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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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SCHEDULE 14D-9
SOLICITATION/RECOMMENDATION STATEMENT
PURSUANT TO SECTION 14(d)(4) OF THE
SECURITIES EXCHANGE ACT OF 1934
SHERIDAN ENERGY, INC.
(NAME OF SUBJECT COMPANY)
SHERIDAN ENERGY, INC.
(NAME OF PERSON(S) FILING STATEMENT)
COMMON STOCK, PAR VALUE $.01 PER SHARE
(TITLE OF CLASS OF SECURITIES)
823764 10 5
(CUSIP NUMBER OF CLASS OF SECURITIES)
B. A. BERILGEN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
SHERIDAN ENERGY, INC.
1000 LOUISIANA, SUITE 800
HOUSTON, TEXAS 77002
(713) 651-7899
(NAME, ADDRESS AND TELEPHONE NUMBER OF PERSON AUTHORIZED TO
RECEIVE NOTICES AND COMMUNICATIONS ON BEHALF OF PERSON(S) FILING STATEMENT)
WITH A COPY TO:
ARTHUR S. BERNER, ESQ.
WINSTEAD SECHREST & MINICK P.C.
BANK ONE CENTER
910 TRAVIS STREET, SUITE 2400
HOUSTON, TEXAS 77002
(713) 650-2729
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SHERIDAN ENERGY, INC.
SCHEDULE 14D-9
ITEM 1. SECURITY AND SUBJECT COMPANY
The name of the subject company is Sheridan Energy, Inc., a Delaware
corporation (the "Company"), and the address of the principal executive offices
of the Company is 1000 Louisiana, Suite 800, Houston, Texas 77002. The title of
the class of equity securities to which this statement relates is the common
stock, par value $.01 per share, of the Company (the "Common Stock").
ITEM 2. TENDER OFFER OF THE BIDDER
This statement relates to a tender offer by CPN Sheridan, Inc., a
Delaware corporation (the "Purchaser"), and wholly-owned subsidiary of Calpine
Corporation, a Delaware corporation (the "Parent"), to purchase all of the
outstanding shares of Common Stock (the "Shares") for a purchase price of $5.50
per Share net to the seller in cash (the "Offer Price"), upon the terms and
subject to the conditions set forth in the Offer to Purchase dated August 31,
1999 (the "Offer to Purchase"), and the related Letter of Transmittal (together
with the Offer to Purchase and any amendments or supplements thereto, the
"Offer"). The Offer is disclosed in a Tender Offer Statement on Schedule 14D-1,
dated August 31, 1999 (as amended and supplemented from time to time, the
"Schedule 14D-1"), which has been filed with the Securities and Exchange
Commission (the "Commission") pursuant to the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), and the rules promulgated by the Commission
thereunder. The Schedule 14D-1 and Offer to Purchase are incorporated herein by
reference. Based upon information provided in the Schedule 14D-1 filed with the
Commission by the Purchaser and the Parent, the principal executive offices of
the Purchaser and the Parent are located at 50 West San Fernando Street, San
Jose, California 95113. All information contained in this Schedule 14D-9 or
incorporated herein by reference concerning the Purchaser or the Parent was
provided by the Purchaser or Parent, and the Company takes no responsibility for
such information.
The Offer is being made pursuant to an Agreement and Plan of Merger,
dated as of August 25, 1999 (the "Merger Agreement"), among the Parent, the
Purchaser and the Company. The Merger Agreement provides, among other things,
that as soon as practicable after the satisfaction or waiver of the conditions
set forth in the Merger Agreement, the Purchaser will be merged with and into
the Company (the "Merger") and the Company will continue as the surviving
corporation (the "Surviving Corporation") and wholly-owned subsidiary of the
Parent. The Offer is conditioned upon there being validly tendered and not
withdrawn before expiration of the Offer that number of Shares representing at
least a majority of the Company's outstanding Common Stock on a "fully diluted"
basis, as defined in the Merger Agreement, on the date of the purchase (the
"Minimum Condition"). The Offer is also subject to certain other conditions,
which are set forth in the Offer to Purchase. The Merger Agreement is
incorporated herein by reference in its entirety.
ITEM 3. IDENTITY AND BACKGROUND
(a) The name and address of the Company, which is the person filing
this statement, are set forth in Item 1 above.
(b) In addition to the matters set forth below, certain contracts,
agreements, arrangements or understandings between the Company or its affiliates
and certain of its executive officers, directors or affiliates are described in
the Company's Information Statement as set forth on Annex A hereto. Such
information is incorporated herein by reference in its entirety. Certain
information set forth on Annex A was included in the Company's Proxy Statement
filed with the Commission on April 27, 1999.
PURPOSE OF THE OFFER; MERGER AGREEMENT; STOCKHOLDERS AGREEMENT;
APPRAISAL RIGHTS.
The purpose of the Offer is to acquire control of, and the entire
equity interest in, the Company. Following the Offer, Parent and Purchaser
intend to acquire any remaining equity interest in the Company not acquired in
the Offer by consummating the Merger. The Company has represented to the Parent
in the Merger Agreement that as of August 25, 1999 there were (i) 6,733,770
Shares issued and outstanding, (ii) 1,139,556.25 shares of Preferred Stock, par
value $.01 per share, of the Company (the "Preferred Stock") issued and
outstanding, (iii) 725,500 Shares reserved
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for issuance upon the exercise of stock options outstanding under various
Company Stock option plans and (iv) 150,000 Shares reserved for issuance upon
exercise of outstanding warrants (the " Warrants") to purchase additional
Shares. Based upon the foregoing, as of August 25, 1999, there were
approximately 7,609,270 fully diluted shares (the "Fully Diluted Shares").
Parent owns no Shares of record, but Purchaser has the right to direct the
tender in connection with the Offer of up to 4,067,537 Shares pursuant to an
agreement with certain Stockholders as more specifically described below.
The Merger Agreement. The following description of the Merger Agreement
is qualified in its entirety by reference to the text of such agreement, which
is referenced as an exhibit to this Solicitation/Recommendation on Schedule
14D-9 ("Schedule 14D-9") filed by Parent and Purchaser with the Commission in
connection with the Offer. The Merger Agreement is incorporated herein by
reference.
The Offer. The Merger Agreement provides for the making of the Offer.
The obligation of Purchaser to accept for payment or pay for Shares is subject
to the satisfaction of the Minimum Condition and certain other conditions
described below. Pursuant to the Merger Agreement, Parent and Purchaser have
reserved the right to waive the conditions to the Offer and to make any change
in the terms or conditions of the Offer; provided that, without the prior
written consent of the Company, no change may be made which (i) changes the form
of consideration to be paid, (ii) decreases the price per Share or the number of
Shares sought in the Offer, (iii) imposes conditions to the Offer in addition to
those set forth in the Merger Agreement, (iv) changes or waives the Minimum
Condition, (v) extends the Offer (except as set forth in the Merger Agreement)
or (vi) makes any other change to any condition to the Offer set forth in the
Merger Agreement which is materially adverse to the holders of Shares.
Notwithstanding the foregoing, the Merger Agreement also provides that Purchaser
may, without the consent of the Company, (i) extend the Offer, if at any
scheduled expiration date of the Offer any of the conditions to Purchaser's
obligation to purchase Shares pursuant to the Offer have not been satisfied or
waived, until such time as such conditions are satisfied or waived, (ii) extend
the Offer for a period of not more than 20 business days beyond the initial
Expiration Date, if on the date of such extension less than 90% of the Fully
Diluted Shares have been validly tendered and not properly withdrawn pursuant to
the Offer and (iii) extend the Offer for any period required by any rule,
regulation, interpretation or position of the Commission or the staff thereof
applicable to the Offer. Parent and Purchaser have also agreed in the Merger
Agreement that if all of the conditions to Purchaser's obligation to purchase
Shares pursuant to the Offer are not satisfied on any scheduled expiration date
of the Offer then, provided that all such conditions are reasonably capable of
being satisfied, Purchaser shall extend the Offer from time to time in
increments of a least five business days each until the earliest to occur of (x)
the satisfaction or waiver of the Minimum Condition or such other condition, (y)
the termination of the Merger Agreement in accordance with its terms and (z)
December 1, 1999. Subject to the terms of the Offer in the Merger Agreement and
the satisfaction (or waiver to the extent permitted by the Merger Agreement) of
the conditions of the Offer, Purchaser shall accept for payment all Shares
validly tendered and not withdrawn pursuant to the Offer as soon as practicable
after the applicable expiration of the Offer.
Consideration to be Paid in the Merger. The Merger Agreement provides
that, following the purchase of Shares pursuant to the Offer and upon the terms
(but subject to the conditions) set forth in the Merger Agreement, Purchaser
will be merged with and into the Company (the "Merger"), with the Company
continuing as the surviving corporation (the "Surviving Corporation"). In the
Merger, (i) each Share held by the Company as treasury stock or owned by Parent,
Purchaser or any subsidiary of either of them immediately prior to the Effective
Time (as defined below) shall be canceled, and no payment shall be made with
respect thereto; (ii) each share of common stock of Purchaser outstanding
immediately prior to the Effective Time shall be converted into and become one
share of common stock of the Surviving Corporation with the same rights, powers
and privileges as the shares so converted and shall constitute the only
outstanding shares of capital stock of the Surviving Corporation; and (iii) each
Share outstanding immediately prior to the Effective Time shall, except as
otherwise provided in the Merger Agreement with respect to Shares as to which
appraisal rights have been exercised, be converted into the right to receive
$5.50 in cash or any higher price paid for each Share in the Offer, without
interest. The Merger Agreement provides that the Merger will be consummated as
soon as practicable after satisfaction of or, to the extent permitted
thereunder, waiver of the conditions to the Merger and shall become effective at
such time as the certificate of merger is duly filed with the Secretary of State
of the State of Delaware or, with the consent of the Independent Directors
referred to below, at such later time as is specified in the certificate of
merger (the "Effective Time").
Board Representation. The Merger Agreement provides that, effective
upon acceptance for payment by Purchaser of the Shares tendered pursuant to the
Offer, Parent shall be entitled to designate the number of directors,
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rounded up to the next whole number, on the Company's Board of Directors that
equals the product of (i) the total number of directors on the Company's Board
of Directors (giving effect to the election of any additional directors pursuant
to the Merger Agreement) and (ii) the percentage that the number of Shares owned
by Parent or Purchaser (including Shares accepted for payment) bears to the
total number of Shares outstanding. The Company has agreed that it will take all
action necessary to cause Parent's designees to be elected or appointed to the
Company's Board of Directors, including, without limitation, increasing the
number of directors or seeking and accepting resignations of incumbent directors
or both; provided that, prior to the Effective Time, the Company's Board of
Directors shall always have one member who is neither a designee nor an
affiliate of Parent or Purchaser nor an employee of the Company (an"Independent
Director"). If the number of Independent Directors is reduced below one for any
reason prior to the Effective Time, the departing Independent Director shall be
entitled to designate a person to fill such vacancy. No action proposed to be
taken by the Company to (i) amend or terminate the Merger Agreement or the
certificate of incorporation or by-laws of the Company or (ii) waive any action
required to be taken by Parent or Purchaser under the Merger Agreement or any
rights of the Company under the Merger Agreement shall be effective without the
approval of the Independent Director. At such times, the Company will use its
best efforts to cause individuals designated by Parent to constitute the same
percentage as such individuals represent on the Company's Board of Directors of
(i) each committee of the Board, (ii) each board of directors of each subsidiary
and (iii) each committee of each such board.
The Merger Agreement provides that, from and after the Effective Time,
the directors and officers of Purchaser at the Effective Time will be the
initial directors and officers of the Surviving Corporation, each to hold office
until his or her respective successors are duly elected or appointed and
qualified in accordance with applicable law. Pursuant to the Merger Agreement,
the by-laws of Purchaser, as in effect at the Effective Time, will be the
by-laws of the Surviving Corporation until amended in accordance with applicable
law, and the certificate of incorporation of Purchaser, as in effect at the
Effective Time, will be the certificate of incorporation of the Surviving
Corporation until amended in accordance with applicable law, except that the
name of the Surviving Corporation shall be changed to the name of the Company.
Stockholder Meeting. The Merger Agreement provides that, if required by
applicable law, the Company will call a meeting of its Stockholders to be held
as soon as reasonably practicable following Purchaser's acquisition of Shares in
the Offer for the purpose of voting on the approval and adoption of the Merger
Agreement and the Merger. Under the Merger Agreement, at any such meeting,
Parent has agreed to make a quorum and to vote all Shares acquired in the Offer
or otherwise beneficially owned by it in favor of adoption of the Merger
Agreement.
If the Minimum Condition is satisfied pursuant to the Offer, Purchaser
will hold at least a majority of the outstanding Shares on a Fully Diluted Basis
and will be able to assure that the requisite number of affirmative votes in
favor of approval and adoption of the Merger Agreement will be received, even if
no other Stockholder votes in favor thereof. If Purchaser obtains at least 90%
of the outstanding Shares, it may effect the Merger without any notice to and
without the authorization of the Stockholders of the Company pursuant to the
"short-form" merger provisions of Delaware law.
Representations and Warranties. The Merger Agreement contains various
representations and warranties of the parties thereto. These include
representations and warranties of the Company with respect to corporate
existence and power, corporate authorization, governmental authorization,
non-contravention, capitalization, subsidiaries, Commission filings, financial
statements, absence of certain changes, undisclosed liabilities, litigation,
taxes, employee benefits, brokers, compliance with laws, contracts and debt
instruments, environmental, intellectual property and technology and other
matters.
Parent and Purchaser have also made certain representations and
warranties with respect to corporate existence and power, corporate
authorization, governmental authorization, non-contravention, disclosure
documents, brokers and other matters.
Conduct of Business Pending the Merger. The Company has agreed that,
during the period from the date of the Merger Agreement to the Effective Time,
the Company will, and will cause its subsidiaries to, carry on their respective
businesses in the ordinary course in substantially the same manner as
theretofore conducted and, to the extent consistent therewith, use all
commercially reasonable efforts to preserve intact their current business
organizations, keep available the services of their current officers and
employees and preserve their relationships with customers, suppliers,
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licensors, licensees, distributors and others having business dealings with them
to the end that their goodwill and ongoing business shall be unimpaired at the
Effective Time. The Company has further agreed that, during the period from the
date of the Merger Agreement to the Effective Time, the Company will not, and
will not permit any of its subsidiaries to, without the prior written approval
of Parent (which determination by Parent will not be unreasonably delayed),
(i)(a) declare, set aside or pay any dividends on, or make any other
distributions in respect of, any of its capital stock, other than dividends and
distributions by any direct or indirect wholly owned subsidiary of the Company
to its parent, (b) split, combine or reclassify any of its capital stock or
issue or authorize the issuance of any other securities in respect of, in lieu
of or in substitution for shares of its capital stock or (c) purchase, redeem or
otherwise acquire any shares of capital stock of the Company or any of its
subsidiaries or any other securities thereof or any rights, warrants or options
to acquire any such shares or other securities (other than in connection with
the exercise of Company Options (defined below)); (ii) issue, deliver, sell,
pledge or otherwise encumber any shares of its capital stock, any other voting
securities or any securities convertible into, or any rights, warrants or
options to acquire, any such shares, voting securities or convertible securities
(other than the issuance of Shares upon the exercise of Company Options; (iii)
amend its certificate of incorporation, by-laws or other comparable charter or
organizational documents; (iv) except as provided in the Merger Agreement,
acquire or agree to acquire (including, without limitation, by merger,
consolidation, or acquisitions of stock or assets) any business including
through the acquisition of any interest in any corporation, partnership, limited
liability company, joint venture, association or other business organization or
division thereof; (v) except as provided in the Merger Agreement, mortgage or
otherwise encumber or subject to any lien or, except in the ordinary course of
business consistent with past practice and pursuant to existing contracts or
commitments, sell, lease, license, transfer or otherwise dispose of any of the
Company's intellectual property rights or any other material properties or
assets; (vi) except as provided in the Merger Agreement, make or agree to make
any new capital expenditures in excess of $500,000; (vii) make any material tax
election (unless required by law) or settle or compromise any material income
tax liability; (viii) pay, discharge or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction, in the ordinary
course of business consistent with past practice and in accordance with their
terms, or waive the benefits of, or agree to modify in any manner, any
confidentiality, standstill or similar agreement to which the Company or any of
its subsidiaries is a party; (ix) commence a lawsuit other than (a) for the
routine collection of bills or (b) in such cases where the Company in good faith
determines that the failure to commence suit would result in a material
impairment of a valuable aspect of the Company's business, provided that the
Company consults with Parent prior to filing such suit; (x) (a) enter into or
amend any employment or severance agreement or similar arrangements, (b) make
any determination as to amounts payable under any plan, arrangement or
agreement, providing for discretionary incentive compensation or bonus to any
officer, director, employee or independent contractor of the Company or any of
its subsidiaries or (c) enter into, adopt, or amend any agreement, arrangement,
or benefit plan so as to increase the liability (whether or not contingent) of
the Company or Parent or any of their subsidiaries in respect of compensation or
benefits except as may be required by law; (xi) incur any additional
indebtedness other than borrowings under the Company's senior bank credit
facilities as in effect of the date of the Merger Agreement; (xii) authorize any
of, or commit or agree to take any of, the foregoing actions; or (xiii) take or
agree or commit to take any action that would make representation or warranty of
the Company hereunder inaccurate in any material respect at, or as of any time
prior to, the Effective Time; or (xiv) omit or agree or commit to omit to take
any action necessary to prevent any such representation or warranty from being
inaccurate in any material respect at any such time.
