operations. 18 19 Employees As of January 31, 1997, the Company had 201 full-time employees, none of whom is represented by any labor union. Approximately 93 of such full-time employees are field personnel involved in oil and natural gas producing activities, trucking and transport activities and crude oil terminalling and storage activities. Item 2. PROPERTIES The Company is an independent energy company engaged in the acquisition, exploitation, development, exploration and production of crude oil and natural gas and the marketing, transportation, terminalling and storage of crude oil. The Company's upstream oil and natural gas activities are focused in the LA Basin, the Sunniland Trend, the Illinois Basin and the Gulf Coast area of Louisiana. The Company's downstream marketing, terminalling and storage activities are concentrated in Oklahoma, Texas and the Gulf Coast area of Louisiana. Plains' upstream operations contributed approximately 90% of the Company's EBITDA for the fiscal year ending December 31, 1996, while the Company's downstream activities accounted for the remainder. See Item 1, "Business" for a discussion of the Company's exploration, acquisition, development and exploitation activities and downstream businesses. Oil and Natural Gas Reserves The following tables set forth certain information with respect to the Company's reserves based upon reserve reports prepared by the independent petroleum consulting firms of H.J. Gruy and Associates, Inc. with respect to the LA Basin Properties, Netherland, Sewell & Associates, Inc. with respect to the Sunniland Trend and other minor properties, and Ryder Scott Company with respect to the Illinois Basin Properties. Such reserve volumes and values were determined under the method prescribed by the SEC which requires the application of year-end prices for each year, held constant throughout the projected reserve life. 19 20
AS OF OR FOR THE YEAR ENDED DECEMBER 31, ------------------------------------------------------------------- 1994 1995 1996 -------------------- ------------------- ------------------- OIL GAS OIL GAS OIL GAS (BBL) (MCF) (BBL) (MCF) (BBL) (MCF) (IN THOUSANDS) PROVED RESERVES Beginning balance ............................ 38,810 49,397 61,459 51,009 94,408 43,110 Revisions of previous estimates .............. 16,834 4,365 5,423 2,792 19,424 6,641 Extensions, discoveries, improved recovery and other additions ............................ 4,362 1,182 15,489 1,730 8,179 1,294 Sale of reserves ............................. (16) (446) (1,227) (9,773) (5) (12,491) Purchase of reserves in place .............. 5,304 80 17,640 130 45 862 Production ................................... (3,835) (3,569) (4,376) (2,778) (6,055) (2,143) -------- -------- -------- -------- -------- -------- Ending balance ............................... 61,459 51,009 94,408 43,110 115,996 37,273 ======== ======== ======== ======== ======== ======== PROVED DEVELOPED RESERVES Beginning balance ............................ 30,646 28,436 48,978 30,869 67,266 29,397 ======== ======== ======== ======== ======== ======== Ending balance ............................... 48,978 30,869 67,266 29,397 86,515 25,629 ======== ======== ======== ======== ======== ========
The following table sets forth the Present Value of Proved Reserves as of December 31, 1994, 1995 and 1996.
1994 1995 1996 ------------- ------------- -------------- (IN THOUSANDS) Proved developed.................................. $ 191,578 $ 272,634 $ 574,686 Proved undeveloped................................ 37,793 94,146 190,088 ------------- ------------- -------------- Total proved.................................... $ 229,371 $ 366,780 $ 764,774 ============= ============== ==============
There are numerous uncertainties inherent in estimating quantities and values of proved reserves and in projecting future rates of production and timing of development expenditures, including many factors beyond the control of the Company. Reserve engineering is a subjective process of estimating the recovery from underground accumulations of oil and natural gas that cannot be measured in an exact manner, and the accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. Because all reserve estimates are to some degree speculative, the quantities of oil and natural gas that are ultimately recovered, production and operating costs, the amount and timing of future development expenditures and future oil and natural gas sales prices may all differ from those assumed in these estimates. In addition, different reserve engineers may make different estimates of reserve quantities and cash flows based upon the same available data. Therefore, the Present Value of Proved Reserves shown above represents estimates only and should not be construed as the current market value of the estimated oil and natural gas reserves attributable to the Company's properties. In this regard, it should be noted that oil prices at December 31, 1996, upon which estimated proved reserve volumes, the Present Value of Proved Reserves and the Standardized Measure as of such date are based, were at the highest year-end level since 1990. At December 31, 1996, the NYMEX Crude Oil Price was $25.92 per barrel, 33% higher than the $19.55 per barrel at December 31, 1995. The information set forth in the preceding tables includes revisions of reserve estimates attributable to proved properties included in the preceding year's estimates. Such revisions reflect additional information from subsequent exploitation and development activities, production history of the properties involved and any adjustments in the projected economic life of such properties resulting from changes in product prices. In accordance with the SEC guidelines, the reserve engineers' estimates of future net revenues from the Company's properties and the present value thereof are made using oil and natural gas sales prices in effect as of the dates of such estimates and are held constant throughout the life of the properties, except where such guidelines permit alternate treatment, including the use of fixed and determinable contractual price escalations. The crude oil price in effect at December 31, 1996, is based on the NYMEX Crude Oil Price of $25.92 per Bbl with variations therefrom based on location and grade of crude oil. The Company has entered into various fixed and floating price collar arrangements to fix the NYMEX Crude Oil Price for a significant portion of its crude oil production. On December 31, 1996, these arrangements provided for a NYMEX Crude Oil Price for: (i) 12,000 barrels per day through March 31, 1997, at $18.51 per barrel; (ii) 10,000 barrels per day from April 1, 20 21 1997, through April 30, 1997, at $18.85 per barrel; (iii) 9,000 barrels per day from May 1, 1997, through June 30, 1997, at $18.85 per barrel; and (iv) 9,100 barrels per day from July 1, 1997, through December 31, 1997, at $18.59 per barrel. The Company has entered into additional swap arrangements which provide for a NYMEX Crude Oil Price ceiling of $24.00 per barrel and a price floor of $19.50 per barrel for 4,000 barrels per day from January 1, 1997, through December 31, 1997. Combined with an additional arrangement providing for 500 barrels per day from April 1, 1997 through December 31, 1997, at $22.00 per barrel, these arrangements provide the Company with an average minimum price of $18.96 per barrel on an average of approximately 14,250 barrels of oil per day for 1997, but provide the Company with upside price participation for 4,000 of such barrels up to $24.00 per barrel. At December 31, 1996, the Company also had a fixed price arrangement on 4,500 barrels per day for 1998 at a NYMEX Crude Oil Price of $19.24 per barrel. Location and quality differentials attributable to the Company's properties are not included in the foregoing prices. The agreements provide for monthly settlement based on the differential between the agreement price and the actual NYMEX Crude Oil Price. The overall average prices used in the reserve reports as of December 31, 1996, were $22.22 per Bbl of crude oil, condensate and natural gas liquids and $2.79 per Mcf of natural gas. See Item 1, "Business--Product Markets and Major Customers". Prices for natural gas and, to a lesser extent, oil are subject to substantial seasonal fluctuations and prices for each are subject to substantial fluctuations as a result of numerous other factors. Since December 31, 1995, the Company has not filed any estimates of total proved net oil or natural gas reserves with any federal authority or agency other than the SEC. See Note 16 to the Company's Consolidated Financial Statements appearing elsewhere in this Report for certain additional information concerning the proved reserves of the Company. PRODUCTIVE WELLS AND ACREAGE As of December 31, 1996, the Company had working interests in 1,617 gross (1,616 net) active oil wells and 5 gross (1 net) active natural gas wells. These totals do not include the Company's royalty and overriding royalty interests in approximately 135 gross (4 net) producing oil and natural gas wells. The following table sets forth certain information with respect to the developed and undeveloped acreage of the Company as of December 31, 1996.
DECEMBER 31, 1996 --------------------------------------------- Developed Acres(1) Undeveloped Acres(2) --------------------- --------------------- Gross Net Gross Net(3) --------- --------- --------- --------- California .............. 3,891 3,818 10 10 Florida ................. 12,044 11,852 96,257 80,774 Illinois ................ 15,887 13,885 33,653 15,416 Indiana ................. 1,155 854 2,562 1,216 Kansas .................. -- -- 52,433 41,496 Kentucky ................ -- -- 1,321 521 Louisiana(4) ............ 700 117 21,903 11,453 Oklahoma ................ 640 88 -- -- --------- --------- --------- --------- Total .............. 34,317 30,614 208,139 150,886 ========= ========= ========= =========
(1) Developed acres are acres spaced or assigned to productive wells. (2) Undeveloped acres are acres on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil and natural gas, regardless of whether such acreage contains proved reserves. (3) Less than 2% of total net undeveloped acres are covered by leases that expire in 1997 and 1998. (4) Does not include approximately 19,000 gross (5,000 net) acres under seismic option. 21 22 DRILLING ACTIVITIES Certain information with regard to the Company's drilling activities during the years ended December 31, 1994, 1995 and 1996 is set forth below:
YEAR ENDED DECEMBER 31, --------------------------------------------------- 1994 1995 1996 --------------- --------------- --------------- Gross Net Gross Net Gross Net ------ ------ ------ ------ ------ ------ Exploratory Wells: Oil ............................. 0.00 0.00 0.00 0.00 0.00 0.00 Natural gas ..................... 0.00 0.00 0.00 0.00 0.00 0.00 Dry ............................. 6.00 4.39 1.00 0.40 2.00 0.63 ------ ------ ------ ------ ------ ------ Total ....................... 6.00 4.39 1.00 0.40 2.00 0.63 ====== ====== ====== ====== ====== ====== Development Wells: Oil ............................. 1.00 1.00 0.00 0.00 24.00 24.00 Natural gas ..................... 0.00 0.00 0.00 0.00 0.00 0.00 Dry ............................. 0.00 0.00 1.00 0.50 0.00 0.00 ------ ------ ------ ------ ------ ------ Total ....................... 1.00 1.00 1.00 0.50 24.00 24.00 ====== ====== ====== ====== ====== ====== Total Wells: Producing ....................... 1.00 1.00 0.00 0.00 24.00 24.00 Dry ............................. 6.00 4.39 2.00 0.90 2.00 0.63 ------ ------ ------ ------ ------ ------ Total ....................... 7.00 5.39 2.00 0.90 26.00 24.63 ====== ====== ====== ====== ====== ======
At December 31, 1996, the Company was in the process of drilling 1 gross (.20 net) exploratory well. See Item 1, "Business--Acquisition and Exploitation" and "--Productive Wells and Acreage" for additional information regarding exploitation activities, including waterflood patterns, workovers and recompletions. PRODUCTION AND SALES The following table presents certain information with respect to oil and natural gas production attributable to the Company's properties, the revenue derived from the sale of such production, average sales prices received and average production costs during the three years ended December 31, 1994, 1995 and 1996.
YEAR ENDED DECEMBER 31, --------------------------------- 1994 1995 1996 --------- --------- --------- (IN THOUSANDS, EXCEPT UNIT DATA) Production: Crude oil and natural gas liquids (Bbls) ........ 3,835 4,376 6,055 Natural gas (Mcf) ............................... 3,569 2,778 2,143 BOE ............................................. 4,430 4,839 6,412 Revenue: Crude oil and natural gas liquids ............... $ 52,331 $ 61,241 $ 95,224 Natural gas ..................................... 4,903 2,839 2,377 --------- --------- --------- Total .......................................... $ 57,234 $ 64,080 $ 97,601 ========= ========= ========= Average sales price: Crude oil and natural gas liquids (per Bbl) ..... $ 13.65 $ 13.99 $ 15.73 Natural gas (per Mcf) ........................... $ 1.37 $ 1.02 $ 1.11 Per BOE ......................................... $ 12.92 $ 13.24 $ 15.22 Production expenses per BOE ...................... $ 6.15 $ 6.25 $ 6.04
22 23 Crude Oil Storage and Terminalling Facility In December 1993, the Company completed construction on the first phase of the Cushing Terminal in Cushing, Oklahoma. The first phase of the facility consists of two million barrels of shell storage capacity comprised of fourteen 100,000 barrel capacity tanks and four 150,000 barrel capacity tanks. See Item 1, "Business -- Downstream Activities". Other Facilities The Company currently leases offices containing approximately 46,000 square feet in Houston, Texas. Item 3. LEGAL PROCEEDINGS On July 9, 1987, Exxon filed an interpleader action in the United States District Court for the Middle District of Florida, Exxon Corporation v. E. W. Adams, et al., Case Number 87-976-CIV-T-23-B. This action was filed by Exxon to interplead royalty funds as a result of a title controversy between certain mineral owners in a field in Florida. One group of mineral owners, John W. Hughes, et al. (the "Hughes Group"), filed a counterclaim against Exxon alleging fraud, conspiracy, conversion of funds, declaratory relief, federal and Florida RICO, breach of contract and accounting, as well as challenging the validity of certain oil and natural gas leases owned by Exxon, and seeking exemplary and treble damages. In March 1993, but effective November 1, 1992, Calumet, a wholly-owned subsidiary of the Company, acquired all of Exxon's leases in the field affected by this lawsuit. In order to address those counterclaims challenging the validity of certain oil and natural gas leases, which constitute approximately 10% of the lands underlying this unitized field, Calumet filed a motion to join Exxon as plaintiff in the subject lawsuit, which was granted July 29, 1994. In August 1994, the Hughes Group amended its counterclaim to add Calumet as a counter- defendant. Exxon and Calumet filed a motion to dismiss the counterclaims. On March 22, 1996, the Court granted Exxon's and Calumet's motion to dismiss the counterclaims alleging fraud, conspiracy, and federal and Florida RICO violations and challenging the validity of certain of the Company's oil and natural gas leases but denied such motion as to the counterclaim alleging conversion of funds. The Company has reached an agreement in principle with all parties to settle this case. In consideration for full and final settlement, and dismissal with prejudice of all issues in this case, the Company has agreed to pay to the defendants the total sum of $100,000, and release certain royalty amounts held in suspense and in the court registry during the pendency of this case. Finalization of this settlement has been delayed due to a dispute between the defendants over certain title issues. The defendants have filed motions requesting the Court to rule on this dispute, but no hearing date has been set. The Company does not believe that this dispute will adversely affect the settlement reached between the Company and the defendants. 23 24 Since the Company acquired the Sunniland Trend Properties in 1993, substantially all crude oil production therefrom has been transported by a third party pipeline company. The current pipeline service agreement (the "Pipeline Agreement") will expire on March 31, 1997, unless modified or extended. Subject to economic and other considerations, such agreement requires the parties to negotiate in good faith to extend such agreement or enter into a new agreement. The Company has been in negotiations with the pipeline company to continue to transport all or a portion of the crude oil production on the existing pipeline system. However, no agreements have been reached. As a safeguard against the failure to agree on an extension or modification of the Pipeline Agreement, the Company entered into a contingent agreement with a local trucking company to transport part or all its crude oil production by trucks. Except as noted below, the Company has in place the necessary facilities to convert to trucking. Approximately 60% of the Company's Sunniland Trend oil production is derived from one field, the production from which is transported by its own proprietary pipeline to a ten acre surface lease held by the Company on lands owned by the Miccosukee Tribe of Indians of Florida (the "Tribe"). Such lease is located at the interconnect with the third party's pipeline. In light of the possibility that the Pipeline Agreement may not be modified or extended, the Company commenced construction in late January of a storage tank and truck loading facilities on this lease that would enable it to truck crude oil from this location. The pipeline company has taken issue with the Company's assertion of its rights to transport its crude oil production by trucks upon the termination of the existing contract, alleging that it had recently acquired an exclusive license to transport production from the Tribe's lands. The Company notified the pipeline company that it believes these allegations are without merit and that the exclusive license would be in violation of the Company's lease with the Tribe. Subsequently, the Tribe's legal representatives notified the pipeline company that the purported exclusive license claimed by the pipeline company is void, unenforceable and of no force and effect. However, the Tribal Chairman has directed the Company to cease its construction operations on the lease, claiming that prior approval of such operations must be approved by the Tribe and the Bureau of Indian Affairs (the "BIA"). The Company believes its construction operations are in compliance with its lease and that no prior approval is required from the Tribe or the BIA. The Company is discussing this matter with representatives of the Tribe and is continuing negotiations with the pipeline company. If these controversies are not resolved, litigation could result and this portion of the Company's Sunniland Trend production could be curtailed until trucking can be commenced or the Company agrees to extend the Pipeline Agreement or enter into a new contract with the pipeline company. The pipeline company is currently demanding that any extension of the Pipeline Agreement provide for a rate which is approximately $.15 per barrel above the current rate and which would be $.80 per barrel higher than the alternative trucking rate. The Company, in the ordinary course of business, is a claimant and/or a defendant in various other legal proceedings in which its exposure, individually and in the aggregate, is not considered material to the Company. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the security holders, through solicitation of proxies or otherwise, during the fourth quarter of the fiscal year covered by this Report. Executive Officers of the Company Information regarding the executive officers of the Company is presented below. All executive officers hold office until their successors are elected and qualified. Greg L. Armstrong, President and Chief Executive Officer Officer Since 1981 Mr. Armstrong, age 38, has been President, Chief Executive Officer and a director of the Company since 1992. He was President and Chief Operating Officer from October to December 1992, and Executive Vice President and Chief Financial Officer from June to October 1992. He was Senior Vice President and Chief Financial Officer from 1991 to June 1992, Vice President and Chief Financial Officer from 1984 to 1991, Corporate Secretary from 1981 to 1988, and Treasurer from 1984 to 1987. William C. Egg, Jr., Senior Vice President Officer Since 1984 Mr. Egg, age 45, has been Senior Vice President of the Company since 1991. He was Vice President- Corporate Development of the Company from 1984 to 1991 and Special Assistant-Corporate Planning from 1982 to 1984. Cynthia A. Feeback, Controller and Principal Accounting Officer Officer Since 1993 Ms. Feeback, age 39, has been Controller and Principal Accounting Officer of the Company since 1993. She was Controller of the Company from 1990 to 1993 and Accounting Manager from 1988 to 1990. Phillip D. Kramer, Vice President, Chief Financial Officer and Treasurer Officer Since 1987 Mr. Kramer, age 41, has been Vice President and Chief Financial Officer of the Company since 1992. He was Vice President and Treasurer from 1988 to 1992, Treasurer from 1987 to 1988, and Controller from 1983 to 1987. 24 25 G. M. McCarroll, Vice President-Exploration and Land Officer Since 1989 Mr. McCarroll, age 39, became Vice President-Exploration and Land in February 1996. He had been Vice President-Land of the Company since 1989, except for the period of May through July 1991 when he was Vice President of a land development company in Lafayette, Louisiana. From 1988 to 1989 he was a consultant to the Company for acquisitions and land functions. Michael R. Patterson, Vice President and General Counsel Officer Since 1985 Mr. Patterson, age 49, has been Vice President and General Counsel of the Company since 1985 and Corporate Secretary since 1988. Harry N. Pefanis, Senior Vice President Officer Since 1988 Mr. Pefanis, age 39, became Senior Vice President in February 1996. He had been Vice President-Products Marketing of the Company since 1988. From 1987 to 1988 he was Manager of Products Marketing. From 1983 to 1987 he was Special Assistant for Corporate Planning for the Company. Mr. Pefanis is also President of Plains Marketing & Transportation Inc., a wholly-owned subsidiary of the Company. Mary O. Peters, Vice President - Administration and Human Resources Officer Since 1991 Ms. Peters, age 48, has been Vice President-Administration and Human Resources since 1991. She was Manager of Office Administration of the Company from 1984 to 1991. 25 26 PART II Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's $.10 par value common stock ("Common Stock") is listed and traded on the American Stock Exchange under the symbol "PLX." The number of stockholders of record of the Common Stock as of February 1, 1997, was 1,503. For the periods indicated below, the following table sets forth the range of high and low closing sales prices for the Common Stock as reported on the American Stock Exchange Composite Tape.
High Low 1995: 1st Quarter ....................................... $ 7 3/4 $ 5 1/2 2nd Quarter ....................................... 9 3/4 7 5/8 3rd Quarter ....................................... 10 3/4 7 5/8 4th Quarter ....................................... 9 6 13/16 1996: 1st Quarter ....................................... $ 9 1/8 $ 7 7/16 2nd Quarter ....................................... 13 8 1/2 3rd Quarter ....................................... 14 7/8 11 3/4 4th Quarter ....................................... 16 5/8 12 7/8
The Company has not paid cash dividends on shares of the Common Stock since the Company's inception and does not anticipate paying any cash dividends on the Common Stock in the foreseeable future. In addition, the Company is prohibited by provisions of the indenture governing the issue of $150 million 10.25% Senior Subordinated Notes Due 2006 (the "10.25% Notes") and the Revolving Credit Facility from paying dividends on the Common Stock. 26 27 Item 6. SELECTED FINANCIAL DATA The following selected historical financial information was derived from, and is qualified by reference to, the Consolidated Financial Statements of the Company, including the Notes thereto, appearing elsewhere in this Report. The selected financial data should be read in conjunction with the Consolidated Financial Statements, including the Notes thereto, and Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations".
YEAR ENDED DECEMBER 31, -------------------------------------------------------------- 1992 1993 1994 1995 1996 --------- --------- --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE INFORMATION) STATEMENT OF OPERATIONS DATA: Revenues: Oil and natural gas sales ............................. $ 38,400 $ 57,507 $ 57,234 $ 64,080 $ 97,601 Marketing, transportation and storage ................. 93,838 128,186 199,239 339,826 531,698 Other ................................................. 413 335 223 319 309 --------- --------- --------- --------- --------- Total revenue ........................................... 132,651 186,028 256,696 404,225 629,608 --------- --------- --------- --------- --------- Costs and expenses: Production expenses ................................... 19,329 28,285 27,220 30,256 38,735 Purchases, transportation and storage ................. 92,107 124,390 193,049 333,460 522,167 General and administrative ............................ 8,592 7,724 6,966 7,215 7,729 Depreciation, depletion and amortization .............. 12,155 36,980(1) 16,305 17,036 21,937 Interest expense ...................................... 3,776 8,847 12,585 13,606 17,286 Litigation settlement ................................. -- -- -- -- 4,000(2) --------- --------- --------- --------- --------- Total expenses .......................................... 135,959 206,226 256,125 401,573 611,854 --------- --------- --------- --------- --------- Income (loss) before income taxes and extraordinary item (3,308) (20,198) 571 2,652 17,754 Income tax expense (benefit) ............................ -- -- -- -- (3,898) --------- --------- --------- --------- --------- Income (loss) before extraordinary item ................. (3,308) (20,198) 571 2,652 21,652 Extraordinary item, net of income taxes ................. -- -- -- -- (5,104)(3) --------- --------- --------- --------- --------- Net income (loss) ....................................... $ (3,308) $ (20,198) $ 571 $ 2,652 $ 16,548 ========= ========= ========= ========= ========= Net income (loss) per common and common equivalent share: Before extraordinary item ............................. $ (.32) $ (1.77) $ .04 $ .16 $ 1.22 Extraordinary item, net of income taxes ............... -- -- -- -- (.29) --------- --------- --------- --------- --------- $ (.32) $ (1.77) $ .04 $ .16 $ .93 ========= ========= ========= ========= ========= Weighted average number of common and common equivalent shares .............................. 10,536 11,438 11,625 15,981 17,732 OTHER FINANCIAL DATA: Cash flow from operations(4) ............................ $ 8,847 $ 16,782 $ 16,876 $ 19,688 $ 43,942(6) EBITDA(5) ............................................... 12,623 25,629 29,461 33,294 61,184(6) Net cash provided by operating activities ............... 11,435 10,397 18,369 16,984 39,008 Net cash used in investing activities ................... 53,104 76,451 40,158 64,398 52,496 Net cash provided by financing activities ............... 63,430 44,688 19,297 52,252 9,876
YEAR ENDED DECEMBER 31, ------------------------------------------------------------ 1992 1993 1994 1995 1996 --------- --------- --------- --------- --------- BALANCE SHEET DATA: Cash and cash equivalents ..... $ 25,149 $ 4,862 $ 2,791 $ 6,129 $ 2,517 Working capital (deficit) ..... 13,065 (13,986) (4,465) (4,749) (4,843) Property and equipment, net ... 144,692 191,985 217,602 280,538 311,040 Total assets .................. 199,093 236,667 266,904 352,046 430,249 Long-term debt ................ 100,000 141,600 149,600 205,089 225,399 Other long-term liabilities ... 2,506 967 3,754 1,547 2,577 Redeemable preferred stock .... -- -- 20,937 -- -- Total stockholders' equity .... 63,333 44,997 46,462 77,029 95,572
- --------------- (1) Includes a $20 million non-cash charge related to a writedown of the capitalized costs of the Company's proved oil and natural gas properties due to low crude oil prices at December 31, 1993. (2) Represents charge related to the settlement of two lawsuits filed in 1992 and 1993. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations". (3) Relates to the early redemption in March 1996 of the Company's 12% Senior Subordinated Notes due 1999. (4) Net cash provided by operating activities before changes in assets and liabilities. (5) EBITDA means earnings before interest, taxes, depreciation, depletion, amortization and other noncash items. EBITDA is commonly used by debt holders and financial statement users as a measurement to determine the ability of an entity to meet its interest obligations. EBITDA is not a measurement presented in accordance with generally accepted accounting principles ("GAAP") and is not intended to be used in lieu of GAAP presentations of results of operations and cash provided by operating activities. (6) Excludes nonrecurring items during 1996. Such items include a $4 million charge for settlement of two lawsuits filed during 1992 and 1993, a benefit of $11 million related to the reversal of a portion of the valuation allowance against the Company's deferred tax asset, and an $8.5 million ($5.1 million, net of tax) extraordinary charge from the early redemption of the Company's 12% Senior Subordinated Notes due 1999. 27 28 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL For the three years ended December 31, 1996, the Company reported significant increases in proved reserves, production and cash flow from oil and natural gas producing activities. Such increases are primarily the result of exploitation activities in the LA Basin Properties, the acquisition during 1994 of the remaining 50% interest in, and exploitation of, the Sunniland Trend Properties and the fourth quarter 1995 acquisition and subsequent exploitation of the Illinois Basin Properties. These three core areas are comprised primarily of crude oil properties and together account for approximately 98% of the Company's year-end 1996 proved reserves. See Item 1, "Business-- Acquisition and Exploitation--Current Exploitation Projects". RESULTS OF OPERATIONS For the year ended December 31, 1996, the Company reported net income before nonrecurring items of $14.7 million, or $.83 per share, on total revenue of $629.6 million. This compares with net income of $2.7 million on total revenue of $404.2 million in 1995 and net income of $.6 million on total revenue of $256.7 million in 1994. Earnings before interest, taxes, depreciation, depletion and amortization ("EBITDA") increased 84% in 1996 to $61.2 million from the $33.3 million reported in 1995 and 107% from the $29.5 million reported in 1994. Cash flow from operations (cash provided by operating activities before changes in assets and liabilities) increased to $43.9 million in 1996, 123% and 160% above the $19.7 million and $16.9 million reported in 1995 and 1994, respectively. Cash flow and EBITDA are also presented before nonrecurring items. Net cash provided by operating activities was $39.0 million for the year ended December 31, 1996 ($43 million excluding nonrecurring items), as compared to $17.0 million for 1995 and $18.4 million in 1994. The improvement in operating results is primarily attributable to increased production volumes and expanded unit operating margins in the upstream segment and continued growth in the downstream segment. Nonrecurring items in 1996 include an $8.5 million extraordinary charge ($5.1 million net of tax) associated with the early redemption of the Company's 12% Senior Subordinated Notes due 1999 (the "12% Notes"), a $4.0 million charge related to the settlement of two lawsuits filed during 1992 and 1993 and an $11.0 million tax benefit related to the reversal of a portion of the valuation reserve against the Company's net deferred tax asset. After giving effect to such nonrecurring items, the Company reported net income for 1996 of $16.5 million, or $.93 per share. Before extraordinary items, net income was $21.7 million or $1.22 per share. The following table sets forth certain operating information of the Company for the periods presented:
YEAR ENDED DECEMBER 31, ------------------------------ 1994 1995 1996 -------- -------- -------- (IN THOUSANDS, EXCEPT PER UNIT DATA) AVERAGE DAILY PRODUCTION VOLUMES Barrels of oil equivalent: LA Basin (approximately 90% oil) 8.1 8.4 9.2 Sunniland Trend (100% oil) ...... 2.7 3.4 4.7 Illinois Basin (100% oil) ....... -- 0.6 3.5 Other ........................... 1.3 0.9 .1 -------- -------- -------- Total .......................... 12.1 13.3 17.5 ======== ======== ======== UNIT ECONOMICS Average sales price per BOE ...... $ 12.92 $ 13.24 $ 15.22 Production expenses per BOE ...... 6.15 6.25 6.04 -------- -------- -------- Gross margin per BOE ............. 6.77 6.99 9.18 Upstream G&A expenses per BOE .... 1.04 .99 .74 -------- -------- -------- Gross profit per BOE ............. $ 5.73 $ 6.00 $ 8.44 ======== ======== ========
Oil and natural gas production volumes in 1996 totaled 6.4 million BOE, a 33% increase over 1995's level of 4.8 million BOE and a 45% increase over the 1994 level of 4.4 million BOE. Approximately 94% of 1996's equivalent production volumes were crude oil. The Company's unit gross margin increased to $9.18 per BOE in 1996, an improvement of 31% and 36% over the amounts reported for 1995 and 1994, respectively. Unit gross profit, which deducts all pre-interest 28 29 cash costs attributable to the upstream segment, was $8.44 per BOE for 1996, up 41% and 47% over the 1995 and 1994 amounts, respectively. The significant increase in production volumes is attributable to the Company's acquisition and exploitation activities. As a result of exploitation activities conducted over the last three years, 1996 average net daily production from the LA Basin Properties increased to approximately 9,200 BOE per day, up 800 BOE per day, or 10% over 1995 and 1,100 BOE per day, or 14% over the 1994 level. Net production from the Company's Sunniland Trend properties averaged approximately 4,700 barrels of oil per day in 1996, a 38% increase compared to 3,400 barrels per day in 1995 and 74% over the 2,700 barrels per day in 1994. The Sunniland Trend's 1996 production includes the impact of production from two key wells drilled and completed in 1996. A development well was drilled in the Raccoon Point field and was completed and placed on production in late March. During 1996, daily gross production from this well averaged around 3,000 barrels of oil per day. A short radius horizontal well was placed on production in mid-November and averaged approximately 1,000 barrels of oil per day during 1996. The Company owns a 100% working interest and an approximate 83% and 86% net revenue interest in each of these wells, respectively. At December 31, 1996, these wells accounted for approximately 60% of the Company's daily production from the Sunniland Trend properties. Due to the high volume of production that is generated by very few wells in the Sunniland Trend, abrupt or abnormal declines or downtime due to mechanical, marketing, or other conditions on any of the properties in this area could have a significant impact on production. The year to year comparisons of production volumes and unit margins were affected by sales of nonstrategic properties, the acquisition of the Company's Illinois Basin properties in the fourth quarter of 1995 and the acquisition of the remaining 50% interest in the Sunniland Trend properties effective May 1, 1994. Net production attributable to properties sold totaled .3 million BOE, or an average of approximately 1,000 BOE per day, during 1995 and .5 million BOE, or an average of approximately 1,300 BOE per day, in 1994. Oil and natural gas revenues increased to $97.6 million in 1996 as compared to $64.1 million in 1995 and $57.2 million in 1994 due to increased production volumes and higher average product prices. The Company's average product price, which represents a combination of fixed and floating price sales arrangements and incorporates location and quality discounts from the benchmark NYMEX Crude Oil Price, increased 15% to $15.22 per BOE in 1996 as compared to $13.24 in 1995 and approximately 18% as compared to $12.92 per BOE in 1994. The increased average product price was primarily attributable to increased crude oil prices, the higher quality Illinois Basin production, a reduction in the quality and location differentials for the Sunniland Trend and Illinois Basin production and the December 1995 purchase of a production payment which previously burdened the price on the LA Basin Properties. Financial swap arrangements and futures transactions entered into by the Company to hedge production are included in the foregoing prices. Such transactions had the effect of decreasing the overall average price per BOE received by the Company by $2.62 and $.17 in 1996 and 1995, respectively, and increasing the average price by $.16 for 1994. During 1996, the NYMEX Crude Oil Price averaged approximately $22.00 per barrel, up 20% as compared to an average of $18.40 in 1995. Although the impact of higher commodity prices on the Company's results was limited due to preexisting hedges, this commodity price increase over the prior year period, as well as the effect on the Company's downstream operations of the strong demand for crude oil, had a positive impact on net income before extraordinary item of approximately $4.1 million and approximately $6.8 million on cash flow and EBITDA, respectively, for 1996. Of this $6.8 million, approximately $6.2 million is related to unhedged production in the upstream segment and approximately $.6 million is related to the Company's downstream activities. Approximately 70% of the Company's crude oil production was hedged throughout 1996 at an average NYMEX Crude Oil Price of approximately $18.04 per barrel, and accordingly, the Company did not receive the full benefit of the higher NYMEX Crude Oil Price. The Company routinely hedges a portion of its crude oil production. See "--Capital Resources, Liquidity and Financial Condition--Changing Oil and Natural Gas Prices". Average unit production expenses declined approximately 3% to $6.04 per BOE versus $6.25 per BOE in 1995 and 2% versus $6.15 per BOE in 1994. However, unit production expenses for each of the Company's three core areas decreased at greater percentages during 1996 from the 1995 levels, with the LA Basin declining 4%, the Sunniland Trend declining 18% and the Illinois Basin declining 30%. Such relationship is caused by the Illinois Basin properties, which have higher unit production costs than the Company's other two core properties. The Illinois Basin properties were acquired effective November 1, 1995, thus significantly skewing the weighted average expenses between the two periods. Unit production expenses for the Illinois Basin properties, which averaged $12.00 per BOE in the fourth quarter of 1995, averaged 29 30 approximately $8.42 per BOE during 1996. The significant reduction in production expenses for the Illinois Basin properties was a result of operational modifications implemented throughout 1996. The reductions in production expenses in the Sunniland Trend and LA Basin were attributable to increased production from fields with a component of fixed production costs that do not increase with incremental production, reimbursements received in 1996 for electricity overcharges relating to the LA Basin properties in the previous year and improved operating practices. Total production expenses increased to $38.7 million from $30.3 million and $27.2 million in 1995 and 1994, respectively, primarily due to the acquisition of the Illinois Basin properties. Unit G&A expense in the upstream segment decreased for the fourth consecutive year. Unit G&A expense decreased 25% to $.74 per BOE during 1996 from $.99 per BOE during 1995. Unit G&A expense was $1.04 per BOE in 1994, $1.34 per BOE in 1993 and $2.48 per BOE in 1992. These reductions were directly attributable to increased production levels and to the Company's ongoing cost reduction and cost control efforts. Depreciation, Depletion and Amortization ("DD&A") per BOE declined to $3.00 in 1996 from $3.02 in 1995 and $3.17 in 1994 primarily as a result of the Company's acquisition and exploitation activities. Primarily as a result of increased production levels, total DD&A for the year ended December 31, 1996 was $21.9 million as compared to $17.0 million and $16.3 million in 1995 and 1994, respectively. The Company's downstream segment reported gross margin (revenues less direct expenses of purchases, transportation, storage and terminalling) of $9.5 million for the year ended December 31, 1996, reflecting an approximate 50% increase over the $6.4 million reported for the 1995 period and an approximate 54% increase over 1994. Gross revenues from this segment were $531.7 million, $339.8 million and $199.2 million for 1996, 1995 and 1994, respectively. Gross profit (gross margin less downstream G&A expenses) increased 66%, totaling $6.6 million versus $4.0 million in 1995, and 72% versus the $3.8 million in 1994. Such results are directly attributable to continued growth in base business activities of marketing and terminalling crude oil and strong crude oil demand throughout 1996. Aggregate marketing and terminalling volumes averaged 115,000 barrels per day in 1996 versus 88,000 barrels per day in 1995 and 64,000 barrels per day in 1994. Downstream G&A expenses for 1995 and 1994 were relatively constant at $2.4 million for each period, while the level for 1996 totaled approximately $3.0 million. The increase in downstream G&A expense in 1996 was attributable to the continued expansion of the Company's marketing and terminalling activities. Interest expense, net of capitalized interest, for 1996 increased to $17.3 million as compared to $13.6 million in 1995 and $12.6 million in 1994, primarily due to higher borrowing levels related to the Company's acquisition, exploitation, development and exploration activities. During 1996, 1995 and 1994, the Company capitalized $3.6 million, $3.1 million and $2.7 million of interest, respectively. The Company and certain of its officers and directors and a former director and officer were named in two class action lawsuits filed in 1992 and 1993 seeking an aggregate of approximately $90 million in compensatory damages and punitive damages in an unspecified amount for alleged violations of the federal securities laws and state common law arising out of certain alleged misrepresentations and omissions in the Company's disclosure regarding its onshore natural gas exploration activities. During 1996, the Company settled such cases for a cash payment of approximately $6.3 million. Approximately $4.1 million of such amount was paid by the Company's insurance carrier and $2.2 million was paid by the Company. Taking into account prior costs incurred by the Company to defend these suits, and for which the Company agreed to relinquish its claims for reimbursement against its insurance company, this settlement resulted in a charge to 1996 first quarter earnings of $4 million. Effective in 1992, Financial Accounting Standard 109 ("FAS 109") requires companies to record an asset or a liability, as appropriate for its net tax position as a result of differences between financial reporting standards and tax reporting requirements. The Company adopted FAS 109 in 1992 and at such time recorded a net deferred tax asset of approximately $20.8 million, but also recorded a valuation reserve against the full amount of such asset to reflect management's uncertainty, based on all information then available, with respect to the realization of such asset. In the first quarter of 1996, the Company reduced its valuation allowance resulting in the recognition of an $11 million credit to deferred income tax expense. Based on recent and anticipated improvement in the Company's outlook for sustained profitability, management believes that it is more likely than not that it will generate taxable income sufficient to realize $11 million of unreserved tax benefits associated with certain of the Company's net operating loss ("NOL") carryforwards prior to their expiration. The reserve adjustment incorporates management's assessment of the significant, 30 31 cumulative progress made by the Company over the last four years to reduce unit expenses, increase unit gross margins and substantially increase its production and proved reserves through its acquisition and exploitation activities. From 1992 to 1996, unit G&A expenses declined 70%, unit gross profit increased 77% and production and proved reserves increased 144% and 205%, respectively. Such reassessment is also reinforced by the refinancing of the 12% Notes in March 1996 and the increased liquidity and flexibility provided by such refinancing. The remaining deferred tax asset was not recognized primarily due to limitations imposed by the IRS regarding the utilization of NOLs generated prior to certain of the Company's subsidiaries being acquired and the uncertainty of utilizing the Company's investment tax credit ("ITC") carryforwards. While the Company's tax planning strategies address certain of these restrictions on the application of subsidiary NOLs, management is currently uncertain as to the extent such strategies will be successful and therefore concluded that a reserve for these amounts was appropriate. Estimates of future taxable income generated using future net cash flows contained in reserve reports prepared by independent consulting firms in accordance with regulations prescribed by the SEC also indicate that the unreserved portion of such deferred tax asset will be realized. Such reserve data was utilized in calculating the Standardized Measure presented in the Company's year-end financial statements. See Item 2,"Properties--Oil and Natural Gas Reserves". Despite the significant turnaround achieved over the last four years and the current outlook for profitability, due to the uncertainties in the oil and natural gas industry, including but not limited to forecasting production, proved reserves, product prices, production expenses and similar events beyond management's control, there can be no assurance that the Company will generate any earnings or specific level of continuing earnings. The Company had carryforwards of approximately $183.4 million of regular tax NOLs at December 31, 1996, which expire as follows: 1997 - $3.6 million; 1998 - $5.1 million; 1999 - $7.1 million; 2000 - $7.9 million; 2001 - $4.4 million; 2002 - $11.8 million; 2003 - $9.4 million; 2004 - $0; 2005 - $7.2 million; 2006 - $1.0 million; 2007 - $16.4 million and thereafter through 2011 - - $109.5 million. Approximately $15.7 million of the regular tax NOL carryforwards at December 31, 1996, may only be utilized to the extent certain subsidiaries that generated the NOLs have taxable income. See Item 1, "Business--Federal Taxation". For the year ended December 31, 1996, the Company recognized a net deferred tax benefit before extraordinary item of $3.9 million. Such amount consists of a $7.1 million deferred tax provision on the Company's income before extraordinary item and the $11 million valuation allowance reduction previously discussed. In addition, the Company reported a $3.4 million deferred tax benefit as an extraordinary item. Such deferred tax benefit was attributable to the $8.5 million pre-tax first quarter extraordinary loss from the early redemption of the 12% Notes. Although the Company recorded net income for 1995 and 1994, no provision for income taxes was reflected during these years, but rather the valuation allowance discussed above was adjusted. CAPITAL RESOURCES, LIQUIDITY AND FINANCIAL CONDITION On March 19, 1996, the Company sold $150 million of Senior Subordinated Notes due 2006, Series A, bearing a coupon rate of 10.25% (the "Series A 10.25% Notes"). Such notes were issued pursuant to a Rule 144A private placement at approximately 99.38% of the principal amount thereof to yield 10.35%. On August 8, 1996, the Company exchanged a total of $149.5 million principal amount of the Series A 10.25% Notes for 10.25% Senior Subordinated Notes due 2006, Series B, (the "Series B 10.25% Notes"). The Series B 10.25% Notes are substantially identical (including principal amount, interest rate, maturity and redemption rights) to the Series A 10.25% Notes for which they were exchanged, except for certain transfer restrictions relating to the Series A 10.25% Notes. The Series A 10.25% Notes and the Series B 10.25% Notes (collectively, the "10.25% Notes") are redeemable, at the option of the Company, on or after March 15, 2001 at 105.13% of the principal amount thereof, at decreasing prices thereafter prior to March 15, 2004, and thereafter at 100% of the principal amount thereof plus, in each case, accrued interest to the date of redemption. In addition, prior to March 15, 1999, up to $45 million in principal amount of the 10.25% Notes are redeemable at the option of the Company, in whole or in part, from time to time, at 110.25% of the principal amount thereof, with the Net Proceeds of any Public Equity Offering (as both are defined in the indenture under which the 10.25% Notes were issued ("the "Indenture")). The Indenture contains covenants including, but not limited to the following: (i) limitations on incurrence of additional indebtedness; (ii) limitations on certain investments; (iii) limitations on restricted payments; (iv) limitations on dispositions of assets; (v) limitations on dividends and other payment restrictions affecting subsidiaries; (vi) limitations on 31 32 transactions with affiliates; (vii) limitations on liens; and (viii) restrictions on mergers, consolidations and transfers of assets. In the event of a Change of Control and a corresponding Rating Decline, as both are defined in the Indenture, the Company will be required to make an offer to repurchase the 10.25% Notes at 101% of the principal amount thereof, plus accrued and unpaid interest to the date of the repurchase. The 10.25% Notes are unsecured general obligations of the Company and are subordinated in right of payment to all existing and future senior indebtedness of the Company and are guaranteed by all of the Company's principal subsidiaries. Proceeds from the sale of the 10.25% Notes, net of offering costs, were approximately $144.6 million and were used to redeem the 12% Notes at 106% of the $100 million principal amount outstanding and, together with amounts borrowed under the Revolving Credit Facility, to retire bridge indebtedness associated with the Illinois Basin acquisition. Prior to redemption, the 12% Notes had an average remaining life of three years and scheduled maturities of $50 million in each of 1998 and 1999. The Company has a $125 million revolving credit facility with a group of five banks (the "Lenders"). The Revolving Credit Facility is secured by the oil and natural gas properties of the Company and is guaranteed by all of the Company's subsidiaries other than PMCT, Inc. ("PMCT"), which guarantees are secured by substantially all of the oil and natural gas properties of the Company and its subsidiaries and the stock of all guaranteeing subsidiaries. The Cushing Terminal is not pledged as security for any of the Company's debt. The borrowing base is currently set at $125 million and is subject to borrowing base availability as determined from time to time by the Lenders in good faith, in the exercise of the Lenders' sole discretion, and in accordance with customary practices and standards in effect from time to time for oil and natural gas loans to borrowers similar to the Company. Such borrowing base may be affected from time to time by the performance of the Company's oil and natural gas properties and changes in oil and natural gas prices. The Company incurs a commitment fee of 1/2% per annum on the unused portion of the borrowing base. The Revolving Credit Facility, as amended, matures on May 1, 1998, at which time the remaining outstanding balance converts to a term loan which is repayable in twenty equal quarterly installments commencing August 1, 1998, with a final maturity of May 1, 2003. The Revolving Credit Facility bears interest, at the Company's option of either LIBOR plus 1 3/8% or Prime Rate (as defined therein). At December 31, 1996, outstanding borrowings under the Revolving Credit Facility were $72.7 million. An additional $1.0 million was reserved against the issuance of a standby letter of credit. The Revolving Credit Facility contains covenants which, among other things, prohibit the payment of cash dividends, limit the amount of consolidate debt, limit the Company's ability to make certain loans and investments, and provide that the Company must maintain a specified relationship between current assets and current liabilities. During 1996, Plains Marketing increased its uncommitted secured demand transactional line of credit (the "Transactional Facility") with five banks to $90 million. The purpose of the Transactional Facility is to provide standby letters of credit to support the purchase of crude oil for resale and borrowings to finance crude oil inventory which has been hedged against future price risk. The Transactional Facility is secured by all of the assets of Plains Marketing and is guaranteed by the Company. The Company's guarantee is secured by a $1.0 million standby letter of credit issued on behalf of the Company. At December 31, 1996, approximately $39.6 million in letters of credit were outstanding under the Transactional Facility. None of the Company's letters of credit under the Transactional Facility have ever been drawn. Generally, purchases secured by the letters of credit and receivables generated from the sale of crude oil are settled on a monthly basis. PMCT has established a $20 million sublimit (the "Sublimit") within the Transactional Facility for standby letters of credit and borrowings to finance crude oil purchased in connection with operations at the Cushing Terminal. Under the terms of the Sublimit, all purchases of crude oil inventory financed are required to be hedged against future price risk on terms acceptable to the lenders. Standby letters of credit and borrowings under the Sublimit are secured by all of the assets of PMCT and are recourse only to the subsidiary. Letters of credit under the Transactional Facility are issued for up to seventy day periods and bear fees of 1.5% per annum. Borrowings incur interest at the borrower's option of either (i) the Base Rate plus 5/8% or (ii) LIBOR plus 2%. All financings under the Transactional Facility, which expires in November 1997, are at the discretion of the lenders. Aggregate cash borrowings by both subsidiaries are limited to $20 million. At December 31, 1996, no letters of credit or borrowings were outstanding under the Sublimit. 32 33 At December 31, 1996, the Company had a working capital deficit of approximately $4.8 million. The Company has historically operated with a working capital deficit due primarily to ongoing capital expenditures that have been financed through cash flow and the Revolving Credit Facility. The working capital deficits at December 31, 1995 and 1994, were $4.7 million and $4.5 million, respectively. The Company has made and will continue to make, substantial capital expenditures for the acquisition, exploitation, development, exploration and production of oil and natural gas reserves. Historically, the Company has financed these expenditures primarily with cash generated by operations, bank borrowings, and the sale of subordinated notes, common stock and preferred stock. The Company intends to make an aggregate of approximately $67 million in capital expenditures in 1997, including approximately $48 million on the development and exploitation of its LA Basin, Sunniland Trend and Illinois Basin properties, approximately $14 million on exploration and higher risk exploitation activities primarily in the Sunniland Trend and the LA Basin and approximately $5 million for various other capital items. In addition, the Company intends to continue to pursue the acquisition of underdeveloped producing properties. The Company believes that it will have sufficient cash from operating activities and borrowings under the Revolving Credit Facility to fund such planned capital expenditures. Changing Oil and Natural Gas Prices The Company is affected by changes in crude oil prices which have historically been volatile. Although the Company has routinely hedged a substantial portion of its crude oil production and intends to continue this practice, substantial future crude oil price declines would have a negative impact on the Company's overall results, and therefore its liquidity. Furthermore, low crude oil prices could affect the Company's ability to raise capital on terms favorable to the Company. In order to manage its exposure to commodity price risk, the Company has routinely hedged a portion of its crude oil production. For 1997, the Company has entered into various fixed price and floating price collar arrangements. Such arrangements generally provide the Company with downside price protection on approximately 14,000 barrels of oil per day at a NYMEX Crude Oil Price of approximately $19.00 per barrel but permit the Company to receive the benefit of increases in the NYMEX Crude Oil Price up to $24.00 per barrel on 4,000 of such barrels per day. Thus, based on the Company's average fourth quarter 1996 oil production rate, these arrangements generally provide the Company with downside price protection for 80% of its production and upside price participation for 43% of its production up to $24.00 per barrel, while 20% of such production and excess volumes, if any, remain unhedged. In addition, the Company also has a fixed price arrangement on 4,500 barrels per day for 1998 at a NYMEX Crude Oil Price of $19.24 per barrel. Management intends to continue to maintain hedging arrangements for a significant portion of its production. Such contracts may expose the Company to the risk of financial loss in certain circumstances. See Item 1, "Business--Product Markets and Major Customers". Investing Activities Net cash flows used in investing activities were $52.5 million, $64.4 million and $40.2 million for the years ended December 31, 1996, 1995 and 1994, respectively. Included in such amounts are payments, net of cash received from property sales and reimbursements from partners, for acquisition, exploration and development costs of $49.9 million, $63.9 million and $39.6 million for the same periods, respectively. Such payments for 1995 include $45.0 million related to the cash portion of the acquisition of the Illinois Basin Properties and for 1994 include approximately $12.4 million related to the cash portion of the acquisition of the remaining 50% interest in the Sunniland Trend Properties. The Company expended $2.6 million, $1.1 million and $2.1 million in 1996, 1995 and 1994, respectively, for other property additions, primarily for downstream activities and computer equipment. 33 34 Financing Activities Net cash provided by financing activities amounted to $9.9 million, $52.3 million and $19.3 million for 1996, 1995 and 1994, respectively. Aggregate proceeds from long-term borrowings for these same years were $263.7 million, $83.6 million and $70.0 million, respectively, while payments of long-term debt were $248.1 million, $32.7 million and $60.5 million for the respective periods. Financing activities during 1996 include net proceeds of approximately $144.6 million from the Series A 10.25% Notes, approximately $107 million for the repayment of the 12% Notes, including the 6% call premium and the net defeasance costs, and approximately $42 million for the repayment of the Illinois Basin acquisition bridge indebtedness. The Illinois Basin acquisition indebtedness of $42 million is included in aggregate financing proceeds for 1995. Remaining long-term debt activity is primarily related to advances received and payments made on the Revolving Credit Facility. Financing activities during 1994 include net payments from short-term borrowings of $9.6 million related to the Transactional Facility. Such amounts were borrowed to finance the purchase of crude oil inventory in 1993 which was sold in 1994. Financing activities include proceeds from the sale of capital stock of $1.8 million, $.9 million and $20.6 million in 1996, 1995 and 1994, respectively. Such proceeds in 1996 and 1995 were primarily from the exercise of employee stock options while the 1994 proceeds were primarily from the issuance of the preferred stock which was converted into Common Stock in 1995. Commitments Although the Company obtained environmental studies on its properties in the LA Basin, Sunniland Trend and Illinois Basin and the Company believes that such properties have been operated in accordance with standard oil field practices, certain of the fields have been in operation for approximately 90 years, and current or future local, state and federal environmental laws and regulations may require substantial expenditures to comply with such rules and regulations. Consistent with normal industry practices, substantially all of the Company's oil and natural gas leases require that, upon termination of economic production, the working interest owners plug and abandon non-producing wellbores, remove tanks, production equipment and flow lines and restore the wellsite. The Company has estimated that the costs to perform these tasks is approximately $13 million, net of salvage value and other considerations. Such estimated costs are amortized to expense through the unit-of-production method as a component of accumulated depreciation, depletion and amortization. Results from operations for 1996, 1995 and 1994 include $.8 million, $1.0 million and $1.1 million, respectively, of expense associated with these estimated future costs. For valuation and realization purposes of the affected oil and natural gas properties, these estimated future costs are also deducted from estimated future gross revenues to arrive at the estimated future net revenues and the Standardized Measure disclosed in the accompanying Consolidated Financial Statements. 34 35 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required to be provided in this item is included in the Consolidated Financial Statements of the Company, including the Notes thereto, attached hereto as pages F-1 to F-24 and such information is incorporated herein by reference. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no disagreements on accounting and financial disclosure with the Company's independent accountants. PART III Item 10.DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information regarding the directors of the Company will be included in the proxy statement for the 1997 Annual Meeting of Stockholders (the "Proxy Statement") to be filed within 120 days after December 31, 1996, and is incorporated herein by reference. Information with respect to the Company's executive officers is presented in Part I, Item 4 of this Report. Item 11.EXECUTIVE COMPENSATION Information regarding executive compensation will be included in the Proxy Statement and is incorporated herein by reference. Item 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information, if any, regarding beneficial ownership of the Common Stock will be included in the Proxy Statement and is incorporated herein by reference. Item 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information regarding Certain Relationships and Related Transactions will be included in the Proxy Statement and is incorporated herein by reference. PART IV Item 14.EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 35 36 (a) (1) Financial Statements The financial statements filed as part of this report are listed in the "Index to Consolidated Financial Statements" on Page F-1 hereof.
