<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] No fee required.
[_] 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.:
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(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 28, 1997
____________________
TO THE SHAREHOLDERS OF MCFARLAND ENERGY, INC.
The annual meeting of shareholders will be held at the Candlewood
Club, 14000 East Telegraph Road, Whittier, California, on May 28, 1997 at 10:00
a.m., for the following purposes:
1. The election to the Board of one class of directors consisting of
three Directors; and
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 March 28,
1997 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
March 28, 1997
<PAGE>
PROXY STATEMENT
____________________
ANNUAL MEETING OF SHAREHOLDERS
MAY 28, 1997
____________________
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 28, 1997 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 Stock 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.
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 reimbursement
of 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 11, 1997.
1
<PAGE>
VOTING SECURITIES
The Company is authorized to issue 10,000,000 $1.00 par value Common Stock.
The Company on March 28, 1997 had 5,700,922 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 Stock are entitled to one vote for
each share of such stock held of record by them.
The following table sets forth, as of March 28, 1997, the information with
respect to ownership of the Company's Common Stock by each person known by the
Company to own beneficially, or have options exercisable on March 28, 1997 and
options which will become exercisable within sixty days thereafter to purchase,
a number of shares which represent more than 5% of the Company's issued and
outstanding Common Stock, 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> <C>
WHITE RIVER CORPORATION.............................. 640,200 (A)(B) 11.2%
777 Westchester Avenue, Suite 201
White Plains, NY 10604
DAVID L. BABSON & CO................................. 553,700 (B) 9.7%
One Memorial Drive
Cambridge, MA 02142-1300
McFARLAND FAMILY TRUST............................... 527,696 (C) 9.3%
10425 So. Painter Avenue
Santa Fe Springs, CA 90670
CROFT-LEOMINSTER, INC................................ 334,900 5.9%
207 E. Redwood Street
Baltimore, MA 21202
DIMENSIONAL FUNDS ADVISORS INC....................... 308,500 (D) 5.4%
1299 Ocean Avenue, 11/th/ Floor
Santa Monica, CA 90401
FUND AMERICAN ENTERPRISES HOLDINGS, INC.............. 300,000 (B)(E) 5.3%
The 1820 House, Main Street
Norwich, VT 05055-0850
All Directors and Officers as a Group (12 persons)... 431,154 7.6%
</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
2
<PAGE>
Letter Agreement dated September 1, 1989, between FAEH and the Company (the
"Letter Agreement"). 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 had
a conversion rate of one share of Common Stock for each $6.50 principal
amount and was 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. See (E) below regarding conversion of
the note.
(B) Based upon Schedules 13D or 13G as filed with the Securities and Exchange
Commission.
(C) 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, as amended, which contained obligations and
restrictions on sales of the Company's shares by Carl and what is now the
estate of Mr. L. C. McFarland. The Shareholder Agreement has now expired by
its terms.
(D) Dimensional Fund Advisors, Inc. ("Dimensional"), a registered investment
advisor, is deemed to have beneficial ownership of 308,500 shares of
McFarland Energy, Inc. stock as of December 31, 1996, all of which shares
are held in portfolios of DFA Investment Dimensions Group Inc., a registered
open-end investment company, or in series of the DFA Investment Trust
Company, a Delaware business trust, or the DFA Group Trust and DFA
Participation Group Trust, investment vehicles for qualified employee
benefit plans, all of which Dimensional serves as investment manager.
Dimensional disclaims beneficial ownership of all such shares.
(E) On January 29, 1996, the Company converted the $2.6 Million convertible note
held by FAEH into 400,000 shares of Company Common Stock. These
unregistered shares are subject to all of the provisions of the Letter
Agreement identified in Note (A) above, as amended.
PROPOSAL 1: ELECTION OF DIRECTORS
The Board of Directors consists of seven members divided into three classes.
Three directors, as set forth hereafter, are to be elected at the Meeting. The
remaining four directors presently serving will continue to serve as set forth
hereafter. The proxy holders will vote the proxies received by them for the
following three 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.
