UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
/ x / Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 1997
or
/ / Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from _______ to ________
Commission File No. ________
PIONEER NATURAL RESOURCES USA, INC.
(Exact name of Registrant as specified in its charter)
Delaware 75-2516853
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1400 Williams Square West, 5205 N. O'Connor Blvd., Irving, Texas 75039
(Address of principal executive offices) (Zip code)
Registrant's Telephone Number, including area code : (972) 444-9001
Not applicable
(Former name, former address and former fiscal year,
if changed since last report)
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 / /
Number of shares of Common Stock outstanding as of
October 31, 1997...................................................... 1,000
Page 1 of 30 pages.
Exhibit index on page 30.
<PAGE>
PIONEER NATURAL RESOURCES USA, INC.
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1997 and
December 31, 1996 ........................................ 3
Consolidated Statements of Operations for the three and nine
months ended September 30, 1997 and 1996..................... 5
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1997 and 1996............................ 6
Notes to Consolidated Financial Statements..................... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 28
Item 6. Exhibits and Reports on Form 8-K............................... 28
Signatures..................................................... 29
Exhibit Index.................................................. 30
2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PIONEER NATURAL RESOURCES USA, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
September 30, December 31,
1997 1996
------------ -----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 40,631 $ 18,711
Restricted cash 1,716 1,749
Accounts receivable:
Trade, net 43,345 34,075
Affiliates 614 434
Oil and gas sales 84,033 48,459
Inventories 6,839 3,644
Deferred income taxes 3,600 7,400
Other current assets 5,073 2,567
----------- ----------
Total current assets 185,851 117,039
----------- ----------
Property, plant and equipment, at cost:
Oil and gas properties, using the successful
efforts method of accounting:
Proved properties 3,994,707 1,419,051
Unproved properties 83,402 7,331
Natural gas processing facilities - 59,276
Accumulated depletion, depreciation and
amortization (554,132) (445,238)
----------- ----------
3,523,977 1,040,420
----------- ----------
Other property and equipment, net 35,736 27,779
Other assets, net 51,078 14,627
----------- ----------
$ 3,796,642 $ 1,199,865
=========== ==========
The financial information included as of September 30, 1997 has been prepared by
management without audit by independent public accountants.
The accompanying notes are an integral part of these consolidated
financial statements.
3
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PIONEER NATURAL RESOURCES USA, INC.
CONSOLIDATED BALANCE SHEETS (continued)
(in thousands, except share data)
September 30, December 31,
1997 1996
------------ -----------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 11,116 $ 5,381
Undistributed unit purchases 1,716 1,749
Accounts payable:
Trade 74,101 56,713
Affiliates 9,088 7,528
Domestic and foreign income taxes 52 1,743
Other current liabilities 46,540 17,856
----------- ----------
Total current liabilities 142,613 90,970
----------- ----------
Long-term debt, less current maturities 1,601,145 320,908
Other noncurrent liabilities 127,614 8,071
Deferred income taxes 213,300 60,800
Preferred stock of subsidiary - 188,820
Stockholders' equity:
Common stock, $.01 par value; 1,000 shares
authorized; 1,000 and 36,899,618 shares
issued at September 30, 1997 and
December 31, 1996, respectively - 369
Additional paid-in capital 1,744,641 462,873
Treasury stock, at cost; 1,833,383 shares
at December 31, 1996 - (31,528)
Unearned compensation (17,316) (1,625)
Retained (deficit) earnings (15,355) 100,207
----------- ----------
Total stockholders' equity 1,711,970 530,296
Commitments and contingencies (Note F)
----------- ----------
$ 3,796,642 $ 1,199,865
=========== ==========
The financial information included as of September 30, 1997 has been prepared by
management without audit by independent public accountants.
The accompanying notes are an integral part of these consolidated
financial statements.
4
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<TABLE>
PIONEER NATURAL RESOURCES USA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
(Unaudited)
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------- -------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Oil and gas $ 150,354 $ 91,313 $ 348,980 $ 283,327
Natural gas processing - 5,706 - 16,810
Interest and other 816 12,573 3,649 14,996
Gain on disposition of assets, net 108 1,638 2,745 96,887
---------- ---------- ---------- ----------
151,278 111,230 355,374 412,020
---------- ---------- ---------- ----------
Costs and expenses:
Oil and gas production 42,003 24,829 91,674 82,233
Natural gas processing - 3,088 - 9,123
Depletion, depreciation and
amortization 67,388 26,590 126,897 86,228
Exploration and abandonments 15,513 3,763 34,310 14,962
General and administrative 16,654 6,430 31,644 19,420
Interest 24,110 10,053 44,264 36,105
Other 2,532 12 2,981 918
---------- ---------- ---------- ----------
168,200 74,765 331,770 248,989
---------- ---------- ---------- ----------
Income (loss) before income taxes
and extraordinary item (16,922) 36,465 23,604 163,031
Income tax benefit (provision) 6,000 (15,500) (8,500) (47,200)
---------- ---------- ---------- ----------
Income (loss) before extraordinary item (10,922) 20,965 15,104 115,831
Extraordinary item - loss on early
extinguishment of debt, net of tax (1,518) - (1,518) -
---------- ---------- ---------- ----------
Net income (loss) $ (12,440) $ 20,965 $ 13,586 $ 115,831
========== ========== ========== ==========
Income (loss) per share:
Income (loss) before extraordinary
item $(10,921.55) $ 20,964.58 $ 15,103.67 $115,830.61
Extraordinary item (1,518.04) - (1,518.04) -
---------- ---------- ---------- ----------
Net income (loss) $(12,439.59) $ 20,964.58 $ 13,585.63 $115,830.61
========== ========== ========== ==========
Dividends declared per share $ - $ 1,780.05 $ 1,753.75 $ 3,549.94
========== ========== ========== ==========
Weighted average shares outstanding 1,000 1,000 1,000 1,000
=========== =========== =========== ===========
<FN>
The financial information included herein has been prepared by
management without audit by independent public accountants.
The accompanying notes are an integral part of these consolidated
financial statements.
</FN>
</TABLE>
5
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PIONEER NATURAL RESOURCES USA
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Nine months ended
September 30,
----------------------
1997 1996
---------- ---------
Cash flows from operating activities:
Net income $ 13,586 $ 115,831
Adjustments to reconcile net income to net cash
provided by operating activities:
Depletion, depreciation and amortization 126,897 86,228
Exploration expenses, including dry holes 25,581 10,386
Deferred income taxes 6,600 46,900
Gain on disposition of assets, net (2,745) (96,887)
Other noncash items 12,901 (2,316)
Change in operating assets and liabilities, net
of effects from acquisitions and dispositions:
Accounts receivable 9,092 21,357
Inventories (1,122) 782
Other current assets 136 88
Accounts payable 4,997 4,941
Accrued income taxes and other current
liabilities (11,110) 2,104
-------- --------
Net cash provided by operating activities 184,813 189,414
-------- --------
Cash flows from investing activities:
Proceeds from disposition of wholly-owned
subsidiaries, net of cash disposed - 183,102
Proceeds from disposition of assets 12,838 51,194
Additions to oil and gas properties (246,574) (139,540)
Other property additions, net (9,878) (4,531)
-------- --------
Net cash provided by (used in) investing
activities (243,614) 90,225
-------- --------
Cash flows from financing activities:
Borrowings under long-term debt 104,896 782
Principal payments on long-term debt (18,279) (229,806)
Payments of other noncurrent liabilities (2,482) (2,035)
Dividends (1,754) (3,550)
Purchase of treasury stock (2,932) (227)
Exercise of long-term incentive plan stock options 1,272 2,757
Other - (151)
-------- --------
Net cash provided by (used in) financing
activities 80,721 (232,230)
-------- --------
Effect of exchange rate changes on cash and cash
equivalents - 290
Net increase in cash and cash equivalents 21,920 47,409
Cash and cash equivalents, beginning of period 18,711 19,940
-------- --------
Cash and cash equivalents, end of period $ 40,631 $ 67,639
======== ========
The financial information included herein has been prepared by
management without audit by independent public accountants.
The accompanying notes are an integral part of these consolidated
financial statements.
6
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PIONEER NATURAL RESOURCES USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(Unaudited)
NOTE A. Organization and Nature of Operations
Pioneer Natural Resources USA, Inc. is a wholly-owned subsidiary of
Pioneer Natural Resources Company ("Pioneer"). Pioneer is a Delaware corporation
whose common stock is listed and traded on the New York Stock Exchange. Pioneer
was formed in order to complete the merger between Parker & Parsley Petroleum
Company ("Parker & Parsley") and MESA Inc. ("Mesa"). On August 7, 1997, the
stockholders of Parker & Parsley and Mesa approved an Amended and Restated
Agreement and Plan of Merger (the "Merger Agreement") that provided for (i) the
merger of Mesa with and into Pioneer, which was a wholly-owned subsidiary of
Mesa, as a result of which Mesa, which was a Texas corporation, reincorporated
into Delaware and (ii) the merger of Parker & Parsley with and into Mesa
Operating Co. ("MOC"), a wholly-owned subsidiary of Mesa (items (i) and (ii)
collectively the "Mergers"). Coincidentally with the Mergers, the name of MOC
was changed to Pioneer Natural Resources USA, Inc. ("Pioneer USA"). Both Parker
& Parsley and Mesa were oil and gas exploration and production concerns with
ownership interests in oil and gas properties located principally in the
MidContinent, Southwestern and onshore and offshore Gulf Coast regions of the
United States.
In accordance with the provisions of Accounting Principles Board No. 16,
"Business Combinations", the Mergers have been accounted for as a purchase of
Mesa by Parker & Parsley. Immediately following the acquisition of Mesa by
Parker & Parsley, Pioneer reorganized its corporate structure whereby Pioneer
USA became the only direct wholly-owned subsidiary of Pioneer. The
reorganization resulted in Pioneer USA owning all of the assets and assuming all
of the liabilities of Pioneer either directly in Pioneer USA or indirectly
through a number of wholly-owned subsidiaries. The assets and liabilities
received from Parker & Parsley are recorded in the financial statements of
Pioneer USA at their historical value and the assets and liabilities acquired
from Mesa are recorded at their fair value in August 1997. The comparative
financial information presented for Pioneer USA represents the historical
financial information of Parker & Parsley and only includes the financial
information of Mesa beginning in August 1997.
The retained deficit caption in the accompanying Consolidated Balance
Sheet as of September 30, 1997 only represents the financial results of Pioneer
USA for the two months ended September 30, 1997 as a result of the
reorganization in August 1997. The income (loss) per share and dividend per
share information in the accompanying Consolidated Statements of Operations for
the three and nine months ended September 30, 1997 are presented as if the
weighted average shares upon consummation of the reorganization had been
outstanding for the entire periods presented.
NOTE B. Summary of Significant Accounting Policies
In the opinion of management, the unaudited consolidated financial
statements of Pioneer USA as of September 30, 1997 and for the three and nine
months ended September 30, 1997 and 1996 include all adjustments and accruals,
consisting only of normal recurring accrual adjustments, which are necessary for
a fair presentation of the results for the interim periods. These interim
results are not necessarily indicative of results for a full year. Certain
amounts in the prior period financial statements have been reclassified to
conform to the current period presentation.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted in this Form 10-Q pursuant to the
rules and regulations of the Securities and Exchange Commission. These
consolidated financial statements should be read in connection with the
consolidated financial statements and notes thereto included in Pioneer's
Quarterly Report on Form 10-Q dated September 30, 1997 and the 1996 Annual
Report on Form 10-K of Parker & Parsley.
NOTE C. Merger with Mesa
In August 1997, the shareholders of Pioneer's predecessor entities,
Parker & Parsley and Mesa, approved the Merger Agreement by a majority vote of
76% by holders of Parker & Parsley common stock and 71%, 58%, and 100% by
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holders of Mesa common stock, Mesa Series A Preferred Stock and Mesa Series B
Preferred Stock, respectively. In accordance with the Merger Agreement, (i)
holders of Parker & Parsley common stock received one share of Pioneer common
stock for each share held; (ii) holders of Mesa common stock received one share
of Pioneer common stock for every seven shares held; and (iii) holders of Mesa
Series A 8% Cumulative Convertible Preferred Stock and Mesa Series B 8%
Cumulative Convertible Preferred Stock received 1.25 shares of Pioneer common
stock for every seven shares held. No fractional shares were issued.
The aggregate Pioneer purchase consideration related to the assets and
liabilities of Mesa, including transaction costs, was $990.5 million. The
following table represents the allocation of the total purchase price (in
thousands) of Mesa to the acquired assets and liabilities based upon the fair
values assigned to each of the assets acquired and liabilities assumed. Any
future adjustments to the allocation of the purchase price are not anticipated
to be material to Pioneer USA's financial statements.
Recorded amounts of assets acquired,
including cash acquired of $7,398 $ 2,496,579
Liabilities assumed, including $152,500
of deferred taxes 1,506,096
----------
$ 990,483
==========
Pioneer common stock consideration $ 982,566
Transaction costs 7,917
----------
Aggregate purchase consideration $ 990,483
==========
The liabilities assumed include amounts recorded for litigation and
certain other preacquisition contingencies of Mesa.
NOTE D. Credit Facility Agreements
On August 7, 1997, Pioneer USA (the "Borrower"), a wholly-owned
subsidiary of Pioneer, entered into two Credit Facility Agreements ("Credit
Facility Agreements") with a syndicate of banks (the "Banks") that refinanced
the credit facilities of Parker & Parsley and Mesa as of the date of the
Mergers. One Credit Facility Agreement (the "Primary Facility") provides for a
$1.1 billion credit facility. The maturity date for the Primary Facility is
August 7, 2002. The second Credit Facility Agreement (the "364-day Facility")
provides for a $300 million credit facility with a maturity date of August 5,
1998. The Borrower has the option to renew the 364-day Facility for another
period of 364 days by notifying the Banks in writing of such election not more
than 60 days and not less than 45 days prior to the maturity date. The prior
credit agreements of Parker & Parsley and Mesa were paid in full following the
Mergers utilizing proceeds from initial borrowings under the new Primary
Facility.
Advances on both Credit Facility Agreements bear interest, at the
Borrower's option, based on (a) the prime rate of NationsBank of Texas, N.A.,
(b) a Eurodollar rate (substantially equal to the London Interbank Offered Rate
("LIBOR")), adjusted for the reserve requirement as determined by the Board of
Governors of the Federal Reserve System with respect to transactions in
Eurocurrency liabilities ("LIBOR Rate"), or (c) a competitive bid rate as quoted
by the Banks electing to participate pursuant to a request by the Borrower.
Advances that are LIBOR Rate have periodic maturities, at the Borrower's option,
of one, two, three, six, nine or twelve months. Maturities of greater than six
months are subject to availability of such deposits in the relevant markets.
Advances that are competitive bid rate have periodic maturities, at the
Borrower's option, of not less than 15 days nor more than 360 days. The interest
rates on LIBOR Rate advances vary with interest rate margins ranging from 18
basis points to 45 basis points. The interest rate margin is determined by a
grid based upon Pioneer's senior unsecured long-term public debt rating.
The obligations of the Borrower under the Credit Facility Agreements are
guaranteed by Pioneer and certain of its subsidiaries unless and to the extent
any such subsidiary has been designated as an "Unrestricted Subsidiary" by the
Borrower pursuant to the Credit Facility Agreements. Certain subsidiaries of the
Borrower which have not been designated as Unrestricted Subsidiaries have not
provided guaranties because either (a) such guaranty would result in adverse tax
consequences pursuant to Section 956 of the Internal Revenue Code of 1986, as
amended, or (b) such subsidiary is prohibited from executing a guaranty pursuant
to contractual restrictions. In these cases, the Borrower and certain of its
subsidiaries have pledged a portion of the issued and outstanding capital stock
of such subsidiaries as security for the obligations of the Borrower under the
Credit Facility Agreements.
