<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 12, 1997
REGISTRATION NO. 333-29783
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
MERCURY MONTANA, INC.
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
DELAWARE 1311 75-2695071
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of
incorporation or Classification No.) Identification No.)
organization)
</TABLE>
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<S> <C>
GLENN M. DARDEN
1619 PENNSYLVANIA AVENUE 1619 PENNSYLVANIA AVENUE
FORT WORTH, TEXAS 76104 FORT WORTH, TEXAS 76104
(817) 332-9133 (817) 332-9133
(Address, including zip code, and
telephone number, including area (Name, address, including zip code,
code, of registrant's principal and telephone number, including area
executive offices) code, of agent for service)
</TABLE>
------------------------
COPIES TO:
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<S> <C>
STEPHEN B. NORRIS SLOAN B. BLAIR
Thompson & Knight, P.C. KIRK R. MANNING
801 Cherry Street, Suite 1600 Cantey & Hanger, LLP
Fort Worth, Texas 76102 801 Cherry Street, Suite 2100
Fort Worth, Texas 76102
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
Upon the effective date of the Merger described in this Registration Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(A),
MAY DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED SEPTEMBER 12, 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PROXY STATEMENT/JOINT PROSPECTUS
---------------------
MSR EXPLORATION LTD.
MERCURY MONTANA, INC.
----------------
This Proxy Statement/Joint Prospectus ("Proxy Statement/Prospectus") is
being furnished to holders of shares of common stock, no par value (the "Company
Common Stock"), of MSR Exploration Ltd. (the "Company"), an Alberta, Canada
corporation, in connection with the proposed continuance of the Company from
Canada to the United States as a Delaware corporation (the "Continuance") and
the subsequent merger (the "Merger") of the Company with and into Mercury
Montana, Inc., a Delaware corporation ("Mercury") and a majority owned
subsidiary of Mercury Exploration Company, a Texas corporation ("Parent").
Pursuant to this Proxy Statement/Prospectus the Board of Directors of the
Company is soliciting proxies for use (i) at the Combined Annual and Special
Meeting of Shareholders of the Company to be held on , 1997 at the
, Fort Worth, Texas , commencing at :00 .m., local time,
and at any adjournment or postponement thereof (the "Special Meeting"), to
consider and vote upon (A) the election of directors of the Company and (B) the
Continuance, and (ii) in connection with the execution of shareholders' consents
approving the Merger (the "Consent").
Pursuant to the Consent, the shareholders of the Company will approve and
adopt the Merger and the Agreement and Plan of Merger dated as of March 26,
1997, by and among the Company, Mercury and Parent, as amended (the "Merger
Agreement"), providing for the Merger. The Continuance will not be consummated
unless the Company receives proxies for Consents sufficient in number to approve
the Merger. Likewise, the effectiveness of the Continuance is a condition to the
Merger.
In the Merger (i) each share of common stock of the continued corporation
(the "Continued Common Stock") (other than shares as to which dissenters' or
appraisal rights have been exercised under the certificate of incorporation of
the continued corporation) will be converted automatically into the right to
receive one share of common stock, par value $0.01 per share, of Mercury, the
Surviving Corporation in the Merger (the "Surviving Corporation Common Stock"),
(ii) each outstanding share of common stock, par value $0.01 per share, of
Mercury (the "Mercury Common Stock"), will remain outstanding as one share of
Surviving Corporation Common Stock, (iii) Mercury will change its name to "MSR
Exploration Ltd.", (iv) the outstanding warrant to acquire shares of Company
Common Stock will be exchanged for an equivalent right to acquire shares of
Surviving Corporation Common Stock and (iv) each outstanding option or warrant
to acquire shares of Mercury Common Stock will remain outstanding as a right to
acquire shares of Surviving Corporation Common Stock, all as more fully
described in this Proxy Statement/Prospectus.
This Proxy Statement/Prospectus constitutes a prospectus of the Company with
respect to 13,777,014 shares of common stock of the continued corporation deemed
to be issued in connection with the Continuance and a prospectus of Mercury with
respect to 13,777,014 shares of Surviving Corporation Common Stock to be issued
in the Merger to the holders of Continued Common Stock.
SEE "RISK FACTORS" BEGINNING ON PAGE 15 OF THIS PROXY STATEMENT/PROSPECTUS
FOR A DISCUSSION OF CERTAIN FACTORS TO BE CONSIDERED BY SHAREHOLDERS OF THE
COMPANY.