3
<PAGE>
<TABLE>
<CAPTION>
NOMINEES FOR ELECTION TO THE BOARD OF DIRECTORS
FOR THREE-YEAR TERM EXPIRING IN 2000
-----------------------------------------------
SHARES OF
COMMON STOCK
PRINCIPAL DIRECTOR BENEFICIALLY OUTSTANDING
NAME OCCUPATION AGE SINCE OWNED(1)(2) PERCENT
- ---- -------------------- --- -------- ----------------- ------------
<C> <S> <C> <C> <C> <C>
William E. Carl Oil and Gas Executive 71 1988 120,362(7)(8) 2.1%
(3)(4)(5)(6)
J. C. McFarland Chairman of the Board 50 1982 169,920(9) 3.0%
(5) and Chief Executive
Officer
Daniel J. Redden Business Executive 55 1986 7,100(8) *
(5)(10)(11)
MEMBERS OF THE BOARD OF DIRECTORS CONTINUING IN OFFICE
TERM EXPIRING IN 1998
Herbert M. Rome Retired Business 70 1992 19,542(8) *
(3)(10)(12) Executive
Daniel E. Pasquini Oil and Gas Consultant 54 1994 4,000(8) *
(10)(13)
TERM EXPIRING IN 1999
John C. Capshaw Retired Business 64 1994 6,000(8) *
(3)(14) Executive
John B. Pollara President and Chief 49 1996 4,500(16) *
(3)(15) Executive Officer of
Zieman Manufacturing
Company
</TABLE>
_______________________
*Less than one percent
(1) Does not include the shares in the Employee Retirement Savings and Stock
Ownership Plan.
(2) Includes shares owned by spouses.
(3) Member of Audit Committee of the Board of Directors.
(4) 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 had been President of Carl Oil & Gas Co., a
wholly-owned subsidiary of the Company. Carl Oil & Gas Co. was merged into
the Company on December 19, 1995. 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.
(5) Member of the Nominating Committee of the Board of Directors.
(6) Vice Chairman of the Board of Directors.
(7) See Note (B) to "Voting Securities".
(8) Includes 4,000 shares which are purchasable upon exercise of outstanding
stock options.
(9) Includes 94,625 shares which are purchasable upon exercise of outstanding
stock options.
(10) Member of the Compensation Committee of the Board of Directors.
(11) Mr. Redden is a principal of Redden-Shaffer Group, a retained executive
search and management consultant firm.
(12) 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.
(13) Mr. Pasquini was elected to serve on the Board of Directors on October 20,
1994. From 1987 through 1994, Mr. Pasquini held the position of President
and Chief Executive Officer of Fortune Petroleum Corporation.
4
<PAGE>
(14) 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.
(15) Mr. Pollara currently serves as the President and Chief Executive Officer
and is part owner of Zieman Manufacturing Company. Zieman Manufacturing is
a leading manufacturer of recreational and equipment hauling trailers.
(16) 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 $10,000. The Company entered into a
two-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 2,000 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 1996, the Board of Directors held six meetings. In
1996 the Compensation Committee held three meetings, and the Audit Committee and
the Nominating Committee each met twice.
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 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.
5
<PAGE>
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 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.
EXECUTIVE COMPENSATION
Cash Compensation
The following tables set forth, for the fiscal year ended December 31, 1996,
certain information concerning compensation paid to or accrued for all executive
officers who were serving as executive officers during 1996 and whose annual
salary and bonus exceeded $100,000 in the current fiscal year.
SUMMARY COMPENSATION TABLE
--------------------------
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation
------------------- ---------------
No. of Shares
Underlying All Other
Salary Bonus Options Granted Compensation(1)
Name and Principal Position Year ($) ($) (#) ($)
- --------------------------- ---- ------- -------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
J. C. McFarland 1996 $190,184 $143,100 20,000 $10,500
Chairman of the Board 1995 $182,896 $ 82,300 15,000 $10,500
and Chief Executive Officer 1994 $166,322 $ 77,700 13,500 $ 7,582
Ronald T Yoshihara 1996 $105,704 $ 71,500 11,000 $10,076
Vice President and 1995 $101,276 $ 42,100 7,000 $ 8,861
Treasurer 1994 $ 92,122 $ 36,050 5,000 $ 6,753
Robert E. Ransom 1996 $ 97,681 $ 53,200 9,500 $ 8,597
Vice President - 1995 $ 93,625 $ 30,200 6,000 $ 8,493
Corporate Development 1994 $ 87,115 $ 31,800 5,000 $ 6,385
William H. Moodie 1996 $ 86,890 $ 59,100 9,500 $ 8,399
Vice President - 1995 $ 82,863 $ 33,600 6,000 $ 7,265
Operations 1994 $ 79,116 $ 27,700 5,000 $ 5,535
Craig M. Sturtevant 1996 $ 93,207 $ 53,200 7,500 $ 5,927
Vice President and 1995 $ 87,828 $ 30,200 5,000 $ 3,152
General Counsel 1994 $ 14,475 $ -0- 5,000 $ -0-
</TABLE>
(1) Amounts represent the matching contributions made by the Company under its
Employees Savings and Stock Ownership Plan.
