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 (Fee Required)
For the fiscal year ended December 31, 1995
or
/ / Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 (No Fee Required)
Commission File No. 33-3353B
PARKER & PARSLEY 86-B, LTD.
(Exact name of Registrant as specified in its charter)
Texas 75-2140235
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
303 West Wall, Suite 101, Midland, Texas 79701
(Address of principal executive offices) (Zip code)
Registrant's Telephone Number, including area code : (915) 683-4768
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Limited partnership interests ($1,000 per unit)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes / x / No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / x /
No market currently exists for the limited partnership interests of the
Registrant. Based on original purchase price the aggregate market value of
limited partnership interests owned by non-affiliates of the Registrant is
$17,080,000.
As of March 8, 1996, the number of outstanding limited partnership interests was
17,208. The following documents are incorporated by reference into the indicated
parts of this Annual Report on Form 10-K: None
Page 1 of 29 pages.
-Exhibit index on page 29-
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PART I
ITEM 1. Business
Parker & Parsley 86-B, Ltd. (the "Registrant") is a limited partnership
organized in 1986 under the laws of the State of Texas. The managing general
partner is Parker & Parsley Development L.P. ("PPDLP"). PPDLP's general partner
is Parker & Parsley Petroleum USA, Inc. ("PPUSA"). The managing general partner
during the year ended December 31, 1994 was Parker & Parsley Development Company
("PPDC"). PPDC was merged into PPDLP on January 1, 1995. See Item 12 (c).
A Registration Statement, as amended, filed pursuant to the Securities Act of
1933, registering limited partnership interests aggregating $50,000,000 in a
series of Texas limited partnerships formed under the Parker & Parsley 86
Development Drilling Program, was declared effective by the Securities and
Exchange Commission on April 7, 1986. On October 29, 1986, the offering of
limited partnership interests in the Registrant, the second partnership formed
under such statement, was closed, with interests aggregating $17,208,000 being
sold to 1,466 subscribers.
The Registrant engages primarily in oil and gas development and production and
is not involved in any industry segment other than oil and gas. See "Item 6.
Selected Financial Data" and "Item 8. Financial Statements and Supplementary
Data" of this report for a summary of the Registrant's revenue, income and
identifiable assets.
The principal markets during 1995 for the oil produced by the Registrant were
refineries and oil transmission companies that have facilities near the
Registrant's oil producing properties. The principal markets for the
Registrant's gas were companies that have pipelines located near the
Registrant's gas producing properties. Of the Registrant's oil and gas revenues
for 1995, approximately 42%, 15%, 15% and 10% were attributable to sales made to
Phibro Energy, Inc., Texaco Trading & Transportation, Mobil Oil Corporation and
Western Gas Resources, Inc., respectively.
Because of the demand for oil and gas, the Registrant does not believe that the
termination of the sales of its products to any one customer would have a
material adverse impact on its operations. The loss of a particular customer for
gas may have an effect if that particular customer has the only gas pipeline
located in the areas of the Registrant's gas producing properties. The
Registrant believes, however, that the effect would be temporary, until
alternative arrangements could be made.
Federal and state regulation of oil and gas operations generally includes the
fixing of maximum prices for regulated categories of natural gas, the imposition
of maximum allowable production rates, the taxation of income and other items,
and the protection of the environment. Although the Registrant believes that its
business operations do not impair environmental quality and that its costs of
complying with any applicable environmental regulations are not currently
significant, the Registrant cannot predict what, if any, effect these
environmental regulations may have on its current or future operations.
2
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The Registrant does not have any employees of its own. PPUSA employs 623
persons, many of whom dedicated a part of their time to the conduct of the
Registrant's business during the period for which this report is filed. The
Registrant's managing general partner, PPDLP through PPUSA, supplies all
management functions.
No material part of the Registrant's business is seasonal and the Registrant
conducts no foreign operations.
ITEM 2. Properties
The Registrant's properties consist primarily of leasehold interests in
properties on which oil and gas wells are located. Such property interests are
often subject to landowner royalties, overriding royalties and other oil and gas
leasehold interests.
Fractional working interests in developmental oil and gas prospects located
primarily in the Spraberry Trend area of West Texas were acquired by the
Registrant, resulting in the Registrant's participation in the drilling of 56
oil and gas wells. At December 31, 1995, 53 wells were producing. One well was
sold in 1990 and two wells were abandoned due to uneconomical operations in
1995. The Registrant received interests in one additional producing oil and gas
well in 1993 due to the Registrant's back-in after payout provision.
For information relating to the Registrant's estimated proved oil and gas
reserves at December 31, 1995, 1994 and 1993, and changes in such quantities for
the years then ended, see Note 7 of Notes to Financial Statements included in
"Item 8. Financial Statements and Supplementary Data" below. Such reserves have
been estimated by the engineering staff of PPUSA with a review by an independent
petroleum consultant.
ITEM 3. Legal Proceedings
The Registrant is a party to material litigation which is described in Note 9 of
Notes to Financial Statements included in "Item 8. Financial Statements and
Supplementary Data" below.
ITEM 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the fourth
quarter of 1995.
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PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
At March 8, 1996, the Registrant had 17,208 outstanding limited partnership
interests held of record by 1,512 subscribers. There is no established public
trading market for the limited partnership interests. Under the limited
partnership agreement, PPDLP has made certain commit ments to purchase
partnership interests at a computed value.
Revenues which, in the sole judgement of the managing general partner, are not
required to meet the Registrant's obligations are distributed to the partners at
least quarterly in accordance with the limited partnership agreement. During the
years ended December 31, 1995 and 1994, distributions of $638,588 and $672,240,
respectively, were made to the limited partners.