THE SECURITIES TO BE ISSUED PURSUANT TO THIS PROXY STATEMENT/PROSPECTUS HAVE
NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
NO REGULATORY AGENCY OR STOCK EXCHANGE HAS IN ANY WAY PASSED UPON
THE MERITS OF THE TRANSACTIONS DESCRIBED HEREIN AND ANY
REPRESENTATION TO THE CONTRARY IS AN OFFENSE.
This Proxy Statement/Prospectus and the accompanying proxy forms are first
being mailed to shareholders of the Company on or about , 1997.
The date of this Proxy Statement/Prospectus is , 1997.
<PAGE>
TABLE OF CONTENTS
<TABLE>
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PAGE
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SOLICITATION OF PROXIES AND VOTING REQUIREMENTS........................... vii
APPOINTMENT AND REVOCATION OF PROXIES..................................... vii
VOTING OF SHARES AND EXERCISE OF DISCRETION OF PROXIES.................... viii
THE SPECIAL MEETING....................................................... viii
THE CONSENT............................................................... ix
THE CONTINUANCE........................................................... ix
THE MERGER................................................................ ix
CONSUMMATION OF THE MERGER................................................ ix
AVAILABLE INFORMATION..................................................... x
SUMMARY................................................................... 1
The Companies........................................................... 1
The Special Meeting..................................................... 2
The Consent............................................................. 2
Security Ownership of Company Management................................ 3
Company Annual Meeting Matters.......................................... 3
The Continuance......................................................... 3
The Merger and the Merger Agreement..................................... 4
Board of Directors...................................................... 6
Regulatory Approval..................................................... 6
Appraisal Rights with respect to the Continuance and the Merger......... 6
Certain Canadian Federal Income Tax Consequences of the Continuance and
the Merger............................................................ 7
Certain United States Federal Income Tax Consequences of the Continuance
and the Merger........................................................ 8
Anticipated Accounting Treatment........................................ 8
Exchange of Stock Certificates.......................................... 8
Comparative Rights of Shareholders...................................... 8
Market Price Data....................................................... 9
Dividends............................................................... 9
Risk Factors Pertaining to the Continuance and the Merger............... 10
Summary Historical Financial Information................................ 11
Summary Pro Forma Financial Information................................. 13
Comparative Per Share Data.............................................. 14
RISK FACTORS.............................................................. 15
Effects of the Continuance and the Merger on Shareholders' Rights....... 15
Volatility of Oil and Natural Gas Prices................................ 16
Uncertainty of Reserve Information and Future Net Revenue Estimates..... 16
History of Operating Losses............................................. 17
Limitation on Use of Net Operating Loss Carryforwards................... 17
Concentration in Cut Bank Field Complex................................. 17
Substantial Capital Requirements and Possible Future Dilution........... 17
Drilling and Operating Hazards and Uninsured Risks...................... 18
Reliance on Contract with Montana Power Company......................... 18
Production Payment Agreement............................................ 19
Tax Treatment of the Continuance; Possible Taxation of the Company...... 19
Compliance with Governmental Regulations................................ 20
</TABLE>
ii
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PAGE
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Compliance with Environmental Regulations and Potential Environmental
Indemnity Obligations................................................. 20
Limited Operating History............................................... 20
Reserve Replacement Risk................................................ 20
No Fairness Opinion Obtained............................................ 21
Dependance on Key Personnel............................................. 21
Control by Existing Shareholders........................................ 21
Competition............................................................. 21
Acquisition Risks....................................................... 21
Absence of Dividends on Common Stock.................................... 22
Possible Decline in Stock Price from Future Sales of Surviving
Corporation Common Stock.............................................. 22
No Prior Public Market; Possible Stock Price Volatility................. 22
ELECTION OF DIRECTORS..................................................... 23
General................................................................. 23
Board Meetings and Committees........................................... 24
THE CONTINUANCE........................................................... 24
General................................................................. 24
Right of Dissent........................................................ 25
Approval of the Continuance under the ABCA.............................. 27
THE MERGER................................................................ 27
General Description of the Merger....................................... 27
Right of Dissent........................................................ 27
Background to the Merger................................................ 29
The Company's Reasons for the Merger; Recommendation of the Company's
Board of Directors.................................................... 31
Mercury's Reasons for the Merger........................................ 32
Interests of Certain Persons in the Merger.............................. 32
Employment Arrangement.................................................. 34
Accounting Treatment.................................................... 34