Access to Information. Subject to the terms of the confidentiality
agreement dated as of June 15, 1999 (the "Confidentiality Agreement") entered
into between the Company and the Parent, the Company has agreed (i) to give
Parent and its representatives access (during normal business hours and upon
reasonable notice) to the offices, properties, books and records, of the Company
and its subsidiaries, (ii) to furnish Parent and its representatives with such
other information concerning its business, properties and personnel as such
persons may reasonably request, (iii) to give Parent and its representatives
full access (during normal business hours and upon reasonable notice) to all
abstracts of title, title opinions, title files, ownership maps, lease files,
assignments, division orders, check vouchers and payment statements as the same
may be in existence and in possession of the Company and (iv) to give Parent and
its representatives full access (during normal business hours and at their
actual location) to all accounting, revenue, marketing, transportation,
processing, environmental, geological, geophysical, production and engineering
books, records and data in possession of the Company, except such records or
data which Company is prevented by contractual obligations with third parties
from disclosing, in which case Company will inform Parent of the existence of
such records, the parties thereto and the subject matter of such records.
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HSR Act Filings; Efforts. Pursuant to the Merger Agreement, each of
Parent and the Company has agreed, if applicable, to (i) promptly make or cause
to be made the filings required of such party or any of its subsidiaries under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the
rules and regulations thereunder (the "HSR Act") with respect to the
transactions contemplated by the Merger Agreement, (ii) comply at the earliest
practicable date with any request under the HSR Act for additional information,
documents, or other material received by such party or any of its subsidiaries
from any Governmental Entity (defined below) in respect of such filings or such
transactions and (iii) cooperate with the other party in connection with any
such filing and in connection with resolving any investigation or other inquiry
of any such agency or other Governmental Entity under any Antitrust Laws
(defined below) with respect to any such filing or any such transaction. Each of
Parent and the Company has agreed, pursuant to the Merger Agreement, to promptly
inform the other of any communication with, and any proposed understanding,
undertaking, or agreement with, any Governmental Entity regarding any such
filings or any such transaction. The Merger Agreement prohibits both Parent and
the Company from participating in any meeting with any Governmental Entity in
respect of any such filings, investigation, or other inquiry without giving the
other notice of the meeting and, to the extent permitted by such Governmental
Entity, the opportunity to attend and participate. "Governmental Entity" means
any federal, state or local government or any court, administrative or
regulatory agency or commission or other governmental authority or agency,
domestic or foreign.
Each of Parent and the Company has agreed, pursuant to the Merger
Agreement, to use all commercially reasonable efforts to resolve such
objections, if any, as may be asserted by any Governmental Entity with respect
to the transactions contemplated by the Merger Agreement under the HSR Act, the
Sherman Act, as amended, the Clayton Act, as amended, the Federal Trade
Commission Act, as amended, and any other federal, state or foreign statutes,
rules, regulations, orders or decrees that are designed to prohibit, restrict or
regulate actions having the purpose or effect of monopolization or restraint of
trade (collectively, "Antitrust Laws"). In connection therewith, if any
administrative or judicial action or proceeding is instituted (or threatened to
be instituted) challenging any transaction contemplated by the Merger Agreement
as violative of any Antitrust Law, and, if by mutual agreement, Parent and the
Company decide that litigation is in their best interests, each of Parent and
the Company have agreed, pursuant to the Merger Agreement, to cooperate and use
all reasonable efforts vigorously to contest and resist any such action or
proceeding and to have vacated, lifted, reversed, or overturned any decree,
judgment, injunction or other order, whether temporary, preliminary or
permanent, that is in effect and that prohibits, prevents, or restricts
consummation of the Merger or any such other transactions. Pursuant to the
Merger Agreement, each of Parent and the Company have agreed to use all
commercially reasonable efforts to take such action as may be required to cause
the expiration of the notice periods under the HSR Act or other Antitrust Laws
with respect to such transactions as promptly as possible after the execution of
the Merger Agreement.
Each of Parent and the Company has agreed, pursuant to the Merger
Agreement, to use all commercially reasonable efforts to take, or cause to be
taken, all actions, and to do, or cause to be done, and to assist and cooperate
with the other party in doing, all things necessary, proper or advisable to
consummate and make effective, in the most expeditious manner practicable, the
Offer, the Merger and the other transactions contemplated by the Merger
Agreement.
Notwithstanding the foregoing, the Merger Agreement provides that (i)
neither Parent nor any of its subsidiaries shall be required to divest any of
their respective businesses, product lines or assets, (ii) neither Parent nor
any of its subsidiaries shall be required to take or agree to take any other
action or agree to any limitation that could reasonably be expected to have an
adverse effect on the business, assets, financial condition, results of
operations or prospects of Parent and its subsidiaries or of Parent combined
with the Surviving Corporation after the Effective Time, (iii) neither the
Company nor its subsidiaries shall be required to divest any of their respective
businesses, product lines or assets, or to take or agree to take any other
action or agree to any limitation that could reasonably be expected to have a
Material Adverse Effect (as defined below), (iv) no party shall be required to
agree to the imposition of, or to comply with, any condition, obligation or
restriction on Parent or any of its subsidiaries or on the Surviving Corporation
or any of its subsidiaries of the type described below and (v) neither Parent
nor Purchaser shall be required to waive any of the conditions to the Offer
described below or any of the conditions to the Merger described herein.
The Merger Agreement provides that the Company will give prompt notice
to Parent of (i) any material representation or warranty made by it contained in
the Merger Agreement becoming untrue or inaccurate in any material respect, (ii)
upon the Company's obtaining knowledge thereof, any representation or warranty
made by it contained in the Merger Agreement and not covered by clause (i) above
becoming untrue or inaccurate in any material respect, or
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(iii) the failure by it to comply with or satisfy in any respect any covenant,
condition or agreement to be complied with or satisfied by it under the Merger
Agreement; provided, however, that no such notification shall affect the
representations, warranties, covenants or agreements of the parties or the
conditions to the obligations of the parties under the Merger Agreement.
The Merger Agreement provides that the Company will give prompt notice
to Parent, and Parent or Purchaser will give prompt notice to the Company of (i)
any notice or other communication from any person alleging that the consent of
such person is or may be required in connection with the transactions
contemplated by the Merger Agreement; (ii) any notice or other communication
from any Governmental Entity in connection with the transactions contemplated by
the Merger Agreement; and (iii) any actions, suits, claims, investigations or
proceedings commenced or, to the best of its knowledge threatened against,
relating to or involving or otherwise affecting it or any of its subsidiaries
which, if pending on the date of the Merger Agreement would have been required
to have been disclosed pursuant to the representations and warranties of the
Company or which relate to the consummation of the transactions contemplated by
the Merger Agreement.
Stock Options. The Merger Agreement provides that, upon acceptance for
payment of Shares pursuant to the Offer, each outstanding Company Option,
whether vested or unvested, shall be canceled, and each holder of any such
option shall be paid by the Company promptly after the acceptance for payment of
Shares pursuant to the Offer for each such option an amount determined by
multiplying (i) the excess, if any, of $5.50 per Share over the applicable
exercise price of such option by (ii) the number of Shares such holder could
have purchased had such holder exercised such option in full immediately prior
to the acceptance for payment of Shares pursuant to the Offer (as if such
Company Option was exercisable in full). Notwithstanding any other provisions of
the Merger Agreement, immediately after the acceptance for payment of Shares
pursuant to the Offer no Company Options will remain outstanding. "Company
Option" means any option granted, whether or not exercisable, and not exercised
or expired, to a current or former employee, director or independent contractor
of the Company or any of its subsidiaries or any predecessor thereof to purchase
Shares pursuant to any stock option, stock bonus, stock award, or stock purchase
plan, program, or arrangement of the Company or any of its subsidiaries or any
predecessor thereof or any other contract or agreement entered into by the
Company or any of its subsidiaries.
Pursuant to the Merger Agreement and as soon as practicable following
the date of the Merger Agreement, the Company has agreed to use its commercially
reasonable efforts to (i) obtain any consents from holders of Company Options
and (ii) make any amendments to the terms of such stock option or compensation
plans or arrangements that, in the case of either clauses (i) or (ii), are
necessary to give effect to the transactions contemplated by the Merger
Agreement. Notwithstanding any other provision of the Merger Agreement, payment
may be withheld in respect of any Company Option until necessary consents are
obtained. All amounts payable pursuant to the Merger Agreement in respect of
Company Options will be subject to, and reduced by, any required withholding of
taxes and will be paid without interest.
Other Offers. Pursuant to the Merger Agreement, the Company has agreed
that, until the termination of the Merger Agreement, the Company and its
subsidiaries will not, and will not authorize or permit the officers, directors,
employees or other agents of the Company and its subsidiaries to, directly or
indirectly, (i) take any action to solicit, initiate or encourage any
Acquisition Proposal (defined below) or (ii) subject to the fiduciary duties of
the Board of Directors under applicable law, as advised by counsel to the
Company, and in response to an unsolicited request that has been submitted to
the Company's Board of Directors and determined to be a Superior Acquisition
Proposal (defined below), engage in negotiations with, or disclose any nonpublic
information relating to the Company or any of its subsidiaries or afford access
to the properties, books or records of the Company or any of its subsidiaries
to, any person that has advised the Company or otherwise publicized the fact
that it may be considering making, or that has made, an Acquisition Proposal;
provided, the foregoing does not prohibit the Company's Board of Directors from
taking and disclosing to the Company's Stockholders a position with respect to a
tender offer pursuant to Rules 14d-9 and 14e-2 promulgated under the Exchange
Act. The Company has agreed to promptly notify Parent after receipt of any
Acquisition Proposal or any indication that any person is considering making an
Acquisition Proposal or any request for nonpublic information relating to the
Company or any of its subsidiaries or for access to the properties, books or
records of the Company or any of its subsidiaries by any person that has advised
the Company that it may be considering making, or that has made, an Acquisition
Proposal and will keep Parent fully informed of the status and details of any
such Acquisition Proposal, indication or request. "Acquisition Proposal" means
any offer or proposal for, or any indication
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of interest in, a merger or other business combination involving the Company or
any of its subsidiaries or the acquisition of any significant equity interest
in, or a significant portion of the assets of, the Company or any of its
subsidiaries, other than the transactions contemplated by the Merger Agreement;
and "Superior Acquisition Proposal" means an Acquisition Proposal which a
majority of the Company's disinterested directors determines in its good faith
judgment (after receiving the advice of the Company's independent financial
advisor) to be more favorable to the Company's stockholders than the Offer or
the Merger, and for which financing, to the extent required, is then committed
or which a majority of the Company's disinterested directors reasonably believes
will be available when required.
Agreement with respect to Director and Officer Indemnification and
Insurance. Pursuant to the Merger Agreement, Parent has agreed to cause the
Surviving Corporation to indemnify and hold harmless the present and former
officers, directors, employees and agents of the Company (the "Indemnified
Parties") in respect of acts or omissions occurring on or prior to the Effective
Time to the extent provided under the Company's certificate of incorporation and
by-laws in effect on the date of the Merger Agreement, provided that such
indemnification shall be subject to any limitation imposed from time to time
under applicable law. Parent has further agreed that for three years after the
Effective Time, Parent will cause the Surviving Corporation to use its best
efforts to provide officers' and directors' liability insurance in respect of
acts or omissions occurring on or prior to the Effective Time covering each such
person currently covered by the Company's officers' and directors' liability
insurance policy on terms substantially similar to those of such policy in
effect on the date of the Merger Agreement, provided that, in satisfying its
obligation Parent shall not be obligated to cause the Surviving Corporation to
pay premiums in excess of 150% of the amount per annum the Company paid in its
last full fiscal year, which amount has been disclosed to Parent, and if the
Surviving Corporation is unable to obtain the insurance required by the Merger
Agreement, it shall obtain as much comparable insurance as possible for an
annual premium equal to such maximum amount. Without limitation of the
foregoing, in the event any such Indemnified Party is or becomes involved in any
capacity in any action, proceeding or investigation in connection with any
matter relating to the Merger, the Offer or the Merger Agreement occurring on or
prior to the Effective Time, Parent has agreed to cause the Surviving
Corporation to pay as incurred such Indemnified Party's reasonable legal and
other expenses (including the cost of any investigation and preparation)
incurred in connection therewith. Parent has further agreed to ensure that, at
all relevant times, the Surviving Corporation will have access to sufficient
funds to fulfill its obligations, as to the Indemnified Parties, pursuant to the
Merger Agreement.
Other Agreements. Parent has agreed that it will take all action
necessary to cause Purchaser to perform its obligations under the Merger
Agreement and to consummate the Offer and the Merger on the terms and conditions
set forth in the Merger Agreement.
Except as otherwise provided in the Merger Agreement, Parent has agreed
to honor (or to cause the Surviving Corporation to honor) in accordance with
their terms all Company employee benefit plans previously delivered to Parent
and all accrued benefits vested thereunder, although such agreement does not
prevent Parent or the Surviving Corporation from terminating any such Company
benefit plan in accordance with its terms. The Merger Agreement also provides
that if Parent merges any Company benefit plan with any Company benefit plan of
Parent or otherwise modifies any benefit plan, prior service with the Company
will be counted for purposes of employee eligibility, seniority and vesting
under such benefit plan, and any pre-existing condition shall be waived for each
employee so long as such employee has had medical coverage under the applicable
benefit plan for a least six months immediately prior to the Effective Time.
Conditions to the Merger. Pursuant to the Merger Agreement, the
respective obligations of each party to consummate the Merger are subject to the
satisfaction of the following conditions: (i) Parent or Purchaser shall have
purchased Shares in an amount equal to at least the Minimum Condition pursuant
to the Offer, (ii) if required by applicable law, the adoption of the Merger
Agreement by the Stockholders of the Company in accordance with Delaware law,
(iii) no provision of any applicable law or regulation and no judgment,
injunction, order or decree shall prohibit the consummation of the Merger; (iv)
any applicable waiting period under the HSR Act relating to the Merger shall
have expired and (v) other than filing the certificate of merger in accordance
with Delaware law, all consents required to permit the consummation of the
Merger shall have been filed, occurred or been obtained (other than those the
failure to file, occur or obtain, in the aggregate, could not reasonably be
expected to have a Material Adverse Effect or prevent or materially delay the
consummation of the Merger).
Termination. The Merger Agreement may be terminated and the Merger may
be abandoned at any time prior to the Effective Time (notwithstanding any
approval of the Merger Agreement by the Stockholders of the Company)
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(i) by mutual written consent of the Company and Parent, (ii) by either the
Company or Parent, if there shall be any law or regulation that makes
consummation of the Merger illegal or otherwise prohibited or if any judgement,
injunction, order or decree enjoining Parent or the Company from consummating
the Merger is entered and such judgment, injunction, order or decree shall
become final and nonappealable, (iii) by either the Company or Parent (provided
that Parent shall not be entitled to terminate the Merger Agreement pursuant to
this sub-clause (iii) as a result of its breach of the Merger Agreement), (x) if
Parent or Purchaser shall have failed to commence the Offer within five business
days following the date of the announcement of the Merger Agreement, (y) if
Parent or Purchaser shall not have purchased any Shares pursuant to the Offer
prior to December 1, 1999 or (z) the Offer shall have been terminated without
Parent or Purchaser having purchased any Shares pursuant to the Offer, (iv) by
Parent upon the occurrence of any Trigger Event described in clauses (i) through
(iii) under the heading "Fees and Expenses" below, (v) by the Company, upon the
occurrence of any Trigger Event described in clause (i) under the heading"Fees
and Expenses" below and (vi) by either the Company or Parent, if the Merger has
not been consummated by June 30, 2000 (provided that the party seeking to
terminate the Merger Agreement shall not have breached its obligations under the
Merger Agreement in any material respect).