(2) Exhibits 2(a) -- Purchase and Sale Agreement dated October 31, 1995, between Marathon and Crete, as amended by that certain Amendment dated December 4, 1995, among Marathon, Plains Resources Inc. and Plains Illinois Inc. (incorporated by reference to Exhibit 2.1 to Form 8-K dated Jan 1996). 3(a) -- Second Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3(a) to the Company's Annual Report on Form 10-K for the year ended December 31, 1995). 3(b) -- Bylaws of the Company, as amended to date (incorporated by reference to Exhibit 3(b) to the Company's Annual Report on Form 10-K for the year ended December 31, 1993). 4(a) -- Specimen Common Stock Certificate (incorporated by reference to Exhibit 4 to the Company's Form S-1 Registration Statement (Reg. No. 33-33986)). 4(c) -- Purchase Agreement for Stock Warrant dated May 16, 1994, between Plains Resources Inc. and Legacy Resources, Co., L.P. (incorporated by reference to Exhibit 4(d) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1994). 10(a)*-- Employment Agreement dated as of March 1, 1993, between the Company and Greg L. Armstrong (incorporated by reference to Exhibit 10(b) to the Company's Annual Report on Form 10-K for the year ended December 31, 1993). 10(b)*-- The Company's 1991 Management Options (incorporated by reference to Exhibit 4.1 to the Company's S-8 Registration Statement (Reg. No. 33-43788)). 10(c)*-- The Company's 1992 Stock Incentive Plan (incorporated by reference to Exhibit 4.3 to the Company's S-8 Registration Statement (Reg. No. 33-48610)). 10(d)*-- The Company's Amended and Restated 401(k) Plan. 10(e) -- Restructure Agreement dated February 25, 1991, among The Aetna Casualty and Surety Company, Aetna Life Insurance Company and the Company (incorporated by reference to Exhibit 10(i) to the Company's Annual Report on Form 10-K for the year ended December 31, 1990). 10(f) -- Uncommitted Secured Transactional Line of Credit Facility letter agreement dated as of August 23, 1995, between Plains Marketing & Transportation Inc. and The First National Bank of Boston, et al. (incorporated by reference to Exhibit 10(m) of the Company's Annual Report on Form 10-K for the year ended 1995). 10(g) -- Uncommitted Secured Transactional Line of Credit Facility letter agreement dated August 23, 1995 between PMCT Inc. and The First National Bank of Boston, et al. (incorporated by reference to Exhibit 10(n) of the Company's Annual Report on Form 10-K for the year ended 1995). 10(h) -- Third Amended and Restated Credit Agreement dated as of April 11, 1996 among the Company and ING (U.S.) Capital Corporation, et al. (incorporated by reference to Exhibit 10(n) to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996). 10(i) -- First Amendment to Third Amended and Restated Credit Agreement dated as of December 16, 1996, among the Company and ING (U.S.) Capital Corporation, et al. 10(j) -- Amendment dated as of November 22, 1996 to Uncommitted Secured Transactional Line of Credit between Plains Marketing & Transportation Inc. and The First National Bank of Boston, et al. 10(k) -- Amendment dated as of November 22, 1996 to Uncommitted Secured Transactional Line of Credit between PMCT and The First National Bank of Boston, et al.
36 37 10(l)*-- Stock Option Agreement dated August 27, 1996 between the Company and Greg L. Armstrong. 10(m)*-- Stock Option Agreement dated August 27, 1996 between the Company and William C. Egg Jr. 10(n) -- First Amendment to the Company's 1992 Stock Incentive Plan. 11(a) -- Statement regarding computation of per share earnings for the year ended December 31, 1996. 11(b) -- Statement regarding computation of per share earnings for the year ended December 31, 1995. 11(c) -- Statement regarding computation of per share earnings for the year ended December 31, 1994. 21 -- Subsidiaries of the Company. 23(a) -- Consent of Price Waterhouse LLP. 23(b) -- Consent of Price Waterhouse LLP. 27 -- Financial Data Schedule
- ---------------- *A management contract or compensation plan. (b) Reports on Form 8-K There were no reports on Form 8-K filed during the fourth quarter of 1996. 37 38 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. PLAINS RESOURCES INC. Date: February 11, 1997 By: /s/ Phillip D. Kramer ------------------------------------------- Phillip D. Kramer, Vice President and Chief Financial Officer (Principal Financial Officer) 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. Date: February 11, 1997 By: /s/ Greg L. Armstrong -------------------------------------- Greg L. Armstrong, President, Chief Executive Officer and Director (Principal Executive Officer) Date: February 11, 1997 By: /s/ Robert A. Bezuch -------------------------------------- Robert A. Bezuch, Director Date: February 11, 1997 By: /s/ Tom H. Delimitros -------------------------------------- Tom H. Delimitros, Director Date: February 11, 1997 By: /s/ Cynthia A. Feeback -------------------------------------- Cynthia A. Feeback, Controller and Principal Accounting Officer (Principal Accounting Officer) Date: February 11, 1997 By: /s/ William M. Hitchcock -------------------------------------- William M. Hitchcock, Director 38 39 Date: February 11, 1997 By: /s/ Phillip D. Kramer --------------------------------------- Phillip D. Kramer, Vice President and Chief Financial Officer (Principal Financial Officer) Date: February 11, 1997 By: /s/ Dan M. Krausse --------------------------------------- Dan M. Krausse, Chairman of the Board and Director Date: February 11, 1997 By: /s/ John H. Lollar --------------------------------------- John H. Lollar, Director Date: February 11, 1997 By: /s/ Robert V. Sinnott --------------------------------------- Robert V. Sinnott, Director Date: February 11, 1997 By: /s/ J. Taft Symonds --------------------------------------- J. Taft Symonds, Director The Annual Report to Stockholders of the Company for the year ended December 31, 1996, and the proxy statement relating to the annual meeting of stockholders will be furnished to stockholders subsequent to the filing of this Annual Report on Form 10-K. Such documents have not been mailed to stockholders as of the date of this report. 39 40 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- PLAINS RESOURCES INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS: Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . F-2 Consolidated Balance Sheets as of December 31, 1995 and 1996 . . . . . . . F-3 Consolidated Statements of Operations for the years ended December 31, 1994, 1995 and 1996 . . . . . . . . . . . . . . . . . . . F-4 Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996 . . . . . . . . . . . . . . . . . . . . F-5 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1994, 1995 and 1996 . . . . . . . . . . F-6 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . F-7
F-1 41 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Plains Resources Inc.: In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Plains Resources Inc. and its subsidiaries at December 31, 1995 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP Houston, Texas February 10, 1997 F-2 42 PLAINS RESOURCES INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
DECEMBER 31, ----------------------------------- 1995 1996 -------------- -------------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 6,129 $ 2,517 Accounts receivable 51,632 93,686 Inventory 5,120 4,563 Prepaids and other 751 1,092 -------------- -------------- Total current assets 63,632 101,858 -------------- -------------- PROPERTY AND EQUIPMENT Oil and natural gas properties - full cost method: Subject to amortization 328,712 384,019 Not subject to amortization 48,795 41,698 Downstream assets, primarily crude oil terminal and storage facility 32,788 35,122 Other property and equipment 7,789 8,275 -------------- -------------- 418,084 469,114 Less allowance for depreciation, depletion and amortization (137,546) (158,074) -------------- -------------- 280,538 311,040 -------------- -------------- OTHER ASSETS 7,876 17,351 -------------- -------------- $ 352,046 $ 430,249 ============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and other current liabilities $ 56,573 $ 93,242 Interest payable 3,977 5,089 Royalties payable and drilling advances 6,364 7,859 Notes payable and other current obligations 1,467 511 -------------- -------------- Total current liabilities 68,381 106,701 BANK DEBT 98,000 72,700 SUBORDINATED DEBT 100,000 149,121 OTHER LONG-TERM DEBT 7,089 3,578 OTHER LONG-TERM LIABILITIES 1,547 2,577 -------------- -------------- 275,017 334,677 -------------- -------------- COMMITMENTS AND CONTINGENCIES (NOTE 11) STOCKHOLDERS' EQUITY Common stock, $.10 par value, 50,000,000 shares authorized; issued and outstanding 16,178,670 shares at December 31, 1995, and 16,518,645 shares at December 31, 1996 1,618 1,652 Additional paid-in capital 118,090 120,051 Accumulated deficit (42,679) (26,131) -------------- -------------- 77,029 95,572 -------------- -------------- $ 352,046 $ 430,249 ============== ==============
See notes to consolidated financial statements. F-3 43 PLAINS RESOURCES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data)
YEAR ENDED DECEMBER 31, ------------------------------------------ 1994 1995 1996 ----------- ----------- ----------- REVENUE Oil and natural gas sales $ 57,234 $ 64,080 $ 97,601 Marketing, transportation and storage 199,239 339,826 531,698 Interest and other income 223 319 309 ----------- ----------- ----------- 256,696 404,225 629,608 ----------- ----------- ----------- EXPENSES Production expenses 27,220 30,256 38,735 Purchases, transportation and storage 193,049 333,460 522,167 General and administrative 6,966 7,215 7,729 Depreciation, depletion and amortization 16,305 17,036 21,937 Interest expense 12,585 13,606 17,286 Litigation settlement -- -- 4,000 ----------- ----------- ----------- 256,125 401,573 611,854 ----------- ----------- ----------- Income before income taxes and extraordinary item 571 2,652 17,754 Income tax expense (benefit) -- -- (3,898) ----------- ----------- ----------- INCOME BEFORE EXTRAORDINARY ITEM 571 2,652 21,652 EXTRAORDINARY ITEM: (Loss) on early extinguishment of debt, net of tax benefit -- -- (5,104) ----------- ----------- ----------- NET INCOME $ 571 $ 2,652 $ 16,548 =========== =========== =========== Net income per common and common equivalent share: Before extraordinary item $ 0.04 $ 0.16 $ 1.22 Extraordinary item -- -- (0.29) ----------- ----------- ----------- $ 0.04 $ 0.16 $ 0.93 =========== =========== =========== Weighted average number of common and common equivalent shares 11,625 15,981 17,732 =========== =========== ===========
See notes to consolidated financial statements. F-4 44 PLAINS RESOURCES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
YEAR ENDED DECEMBER 31, ----------------------------------------------- 1994 1995 1996 ------------ ------------ ------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 571 $ 2,652 $ 16,548 Items not affecting cash flows from operating activities: Depreciation, depletion and amortization 16,305 17,036 21,937 Loss on early extinguishment of debt, net of tax -- -- 5,104 Deferred income taxes -- -- (3,898) Amortization of debt discount and other -- -- 251 Change in assets and liabilities resulting from operating activities: Accounts receivable (17,578) (18,598) (41,046) Inventory 8,050 405 551 Prepaids and other (115) 106 (64) Accounts payable and other current liabilities 11,119 14,133 37,296 Interest payable 503 347 977 Royalties payable (486) 903 1,352 ------------ ------------ ------------- Net cash provided by operating activities 18,369 16,984 39,008 ------------ ------------ ------------- CASH FLOWS FROM INVESTING ACTIVITIES Cash received for the sale of oil and gas properties 314 7,355 3,066 Payment for acquisition, exploration and development costs (39,885) (71,250) (53,011) Payment for additions to other property and assets (2,130) (1,120) (2,551) Proceeds from escrow account 1,543 617 -- ------------ ------------ ------------- Net cash used in investing activities (40,158) (64,398) (52,496) ------------ ------------ ------------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from long-term debt 70,000 83,550 263,723 Proceeds from short-term debt 10,576 -- -- Proceeds from sale of capital stock, options and warrants 20,641 869 1,785 Principal payments of long-term debt (60,500) (32,717) (248,144) Principal payments of short-term debt (20,214) -- -- Costs incurred to redeem long-term debt -- -- (6,468) Other (1,206) 550 (1,020) ------------ ------------ ------------- Net cash provided by financing activities 19,297 52,252 9,876 ------------ ------------ ------------- Net increase (decrease) in cash and cash equivalents (2,492) 4,838 (3,612) Cash and cash equivalents, beginning of year 3,783 1,291 6,129 ------------ ------------ ------------- Cash and cash equivalents, end of year $ 1,291 $ 6,129 $ 2,517 ============ ============ =============
See notes to consolidated financial statements. F-5 45 PLAINS RESOURCES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (in thousands, except share data)
$1.30 CUMULATIVE ADDITIONAL CONVERTIBLE PAID-IN ACCUMULATED PREFERRED STOCK COMMON STOCK CAPITAL DEFICIT ------------------------ ---------------------- ---------- ----------- SHARES AMOUNT SHARES AMOUNT ---------- ---------- ---------- ---------- BALANCE AT JANUARY 1, 1994 48,070 $ 481 11,567,013 $ 1,157 $ 87,211 $ (43,852) Warrant issued in connection with an acquisition -- -- -- -- 2,000 -- Preferred stock dividends -- -- -- -- -- (1,171) Capital stock issued upon exercise of options and other -- -- 26,444 2 63 -- Net income for the year -- -- -- -- -- 571 ---------- ---------- ---------- ---------- ---------- ---------- BALANCE AT DECEMBER 31, 1994 48,070 481 11,593,457 1,159 89,274 (44,452) Preferred stock dividends -- -- -- -- -- (879) Redemption of $1.30 Cumulative Convertible Preferred Stock (48,070) (481) -- -- -- -- Conversion of Redeemable Preferred Stock -- -- 3,628,125 363 21,406 -- Issuance of common stock in connection with an acquisition -- -- 798,143 80 6,447 -- Capital stock issued upon exercise of options and other -- -- 158,945 16 963 -- Net income for the year -- -- -- -- -- 2,652 ---------- ---------- ---------- ---------- ---------- ---------- BALANCE AT DECEMBER 31, 1995 -- -- 16,178,670 1,618 118,090 (42,679) Capital stock issued upon exercise of options and other -- -- 339,975 34 1,961 -- Net income for the year -- -- -- -- -- 16,548 ---------- ---------- ---------- ---------- ---------- ---------- BALANCE AT DECEMBER 31, 1996 -- $ -- 16,518,645 $ 1,652 $ 120,051 $ (26,131) ========== ========== ========== ========== ========== ==========
See notes to consolidated financial statements. F-6 46 PLAINS RESOURCES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 -- ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION AND PRESENTATION The consolidated financial statements include the accounts of Plains Resources Inc. (the "Company"), and its wholly-owned subsidiaries. All material intercompany accounts and transactions have been eliminated. Certain reclassifications have been made to the prior year statements to conform with the current year presentation. The Company is an independent energy company engaged in the acquisition, exploitation, development, exploration and production of crude oil and natural gas and the marketing, transportation, terminalling and storage of crude oil. The Company's upstream oil and natural gas activities are focused in the Los Angeles Basin of California (the "LA Basin"), the Sunniland Trend of South Florida (the "Sunniland Trend"), the Illinois Basin in southern Illinois and the Gulf Coast area of Louisiana. Its downstream marketing activities are concentrated in Oklahoma, where it owns a two million barrel, above ground crude oil terminalling and storage facility (the "Cushing Terminal"), Texas and the Gulf Coast area of Louisiana. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of all demand deposits and funds invested in highly liquid instruments. INVENTORY Crude oil inventory is carried at the lower of cost, as adjusted for deferred hedging gains and losses, or market value using an average cost method. Materials and supplies inventory is stated at the lower of cost or market with cost determined on a first-in, first-out method. OIL AND NATURAL GAS PROPERTIES The Company follows the full cost method of accounting whereby all costs associated with property acquisition, exploration and development activities are capitalized. Such costs include internal general and administrative costs such as payroll and related benefits and costs directly attributable to employees engaged in acquisition, exploration and development activities. General and administrative costs associated with production, operations, marketing and general corporate activities are expensed as incurred. These capitalized costs along with the Company's estimate of future development and abandonment costs, net of salvage values and other considerations, are amortized to expense by the unit-of-production method using engineers' estimates of unrecovered proved oil and natural gas reserves. The costs of unproved properties are excluded from amortization until the properties are evaluated. Interest is capitalized on oil and natural gas properties not subject to amortization and in the process of development. Proceeds from the sale of properties are accounted for as reductions to capitalized costs unless such sales involve a significant change in the relationship between costs and the estimated value of proved reserves, in which case a gain or loss is recognized. Unamortized costs of proved properties are subject to a ceiling which limits such costs to the present value of estimated future cash flows from proved oil and natural gas reserves of such properties reduced by future operating expenses, development expenditures and abandonment costs (net of salvage values), and estimated future income taxes thereon (the "Standardized Measure") (See Note 16). F-7 47 OTHER PROPERTY AND EQUIPMENT Other property and equipment is recorded at cost. Acquisitions, renewals, and betterments are capitalized; maintenance and repairs are expensed. Depreciation on the Cushing Terminal is provided using the straight-line method over an estimated useful life of forty years; other property and equipment is also depreciated using the straight-line method over estimated useful lives of three to seven years. DEBT ISSUE COSTS Costs incurred in connection with the issuance of long-term debt are capitalized and amortized using the straight-line method over the term of the related debt. Debt issue costs, net of accumulated amortization, as of December 31, 1995 and 1996, in the amount of $3.4 million and $5.0 million, respectively, are included in "Other Assets" in the accompanying Consolidated Balance Sheets. FEDERAL AND STATE INCOME TAXES Income taxes are accounted for in accordance with SFAS No. 109, "Accounting for Income Taxes." SFAS 109 requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. MARKETING AND TRANSPORTATION The Company's marketing activities are conducted through its wholly-owned subsidiary, Plains Marketing & Transportation Inc. ("Plains Marketing"). Plains Marketing markets principally crude oil of third party producers as well as crude oil and natural gas produced by the Company. Marketing and transportation revenue is accrued at the time title to the product sold transfers to the purchaser and purchases are accrued at the time title to the product purchased transfers to Plains Marketing. The Company's policy is to purchase only crude oil for which it has a market and to structure its sales contracts so that crude oil price fluctuations do not materially affect the gross margin which it receives. HEDGING The Company periodically uses certain instruments to hedge its exposure to price fluctuations on oil and natural gas transactions. Recognized gains and losses on hedge contracts are reported as a component of the related transaction. Results for hedging transactions are reflected in oil and natural gas sales to the extent related to the Company's oil and natural gas production and in marketing, transportation and storage revenues to the extent related to such activities. STOCK OPTIONS In October 1995, the Financial Accounting Standards Board issued Statement No. 123 ("SFAS 123"), "Accounting for Stock Based Compensation". In accordance with the provisions of SFAS No. 123, the Company applies APB Opinion 25 and related Interpretations in accounting for its stock option plans (See Note 10). NOTE 2 -- INVENTORY Inventory consists of the following:
DECEMBER 31, ---------------------------- 1995 1996 ----------- ------------ (IN THOUSANDS) Crude oil $ 2,884 $ 2,536 Materials and supplies 2,236 2,027 ----------- ------------ $ 5,120 $ 4,563 =========== ============
F-8 48 Substantially all of the crude oil inventory at December 31, 1995 and 1996, except for minor amounts of working inventory, was hedged with New York Mercantile Exchange ("NYMEX") futures contracts or short-term physical delivery contracts. Deferred gains or losses from inventory hedges are included as part of the inventory cost and recognized when the related inventory is sold. NOTE 3 -- LONG-TERM DEBT Long-term debt consists of the following:
DECEMBER 31, --------------------------- 1995 1996 ------------ ------------ (IN THOUSANDS) Revolving Credit Facility, bearing interest at weighted average interest rates of 8.2% and 7.0%, at December 31, 1995 and 1996, respectively $ 56,000 $ 72,700 Illinois Basin Acquisition Indebtedness, bearing interest at 7.35% at December 31, 1995 42,000 -- 10 1/4% Senior Subordinated Notes due 2006, net of unamortized discount of $.9 million -- 149,121 12% Senior Subordinated Notes due 1999 100,000 -- Other long-term debt 8,533 4,089 ------------ ------------ Total long-term debt $ 206,533 $ 225,910 Less current maturities (1,444) (511) ------------ ------------ $ 205,089 $ 225,399 ============ ============
REVOLVING CREDIT FACILITY The Company has a $125 million revolving credit facility (the "Revolving Credit Facility") with a group of five banks (the "Lenders"). The Revolving Credit Facility is secured by the oil and natural gas properties of the Company and is guaranteed by all of the Company's subsidiaries other than PMCT, Inc. ("PMCT"), which guarantees are secured by substantially all of the oil and natural gas properties of the Company and its subsidiaries and the stock of all guaranteeing subsidiaries. The Cushing Terminal is not pledged as security for any of the Company's debt. The borrowing base under the Revolving Credit Facility at December 31, 1996, is set at $125 million and is subject to borrowing base availability as determined from time to time by the Lenders in good faith, in the exercise of the Lenders' sole discretion, and in accordance with customary practices and standards in effect from time to time for oil and natural gas loans to borrowers similar to the Company. Such borrowing base may be affected from time to time by the performance of the Company's oil and natural gas properties and changes in oil and natural gas prices. The Company incurs a commitment fee of 1/2% per annum on the unused portion of the borrowing base. The Revolving Credit Facility, as amended, matures on May 1, 1998, at which time the remaining outstanding balance converts to a term loan which is repayable in twenty equal quarterly installments commencing August 1, 1998, with a final maturity of May 1, 2003. The Revolving Credit Facility bears interest, at the Company's option of either LIBOR plus 1 3/8% or Prime Rate (as defined therein). At December 31, 1996, outstanding borrowings under the Revolving Credit Facility were $72.7 million. An additional $1 million was reserved against the issuance of a standby letter of credit. The Revolving Credit Facility contains covenants which, among other things, prohibit the payment of cash dividends, limit the amount of consolidated debt, limit the Company's ability to make certain loans and investments, and provide that the Company must maintain a specified relationship between current assets and current liabilities. 10.25% SENIOR SUBORDINATED NOTES DUE 2006 On March 19, 1996, the Company sold $150 million of Senior Subordinated Notes due 2006, Series A, bearing a coupon rate of 10.25% (the "Series A 10.25% Notes"). Such notes were issued pursuant to a Rule 144A private placement at approximately 99.38% of the principal amount thereof to yield 10.35%. On August 8, 1996, the Company exchanged a total of $149.5 million principal amount of the Series A 10.25% Notes for 10.25% Senior Subordinated Notes due 2006, Series B, (the "Series B 10.25% Notes"). The Series B 10.25% Notes are substantially F-9 49 identical (including principal amount, interest rate, maturity and redemption rights) to the Series A 10.25% Notes for which they were exchanged, except for certain transfer restrictions relating to the Series A 10.25% Notes. The Series A 10.25% Notes and the Series B 10.25% Notes (collectively, the "10.25% Notes") are redeemable, at the option of the Company, on or after March 15, 2001 at 105.13% of the principal amount thereof, at decreasing prices thereafter prior to March 15, 2004, and thereafter at 100% of the principal amount thereof plus, in each case, accrued interest to the date of redemption. In addition, prior to March 15, 1999, up to $45 million in principal amount of the 10.25% Notes are redeemable at the option of the Company, in whole or in part, from time to time, at 110.25% of the principal amount thereof, with the Net Proceeds of any Public Equity Offering (as both are defined in the indenture under which the 10.25% Notes were issued (the "Indenture")). The Indenture contains covenants including, but not limited to the following: (i) limitations on incurrence of additional indebtedness; (ii) limitations on certain investments; (iii) limitations on restricted payments; (iv) limitations on dispositions of assets; (v) limitations on dividends and other payment restrictions affecting subsidiaries; (vi) limitations on transactions with affiliates; (vii) limitations on liens; and (viii) restrictions on mergers, consolidations and transfers of assets. In the event of a Change of Control and a corresponding Rating Decline, as both are defined in the Indenture, the Company will be required to make an offer to repurchase the 10.25% Notes at 101% of the principal amount thereof, plus accrued and unpaid interest to the date of the repurchase. The 10.25% Notes are unsecured general obligations of the Company and are subordinated in right of payment to all existing and future senior indebtedness of the Company and are guaranteed by all of the Company's principal subsidiaries. Proceeds from the sale of the 10.25% Notes, net of offering costs, were approximately $144.6 million and were used to redeem the Company's 12% Senior Subordinated Notes due 1999 (the "12% Notes") at 106% of the $100 million principal amount outstanding and to retire $42 million of bridge bank indebtedness which was incurred in December 1995 in connection with the acquisition of all of the upstream oil and gas assets of Marathon Oil Company ("Marathon") in the Illinois Basin (the "Illinois Basin Properties"). The 12% Notes were redeemed in April 1996, and the Company recognized an extraordinary loss of $8.5 million, $5.1 million net of deferred income tax, in connection therewith. Prior to redemption, the 12% Notes had an average remaining life of three years and scheduled maturities of $50 million in each of 1998 and 1999. OTHER LONG-TERM DEBT Included in other long-term debt at December 31, 1995 and 1996 is $4.6 million and $4.1 million, respectively, related to the 1995 acquisition of a production payment burdening certain of the Company's LA Basin properties. Such other long-term debt has maturities of approximately $.5 million per year in each of the years 1997 through 2004. The aggregate amount of maturities of all long-term indebtedness for the next five years is: 1997 - $.5 million, 1998 - $7.8 million, 1999 - $15.1 million, 2000 - $15.1 million and 2001 - $15.1 million. NOTE 4 -- UNCOMMITTED SECURED TRANSACTIONAL GUIDANCE FACILITY Plains Marketing has a $90 million Uncommitted Secured Demand Transactional Line of Credit (the "Transactional Facility") with five banks. The purpose of the Transactional Facility is to provide standby letters of credit to support the purchase of crude oil for resale and borrowings to finance crude oil inventory which has been hedged against future price risk. The Transactional Facility is secured by all of the assets of Plains Marketing, primarily accounts receivable and crude oil inventory, and is guaranteed by the Company. The Company's guarantee is secured by a $1 million standby letter of credit issued on behalf of the Company under the Revolving Credit Facility. At December 31, 1996, approximately $39.6 million in letters of credit were outstanding under the Transactional Facility. PMCT, a wholly owned subsidiary of the Company, has established a $20 million sublimit (the "Sublimit") within the Transactional Facility for standby letters of credit and borrowings to finance crude oil purchased in connection with operations at the Cushing Terminal. Under the terms of the Sublimit, all purchases of crude oil inventory financed are required to be hedged against future price risk on terms acceptable to the lenders. Standby F-10 50 letters of credit and borrowings under the Sublimit are secured by all of the assets of PMCT and are recourse only to PMCT. At December 31, 1996, no letters of credit or borrowings were outstanding under the Sublimit. Letters of credit under the Transactional Facility are generally issued for up to seventy day periods and bear fees of 1.5% per annum. Borrowings incur interest at the borrower's option of either (i) the Prime Rate, as defined, plus 5/8% or (ii) LIBOR plus 2%. All financings under the Transactional Facility, which expires in November 1997, are at the discretion of the lenders. Aggregate cash borrowings by both subsidiaries are limited to $20 million. NOTE 5 -- CAPITAL STOCK COMMON STOCK The Company has authorized capital stock consisting of 50 million shares of Common Stock, $.10 par value, and 2 million shares of preferred stock, $1.00 par value. At December 31, 1996, there were 16.5 million shares of common stock ("Common Stock") issued and outstanding and no shares of preferred stock outstanding. STOCK WARRANTS AND OPTIONS At December 31, 1996, the Company had warrants outstanding which entitle the holders thereof to purchase an aggregate 850,000 shares of Common Stock. Per share exercise prices and expiration dates for the warrants are as follows: 100,000 shares at $7.50 expiring in 2000 and 750,000 shares at $6.00 expiring in 1999. The Company has various stock option plans for its employees and directors (See Note 10). $1.30 PREFERRED STOCK On October 31, 1995, all outstanding shares of the Company's $1.30 Cumulative Convertible Preferred Stock (the "$1.30 Preferred Stock") were redeemed for $10 per share plus unpaid and accrued dividends of $.0325 per share. The Company paid a total of $496,000, including unpaid dividends, to redeem the $1.30 Preferred Stock. REDEEMABLE PREFERRED STOCK In July 1994, the Company sold in a private placement 200,000 shares of its Series C Cumulative Convertible Preferred Stock (the "Series C Preferred Stock") for net proceeds of approximately $20 million. On January 2, 1995, the Company paid a dividend on the Series C Preferred Stock for the period of July 14, 1994, through December 31, 1994. The dividend amount of approximately $937,000 was paid by issuing 9,370 additional shares of the Series C Preferred Stock. On May 25, 1995, all 209,370 outstanding shares of the Series C Preferred Stock, including accrued dividends, were converted into approximately 3.6 million shares of Common Stock. As a result of this conversion and the redemption of the $1.30 Preferred Stock, all outstanding preferred stock has been eliminated. NOTE 6 -- EARNINGS PER SHARE Primary earnings per share is based on the weighted average number of common and common equivalent shares of Common Stock outstanding. Common equivalent shares include employee stock options and warrants when dilutive. Fully diluted earnings per share is based on the weighted average number of common and common equivalent shares in addition to all other convertible securities, when dilutive. The assumed conversion of these securities had a dilutive effect of less than 3% for all periods presented and, accordingly, is not reflected herein. For purposes of the earnings per share calculation, Common Stock issued upon the conversion of the Series C Preferred F-11 51 Stock is included in the weighted average number of shares outstanding effective January 1, 1995. Additionally, 1994 earnings per share includes the dilutive effect of additional shares of Series C Preferred Stock issued in 1995 as payment of 1994 accrued dividends (See Note 5). NOTE 7 -- INCOME TAXES The Company's deferred income tax assets (liabilities) at December 31, 1995 and 1996 consist of the tax effect of income tax carryforwards and differences related to the timing of recognition of certain acquisition, exploration, and development costs for financial and tax reporting as follows:
DECEMBER 31, ------------------------ 1995 1996 ---------- ----------- (IN THOUSANDS) Deferred tax assets: Tax credit carryforwards $ 988 $ 934 Percentage depletion carryforward 2,380 2,450 Net operating loss ("NOL") carryforwards 55,798 64,186 ---------- ----------- 59,166 67,570 Deferred tax liabilities: Acquisition, exploration and development costs (40,871) (51,431) ----------- ------------ Net deferred tax asset 18,295 16,139 Valuation allowance (18,295) (8,376) ---------- ----------- $ -- $ 7,763 ========== ===========
In the first quarter of 1996, the Company reduced its valuation allowance resulting in the recognition of an $11 million credit to deferred income tax expense. Based on recent and anticipated improvement in the Company's outlook for sustained profitability, management believes that it is more likely than not that it will generate taxable income sufficient to realize $11 million of unreserved tax benefits associated with certain of the Company's NOL carryforwards prior to their expiration. The reserve adjustment incorporates management's assessment of the significant, cumulative progress made by the Company over the last four years to reduce unit expenses, increase unit gross margins and substantially increase its production and proved reserves through its acquisition and exploitation activities. Such reassessment is also reinforced by the first quarter 1996 settlement of litigation and the refinancing of the Company's $100 million 12% Notes and the increased liquidity and flexibility provided by such refinancing. The remaining deferred tax asset was not recognized primarily due to limitations imposed by the IRS regarding the utilization of NOLs generated prior to certain of the Company's subsidiaries being acquired and the uncertainty of utilizing the Company's investment tax credit ("ITC") carryforwards. While the Company's tax planning strategies address certain of these restrictions on the application of subsidiary NOLs, management is currently uncertain as to the extent such strategies will be successful and therefore concluded that a reserve for these amounts was appropriate. At December 31, 1996, the Company had carryforwards of approximately $183.4 million of regular tax NOL's, $7 million of statutory depletion, $.7 million of ITC and $.2 million of alternative minimum tax ("AMT") credit. Of these amounts, utilization of approximately $15.7 million of the NOL carryforwards and $.5 million of the ITC carryforwards are limited to certain companies within the consolidated group. At December 31, 1996, the Company had approximately $168.6 million of AMT NOL carryforwards available as a deduction against future AMT income. The NOL carryforwards expire from 1997 through 2011. F-12 52 Set forth below is a reconciliation between the income tax provision computed at the United States statutory rate on income before income taxes and the income tax provision per the accompanying Consolidated Statements of Operations:
DECEMBER 31, ------------------------ 1995 1996 ----------- ---------- (IN THOUSANDS) U.S. federal income tax provision at statutory rate $ 902 $ 6,214 Reduction of valuation allowance against deferred tax asset -- (11,000) State income taxes -- 888 Utilization of tax attributes previously included in allowance and other (902) -- ----------- ---------- Income taxes on income before extraordinary item $ -- $ (3,898) Income tax benefit allocated to extraordinary item -- (3,403) ----------- ---------- $ -- $ (7,301) =========== ==========
In accordance with certain provisions of the Tax Reform Act of 1986, a change of greater than 50% of the beneficial ownership of the Company within a three-year period (an "Ownership Change") will place an annual limitation on the Company's ability to utilize its existing tax carryforwards. Under the Final Treasury Regulations issued by the Internal Revenue Service, the Company does not believe that an Ownership Change has occurred as of December 31, 1996. NOTE 8 -- ACQUISITIONS AND DISPOSITIONS On December 22, 1995, Plains Illinois Inc., a wholly owned subsidiary of the Company, acquired the Illinois Basin Properties, effective November 1, 1995. The aggregate purchase price was approximately $51.5 million including associated transaction costs, of which approximately $6.5 million was paid for by the issuance of 798,143 shares of Common Stock and the remaining $45 million was paid in cash. The cash portion of the purchase price was financed through a combination of advances under the Revolving Credit Facility and $42 million of bridge bank indebtedness (See Note 3). The Illinois Basin Properties include three Marathon operated oil fields, various nonoperated producing properties and all of Marathon's oil and natural gas mineral interests, surface fee and undeveloped leasehold within the Illinois Basin as well as Marathon's geological, geophysical and engineering database for the entire region. At the acquisition date, the Illinois Basin Properties added approximately 17.3 million barrels to the Company's proved oil reserves. The following unaudited information reflects pro forma results of operations as if the acquisition of the Illinois Basin Properties occurred on January 1, 1995:
YEAR ENDED DECEMBER 31, 1995 --------------------- HISTORICAL PRO FORMA ----------- --------- Revenue (in thousands) $404,225 $ 426,294 Net income (in thousands) $ 2,652 $ 9,589 Net income per common and common equivalent share $ 0.16 $ 0.57
In December 1995, Stocker Resources Inc. ("Stocker"), a wholly-owned subsidiary of the Company, acquired from Chevron USA ("Chevron") a production payment burdening certain of Stocker's LA Basin properties. The production payment had a face amount of approximately $30 million and was accounted for in prior periods as an overriding royalty interest. Stocker also acquired a fifteen year term mineral interest in certain of its LA Basin properties and F-13 53 approximately ten acres of surface fee lands in Los Angeles County. These assets were acquired in connection with a settlement agreement resolving certain outstanding issues between Chevron and Stocker. In return for the conveyance of the foregoing assets, Stocker agreed to forgive certain amounts due it, dismiss existing lawsuits related to such claims and issue to Chevron a ten year note for $4.6 million. The settlement also provides for a modification of Stocker's existing contractual obligations to Chevron to plug inactive wells, that Stocker continue its present activities to remediate oil contaminated soil from existing wellsites on an accelerated basis, and for the Company to guarantee the performance of such obligations. During 1995 and 1996, the Company sold certain non-strategic oil and natural gas properties located primarily in the Gulf Coast areas of Texas and Louisiana and in Utah for net proceeds of approximately $7.4 million and $3.1 million respectively. During 1994, Calumet Florida Inc. ("Calumet"), a wholly-owned subsidiary of the Company, acquired the remaining 50% working interest in its Sunniland Trend properties, increasing its working interest to approximately 100% and adding approximately five million barrels of oil to its proved reserve base at the acquisition date. Operating results from the additional 50% interest in the Sunniland Trend properties are included in the accompanying financial statements effective May 1, 1994. The aggregate purchase price, including acquisition costs, was approximately $13.6 million including the issuance of a five year warrant to purchase 750,000 shares of Common Stock at an exercise price of $6.00 per share. The acquisition was initially financed by an $11.5 million bridge loan which was repaid in July 1994 with proceeds from the sale of the Series C Preferred Stock (See Note 5). NOTE 9 -- RETIREMENT PLAN Effective June 1, 1996, the Company's Board of Directors adopted a nonqualified retirement plan (the "Plan") for certain officers of the Company. Benefits under the Plan are based on salary at the time of adoption, vest over a 15 year period and are payable over a 15 year period commencing at age 60. The Plan is unfunded. Net pension expense for the year ended December 31, 1996, is comprised of the following components (in thousands): Service cost - benefits earned during the period $ 44 Interest on projected benefit obligation 31 Amortization of prior service cost 22 --------- Net pension expense $ 97 =========
The following schedule reconciles the funded status of the Plan with amounts reported in the Company's balance sheet at December 31, 1996 (in thousands). Actuarial present value of benefit obligations: Vested benefits $ 563 Nonvested benefits 191 --------- Accumulated benefit obligation $ 754 ========= Projected benefit obligation for service rendered to date $ 754 Plan assets at fair value -- --------- Projected benefit obligation in excess of plan assets 754 Prior service cost not yet recognized in net periodic pension expenses (657) --------- Net pension liability 97 Adjustment required to recognize minimum liability 657 --------- Accrued pension cost liability recognized in the balance sheet $ 754 =========
The weighted-average discount rate used in determining the projected benefit obligation was 8%. F-14 54 NOTE 10 -- STOCK COMPENSATION PLANS Historically, the Company has used stock options as a long-term incentive for its employees, officers and directors under various stock option plans. The exercise price of options granted to employees is equal to or greater than the market price of the underlying stock on the date of grant. Accordingly, consistent with the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"), no compensation expense has been recognized in the accompanying financial statements. During 1996, the Company's shareholders approved the Company's 1996 Stock Incentive Plan, under which a maximum of 1.5 million shares of Common Stock were reserved for issuance. The Company also has options outstanding under its 1991 and 1992 plans, under which a maximum of 2.0 million shares of Common Stock were reserved for issuance. Generally, terms of the options provide for an exercise price of not less than the market price of the Company's stock on the date of the grant, a pro rata vesting period of two to four years and an exercise period of five to ten years. In addition, during 1996, the Company granted performance options to purchase a total of 500,000 shares of Common Stock to two executive officers. Terms of the options provide for an exercise price of $13.50, the market price on the date of grant, and an exercise period of five years. The performance options vest when the price of the Common Stock trades at or above $24 per share for any 20 trading days in any 30 consecutive trading day period or upon a change in control if certain conditions are met. A summary of the status of the Company's stock options as of December 31, 1996, 1995, and 1994, and changes during the years ending on those dates are presented below:
1994 1995 1996 ------------------------- ------------------------ ------------------------- WEIGHTED- WEIGHTED- WEIGHTED- SHARES AVERAGE SHARES AVERAGE SHARES AVERAGE FIXED OPTIONS (000) EXERCISE PRICE (000) EXERCISE PRICE (000) EXERCISE PRICE - ----------------------------------- -------- -------------- --------- -------------- ---------- -------------- Outstanding at beginning of year 1,642 $ 6.40 1,519 $ 6.40 1,728 $ 6.40 Granted -- $ -- 365 $ 6.25 1,060 $ 11.34 Exercised (19) $ 5.00 (147) $ 5.92 (285) $ 6.26 Forfeited (104) $ 6.67 (9) $ 6.68 (68) $ 6.63 ------ ----- ------ Outstanding at end of year 1,519 $ 6.39 1,728 $ 6.40 2,435 $ 8.56 ====== ===== ====== Options exercisable at year-end 1,202 $ 6.28 1,233 $ 6.40 1,289 $ 6.78 ====== ===== ====== Weighted-average fair value of options granted during the year N/A $2.18 $ 3.19
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123 establishes financial accounting and reporting standards for stock-based employee compensation. The pronouncement defines a fair value based method of accounting for an employee stock option or similar equity instrument. SFAS No. 123 also allows an entity to continue to measure compensation cost for those instruments using the intrinsic value-based method of accounting prescribed by APB 25. The Company has elected to follow APB 25 and related Interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under SFAS No. 123 requires the use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense has been recognized in the accompanying financial statements. The Company will recognize compensation expense under APB 25 in the future for the two performance options described above, if certain conditions are met and such options vest. Pro forma information regarding net income and earnings per share is required by SFAS No.123 and has been determined as if the Company had accounted for its employee stock options under the fair value method as provided therein. The fair value for the options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions: risk-free interest rates of 7.5% for 1995 and 6.0% for 1996; a volatility factor of the expected market price of the Company's common stock of .36; no expected dividends; and weighted-average expected option lives of 3.5 years in 1995 and 2.7 years in 1996. F-15 55 The Black-Scholes option valuation model and other existing models were developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of and are highly sensitive to subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. Set forth below is a summary of the Company's net income and earnings per share as reported and pro forma as if the fair value based method of accounting defined in SFAS No. 123 had been applied. The pro forma information is not meant to be representative of the effects on reported net income for future years, because as provided by SFAS 123, only the effects of awards granted in 1995 and 1996 are considered in the pro forma calculations.
