<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
MCFARLAND ENERGY, INC.
- - --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- - --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2)
or Item 22(a)(2) of Schedule 14A.
[_] $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
-------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
-------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
-------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-------------------------------------------------------------------------
(5) Total fee paid:
-------------------------------------------------------------------------
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-------------------------------------------------------------------------
(3) Filing Party:
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(4) Date Filed:
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Notes:
<PAGE>
MCFARLAND ENERGY, INC.
10425 SO. PAINTER AVENUE
SANTA FE SPRINGS, CA 90670
____________________
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 31, 1995
____________________
TO THE SHAREHOLDERS OF MCFARLAND ENERGY, INC.
The annual shareholders' meeting will be held at the Candlewood Club, 14000
East Telegraph Road, Whittier, California, on May 31, 1995 at 10:00 a.m., for
the following purposes:
1. The election to the Board of one class of directors consisting of
two Directors.
2. The transaction of such other business as may properly come before the
meeting or any adjournment thereof.
The Board of Directors has fixed the close of business on April 5, 1995 as
the record date for the shareholders entitled to the notice of, and to vote at,
such meeting.
You are cordially invited to attend the meeting in person. IF YOU CANNOT
DO SO, IT IS IMPORTANT THAT YOU FILL IN, SIGN AND RETURN THE ENCLOSED PROXY CARD
PROMPTLY.
By order of the Board of Directors
SILVIA D. NELSON
Secretary
April 5, 1995
<PAGE>
PROXY STATEMENT
____________________
ANNUAL MEETING OF SHAREHOLDERS
MAY 31, 1995
____________________
SOLICITATION AND REVOCATION OF PROXY
The following information is furnished in connection with the solicitation
of the enclosed proxy by and on behalf of the Board of Directors of McFarland
Energy, Inc. ("Company") for use at the Annual Meeting of Shareholders of the
Company to be held on May 31, 1995 and at any adjournment or adjournments
thereof ("Meeting").
Any shareholder who has given a proxy may revoke it any time prior to its
exercise at the Meeting (1) by mailing or by delivering, at or prior to its
exercise at the Meeting, to the corporate secretary of the Company, (a) an
executed instrument revoking such proxy, or (b) an executed proxy bearing a
later date, or (2) by appearing at the Meeting, revoking his or her proxy, and
voting in person. Any written notice revoking a proxy should be sent to the
principal office of the Company to the attention of the corporate secretary.
The mere presence at the Meeting of a person who has given a proxy will not
revoke such proxy.
VOTING AT THE MEETING
The Common Shares represented at the Meeting by properly executed proxies
will, unless such proxies have previously been revoked, be voted in accordance
with the instructions indicated in such proxies. If no instructions are
indicated, the shares will be voted by the Company in favor of the election of
the directors named herein.
Abstentions may be specified on all proposals submitted to a shareholder
vote other than the election of Directors. Abstentions will be counted as
present for purposes of determining the existence of a quorum regarding the
proposal on which the abstention is noted. The election of each nominee for
director requires a plurality of the votes cast.
Brokers holding shares of the Company's Common Stock in street name who do
not receive instructions are entitled to vote on the election of Directors.
However, brokers may not vote shares held for customers on any of the
shareholder proposals without specific instructions from such customers. Under
applicable Delaware law "broker non-votes" on any such proposal (where a broker
submits a proxy but does not have authority to vote a customer's shares on such
proposal) will be considered not entitled to vote on that proposal and thus will
not be counted in determining whether such proposal receives a majority of the
shares of the Company's Common Stock present and entitled to vote at the
Meeting.
1
<PAGE>
The Company will bear the costs of solicitation of proxies. In addition to
soliciting proxies by mail, directors, officers and employees of the Company,
without receiving additional compensation therefor, may solicit proxies in
person, by telephone, telegram or other means and such person shall be
reimbursed by the Company for reasonable out-of-pocket expenses incurred in
connection with such solicitation. Arrangements will also be made with
brokerage firms and other custodians, nominees and fiduciaries for reasonable
out-of-pocket expenses incurred by them in connection therewith. The Proxy
Statement and the accompanying proxy card are first being mailed to shareholders
on or about April 17, 1995.