8
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The Credit Facility Agreements contain various restrictive covenants and
compliance requirements, which include (a) minimum financial requirements; (b)
limits on the incurrence of additional indebtedness; (c) limitations on mergers;
and (d) limits on making certain restricted payments.
As of September 30, 1997 and December 31, 1996, long-term debt consists
of the following:
September 30, December 31,
1997 1996
------------ -----------
(in thousands)
Line of credit................................... $ 713,000 $ 9,000
8-7/8% senior notes due 2005..................... 150,000 150,000
8-1/4% senior notes due 2007 (net of discount)... 149,328 149,277
10-5/8% senior subordinated notes due 2006
(including premium)............................ 369,572 -
11-5/8% senior subordinated notes discount due
2006 (net of discount)......................... 209,481 -
Fixed rate building loan......................... 9,336 10,121
Other............................................ 11,544 7,891
----------- ----------
1,612,261 326,289
Less current maturities.......................... 11,116 5,381
----------- ----------
$ 1,601,145 $ 320,908
=========== ==========
The accompanying Consolidated Statements of Operations for the three and
nine months ended September 30, 1997 include a $1.5 million after-tax, noncash
charge for an extraordinary loss on early extinguishment of debt resulting from
the Mergers. This extraordinary loss relates to capitalized issuance fees
associated with Parker & Parsley's previously existing bank credit facility
which was replaced by the new Credit Facility Agreements for Pioneer USA.
NOTE E. Conversion of Subsidiary Preferred Shares to Common Stock
On July 28, 1997, Pioneer exercised its right to require each holder of
its 6 1/4% Cumulative Guaranteed Monthly Income Convertible Preferred Shares
("Preferred Shares") to exchange all Preferred Shares for shares of common stock
of Pioneer. The Preferred Shares were issued by Parker & Parsley Capital LLC, a
wholly-owned finance subsidiary of Pioneer, in 1994. On or after April 1, 1997,
Pioneer had the option to exchange the Preferred Shares for Pioneer common stock
at a rate of 1.7778 shares of common stock for each Preferred Share, provided
that, among other conditions, the closing price of Pioneer common stock equaled
or exceeded 125% of the then applicable conversion price for the 20 day trading
period before the date of conversion. Subsequent to April 1, 1997, 125% of the
applicable conversion price equaled $35.16. The closing price of Pioneer's
common stock for the period from June 27, 1997 to July 25, 1997 ranged from
$35.38 to $39.50.
On July 28, 1997, Pioneer issued 6.7 million shares of common stock in
exchange for the 3,776,400 Preferred Shares outstanding. As a result, Pioneer
USA, as successor, will no longer incur interest expense associated with the
Preferred Shares of approximately $12 million per year.
NOTE F. Commitments and Contingencies
Legal Actions. Pioneer USA is party to various legal actions incidental
to its business, including, but not limited to, the proceedings described below.
The majority of these lawsuits primarily involve claims for damages arising from
oil and gas leases and ownership interest disputes. Pioneer USA believes that
the ultimate disposition of these legal actions will not have a material adverse
effect on Pioneer USA's consolidated financial position, liquidity, capital
resources or future results of operations. Pioneer USA will continue to evaluate
its litigation matters on a quarter-by-quarter basis and will adjust its
litigation reserve as appropriate to reflect the then current status of its
litigation.
Pioneer USA believes that the costs for compliance with environmental
laws and regulations have not and will not have a material effect on Pioneer
USA's financial position or results of operations.
Kansas Ad Valorem Tax
The Natural Gas Policy Act of 1978 ("NGPA") allows a "severance,
production or similar" tax to be included as an add-on, over and above the
maximum lawful price for natural gas. Based on a Federal Energy Regulatory
9
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Commission ("FERC") ruling that Kansas ad valorem tax was such a tax, Mesa
collected the Kansas ad valorem tax in addition to the otherwise maximum lawful
price. The FERC's ruling was appealed to the United States Court of Appeals for
the District of Columbia ("D.C. Circuit"), which held in June 1988 that the FERC
failed to provide a reasoned basis for its findings and remanded the case to the
FERC for further consideration.
On December 1, 1993, the FERC issued an order reversing its prior
ruling, but limiting the effect of its decision to Kansas ad valorem taxes for
sales made on or after June 28, 1988. The FERC clarified the effective date of
its decision by an order dated May 18, 1994. The order clarified that the
effective date applies to tax bills rendered after June 28, 1988, not sales made
on or after that date. Numerous parties filed appeals on the FERC's action in
the D.C. Circuit. Various natural gas producers challenged the FERC's orders on
two grounds: (1) that the Kansas ad valorem tax, properly understood, does
qualify for reimbursement under the NGPA; and (2) the FERC's ruling should, in
any event, have been applied prospectively. Other parties challenged the FERC's
orders on the grounds that the FERC's ruling should have been applied
retroactively to December 1, 1978, the date of the enactment of the NGPA and
producers should have been required to pay refunds accordingly.
The D.C. Circuit issued its decision on August 2, 1996, which holds that
producers must make refunds of all Kansas ad valorem tax collected with respect
to production since October 4, 1983 as opposed to June 28, 1988. Petitions for
rehearing were denied on November 6, 1996. Various natural gas producers
subsequently filed a petition for writ of certiori with the United States
Supreme Court seeking to limit the scope of the potential refunds to tax bills
rendered on or after June 28, 1988 (the effective date originally selected by
the FERC). Williams Natural Gas Company filed a cross-petition for certiori
seeking to impose refund liability back to December 1, 1978. Both petitions were
denied on May 12, 1997.
Pioneer USA and other producers filed petitions for adjustment with the
FERC on June 24, 1997. Pioneer USA is unable at this time to predict the final
outcome of this matter or the amount, if any, that will ultimately be refunded.
Pioneer USA has a $20 million provision recorded for such litigation in the
accompanying Consolidated Balance Sheet at September 30, 1997. Pioneer USA is
seeking waiver or set-off from FERC with respect to that portion of the refund
associated with (i) non-recoupable royalties, (ii) non-recoupable Kansas
property taxes based, in part, upon the higher prices collected, and (iii)
interest for all periods. On September 10, 1997, FERC denied this request, and
on October 10, 1997, Pioneer USA and other producers filed a request for
rehearing.
Masterson
In February 1992, the current lessors of an oil and gas lease (the "Gas
Lease") dated April 30, 1955, between R.B. Masterson et al., as lessor, and
Colorado Interstate Gas Company ("CIG"), as lessee, sued CIG in Federal District
Court in Amarillo, Texas, claiming that CIG had underpaid royalties due under
the Gas Lease. Under the agreements with CIG, Pioneer USA, as successor to Mesa,
has an entitlement to gas produced from the Gas Lease. In August 1992, CIG filed
a third-party complaint against Pioneer USA for any such royalty underpayment
which may be allocable to Pioneer USA. Plaintiffs alleged that the underpayment
was the result of CIG's use of an improper gas sales price upon which to
calculate royalties and that the proper price should have been determined
pursuant to a "favored-nations" clause in a July 1, 1967, amendment to the Gas
Lease (the "Gas Lease Amendment"). The plaintiffs also sought a declaration by
the court as to the proper price to be used for calculating future royalties.
The plaintiffs alleged royalty underpayments of approximately $500
million (including interest at 10%) covering the period from July 1, 1967, to
the present. In March 1995 the court made certain pretrial rulings that
eliminated approximately $400 million of the plaintiff's claims (which related
to periods prior to October 1, 1989), but which also reduced a number of Pioneer
USA's defenses. Pioneer USA and CIG filed stipulations with the court whereby
Pioneer USA would have been liable for between 50% and 60%, depending on the
time period covered, of an adverse judgment against CIG or post-February 1988
underpayments of royalties.
On March 22, 1995, a jury trial began and on May 4, 1995, the jury
returned its verdict. Among its findings, the jury determined that CIG had
underpaid royalties for the period after September 30, 1989, in the amount of
approximately $140,000. Although the plaintiffs argued that the
"favored-nations" clause entitled them to be paid for all of their gas at the
highest price voluntarily paid by CIG to any other lessor, the jury determined
that the plaintiffs were estopped from claiming that the "favored-nations"
clause provides for other than a pricing-scheme to pricing-scheme comparison. In
light of this determination, and the plaintiff's stipulation that a
pricing-scheme to pricing-scheme comparison would not result in any "trigger
prices" or damages, defendants asked the court for a judgment that plaintiffs
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take nothing. The court, on June 7, 1995, entered final judgment that plaintiffs
recover no monetary damages. The plaintiffs filed a motion for new trial on June
22, 1995. The court, on July 18, 1997, denied plaintiffs' motion. The plaintiffs
have appealed to the Fifth Circuit.
On June 7, 1996, the plaintiffs filed a separate suit against CIG and
Pioneer USA in state court in Amarillo, Texas, similarly claiming underpayment
of royalties under the "favored-nations" clause, but based upon the
above-described pricing-scheme to pricing-scheme comparison on a well-by-well
monthly basis. The plaintiffs also claim underpayment of royalties since June 7,
1995, under the "favored-nations" clause based upon either the pricing-scheme to
pricing-scheme method or their previously alleged higher price method. Pioneer
USA believes it has several defenses to this action and intends to contest it
vigorously. Pioneer USA is not currently able to determine the range of
reasonably possible losses, if any, that would be payable if such action was
determined adversely to Pioneer USA.
The federal court in the above-referenced first suit issued an order on
July 29, 1996, which stayed the second suit pending the plaintiffs' resolution
of the first suit.
However, based on the jury verdict and final judgment, Pioneer USA does
not currently expect the ultimate resolution of these lawsuits to have a
material adverse effect on its financial position or results of operations.
Shareholder Litigation
On July 3, 1995, Robert Strougo filed a class action and derivative
action in the District Court of Dallas County, Texas, 160th Judicial District,
against T. Boone Pickens, Paul W. Cain, John L. Cox, John S. Herrington, Wales
H. Madden, Jr., Fayez S. Sarofim, Robert L. Stillwell and J. R. Walsh, Jr. (the
"Director Defendants"), each of whom was a former director of Mesa. The class
action was purportedly brought on behalf of a class of Mesa shareholders and
alleges, inter alia, that the Mesa Board infringed upon the suffrage rights of
the class and impaired the ability of the class to receive tender offers by
adoption of a shareholder rights plan. The lawsuit was also brought derivatively
on behalf of Mesa and alleges, inter alia, that the Mesa Board breached
fiduciary duties to Mesa by adopting a shareholder rights plan and by failing to
consider the sale of Mesa. The lawsuit seeks unspecified damages, attorneys'
fees, and injunctive and other relief. Two other lawsuits filed by Herman
Krangel, Lilian Krangel, Jacquelyn A. Cady and William S. Montagne, Jr., in the
District Court of Dallas County have been consolidated into this lawsuit. A
third lawsuit filed by Deborah M. Eigen and Adele Brody as a derivative lawsuit
in the U.S. District Court for the Northern District of Texas, Dallas Division,
intervened in this lawsuit. In November 1997, the Court dismissed this lawsuit.
NOTE G. Derivative Financial Instruments
Commodity hedges. Pioneer USA utilizes various swap and option contracts
to (i) reduce the effect of the volatility of price changes on the commodities
Pioneer USA produces and sells, (ii) support Pioneer USA's annual capital
budgeting and expenditure plans and (iii) lock in prices to protect the
economics related to certain capital projects.
Crude Oil. All material purchase contracts governing Pioneer USA's oil
production are tied directly or indirectly to NYMEX prices. The following table
sets forth Pioneer USA's outstanding oil swap contracts and collar option
contracts as of September 30, 1997.
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------------ ------------
Oil production:
1997 - Swap Contracts
Volume (MMBbl) - - - .9 .9
Price per Bbl $ - $ - $ - $ 18.93 $ 18.93
1997 - Collar Options
Volume (MMBbl) - - - .1 .1
Price per Bbl $ - $ - $ - $17.82-24.31 $17.82-24.31
1998 - Swap Contracts
Volume (MMBbl) .8 .8 .8 .8 3.2
Price per Bbl $ 19.76 $ 19.76 $ 19.75 $ 19.74 $ 19.75
11
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Pioneer USA reports average oil prices per Bbl including the effects of
oil quality, gathering and transportation costs and the net effect of the oil
hedges. During the three and nine months ended September 30, 1997, Pioneer USA
reported average oil prices of $17.93 per Bbl and $18.70 per Bbl, respectively,
while realizing an average price for physical oil sales (excluding hedge
results) for the same periods of $18.03 per Bbl and $19.37 per Bbl,
respectively. The comparable average NYMEX prompt month closing per Bbl for the
three and nine months ended September 30, 1997 was $19.79 and $20.83,
respectively. Pioneer USA recorded net reductions to oil revenues of $351
thousand and $6.3 million for the three and nine months ended September 30,
1997, respectively, as a result of its oil price hedges.
During the three and nine months ended September 30, 1996, Pioneer USA
reported average oil prices per Bbl of $20.34 and $19.62, respectively, while
realizing an average price for physical oil sales (excluding hedge results) for
the same periods of $21.63 per Bbl and $20.39 per Bbl, respectively. The
comparable average NYMEX prompt month closing per Bbl for the three and nine
months ended September 30, 1996 was $22.33 and $21.18, respectively. Pioneer USA
recorded net reductions to oil revenues of $3.3 million and $6.4 million for the
three and nine months ended September 30, 1996, respectively, as a result of its
oil price hedges.
Natural Gas. Pioneer USA employs a policy of hedging gas production
based on the index price upon which the gas is actually sold in order to
mitigate the basis risk between NYMEX prices and actual index prices. The
following table sets forth Pioneer USA's outstanding gas swap contracts, collar
option contracts and put option contracts as of September 30, 1997. Prices
included herein represent Pioneer USA's weighted average index price per MMBtu
for the swap contracts and put option contracts and the weighted average index
price range for the collar option contracts and, as an additional point of
reference, the weighted average NYMEX price.
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
---------- ------- ------- ---------- ----------
Gas production:
1997 - Swap Contracts
Volume (Bcf) - - - 13.4 13.4
Index price per MMBtu $ - $ - $ - $ 2.18 $ 2.18
NYMEX price per MMBtu $ - $ - $ - $ 2.34 $ 2.34
1997 - Collar Options
Volume (Bcf) - - - 7.0 7.0
Index price per MMBtu $ - $ - $ - $2.13-2.67 $2.13-2.67
1997 - Put Options
Volume (Bcf) - - - .2 .2
Index price per MMBtu $ - $ - $ - $ 2.13 $ 2.13
1998 - Swap Contracts
Volume (Bcf) 12.6 3.9 2.8 2.4 21.7
Index price per MMBtu $ 2.35 $ 1.93 $ 1.75 $ 1.79 $ 2.13
NYMEX price per MMBtu $ 2.48 $ 2.22 $ 2.22 $ 2.22 $ 2.39
1998 - Collar Options
Volume (Bcf) 3.6 - - - 3.6
Index price per MMBtu $2.50-3.44 $ - $ - $ - $2.50-3.44
1998 - Put Options
Volume (Bcf) .3 2.5 3.0 1.1 6.9
Index price per MMBtu $ 2.50 $ 1.83 $ 1.83 $ 1.85 $ 2.08
1999 - Swap Contracts
Volume (Bcf) 1.4 .4 - - 1.8
Index price per MMBtu $ 1.58 $ 1.86 $ - $ - $ 1.65
NYMEX price per MMBtu $ 2.03 $ 2.03 $ - $ - $ 2.03
12
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In addition to the open positions above for the fourth quarter of 1997
and the first quarter of 1998, Pioneer USA has sold short put options for 2.9
Bcf and 3.9 Bcf, respectively. Consequently, there is no effective minimum price
to be realized from the collar and put options if the NYMEX price falls below
$2.45 and $2.37, respectively.