MATERIAL CANADIAN FEDERAL INCOME TAX CONSEQUENCES OF THE CONTINUANCE AND
THE MERGER.............................................................. 34
General................................................................. 34
The Continuance......................................................... 35
The Merger.............................................................. 37
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO SHAREHOLDERS AND
WARRANT HOLDERS OF THE CONTINUANCE AND THE MERGER....................... 40
General................................................................. 40
Taxation of U.S. Shareholders........................................... 40
Taxation of Non-U.S. Shareholders....................................... 44
Taxation of Warrant Holders............................................. 46
Information Reporting and Backup Withholding............................ 47
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO THE COMPANY OF
THE CONTINUANCE AND THE MERGER.......................................... 49
General................................................................. 49
Continuance............................................................. 49
Merger.................................................................. 50
Limitation on Use of Net Operating Loss Carryforwards................... 50
</TABLE>
iii
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<CAPTION>
PAGE
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<S> <C>
VALUATION FOR TAX PURPOSES................................................ 51
DIFFERENCES BETWEEN THE DGCL AND THE ABCA................................. 53
Vote on Extraordinary Corporate Transactions............................ 53
Bylaw Amendments........................................................ 53
Removal of Directors.................................................... 53
Quorum of Shareholders.................................................. 54
Notice and Call of Shareholder Meetings................................. 54
Shareholder Written Consent in lieu of Meeting.......................... 54
Appraisal Rights........................................................ 54
Shareholder Register.................................................... 55
Dividends and Distributions............................................. 55
Director Qualifications and Number...................................... 55
Director Liability...................................................... 56
Indemnification of Officers, Directors and Others....................... 56
Oppression Relief and Equitable Remedies................................ 57
Business Combinations................................................... 57
STOCK EXCHANGE LISTING.................................................... 58
CERTAIN UNITED STATES FEDERAL SECURITIES LAW CONSEQUENCES................. 58
CANADIAN SECURITIES LAW CONSEQUENCES...................................... 58
CERTAIN TERMS OF THE MERGER AGREEMENT..................................... 58
Effective Time of the Merger............................................ 58
Manner and Basis of Converting Shares of Company Common Stock and
Warrants.............................................................. 59
Mercury Common Stock and Options and Warrants........................... 59
Conditions to the Merger................................................ 59
Representations and Warranties.......................................... 61
Certain Covenants; Conduct of Business Prior to the Merger.............. 61
Effect of the Merger.................................................... 63
Termination............................................................. 63
THE SPECIAL MEETING AND THE CONSENT....................................... 64
Date, Time and Place of the Special Meeting............................. 64
Time of Execution of Consent............................................ 64
Purposes of the Special Meeting......................................... 64
Purposes of the Consent................................................. 64
Record Date and Outstanding Shares...................................... 64
Voting and Revocation of Proxies........................................ 64
Vote Required........................................................... 65
Solicitation of Proxies................................................. 65
PRICE RANGE OF COMPANY COMMON STOCK AND DIVIDEND POLICY................... 66
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS AND BALANCE SHEET OF THE
SURVIVING CORPORATION................................................... 67
SELECTED FINANCIAL DATA OF THE COMPANY.................................... 75
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE COMPANY'S FINANCIAL CONDITION
AND RESULTS OF OPERATIONS............................................... 77
General................................................................. 77
Six Months Ended June 30, 1997 Compared with Six Months Ended June 30,
1996.................................................................. 77
Year Ended December 31, 1996 Compared with Year Ended December 31,
1995.................................................................. 77
</TABLE>
iv
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<CAPTION>
PAGE
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<S> <C>
Year Ended December 31, 1995 Compared with Year Ended December 31,
1994.................................................................. 78
Liquidity and Financial Resources....................................... 79
Deferred Tax Assets..................................................... 80
GeoResources, Inc....................................................... 80
Inflation............................................................... 80
SELECTED FINANCIAL DATA OF MERCURY........................................ 81
MANAGEMENT'S DISCUSSION AND ANALYSIS OF MERCURY'S FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................... 82
General................................................................. 82
Results of Operations................................................... 83
Six Months Ended June 30, 1997 Compared with Six Months Ended June 30,
1996.................................................................. 83
Year Ended December 31, 1996 Compared with Year Ended December 31,
1995.................................................................. 83
Liquidity and Capital Resources......................................... 84