1995 1996 ----------------------------- ----------------------------- AS REPORTED PRO FORMA AS REPORTED PRO FORMA ------------ ------------ ------------ ------------ Net income (in thousands) $ 2,652 $ 2,497 $ 16,548 $ 16,161 Earnings per share $ 0.16 $ 0.15 $ 0.93 $ 0.91
The following table summarizes information about stock options outstanding at December 31, 1996:
WEIGHTED- AVERAGE WEIGHTED- NUMBER REMAINING AVERAGE NUMBER WEIGHTED- OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE AVERAGE RANGE OF EXERCISE PRICES AT 12/31/96 LIFE PRICE AT 12/31/96 EXERCISE PRICE - --------------------------- ----------- ----------- ---------- ----------- -------------- $ 5.25 to $ 6.75 1,191 5.5 years $ 6.16 981 $ 6.12 $ 7.50 to $ 7.81 514 6.2 years $ 7.65 244 $ 7.57 $ 10.50 to $ 15.63 730 4.2 years $ 13.12 64 $ 12.36 -------- --------- $ 5.25 to $ 15.63 2,435 5.3 years $ 8.56 1,289 $ 6.78 ======== =========
During 1996, pursuant to a Board of Directors' resolution, the Company contributed approximately 18,000 shares of Common Stock at a weighted average price of $11.35 per share on behalf of participants in the Company's 401(k) Savings Plan, representing a matching contribution by the Company for up to 50% of an employee's contribution. NOTE 11 -- COMMITMENTS, CONTINGENCIES AND INDUSTRY CONCENTRATION COMMITMENTS AND CONTINGENCIES Minimum commitments in connection with office space and computer equipment leased by the Company are: 1997 and 1998 - $1.0 million annually; 1999 - $.9 million; thereafter - $.8 million. Rental payments made under the terms of similar arrangements totaled approximately $1.1 million in 1996 and $1.2 million in each of the years ended December 31, 1995 and 1994. In connection with its crude oil marketing, Plains Marketing provides certain purchasers and transporters with irrevocable standby letters of credit to secure the Company's obligation for the purchase of crude oil (See Note 4). Generally, these letters of credit are issued for up to seventy day periods and are terminated upon completion of each transaction. At December 31, 1996, Plains Marketing had outstanding letters of credit of approximately $39.6 million. Such letters of credit are secured by the crude oil inventory and accounts receivable of Plains Marketing F-16 56 and are guaranteed by the Company. To date, no amounts have been drawn on such letters of credit issued by the Company. Under the amended terms of the asset purchase agreement between Stocker and Chevron, commencing with the year beginning January 1, 2000, and each year thereafter, Stocker is required to plug and abandon 20% of the then remaining inactive wells, which currently aggregate approximately 250. To the extent the Company elects not to plug and abandon the number of required wells, the Company is required to escrow an amount equal to the greater of $25,000 per well or the actual average plugging cost per well in order to provide for the future plugging and abandonment of such wells. In addition, Stocker is required to expend a minimum of $600,000 per year in each of the ten years beginning January 1, 1996, and $300,000 per year in each of the succeeding five years to remediate oil contaminated soil from existing well sites, provided there are remaining sites to be remediated. In the event Stocker does not expend the required amounts during a calendar year, Stocker is required to contribute an amount equal to 125% of the actual shortfall to an escrow account. Stocker may withdraw amounts from such escrow account to the extent it expends excess amounts in a future year. Although the Company obtained environmental studies on its properties in the LA Basin, Sunniland Trend and Illinois Basin and the Company believes that such properties have been operated in accordance with standard oil field practices, certain of the fields have been in operation for more than 90 years, and current or future local, state and federal environmental laws and regulations may require substantial expenditures to comply with such rules and regulations. In connection with the purchase of the Stocker Properties, Stocker received a limited indemnity from Chevron for certain conditions if they violate applicable local, state and federal environmental laws and regulations in effect on the date of such agreement. While the Company believes that it does not have any material obligations for operations conducted prior to Stocker's acquisition of the properties from Chevron, other than its obligation to plug existing wells and those normally associated with customary oil field operations of similarly situated properties, there can be no assurance that current or future local, state or federal rules and regulations will not require it to spend material amounts to comply with such rules and regulations or that any portion of such amounts will be recoverable under the Chevron indemnity. Consistent with normal industry practices, substantially all of the Company's oil and natural gas leases require that, upon termination of economic production, the working interest owners plug and abandon non-producing wellbores, remove tanks, production equipment and flow lines and restore the wellsite. The Company has estimated that the costs to perform these tasks is approximately $13 million, net of salvage value and other considerations. Such estimated costs are amortized to expense through the unit-of-production method as a component of accumulated depreciation, depletion and amortization ("DD&A"). Results from operations for 1994, 1995 and 1996 include $1.1 million, $1 million and $.8 million, respectively, of expense associated with these estimated future costs. For valuation and realization purposes of the affected oil and natural gas properties, these estimated future costs are also deducted from estimated future gross revenues to arrive at the estimated future net revenues and the Standardized Measure disclosed in Note 16. As is common within the industry, the Company has entered into various commitments and operating agreements related to the exploration and development of and production from certain proved oil and natural gas properties. It is management's belief that such commitments will be met without a material adverse effect on the Company's financial position. INDUSTRY CONCENTRATION Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of trade receivables. The Company's accounts receivable are primarily from purchasers of oil and natural gas products and exploration and production companies which own interests in properties operated by the Company. This industry concentration has the potential to impact the Company's overall exposure to credit risk, either positively or negatively, in that the customers may be similarly affected by changes in economic, industry or other conditions. The Company generally requires letters of credit for receivables from customers which are not considered investment grade, unless the credit risk can otherwise be mitigated. There are a limited number of alternative methods of transportation for the Company's production. Substantially all of the Company's LA Basin crude oil and natural gas production and its Sunniland Trend and Illinois F-17 57 Basin oil production are transported by pipelines owned by third parties. The inability or unwillingness of these pipelines to provide transportation services to the Company for a reasonable fee could result in the Company having to find transportation alternatives, increased transportation costs to the Company or involuntary curtailment of a significant portion of its crude oil and natural gas production which could have a negative impact on future results. NOTE 12 -- LITIGATION The Company and certain of its officers and directors and a former director and officer were named in two class action lawsuits filed in 1992 and 1993 seeking an aggregate of approximately $90 million in compensatory damages and punitive damages in an unspecified amount for alleged violations of the federal securities laws and state common law arising out of certain alleged misrepresentations and omissions in the Company's disclosure regarding its onshore natural gas exploration activities. During 1996, the Company settled such cases for a cash payment of approximately $6.3 million. Approximately $4.1 million of such amount was paid by the Company's insurance carrier and $2.2 million was paid by the Company. Taking into account prior costs incurred by the Company to defend these suits and for which the Company agreed to release its claims for reimbursement from its insurance carrier, this settlement resulted in a charge to 1996 first quarter earnings of $4 million. On July 9, 1987, Exxon filed an interpleader action in the United States District Court for the Middle District of Florida, Exxon Corporation v. E. W. Adams, et al., Case Number 87-976-CIV-T-23-B. This action was filed by Exxon to interplead royalty funds as a result of a title controversy between certain mineral owners in a field in Florida. One group of mineral owners, John W. Hughes, et al. (the "Hughes Group"), filed a counterclaim against Exxon alleging fraud, conspiracy, conversion of funds, declaratory relief, federal and Florida RICO, breach of contract and accounting, as well as challenging the validity of certain oil and natural gas leases owned by Exxon, and seeking exemplary and treble damages. In March 1993, but effective November 1, 1992, Calumet, a wholly-owned subsidiary of the Company, acquired all of Exxon's leases in the field affected by this lawsuit. In order to address those counterclaims challenging the validity of certain oil and natural gas leases, which constitute approximately 10% of the lands underlying this unitized field, Calumet filed a motion to join Exxon as plaintiff in the subject lawsuit, which was granted July 29, 1994. In August 1994, the Hughes Group amended its counterclaim to add Calumet as a counter-defendant. Exxon and Calumet filed a motion to dismiss the counterclaims. On March 22, 1996, the Court granted Exxon's and Calumet's motion to dismiss the counterclaims alleging fraud, conspiracy, and federal and Florida RICO violations and challenging the validity of certain of the Company's oil and natural gas leases but denied such motion as to the counterclaim alleging conversion of funds. The Company has reached an agreement in principle with all parties to settle this case. In consideration for full and final settlement, and dismissal with prejudice of all issues in this case, the Company has agreed to pay to the defendants the total sum of $100,000, and release certain royalty amounts held in suspense and in the court registry during the pendency of this case. Finalization of this settlement has been delayed due to a dispute between the defendants over certain title issues. The defendants have filed motions requesting the Court to rule on this dispute, but no hearing date has been set. The Company does not believe that this dispute will adversely affect the settlement reached between the Company and the defendants. The Company, in the ordinary course of business, is a claimant and/or a defendant in various other legal proceedings in which its exposure, individually and in the aggregate, is not considered material to the consolidated financial statements. NOTE 13 -- MAJOR CUSTOMERS Koch Oil Company and Basis Petroleum, Inc. ("Basis"), formerly Phibro Energy USA Inc., accounted for 16% and 11%, respectively, of the Company's total revenue (exclusive of interest and other income) during 1996. Customers accounting for more than 10% of total revenue for 1995 and 1994 were as follows: 1995 -- Phibro Inc. ("Phibro") -- 16% and Basis -- 12%; 1994 -- Phibro -- 19% and Chevron -- 16%. Basis and Phibro Inc. are both subsidiaries of Salomon Inc. No other single purchaser of the Company's products accounted for as much as 10% of total sales during 1996, 1995 or 1994. Additionally during 1996, Unocal, Marathon and Basis accounted for approximately 51%, 24% and 20%, respectively, of the Company's oil and gas sales. During 1996, Unocal, Marathon and Basis purchased the crude oil from the LA Basin Properties, Illinois Basin Properties and the Sunniland Trend Properties, respectively. F-18 58 NOTE 14 -- FINANCIAL INSTRUMENTS DERIVATIVES The Company has only limited involvement with derivative financial instruments, as defined in SFAS No. 119, "Disclosure About Derivative Financial Instruments and Fair Value of Financial Instruments" and does not use them for speculative trading purposes. The Company's principle objective is to hedge exposure to price volatility on crude oil and natural gas. These arrangements expose the Company to credit risk (as to counterparties) and to risk of adverse price movements in certain cases where the Company's production is less than expected. The Company has entered into various fixed and floating price collar arrangements to fix the NYMEX crude oil spot price ("NYMEX Crude Oil Price") for a significant portion of its crude oil production. On December 31, 1996, these arrangements provided for a NYMEX Crude Oil Price for: (i) 12,000 barrels per day through March 31, 1997, at $18.51 per barrel; (ii) 10,000 barrels per day from April 1, 1997, through April 30, 1997, at $18.85 per barrel; (iii) 9,000 barrels per day from May 1, 1997, through June 30, 1997, at $18.85 per barrel; and (iv) 9,100 barrels per day from July 1, 1997, through December 31, 1997, at $18.59 per barrel. The Company has entered into additional swap arrangements which provide for a NYMEX Crude Oil Price ceiling of $24.00 per barrel and a price floor of $19.50 per barrel for 4,000 barrels per day from January 1, 1997, through December 31, 1997. Combined with an additional arrangement providing for 500 barrels per day from April 1, 1997 through December 31, 1997, at $22.00 per barrel, these arrangements provide the Company with an average minimum price of $18.96 per barrel on an average of approximately 14,250 barrels of oil per day for 1997, but provide the Company with upside price participation for 4,000 of such barrels up to $24.00 per barrel. At December 31, 1996, the Company also had a fixed price arrangement on 4,500 barrels per day for 1998 at a NYMEX Crude Oil Price of $19.24 per barrel. Location and quality differentials attributable to the Company's properties are not included in the foregoing prices. The agreements provide for monthly settlement based on the differential between the agreement price and the actual NYMEX Crude Oil Price. Gains or losses on the crude oil swaps are recognized in the month of related production and are included in oil and natural gas sales. FAIR VALUE OF FINANCIAL INSTRUMENTS The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of SFAS No. 107, "Disclosures About Fair Value of Financial Instruments". The estimated fair value amounts have been determined by the Company using available market information and valuation methodologies described below. Considerable judgement is required in interpreting market data to develop the estimates of fair value. The use of different market assumptions or valuation methodologies may have a material effect on the estimated fair value amounts. F-19 59 The carrying values of items comprising current assets and current liabilities approximate fair values due to the short-term maturities of these instruments. Crude oil futures contracts permit settlement by delivery of the crude oil and, therefore, are not financial instruments, as defined. The carrying amounts and fair values of the Company's other financial instruments are as follows:
DECEMBER 31, ------------------------------------------------- 1995 1996 ---------------------- ---------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE -------- -------- -------- -------- (IN THOUSANDS) DEBT: Bank debt $ 98,000 $ 98,000 $ 72,700 $ 72,700 Subordinated debt 100,000 105,250 149,121 160,500 Other long-term debt 8,533 8,624 3,578 3,578 OFF BALANCE SHEET FINANCIAL INFORMATION: Unrealized loss on crude oil swap agreements -- 5,438(1) -- 15,472(1)
- --------------- (1) These amounts represent the calculated excess of the NYMEX Crude Oil Price over hedge arrangements for future production of the Company's properties as of December 31, 1995 and 1996. Such hedges, and therefore the unrealized loss, have been fully deducted from estimated future gross revenues to arrive at the estimated future net revenues and the Standardized Measure disclosed in Note 16. The carrying value of bank debt approximates its fair value as interest rates are variable, based on prevailing market rates. The fair value of subordinated debt was based on quoted market prices based on trades of subordinated debt. Other long-term debt was valued by discounting the future payments using the Company's incremental borrowing rate. NOTE 15 -- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Selected cash payments and noncash activities were as follows:
YEAR ENDED DECEMBER 31, ------------------------------------ 1994 1995 1996 --------- -------- -------- (IN THOUSANDS) Cash paid for interest (net of amount capitalized) $ 12,082 $ 13,259 $ 16,309 ========= ======== ======== Noncash investing and financing activities: Series C Preferred Stock Dividends $ 937 $ -- $ -- ========= ======== ======== Conversion of Series C Preferred $ -- $ 21,769 $ -- ========= ======== ======== Detail of properties acquired for other than cash: Fair value of acquired assets $ 13,600 $ 56,100 $ -- Debt issued and liabilities assumed -- (4,600) -- Capital stock and warrants issued (1,250) (6,527) -- --------- -------- -------- Cash paid $ 12,350 $ 44,973 $ -- ========= ======== ========
F-20 60 NOTE 16 -- OIL AND NATURAL GAS ACTIVITIES COSTS INCURRED The Company's oil and natural gas acquisition, exploration and development activities are primarily conducted in the United States. The following table summarizes the costs incurred in connection therewith during the last three years.
YEAR ENDED DECEMBER 31, --------------------------- 1994 1995 1996 ------- ------- ------- (IN THOUSANDS) Property acquisition costs: Unproved properties $ 6,150 $18,136 $ 728 Proved properties 13,222 41,194 3,087 Exploration costs 5,907 2,001 2,433 Exploitation and development costs 15,570 22,681 45,007 ------- ------- ------- $40,849 $84,012 $51,255 ======= ======= =======
CAPITALIZED COSTS The following table presents the aggregate capitalized costs subject to amortization relating to the Company's oil and natural gas acquisition, exploration, exploitation and development activities, and the aggregate related DD&A.
DECEMBER 31, ----------------------- 1995 1996 ---------- ---------- (IN THOUSANDS) Proved properties $ 328,712 $ 384,019 Accumulated DD&A (131,063) (150,300) ---------- ---------- $ 197,649 $ 233,719 ========== ==========
The DD&A rate per equivalent unit of production was $3.17, $3.02 and $3.00 for the years ended December 31, 1994, 1995 and 1996, respectively. COSTS NOT SUBJECT TO AMORTIZATION The following table summarizes the categories of costs which comprise the amount of unproved properties not subject to amortization.
DECEMBER 31, ----------------------- 1995 1996 ---------- ---------- (IN THOUSANDS) Acquisition costs $ 35,550 $ 31,940 Exploration costs 5,075 3,210 Capitalized interest 8,170 6,548 ---------- ---------- $ 48,795 $ 41,698 ========== ==========
Unproved property costs not subject to amortization consist mainly of acquisition and lease costs and seismic data related to unproved areas. The Company will continue to evaluate these properties over the lease terms; however, the timing of the ultimate evaluation and disposition of a significant portion of the properties has not been determined. Costs associated with seismic data and all other costs will become subject to amortization as the prospects to which they relate are evaluated. Approximately 14%, 38% and 9% of the balance in unproved properties at December 31, 1996, related to additions made in 1994, 1995, and 1996, respectively. During 1994, 1995 and 1996, the Company capitalized $2.7 million, $3.1 million and $3.6 million, respectively, of interest related to costs of unproved properties in the process of development. SUPPLEMENTAL RESERVE INFORMATION (UNAUDITED) The following information summarizes the Company's net proved reserves of oil (including condensate and natural gas liquids) and natural gas and the present values thereof for the three years ended December 31, 1996. The F-21 61 following reserve information is based upon reports of the independent petroleum consulting firms of H.J. Gruy and Company with respect to the LA Basin properties, Netherland, Sewell & Associates, Inc. with respect to the Sunniland Trend Properties and other minor properties and Ryder Scott Company with respect to the Illinois Basin Properties. The estimates are in accordance with regulations prescribed by the Securities and Exchange Commission (the "SEC"). In management's opinion, the reserve estimates presented herein, in accordance with generally accepted engineering and evaluation principles consistently applied, are believed to be reasonable. However, there are numerous uncertainties inherent in estimating quantities and values of proved reserves and in projecting future rates of production and timing of development expenditures, including many factors beyond the control of the Company. Reserve engineering is a subjective process of estimating the recovery from underground accumulations of oil and natural gas that cannot be measured in an exact manner, and the accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. Because all reserve estimates are to some degree speculative, the quantities of oil and natural gas that are ultimately recovered, production and operating costs, the amount and timing of future development expenditures and future oil and natural gas sales prices may all differ from those assumed in these estimates. In addition, different reserve engineers may make different estimates of reserve quantities and cash flows based upon the same available data. Therefore, the Standardized Measure shown below represents estimates only and should not be construed as the current market value of the estimated oil and natural gas reserves attributable to the Company's properties. In this regard, the information set forth in the following tables includes revisions of reserve estimates attributable to proved properties included in the preceding year's estimates. Such revisions reflect additional information from subsequent exploitation and development activities, production history of the properties involved and any adjustments in the projected economic life of such properties resulting from changes in product prices. ESTIMATED QUANTITIES OF OIL AND NATURAL GAS RESERVES (UNAUDITED) The following table sets forth certain data pertaining to the Company's proved and proved developed reserves for the three years ended December 31, 1996.
AS OF OR FOR THE YEAR ENDED DECEMBER 31, ------------------------------------------------------ 1994 1995 1996 ----------------- ----------------- ----------------- OIL GAS OIL GAS OIL GAS (BBL) (MCF) (BBL) (MCF) (BBL) (MCF) ------- -------- -------- ------- -------- ------- (IN THOUSANDS) PROVED RESERVES Beginning balance 38,810 49,397 61,459 51,009 94,408 43,110 Revisions of previous estimates 16,834 4,365 5,423 2,792 19,424 6,641 Extensions, discoveries, improved recovery and other additions 4,362 1,182 15,489 1,730 8,179 1,294 Sale of reserves in-place (16) (446) (1,227) (9,773) (5) (12,491) Purchase of reserves in-place 5,304 80 17,640 130 45 862 Production (3,835) (3,569) (4,376) (2,778) (6,055) (2,143) ------- -------- -------- ------- -------- ------- Ending balance 61,459 51,009 94,408 43,110 115,996 37,273 ======= ======== ======== ======= ======== ======= PROVED DEVELOPED RESERVES Beginning balance 30,646 28,436 48,978 30,869 67,266 29,397 ======= ======== ======== ======= ======== ======= Ending balance 48,978 30,869 67,266 29,397 86,515 25,629 ======= ======== ======== ======= ======== =======
F-22 62 STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS (UNAUDITED) The Standardized Measure of discounted future net cash flows relating to proved oil and natural gas reserves is presented below:
DECEMBER 31, -------------------------------------- 1994 1995 1996 ---------- ---------- ---------- (IN THOUSANDS) Future cash inflows $ 894,434 $1,513,145 $2,681,007 Future development costs (62,695) (107,995) (111,785) Future production expense (414,741) (692,008) (977,551) Future income tax expense (69,911) (157,110) (437,654) ---------- ---------- ---------- Future net cash flows 347,087 556,032 1,154,017 Discounted at 10% per year (144,143) (251,191) (575,436) ---------- ---------- ---------- Standardized measure of discounted future net cash flows $ 202,944 $ 304,841 $ 578,581 ========== ========== ==========
The Standardized Measure of discounted future net cash flows (discounted at 10%) from production of proved reserves was developed as follows: 1. An estimate was made of the quantity of proved reserves and the future periods in which they are expected to be produced based on year-end economic conditions. 2. In accordance with SEC guidelines, the engineers' estimates of future net revenues from the Company's proved properties and the present value thereof are made using oil and natural gas sales prices in effect as of the dates of such estimates and are held constant throughout the life of the properties, except where such guidelines permit alternate treatment, including the use of fixed and determinable contractual price escalations. The crude oil price in effect at December 31, 1996, is based on the NYMEX Crude Oil Price of $25.92 per barrel with variations therefrom based on location and grade of crude oil. On February 7, 1997, the NYMEX Crude Oil Price was $22.23 per barrel. The Company has entered into various fixed price and floating price collar arrangements to fix or limit the NYMEX Crude Oil Price for a significant portion of its crude oil production. These prices are included in the reserve reports through the term of the arrangements (See Note 14). The overall average prices used in the reserve reports as of December 31, 1996, were $22.22 per barrel of crude oil, condensate and natural gas liquids and $2.79 per Mcf of natural gas. 3. The future gross revenue streams were reduced by estimated future operating costs (including production and ad valorem taxes) and future development and abandonment costs, all of which were based on current costs. 4. The reports reflect the estimated present value (discounted at 10%) of future net revenue from the Company's proved oil and natural gas reserves to be $229.4 million, $366.8 million and $764.8 million at December 31, 1994, 1995 and 1996, respectively. SFAS No. 69 requires the Company to further reduce these estimates by an amount equal to the present value of estimated income taxes which might be payable by the Company in future years to arrive at the Standardized Measure. Future income taxes were calculated by applying the statutory federal income tax rate to pretax future net cash flows, net of the tax basis of the properties involved and utilization of available tax carryforwards. F-23 63 The principal sources of changes in the Standardized Measure of future net cash flows for the three years ended December 31, 1996, are as follows:
YEAR ENDED DECEMBER 31, --------------------------------------- 1994 1995 1996 ---------- ----------- ----------- (IN THOUSANDS) Balance, beginning of year $ 130,489 $ 202,944 $ 304,841 Sales, net of production expenses (30,014) (33,824) (58,866) Net change in sales and transfer prices, net of production expenses 29,840 26,968 275,200 Changes in estimated future development costs (9,477) (3,228) (5,188) Extensions, discoveries and improved recovery, net of costs 14,928 59,050 50,013 Previously estimated development costs incurred during the year 2,995 3,136 19,662 Purchase of reserves in-place 16,919 64,214 2,253 Sales of reserves in-place (426) (11,381) (3,357) Revision of quantity estimates 71,188 24,533 145,815 Accretion of discount 13,454 22,937 36,678 Net change in income taxes (22,377) (35,512) (124,254) Changes in estimated timing of production and other (14,575) (14,996) (64,216) ---------- ----------- ----------- Balance, end of year $ 202,944 $ 304,841 $ 578,581 ========== =========== ===========
NOTE 17 -- QUARTERLY FINANCIAL DATA (UNAUDITED) The following table shows summary financial data for 1995 and 1996.
QUARTER ENDED ---------------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 ----------- ---------- ------------ ----------- 1995 (IN THOUSANDS, EXCEPT PER SHARE DATA) - ---- Revenues $ 93,647 $ 95,256 $ 103,607 $ 111,715 Operating profits $ 9,500 $ 10,312 $ 9,744 $ 10,953 Net income $ 319 $ 914 $ 483 $ 936 Net income per share $ .02 $ .06 $ .03 $ .06 1996 - ---- Revenues $ 123,513 $ 155,930 $ 169,245 $ 180,920 Operating profits $ 13,360 $ 18,353 $ 17,616 $ 19,377 Income before extraordinary item $ 9,216 $ 4,614 $ 3,486 $ 4,336 Net income $ 709 $ 6,502 $ 5,001 $ 4,336 Net income per share Before extraordinary item $ .54 $ .26 $ .20 $ .24 Extraordinary item (.50) .11 .08 -- ----------- ---------- ---------- ---------- $ .04 $ .37 $ .28 $ .24 =========== ========== ========== ==========
F-24 64 INDEX TO EXHIBITS
2(a) -- Purchase and Sale Agreement dated October 31, 1995, between Marathon and Crete, as amended by that certain Amendment dated December 4, 1995, among Marathon, Plains Resources Inc. and Plains Illinois Inc. (incorporated by reference to Exhibit 2.1 to Form 8-K dated Jan 1996). 3(a) -- Second Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3(a) to the Company's Annual Report on Form 10-K for the year ended December 31, 1995). 3(b) -- Bylaws of the Company, as amended to date (incorporated by reference to Exhibit 3(b) to the Company's Annual Report on Form 10-K for the year ended December 31, 1993). 4(a) -- Specimen Common Stock Certificate (incorporated by reference to Exhibit 4 to the Company's Form S-1 Registration Statement (Reg. No. 33-33986)). 4(c) -- Purchase Agreement for Stock Warrant dated May 16, 1994, between Plains Resources Inc. and Legacy Resources, Co., L.P. (incorporated by reference to Exhibit 4(d) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1994). 10(a)*-- Employment Agreement dated as of March 1, 1993, between the Company and Greg L. Armstrong (incorporated by reference to Exhibit 10(b) to the Company's Annual Report on Form 10-K for the year ended December 31, 1993). 10(b)*-- The Company's 1991 Management Options (incorporated by reference to Exhibit 4.1 to the Company's S-8 Registration Statement (Reg. No. 33-43788)). 10(c)*-- The Company's 1992 Stock Incentive Plan (incorporated by reference to Exhibit 4.3 to the Company's S-8 Registration Statement (Reg. No. 33-48610)). 10(d)*-- The Company's Amended and Restated 401(k) Plan. 10(e) -- Restructure Agreement dated February 25, 1991, among The Aetna Casualty and Surety Company, Aetna Life Insurance Company and the Company (incorporated by reference to Exhibit 10(i) to the Company's Annual Report on Form 10-K for the year ended December 31, 1990). 10(f) -- Uncommitted Secured Transactional Line of Credit Facility letter agreement dated as of August 23, 1995, between Plains Marketing & Transportation Inc. and The First National Bank of Boston, et al. (incorporated by reference to Exhibit 10(m) of the Company's Annual Report on Form 10-K for the year ended 1995). 10(g) -- Uncommitted Secured Transactional Line of Credit Facility letter agreement dated August 23, 1995 between PMCT Inc. and The First National Bank of Boston, et al. (incorporated by reference to Exhibit 10(n) of the Company's Annual Report on Form 10-K for the year ended 1995). 10(h) -- Third Amended and Restated Credit Agreement dated as of April 11, 1996 among the Company and ING (U.S.) Capital Corporation, et al. (incorporated by reference to Exhibit 10(n) to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996). 10(i) -- First Amendment to Third Amended and Restated Credit Agreement dated as of December 16, 1996, among the Company and ING (U.S.) Capital Corporation, et al. 10(j) -- Amendment dated as of November 22, 1996 to Uncommitted Secured Transactional Line of Credit between Plains Marketing & Transportation Inc. and The First National Bank of Boston, et al. 10(k) -- Amendment dated as of November 22, 1996 to Uncommitted Secured Transactional Line of Credit between PMCT and The First National Bank of Boston, et al.