Fees and Expenses. Each party to the Merger Agreement has agreed to pay
its own fees and expenses and there are no provisions for payment by the Company
of the fees and expenses of Parent or Purchaser or vice versa or at any time
prior to the consummation of the Offer as if made at and as of such time, if the
Merger Agreement is terminated, except as stated below. The Company has agreed
to pay Parent a fee in immediately available funds equal to $2,000,000 promptly,
but in no event later than one business day, after the termination of the Merger
Agreement as a result of the occurrence of any of the events set forth below (a
"Trigger Event"): (i) the Company shall have entered into, or shall have
publicly announced its intention to enter into, an agreement or an agreement in
principle with respect to any Acquisition Proposal, (ii) any representation or
warranty made by the Company in, or pursuant to, the Merger Agreement that is
qualified as to materiality shall not have been true and correct when made or at
any time prior to the consummation of the Offer as if made at and as of such
time, or any representation or warranty made by the Company in, or pursuant to,
the Merger Agreement that is not so qualified shall not have been true and
correct in all material respects when made or at any time prior to the
consummation of the Offer as if made at and as of such time, or the Company
shall have failed to observe or perform in any material respect any of its
obligations under the Merger Agreement; provided that it shall not be a Trigger
Event unless (x) the breaches of the representations and warranties without
regard to any materiality qualifier or threshold, and failure to perform or
breach of any obligation, individually or in the aggregate, have had or could
reasonably be expected to have a Material Adverse Effect and (y) with respect to
breaches of representations and warranties, such breaches in significant part
were intentional; provided further that it shall not be a Trigger Event if (1)
such breaches and failures to perform are reasonably capable of being cured by
December 1, 1999, (2) the Company diligently pursues such cure beginning as soon
as it obtains knowledge of such breaches and failures to perform and (3) the
Company cures all of such breaches and failures to perform that have given rise
to the Trigger Event by December 1, 1999; or (iii) the Board of Directors of the
Company (or any special committee thereof) shall have withdrawn or materially
modified in a manner adverse to Parent or Purchaser its approval or
recommendation of the Offer, the Merger or the Merger Agreement or its approval
of the entry by Parent and Purchaser into the Stockholders Agreement (as herein
defined), in any such case whether or not such withdrawal or modification is
required by the fiduciary duties of the Company's Board of Directors (or any
special committee thereof).
Appraisal Rights. Stockholders do not have dissenters' rights as a
result of the Offer. However, if the Merger is consummated, Stockholders at the
time of the Merger who do not vote in favor of or consent in writing to the
Merger will have the right under Delaware law to dissent and demand appraisal of
their Shares in accordance with Section 262 of the Delaware General Corporation
Law.
Under Delaware law, dissenting stockholders who comply with the
applicable statutory procedures will be entitled to receive a judicial
determination of the fair value of their Shares (exclusive of any element of
value arising from the accomplishment or expectation of the Merger) and to
receive payment of such fair value in cash, together with a fair rate of
interest, if any. Any such judicial determination of the fair value of the
Shares could be based upon considerations other than or in addition to the price
paid in the Offer (or the Merger) and the market value of the Shares.
Stockholders should recognize that the value so determined could be higher or
lower than the price per Share paid pursuant to the Offer or the Merger.
Moreover, Parent or Purchaser may argue in an appraisal proceeding that, for
purposes of such a proceeding, the fair value of the Shares is less than the
price paid in the Offer (or the Merger).
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THE FOREGOING SUMMARY OF THE RIGHTS OF DISSENTING STOCKHOLDERS DOES NOT
PURPORT TO BE A COMPLETE STATEMENT OF PROCEDURES TO BE FOLLOWED BY STOCKHOLDERS
DESIRING TO EXERCISE THEIR DISSENTERS' RIGHTS.
Stockholders Agreement. The following description of the Stockholders
Agreement dated as of August 25, 1999 ("Stockholders Agreement") among Parent,
Purchaser and the Stockholders named therein (each, a "Principal Stockholder")
is qualified in its entirety by reference to the text of such agreement, which
is referenced as an exhibit to this Schedule 14D-9 and is incorporated herein by
reference. The Principal Stockholders include affiliates of Enron Corporation,
Jeffrey E. Susskind, the Chairman of the Board of Directors of the Company, B.
A. Berilgen, the President and Chief Executive Officer of the Company, and
certain other executive officers of the Company.
Grant of Stock Option. Under the Stockholders Agreement, each Principal
Stockholder has granted Purchaser an irrevocable option (the "Stock Option") to
purchase, subject to the terms and conditions set forth in the Stockholders
Agreement, for a price of $5.50 per Share in cash, or to cause to be tendered
pursuant to the Offer, such Principal Stockholder's Shares. In addition, if the
price to be paid by Purchaser pursuant to the Offer is increased, the purchase
price payable upon exercise of the Stock Option shall similarly be increased.
The Stockholders Agreement also provides that the number and kind of Shares
subject to the Stock Option and the purchase price therefor shall be
appropriately and equitably adjusted in the event of changes in the Company's
capital stock.
Exercise of Option. Subject to the terms of the Stockholders Agreement,
Purchaser has the right to exercise the Stock Option, in whole but not in part,
at any time up to the 20th business day after the termination of the Merger
Agreement in accordance with the terms thereof if, but only if, the termination
of the Merger Agreement did not result from the material breach thereof by
Purchaser or Parent.
Agreement to Tender. Each Principal Stockholder has agreed, in the
Stockholders Agreement, upon receipt of written instructions from Purchaser, to
deliver to the American Stock Transfer & Trust Company (the "Depositary") (i) a
Letter of Transmittal with respect to such Principal Stockholder's Shares
complying with the terms of the Offer together with instructions directing the
Depositary to make payment for such Shares directly to the Principal Stockholder
(but if such Shares are not accepted for payment or are withdrawn and are to be
returned pursuant to the Offer, to return such Shares to such Principal
Stockholder whereupon they shall continue to be held by such Principal
Stockholder subject to the terms and conditions of the Stockholders Agreement),
(ii) the certificates evidencing such Principal Stockholder's Shares and (iii)
all other documents or instruments required to be delivered pursuant to the
terms of the Offer. Notwithstanding anything to the contrary set forth in the
Stockholders Agreement, no Principal Stockholder shall be required to tender
such Principal Stockholder's Shares in the Offer if the per Share consideration
to be paid by Purchaser pursuant to the Offer is less than $5.50 per Share in
cash.
Conditions. The Principal Stockholders' obligations to sell their
Shares (other than by tendering pursuant to the Offer) under the Stockholders
Agreement are subject to the satisfaction of the following conditions: (i) the
representations and warranties of Purchaser set forth in the Stockholders
Agreement shall be true and correct in all material respects on the date of sale
as if made on such date, (ii) if applicable, all waiting periods under the HSR
Act to the exercise of the Stock Option shall have expired or been terminated,
(iii) there shall be no preliminary or permanent injunction or other order,
decree or ruling issued by a court of competent jurisdiction or by a
governmental, regulatory or administrative agency or commission, nor any
statute, rule, regulation or order promulgated or enacted by any governmental
authority, prohibiting or otherwise restraining such exercise of the Stock
Option and (iv) Purchaser shall have commenced the Offer.
No Shopping. Each Principal Stockholder has further agreed to not,
directly or indirectly, solicit, initiate or encourage (or authorize any person
to solicit) any inquiry, proposal or offer from any person to acquire the
business, property or capital stock of the Company, or any direct or indirect
subsidiary thereof, or any acquisition of a substantial equity interest in, or a
substantial amount of assets of, the Company or any direct or indirect
subsidiary thereof, whether by merger, purchase of assets, tender offer or other
transaction (a "Business Combination Proposal") or, subject to a Principal
Stockholder's fiduciary duty as a director of the Company, if applicable, as
further provided in the Merger Agreement participate in any discussion or
negotiations regarding, or furnish to any other person any information with
respect to, or otherwise cooperate in any way with, or participate in,
facilitate or encourage any effort or attempt by any other person to make or
seek any Business Combination Proposal. Each Principal Stockholder agreed to
promptly advise Purchaser of the terms of any communication it may receive
relating to a Business Combination Proposal if a
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representative of such Principal Stockholder having direct working knowledge of
the Stockholders Agreement has knowledge of such communications.
Proxy. In entering into the Stockholders Agreement, each Principal
Stockholder granted Purchaser a proxy to vote or consent at every annual,
special or adjourned meeting, or solicitation of consents, of the Stockholders
of the Company (i) in favor of the adoption of the Merger Agreement and the
Stockholders Agreement and approval of the Merger and the other transactions
contemplated by the Merger Agreement and Stockholders Agreement, (ii) against
any proposal for any recapitalization, merger, sale of assets or other business
combination between the Company and any person or entity (other than the Merger)
or any other action or agreement that would result in a breach of any covenant,
representation or warranty or any other obligation or agreement of the Company
under the Merger Agreement not being fulfilled and (iii) in favor of any other
matter relating to consummation of the transactions contemplated by the Merger
Agreement and the Stockholders Agreement. Each Stockholder also agreed to cause
such Principal Stockholder's Shares that are outstanding and owned by it
beneficially to be voted in accordance with the foregoing. The proxy granted
under the Stockholders Agreement is irrevocable, but such proxy will be revoked
upon the earlier of (i) termination of the Stockholders Agreement in accordance
with its terms and (ii) the purchase of the Principal Stockholder Shares
pursuant to the Offer.
Pursuant to the Stockholders Agreement, the Principal Stockholders
granted Purchaser an option to purchase, subject to certain conditions, for a
price of $5.50 per Share, or to cause to be tendered pursuant to the Offer, an
aggregate of up to 3,492,537 outstanding Shares, up to an additional 425,000
Shares issuable upon exercise of outstanding stock options and up to an
additional 150,000 shares issuable upon exercise of the outstanding Warrants.
Assuming that the full amount of Shares that are subject to the Stockholders
Agreement are validly tendered and not withdrawn pursuant to a directive from
Purchaser, no additional Shares would be required to be tendered under the Offer
in order to satisfy the Minimum Condition (assuming the number of Fully Diluted
Shares set forth above).
Preferred Stock and Warrants. Enron Capital & Trade Resources Corp., a
Principal Stockholder which beneficially holds all of the issued and outstanding
Preferred Stock of the Company, has agreed, in the Stockholders Agreement, to
sell and transfer to the Company, and the Purchaser has agreed to purchase or to
cause the Company to purchase and redeem, all of the shares of Preferred Stock,
at a price per share of Preferred Stock equal to $10.10, plus all accrued and
unpaid dividends thereon (whether or not declared), promptly (but in no event
more than one business day) following the consummation of the Offer. In
addition, Joint Energy Development Investments Limited Partnership, which holds
all of the outstanding Warrants, has agreed, in the Stockholders Agreement, to
transfer and surrender to the Company for cancellation for no additional
consideration all of the Warrants, promptly (but in no event more than one
business day) following consummation of the Offer; provided that, if Purchaser
increases the consideration per Share to be paid pursuant to the Offer to an
amount that exceeds the exercise price of the Warrants, Purchaser shall pay, or
cause the Company to pay, to such Principal Stockholder an amount equal to the
aggregate net in the money value of such Warrants, in connection with the
transfer and surrender thereof. If Purchaser exercises the Stock Option, at the
closing of the acquisition of the Principal Stockholders' Shares, Purchaser
shall purchase from the relevant Principal Stockholder, and such Principal
Stockholder will sell to Purchaser, all of the shares of Preferred Stock, at a
price per share of Preferred Stock equal to $10.10, plus all accrued and unpaid
dividends thereon (whether or not declared).
Delaware Law. The Merger is required to comply with other applicable
procedural and substantive requirements of Delaware law. The Company is
incorporated under the laws of the State of Delaware, which has adopted certain
laws regarding business combinations. In general, Section 203 of Delaware's
General Corporation Law prevents an "interested stockholder" (generally, a
stockholder owning 15% or more of a corporation's outstanding voting stock or an
affiliate or associate thereof) from engaging in a "business combination"
(defined to include a merger and certain other transactions) with a Delaware
corporation for a period of three years following the time that such stockholder
became an interested stockholder unless (i) prior to such time the corporation's
board of directors approved either the business combination or the transaction
which resulted in such stockholder becoming an interested stockholder, (ii) upon
consummation of the transaction which resulted in such stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
corporation's voting stock outstanding at the time the transaction commenced
(excluding shares owned by certain employee stock plans and persons who are
directors and also officers of the corporation) or (iii) at or subsequent to
such time the business combination is approved by the corporation's board of
directors and authorized at an annual or special meeting of stockholders, and
not by written consent, by the affirmative vote of at least 66 2/3% of the
outstanding voting stock not owned by the interested stockholder. The Board of
Directors
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of the Company has approved the Merger Agreement and the Stockholders Agreement
and the transactions contemplated thereby, including the Offer and the Merger,
for purposes of Section 203. Accordingly, the restrictions of Section 203 do not
apply to the transactions contemplated hereby.
Other Matters. Any merger or other similar business combination
proposed by Parent are also required to comply with any applicable federal law.
In particular, the Commission has adopted Rule 13e-3 under the Exchange Act
which is applicable to certain "going private" transactions. Parent believes
that Rule 13e-3 will not be applicable to the Merger unless the Merger is
consummated more than one year after termination of the Offer or if an
alternative merger transaction were to provide for stockholders to receive
consideration for their Shares in an amount less than the price per Share paid
pursuant to the Offer. If applicable, Rule 13e-3 would require, among other
things, that certain financial information concerning the Company and certain
information relating to the fairness of the proposed transaction and the
consideration offered to minority stockholders in such a transaction be filed
with the Commission and distributed to such stockholders prior to consummation
of the transaction.
If for any reason the Merger is not consummated, Parent and Purchaser
will evaluate their alternatives. Such alternatives could include purchasing
additional Shares in the open market, in privately negotiated transactions, in
another tender or exchange offer or otherwise, or taking no further action to
acquire additional Shares. Any additional purchases of Shares could be at a
price greater or less than the price to be paid for Shares in the Offer and
could be for cash or other consideration. Alternatively, Purchaser may sell or
otherwise dispose of any or all Shares acquired pursuant to the Offer or
otherwise. Such transactions may be effected on terms and at prices then
determined by Parent or Purchaser, which may vary from the price to be paid for
Shares in the Offer.
Parent has stated that it intends to conduct a review of the Company
and its assets, corporate structure, dividend policy, capitalization,
operations, properties and policies and to consider, subject to the terms of the
Merger Agreement, what, if any, changes would be desirable in light of the
circumstances then existing, and reserves the right to take such actions or
effect such changes as it deems desirable. Such changes could include changes in
the Company's business, operations, corporate structure, capitalization, Board
of Directors, policies or dividend policy.
Except as otherwise described in the Offer to Purchase of Parent and
Purchaser, they have stated that they have no current plans or proposals that
would relate to, or result in, any extraordinary corporate transaction involving
the Company, such as a merger, reorganization or liquidation involving the
Company or any of its subsidiaries, a sale or transfer of a material amount of
assets of the Company or any of its subsidiaries, any material change in the
Company's capitalization or dividend policy or any other material change in the
Company's business, corporate structure, Board of Directors or management.
EXTENSION OF TENDER PERIOD; TERMINATION; AMENDMENT.
Purchaser reserves the right, at any time or from time to time, (i) to
extend the Offer if, at the scheduled Expiration Date, any of the conditions to
the Offer have not been satisfied or waived, until such time as such conditions
are satisfied or waived, and for a further period of time as described below in
this paragraph, in any case by giving oral or written notice of such extension
to the Depositary and by making a public announcement of such extension or (ii)
except to the extent otherwise provided in the Merger Agreement, to amend the
Offer in any respect by making a public announcement of such amendment. There
can be no assurance that Purchaser will exercise its right to extend or amend
the Offer. Subject to the terms of the Offer and the satisfaction (or waiver to
the extent permitted by the Merger Agreement) of the conditions to the Offer,
Purchaser shall accept for payment all Shares validly tendered and not withdrawn
pursuant to the Offer as soon as practicable after the expiration of the Offer
and shall pay for all such Shares promptly after acceptance; provided, that
Purchaser may, without the consent of the Company, extend the Offer for a period
of time of not more than 20 business days beyond the initial Expiration Date if
on the date of such extension less than 90% of the Fully Diluted Shares have
been validly tendered and not withdrawn. Under certain circumstances Purchaser
may be required under the Merger Agreement to extend the Offer, as discussed
herein.