Pioneer USA reports average gas prices per Mcf including the effects of
Btu content, gathering and transportation costs, gas processing and shrinkage
and the net effect of the gas hedges. During the three and nine months ended
September 30, 1997, Pioneer USA reported average gas prices of $2.16 per Mcf and
$2.21 per Mcf, respectively, while realizing an average price for physical gas
sales (excluding hedge results) for the same periods of $2.22 per Mcf and $2.32
per Mcf, respectively. The comparable average NYMEX prompt month closing per Mcf
for the three and nine months ended September 30, 1997 was $2.49 and $2.33,
respectively. Pioneer USA recorded net reductions to gas revenues of $1.8
million and $7.9 million for the three and nine months ended September 30, 1997,
respectively, as a result of its gas price hedges.
During the three and nine months ended September 30, 1996, Pioneer USA
reported average gas prices per Mcf of $2.09 and $2.12, respectively, while
realizing an average price for physical gas sales (excluding hedge results) for
the same periods of $2.12 per Mcf and $2.19 per Mcf, respectively. The
comparable average NYMEX prompt month closing per Mcf for the three and nine
months ended September 30, 1996 was $2.17 and $2.33, respectively. Pioneer USA
recorded net reductions to gas revenues of $621 thousand and $3.7 million for
the three and nine months ended September 30, 1996, respectively, as a result of
its gas price hedges.
Natural Gas Liquids. Pioneer USA employs a policy of hedging natural gas
liquids based on actual product prices in order to mitigate some of the
volatility associated with NYMEX pricing. Natural gas liquids are sold under
long-term contracts which provide price flexibility and allow the company to
maximize prices between trading hubs. The following table sets forth Pioneer
USA's outstanding natural gas liquids swap contracts as of September 30, 1997.
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -------
Natural gas liquids production:
1997 - Swap Contracts
Volume (MMBbl) - - - .1 .1
Price per Bbl $ - $ - $ - $ 16.27 $ 16.27
During the three and nine months ended September 30, 1997, Pioneer USA
reported average natural gas liquids prices of $12.89 per Bbl while realizing an
average price for physical sales (excluding hedge results) of $12.78 per Bbl and
recorded a net increase to natural gas liquids revenue of $124 thousand.
Fair market value adjustment. During December 1996, Mesa entered into
BTU swap agreements that cover 13,036 MMBTU per day from January 1, 1997 through
December 31, 2004. The agreements require that from January 1, 1997 through
December 31, 1998, Pioneer USA will receive a premium of $.52 per MMBTU over
market natural gas prices. During the six year period of January 1, 1999 through
December 31, 2004, Pioneer USA will receive 10% of the NYMEX oil price for the
volumes covered. On September 30, 1997, Pioneer USA recorded a mark-to-market
adjustment to the carrying value of the BTU swap agreements that resulted in the
recognition of a $2.1 million noncash pre-tax charge to the results for the
third quarter of 1997. These contracts will continue to be marked-to-market at
the end of each reporting period during their respective lives and the effects
on Pioneer USA's results of operations in future periods could be significant.
Interest rate swaps. During the second quarter of 1996, Pioneer USA
entered into a series of interest rate swap agreements for an aggregate amount
of $150 million with four counterparties. These agreements, which have a term of
three years, effectively convert a portion of Pioneer USA's fixed-rate
borrowings into floating-rate obligations. The weighted average fixed rate being
received by Pioneer USA over the term of these agreements is 6.62% while the
weighted average variable rate paid by Pioneer USA for the three and nine months
ended September 30, 1997 was 5.94% and 5.75%, respectively, and for the three
and nine months ended September 30, 1996, the weighted average variable rate
paid by Pioneer USA was 5.65%. The variable rate will be redetermined
approximately every six months based upon the London interbank offered rate at
that point in time.
In August 1996, Mesa entered into an interest rate swap agreement with
one counterparty for an aggregate amount of $250 million. This agreement, which
has a term of two years, effectively converts a portion of Pioneer USA's
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floating rate borrowings into fixed-rate obligations. The economic effect of
this agreement, given Pioneer USA's current interest rate on its Credit Facility
Agreements, is to fix the interest rate on $250 million of floating rate debt at
a rate of 6.51%.
The accompanying Consolidated Statements of Operations for the three and
nine months ended September 30, 1997 include a reduction in interest expense of
$5 thousand and $705 thousand, respectively, and a reduction in interest expense
of $350 thousand and $461 thousand for the three and nine months ended September
30, 1996, respectively, to account for the settlement of Pioneer USA's interest
rate swap agreements.
In October 1997, Pioneer USA entered into two agreements with a
counterparty designated as forward U.S. Treasury interest rate locks. In such
agreements, Pioneer USA agreed to sell U.S. Treasury securities at a designated
point in the future. This acts to lock in the interest rate for anticipated
future public debt issuances by Pioneer USA which will be priced based upon such
U.S. Treasury securities. The face amount of the U.S. Treasury securities which
were sold is $300 million with maturities of the underlying U.S. Treasury
securities ranging from 10 years to 30 years and the associated forward U.S.
Treasury interest rates ranging from 6.00% to 6.30%. Such agreements expire in
December 1997.
NOTE H. Subsequent Events
Sale of Subsidiary
Subsequent to September 30, 1997, Pioneer USA sold a wholly-owned
subsidiary, Pioneer International Petroleum Company, to Pioneer for
approximately $3.5 million to facilitate the acquisition of Chauvco Resources
Ltd. as described in "Acquisition of Chauvco".
Acquisition of Chauvco
On September 3, 1997, Pioneer entered into an agreement (the
"Combination Agreement") to acquire the Canadian and Argentine oil and gas
business of Chauvco Resources Ltd. ("Chauvco"), a publicly traded independent
oil and gas company based in Calgary, Canada, and to spin-off to Chauvco
shareholders Chauvco's Gabonese oil and gas operations and other international
interests through Chauvco's existing subsidiary, Chauvco Resources International
Ltd. ("CRI"). Prior to the consummation of this transaction, Chauvco will
distribute its 20% interest in the Alliance Pipeline project. In accordance with
the Combination Agreement, holders of Chauvco common shares will receive for
each Chauvco common share held (i) one share of CRI and (ii) a number of Pioneer
common shares or shares exchangeable into Pioneer shares ("Exchangeable Shares")
or a combination of both. The number of Pioneer common shares or Exchangeable
shares to be issued is determined by an exchange ratio which is dependent upon
the price of Pioneer common stock. The exchange ratio for shares of Chauvco
common stock into shares of Pioneer common stock or Exchangeable shares varies
between 0.493827 and 0.451467.
The preliminary aggregate Pioneer purchase consideration for the assets
and liabilities to be acquired from Chauvco, including estimated transaction
costs, is $980.5 million. The following table represents the preliminary
allocation of the total purchase price of Chauvco to the acquired assets and
liabilities based upon the fair values assigned to each of the significant
assets acquired and liabilities assumed. Any future adjustments to the
allocation of the purchase price are not anticipated to be material to Pioneer's
financial statements.
14
<PAGE>
Allocation
of Aggregate
Purchase
Consideration
-------------
(in thousands)
Net working capital $ (11,123)
Property, plant and equipment 1,444,049
Other assets 28,785
Long-term debt (208,653)
Other non-current liabilities,
including deferred taxes (272,585)
----------
$ 980,473
==========
Pioneer common stock consideration $ 950,473
Transaction costs 30,000
---------
Aggregate purchase consideration $ 980,473
==========
East Texas Basin Assets
On October 23, 1997, Pioneer USA signed a Purchase and Sale Agreement to
acquire substantial assets in the East Texas Basin from American Cometra, Inc.
("ACI") and Rockland Pipe Co. ("Rockland"), both subsidiaries of Electrafina
S.A. of Belgium. Purchase consideration consists of $85 million cash and 1.75
million shares of Pioneer common stock. Pioneer USA will acquire all of ACI's
producing wells, acreage (95,000 gross and 38,000 net), seismic data, royalties
and mineral interests and Rockland's gathering system, pipeline and Plum Creek
gas treating facility. It is anticipated that this transaction will close by
mid-December 1997.
Tender Offer
On November 14, 1997, Pioneer USA initiated an offer to purchase for
cash (the "Offer") any and all of its 11 5/8% senior subordinated discount notes
due 2006 (the "11 5/8% Notes"), and its 10 5/8% senior subordinated notes due
2006 (the "10 5/8% Notes" and together with the 11 5/8% Notes, the "Notes"). The
purchase price offered by Pioneer USA for the 11 5/8% Notes and the 10 5/8%
Notes is, respectively, $829.90 and $1,171.40 per $1,000 face amount tendered,
plus any interest on the 10 5/8% Notes accrued from July 1, 1997 to the
expiration date of the Offer. Pioneer USA intends to pay for the purchase price
of the Notes tendered in the Offer with borrowings under its Credit Facility
Agreements. There are currently outstanding $264 million aggregate face amount
of the 11 5/8% Notes (having an aggregate accreted value of $168 million as of
July 1, 1997), and $325 million aggregate principal amount of the 10 5/8% Notes.
In connection with the Offer, Pioneer USA is soliciting consents from
holders of record of the Notes at the close of business on November 14, 1997, to
approve amendments to the respective indentures governing the Notes which would
eliminate or modify most of the restrictive covenants contained in the
indentures. Such amendments would become effective upon the closing of the
Offer. A holder of more than 66 2/3% in aggregate principal amount of each
outstanding issue of the Notes has agreed to consent to the proposed amendments,
thereby assuring that the proposed amendments would become effective if the
Offer is completed.
The Offer is expected to expire on December 15, 1997, and the closing of
the Offer is expected to occur three business days after the expiration date. If
the Offer is completed with 100% of the Notes tendered, Pioneer USA expects to
take a charge to its fourth quarter 1997 financial results of $12 million to $15
million (net of tax benefit).
15
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PIONEER NATURAL RESOURCES USA, INC.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations(1)
The Formation of Pioneer & Pioneer USA
Pioneer Natural Resources USA, Inc. ("Pioneer USA") is a wholly-owned
subsidiary of Pioneer Natural Resources Company ("Pioneer"). Pioneer is a
Delaware corporation whose common stock is listed and traded on the New York
Stock Exchange. Pioneer was formed in order to complete the merger between
Parker & Parsley Petroleum Company ("Parker & Parsley") and MESA Inc. ("Mesa").
Upon consummation of the merger, Pioneer reorganized its corporate structure
whereby Pioneer became a holding company and Pioneer USA became the principal
operating entity. Pioneer USA, together with its wholly-owned subsidiaries, is
an oil and gas exploration and production company with ownership interests in
oil and gas properties located principally in the MidContinent, Southwestern and
onshore and offshore Gulf Coast regions of the United States.
Prior to the merger, Parker & Parsley and Mesa, as separate companies,
had complimentary strategies which focused on enhancing shareholder value
through (i) maximizing the value of existing reserves through efficient
operating and marketing practices, (ii) increasing production from existing oil
and gas properties by drilling low-risk development wells, (iii) drilling
selective exploratory wells with significant production and reserve potential,
(iv) pursuing strategic acquisitions which either complement the existing asset
base or provide exploration and exploitation opportunities and (v) maintaining
financial flexibility for future exploration, development and acquisition
activities. The merger met the strategic objectives of both companies and
positioned the newly created Pioneer USA to continue to pursue these strategies
on a larger scale.
Combining the physical assets and management teams of Parker & Parsley
and Mesa into Pioneer USA created a company with a solid foundation of core
assets. This foundation includes three "crown jewels " (the Hugoton gas field
located in Southwest Kansas, the West Panhandle gas field located in the Texas
panhandle, and the Spraberry oil and gas field in West Texas) which provide
consistent and dependable production, cash flow and ongoing development
opportunities; a reserve portfolio which is balanced between oil and natural gas
liquids and gas; a portfolio of exciting exploration opportunities; and a team
of over 1,100 dedicated employees representing the professional disciplines and
sciences which will allow Pioneer USA to continue to provide Pioneer's
shareholders with superior long-term value.
In accordance with the provisions of Accounting Principles Board No. 16,
"Business Combinations", the Mergers have been accounted for as a purchase of
Mesa by Parker & Parsley. Immediately following the acquisition of Mesa by
Parker & Parsley, Pioneer reorganized its corporate structure whereby Pioneer
USA became the only direct wholly-owned subsidiary of Pioneer. The
reorganization resulted in Pioneer USA owning all of the assets and assuming all
of the liabilities of Pioneer either directly in Pioneer USA or indirectly
through a number of wholly-owned subsidiaries. The assets and liabilities
received from Parker & Parsley are recorded in the financial statements of
Pioneer USA at their historical value and the assets and liabilities acquired
from Mesa are recorded at their fair value in August 1997. The comparative
financial information presented for Pioneer USA represents the historical
financial information of Parker & Parsley and only includes the financial
information of Mesa beginning in August 1997.
The retained deficit caption in the accompanying Consolidated Balance
Sheet as of September 30, 1997 only represents the financial results of Pioneer
USA for the two months ended September 30, 1997 as a result of the
reorganization in August 1977. The income (loss) per share and dividend per
share information in the accompanying Consolidated Statements of Operations for
the three and nine months ended September 30, 1997 are presented as if the
weighted average shares upon consummation of the reorganization had been
outstanding for the entire periods presented.
Financial Performance
Pioneer USA reported a net loss of $12.4 million ($12,439.59 per share)
and net income of $13.6 million ($13,585.63 per share) for the three and nine
months ended September 30, 1997, respectively, as compared to net income of $21
million ($20,964.58 per share) and $115.8 million ($115,830.61 per share) for
the same periods in 1996. The process of organizationally and operationally
combining the two companies to create Pioneer USA resulted in $4.3 million of
relocation expenses and a $2.3 million write-off of commitment fees related to
Parker & Parsley's credit facility that was replaced with a new Pioneer USA $1.4
billion credit agreement during the three months ended September 30, 1997. The
16
<PAGE>
PIONEER NATURAL RESOURCES USA, INC.
three month period ended September 30, 1997 was also negatively impacted by an
increase in noncash depletion expense that resulted from the fair value
allocated to Mesa's long-lived, low cost natural gas reserves. As discussed more
fully in "Results of Operations" below, Pioneer USA's financial performance
during 1997 has been positively affected by increases in oil and gas production
and decreases in production costs per BOE due to ongoing cost reduction efforts,
offset by increases in exploration and general and administrative expenses and
an increase in interest expense due to the additional debt assumed from Mesa.
The nine months ended September 30, 1996 includes $75.9 million ($2.12 per
share) related to net after-tax gains on asset dispositions primarily due to the
sale of Pioneer's Australasian subsidiaries.
Net cash provided by operating activities decreased to $185.3 million
during the nine months ended September 30, 1997, as compared to the net cash
provided by operating activities of $189.4 million for the same period in 1996.
This decrease is primarily attributable to increases in interest expense and
general and administrative expenses and the payment of certain liabilities
assumed from Mesa, including severance payments made to former Mesa employees,
offset, to some extent, by cash flows generated by the acquired oil and gas
properties from Mesa.
Pioneer USA strives to maintain its outstanding indebtedness at a
moderate level in order to provide sufficient financial flexibility to fund
future opportunities. Pioneer USA's total book capitalization at September 30,
1997 was $3.3 billion, consisting of total long-term debt of $1.6 billion and
stockholders' equity of $1.7 billion. Debt as a percentage of total book
capitalization was 49% at September 30, 1997, up from 31% at December 31, 1996.
The increase is primarily due to the total long-term debt assumed from Mesa of
$1.2 billion.