VOTING SECURITIES
The Company is authorized to issue 10,000,000 $1.00 par value Common
Shares. The Company on April 5, 1995 had 5,227,109 outstanding shares of common
stock, all of which will be entitled to vote at the Meeting and any adjournments
thereof. The holders of the Company's Common Shares are entitled to one vote
for each share of such stock held of record by them.
The following table sets forth, as of April 5, 1995, the information with
respect to ownership of the Company's Common Shares by each person known by the
Company to own beneficially, or have options exercisable on April 5, 1995 and
options which will become exercisable within sixty days thereafter to purchase,
shares which represent more than 5% of the Company's Common Shares, and of all
directors and officers as a group:
<TABLE>
<CAPTION>
AMOUNT AND NATURE
NAME AND ADDRESS OF BENEFICIAL PERCENT
OF BENEFICIAL OWNER OWNERSHIP OF CLASS
------------------- ------------------ --------
<S> <C> <C>
WHITE RIVER CORPORATION.............................. 685,200 (A) 13.1%
777 Westchester Avenue, Suite 201
White Plains, NY 10604
McFARLAND FAMILY TRUST............................... 586,351 (B) 11.2%
10425 So. Painter Avenue
Santa Fe Springs, CA 90670
DAVID L. BABSON & CO................................. 537,300 (C) 10.3%
One Memorial Drive
Cambridge, MA 02142-1300
WILLIAM E. CARL...................................... 370,504 (B)(D) 7.1%
500 No. Water Street, Suite 901N
Corpus Christi, TX 78471
All Directors and Officers as a Group (10 persons)... 630,726 12.1%
</TABLE>
(A) Prior to December 22, 1993, White River Corporation ("WRC") was a wholly-
owned subsidiary of Fund American Enterprises Holdings, Inc. ("FAEH"),
formerly Fireman's Fund Corporation. WRC purchased the shares of the
Company from FAEH on September 24, 1993 as part of the initial
capitalization of WRC. In October 1993, FAEH provided the Company with a
letter which stated that WRC had agreed to be bound by all the obligations
of FAEH as set forth in that certain Letter Agreement dated September 1,
1989, between FAEH and the Company (the "Letter Agreement").
2
<PAGE>
The Letter Agreement provides that for a period of no less than five years
FAEH (a) will not buy Company's shares without its consent if the purchases
would increase FAEH's holding above 15%; (b) if by Company's actions the
percentage ownership would be increased to more than 15% of the common
stock, and if Company asks FAEH, FAEH will sell back to Company, at a price
both parties consider reasonable, enough stock to hold the shares owned by
FAEH to 15%; (c) FAEH will continue to support Company's current senior
management and Board of Directors at shareholder meetings and will vote as
Company asks; and (d) FAEH will not sell its shares as a block without
first discussing with Company and in a manner amenable to Company. On
January 4, 1993 the principal terms of the Letter Agreement were extended
to January 4, 1998 in conjunction with the Company's refinancing of its
$2.6 million convertible note through FAEH. The newly issued convertible
note has a conversion rate of one share of Common Stock for each $6.50
principal amount and is convertible by FAEH after January 4, 1994.
Provisions (a) and (b) of the Letter Agreement were amended to exclude any
shares issued upon conversion of the convertible note.
(B) As part of the transaction whereby the Company acquired Carl Oil & Gas Co.,
L.C. McFarland and William E. Carl entered into a Shareholder Agreement
dated July 15, 1988, which provides that Mr. Carl will not sell a
substantial number of his shares except in a registered or open market
transaction or to a related party without first offering his shares to the
Company. In the event Mr. L.C. McFarland's estate sells a substantial
number of its shares in a transaction that would constitute a change of
control of the Company, Mr. Carl has the right to sell his shares on the
same terms. The Shareholder Agreement is in effect until either Mr. Carl
or Mr. McFarland's estate cease to be the beneficial owner of five percent
(5%) or more of the outstanding common shares of the Company and is binding
upon their assigns, successors in interest, personal representatives,
estates, heirs, and legatees.
(C) Based upon Schedule 13G as filed with the Securities and Exchange
Commission.
(D) Of these shares, 157,142 shares are owned of record by Mr. Carl's two adult
daughters. Mr. Carl shares investment and voting power over these shares
with his daughters.
PROPOSAL 1: ELECTION OF DIRECTORS
The Board of Directors consists of seven members divided into three classes.