ITEM 6. Selected Financial Data
The following table sets forth selected financial data for the years ended
December 31:
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
Operating results:
Oil and gas sales $1,481,520 $1,584,722 $1,912,106 $2,306,662 $2,647,160
========= ========= ========= ========= =========
Litigation settle-
ment, net $ - $ - $5,954,475 $ - $ -
========= ========= ========= ========= =========
Impairment of oil
and gas properties$ 244,024 $ - $ - $ - $ -
========= ========= ========= ========= =========
Net income (loss) $ (31,098) $ 29,196 $6,126,162 $ 519,172 $ 659,564
========= ========= ========= ========= =========
Allocation of net
income (loss):
Managing general
partner $ (310) $ 292 $ 61,226 $ 5,192 $ 7,170
========= ========= ========= ========= =========
Limited partners $ (30,788) $ 28,904 $6,064,936 $ 513,980 $ 652,394
========= ========= ========= ========= =========
Limited partners'
net income (loss)
per limited part-
nership interest $ (1.79) $ 1.68 $ 352.45 $ 29.87 $ 37.91
========= ========= ========= ========= =========
Limited partners'
cash distributions
per limited part-
nership interest $ 37.11 $ 39.07 $ 376.16(a) $ 78.38 $ 96.14
========= ========= ========= ========= =========
At year end:
Total assets $4,800,510 $5,496,873 $6,166,171 $6,965,824 $7,802,967
- -------------- ========= ========= ========= ========= =========
(a) Including litigation settlement per limited partnership interest of $319.66
in 1993. 4
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ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of operations
1995 compared to 1994
The Registrant's 1995 oil and gas revenues decreased to $1,481,520 from
$1,584,722 in 1994, a decrease of 7%. The decrease in revenues resulted from a
12% decline in barrels of oil produced and sold and an 11% decline in mcf of gas
produced and sold, offset by an 8% increase in the average price received per
barrel of oil. In 1995, 62,183 barrels of oil were sold compared to 70,542 in
1994, a decrease of 8,359 barrels. In 1995, 245,744 mcf of gas were sold
compared to 274,904 in 1994, a decrease of 29,160 mcf. The decreases were
primarily due to the decline characteristics of the Registrant's oil and gas
properties. Because of these characteristics, management expects a certain
amount of decline in production to continue in the future until the Registrant's
economically recoverable reserves are fully depleted.(1)
The average price received per barrel of oil increased $1.26 from $15.96 in 1994
to $17.22 in 1995, while the average price received per mcf of gas remained at
$1.67 in 1994 and 1995. The market price for oil and gas has been extremely
volatile in the past decade, and management expects a certain amount of
volatility to continue in the foreseeable future.(1) The Registrant may
therefore sell its future oil and gas production at average prices lower or
higher than that received in 1995.(1)
Salvage income of $3,991 received during 1995 consisted of equipment credits
received on one fully depleted abandoned well. Expenses incurred in 1995 to plug
and abandon two wells totaled $1,658. There was no abandonment activity during
1994.
Total costs and expenses decreased in 1995 to $1,528,663 as compared to
$1,562,438 in 1994, a decrease of $33,775, or 2%. The decrease was due to
declines in production costs, general and administrative expenses ("G&A") and
depletion, offset by an increase in abandoned property costs and the impairment
of oil and gas properties.
Production costs were $754,893 in 1995 and $803,469 in 1994, resulting in a
$48,576 decrease, or 6%. This decrease was due to declines in well repair and
maintenance costs and production and ad valorem taxes.
G&A's components are independent accounting and engineering fees, computer
services, postage and managing general partner personnel costs. During this
period, G&A decreased, in aggregate, 7% from $47,542 in 1994 to $44,446 in 1995.
The Registrant paid the managing general partner $36,568 in 1995 and $37,030 in
1994 for G&A incurred on behalf of the Registrant. G&A is allocated, in part, to
the Registrant by the managing general partner. The Partnership agreement limits
allocated G&A to 3% of gross oil and gas revenues. Such allocated expenses are
determined by the managing general partner based upon its judgement of the level
of activity of the Registrant relative to the managing general partner's
activities and other entities it manages.
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The method of allocation has varied in certain years and may do so again
depending on the activities of the managed entities.(1)
Depletion was $483,642 in 1995 compared to $711,427 in 1994. This represented a
decrease of $227,785, or 32%. Depletion was computed property-by-property
utilizing the unit-of-production method based upon the dominant mineral
produced, generally oil. Oil production decreased 8,359 barrels in 1995 from
1994, while oil reserves of barrels were revised upward by 15,292 barrels, or
2%.
Effective for the fourth quarter of 1995 the Registrant adopted Statement of
Financial Accounting Standards No. 121 - Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of ("SFAS 121") which
requires that long-lived assets held and used by an entity, including oil and
gas properties accounted for under the successful efforts method of accounting,
be reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. In performing the
review of recoverability, the entity should estimate the future cash flows
expected to result from the use of the asset and its eventual disposition. If
the sum of the expected future cash flows is less than the carrying amount of
the assets, an impairment is recognized based on the asset's fair value as
determined for oil and gas properties by discounting their expected future cash
flows at a discount rate commensurate with the risks involved in the industry.
As a result of the natural gas price environment and the Registrant's
expectation of future cash flows from its oil and gas properties at the time of
review, the Registrant recognized a non-cash charge of $244,024 associated with
the adoption of SFAS 121.
1994 compared to 1993
The Registrant's 1994 oil and gas revenues decreased to $1,584,722 from
$1,912,106 in 1993, a decrease of 17%. The decrease in revenues resulted from a
7% decrease in the average price received per barrel of oil, a 12% decrease in
the average price received per mcf of gas, a 10% decrease in barrels of oil
produced and sold and an 8% decrease in mcf of gas produced and sold. In 1994,
70,542 barrels of oil were sold compared to 78,387 in 1993, a decrease of 7,845
barrels. In 1994, 274,904 mcf of gas were sold compared to 298,721 in 1993, a
decrease of 23,817 mcf. The decreases were primarily due to the decline
characteristics of the Registrant's oil and gas properties.
The average price received per barrel of oil decreased $1.20 from $17.16 in 1993
to $15.96 in 1994, while the average price received per mcf of gas decreased
from $1.90 in 1993 to $1.67 in 1994.
Interest income decreased to $6,912 in 1994 as compared to $17,384 for 1993.
This decrease was due to interest earned on the litigation proceeds received in
1993 until it was disbursed to the limited partners in September 1993.
Total costs and expenses decreased in 1994 to $1,562,438 as compared to
$1,757,803 in 1993, a decrease of $195,365, or 11%. The decline was due to
decreases in production costs, G&A, depletion and interest expense.
6
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Production costs were $803,469 in 1994 and $919,710 in 1993, resulting in a
$116,241 decrease, or 13%. This decrease was due to declines in well repair and
maintenance costs, workover expense and production and ad valorem taxes.
G&A's components are independent accounting and engineering fees, computer
services, postage and managing general partner personnel costs. During this
period, G&A decreased, in aggregate, 17% from $57,380 in 1993 to $47,542 in
1994. The Registrant paid the managing general partner $37,030 in 1994 and
$48,599 in 1993 for G&A incurred on behalf of the Registrant.
Depletion was $711,427 in 1994 compared to $772,445 in 1993. This represented a
decrease of $61,018, or 8%. Oil production decreased 7,845 barrels in 1994 from
1993, while oil reserves of barrels were revised downward by 34,688 barrels, or
4%.