1998 Projections
Pioneer USA expects to invest $600 million in capital projects during
1998. This preliminary capital budget is based on Pioneer USA's current
projection that its 1998 production will be 72 million barrels of oil
equivalents (MMBOE), versus previous analysts' estimates of 76 to 80 MMBOE. The
capital expenditure budget is divided between development ($450 million) and
exploration ($150 million) activities, and is expected to result in the drilling
of more than 900 wells. Pioneer USA expects to invest $170 million in West
Texas, $150 million in the Gulf Coast areas, $65 million in Canada, and $85
million in other areas of North America. Internationally, Pioneer USA expects to
invest $100 million in Argentina and $30 million in other areas.
Pioneer USA's revised production estimate includes an allowance for
delays in the deployment of Pioneer USA's cash flow caused by the five-month
process of merging Mesa with Parker & Parsley, as well as equipment procurement
difficulties that the entire oil and gas industry is currently experiencing. In
addition, Pioneer USA has recently adopted a new strategy to commit a greater
portion of its cash flow to higher growth potential projects, including
significant 3D seismic projects, which will delay immediate oil production and
cash flow. Historically, Mesa and Parker & Parsley had each spent a small
percentage of its respective capital on exploration projects. Pioneer USA now
expects to spend approximately 25% of its capital on exploration. The forward
looking statements in these projections, including statements relating to
capital budget, production, cash flows and drilling activities are based upon a
number of assumptions, among others limited changes in oil and gas prices and
the accuracy of reserve engineering studies. These assumptions may prove not to
have been accurate. (1)
Acquisition Activities
Acquisition of Chauvco
On September 3, 1997, Pioneer entered into an agreement (the "Combination
Agreement") to acquire the Canadian and Argentine oil and gas business of
Chauvco Resources Ltd. ("Chauvco"), a publicly traded independent oil and gas
company based in Calgary, Canada and to spin-off to Chauvco shareholders
Chauvco's Gabonese oil and gas operations and other international interests
through Chauvco's existing subsidiary, Chauvco Resources International Ltd.
("CRI"). Prior to the consummation of this transaction, Chauvco will distribute
its 20% interest in the Alliance Pipeline project. In accordance with the
Combination Agreement, holders of Chauvco common shares will receive for each
Chauvco common share held (i) one share of CRI and (ii) a number of Pioneer
common shares or shares exchangeable into Pioneer shares ("Exchangeable Shares")
or a combination of both. The number of Pioneer common shares or Exchangeable
17
<PAGE>
PIONEER NATURAL RESOURCES USA, INC.
shares to be issued is determined by an exchange ratio which is dependent upon
the price of Pioneer common stock. The exchange ratio for shares of Chauvco
common stock into shares of Pioneer common stock or Exchangeable shares varies
between 0.493827 and 0.451467.
The acquisition of Chauvco will meet many of Pioneer's strategic
objectives. In addition to the proved producing assets of Chauvco, Pioneer will
be acquiring a substantial inventory of unproved oil and gas properties which
will provide Pioneer with many exploration opportunities and potential for
significant reserve additions. The acquisition of Chauvco will also reduce
Pioneer's debt to total book capitalization ratio from 48% at September 30, 1997
to an anticipated level of 41% on a pro forma basis at September 30, 1997.
Although the acquisition of a portfolio of unproved properties represents
an exciting challenge to Pioneer's team of engineers, geologists and
geophysicists, such opportunities are not without risk. U.S. GAAP requires
periodic evaluation of these costs on a project-by-project basis in comparison
to their estimated value. These evaluations will be affected by results of
exploration activities, future sales or expiration of all or a portion of such
projects. If the quantity of proved reserves determined by such evaluations are
not sufficient to fully recover the cost invested in each project, Pioneer may
be required to recognize significant noncash charges to the earnings of future
periods. There can be no assurance that economic reserves will be determined to
exist for such projects.
Board Recommendation. The Pioneer Board of Directors (the "Pioneer
Board") believes that the terms of the Combination Agreement and the acquisition
of Chauvco are fair to and in the best interest of Pioneer and its stockholders.
Accordingly, the Pioneer Board has approved the Combination Agreement and the
acquisition of Chauvco and recommends that the Pioneer stockholders approve the
Combination Agreement and the acquisition of Chauvco. The Pioneer Board believes
that the acquisition of Chauvco will have numerous benefits, the most
significant of which are described below.
Establishment of New Core Areas. The Pioneer Board considered the
opportunities presented by the establishment of two new core areas in western
Canada and Argentina, the benefits of owning Canadian oil and gas reserves in
terms of the long-term supply and demand dynamics of the North American energy
markets, the attractive operating climate in Argentina and the similarity of the
reservoir characteristics in Argentina to Pioneer's domestic properties.
Production Growth. The Pioneer Board considered that the expected oil and
gas production volumes for the Chauvco properties' reinvestment projects and the
net growth in production from the Chauvco properties will accelerate Pioneer's
expansion and growth strategies.
Reserve Growth Potential. The Pioneer Board considered the projected
reserves of the Chauvco properties based on an evaluation by its engineering
staff and believed that the complementary nature of the two companies will
provide a strong foundation for growth that will benefit the Pioneer
stockholders.
Accretion to Cash Flow. The Pioneer Board considered that the projected
and future results of the acquisition of Chauvco will be accretive to
discretionary cash flow by approximately 7% in 1998 and 15% in 1999.
Improved Balance Sheet. Based upon June 30, 1997 financial information,
the Pioneer Board considered that upon consummation of the Combination
Agreement, Pioneer's debt to book capitalization ratio will decrease from 46% to
40%, which had been set as a target ratio, and that other credit ratios will
approach their targets as well.
Management. The Pioneer Board also considered the depth and breadth of
management experience of Guy Turcotte and James Baroffio, members of Chauvco's
board of directors, who have each agreed to serve on the Pioneer Board if the
acquisition of Chauvco is consummated. Both of these individuals have extensive
experience and successful track records as builders of oil and gas companies and
operations in foreign lands.
18
<PAGE>
PIONEER NATURAL RESOURCES USA, INC.
Property Acquisitions
Cotton Valley. In May of 1997, Pioneer USA acquired a 35% interest in
approximately 375,000 acres within the Cotton Valley Pinnacle Reef Trend from
Union Pacific Resources Company ("UPRC") for $26.9 million. Pioneer USA and UPRC
have signed an exploration agreement to jointly explore and develop this area
located in eastern Texas and plan to begin drilling the first exploration well
before the end of the year.
On October 27, 1997, Pioneer USA signed a Purchase and Sale Agreement to
acquire substantial assets in the East Texas Basin from American Cometra, Inc.
("ACI") and Rockland Pipe Co. ("Rockland"), both subsidiaries of Electrafina
S.A. of Belgium. Purchase consideration consists of $85 million cash and 1.75
million shares of Pioneer USA common stock. Pioneer USA will acquire all of
ACI's producing wells, acreage (95,000 gross and 38,000 net), seismic data,
royalties and mineral interests and Rockland's gathering system, pipeline and
Plum Creek gas treating facility. The acquired acreage is in Henderson,
Freestone, Anderson and Leon counties. The acquired wells are currently
producing approximately 25 MMcf per day and have significant upside potential
with the planned drilling of additional wells. It is anticipated that this
transaction will close by mid-December 1997.
These two acquisitions combined will make Pioneer USA one of the largest
acreage holders in the East Texas Basin with total holdings of 650,000 gross
acres (175,000 net). Having gained such holdings, Pioneer USA is anticipating
developing these assets into a new core area.
Maude Traylor. In addition, Pioneer USA's Gulf Coast Division completed
the acquisition of a majority interest in the Maude Traylor field in Calhoun
County, Texas for approximately $8.8 million in February 1997. This acquisition
represented an average working interest of 87% in approximately 1,840 acres and
five wells which produce from the upper and lower Frio formations. Pioneer USA
is currently realizing gross gas production of 1.7 MMcf per day in this field,
and since Pioneer USA assumed operations the gross oil production rate has more
than tripled to 185 Bbls per day. The Gulf Coast Division is currently
completing an exploratory well in the Maude Traylor field in the Deep Frio
formation which should be producing by year-end. Pioneer USA anticipates that
recently upsized mainline gas production piping will yield an increase in
production in this area of approximately 5%. Pioneer USA plans to drill three
additional wells during 1997 and five wells in 1998 on this acreage utilizing
existing 3-D seismic information.
Guatemala. During May of 1997, Pioneer USA finalized negotiations with
Triton Energy for a 40% working interest in a joint exploration program of two
blocks in Guatemala's South Peten Basin. Drilling on the Piedras Blancas #1 is
expected to be completed by the end of the year at an estimated total cost to
Pioneer USA of $3.7 million.
Drilling Activities
Pioneer USA's 1997 capital expenditure budget has been increased to $541
million from its initial budget of $270 million, reflecting planned expenditures
of $240 million for exploitation activities, $89 million for exploration
activities and $212 million for oil and gas property acquisitions in Pioneer
USA's core areas. For the nine months ended September 30, 1997, costs incurred
were $267.3 million. During the first three quarters of 1997, Pioneer USA
participated in the completion of 413 gross exploration and development wells,
including 239 wells in the Spraberry Division, 85 wells in the Permian Division,
43 wells in the Gulf Coast Division, 40 wells in the MidContinent Division and
six wells in Argentina. Of these wells, 76 were in progress at December 31,
1996. Of the total wells completed during the nine months ended September 30,
1997, 371 wells were completed successfully which resulted in a 90% success
rate. In addition to the wells completed in the first three quarters of 1997,
Pioneer USA had 138 wells in progress at September 30, 1997. In total during
1997, Pioneer USA plans to drill approximately 610 development wells and 90
exploratory wells and to perform recompletions on over 150 wells.
During February 1997, the Texas Railroad Commission (which regulates oil
and gas production in Texas) entered a favorable order on Pioneer USA's
application to allow administrative approval of uncontested applications to
increase the density of the drilling in the Spraberry field from one well per 80
acres to one well per 40 acres. Pioneer USA believes such reduced spacing may
provide in excess of 1,000 additional drilling locations which have the
potential to add 70 million equivalent barrels to Pioneer USA's proved reserve
base. Through September 30, 1997, the Spraberry Division has drilled 40 wells
under the reduced spacing requirements resulting in the addition of
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PIONEER NATURAL RESOURCES USA, INC.
approximately three million BOE's to its reserve portfolio. Additional drilling
is planned for the fourth quarter of 1997 and during fiscal 1998 that should add
additional BOE's to Pioneer USA's reserve base. Future plans for the Spraberry
Division include the implementation of a field demonstration CO2 pilot in 1998
and a 3-D seismic study of a 100 square mile area under the major Spraberry
units looking for Strawn, Atoka and Devonian structures.
Pioneer USA continues to develop the War-Wink field discovery in the
Delaware Basin. The Permian Division is currently drilling two wells and
completing a third well in this field with plans to drill an additional six
wells by year-end. Average daily gross production from the eight wells producing
from this formation is up to a total of 1,547 Bbls of oil (580 Bbls net) and
1,723 Mcf of gas (650 Mcf net).
Other Events
Sale of Subsidiary. Subsequent to September 30, 1997, Pioneer USA sold a
wholly-owned subsidiary, Pioneer International Petroleum Company, to Pioneer for
approximately $3.5 million to facilitate the acquisition of Chauvco as described
above.
Asset Dispositions. For the nine months ended September 30, 1997, Pioneer
USA's asset disposition activity primarily consisted of the sale of certain
domestic assets for proceeds of $11.2 million, which resulted in a net gain of
$2.0 million and the sale of Pioneer USA's subsidiary with an ownership interest
in oil and gas properties in Turkey for proceeds of $1.6 million, which resulted
in the recognition of a gain of $725 thousand. During the nine months ended
September 30, 1996, Pioneer USA sold certain wholly-owned Australasian
subsidiaries for proceeds of $183.1 million resulting in a pre-tax gain of $83.2
million and certain nonstrategic domestic assets for proceeds of $51.2 million
that resulted in the recognition of a pre-tax net gain of $13.7 million.
During the fourth quarter of 1997, Pioneer USA anticipates selling
certain nonstrategic domestic oil and gas properties for approximately $100
million.
Conversion of Subsidiary Preferred Shares to Common Stock. On July 28,
1997, Pioneer exercised its right to require each holder of its 6 1/4%
Cumulative Guaranteed Monthly Income Convertible Preferred Shares ("Preferred
Shares") to exchange all Preferred Shares for shares of common stock of Pioneer
(see Note E of Notes to Consolidated Financial Statements included in "Item 1.
Financial Statements"). On July 28, 1997, Pioneer issued 6.7 million shares of
common stock in exchange for the 3,776,400 Preferred Shares outstanding. As a
result, Pioneer USA, as successor, will no longer incur interest expense
associated with the Preferred Shares of approximately $12 million per year.
Earnings per Share. In February 1997, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards No. 128
"Earnings per Share" ("SFAS 128") which simplifies the existing standards for
computing earnings per share ("EPS") and makes them comparable to international
standards. Pioneer USA does not anticipate that its EPS as calculated under SFAS
128 will differ significantly from its existing disclosures.
Reporting Comprehensive Income. In June 1997, the FASB issued Statement
of Financial Accounting Standards No. 130 "Reporting Comprehensive Income"
("SFAS 130") which establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. Specifically, SFAS 130 requires that an enterprise (i)
classify items of other comprehensive income by their nature in a financial
statement and (ii) display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of a statement of financial position. This statement is effective for
fiscal years beginning after December 15, 1997.
Comprehensive income consists of the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from nonowner sources. Specifically, this includes net income and other
comprehensive income, which is made up of certain changes in assets and
liabilities that are not reported in a statement of operations but are included
in the balances within a separate component of equity in a statement of
financial position. Such changes include, but are not limited to, unrealized
gains for marketable securities and future contracts, foreign currency
translation adjustments and minimum pension liability adjustments.
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PIONEER NATURAL RESOURCES USA, INC.
Segment Reporting. In June 1997, the FASB issued Statement of Financial
Accounting Standards No. 131 "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131") which establishes standards for public
business enterprises for reporting information about operating segments in
annual financial statements and requires that such enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. This statement also establishes standards for related disclosures
about products and services, geographic areas, and major customers. SFAS 131 is
effective for financial statements for periods beginning after December 15,
1997.
Results of Operations
A merger between two companies the size of Mesa and Parker & Parsley
requires certain financial reporting changes to conform the accounting policies
of the two companies to a consistent methodology. Two of these changes which are
apparent in the results of operations are the accounting treatment for natural
gas liquids revenues and the results of operations of the natural gas processing
facilities. See "Oil and Gas Revenues", "Production Costs" and "Natural Gas
Processing" below for further discussion.
Oil and Gas Production.
Three months ended Nine months ended
September 30, September 30,
--------------------- ---------------------
1997 1996 1997 1996
--------- --------- --------- ---------
(in thousands, except per unit amounts)
Revenues:
Oil and gas $ 150,354 $ 91,313 $ 348,980 $ 283,327
Gain on disposition of oil
and gas properties, net (a) (3) 186 1,068 7,939
-------- -------- -------- --------
150,351 91,499 350,048 291,266
-------- -------- -------- --------
Costs and expenses:
Oil and gas production (42,003) (24,829) (91,674) (82,233)
Depletion (65,132) (24,284) (121,302) (79,057)
Exploration and abandonments (8,442) (2,163) (20,073) (7,187)
Geological and geophysical (7,071) (1,600) (14,237) (6,451)
-------- -------- -------- --------
(122,648) (52,876) (247,286) (174,928)
-------- -------- -------- --=-----
Operating profit (excluding
general and administrative
expenses and income taxes) $ 27,703 $ 38,623 $ 102,762 $ 116,338
======== ======== ======== ========
- ---------------
(a) The 1997 amounts do not include the gain related to the disposition of
Pioneer's subsidiary which owned an interest in oil and gas properties in
Turkey. The 1996 amounts do not include the gain related to the disposition
of certain of Pioneer's wholly-owned Australasian subsidiaries.