Two directors, as set forth hereafter, are to be elected at the Meeting. The
remaining five directors presently serving will continue to serve as set forth
hereafter. The proxy holders will vote the proxies received by them for the
following two nominees for a term of three years and until their successors are
duly elected and qualified unless authorization to vote for election of
directors has been withheld.
NOMINEES FOR ELECTION TO THE BOARD OF DIRECTORS
FOR THREE-YEAR TERM EXPIRING IN 1998
-----------------------------------------------
<TABLE>
<CAPTION>
SHARES OF
COMMON STOCK
PRINCIPAL DIRECTOR BENEFICIALLY OUTSTANDING
NAME(12) OCCUPATION AGE SINCE OWNED PERCENT
- - --------------------- ------------------ --- -------- ----------------- -----------
<S> <C> <C> <C> <C> <C>
Herbert M. Rome Retired Business 68 1992 17,542(14) *
(5)(8)(9) Executive
Daniel E. Pasquini Business Executive 52 1994 2,000(14) *
(11)
</TABLE>
3
<PAGE>
MEMBERS OF THE BOARD OF DIRECTORS CONTINUING IN OFFICE
<TABLE>
<CAPTION>
SHARES OF
COMMON STOCK
PRINCIPAL DIRECTOR BENEFICIALLY OUTSTANDING
NAME(13) OCCUPATION AGE SINCE OWNED(1)(2) PERCENT
- - ------------------- ----------------------- --- -------- ------------------ ------------
<S> <C> <C> <C> <C> <C>
TERM EXPIRING IN 1996
Barclay Simpson Business Executive 73 1972 64,600(14) 1.2%
(8)
John C. Capshaw Retired Business 62 1994 4,000(14) *
(5)(10) Executive
TERM EXPIRING IN 1997
William E. Carl Vice Chairman and 69 1988 370,504(6)(14) 7.1%
(3)(4)(5) President of Company's
subsidiary, Carl Oil &
Gas Co.
J. C. McFarland Chairman of the Board 48 1982 120,625(7) 2.3%
(4) and Chief Executive
Officer
Daniel J. Redden Business Executive 53 1986 5,100(14) *
(4)(8)
</TABLE>
- - -----------------
*Less than one percent
(1) Does not include the shares in the Employee Retirement Savings and Stock
Ownership Plan.
(2) Includes shares held in trust and shares owned by spouses.
(3) Elected to the Board of Directors in September, 1988 pursuant to the terms
of the Shareholder Agreement discussed in Note (B) to "Voting Securities".
Since July 1988, Mr. Carl has been President of Carl Oil & Gas Co., a
wholly-owned subsidiary of the Company. For more than five years prior to
that time, Mr. Carl was President of Carl Oil & Gas Co., a privately owned
company engaged in oil and gas exploration and production.
(4) Member of the Nominating Committee of the Board of Directors.
(5) Member of Audit Committee of the Board of Directors.
(6) See Note (B) to "Voting Securities".
(7) Includes 45,875 shares which are purchasable upon exercise of outstanding
stock options.
(8) Member of the Compensation Committee of the Board of Directors.
(9) From 1978 until he retired in 1991, Mr. Rome held the position of Executive
Vice President of Eldon Industries, Inc. He also served on Eldon
Industries, Inc.'s Board of Directors from 1979 through 1990.
(10) In 1993, Mr. Capshaw retired from Hadson Energy Resources Corporation where
he had held the positions of Chairman, Chief Executive Officer and
President. Prior to Hadson Energy Resources Corporation, Mr. Capshaw
served as Chief Executive Officer and President of UMC Petroleum
Corporation from 1988 to 1989.
(11) Mr. Pasquini was elected to serve on the Board of Directors on October 20,
1994 as a Class II director. From 1987 through 1994, Mr. Pasquini held the
position of President and Chief Executive
4
<PAGE>
Officer of Fortune Petroleum Corporation. Fortune Petroleum is an
independent energy company primarily engaged in the acquisition, operation,
production and development of domestic oil and gas properties with its
principal operations located in California, Texas and Oklahoma.