On May 25, 1993, a final settlement agreement was negotiated, drafted and
finally executed, ending litigation which had begun on September 5, 1989, when
the Registrant filed suit along with other parties against Dresser Industries,
Inc.; Titan Services, Inc.; BJ-Titan Services Company; BJ-Hughes Holding
Company; Hughes Tool Company; Baker Hughes Production Tools, Inc.; and Baker
Hughes Incorporated alleging that the defendants had intentionally failed to
provide the materials and services ordered and paid for by the Registrant and
other parties in connection with the fracturing and acidizing of 523 wells, and
then fraudulently concealed the shorting practice from PPDLP. The May 25, 1993
settlement agreement called for a payment of $115 million in cash by the
defendants, and Southmark, the Registrant, and the other plaintiffs indemnified
the defendants against the claims of Jack N. Price. The managing general partner
received the funds, deducted incurred legal expenses, accrued interest,
determined the general partner's portion of the funds and calculated any
inter-partnership allocations. A distribution of $91,000,000 was made to the
working interest owners, including the Registrant, on July 30, 1993. The limited
partners received their distribution of $5,500,648, or $319.66 per limited
partnership interest, in September 1993.
On May 3, 1993, Jack N. Price, the attorney who represented Gary G. "Zeke"
Lancaster in the Federal Court lawsuit, filed suit in State Court in Beaumont
against all of the plaintiff partnerships, including the Registrant and others,
alleging his entitlement to 12% of the settlement proceeds. Price's lawsuit
claim for approximately $13.8 million is predicated on a purported contract
entered into with Southmark Corporation in August 1988 in which he allegedly
binds the Registrant and the other defendants, as well as Southmark. Although
PPDLP believes the lawsuit is without merit and intends to vigorously defend it,
PPDLP is holding in reserve approximately 12.5% of the total settlement (the
"Reserve") pending final resolution of the litigation by the court.
On September 20, 1995, the Beaumont trial judge entered a summary judgment
against Southmark for the $13,790,000 contingent fee sought by Price, together
with prejudgment interest, and also awarded Price an additional $5,498,525 in
attorneys' fees. On January 22, 1996, the trial judge entered an interlocutory
summary judgment against Dresser Industries and Baker Hughes for an amount yet
to be determined. Pursuant to their indemnity obligations, the Registrant,
Southmark, PPDLP and other original plaintiffs will vigorously pursue appeal
when the final judgment is entered. Southmark is vigorously pursuing its appeal
7
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of the judgment, and has posted a supersedeas bond using the Reserve as
collateral. Trial against the Registrant is currently scheduled for April 29,
1996.
Legal expenses were incurred during 1989, 1990, 1991, 1992 and 1993 by the
Registrant and other joint property owners for participating in the lawsuit
pursuant to the joint operating agree ment. Litigation settlement proceeds
received by the Registrant, less legal expenses incurred in 1993, are recorded
as litigation settlement, net in the accompanying statement of operations for
the year ended December 31, 1993. Interest charged on legal expenses paid on
behalf of the Registrant by the managing general partner was $8,268 in 1993 and
$20,616 in 1992.
Impact of inflation and changing prices on sales and net income
Inflation impacts the fixed overhead rate charges of the lease operating
expenses for the Registrant. During 1993, the annual change in the index of
average weekly earnings of crude petroleum and gas production workers issued by
the U.S. Department of Labor, Bureau of Labor Statistics, decreased by 1.1%. The
1994 annual change in average weekly earnings increased by 4.8% and was
implemented April 1, 1994. The 1995 index (effective April 1, 1994) increased
4.4%. The impact of inflation for other lease operating expenses is small due to
the current economic condition of the oil industry.
The oil and gas industry experienced volatility during the past decade because
of the fluctuation of the supply of most fossil fuels relative to the demand for
such products and other uncertainties in the world energy markets causing
significant fluctuations in oil and gas prices. Since December 31, 1994, prices
for oil production have fluctuated throughout the year. The price per barrel for
oil production similar to the Registrant's ranged from approximately $16.00 to
$19.00. For February 1996, the average price for the Registrant's oil was
approximately $18.00.
Prices for natural gas are subject to ordinary seasonal fluctuations, and this
volatility of natural gas prices may result in production being curtailed and,
in some cases, wells being completely shut-in.(1)
Liquidity and capital resources
Net Cash Provided by Operating Activities
Net cash provided by operating activities decreased to $693,319 during the year
ended December 31, 1995, a $28,338 decrease from the year ended December 31,
1994. This decrease was due to a decline in oil and gas sales, offset by a
decrease in production costs. The decline in oil and gas sales was due to a
decline in the barrels of oil and mcf of gas produced and sold, offset by an
increase in the average price received for oil. The decrease in production costs
was due to less well repair and maintenance costs.
Net Cash Used in Investing Activities
The Registrant's principal investing activities during 1995 included additions
to oil and gas properties related to a capitalized workover on one well.
8
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Proceeds of $3,991 were received during 1995 from equipment credits received on
one fully depleted abandoned well.
Net Cash Used in Financing Activities
Cash was sufficient in 1995 for distributions to the partners of $645,040 of
which $638,588 was distributed to the limited partners and $6,452 to the
managing general partner. In 1994, cash was sufficient for distributions to the
partners of $679,031 of which $672,240 was distributed to the limited partners
and $6,791 to the managing general partner.
It is expected that future net cash provided by operations will be sufficient
for any capital expenditures and any distributions.(1) As the production from
the properties declines, distributions are also expected to decrease.(1)
- ---------------
(1) This statement is a forward looking statement that involves risks and
uncertainties. Accordingly, no assurances can be given that the actual
events and results will not be materially different than the anticipated
results described in the forward looking statement.
ITEM 8. Financial Statements and Supplementary Data
The Registrant's audited financial statements are included elsewhere herein.
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None.
9
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PART III
ITEM 10. Directors and Executive Officers of the Registrant
The Registrant does not have any officers or directors. Under the limited
partnership agreement, the Registrant's managing general partner, PPDLP, is
granted the exclusive right and full authority to manage, control and administer
the Registrant's business. PPUSA, the sole general partner of PPDLP, is a
wholly-owned subsidiary of Parker & Parsley Petroleum Company (the "Company"), a
publicly-traded corporation on the New York Stock Exchange.
Set forth below are the names, ages and positions of the directors and executive
officers of PPUSA. Directors of PPUSA are elected to serve until the next annual
meeting of stockholders or until their successors are elected and qualified.
Age at
December 31,
Name 1995 Position
Scott D. Sheffield 43 Chairman of the Board and Director
James D. Moring (a) 59 President, Chief Executive Officer and
Director
Timothy A. Leach 36 Executive Vice President and Director
Steven L. Beal 36 Senior Vice President, Treasurer and
Chief Financial Officer
Mark L. Withrow 48 Senior Vice President and Secretary
- ---------------
(a) Mr. Moring retired from the Company and subsidiaries effective January 1,
1996. Mr. Sheffield assumed the positions of President and Chief Executive
Officer of PPUSA effective January 1, 1996.