6
<PAGE>
OPTION GRANTS IN 1996
---------------------
<TABLE>
<CAPTION>
Potential Realizable Value at
Assumed Annual Rates of Stock Price
Individual Grants Appreciation for Option Term(3)
------------------------------------------------------ ------------------------------------
% of Total
Options
Options Granted Exercise
Granted to Employees Price Expiration
Name (#)(1) in 1996 ($/Sh)(2) Date 5% 10%
- ----------------------------- ------ ------------ --------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
J. C. McFarland 20,000 23% $7.50 1/10/06 $94,500 $238,500
Ronald T Yoshihara 11,000 13% $7.50 1/10/06 $51,975 $131,175
Robert E. Ransom 9,500 11% $7.50 1/10/06 $44,888 $113,288
William H. Moodie 9,500 11% $7.50 1/10/06 $44,888 $113,288
Craig M. Sturtevant 7,500 9% $7.50 1/10/06 $35,438 $ 89,438
</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) All options were granted at the Company's Common Stock fair market value on
the date of grant.
(3) 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.
AGGREGATED OPTION EXERCISES IN 1996
-----------------------------------
AND YEAR ENDED DECEMBER 31, 1996 VALUES
---------------------------------------
<TABLE>
<CAPTION>
Number of Shares Dollar Value of
Underlying Unexercised,
Unexercised Option 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- 82,500 38,000 $628,188 $205,000
Ronald T Yoshihara -0- $ -0- 35,250 18,750 $267,969 $ 98,906
Robert E. Ransom -0- $ -0- 31,500 16,500 $238,500 $ 87,563
William H. Moodie 2,500 $10,938 2,750 15,250 $ 17,406 $ 78,969
Craig M. Sturtevant -0- $ -0- 3,750 13,750 $ 24,531 $ 73,906
</TABLE>
(1) The amounts represent the difference between the fair market value of the
Common Stock on December 31, 1996 of $12.125 and the option exercise price.
7
<PAGE>
TEN-YEAR OPTION REPRICING
-------------------------
<TABLE>
<CAPTION>
Length of
Market Price Exercise Original Option
Number of Price New Term Remaining
of Options Stock at Time at Time Exercise at Date of
Name Date Amended of 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
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.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Messrs. McFarland,
Yoshihara, Ransom, Moodie and Sturtevant and a key employee. The initial term
of each employment agreement expires on December 31, 1999, or twenty-four months
following a "Change in Control" (as defined below). Mr. McFarland's agreement
provides that if he is terminated as a result of a Change in Control, he will
receive a lump sum amount equal to two times his base salary, including any
bonus, and is entitled to receive medical benefits for a two year period. In
the event Mr. McFarland is terminated without "Good Cause" (as defined below),
the agreement provides that he will be entitled to receive a lump sum amount
equal to two weeks salary for every year of service and medical benefits for the
same number of weeks as the number of weeks of salary he is entitled to receive.
Mr. Yoshihara's, Mr. Ransom's, Mr. Moodie's and Mr. Sturtevant's agreements
provide for a lump sum payment in the event of a Change in Control equal to one
and one-half times their salary, plus bonus; while the agreement for the key
employee provides for a lump sum payment equal to one times his salary, plus
bonus. The agreements entered into with Messrs. Yoshihara, Ransom, Moodie and
Sturtevant and a key employee are identical to Mr. McFarland's agreement with
respect to the formula for the calculation of lump sum payments received if
terminated without Good Cause.