65 10(l)*-- Stock Option Agreement dated August 27, 1996 between the Company and Greg L. Armstrong. 10(m)*-- Stock Option Agreement dated August 27, 1996 between the Company and William C. Egg Jr. 10(n) -- First Amendment to the Company's 1992 Stock Incentive Plan. 11(a) -- Statement regarding computation of per share earnings for the year ended December 31, 1996. 11(b) -- Statement regarding computation of per share earnings for the year ended December 31, 1995. 11(c) -- Statement regarding computation of per share earnings for the year ended December 31, 1994. 21 -- Subsidiaries of the Company. 23(a) -- Consent of Price Waterhouse LLP. 23(b) -- Consent of Price Waterhouse LLP. 27 -- Financial Data Schedule
- ---------------- *A management contract or compensation plan. EX-10.D 2 THE COMPANY'S AMENDED AND RESTATED 401(K) PLAN 1 EXHIBIT 10(d) PLAINS RESOURCES INC. 401(k) PLAN 2 TABLE OF CONTENTS ARTICLE I -- DEFINITIONS Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1 Actual Contribution Ratio . . . . . . . . . . . . . . . . . . . . 1.2 Actual Deferral Percentage . . . . . . . . . . . . . . . . . . . 1.3 Actual Deferral Ratio . . . . . . . . . . . . . . . . . . . . . . 1.4 Administrative Committee . . . . . . . . . . . . . . . . . . . . . 1.5 Affiliated Employer . . . . . . . . . . . . . . . . . . . . . . . 1.6 Aggregation Group . . . . . . . . . . . . . . . . . . . . . . . . . 1.7 Annual Addition . . . . . . . . . . . . . . . . . . . . . . . . . 1.8 Annual Compensation . . . . . . . . . . . . . . . . . . . . . . . 1.9 Annuity Start Date . . . . . . . . . . . . . . . . . . . . . . . . 1.10 Beneficiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.11 Board of Directors . . . . . . . . . . . . . . . . . . . . . . . 1.12 Calendar Quarter . . . . . . . . . . . . . . . . . . . . . . . . 1.13 Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.14 Computation Period . . . . . . . . . . . . . . . . . . . . . . . . 1.15 Considered Compensation . . . . . . . . . . . . . . . . . . . . . 1.16 Contribution Percentage . . . . . . . . . . . . . . . . . . . . . 1.17 Defined Benefit Fraction . . . . . . . . . . . . . . . . . . . . 1.18 Defined Contribution Fraction . . . . . . . . . . . . . . . . . . 1.19 Determination Date . . . . . . . . . . . . . . . . . . . . . . . 1.20 Eligible Class . . . . . . . . . . . . . . . . . . . . . . . . . 1.21 Employee . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.22 Employer . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.23 Employer Contribution . . . . . . . . . . . . . . . . . . . . . . 1.24 Employer Matching Contribution . . . . . . . . . . . . . . . . . 1.25 Employer Matching Contribution Account . . . . . . . . . . . . . 1.26 Entry Date . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.27 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.28 Excess Aggregate 401(m) Contributions . . . . . . . . . . . . . . 1.29 Excess Amount . . . . . . . . . . . . . . . . . . . . . . . . . . 1.30 Excess 401(k) Contributions . . . . . . . . . . . . . . . . . . . 1.31 Family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.32 Family Member . . . . . . . . . . . . . . . . . . . . . . . . . 1.33 Five Percent Owner . . . . . . . . . . . . . . . . . . . . . . . 1.34 Highly Compensated Employee . . . . . . . . . . . . . . . . . . . . 1.35 Hour of Employment . . . . . . . . . . . . . . . . . . . . . . . 1.36 Individual Medical Account . . . . . . . . . . . . . . . . . . . 1.37 Investment Gain or Loss . . . . . . . . . . . . . . . . . . . . . 1.38 Key Employee . . . . . . . . . . . . . . . . . . . . . . . . . . 1.39 Leased Employee . . . . . . . . . . . . . . . . . . . . . . . . . 1.40 Limitation Year . . . . . . . . . . . . . . . . . . . . . . . . . 1.41
-i- 3 Matched Salary Deferral Contribution . . . . . . . . . . . . . . 1.42 Maximum Permissible Amount . . . . . . . . . . . . . . . . . . . 1.43 Member . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.44 Non-Highly Compensated Employee . . . . . . . . . . . . . . . . . 1.45 Non-Key Employee . . . . . . . . . . . . . . . . . . . . . . . . 1.46 Normal Retirement Age . . . . . . . . . . . . . . . . . . . . . . 1.47 Period of Service . . . . . . . . . . . . . . . . . . . . . . . . 1.48 Period of Severance . . . . . . . . . . . . . . . . . . . . . . . 1.49 Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.50 Plan Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.51 Projected Annual Benefit . . . . . . . . . . . . . . . . . . . . 1.52 Qualified Domestic Relations Order . . . . . . . . . . . . . . . 1.53 Qualified Nonelective Employer Contribution . . . . . . . . . . . . 1.54 Qualified Nonelective Employer Contribution Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.55 Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.56 Required Beginning Date . . . . . . . . . . . . . . . . . . . . . 1.57 Restoration Contribution . . . . . . . . . . . . . . . . . . . . 1.58 Retirement . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.59 Rollover Contribution . . . . . . . . . . . . . . . . . . . . . . 1.60 Rollover Contribution Account . . . . . . . . . . . . . . . . . . 1.61 Salary Deferral Contribution . . . . . . . . . . . . . . . . . . 1.62 Salary Deferral Contribution Account . . . . . . . . . . . . . . 1.63 Section 401(k) Contributions . . . . . . . . . . . . . . . . . . 1.64 Section 401(m) Contributions . . . . . . . . . . . . . . . . . . 1.65 Separation . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.66 Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.67 Sponsor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.68 Sponsor Stock . . . . . . . . . . . . . . . . . . . . . . . . . . 1.69 Top-Heavy Plan . . . . . . . . . . . . . . . . . . . . . . . . . 1.70 Total Permanent Disability . . . . . . . . . . . . . . . . . . . 1.71 Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.72 Trust Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.73 Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.74 Valuation Date . . . . . . . . . . . . . . . . . . . . . . . . . 1.75 Welfare Benefit Fund . . . . . . . . . . . . . . . . . . . . . . 1.76 ARTICLE II - SERVICE Years of Active Service Credit for Vesting . . . . . . . . . . . . 2.1 When An Employee Severs Service . . . . . . . . . . . . . . . . . . 2.2 Periods of Severance of Five Years or More. . . . . . . . . . . . . 2.3 Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4 Employment Records Conclusive . . . . . . . . . . . . . . . . . . . 2.5 Coverage of Certain Previously Excluded Employees . . . . . . . . . . . . . . . . . . . . . . . . . 2.6 Service Credit Required under Federal Law. . . . . . . . . . . . . 2.7
-ii- 4 ARTICLE III - ELIGIBILITY AND PARTICIPATION Eligibility Requirements . . . . . . . . . . . . . . . . . . . . . 3.1 Eligibility Upon Reemployment . . . . . . . . . . . . . . . . . . . 3.2 Frozen Participation . . . . . . . . . . . . . . . . . . . . . . . 3.3 ARTICLE IV - CONTRIBUTIONS Salary Deferral Contributions . . . . . . . . . . . . . . . . . . . 4.1 Employer Matching Contributions . . . . . . . . . . . . . . . . . . 4.2 Rollover Contributions and Plan-to-Plan Transfers . . . . . . . . . 4.3 Qualified Nonelective Employer Contributions . . . . . . . . . . . 4.4 Restoration Contributions . . . . . . . . . . . . . . . . . . . . . 4.5 Limit upon Salary Deferral Contributions . . . . . . . . . . . . . 4.6 Actual Deferral Percentage Test . . . . . . . . . . . . . . . . . . 4.7 Actual Deferral Percentage Fail Safe Provision . . . . . . . . . . 4.8 Special Actual Deferral Percentage Rules For Family Members . . . . . . . . . . . . . . . . . . . . . . . . . . 4.9 Contribution Percentage Test . . . . . . . . . . . . . . . . . . 4.10 Contribution Percentage Fail Safe Provision . . . . . . . . . . . 4.11 Special Contribution Percentage Rules For Family Members . . . . . . . . . . . . . . . . . . . . . . . . . 4.12 Income Allocable to Excess 401(k) Contributions and Excess Aggregate 401(m) Contributions . . . . . . . . 4.13 Additional Required Test if Alternative Compliance is Used . . . . . . . . . . . . . . . . . . . . . . . . . 4.14 Nondeductible Contributions Prohibited . . . . . . . . . . . . . 4.15 Form of Payment of Contributions . . . . . . . . . . . . . . . . 4.16 Deadline for Payment of Employer Contributions . . . . . . . . . 4.17 ARTICLE V - ALLOCATIONS AND VALUATION OF ACCOUNTS Information Statements from Employer . . . . . . . . . . . . . . . 5.1 Allocation of Salary Deferral Contribution . . . . . . . . . . . . 5.2 Allocation of Employer Matching Contribution . . . . . . . . . . . 5.3 Allocation of Qualified Nonelective Employer Contribution . . . . . . . . . . . . . . . . . . . . . . . . 5.4 Allocation of Dividends on Sponsor Stock . . . . . . . . . . . . . 5.5 Sponsor Stock Splits . . . . . . . . . . . . . . . . . . . . . . 5.6 Valuation of Accounts . . . . . . . . . . . . . . . . . . . . . . . 5.7 Allocation of Forfeitures . . . . . . . . . . . . . . . . . . . . . 5.8 Restoration of Forfeited Amounts . . . . . . . . . . . . . . . . . 5.9 No Vesting Unless Otherwise Prescribed . . . . . . . . . . . . . 5.10
-iii- 5 ARTICLE VI - LIMITATIONS ON ALLOCATIONS Basic Limitation . . . . . . . . . . . . . . . . . . . . . . . . . 6.1 Estimation of Maximum Permissible Amount . . . . . . . . . . . . . 6.2 Attribution of Excess Amounts . . . . . . . . . . . . . . . . . . . 6.3 Treatment of Excess Amounts . . . . . . . . . . . . . . . . . . . . 6.4 Members Participating in Qualified Defined Benefit Plan . . . . . . 6.5 ARTICLE VII - TOP-HEAVY REQUIREMENTS Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1 Top-Heavy Test . . . . . . . . . . . . . . . . . . . . . . . . . . 7.2 Vesting Restrictions if Plan Becomes Top-Heavy . . . . . . . . . . 7.3 Minimum Contribution if Plan Becomes Top-Heavy . . . . . . . . . . 7.4 Disregard of Government Programs . . . . . . . . . . . . . . . . . 7.5 Coverage Under Multiple Top-Heavy Plans . . . . . . . . . . . . . . 7.6 Restrictions if Plan Becomes Super Top-Heavy . . . . . . . . . . . 7.7 ARTICLE VIII - BENEFITS AND EVENTS ENTITLING MEMBERS TO DISTRIBUTION OF BENEFITS Valuation of Accounts for Withdrawals and Distributions . . . . . . 8.1 Death, Retirement, or Total Permanent Disability . . . . . . . . . 8.2 Severance Benefit . . . . . . . . . . . . . . . . . . . . . . . . . 8.3 Forfeiture on Termination of Participation . . . . . . . . . . . . 8.4 Withdrawal of Rollover Contributions . . . . . . . . . . . . . . . 8.5 Withdrawal upon Attainment of Normal Retirement Age . . . . . . . . 8.6 Withdrawal for Financial Hardship . . . . . . . . . . . . . . . . . 8.7 Loans to Members . . . . . . . . . . . . . . . . . . . . . . . . . 8.8 Receipt of Domestic Relations Order . . . . . . . . . . . . . . . . 8.9 Distributions Upon Disposition of Assets or a Subsidiary . . . . . 8.10 ARTICLE IX - DISTRIBUTION OF BENEFITS Form of Distribution . . . . . . . . . . . . . . . . . . . . . . .9.1 Information Provided to Members . . . . . . . . . . . . . . . . . . 9.2 Automatic Payment of Small Amounts . . . . . . . . . . . . . . . . 9.3 Time of Distribution . . . . . . . . . . . . . . . . . . . . . . . 9.4 Member Consent to Early Distributions . . . . . . . . . . . . . . . 9.5 Compliance with Statutory Requirements . . . . . . . . . . . . . . 9.6 Qualified Domestic Relations Orders . . . . . . . . . . . . . . . . 9.7 Distributions to Disabled . . . . . . . . . . . . . . . . . . . . . 9.8 Designation of Beneficiary . . . . . . . . . . . . . . . . . . . . 9.9 No Duplication of Benefits . . . . . . . . . . . . . . . . . . . 9.10 Missing Members or Beneficiaries . . . . . . . . . . . . . . . . 9.11
-iv- 6 Claims Procedure . . . . . . . . . . . . . . . . . . . . . . . . 9.12 Claims Appeal Procedure . . . . . . . . . . . . . . . . . . . . . 9.13 Direct Rollover Option for Distributions on or After January 1, 1993 . . . . . . . . . . . . . . . . . . . 9.14 ARTICLE X - ADMINISTRATIVE COMMITTEE Appointment, Term, Resignation, and Removal . . . . . . . . . . . 10.1 Powers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.2 Organization . . . . . . . . . . . . . . . . . . . . . . . . . . 10.3 Quorum and Majority Action . . . . . . . . . . . . . . . . . . . 10.4 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.5 Disqualification of Administrative Committee Members . . . . . . 10.6 Disclosure to Members . . . . . . . . . . . . . . . . . . . . . . 10.7 Standard of Performance . . . . . . . . . . . . . . . . . . . . . 10.8 Liability of Administrative Committee and Liability Insurance . . . . . . . . . . . . . . . . . . . 10.9 Bonding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.10 Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . 10.11 Persons Serving in Dual Fiduciary Roles . . . . . . . . . . . . . 10.12 Administrator . . . . . . . . . . . . . . . . . . . . . . . . . . 10.13 Named Fiduciary . . . . . . . . . . . . . . . . . . . . . . . . . 10.14 Standard of Judicial Review of Administrative Committee Actions . . . . . . . . . . . . . . . . . . . . 10.15 Indemnification of Administrative Committee by the Sponsor . . . . . . . . . . . . . . . . . . . . . . . 10.16 ARTICLE XI - INVESTMENT ELECTIONS Investment Funds Established . . . . . . . . . . . . . . . . . . 11.1 Election Procedures Established . . . . . . . . . . . . . . . . . 11.2 ARTICLE XII - VOTING OF SPONSOR STOCK AND TENDER OFFERS Voting of Sponsor Stock . . . . . . . . . . . . . . . . . . . . . 12.1 Tender Offers . . . . . . . . . . . . . . . . . . . . . . . . . 12.2 Shares Credited . . . . . . . . . . . . . . . . . . . . . . . . . 12.3 Conversion . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.4 Named Fiduciary . . . . . . . . . . . . . . . . . . . . . . . . . 12.5 ARTICLE XIII - ADOPTION OF PLAN BY OTHER EMPLOYERS Adoption Procedure . . . . . . . . . . . . . . . . . . . . . . . 13.1 No Joint Venture Implied . . . . . . . . . . . . . . . . . . . . 13.2 All Trust Assets Available to Pay All Benefits . . . . . . . . . 13.3 Qualification a Condition Precedent to Adoption and Continued Participation . . . . . . . . . . . . . . . . . 13.4
-v- 7 ARTICLE XIV - AMENDMENT AND TERMINATION Sponsor's Right to Amend . . . . . . . . . . . . . . . . . . . . 14.1 Limitations on Right to Amend . . . . . . . . . . . . . . . . . . 14.2 Retroactive Amendments to Meet Labor or Tax Requirements . . . . 14.3 Termination of Plan . . . . . . . . . . . . . . . . . . . . . . . 14.4 Vesting upon Termination, Partial Termination, and Suspension or Discontinuance of Employer Contributions . . 14.5 Plan Mergers . . . . . . . . . . . . . . . . . . . . . . . . . . 14.6 ARTICLE XV - MISCELLANEOUS No Reversionary Interest . . . . . . . . . . . . . . . . . . . . 15.1 Plan Does Not Constitute an Employment Contract . . . . . . . . . 15.2 Benefits Provided Solely by Trust . . . . . . . . . . . . . . . . 15.3 Spendthrift Clause . . . . . . . . . . . . . . . . . . . . . . . 15.4 Governing Laws; Parties to Legal Actions . . . . . . . . . . . . 15.5 Plan Document Controlling . . . . . . . . . . . . . . . . . . . . 15.6 Cross References . . . . . . . . . . . . . . . . . . . . . . . . 15.7 Trustee's Fees and Expenses . . . . . . . . . . . . . . . . . . . 15.8
-vi- 8 PLAINS RESOURCES INC. 401(k) PLAN THIS AGREEMENT adopted by Plains Resources Inc. (the "Sponsor"), Calumet Florida, Inc., PLX Ingleside Inc., Plains Illinois Inc. and Stocker Resources, Inc., W I T N E S S E T H: WHEREAS, effective January 1, 1987, the Sponsor established the Plains Resources Inc. 401(k) Plan (the "Plan") which is intended to be a profit sharing plan that satisfies the requirements of Section 401(a) of the Internal Revenue Code of 1986, as amended; and WHEREAS, the parties hereto desire to amend and restate the Plan; NOW, THEREFORE, the Plan is hereby amended and restated in its entirety as set forth below. 9 ARTICLE I DEFINITIONS As used herein the words and phrases next below set out shall have the meaning next below attributed to them unless the context in which any such word or phrase appears reasonably requires a broader, narrower, or different meaning: 1.1 ACCOUNT. "Account" shall mean any of the ledger accounts pertaining to a Member or former Member that are maintained by the Administrative Committee to reflect his interest in the Trust Fund. The Administrative Committee will establish the Accounts specifically described in the Plan and any additional Accounts that the Administrative Committee considers to be necessary in order to reflect the entire interest of the Member or former Member in the Trust Fund. Each of the Accounts will reflect any contributions, forfeitures, and Investment Gain or Loss allocated to the Account. 1.2 ACTUAL CONTRIBUTION RATIO. "Actual Contribution Ratio" shall mean the ratio of Section 401(m) Contributions actually paid into the Trust on behalf of an Employee for a Plan Year to the Employee's Annual Compensation for the same Plan Year. 1.3 ACTUAL DEFERRAL PERCENTAGE. "Actual Deferral Percentage" shall mean, for a specified group of Employees for a Plan Year, the average of the ratios (calculated separately for each Employee in the group) of the amount of Section 401(k) Contributions actually paid into the Trust on behalf of the Employee for the Plan Year to the Employee's Annual Compensation for the Plan Year. Solely for this purpose all Section 401(k) Contributions and Annual Compensation of all eligible Family Members will be attributed to each Highly Compensated Employee. 1.4 ACTUAL DEFERRAL RATIO. "Actual Deferral Ratio" shall mean the ratio of Section 401(k) Contributions actually paid into the Trust on behalf of an Employee for a Plan Year to the Employee's Annual Compensation for the same Plan Year. 1.5 ADMINISTRATIVE COMMITTEE. "Administrative Committee" shall mean the committee appointed by the Board of Directors to administer the Plan. 1.6 AFFILIATED EMPLOYER. "Affiliated Employer" shall mean the Employer and any other business organization required to be aggregated with the Employer under Sections 414(b), 414(c), 414(m), or 414(o) of the Code and the regulations promulgated thereunder. In determining whether a business organization is an Affiliated Employer for purposes of Article VII (including any defined term when used in Article VII), the modification required under Section 415(h) of the Code shall be given effect in applying Sections 414(b) and 414(c) of the Code. 1.7 AGGREGATION GROUP. "Aggregation Group" shall mean (a) each plan of any Affiliated Employer in which a Key Employee is a participant and (b)each other plan of any Affiliated Employer which enables any plan described in clause (a) to meet the requirements of either Section 401(a)(4) or 410 of the Code. Any Employer may treat a plan not required to be included in the Aggregation I-1 10 Group as being a part of the group if the group would continue to meet the requirements of Sections 401(a)(4) and 410 of the Code with that plan being taken into account. 1.8 ANNUAL ADDITION. "Annual Addition" shall mean the sum of the following amounts credited to a Member's Account for the Limitation Year: (a) Employer Contributions; (b) after-tax Employee contributions; (c) forfeitures; (d) amounts allocated to an Individual Medical Account; (e) amounts derived from contributions paid or accrued, which are attributable to post-retirement medical benefits, allocated to the separate account of a Key Employee under a Welfare Benefit Fund; and (f) any Excess Amount applied in the Limitation Year to reduce Employer Contributions. 1.9 ANNUAL COMPENSATION. "Annual Compensation" shall mean for purposes of Section 415 of the Code and Section 7.1 of the Plan, as to each Employee's wages as defined in Section 3401(a) of the Code for purposes of income tax withholding at the source but determined without regard to any rules that limit the remuneration included in wages based on the nature or location of the employment or the services performed. All Annual Compensation, without regard to its definition, in excess of $150,000.00 (as adjusted by the Secretary of the Treasury) shall be disregarded. If an Employee is a member of the Family of a Five Percent Owner or of a Highly Compensated Employee in the group consisting of the 10 Highly Compensated Employees paid the greatest Annual Compensation during the Plan Year, the Employee will not be considered a separate Employee and any Annual Compensation paid to him will be treated as if it were paid to or on behalf of the Five Percent Owner or Highly Compensated Employee. If as a result of the application of this rule, the adjusted $150,000.00 limitation is exceeded, the limitation shall be prorated among the affected Members in proportion to each Member's Annual Compensation as determined under this Section prior to the application of this limitation. If the Plan Year is ever less than twelve months (because of a change in the Plan Year) the $150,000.00 limitation (as adjusted by the Secretary of Treasury) will be prorated by multiplying the limitation by a fraction, the numerator of which is the number of months in the Plan Year, and the denominator of which is 12. 1.10 ANNUITY STARTING DATE. "Annuity Starting Date" shall mean the first day on which all events have occurred that entitle the Member to a distribution. 1.11 BENEFICIARY. "Beneficiary: shall mean any person(s), trust(s), or other entity(ies), including the Member's or former Member's estate, entitled to receive the benefits payable hereunder upon the Member's or former Member's death. 1.12 BOARD OF DIRECTORS. "Board of Directors" shall mean the board of directors or the executive committee of the board of directors of the Sponsor. 1.13 CALENDAR QUARTER. "Calendar Quarter" shall mean each of the three-month periods ending March 31, June 30, September 30, and December 31 of each calendar year. 1.14 CODE. "Code" shall mean the Internal Revenue Code of 1986, as amended. 1.15 COMPUTATION PERIOD. "Computation Period" shall mean a period of 12 consecutive months used to determine an Employee's eligibility or vesting. I-2 11 1.16 CONSIDERED COMPENSATION. "Considered Compensation" shall mean, as to each Employee, that Employee's Annual Compensation modified by including elective contributions under a cafeteria plan described in Section 125 of the Code and elective contributions to any plan qualified under Section 401(k), 408(k) or 403(b) of the Code, and modified further by excluding the following items (even if includable in gross income): reimbursements or other expense allowances, fringe benefits (cash and noncash), moving expenses, deferred compensation and welfare benefits. Considered Compensation in excess of $150,000.00 (as adjusted by the Secretary of the Treasury) shall be disregarded. If an Employee is a member of the Family of a Five Percent Owner or of a Highly Compensated Employee in the group consisting of the 10 Highly Compensated Employees paid the greatest Considered Compensation during the Plan Year, the Employee will not be considered a separate Employee and any Considered Compensation paid to him will be treated as if it were paid to or on behalf of the Five Percent Owner or Highly Compensated Employee. If as a result of the application of this rule, the adjusted $150,000.00 limitation is exceeded, the limitation shall be prorated among the affected Members in proportion to each Member's Considered Compensation as determined under this Section prior to the application of this limitation. If the Plan Year is ever less than twelve months (because of a change in the Plan Year) the $150,000.00 limitation (as adjusted by the Secretary of Treasury) will be prorated by multiplying the limitation by a fraction, the numerator of which is the number of months in the Plan Year, and the denominator of which is 12. 1.17 CONTRIBUTION PERCENTAGE. "Contribution Percentage" shall mean, for a specified group of Employees for a Plan Year, the average of the ratios (calculated separately for each Employee in the group) of the amount of Section 401(m) Contributions actually paid into the Trust on behalf of the Employee for the Plan Year to the Employee's Annual Compensation for the Plan Year. Solely for this purpose all Section 401(m) Contributions and Annual Compensation of all eligible Family Members will be attributed to each Highly Compensated Employee. 1.18 DEFINED BENEFIT FRACTION. "Defined Benefit Fraction" shall mean a fraction, the numerator of which is the sum of the Member's Projected Annual Benefits under all the defined benefit plans (whether or not terminated) maintained by any Affiliated Employer; and the denominator of which is the lesser of 125 percent of the dollar limitation in effect for the Limitation Year under Section 415(b)(1)(A) of the Code or 140 percent of the Highest Average Compensation, taking into account any adjustments required under Section 415(b) of the Code. 1.19 DEFINED CONTRIBUTION FRACTION. "Defined Contribution Fraction" shall mean a fraction, the numerator of which is the sum of the Annual Additions to the Member's account under all the defined contribution plans (whether or not terminated) maintained by any Affiliated Employer for the current and all prior Limitation Years (including the Annual Additions attributable to the Member's nondeductible employee contributions to all defined benefit plans, whether or not terminated, maintained by any Affiliated Employer, and the Annual Additions attributable to all Welfare Benefit Funds and Individual Medical Accounts), and the denominator of which is the sum of the maximum aggregate amounts for the current and all prior Limitation Years of service with any Affiliated Employer (regardless of whether a defined contribution plan was maintained by any Affiliated Employer). The maximum aggregate amount in any Limitation Year is the lesser of 125 I-3 12 percent of the dollar limitation in effect under Section 415(c)(1)(A) of the Code or 35 percent of the Member's Annual Compensation for such year. 1.20 DETERMINATION DATE. "Determination Date" shall mean, for a given Plan Year, the last day of the preceding Plan Year, or in the case of the first Plan Year, the last day of that Plan Year. 1.21 ELIGIBLE CLASS. "Eligible Class" shall mean all Employees who are employed by the Employer, regardless of employment classification, except that (a) Leased Employees and (b) Employees who are nonresident aliens and who receive no earned income which constitutes income from sources within the United States (within the meaning of Section 861(a)(3) of the Code) shall be excluded; provided, however, that the Administrative Committee may designate any such nonresident alien Employee as a member of the Eligible Class for such period as the Administrative Committee may, in its absolute discretion, determine. 1.22 EMPLOYEE. "Employee" shall mean every person who is (a) a common- law employee of any Employer, or (b) a Leased Employee with respect to the Employer. 1.23 EMPLOYER. "Employer" shall mean the Sponsor and any other business organization that adopts the Plan in accordance with applicable provisions thereof. 1.24 EMPLOYER CONTRIBUTION. "Employer Contribution" shall mean the aggregate of the Employer's Salary Deferral Contribution, Employer Matching Contribution, Qualified Nonelective Employer Contribution, and Restoration Contribution. 1.25 EMPLOYER MATCHING CONTRIBUTION. "Employer Matching Contribution" shall mean the Employer's contribution made pursuant to the provisions of Section 4.3. 1.26 EMPLOYER MATCHING CONTRIBUTION ACCOUNT. "Employer Matching Contribution Account" shall mean the ledger account maintained by the Administrative Committee for each Member which reflects the portion of the Employer Matching Contribution allocated to the Member and any Investment Gain or Loss attributable to such contributions. 1.27 ENTRY DATE. "Entry Date" shall mean the first day of each Calendar Quarter. 1.28 ERISA. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time. 1.29 EXCESS AGGREGATE 401(M) CONTRIBUTIONS. "Excess Aggregate 401(m) Contributions" shall mean, with respect to any Plan Year, the excess of (a) the aggregate amount of Section 401(m) Contributions actually paid into the Trust on behalf of Highly Compensated Employees for the Plan Year over (b) the maximum amount of those contributions permitted under the limitations set out in the first sentence of Section 5.9 of the Plan. To calculate the amount of Excess Aggregate 401(m) Contributions, the Actual Contribution Ratio of the Highly Compensated Employee with the highest Actual Contribution Ratio shall be reduced to equal the ratio of the Highly Compensated Employee with the next highest Actual Contribution Ratio. However, if a lesser reduction would enable the I-4 13 Plan to pass the test, only that lesser reduction shall be made. This leveling process shall be repeated until the Contribution Percentage test is satisfied. 1.30 EXCESS AMOUNT. "Excess Amount" shall mean the excess of the Annual Additions credited to the Member's Account for the Limitation Year over the Maximum Permissible Amount. 1.31 EXCESS 401(K) CONTRIBUTIONS. "Excess 401(k) Contributions" shall mean, with respect to any Plan Year, the excess of (a) the aggregate amount of Section 401(k) Contributions actually paid into the Trust on behalf of Highly Compensated Employees for the Plan Year over (b) the maximum amount of those contributions permitted under the limitations set out in the first sentence of Section 5.6 of the Plan. To calculate the amount of Excess 401(k) Contributions, the Actual Deferral Ratio of the Highly Compensated Employee with the highest Actual Deferral Ratio shall be reduced to equal the ratio of the Highly Compensated Employee with the next highest Actual Deferral Ratio. However, if a lesser reduction would enable the Plan to pass the test, only that lesser reduction shall be made. This leveling process shall be repeated until the Actual Deferral Percentage test is satisfied. 1.32 FAMILY. "Family" shall mean with respect to any Employee, the Employee's spouse and any lineal descendants of the Employee who have not attained age 19 before the close of the Plan Year. 1.33 FAMILY MEMBER. "Family Member" shall mean the spouse and lineal ascendants or descendants and the spouses of those lineal ascendants or descendants of a Five Percent Owner or of a Highly Compensated Employee who is one of the 10 employees receiving the greatest Annual Compensation from the Affiliated Employers during the Plan Year. 1.34 FIVE PERCENT OWNER. "Five Percent Owner" shall mean an Employee who is a five percent owner as defined in Section 416(i) of the Code. 1.35 HIGHLY COMPENSATED EMPLOYEE. "Highly Compensated Employee" shall mean an Employee or an employee of an Affiliated Employer who during the Plan Year or the preceding Plan Year (a) was at any time a Five Percent Owner, (b) received Annual Compensation from the Affiliated Employers in excess of $75,000.00 (as adjusted from time to time by the Secretary of the Treasury), (c) received Annual Compensation from the Affiliated Employers in excess of $50,000.00 (as adjusted from time to time by the Secretary of the Treasury) and was within the 20% of employees of the Affiliated Employers who were the highest paid for the Plan Year, or (d) was at any time an officer and received Annual Compensation from the Affiliated Employers in excess of 50% of the annual addition limitation of Section 415(b)(1)(A) of the Code. For this purpose no more than 50 employees or, if lesser, the greater of three employees or 10% of the employees shall be treated as officers, excluding those Employees who may be excluded in determining the top paid group. If no officer has Annual Compensation in excess of 50% of the annual limitation of Section 415(b)(1)(A) of the Code, the highest paid officer for the year shall be treated as a Highly Compensated Employee. If a Member did not fall within (b), (c) or (d) without regard to this sentence for the Plan Year preceding the Plan Year of the determination, he will not be treated as falling within (b), (c) or (d) for the Plan Year of the determination unless he is a member of the group I-5 14 consisting of the 100 employees paid the greatest Annual Compensation during that Plan Year. For this purpose the determination of the top paid 100 employees will be made using Section 414(q) of the Code and its Regulations. A former Member will be treated as a Highly Compensated Employee if he was a Highly Compensated Employee when he severed Service or he was a Highly Compensated Employee at any time after attaining age 55. 1.36 HOUR OF EMPLOYMENT. "Hour of Employment" shall mean each hour (a) that an Employee is either directly or indirectly paid or entitled to payment by the Employer or Affiliated Employer for the performance of duties; (b) that an Employee is either directly or indirectly paid or entitled to payment by the Employer or Affiliated Employer for a period of time during which no duties are performed (whether or not the employment relationship has terminated) due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty, or leave of absence; or (c) that an Employee is paid or entitled to payment of back pay, irrespective of mitigation of damages, which is awarded or agreed to by the Employer or Affiliated Employer. The same Hours of Employment shall not be credited both under clauses (a) or (b) and (c). For purposes of clauses (b) and (c) no more than 501 Hours of Employment shall be credited to an Employee due to any single continuous period during which he performs no duties (whether or not the period occurs in a single Computation Period). Hours of Employment shall not be credited if they are paid for under a plan maintained solely to comply with workmen's compensation, unemployment compensation or disability insurance laws. Hours of Employment shall not be credited if they are paid for solely to reimburse an Employee for medical or medically related expenses incurred by him. The number of Hours of Employment credited as Active Service shall be the number of actual Hours of Employment performed by the Employee, based upon the records of the Employer. If the Employer's records are inadequate and the Employee would be required to be credited with an Hour of Employment for a payroll period under the foregoing provisions of this Section, the Employee will be credited with 10 Hours of Employment if he is customarily paid on a daily basis, 45 Hours of Employment if he is customarily paid on a weekly basis, 90 Hours of Employment if he is customarily paid on a bi-weekly basis, 95 Hours of Employment if he is customarily paid on a semi-monthly basis, and 190 Hours of Employment if he is customarily paid on a monthly basis. If an Employee receives compensation for which no duties were performed that was not based upon units of time, the Hours of Employment to be credited will be calculated under the method set forth in Department of Labor Regulation Section 2530.200b-2(b)(2). 1.37 INDIVIDUAL MEDICAL ACCOUNT. "Individual Medical Account" shall mean an individual medical account, as defined in Section 415(l)(2) of the Code, maintained by any Affiliated Employer. 1.38 INVESTMENT GAIN OR LOSS. "Investment Gain or Loss" shall mean the sum of the income, appreciation, and realized gains on Trust Fund assets, minus the sum of expenses, depreciation, and realized losses on Trust Fund assets. I-6 15 1.39 KEY EMPLOYEE. "Key Employee" shall mean an individual who at any time during the Plan Year containing the Determination Date or any of the four preceding Plan Years is (a) an officer of any Affiliated Employer whose Annual Compensation is greater than 50 percent of the amount in effect under Section 415(b)(1)(A) of the Code for the Plan Year, (b) one of the Employees having Annual Compensation greater than the limitation in effect under Section 415(c)(1)(A) of the Code for the Plan Year and owning (or considered as owning within the meaning of Section 318 of the Code) one of the 10 largest interests in any Affiliated Employer, treated separately, (c) a Five Percent Owner of any Affiliated Employer, treated separately, or (d) a one percent owner of any Affiliated Employer, treated separately, having Annual Compensation of more than $150,000.00. No more than 50 Employees or, if lesser, the greater of three Employees or 10 percent of the Employees, will be treated as officers. The rules of Section 416(i) of the Code will be applied in determining percentage of ownership. If two or more Employees have the same interest in an Affiliated Employer, the Employee with the greater Annual Compensation from the Affiliated Employer will be treated as having the larger interest. 1.40 LEASED EMPLOYEE. "Leased Employee" shall mean any person (a) who is not a common law employee of the recipient and (b) who (pursuant to an agreement between an Affiliated Employer and any other person) has performed services for the Employer (or for the Employer and related persons determined in accordance with Section 414(n)(6) of the Code) on a substantially full time basis for a period of at least one year, and such services are of a type historically performed by employees in the business field of the recipient. 1.41 LIMITATION YEAR. "Limitation Year" shall mean the Plan Year. All qualified plans maintained by any Affiliated Employer must use the same Limitation Year. If the Limitation Year is amended to a different 12-consecutive month period, the new Limitation Year must begin on a date within the Limitation Year in which the amendment is made. 1.42 MATCHED SALARY DEFERRAL CONTRIBUTION. "Matched Salary Deferral Contribution" means that portion of the Salary Deferral Contribution that the Board of Directors determines to match from time to time in its sole discretion. 1.43 MAXIMUM PERMISSIBLE AMOUNT. "Maximum Permissible Amount" shall mean the lesser of (a) the dollar limitation in effect under Section 415(c)(1)(A) of the Code for the Limitation Year, or (b) 25 percent of the Member's Annual Compensation for the Limitation Year. The Annual Compensation limitation referred to in clause (b) of the immediately preceding sentence shall not apply to any contribution for medical benefits (within the meaning of Section 401(h) or Section 419(A)(f)(2) of the Code) that is otherwise treated as an Annual Addition under Section 415(l)(1) or Section 419(A)(d)(2) of the Code. If a short Limitation Year is created because of an amendment changing the Limitation Year to a different 12-consecutive month period, the Maximum Permissible Amount shall not exceed the dollar limitation in effect under Section 415(c)(1)(A) of the Code multiplied by a fraction, the numerator of which is the number of months in the short Limitation Year, and the denominator of which is 12. 1.44 MEMBER. "Member" shall mean a person who qualifies as such under Article III. I-7 16 1.45 NON-HIGHLY COMPENSATED EMPLOYEE. "Non-Highly Compensated Employee" shall mean any Employee who is not a Highly Compensated Employee. 1.46 NON-KEY EMPLOYEE. "Non-Key Employee" shall mean any Employee who is not a Key Employee. 1.47 NORMAL RETIREMENT AGE. "Normal Retirement Age" shall mean the later of the time a Member attains age 65 or the fifth anniversary of the date he commenced participation in the Plan. 1.48 PERIOD OF SERVICE. "Period of Service" shall mean a period of employment with an Employer or Affiliated Employer, which commences on the day on which an Employee performs his initial Hour of Employment or performs his initial Hour of Employment upon returning to the employ of the Employer or an Affiliated Employer, whichever is applicable, and ends on the date the Employee severs Service. 1.49 PERIOD OF SEVERANCE. "Period of Severance" shall mean the period of time commencing on the date an Employee severs Service and ending on the date the Employee again performs an Hour of Employment. 1.50 PLAN. "Plan" shall mean the Plains Resources, Inc. 401(k) Plan set forth in this document and all subsequent amendments hereto. 1.51 PLAN YEAR. "Plan Year" shall mean the 12-month annual accounting period of the Plan, which shall end on the last day of December. 1.52 PROJECTED ANNUAL BENEFIT. "Projected Annual Benefit" shall mean the annual retirement benefit (adjusted to an actuarially equivalent straight life annuity if such benefit is expressed in a form other than a straight life annuity or Qualified Joint and Survivor Annuity) to which the Member would be entitled under the terms of the Plan, assuming (a) the Member will continue employment until Normal Retirement Age under the Plan (or current age, if later), and (b) the Member's Annual Compensation for the current Limitation Year and all other relevant factors used to determine benefits under the Plan will remain constant for all future Limitation Years. 1.53 QUALIFIED DOMESTIC RELATIONS ORDER. "Qualified Domestic Relations Order" shall mean any order determined by the Administrative Committee to be a qualified domestic relations order within the meaning of Section 414(p) of the Code. 1.54 QUALIFIED NONELECTIVE EMPLOYER CONTRIBUTION. "Qualified Nonelective Employer Contribution" shall mean the Employer's Contribution, if any, made pursuant to the provisions of Section 4.4 as a means of passing the Actual Deferral Percentage Test or the Actual Contribution Percentage Test. 1.55 QUALIFIED NONELECTIVE EMPLOYER CONTRIBUTION ACCOUNT. "Qualified Nonelective Employer Contribution Account" shall mean the ledger account maintained by the Administrative Committee for each Member which reflects the portion of the Qualified Nonelective Employer I-8 17 Contributions allocated to the Member, and any Investment Gain or Loss attributable to such contributions. 1.56 REGULATION. "Regulation" shall mean the Internal Revenue Service regulation specified, as it may be changed from time to time. 1.57 REQUIRED BEGINNING DATE. "Required Beginning Date" shall mean: (a) Except as otherwise provided in this Section, April 1 of the calendar year following the calendar year in which the Member or former Member attains age 70 1/2; (b) In the case of an individual who attained age 70 1/2 before January 1, 1988, and is not a Five Percent Owner, April 1 of the calendar year following the later of (i) the calendar year in which the individual attained age 70 1/2, or (ii) the calendar year in which occurs the individual's Separation; and (c) In the case of an individual who attained age 70 1/2 before January 1, 1988, and is a Five Percent Owner, April 1 of the calendar year following the later of (i) the calendar year in which the employee attained age 70 1/2, or (ii) the earlier of (A) the calendar year with or within which ends the Plan Year in which the individual becomes a Five Percent Owner, or (B) the calendar year in which occurs the individual's Separation. 1.58 RESTORATION CONTRIBUTION. "Restoration Contribution" shall mean the Employer's contribution, if any, made pursuant to the provisions of Section 4.5. 1.59 RETIREMENT. "Retirement" shall mean a Member's Separation upon or after his attainment of his Normal Retirement Age. 1.60 ROLLOVER CONTRIBUTION. "Rollover Contribution" shall mean the amount contributed by a Member of this Plan which consists of any part of an eligible rollover distribution (as defined in Section 402 of the Code) from a qualified employee trust described in Section 401(a) of the Code. 1.61 ROLLOVER CONTRIBUTION ACCOUNT. "Rollover Contribution Account" shall mean the ledger account maintained by the Administrative Committee for each Member which reflects the Rollover Contributions made by the Member, and any Investment Gain or Loss attributable to such contributions. 1.62 SALARY DEFERRAL CONTRIBUTION. "Salary Deferral Contribution" shall mean the Employer's contribution, if any, made pursuant to the provisions of Section 4.2. 1.63 SALARY DEFERRAL CONTRIBUTION ACCOUNT. "Salary Deferral Contribution Account" shall mean the ledger account maintained by the Administrative Committee for each Member which reflects the portion of the Salary Deferral Contributions allocated to the Member, and any Investment Gain or Loss attributable to such contributions. I-9 18 1.64 SECTION 401(K) CONTRIBUTIONS. "Section 401(k) Contributions" shall mean the sum of Salary Deferral Contributions made on behalf of the Member during the Plan Year, and Qualified Nonelective Employer Contributions that the Employer elects to have treated as Section 401(k) Contributions pursuant to Section 401(k)(3)(d)(ii) of the Code. 1.65 SECTION 401(M) CONTRIBUTIONS. "Section 401(m) Contributions" shall mean the sum of Employer Matching Contributions made on behalf of the Member during the Plan Year and other amounts that the Employer elects to have treated as Section 401(m) Contributions pursuant to Section 401(m)(3)(B) of the Code. However, Employer Matching Contributions and Salary Deferral Contributions that the Employer could otherwise elect to have treated as Section 401(m) Contributions are not Section 401(m) Contributions to the extent that they are used to enable the Plan to satisfy the minimum contribution requirements of Section 416 of the Code. 1.66 SEPARATION. "Separation" shall mean an individual's termination of employment with an Affiliated Employer without commencing or continuing employment with any other Affiliated Employer. 1.67 SERVICE. "Service" shall mean the period or periods that a person is paid or is entitled to payment for performance of duties with the Employer or an Affiliated Employer. 1.68 SPONSOR. "Sponsor" shall mean Plains Resources, Inc., a Delaware corporation. 1.69 SPONSOR STOCK. "Sponsor Stock" shall mean the common stock of the Sponsor, $.10 par value. 1.70 TOP-HEAVY PLAN. "Top-Heavy Plan" shall mean any plan which has been determined to be top-heavy under the test described in Article VIII. 1.71 TOTAL PERMANENT DISABILITY. "Total Permanent Disability" shall mean a mental or physical disability which, in the opinion of a physician selected by the Administrative Committee, will prevent a Member from engaging in any occupation for wage or profit for which the Employee is reasonably suited by training, education or experience, which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months, and which: (a) was not contracted, suffered, or incurred while such Member was engaged in, or did not result from his having engaged in, a felonious criminal enterprise; (b) did not result from alcoholism, addiction to narcotics, or any other self-inflicted injury; and (c) did not result from an injury incurred while a member of the armed forces of the United States after the effective date of the Plan and for which such Member receives a military pension. I-10 19 The standards for Total Permanent Disability shall be applied uniformly to all Employees in similar circumstances. 1.72 TRUST. "Trust" shall mean the one or more estates created to fund this Plan. 1.73 TRUST FUND. "Trust Fund" shall mean the cash, bonds, stocks, insurance policies, and other properties actually held by the Trustee pursuant to the terms of the Plan for the purpose of funding the benefits provided hereunder. 1.74 TRUSTEE. "Trustee" shall mean collectively one or more persons or corporations with trust powers which have been appointed by the Sponsor and have accepted the duties of Trustee and any and all successor or successors appointed by the Sponsor. 1.75 VALUATION DATE. "Valuation Date" shall mean each business day of the Plan Year. 1.76 WELFARE BENEFIT FUND. "Welfare Benefit Fund" shall mean a welfare benefit fund, as defined in Section 419(e) of the Code, maintained by any Affiliated Employer. I-11 20 ARTICLE II SERVICE 2.1 YEARS OF ACTIVE SERVICE CREDIT FOR VESTING. An Employee shall receive one year of Active Service credit for vesting purposes for each Computation Period in which he has 1,000 or more Hours of Employment with the Employer and all Affiliated Employers (or a predecessor employer if the Employer maintains one or more of the predecessor's plans or that treatment is required under the Regulations). The Computation Period for vesting purposes is the Plan Year. 2.2 WHEN AN EMPLOYEE SEVERS SERVICE. An Employee shall sever Service if he is not credited with at least 501 Hours of Employment with the Employer and all Affiliated Employers during a Computation Period unless he is credited with less than 501 Hours of Employment because: (a) he is transferred; (b) he is on an approved leave of absence that does not exceed 18 months and he returns to employment immediately following the leave of absence; or (c) he is temporarily laid off, and he returns to employment immediately following the temporary layoff. Solely for the purpose of determining whether an Employee has severed Service, if the Employee is absent from Service because of her pregnancy, the birth of her child, his or her receipt of a child through adoption, or his or her caring for the child immediately after birth or adoption, he or she shall be entitled to the Hours of Employment that he or she would have received but for that absence for one year after the absence began. Eight hours of Service shall be credited for each day of absence. But, no more than a total of 501 hours can be credited. The 501 hours shall be credited to the Computation Period in which the absence first begins if they shall prevent a severance from Service in that period; otherwise, the 501 hours shall be credited to the next Computation Period. 2.3 PERIODS OF SEVERANCE OF FIVE YEARS OR MORE. If an Employee is reemployed after he has incurred a Period of Severance for a continuous period of at least five years, then any prior Period of Service shall not count as Active Service for purposes of determining his nonforfeitable interest in his Account balance accrued prior to the Period of Severance. If a Member is not fully vested upon his re-employment with the Employer or an Affiliated Employer, a new account shall be established for him to separate his nonforfeitable pre-break account balance, if any, from the account to which new allocations will be made. The Member's account to the extent remaining shall be fully vested and shall continue to share in earnings and losses of the Trust Fund. When computing the Member's vested portion of the new account, all pre-break and post-break Service shall be counted. 2.4 TRANSFERS. If an Employee of one Employer is Transferred to the service of another Employer, his Active Service shall not be interrupted and he shall continue to be in Active Service for purposes of eligibility, vesting and allocation of Contributions and/or forfeitures. If an Employee is transferred to the service of an Affiliated Employer that has not adopted the Plan he shall not have Severed Service; however, even though he shall continue to be in Active Service for eligibility and vesting purposes he shall not receive any allocation of Contributions or forfeitures. 2.5 EMPLOYMENT RECORDS CONCLUSIVE. The employment records of the Employer shall be conclusive for all determinations of Active Service. II-1 21 2.6 COVERAGE OF CERTAIN PREVIOUSLY EXCLUDED EMPLOYEES. Any Employee who is no longer excludable because he or she is no longer included in a unit of Employees covered by a collective bargaining agreement between the Employees' representative and the Employer where retirement benefits were the subject of good faith bargaining shall immediately become eligible for membership if he meets the eligibility requirements. All his Service with the Employer or any Affiliated Employer which would have been counted had he not been previously excluded shall now be counted as Active Service for eligibility and vesting purposes. 2.7 SERVICE CREDIT REQUIRED UNDER FEDERAL LAW. An Employee shall be credited with such additional Years of Vesting Service as is required under any applicable law of the United States. II-2 22 ARTICLE III ELIGIBILITY AND PARTICIPATION 3.1 ELIGIBILITY REQUIREMENTS. An Employee who is in the Eligible Class shall become a Member of the Plan on the Entry Date that coincides with or next follows his attainment of age 21 and the completion of 1,000 or more Hours of Employment with the Employer and all Affiliated Employers (or a predecessor employer if the Employer maintains one or more of the predecessor's plans or that treatment is required under the Regulations) during a Computation Period. The initial Computation Period for eligibility is the 12-consecutive-month period starting with the Employee's first day of employment (or reemployment) for which he is entitled to be credited with one Hour of Employment. The eligibility Computation Period then shifts to the Plan Year that includes the Employee's first anniversary of employment (or reemployment) and remains on that schedule. Notwithstanding the foregoing, all Employees who are included in a unit of Employees covered by a collective bargaining agreement between the Employees' representative and the Employer shall be excluded, even if they have met the requirements for eligibility, if there has been good faith bargaining between the Employer and the Employees' representative pertaining to retirement benefits and the agreement does not require the Employer to include such Employees in this Plan. 3.2 ELIGIBILITY UPON REEMPLOYMENT. If an Employee severs Service with the Employer for any reason after fulfilling the eligibility requirements, the Employee shall be eligible to begin participation in this Plan on the day he first completes an Hour of Employment upon his return to employment with an Employer. Once an Employee has become eligible to be a Member, he shall continue to be a Member until he severs Service. A former Member shall become a Member again upon his return to employment with an Employer. 