Scott D. Sheffield. Mr. Sheffield, a graduate of The University of Texas
with a Bachelor of Science degree in Petroleum Engineering, has been the
President and a Director of the Company since May 1990 and has been the Chairman
of the Board and Chief Executive Officer since October 1990. Mr. Sheffield
joined PPDC, the principal operating subsidiary of the Company, as a petroleum
engineer in 1979. Mr. Sheffield served as Vice President - Engineering of PPDC
from September 1981 until April 1985 when he was elected President and a
Director of PPDC. In March 1989, Mr. Sheffield was elected Chairman of the Board
and Chief Executive Officer of PPDC. On January 1, 1995, Mr. Sheffield resigned
as President and Chief Executive Officer of PPUSA, but remained Chairman of the
Board and a Director of PPUSA. On January 1, 1996, Mr. Sheffield reassumed the
positions of President and Chief Executive Officer of PPUSA. Before joining
PPDC, Mr. Sheffield was principally occupied for more than three years as a
production and reservoir engineer for Amoco Production Company.
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James D. Moring. Mr. Moring, a graduate of Texas Tech University with a
Bachelor of Science degree in Petroleum Engineering has been a Director of the
Company since October 1990 and was Senior Vice President - Operations of the
Company from October 1990 until May 1993, when he was appointed Executive Vice
President - Operations. Mr. Moring has been principally occupied since July 1982
as the supervisor of the drilling, completion, and production operations of PPDC
and its affiliates and has served as an officer of PPDC since January 1983. Mr.
Moring has been Senior Vice President - Operations and a Director of PPDC since
June 1989 and in May 1993, Mr. Moring was appointed Executive Vice President -
Operations. Mr. Moring was elected President and Director and appointed Chief
Executive Officer of PPUSA on January 1, 1995. Effective January 1, 1996, Mr.
Moring retired from the Company and subsidiaries. In the five years before
joining PPDC, Mr. Moring was employed as a Division Operations Manager with
Moran Exploration, Inc. and its predecessor.
Timothy A. Leach. Mr. Leach, a graduate of Texas A&M University with a
Bachelor of Science degree in Petroleum Engineering and the University of Texas
of the Permian Basin with a Master of Business Administration degree, was
elected Executive Vice President - Engineering of the Company on March 21, 1995.
Mr. Leach had been serving as Senior Vice President Engineering since March 1993
and served as Vice President - Engineering of the Company from October 1990 to
March 1993. Mr. Leach was elected Executive Vice President of PPUSA on December
1, 1995. He had joined PPDC as Vice President - Engineering in September 1989.
Prior to joining PPDC, Mr. Leach was employed as Senior Vice President and
Director of First City Texas - Midland, N.A.
Steven L. Beal. Mr. Beal, a graduate of the University of Texas with a
Bachelor of Business Administration degree in Accounting and a certified public
accountant, was elected Senior Vice President - Finance of the Company in
January 1995 and Chief Financial Officer of the Company on March 21, 1995. On
January 1, 1995, Mr. Beal was elected Senior Vice President, Treasurer and Chief
Financial Officer of PPUSA. Mr. Beal has been the Company's Chief Accounting
Officer since November 1992 and been the Company's Treasurer since October 1990.
Mr. Beal joined PPDC as Treasurer in March 1988 and was elected Vice President -
Finance in October 1991. Prior to joining PPDC, Mr. Beal was employed as an
audit manager of Price Waterhouse.
Mark L. Withrow. Mr. Withrow, a graduate of Abilene Christian University
with Bachelor of Science degree in Accounting and Texas Tech University with a
Juris Doctorate degree, was Vice President - General Counsel of the Company from
February 1991 to January 1995, when he was appointed Senior Vice President -
General Counsel, and has been the Company's Secretary since August 1992. On
January 1, 1995, Mr. Withrow was elected Senior Vice President and Secretary of
PPUSA. Mr. Withrow joined PPDC in January 1991. Prior to joining PPDC , Mr.
Withrow was the managing partner of the law firm of Turpin, Smith, Dyer, Saxe &
MacDonald, Midland, Texas.
ITEM 11. Executive Compensation
The Registrant does not have any directors or officers. Management of the
Registrant is vested in PPDLP, the managing general partner. The Registrant
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participates in oil and gas activities through an income tax partnership (the
"Program") pursuant to the Program agreement. Under the Program agreement, PPDLP
pays approximately 10% of the Registrant's acquisition, drilling and completion
costs and approximately 25% of its operating and general and administrative
expenses. In return, PPDLP is allocated approximately 25% of the Registrant's
revenues. See Note 6 and 10 of Notes to Financial Statements included in "Item
8. Financial Statements and Supplementary Data" below for information regarding
fees and reimbursements paid to the managing general partner or its affiliates
by the Registrant.
The Registrant does not directly pay any salaries of the executive officers of
PPUSA, but does pay a portion of PPUSA's general and administrative expenses of
which these salaries are a part. See Note 6 of Notes to Financial Statements
included in "Item 8. Financial Statements and Supplementary Data" below.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
(a) Beneficial owners of more than five percent
The Registrant is not aware of any person who beneficially owns 5% or more of
the outstanding limited partnership interests of the Registrant. PPDLP owned 128
limited partner interests at January 1, 1996.
(b) Security ownership of management
The Registrant does not have any officers or directors. The managing general
partner of the Registrant, PPDLP, has the exclusive right and full authority to
manage, control and administer the Registrant's business. Under the limited
partnership agreement, limited partners holding a majority of the outstanding
limited partnership interests have the right to take certain actions, including
the removal of the managing general partner or any other general partner. The
Registrant is not aware of any current arrangement or activity which may lead to
such removal. The Registrant is not aware of any officer or director of PPUSA
who beneficially owns limited partnership interests in the Registrant.
(c) Changes in control
On January 1, 1995, PPDLP, a Texas limited partnership, became the sole managing
general partner of Parker & Parsley 86-B, Ltd., as a result of the merger into
it of PPDC, a Delaware corporation, and an affiliate of PPDLP and the Company,
which previously served as the managing general partner of the Registrant. PPDLP
has, therefore, succeeded to all of the rights and obligations of PPDC and will
manage and conduct the property, business and affairs of the Registrant,
including the development drilling program in which the Registrant participates.