Inflation and Changes in Prices......................................... 84
Production Payment...................................................... 85
Forward Looking Statements.............................................. 85
BUSINESS AND PROPERTIES OF THE COMPANY.................................... 86
Business Development.................................................... 86
Prior Bankruptcy........................................................ 87
General................................................................. 87
Oil and Gas Reserves.................................................... 88
Productive Wells and Acreage as of December 31, 1996.................... 88
Title of Properties..................................................... 88
Production Results...................................................... 89
Drilling Results........................................................ 89
Reserves................................................................ 89
Acquisition of Additional Properties.................................... 89
Drilling Agreements and Operation of Wells.............................. 90
Timing of Acquisitions/Operations....................................... 91
Gas Gathering, Processing and Transmission.............................. 91
Insurance............................................................... 92
Competition............................................................. 92
Business Risks and Regulation........................................... 92
Environmental Regulation................................................ 93
Raw Materials........................................................... 93
Working Capital Practices............................................... 93
Major Customers......................................................... 93
Employees............................................................... 94
Financial Information About Foreign and Domestic Operations and Export
Sales................................................................. 94
Legal Proceedings....................................................... 94
BUSINESS AND PROPERTIES OF MERCURY........................................ 95
General................................................................. 95
Business Strategy....................................................... 95
Development Areas....................................................... 95
Marketing Arrangements.................................................. 95
Production Payment...................................................... 95
Reserves................................................................ 96
Exploration and Development Activities.................................. 97
</TABLE>
v
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PAGE
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<S> <C>
Productive Well Summary................................................. 97
Volumes, Prices and Production Costs.................................... 97
Development, Exploration and Acquisition Expenditures................... 98
Acreage................................................................. 98
Acquisitions............................................................ 98
Competition............................................................. 98
Operating Hazards and Uninsured Risks................................... 99
Regulation.............................................................. 99
Abandonment Costs....................................................... 100
Title to Properties..................................................... 101
Other Facilities........................................................ 101
Employees............................................................... 101
Legal Proceedings....................................................... 101
DIRECTORS AND EXECUTIVE OFFICERS OF THE SURVIVING CORPORATION............. 102
General................................................................. 102
Compensation............................................................ 103
DESCRIPTION OF SECURITIES OF THE SURVIVING CORPORATION.................... 104
General................................................................. 104
Common Stock............................................................ 104
Preferred Stock......................................................... 104
Warrants and Convertible Securities..................................... 104
Stock Option Plan....................................................... 105
Provisions Having Possible Anti-Takeover Effects........................ 105
Exchange Agent, Transfer Agent and Registrar............................ 105
BENEFICIAL OWNERSHIP OF SECURITIES........................................ 106
CERTAIN TRANSACTIONS...................................................... 107
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934...... 108
LEGAL MATTERS............................................................. 108
EXPERTS................................................................... 108
OTHER MATTERS WHICH MAY COME BEFORE THE SPECIAL MEETING................... 109
GLOSSARY OF OIL AND NATURAL GAS TERMS..................................... 110
INDEX TO FINANCIAL STATEMENTS............................................. F-1
</TABLE>
APPENDIX A--Certificate of Domestication
APPENDIX B--Certificate of Incorporation of Continued Company
APPENDIX C--Section 184 of the ABCA
APPENDIX D--Form of Consent
APPENDIX E--Merger Agreement
APPENDIX F--Certificate of Incorporation of Surviving Corporation
APPENDIX G--Bylaws of Surviving Corporation
APPENDIX H--Summary Reserve Report
vi
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SOLICITATION OF PROXIES AND VOTING REQUIREMENTS
The cost of soliciting proxies on behalf of the Company, including the cost
of preparing and mailing the notice of the Special Meeting and this Proxy
Statement/Prospectus, will be paid by the Company. Solicitation will be
primarily by mailing this Proxy Statement/Prospectus to all shareholders of the
Company entitled to vote at the Special Meeting and sign the Consent. Proxies
may be solicited by officers of the Company personally, but at no compensation
in addition to their regular compensation as officers. The Company may reimburse
brokers, banks and others holding shares in their names for others for the cost
of forwarding proxy materials and obtaining proxies from their principals.
