See accompanying notes to financial statements
4
POSTROCK ENERGY SERVICES CORPORATION 401(k) PROFIT SHARING PLAN
NOTES TO FINANCIAL STATEMENTS
Note A – Description of Plan
The following description of the PostRock Energy Services Corporation 401(k) Profit Sharing Plan (the “Plan”) provides only general information. Participants should refer to the Plan Agreement for a more complete description of the Plan’s provisions.
General
: The Plan was established effective June 1, 2001, as a defined contribution plan covering all eligible employees as defined in the Plan Agreement. The Plan, sponsored by PostRock Energy Services Corporation (the “Employer” or “Plan Administrator”), has an income deferral feature under Section 401(k) of the Internal Revenue Code
, as amended
(“IRC”) and is subject to the provisions of the ERISA, and any subsequent amendments.
Administration of the Plan
: Effective January 1, 2013, Principal Life Insurance Company (“Principal”) became the trustee and recordkeeper for the Plan.
Hartford Retirement Services, LLC (“Hartford”) was the recordkeeper for the period from January 1, 2012 through November 30, 2012. As of December 1, 2012, the Plan appointed FASCore LLC (“FASCore”) as the recordkeeper (collectively Hartford and FASCore are referred to as “Recordkeeper”) while J.P. Morgan Chase Bank, N.A. (“J.P. Morgan”) was the Plan’s designated trustee for all of 2012.
Eligibility
: Eligible employees 21 years of age or older may participate in the Plan on the first day of calendar quarter following completion of 90 days of service
(“entry date”)
. Employees that are covered under a collective bargaining agreement and leased employees are not eligible to participate.
Contributions
: The Plan has an automatic enrollment feature whereby all
eligible employees
will be deemed to have automatically elected to have 3% of their compensation
as defined in the Plan (“compensation”)
withheld from their payroll checks once they become eligible to participate in the Plan
on their entry date, unless the employee
affirmatively elects otherwise. In addition, participants may elect to defer up to 100% of their compensation during any plan year on either a pre-tax or an after-tax basis (as a Roth Elective Deferral), subject to a maximum imposed by the IRC. The Employer may make a discretionary matching contribution (during each pay period) not to exceed 100% of the participant’s contribution to the Plan. For the year ended December 31, 2013, the Employer made discretionary matching co
ntributions of $180,799
. In addition, the Employer may also make an annual discretionary profit sharing contribution to participants. For the year ended December 31, 2013, the Employer made discretionary profit sharing contributions of $294,512.
Rollover Contributions
: Generally, if a participant received a qualified distribution from another plan as defi
ned by the IRC
, the participant can deposit or rollover those funds into the Plan if approved by the Plan Administrator.
Participant Accounts
: Each participant’s account is credited with the allocation of (a) participant’s contribution, (b) the Employer’s discretionary matching contributions, if any, (c) the Employer’s discretionary profit sharing contributions, if any, and (d) plan earnings less plan expenses. Allocations are based on either the participant’s compensation or account balances, as defined by the Plan Agreement. The benefit to which a participant is entitled is the benefit that can be provided from the participant’s vested account.
Vesting
: Participants are fully vested in their salary deferral contributions and earnings allocated thereon. Vesting in the Employer’s discretionary matching contributions as well as Employer’s discretionary profit sharing contributions, if any, and earnings attributable thereon, are based on the participant’s years of service. Upon the completion of one year of service, a participant becomes 33% vested, upon the completion of two years of service, a participant becomes 67% vested, and upon three years of service, a
participant becomes 100% vested; provided, however, that regardless of a participant’s years of service, the participant will be 100% in such Employer contributions, if any, on the date the participant (a) obtains normal retirement age (age 65), (b) becomes totally disabled (as defined in the Plan) or (c) dies (provided the participant is employed by the Employer on such date).
Forfeitures
: Forfeitures are used to pay Plan administrative expenses or reduce discretionary Employer contributions to the Plan. At December 31, 2013 and 2012, the unallocated forfeited account balance was $37 and $146,717, respectively. During the year ended December 31, 2013, the Company used $138,397 to reduce
employer
discretionary matching contributions.
POSTROCK ENERGY SERVICES CORPORATION 401(k) PROFIT SHARING PLAN
NOTES TO FINANCIAL STATEMENTS – CONTINUED
Notes Receivable from Participants
:
Participants may borrow from their accounts a minimum of $1,000 up to a maximum equal to the lesser of $50,000 or 50% of their vested account balance, less the balance of any existing loans. Note terms range from one to five years or longer for the purchase of a primary residence. The notes are secured by the balance in the participant’s account and bear interest at a rate commensurate with prevailing rates. Principal and interest is paid ratably through payroll deductions. A participant’s note balance becomes immediately due and payable upon termination of employment.