3.3 FROZEN PARTICIPATION. An Employee employed by an Affiliated Employer that has not adopted this Plan cannot actively participate in this Plan even though he accrues Active Service. Likewise, if an Employee: (a) is transferred from an Employer to an Affiliated Employer which has not adopted the Plan or (b) is a Member of this Plan when he is excluded under the provisions of a collective bargaining agreement, his participation becomes inactive. Such a person's Account becomes frozen: he cannot share in any allocation of Employer Contributions or forfeitures, except for Periods of Service in which he is employed by the Employer or an Affiliated Employer that has adopted the Plan. However, his Account shall continue to share in any appreciation or depreciation of the Trust Fund and in any income earned or losses incurred by the Trust Fund during the period of time that he is employed by an Affiliated Employer that has not adopted the Plan or is excluded from covered employment under the provisions of a collective bargaining agreement. III-1 23 ARTICLE IV CONTRIBUTIONS 4.1 SALARY DEFERRAL CONTRIBUTIONS. The Employer shall make a Salary Deferral Contribution in an amount equal to the amount by which its Members' Considered Compensation was reduced as a result of salary deferral agreements. Any such salary deferral agreement shall be an agreement in a form satisfactory to the Administrative Committee to prospectively receive Considered Compensation from the Employer in a reduced amount and to have the Employer contribute an amount equal to the amount of the reduction to the Trust Fund on account of the Member. Any such salary deferral agreement shall be revocable in accordance with its terms, provided that no revocation shall be retroactive or permit payment to the Member of the amount required to be contributed to the Trust Fund. A Member shall be entitled to prospectively modify his salary deferral agreement at least once a year. A Member's right to benefits derived from Salary Deferral Contributions made to the Plan on his behalf shall be nonforfeitable. The election to have Salary Deferral Contributions made, the ability to change the rate of Salary Deferral Contributions, the right to suspend Salary Deferral Contributions, and the manner of commencing new Salary Deferral Contributions shall be permitted under any uniform method determined by the Administrative Committee from time to time. 4.2 EMPLOYER MATCHING CONTRIBUTIONS. The Employer shall make an Employer Matching Contribution in such an amount, and for such period,if any, as is determined by the Board of Directors in its sole discretion. 4.3 ROLLOVER CONTRIBUTIONS AND PLAN-TO-PLAN TRANSFERS. The Administrative Committee may permit Rollover Contributions by Members and/or direct transfers to or from another qualified plan on behalf of Members from time to time. If Rollover Contributions and/or direct transfers to or from another qualified plan are permitted, the opportunity to make those contributions and/or direct transfers must be made available to Members on a nondiscriminatory basis. For this purpose only, all Employees in the Eligible Class shall be considered to be Members of the Plan even though they may not have met the eligibility requirements. However, they shall not be entitled to elect to have Salary Deferral Contributions made or to share in Employer Contributions or forfeitures unless and until they have met the requirements for eligibility, contributions and allocations. A Rollover Contribution shall not be accepted unless it is directly rolled over to this Plan in a rollover described in Section 401(a)(31) of the Code. A Member shall not be permitted to make a Rollover Contribution if the property he intends to contribute is for any reason unacceptable to the Trustee. A Rollover Contribution Account shall be established for any Employee who makes a Rollover Contribution. A direct transfer of assets from another qualified plan in a transfer subject to the requirements of Section 414(l) of the Code shall not be accepted if it was at any time part of (a) a defined benefit plan (as defined in Section 401(a) or 414(j) of the Code), (b) a defined contribution plan (as defined in Sections 401(a) and 414(i) of the Code) which is subject to the minimum funding standards of Section 412 of the Code, (c) any other qualified plan which has joint and survivor annuity benefits or qualified preretirement survivor annuity benefits as described in Section 417 of the Code, or (d) a plan which permits a distribution or withdrawal in a form not permitted under this Plan. IV-1 24 4.4 QUALIFIED NONELECTIVE EMPLOYER CONTRIBUTIONS. The Employer may make a Qualified Nonelective Employer Contribution in such amount, if any, as shall be determined by the Employer. A Member's right to benefits derived from Qualified Nonelective Employer Contributions made to the Plan on his behalf shall be nonforfeitable. In no event will Qualified Nonelective Employer Contributions be distributed before Salary Deferral Contributions may be distributed 4.5 RESTORATION CONTRIBUTIONS. The Employer shall, for each Calendar Quarter, make a Restoration Contribution in an amount equal to the sum of (a) such amount, if any, as shall be necessary to fully restore all Employer Matching Contribution Accounts required to be restored pursuant to the provisions of Section 5.9, after application of all forfeitures and any appreciation in the value of the Trust Fund available for such restoration; plus (b) an amount equal in value to the value of forfeited benefits described in and payable under Section 9.11. 4.6 LIMITATION UPON SALARY DEFERRAL CONTRIBUTIONS. The maximum Salary Deferral Contribution that a Member may elect to have made on his behalf during the Member's taxable year may not, when added to the amounts deferred under other plans or arrangements described in Sections 401(k), 408(k) and 403(b) of the Code exceed $7,000 (as adjusted by the Secretary of Treasury). If this dollar limitation is exceeded during any taxable year of the Member, the excess of the amounts deferred on behalf of the Member under plans or arrangements described in Sections 401(k), 408(k) and 403(b) of the Code during the Member's taxable year over the dollar limitation (the "Excess Deferral") as adjusted by any earnings or losses thereon will be distributed to the Member no later than April 15 following the Member's taxable year in which the Excess Deferral was made. A Member who has Excess Deferrals for a taxable year may receive a corrected distribution of Excess Deferrals during the same year, if the Member designates the distribution as an Excess Deferral. A Member shall be deemed to have designated the distribution as an Excess Deferral to the extent the Member has Excess Deferrals for the taxable year calculated by taking into account only elective deferrals under the Plan and other plans of the Affiliated Employers. The correcting distribution shall be made after the date on which the Plan received the Excess Deferral. The Plan shall designate the distribution as a distribution of Excess Deferrals. If any amount is included in the gross income of a Member for a taxable year because his Excess Deferrals exceeded the limitations set forth in this Section 4.6, the Member may notify the Administrative Committee of the amount of the Excess Deferrals received by the Plan. A Member shall be deemed to have notified the Administrative Committee of Excess Deferrals to the extent the Member has Excess Deferrals for the taxable year, calculated by taking into account only Elective Deferrals under the Plan and other plans of the Affiliated Employers. Not later than the first April 15 following the close of the taxable year, the Plan Trustee shall distribute to the Member the amount designated under the preceding provisions of this Section (and any income allocable to that amount). The income allocable to that amount shall be determined by multiplying the Investment Gain or Loss for the taxable year of the Member allocable to the Member's Salary Deferral Contribution by a fraction. The numerator of the fraction is the Excess Deferrals by the Member for the taxable year. The denominator of the fraction is the Member's Salary Deferral Account as of the beginning of the taxable year, plus the Member's Salary Deferral Contributions for the taxable year. IV-2 25 For purposes of applying the requirements of Section 4.7 and Article VII, Excess Deferrals shall not be disregarded merely because they are Excess Deferrals or because they are distributed in accordance with this Section. However, Excess Deferrals made to the Plan on behalf of Non-Highly Compensated Employees are not to be taken into account under Section 4.7. 4.7 ACTUAL DEFERRAL PERCENTAGE TEST. The Actual Deferral Percentage for Highly Compensated Employees for any Plan Year must bear a relationship to the Actual Deferral Percentage for all other eligible Employees for the Plan Year which meets either of the following tests: (a) The Actual Deferral Percentage of the Highly Compensated Employees is not more than the Actual Deferral Percentage of all other eligible Employees multiplied by 1.25; or (b) The excess of the Actual Deferral Percentage of the Highly Compensated Employees over that of all other eligible Employees is not more than two percentage points, and the Actual Deferral Percentage of the Highly Compensated Employees is not more than the Actual Deferral Percentage of all other eligible Employees multiplied by two. For purposes of this test an eligible Employee is an Employee who is directly or indirectly eligible to make Salary Deferral Contributions for all or part of the Plan Year. A person who is suspended from making Salary Deferral Contributions because he has made a withdrawal is an eligible Employee. Except as provided below, an Employee who would be eligible to make Salary Deferral Contributions but for his election not to participate is an eligible Employee. An Employee is not an eligible Employee merely because the Employee, upon commencing employment with an Affiliated Employer or upon the Employee's first becoming eligible to make a cash or deferred election under any plan of an Affiliated Employer is given a one-time opportunity to elect, and the employee does in fact elect, not to be eligible to make a cash or deferred election under any plan maintained by an Affiliated Employer (including plans not yet established) for the duration of the Employee's employment with the Affiliated Employer. In addition, an Employee who would be eligible to make a Salary Deferral Contribution but for the limitations on his Annual Additions imposed by Sections 415 of the Code is an eligible Employee. If no Salary Deferral Contributions are made for an eligible Employee, the Actual Deferral Ratio that shall be included for him in determining the Actual Deferral Percentage is zero. If this Plan and any other plan or plans which include cash or deferred arrangements are considered as one plan for purposes of Section 401(a)(4) or 410(b) of the Code, the cash or deferred arrangements included in this Plan and the other plans shall be treated as one plan for purposes of this Section. If any Member who is a Highly Compensated Employee is a participant in any other cash or deferred arrangements of the Employer, when determining the deferral percentage of such Member, all such cash or deferred arrangements are treated as one. A Salary Deferral Contribution will be taken into account under the actual deferral percentage test of Code Section 401(k) and this Section for a Plan Year only if it relates to Considered Compensation that either would have been received by the Employee in the Plan Year (but for the IV-3 26 deferral election) or is attributable to services performed by the Employee in the Plan Year and would have been received by the Employee within 2 1/2 months after the close of the Plan Year (but for the deferral election). In addition, a Section 401(k) Contribution will be taken into account under the actual deferral percentage test of Code Section 401(k) and this Section for a Plan Year only if it is allocated to an Employee as of a date within that Plan Year. For this purpose a Section 401(k) Contribution is considered allocated as of a date within a Plan Year if the allocation is not contingent on participation or performance of services after such date and the Section 401(k) Contribution is actually paid to the Trust no later than 12 months after the Plan Year to which the Section 401(k) Contribution relates. 4.8 ACTUAL DEFERRAL PERCENTAGE FAIL SAFE PROVISION. As soon as practicable after the close of each Plan Year, the Administrative Committee shall determine whether the Actual Deferral Percentage for the Highly Compensated Employees would exceed the limitation set forth in Section 4.7. If the limitation would be exceeded for a Plan Year, before the close of the following Plan Year (a) the amount of Excess 401(k) Contributions for that Plan Year (and any income allocable to those contributions as calculated in the specific manner required by Section 4.14) shall be distributed, or (b) the Employer may make a Qualified Nonelective Employer Contribution which it elects to have treated as a Section 401(k) Contribution. Qualified Nonelective Employer Contributions will be treated as Section 401(k) Contributions only if the conditions described in Regulation Section 1.401(k)-1(b)(5) are satisfied. Qualified Nonelective Employer Contributions will be treated as Section 401(k) Contributions for a Plan Year only if they are allocated to Members' Accounts as of a date within that Plan Year and are actually paid to the Trust no later than the end of the 12-month period immediately following the Plan Year to which the contributions relate. Any distributions of the Excess 401(k) Contributions for any Plan Year are to be made to Highly Compensated Employees on the basis of the respective portions of the Excess 401(k) Contributions attributable to each of them. The amount of Excess 401(k) Contributions to be distributed or recharacterized for any Plan Year must be reduced by any excess Salary Deferral Contributions previously distributed for the taxable year ending in the same Plan Year. 4.9 SPECIAL ACTUAL DEFERRAL PERCENTAGE RULES FOR FAMILY MEMBERS. If a Member is a Highly Compensated Employee and a Family Member, the combined Actual Deferral Ratio for the family group (which is treated as one Highly Compensated Employee) must be determined by combining the Section 401(k) Contributions and Annual Compensation of all the eligible Family Members. If an Employee is required to be aggregated as a member of more than one family group in the Plan, all eligible Employees who are members of those family groups that include that Employee are aggregated as one family group. The correction of Excess 401(k) Contributions of a Highly Compensated Employee whose Actual Deferral Ratio is determined under the family aggregation rules is accomplished by reducing the Actual Deferral Ratio and allocating the Excess 401(k) Contributions for the family group among the Family Members in proportion to the Section 401(k) Contributions of each Family Member that is combined to determine the Actual Deferral Ratio. These family aggregation rules do not apply for purposes of determining the Actual Deferral Percentage for the group of Non-Highly Compensated Employees. IV-4 27 4.10 CONTRIBUTION PERCENTAGE TEST. The Contribution Percentage for eligible Highly Compensated Employees for any Plan Year must not exceed the greater of the following: (a) The Contribution Percentage for all other eligible Employees multiplied by 1.25; or (b) The lesser of the Contribution Percentage for all other eligible Employees multiplied by two, or the Contribution Percentage for all other eligible Employees plus two percentage points. For purposes of this test an eligible Employee is an Employee who is directly or indirectly eligible to receive an allocation of Employer Matching Contributions for all or part of the Plan Year. Except as provided below, an Employee who would be eligible to receive an allocation of Employer Matching Contributions but for his election not to participate is an eligible Employee. An Employee who would be eligible to receive an allocation of Matching Employer Contributions but for the limitations on his Annual Additions imposed by Section 415 of the Code is an eligible Employee. If no Section 401(m) Contributions are made on behalf of an eligible Employee the Actual Contribution Ratio that shall be included for him in determining the Contribution Percentage is zero. If this Plan and any other plan or plans to which Section 401(m) Contributions are made are considered as one plan for purposes of Section 401(a)(4) or 410(b) of the Code, this Plan and those plans are to be treated as one. The Actual Contribution Ratio of a Highly Compensated Employee who is eligible to participate in more than one plan of an Affiliated employer to which employee or matching contributions are made is calculated by treating all the plans in which the Employee is eligible to participate as one plan. However, plans that are not permitted to be aggregated under Regulation Section 1.410(m)-1(b)(3)(ii) are not aggregated for this purpose. An Employer Matching Contribution will be taken into account under this Section for a Plan Year only if (1) it is allocated to the Employee's Account as of a date within the Plan Year, (2) it is paid to the Trust no later than the end of the 12 month period beginning after the close of the Plan Year, and (3) it is made on behalf of an Employee on account of his Salary Deferral Contributions for the Plan Year. At the election of the Employer, a Member's Salary Deferral Contributions, and Qualified Nonelective Employer Contributions made on behalf of the Member during the Plan Year shall be treated as Section 401(m) Contributions that are Employer Matching Contributions provided that the conditions set forth in Regulation Section 1.401(m)-1(b)(5) are satisfied. Salary Deferral Contributions may not be treated as Employer Matching Contributions for purposes of the contribution percentage test set forth in this Section unless such contributions, including those taken into account for purposes of the test set forth in this Section, satisfy the actual deferral percentage test set forth in Section 4.7. Moreover, Salary Deferral Contributions and Qualified Nonelective Employer Contributions may not be taken into account for purposes of the test set forth in this Section to the extent that such contributions are taken into account in determining whether any other contributions satisfy the actual deferral percentage test set forth in Section 4.7. Finally, Salary Deferral Contributions and Qualified Nonelective Employer Contributions may be taken into account IV-5 28 for purposes of the test set forth in this Section only if they are allocated to the employee's Account as of a date within the Plan Year being tested within the meaning of Regulation Section 1.401(k)-1(b)(4). 4.11 CONTRIBUTION PERCENTAGE FAIL SAFE PROVISION. If the limitation set forth in Section 4.10 would be exceeded for any Plan Year, before the close of the following Plan Year (a) the amount of the Excess Aggregate 401(m) Contributions for that Plan Year (and any income allocable to those Contributions as calculated in the manner set forth in Section 4.13) shall be either distributed, or forfeited to the extent they are not vested, or (b) the Employer may make a Qualified Nonelective Employer Contribution which it elects to have treated as a Section 401(m) Contribution. Any distributions of the Excess Aggregate 401(m) Contributions for any Plan Year are to be made to Highly Compensated Employees on the basis of the respective portions of the amounts attributable to each of them. Forfeitures of Excess Aggregate 401(m) Contributions shall be allocated to Members who are Non-Highly Compensated Employees as if such contributions were additional Employer Matching Contributions for the Plan Year. 4.12 SPECIAL CONTRIBUTION PERCENTAGE RULES FOR FAMILY MEMBERS. If a Member is a Highly Compensated Employee and a Family Member, the combined Actual Contribution Ratio for the family group (which is treated as one Highly Compensated Employee) shall be determined by combining the Section 401(m) Contributions and Annual Compensation of all the eligible Family Members. If an Employee is required to be aggregated as a member of more than one family group in the Plan, all eligible Employees who are members of those family groups that include that Employee shall be aggregated as one family group. The correction of Excess 401(m) Contributions of a Highly Compensated Employee whose Actual Contribution Ratio is determined under the family aggregation rules shall be accomplished by reducing the Actual Contribution Ratio and allocating the Excess Aggregate 401(m) Contributions for the family group among the Family Members in proportion to the Section 401(m) Contributions of each Family Member that is aggregated to determine the Actual Contribution Ratio. The family aggregation rules do not apply for purposes of determining the Actual Contribution Percentage for the group of Non-Highly Compensated Employees. 4.13 INCOME ALLOCABLE TO EXCESS 401(K) CONTRIBUTIONS AND EXCESS AGGREGATE 401(M) CONTRIBUTIONS. The income allocable to Excess 401(k) Contributions for the Plan Year shall be determined by multiplying the income for the Plan Year allocable to Section 401(k) Contributions by a fraction. The numerator of the fraction shall be the amount of Excess 401(k) Contributions made on behalf of the Member for the Plan Year. The denominator of the fraction shall be the Member's total Account balance attributable to Section 401(k) Contributions as of the beginning of the Plan Year plus the Member's Section 401(k) Contributions for the Plan Year. The income allocable to Excess Aggregate 401(m) Contributions for a Plan Year shall be determined by multiplying the income for the Plan Year allocable to Section 401(m) Contributions by a fraction. The numerator of the fraction shall be the amount of Excess Aggregate 401(m) Contributions made on behalf of the Member for the Plan Year. The denominator of the fraction shall be the Member's total Account balance attributable to Section 401(m) Contributions as of the beginning of the Plan Year plus the Member's Section 401(m) Contributions for the Plan Year. IV-6 29 4.14 ADDITIONAL REQUIRED TEST IF ALTERNATIVE COMPLIANCE IS USED. If the second alternative permitted in Sections 4.7 and 4.10 is used for both the Actual Deferral Percentage test and the Contribution Percentage test the following additional limitation on Salary Deferral Contributions shall apply. The Actual Deferral Percentage plus the Contribution Percentage of the eligible Highly Compensated Employees cannot exceed the greater of (a) or (b), where (a) is the sum of: (i) 1.25 times the greater of the Actual Deferral Percentage or the Contribution Percentage of the eligible Non-Highly Compensated Employees, and (ii) the lesser of (x) two percentage points plus the lesser of the Actual Deferral Percentage or the Contribution Percentage of the eligible Non-Highly Compensated Employees or (y) two times the lesser of the Actual Deferral Percentage or the Contribution Percentage of the group of eligible Non-Highly Compensated Employees; and (b) is the sum of: (i) 1.25 times the lesser of the Actual Deferral Percentage or the Contribution Percentage of the eligible Non-Highly Compensated Employees, and (ii) the lesser of (x) two percentage points plus the greater of the Actual Deferral Percentage or the Contribution Percentage of the eligible Non-Highly Compensated Employees or (y) two times the greater of the Actual Deferral Percentage or the Contribution Percentage of the group of eligible Non-Highly Compensated Employees. If the limitation would be exceeded for any Plan Year, before the close of the following Plan Year the Actual Deferral Percentage or Contribution Percentage of the eligible Highly Compensated Employees, or a combination of both, shall be reduced by distributions made in the manner described in the Regulations. These distributions shall be in addition to and not in lieu of distributions required for Excess 401(k) Contributions and Excess Aggregate 401(m) Contributions. 4.15 NONDEDUCTIBLE CONTRIBUTIONS PROHIBITED. Notwithstanding any other provision of the Plan, no Employer shall make any contribution that would be a "nondeductible contribution" within the meaning of Section 4972 of the Code. 4.16 FORM OF PAYMENT OF CONTRIBUTIONS. Contributions may be paid to the Trustee either in cash or in qualifying employer securities (as such term is defined in Section 407(d) of ERISA) or any combination thereof, provided that payment may not be made in any form constituting a prohibited transaction under Section 4975 of the Code or Section 406 of ERISA. 4.17 DEADLINE FOR PAYMENT OF EMPLOYER CONTRIBUTIONS. The Employer's Salary Deferral Contribution and Employer Matching Contribution shall be paid to the Trustee in installments. The IV-7 30 installment for each payroll period shall be paid within 60 days after the end of the Calendar Quarter in which such payroll period ends, and shall be in an amount equal to the amount by which all Members' Considered Compensation was reduced pursuant to salary deferral agreements (as described in Section 4.2) for such period, plus the amount of the Employer Matching Contribution for such period. The Qualified Nonelective Employer Contributions of the Employer for each Plan Year shall be paid to the Trustee in one or more installments, as the Employer may from time to time determine; provided, however, that the Qualified Nonelective Employer Contribution may be paid not later than the time prescribed by law (including extensions thereof) for filing the Employer's income tax return for its taxable year ending with or within such Plan Year. IV-8 31 ARTICLE V ALLOCATIONS AND VALUATION OF ACCOUNTS 5.1 INFORMATION STATEMENTS FROM EMPLOYER. As soon as practical after the last day of each Calendar Quarter, the Employer shall provide the Administrative Committee with a schedule setting forth the amount of its Salary Deferral Contribution, Employer Matching Contribution, Qualified Nonelective Employer Contribution, and Restoration Contribution; the names of its Members, the number of Years of Vesting Service of each of its Members, the amount of Considered Compensation paid to each Member, and the amount of Considered Compensation paid to all its Members. Such schedules shall be conclusive evidence of such facts. 5.2 ALLOCATION OF SALARY DEFERRAL CONTRIBUTION. The Administrative Committee shall allocate the Employer's Salary Deferral Contribution among the Employer's Members by allocating to each such Member the amount by which his Considered Compensation was reduced pursuant to a salary deferral agreement (as described in Section 4.2) and shall credit each such Member's share to the Member's Salary Deferral Contribution Account. 5.3 ALLOCATION OF EMPLOYER MATCHING CONTRIBUTION. The Administrative Committee shall separately allocate the Employer Matching Contribution among the Employer's Members in the proportion which the Matched Salary Deferral Contributions of each such Member bears to the total Matched Salary Deferral Contributions of all such Members. Each Member's proportionate share shall be credited to his Employer Matching Contribution Account. 5.4 ALLOCATION OF QUALIFIED NONELECTIVE EMPLOYER CONTRIBUTION. The Administrative Committee shall separately allocate the Qualified Nonelective Employer Contribution among the Non-Highly Compensated Employees who are Members based upon each such Member's Considered Compensation as compared to the Considered Compensation of all such Members. 5.5 ALLOCATION OF DIVIDENDS ON SPONSOR STOCK. Cash and Sponsor Stock dividends paid with respect to Sponsor Stock shall be allocated among the Members and former Members with Account balances in proportion to the number of shares of Sponsor Stock (of the class with respect to which the dividend is paid) allocated to Member's or former Member's Employer Matching Contribution Account as of the record date for the dividend. 5.6 SPONSOR STOCK SPLITS. If the shares of Company Stock are subdivided, the additional shares acquired by the Trustee upon the subdivision will be allocated among the Members and former Members with Account balances in proportion to the number of shares of Sponsor Stock (of the class with respect to which the subdivision is made) allocated to the Member's or former Member's Employer Matching Contribution Account as of the record date for the subdivision. 5.7 VALUATION OF ACCOUNTS. A Member's or former Member's Accounts shall be valued at fair market value on each Valuation Date. The earnings and losses attributable to any asset in the Trust Fund will be allocated solely to the Account of the Member or former Member on whose behalf the investment in the asset was made. In determining the fair market value of the Members' or former V-1 32 Member's Accounts, the Trustee shall utilize such sources of information as it may deem reliable including, but not limited to, stock market quotations, statistical evaluation services, newspapers of general circulation, financial publications, advice from investment counselors or brokerage firms, or any combination of sources which in the opinion of the Trustee will provide the price such assets were last traded at on a registered stock exchange; provided, however, that with respect to regulated investment company shares, the Trustee shall rely exclusively on information provided to it by the investment adviser to such funds. 5.8 ALLOCATION OF FORFEITURES. As of the last day of each Calendar Quarter the Trustee shall determine the total amount of forfeitures arising under the Plan during the Calendar Quarter then ended. As soon as practicable after the last day of the Calendar Quarter such forfeitures and Investment Gain or Loss thereon shall first be applied to restore any Employer Matching Contribution Account required to be restored under the provisions of Section 5.9. Any remaining forfeitures and Investment Gain or Loss thereon attributable to such Calendar Quarter shall be applied during each succeeding Calendar Quarter to restore Accounts required to be restored during succeeding Calendar Quarters; provided, however, that any forfeitures and Investment Gain or Loss thereon that have not been applied to reinstate Accounts by the last day of the Plan Year during which such forfeitures arose shall be allocated to the Members (without regard to which Employer contributed the amount forfeited) for the Plan Year in the manner provided in Section 5.3 as if such forfeitures and Investment Gain or Loss thereon were part of the Employer Matching Contribution for the Plan Year. 5.9 RESTORATION OF FORFEITED AMOUNTS. If a Member or former Member who forfeited any portion of his Employer Matching Contribution Account pursuant to the provisions of Section 8.4 resumes employment covered under the Plan, then the following provisions shall apply: (a) REPAYMENT REQUIREMENT. The Member's Employer Matching Contribution Account shall be restored if he repays to the Trustee the full amount of any distribution from the Employer Matching Contribution Account with respect to which the forfeiture arose. Such repayment must be made prior to the earlier of (a) the date on which he incurs a Period of Severance of five years, or (b) the fifth anniversary of the first date on which the Member is subsequently re-employed by the Employer. (b) MEMBERS WITH NO VESTED INTEREST. If a Member or former Member who forfeited any portion of his Employer Matching Contribution Account pursuant to the provisions of Section 8.4 received no distribution from his Employer Matching Contribution Account as a result of his termination of participation in the Plan (because his vested percentage was zero), that Account will be restored if, and only if, he resumes employment covered under the Plan prior to incurring a Period of Severance of five years. (c) AMOUNT RESTORED. The amount to be restored under the preceding provisions of this Section shall be the dollar value of the amount in the Member's Employer Matching Contribution Account, both the amount distributed and the amount forfeited, unadjusted by any subsequent gains or losses. The Member's Employer Matching Contribution Account balance shall be restored as soon as administratively practicable after the later of the date the Member resumes employment covered under the Plan or the date on which any required V-2 33 repayment is completed. No distribution shall be made to a Member from his Employer Matching Contribution Account as a result of a prior Separation from service after the restoration of such Account has been effectuated. (d) NO OTHER BASIS FOR RESTORATION. Except as otherwise provided above, a Member's Employer Matching Contribution Account shall not be restored upon resumption of employment covered by the Plan. Any portion of the Trust Fund attributable to Years of Service prior to resumption of employment by a Member whose Employer Matching Contribution Account has not been restored shall be held and distributed in accordance with applicable provisions of the Plan and elections made thereunder. A separate Employer Matching Contribution Account shall be established and maintained for Employer Matching Contributions allocable to such a Member after his resumption of employment covered by the Plan. 5.10 NO VESTING UNLESS OTHERWISE PRESCRIBED. No allocations, adjustments, credits, or transfers shall ever vest in any Member or former Member any right, title, or interest in the Trust Fund except at the times and upon the terms and conditions herein set forth. V-3 34 ARTICLE VI LIMITATIONS ON ALLOCATIONS 6.1 BASIC LIMITATION. The Annual Additions which may be credited to a Member's Accounts under this Plan for any Limitation Year will not exceed the Maximum Permissible Amount reduced by the Annual Additions credited to a Member's Account for the same Limitation Year under any other qualified defined contribution plans, Welfare Benefit Funds, and Individual Medical Accounts maintained by any Affiliated Employer. If the Annual Additions with respect to the Member under such other plans, funds, and accounts are less than the Maximum Permissible Amount and the Employer Contribution that would otherwise be contributed or allocated to the Member's Accounts under this Plan would cause the Annual Additions for the Limitation Year to exceed this limitation, the amount contributed or allocated will be reduced so that the Annual Additions under all such plans, funds, and accounts for the Limitation Year will equal the Maximum Permissible Amount. If the Annual Additions with respect to the Member under such other plans, funds, and accounts in the aggregate are equal to or greater than the Maximum Permissible Amount, no amount will be contributed or allocated to the Member's Account under this Plan for the Limitation Year. 6.2 ESTIMATION OF MAXIMUM PERMISSIBLE AMOUNT. Prior to determining the Member's actual Annual Compensation for the Limitation Year, the Employer may determine the Maximum Permissible Amount on the basis of a reasonable estimation of the Member's Annual Compensation for such Limitation Year, uniformly determined for all Members similarly situated. As soon as is administratively feasible after the end of the Limitation Year, the Maximum Permissible Amount for the Limitation Year shall be determined on the basis of the Member's actual Annual Compensation for such Limitation Year. 6.3 ATTRIBUTION OF EXCESS AMOUNTS. If, pursuant to Section 6.2 or as a result of the allocation of forfeitures, or for any other reason permitted by the Internal Revenue Service, a Member's Annual Additions under this Plan and all such other plans, funds, and accounts result in an Excess Amount, such Excess Amount shall be deemed to consist of the Annual Additions last allocated, except that Annual Additions attributable to a Welfare Benefit Fund or Individual Medical Account will be deemed to have been allocated first regardless of the actual allocation date. If an Excess Amount was allocated to a Member's Account on an allocation date of this Plan which coincides with an allocation date of another plan, the Excess Amount attributed to this Plan will be the product of: (a) the total Excess Amount allocated as of such date, times (b) the ratio of (i) the Annual Additions allocated to the Member's Account for the Limitation Year as of such date under this Plan, to (ii) the total Annual Additions allocated to the Member's Accounts for the Limitation Year as of such date under all qualified defined contribution plans. 6.4 TREATMENT OF EXCESS AMOUNTS. If an Excess Amount attributed to this Plan is held or contributed as a result of the allocation of forfeitures, reasonable error in estimating a Member's VI-1 35 Considered Compensation, reasonable error in calculating the maximum Salary Deferral Contribution that may be made with respect to a Member under Section 415 of the Code or because of any other facts and circumstances which the Commissioner of Internal Revenue finds to be justified, the Excess Amount shall be reduced as follows: (a) If the Member is in the Eligible Class at the end of the Limitation Year, then such Excess Amounts shall not be distributed to the Member, but shall be reallocated to a suspense account and shall be reapplied to reduce future Employer Contributions (including any allocation of forfeitures) under this Plan for such Member in the next Limitation Year, and for each succeeding Limitation Year, if necessary. (b) If, after application of paragraph (a) of this Section, an Excess Amount still exists, and the Member is not in the Eligible Class at the end of the Limitation Year, then such Excess Amounts in the Member's Accounts shall not be distributed to the Member, but shall be reallocated to a suspense account and shall be reapplied to reduce future Employer Contributions (including allocation of any forfeitures), for all remaining Members in the next Limitation Year and each succeeding Limitation Year if necessary. (c) If a suspense account is in existence at any time during the Limitation Year pursuant to this Section, it will not participate in the allocation of the Trust Fund's investment gains and losses. If a suspense account is in existence at any time during a particular Limitation Year, all amounts in the suspense account must be allocated and reallocated to Members' Accounts before any Employer Contribution may be made to the Plan for that Limitation Year. Excess Amounts may not be distributed to Members or former Members. If the Plan is terminated while a suspense account described in this Section is in existence, the amount in such suspense account shall revert to the Employer(s) to which it is attributable. 6.5 MEMBERS PARTICIPATING IN QUALIFIED DEFINED BENEFIT PLAN. If any Affiliated Employer maintains, or at any time maintained, a qualified defined benefit plan covering any Member in this Plan, the sum of the Member's Defined Benefit Fraction and Defined Contribution Fraction will not exceed 1.0 in any Limitation Year. The Annual Additions credited to any such Member's Accounts under this Plan in any Limitation Year will be limited as necessary to meet the limitations of this Section. VI-2 36 ARTICLE VII TOP-HEAVY REQUIREMENTS 7.1 APPLICATION. The requirements described in this Article will apply to each Plan Year that this Plan is determined to be a Top-Heavy Plan under the test set out in the following Section. 7.2 TOP-HEAVY TEST. If on the Determination Date the total of the Accounts of Key Employees in the Plan exceeds 60 percent of the total of the Accounts of all Employees in the Plan, this Plan will be a Top-Heavy Plan for that Plan Year. In addition, if this Plan is required to be included in an Aggregation Group and that group is a top-heavy group, this Plan will be treated as a Top-Heavy Plan. An Aggregation Group is a top-heavy group if on the Determination Date the sum of (a) the present value of the cumulative accrued benefits for Key Employees under all defined benefit plans in the Aggregation Group plus (b) the total of all of the accounts of Key Employees under all defined contribution plans in the Aggregation Group is more than 60 percent of a similar sum determined for all employees covered in the Aggregation Group. In determining the present value of the accumulated accrued benefits for any Employee or the amount in the account of any Employee, the value or amount will be increased by all distributions made to or for the benefit of the Employee under the Plan during the five-year period ending on the Determination Date. All rollover contributions made by the Employee to the Plan will not be considered by the Plan for either test. If an Employee is a Non-Key Employee under the Plan for the Plan Year but was a Key Employee under the Plan for another prior Plan Year, his account will not be considered. Benefits will not be taken into account in determining the top-heavy ratio for any Employee who has not performed services for the Employer during the last five-year period ending on the Determination Date. For purposes of computing the top-heavy ratio, the valuation date of the Plan shall be the last day of each Plan Year. For purposes of establishing present value to compute the top- heavy ratio, any benefit shall be discounted only for mortality and interest based on an interest rate of eight percent and the 1983 IAM mortality table without setback. 7.3 VESTING RESTRICTIONS IF PLAN BECOMES TOP-HEAVY. If a Member has at least one Hour of Service during a Plan Year when the Plan is a Top-Heavy Plan, he will either vest under the normal vesting provisions of the Plan or under the Top-Heavy vesting schedule set forth below in this Section, whichever is more favorable. If the Plan ceases to be a Top-Heavy Plan, this requirement will no longer apply, and the normal vesting provisions of the Plan will be applicable to all subsequent contributions by the Employers. However, a Member who has at least three Years of Vesting Service at the time that the Plan ceases to be a Top-Heavy Plan will continue to vest under the Top-Heavy vesting schedule or the normal vesting provisions of the Plan, whichever is more favorable. The Top-Heavy vesting schedule is: VII-1 37
Years of Active Service Vested Percentage ----------------------- ----------------- Less than 2 0% 2 20% 3 40% 4 60% 5 80% 6 100%
7.4 MINIMUM CONTRIBUTION IF PLAN BECOMES TOP-HEAVY. For any Plan Year during which the Plan is a Top-Heavy Plan, the Employer Contributions and forfeitures allocated on behalf of any Member who is not a Key Employee shall not be less than the lesser of (a) three percent of such Member's Annual Compensation, or (b) in the case where no Affiliated Employer has a defined benefit plan that designates this Plan to satisfy Section 401 of the Code, the largest percentage of Employer Contributions and forfeitures, as a percentage of the Key Employee's Annual Compensation, allocated on behalf of any Key Employee for that Plan Year. Each Employee who is eligible to be a Member and is employed by any Affiliated Employer on the last day of the Plan Year shall be entitled to receive an allocation under this Section, regardless of whether he has made any Required Employee Contributions, whether his Annual Compensation is less than a stated amount, or whether he has completed any minimum number of Hours of Service during the Plan Year. All defined contribution plans required to be included in the Aggregation Group will be treated as one plan for purposes of meeting the three percent minimum, unless this Plan is also required to be included in an Aggregation Group which includes a defined benefit plan and this Plan enables that defined benefit plan to meet the requirements of Sections 401(a)(4) or 410 of the Code. Salary Deferral Contributions and Employer Matching Contributions made on behalf of Key Employees are included in determining the highest rate of Employer Contributions. Salary Deferral Contributions and Employer Matching Contributions made on behalf of Non-Key Employees are not included for that purpose. Salary Deferral Contributions that may be treated as Section 401(k) Contributions or Section 401(m) Contributions made on behalf of Non-Key Employees may not be included in determining the minimum contribution required under this Section to the extent that they are treated as Section 401(m) Contributions or Section 401(k) Contributions for purposes of the Actual Deferral Percentage test or the Contribution Percentage test. 7.5 DISREGARD OF GOVERNMENT PROGRAMS. If this Plan is a Top-Heavy Plan, it must meet the vesting and benefit requirements described in this Article without taking into account contributions or benefits under Chapter 2 of the Code (relating to the tax on self-employment income), Chapter 21 of the Code (relating to the Federal Insurance Contributions Act), Title II of the Social Security Act, or any other Federal or State law. 7.6 COVERAGE UNDER MULTIPLE TOP-HEAVY PLANS. If a Non-Key Employee is covered by both a Top-Heavy defined contribution plan and a defined benefit plan, he will receive the defined benefit minimum, offset by the benefits provided under the defined contribution plan. VII-2 38 7.7 RESTRICTIONS IF PLAN BECOMES SUPER TOP-HEAVY. If the Plan is determined to be a Top-Heavy Plan, the number "1.00" shall be substituted for the number "1.25" when applying the limitations of Section 415 of the Code to this Plan, unless the Plan would not be a Top-Heavy Plan if "90 percent" were substituted for "60 percent" and the Employer Contribution for the Plan Year for each Non-Key Employee who is a Member is not less than four percent of the Member's Annual Compensation. VII-3 39 ARTICLE VIII BENEFITS AND EVENTS ENTITLING MEMBERS TO DISTRIBUTION OF BENEFITS 8.1 VALUATION OF ACCOUNTS FOR WITHDRAWALS AND DISTRIBUTIONS. For the purpose of making a distribution or withdrawal, a Member's or former Member's Accounts shall be the value of his Accounts on the Valuation Date which is coincident with the distribution or withdrawal. However, for purposes of making a distribution or withdrawal of the Member's or former Member's interest in the Sponsor Stock fund, the value of shares of Sponsor Stock allocated to the Member's or former Member's Account will be the net cash proceeds of the sale of Sponsor Stock when the Trustee sells it in order to make the distribution or withdrawal. 8.2 DEATH, RETIREMENT, OR TOTAL PERMANENT DISABILITY. The amount payable upon the death, Retirement, or Separation on account of Total and Permanent Disability of a Member will be 100 percent of the amount credited to his Accounts. 8.3 SEVERANCE BENEFIT. A Member or former Member whose Separation occurs for any reason other than death, Retirement, or Total Permanent Disability shall be entitled to a severance benefit equal to the "vested interest" of such Member in his Accounts. For purposes of this Section, a Member's or former Member's "vested interest" shall be an amount equal to the sum of the total amount credited to all of his Accounts other than his Employer Matching Contribution Account, plus the total amount credited to his Employer Matching Contribution Account, adjusted for prior withdrawals, if any, and multiplied by his vested percentage as shown in the vesting schedule set forth below:
YEARS OF ACTIVE SERVICE VESTING PERCENTAGE -------------- ------------------ Less than 1 0% 1 0% 2 0% 3 20% 4 40% 5 60% 6 80% 7 or more 100%