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ITEM 13. Certain Relationships and Related Transactions
Transactions with the managing general partner or its affiliates
Pursuant to the limited partnership agreement, the Registrant had the following
related party transactions with the managing general partner or its affiliates
during the years ended December 31:
1995 1994 1993
--------- --------- ---------
Payment of lease operating and
supervision charges in accordance
with standard industry operating
agreements $ 331,009 $ 325,808 $ 339,047
Reimbursement of general and
administrative expenses $ 36,568 $ 37,030 $ 48,599
Purchase of oil and gas properties
and related equipment, at
predecessor cost $ - $ 1,358 $ 15,281
Receipt of proceeds for the salvage
value of retired oil and gas
equipment $ 6,072 $ - $ -
Interest expense charged on legal
expenses paid on behalf of the
Registrant by the managing
general partner $ - $ - $ 8,268
Under the limited partnership agreement, the managing general partner pays 1% of
the Registrant's acquisition, drilling and completion costs and 1% of its
operating and general and administrative expenses. In return, it is allocated 1%
of the Registrant's revenues. Also, see Notes 6 and 10 of Notes to Financial
Statements included in "Item 8. Financial Statements and Supplementary Data"
below, regarding the Registrant's participation with the managing general
partner in oil and gas activities of the Program.
13
<PAGE>
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1. Financial statements
The following are filed as part of this annual report:
Independent Auditors' Report
Balance sheets as of December 31, 1995 and 1994
Statements of operations for the years ended December 31, 1995,
1994 and 1993
Statements of partners' capital for the years ended December 31,
1995, 1994 and 1993
Statements of cash flows for the years ended December 31, 1995,
1994 and 1993
Notes to financial statements
2. Financial statement schedules
All financial statement schedules have been omitted since the required
information is in the financial statements or notes thereto, or is not
applicable nor required.
(b) Reports on Form 8-K
None.
(c) Exhibits
The exhibits listed on the accompanying index to exhibits are filed or
incorporated by reference as part of this annual report.
14
<PAGE>
S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PARKER & PARSLEY 86-B, LTD.
Dated: March 26, 1996 By: Parker & Parsley Development L.P.,
Managing General Partner
By: Parker & Parsley Petroleum USA, Inc.
("PPUSA"), General Partner
By: /s/ Scott D. Sheffield
--------------------------------
Scott D. Sheffield, President
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 date indicated.
/s/ Scott D. Sheffield President, Chairman of the Board, March 26, 1996
- ------------------------- Chief Executive Officer and
Scott D. Sheffield Director of PPUSA
/s/ Timothy A. Leach Executive Vice President March 26, 1996
- ------------------------- and Director of PPUSA
Timothy A. Leach
/s/ Steven L. Beal Senior Vice President, March 26, 1996
- ------------------------- Treasurer and Chief
Steven L. Beal Financial Officer of PPUSA
/s/ Mark L. Withrow Senior Vice President and March 26, 1996
- ------------------------- Secretary of PPUSA
Mark L. Withrow
15
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Partners
Parker & Parsley 86-B, Ltd.
(A Texas Limited Partnership):
We have audited the financial statements of Parker & Parsley 86-B, Ltd. as
listed in the accompa nying index under Item 14(a). These financial statements
are the responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Parker & Parsley 86-B, Ltd. as
of December 31, 1995 and 1994, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1995, in
conformity with generally accepted accounting principles.
As discussed in Notes 2 and 3 to the financial statements, the Partnership
changed its method of accounting for the impairment of long-lived assets and for
long-lived assets to be disposed of in 1995 to adopt the provisions of the
Financial Accounting Standards Board's Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long- Lived Assets to Be Disposed Of."
KPMG Peat Marwick LLP
Midland, Texas
March 8, 1996
16
<PAGE>
PARKER & PARSLEY 86-B, LTD.
(A Texas Limited Partnership)
BALANCE SHEETS
December 31
1995 1994
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents, including interest
bearing deposits of $151,136 in 1995 and
$141,462 in 1994 $ 151,763 $ 141,681
Accounts receivable - oil and gas sales 178,375 184,109
---------- ----------
Total current assets 330,138 325,790
Oil and gas properties - at cost, based on the
successful efforts accounting method 14,156,180 14,129,225
Accumulated depletion (9,685,808) (8,958,142)
---------- ----------
Net oil and gas properties 4,470,372 5,171,083
---------- ----------
$ 4,800,510 $ 5,496,873
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable - affiliate $ 70,218 $ 90,443
Partners' capital:
Limited partners (17,208 interests) 4,684,266 5,353,642
Managing general partner 46,026 52,788
---------- ----------
4,730,292 5,406,430
---------- ----------
$ 4,800,510 $ 5,496,873
========== ==========
The accompanying notes are an integral part of these statements.
17
<PAGE>
PARKER & PARSLEY 86-B, LTD.
(A Texas Limited Partnership)
STATEMENTS OF OPERATIONS
For the years ended December 31
1995 1994 1993
---------- ---------- ----------
Revenues:
Oil and gas sales $1,481,520 $1,584,722 $1,912,106
Interest income 12,054 6,912 17,384
Salvage income from equipment
disposals 3,991 - -
Litigation settlement, net - - 5,954,475
--------- --------- ---------
Total revenues 1,497,565 1,591,634 7,883,965
Costs and expenses:
Production costs 754,893 803,469 919,710
General and administrative expenses 44,446 47,542 57,380
Depletion 483,642 711,427 772,445
Impairment of oil and gas properties 244,024 - -
Abandoned property costs 1,658 - -
Interest expense - - 8,268
--------- --------- ---------
Total costs and expenses 1,528,663 1,562,438 1,757,803
--------- --------- ---------
Net income (loss) $ (31,098) $ 29,196 $6,126,162
========= ========= =========
Allocation of net income (loss):
Managing general partner $ (310) $ 292 $ 61,226
========= ========= =========
Limited partners $ (30,788) $ 28,904 $6,064,936
========= ========= =========
Net income (loss) per limited
partnership interest $ (1.79) $ 1.68 $ 352.45
========= ========= =========
The accompanying notes are an integral part of these statements.
18
<PAGE>
PARKER & PARSLEY 86-B, LTD.
(A Texas Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Managing
general Limited
partner partners Total
--------- ----------- -----------
Partners' capital at January 1, 1993 $ 63,408 $ 6,404,918 $ 6,468,326
Distributions (65,347) (6,472,876) (6,538,223)
Net income 61,226 6,064,936 6,126,162
-------- ---------- ----------
Partners' capital at December 31, 1993 59,287 5,996,978 6,056,265
Distributions (6,791) (672,240) (679,031)
Net income 292 28,904 29,196
-------- ---------- ----------
Partners' capital at December 31, 1994 52,788 5,353,642 5,406,430
Distributions (6,452) (638,588) (645,040)
Net loss (310) (30,788) (31,098)
-------- ---------- ----------
Partners' capital at December 31, 1995 $ 46,026 $ 4,684,266 $ 4,730,292
======== ========== ==========
The accompanying notes are an integral part of these statements.