Production:
Oil (MBbls) 3,672 2,577 9,425 8,297
Gas (MMcf) 32,327 18,630 71,284 56,825
Natural gas liquids (MBbls) 1,151 - 1,151 -
Total (MBOE) 10,211 5,682 22,457 17,768
Average daily production:
Oil (Bbls) 39,912 28,008 34,525 30,282
Gas (Mcf) 351,384 202,497 261,113 207,392
Natural gas liquids (Bbls) 12,506 - 4,214 -
Average oil price (per Bbl) $ 17.93 $ 20.34 $ 18.70 $ 19.62
Average gas price (per Mcf) 2.16 2.09 2.21 2.12
Average NGL price (per Bbl) 12.89 - 12.89 -
Costs (per BOE):
Lease operating expense $ 3.11 $ 3.32 $ 2.94 $ 3.51
Production taxes $ .78 $ .91 $ .85 $ .83
Workover costs $ .22 $ .14 $ .29 $ .29
-------- -------- -------- --------
Total production costs $ 4.11 $ 4.37 $ 4.08 $ 4.63
======== ======== ======== ========
Depletion $ 6.38 $ 4.27 $ 5.40 $ 4.45
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PIONEER NATURAL RESOURCES USA, INC.
Oil and Gas Revenues. Revenues from oil and gas operations increased 23%
during the nine months ended September 30, 1997 to $349 million and 65% to
$150.4 million during the three months ended September 30, 1997, as compared to
$283.3 million and $91.3 million during the same periods in 1996. The increase
during the three and nine months ended September 30, 1997 is primarily due to
increases in oil and gas production and an increase in the average gas price
received, offset by a decrease in the average price received per barrel of oil.
The majority of the increased production is a direct result of the oil and gas
properties acquired from Mesa.
Parker & Parsley historically accounted for processed natural gas
production as wellhead production on a wet gas basis while Mesa accounted for
processed natural gas production in two components: natural gas liquids and dry
residue gas. The combined entities own three major gas processing facilities,
and the majority of the gas processed by these facilities is owned by Pioneer
USA and produced by Pioneer USA operated properties. Consequently, Pioneer USA
now produces a higher proportion of processed gas relative to total natural gas
production and will account for natural gas production as processed natural gas
liquids and dry residue gas. As a result, separate product volumes will not be
comparable for periods prior to September 30, 1997.
On a BOE basis, production increased by 80% and 26% for the three and
nine months ended September 30, 1997, as compared to the same periods in 1996.
The additional production volumes from the Mesa properties contributed 71% and
22% to the growth for the three and nine months ended September 30, 1997,
respectively. The remainder of the increases are a direct result of the
successes of Pioneer USA's exploration and exploitation efforts. Such production
growth becomes particularly evident in light of the fact that a portion of the
average daily oil and gas production for the first nine months of 1996 related
to properties included in the 1996 sale of Pioneer's Australasian subsidiaries
and the 1996 sale of certain nonstrategic domestic assets. Excluding production
associated with assets sold during 1996 and the Mesa properties acquired in
1997, on a BOE basis, production increased 10% and 13% for the three and nine
months ended September 30, 1997 as compared to the same periods in 1996.
The average oil prices received per Bbl for the three and nine months
ended September 30, 1997 decreased 12% and 5% as compared to the same periods in
1996, respectively, from $20.34 during the three months ended September 30, 1996
to $17.93 during the same period ended 1997 and from $19.62 to $18.70 for the
nine months ended September 30, 1996 and 1997, respectively. However, the
average gas price received per Mcf increased 3% during the three months ended
September 30, 1997 to $2.16 from $2.09 during the three months ended September
30, 1996 and 4% from $2.12 to $2.21 for the nine months ended September 30, 1996
and 1997, respectively. Natural gas liquids prices per barrel averaged $12.89
during the three and nine months ended September 30, 1997.
Hedging Activities
The oil and gas prices that Pioneer USA reports are based on the market
price received for the commodities adjusted by the results of Pioneer USA's
hedging activities. Pioneer USA utilizes commodity derivative contracts (swaps,
futures and options) in order to (i) reduce the effect of the volatility of
price changes on the commodities Pioneer USA produces and sells, (ii) support
Pioneer USA's annual capital budgeting and expenditure plans and (iii) lock in
prices to protect the economics related to certain capital projects.
Crude Oil. All material purchase contracts governing Pioneer USA's oil
production are tied directly or indirectly to NYMEX prices. The average oil
price per Bbl that Pioneer USA reports includes the effects of oil quality,
gathering and transportation costs and the net effect of the oil hedges. Pioneer
USA's average realized price for physical oil sales (excluding hedge results)
for the three and nine months ended September 30, 1997 was $18.03 per Bbl and
$19.37 per Bbl, respectively, while, as a point of reference, the comparable
average NYMEX prompt month closing per Bbl for the same periods was $19.79 and
$20.83, respectively. Pioneer USA recorded net reductions to oil revenues of
$351 thousand and $6.3 million for the three and nine months ended September 30,
1997, respectively, as a result of its oil price hedges.
During the three and nine months ended September 30, 1996, Pioneer USA
realized an average price for physical oil sales (excluding hedge results) of
$21.63 per Bbl and $20.39 per Bbl, respectively, while, as a point of reference,
the comparable average NYMEX prompt month closing per Bbl for the same periods
was $22.33 and $21.18, respectively. Pioneer USA recorded net reductions to
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PIONEER NATURAL RESOURCES USA, INC.
oil revenues of $3.3 million and $6.4 million for the three and nine months
ended September 30, 1996, respectively, as a result of its oil price hedges.
Natural Gas. Pioneer USA employs a policy of hedging gas production
based on the index price upon which the gas is actually sold in order to
mitigate the basis risk between NYMEX prices and actual index prices. The
average gas price per Mcf that Pioneer USA reports includes the effects of Btu
content, gathering and transportation costs, gas processing and shrinkage and
the net effect of the gas hedges. Pioneer USA's average realized price for
physical gas sales (excluding hedge results) for the three and nine months ended
September 30, 1997 was $2.22 per Mcf and $2.32 per Mcf, respectively, while as a
point of reference, the comparable average NYMEX prompt month closing per Mcf
for the same periods was $2.49 and $2.33, respectively. Pioneer USA recorded net
reductions to gas revenues of $1.8 million and $7.9 million for the three and
nine months ended September 30, 1997, respectively, as a result of its gas price
hedges.
During the three and nine months ended September 30, 1996, Pioneer USA
realized an average price for physical gas sales (excluding hedge results) of
$2.12 per Mcf and $2.19 per Mcf, respectively, while as a point of reference,
the comparable average NYMEX prompt month closing per Mcf for the same periods
was $2.17 and $2.33, respectively. Pioneer USA recorded net reductions to gas
revenues of $621 thousand and $3.7 million for the three and nine months ended
September 30, 1996, respectively, as a result of its gas price hedges.
Natural Gas Liquids. Pioneer USA employs a policy of hedging natural gas
liquids based on actual product prices in order to mitigate some of the
volatility associated with NYMEX pricing. Natural gas liquids are sold under
long-term contracts which provide price flexibility and allow the company to
maximize prices between trading hubs. During the three and nine months ended
September 30, 1997, Pioneer USA realized an average natural gas liquids price
for physical sales (excluding hedge results) of $12.78 per Bbl and recorded a
net increase to natural gas liquids revenue of $124 thousand.
See Note G of Notes to Consolidated Financial Statements included in
"Item 1. Financial Statements" for information concerning Pioneer USA's open
hedge positions at September 30, 1997 and the related prices to be realized.
During December 1996, Mesa entered into BTU swap agreements that cover
13,036 MMBTU per day from January 1, 1997 through December 31, 2004. The
agreements require that from January 1, 1997 through December 31, 1998, Pioneer
USA will receive a premium of $.52 per MMBTU over market natural gas prices.
During the six year period of January 1, 1999 through December 31, 2004, Pioneer
USA will receive 10% of the NYMEX oil price for the volumes covered. On
September 30, 1997, Pioneer USA recorded a mark-to-market adjustment to the
carrying value of the BTU swap agreements that resulted in the recognition of a
$2.1 million noncash pre-tax charge to the results of the third quarter of 1997.
These contracts will continue to be marked-to-market at the end of each
reporting period during their respective lives and the effects on Pioneer USA's
results of operations in future periods could be significant.
Production Costs. While total production costs per BOE decreased 12% to
$4.08 during the nine months ended September 30, 1997 as compared to production
costs per BOE of $4.63 during the same period in 1996, the primary component of
production costs, lease operating expense, decreased 16% from $3.51 per BOE for
the nine months ended September 30, 1996 to $2.94 per BOE for the same period in
1997. During the three months ended September 30, 1997 production costs per BOE
decreased 6% to $4.11 from $4.37 during the same period in 1996. As discussed
more fully in "Natural Gas Processing" below, Pioneer USA has adopted a new
method of reporting the financial results of its natural gas processing
facilities and is now presenting these results as oil and gas production
activities. In 1997, the operating margin from Pioneer USA's gas plants (i.e.,
third party processing revenues less processing costs and expenses) is included
in oil and gas production costs, specifically lease operating expense, which
resulted in a decrease in lease operating expense per BOE of $.26 and $.37 for
the three and nine months ended September 30, 1997, respectively. The additional
reductions in lease operating expense during the nine months ended September 30,
1997 are primarily due to Pioneer USA's concentrated efforts to evaluate and
reduce all operating costs and the sale of certain high operating cost
properties during 1996.
Depletion Expense. Depletion expense per BOE increased to $6.38 and
$5.40 during the three and nine months ended September 30, 1997, respectively,
as compared to $4.27 per BOE and $4.45 per BOE during the same periods in 1996.
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PIONEER NATURAL RESOURCES USA, INC.
The increase is primarily associated with the fair value allocated to Mesa's
long-lived, low cost natural gas reserves.
Exploration and Abandonments/Geological and Geophysical Costs.
Exploration and abandonments/geological and geophysical costs increased to $15.5
million and $34.3 million during the three and nine months ended September 30,
1997, respectively, from $3.8 million and $13.6 million during the same
respective periods in 1996. The increase is largely the result of increased
domestic activity, both in exploratory drilling and geological and geophysical
activity, resulting from Pioneer USA's increased exploration activities. During
the nine months ended September 30, 1997, the domestic exploratory dry hole
costs were primarily related to 16 unsuccessful exploratory wells in the Gulf
Coast Division, 12 unsuccessful exploratory wells in the Permian Division and
seven unsuccessful wells in the MidContinent Division, at a total cost of $11.7
million, $2.2 million and $2.2 million, respectively, and additional costs of
approximately $830 thousand associated with wells which were determined to be
unsuccessful in 1996. The following table sets forth the components of Pioneer
USA's 1997 and 1996 expense for the three and nine months ended September 30,
1997:
Three months Nine months
ended September 30, ended September 30,
------------------- -------------------
1997 1996 1997 1996
-------- -------- -------- --------
(in thousands)
Exploratory dry holes:
United States $ 7,184 $ 1,012 $ 16,885 $ 1,736
Foreign 34 201 253 781
Geological and geophysical costs:
United States 5,900 1,413 11,690 4,712
Foreign 1,171 187 2,547 1,739
Leasehold abandonments and other 1,224 950 2,935 4,670
------- ------- ------- -------
$ 15,513 $ 3,763 $ 34,310 $ 13,638
======= ======= ======= =======
Approximately 16% of Pioneer USA's 1997 capital budget will be spent on
exploratory projects (compared to 16.7% in 1996 and 13.3% in 1995). The
remainder of Pioneer USA's 1997 exploration efforts will be concentrated in the
Gulf Coast Division, the Permian Division, the MidContinent Division, Pioneer
USA's newly acquired interests in the Cotton Valley Reef Trend and its interests
in Guatemala. Pioneer USA continues to review opportunities involving
exploration joint ventures in domestic or international areas outside Pioneer
USA's existing core operating areas.
Natural Gas Processing
Pioneer USA historically has reflected its ownership interests in and
revenues and expenses related to its natural gas processing facilities as
separate items in the consolidated financial statements while Mesa reported
revenues and expenses from its natural gas processing facilities as oil and gas
production costs. During the last four years, Pioneer USA has sold its interests
in 12 natural gas processing facilities and now owns interests in five
facilities which collectively process an insignificant volume of third party
gas. The ownership interest in the remaining gas plant facilities and the
related results of operations are not material to Pioneer USA's financial
position. Due to the immateriality of the remaining facilities and to report the
results of gas processing activities consistently within the financial
statements, during 1997, Pioneer USA reclassified the natural gas processing
facilities into oil and gas properties for financial statement purposes and will
report all third party revenues and expenses from its natural gas processing
facilities in oil and gas production costs.
Natural gas processing revenues were $5.7 million and $16.8 million for
the three and nine months ended September 30, 1996, respectively, and natural
gas processing costs for the three and nine months ended September 30, 1996 were
$3.1 million and $9.1 million, respectively. The average price per Bbl of NGL's
was $14.79 per Bbl and $13.77 per Bbl for the three and nine months ended
September 30, 1996, respectively, and the average price per Mcf of residue gas
was $2.03 and $2.02 during the three and nine months ended September 30, 1996,
respectively.
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PIONEER NATURAL RESOURCES USA, INC.
During the nine months ended September 30, 1996, Pioneer USA recognized
noncash pre-tax charges of $1.3 million related to abandonments of certain of
Pioneer USA's gas processing facilities and the cancellation of certain gas
processing contracts.
General and Administrative Expense
General and administrative expense was $16.7 million and $31.6 million
for the three and nine months ended September 30, 1997, respectively, as
compared to $6.4 million and $19.4 million for the three and nine months ended
September 30, 1996, respectively. Aside from the additional costs resulting from
Pioneer USA's substantial growth in size, the increase for both periods is
primarily due to $4.3 million of relocation expenses in the third quarter of
1997 associated with moving Pioneer's corporate headquarters from Midland, Texas
to Dallas, Texas.
Interest Expense
During the three months ended September 30, 1997, interest expense
totaled $24.1 million, up from $10.1 million for the third quarter of 1996.
Interest expense for the nine months ended September 30, 1997 increased to $44.3
million as compared to $36.1 million for the same period in 1996. The increases
are primarily due to increases in the weighted average outstanding balance of
Pioneer USA's indebtedness of $654.5 million and $118.8 million for the three
and nine months ended September 30, 1997, respectively, as compared to the same
periods in 1996. The increases in Pioneer USA's weighted average indebtedness
were primarily the result of the debt instruments assumed from Mesa, including
10 5/8% and 11 5/8% senior subordinated note issuances and additional bank
indebtedness, which are included in Pioneer USA' indebtedness for the two months
of August and September 1997. The weighted average interest rate on Pioneer
USA's indebtedness during the three months ended September 30, 1997 was 8.22% as
compared to the rate of 7.86% for the same period in 1996, and the rate for the
nine months ended September 30, 1997 was 8.05% as compared to 7.82% for the same
period in 1996.
During the three and nine months ended September 30, 1997, Pioneer USA
recorded a reduction in interest expense of $5 thousand and $705 thousand,
respectively, related to interest rate swap agreements. During the same periods
in 1996, such agreements resulted in reductions in interest expense of $350
thousand and $461 thousand, respectively. See Note G of Notes to Consolidated
Financial Statements included in "Item 1. Financial Statements" for information
concerning the fixed and variable interest rates in effect during these periods.
Income Taxes
Pioneer USA's income tax benefit of $6 million and provision of $8.5
million for the three and nine months ended September 30, 1997, respectively,
and provisions of $15.5 and $47.2 million for the three and nine months ended
September 30, 1996, respectively, reflect the net benefit or provision resulting
from the separate tax calculation prepared for each tax jurisdiction in which
Pioneer USA is subject to income taxes.