If Purchaser shall decide, in its sole discretion, subject to the terms
of the Merger Agreement, to increase the consideration to be paid for Shares
pursuant to the Offer and the Offer is scheduled to expire at any time before
the expiration of a period of 10 business days from, and including, the date
that notice of such increase is first published,
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sent or given in the manner specified below, the Offer will be extended until
the expiration of such period of 10 business days. If Purchaser makes a material
change in the terms of the Offer (other than a change in price or percentage of
securities sought) or in the information concerning the Offer, or waives a
material condition of the Offer, Purchaser will extend the Offer, if required by
applicable law, for a period sufficient to allow stockholders to consider the
amended terms of the Offer.
Purchaser also reserves the right, in its sole discretion, subject to
the terms of the Merger Agreement, in the event any of the conditions specified
above shall not have been satisfied and so long as Shares have not theretofore
been accepted for payment, to delay (except as otherwise required by applicable
law and the rules of the Commission including Rule 14e-1) acceptance for payment
of or payment for Shares or to terminate the Offer and not accept for payment or
pay for Shares.
If Purchaser extends the period of time during which the Offer is open,
is delayed in accepting for payment or paying for Shares or is unable to accept
for payment or pay for Shares pursuant to the Offer for any reason, then,
without prejudice to Purchaser's rights under the Offer, the Depositary may, on
behalf of Purchaser, retain all Shares tendered, and such Shares may not be
withdrawn except in the limited circumstances set forth in the Merger Agreement.
The reservation by Purchaser of the right to delay acceptance for payment of or
payment for Shares is subject to applicable law, which requires that Purchaser
pay the consideration offered or return the Shares deposited by or on behalf of
Stockholders promptly after the termination or withdrawal of the Offer.
Any extension, termination or amendment of the Offer will be followed
as promptly as practicable by a public announcement thereof. In the case of an
extension of the Offer, Purchaser will make a public announcement of such
extension no later than 9:00 a.m., New York City time, on the next business day
after the previously scheduled Expiration Date. Without limiting the manner in
which Purchaser may choose to make any public announcement, Purchaser will have
no obligation (except as otherwise required by applicable law) to publish,
advertise or otherwise communicate any such public announcement other than by
making a release to the Dow Jones News Service.
CERTAIN CONDITIONS OF THE OFFER.
Notwithstanding any other provision of the Offer, Parent and Purchaser
are not required to accept for payment or (subject to any applicable rules and
regulations of the Commission, including Rule 14e-1(c) under the Exchange Act
(relating to Purchaser's obligation to pay for or return tendered Shares after
the termination or withdrawal of the Offer)) pay for any Shares, and may
terminate the Offer, if by the expiration of the Offer, the Minimum Condition
shall not have been satisfied, or at any time on or after August 25, 1999 and
prior to the acceptance for payment of Shares pursuant to the Offer, any of the
following conditions exist:
(a) there shall be instituted or pending any action or proceeding by
any Governmental Entity or by any other person, domestic or foreign, before any
Governmental Entity or arbitrator, (i) challenging or seeking to make illegal,
to delay materially or otherwise directly or indirectly to restrain or prohibit
the making of the Offer, the acceptance for payment of or payment for some of or
all the Shares by Parent or Purchaser or the consummation by Parent or Purchaser
of the Merger, seeking to obtain material damages or otherwise directly or
indirectly relating to the transactions contemplated by the Stockholders
Agreement, the Merger Agreement, the Offer or the Merger, (ii) seeking to
restrain or prohibit Parent's or Purchaser's ownership or operation (or that of
their respective subsidiaries or affiliates) of all or any material portion of
the business or assets of the Company or any of its subsidiaries or of Parent
and its subsidiaries or to compel Parent or any of its subsidiaries or
affiliates to dispose of or hold separate all or any material portion of the
business or assets of the Company or any of its subsidiaries or of Parent and
its subsidiaries, (iii) seeking to impose material limitations on the ability of
Parent or any of its subsidiaries or affiliates effectively to exercise full
rights of ownership of the Shares, including, without limitation, the right to
vote any Shares acquired or owned by Parent or any of its subsidiaries or
affiliates on all matters properly presented to the Company's stockholders, (iv)
seeking to require divestiture by Parent or any of its subsidiaries or
affiliates of any Shares or (v) that otherwise, in the judgment of Parent, is
likely to materially adversely affect the business, assets, liabilities,
operations, condition (financial or otherwise), results of operations or
prospects of the Company or any of its subsidiaries, or Parent and its
subsidiaries, taken as a whole; or
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(b) there shall be any action taken, or any statute, rule, regulation,
injunction, order or decree proposed, enacted, enforced, promulgated, issued or
deemed applicable to the Stockholders Agreement, the Merger Agreement, the Offer
or the Merger, by any Governmental Entity or arbitrator (other than the
application of the waiting period provisions of the HSR Act to the Stockholders
Agreement, the Merger Agreement, the Offer or the Merger), that, in the
reasonable judgment of Parent, is substantially likely, directly or indirectly,
to result in any of the consequences referred to in clauses (i) through (v) of
paragraph (a) above; or
(c) any change shall have occurred (or any development shall have
occurred involving a prospective change) in the business, assets, liabilities,
financial condition, capitalization, operations, results of operations or
prospects of the Company and its subsidiaries taken as a whole that, in the
reasonable judgment of Parent, is or is likely to be materially adverse to the
Company and its subsidiaries taken as a whole or Parent shall have become aware
of any facts that, in the reasonable judgment of Parent have or are likely to
have or result in a Material Adverse Effect; or
(d) there shall have occurred (i) any general suspension of trading in,
or limitation on prices for, securities on the New York Stock Exchange or in the
NASDAQ over-the-counter market in the United States that lasts or has lasted for
at least two full consecutive trading days, (ii) a declaration of a general
banking moratorium or any suspension of payments in respect of banks in the
United States, (iii) any material limitation (whether or not mandatory) by any
Governmental Entity on the extension of credit by banks or other lending
institutions, (iv) a commencement of a war or armed hostilities or other
national or international calamity directly or indirectly involving the United
States which would reasonably be expected to have a Material Adverse Effect or
prevent (or materially delay) the consummation of the Offer or (v) in the case
of any of the foregoing existing at the time of commencement of the Offer, a
material acceleration or worsening thereof; or
(e) a tender or exchange offer for some or all of the Shares shall have
been publicly proposed to be made or shall have been made by another person, or
it shall have been publicly disclosed or Parent shall have otherwise learned
that (i) any person or "group (defined in Section 13(d)(3) of the Exchange Act)
shall have acquired or proposed to acquire beneficial ownership of more than 50%
of any class or series of capital stock of the Company (including the Shares),
through the acquisition of stock, the formation of a group or otherwise, or
shall have been granted any option, right or warrant, conditional or otherwise,
to acquire beneficial ownership of more than 50% of any class or series of
capital stock of the Company (including the Shares) or (ii) any person shall
have filed a Notification and Report Form under the HSR Act or made a public
announcement reflecting an intent to acquire the Company or any of its
subsidiaries or any assets or securities of the Company or any of its
subsidiaries; or
(f) any consent (other than the filing of a certificate of merger or
approval by the stockholders of the Company of the Merger (if required by
Delaware law)) required to be filed, occurred or been obtained by the Company or
any of its subsidiaries or Parent or any of its subsidiaries (including
Purchaser) in connection with the execution and delivery of the Merger
Agreement, the Offer and the consummation of the transactions contemplated by
the Merger Agreement shall not have been filed, occurred or been obtained (other
than any such consents the failure to file, occur or obtain in the aggregate,
could not reasonably be expected to (i) have a Material Adverse Effect or (ii)
prevent or materially delay the consummation of the Offer or the Merger); or
(g) the Company shall have breached or failed to perform in any
material respect any of its covenants or agreements under the Merger Agreement,
or any of the representations and warranties of the Company set forth in the
Merger Agreement that is qualified as to materiality shall not be true when made
or at any time prior to the consummation of the Offer as if made at and as of
such time or any of the representations and warranties set forth in the Merger
Agreement that is not so qualified shall not be true in any material respect
when made or at any time prior to consummation of the Offer as if made at and as
of such time; provided that this condition shall not be deemed to exist unless,
in the reasonable judgment of Parent, such breaches or failures to perform any
covenant, obligation or agreement, and any breach of representation or warranty
without regard to any materiality qualifier or threshold, individually or in the
aggregate, has had or could reasonably be expected to have a Material Adverse
Effect; or
(h) any party to the Stockholders Agreement (other than Purchaser or
Parent) shall have breached or failed to perform in any material respect any of
its agreements under the Stockholders Agreement or any of the representations
and warranties of any such party set forth in the Stockholders Agreement shall
not be true in any material respect, in each
13
<PAGE> 15
case, when made or at any time prior to the consummation of the Offer as if made
at and as of such time, or the Stockholders Agreement shall have been
invalidated or terminated with respect to any Shares subject thereto; or
(i) the Merger Agreement or the Stockholders Agreement shall have been
terminated in accordance with its terms; or
(j) the Board of Directors of the Company (or any special committee
thereof) shall have withdrawn or materially modified in a manner adverse to
Parent or Purchaser its approval or recommendation of the Offer, the Merger or
the Merger Agreement or its approval of the entry by Parent and Purchaser into
the Stockholders Agreement; or
(k) the Company shall have entered into, or shall have publicly
announced its intention to enter into, an agreement or agreement in principle
with respect to any Acquisition Proposal;
which, in the judgment of Parent in any such case, and regardless of the
circumstances (including any action or omission by Parent or Purchaser) giving
rise to any such condition, makes it inadvisable to proceed with such acceptance
for payment or payment. The term"Material Adverse Effect" means a material
adverse effect on (a) the assets, liabilities, condition (financial or
otherwise), business, properties, results of operations or prospects of the
Company and its subsidiaries taken as a whole or (b) the consummation of the
transactions contemplated hereby; provided that occurrences or events resulting
from (i) changes in the prices of oil, gas, natural gas liquids or other
hydrocarbon products, (ii) changes in general economic conditions, including
general stock market conditions and interest rate changes or (iii) the adverse
determination of any pending litigation disclosed in the disclosure schedule to
the Merger Agreement shall in each case be excluded from consideration for
purposes of the effect of an occurrence or event on the Company and its
subsidiaries taken as a whole.
The foregoing conditions may be asserted by Parent in its sole
discretion regardless of the circumstances (including any action or omission by
Parent or Purchaser) giving rise to any such condition or (other than the
Minimum Condition) may be waived by Parent and Purchaser in their discretion in
whole at any time or in part from time to time. The failure by Parent or
Purchaser at any time to exercise its rights under any of the foregoing
conditions shall not be deemed a waiver of any such right; the waiver of any
such right with respect to particular facts and circumstances shall not be
deemed a waiver with respect to any other facts and circumstances, and each such
right shall be deemed an ongoing right which may be asserted at any time or from
time to time. Any determination by Parent concerning the events described above
will be final and binding upon all parties.
In response to any condition to the Offer not being satisfied,
Purchaser may not upon expiration of the Offer (and without extending the period
of time for which the Offer is open) delay acceptance for payment or payment for
Shares until such time as such condition is satisfied or waived; provided that,
subject to the applicable regulations of the Commission, Purchaser reserves the
right (subject to the terms of the Merger Agreement), at any time and from time
to time, to delay acceptance for payment of, or, regardless of whether such
Shares were theretofore accepted for payment, pay for, any Shares in order to
comply with applicable law.
TRANSACTIONS WITH SHERIDAN CALIFORNIA ENERGY, INC.
On January 25, 1999, the Parent entered into an Agreement Regarding
Formation of Corporation with Sheridan California Energy, Inc. ("SCEI"), a
subsidiary of the Company, pursuant to which the Parent, through a subsidiary,
contributed $15 million in cash to SCEI in exchange for (i) a 20% common equity
interest in SCEI and (ii) $13 million of seven-year redeemable non-voting
preferred stock of SCEI. The preferred stock provides for cash dividends of
$0.70 payable annually (a 14.0% annual rate) or, at the discretion of SCEI,
dividends may be paid in kind in an amount equal to .07 additional shares for
each outstanding share of preferred stock. The proceeds of the financing were
used by SCEI to acquire certain Sacramento Basin, California properties (the
"Sacramento Basin Properties") from the Amerada Hess Corporation. The Company in
such transaction contributed $3 million in cash and $4.6 million of seismic data
and oil and gas producing assets in California in exchange for an 80% common
equity interest in SCEI. In connection with such transaction, the Parent,
through a subsidiary, entered into a Gas Purchase and Sale Agreement with the
Company which provides that substantially all of the natural gas produced at the
Sacramento Basin Properties will be sold to the Parent. The above Agreements are
referenced as exhibits to this Schedule 14D-9 and are incorporated herein by
reference in their entirety.
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<PAGE> 16
ITEM 4. THE SOLICITATION OR RECOMMENDATION
(a) Recommendation of the Board of Directors
A Special Meeting of the Company's Board of Directors ("Board" or
"Board of Directors") was held on August 24, 1999 to discuss the terms of the
Merger Agreement and the transactions contemplated thereunder. Since, pursuant
to the terms of the proposed Merger Agreement, the Preferred Stock beneficially
owned by Enron Capital & Trade Resources Corp. ("ECT") will be redeemed at a
premium (equal to $10.10 per share of Preferred Stock), Messrs. Childers and
Dunn, directors of the Company and employees of ECT, abstained from the initial
vote on the transaction to avoid any claim of their being considered
"interested" directors in connection with the contemplated transactions.
Thereafter, after all of the disinterested directors voted unanimously in favor
of the transaction, in order to accurately state that the transaction was
approved unanimously by the Board of Directors, Messrs. Childers and Dunn voted
in favor of the Merger Agreement and the transactions contemplated thereunder.
Accordingly, THE BOARD HAS UNANIMOUSLY APPROVED THE OFFER AND THE MERGER AND
DETERMINED THAT THE TERMS OF THE OFFER AND THE MERGER ARE FAIR TO, AND IN THE
BEST INTERESTS OF, THE STOCKHOLDERS OF THE COMPANY. THE BOARD UNANIMOUSLY
RECOMMENDS THAT ALL STOCKHOLDERS ACCEPT THE OFFER AND TENDER THEIR SHARES
PURSUANT TO THE OFFER.
A copy of the letter to the Company's stockholders communicating the
Board's recommendation is filed as an Exhibit to this Schedule 14D-9 and is
incorporated herein by reference in its entirety.
(b) Background; Reasons for the Recommendation.
Background.
In January 1999, Parent made an investment in, and agreed to purchase
natural gas from, SCEI, a subsidiary of the Company. SCEI used the proceeds of
the investment and other funds to purchase the Sacramento Basin Properties.
Following the January 1999 investment in SCEI, John T. King, Vice
President-Business Development of Parent, had several discussions with B. A.
Berilgen, the President and Chief Executive Officer of the Company, about the
Company's capitalization and prospects for growth. During these discussions, Mr.
King inquired as to whether the Company would be interested in discussing a
possible business combination transaction. Mr. Berilgen encouraged Mr. King to
discuss the possibility of a transaction directly with Jeffrey E. Susskind, the
Chairman of the Board of Directors of the Company.
On May 21, 1999, on behalf of Parent, Mr. King sent a letter to Mr.
Susskind expressing an interest to meet and discuss Parent's interest in the
Company. On May 24, 1999, Mr. King and Mr. Susskind met in Houston, Texas. At
such meeting, Mr. King indicated that Parent desired to evaluate further a
possible business combination with the Company at a price of $4.00 per Share.
Mr. Susskind indicated that he was not satisfied with Parent's valuation, but
expressed interest in further discussions and indicated that the Company would
be willing to provide Parent with an opportunity to conduct preliminary due
diligence with respect to the Company.
Following execution of the Confidentiality Agreement, the Company
provided Parent with certain due diligence materials including information
relating to the Company's natural gas reserves. In addition, on June 10, 1999,
Mr. Susskind, along with D. Bradley Dunn, a director of the Company, made a
presentation to certain members of Parent's management at Parent's offices in
San Jose, California regarding the Company's views on valuation.
On July 2, 1999, Mr. King sent a letter to Mr. Susskind that contained
a revised proposal to enter into a business combination transaction with the
Company at a price of $5.00 per Share. Following the July 2 letter, Mr. King was
informed that the Company had engaged DLJ as the Company's exclusive financial
advisor in connection with a possible transaction. Mr. Berilgen then informed
Mr. King that the Company intended to explore a sale opportunity with another
party.