(12) Effective October 1, 1994, Mr. Lawrence M. Hirst resigned as an officer,
employee and director of the Company and its subsidiaries. The Company and
Mr. Hirst entered into a General Release and Settlement Agreement dated
November 17, 1994. The details of the settlement are set forth in the
Agreement which is attached as an exhibit to the Company's Form 8-K as
filed on November 25, 1994.
(13) Mr. Lee C. McFarland, founder of the Company, passed away on December 1,
1994.
(14) Includes 2,000 shares which are purchasable upon exercise of
outstanding stock options.
Unless otherwise noted, each of the directors has had the same principal
occupation during the past five years.
Directors' Compensation
The Company does not pay any salaried employee of the Company additional
compensation for service on the Board of Directors or any Board committee. For
directors who are not salaried employees of the Company, the presently
established fee is $1,000 for attending meetings of the Board. The fee for
attending meetings of the Audit, Compensation and Nominating Committees is $500
if a meeting occurs on the same day as a regularly scheduled Board meeting,
however, if a meeting occurs on a day separate from a Board meeting, the fee is
$1,000. In addition, except for any salaried employee or retained consultant,
directors receive an annual retainer of $5,000. The Company entered into a one-
year Consulting Agreement with William E. Carl, which is described in further
detail hereafter under the heading "Transactions with Management and Others".
Pursuant to the Non-Employee Director Stock Option Plan, each non-employee
director receives an initial option to purchase 2,000 shares of Company Common
Stock. Annually, thereafter, options to purchase 1,000 shares of common stock
are granted to each non-employee director. The option exercise price is equal
to the fair market value of the Company's common stock on the date of grant.
The options are exercisable immediately after grant date.
Meetings of the Board of Directors
During the calendar year 1994, the Board of Directors held eight meetings.
In 1994 the Compensation Committee held three meetings, the Audit Committee held
one meeting and the Nominating Committee met once.
Committees of the Board of Directors
The Board of Directors maintains standing Audit, Compensation and Nominating
Committees. The purpose and objective of the Audit Committee is to provide
assistance and advice to the directors in connection with corporate accounting,
auditing and reporting practices and to facilitate communication between the
Board and the independent auditors of the Company. It meets periodically with
management and external auditors and reviews the Company's accounting policies
and internal controls. The committee recommends the firm of independent
accountants to be retained by the Company, and approves all material non-audit
services provided by them.
The Compensation Committee's functions are to review the Company's policies
and programs for the development of management personnel; to make
recommendations to the Board with respect to any proposals for compensation or
compensation adjustments for other elected officers of the Company; from time to
time
5
<PAGE>
to delegate to the chief executive officer authority to act on compensation or
compensation adjustment of other executives of the Company; to administer the
Company's stock option plans; and to make recommendations to the Board with
respect to directors' compensation.
The Nominating Committee considers and makes recommendations to the Board as
to the number of directors to constitute the whole Board, the names of persons
whom it concludes should be considered for Board membership, and recommends
matters relating to the selection, tenure and retirement of directors.
Reports under Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 and the rules
thereunder require the Company's officers and directors, and persons who own
more than ten percent of a registered class of the Company's equity securities,
to file reports of ownership and changes in ownership with the Securities and
Exchange Commission and the NASDAQ National Market System and to furnish the
Company with copies.
Based on its review of the copies of such forms received by it, or written
representations from certain reporting persons, the Company believes that all
filing requirements applicable to its officers, directors, and greater than ten-
percent beneficial owners were complied with except that one report, covering
one transaction, was filed late by Mr. Herbert Rome.
EXECUTIVE COMPENSATION
Cash Compensation
The following tables set forth, for the fiscal year ended December 31, 1994,
certain information concerning compensation paid to or accrued for all executive
officers who were serving as executive officers during 1994 and whose annual
salary and bonus exceeded $100,000 in the current fiscal year.