Only holders of record of the Company Common Stock at the close of business
on , 1997 (the "Meeting Record Date") may vote at the Special
Meeting or at any adjournment thereof. Only holders of Continued Common Stock
immediately after the effectiveness of the Continuance are entitled to execute
the Consent. On the Meeting Record Date, there were 13,777,014 shares of Company
Common Stock outstanding, the only outstanding class of securities of the
Company, except for a warrant to purchase shares of Company Common Stock that
does not entitle the holder thereof to vote at the Special Meeting or execute
the Consent. Each holder of record of the Company Common Stock or Continued
Common Stock is entitled to one vote for each share registered in his or her
name. Cumulative voting is not permitted. Meeting materials and Consent
materials will be mailed to the registered holders of Company Common Stock by
the Company. Beneficial shareholders will receive materials from intermediaries
who hold shares of Company Common Stock on their behalf. These materials will be
delivered to the intermediaries by the Company for redistribution to the
beneficial shareholders.
Five percent of the shares of Company Common Stock entitled to vote, present
in person or represented by proxy, will constitute a quorum at the Special
Meeting. With regard to the election of directors, votes may be in favor of or
withheld from each nominee. Votes that are withheld will be excluded entirely
from the vote and will have no effect. Abstentions may be specified on the
proposal to approve the Continuance. Abstentions will be counted as shares that
are present and entitled to vote at the Special Meeting for purposes of
determining the presence of a quorum, but an abstention does not constitute a
vote "for" or "against" and will be disregarded in calculating the votes cast.
"Broker non-votes" (i.e., where a broker or nominee submits a proxy specifically
indicating the lack of discretionary authority to vote on a matter), if any,
with regard to the Continuance will be treated in the same manner as
abstentions. Subsequent to the Continuance, approval by the Board of Directors
of the Company (as continued) and by a majority of the outstanding shares of
Continued Common Stock, by means of a Consent, executed pursuant to proxies
solicited hereby, is required to authorize the Merger.
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE,
SIGN, DATE AND RETURN PROMPTLY THE ACCOMPANYING PROXY IN THE ENVELOPE PROVIDED.
THERE WILL BE NO MEETING OF SHAREHOLDERS OF THE COMPANY TO CONSIDER THE MERGER.
THE ONLY WAY IN WHICH A SHAREHOLDER OF THE COMPANY CAN EXPRESS HIS OR HER
APPROVAL OF THE MERGER IS BY EXECUTING THE CONSENT. THE FAILURE TO GRANT A PROXY
OR THE WITHHOLDING OF AUTHORITY TO EXECUTE THE CONSENT HAS THE SAME EFFECT AS A
VOTE "AGAINST" THE MERGER. THEREFORE, PLEASE COMPLETE THE ENCLOSED FORM OF PROXY
FOR THE CONSENT AND FORWARD IT TO THE COMPANY.
APPOINTMENT AND REVOCATION OF PROXIES
THE INSTRUMENTS OF PROXY ARE BEING SOLICITED ON BEHALF OF THE BOARD OF
DIRECTORS OF THE COMPANY.
The proxy for the Special Meeting and the proxy for the Consent must each be
signed by an individual holder of Company Common Stock, or Continued Common
Stock in the case of the proxy for the Consent, or by his attorney authorized in
a writing executed by the shareholder. If the shareholder is a corporation,
vii
<PAGE>
such proxy must either be under its common seal or signed by a duly authorized
officer, or if the shareholder is a partnership, it must be signed by either a
general partner, managing partner or duly authorized officer of the partnership.
A holder of Company Common Stock who has given a proxy may revoke it at any
time before it is exercised. In addition to revocation in any other manner
permitted by law, a proxy may be revoked by a later dated instrument in writing
executed by a shareholder of the Company or by his or her attorney authorized in
a writing executed by the shareholder. If the shareholder is a corporation, it
must either be under its common seal, or signed by a duly authorized officer, or
if the shareholder is a partnership it must be signed by either a general
partner, managing partner or duly authorized officer of the partnership. A
revocation of a proxy by a holder of shares of Company Common Stock should be
deposited with the Registrar and Transfer Agent of the Company, ChaseMellon
Shareholder Services L.L.C., 2323 Bryan Street, Suite 2300, Dallas, Texas.
Revocation of a proxy for the Special Meeting may be delivered at any time up to
and including the day of the Special Meeting or any adjournment thereof.
Revocation of a proxy for a Consent may be delivered at any time up to and
including the date of execution of the Consent. A proxy for the Special Meeting
is also revoked if the shareholder is present at the Special Meeting and elects
to vote in person.