Capital Commitments, Capital Resources and Liquidity
Capital Commitments. Pioneer USA's primary needs for cash are for
exploration, development and acquisitions of oil and gas properties, repayment
of principal and interest on outstanding indebtedness and working capital
obligations.
Pioneer USA's cash expenditures during the nine months ended September
30, 1997 for additions to oil and gas properties totaled $246.6 million. This
amount includes $36.5 million for the acquisition of properties and $210.1
million for development and exploratory drilling. Pioneer USA's acquisition
activities during the nine months ended September 30, 1997 primarily consisted
of (i) a 35% interest in approximately 375,000 acres within the Cotton Valley
Reef Trend acquired from UPRC for $26.9 million funded by $11.1 million in cash
and a note payable to UPRC of $15.8 million and (ii) an 87% average working
interest acquired in the Maude Traylor field in Calhoun County, Texas for
approximately $8.8 million. Significant drilling expenditures in the nine months
ended September 30, 1997 included $77.8 million in the unitized portion of the
Spraberry field of the Permian Basin (including $35.5 million in the Driver
unit, $12.0 million in the North Pembrook unit, $10.3 million in the Merchant
unit, $9.4 million in the Preston unit, $7.3 million in the Shackelford unit and
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PIONEER NATURAL RESOURCES USA, INC.
$3.3 million in the Midkiff unit), $11.7 million in other portions of the
Spraberry field, $50.3 million in the onshore Gulf Coast region, $33.8 million
in other areas of the Permian Basin, $22.3 million in the MidContinent region,
$6.8 million in the acquired Mesa properties and $7.4 million internationally in
Argentina and Guatemala.
Pioneer USA's 1997 capital expenditure budget has been increased to $541
million from its initial budget of $270 million, reflecting planned expenditures
of $240 million for exploitation activities, $89 million for exploration
activities and $212 million for oil and gas property acquisitions in Pioneer
USA's core areas. The significant increase in the capital expenditure budget is
indicative of the increased exploration, exploitation and acquisition
opportunities available to Pioneer USA. Funding for Pioneer USA's capital
expenditure budget will be primarily provided by cash flows generated by
operating activities and by proceeds resulting from Pioneer USA's ongoing
divestiture program for nonstrategic assets. In addition, Pioneer USA may borrow
funds under its $1.4 billion bank facility in order to fund these commitments to
the extent that they exceed such internally-generated cash flows.
Funding for Pioneer USA's working capital obligations is provided by
internally-generated cash flows. Funding for the repayment of principal and
interest on outstanding debt may be provided by any combination of
internally-generated cash flows, proceeds from the disposition of nonstrategic
assets or alternative financing sources as discussed in "Capital Resources"
below.
Capital Resources. Pioneer USA's primary capital resources are net cash
provided by operating activities, proceeds from financing activities and
proceeds from sales of nonstrategic assets. Pioneer USA expects that these
resources will be sufficient to fund its capital commitments in 1997.
Operating Activities. Net cash provided by operating activities was
$185.3 million during the nine months ended September 30, 1997, as compared to
net cash provided by operating activities of $189.4 million for the same period
in 1996. The decrease is primarily attributable to increases in interest and
general and administrative expenses and the payment of certain liabilities
assumed from Mesa, including severance payments made to former Mesa employees,
offset, to some extent, by cash flows generated by the acquired oil and gas
properties from Mesa.
Financing Activities. As described more fully in Note D of Notes to
Consolidated Financial Statements included in "Item 1. Financial Statements", on
August 7, 1997, Pioneer USA entered into two credit facility agreements with a
syndicate of banks which provide for a total bank credit facility of $1.4
billion. Pioneer USA had an outstanding balance under its bank facility at
September 30, 1997 of $743.6 million (including outstanding, undrawn letters of
credit of $30.6 million), leaving approximately $656.4 million of unused
borrowing base immediately available. At September 30, 1997, Pioneer USA has
four other outstanding debt issuances. Such debt issuances consist of (i) $150
million aggregate principal amount of 8 7/8% senior notes issued by Parker &
Parsley in 1995 and due in 2005 (carrying value of $150.0 million), (ii) $150
million aggregate principal amount of 8 1/4% senior notes issued by Parker &
Parsley in 1995 and due in 2007 (carrying value of $149.3 million), (iii) $325
million aggregate principal amount of 10 5/8% senior subordinated notes issued
by Mesa in 1996 and due 2006 (carrying value of $369.6 million) and (iv) $264
million aggregate principal amount of 11 5/8% senior subordinated discount notes
issued by Mesa in 1996 and due 2006 (carrying value of $209.5 million). The
weighted average interest rate for the nine months ended September 30, 1997 on
Pioneer USA's total indebtedness was 8.05% as compared to 7.82% for the nine
months ended September 30, 1996 (taking into account the effect of interest rate
swaps).
Pioneer USA continues to review its capital structure and assess its
options with regard to the various debt instruments currently in its capital
structure. Options available to Pioneer USA include leaving the existing debt
instruments in place, refinancing with a similar debt instrument with a current
market rate, prepayments as allowed by the agreement governing such instruments,
refinancing with debt instruments unlike the instrument being retired and other
options as either specified or allowed by the agreements or indentures governing
the respective obligations. Pioneer USA anticipates beginning the process of
refinancing certain of its debt instruments during the fourth quarter of 1997.
On November 14, 1997, Pioneer USA initiated an offer to purchase for
cash (the "Offer") any and all of its 11 5/8% senior subordinated discount notes
due 2006 (the "11 5/8% Notes"), and its 10 5/8% senior subordinated notes due
2006 (the "10 5/8% Notes" and together with the 11 5/8% Notes, the "Notes"). The
purchase price offered by Pioneer USA for the 11 5/8% Notes and the 10 5/8%
26
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PIONEER NATURAL RESOURCES USA, INC.
Notes is, respectively, $829.90 and $1,171.40 per $1,000 face amount tendered,
plus any interest on the 10 5/8% Notes accrued from July 1, 1997 to the
expiration date of the Offer. Pioneer USA intends to pay for the purchase price
of the Notes tendered in the Offer with borrowings under its Credit Facility
Agreements. There are currently outstanding $264 million aggregate face amount
of the 11 5/8% Notes (having an aggregate accreted value of $168 million as of
July 1, 1997), and $325 million aggregate principal amount of the 10 5/8% Notes.
In connection with the Offer, Pioneer USA is soliciting consents from
holders of record of the Notes at the close of business on November 14, 1997, to
approve amendments to the respective indentures governing the Notes which would
eliminate or modify most of the restrictive covenants contained in the
indentures. Such amendments would become effective upon the closing of the
Offer. A holder of more than 66 2/3% in aggregate principal amount of each
outstanding issue of the Notes has agreed to consent to the proposed amendments,
thereby assuring that the proposed amendments would become effective if the
Offer is completed.
The Offer is expected to expire on December 15, 1997, and the closing of
the Offer is expected to occur three business days after the expiration date. If
the Offer is completed with 100% of the Notes tendered, Pioneer USA expects to
take a charge to its fourth quarter 1997 financial results of $12 million to $15
million (net of tax benefit).
Sales of Nonstrategic Assets. During the nine months ended September 30,
1997 and 1996, proceeds from the sale of domestic nonstrategic assets totaled
$12.8 million and $51.2 million, respectively. In addition, during the nine
months ended September 30, 1996, Pioneer sold certain Australasian subsidiaries
resulting in cash proceeds of $183.1 million. The proceeds from these sales were
utilized to reduce Pioneer USA's outstanding bank indebtedness and for general
working capital purposes. Pioneer USA anticipates that it will continue to sell
nonstrategic properties from time to time to increase capital resources
available for other activities and to achieve administrative efficiencies.
During the fourth quarter of 1997, Pioneer USA anticipates selling
certain nonstrategic oil and gas properties for approximately $100 million.
Liquidity. At September 30, 1997, Pioneer USA had $40.6 million of cash
and cash equivalents on hand, compared to $18.7 million at December 31, 1996.
Pioneer USA's ratio of current assets to current liabilities was 1.30 at
September 30, 1997 and 1.29 at December 31, 1996.
- ---------------
(1) The information in this document includes forward-looking statements that
are based on assumptions that in the future may prove not to have been
accurate. Those statements, and Pioneer USA's business and prospects, are
subject to a number of risks including the volatility of oil and gas
prices, environmental risks, operating hazards and risks, risks associated
with natural gas processing plants, risks related to exploration and
development drilling, uncertainties about estimates of reserves,
competition, government regulation, and the ability of Pioneer USA to
implement its business strategy. These and other risks are described in
Parker & Parsley's 1996 Annual Report on Form 10-K which is available from
the United States Securities and Exchange Commission.
27
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PIONEER NATURAL RESOURCES USA, INC.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Pioneer USA is party to various legal proceedings, which are described under
"Legal Actions" in Note F of Notes to Consolidated Financial Statements included
in "Item 1. Financial Statements". Pioneer USA is also party to other litigation
incidental to its business. The claims for damages from such other legal actions
are not in excess of 10% of Pioneer USA's current assets and Pioneer USA
believes none of these actions to be material.
Item 6. Exhibits and Reports on Form 8-K
Exhibits
3.1* Restated Certificate of Incorporation of Pioneer Natural Resources
USA, Inc.
3.2* Amended and Restated Bylaws of Pioneer Natural Resources USA, Inc.
27.* Financial Data Schedule.
* filed herewith
Reports on Form 8-K
None.
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PIONEER NATURAL RESOURCES USA, INC.
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 thereto duly authorized.
PIONEER NATURAL RESOURCES USA, INC.
Date: November 14, 1997 By: /s/ Rich Dealy
-----------------------------------
Rich Dealy
Vice President, Controller
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PIONEER NATURAL RESOURCES USA, INC.
Exhibit Index Page
3.1* Restated Certificate of Incorporation of Pioneer Natural
Resources USA, Inc.
3.2* Amended and Restated Bylaws of Pioneer Natural Resources
USA, Inc.
27.* Financial Data Schedule.
* filed herewith
30
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EXHIBIT 3.1
RESTATED CERTIFICATE OF INCORPORATION
of
PIONEER NATURAL RESOURCES USA, INC.
Pioneer Natural Resources USA, Inc., a Delaware corporation (the
"Corporation"), pursuant to the provisions of Section 245 of the Delaware
General Corporation Law, hereby adopts this Restated Certificate of
Incorporation (this "Restated Certificate of Incorporation"), which only
restates and integrates, but does not further amend, the provisions of the
Corporation's Certificate of Incorporation as theretofore amended or
supplemented. There is no discrepancy between those provisions and the
provisions of this Restated Certificate of Incorporation. The Corporation was
originally incorporated under the name "Mesa Sub 1, Inc." , and its original
Certificate of Incorporation was filed with the Delaware Secretary of State on
December 30, 1993. This Restated Certificate of Incorporation was duly adopted
in accordance with Section 245 of the Delaware General Corporation Law.
FIRST: The name of the corporation is Pioneer Natural Resources USA, Inc.
(the "Corporation").
SECOND: The address of the registered office of the Corporation in the
State of Delaware is 1209 Orange Street, Wilmington, county of New Castle,
Delaware 19801. The name of the registered agent of the Corporation at such
address is The Corporation Trust Company.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware (the "General Corporation Law").
FOURTH: The total number of shares of stock which the Corporation shall
have the authority to issue is 1,000 shares of common stock, par value $.01 per
share ("Common Stock").
In the event of a voluntary or involuntary liquidation, dissolution or
winding up of the affairs of the Corporation and upon any distribution of the
assets of the Corporation in connection therewith, the holders of Common Stock
shall be entitled to receive all the assets of the Corporation, tangible and
intangible, of whatever kind available for distribution to stockholders, ratably
in proportion to the number of shares of Common Stock held by them.
Each holder of Common Stock shall have one vote in respect of each share of
Common Stock held by such holder on any matter submitted to the stockholders.
Cumulative voting of shares of Common Stock is prohibited.
FIFTH: The business and affairs of the Corporation shall be managed by or
under the direction of the Board of Directors. In furtherance and not in
limitation of the powers conferred by statute, the Board of Directors is
expressly authorized to adopt, amend or repeal the Bylaws of the Corporation;
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provided, however, that the grant of such authority shall not divest the
stockholders of the power, nor limit their power to adopt, amend or repeal the
Bylaws. The number of directors that shall constitute the whole Board of
Directors of the Corporation shall be as from time to time fixed by, or in the
manner provided in, the Bylaws of the Corporation. The election of directors
need not be by written ballot, unless the Bylaws so provide. In addition to the
authority and powers hereinabove or by statute conferred upon the directors, the
directors are hereby authorized and empowered to exercise all such powers and do
all such acts and things as may be exercised or done by the Corporation, subject
to the provisions of the General Corporation Law, this Certificate of
Incorporation and any Bylaws adopted by the stockholders of the Corporation;
provided, however, that no Bylaws hereafter adopted by the stockholders of the
Corporation shall invalidate any prior act of the directors that would have been
valid if such Bylaws had not been adopted.
SIXTH: No director of the Corporation shall be personally liable to the
Corporation or any of its stockholders for monetary damages for breach of
fiduciary duty as a director involving any act or omission of any such director;
provided, however, that the foregoing provision shall not eliminate or limit the
liability of a director (a) for any breach of the director's duty of loyalty to
the Corporation or its stockholders, (b) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, (c) under
Section 174 of the General Corporation Law, as the same exists or hereafter may
be amended, or (d) for any transaction from which the director derived an
improper personal benefit. If the General Corporation Law is amended after the
date of filing of this Certificate of Incorporation to authorize corporate
action further limiting or eliminating the personal liability of directors, then
the liability of a director of the Corporation, in addition to the limitation on
personal liability provided for herein, shall be limited to the fullest extent
permitted by the General Corporation Law as so amended. Any repeal or
modification of this Article Sixth by the stockholders of the Corporation shall
be prospective only, and shall not adversely affect any limitation on the
personal liability of a director of the Corporation existing at the time of such
repeal or modification.
SEVENTH: The Corporation expressly elects not to be governed by Section 203
of the General Corporation Law, as the same exists or hereafter may be amended.
IN WITNESS WHEREOF, the Corporation has caused this Restated Certificate of
Incorporation to be signed by its authorized officer as of November 10, 1997.
PIONEER NATURAL RESOURCES USA, INC.
By: /s/ Garrett Smith
-------------------------------
M. Garrett Smith,
Senior Vice President - Finance
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<PAGE>
EXHIBIT 3.2
AMENDED AND RESTATED BYLAWS
OF
PIONEER NATURAL RESOURCES USA, INC.
ARTICLE I
MEETINGS OF STOCKHOLDERS
SECTION 1. Place of Meetings. All meetings of stockholders of Pioneer
Natural Resources USA, Inc. (the "Corporation") shall be held at such place,
either within or without the State of Delaware, as shall be designated from time
to time by the Board of Directors.
SECTION 2. Annual Meeting. An annual meeting of stockholders shall be held
for the election of directors on such date in each year and at such time as
shall be designated by the Board of Directors. At such annual meeting the
stockholders shall elect by a plurality vote a Board of Directors, and transact
such other business as may properly be brought before the meeting. A failure to
hold the annual meeting at the designated time or to elect a sufficient number
of directors to conduct the business of the Corporation shall not affect
otherwise valid corporate acts or work a forfeiture or dissolution of the
Corporation, except as may be otherwise specifically provided by law. If the
annual meeting for election of directors is not held on the date designated
therefor, the directors shall cause the meeting to be held as soon thereafter as
convenient. Written notice of the annual meeting stating the place, date and
hour of the meeting shall be given not less than ten nor more than sixty days
before the date of the meeting to each stockholder entitled to vote at such
meeting. If mailed, notice is given when deposited in the United States mail,
postage prepaid, directed to the stockholder at his address as it appears on the
records of the Corporation.