15
<PAGE> 17
Approximately one week later, Mr. King received telephone calls from
both Mr. Berilgen and a representative of DLJ indicating an opportunity for
Parent to make a revised proposal to acquire the Company. On August 11, 1999,
Mr. King sent a letter to Mr. Berilgen containing Parent's final offer to
acquire the Company at a $5.50 per Share cash price. On August 12, 1999, a DLJ
representative informed Mr. King that the Company was prepared to negotiate
definitive agreements for the proposed transaction.
During the week of August 16, 1999 through the morning of August 25,
representatives of Parent, including its legal advisor, negotiated with
representatives of the Company, including its legal advisor, regarding terms of
a definitive merger agreement and conducted detailed due diligence. During this
time, representatives of Parent also negotiated with representatives of the
Stockholders party to the Stockholders Agreement regarding the terms of the
Stockholders Agreement. These negotiations included a meeting in Houston, Texas
on Friday, August 20, 1999 attended by representatives of Parent and of the
Company and, to finalize the definitive agreements, a subsequent meeting of
representatives of both companies in Houston, Texas on Tuesday, August 24, 1999.
Final negotiations continued into the early morning of Wednesday, August 25. At
the conclusion of these negotiations, the Merger Agreement and the Stockholders
Agreement were executed. At approximately 9:00 a.m., New York City time, on
Wednesday, August 25, 1999, Parent and the Company issued separate press
releases announcing the transaction.
Reasons for the Recommendation. In reaching its conclusions and
recommendations described above, the Board of Directors considered the following
factors:
(i) the fact that the Company is relatively small in the oil
and gas industry and is susceptible to any changes in the oil and gas
market. The Board noted that a significant drop in the volatile price
of oil and gas could have a material and adverse impact in the
Company's earnings and future growth;
(ii) the Company's need for additional capital infusion for
its working capital and the difficulty in securing the same without
substantially diluting the interests of existing stockholders;
(iii) the terms of the Merger Agreement, including the
proposed structure of the Offer and the Merger involving an immediate
cash tender offer for outstanding Shares to be followed by a merger for
the same consideration, thereby enabling stockholders to obtain cash
for their Shares at the earliest possible time;
(iv) that the discussions with certain unrelated parties,
although preliminary in nature, indicated that a per share cash price
of $5.50 was at the upper end of the range at which a transaction was
likely to be consummated;
(v) that the $5.50 per share cash price represents a
substantial premium over the closing price for the Shares on August 20,
1999, and a premium of approximately 74.1% over the one year average
share price for the Common Stock;
(vi) the presentations by Donaldson, Lufkin & Jenrette
Securities Corporation ("DLJ") and the opinion delivered orally at the
August 24, 1999 Board special meeting, as well as its written opinion
delivered on August 27, 1999, to the effect that, as of such date and
based upon and subject to the matters reviewed with the Board, the cash
consideration to be received by the holders of the Shares pursuant to
the Merger Agreement is fair from a financial point of view to such
holders. A copy of the opinion of DLJ, which sets forth the factors
considered, the assumptions made and the limitations on the review
undertaken by DLJ, is attached hereto as an Exhibit to this Schedule
14D-9 and is incorporated herein by reference in its entirety.
STOCKHOLDERS ARE URGED TO READ THE OPINION OF DLJ CAREFULLY IN ITS
ENTIRETY; and
(vii) that Parent requested in connection with its
negotiations with the Company that led to the Merger Agreement that the
Company not solicit possible acquisition interest from third parties.
In determining that this was an appropriate course of action, the Board
considered (1) the results of the Company's contact with other
potential acquirors, (2) the uncertainties and potential adverse impact
that a "public" auction of the company could have on the business,
employees and prospects of the Company, including its relationships
with customers and other third parties, (3) its belief, after
considering the presentations of its financial advisors, that the price
per share in the Offer and Merger was sufficiently attractive so that
it did not feel compelled to seek
16
<PAGE> 18
other offers before executing the Merger Agreement and (4) the terms of
the Merger Agreement, which permit the Company, under certain
circumstances, to participate in discussions and negotiations with
third parties and to recommend a Superior Acquisition Proposal (as
defined in the Merger Agreement). The Board, after considering the
presentations of its financial advisor, did not believe that the
termination provisions set forth in the Merger Agreement, including
payment of a termination fee, would deter a higher offer.
The Board did not assign relative weights to the foregoing factors or
determine that any factor was of particular importance. Rather, the Board viewed
its position and recommendation as being based on the totality of the
information presented to and considered by it.
ITEM 5. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED
DLJ was retained, pursuant to the terms of a letter agreement dated
July 8, 1999, as thereafter supplemented, as the Company's exclusive financial
advisor assisting the Company in identifying and evaluating potential
acquisition candidates and to render an opinion letter as to the consideration
to be received by the Company's stockholders pursuant to the terms of the Merger
Agreement from a financial point of view. The Company agreed to pay DLJ (i) a
retainer fee of $100,000 upon execution of the letter agreement; (ii) a fee of
$500,000 at the time DLJ delivered its opinion to the Board in connection with
the Merger Agreement, and an additional fee of $50,000 for each update of a
prior opinion delivered by DLJ; and (iii) an additional fee upon the successful
consummation of the transactions contemplated by the Merger Agreement, equal to
one and one-quarter percent (1.25%) of the Total Transaction Value, as defined
in such letter agreement, of such transaction (the "Success Fee"), less amounts
previously paid under Items (i) and (ii) above. However, the Success Fee is
reduced to one percent (1%) if the Total Transaction Value is less than a
certain specified amount. The Company has also agreed to reimburse DLJ for its
reasonable out-of-pocket expenses (including the reasonable fees and expenses of
its legal counsel) up to a maximum of $20,000, and to indemnify DLJ for certain
liabilities arising out of or in connection with the engagement of DLJ.
DLJ has previously performed investment banking and other services for
the Parent including acting as co-manager for the Parent's $186 million common
stock offering in February 1999 and has been compensated for such services.
Except as disclosed herein, neither the Company nor any person acting
on its behalf currently intends to employ, retain or compensate any other person
to make solicitations or recommendations to security holders on its behalf
concerning the Offer or the Merger.
ITEM 6. RECENT TRANSACTIONS WITH RESPECT TO SECURITIES
(a) No transactions in shares of Common Stock have been effected during
the past 60 days by the Company or, to the best of the Company's knowledge,
except as otherwise set forth or referenced in this Schedule 14D-9, by any
executive officer, director, affiliate or subsidiary of the Company.
(b) To the knowledge of the Company, all of its executive officers,
directors, affiliates and subsidiaries currently intend to tender pursuant to
the Offer all shares of Common Stock held of record or beneficially owned by
them (other than shares issuable upon exercise of options and shares, if any,
which if tendered could cause such persons to incur liability under the
provisions of Section 16(b) of the Exchange Act) or to vote such shares of
Common Stock in favor of approval and adoption of the Merger Agreement. As
referenced above, certain stockholders of the Company, including Messrs.
Berilgen, Chambers, Gerlich and Susskind, have entered into a Stockholders
Agreement with the Purchaser and the Parent which grants the Purchaser a proxy
to vote or consent at every annual, special or adjourned meeting, or
solicitation of consents, among other things, in favor of the adoption of the
Merger Agreement and such Stockholders Agreement and approval of the Merger and
the other transactions contemplated by such agreements. A copy of the
Stockholders Agreement is attached hereto as an Exhibit to this Schedule 14D-9
and is incorporated herein in its entirety.
17
<PAGE> 19
ITEM 7. CERTAIN NEGOTIATIONS AND TRANSACTIONS BY THE SUBJECT COMPANY
(a) Except as set forth in this Schedule 14D-9, the Company is not
engaged in any negotiation in response to the Offer which relates to or would
result in (i) an extraordinary transaction, such as a merger or reorganization,
involving the Company or any subsidiary of the Company; (ii) a purchase, sale or
transfer of a material amount of assets by the Company or any subsidiary of the
Company; (iii) a tender offer for or other acquisition of securities by or of
the Company; or (iv) any material change in the present capitalization or
dividend policy of the Company.
(b) Except as set forth in this Schedule 14D-9, there are no
transactions, Board resolutions, agreements in principle or signed contracts in
response to the Offer that relate to or would result in one or more of the
events referred to in Item 7(a) above.
ITEM 8. ADDITIONAL INFORMATION TO BE FURNISHED
(a) Delaware General Corporation Law 203 and State Takeover Statutes
Section 203 of the Delaware General Corporation Law ("DGCL") provides
that a corporation organized under Delaware law, such as the Company, shall not
engage in a business combination with a stockholder beneficially owning 15% or
more of the outstanding voting stock of such corporation (an "Interested
Stockholder") for a period of three years following the date such stockholder
first becomes an Interested Stockholder unless (i) prior to the date the
stockholder first becomes an Interested Stockholder, the board of directors of
the corporation approved either the business combination or the transaction
which resulted in the stockholder becoming an Interested Stockholder, (ii) upon
becoming an Interested Stockholder, the Interested Stockholder owned at least
85% of the voting stock of the corporation outstanding at the time the
transaction commenced, or (iii) at or subsequent to the date the stockholder
becomes an Interested Stockholder, the business combination is approved by the
board of directors and authorized at an annual or special meeting of the
stockholders by the affirmative vote of at least two-thirds of the outstanding
voting stock which is not owned by the Interested Stockholder. The Company's
Board has approved the Merger Agreement, the Stockholders Agreement and the
transactions contemplated thereunder, including the Offer and the Merger, and,
therefore, Section 203 of the DGCL is inapplicable to the Offer and the Merger.
Pursuant to the Merger Agreement, the Company has agreed to take all
steps necessary if any state takeover statute or similar law or regulation
becomes applicable to the Merger Agreement, to ensure the Offer, the Merger and
the other transactions contemplated by the Merger Agreement may be consummated
as promptly as practicable on the terms set forth in the Merger Agreement and to
otherwise minimize the effect of such law or regulation on the Offer, the Merger
and the other transactions contemplated thereby.
(b) Information Statement
The Information Statement attached hereto as Annex A hereto is being
furnished in connection with the possible designation by the Parent, pursuant to
the Merger Agreement, of certain persons to be appointed to the Board other than
at a meeting of the Company's stockholders.
(c) Schedule 14D-1 and Offer to Purchase
(d) Press Releases
Press releases issued by the Company and the Parent on August 25, 1999
with respect to the announcement of the execution of the Merger Agreement and
the Offer are attached hereto and incorporated herein by reference.
The Schedule 14D-1 and Offer to Purchase are incorporated herein by
reference.
ITEM 9. MATERIAL TO BE FILED AS EXHIBITS
Exhibit 1 Agreement and Plan of Merger dated as of August 25, 1999
among the Company, the Parent and the Purchaser
(Incorporated by reference to Exhibit 2.1 of the Company's
report on Form 8-K dated August 31, 1999).
Exhibit 2 Stockholders Agreement dated as of August 25, 1999 between
the Parent and several stockholders (Incorporated by
reference to Exhibit 99.1 of the Company's report on Form
8-K dated August 31, 1999).
18
<PAGE> 20
Exhibit 3 Offer to Purchase dated August 31, 1999 (Incorporated by
reference to Tender Offer Statement on Schedule 14D-1, dated
August 31, 1999, as filed by CPN Sheridan, Inc. and amended
and supplemented from time to time).
Exhibit 4 Employment Agreement dated as of June 5, 1997, as amended,
between the Company and B. A. Berilgen (Incorporated by
reference to Exhibit 10.29 of the Company's Form 10-QSB
filed August 14, 1997).
Exhibit 5 Shareholder Agreement among the Company, ECT et al.
(Incorporated by reference to Exhibit 10.2 of the Company's
Form 8-K filed on December 2, 1997).
Exhibit 6 Agreement Regarding Formation of Corporation by and among
the Company, SCEI, the Parent and CPN Production Company
(Incorporated by reference to Exhibit 10.2 of the Company's
Form 8-K dated January 25, 1999).
Exhibit 7 Gas Purchase and Sale Agreement between SCEI and Calpine
Fuel Company (Incorporated by reference to Exhibit 10.4 of
the Company's Form 8-K dated January 25, 1999).
*Exhibit 8 Opinion of Donaldson, Lufkin & Jenrette Securities
Corporation dated August 27, 1999.
*Exhibit 9 Letter to Stockholders from Company dated August 31, 1999.
*Exhibit 10 Press Release issued by the Company dated August 25, 1999.
*Exhibit 11 Press Release issued by Calpine Corporation dated August 25,
1999.
*Annex A Information Statement of the Company.
- ------------
* Included in copies of the Schedule 14D-9 mailed to stockholders.
This document and exhibits attached hereto may contain certain statements
that are considered "forward-looking statements" under the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995 (the
"PSLRA"). Although the Company believes the expectations reflected in such
forward-looking statements are based on reasonable assumptions, it can give no
assurance that its expectations will be realized. There can be no assurance that
actual results will not differ materially due to various factors, many of which
are beyond the control of the Company, including, but not limited to,
competition and general economic, capital and commodity market conditions and
other risks described from time to time in the Company's reports with the
Securities and Exchange Commission including quarterly reports on Form 10-QSB,
annual reports on Form 10-KSB and reports on Form 8-K. The safe harbor
provisions of the PSLRA with respect to forward-looking statements are not
available to statements made in connection with a tender offer.
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<PAGE> 21
SIGNATURES
After reasonable inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete and
correct.
Dated: August 31, 1999
SHERIDAN ENERGY, INC.
By: /s/ B. A. BERILGEN
-----------------------------------
B. A. Berilgen
President and Chief Executive
Officer
20
<PAGE> 22
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<S> <C>
Exhibit 1 Agreement and Plan of Merger dated as of August 25, 1999
among the Company, the Parent and the Purchaser
(Incorporated by reference to Exhibit 2.1 of the Company's
report on Form 8-K dated August 31, 1999).
Exhibit 2 Stockholders Agreement dated as of August 25, 1999 between
the Parent and several stockholders (Incorporated by
reference to Exhibit 99.1 of the Company's report on Form
8-K dated August 31, 1999).
Exhibit 3 Offer to Purchase dated August 31, 1999 (Incorporated by
reference to Tender Offer Statement on Schedule 14D-1, dated
August 31, 1999, as filed by CPN Sheridan, Inc. and amended
and supplemented from time to time).
Exhibit 4 Employment Agreement dated as of June 5, 1997, as amended,
between the Company and B. A. Berilgen (Incorporated by
reference to Exhibit 10.29 of the Company's Form 10-QSB
filed August 14, 1997).
Exhibit 5 Shareholder Agreement among the Company, ECT et al.
(Incorporated by reference to Exhibit 10.2 of the Company's
Form 8-K filed on December 2, 1997).
Exhibit 6 Agreement Regarding Formation of Corporation by and among
the Company, SCEI, the Parent and CPN Production Company
(Incorporated by reference to Exhibit 10.2 of the Company's
Form 8-K dated January 25, 1999).
Exhibit 7 Gas Purchase and Sale Agreement between SCEI and Calpine
Fuel Company (Incorporated by reference to Exhibit 10.4 of
the Company's Form 8-K dated January 25, 1999).
*Exhibit 8 Opinion of Donaldson, Lufkin & Jenrette Securities
Corporation dated August 27, 1999.
*Exhibit 9 Letter to Stockholders from Company dated August 31, 1999.
*Exhibit 10 Press Release issued by the Company dated August 25, 1999.
*Exhibit 11 Press Release issued by Calpine Corporation dated August 25,
1999.
*Annex A Information Statement of the Company.
</TABLE>
- ------------
* Included in copies of the Schedule 14D-9 mailed to stockholders.
<PAGE> 1
EXHIBIT 8
[DONALDSON, LUFKIN & JENRETTE LETTERHEAD]
August 27, 1999
Board of Directors
Sheridan Energy, Inc.
1000 Louisiana Street, Suite 800
Houston, Texas 77002
Dear Sirs:
You have requested our opinion as to the fairness from a financial point
of view to the stockholders of Sheridan Energy, Inc. (the "Company") of the
consideration to be received by such stockholders of the Company pursuant to
the terms of the Agreement and Plan of Merger, dated as of August 16, 1999 (the
"Agreement"), among the Company, Calpine Corporation ("Calpine"), and Merger
Subsidiary, a wholly owned subsidiary of Calpine ("Merger Subsidiary"),
pursuant to which the Merger Subsidiary will be merged (the "Merger") with and
into the Company.