Payment of Benefits
: Benefits are generally paid upon normal retirement, disability, death or termination of employment. Upon normal retirement, disability or death, participants are entitled to receive 100% of their account balance. A participant eligible for a distribution from the Plan may elect to receive an immediate lump sum payment or installment payments
as defined in the Plan
. Upon termination, a participant is entitled to receive the vested portion of their account balance.
Under the IRC, a participant must begin receiving his vested account balance on the April 1st following the later of the year the participant reaches age 70½ or terminates employment.
In-service distributions may be made from a participant’s vested account balance upon a participant attaining age 59½. In-service distributions may also be made from a participant’s vested account balance on account of a severe financial hards
hip in accordance with the Plan
. A participant who receives a hardship withdrawal shall be
prohibited from making
contributions to the Plan for six months after receipt of such distribution.
Note
B
–
S
ummary of Accounting Policies
Basis of Accounting
:
The accompanying financial statements of the Plan have been prepared on the accrual basis of accounting in accordance with
auditing standards generally accepted in the United States of America
(“U.S. GAAP”) as codified by the Financial Accounting Standards Board in its Accounting Standards Codification (“ASC”).
Use of Estimates
: The preparation of financial statements in conformity with U.S. GAAP requires the Plan Administrator to make estimates and assumptions that affect the reported amounts of assets and liabilities and changes therein, and disclosures of contingent assets and liabilities. Accordingly, actual results could differ from those estimates.
Investment Valuation and Income Recognition
:
Mutual funds are valued at published market prices, which represent the net asset value (NAV) of shares held by the Plan at year-end. The fair value of participation units in the common collective trust funds are based on the quoted market price of the underlying securities and the number of units owned by the Plan at year-end. Participation units in the J.P. Morgan
Stable Asset Income Fund are valued at a unit price determined by the portfolio’s sponsor based on the fair value of the underlying assets held by the portfolio. Purchases and sales of securities are recorded on a trade-date basis. Interest income is recorded on the accrual basis. Dividends are recorded on the ex-dividend date.
As described in ASC 962,
Plan Accounting - Defined Contribution Pension Plans
, defined contribution plans holding an investment in a GIC are required to report the investment at fair value. However, contract value is the relevant measurement attribute for that portion of the net assets available for benefits of a defined contribution plan which are attributable to fully benefit-responsive investment contracts because contract value is the amount participants would receive if they were to initiate permitted transactions under the terms of the Plan. Since the difference between fair value and contract value is not significant to the Plan, the Plan has not recorded an adjustment from fair value to contract value for this investment in these financial statements. Participants may ordinarily direct the withdrawal or transfer of all or a portion of their investment at contract value.
The changes in the current value of investments (including investments bought and sold) during the period are reflected in the Statement of Changes in Net Assets Available for Benefits as net appreciation or depreciation in fair value of investments.
Risks and Uncertainties
: The Plan provides for investment options in mutual funds
, common collective fund, pooled separate accounts and equity securities
. Investment securities, in general, are exposed to various risks, such as interest rate, credit, and overall market volatility risks. Due to the level of risk associated with certain investment securities, it is reasonably possible that changes in the value of investment securities will occur in the near term and that such changes could materially affect the amounts reported in the Statements of Net Assets Available for Benefits and participant account balances.
Benefits
: Benefit payments to participants are recorded upon distribution.
POSTROCK ENERGY SERVICES CORPORATION 401(k) PROFIT SHARING PLAN
NOTES TO FINANCIAL STATEMENTS – CONTINUED
Administrative Expenses
: Fees and expenses incurred in the administration of the Plan, to the extent not paid by the Employer, are charged to and paid from the Plan’s assets. Fees and expenses that are paid directly by the Employer are excluded from these financial statements. Fees related to the administration of notes receivable from participants, and other participant-directed expenses are charged directly to the participant’s account and are included in expenses of the Plan. Investment related expenses are included in net appreciation or depreciation of fair value of investments.
Subsequent Events
: As of the date of issuance of these financial statements there are no events that required recognition in the financial statements or disclosure in the notes to the financial statements.