SUMMARY COMPENSATION TABLE
--------------------------
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation
----------------------- --------------------
No. of Shares
Underlying Options All Other
Salary(1) Bonus Granted(2) Compensation(3)
Name and Principal Position Year ($) ($) (#) ($)
- - ---------------------------------- ---- ------------ -------- -------------------- ---------------
<S> <C> <C> <C> <C> <C>
J. C. McFarland 1994 $166,322 $77,700 13,500 $ 7,582
Chairman of the Board 1993 $166,259 -- -- $11,352
and Chief Executive Officer 1992 $158,415 $38,000 46,000 $ 7,390
Lawrence M. Hirst(4) 1994 $100,500 -- 11,000 $40,617
President and 1993 $134,276 -- -- $10,309
Chief Operating Officer 1992 $110,288 $38,000 45,000 $ 7,899
Ronald T Yoshihara 1994 $ 92,122 $36,050 5,000 $ 6,753
Vice President and 1993 $ 92,091 -- -- $ 6,446
Treasurer 1992 $ 84,398 $17,000 19,000 $ 7,098
Robert E. Ransom 1994 $ 87,115 $31,800 5,000 $ 6,385
Vice President - 1993 $ 87,085 -- -- $ 6,656
Corporate Development 1992 $ 82,298 $12,000 20,500 $ 6,041
</TABLE>
6
<PAGE>
(1) In May 1992, the Company discontinued its practice of providing Company
vehicles for its executives and it now provides a monthly auto allowance
which is reflected in the executive's salary compensation. In 1993 and 1994,
Mr. McFarland received an annual auto allowance of $6,000, while Mr.
Yoshihara and Mr. Ransom received an annual auto allowance of $4,800 each
year. Mr. Hirst, who resigned from the Company effective October 1, 1994,
received an auto allowance of $6,000 and $4,500 in 1993 and 1994,
respectively.
(2) Options granted in 1992 include options exchanged on June 12, 1992 under the
amendment to the 1986 and 1989 Stock Option Plans. No options were granted
in 1993.
(3) Amounts represent the matching contributions made by the Company under its
Employees Savings and Stock Ownership Plan.
(4) Effective October 1, 1994, Mr. Hirst resigned as an officer, employee and
director of the Company and its subsidiaries. The Company and Mr. Hirst
entered into a General Release and Settlement Agreement dated November 17,
1994. The amount reported in 1994 for All Other Compensation consists of
$31,385 of previously unpaid accrued vacation pay and $9,232 representing
the matching contribution made by the Company under its Employees Savings
and Stock Ownership Plan.
OPTION GRANTS IN 1994
---------------------
<TABLE>
<CAPTION>
Potential Realizable Value at
Assumed Annual Rates of Stock Price
Individual Grants Appreciation for Option Term(4)
------------------------------------------------------- ------------------------------------
% of Total
Options Options Granted Exercise
Granted to Employees Price Expiration
Name (#)(1) in 1994 ($/Sh)(3) Date 5% 10%
- - --------------------------- -------- --------------- --------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
J. C. McFarland 13,500 22% $5.25 1/19/04 $69,407 $152,027
Lawrence M. Hirst(2) 11,000 18% $5.25 1/19/04 $56,554 $123,874
Ronald T Yoshihara 5,000 8% $5.25 1/19/04 $25,706 $ 56,306
Robert E. Ransom 5,000 8% $5.25 1/19/04 $25,706 $ 56,306
</TABLE>
(1) Option holders vest in the granted options at the rate of 25% per year,
commencing on the first anniversary of the grant date.
(2) The 11,000 options granted to Mr. Hirst were cancelled pursuant to the
General Release and Settlement Agreement dated November 17, 1994 between the
Company and Mr. Hirst.
(3) All options were granted at the Company's Common Stock fair market value on
date of grant.
(4) These columns present hypothetical future values of the stock obtainable
upon exercise of the options net of the option's exercise price, assuming
that the market price of the Company's common stock appreciates at a five
and ten percent compound annual rate over the ten year term of the options.
The five and ten percent rates of stock price appreciation are presented as
examples pursuant to the Securities and Exchange Commission Rules and do not
necessarily reflect management's assessment of the Company's future stock
price performance. The potential realizable values presented are NOT
---
intended to indicate the value of the options.
7
<PAGE>
AGGREGATED OPTION EXERCISES IN 1994
-----------------------------------
AND YEAR ENDED DECEMBER 31, 1994 VALUES
---------------------------------------
<TABLE>
<CAPTION>
Number of Shares Dollar Value of
Underlying Unexercised,
Unexercised Options In-The-Money Options
Number of Dollar Held at Year End at Year End(1)
Shares Acquired Value --------------------------- ----------------------------
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- - ----------------------- ---------------- ---------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
J. C. McFarland -0- $ -0- 42,500 43,000 $ 83,438 $77,500
Lawrence M. Hirst(2) -0- $ -0- 63,000 -0- $130,500 $ -0-
Ronald T Yoshihara -0- $ -0- 18,500 17,500 $ 36,000 $31,875
Robert E. Ransom 3,500 $12,688 15,750 18,250 $ 29,813 $33,562
</TABLE>
(1) The amounts represent the difference between the fair market value of the
Common Stock on December 31, 1994 of $6.38 and the option exercise price.