Pursuant to the Agreement, Merger Subsidiary will commence a tender offer
(the "Tender Offer") for any and all outstanding shares of the Company's common
stock at a price of $5.50 per share. The Tender Offer is to be followed by the
Merger in which the shares of all stockholders of the Company who did not
tender their shares in the Tender Offer should be converted into the right to
receive $5.50 per share in cash.
In arriving at our opinion, we have reviewed the draft dated August 16,
1999 of the Agreement. We also have reviewed financial and other information
that was publicly available or furnished to us by the Company including
information provided during discussions with management. Included in the
information provided during discussions with management were estimates, dated
as of July 1, 1999, of proved reserves and future revenue of the Company's
interest in certain of the Company's oil and gas properties prepared by
Netherland, Sewell & Associates, Inc. as well as management. We have also
reviewed certain financial projections of the Company for the period beginning
January 1999 and ending December 2000 prepared by the management of the Company.
In addition, we have compared certain financial and securities data of the
Company with data of various other companies whose securities are traded in
public markets, reviewed the historical stock prices and trading volumes of the
Company's common stock, reviewed prices paid in certain other business
combinations and conducted such other financial studies, analyses and
investigations as we deemed appropriate for purposes of this opinion.
<PAGE> 2
Sheridan Energy, Inc.
Page 2 August 27, 1999
In rendering our opinion, we have relied upon and assumed the accuracy and
completeness of all of the financial and other information that was available
to us from public sources, that was provided to us by the Company or its
representatives, or that was otherwise reviewed by us. With respect to the
financial projections and other estimates prepared by the Company that were
supplied to us, we have relied on representations that they have been
reasonably prepared on the basis reflecting the best currently available
estimates and judgments of the management of the Company as to the future
operating and financial performance of the Company. We have not assumed any
responsibility for making an independent evaluation of any assets or
liabilities of the Company or for making any independent verification of any of
the information reviewed by us.
Our opinion is necessarily based on economic, market, financial and other
conditions as they exist on, and on the information made available to us as of,
the date of this letter. It should be understood that, although subsequent
developments may affect this opinion, we do not have any obligation to update,
revise or reaffirm this opinion. Our opinion does not address the relative
merits of the Tender Offer or Merger and the other business strategies being
considered by the Company's Board of Directors, nor does it address the Board's
decision to proceed with the Tender Offer or Merger. Our opinion does not
constitute a recommendation to any stockholder as to whether such stockholder
should tender any shares in the Tender Offer or as to how such stockholder
should vote on the proposed Merger.
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), as part of its
investment banking services, is regularly engaged in the valuation of businesses
and securities in connection with mergers, acquisitions, underwritings, sales
and distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes. You should be aware that DLJ has
performed investment banking and other services for Calpine in the past,
including acting as co-manager for Calpine's $186 million common stock offering
in February 1999 and has been compensated for such services.
Based upon the foregoing and such other factors as we deem relevant, we
are of the opinion that the consideration to be received by the holders of
common stock of the Company pursuant to the Agreement is fair to such holders
of the Company from a financial point of view.
Very truly yours,
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By: /s/ TOWNES G. PRESSLER, JR.
-----------------------------
Townes G. Pressler, Jr.
Senior Vice President
<PAGE> 1
EXHIBIT 9
[SHERIDAN ENERGY, INC. LETTERHEAD]
August 31, 1999
Dear Stockholder:
On August 25, 1999, Sheridan Energy, Inc. ("Sheridan") entered into an
Agreement and Plan of Merger (the "Agreement") with Calpine Corporation
("Calpine") and its wholly owned subsidiary, CPN Sheridan, Inc. ("Purchaser"),
that provides for the acquisition of Sheridan by Purchaser. Under the terms of
the Agreement, the Purchaser has commenced a cash tender offer for all
outstanding shares of Sheridan's common stock at $5.50 per share.
A Special Meeting of Sheridan's Board of Directors ("Board" or "Board
of Directors") was held on August 24, 1999, to discuss the terms of the Merger
Agreement and the transactions contemplated thereunder. THE BOARD HAS
UNANIMOUSLY APPROVED THE OFFER AND THE MERGER AND DETERMINED THAT THE TERMS OF
THE OFFER AND THE MERGER ARE FAIR TO, AND IN THE BEST INTERESTS OF, THE
STOCKHOLDERS OF SHERIDAN. THE BOARD UNANIMOUSLY RECOMMENDS THAT ALL STOCKHOLDERS
ACCEPT THE OFFER AND TENDER THEIR SHARES PURSUANT TO THE OFFER.
In arriving at its recommendation, the Board of Directors gave careful
consideration to a number of factors. These factors included, among other
things, the opinion orally delivered on August 24, 1999 and in writing on
August 27, 1999, of Donaldson, Lufkin & Jenrette Securities Corporation,
financial advisor to Sheridan, that the cash consideration to be offered to
Sheridan's stockholders pursuant to the cash tender offer and merger is fair to
the stockholders from a financial point of view.
Enclosed with this letter is a copy of Sheridan's
Solicitation/Recommendation Statement on Schedule 14D-9 and related materials.
Also enclosed is the Offer for Purchase for Cash of Purchaser, together with
other related materials. These documents set forth the terms and conditions of
the offer and other important information. We encourage you to read the enclosed
materials carefully.
On behalf of myself, the other members of management and the Board of
Sheridan, I want to thank you for the support you have given Sheridan.
Sincerely,
SHERIDAN ENERGY, INC.
/s/ JEFFREY E. SUSSKIND
Jeffrey E. Susskind
Chairman of the Board
<PAGE> 1
EXHIBIT 10
WEDNESDAY, AUGUST 25, 7:58 AM EASTERN TIME
COMPANY PRESS RELEASE
SOURCE: Sheridan Energy, Inc.
CALPINE CORPORATION TO ACQUIRE SHERIDAN ENERGY, INC.
HOUSTON, Aug. 25/PRNewswire/ -- Jeffrey E. Susskind, Chairman of the Board of
Sheridan Energy, Inc. (Nasdaq: SHDN - news; "Sheridan") announced today that
Calpine Corporation (NYSE:CPN - news; "Calpine"), has agreed to commence,
through a wholly owned newly formed subsidiary, a cash tender offer for all
outstanding shares of common stock of Sheridan at a price of $5.50 net per
share (the "Offer"). The Offer is being made pursuant to a Merger Agreement
with Sheridan which was executed on August 25, 1999.
The Offer is conditioned upon, among other things, there being validly tendered
and not withdrawn prior to the expiration date of the Offer, shares of Sheridan
common stock representing not less than 50.1% of the fully diluted outstanding
shares. Certain stockholders and executive officers of Sheridan have agreed to
tender their shares in the Offer representing over 50% of the outstanding
Sheridan common stock.
Mr. Susskind stated that the Board of Directors of Sheridan has determined that
the Offer and proposed merger are advisable and fair to, and in the best
interests of, Sheridan and its stockholders. Based upon, among other things,
their review of the market place, Sheridan's prospects for future growth, and an
opinion received from Donaldson, Lufkin & Jenrette Securities Corporation, that
the consideration to be received by the Sheridan stockholders pursuant to the
Offer were fair from a financial point of view, the Sheridan Board has
unanimously recommended that the stockholders accept the Offer and tender their
shares.
Mr. Susskind stated that the price was a significant premium over Sheridan's
12-month average trading price and represents an attractive transaction for
Sheridan's shareholders.
Following the consummation of the Offer, any shares not purchased in the Offer
will be acquired in a merger at the same $5.50 net per share in cash, to be
consummated as soon as practicable following completion of the Offer.
Stockholders are cautioned that all forward-looking statements involve risks and
uncertainties, including without limitation, statements about the costs of
exploring and developing new oil and natural gas reserves, the price for which
such reserves can be sold, environmental concerns affecting the drilling of oil
and natural gas wells, pending litigation, and general market conditions,
competition and pricing. Although Sheridan believes that the assumptions
underlying the forward-looking statements contained herein are reasonable, any
of the assumptions could be inaccurate, and
<PAGE> 2
Yahoo - Calpine Corporation to Acquire Sheridan Energy, Inc. Page 2 of 2
there can, therefore, be no assurance that the forward-looking statements
included herein will prove accurate. Because of significant uncertainties
inherent in the forward-looking statements contained herein, the inclusion of
such information should not be regarded as a representation by Sheridan or any
other person that the objectives and plans of Sheridan will be achieved.
Sheridan Energy, Inc. is a publicly traded oil and gas exploration production
company. Sheridan's core properties and operations are in the Sacramento Basin
of California and South Texas. For more information on Sheridan, contact
Michael A. Gerlich, Vice President and Chief Financial Officer at 713-651-7899
or please visit our web site at www.sheridanenergy.com.
SOURCE: Sheridan Energy, Inc.
MORE QUOTES o Calpine Corp (NYSE:CPN - news)
AND NEWS: o Sheridan Energy Inc (Nasdaq:SHDN - news)
RELATED NEWS CATEGORIES: oil/energy, utilities
[ ] [ ] HELP
Copyright (c) 1999 PRNewswire. All rights reserved. Republication or
redistribution of PRNewswire content is expressly prohibited without prior
written consent of PRNewswire. PRNewswire shall not be liable for any errors or
delays in the content, or for any actions taken in reliance thereon.
See our Important Disclaimers and Legal Information.
Questions or Comments?
<PAGE> 1
EXHIBIT 11
WEDNESDAY AUGUST 25, 9:05 AM EASTERN TIME
COMPANY PRESS RELEASE
CALPINE CORPORATION TO ACQUIRE SHERIDAN
ENERGY, INC.
CALPINE TO ADD 148 BCF OF PROVEN GAS RESERVES
SAN JOSE, Calif. --(BUSINESS WIRE)-- Aug. 25, 1999--Calpine Corporation
(NYSE:CPN - news), a leading U.S. power company, today announced it has entered
into an agreement with Houston, Texas-based Sheridan Energy, Inc.
(Nasdaq:SHDN - news; Sheridan), a natural gas exploration and production
company, to acquire Sheridan through a $41 million cash tender offer.
Calpine will offer to purchase all outstanding shares of Sheridan's common
stock for $5.50 per share. Subject to customary conditions, the companies
expect to complete the tender offer in September 1999.
Sheridan's oil and gas properties are located in northern California and the
Gulf Coast region, including 148 billion cubic feet equivalent of proven
reserves, of which 90 percent are natural gas.
These reserves are located in strategic markets where Calpine is developing
low-cost natural gas supplies and proprietary pipeline systems in support of
its highly efficient, natural gas-fired power plants. These fully integrated
regional systems will provide Calpine with the flexibility to respond quickly
and cost effectively to changing market conditions.
In January 1999, Calpine acquired a 20 percent interest in Sheridan's northern
California properties through an investment in Sheridan California Energy,
Inc., an affiliate of Sheridan.
"Sheridan is a strategic addition to Calpine's fuel capabilities and brings to
Calpine a wealth of expertise in every facet of gas exploration and
development," said Tom Mason, Calpine executive vice president. "In addition,
Sheridan's portfolio of proven gas reserves will further strengthen our
'wellhead-to-burner tip' fuel program, giving Calpine a stronger competitive
advantage as energy markets across the country deregulate."
The Boards of Directors of Calpine and Sheridan have approved the transaction.
In addition, certain Sheridan shareholders have agreed to tender their shares,
representing an aggregate of approximately 51 percent of the outstanding
shares, to Calpine.
Calpine Corporation is national power company dedicated to providing customers
with reliable and competitively priced electricity and thermal energy. Calpine
currently has approximately 8,500
<PAGE> 2
Yahoo - Calpine Corporation to Acquire Sheridan Energy, Inc. Page 2 of 2
megawatts of capacity in operation, under construction or in announced
development in 12 states -- enough energy to power eight and a half million
households.
Calpine has headquarters in San Jose, with regional offices in Houston, Texas;
Pleasanton, Calif.; and Boston, Mass. The company was founded in 1984 and is
publicly traded on the New York Stock Exchange under the symbol CPN. To learn
more about Calpine, visit its website at www.calpine.com.
The matters discussed in this news release may be considered "forward looking"
statements within the meaning of Section 27A of the Securities and Exchange Act
of 1993, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. Such statements include declarations regarding the intent, belief or
current expectations of the Company and its management. Prospective investors
are cautioned that any such forward-looking statements are not guarantees of
future performance and involve a number of risks and uncertainties; actual
results could differ materially from those indicated by such forward-looking
statements. Among the important factors that could cause results to differ
materially from those indicated by such forward-looking statements are: (i) that
the information is of a preliminary nature and may be subject to further
adjustments, (ii) risks associated with tender offers and mergers, (iii) changes
in government regulation, (iv) general operating risks, (v) the dependence on
third parties, (vi) the dependence on senior management, (vii) the successful
exploitation of an oil or gas resource that ultimately depends upon the geology
of the resource, the total amount and cost to develop recoverable reserves,
and operational factors relating to the extraction of natural gas, and (viii)
other risks identified from time to time in the Company's reports and
registration statements filed with the Securities and Exchange Commission.
- -----------------------------------
Contact:
Calpine Corporation, San Jose
Katharine Potter, 408/995 5115 Ext. 1168
Rick Barraza, 408/995-5115 Ext. 1125 (IR)
- ---------------------------------------------
MORE QUOTES AND NEWS: Calpine Corp (NYSE:CPN - news)
RELATED NEWS CATEGORIES: oil/energy, utilities
- ---------------------------------------------
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provided by Business Wire are copyrighted. Any forms of copying other than an
individual user's personal reference without express written permission is
prohibited. Further distribution of these materials is strictly forbidden,
including but not limited to, posting, emailing, faxing, archiving in a public
database, redistributing via a computer network or in a printed form.
See our Important Disclaimers and Legal Information.
Questions or Comments?
<PAGE> 1
ANNEX A
SHERIDAN ENERGY, INC.
1000 LOUISIANA, SUITE 800
HOUSTON, TEXAS 77002
INFORMATION STATEMENT PURSUANT TO
SECTION 14(f) OF THE SECURITIES EXCHANGE ACT OF 1934
AND RULE 14f-1 THEREUNDER
This Information Statement is being mailed on or about August 31, 1999
as a part of the Solicitation/Recommendation Statement on Schedule 14D-9 (the
"Schedule 14D-9") of Sheridan Energy, Inc. (the "Company") to the holders of
record of shares of common stock, par value $.01 per share, of the Company (the
"Common Stock") at the close of business on or about August 31, 1999.
Capitalized terms used herein and not otherwise defined herein shall have the
respective meanings set forth in the Schedule 14D-9. You are receiving this
Information Statement in connection with the possible election of persons
designated by Calpine Corporation, a Delaware corporation (the "Parent") to a
majority of the seats on the Board of Directors of the Company (the "Board").
On August 25, 1999, the Company, the Parent and CPN Sheridan, Inc., a
Delaware corporation (the "Purchaser") and wholly owned subsidiary of the
Parent, entered into an Agreement and Plan of Merger (the "Merger Agreement"),
in accordance with the terms and subject to the conditions of which (i) the
Parent will cause the Purchaser to commence a tender offer (the "Offer") for the
issued and outstanding Fully Diluted Shares (as defined below) of the Common
Stock (the "Shares") at a price per Share of $5.50 net to the seller in cash,
and (ii) following consummation of the Offer and subject to certain conditions,
the Purchaser will merge with and into the Company (the "Merger"). As a result
of the Offer and the Merger, the Company will become a wholly owned subsidiary
of the Parent. The Merger Agreement requires the Company, promptly upon the
acceptance for payment of, and payment by the Purchaser in accordance with the
Offer for, Shares pursuant to the Offer constituting at least a majority of the
issued and outstanding Fully Diluted Shares of Common Stock, to take all actions
necessary to cause the Parent's designees to be elected to the Board under the
circumstances described therein. See Section 1.3 of the Merger Agreement
entitled "Directors."
You are urged to read this Information Statement carefully. You are
not, however, required to take any action.
Pursuant to the Merger Agreement, the Purchaser commenced the Offer on
August 31, 1999. The Offer is scheduled to expire at 12:00 midnight, New York
City time, on September 28, 1999, unless the Offer is extended.
The information contained in this Information Statement concerning the
Parent, the Purchaser and the Parent's designees has been furnished to the
Company by the Parent and the Purchaser, and the Company assumes no
responsibility for the accuracy or completeness of such information.