19
<PAGE>
PARKER & PARSLEY 86-B, LTD.
(A Texas Limited Partnership)
STATEMENTS OF CASH FLOWS
For the years ended December 31
1995 1994 1993
--------- --------- -----------
Cash flows from operating activities:
Net income (loss) $ (31,098) $ 29,196 $ 6,126,162
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depletion 483,642 711,427 772,445
Impairment of oil and gas properties 244,024 - -
Changes in assets and liabilities:
Salvage income from equipment
disposals (3,991) - -
(Increase) decrease in accounts
receivable 5,734 (3,408) 40,152
Decrease in accounts payable (4,992) (15,558) (393,146)
-------- -------- ----------
Net cash provided by operating
activities 693,319 721,657 6,545,613
Cash flows from investing activities:
Additions to oil and gas properties (42,188) (5,263) (25,723)
Proceeds from salvage income on
equipment disposals 3,991 - -
-------- -------- ----------
Net cash used in investing
activities (38,197) (5,263) (25,723)
Cash flows from financing activities:
Cash distributions to partners (645,040) (679,031) (6,538,223)
-------- -------- ----------
Net increase (decrease) in cash and
cash equivalents 10,082 37,363 (18,333)
Cash and cash equivalents at beginning
of year 141,681 104,318 122,651
-------- -------- ----------
Cash and cash equivalents at end
of year $ 151,763 $ 141,681 $ 104,318
======== ======== ==========
The accompanying notes are an integral part of these statements.
20
<PAGE>
PARKER & PARSLEY 86-B, LTD.
(A Texas Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
Note 1. Organization and nature of operations
Parker & Parsley 86-B, Ltd. (the "Partnership") is a limited partnership
organized in 1986 under the laws of the State of Texas.
The Partnership engages primarily in oil and gas development and production
in Texas and is not involved in any industry segment other than oil and gas.
Note 2. Summary of significant accounting policies
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying financial statements follows:
Impairment of long-lived assets - Effective for the fourth quarter of 1995
the Partnership adopted the provisions of Statement of Financial Accounting
Standards No. 121 - Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of ("SFAS 121"). Consequently, the Partnership
reviews its long-lived assets to be held and used, including oil and gas
properties accounted for under the successful efforts method of accounting,
whenever events or circumstances indicate that the carrying value of those
assets may not be recoverable. An impairment loss is indicated if the sum of the
expected future cash flows is less than the carrying amount of the assets. In
this circumstance, the Partnership recognizes an impairment loss for the amount
by which the carrying value of the asset exceeds the fair value of the asset.
The Partnership accounts for long-lived assets to be disposed of at the
lower of their carrying amount or fair value less costs to sell once management
has committed to a plan to dispose of the assets.
Oil and gas properties - The Partnership utilizes the successful efforts
method of accounting for its oil and gas properties and equipment. Under this
method, all costs associated with productive wells and nonproductive development
wells are capitalized while nonproductive exploration costs are expensed.
Capitalized costs relating to proved properties are depleted using the
unit-of-production method on a property-by-property basis based on proved oil
(dominant mineral) reserves as determined by the engineering staff of Parker &
Parsley Petroleum USA, Inc. ("PPUSA"), the sole general partner of Parker &
Parsley Development L.P. ("PPDLP"), the Partnership's managing general partner,
and reviewed by independent petroleum consultants. The carrying amounts of
properties sold or otherwise disposed of and the related allowances for
depletion are eliminated from the accounts and any gain or loss is included in
operations.
21
<PAGE>
Prior to the adoption of SFAS 121 in the fourth quarter, the Partnership's
aggregate oil and gas properties were stated at cost not in excess of total
estimated future net revenues and the estimated fair value of oil and gas assets
not being depleted.
Use of estimates in the preparation of financial statements - Preparation
of the accompanying financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reporting amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Net income (loss) per limited partnership interest - The net income (loss)
per limited partnership interest is calculated by using the number of
outstanding limited partnership interests.
Income taxes - A Federal income tax provision has not been included in the
financial statements as the income of the Partnership is included in the
individual Federal income tax returns of the respective partners.
Statements of cash flows - For purposes of reporting cash flows, cash and
cash equivalents include depository accounts held by banks.
General and administrative expenses - General and administrative expenses
are allocated in part to the Partnership by the managing general partner or its
affiliates. Such allocated expenses are determined by the managing general
partner based upon its judgement of the level of activity of the Partnership
relative to the managing general partner's activities and other entities it
manages. The method of allocation has varied in certain years and may do so
again depending on the activities of the managed entities.
Environmental - The Partnership is subject to extensive federal, state and
local environmental laws and regulations. These laws, which are constantly
changing, regulate the discharge of materials into the environment and may
require the Partnership to remove or mitigate the environ mental effects of the
disposal or release of petroleum or chemical substances at various sites.
Environmental expenditures are expensed or capitalized depending on their future
economic benefit. Expenditures that relate to an existing condition caused by
past operations and that have no future economic benefits are expensed.
Liabilities for expenditures of a noncapital nature are recorded when
environmental assessment and/or remediation is probable, and the costs can be
reasonably estimated.
Note 3. Impairment of long-lived assets
The Partnership adopted SFAS 121 effective for the fourth quarter of 1995.
SFAS 121 requires that long-lived assets held and used by an entity, including
oil and gas properties accounted for under the successful efforts method of
accounting, be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Long-lived assets to be disposed of are to be accounted for at the
lower of carrying amount or fair value less cost to sell when management has
22
<PAGE>
committed to a plan to dispose of the assets. All companies, including
successful efforts oil and gas companies, are required to adopt SFAS 121 for
fiscal years beginning after December 15, 1995.
In order to determine whether an impairment had occurred, the Partnership
estimated the expected future cash flows of its oil and gas properties and
compared such future cash flows to the carrying amount of the oil and gas
properties to determine if the carrying amount was recoverable. For those oil
and gas properties for which the carrying amount exceeded the estimated future
cash flows, an impairment was determined to exist; therefore, the Partnership
adjusted the carrying amount of those oil and gas properties to their fair value
as determined by discounting their expected future cash flows at a discount rate
commensurate with the risks involved in the industry. As a result, the
Partnership recognized a non-cash charge of $244,024 related to its oil and gas
properties during the fourth quarter of 1995.
As of December 31, 1995, management had not committed to sell any
Partnership assets.
Note 4. Income taxes
The financial statement basis of the Partnership's net assets and
liabilities was $2,710,684 greater than the tax basis at December 31, 1995.