8.4 FORFEITURE ON TERMINATION OF PARTICIPATION. If as a result of terminating his participation in the Plan a former Member receives a distribution of his entire vested interest in his Accounts, the nonvested amount in his Employer Matching Contribution Account is immediately forfeited. A former Member who received no distribution of Employer Contributions because he had no vested interest shall be treated as if he received a distribution of his entire vested interest in the Plan. VIII-1 40 If a former Member who has a vested interest in his Employer Matching Contribution Account received no distribution or a distribution of less than the full amount of his entire vested interest in his Employer Matching Contribution Account as a result of his termination of participation in the Plan, the nonvested amount in his Account is forfeited after he incurs five consecutive one-year Periods of Severance. A distribution shall be treated as if it were made as a result of termination of participation in the Plan if it is made not later than the end of the second Plan Year following the Plan Year in which the former Member's termination occurs. 8.5 WITHDRAWAL OF ROLLOVER CONTRIBUTIONS. Each Member, upon giving written notice to the Administrative Committee, shall be entitled to withdraw from his Rollover Contribution Account such amount payable in a lump sum cash payment as he may specify, but not in excess of the balance of such Account. No vested benefit shall be forfeited because of a withdrawal under this Section. 8.6 WITHDRAWAL UPON ATTAINMENT OF NORMAL RETIREMENT AGE. Each Member, upon giving written notice to the Administrative Committee, shall be entitled to withdraw from his Accounts such amount payable in a lump sum cash payment as he may specify, but not in excess of the balance of his Accounts. 8.7 WITHDRAWAL FOR FINANCIAL HARDSHIP. Any Member may make application to the Administrative Committee to withdraw from his Salary Deferral Contribution Account, Employer Matching Contribution Account, and Rollover Contribution Account an amount payable in a lump sum cash payment not in excess of the balance of such Accounts. Withdrawals made pursuant to this Section will be permitted only in the event of immediate and heavy financial need incurred by the Member. Whether or not a Member has incurred an immediate and heavy financial need shall be determined by the Administrative Committee on the basis of all relevant facts available to the Administrative Committee and in accordance with written procedures established by the Administrative Committee. Such written procedures shall specify the requirements for requesting and receiving distributions on account of hardship, including what forms must be submitted and to whom. The Administrative Committee shall uniformly and consistently apply such written procedures so that all Members in similar circumstances are treated alike. All determinations regarding financial hardship must be made in accordance with objective nondiscretionary criteria. Such determinations must also comply with applicable Department of Treasury regulations. A financial need shall not fail to qualify as immediate and heavy merely because such need was reasonably foreseeable or voluntarily incurred by the Member. A distribution will be deemed to be made on account of an immediate and heavy financial need of the Member if the distribution is for (a) medical expenses described in Section 213(d) of the Code previously incurred by the Member, the Member's spouse, or any dependents of the Member (as defined in Section 152 of the Code) or necessary for these persons to obtain medical care described in Section 213(d) of the Code, not reimbursed by insurance or otherwise, (b) costs directly related to the purchase of a principal residence for the Member (excluding mortgage payments), (c) payment of tuition and related educational fees for the next 12 months of post-secondary education for the Member, or his or her spouse, children, or dependents, (d) payments necessary to prevent the eviction of the Member from his principal residence or foreclosure on the VIII-2 41 mortgage of the Member's principal residence, or (e) any other reason specified by the Administrative Committee and designated as a "deemed immediate and heavy financial need" in authority issued by the Internal Revenue Service. An application for a withdrawal made pursuant to this Section must be in writing and must state the reason or reasons for the need of such Member to make such a withdrawal. Such application must specify the amount necessary to satisfy the Member's immediate and heavy financial need, and the Member must have obtained all distributions, other than hardship distributions, and all nontaxable (at the time of the loan) loans currently available under all plans maintained by the Affiliated Employers. The Administrative Committee shall be entitled to rely upon the Employee's representations set forth in his application, to the extent that such reliance is reasonable. A distribution made pursuant to this Section shall not exceed the amount of the immediate and heavy financial need of the Member. The amount of an immediate and heavy financial need may include any amounts necessary to pay any federal, state, or local income taxes or penalties reasonably anticipated to result from the distribution. Applications under this Section shall be processed as soon as administratively feasible. The Administrative Committee shall direct the Trustee when to disburse any funds as a hardship withdrawal. Withdrawals made pursuant to this Section shall be made in the following order: first, withdrawals shall be made from a Member's Rollover Contribution Account, then from his Salary Deferral Contribution Account, and finally from his Employer Matching Account. Notwithstanding the foregoing, a Member shall not be entitled to make a financial hardship withdrawal of any Investment Gain or Loss credited to the Member's Salary Deferral Contribution Account after December 31, 1988. The Member's election to withdraw funds pursuant to this Section shall suspend the Member's right to have Salary Deferral Contributions made to the Plan on his behalf for a period of twelve months beginning on the date that the Member receives a hardship distribution pursuant to this Section. No withdrawal may be made under this Section unless the Member is prohibited, under the terms of the plan or an otherwise legally enforceable agreement, from making elective contributions and employee contributions to any other plan maintained by any Affiliated Employer for at least 12 months after receipt of the distribution under this Section. For purposes of the immediately preceding sentence, the phrase "any other plan" means all qualified and nonqualified plans of deferred compensation, including a stock option, stock purchase, or similar plan, or a cash or deferred arrangement that is part of a cafeteria plan within the meaning of Section 125 of the Code. Such phrase, however, does not include the mandatory employee contribution portion of a defined benefit plan, nor does it include a health or welfare benefit plan (including one that is part of a cafeteria plan within the meaning of Section 125). Moreover, the Member shall not be entitled to have Salary Deferral Contributions made to the Plan on his behalf for the Member's taxable year immediately following the taxable year of the distribution in excess of the applicable limit of Code Section 402(g) for such next taxable year less the amount of the Member's Salary Deferral Contributions for the taxable year of the hardship distribution. 8.8 LOANS TO MEMBERS. The Administrative Committee shall determine from time to time whether loans may be made to Members, former Members or Beneficiaries. However, no loans shall be made to any shareholder-employee (as defined in Section 1379 of the Internal Revenue Code of 1954 in effect on the day before the enactment of the Subchapter S Revision Act of 1982), any owner- employee (as defined in Section 401(c)(3) of the Code), or any member of the family of either (as defined in Section 267(c)(4) of the Code). VIII-3 42 If the Administrative Committee permits loans to Members, the opportunity shall be made available to all Members on an equal basis. If the Administrative Committee permits loans, each Member may borrow up to the lesser of (a) 50 percent of the vested interest in his Accounts, or (b) $50,000.00 reduced by the excess of the Member's highest outstanding loan balance from the Plan during the one-year period ending on the day before the date on which such loan was made over the Member's outstanding loan balance from the Plan on the date the loan was made. In determining whether a loan would exceed these limits, all loans under all qualified plans of the Employer and all Affiliated Employers shall be treated as loans under this Plan. A loan to a Member shall be a Member directed investment of his Account. The principal amount of the loan shall be made on a pro-rata basis from the Member's Salary Deferral Contribution Account, Rollover Contribution Account, Employer Matching Contribution Account, and Qualified Nonelective Employer Contribution Account. All principal and interest paid on the loan shall be credited to the Member's Loan Account which may be invested in such Plan investment funds as may be directed by the Member pursuant to Section 11.1. All loans shall be secured by the Member's vested interest in his Accounts at the date of the loan. The loan shall (a) be evidenced by a written note and security agreement, (b) require level amortization of the loan (with payments not less frequently than quarterly) over the term of the loan, and (c) have a term of not more than five years. Notwithstanding any other provision of the Plan, a Member may not make a withdrawal or receive a distribution if the remaining balance of the Member's Account would be less than the outstanding loan balance or the withdrawal or distribution would violate any security requirements of the loan. The Administrative Committee is authorized to establish written guidelines which, if and when adopted, shall become part of this Plan and shall establish the class of Members eligible for loans under the plan (which shall not exclude any Member who is a party in interest with respect to the Plan, within the meaning of Section 3(14) of ERISA) a procedure for applying for loans, the basis on which loans will be approved or denied, limitations (if any) on the types and amounts of loans offered, the procedure for determining a reasonable rate of interest, the events causing acceleration of the note or constituting default and steps that will be taken to preserve plan assets in the event of a default. Prior to the time that a Member is entitled to receive a distribution from his Salary Deferral Contribution Account, his Account balance will not be reduced as a result of his default on a loan. 8.9 RECEIPT OF DOMESTIC RELATIONS ORDER. The receipt of a judicial decree or order shall constitute an event permitting distribution under the Plan, provided that such judicial decree or order would constitute a Qualified Domestic Relations Order if the requirement that such an order not require a plan to make distribution to an alternate payee prior to a Member's or former Member's earliest retirement age, as defined in Section 414(p)(4)(B) of the Code, were disregarded. VIII-4 43 8.10 DISTRIBUTIONS UPON DISPOSITION OF ASSETS OR A SUBSIDIARY. An individual employed by an Employer that is a corporation is entitled to receive a lump sum distribution of his nonforfeitable interest in his Account in the event of the sale or other disposition by the Employer of at least 85% of all of the assets used by the Employer in a trade or business to an unrelated corporation if (a) the Employer continues to maintain the Plan after the disposition and (b) in connection with the disposition the individual is transferred to the employ of the corporation acquiring the assets. An individual employed by a subsidiary of the Sponsor is entitled to receive a lump sum distribution of his nonforfeitable interest in his Account in the event of the sale or other disposition by the Sponsor of its interest in a subsidiary (within the meaning of Section 409(d)(3) of the Code) to an unrelated entity or individual if (a) the Sponsor continues to maintain the Plan after the disposition and (b) in connection with the disposition the individual continues employment with the subsidiary. The selling Employer is treated as continuing to maintain the Plan after the disposition only if the purchaser does not maintain the Plan after the disposition. A purchaser is considered to maintain the Plan if it adopts the Plan, becomes an employer whose employees accrue benefits under the Plan, or if the Plan is merged or consolidated with, or any assets or liabilities are transferred from the Plan to, a plan maintained by the purchaser in a transaction subject to Section 414(l)(1) of the Code. An unrelated corporation, entity or individual is one that is not required to be aggregated with the selling Employer under Section 414(b), (c), (m), or (o) of the Code after the sale or other disposition. If a Member's nonforfeitable Account balance at the date of the disposition and at the time of any prior payment to the Member is $3,500 or less, the Administrative Committee will direct the Trustee to pay to the Member a lump sum cash distribution of his nonforfeitable interest in his Account as soon as administratively practicable following the disposition and any Internal Revenue Service approval of the distribution that the Administrative Committee deems advisable to obtain. If a Member's nonforfeitable Account balance at the date of the disposition or at the time of any prior payment to the Member is more than $3,500, he may elect (1) to receive a lump sum cash distribution of his Account balance as soon as administratively practicable following the disposition and any Internal Revenue Service approval of the distribution that the Administrative Committee deems advisable to obtain, or (2) he may elect to defer receipt of his nonforfeitable Account balance until the first day of the month coincident with or next following the date that he attains age 65. In the manner and at the time required under Regulations, the Administrative Committee will provide the Member with a notice of his right to defer receipt of his Account balance. However, no distribution shall be made to a Member under this Section after the end of the second calendar year following the calendar year in which the disposition occurred. In addition, no distribution shall be made under this Section unless it is a lump sum distribution within the meaning VIII-5 44 of Section 402(d)(4) of the Code, without regard to subparagraphs (A)(i) through (iv), (B), and (H) of that Section. VIII-6 45 ARTICLE IX DISTRIBUTION OF BENEFITS 9.1 FORM OF DISTRIBUTION. Any distribution from the Plan shall be paid in a single sum in cash. 9.2 INFORMATION PROVIDED TO MEMBERS. Information regarding the benefits available under the Plan shall be provided to Members or former Members in accordance with the following provisions: (a) GENERAL INFORMATION. Except as otherwise provided in paragraph (c), each Member or former Member shall be provided with a written explanation of the Member's or former Member's right, if any, to defer receipt of the distribution. (b) TIME FOR GIVING NOTICE. The written explanation shall be provided to a Member or former Member no less than 30 days and no more than 90 days before the Annuity Starting Date unless the Member or former Member legally waives this requirement. (c) EXCEPTION FOR MEMBERS WITH SMALL BENEFIT AMOUNTS. Notwithstanding the preceding provisions of this Section, no information regarding any form of benefit payable in whole or in part during the life of the Member or former Member shall be provided to the Member or former Member if his benefit is payable in a single sum under Section 9.3. 9.3 AUTOMATIC PAYMENT OF SMALL AMOUNTS. Notwithstanding any other provision of the Plan, each Member or former Member (a) who does not die before the Annuity Starting Date and (b) whose vested Account balance at the time of distribution and at the time of any other payment to him is $3,500 or less shall be paid in the form of a single sum payment. 9.4 TIME OF DISTRIBUTION. Subject to any contrary provisions in this Article, distributions provided for in the Plan shall be made or commenced as soon as practical, and in any event, within one year after the Member's or former Member's Separation. 9.5 MEMBER CONSENT TO EARLY DISTRIBUTIONS. Notwithstanding any other provision of the Plan, no benefit shall be distributed or commence to be distributed to a Member or former Member prior to his attainment of the later of age 62 or Normal Retirement Age without his consent, unless the benefit is payable in a single sum under Section 9.3. Any such consent shall be valid only if given not more than 90 days prior to the Member's or former Member's Annuity Starting Date and after his receipt of the notice regarding benefits described in Section 9.2(b). 9.6 COMPLIANCE WITH STATUTORY REQUIREMENTS. Notwithstanding any other provision of the Plan, all benefits payable under the Plan shall be distributed, or commence to be distributed, in compliance with the following provisions: IX-1 46 (a) DISTRIBUTION DEADLINES FOR MEMBERS OR FORMER MEMBERS WHO ARE 70 1/2 OR OLDER. If a Member or former Member attains 70 1/2, the Member or former Member must elect to receive the distribution required under Section 401(a)(9) of the Code in one lump sum or in installments which must commence by his Required Beginning Date. If installments are elected, each installation paid must be equal to or greater than the minimum required distribution under Section 401(a)(9) of the Code. (b) DISTRIBUTION DEADLINE FOR DEATH BENEFITS. If a Member or former Member dies before the distribution of his entire interest, his entire interest shall be distributed within five years after his death. (c) LIMITATIONS ON DEATH BENEFITS. Benefits payable under the Plan shall not be provided in any form that would cause a Member's death benefit to be more than incidental. Any distribution required to satisfy the incidental benefit requirement shall be considered a required distribution for purposes of Section 401(a)(9) of the Code. (d) COMPLIANCE WITH SECTION 401(A)(9). All distributions under the Plan will be made in accordance with the requirements of Section 401(a)(9) of the Code and all Regulations promulgated thereunder. The provisions of the Plan reflecting Section 401(a)(9) of the Code override any distribution options in the Plan inconsistent with such Section. (e) COMPLIANCE WITH SECTION 401(A)(14). Unless the Member or former Member otherwise elects, the payment of benefits under the Plan to the Member or former Member will begin not later than the 60th day after the close of the Plan Year in which occurs the latest of (a) the date on which the Member or former Member attains the earlier of age 65 or the Normal Retirement Age, (b) the 10th anniversary of the year in which the Member or former Member commenced participation in the Plan, or (c) the Member's or former Member's Separation. 9.7 QUALIFIED DOMESTIC RELATIONS ORDERS. Payment will be made in accordance with the provisions of any Qualified Domestic Relations Order. 9.8 DISTRIBUTIONS TO DISABLED. If the Administrative Committee determines that any person to whom a payment is due is unable to care for his affairs because of physical or mental disability, it will have the authority to cause the payments to be made to the spouse, brother, sister, or other person the Administrative Committee determines to have incurred, or to be expected to incur, expenses for that person unless a prior claim is made by a qualified guardian or other legal representative. The Administrative Committee will not be responsible to oversee the application of those payments. Payments made pursuant to this power will be a complete discharge of all liability under the Plan. Any amount payable to a minor under any provision of this Plan including the foregoing provisions of this Section may be paid directly to the minor. The receipt by the minor will be a complete discharge of all liability under the Plan. 9.9 DESIGNATION OF BENEFICIARY. Each Member and former Member has the right to designate and to revoke the designation of his Beneficiary. Each designation or revocation must be IX-2 47 evidenced by a written document in the form required by the Administrative Committee, signed by the Member or former Member, and filed with the Administrative Committee. If no designation is on file at the time of a Member's or former Member's death or if the Administrative Committee determines that the designation is ineffective, the designated Beneficiary will be the Member's or former Member's spouse, if living, or if not, the executor, administrator, or other personal representative of the Member's or former Member's estate. If a Member or former Member is considered to be married under local law, the Member's or former Member's designation of any Beneficiary, other than the Member's or former Member's spouse, will not be valid unless the spouse acknowledges in writing that he or she understands the effect of the Member's or former Member's beneficiary designation and consents to it. The consent must be to a specific Beneficiary or must expressly permit the Member or former Member to change Beneficiaries in the future without any further consent by the spouse. The written acknowledgment and consent must be filed with the Administrative Committee and signed by the spouse and a witness who is a notary public or a member of the Administrative Committee. However, if the spouse cannot be located or there exist other circumstances as described in Sections 401(a)(11) and 417(a)(2) of the Code, the requirement of the Member's or former Member's spouse's acknowledgment and consent may be waived. If a Beneficiary other than the Member's or former Member's spouse is named, the designation will become invalid if the Member is later determined to be married under local law, the Member's or former Member's missing spouse is located, or the circumstances that supported waiver of the requirement of obtaining the consent of the Member's or former Member's spouse no longer exist. 9.10 NO DUPLICATION OF BENEFITS. There will be no duplication of benefits under this Plan. Without regard to any other language in this Plan, all distributions are to be debited to a Member's or former Member's Account as of the date of the distribution. 9.11 MISSING MEMBERS OR BENEFICIARIES. If a person entitled to a distribution cannot be located within one year of the date any benefits payable under the Plan should be paid or commence to be paid, his Account may be forfeited and allocated as any other forfeiture pursuant to the provisions of Section 6.6. Notwithstanding the preceding sentence, if at any time prior to termination of the Plan and complete distribution of the Trust Fund, the former Member or Beneficiary files a valid claim for the forfeited benefits payable under the Plan, then (a) as soon as administratively practicable, the forfeited benefits payable to such former Member or Beneficiary shall be reinstated, and (b) as soon as administratively practicable following the reinstatement of such forfeited benefits, the value of the reinstated benefits shall be paid pursuant to the provisions of this Article to the former Member or Beneficiary thereof. 9.12 CLAIMS PROCEDURE. When a benefit is or is about to be due, the Member, former Member or Beneficiary must submit a claim to the personnel office of his most recent Employer. Under normal circumstances, a final decision will be made as to a claim within 90 days after receipt of the claim. If the Administrative Committee notifies the claimant in writing during the initial 90-day period, it may extend the period up to 180 days after the initial receipt of the claim. The written notice must contain the circumstances necessitating the extension and the anticipated date for the final decision. If a claim is denied during the claims period, the Administrative Committee must notify the IX-3 48 claimant in writing. The denial must include the specific reasons for it, the Plan provisions upon which the denial is based, and the claims review procedure. If no action is taken during the claims period, the claim is treated as if it were denied on the last day of the claims period. 9.13 CLAIMS APPEAL PROCEDURE. If a Member's, former Member's, or Beneficiary's claim is denied and he wants a review, he must apply to the Administrative Committee in writing. That application can include any comment or argument the claimant wants to make. The claimant can either represent himself or appoint a representative, either of whom has the right to inspect all documents pertaining to the claim and its denial. The Administrative Committee can schedule any meeting with the claimant or his representative that it finds necessary or appropriate to complete its review. The request for review must be filed within 90 days after the denial. If it is not, the denial becomes final. If a timely request is made, the Administrative Committee must make its decision, under normal circumstances, within 60 days of the receipt of the request for review. However, if the Administrative Committee notifies the claimant prior to the expiration of the initial review period, it can extend the period of review up to 120 days following the initial receipt of the request for a review. All decisions of the Administrative Committee must be in writing and must include the specific reasons for its action and the Plan provisions on which its decision is based. If a decision is not given to the claimant within the review period, the claim is treated as if it were denied on the last day of the review period. 9.14 DIRECT ROLLOVER OPTION FOR DISTRIBUTIONS MADE ON OR AFTER JANUARY 1, 1993. Effective for distributions made on or after January 1, 1993, a Member, former Member, his spouse, his surviving spouse, or his former spouse who is an alternate payee under a qualified domestic relations order (as defined in Section 414(p) of the Code) will have the right to direct that any portion of his eligible rollover distribution will be directly paid to an eligible retirement plan specified by the distributee. Any payment made under this Section will not be subject to the requirements of Section 414(l) of the Code. The term "eligible rollover distribution" means any distribution of all or any portion of the balance to the credit of the distributee, except that an eligible rollover distribution does not include: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the distributee or the joint lives (or joint life expectancies) of the distributee and the distributee's designated beneficiary, or for a specified period of ten years or more; any distribution to the extent such distribution is required under Section 401(a)(9) of the Code; and the portion of any distribution that is not includable in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities). The term "eligible retirement plan" means an individual retirement account described in Section 408(a) of the Code, an individual retirement annuity described in Section 408(b) of the Code, an annuity plan described in Section 403(a) of the Code, or a qualified trust described in Section 401(a) of the Code, that accepts the distributee's eligible rollover distribution. However, in the case of an eligible rollover distribution to the surviving spouse, an eligible retirement plan is an individual retirement account or individual retirement annuity. IX-4 49 ARTICLE X ADMINISTRATIVE COMMITTEE 10.1 APPOINTMENT, TERM, RESIGNATION, AND REMOVAL. The Board of Directors shall appoint an Administrative Committee of not less than two persons, the members of which shall serve until their resignation, death, or removal. The Sponsor shall notify the Trustee in writing of its composition from time to time. Any member of the Administrative Committee may resign at any time by giving written notice of such resignation to the Sponsor. Any member of the Administrative Committee may be removed by the Board of Directors, with or without cause. Vacancies in the Administrative Committee arising by resignation, death, removal, or otherwise shall be filled by such persons as may be appointed by the Board of Directors. 10.2 POWERS. The Administrative Committee shall have exclusive responsibility for the administration of the Plan, according to the terms and provisions of this document, and shall have all powers necessary to accomplish such purposes, including, but not by way of limitation, the right, power, and authority: (a) To make rules and regulations for the administration of the Plan which are not inconsistent with the terms and provisions thereof, provided such rules and regulations are evidenced in writing; (b) To construe all terms, provisions, conditions, and limitations of the Plan; and its construction thereof made in good faith and without discrimination in favor of or against any Member or former Member shall be final and conclusive on all parties at interest; (c) To correct any defect, supply any omission, or reconcile any inconsistency which may appear in the Plan in such manner and to such extent as it shall deem expedient to carry the Plan into effect for the greatest benefit of all parties at interest, and its judgment in such matters shall be final and conclusive as to all parties at interest; (d) To select, employ, and compensate from time to time such consultants, actuaries, accountants, attorneys, and other agents and employees as the Administrative Committee may deem necessary or advisable for the proper and efficient administration of the Plan, and any agent, firm, or employee so selected by the Administrative Committee may be a disqualified person, but only if the requirements of Section 4975(d) of the Code have been met; (e) To resolve all questions relating to the eligibility of Employees to become Members, and to determine the period of Active Service and the amount of Considered Compensation upon which the benefits of each Member shall be calculated; X-1 50 (f) To resolve all controversies relating to the administration of the Plan, including but not limited to (1) differences of opinion arising between the Employer and a Member or former Member, and (2) any questions it deems advisable to determine in order to promote the uniform and nondiscriminatory administration of the Plan for the benefit of all parties at interest; (g) To direct and instruct or to appoint an investment manager or managers which would have the power to direct and instruct the Trustee in all matters relating to the preservation, investment, reinvestment, management, and disposition of the Trust Fund; provided, however, that the Administrative Committee shall have no authority that would prevent the Trustee from being an "agent independent of the issuer," as that term is defined in Rule 10b-18 promulgated under the Securities Exchange Act of 1934, at any time that the Trustee's failure to maintain such status would result in the Sponsor or any other person engaging in a "manipulative or deceptive device or contrivance" under the provisions of Rule 10b-6 of such Act; (h) To direct and instruct the Trustee in all matters relating to the payment of Plan benefits and to determine a Member's or former Member's entitlement to a benefit should he appeal a denial of his claim for a benefit or any portion thereof; and (i) To delegate such of its clerical and recordation duties under the Plan as it may deem necessary or advisable for the proper and efficient administration of the Plan. 10.3 ORGANIZATION. The Administrative Committee shall select from among its members a chairman, who shall preside at all of its meetings, and shall select a secretary, without regard as to whether that person is a member of that Administrative Committee, who shall keep all records, documents, and data pertaining to its supervision of the administration of the Plan. 10.4 QUORUM AND MAJORITY ACTION. A majority of the members of the Administrative Committee shall constitute a quorum for the transaction of business, and the vote of a majority of the members present at any meeting will decide any question brought before that meeting. In addition, the Administrative Committee may decide any question by a vote, taken without a meeting, of a majority of its members. 10.5 SIGNATURES. The chairman, the secretary, and any one or more of the members of the Administrative Committee to which the Administrative Committee has delegated the power, shall each, severally, have the power to execute any document on behalf of the Administrative Committee, and to execute any certificate or other written evidence of the action of the Administrative Committee. The Trustee, after being notified of any such delegation of power in writing, shall thereafter accept and may rely upon any document executed by such member or members as representing the action of the Administrative Committee until the Administrative Committee files with the Trustee a written revocation of that delegation of power. X-2 51 10.6 DISQUALIFICATION OF ADMINISTRATIVE COMMITTEE MEMBERS. A member of the Administrative Committee who is also a Member of the Plan shall not vote or act upon any matter relating solely to himself, unless he is the sole member of the Administrative Committee. 10.7 DISCLOSURE TO MEMBERS. The Administrative Committee shall make available to each Member, former Member, and Beneficiary for his examination such records, documents, and other data as are required under ERISA, but only at reasonable times during business hours. No Member, former Member, or Beneficiary shall have the right to examine any data or records reflecting the compensation paid to any other Member, former Member, or Beneficiary, and the Administrative Committee shall not be required to make any data or records available other than those required by ERISA. 10.8 STANDARD OF PERFORMANCE. The Administrative Committee and each of its members shall use the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in conducting his business as the administrator of the Plan; shall, when exercising its power to direct investments, diversify the investments of the Plan so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so; and shall otherwise act in accordance with the provisions of the Plan and ERISA. 10.9 LIABILITY OF ADMINISTRATIVE COMMITTEE AND LIABILITY INSURANCE. No member of the Administrative Committee shall be liable for any act or omission of any other member of the Administrative Committee, the Trustee, any investment manager, or any Member who directs the investment of his Account or other agent appointed by the Administrative Committee except to the extent required by the terms of ERISA, and any other applicable state or federal law, which liability cannot be waived. No member of the Administrative Committee shall be liable for any act or omission on his own part except to the extent required by the terms of ERISA, and any other applicable state or federal law, which liability cannot be waived. In this connection, each provision hereof is severable and if any provision is found to be void as against public policy, it shall not affect the validity of any other provision hereof. Further, it is specifically provided that the Trustee may, at the direction of the Administrative Committee, purchase out of the Trust Funds hereof insurance for the members of the Administrative Committee and any other fiduciaries appointed by the Administrative Committee, and for the Trust Fund itself to cover liability or losses occurring by reason of the act or omission of any one or more of the members of the Administrative Committee or any other fiduciary appointed by them under this Plan, provided such insurance permits recourse by the insurer against the members of the Administrative Committee or the other fiduciaries concerned in the case of a breach of a fiduciary obligation by one or more members of the Administrative Committee or other fiduciary covered thereby. 10.10 BONDING. No member of the Administrative Committee shall be required to give bond for the performance of his duties hereunder unless required by a law which cannot be waived. X-3 52 10.11 COMPENSATION. The Administrative Committee shall serve without compensation for their services, but shall be reimbursed by the Employers for all expenses properly and actually incurred in the performance of their duties under the Plan unless the Employers elect to have such expenses paid out of the Trust Fund. 10.12 PERSONS SERVING IN DUAL FIDUCIARY ROLES. Any person, group of persons, corporations, firm, or other entity may serve in more than one fiduciary capacity with respect to the Plan, including the ability to serve both as a successor trustee and as a member of the Administrative Committee. 10.13 ADMINISTRATOR. For all purposes of ERISA, the Administrator of the Plan shall be the Sponsor. The Administrator of the Plan shall have final responsibility for compliance with all reporting and disclosure requirements imposed with respect to the Plan under any federal or state law, or any regulations promulgated thereunder. 10.14 NAMED FIDUCIARY. The members of the Administrative Committee shall be the "named fiduciary" for purposes of Section 402(a)(1) of ERISA, and as such shall have the authority to control and manage the operation and administration of the Plan, except to the extent such authority and control is allocated or delegated to other parties pursuant to the terms of the Plan. 10.15 STANDARD OF JUDICIAL REVIEW OF ADMINISTRATIVE COMMITTEE ACTIONS. The Administrative Committee has full and absolute discretion in the exercise of each and every aspect of its authority under the Plan, including without limitation, the authority to determine any person's right to benefits under the Plan, the correct amount and form of any such benefits; the authority to decide any appeal; the authority to review and correct the actions of any prior administrative committee; and all of the rights, powers, and authorities specified in Sections 9.12, 9.13, and 10.2. Notwithstanding any provision of law or any explicit or implicit provision of this document or, any action taken, or ruling or decision made, by the Administrative Committee in the exercise of any of its powers and authorities under the Plan will be final and conclusive as to all parties other than the Sponsor or Trustee, including without limitation all Members and Beneficiaries, regardless of whether the Administrative Committee or one or more members thereof may have an actual or potential conflict of interest with respect to the subject matter of such action, ruling, or decision. No such final action, ruling, or decision of the Administrative Committee will be subject to de novo review in any judicial proceeding; and no such final action, ruling, or decision of the Administrative Committee may be set aside unless it is held to have been arbitrary and capricious by a final judgment of a court having jurisdiction with respect to the issue. 10.16 INDEMNIFICATION OF ADMINISTRATIVE COMMITTEE BY THE SPONSOR. The Sponsor shall indemnify and hold harmless the Administrative Committee, the Administrative Committee members, and any persons to whom the Administrative Committee has allocated or delegated its responsibilities in accordance with the provisions hereof, as well as any other fiduciary who is also an officer, director, or Employee of an Employer, and hold each of them harmless from and against all claims, loss, damages, expense, and liability arising from their responsibilities in connection with the administration of the Plan which is not otherwise paid or reimbursed by insurance, unless the same shall result from their own willful misconduct. X-4 53 ARTICLE XI INVESTMENT ELECTIONS 11.1 INVESTMENT FUNDS ESTABLISHED. It is contemplated that the assets of this Plan shall be invested in such categories of assets as may be determined from time to time by the Administrative Committee and announced and made available on an equal basis to all Members and former Members. All amounts contributed to a Member's Employer Matching Contribution Account in the form of Sponsor Stock shall be deposited in the Sponsor Stock fund and shall remain invested in the Sponsor Stock fund until the Member or former Member instructs the Trustee to transfer all or a portion of such amounts to other investment funds in accordance with procedures established by the Administrative Committee. In accordance with procedures established by the Administrative Committee, each Member and former Member may designate the percentage of his Employer Matching Contribution Account (except as specified above), Qualified Nonelective Employer Contribution Account, Rollover Contribution Account, and Salary Deferral Contribution Account to be invested in each investment fund available under the Plan. Up to one hundred percent (100%) of the Trust assets may be invested in Sponsor Stock. 11.2 ELECTION PROCEDURES ESTABLISHED. The Administrative Committee shall, from time to time, establish rules to be applied in a nondiscriminatory manner as to all matters relating to the administration of the investment of funds including, but not limited to, the following: (a) The percentage of a Member's or former Member's Account as it exists, from time to time, that may be transferred from one fund to another and the limitations based on amounts, percentages, time, or frequency, if any, on such transfers; (b) The percentage of a Member's future contributions, when allocated to his Account, that may be invested in any one or more funds and the limitations based upon amounts, percentages, time, or frequency, if any, on such investments in various funds; (c) The procedures for making investment elections and changing existing investment elections; (d) The period of notice required for making investment elections and changing existing investment elections; (e) The handling of income and change of value in funds when funds are in the process of being transferred between investment funds and to investment funds; and (f) All other matters necessary to permit the orderly operation of investment funds within the Plan. When the Administrative Committee changes any previous applicable rule, it shall state the effective time of the change and the procedures for complying with any such change. Any change shall remain XI-1 54 effective until such date as stated in the change, or if none is stated, then until revoked or changed in a like manner. XI-2 55 ARTICLE XII VOTING OF SPONSOR STOCK AND TENDER OFFERS 12.1 VOTING OF SPONSOR STOCK. When the Sponsor files preliminary or final proxy solicitation materials with the Securities and Exchange Commission, the Sponsor shall cause a copy of all materials to be simultaneously sent to the Trustee. Based on these materials, the Trustee shall prepare a voting instruction form. At the time of mailing of notice of each annual or special stockholders' meeting of the Sponsor, the Sponsor shall cause a copy of the notice and all proxy solicitation materials to be sent to each Member with an interest in Sponsor Stock held in the Trust, together with the foregoing voting instruction form to be returned to the Trustee or its designee. The form shall show the number of full and fractional shares of the Sponsor Stock credited to each Member's or former Member's Account. The Sponsor shall provide the Trustee with a copy of any materials provided to the Members and shall certify to the Trustee that the materials have been mailed or otherwise sent to the Members and former Members. Each Member and former Member with an interest in Sponsor Stock held in the Trust shall have the right to direct the Trustee as to the manner in which the Trustee is to vote the number of shares of the Sponsor Stock reflecting such Member's or former Member's proportional interest in the Sponsor Stock held in the Trust (both vested and unvested). Directions from a Member or former Member to the Trustee concerning the voting of the Sponsor Stock shall be communicated in writing, or by mailgram or similar means. These directions shall be held in confidence by the Trustee and shall not be divulged to the Sponsor, or any officer or employee thereof, or any other person except to the extent that the Sponsor must have the safeguarded information in order to comply with Federal laws or State laws not preempted by ERISA. Upon its receipt of the directions, the Trustee shall vote the shares of the Sponsor Stock reflecting the Member's or former Member's proportional interest in the Sponsor Stock held in the Trust as directed by the Member or former Member. The Trustee shall vote shares of the Sponsor Stock reflecting such Member's or former Member's proportional interest in the Sponsor Stock held in the Trust (both vested and unvested) for which it has received no directions from the Member or former Member in the same proportion on each issue as it votes those shares for which it received voting directions from Members and former Members. The Trustee shall vote shares of the Sponsor Stock not credited to Members' or former Members' Accounts in the same proportion on each issue as it votes those shares credited to Members' and former Members' Accounts for which it received voting directions from Members and former Members. 12.2 TENDER OFFERS. Upon commencement of a tender offer for any securities held in the Trust that are the Sponsor Stock, the Sponsor shall notify each Member and former Member of the tender offer and utilize its best efforts to timely distribute or cause to be distributed to each Member and former Member the same information that is distributed to other stockholders of the Sponsor in connection with the tender offer, and, after consulting with the Trustee, shall provide and pay for a means by which the Member or former Member may direct the Trustee whether or not to tender the Sponsor Stock credited to the Member's or former Member's vested and unvested Accounts. The Sponsor shall provide the Trustee with a copy of any material provided to the Members and former Members and shall certify to the Trustee that the materials have been mailed or otherwise sent to Members and former Members. XII-1 56 Each Member and former Member shall have the right to direct the Trustee to tender or not to tender some or all of the shares of the Sponsor Stock reflecting his proportional interest in the Sponsor Stock held in the Trust (both vested and unvested). Directions from a Member or former Member to the Trustee concerning the tender of the Sponsor Stock shall be communicated in writing, or by mailgram or such similar means as is agreed upon by the Trustee and the Sponsor under the preceding paragraph. These directions shall be held in confidence by the Trustee and shall not be divulged to the Sponsor, or any officer or employee thereof, or any other person except to the extent that the consequences of such directions are reflected in reports regularly communicated to any such persons in the ordinary course of the performance of the Trustee's services hereunder. The Trustee shall tender or not tender shares of Sponsor Stock as directed by the Member or former Member. To the extent that Members or former Members fail to affirmatively direct the Trustee or fail to issue valid directions to the Trustee to tender shares of the Sponsor Stock credited to their Accounts, those Members or former Members will be deemed to have instructed the Trustee not to tender those shares. Accordingly, the Trustee shall not tender shares of Sponsor Stock credited to a Member's or former Member's Accounts for which it has received no directions or invalid directions from the Member or former Member. The Trustee shall tender that number of shares of the Sponsor Stock not credited to Members' or former Members' Accounts which is determined by multiplying the total number of shares of the Sponsor Stock not credited to Members' or former Members' Accounts by a fraction of which the numerator is the number of shares of the Sponsor Stock credited to Members' or former Members' accounts for which the Trustee has received valid directions from Members or former Members to tender (which directions have not been withdrawn as of the date of this determination) and of which the denominator is the total number of shares of the Sponsor Stock credited to Members' or former Members' Accounts. A Member or former Member who has directed the Trustee to tender some or all of the shares of the Sponsor Stock credited to the Member's or former Member's Accounts may, at any time prior to the tender offer withdrawal date, direct the Trustee to withdraw some or all of the tendered shares, and the Trustee shall withdraw the directed number of shares from the tender offer prior to the tender offer withdrawal deadline. Prior to the withdrawal deadline, if any shares of the Sponsor Stock not credited to Members' or former Members' Accounts have been tendered, the Trustee shall redetermine the number of shares of the Sponsor Stock that would be tendered under this Section if the date of the foregoing withdrawal were the date of determination, and withdraw from the tender offer the number of shares of the Sponsor Stock not credited to Members' or former Members' Accounts necessary to reduce the amount of tendered Sponsor Stock not credited to Members' or former Members' Accounts to the amount so redetermined. A Member or former Member shall not be limited as to the number of directions to tender or withdraw that the Member or former Member may give to the Trustee. A direction by a Member or former Member to the Trustee to tender shares of the Sponsor Stock reflecting the Member's or former Member's proportional interest in the Sponsor Stock held in the Trust shall not be considered a written election under the Plan by the Member or former Member to withdraw, or have distributed, any or all of his withdrawable shares. The Trustee shall credit to each proportional interest of the Member or former Member from which the tendered shares XII-2 57 were taken the proceeds received by the Trustee in exchange for the shares of the Sponsor Stock tendered from that interest. 12.3 SHARES CREDITED. For all purposes of this Article, the number of shares of the Sponsor Stock deemed "credited" to a Member's or former Member's Accounts as of the relevant date (the record date or the date specified in the tender offer) shall be calculated by reference to the number of shares reflected on the books of the transfer agent as of the relevant date. In the case of a tender offer, the number of shares credited shall be determined as of a date as close as administratively feasible to the relevant date. 12.4 CONVERSION. All provisions in this Article shall also apply to any securities received as a result of a conversion of the Sponsor Stock. 12.5 NAMED FIDUCIARY. For purposes of ERISA, each Member or former Member shall be the named fiduciary for purposes of Section 403(a)(1) of ERISA in connection with the exercise of voting and tender offer rights relating to shares of the Sponsor Stock credited to the his Accounts and any shares of the Sponsor Stock not credited to his Accounts that may be affected by his voting or tender decision. XII-3 58 ARTICLE XIII ADOPTION OF PLAN BY OTHER EMPLOYERS 13.1 ADOPTION PROCEDURE. Any business organization may, with the approval of the Board of Directors, adopt this Plan by: (a) executing an adoption instrument (approved by the board of directors of the adopting Employer) agreeing to be bound as an Employer by all the terms, conditions, and limitations of this Plan except those, if any, specifically described in the adoption instrument; and (b) providing all information required by the Administrative Committee and the Trustee. An adoption may be retroactive to the beginning of a Plan Year if these conditions are complied with on or before the last day of that Plan Year. 13.2 NO JOINT VENTURE IMPLIED. The document which evidences the adoption of the Plan by an Employer shall become a part of this Plan. However, neither the adoption of this Plan by an Employer nor any act performed by it in relation to this Plan shall ever create a joint venture or partnership relation between it and any other Employer. 13.3 ALL TRUST ASSETS AVAILABLE TO PAY ALL BENEFITS. The Accounts of Members and former Members employed by the Employers which adopt this Plan shall be commingled for investment purposes. All assets in the Trust Fund shall be available to pay benefits to all Members and former Members. 13.4 QUALIFICATION A CONDITION PRECEDENT TO ADOPTION AND CONTINUED PARTICIPATION. The adoption of this Plan by a business organization is contingent upon and subject to the express condition precedent that the initial adoption does not cause the Plan to fail to qualify under Section 401(a) of the Code. In the event the adoption causes the Plan to fail to qualify, the adoption shall fail retroactively for failure to meet the condition precedent, the portion of the Trust Fund attributable to the attempted adoption shall be immediately returned to the adopting business organization, and the adoption shall be void ab initio. In the event the adoption of the Plan by a business organization later causes the Plan to be disqualified for any reason, the adoption shall fail retroactively for failure to meet the condition precedent and the portion of the Trust Fund attributable to the adoption by that business organization shall be immediately spun off, retroactively as of the last date for which the Plan qualified, to a separate trust fund for its sole benefit and an identical but separate plan shall be created, retroactively effective as of the last date the Plan as adopted by that business organization qualified, for the benefit of the Members covered by that adoption. XIII-1 59 ARTICLE XIV AMENDMENT AND TERMINATION 14.1 SPONSOR'S RIGHT TO AMEND. Subject to the limitations prescribed by Section 14.2, the Board of Directors may at any time and from time to time modify or amend the Plan in whole or in part. Any amendment shall be made by an instrument in writing, executed by the appropriate officer of the Sponsor, setting forth the nature of the amendment and its effective date. 14.2 LIMITATIONS ON RIGHT TO AMEND. No amendment shall vest in any Employer, directly or indirectly, any right, title or interest in or to control over any Trust Fund or any portion thereof. No part of the Trust Fund shall by reason of any amendment be used for or diverted to purposes other than the exclusive benefit of Members and their Beneficiaries. If the Plan is amended in any manner, the nonforfeitable percentage of the accrued benefit derived from Employer Contributions (determined as of the later of the date of the adoption of the amendment or of the effective date of the amendment) of each Member shall not be less than such nonforfeitable percentage computed under the Plan without regard to such amendment. If the Plan's vesting schedule is amended, if the Plan is amended in any way that directly or indirectly affects the computation of the Member's nonforfeitable percentage, each Member with at least three Years of Vesting Service may elect, within a reasonable period after the adoption of the amendment or change, to have the nonforfeitable percentage computed under the Plan without regard to such amendment or change. The period during which the election may be made shall begin on the date on which the amendment is adopted or deemed to be made and shall end on the day which is 60 days after the latest of (a) the day the amendment is adopted or deemed to be made; (b) the day the amendment becomes effective; or (c) the day the Member is issued written notice of the amendment by the Employer. No amendment shall decrease the Account balance of a Member or eliminate an optional form of benefit with respect to benefits attributable to service before the amendment in violation of Section 411(d)(6) of the Code. No amendment shall increase substantially the duties or responsibilities of the Trustee without its written consent. 14.3 RETROACTIVE AMENDMENTS TO MEET LABOR OR TAX REQUIREMENTS. It is the intention of the Sponsor that Employer Contributions to the Plan be deductible under the applicable provisions of the Code; that the Plan meet all requirements of ERISA; that (except as otherwise prescribed by applicable law) such contributions not be subject to the Federal Social Security Act; that to the extent permitted under applicable law such contributions not be subject to withholding under the Internal Revenue Code of 1986 or the Federal Social Security Act; and that such contributions not be subject to the Fair Labor Standards Act of 1938, as amended, as part of its Employees' "regular rate." The Sponsor shall make such amendments to the Plan as may be necessary to carry out this intention. All such amendments may be made retroactively as limited by the applicable federal law. 14.4 TERMINATION OF PLAN. The Sponsor may terminate this Plan and its related Trust Fund with respect to all Employers by executing and delivering to the Administrative Committee and the Trustee a notice of termination, specifying the date of termination. Any Employer may terminate this Plan and its related Trust Fund with respect to itself by executing and delivering to the Trustee a notice of termination, specifying the date of termination. Likewise, this Plan and its related Trust XIV-1 60 Fund shall automatically terminate with respect to any Employer if there is a general assignment by that Employer to or for the benefit of its creditors, or a liquidation or dissolution of that Employer without a successor. Upon the termination of this Plan as to an Employer, the Trustee shall, subject to the provisions of Section 15.5, distribute to each Member employed by the terminating Employer the amount certified by the Administrative Committee to be due the Member. The Employer should apply to the Internal Revenue Service for a determination letter with respect to its termination, and the Trustee should not distribute the Trust Funds until a determination is received. However, should it decide that a distribution before receipt of the determination letter is necessary or appropriate it should retain sufficient assets to cover any tax that may become due upon that determination. 