A-1
<PAGE> 2
BOARD OF DIRECTORS AND EXECUTIVE OFFICERS
GENERAL
The Shares are the only class of voting securities of the Company
outstanding. Each Share has one vote. As of August 25, 1999, there were
6,733,770 Shares outstanding, 725,500 Shares authorized for issuance pursuant to
the exercise of outstanding stock options and 150,000 Shares authorized for
issuance pursuant to the exercise of outstanding Warrants. The Board currently
consists of seven members. Each director holds office until the next Annual
Meeting of stockholders and until his successor is duly elected and qualifies,
or until such director's earlier resignation or removal. In accordance with a
shareholders' agreement entered into between the Company and Enron Capital &
Trade Resources Corp. ("ECT") in 1997, ECT was given the right to require the
Company to name two ECT designees to the Board. ECT made such request in 1998
and as a result, the Board increased the size of the Board of Directors from
five to seven members and elected Messrs. Childers and Dunn to serve until the
Annual Meeting. At the 1999 Annual Meeting of Stockholders, Messrs. Childers and
Dunn, together with the other members of the Board, were elected by the
stockholders to serve for a period of one year or until their successors are
duly elected and qualified.
ECT beneficially owns (see "Security Ownership of Certain Beneficial
Owners and Management") 1,139,556.25 shares of the Company's Series A Preferred
Stock ("Preferred Stock"). Although such Preferred Stock will not be purchased
in the Offer, the Minimum Condition (as defined below) shall cause a "change of
control" under the terms of the Preferred Stock and, pursuant to a certain
stockholders agreement entered into between the Purchaser, ECT and others (the
"Stockholders Agreement"), the shares of Preferred Stock will be purchased by
the Purchaser after consummation of the Offer at a price of $10.10 per share.
Additionally, pursuant to the Stockholders Agreement, the Warrants beneficially
owned by ECT will be canceled prior to the Merger.
RIGHT TO DESIGNATE DIRECTORS; PURCHASER'S DESIGNEES
The Merger Agreement provides that, effective upon acceptance for
payment by Purchaser of a majority of the Shares tendered, assuming the exercise
of all outstanding options, rights and convertible securities (if any) and the
issuance of all Shares that the Company would be obligated to issue thereon (the
"Fully Diluted Shares"), pursuant to the Offer (the "Minimum Condition"), the
Parent shall be entitled to designate the number of directors, rounded up to the
next whole number, on the Board that equals the product of (a) the total number
of directors on the Board (giving effect to the election of any additional
directors pursuant to the Merger Agreement) and (b) the percentage that the
number of Shares owned by Parent and Purchaser (including Shares accepted for
payment) bears to the total number of Fully Diluted Shares outstanding. The
Company has agreed that it will take all action necessary to cause the Parent's
designees to be elected or appointed to the Company's Board, including, without
limitation, increasing the number of directors or seeking and accepting
resignations of incumbent directors, or both; provided that, prior to the
Effective Time, the Company's Board shall always have one member who is neither
a designee nor an affiliate of the Parent or the Purchaser nor an employee of
the Company (the "Independent Director"). If the number of Independent Directors
is reduced below one for any reason prior to the Effective Time, the departing
Independent Director shall be entitled to designate a person to fill such
vacancy. No action proposed to be taken by the Company (a) to amend or terminate
the Merger Agreement or the certificate of incorporation or by-laws of the
Company or (b) waive any action required to be taken by the Parent or the
Purchaser under the Merger Agreement or any rights of the Company under the
Merger Agreement shall be effective without the approval of the Independent
Directors. At such times, the Company will use its best efforts to cause
individuals designated by the Parent to constitute the same percentage as such
individuals represent on the Company's Board of (x) each committee of the Board,
(y) each board of directors of each subsidiary and (z) each committee of each
such board.
The Company's obligation to appoint the Parent's designees is subject
to Section 14(f) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") and Rule 14f-1 promulgated thereunder. The Company is obligated
to promptly take all actions required to effect any such election and to include
in this Information Statement the information required by Section 14(f) of the
Exchange Act and Rule 14f-1.
It is anticipated that the Parent's designees may assume office at any
time following the purchase, which cannot be earlier than September 28, 1999, by
the Purchaser of a majority of the Fully Diluted Shares pursuant to the Offer.
A-2
<PAGE> 3
Upon accepting for payment at least a majority of the Fully Diluted Shares, the
Company anticipates that, upon assuming office, the Parent's designees will
constitute at least a majority of the Board. PARENT'S DESIGNEES
Parent has informed the Company that it will choose its designees from
the directors and executive officers listed in Schedule I to the Purchaser's
Offer to Purchase dated August 31, 1999 (the "Offer to Purchase"), a copy of
which is being mailed to the Company's stockholders together with this Schedule
14D-9. Parent has informed the Company that each of the directors and executive
officers listed in Schedule I to the Offer to Purchase has consented to act as a
director, if so designated. The information on such Schedule I is incorporated
herein by reference. The business address of Purchaser is c/o Calpine
Corporation, 50 West Fernando Street, San Jose, California 95113.
DIRECTORS OF THE COMPANY
The following table sets forth each current director's name, age as of
August 31, 1999, principal occupation and employment for the past five years,
offices held with Sheridan and the date he first became a director. The business
address of each of the directors is 1000 Louisiana, Suite 800, Houston, Texas
77002.
<TABLE>
<CAPTION>
Position, Principal Occupation, Business Director
Name Age Experience and Directorships Held Since(1)
---- --- -------------------------------------------------------------------- --------
<S> <C> <C> <C>
B. A. Berilgen 51 Mr. Berilgen is currently President and Chief Executive Officer of 1997
the Company. He joined the Company in June 1997. Prior thereto
he was Vice-President and Chief Technical Officer with Forest Oil
Company, a position he held from January to June 1997. From 1992
to January 1997, he was Vice President of Operations in charge of
field operations, reservoir engineering and domestic and
international development, exploration and acquisition functions.
Jonathan P. Carroll 37 Mr. Carroll has served on the Board since the merger (the 1997
"Merger") of the Company with TGX Corporation ("TGX") in 1997. He
is currently President of a privately owned investment management
company. He was previously President of Enserch Energy Services,
Inc., and from 1991 until 1995, President and CEO of DGS Holdings
Corp., an oil and gas marketing company. He has also served as a
Vice President at Manufacturers Hanover Bank and Head Trader in
the Capital Markets Group of First Interstate Bank, Ltd.
W. Craig Childers(2) 50 Mr. Childers has been a Director of the Company since February 1998
1998. He was a Principal in Canberras Energy Associates from
January 1, 1993 through May 15, 1994. Mr. Childers was Vice
President of Enron Capital & Trade Resources from May 1994
through January 1998 and has been a Managing Director of the same
company since January 1998.
D. Bradley Dunn(2) 35 Mr. Dunn is a Vice President of ECT and has held various positions 1998
with ECT since September of 1994. Prior to this Mr. Dunn worked
as a Petroleum Engineer with Delhi Gas Pipeline Corporation and
Mobil Oil Corporation.
</TABLE>
A-3
<PAGE> 4
<TABLE>
<CAPTION>
Position, Principal Occupation, Business Director
Name Age Experience and Directorships Held Since(1)
---- --- -------------------------------------------------------------------- --------
<S> <C> <C> <C>
Michael A. Gerlich 45 Mr. Gerlich has been Vice President and Chief Financial Officer 1997
of the Company since the Merger, and was elected Secretary in
May 1998. He was elected Vice President and Chief Financial
Officer of TGX in December 1994. In April 1997 he was
appointed interim President. From January 1993 until joining
TGX, he owned and managed Chalk Hill Resources, Inc., an
independent oil and gas investing and financial consulting
company. Prior thereto, he was Executive Vice President from
January 1989 to December 1992 and Vice President of Finance
from May 1982 to December 1988 for Trinity Resources, Inc.,
an independent public oil and gas company.
David H. Scheiber 40 Mr. Scheiber has been a principal of Cana Capital, LLC, a private 1995
investment company, since September 1992. From April 1996
through May 1997, Mr. Scheiber was a principal of Chesapeake
Bay Investors, L.L.C., a registered investment advisor in
Baltimore, Maryland. From September 1991 to August 1992, Mr.
Scheiber was affiliated with Monitor Company, Inc., a
management consulting firm headquartered in Boston,
Massachusetts, as manager of its bankruptcy practice. From
April 1997 until December 1997 Mr. Scheiber was a member of
the Board of Directors of Tuneup Masters, Inc.
Jeffrey E. Susskind 45 Mr. Susskind is engaged in personal investments and is an 1992
investment consultant. For the five years prior to 1999 he
was a principal of Strome, Susskind Investment Management,
L.P., an investment management company in Santa Monica,
California.
</TABLE>
(1) Includes time served as a director of TGX.
(2) If ECT's beneficial ownership of Common Stock falls below 14%, ECT's
right to designate directors reduces to one and, upon a further
reduction below 7%, ECT no longer retains the right to designate a
director. At such times, one or more of the ECT designees will resign
from the Board.
MEETINGS OF THE BOARD OF DIRECTORS
AND COMMITTEES
Twelve meetings of the Board were held in the last fiscal year ended
December 31, 1998. No incumbent director attended fewer than 75% of the meetings
of the Board held in the last fiscal year after his election as a Director.
The Board has a standing Audit Committee which met one time during
1998. The Audit Committee consists of Messrs. Carroll, Scheiber and Dunn. The
Audit Committee assists the Board in fulfilling its fiduciary responsibilities
with respect to the accounting policies and reporting practices of the Company
and the sufficiency of the audits of all Company activities. It is the Board's
agent in ensuring the integrity of financial reports of the Company, and the
adequacy of disclosures to shareholders. The Audit Committee is the focal point
for communication between the directors, the independent accountants and
management as their duties relate to financial accounting, reporting, and
controls.
The Board has a standing Compensation Committee which met four times
during the last fiscal year, and consists of Messrs. Carroll, Childers and
Susskind. During the year, the Compensation Committee consulted with management
regarding the compensation and benefits that are provided to the directors,
officers and employees of the Company.
The Board has a standing Executive Committee which did not meet during
the last fiscal year. The Executive Committee is authorized to exercise all of
the powers of the Board of Directors except those not permitted by the
A-4
<PAGE> 5
Delaware General Corporation Law. In 1998, the Executive Committee consisted of
Messrs. Susskind, Berilgen and Gerlich.
COMPENSATION COMMITTEE INTERLOCKS
AND INSIDER PARTICIPATION
No non-employee director is or has been an officer or employee of the
Company or had any relationship requiring disclosure pursuant to Item 404 of the
Regulation S-K promulgated by the Commission. No executive officer of the
Company served as a member of the compensation committee (or other board
committee performing similar functions or, in the absence of any such committee,
the entire board of directors) of another corporation, any of whose executive
officers served on the Company's Compensation Committee. No executive officer of
the Company served as a director of another corporation, one of whose executive
officers served on the Company's compensation committee. No executive officer of
the Company served as a member of the compensation committee (or other board
committee performing equivalent functions or, in the absence of any such
committee, the entire board of directors) of another corporation, one of whose
executive officers served as a director of the Company.
COMPENSATION OF DIRECTORS
Only those directors who are not employees of the Company are entitled
to receive a fee, plus reimbursement for reasonable travel expenses incurred in
conjunction with meetings. Under the Company's standard arrangement for
compensation of directors, directors receive a retainer fee of $833 per month
plus a meeting fee of $1,000 per day and $250 for each telephone meeting. The
monthly retainer fee is subject to forfeiture on a six-month prospective basis
if a director attends less than 75% of the meetings. In 1997 Messrs. Susskind,
Carroll and Scheiber were granted options to acquire 25,000, 20,000, and 20,000
shares of stock, respectively. Such options vest over three years and are
exercisable for a ten year period. However, upon achievement of the Minimum
Condition and acceptance by Purchaser of the Shares tendered pursuant thereto,
pursuant to the Merger Agreement, such options will immediately vest and the
option holders will receive a cash payment per Share equal to the difference
between the option exercise price and $5.50 per Share. Messrs. Childers and Dunn
have elected to waive any right to stock options and have waived their director
fees for 1998 and 1999.
A-5
<PAGE> 6
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table reflects as of August 25, 1999 certain information
regarding the holdings of the only persons known to the Company to own
beneficially five percent or more of the Company's Common Stock or the Company's
Preferred Stock :
<TABLE>
<CAPTION>
Name and Address Amount and Nature of Beneficial
of Beneficial Owner Ownership Percent of Class
------------------- ------------------------------- ----------------
<S> <C> <C>
Jeffrey and Janis Susskind(1) 1,025,037 Common Stock 15.2%
FBO The Susskind Family Trust
100 Wilshire Boulevard, 15th Floor
Santa Monica, CA 90401
AIF-Lion Group(2) 911,100 Common Stock 13.5%
c/o Apollo Advisers L.P.
Two Manhattanville Rd.
Purchase, NY 10577
Enron Capital & Trade Resources Corp.(3)(6) 2,600,000 Common Stock 37.8%
1400 Smith Street 1,139,556.25 Preferred Stock 100%
Houston, TX 77002
Oppenheimer Funds, Inc.(4) 394,283 Common Stock 5.9%
Two World Trade Center
New York, NY 10048
Goldman, Sachs & Co.(5) 398,841 Common Stock 5.9%
85 Broad Street
New York, NY 10004
</TABLE>
- ----------
(1) Includes options to acquire 25,000 shares held by Mr. Susskind, a
portion of which are vested and the remainder of which will immediately
vest, pursuant to the Merger Agreement, upon achievement of the Minimum
Condition and acceptance by Purchaser of the Shares tendered pursuant
thereto. At such time Mr. Susskind will receive $75,000 for said
options, which is equal to the difference between $5.50 per share and
the option exercise price.
(2) As reported in its Schedule 13D filed with the Securities and Exchange
Commission on February 27, 1995, such securities are held jointly by
AIF II, L.P. and Lyon Advisors, L.P., each a Delaware limited
partnership. AIF and Lyon are engaged in the business of managing
investment funds while serving as advisors and representatives for its
clients.
(3) Includes Warrants which are exercisable at a price of $5.50 per share
on or before December 31, 2002 to acquire 150,000 shares of the
Company's Common Stock, and 850,000 shares of Common Stock owned by
Joint Energy Development Investments Limited Partnership, a Delaware
limited partnership ("JEDI") and 1,600,000 shares of the Company's
Common Stock and, 1,139,556.25 shares of Preferred Stock held by
Sundance Assets, L.P. ("Sundance"), a Delaware limited partnership.
Sundance, JEDI and ECT are affiliated entities. Entities that may be
deemed to be control persons of JEDI are (a) Enron Capital Management
Limited Partnership, a Delaware limited partnership and the general
partner of JEDI ("ECMLP"), (b) Enron Capital Corp., a Delaware
corporation and the general partner of ECMLP ("ECC"), and (c) ECT. ECC
is a wholly owned subsidiary of ECT, and an indirect, wholly owned
subsidiary of Enron Corp., an Oregon corporation. ECT is a wholly owned
subsidiary of Enron Corp. Prior to the Merger, the Warrants will be
canceled.
(4) In its Schedule 13G, Oppenheimer Funds, Inc. states that it is an
investment advisor and that it has shared dispositive power with
respect to 394,283 shares of the Company's common stock (sole voting
power being held by Oppenheimer's Strategic Income Fund).
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<PAGE> 7
(5) In its Schedule 13G, Goldman, Sachs & Co. and the Goldman Sachs Group,
L.P. in their capacity as investment advisors state that they have sole
voting power as to no shares and shared voting and dispositive power as
to 398,841 shares.
(6) Pursuant to a certain Shareholders Agreement entered into between the
Purchaser and ECT, the shares of Preferred Stock will be purchased by
the Purchaser after consummation of the Offer at a price equal to
$10.10 per share of Preferred Stock.
The following table sets forth the amounts and percentages of Common
Stock beneficially owned as of August 25, 1999 by each Director of the Company,
by each of the individuals named in the Summary Compensation Table and by all
Directors and Executive Officers of the Company as a group. Beneficial ownership
has been determined in accordance with Rule 13d-3 under the Exchange Act and
does not necessarily bear on the economic incidents of ownership or the right to
transfer such shares:
<TABLE>
<CAPTION>
Amount and Nature of Beneficial
Ownership of Shares of Common
Name of Individual Stock Percent of Class
------------------- ------------------------------- ----------------
<S> <C> <C>
B. A. Berilgen(1) 313,000 4.4%
Jonathan P. Carroll(1) 53,333 *
Charles Chambers(1) 44,500 *
W. Craig Childers(2) 2,600,000 37.8%
D. Bradley Dunn(2) 2,600,000 37.8%
Michael A. Gerlich(1) 85,000 1.3%
David H. Scheiber(1) 20,000 *
Jeffrey E. Susskind(1)(3) 1,025,037 15.2%
All Directors and Executive Officers
as a Group (8 persons including those
named above) 4,140,870 56.3%
</TABLE>
- ----------
* Less than 1%
(1) Includes 300,000, 20,000, 40,000 60,000, 20,000 and 25,000 options held
by Messrs. Berilgen, Carroll, Chambers, Gerlich, Scheiber and Susskind,
respectively, which will fully vest, pursuant to the Merger Agreement,
immediately upon Purchaser acquiring the Minimum Condition. With
respect to the above referenced options, 116,667, 13,333, 5,000,
40,000, 13,333 and 16,667, respectively, are currently vested and
exercisable.