(2) Pursuant to the terms of the General Release and Settlement Agreement dated
November 17, 1994 between the Company and Mr. Hirst, the vesting of certain
shares under option were accelerated whereby 31,500 shares under option
became fully exercisable and 11,000 options granted in 1994 were cancelled.
TEN-YEAR OPTION REPRICING
-------------------------
<TABLE>
<CAPTION>
Length of Original
Option Term
Number of Market Price of Exercise Price Remaining at
Options Stock at Time of at Time New Exercise Date of
Name Date Amended Amendment of Amendment Price Amendment
- - --------------------- ------- --------- ----------------- -------------- ------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
J. C. McFarland 6/12/92 46,000 $4.13 $8.00-$10.00 $4.13 4-9 Years
Lawrence M. Hirst 6/12/92 25,000 $4.13 $8.00-$10.00 $4.13 4-9 Years
Ronald T Yoshihara 6/12/92 19,000 $4.13 $8.00-$10.00 $4.13 4-9 Years
Robert E. Ransom 6/12/92 20,500 $4.13 $8.00-$10.00 $4.13 4-9 Years
</TABLE>
At the May 29, 1992 Annual Meeting of Shareholders, the shareholders approved
an amendment to the 1986 and 1989 Stock Option Plans to permit the Company to
exchange options previously granted to officers and employees under the Plans on
such terms and conditions as the Board of Directors or its Compensation
Committee may determine within the confines of the Plans. The purpose of the
authority to authorize an exchange of outstanding options was to restore the
incentive value of the options previously granted to officers and employees in
light of the dramatic market correction that occurred for the Company as well as
other oil and gas companies in 1991. The Company had experienced a weak oil and
gas market, which had contributed to a decline in the market price of the
Company's common stock. As a result of these conditions, salaries of all
management personnel were "frozen" in 1991. The amendment to the Plans was
intended to provide further incentives to participating officers and employees
to improve the profit position of the Company. In addition, the Company
believes that providing an opportunity to officers and key employees to develop
a proprietary interest in the Company will aid the Company in obtaining and
retaining the services of individuals of outstanding ability.
The Board of Directors, through its Compensation Committee engaged Strategic
Compensation Associates ("SCA") to advise it on the appropriate method and
formula to apply to an exchange. Utilizing the "Black-Scholes" options
valuation model, and considering the above stated purpose of the Board, SCA
concluded that a two for one exchange ratio would properly provide for
shareholder interests. On June 12, 1992 the Board of Directors approved an
exchange ratio of two outstanding options for the issuance of one new option
with an exercise price of $4.13, the Company's Common Stock fair market value on
date of grant. Option holders vest in the new options at the rate of 25% per
year, commencing one year after the date of grant.
8
<PAGE>
Performance Graph
The following graph compares the yearly percentage change in the Company's
cumulative total shareholder return on its Common Stock to that of the NASDAQ
Non-Financial Stock Index and a group of ten peer companies engaged in oil and
gas exploration and production and with comparable market capitalizations. The
Company's peer group index includes Alexander Energy Corp., American Exploration
Co., Berry Petroleum Co., Coho Energy Inc., Equity Oil Co., Maynard Oil Co.,
Nahama & Weagant Energy Co., Patrick Petroleum Co., Plains Resources Inc., and
Wiser Oil Co.