14.5 VESTING UPON TERMINATION, PARTIAL TERMINATION, AND SUSPENSION OR DISCONTINUANCE OF EMPLOYER CONTRIBUTIONS. Notwithstanding any other provision of the Plan, in the event there is a total or partial termination, or a complete discontinuance of the Employer's contributions hereunder, the vesting schedules contained in this Plan will be inapplicable and each affected Member employed by the Employers will thereupon have a full one hundred percent (100%) vested and nonforfeitable interest in the amount standing to his credit in his Account as of the total or partial termination or complete discontinuance of the Employer's contributions. If the Employers should thereafter resume making substantial Employer Contributions, all amounts credited or allocated to the affected Member's Account with respect to the Plan Years for which the contributions are resumed by the Employers and the Plan Years for which they are continued will again vest only in accordance with the vesting schedules set forth herein. During any period of termination or complete discontinuance of the Employer Contributions all other provisions of its Plan will continue in full force and effect other than the provision for the Employer Contributions and their allocation to the affected Member's Accounts. 14.6 PLAN MERGERS. Notwithstanding any other provision hereof, the Plan will not be merged or consolidated with, nor shall any assets or liabilities of the Plan be transferred to, any other plan unless each Member would (if the plan then terminated) receive a benefit immediately after the merger, consolidation, or transfer which is equal to or greater than the benefit he would have been entitled to receive immediately before the merger, consolidation, or transfer (if the Plan had then terminated). XIV-2 61 ARTICLE XV MISCELLANEOUS 15.1 NO REVERSIONARY INTEREST. In no event shall the principal or income of the Trust be paid to or revert to the Employer or be used for any purpose other than the exclusive benefit of the Members or Beneficiaries and the reasonable expenses of administering the Plan, except that: (a) If the Employer makes a contribution by mistake of fact, such mistaken contribution may revert and be repaid to the Employer within one year after the payment of the contribution. (b) The Employer's Contribution is conditioned upon the deductibility thereof under Section 404 of the Code. To the extent the deduction is disallowed the contribution may revert and be repaid to the Employer within one year after the disallowance of the deduction. The Employer shall, subject to the limitations set forth below, have exclusive authority and absolute discretion to determine whether a contribution, or any part thereof, shall revert and be repaid to it or shall instead remain a part of the Trust Fund. The amount which may be repaid to the Employer may not exceed the excess of the amount contributed over the amount that would have been contributed had there not occurred a mistake of fact, or the amount disallowed as a deduction. Earnings attributable to such excess contribution shall not be repaid, and losses attributable thereto shall reduce the amount which may be returned. If the repayment of the amount attributable to the mistaken contribution would cause the balance of any Member's Accounts to be reduced to less than the balance which would have been in the Accounts had the mistaken amount not been contributed, then the amount which may be repaid to the Employer shall be limited so as to avoid such reduction. 15.2 PLAN DOES NOT CONSTITUTE AN EMPLOYMENT CONTRACT. The adoption and maintenance of the Plan shall not be deemed to be a contract between any Employer and any Member. Nothing contained herein shall be deemed to give any Member the right to be retained in the employment of the Employer or to interfere with the rights of the Employer to discharge any Member at any time, nor shall it interfere with the Member's right to terminate his employment at any time. 15.3 BENEFITS PROVIDED SOLELY BY TRUST. All benefits payable under the Plan shall be paid or provided for solely from the Trust, and the Employer assumes no liability or responsibility therefor. 15.4 SPENDTHRIFT CLAUSE. Except as otherwise specifically provided, no principal or income payable or to become payable from the Trust Fund shall be subject to anticipation or assignment by any Member or by any Beneficiary or be subject to attachment by, or to the interference or control of, any creditor of a Member or Beneficiary, or be taken or reached by any legal or equitable process in satisfaction of any debt or liability of a Member or Beneficiary prior to its actual receipt by such Member or Beneficiary. The interests of the Employer in the assets, earnings and profits of the Trust Fund shall not be subject to garnishment, attachment, levy, or execution of any kind for debts or defaults of any person, natural or legal, having an interest in any portion of the Trust Fund. Any XV-1 62 attempted conveyance, transfer, assignment, mortgage, pledge, or encumbrance of the Trust estate, or any part thereof, or any interest therein, by a Member or Beneficiary, prior to distribution as herein provided, shall be absolutely and wholly void, whether such conveyance, transfer, assignment, mortgage, pledge, or encumbrance be intended to take place or become effective before or after the expiration of the period herein fixed for the continuance of the said Trust estate. The Trustee shall never under any circumstances be required to recognize any conveyance, transfer, assignment, mortgage, or pledge by a Member or Beneficiary hereunder, of any part of the Trust estate, or of any interest therein, and the Trustee shall never be required to pay any money or thing of value thereon or therefor to any creditor of a Member or Beneficiary, nor upon any debt created by a Member or Beneficiary for any cause whatsoever. This Section shall also apply to the creation, assignment, or recognition of a right to any benefit payable with respect to a participant pursuant to a domestic relations order, unless such order is determined to be a Qualified Domestic Relations Order, or any domestic relations order entered before January 1, 1985. Notwithstanding any provision of this Section 16.4, a Member may make a voluntary revocable assignment of his Plan benefits to the extent permitted in Regulations. 15.5 GOVERNING LAWS; PARTIES TO LEGAL ACTIONS. The provisions of the Plan shall be construed, administered and enforced according to the laws of the United States and the State of Texas. The Trustee or the Employer may at any time initiate any legal action or proceeding for the settlement of the accounts of the Trustee or for the determination of any questions, including questions of construction which may arise, or for instruction, and the only necessary parties to such action or proceeding shall be the Trustee and the Employer, except that any other person or persons may be included as parties defendant at the election of the Trustee and the Employer. 15.6 PLAN DOCUMENT CONTROLLING. In the event that there is a discrepancy between the terms of this document and the terms of any policy or contract issued under the Plan, the provisions of this document shall control. 15.7 CROSS REFERENCES. All Section references are to Sections of this document, unless otherwise specified. 15.8 TRUSTEE'S FEES AND EXPENSES. The Trustee shall receive for its services as Trustee hereunder the compensation which from time to time may be agreed upon by the Sponsor and the Trustee. All of such compensation, together with the expenses incurred by the Trustee in connection with the administration of this Trust, including fees for legal services rendered to the Trustee, all other charges and disbursements of the Trustee, and all other expenses of the Plan shall be charged to and deducted from the Trust Fund, unless the Sponsor elects in writing to have any part or all of such compensation, expenses, charges, and disbursements paid directly by the Sponsor. The Trustee shall deduct from and charge against the Trust assets any and all taxes paid by it which may be levied or assessed upon or in respect of the Trust hereunder or the income thereof, and shall equitably allocate the same among the several Members. XV-2 63 IN WITNESS WHEREOF, the parties hereto have executed this Agreement this 12th day of August, 1996, to be effective as of January 1, 1996, except as otherwise specified or as otherwise required to comply with the provisions of the Tax Reform Act of 1986, or any other applicable statute, regulation, or ruling. PLAINS RESOURCES INC. By: Mary O. (Susie) Peters ------------------------------- Title: Vice President CALUMET FLORIDA, INC. By: Michael R. Patterson ------------------------------- Title: Vice President PLX INGLESIDE INC. By: Michael R. Patterson ------------------------------- Title: Vice President PLAINS ILLINOIS INC. By: Michael R. Patterson ------------------------------- Title: Vice President STOCKER RESOURCES, INC. By: Michael R. Patterson ------------------------------- Title: Vice President EX-10.I 3 CREDIT AGREEMENT DATED DECEMBER 16, 1996 1 EXHIBIT 10(i) FIRST AMENDMENT TO THIRD AMENDED AND RESTATED CREDIT AGREEMENT THIS FIRST AMENDMENT TO THIRD AMENDED AND RESTATED CREDIT AGREEMENT (this "Amendment") dated as of the 16th day of December, 1996, by and among PLAINS RESOURCES INC., a Delaware corporation (the "Company"), ING (U.S.) CAPITAL CORPORATION, f/k/a Internationale Nederlanden (U.S.) Capital Corporation, as Agent ("Agent"), and the Lenders under the Original Agreement (as defined herein). W I T N E S S E T H: WHEREAS, the Company, Agent and Lenders entered into that certain Third Amended and Restated Credit Agreement dated as of April 11, 1996 (the "Original Agreement") for the purposes and consideration therein expressed, pursuant to which Lenders became obligated to make and made loans to the Company as therein provided; and WHEREAS, the Company, Agent and Lenders desire to amend the Original Agreement to (i) set forth certain agreements relating to an indemnity or other credit support which ING (U.S.) Capital Corporation may provide on behalf of Borrower in connection with Hedging Transactions, and (ii) incorporate amendments to the Bank of Boston/ING Capital Facility; NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements contained herein and in the Original Agreement, in consideration of the loans which may hereafter be made by Lenders to the Company, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto do hereby agree as follows: ARTICLE I. -- Definitions and References Section 1.1. Terms Defined in the Original Agreement. Unless the context otherwise requires or unless otherwise expressly defined herein, the terms defined in the Original Agreement shall have the same meanings whenever used in this Amendment. Section 1.2. Other Defined Terms. Unless the context otherwise requires, the following terms when used in this Amendment shall have the meanings assigned to them in this Section 1.2. "Amendment" means this First Amendment to Third Amended and Restated Credit Agreement. "Credit Agreement" means the Original Agreement as amended hereby. -1- 2 ARTICLE II. -- Amendments Section 2.1. Definitions. The definitions of "Applicable Margin", "Bank of Boston/ING Capital Facility" and "Hedging Agreement" set forth in Section 1.01 of the Original Agreement are hereby amended in their entirety to read as follows: "Applicable Margin" shall mean (i) with respect to Base Rate Loans zero percent (0%) per annum and (ii) with respect to Eurodollar Loans, one and three-eighths percent (1.375%) per annum. "Bank of Boston/ING Capital Facility" shall mean, collectively, two uncommitted secured demand transactional line of credit facilities, in an aggregate amount not to exceed $90,000,000, dated August 23, 1995, as amended as of November 20, 1996, among The First National Bank of Boston, individually and as agent, ING (U.S.) Capital Corporation, the other lenders named therein, and (i) Plains Marketing, and (ii) PMCT, together with the security documents and other documents and agreements executed in connection with each such facility. "Hedging Agreement" shall mean (i) any currency rate swap, rate cap, rate floor, rate collar, exchange transaction, forward rate agreement, or other exchange or rate protection agreements or any option with respect to any such transaction now existing or hereafter entered into between any Obligor and Agent, AIG Trading Corporation, or any Lender, or (ii) any swap agreement, cap, floor, collar, exchange transaction, forward agreement, or other exchange or protection agreements relating to crude oil, natural gas or other hydrocarbons, or any option with respect to any such transaction now existing or hereafter entered into between any Obligor and Agent, AIG Trading Corporation, or any Lender. Section 2.2 Hedging Agreement Indemnity. Article 2 of the Original Agreement is hereby amended by adding a new Section 2.10 to read as follows: 2.10. Hedging Agreement Indemnity. From time to time ING (U.S.) Capital Corporation ("ING Capital") may provide an indemnity or other credit support on behalf of Obligors to AIG Trading Corporation, whereby ING Capital agrees to pay the obligations of such Obligor arising from time to time under a Hedging Agreement (a "Hedging Agreement Indemnity"). In consideration thereof, the Company hereby promises and agrees to pay to ING Capital each amount which ING Capital is called upon to pay on behalf of or for the benefit of such Obligor under a Hedging Agreement Indemnity. The Company shall pay each such amount, immediately upon demand, in legal tender of the United States in same day funds. Such promise and agreement of the Company is irrevocable and unconditional. ING Capital is authorized and instructed to pay all demands for payment under any such Hedging Agreement Indemnity after exercising reasonable care to determine whether such demand or the amount thereof is correct. The Company hereby promises to pay to ING Capital, on demand, interest at the Post-Default Rate on any amount payable by the Company -2- 3 under this section from the date such amounts become due until they are paid. The Company may enter into a separate Reimbursement Agreement governing such promise and agreement of the Company to pay to ING Capital each amount which ING Capital is called upon to pay on behalf of or for the benefit of such Obligor under a Hedging Agreement Indemnity. Notwithstanding the existence of any such separate Reimbursement Agreement, the obligation of the Company described in this section shall be an "Obligation" arising under this Agreement and shall be secured by and entitled to the benefit of all Guaranties and Security Documents, whether or not the Security Documents specifically describe such separate Reimbursement Agreement or the obligations of the Company under this section. Each payment under a Hedging Agreement Indemnity (whether in response to a demand for payment or otherwise) shall constitute a loan by ING Capital and shall be secured by and entitled to all benefits under the Security Documents. Section 2.3. Indebtedness. Section 8.09(e) is hereby amended in its entirety to read as follows: (e) (i) Indebtedness of Plains Marketing, PMCT and their Wholly-Owned Subsidiaries under the Bank of Boston/ING Capital Facility, and the guaranty by the Company of such Indebtedness (together with reimbursement obligations of the Company in connection with the Support Letter of Credit), (ii) the unsecured guaranty by PMCT of the indebtedness of the Company under the Senior Subordinated Indenture and the Senior Subordinated Notes, (iii) other Indebtedness of Plains Marketing, PMCT and their Wholly-Owned Subsidiaries arising in the ordinary course of their businesses under crude oil purchase or sale agreements, crude oil future, forward or similar contracts, or letters of credit supporting such obligations, and the unsecured guaranty by the Company of such other Indebtedness, and (iv) the unsecured guaranty by the Company of indebtedness of Plains Marketing, PMCT and their Wholly-Owned Subsidiaries arising in the ordinary course of their businesses under crude oil purchase or sale agreements, crude oil future, forward or similar contracts, or letters of credit supporting such obligations; provided, the aggregate outstanding amount of such Indebtedness under the preceding clauses (iii) and (iv) shall not at any time exceed (A) $125,000,000 minus (B) the outstanding Indebtedness under the Bank of Boston/ING Capital Facility. ARTICLE III. -- Miscellaneous Section 3.1. Representations and Warranties of the Company. In order to induce Agent and Lenders to enter into this Amendment, the Company represents and warrants to Agent and Lenders that the representations and warranties contained in Section 7 of the Original Agreement, are true and correct at and as of the time of the effectiveness hereof, subject to the amendment of certain of the Schedules to the Credit Agreement as attached hereto. Section 3.2. Ratification of Agreements. The Original Agreement, as hereby amended, is hereby ratified and confirmed in all respects. The Basic Documents, as they may be amended -3- 4 or affected by this Amendment are hereby ratified and confirmed in all respects. Any reference to the Credit Agreement in any Basic Document shall be deemed to refer to this Amendment also. The execution, delivery and effectiveness of this Amendment shall not, except as expressly provided herein or therein, operate as a waiver of any right, power or remedy of Agent or any Lender under the Credit Agreement or any other Basic Document nor constitute a waiver of any provision of the Credit Agreement or any other Basic Document. Section 3.3. Ratification of Security Documents. The Company, Agent and Lenders each acknowledge and agree that any and all indebtedness, liabilities or obligations arising under or in connection with the Notes are Obligations and is secured indebtedness under, and is secured by, each and every Security Document to which the Company is a party. The Company hereby re-pledges, re-grants and re-assigns a security interest in and lien on every asset of the Company described as collateral in any Security Document. Section 3.4. Survival of Agreements. All representations, warranties, covenants and agreements of the Company herein shall survive the execution and delivery of this Amendment and the performance hereof and thereof, including without limitation the making or granting of each Loan, and shall further survive until all of the Obligations are paid in full. All statements and agreements contained in any certificate or instrument delivered by the Company or any Subsidiary hereunder or under the Credit Agreement to Agent or any Lender shall be deemed to constitute representations and warranties by, or agreements and covenants of, the Company under this Amendment and under the Credit Agreement. Section 3.5. Basic Document. This Amendment is a Basic Document, and all provisions in the Credit Agreement pertaining to Basic Documents apply hereto and thereto. Section 3.6. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK AND ANY APPLICABLE LAWS OF THE UNITED STATES OF AMERICA IN ALL RESPECTS, INCLUDING CONSTRUCTION, VALIDITY AND PERFORMANCE. Section 3.7. Counterparts. This Amendment may be separately executed in counterparts and by the different parties hereto in separate counterparts, each of which when so executed shall be deemed to constitute one and the same Amendment. IN WITNESS WHEREOF, this Amendment is executed as of the date first above written. PLAINS RESOURCES INC. By: /s/ Phillip D. Kramer ------------------------------------ Phillip D. Kramer Vice President and Chief Financial Officer -4- 5 ING (U.S.) CAPITAL CORPORATION, f/k/a Internationale Nederlanden (U.S.) Capital Corporation, individually as a Lender and as Agent By: /s/ Robi Artman-Hodge -------------------------------------- Robi Artman-Hodge, Managing Director THE FIRST NATIONAL BANK OF BOSTON, Lender By: /s/ George W. Passela -------------------------------------- George W. Passela, Managing Director DEN NORSKE BANK AS, Lender By: /s/ Byron L. Cooley -------------------------------------- Byron L. Cooley,Senior Vice President By: /s/ Morten Bjornsen -------------------------------------- Morten Bjornsen, Senior Vice President WELLS FARGO BANK (TEXAS) NATIONAL ASSOCIATION (f/k/a First Interstate Bank of Texas, N.A.), Lender By: /s/ Ann M. Rhoads -------------------------------------- Ann M. Rhoads, Vice President -5- 6 TEXAS COMMERCE BANK NATIONAL ASSOCIATION, Lender By: /s/ Scott H. Richardson -------------------------------------- Scott H. Richardson, Vice President -6- 7 CONSENT AND AGREEMENT Each of the undersigned Subsidiary Guarantors hereby consents to the provisions of this Amendment and the transactions contemplated herein and hereby (i) acknowledges and agrees that any and all indebtedness, liabilities or obligations arising under or in connection with the Notes are Obligations and are secured indebtedness under, and are secured by, each and every Security Document to which it is a party, (ii) re-pledges, re-grants and re-assigns a security interest in and lien on all of its assets described as collateral in any Security Document, (iii) ratifies and confirms its Amended and Restated Guaranty dated April 11, 1996 made by it for the benefit of Agent and Lenders, and (iv) expressly acknowledges and agrees that such Subsidiary Guarantor guarantees all indebtedness, liabilities and obligations arising under or in connection with the Notes pursuant to the terms of such Amended and Restated Guaranty, and agrees that its obligations and covenants thereunder are unimpaired hereby and shall remain in full force and effect. Each of the undersigned hereby further agrees that any obligation of the Company arising pursuant to Section 2.10 of the Credit Agreement shall constitute "Obligations" under the Guaranty. PLAINS MARKETING & TRANSPORTATION INC. By: /s/ Phillip D. Kramer -------------------------------------- Phillip D. Kramer, Vice President PLAINS RESOURCES INTERNATIONAL INC. By: /s/ Phillip D. Kramer -------------------------------------- Phillip D. Kramer, Vice President PLAINS TERMINAL & TRANSFER CORPORATION By: /s/ Phillip D. Kramer -------------------------------------- Phillip D. Kramer, Vice President PLX CRUDE LINES INC. By: /s/ Phillip D. Kramer -------------------------------------- Phillip D. Kramer, Vice President -7- 8 STOCKER RESOURCES, INC. By: /s/ Phillip D. Kramer ---------------------------------------- Phillip D. Kramer, Vice President PLX INGLESIDE INC. By: /s/ Phillip D. Kramer ---------------------------------------- Phillip D. Kramer, Vice President STOCKER RESOURCES, L.P. By: Stocker Resources, Inc., its General Partner By: /s/ Phillip D. Kramer -------------------------------- Phillip D. Kramer, Vice President CALUMET FLORIDA, INC. By: /s/ Phillip D. Kramer ---------------------------------------- Phillip D. Kramer, Vice President PLAINS ILLINOIS INC. By: /s/ Phillip D. Kramer ---------------------------------------- Phillip D. Kramer, Vice President -8- EX-10.J 4 UNCOMMITTED SECURED TRANSACTIONAL LINE OF CREDIT 1 EXHIBIT 10(j) Dated as of November 22, 1996 Plains Marketing & Transportation Inc. 1600 Smith Street Houston, TX 77002 Re: Amendment No. 4 to Uncommitted Secured Demand Transactional Line of Credit Facility Gentlemen: Reference is made to that certain letter agreement outlining the parameters of an uncommitted secured demand transactional line of credit facility dated August 23, 1995 (as further amended to date and including all exhibits, schedules and annexes thereto, the "Marketing Letter Agreement") among The First National Bank of Boston ("FNBB"), Internationale Nederlanden (U.S.) Capital Corporation ("ING"), Den Norske Bank ASA, Comerica Bank-Texas and such other banks as may from time to time become parties thereto, (collectively, the "Lenders") and FNBB, as agent for the Lenders (in such capacity, the "Agent") and Plains Marketing & Transportation Inc. (the "Borrower"). All capitalized terms used herein without definition which are defined in the Marketing Letter Agreement shall have the same meaning herein as therein. Wells Fargo Bank (Texas), National Association ("Wells") wishes to become a party to the Marketing Letter Agreement as a Lender to the Borrower and simultaneously with the execution hereof will execute an Instrument of Accession in substantially the form attached as Exhibit A to the Marketing Letter Agreement. Borrower, the Lenders (which term for all purposes in this Amendment shall include Wells) and the Agent wish to amend certain terms of the Marketing Letter Agreement as follows: 1. FACILITY AMOUNT. Section 1(b) of the Marketing Letter Agreement is hereby amended by deleting the first sentence thereof and substituting the following therefor: "The aggregate amount of the Accommodations which may be made available by the Lenders and which will be allowed to be outstanding at any one time under the Marketing Facility shall be restricted to the excess of (i) $90,000,000 (subject to adjustment as set forth in the proviso below) over (ii) the then aggregate amount of the outstanding 2 -2- Accommodations made by the Lenders to or for the account of PMCT Inc., a Delaware corporation ("PMCT"), under that certain letter agreement of even date herewith, as amended and in effect from time to time (the "PMCT AGREEMENT"), among the Lenders, the Agent and PMCT (such difference in amount, as in effect from time to time under the Marketing Facility, hereinafter referred to as the "MARKETING FACILITY AMOUNT"); provided that for purposes of determining the Marketing Facility Amount, the amount set forth in clause (i) of this Section 1(b) shall be limited to $80,000,000 until such time as the Agent shall have received, in form and substance satisfactory to the Agent, a copy of an amendment to the Resources Credit Agreement duly executed by all parties thereto pursuant to which the lenders under the Resources Credit Agreement consent to the increase to $90,000,000 of the maximum aggregate Marketing Facility Amount available under the Marketing Facility subject to decreases as provided in clause (ii) above and the guaranty by Resources of such maximum Marketing Facility Amount." 2. EXPIRATION DATE. Section 1(e)(i) of the Marketing Letter Agreement is hereby amended and restated in its entirety to read as follows: "(e) EXPIRATION: (i) No request for any Accommodation may be made after November 21, 1997, unless the Lenders, in their sole discretion and without any obligation to do so, extend such date in writing." 3. RESOURCES CREDIT AGREEMENT. Section 1(j)(vi) of the Marketing Letter Agreement is hereby amended by deleting the phrase "that certain Second Amended and Restated Credit Agreement dated as of February 11, 1994" and substituting therefor the phrase "that certain Third Amended and Restated Credit Agreement dated as of April 11, 1996", which Third Amended and Restated Credit Agreement shall be the agreement referred to in the Marketing Letter Agreement as the "Resources Credit Agreement". 4. CUSHING TERMINAL REPORT. Section 1(j) of the Marketing Letter Agreement is hereby amended by renumbering the current clause (ix) to be clause (x) and by inserting the following paragraph as a new clause (ix): "(ix) on a monthly basis, a certificate signed by the Borrower's chief financial officer, chief accounting officer or chief operating officer certifying that as of a date which shall be not more than one week prior to the date of the certificate the aggregate sum of (i) the aggregate current crude oil inventory volumes held by the Borrower and/or PMCT, plus (ii) the aggregate volume of current crude oil positions subject to time spreads as described in paragraph (v)(D) of Schedule 4 of the Marketing Letter Agreement for both the Borrower and PMCT, plus (iii) the aggregate volume of all current cash and carry crude oil positions for both the Borrower and PMCT, plus (iv) the aggregate volume of all crude oil which the 3 -3- Borrower and/or PMCT is otherwise obligated to take pursuant to the terms of existent contracts, does not exceed the then currently available crude oil storage capacity at the Cushing Terminal; and" 5. SCHEDULE 1. Schedule 1 to the Marketing Letter Agreement is hereby amended by substituting therefor the Schedule 1 attached hereto. 6. FINANCIAL AND OTHER GUIDELINES. Schedule 4 to the Marketing Letter Agreement is hereby amended as follows: (a) paragraph (v)(C) of Schedule 4 is amended by deleting the text thereof in its entirety and substituting the following therefor: "(C) The aggregate of (a) crude oil pipeline inventory and (b) crude oil inventory in the Cushing Terminal shall not exceed, in the aggregate for both PMCT Inc. and Marketing, a maximum of 250,000 barrels and such barrels shall be hedged (i) on the NYMEX for delivery within the next 6 months; provided that of such aggregate amount up to 100,000 barrels may be hedged on the NYMEX for delivery between the next 6 and 12 months or (ii) in the cash market with counterparties satisfactory to the Lenders for delivery within the next 60 days. Notwithstanding the above, inventories in crude oil pipelines shall be limited to 175,000 barrels." (b) paragraph (v)(D) of Schedule 4 is amended by deleting the text thereof in its entirety and substituting the following therefor: "(D) Inventory positions (other than fully hedged cash-and-carry positions which qualify under subsection (C) above) and positions which do not otherwise qualify under subsection (C) above shall be limited to time spreads for periods up to a maximum of twelve months for up to a maximum of 500,000 barrels, in the aggregate for both PMCT Inc. and Marketing, of crude oil hedged on the NYMEX." (c) paragraph (xi) of Schedule 4 is amended by deleting from the first sentence thereof the phrase "that certain Indenture dated as of October 1, 1992 among Resources, certain subsidiaries and Ameritrust Texas National Association" and substituting therefor the phrase "that certain Indenture dated as of March 15, 1996 among Resources, certain subsidiaries of Resources and Texas Commerce Bank National Association as Trustee, pursuant to which Resources issued 10 1/4% Senior Subordinated Notes due 2006, Series A and Series B, in the aggregate principal amount of $150,000,000". 4 -4- 7. SECURITY. The Borrower hereby confirms that the reference to "Marketing Letter Agreement" in the term "Marketing Obligations" as used in that certain Security Agreement dated as of August 23, 1995 between Marketing and the Agent includes the Marketing Letter Agreement as amended hereby and that references to the Demand Loans and L/C's issued pursuant to the Marketing Letter Agreement refers to all Demand Loans and L/C's issued pursuant to the Marketing Letter Agreement, as amended hereby. 8. CONDITIONS PRECEDENT. This Amendment shall become effective upon receipt by the Agent of the following: (a) a counterpart of this Amendment duly signed where indicated below by each Lender, the Agent, the Borrower and Plains Resources Inc.; (b) a counterpart of the Instrument of Accession duly signed where indicated by the Borrower and each Lender as indicated thereon, evidencing Wells' accession to the Marketing Letter Agreement and certain other agreements referenced therein; (c) a promissory note (the "Wells Note") duly signed by the Borrower evidencing the Borrower's obligations to repay to Wells the Demand Loans advanced by Wells and any drawings under the L/C's funded by Wells in form and substance of Exhibit I to the Marketing Letter Agreement; (d) a counterpart of Amendment No. 4 to the PMCT Agreement duly signed where indicated by PMCT, each Lender and the Agent; (e) a legal opinion of even date herewith from the Borrower's general counsel in form and substance satisfactory in all respects to the Agent and its counsel; (f) evidence satisfactory to the Agent that the execution and delivery of this Amendment and the Wells Note have been duly authorized by all necessary corporate action and that the Borrower is validly incorporated and in good standing in all relevant jurisdictions; (g) an acknowledgment from the lenders under the Resources Credit Agreement that the terms of that certain letter agreement dated August 23, 1995 from the Agent to ING as Agent under the Resources Credit Agreement are in full force and effect and applicable to the Marketing Letter Agreement as amended hereby; (h) a counterpart of the Security Agreement and Assignment of Hedging Account and Agency Agreement in form and substance satisfactory to the Agent duly executed by the Borrower, the Agent and Bear, Stearns Securities Corp. in connection with the Borrower's commodity account #J278 0L60 00757 at Bear, Stearns Securities Corp; and 5 -5- (i) a counterpart of the Security Agreement and Assignment of Hedging Account and Agency Agreement in form and substance satisfactory to the Agent duly executed by the Borrower, the Agent and Citicorp Futures Corporation in connection with the Borrower's commodity account #10730 at Citicorp Futures Corporation. 6 -6- If you agree to and accept the foregoing amendment, please so indicate by signing a counterpart of this letter and returning it to the Agent. Upon satisfaction of the conditions set forth in Section 8 hereof, this Amendment shall take effect as a binding agreement among us, to be construed and enforceable in accordance with the laws of The Commonwealth of Massachusetts. PLAINS MARKETING & TRANSPORTATION INC. By: /s/ Phil Kramer --------------------------------- Phil Kramer, Vice President THE FIRST NATIONAL BANK OF BOSTON, Individually and as Agent By: /s/ Christopher Holmgren --------------------------------- Christopher Holmgren, Director INTERNATIONALE NEDERLANDEN (U.S.) CAPITAL CORPORATION By: /s/ Robi Artman-Hodge --------------------------------- Robi Artman-Hodge, Managing Director DEN NORSKE BANK ASA DEN NORSKE BANK ASA By: /s/ William V. Moyer By: /s/ Byron L. Cooley --------------------------------- ---------------------------------- William V. Moyer, Vice President Byron L. Cooley, Senior Vice President 7 -7- COMERICA BANK-TEXAS By: /s/ Daniel G. Steele ---------------------------------- Daniel G. Steele, Senior Vice President WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION By: /s/ Ann M. Rhoades ---------------------------------- Ann M. Rhoades, Vice President 8 -8- RATIFICATION OF GUARANTY The undersigned Guarantor acknowledges and accepts the foregoing Amendment and ratifies and confirms in all respects such Guarantor's obligations under the Guaranty dated as of August 23, 1995 (the "Guaranty") executed and delivered by the Guarantor to the Agent and the Lenders. The undersigned Guarantor further agrees that references in the Guaranty to the Resources Credit Agreement shall be references to the Third Amended and Restated Credit Agreement dated as of April 11, 1996 among the undersigned Guarantor, ING as agent and the lenders named therein. PLAINS RESOURCES INC. By: /s/ Phil Kramer -------------------------------- Title: Vice President 9 -9- SCHEDULE 1 LENDER PERCENTAGES
Lender Percentage ------ ---------- The First National Bank of Boston 30.555556% Internationale Nederlanden (U.S.) Capital Corporation 30.555556% Den Norske Bank ASA 16.666667% Comerica Bank - Texas 11.111111% Wells Fargo Bank (Texas), National Association 11.111111% ========== 100%
EX-10.K 5 LINE OF CREDIT PMCT & 1ST NATIONAL BANK OF BOSTON 1 EXHIBIT 10(k) Dated as of November 22, 1996 PMCT Inc. 1600 Smith Street Houston, TX 77002 Re: Amendment No. 4 to Uncommitted Secured Demand Transactional Line of Credit Facility Gentlemen: Reference is made to that certain letter agreement outlining the parameters of an uncommitted secured demand transactional line of credit facility dated August 23, 1995 (as further amended to date and including all exhibits, schedules and annexes thereto, the "PMCT Letter Agreement") among The First National Bank of Boston ("FNBB"), Internationale Nederlanden (U.S.) Capital Corporation ("ING"), Den Norske Bank ASA, Comerica Bank-Texas and such other banks as may from time to time become parties thereto, (collectively, the "Lenders") and FNBB, as agent for the Lenders (in such capacity, the "Agent") and PMCT Inc. (the "Borrower"). All capitalized terms used herein without definition which are defined in the PMCT Letter Agreement shall have the same meaning herein as therein. Wells Fargo Bank (Texas), National Association ("Wells") wishes to become a party to the PMCT Letter Agreement as a Lender to the Borrower and simultaneously with the execution hereof will execute an Instrument of Accession in substantially the form attached as Exhibit A to the PMCT Letter Agreement. Borrower, the Lenders (which term for all purposes in this Amendment shall include Wells) and the Agent wish to amend certain terms of the PMCT Letter Agreement as follows: 1. FACILITY AMOUNT. Section 1(b) of the PMCT Letter Agreement is hereby amended by deleting the first sentence thereof and substituting the following therefor: "The aggregate amount of the Accommodations which may be made available by the Lenders and which will be allowed to be outstanding at any one time under the PMCT Facility shall be restricted to the excess of (i) $90,000,000 (subject to adjustment as set forth in the proviso below) over (ii) the then aggregate amount of the outstanding Accommodations made by the Lenders to or for the account of Plains Marketing & 2 -2- Accommodations made by the Lenders to or for the account of Plains Marketing and Transportation Inc., a Delaware corporation ("MARKETING"), under that certain letter agreement of even date herewith, as amended and in effect from time to time (the "MARKETING AGREEMENT"), among the Lenders, the Agent and Marketing (such difference in amount, as in effect from time to time under the PMCT Facility, hereinafter referred to as the "PMCT FACILITY AMOUNT"); provided that for purposes of determining the PMCT Facility Amount, the amount set forth in clause (i) of this Section 1(b) shall be limited to $80,000,000 until such time as the Agent shall have received, in form and substance satisfactory to the Agent, a copy of an amendment to the Resources Credit Agreement duly executed by all parties thereto pursuant to which the lenders under the Resources Credit Agreement consent to the increase to $90,000,000 of the maximum aggregate PMCT Facility Amount available under this PMCT Facility subject to decreases as provided in clause (ii) above and the guaranty by Resources of such maximum amount of Accommodations available under the Marketing Agreement." 2. EXPIRATION DATE. Section 1(e)(i) of the PMCT Letter Agreement is hereby amended and restated in its entirety to read as follows: "(e) EXPIRATION: (i) No request for any Accommodation may be made after November 21, 1997, unless the Lenders, in their sole discretion and without any obligation to do so, extend such date in writing." 3. RESOURCES CREDIT AGREEMENT. Section 1(d)(iii) of the PMCT Letter Agreement is hereby amended by deleting the phrase "that certain Second Amended and Restated Credit Agreement dated as of February 11, 1994" and substituting therefor the phrase "that certain Third Amended and Restated Credit Agreement dated as of April 11, 1996", which Third Amended and Restated Credit Agreement shall be the agreement referred to in the PMCT Letter Agreement as the "Resources Credit Agreement". 4. CUSHING TERMINAL REPORT. Section 1(j) of the PMCT Letter Agreement is hereby amended as follows: (a) by deleting the reference to "Marketing Letter Agreement" in clause (i) thereof and substituting the phrase "PMCT Letter Agreement" therefor; and (b) by renumbering the current clause (ix) to be clause (x) and by inserting the following paragraph as a new clause (ix): "(ix) on a monthly basis, a certificate signed by the Borrower's chief financial officer, chief accounting officer or chief operating officer certifying that as of a date which shall be not more than one week prior to the date of the certificate the 3 -3- aggregate sum of (i) the aggregate current crude oil inventory volumes held by the Borrower and/or Marketing, plus (ii) the aggregate volume of current crude oil positions subject to time spreads as described in paragraph (v)(D) of Schedule 4 of the PMCT Letter Agreement for both the Borrower and Marketing, plus (iii) the aggregate volume of all current cash and carry crude oil positions for both the Borrower and Marketing, plus (iv) the aggregate volume of all crude oil which the Borrower and/or Marketing is otherwise obligated to take pursuant to the terms of existent contracts, does not exceed the then currently available crude oil storage capacity at the Cushing Terminal; and" 5. SCHEDULE 1. Schedule 1 to the PMCT Letter Agreement is hereby amended by substituting therefor the Schedule 1 attached hereto. 6. FINANCIAL AND OTHER GUIDELINES. Schedule 4 to the PMCT Letter Agreement is hereby amended as follows: (a) paragraph (v)(C) of Schedule 4 is amended by deleting the text thereof in its entirety and substituting the following therefor: "(C) The aggregate of (a) crude oil pipeline inventory and (b) crude oil inventory in the Cushing Terminal shall not exceed, in the aggregate for both PMCT Inc. and Marketing, a maximum of 250,000 barrels and such barrels shall be hedged (i) on the NYMEX for delivery within the next 6 months; provided that of such aggregate amount up to 100,000 barrels may be hedged on the NYMEX for delivery between the next 6 and 12 months or (ii) in the cash market with counterparties satisfactory to the Lenders for delivery within the next 60 days. Notwithstanding the above, inventories in crude oil pipelines shall be limited to 175,000 barrels." (b) paragraph (v)(D) of Schedule 4 is amended by deleting the text thereof in its entirety and substituting the following therefor: "(D) Inventory positions (other than fully hedged cash-and- carry positions which qualify under subsection (C) above) and positions which do not otherwise qualify under subsection (C) above shall be limited to time spreads for periods up to a maximum of twelve months for up to a maximum of 500,000 barrels, in the aggregate for both PMCT Inc. and Marketing, of crude oil hedged on the NYMEX." (c) paragraph (xi) of Schedule 4 is amended by deleting from the first sentence thereof the phrase "that certain Indenture dated as of October 1, 1992 among Resources, certain 4 -4- subsidiaries and Ameritrust Texas National Association" and substituting therefor the phrase "that certain Indenture dated as of March 15, 1996 among Resources, certain subsidiaries of Resources and Texas Commerce Bank National Association as Trustee, pursuant to which Resources issued 10 1/4% Senior Subordinated Notes due 2006, Series A and Series B, in the aggregate principal amount of $150,000,000". 7. SECURITY. The Borrower hereby confirms that the reference to "PMCT Letter Agreement" in the term "PMCT Obligations" as used in that certain Security Agreement dated as of August 23, 1995 between PMCT and the Agent includes the PMCT Letter Agreement as amended hereby and that references to the Demand Loans and L/C's issued pursuant to the PMCT Letter Agreement refers to all Demand Loans and L/C's issued pursuant to the PMCT Letter Agreement, as amended hereby. 8. CONDITIONS PRECEDENT. This Amendment shall become effective upon receipt by the Agent of the following: (a) a counterpart of this Amendment duly signed where indicated below by each Lender, the Agent and the Borrower; (b) a counterpart of the Instrument of Accession duly signed where indicated by the Borrower and each Lender as indicated thereon, evidencing Wells' accession to the PMCT Letter Agreement and certain other agreements referenced therein; (c) a promissory note (the "Wells Note") duly signed by the Borrower evidencing the Borrower's obligations to repay to Wells the Demand Loans advanced by Wells and any drawings under the L/C's funded by Wells in form and substance of Exhibit I to the PMCT Letter Agreement; (d) a counterpart of Amendment No. 4 to the Marketing Agreement duly signed where indicated by Marketing, each Lender, the Agent and Resources; (e) a legal opinion of even date herewith from the Borrower's general counsel in form and substance satisfactory in all respects to the Agent and its counsel; (f) evidence satisfactory to the Agent that the execution and delivery of this Amendment and the Wells Note have been duly authorized by all necessary corporate action and that the Borrower is validly incorporated and in good standing in all relevant jurisdictions; (g) an acknowledgment from the lenders under the Resources Credit Agreement that the terms of that certain letter agreement dated August 23, 1995 from the Agent to ING as Agent 5 -5- under the Resources Credit Agreement are in full force and effect and applicable to the PMCT Letter Agreement as amended hereby; (h) a counterpart of the Security Agreement and Assignment of Hedging Account and Agency Agreement in form and substance satisfactory to the Agent duly executed by Marketing, the Agent and Bear, Stearns Securities Corp. in connection with Marketing's commodity account #J278 0L60 00751 at Bear, Stearns Securities Corp; and (i) a counterpart of the Security Agreement and Assignment of Hedging Account and Agency Agreement in form and substance satisfactory to the Agent duly executed by Marketing, the Agent and Citicorp Futures Corporation in connection with Marketing's commodity account #10730 at Citicorp Futures Corporation. 6 -6- If you agree to and accept the foregoing amendment, please so indicate by signing a counterpart of this letter and returning it to the Agent. Upon satisfaction of the conditions set forth in Section 8 hereof, this Amendment shall take effect as a binding agreement among us, to be construed and enforceable in accordance with the laws of The Commonwealth of Massachusetts. PMCT INC. By: /s/ Phil Kramer -------------------------------------- Phil Kramer, Vice President THE FIRST NATIONAL BANK OF BOSTON, Individually and as Agent By: /s/ Christopher Holmgren -------------------------------------- Christopher Holmgren, Director INTERNATIONALE NEDERLANDEN (U.S.) CAPITAL CORPORATION By: /s/Robi Artman-Hodge -------------------------------------- Robi Artman-Hodge, Managing Director DEN NORSKE BANK ASA DEN NORSKE BANK ASA By: /s/ William V. Moyer By: /s/ Byron L. Cooley ----------------------------------- ------------------------------------ William V. Moyer, Vice President Byron L. Cooley, Senior Vice President 7 -7- COMERICA BANK-TEXAS By: /s/ Daniel G. Steele -------------------------------------- Daniel G. Steele, Senior Vice President WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION By: /s/ Ann M. Rhoades -------------------------------------- Ann M. Rhoades, Vice President 8 -8- SCHEDULE 1 LENDER PERCENTAGES Lender Percentage ------ ---------- The First National Bank of Boston 30.555556% Internationale Nederlanden (U.S.) Capital Corporation 30.555556% Den Norske Bank ASA 16.666667% Comerica Bank - Texas 11.111111% Wells Fargo Bank (Texas), National Association 11.111111% ========== 100%