The following is a reconciliation of net income (loss) per statements of
operations with the net income per Federal income tax returns for the years
ended December 31:
1995 1994 1993
--------- --------- ----------
Net income (loss) per statements of
operations $ (31,098) $ 29,196 $6,126,162
Intangible development costs capitalized
for financial reporting purposes and
expensed for tax reporting purposes (32,674) - (297)
Depletion and depreciation provisions
for tax reporting purposes under amounts
for financial reporting purposes 461,801 533,343 445,548
Impairment of oil and gas properties for
financial reporting purposes 244,024 - -
Other, net 9,753 2,751 180
-------- -------- ---------
Net income per Federal
income tax returns $ 651,806 $ 565,290 $6,571,593
======== ======== =========
Note 5. Oil and gas producing activities
The following is a summary of the costs incurred, whether capitalized or
expensed, related to the Partnership's oil and gas producing activities for the
years ended December 31:
1995 1994 1993
--------- --------- ---------
Development costs $ 22,964 $ 1,358 $ 31,277
======== ======== ========
23
<PAGE>
Capitalized oil and gas properties consist of the following:
1995 1994 1993
----------- ----------- -----------
Proved properties:
Property acquisition costs $ 618,863 $ 618,863 $ 618,863
Completed wells and equipment 13,537,317 13,510,362 13,509,004
---------- ---------- ----------
14,156,180 14,129,225 14,127,867
Accumulated depletion (9,685,808) (8,958,142) (8,246,715)
---------- ---------- ----------
Net capitalized costs $ 4,470,372 $ 5,171,083 $ 5,881,152
========== ========== ==========
During 1995, the Partnership recognized a non-cash charge of $244,024 associated
with the adoption of SFAS 121. See Note 3.
Note 6. Related party transactions
Pursuant to the limited partnership agreement, the Partnership had the
following related party transactions with the managing general partner or its
affiliates during the years ended December 31:
1995 1994 1993
--------- --------- ---------
Payment of lease operating and
supervision charges in accordance
with standard industry operating
agreements $ 331,009 $ 325,808 $ 339,047
Reimbursement of general and
administrative expenses $ 36,568 $ 37,030 $ 48,599
Purchase of oil and gas properties
and related equipment, at
predecessor cost $ - $ 1,358 $ 15,281
Receipt of proceeds for the salvage
value of retired oil and gas
equipment $ 6,072 $ - $ -
Interest expense charged on legal
expenses paid on behalf of the
Partnership by the managing
general partner $ - $ - $ 8,268
The Partnership participates in oil and gas activities through an income
tax partnership (the "Program") pursuant to the Program agreement. PPDLP and the
Partnership are parties to the Program agreement.
24
<PAGE>
The costs and revenues of the Program are allocated to PPDLP and the
Partnership as follows:
PPDLP (1) Partnership
--------- -----------
Revenues:
Proceeds from disposition of depreciable
properties 9.09091% 90.90909%
All other revenues 24.242425% 75.757575%
Costs and expenses:
Lease acquisition costs, drilling and
completion costs and all other costs 9.09091% 90.90909%
Operating costs, direct costs and general
and administrative expenses 24.242425% 75.757575%
(1) Excludes PPDLP's 1% general partner ownership which is allocated at the
Partnership level and 128 limited partner interests owned by PPDLP.
Note 7. Oil and gas information (unaudited)
The following table presents information relating to the Partnership's
estimated proved oil and gas reserves at December 31, 1995, 1994 and 1993 and
changes in such quantities during the years then ended. All of the Partnership's
reserves are proved and located within the United States. The Partnership's
reserves are based on an evaluation prepared by the engineering staff of PPUSA
and reviewed by an independent petroleum consultant, using criteria established
by the Securities and Exchange Commission. Reserve value information is
available to limited partners pursuant to the Partnership agreement and,
therefore, is not presented.
Oil (bbls) Gas (mcf)
---------- ----------
Net proved reserves at January 1, 1993 980,140 4,526,513
Revisions of estimates of January 1, 1993 (1,156) (168,324)
Production (78,387) (298,721)
---------- ----------
Net proved reserves at December 31, 1993 900,597 4,059,468
Revisions of estimates of December 31, 1993 (34,688) (316,784)
Production (70,542) (274,904)
---------- ----------
Net proved reserves at December 31, 1994 795,367 3,467,780
Revisions of estimates of December 31, 1994 15,292 (182,307)
Production (62,183) (245,744)
---------- ----------
Net proved reserves at December 31, 1995 748,476 3,039,729
========== ==========
The estimated present value of future net revenues of proved reserves,
calculated using December 31, 1995 prices of $19.27 per barrel of oil and $1.89
per mcf of gas, discounted at 10% was approximately $4,389,000 and undiscounted
was $8,193,000 at December 31, 1995.
The Partnership emphasizes that reserve estimates are inherently imprecise
and, accordingly, the estimates are expected to change as future information
becomes available.
25
<PAGE>
Note 8. Major customers
The following table reflects the major customers of the Partnership's oil
and gas sales during the years ended December 31:
1995 1994 1993
---- ---- ----
Phibro Energy, Inc. 42% 40% 52%
GPM Gas Corporation - 17% 16%
Texaco Trading & Transportation 15% 16% -
Mobil Oil Corporation 15% 14% 13%
Western Gas Resources, Inc . 10% - -
PPDLP is party to a long-term agreement pursuant to which PPDLP and
affiliates are to sell to Phibro Energy, Inc. ("Phibro") substantially all crude
oil (including condensate) which any of such entities has the right to market
from time to time. On December 29, 1995, PPDLP and Phibro entered into a
Memorandum of Agreement ("Phibro MOA") that cancels the prior crude oil purchase
agreement between the parties and provides for adjusted terms effective December
1, 1995. The price to be paid for oil purchased under the Phibro MOA is to be
competitive with prices paid by other substantial purchasers in the same area
who are significant competitors of Phibro. The price to be paid for oil
purchased under the Phibro MOA also includes a market-related bonus that may
vary from month to month based upon spot oil prices at various commodity trade
points. The term of the Phibro MOA is through June 30, 1998, and it may continue
thereafter subject to termination rights afforded each party. Although Phibro
was required to post a $16 million letter of credit in connection with purchases
under the prior agreement, it is anticipated that this security requirement will
be replaced by a $25 million payment guarantee by Phibro's parent company,
Salomon Inc. Accounts receivable-oil and gas sales included $50,948 due from
Phibro at December 31, 1995.