SECTION 3. Special Meeting. Unless otherwise prescribed by law or by the
Certificate of Incorporation, a special meeting of the stockholders, for any
purpose or purposes, may be called by either (i) the Chairman, if there be one,
or (ii) the President, (iii) any Vice President, if there be one, (iv) the
Secretary, or (v) any Assistant Secretary, if there be one, and shall be called
by any such officer at the request in writing of a majority of the Board of
Directors. Any such request shall state the purpose or purposes of the proposed
meeting. Written notice of a special meeting stating the place, date and hour of
the meeting and the purpose or purposes for which the meeting is called shall be
given not less than ten nor more than sixty days before the date of the meeting
to each stockholder entitled to vote at such meeting. If mailed, notice is given
when deposited in the United States mail, postage prepaid, directed to the
stockholder at his address as it appears on the records of the Corporation.
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<PAGE>
SECTION 4. Quorum and Adjournment. Except as otherwise provided by law, the
Certificate of Incorporation or these Bylaws, the presence, in person or
represented by proxy, of the holders of a majority of the voting power of the
shares of capital stock of the Corporation entitled to vote on any matter shall
constitute a quorum for the purpose of considering such matter at a meeting of
the stockholders. If a meeting of stockholders cannot be organized because a
quorum has not attended, the stockholders entitled to vote thereat, present in
person or represented by proxy, shall have the power to adjourn the meeting from
time to time, without notice other than announcement at the meeting at which the
adjournment is taken of the time and place of the adjourned meeting, until a
quorum shall be present or represented. When a meeting is adjourned to another
time or place, notice need not be given of the adjourned meeting if the time and
place thereof are announced at the meeting at which the adjournment is taken. At
the adjourned meeting at which a quorum shall be present or represented, the
Corporation may transact any business which might have been transacted at the
original meeting. If the adjournment is for more than thirty days, or if after
the adjournment a new record date is fixed for the adjourned meeting, a notice
of the adjourned meeting shall be given to each stockholder of record entitled
to vote at the meeting.
SECTION 5. Conduct of Meetings of Stockholders. At each meeting of the
stockholders, the President, or, in his absence, a chairman chosen by a majority
vote of the stockholders present in person or represented by proxy and entitled
to vote thereat, shall preside and act as chairman of the meeting. The Secretary
or, in his absence, an Assistant Secretary, or, in the absence of the Secretary
and all Assistant Secretaries, a person whom the chairman of such meeting shall
appoint, shall act as secretary of such meeting and keep the minutes thereof.
The Board of Directors may adopt such rules and regulations as it determines are
reasonably necessary or appropriate in connection with the organization and
conduct of any meeting of the stockholders.
SECTION 6. Vote Required. Except as otherwise provided by law, the
Certificate of Incorporation or these Bylaws and in all matters other than the
election of directors, the affirmative vote of the holders of a majority of the
shares present in person or represented by proxy at the meeting and entitled to
vote on the subject matter shall be the act of the stockholders. Directors of
the Corporation shall be elected by a plurality of the votes of the shares
present in person or represented by proxy at the meeting and entitled to vote on
the election of directors.
SECTION 7. Proxies. Each stockholder entitled to vote at a meeting of
stockholders or to express consent or dissent to corporate action in writing
without a meeting may authorize another person or persons to act for him by
proxy, but no such proxy shall be voted or acted upon after three years from its
date, unless the proxy provides for a longer period. A duly executed proxy shall
be irrevocable if it states that it is irrevocable and if, and only as long as,
it is coupled with an interest sufficient in law to support an irrevocable
power. A proxy may be made irrevocable regardless of whether the interest with
which it is coupled is an interest in the stock itself or an interest in the
Corporation generally.
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<PAGE>
SECTION 8. Stockholder List. The officer who has charge of the stock ledger
of the Corporation shall prepare and make, at least ten days before every
meeting of stockholders, a complete list of the stockholders entitled to vote at
the meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept open at the time and place of the
meeting during the whole time thereof, and may be inspected by any stockholder
who is present. In lieu of making and producing such list, the Corporation may
make the information therein available by any other means permitted by law.
SECTION 9. Stock Ledger. The stock ledger shall be the only evidence as to
who are the stockholders entitled to examine the stock ledger, the list required
by Section 8 of this Article or the books of the Corporation, or to vote in
person or by proxy at any meeting of stockholders.
SECTION 10. Action by Written Consent. Unless otherwise provided in the
Certificate of Incorporation, any action required to be taken at any annual or
special meeting of stockholders of the Corporation, or any action which may be
taken at any annual or special meeting of stockholders of the Corporation, may
be taken without a meeting, without prior notice and without a vote, if a
consent or consents in writing, setting forth the action so taken, shall be
signed by the holders of outstanding stock having not less than the minimum
number of votes that would be necessary to authorize or take such action at a
meeting at which all shares entitled to vote thereon were present and voted and
shall be delivered to the Corporation to its registered office in the State of
Delaware, its principal place of business, or an officer or agent of the
Corporation having custody of the book in which proceedings of meetings of
stockholders are recorded. Delivery made to the Corporation's registered office
shall be by hand or by certified or registered mail, return receipt requested.
Every written consent shall bear the date of signature of each stockholder who
signs the consent and no written consent shall be effective to take the
corporate action referred to therein unless, within sixty days of the earliest
dated consent delivered in the manner required by this Section 10 to the
Corporation, written consents signed by a sufficient number of holders to take
action are delivered to the Corporation by delivery to its registered office in
the State of Delaware, its principal place of business, or an officer or agent
of the Corporation having custody of the book in which proceedings of meetings
of stockholders are recorded. Prompt notice of the taking of the corporate
action without a meeting by less than unanimous written consent shall be given
to those stockholders who have not consented in writing.
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<PAGE>
ARTICLE II
DIRECTORS
SECTION 1. Board of Directors. The business and affairs of the Corporation
shall be managed by or under the direction of the Board of Directors. The number
of directors that shall constitute the whole Board of Directors of the
Corporation shall be fixed by the affirmative vote of a majority of the members
at any time constituting the Board of Directors, and such number may be
increased or decreased from time to time; provided, however, that no such
decrease shall have the effect of shortening the term of any incumbent director.
Except as provided in Section 2 of this Article, directors shall be elected by a
plurality of the votes cast at the annual meetings of stockholders, and each
director so elected shall hold office until the next annual meeting of
stockholders and until his successor is duly elected and qualified or until the
earliest of his death, resignation or removal. Directors need not be
stockholders.
SECTION 2. Vacancies and Newly Created Directorships. Vacancies and newly
created directorships resulting from any increase in the authorized number of
directors elected by all of the stockholders having the right to vote as a
single class may be filled by a majority of the directors then in office,
although less than a quorum, or by a sole remaining director. Whenever the
holders of any class or classes of stock or series thereof are entitled to elect
one or more directors by the Certificate of Incorporation, vacancies and newly
created directorships of such class or classes or series may be filled by a
majority of the directors elected by such class or classes or series thereof
then in office, or by a sole remaining director so elected. If at any time, by
reason of death, resignation, removal or other cause, there are no directors in
office, then an election of directors may be held in the manner provided by the
General Corporation Law of the State of Delaware (the "General Corporation
Law"). When one or more directors shall resign from the Board, effective at a
future date, a majority of the directors then in office, including those who
have so resigned, shall have power to fill such vacancy or vacancies, the vote
thereon to take effect when such resignation or resignations shall become
effective, and each director so chosen shall hold office as provided in this
Section 2 in the filling of other vacancies.
SECTION 3. Removal. Any director or the entire Board of Directors of the
Corporation may be removed, with or without cause, by the holders of a majority
of the shares then entitled to vote at the election of directors; provided,
however, that whenever the holders of any class or series of capital stock of
the Corporation are entitled to elect one or more directors by the provisions of
the Certificate of Incorporation, the provisions of this Section 3 shall apply,
in respect of the removal without cause of a director or directors so elected,
to the vote of the holders of the outstanding shares of such class or series of
capital stock and not to the vote of the outstanding shares as a whole.
SECTION 4. Resignation. Any director of the Corporation may resign at any
time by giving written notice of his resignation to the President or the
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<PAGE>
Secretary. Such resignation shall take effect at the date of receipt of such
notice by the President or the Secretary, or at any later time specified
therein. Unless otherwise specified therein, the acceptance of such resignation
shall not be necessary to make it effective.
SECTION 5. Compensation of Directors. The directors shall receive such
compensation for their services as the Board of Directors may from time to time
determine. No director shall be prevented from receiving compensation for his
services as a director by reason of the fact that he is also an officer of the
Corporation. All directors shall be reimbursed for their reasonable expenses of
attendance at each regular or special meeting of the Board of Directors. Members
of any committee of directors may be allowed like compensation and reimbursement
for expenses for serving as members of any such committee and for attending
committee meetings.
SECTION 6. Place of Meetings. The Board of Directors of the Corporation may
hold its meetings, both regular and special, either within or without the State
of Delaware.
SECTION 7. Regular Meetings. Promptly after each annual election of
directors, the Board of Directors shall meet for the purpose of the election of
officers and the transaction of other business, at the place where such annual
election is held. The Board of Directors may also hold other regular meetings at
such time or times and at such place or places as shall be designated by the
Board of Directors from time to time. Notice of regular meetings of the Board of
Directors need not be given.
SECTION 8. Special Meetings. Special meetings of the Board of Directors may
be called by the President or by a majority of the Board of Directors. Notice
shall be sent to the last known address of each director, by mail, telegram,
cable or telex, at least two days before the meeting, or oral notice may be
substituted for such written notice if received not later than the day preceding
such meeting. Special meetings shall be called by the President or by the
Secretary in like manner and on like notice at the written request of a majority
of directors, and the place and time of such special meeting shall be as
designated in the notice of such meetings.
SECTION 9. Quorum. Except as otherwise provided by law, the Certificate of
Incorporation or these Bylaws, at all meetings of the Board of Directors a
majority of the total number of directors in office shall constitute a quorum
for the transaction of business and the vote of the majority of the directors
present at a meeting at which a quorum is present shall be the act of the Board
of Directors. If a quorum shall not be present at any meeting of the Board of
Directors, the directors present thereat may adjourn the meeting from time to
time, without notice other than announcement at the meeting, until a quorum
shall be present.
SECTION 10. Conduct of Meetings of Board of Directors. At each meeting of
the Board of Directors the President or, in his absence, a director chosen by a
majority of the directors present, shall act as chairman of the meeting. The
Secretary or, in his absence, a person whom the chairman of such meeting shall
appoint, shall act as secretary of such meeting and keep the minutes thereof.
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SECTION 11. Meetings by Telephone Conference. Members of the Board of
Directors of the Corporation may participate in a meeting of such Board of
Directors or committee by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and participation in a meeting pursuant to this
Section 11 shall constitute presence in person at such meeting.
SECTION 12. Action by Written Consent. Unless otherwise restricted by the
Certificate of Incorporation or these Bylaws, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting if all members of the Board of Directors or
committee, as the case may be, consent thereto in writing setting forth the
action so taken, and the writing or writings are filed with the minutes of pro
ceedings of the Board of Directors or committee.
SECTION 13. Committees of Directors. The Board of Directors may, by
resolution passed by a majority of the whole Board of Directors, designate one
or more committees, each committee to consist of one or more of the directors of
the Corporation. The Board of Directors may designate one or more directors as
alternate members of any committee, who may replace any absent or disqualified
member at any meeting of the committee. In the absence or disqualification of a
member of a committee, the member or members thereof present at any meeting and
not disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member. Any such
committee, unless otherwise provided in the resolution of the Board of
Directors, shall have and may exercise all the powers and authority of the Board
of Directors in the management of the business and affairs of the Corporation,
and may authorize the seal of the Corporation to be affixed to all papers which
may require it. Notwithstanding the foregoing, no committee shall have the power
or authority to take any of the following actions:
(a) amend the Certificate of Incorporation (except that a committee may, to the
extent authorized in the resolution or resolutions providing for the
issuance of shares of any series of capital stock of the Corporation
adopted by the Board of Directors as permitted by the General Corporation
Law, fix the designations and any of the preferences or rights of such
shares relating to dividends, redemption, dissolution, any distribution of
assets of the Corporation or the conversion into, or the exchange of such
shares for, shares of any other class or classes or any other series of the
same or any other class or classes of stock of the Corporation or fix the
number of shares of any series of stock or authorize the increase or
decrease of the shares of any series);
(b) adopt an agreement of merger or consolidation under the General Corporation
Law;
(c) recommend to the stockholders the sale, lease or exchange of all or
substantially all of the Corporation's property and assets;
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<PAGE>
(d) recommend to the stockholders a dissolution of the Corporation or a
revocation of a dissolution; or
(e) amend the Bylaws of the Corporation.
In addition, unless the resolution of the Board of Directors designating
the committee expressly so provides, no such committee shall have the power or
authority to take any of the following actions:
(i) declare a dividend;
(ii) authorize the issuance of stock; or
(iii) adopt a certificate of ownership and merger pursuant to the General
Corporation Law.
Each committee shall keep regular minutes of its meetings and report the
same to the Board of Directors when required.
SECTION 14. Interested Directors. No contract or transaction between the
Corporation and one or more of its directors or officers, or between the
Corporation and any other corporation, partnership, association, or other
organization in which one or more of its directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because the director or officer is present at or
participates in the meeting of the Board of Directors or committee thereof which
authorizes the contract or transaction, or solely because his or their votes are
counted for such purpose if (i) the material facts as to his or their
relationship or interest and as to the contract or transaction are disclosed or
are known to the Board of Directors or the committee, and the Board of Directors
or committee in good faith authorizes the contract or transaction by the
affirmative vote of a majority of the disinterested directors, even though the
disinterested directors be less than a quorum; or (ii) the material facts as to
his or their relationship or interest and as to the contract or transaction are
disclosed or are known to the stockholders entitled to vote thereon, and the
contract or transaction is specifically approved in good faith by vote of the
stockholders; or (iii) the contract or transaction is fair as to the Corporation
as of the time it is authorized, approved or ratified by the Board of Directors,
a committee thereof or the stockholders. Interested directors may be counted in
determining the presence of a quorum at a meeting of the Board of Directors or
of a committee which authorizes the contract or transaction.
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ARTICLE III
OFFICERS
SECTION 1. General. The officers of the Corporation shall consist of a
President, a Secretary and such other officers, including assistant officers, as
may be deemed necessary by the Board of Directors. Any number of offices may be
held by the same person, unless the Certificate of Incorporation or these Bylaws
otherwise provide. The Board of Directors at its first meeting held after each
annual meeting of stockholders shall elect the officers of the Corporation who
shall hold their offices for such terms and shall exercise such powers and
perform such duties as shall be determined from time to time by the Board of
Directors. The Board of Directors may delegate to the President, any Vice
President, the Secretary and the Treasurer the power to appoint or remove any
subordinate officers, agents or employees. Each officer of the Corporation shall
hold his office until his successor is elected and qualified or until the
earliest of his death, resignation or removal.
SECTION 2. Removal. Any officer may be removed, either with or without
cause, by the affirmative vote of a majority of the directors then in office at
a meeting called for that purpose, or, except in the case of any officer elected
by the Board of Directors, by any officer upon whom the powers of removal may be
conferred by the Board of Directors.
SECTION 3. Resignation. Any officer of the Corporation may resign at any
time by giving written notice of his resignation to the Corporation. Such
resignation shall take effect at the date of receipt of such notice by the
Corporation, or at any later time specified therein. Unless otherwise specified
therein, the acceptance of such resignation shall not be necessary to make it
effective.