EX-10.L 6 STOCK OPTION AGREEMENT-GREG L. ARMSTRONG 1 EXHIBIT 10(l) STOCK OPTION AGREEMENT THIS AGREEMENT, made as of August 27, 1996, between Plains Resources Inc., a Delaware corporation (the "Company"), and Greg L. Armstrong (the "Optionee"). WHEREAS, on May 23, 1996, the Board of Directors (the "Board") of the Company authorized and empowered the Compensation Committee of the Board (the "Compensation Committee") to grant to Greg L. Armstrong, President and Chief Executive Officer of the Company, an option for the purchase of 300,000 shares of the Company's common stock, $.10 per share par value ("Common Stock"), upon such terms and provisions as the Compensation Committee deems to be in the best interest of the Company; and WHEREAS, pursuant to the authority granted by the Board, the Compensation Committee has determined to grant an option to the Optionee as provided herein. NOW THEREFORE, the parties hereto agree as follows: 1. GRANT OF OPTION. The Company hereby grants to the Optionee the right and option (the "Option") to purchase, from time to time, all or any part of an aggregate of 300,000 whole shares of Common Stock (the "Option Shares") subject to, and in accordance with, the terms and provisions set forth in this Agreement. 2. EXERCISE PRICE. The price at which the Optionee shall be entitled to purchase the Option Shares upon the exercise of the Option shall be $13.50 per share (the "Exercise Price"), subject to adjustment from time to time in accordance with the terms and provisions of this Agreement.. 3. EXPIRATION DATE. The Option shall be exercisable to the extent and in the manner provided herein until 5:00 p.m., Houston time, on August 27, 2001 (the "Expiration Date"): provided, however, that the Option may be earlier terminated as provided in Paragraph 7 hereof. 4. EXERCISABILITY OF OPTION. The Option shall not be exercisable by the Optionee, his guardian or his legal representative unless and until one of the following events (a "Vesting Event") occurs on or before the Expiration Date: (a) The Per Share Market Value (as defined below) of the Common Stock equals or exceeds the Vesting Price (as defined below) for any 20 Trading Days (as defined below) in any 30 consecutive Trading Days. (b) The distribution to the holders of the Company's Common Stock, in connection with 2 a merger or consolidation of the Company with another corporation or entity, whether or not the Company is the surviving entity, or the liquidation of the Company or the sale or other disposition of substantially all of its assets (such merger, consolidation, liquidation, or disposition of assets being herein referred to as a "Transaction"), of securities, cash or property having a value per share of such Common Stock equal to or exceeding the Vesting Price. Notwithstanding any other provision herein to the contrary, in the event a Transaction is consummated (the date of such consummation herein referred to as the "Consummation Date") on or before August 27, 1999, the Option shall become exercisable on the Consummation Date, if: (i) the Per Share Market Value of the Common Stock on the day prior to the Consummation Date equals or exceeds $20.00 per share; (ii) prior to the Consummation Date, the Per Share Market Value of the Common Stock equals or exceeds $20.00 per share for any 20 Trading Days in any 30 consecutive Trading Days; or (iii) the securities, cash or property distributed in such Transaction to the holders of the Company's Common Stock has a value per share of such Common Stock of $20.00 or more. For purposes of this Paragraph 4 (b), the value of any securities so distributed shall be determined on the same basis set forth herein for determining the Per Share Market Value of a share of Common Stock, and the value of any other property so distributed shall be determined by a nationally recognized or major regional investment banking firm or firm of independent certified public accountants of recognized standing (which may be the firm that regularly examines the financial statements of the Company) selected in good faith by the Board of Directors of the Company. (c) The death of the Optionee. (d) The Disability (as defined below) of the Optionee. (e) The Company terminates the employment of the Optionee, without Cause (as defined below), in connection with or in anticipation of a Change in Control (as defined below) of the Company. (f) A Change in Control of the Company occurs subsequent to August 27, 2000. (g) Subsequent to August 27,1996, the Company terminates the employment of the Optionee for any reason other than (i) Cause or, (ii) a determination by at least a majority of the Incumbent Board (as hereinafter defined), evidenced by a Board resolution, that the Optionee has failed to perform his duties consistent with the goals set forth in the Five Year Strategic Plan adopted by the Board on November 9, 1995, and modified on February 8, 1996, provided however, this clause (ii) shall be null and void if the foregoing determination by the Incumbent Board is made during a period within which Optionee could have terminated his employment for Good Reason (as hereinafter defined). 2 3 (h) The Optionee terminates his employment with the Company for Good Reason prior to August 27, 1999, and the Per Share Market Value of the Common Stock prior to such date has equaled or exceeded $20.00 per share for any 20 Trading Days in any 30 consecutive Trading Days. From the date of the occurrence of a Vesting Event, the Option shall remain exercisable until the Expiration Date unless the Company terminates the Optionee's employment for Cause, in which case the Option will terminate in accordance with Paragraph 7.1 below. As used herein, the term "CAUSE" shall mean (i) the willful engaging by the Optionee in gross misconduct resulting in demonstrable material injury to the Company, or (ii) the nonappealable conviction of the Optionee of a felony involving moral turpitude. For purposes of this definition, no act or failure to act on the Optionee's part shall be considered "willful" unless done, or omitted to be done, by him not in good faith and without reasonable belief that his act or omission was in the best interest of the Company or otherwise likely to result in no material injury thereto. As used herein a "CHANGE IN CONTROL" shall be deemed to have occurred if, prior to the Expiration Date of the Option; (i) Any "person" for purposes of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the "1934 Act"), (A) acquires beneficial ownership (within the meaning of Rule 13d-3 promulgated under the 1934 Act) of shares of the Company's capital stock having 25% or more of the total number of votes that may be cast in the election of directors of the Company ("Voting Stock"), and (B) such person seeks to elect or cause to be elected two or more members of the Company's Board of Directors or otherwise exerts or attempts to exert a controlling influence on the management of the Company; provided, however, that if the transaction in which such person becomes the beneficial owner of 25% or more of the Voting Stock is approved by a majority of the Incumbent Board (as defined below), such transaction shall not be deemed to constitute a Change in Control, or (ii) The individuals who are directors of the Company on the date hereof (the "Incumbent Board") cease to constitute a majority of the Board of Directors of the Company, provided, however, that if either the election of any new director or the nomination for election of any new director was approved by a majority of the Incumbent Board, such new director shall be considered as a member of the Incumbent Board. Notwithstanding the foregoing, a "Change in Control" of the Company shall not be deemed to have occurred solely as a result of (i) a restructuring of the Company as a wholly-owned subsidiary of another corporation in a transaction in which the owners of shares of capital stock of the Company become the owners, in substantially identical proportions, of all or substantially all of the shares of capital stock of such other corporation or (ii) the issuance of the authorized and unissued capital stock of the Company or of any parent of the Company in connection with a financing or acquisition initiated by the Company or such parent. 3 4 As used herein, the term "DISABILITY" shall mean a physical or mental infirmity which impairs the Optionee's ability to perform substantially his duties for a period of one hundred eighty (180) consecutive days or which the Board determines constitutes a Disability. As used herein, the term "PER SHARE MARKET VALUE" for any particular date shall mean, (a) the last sale price per share of the Common Stock on such date on the principal stock exchange on which the Common Stock has been listed or if there is no such price on such date, then the last price on such exchange on the date nearest preceding such date, or (b) if the Common Stock is not listed on any stock exchange, the average between the high and low prices for a share of Common Stock in the over-the -counter market, as reported by the Nasdaq National Market at the close of business on such date, or the last sales price if such price is reported and high and low prices are not available, or (c) if the Common Stock is not quoted on the Nasdaq National Market, the average between the high and low prices for a share of Common Stock in the over-the-counter market as reported by the National Quotation Bureau Incorporated (or any similar organization or agency succeeding to its functions of reporting prices), or (d) if the Common Stock is no longer publicly traded, as determined by a nationally recognized or major regional investment banking firm or firm of independent certified public accountants of recognized standing (which may be the firm that regularly examines the financial statements of the Company) selected in good faith by the Board of Directors of the Company, provided that none of the transactions related to the foregoing shall include purchases by the Optionee or any "affiliate" (as such term is defined in the General Rules and Regulations under the Securities Act of 1933) of the Company. As used herein, the term "VESTING PRICE" shall mean $24.00 per share of Common Stock. Upon any adjustment of the Exercise Price pursuant to Paragraph 10 hereof, the Vesting Price shall be adjusted, as of the date of such adjustment of the Exercise Price, to that price determined by multiplying the Vesting Price in effect immediately prior to such adjustment of the Exercise Price by a fraction (i) the numerator of which shall be the Exercise Price in effect immediately after such adjustment of the Exercise Price, and (ii) the denominator of which shall be the Exercise Price in effect immediately prior to such adjustment. As used herein, the term "TRADING DAY" shall mean (a) a day on which the Common Stock is traded on the principal stock exchange on which the Common Stock has been listed, or (b) if the Common Stock is not listed on any stock exchange, a day on which the Common Stock is traded in the over-the-counter market, as reported by the Nasdaq National Market, or (c) if the Common Stock is not quoted on the Nasdaq National Market, a day on which the Common Stock is traded in the over-the-counter market as reported by the National Quotation Bureau Incorporated (or any similar organization or agency succeeding to its functions of reporting prices). 5. MANNER OF EXERCISE AND PAYMENT. 5.1 Subject to the terms and conditions of this Agreement, the Option may be exercised by delivery of written notice to the Company, at its principal executive office. Such notice shall state 4 5 that the Optionee is electing to exercise the Option and the number of Option Shares in respect of which the Option is being exercised and shall be signed by the person or persons exercising the Option. 5.2 The notice of exercise shall be accompanied by the full purchase price for the Option Shares in respect of which the Option is being exercised, (i) in cash, (ii) by check or (iii) by transferring shares of Common Stock to the Company (other than shares held by the Optionee for less than 6 months prior to the date of exercise) the number of which shares shall be determined by dividing the full purchase price for the Option Shares in respect of which the Option is being exercised by the Per Share Market Value of the Common Stock on the Trading Day preceding the date of exercise. 5.3 Upon receipt of the notice of exercise and full payment for the Option Shares in respect of which the Option is being exercised, the Company shall take such action as may be necessary promptly to effect the transfer to the Optionee of the number of Option Shares as to which such exercise was effective. 5.4 The Optionee shall not be deemed to be the holder of, or to have any of the rights of a holder with respect to any Option Shares subject to the Option until (i) the Option shall have been exercised pursuant to the terms of this Agreement and the Optionee shall have paid the full purchase price for the number of Option Shares in respect of which the Option was exercised, (ii) the Company shall have issued and delivered the Option Shares to the Optionee, and (iii) the Optionee's name shall have been entered as a stockholder of record on the books of the Company, whereupon the Optionee shall have full voting and other ownership rights with respect to such Option Shares. 6. COMPLIANCE WITH LAWS, RULES AND REGULATIONS. Notwithstanding any other provision of this Agreement to the contrary, the obligation of the Company to sell or issue any Option Shares under the Option shall be suspended during any period of time when the issuance of such Option Shares would constitute a violation by Optionee or the Company of any provisions of any law or regulation of any governmental authority. The Option shall be subject to the requirements that, if at any time the Board shall, in good faith and upon a reasonable basis, determine that the listing, registration or qualification of the Option Shares upon any stock exchange or under any state or federal law of the United States or any governmental subdivision thereof, or the consent or approval of any governmental regulatory body, or investment or other representation, are necessary or desirable in connection with the issue or purchase of Option Shares, the Option may not be exercised in whole or in part unless such listing, registration, qualification, consent, approval or representations shall have been effected or obtained free of any conditions not acceptable to the Board acting reasonably and in good faith. In the event the Option Shares issuable on exercise of an Option are not registered under the Securities Act of 1933, as amended (the "Act"), the Company may imprint on the certificate for such Option Shares the following legend which counsel for the Company considers necessary or advisable to comply with the Act: 5 6 "The shares represented by this certificate have not been registered under the Securities Act of 1933 or under the securities laws of any state and may reoffered or sold only if registered or if an exemption from registration is available." Notwithstanding any other provision in this Agreement to the contrary, if within 10 days preceding the Expiration Date, the Company is unable to issue Option Shares under the Option, the term of the Option shall be extended and written notice given to Optionee (at least 7 days prior to the Expiration Date) of such extension so as to provide a reasonable opportunity for Optionee to exercise the Option; provided, however, in no event shall such extension exceed the period during which the Company was unable to issue Option Shares under the Option plus 10 days. 7. TERMINATION OF OPTION 7.1 Notwithstanding any other provision in this Agreement to the contrary, if on or before the Expiration Date of the Option, the Company terminates the Optionee's employment with the Company, with Cause, the Option shall terminate on the date of such termination and after such date no rights thereunder may be exercised. 7.2 Notwithstanding any other provision in this Agreement to the contrary, if prior to the date the Option becomes exercisable and on or before the Expiration Date of the Option, the Optionee terminates his employment with the Company, other than for Good Reason (as defined below) or as a result of his Disability, the Option shall terminate on the date of such termination and after such date no rights thereunder may be exercised. As used herein, the term "GOOD REASON" shall mean (i) any removal of the Optionee from, or any failure to re-elect the Optionee to the positions of President and Chief Executive Officer of the Company, except in connection with termination of Optionee's employment for Cause, (ii) a material breach by the Company of the Optionee's Employment Agreement with the Company dated as of March 1, 1993, as amended or replaced prior to the Expiration Date of the Option, or (iii) a Change in Control of the Company. 8. NONTRANSFERABILITY. The Option shall not be transferrable other than by will or by the laws of descent and distribution. During the lifetime of the Optionee, the Option shall be exercisable only by the Optionee or his guardian or legal representative. 9. NO RIGHT TO CONTINUED EMPLOYMENT. Nothing in this Agreement shall be interpreted or construed to confer upon the Optionee any right with respect to continuance of employment with the Company, nor shall this Agreement interfere 6 7 in any way with the right of the Company to terminate the Optionee's employment at any time. 10. ADJUSTMENTS UPON CHANGES IN THE COMPANY'S CAPITAL STRUCTURE. 10.1 If the Company shall effect a subdivision or consolidation of the Common Stock or other capital readjustment, the payment of a stock dividend, or other increase or reduction of the number of shares of Common Stock outstanding, without receiving compensation therefor in money, services, or property, then the number of Option Shares purchasable under the Option and the Exercise Price shall be appropriately adjusted in such a manner as to entitle the Optionee to receive, upon exercise of the Option, for the same aggregate consideration, the same total number of Option Shares and other securities as he would have received after the happening of any of the events described above had he exercised the Option in full immediately prior to such event. 10.2 If (i) a Transaction described in Paragraph 4(b) is consummated while the Option remains outstanding, and (ii) the Option becomes exercisable as a result of such Transaction, (x) Optionee shall be entitled upon exercise of the Option, to receive, in lieu of Option Shares, the number and class or classes of shares of such stock or other securities or property to which Optionee would have been entitled if, immediately prior to such Transaction, Optionee had been the holder of the Option Shares or (y) the Option may be canceled by the Board as of the Consummation Date of any such Transaction upon payment to Optionee in cash equal to the amount by which the value (as determined in good faith by the Board) of the securities or property to which Optionee would have been entitled if, immediately prior to such Transaction, Optionee had been the holder of the Option Shares exceeds the aggregate Exercise Price of the Option Shares. 10.3 If the Company shall issue rights or warrants to all holders of Common Stock entitling them to subscribe for or purchase shares of Common Stock at a price less than the Per Share Market Value of Common Stock on the record date of such issuance, the Exercise Price shall be reduced by multiplying the Exercise Price in effect prior to such record date by a fraction, of which the denominator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding on the date of such issuance of such rights or warrants plus the number of additional shares of Common Stock offered for subscription or purchase, and of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding on the date of issuance of such rights or warrants plus the number of shares which the aggregate offering price of the total number of shares so offered would purchase at such Per Share Market Price. Such adjustment shall be made whenever such rights or warrants are issued, and shall become effective immediately after the record date for the determination of stockholders entitled to receive such rights or warrants. However, upon the expiration of any right or warrant to purchase Common Stock, the issuance of which resulted in an adjustment in the Exercise Price pursuant to this paragraph 10.3, if any such right or warrant shall expire and shall not have been exercised, the Exercise Price shall immediately upon such expiration be recomputed and effective immediately upon such expiration be increased to the price which it would have been had the adjustment of the Exercise Price made upon the issuance of such rights or warrants been made on the basis of offering for subscription or purchase only that number of shares of Common Stock actually purchased upon the exercise of such rights or warrants actually exercised. 7 8 10.4 If the Company shall distribute to all holders of Common Stock evidences of its indebtedness or assets (excluding cash dividends or cash distributions paid out of earned surplus) or rights or warrants to subscribe for or purchase any security (excluding those referred to in paragraph 10.3 above) then in each such case the Exercise Price shall be determined by multiplying the Exercise Price in effect prior to the record date fixed for determination of stockholders entitled to receive such distribution by a fraction, of which the denominator shall be the Per Share Market Value of the Common Stock on the record date, and of which the numerator shall be such Per Share Market Value of the Common Stock, less the then fair market value (as determined by the Board of the Company in good faith, whose determination shall be conclusive if made in good faith; provided, however that in the event of a distribution or series of related distributions exceeding 10% of the net assets of the Company, then such fair market value shall be determined by a nationally recognized or major regional investment banking firm or firm of independent certified public accountants of recognized standing (which may be the firm that regularly examines the financial statements of the Company) selected in good faith by the Board of the Company, and in either case shall be described in a statement provided to the Optionee) of the portion of assets or evidences of indebtedness so distributed or such subscription rights applicable to one share of Common Stock. Such adjustment shall be made whenever any such distribution is made and shall become effective immediately after the record date mentioned above. 10.5 If conditions shall arise by reason of action taken by the Company, which, in the opinion of the Board of the Company, are not adequately covered by the other provisions hereof and which might reasonably be expected to materially and adversely affect the rights of the Optionee hereunder, or if any such conditions are expected to arise by reason of any action contemplated by the Company, the Board of the Company shall appoint a firm of independent certified public accountants of recognized standing (which may be the firm that regularly examines the financial statements of the Company), who shall give their opinion as to the adjustment, if any (not inconsistent with the standards established in this paragraph 10), of the Exercise Price (including, if necessary, any adjustment as to the securities which may be purchased hereunder) which is or would be required to preserve without dilution the rights of the Optionee hereunder. The Board of the Company shall make the adjustment recommended forthwith upon receipt of such opinion or the taking of any such action contemplated, as the case may be: provided, however, that no such adjustment of the Exercise Price shall be made which in the opinion of the investment banking firm or firm of accountants giving the aforesaid opinion would result in an increase of the Exercise Price to more than the Exercise Price then in effect. Except as hereinbefore expressly provided, the issue by the Company of shares of any class, or securities convertible into shares of any class, for cash or property, or for labor or services either upon direct sale or upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares or obligations of the Company convertible into such shares or other securities, shall not affect, and no adjustment by reason thereof shall be made with respect to the number or exercise price of Option Shares then subject to the Option. 8 9 11. WITHHOLDING OF TAXES. Prior to the issuance of the Option Shares for an exercise of the Option, the Optionee shall pay to the Company any federal, state and local income taxes and other amounts (the "Withholding Taxes") as may be required by law to be withheld. In satisfaction of the Withholding Taxes, the Optionee may transfer shares of Common Stock to the Company (other than shares held by Optionee for less than 6 months prior to the date of exercise) the number of which shares shall be determined by dividing the total amount of the Withholding Taxes by the Per Share Market Value on the Trading Day preceding the date of exercise. 12. MODIFICATION OF AGREEMENT. This Agreement may be modified, amended, suspended or terminated, and any terms and conditions may be waived, but only by a written instrument executed by the parties hereto. 13. SEVERABILITY. Should any provision of the Agreement be held by a court of competent jurisdiction to be unenforceable or invalid for any reason, the remaining provisions of this Agreement shall not be affected by such holding and shall continue in full force in accordance with their terms. 14. GOVERNING LAW. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Delaware without giving effect to the conflicts of laws principles thereof. 15. SUCCESSORS IN INTEREST. This Agreement shall inure to the benefit of and be binding upon any successor to the Company. This Agreement shall inure to the benefit of the Optionee's legal representatives. All obligations imposed upon the Optionee and all rights granted to the Company under this Agreement shall be final, binding and conclusive upon the Optionee's heirs, executors, administrators and legal representatives. Attest: PLAINS RESOURCES INC. /s/ Michael R. Patterson by: /s/ Tom H. Delimitros ------------------------------- ---------------------------- Secretary Chairman of the Compensation Committee /s/ Greg L. Armstrong ---------------------------- GREG L. ARMSTRONG, OPTIONEE 9 EX-10.M 7 STOCK OPTION AGREEMENT-WILLIAM C. EGG JR. 1 EXHIBIT 10(m) STOCK OPTION AGREEMENT THIS AGREEMENT, made as of August 27, 1996, between Plains Resources Inc., a Delaware corporation (the "Company"), and William C. Egg, Jr. (the "Optionee"). WHEREAS, on May 23, 1996, the Board of Directors (the "Board") of the Company authorized and empowered the Compensation Committee of the Board (the "Compensation Committee") to grant to William C. Egg, Jr., Senior Vice President of the Company, an option for the purchase of 200,000 shares of the Company's common stock, $.10 per share par value ("Common Stock"), upon such terms and provisions as the Compensation Committee deems to be in the best interest of the Company; and WHEREAS, pursuant to the authority granted by the Board, the Compensation Committee has determined to grant an option to the Optionee as provided herein. NOW THEREFORE, the parties hereto agree as follows: 1. GRANT OF OPTION. The Company hereby grants to the Optionee the right and option (the "Option") to purchase, from time to time, all or any part of an aggregate of 200,000 whole shares of Common Stock (the "Option Shares") subject to, and in accordance with, the terms and provisions set forth in this Agreement. 2. EXERCISE PRICE. The price at which the Optionee shall be entitled to purchase the Option Shares upon the exercise of the Option shall be $13.50 per share (the "Exercise Price"), subject to adjustment from time to time in accordance with the terms and provisions of this Agreement.. 3. EXPIRATION DATE. The Option shall be exercisable to the extent and in the manner provided herein until 5:00 p.m., Houston time, on August 27, 2001 (the "Expiration Date"): provided, however, that the Option may be earlier terminated as provided in Paragraph 7 hereof. 4. EXERCISABILITY OF OPTION. The Option shall not be exercisable by the Optionee, his guardian or his legal representative unless and until one of the following events (a "Vesting Event") occurs on or before the Expiration Date: (a) The Per Share Market Value (as defined below) of the Common Stock equals or exceeds the Vesting Price (as defined below) for any 20 Trading Days (as defined below) in any 30 consecutive Trading Days. (b) The distribution to the holders of the Company's Common Stock, in connection with 2 a merger or consolidation of the Company with another corporation or entity, whether or not the Company is the surviving entity, or the liquidation of the Company or the sale or other disposition of substantially all of its assets (such merger, consolidation, liquidation, or disposition of assets being herein referred to as a "Transaction"), of securities, cash or property having a value per share of such Common Stock equal to or exceeding the Vesting Price. Notwithstanding any other provision herein to the contrary, in the event a Transaction is consummated (the date of such consummation herein referred to as the "Consummation Date") on or before August 27, 1999, the Option shall become exercisable on the Consummation Date, if: (i) the Per Share Market Value of the Common Stock on the day prior to the Consummation Date equals or exceeds $20.00 per share; (ii) prior to the Consummation Date, the Per Share Market Value of the Common Stock equals or exceeds $20.00 per share for any 20 Trading Days in any 30 consecutive Trading Days; or (iii) the securities, cash or property distributed in such Transaction to the holders of the Company's Common Stock has a value per share of such Common Stock of $20.00 or more. For purposes of this Paragraph 4 (b), the value of any securities so distributed shall be determined on the same basis set forth herein for determining the Per Share Market Value of a share of Common Stock, and the value of any other property so distributed shall be determined by a nationally recognized or major regional investment banking firm or firm of independent certified public accountants of recognized standing (which may be the firm that regularly examines the financial statements of the Company) selected in good faith by the Board of Directors of the Company. (c) The death of the Optionee. (d) The Disability (as defined below) of the Optionee. (e) The Company terminates the employment of the Optionee, without Cause (as defined below), in connection with or in anticipation of a Change in Control (as defined below) of the Company. (f) A Change in Control of the Company occurs subsequent to August 27, 2000. (g) Subsequent to August 27,1996, the Company terminates the employment of the Optionee for any reason other than (i) Cause or, (ii) a determination by at least a majority of the Incumbent Board (as hereinafter defined), evidenced by a Board resolution, that the Optionee has failed to perform his duties consistent with the goals set forth in the Five Year Strategic Plan adopted by the Board on November 9, 1995, and modified on February 8, 1996, provided however, this clause (ii) shall be null and void if the foregoing determination by the Incumbent Board is made during a period within which Optionee could have terminated his employment for Good Reason (as hereinafter defined). 2 3 (h) The Optionee terminates his employment with the Company for Good Reason prior to August 27, 1999, and the Per Share Market Value of the Common Stock prior to such date has equaled or exceeded $20.00 per share for any 20 Trading Days in any 30 consecutive Trading Days. From the date of the occurrence of a Vesting Event, the Option shall remain exercisable until the Expiration Date unless the Company terminates the Optionee's employment for Cause, in which case the Option will terminate in accordance with Paragraph 7.1 below. As used herein, the term "CAUSE" shall mean (i) the willful engaging by the Optionee in gross misconduct resulting in demonstrable material injury to the Company, or (ii) the nonappealable conviction of the Optionee of a felony involving moral turpitude. For purposes of this definition, no act or failure to act on the Optionee's part shall be considered "willful" unless done, or omitted to be done, by him not in good faith and without reasonable belief that his act or omission was in the best interest of the Company or otherwise likely to result in no material injury thereto. As used herein a "CHANGE IN CONTROL" shall be deemed to have occurred if, prior to the Expiration Date of the Option; (i) Any "person" for purposes of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the "1934 Act"), (A) acquires beneficial ownership (within the meaning of Rule 13d-3 promulgated under the 1934 Act) of shares of the Company's capital stock having 25% or more of the total number of votes that may be cast in the election of directors of the Company ("Voting Stock"), and (B) such person seeks to elect or cause to be elected two or more members of the Company's Board of Directors or otherwise exerts or attempts to exert a controlling influence on the management of the Company; provided, however, that if the transaction in which such person becomes the beneficial owner of 25% or more of the Voting Stock is approved by a majority of the Incumbent Board (as defined below), such transaction shall not be deemed to constitute a Change in Control, or (ii) The individuals who are directors of the Company on the date hereof (the "Incumbent Board") cease to constitute a majority of the Board of Directors of the Company, provided, however, that if either the election of any new director or the nomination for election of any new director was approved by a majority of the Incumbent Board, such new director shall be considered as a member of the Incumbent Board. Notwithstanding the foregoing, a "Change in Control" of the Company shall not be deemed to have occurred solely as a result of (i) a restructuring of the Company as a wholly-owned subsidiary of another corporation in a transaction in which the owners of shares of capital stock of the Company become the owners, in substantially identical proportions, of all or substantially all of the shares of capital stock of such other corporation or (ii) the issuance of the authorized and unissued capital stock of the Company or of any parent of the Company in connection with a financing or acquisition initiated by the Company or such parent. 3 4 As used herein, the term "DISABILITY" shall mean a physical or mental infirmity which impairs the Optionee's ability to perform substantially his duties for a period of one hundred eighty (180) consecutive days or which the Board determines constitutes a Disability. As used herein, the term "PER SHARE MARKET VALUE" for any particular date shall mean, (a) the last sale price per share of the Common Stock on such date on the principal stock exchange on which the Common Stock has been listed or if there is no such price on such date, then the last price on such exchange on the date nearest preceding such date, or (b) if the Common Stock is not listed on any stock exchange, the average between the high and low prices for a share of Common Stock in the over-the -counter market, as reported by the Nasdaq National Market at the close of business on such date, or the last sales price if such price is reported and high and low prices are not available, or (c) if the Common Stock is not quoted on the Nasdaq National Market, the average between the high and low prices for a share of Common Stock in the over-the-counter market as reported by the National Quotation Bureau Incorporated (or any similar organization or agency succeeding to its functions of reporting prices), or (d) if the Common Stock is no longer publicly traded, as determined by a nationally recognized or major regional investment banking firm or firm of independent certified public accountants of recognized standing (which may be the firm that regularly examines the financial statements of the Company) selected in good faith by the Board of Directors of the Company, provided that none of the transactions related to the foregoing shall include purchases by the Optionee or any "affiliate" (as such term is defined in the General Rules and Regulations under the Securities Act of 1933) of the Company. As used herein, the term "VESTING PRICE" shall mean $24.00 per share of Common Stock. Upon any adjustment of the Exercise Price pursuant to Paragraph 10 hereof, the Vesting Price shall be adjusted, as of the date of such adjustment of the Exercise Price, to that price determined by multiplying the Vesting Price in effect immediately prior to such adjustment of the Exercise Price by a fraction (i) the numerator of which shall be the Exercise Price in effect immediately after such adjustment of the Exercise Price, and (ii) the denominator of which shall be the Exercise Price in effect immediately prior to such adjustment. As used herein, the term "TRADING DAY" shall mean (a) a day on which the Common Stock is traded on the principal stock exchange on which the Common Stock has been listed, or (b) if the Common Stock is not listed on any stock exchange, a day on which the Common Stock is traded in the over-the-counter market, as reported by the Nasdaq National Market, or (c) if the Common Stock is not quoted on the Nasdaq National Market, a day on which the Common Stock is traded in the over-the-counter market as reported by the National Quotation Bureau Incorporated (or any similar organization or agency succeeding to its functions of reporting prices). 5. MANNER OF EXERCISE AND PAYMENT. 5.1 Subject to the terms and conditions of this Agreement, the Option may be exercised by delivery of written notice to the Company, at its principal executive office. Such notice shall state 4 5 that the Optionee is electing to exercise the Option and the number of Option Shares in respect of which the Option is being exercised and shall be signed by the person or persons exercising the Option. 5.2 The notice of exercise shall be accompanied by the full purchase price for the Option Shares in respect of which the Option is being exercised, (i) in cash, (ii) by check or (iii) by transferring shares of Common Stock to the Company (other than shares held by the Optionee for less than 6 months prior to the date of exercise) the number of which shares shall be determined by dividing the full purchase price for the Option Shares in respect of which the Option is being exercised by the Per Share Market Value of the Common Stock on the Trading Day preceding the date of exercise. 5.3 Upon receipt of the notice of exercise and full payment for the Option Shares in respect of which the Option is being exercised, the Company shall take such action as may be necessary promptly to effect the transfer to the Optionee of the number of Option Shares as to which such exercise was effective. 5.4 The Optionee shall not be deemed to be the holder of, or to have any of the rights of a holder with respect to any Option Shares subject to the Option until (i) the Option shall have been exercised pursuant to the terms of this Agreement and the Optionee shall have paid the full purchase price for the number of Option Shares in respect of which the Option was exercised, (ii) the Company shall have issued and delivered the Option Shares to the Optionee, and (iii) the Optionee's name shall have been entered as a stockholder of record on the books of the Company, whereupon the Optionee shall have full voting and other ownership rights with respect to such Option Shares. 6. COMPLIANCE WITH LAWS, RULES AND REGULATIONS. Notwithstanding any other provision of this Agreement to the contrary, the obligation of the Company to sell or issue any Option Shares under the Option shall be suspended during any period of time when the issuance of such Option Shares would constitute a violation by Optionee or the Company of any provisions of any law or regulation of any governmental authority. The Option shall be subject to the requirements that, if at any time the Board shall, in good faith and upon a reasonable basis, determine that the listing, registration or qualification of the Option Shares upon any stock exchange or under any state or federal law of the United States or any governmental subdivision thereof, or the consent or approval of any governmental regulatory body, or investment or other representation, are necessary or desirable in connection with the issue or purchase of Option Shares, the Option may not be exercised in whole or in part unless such listing, registration, qualification, consent, approval or representations shall have been effected or obtained free of any conditions not acceptable to the Board acting reasonably and in good faith. In the event the Option Shares issuable on exercise of an Option are not registered under the Securities Act of 1933, as amended (the "Act"), the Company may imprint on the certificate for such Option Shares the following legend which counsel for the Company considers necessary or advisable to comply with the Act: 5 6 "The shares represented by this certificate have not been registered under the Securities Act of 1933 or under the securities laws of any state and may reoffered or sold only if registered or if an exemption from registration is available." Notwithstanding any other provision in this Agreement to the contrary, if within 10 days preceding the Expiration Date, the Company is unable to issue Option Shares under the Option, the term of the Option shall be extended and written notice given to Optionee (at least 7 days prior to the Expiration Date) of such extension so as to provide a reasonable opportunity for Optionee to exercise the Option; provided, however, in no event shall such extension exceed the period during which the Company was unable to issue Option Shares under the Option plus 10 days. 7. TERMINATION OF OPTION 7.1 Notwithstanding any other provision in this Agreement to the contrary, if on or before the Expiration Date of the Option, the Company terminates the Optionee's employment with the Company, with Cause, the Option shall terminate on the date of such termination and after such date no rights thereunder may be exercised. 7.2 Notwithstanding any other provision in this Agreement to the contrary, if prior to the date the Option becomes exercisable and on or before the Expiration Date of the Option, the Optionee terminates his employment with the Company, other than for Good Reason (as defined below) or as a result of his Disability, the Option shall terminate on the date of such termination and after such date no rights thereunder may be exercised. As used herein, the term "GOOD REASON" shall mean (i) any removal of the Optionee from, or any failure to re-elect the Optionee to the positions of President and Chief Executive Officer of the Company, except in connection with termination of Optionee's employment for Cause, (ii) a material breach by the Company of the Optionee's Employment Agreement with the Company dated as of March 1, 1993, as amended or replaced prior to the Expiration Date of the Option, or (iii) a Change in Control of the Company. 8. NONTRANSFERABILITY. The Option shall not be transferrable other than by will or by the laws of descent and distribution. During the lifetime of the Optionee, the Option shall be exercisable only by the Optionee or his guardian or legal representative. 9. NO RIGHT TO CONTINUED EMPLOYMENT. Nothing in this Agreement shall be interpreted or construed to confer upon the Optionee any right with respect to continuance of employment with the Company, nor shall this Agreement 6 7 interfere in any way with the right of the Company to terminate the Optionee's employment at any time. 10. ADJUSTMENTS UPON CHANGES IN THE COMPANY'S CAPITAL STRUCTURE. 10.1 If the Company shall effect a subdivision or consolidation of the Common Stock or other capital readjustment, the payment of a stock dividend, or other increase or reduction of the number of shares of Common Stock outstanding, without receiving compensation therefor in money, services, or property, then the number of Option Shares purchasable under the Option and the Exercise Price shall be appropriately adjusted in such a manner as to entitle the Optionee to receive, upon exercise of the Option, for the same aggregate consideration, the same total number of Option Shares and other securities as he would have received after the happening of any of the events described above had he exercised the Option in full immediately prior to such event. 10.2 If (i) a Transaction described in Paragraph 4(b) is consummated while the Option remains outstanding, and (ii) the Option becomes exercisable as a result of such Transaction, (x) Optionee shall be entitled upon exercise of the Option, to receive, in lieu of Option Shares, the number and class or classes of shares of such stock or other securities or property to which Optionee would have been entitled if, immediately prior to such Transaction, Optionee had been the holder of the Option Shares or (y) the Option may be canceled by the Board as of the Consummation Date of any such Transaction upon payment to Optionee in cash equal to the amount by which the value (as determined in good faith by the Board) of the securities or property to which Optionee would have been entitled if, immediately prior to such Transaction, Optionee had been the holder of the Option Shares exceeds the aggregate Exercise Price of the Option Shares. 10.3 If the Company shall issue rights or warrants to all holders of Common Stock entitling them to subscribe for or purchase shares of Common Stock at a price less than the Per Share Market Value of Common Stock on the record date of such issuance, the Exercise Price shall be reduced by multiplying the Exercise Price in effect prior to such record date by a fraction, of which the denominator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding on the date of such issuance of such rights or warrants plus the number of additional shares of Common Stock offered for subscription or purchase, and of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding on the date of issuance of such rights or warrants plus the number of shares which the aggregate offering price of the total number of shares so offered would purchase at such Per Share Market Price. Such adjustment shall be made whenever such rights or warrants are issued, and shall become effective immediately after the record date for the determination of stockholders entitled to receive such rights or warrants. However, upon the expiration of any right or warrant to purchase Common Stock, the issuance of which resulted in an adjustment in the Exercise Price pursuant to this paragraph 10.3, if any such right or warrant shall expire and shall not have been exercised, the Exercise Price shall immediately upon such expiration be recomputed and effective immediately upon such expiration be increased to the price which it would have been had the adjustment of the Exercise Price made upon the issuance of such rights or warrants been made on the basis of offering for subscription or purchase only that number of shares of Common Stock actually purchased upon the exercise of such rights or warrants actually exercised. 7 8 10.4 If the Company shall distribute to all holders of Common Stock evidences of its indebtedness or assets (excluding cash dividends or cash distributions paid out of earned surplus) or rights or warrants to subscribe for or purchase any security (excluding those referred to in paragraph 10.3 above) then in each such case the Exercise Price shall be determined by multiplying the Exercise Price in effect prior to the record date fixed for determination of stockholders entitled to receive such distribution by a fraction, of which the denominator shall be the Per Share Market Value of the Common Stock on the record date, and of which the numerator shall be such Per Share Market Value of the Common Stock, less the then fair market value (as determined by the Board of the Company in good faith, whose determination shall be conclusive if made in good faith; provided, however that in the event of a distribution or series of related distributions exceeding 10% of the net assets of the Company, then such fair market value shall be determined by a nationally recognized or major regional investment banking firm or firm of independent certified public accountants of recognized standing (which may be the firm that regularly examines the financial statements of the Company) selected in good faith by the Board of the Company, and in either case shall be described in a statement provided to the Optionee) of the portion of assets or evidences of indebtedness so distributed or such subscription rights applicable to one share of Common Stock. Such adjustment shall be made whenever any such distribution is made and shall become effective immediately after the record date mentioned above. 10.5 If conditions shall arise by reason of action taken by the Company, which, in the opinion of the Board of the Company, are not adequately covered by the other provisions hereof and which might reasonably be expected to materially and adversely affect the rights of the Optionee hereunder, or if any such conditions are expected to arise by reason of any action contemplated by the Company, the Board of the Company shall appoint a firm of independent certified public accountants of recognized standing (which may be the firm that regularly examines the financial statements of the Company), who shall give their opinion as to the adjustment, if any (not inconsistent with the standards established in this paragraph 10), of the Exercise Price (including, if necessary, any adjustment as to the securities which may be purchased hereunder) which is or would be required to preserve without dilution the rights of the Optionee hereunder. The Board of the Company shall make the adjustment recommended forthwith upon receipt of such opinion or the taking of any such action contemplated, as the case may be: provided, however, that no such adjustment of the Exercise Price shall be made which in the opinion of the investment banking firm or firm of accountants giving the aforesaid opinion would result in an increase of the Exercise Price to more than the Exercise Price then in effect. Except as hereinbefore expressly provided, the issue by the Company of shares of any class, or securities convertible into shares of any class, for cash or property, or for labor or services either upon direct sale or upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares or obligations of the Company convertible into such shares or other securities, shall not affect, and no adjustment by reason thereof shall be made with respect to the number or exercise price of Option Shares then subject to the Option. 8 9 11. WITHHOLDING OF TAXES. Prior to the issuance of the Option Shares for an exercise of the Option, the Optionee shall pay to the Company any federal, state and local income taxes and other amounts (the "Withholding Taxes") as may be required by law to be withheld. In satisfaction of the Withholding Taxes, the Optionee may transfer shares of Common Stock to the Company (other than shares held by Optionee for less than 6 months prior to the date of exercise) the number of which shares shall be determined by dividing the total amount of the Withholding Taxes by the Per Share Market Value on the Trading Day preceding the date of exercise. 12. MODIFICATION OF AGREEMENT. This Agreement may be modified, amended, suspended or terminated, and any terms and conditions may be waived, but only by a written instrument executed by the parties hereto. 13. SEVERABILITY. Should any provision of the Agreement be held by a court of competent jurisdiction to be unenforceable or invalid for any reason, the remaining provisions of this Agreement shall not be affected by such holding and shall continue in full force in accordance with their terms. 14. GOVERNING LAW. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Delaware without giving effect to the conflicts of laws principles thereof. 15. SUCCESSORS IN INTEREST. This Agreement shall inure to the benefit of and be binding upon any successor to the Company. This Agreement shall inure to the benefit of the Optionee's legal representatives. All obligations imposed upon the Optionee and all rights granted to the Company under this Agreement shall be final, binding and conclusive upon the Optionee's heirs, executors, administrators and legal representatives. Attest: PLAINS RESOURCES INC. /s/ Michael R. Patterson by: /s/ Tom H. Delimitros ------------------------------- ---------------------------------- Secretary Chairman of the Compensation Committee /s/ William C. Egg, Jr. ------------------------------------------ William C. Egg, Jr., OPTIONEE
9 EX-10.N 8 AMENDMENT TO COMPANY'S 1992 STOCK INCENTIVE PLAN 1 EXHIBIT 10(n) AMENDMENT OF 1992 STOCK INCENTIVE PLAN 1. Article 8 of the Plan is hereby amended and restated in its entirety to read as follows: 8. Awards to Non-employee Directors in Lieu of Regular Meeting Attendance Fees. Each Non-employee Director shall have the right to make an annual election to receive Shares (a "Shares Election") in lieu of regular meeting attendance fees (excluding attendance fees for special meetings, committee meetings and telephonic meetings) earned for service on the Board in the year following receipt by the Company of a Shares Election. 8.1 Shares Election. A Non-employee Director may make a Shares Election by written notice to the Secretary of the Company on or before each annual stockholders' meeting and such election shall be irrevocable and remain in effect for a one-year period which shall begin on the day of the annual stockholders' meeting and end on the day before the succeeding annual stockholders' meeting (the "Election Year"). Provided, however, a Non-employee Director who is elected or appointed to the Board at a time other than the annual stockholders' meeting may make a Shares Election by written notice to the Secretary of the Company within 10 days after the date his term begins and such election shall remain in effect for the remainder of the Election Year. 8.2 Issuance of Shares. After each regular meeting of the Board, the Company shall award to each Non-employee Director who made a Shares Election and attended such meeting, a number of Shares (rounded to the nearest whole Share) determined by dividing the amount of the fee to which he would have otherwise been entitled for attendance at such meeting by the Fair Market Value of a Share on the date of such meeting. Certificates for the Shares awarded shall be issued to the recipient Non-employee Director as soon as practicable and thereupon the recipient Non-employee Director shall have full voting, dividend and other ownership rights with respect to such Shares. 2. Section 9.1 of the Plan is hereby amended and restated in its entirety to read as follows: 9.1 The Plan shall terminate June 1, 2002, and no Options or awards of Shares may be granted thereafter. The Board may sooner terminate or, except as otherwise provided herein, amend the Plan at any time and from time to time. ADOPTED BY PLAINS RESOURCES INC. BOARD OF DIRECTORS ON FEBRUARY 6, 1997. EX-11.A 9 PER SHARE EARNINGS FOR YEAR ENDED DECEMBER 31,1996 1 Exhibit 11 (A) EXHIBIT Computation of Earnings Per Share Year Ended December 31, 1996 (in thousands, except per share data)
Assuming Primary Full Dilution -------------- -------------- Weighted average common shares outstanding 16,384 16,384 Other dilutive securities 1,348 1,707 -------------- -------------- Total shares outstanding for calculation 17,732 18,091 ============== ============== Net income before extraordinary item - as reported $ 21,652 $ 21,652 Extraordinary item, loss on early extinguishment of debt, net of tax benefit (5,104) (5,104) -------------- -------------- Net income for calculation $ 16,548 $ 16,548 ============== ============== Net income (loss) per share Before extraordinary item $ 1.22 $ 1.19 Extraordinary item $ (0.29) $ (0.28) --------------- --------------- Net income per share $ 0.93 $ 0.91 ============== ==============
EX-11.B 10 PER SHARE EARNINGS FOR YEAR ENDED DECEMBER 31,1995 1 Exhibit 11 (B) EXHIBIT Computation of Earnings Per Share Year Ended December 31, 1995 (in thousands, except per share data)
Assuming Primary Full Dilution -------------- -------------- Weighted average common shares outstanding 13,859 13,859 Other dilutive securities 2,122 2,313 -------------- -------------- Total shares outstanding for calculation 15,981 16,172 ============== ============== Net income - as reported $ 2,652 $ 2,652 Deduct: Dividends on Cumulative Convertible Preferred Stock (42) (42) -------------- -------------- Net income for calculation $ 2,610 $ 2,610 ============== ============== Net income per share $ .16 $ .16 ============== ==============
EX-11.C 11 PER SHARE EARNINGS FOR YEAR ENDED DECEMBER 31,1994 1 Exhibit 11 (C) EXHIBIT Computation of Earnings Per Share Year Ended December 31, 1994 (in thousands, except per share data)
Assuming Primary Full Dilution ------------- -------------- Weighted average common shares outstanding 11,576 11,576 Other dilutive securities 49 1,694 ------------- -------------- Total shares outstanding for calculation 11,625 13,270 ============= ============== Net income - as reported $ 571 $ 571 Deduct: Dividends on Cumulative Convertible Preferred Stock (62) (62) ------------- -------------- Net income for calculation $ 509 $ 509 ============= ============== Net income per share $ .04 $ .04 ============= ==============
EX-21 12 SUBSIDIARIES OF THE COMPANY 1 Exhibit 21 SUBSIDIARIES OF PLAINS RESOURCES INC. o PMCT INC. o Plains Terminal & Transfer Corporation o Plains Marketing & Transportation Inc. o Plains Resources International Inc. o PLX Crude Lines Inc. o Stocker Resources Inc. o Calumet Florida, Inc. o Plains Illinois Inc. o PLX Ingleside Inc. o Stocker Resources, L.P. EX-23.A 13 CONSENT OF PRICE WATERHOUSE LLP 1 Exhibit 23.(a) CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in each of the Registration Statements on Form S-8 (Nos. 3332565, 33-43788, 33-53802 and 333-06191) of Plains Resources Inc. of our report dated February 10, 1997 appearing on page F-2 of this Form 10-K. PRICE WATERHOUSE LLP Houston, Texas February 10, 1997 EX-23.B 14 CONSENT OF PRICE WATERHOUSE LLP 1 Exhibit 23.(b) CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in each Prospectus constituting part of the Registration Statements on Form S-3 (Nos. 333-80364, 333-01851, 33-84064) of Plains Resources Inc. of our report dated February 10, 1997 appearing on page F-2 of the Annual Report on Form 10-K for the year ended December 31, 1996. PRICE WATERHOUSE LLP Houston, Texas February 10, 1997 EX-27 15 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PLAINS RESOURCES INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1996, AND CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 2,517 0 93,686 0 4,563 101,858 469,114 158,074 430,249 106,701 225,399 1,652 0 0 93,920 430,249 629,299 629,608 560,902 582,839 0 0 17,286 17,754 (3,898) 21,652 0 (5,104) 0 16,548 .93 .91
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