8
<PAGE>
Under the agreements, a "Change in Control" is defined as an occurrence of
an event whereby (i) the Board of Directors in office on the date of the
agreement cease to constitute a majority; (ii) any person or group becomes the
beneficial owner of 35% or more of the combined voting power of the Company's
outstanding securities; or (iii) the Company merges or combines into another
corporation. Under the agreements, termination with "Good Cause" shall mean
that any of the following conditions are met: (i) grounds exists to terminate
the employment of the individual pursuant to California Labor Code Section 2924;
(ii) the individual engages in serious or willful misconduct which is
detrimental to the interests of the employer or its stockholders; or (iii) the
individual willfully refuses to carry out the directions and responsibilities
assigned to him.
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. (which was merged
into National Energy Group, Inc. in September, 1996), American Exploration Co.,
Berry Petroleum Co., Coho Energy Inc., Equity Oil Co., Harcor Energy, Maynard
Oil 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, 1991 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 MACFARLAND PEER
(Fiscal Year Covered) ENERGY GROUP NASDAQ
- ------------------- ---------- --------- ------
<S> <C> <C> <C>
Measurement Pt- 1991 $100.00 $100.00 $100.00
FYE 1992 $124.98 $106.95 $109.39
FYE 1993 $146.16 $ 99.76 $126.30
FYE 1994 $182.13 $ 91.72 $121.45
FYE 1995 $217.85 $103.48 $169.21
FYE 1996 $346.38 $165.26 $205.63
</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.
9
<PAGE>
COMPENSATION COMMITTEE REPORT
The Compensation Committee of the Board of Directors 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.
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 company wide 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.
1996 Compensation of Chief Executive Officer
- --------------------------------------------
Base Salary
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Effective January 1, 1997, Mr. McFarland received a 4% increase in his base
salary to $190,000. This increase in base salary recognizes the strong
leadership demonstrated by Mr. McFarland in 1996, which was instrumental in the
Company's outstanding financial and operating performance during the year. In
1996, the Company achieved another record setting year in terms of production,
cash flow and operating earnings. In addition, the Company's oil and gas
reserve volumes and SEC PV 10 value at the end of 1996 were at all-time highs.
These performance factors, along with the 59% increase in the Company's common
stock price, were considered in the evaluation of Mr. McFarland's base salary
adjustment for 1996. The Compensation Committee believes that Mr. McFarland's
base salary is in line with his level of responsibility, as well as salaries
paid to chief executive officers of other oil and gas industry peer companies.
Incentive Compensation
----------------------
For 1996, Mr. McFarland earned a bonus award of $143,100 under the
Management Incentive
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Compensation Plan ("Incentive Plan"). In 1996, the Company exceeded its company
wide production target by 6% and lowered its per unit lifting costs 5% below the
pre-established target figure. Exploration activities in 1996 did not contribute
to Mr. McFarland's Incentive Plan bonus. Based on the Company's 1996 cash flow,
his individual performance rating and the company wide performance factors which
are established by management and approved by the Board of Directors at the
beginning of the year, Mr. McFarland's 1996 bonus award represented 67% of the
maximum achievable payout under the Incentive Plan.
Stock Options
-------------
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 20,000 stock options in 1996.
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 or 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
Daniel E. Pasquini
Herbert M. Rome
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 two-year Consulting Agreement with William E.
Carl, a director, commencing on July 15, 1995, and terminating on July 14, 1997,
pursuant to which he would continue as a consultant to the Company. In
consideration of such consulting services, the Company pays Mr. Carl the amount
of $60,000 per year. In addition, the Company provides Mr. Carl with group
dental and term life insurance and pays the cost of Medicare supplemental
coverage.
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INDEPENDENT ACCOUNTANTS
Coopers & Lybrand, Certified Public Accountants, who certified the Company's
financial statements for 1996, has advised the Company that it has no direct or
material financial interest in the Company. A representative of the firm of
Coopers & Lybrand L.L.P. 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.
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 1996, are currently being mailed with this Proxy Statement.
DATE FOR SUBMISSION OF SHAREHOLDER PROPOSALS
Proposals to be submitted for the Company's 1998 Annual Meeting of
Shareholders must be received by the Company no later than March 15, 1998
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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 28, 1997 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 [_] WITHHOLD AUTHORITY
(except as marked to the contrary below) to vote for all
nominees listed below
J.C. McFARLAND, WILLIAM E. CARL AND DANIEL J. REDDEN
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:
---------------------------------
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Please sign as name(s) appears. If joint
account, EACH joint owner should sign.