The graph assumes the value of the investment in McFarland Common Stock and
each index as $100 on December 31, 1989 and that all dividends were reinvested.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
AMONG MCFARLAND ENERGY, PEER GROUP AND NASDAQ
PERFORMANCE GRAPH APPEARS HERE
<TABLE>
<CAPTION>
Measurement Period MCFARLAND
(Fiscal Year Covered) ENERGY PEER GROUP NASDAQ
- - --------------------- --------- ---------- ------
<S> <C> <C> <C>
Measurement Pt- 12/31/89 $100 $100 $100
FYE 12/31/90 $ 73.91 $ 87.49 $ 88.55
FYE 12/31/91 $ 30.43 $ 79.87 $139.63
FYE 12/31/92 $ 38.04 $ 86.16 $152.78
FYE 12/31/93 $ 44.57 $ 80.57 $177.88
FYE 12/31/94 $ 55.43 $ 77.10 $170.63
</TABLE>
The stock price performance depicted in the above graph is not necessarily
indicative of future price performance. The Performance Graph will not be deemed
to be incorporated by reference in any filing by the Company under the
Securities Act of 1933 or the Securities Exchange Act of 1934, except to the
extent that the Company specifically incorporates same by reference.
Compensation Committee Report
The Compensation Committee of McFarland Energy, Inc. is responsible for
defining, implementing and monitoring the policies and programs which govern
executive compensation and recommends appropriate actions to the Board of
Directors. The policy of the Committee is to provide a compensation program
that will attract, motivate and retain executives of outstanding ability and
will foster dedication to the long-term interests of the Company. The
Compensation Committee utilizes oil and gas industry analyses of peer group
compensation programs, external consultant input and historic Company
compensation data to form its conclusions for compensation program actions.
9
<PAGE>
Compensation for executives is comprised of three elements: base salary,
incentive compensation and stock options. The objective of the Compensation
Committee in creating this program is to maintain a competitive industry
posture, to reward performance as demonstrated by the attainment of business
objectives and to align the interests of executives with those of shareholders.
The base salaries of executives are reviewed annually and adjustments, if
any, are based primarily on individual and Company performance. Length of
service and cost of living are also considered. The general policy of the
Compensation Committee is to establish competitive base salaries that
approximate industry averages.
Effective January 1, 1993, the Board of Directors approved and implemented a
new Management Incentive Compensation Plan ("Incentive Plan"). The Incentive
Plan established annual Companywide goals for oil and gas production quantities
and production cost levels, as well as individual performance goals for each
plan participant. The Incentive Plan limited total distributions to a maximum of
8% of Company net cash flow and provided that no incentive payments would be
made to executives unless the Company reported certain levels of pretax profit.
Effective January 1, 1994, the Compensation Committee modified the Incentive
Plan to include a component for the Company's exploration activities and to
reduce the maximum distribution limit to 6% of net cash flow, before exploration
activities. Goals are established by the Compensation Committee and are based
primarily on the annual budget plan. In order to achieve maximum payout, plan
goals must be substantially exceeded. Individual goals are established for each
participant, and executive officer goals include a factor based on Company stock
price performance.
1994 Compensation of Chief Executive Officer
Base Salary
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In 1994, Mr. J. C. McFarland was paid a base salary of $160,000, unchanged
from his 1993 salary. Mr. McFarland's base salary was frozen at the 1993 level
in light of the Company's poor financial performance in that year.
For 1995, Mr. McFarland will be paid a base salary of $176,000, which
represents a 10% increase over his previous year salary. Mr. McFarland's 1995
salary adjustment is in recognition of his superior performance in 1994. Under
his leadership, the Company made significant progress in its principal
objectives of overall growth, increased profitability and enhanced shareholder
value. In 1994, production volumes were increased 26%, earnings per share
totalled $0.29 compared to a net loss of $0.21 reported in 1993, and the
Company's year-end stock price rose 24% from the prior year to $6.38 per share.
Incentive Compensation
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Under the Management Incentive Compensation Plan ("Plan"), Mr. McFarland
received a bonus of $69,700 for 1994. In 1994, under Mr. McFarland's
leadership, the Company reported a substantial improvement in net income and
operating cash flow, and exceeded its targeted production volumes, lifting costs
and exploration goals for the year. Mr. McFarland also received a very high
rating for his individual performance goal in 1994. The Compensation Committee
based its rating of Mr. McFarland on his overall performance and significant
contributions to the Company's improved results for the year. More
specifically, he was instrumental in the consummation of two significant
property acquisitions, which were the principal reasons for record crude oil
production, substantially improved operating results and a 66% increase in the
Company's year-end barrel of oil equivalent reserves. Mr. McFarland's
individual performance rating, combined with the production volumes, production
cost levels and exploration factors achieved in 1994, resulted in a bonus which
represented 87% of his maximum achievable payout under the Plan's calculation
for 1994.