Note 9. Contingencies
On May 25, 1993, a final settlement agreement was negotiated, drafted and
finally executed, ending litigation which had begun on September 5, 1989, when
the Partnership filed suit along with other parties against Dresser Industries,
Inc.; Titan Services, Inc.; BJ-Titan Services Company; BJ-Hughes Holding
Company; Hughes Tool Company; Baker Hughes Production Tools, Inc.; and Baker
Hughes Incorporated alleging that the defendants had intentionally failed to
provide the materials and services ordered and paid for by the Partnership and
other parties in connection with the fracturing and acidizing of 523 wells, and
then fraudulently concealed the shorting practice from PPDLP. The May 25, 1993
settlement agreement called for a payment of $115 million in cash by the
defendants, and Southmark, the Partnership, and the other plaintiffs indemnified
the defendants against the claims of Jack N. Price. The managing general partner
received the funds, deducted incurred legal expenses, accrued interest,
determined the general partner's portion of the funds and calculated any
inter-partnership allocations.
26
<PAGE>
On May 3, 1993, Jack N. Price, the attorney who represented Gary G. "Zeke"
Lancaster in the Federal Court lawsuit, filed suit in State Court in Beaumont
against all of the plaintiff partnerships, including the Partnership and others,
alleging his entitlement to 12% of the settlement proceeds. Price's lawsuit
claim for approximately $13.8 million is predicated on a purported contract
entered into with Southmark Corporation in August 1988 in which he allegedly
binds the Partnership and the other defendants, as well as Southmark. Although
PPDLP believes the lawsuit is without merit and intends to vigorously defend it,
PPDLP is holding in reserve approximately 12.5% of the total settlement (the
"Reserve") pending final resolution of the litigation by the court.
On September 20, 1995, the Beaumont trial judge entered a summary judgment
against Southmark for the $13,790,000 contingent fee sought by Price, together
with prejudgment interest, and also awarded Price an additional $5,498,525 in
attorneys' fees. On January 22, 1996, the trial judge entered an interlocutory
summary judgment against Dresser Industries and Baker Hughes for an amount yet
to be determined. Pursuant to their indemnity obligations, the Partnership,
Southmark, PPDLP and other original plaintiffs will vigorously pursue appeal
when the final judgment is entered. Southmark is vigorously pursuing its appeal
of the judgment, and has posted a supersedeas bond using the Reserve as
collateral. Trial against the Partnership is currently scheduled for April 29,
1996.
Legal expenses were incurred during 1989, 1990, 1991, 1992 and 1993 by the
Partnership and other joint property owners for participating in the lawsuit
pursuant to the joint operating agreement. Litigation settlement proceeds
received by the Partnership, less legal expenses incurred in 1993, are recorded
as litigation settlement, net in the accompanying statement of operations for
the year ended December 31, 1993.
A distribution of $91,000,000 was made to the working interest owners,
including the Partnership, on July 30, 1993. The limited partners received their
distribution of $5,500,648, or $319.66 per limited partnership interest, in
September 1993. The allocation of the lawsuit settlement amount was based on the
original verdict entered on October 26, 1990. The allocation to the working
interest owners in each well (including the Partnership) was based on a ratio of
the relative amount of damages due to overcharges for services and materials
("Materials") and damages for loss of past and future production ("Production"),
each as determined in that initial judgment. Within the Partnership, damages for
Materials were allocated between the partners based on their original sharing
percentages for costs of acquiring and/or drilling of wells. Similarly, damages
related to Production were allocated to the partners in the Partnership based on
their respective share of revenues from the subject wells (see Note 6).
As a condition of the purchase by Parker & Parsley Petroleum Company of
Parker & Parsley Development Company ("PPDC"), which was merged into PPDLP on
January 1, 1995 (see Note 10), from its former parent in May 1989, PPDC's
interest in the lawsuit and subsequent settlement was retained by the former
parent. Consequently, all of PPDC's share of the settlement related to its
separately held interests in the wells and its partnership interests in the
sponsored partnerships (except that portion allocable to interests acquired by
PPDC after May 1989) was paid to the former parent.
27
<PAGE>
Note 10. Organization and operations
The Partnership was organized October 29, 1986 as a limited partnership
under the Texas Uniform Limited Partnership Act for the purpose of acquiring and
developing oil and gas properties. The following is a brief summary of the more
significant provisions of the limited partnership agreement:
Managing general partner - On January 1, 1995, PPDLP, a Texas limited
partnership, became the sole managing general partner of the Partnership as
a result of the merger into it of PPDC, a Delaware corporation, and an
affiliate of PPDLP and the Company, and which previously served as the
managing general partner of the Partnership. PPDLP has, therefore,
succeeded to all of the rights and obligations of PPDC and will manage and
conduct the property, business and affairs of the Partnership, including
the development drilling program in which the Partnership participates.
PPDLP has the power and authority to manage, control and administer all
Program and Partnership affairs. Under the limited partnership agreement,
the managing general partner pays 1% of the Partnership's acquisi tion,
drilling and completion costs and 1% of its operating and general and
administrative expenses. In return, it is allocated 1% of the Partnership's
revenues.
Limited partner liability - The maximum amount of liability of any limited
partner is the total contributions of such partner plus his share of any
undistributed profits.
Initial capital contributions - The limited partners entered into
subscription agreements for aggregate capital contributions of $17,208,000.
PPDLP is required to contribute amounts equal to 1% of initial Partnership
capital less commission and offering expenses allocated to the limited
partners and to contribute amounts necessary to pay costs and expenses
allocated to it under the Partnership agreement to the extent its share of
revenues does not cover such costs.
28
<PAGE>
PARKER & PARSLEY 86-B, LTD.
INDEX TO EXHIBITS
The following documents are incorporated by reference in response to Item
14(c):
Exhibit No. Description Page
3(a) Amended and Restated Certificate of -
Limited Partnership of Parker & Parsley
86-B, Ltd.
4(a) Agreement of Limited Partnership of -
Parker & Parsley 86-B, Ltd.
4(b) Form of Subscription Agreement and -
Power of Attorney
4(c) Specimen Certificate of Limited -
Partnership Interest
10(a) Operating Agreement -
10(b) Exploration and Development Program -
Agreement
99.1 Mutual Release and Indemnity Agreement
dated May 25, 1993 -
29
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000789790
<NAME> 86B.TXT
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 151,763
<SECURITIES> 0
<RECEIVABLES> 178,375
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 330,138
<PP&E> 14,156,180
<DEPRECIATION> 9,685,808
<TOTAL-ASSETS> 4,800,510
<CURRENT-LIABILITIES> 70,218
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 4,730,292
<TOTAL-LIABILITY-AND-EQUITY> 4,800,510
<SALES> 1,481,520
<TOTAL-REVENUES> 1,497,565
<CGS> 0
<TOTAL-COSTS> 1,528,663
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (31,098)
<INCOME-TAX> 0
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