Note C - Investments
The following table represents the fair value of all investments that represent 5% or more of the net assets available for bene
fits as of December 31,
2012
and
2013
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2012
|
|
2013
|
|
|
|
|
|
|
|
|
J.P. Morgan Stable Asset Income Fund
|
$
|
645,998
|
|
$
|
—
|
|
Principal Trust Target Retirement 2010 Fund
|
|
—
|
|
|
294,401
|
|
Principal Trust Target Retirement 2025 Fund
|
|
—
|
|
|
340,848
|
|
Principal Trust Target Retirement 2030 Fund
|
|
—
|
|
|
605,004
|
|
Principal Trust Target Retirement 2035 Fund
|
|
—
|
|
|
801,669
|
|
Principal Trust Target Retirement 2040 Fund
|
|
—
|
|
|
486,027
|
|
Principal Trust Target Retirement 2045 Fund
|
|
—
|
|
|
744,490
|
|
Principal Trust Target Retirement 2055 Fund
|
|
—
|
|
|
645,623
|
|
Principal Trust Income Fund
|
|
—
|
|
|
366,537
|
|
Fidelity Contrafund
|
|
338,993
|
|
|
—
|
|
American Funds Income Fund of America
|
|
406,844
|
|
|
—
|
|
American Funds American Mutual
|
|
1,526,092
|
|
|
—
|
|
J.P. Morgan Value Advantage
|
|
356,507
|
|
|
—
|
|
PostRock Energy Corp. Common Stock
|
|
—
|
|
|
464,386
|
|
Other (investments less than 5%)
|
|
1,124,964
|
|
|
522,405
|
|
Total investments, at fair value
|
$
|
4,399,398
|
|
$
|
5,271,390
|
Note
D
–
Fair Value Measurements
The Plan follows ASC 820,
Fair Value Measurements and Disclosures,
for its financial assets and liabilities carried at fair value on a recurring basis in the financial statements. As defined by this guidance, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The transaction is based on a hypothetical transaction in the principal or most advantageous market considered from the perspective of the market participant that holds the asset or owes the liability.
The Plan utilizes market data or assumptions that market participants who are independent, knowledgeable and willing and able to transact would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable. The Plan attempts to utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. The Plan is able to classify fair value balances based in the observability of those inputs. This guidance establishes a formal fair value hierarchy based on the inputs used to measure fair value. The hierarchy gives the highest priority to level 1 measurements and the lowest priority to level 3 measurements, and accordingly, level 1 measurement should be used whenever possible.
The three levels of the fair value hierarchy are as follows:
Level 1
: Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Plan has the ability to access.
Level 2
: Inputs to the valuation methodology include:
|
|
·
|
|
quoted prices for similar assets or liabilities in active markets
|
POSTROCK ENERGY SERVICES CORPORATION 401(k) PROFIT SHARING PLAN
NOTES TO FINANCIAL STATEMENTS – CONTINUED
|
|
·
|
|
quoted prices for identical or similar assets or liabilities in inactive markets
|
|
|
·
|
|
inputs other than quoted prices that are observable for the asset or liability
|
|
|
·
|
|
inputs that are derived principally from or corroborated by observable market data by correlation or other means
|
If the asset or liability has a specified (contractual) term, the level 2 input must be observable for substantially the full term of the asset or liability.
Level 3
: Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
In some cases, certain inputs used to measure fair value may be categorized into different levels of the fair value hierarchy. For disclosure purposes, the lowest level that contains significant inputs used in valuation should be chosen. The Plan has classified its investments into these levels depending upon the data relied on to determine fair values.
The following is a description for the valuation methodologies used for assets measured at fair value. There have been no changes in methodologies used at December 31, 2013 and 2012.
|
|
·
|
|
Interest bearing cash
: Valued at cost, which approximates fair value due to its liquid nature.
|
|
|
·
|
|
Equity Securities:
Investments in PostRock common stock are valued at market traded price per share.
|
|
|
·
|
|
Mutual Funds
: Valued at the net asset value of shares held by the Plan at year end based on quoted market prices. Investments are generally subject to the volatility of the major stock markets in which the underlying investments are held.
|
|
|
·
|
|
Common/Collective Trust
: Valued based on fair market value of underlying investments as determined by the Trustee.
The common/collective trust has underlying investments in investment contracts which are valued at fair value of the underlying investments and then adjusted by the issuer to contract value.
|
|
|
·
|
|
Pooled Separate Accounts:
These accounts are valued on a net unit basis as determined by the trustee on the last business day of the Plan year. The fair value of these investments are determined by the reference to the respective fund’s underlying assets, with the trustee specifying the source(s) to use for the underlying investment asset prices.