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Stock Options
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Stock options are intended to provide long-term incentive for the continuing
growth, success and value of the Company and to directly link the interests of
the option holders with those of the shareholders. The Compensation Committee
is dedicated to creating programs that will address the continuing success and
value of the Company to its shareholders and its employees. The Committee
believes that attracting, motivating and retaining outstanding executives is
central to this dedication.
Mr. McFarland was granted 13,500 options in 1994.
Section 162(m) of the Internal Revenue Code, which became effective in 1994,
generally disallows a tax deduction to public companies for compensation over $1
million paid to the corporation's Chief Executive Officer and the four other
most highly compensated executive officers. Certain exceptions are provided for
non-discretionary, performance-related compensation. Based on their
understanding of Section 162(m) in the context of the compensation programs of
the Company, the Compensation Committee considers it unlikely that the
compensation level of any executive officer will exceed the deductibility limits
under Section 162(m).
The Compensation Committee will continue to monitor the compensation programs
of the Company in light of the potential impact of Section 162(m), to the extent
it is determinable. The Compensation Committee's general intent is to design
and administer the Company's compensation programs in a manner that will
preserve the deductibility of compensation payments to executive officers.
Compensation Committee
Daniel J. Redden, Chairman
Herbert Rome
Barclay Simpson
The above report of the Compensation Committee will not be deemed to be
incorporated by reference into any filing by the Company under the Securities
Act of 1933 or the Securities Exchange Act of 1934, except to the extent that
the Company specifically incorporates same by reference.
TRANSACTIONS WITH MANAGEMENT AND OTHERS
The Company entered into a one-year Consulting Agreement with William E.
Carl, a director, commencing on July 15, 1994, and terminating on July 14, 1995,
pursuant to which he would continue as a consultant to the Company, primarily in
the capacity of overseeing all the activities of Carl Oil & Gas Co., a wholly-
owned subsidiary of the Company. In consideration of such consulting services,
the Company will pay Mr. Carl the amount of $72,000 per year and an automobile
allowance of $400 per month. In addition, the Company provides Mr. Carl with
group dental and term life insurance and pays the cost of Medicare supplemental
coverage.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand, Certified Public Accountants, who certified the Company's
financial statements for 1994, has advised the Company that it has no direct or
material financial interest in the Company. A representative of the firm of
Coopers & Lybrand will be present at the Meeting. He or she will be provided
the opportunity to make a statement if he or she desires to do so, and will be
available to respond to appropriate questions. The Board of Directors has not
yet selected accountants for the current calendar year.
11
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OTHER MATTERS
Management knows of no other business to be presented at the Meeting. If
other matters do properly come before the Meeting, persons acting pursuant to
the proxy will vote on them in their discretion.
A copy of the Company's Annual Report, including financial statements for
calendar year 1994, are currently being mailed with this Proxy Statement.
DATE FOR SUBMISSION OF SHAREHOLDER PROPOSALS
Proposals to be submitted for the Company's 1996 Annual Meeting of
Shareholders must be received by the Company no later than March 15, 1996
12
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PROXY MCFARLAND ENERGY, INC. PROXY
10425 S. PAINTER AVENUE
SANTA FE SPRINGS, CA 90670
J. C. MCFARLAND and WILLIAM E. CARL, and each of them, with full power of
substitution, are hereby authorized to represent and to vote the stock of the
undersigned MCFARLAND ENERGY, INC. ("Company") at the Annual Meeting of
Shareholders to be held on May 31, 1995 and at any adjournment thereof.
Unless otherwise specified in the squares provided below, the undersigned's
vote is to be cast FOR Item 1.
1. ELECTION OF DIRECTORS
[_] FOR all nominees listed below
(except as marked to the contrary below)
[_] WITHHOLD AUTHORITY
to vote for all nominees listed below
Daniel E. Pasquini and Herbert M. Rome
INSTRUCTION: To withhold authority to vote for any individual nominee write
that nominee's name on the space provided below.
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2. TO TRANSACT SUCH OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING OR
ANY ADJOURNMENT THEREOF.
Date: ___________________________________
_________________________________________
_________________________________________
_________________________________________
Please sign as name(s) appears. If joint
account, EACH joint owner should sign.
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