SECTION 4. Vacancies. A vacancy in any office resulting from death,
resignation, removal or any other cause shall be filled for the unexpired
portion of the term in the manner prescribed in these Bylaws for regular
election or appointment to such office.
SECTION 5. Officers' Salaries. The salaries of the officers shall be fixed
from time to time by the Board of Directors, and no officer shall be prevented
from receiving a salary by reason of the fact that he is also a director of the
Corporation.
SECTION 6. Chairman of the Board. The Chairman of the Board, if there is
one, shall, if present, preside at all meetings of the shareholders and of the
Board of Directors. If so designated by the Board of Directors, the Chairman of
the Board shall be the chief executive officer of the Corporation. The Chairman
of the Board may sign, with the Secretary or any other proper officer of the
Corporation thereunto authorized by the Board of Directors, certificates for
shares of the Corporation, any deeds, mortgages, bonds, contracts or other
instruments which the Board of Directors has authorized to be executed, except
in cases where the signing and execution thereof shall be expressly delegated by
the Board of Directors or by these Bylaws to some other officer or agent of the
Corporation, or shall be required by law to be otherwise signed and executed;
and in general shall perform all duties incident to the office of Chairman of
the Board and such other duties as may be prescribed by the Board of Directors
from time to time.
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<PAGE>
SECTION 7. President. The President shall be the chief operating officer of
the Corporation and shall in general supervise and control all of the business
and affairs of the Corporation. He shall preside at all meetings of the
stockholders and of the Board of Directors and shall perform such other duties
as may be assigned to him from time to time by the Board of Directors. He may
execute certificates for shares of the Corporation, any deeds, mortgages, bonds,
contracts or other instruments that the Board of Directors has authorized to be
executed, except in cases where the execution thereof shall be expressly
delegated by the Board of Directors or by these Bylaws to some other officer or
agent of the Corporation or shall be required by law to be otherwise signed and
executed. In addition, the President shall perform, under the direction and
subject to the control of the Board of Directors, all such other duties as are
incident to the office of President and as may be prescribed by the Board of
Directors from time to time.
SECTION 8. Vice President. Each Vice President, if any, shall perform,
under the direction and subject to the control of the Board of Directors and the
President, the usual and customary duties incident to such office (but not any
unusual or extraordinary duties or powers conferred by the Board of Directors
upon the President) and such other duties as may be assigned to him from time to
time by the Board of Directors or the President.
SECTION 9. Secretary and Assistant Secretary. It shall be the duty of the
Secretary to attend all meetings of the stockholders and Board of Directors and
record correctly the proceedings held at such meetings in a book suitable for
that purpose. It shall also be the duty of the Secretary to attest with his
signature all stock certificates issued by the Corporation, to keep a stock
ledger in which shall be correctly recorded all transactions pertaining to the
capital stock of the Corporation and to attest with his signature all deeds,
conveyances or other instruments requiring the seal of the Corporation. The
Secretary shall have full power and authority on behalf of the Corporation to
execute any stockholders' consents and to attend and act and to vote in person
or by proxy at any meetings of the stockholders of any corporation in which the
Corporation may own stock, and at any such meetings shall possess and may
exercise any and all the rights and powers incident to the ownership of such
stock that as the owner thereof the Corporation might have possessed and
exercised if present. The Secretary shall also perform, under the direction and
subject to the control of the Board of Directors and the President, the usual
and customary duties incident to such office and such other duties as may be
assigned to him from time to time. The duties of the Secretary may also be
performed by any Assistant Secretary.
SECTION 10. Treasurer and Assistant Treasurer. The Treasurer shall have the
care and custody of all the funds and securities of the Corporation that may
come into his hands as Treasurer. He may endorse checks, drafts and other
instruments for the payment of money for deposit or collection when necessary or
proper and may deposit the same to the credit of the Corporation in such bank or
banks or depositary as the Board of Directors may designate. In addition, he may
endorse all commercial documents requiring endorsements for or on behalf of the
Corporation and may sign all receipts and vouchers for the payments made to the
Corporation. He shall enter regularly in the books to be kept by him for that
purpose a full and accurate account of all monies received and paid by him on
account of the Corporation and shall render an account of his transactions to
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<PAGE>
the Board of Directors as often as the Board of Directors shall require. The
Treasurer shall have full power and authority on behalf of the Corporation to
execute any stock holders' consents and to attend and act and to vote in person
or by proxy at any meetings of stockholders of any corporation in which the
Corporation may own stock, and at any such meetings shall possess and may
exercise any and all of the rights and powers incident to the ownership of such
stock that as the owner thereof the Corporation might have possessed and
exercised if present. He shall when requested, pursuant to a vote of the Board
of Directors, give a bond to the Corporation for the faithful performance of his
duties, the expense of which bond shall be borne by the Corporation. The
Treasurer shall also perform, under the direction and subject to the control of
the Board of Directors and the President, the usual and customary duties
incident to such office and such other duties as may be assigned to him from
time to time. The duties of the Treasurer may also be performed by any Assistant
Treasurer.
SECTION 11. Delegation of Authority. In the case of any absence of any
officer of the Corporation or for any other reason that the Board of Directors
may deem sufficient, the Board of Directors may delegate some or all of the
powers or duties of such officer to any other officer or to any director,
employee, stockholder or agent for whatever period of time the Board of
Directors determines is necessary or appropriate.
ARTICLE IV
STOCK AND STOCK CERTIFICATES
SECTION 1. Stockholders Entitled to Certificates. Every holder of stock in
the Corporation shall be entitled to have a certificate representing the number
of shares owned by him signed by or in the name of the Corporation by the
President or a Vice President and by the Secretary or an Assistant Secretary of
the Corporation. Any and all the signatures on the certificate may be a
facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent or registrar before such certificate is
issued, such certificate may be issued by the Corporation with the same effect
as if such officer, transfer agent or registrar continued to discharge said
office or function at the date of issuance.
SECTION 2. Lost, Stolen or Destroyed Stock Certificates. The Corporation
may issue a new stock certificate in place of any certificate theretofore issued
by it which is alleged to have been lost, stolen or destroyed upon the making of
an affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen or destroyed. When authorizing such issuance of a new certificate
or certificates, the Board of Directors may, in its discretion and as a
condition precedent to the issuance thereof, require that the owner of such
lost, stolen or destroyed certificate or certificates, or his legal
representative, give the Corporation a bond sufficient to indemnify the
Corporation against any claim that may be made against the Corporation on
account of the alleged loss, theft or destruction of any such certificate or the
issuance of such new certificate.
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<PAGE>
SECTION 3. Transfers of Stock. Upon surrender to the Corporation or the
transfer agent or agents of the Corporation of a certificate for shares duly
endorsed or accompanied by proper evidence of succession, assignment or
authority to transfer, the Corporation shall issue a new certificate to the
person entitled thereto, cancel the certificate surrendered to the Corporation
and record the transaction upon its books.
SECTION 4. Fixing Record Date.
(a) Notice of Meeting; Vote. In order that the Corporation may determine the
stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, the Board of Directors may fix a
record date, which record date shall not precede the date upon which the
resolution fixing the record date is adopted by the Board of Directors, and
which record date shall not be more than sixty nor less than ten days
before the date of such meeting. If no record date is fixed by the Board of
Directors, the record date for determining stockholders entitled to notice
of or to vote at a meeting of stockholders shall be at the close of
business on the day next preceding the day on which notice is given, or, if
notice is waived, at the close of business on the day next preceding the
day on which the meeting is held. A determination of stockholders of record
entitled to notice of or to vote at a meeting of stockholders shall apply
to any adjournment of the meeting; provided, however, that the Board of
Directors may fix a new record date for the adjourned meeting.
(b) Written Consent. In order that the Corporation may determine the
stockholders entitled to consent to corporate action in writing without a
meeting, the Board of Directors may fix a record date, which record date
shall not precede the date upon which the resolution fixing the record date
is adopted by the Board of Directors, and which date shall not be more than
ten days after the date upon which the resolution fixing the record date is
adopted by the Board of Directors. If no record date has been fixed by the
Board of Directors, the record date for determining stockholders entitled
to consent to corporate action in writing without a meeting, when no prior
action by the Board of Directors is required by the General Corporation
Law, shall be the first date on which a signed written consent setting
forth the action taken or proposed to be taken is delivered to the
Corporation by delivery to its registered office in the State of Delaware,
its principal place of business, or an officer or agent of the Corporation
having custody of the book in which proceedings of meetings of stockholders
are recorded. Delivery made to the Corporation's registered office shall
be by hand or by certified or registered mail, return receipt requested. If
no record date has been fixed by the Board of Directors and prior action by
the Board of Directors is required by the General Corporation Law, the
record date for determining stockholders entitled to consent to corporate
action in writing without a meeting shall be at the close of business on
the day on which the Board of Directors adopts the resolution taking such
prior action.
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<PAGE>
(c) Dividend; Distribution; Allotment of Rights. In order that the Corporation
may determine the stockholders entitled to receive payment of any dividend
or other distribution or allotment of any rights or the stockholders
entitled to exercise any rights in respect of any change, conversion or
exchange of stock, or for the purpose of any other lawful action, the Board
of Directors may fix a record date, which record date shall not precede the
date upon which the resolution fixing the record date is adopted, and which
record date shall be not more than sixty days prior to such action. If no
record date is fixed, the record date for determining stockholders for any
such purpose shall be at the close of business on the day on which the
Board of Directors adopts the resolution relating thereto.
SECTION 5. Registered Stockholders. Except as otherwise required by law,
the Corporation shall be entitled to recognize the exclusive right of the person
registered on its books as the owner of shares to receive dividends in respect
of such shares and to vote as the owner thereof, and shall not be bound to
recognize any equitable or other claim to or interest in such share or shares on
the part of any other person, whether or not it shall have express or other
notice thereof.
ARTICLE V
INDEMNIFICATION
SECTION 1. Indemnification and Advancement of Expenses.
(a) Indemnification in the Case of Proceedings Other Than by or in the Right of
the Corporation. The Corporation shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of
the Corporation) by reason of the fact that he is or was a director,
officer, employee or agent of the Corporation, or is or was serving at the
request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred by him in connection
with such action, suit or proceeding if he acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests
of the Corporation, and, with respect to any criminal action or proceeding,
had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proce eding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its
equivalent, shall not, of itself, create a presumption that the person did
not act in good faith and in a manner which he reasonably believed to be in
or not opposed to the best interests of the Corporation, and, with respect
to any criminal action or proceeding, had reasonable cause to believe that
his conduct was unlawful.
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<PAGE>
(b) Indemnification in the Case of Proceedings By or in the Right of the
Corporation. The Corporation shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the Corporation to procure a
judgment in its favor by reason of the fact that he is or was a director,
officer, employee or agent of the Corporation, or is or was serving at the
request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection with the defense or settlement of such action
or suit if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the Corporation and except
that no indemnification shall be made in respect of any claim, issue or
matter as to which such person shall have been adjudged to be liable to the
Corporation unless and only to the extent that the Court of Chancery or the
court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery or such
other court shall deem proper.
(c) Indemnification for Expenses. To the extent that a director, officer,
employee or agent of the Corporation has been successful on the merits or
otherwise in de fense of any action, suit or proceeding referred to in
paragraph (a) or (b) of this Section 1, or in defense of any claim, issue
or matter therein, he shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by him in connection
therewith.
(d) Determination of Entitlement to Indemnification. Any indemnification under
paragraph (a) or (b) of this Section 1 (unless ordered by a court) shall be
made by the Corporation only as authorized in the specific case upon a
determination that indemnification of the director, officer, employee or
agent is proper in the circumstances because he has met the applicable
standard of conduct set forth in paragraph (a) or (b) of this Section 1.
Such determination shall be made (i) by the Board of Directors by a
majority vote of a quorum consisting of directors who were not parties to
such action, suit or proceeding, or (ii) if such a quorum is not
obtainable, or, even if obtainable and a quorum of disinterested directors
so directs, by independent legal counsel in a written opinion, or (iii) by
the stockholders.
(e) Advancement of Expenses. Expenses (including attorneys' fees) incurred by
an officer or director in defending any civil, criminal, administrative or
investigative action, suit or proceeding shall be paid by the Corporation
in advance of the final disposition of such action, suit or proceeding upon
receipt of an undertaking by or on behalf of such director or officer to
repay such amount if it shall ultimately be determined that he is not
entitled to be indemnified by the Corporation as authorized in this Article
V. Such expenses (including attorneys' fees) incurred by other employees
and agents may be so paid upon such terms and conditions, if any, as the
Board of Directors deems appropriate.
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<PAGE>
SECTION 2. Indemnification and Advancement not Exclusive Right. The
indemnification and advancement of expenses provided by, or granted pursuant to,
this Article V shall not be deemed exclusive of any other rights to which those
seeking indemnification or advancement of expenses may be entitled under any
Bylaw, agreement, vote of stockholders or disinterested directors or otherwise,
both as to action in his official capacity and as to action in another capacity
while holding such office.
SECTION 3. Insurance. The Corporation shall have power to purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against any liability
asserted against him and incurred by him in any such capacity, or arising out of
his status as such, whether or not the Corporation would have the power to
indemnify him against such liability under the provisions of this Article V.
SECTION 4. Certain Definitions. For purposes of this Article V, references
to "other enterprises" shall include employee benefit plans; references to
"fines" shall include any excise taxes assessed on a person with respect to any
employee benefit plan; and references to "serving at the request of the
Corporation" shall include any service as a director, officer, employee or agent
of the Corporation which imposes duties on, or involves services by, such
director, officer, employee or agent with respect to an employee benefit plan,
its participants or beneficiaries. In addition, for purposes of this Article V,
a person who acted in good faith and in a manner he reasonably believed to be in
the interest of the participants and beneficiaries of an employee benefit plan
shall be deemed to have acted in a manner "not opposed to the best interests of
the Corporation."
SECTION 5. Continuation. The indemnification and advancement of expenses
provided by, or granted pursuant to, this Article V shall, unless otherwise
provided when authorized or ratified, continue as to a person who has ceased to
be a director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such person.
ARTICLE VI
GENERAL PROVISIONS
SECTION 1. Amendments. The Bylaws may be altered, amended or repealed, in
whole or in part, or new Bylaws may be adopted by the stockholders or by the
Board of Directors; provided, however, that notice of such alteration,
amendment, repeal or adoption of new Bylaws be contained in the notice of such
meeting of stockholders or Board of Directors, as the case may be. All such
amendments must be approved by either the holders of a majority of the
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<PAGE>
outstanding capital stock entitled to vote thereon or by a majority of the
entire Board of Directors then in office.
SECTION 2. Waiver of Notice. Whenever notice is required to be given under
any provision of the General Corporation Law, the Certificate of Incorporation
or these Bylaws, a written waiver, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting of stockholders, in person or by
proxy, or at a meeting of the Board of Directors or committee thereof shall
constitute a waiver of notice of such meeting, except when the person attends
such meeting for the express purpose of objecting, at the beginning of the
meeting, to the transaction of any business because the meeting is not lawfully
called or convened. Neither the business to be transacted at, nor the purpose
of, any regular or special meeting of the stockholders, directors, or members of
a committee of directors need be specified in any written waiver of notice
unless so required by the Certificate of Incorporation or these Bylaws.
SECTION 3. Fiscal Year. The fiscal year of the Corporation shall end on the
thirty-first day of December of each year, unless otherwise provided by
resolution of the Board of Directors.
SECTION 4. Offices. The registered office of the Corporation in the State
of Delaware shall be in care of The Corporation Trust Company, Corporation Trust
Center, 1209 Orange Street, City of Wilmington, County of New Castle, Delaware
19801. The Corporation may also have offices at such other places, both within
and without the State of Delaware, as the Board of Directors may from time to
time determine or the business of the Corporation may require.
- 15 -
<PAGE>
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