(2) Messrs. Childers and Dunn are employees of ECT. However, Messrs.
Childers and Dunn disclaim beneficial ownership of any shares owned
directly or indirectly by ECT and its affiliates. ECT also owns 100% of
the Preferred Stock to which Messrs. Childers and Dunn also disclaim
beneficial ownership. For information concerning the Common Stock and
Warrants owned directly or indirectly by ECT and its affiliates, see
footnote (3) to the previous table. This does not include the Warrants
being canceled as set forth in the above referenced footnote.
(3) Includes 1,000,037 shares held by The Susskind Family Trust which is
controlled by Mr. Susskind and his wife.
EXECUTIVE OFFICERS OF THE COMPANY
For information regarding the Executive Officers of the Company, see
"Directors of the Company" above. Pursuant to the Company's Bylaws, the officers
serve at the discretion of the Board and may be removed, with or without cause,
at any time.
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<PAGE> 8
EMPLOYMENT AGREEMENTS
The Company entered into an Employment Agreement dated and effective as
of June 5, 1997 which was subsequently amended in 1998, with Mr. B. A. Berilgen
(the "Berilgen Agreement"). Pursuant to the Berilgen Agreement, Mr. Berilgen
hasbeen retained as President and Chief Executive Officer of the Company for a
term ending December 31, 2000, which may be extended on an annual basis unless
terminated by either party. Pursuant to the Berilgen Agreement, Mr. Berilgen
receives a base salary of $200,000 per annum subject to the Compensation
Committee's annual review, and annual discretionary bonuses. Beginning January
1, 2000, such base salary may be increased to $225,000 per annum to the extent
certain financial objectives are met. As a result of the Berilgen Agreement, Mr.
Berilgen was granted options to acquire 175,000 shares of the Company's Common
Stock at an option exercise price of $2.50 per share. The Berilgen Agreement can
be terminated at any time by the Company, but if terminated for any reason other
than for "cause," the Company is obligated to pay the full amount that Mr.
Berilgen is entitled to under the Berilgen Agreement with a minimum of
one-year's base salary as severance. Mr. Berilgen would also be entitled to
receive such payments upon a change of control which, without his consent,
results in a significant diminishment in the nature of Mr. Berilgen's
employment. Upon Purchaser acquiring the Minimum Condition, a change of control
shall occur under the terms of the Berilgen Agreement.
The foregoing statements are not a complete description of the
Employment Agreement and are qualified in their entirety by reference to the
Employment Agreement referenced as an exhibit to Schedule 14D-9.
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<PAGE> 9
EXECUTIVE COMPENSATION
The following table sets forth certain information concerning the
compensation of the Chief Executive Officer of the Company, and of the Company's
most highly compensated executive officers (other than the CEO) whose total
annual salary and bonus exceeded $100,000, for each of the Company's fiscal
years ending December 31, 1998, 1997 and December 31, 1996. No other officers
earned in excess of $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation Awards
--------------------------- -------------------
Securities
Underlying All
Name and Options/ Other
Principal Position Year Salary($)(1) Bonus($)(2) SARs(#) Compensation ($)
------------------- ---- --------- ----------- ---------- ----------------
<S> <C> <C> <C> <C>
B. A. Berilgen 1998 240,000 75,000 125,000 --
President and CEO(3) 1997 98,000 50,000 175,000 --
Michael A. Gerlich (4) 1998 151,000 10,000 -- --
Vice-President & CFO 1997 133,000 30,000 60,000 3,000(3)
1996 120,000 12,000 -- 3,000(3)
Charles Chambers(5) 1998 93,000 50,000 40,000 --
Vice President - Cor-
porate Development
Jon W. Wright, Jr.(6) 1998 112,000 -- -- --
Secretary 1997 101,000 16,000 3,000 --
</TABLE>
- -------------
(1) Includes perquisites and other benefits, unless the aggregate amount of
such does not exceed the lesser of either $50,000 or 10% of the total
annual salary and prior year bonus reported for the named executive
officer. See "Employment Agreements."
(2) Bonus was granted for year shown and paid in January following the year
of grant.
(3) Mr. Berilgen commenced his employment effective June 5, 1997.
(4) Mr. Gerlich acted as interim President from April 1997 to June 1997.
The $3,000 of "All Other Compensation" represents estimated
compensation value recognized related to restricted stock awards upon
vesting.
(5) Mr. Chambers became an employee in June 1998. Includes amounts paid to
Mr. Chambers as a consultant in 1998, prior to his becoming an employee
of the Company.
(6) Mr. Wright resigned from the Company in February 1999. At such time all
outstanding options were forfeited.
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<PAGE> 10
STOCK OPTION GRANTS AND EXERCISES
The following table sets forth information concerning individual grants
of stock options under the 1997 and 1998 Flexible Incentive Plans to each of the
Executive Officers named in the Summary Compensation Table.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
-----------------------------------------------------------
Potential Realizable
Value at Assumed
% of Total Annual Rates of Stock
Number of Options Price Appreciation for
Securities Granted to Exercise Option Term(1)
Underlying Employees in Price Expiration ----------------------
Name Options Granted Fiscal Year Per Share(2) Date 5% 10%
----- ---------------- ------------ ------------ ----- --- ---
<S> <C> <C> <C> <C> <C> <C>
B. A. Berilgen ......... 125,000(3) 40.5 $3.12(4) 12/28/08 $245,662 $622,556
Michael A. Gerlich ..... 0 N/A N/A N/A N/A N/A
Charles Chambers ....... 20,000 6.5 $3.00 08/04/08 37,734 95,625
20,000 6.5 $3.12(4) 12/28/08 39,396 99,609
Jon W. Wright, Jr.(5) 5,000 1.6 $3.75 5/15/99
</TABLE>
- ----------
* Less than one percent
(1) The Company does not believe that the value estimated herein, or any
other model, will necessarily be indicative of the values to be
realized by an executive. Moreover, pursuant to the Merger Agreement,
these options will immediately vest upon achievement of the Minimum
Condition and acceptance by Purchaser of the Shares tendered pursuant
thereto, whereupon the option holder will receive the difference
between $5.50 per Share and the option exercise price. Accordingly,
Messrs. Berilgen, Gerlich and Chambers shall receive in cash proceeds
of $296,875, $0.00 and $97,500, respectively, for the options set forth
in this table.
(2) The exercise price may be paid in cash or in shares of Common Stock.
(3) Such options become exercisable pursuant to their terms at the rate of
25% per year on each of the first four anniversaries of the date of
grant, provided that the officer remains employed by the Company.
However, these options shall immediately vest upon achievement of the
Minimum Condition and acceptance by Purchaser of the Shares tendered
pursuant thereto. See footnote (1) of the table below for the amounts
payable to these individuals upon vesting.
(4) The exercise price of these options increases by 10% on each
anniversary of their grant.
(5) Mr. Wright resigned from the Company in February 1999. All options are
forfeited to the Company, three months after such resignation.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END VALUES
The following table sets forth information concerning each exercise of
stock options during the last completed fiscal year by each of the Executive
Officers named in the Summary Compensation Table and the fiscal year end value
of unexercised options.
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<PAGE> 11
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options at
December 31, 1998 (1) December 31, 1998 ($)(2)
Shares ---------------------- ------------------------
Acquired on Value Realized
Name Exercise (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable
----- ------------ ---- -------------------------- -------------------------
<S> <C> <C> <C> <C>
B. A. Berilgen 0 N/A 116,667 / 183,333 $72,917 / $36,458
Michael A. Gerlich 0 N/A 40,000 / 20,000 25,000 / 12,500
Charles Chambers 0 N/A - / 40,000 - / 2,500
Jon W. Wright, Jr. 0 N/A 3,750 / 4,250 - / -
</TABLE>
- ----------
(1) These options will immediately vest, pursuant to the terms of the
Merger Agreement, upon achievement of the Minimum Condition and
acceptance by Purchaser of the Shares tendered pursuant thereto. Based
upon the terms of the Offer, Messrs. Berilgen, Gerlich and Chambers
shall be entitled to receive the difference between the Share option
price and the exercise price for each Share tendered pursuant to the
Offer. Accordingly, Messrs. Berilgen, Gerlich and Chambers shall
receive in cash proceeds of $821,875, $180,000 and $97,500
respectively.
(2) Based on a closing stock price on the Nasdaq Small-Cap Market of $3.12
per share on December 31, 1998.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
This report is presented to stockholders on executive compensation.
This report summarizes the responsibilities of certain of the Company's
non-employee directors who are the members of the Compensation Committee (the
"Committee"). Such Committee establishes the compensation policies and
objectives that guide the development and administration of the executive
compensation program and provide the basis on which the compensation for the
Chief Executive Officer, corporate officers and other key executives was
determined for the fiscal year ended December 31, 1998.
During the fiscal year, the Committee was comprised of the following
Board members, all of whom were non-employee directors of the Company: Jonathan
P. Carroll, W. Craig Childers, and Jeffrey E. Susskind. The Committee's
responsibilities are to oversee the development and administration of the
compensation program for corporate officers and subsidiary presidents, and
administer the executive incentive and stock option plans. During fiscal year
1998, the Committee also reviewed market compensation trends for outside
directors.
The objective of the executive compensation program is to create strong
financial incentives for corporate officers and managers to increase profits and
grow revenues. The following objectives guide the Committee in its
deliberations:
o Provide a competitive compensation program that enables the
Company to attract and retain key executives and Board
members.
o Assure a strong relationship between the performance results
of the Company and the total compensation received.
o Balance both annual and longer term performance objectives of
the Company.
o Encourage executives to acquire and retain meaningful levels
of equity ownership in the Company.
o Work closely with the Chief Executive Officer to assure that
the compensation program supports the management style and
culture of the Company.
In addition to normal employee benefits, the executive total
compensation program includes base salary, annual cash bonus compensation, and
longer term stock based grants and awards.
Section 162(m) of the Internal Revenue Code imposes a $1,000,000 limit,
with certain exceptions, on the deductibility of compensation paid to each of
the five highest paid executives. In particular, compensation that is determined
to be "performance based" is exempt from this limitation. To be "performance
based," incentive payments must use predetermined objective standards, limit the
use of discretion in making awards, and be certified by the Compensation
Committee made up of "outside directors." While the Committee intends to comply
with the provisions of Section 162(m) with respect to the longer term stock
based incentives, it believes that the use of discretion in
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<PAGE> 12
evaluating the individual contributions of corporate management is appropriate.
As such, the Committee has taken no action to comply with Section 162(m) with
respect to annual incentive payments. It is not anticipated that any executive
will receive compensation in excess of this limit during 1999. The Committee
will continue to monitor this situation and will take appropriate action if it
is warranted in the future.
The base salary objective of the Committee is to target the median of a
primary comparison group for corporate officers. Primary market comparisons are
made to a broad group of oil and gas companies adjusted for size and job
responsibilities. Salary adjustments are based on an individual's experience,
background performance during the year, the general movement of salaries in the
marketplace and the Company's financial position. Similar criteria are used to
determine discretionary bonuses.
Stock ownership is encouraged through the use of stock option grants
which are made on a periodic basis.
The Chief Executive Officer participates in the executive compensation
program described in this report.
In establishing the total compensation program for Mr. Berilgen, the
Committee assessed the pay levels for CEOs in similar companies in the oil and
gas industry, Mr. Berilgen's efforts in seeking out growth opportunities for the
Company and controlling costs, and other relevant factors.
Respectfully submitted,
Jonathan P. Carroll
W. Craig Childers
Jeffrey E. Susskind
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<PAGE> 13
MANAGEMENT RELATIONSHIPS AND TRANSACTIONS
During 1997, the Company entered into a series of agreements with ECT,
and Jeffrey E. Susskind, Chairman of the Board on behalf of The Susskind Family
Trust ("Susskind"). Pursuant to the Company's agreements with ECT, in connection
with the acquisition of producing and non-producing oil and gas properties
acquired from Pioneer Natural Resources USA, Inc., ECT acquired 100% of the
Company's outstanding Preferred Stock in consideration for a payment of
$10,000,000, and further acquired 1,600,000 shares of Common Stock of the
Company for a further and additional payment of $10,000,000. The Preferred Stock
has a cumulative dividend which, if paid in cash, is in the amount of 12% per
annum. However, the Company has the option to pay such dividend with additional
shares of Preferred Stock. In such event, the Preferred Stock bears a dividend
rate of 13.5% per annum. Shares of Preferred Stock are entitled to a liquidation
preference of $10 per share plus accrued, unpaid dividends, before any
distribution to holders of Common Stock on dissolution of the Company. The
Preferred Stock is fully redeemable before December 15, 1998, at a premium of
105% decreasing to 100% after December 15, 2001. The Preferred Stock must be
redeemed on or before December 15, 2002. In addition, upon certain defined
defaults by the Company, including failure to name two directors to the
Company's Board of Directors after the request of ECT or failure to pay the
appropriate dividend, the Preferred Stock is immediately redeemable. In
addition, at such time, the holders of the Preferred Stock will have right to
elect a majority of the Board of Directors. In connection with the issuance of
the Preferred and Common Stock to ECT, ECT agreed that, except in limited
circumstances or with the Company's permission, it would not acquire any
additional shares of the Company's Common Stock for a period of two years. In
addition, ECT, the Company and Susskind agreed that Susskind would vote its
shares in favor of the ECT nominees and, conversely, ECT would vote its shares
in favor of Susskind's nominees to the Board. The foregoing statements are
qualified in their entirety by reference to the copy of the Shareholder
Agreement among ECT, the Company and Susskind, which is referenced as an exhibit
to Schedule 14D-9. In connection with the transaction, ECT was also granted
certain registration rights including certain demand and piggy-back registration
rights. ECT's demand registration rights do not become effective until the first
anniversary of the agreement, and all registration rights terminate when ECT's
Common Stock ownership is reduced below 2% of the Company's outstanding shares.
Since, pursuant to the terms of the proposed Merger Agreement, the
Preferred Stock owned by ECT will be redeemed at a premium (equal to $10.10 per
share of Preferred Stock), Messrs. Childers and Dunn, employees of ECT,
abstained from the initial vote on the transaction to avoid any claim of their
being considered "interested" directors in connection with the contemplated
transactions. Thereafter, after all of the disinterested directors voted
unanimously in favor of the transaction, in order to accurately state that the
transaction was approved unanimously by the Board of Directors, Messrs. Childers
and Dunn voted in favor of the Merger Agreement and the transactions
contemplated thereunder.
On June 12, 1997, TGX Corporation merged with and into the Company. As
a result of such merger, TGX Shareholders owning Series A Senior Preferred Stock
were entitled to receive .5 shares of Sheridan Common Stock for each share of
TGX Series A Senior Preferred Stock they held on the date of the merger. As of
such date, Susskind held 1,778,002 shares of Series A Senior Preferred Stock. In
connection with the merger, all other preferred stockholders and common
stockholders of TGX received no shares of Sheridan and, as a result, their
interest in the assets of TGX was canceled and they received no ongoing interest
in the Company. Mr. Susskind may be deemed to have had a conflict of interest in
recommending to the stockholders of TGX that the merger be consummated.
SECTION 16(a) BENEFICIAL OWNERSHIP
REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's Executive
Officers and Directors and persons who own more than ten percent of a registered
class of the Company's equity securities to file initial reports of ownership
and changes in ownership with the SEC. Such Officers, Directors and stockholders
are required by Commission regulations to furnish the Company with copies of all
Section 16(a) forms they file. Based solely on a review of the copies of such
forms furnished to the Company and written representations from the Company's
Executive Officers and Directors, the Company believes that, except as set forth
below, all persons subject to the reporting requirements of Section 16(a) filed
the required reports on a timely basis. Mr. Chambers failed to timely file a
Form 4 on two occasions during the 1998 fiscal year to report the acquisition of
an aggregate of 4,000 shares of Common Stock.
A-13