|
The preceding methods described may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, although the Plan’s management believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies and assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
The fair value of investments as of December 31, 2013 is categorized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing cash
|
$
|
2,367
|
|
$
|
—
|
|
$
|
—
|
|
$
|
2,367
|
|
Mutual funds
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income
|
|
2,856
|
|
|
—
|
|
|
—
|
|
|
2,856
|
|
Small/mid cap funds
|
|
42,626
|
|
|
—
|
|
|
—
|
|
|
42,626
|
|
Large cap funds
|
|
88,382
|
|
|
—
|
|
|
—
|
|
|
88,382
|
|
International
|
|
31,728
|
|
|
—
|
|
|
—
|
|
|
31,728
|
|
Total mutual funds
|
|
165,592
|
|
|
—
|
|
|
—
|
|
|
165,592
|
|
Common/collective trust
|
|
—
|
|
|
4,614,562
|
|
|
—
|
|
|
4,614,562
|
|
Pooled separate accounts
|
|
—
|
|
|
24,483
|
|
|
—
|
|
|
24,483
|
|
PostRock Energy Corp. Common Stock
|
|
464,386
|
|
|
—
|
|
|
—
|
|
|
464,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
$
|
632,345
|
|
$
|
4,639,045
|
|
$
|
—
|
|
$
|
5,271,390
|
POSTROCK ENERGY SERVICES CORPORATION 401(k) PROFIT SHARING PLAN
NOTES TO FINANCIAL STATEMENTS – CONTINUED
The fair value at investments as of December 31, 201
2
is categorized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing cash
|
$
|
2,417
|
|
$
|
—
|
|
$
|
—
|
|
$
|
2,417
|
|
Mutual funds
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset allocation funds
|
|
531,941
|
|
|
—
|
|
|
—
|
|
|
531,941
|
|
International funds
|
|
286,335
|
|
|
—
|
|
|
—
|
|
|
286,335
|
|
Small cap funds
|
|
73,427
|
|
|
—
|
|
|
—
|
|
|
73,427
|
|
Mid cap funds
|
|
356,507
|
|
|
—
|
|
|
—
|
|
|
356,507
|
|
Large cap funds
|
|
1,914,436
|
|
|
—
|
|
|
—
|
|
|
1,914,436
|
|
Balanced funds
|
|
406,844
|
|
|
—
|
|
|
—
|
|
|
406,844
|
|
Bond funds
|
|
181,493
|
|
|
—
|
|
|
—
|
|
|
181,493
|
|
Total mutual funds
|
|
3,750,983
|
|
|
—
|
|
|
—
|
|
|
3,750,983
|
|
Common/collective trust
|
|
—
|
|
|
645,998
|
|
|
—
|
|
|
645,998
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
$
|
3,753,400
|
|
$
|
645,998
|
|
$
|
—
|
|
$
|
4,399,398
|
Note E – Income Tax Status
The Internal Revenue Service has determined and informed the Employer by a letter dated June 28, 2002 that the Plan is designed in accordance with applicable sections of the IRC. Effective January 1, 2011, the Plan was amended and restated with the Employer’s adoption of the Prototype Non-Standardized 401(k) Profit Sharing Plan (the “Prototype Plan”) sponsored by Hartford Retirement Services, LLC, which received a favorable opinion letter from the Internal Revenue Service, dated March 31, 2008, informing it that the form of the Prototype Plan was acceptable under section 401 of the IRC for use by employers for the benefit of their employees. The Plan has since been amended; however, the Plan Administrator believes that the Plan
is currently designed and being operated in compliance with the applicable
requirements of the IRC.
Therefore, no provision for income taxes has been included in the Plan’s financial statements.
U.S. GAAP requires the Plan’s management to evaluate tax positions taken by the Plan and recognize a tax liability (or asset) if the Plan has taken an uncertain position that more likely than not would not be sustained upon examination by the applicable taxing authorities. The Plan is subject to routine audits by taxing jurisdictions; however, there are currently no audits for any tax periods in progress. The Employer believes it is no longer subject to income tax exam
inations for years prior to 2010
.
Note
F
–
Plan Termination
Although it has not expressed any intent to do so, the Plan Administrator has the right under the Plan Agreement to discontinue its contribution at any time and to terminate the Plan subject to the provisions of ERISA. In the event of plan termination or partial termination, affected participants would become fully vested in their accounts and all assets remaining in the Plan would be paid to the participants or their beneficiaries in accordance with the Plan Agreement.
Note
G
–
Party-In-Interest Transactions
Principal
, J.P. Morgan and the Recordkeeper (FASCore)
received contributions, managed the investments of the Plan, performed certain recordkeeping functions, and made payments to participants in accordance with the Plan Agreement, therefore, certain transactions qualify as
party-in-interest
transactions
one of the Plan’s investment is PostRock common stock, and therefore, qualifies as a party-in-interest
.