VOTING OF SHARES AND EXERCISE OF DISCRETION OF PROXIES
THE SHARES OF COMPANY COMMON STOCK OR CONTINUED COMMON STOCK REPRESENTED BY
A PROXY WILL BE VOTED OR WITHHELD FROM VOTING BY THE PROXY HOLDER IN ACCORDANCE
WITH THE INSTRUCTION OF THE SHAREHOLDER. IF THE SHAREHOLDER SPECIFIES A CHOICE
WITH RESPECT TO ANY MATTER TO BE ACTED UPON, THE SHARES WILL BE VOTED
ACCORDINGLY. IN THE ABSENCE OF ANY INSTRUCTIONS IN A PROXY, IT IS INTENDED THAT
SUCH PROXY WILL BE UTILIZED TO (i) TO VOTE FOR ELECTION TO THE BOARD OF
DIRECTORS OF THE COMPANY OF THE PERSONS NOMINATED BY THE BOARD OF DIRECTORS,
(ii) VOTE IN FAVOR OF THE SPECIAL RESOLUTIONS PROPOSED TO BE APPROVED AT THE
SPECIAL MEETING AUTHORIZING THE CONTINUANCE AND (iii) EXECUTE THE CONSENT
APPROVING AND ADOPTING THE MERGER AND THE MERGER AGREEMENT.
THE ACCOMPANYING INSTRUMENTS OF PROXY CONFER DISCRETIONARY AUTHORITY ON THE
PERSONS NAMED THEREIN WITH RESPECT TO AMENDMENTS OR VARIATIONS TO MATTERS
IDENTIFIED IN THE NOTICE OF SPECIAL MEETING AND IN THE CONSENT, AND WITH RESPECT
TO OTHER MATTERS WHICH MAY PROPERLY COME BEFORE THE SPECIAL MEETING. FOR THOSE
SHAREHOLDERS VOTING AGAINST THE PROPOSALS CONTAINED IN THE PROXY FOR THE SPECIAL
MEETING, THE DISCRETIONARY AUTHORITY OF THOSE NAMED THEREIN WILL NOT BE VOTED TO
ADJOURN ANY MEETING. AT THE DATE HEREOF, MANAGEMENT OF THE COMPANY KNOWS OF NO
SUCH AMENDMENTS, VARIATIONS OR OTHER MATTERS TO COME BEFORE THE SPECIAL MEETING
OR TO BE ACTED UPON PURSUANT TO THE CONSENT OTHER THAN THE MATTERS REFERRED TO
IN THE NOTICE OF SPECIAL MEETING AND/OR SET FORTH IN THE FORM OF CONSENT THAT IS
ATTACHED HERETO AS APPENDIX "D".
THE SPECIAL MEETING
At the Special Meeting, shareholders of record of Company Common Stock as of
the close of business on the Meeting Record Date will consider and vote upon (i)
a proposal to elect directors of the Company, (ii) a proposal to continue and
domesticate the Company into the State of Delaware and (iii) such other matters
as may properly be brought before the Special Meeting or any adjournment or
postponement thereof.
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THE CONSENT
If the Company receives proxies for Consents representing at least a
majority of the shares of Continued Common Stock, the Consent, substantially in
the form of Appendix "D" hereto, will be executed as soon as possible after the
Continuance shall have become effective and the directors of the Company (as
continued) shall have approved the Merger. Holders of Company Common Stock at
the time the Continuance becomes effective (who will be the persons registered
as shareholders of the Company once it is domiciled in Delaware) will be
entitled to express their consent to the Merger by means of the proxy for the
Consent solicited hereby. Any proxy relating to the Consent executed by a holder
who is no longer a shareholder of record at the time the Continuance becomes
effective and the Consent is executed shall become null and void and of no
further force and effect.
THE CONTINUANCE
If holders of record on the Meeting Record Date of at least five percent of
the Company Common Stock are represented in person or by proxy at the Special
Meeting, and if the Continuance is approved by at least two-thirds of the votes
cast by holders of Company Common Stock represented in person or by proxy at the
Special Meeting, the Continuance will result in a change in the Company's
jurisdiction of incorporation from the Province of Alberta to the State of
Delaware and will also result in the adoption of a new certificate of
incorporation for the Company, which will govern the Company under Delaware law.
If approved by the shareholders and subject to requisite regulatory approval, it
is anticipated that the Continuance will become effective on or about
, 1997, or as soon as practicable after the Special Meeting. Upon
the effectiveness of the Continuance, each share of Company Common Stock and
each outstanding warrant to acquire shares of Company Common Stock will remain
issued and outstanding as an equivalent security of MSR Exploration Ltd., then a
Delaware corporation. The Board of Directors of the Company intends to terminate
or abandon the Continuance if a number of proxies for Consents sufficient to
approve the Merger are not obtained. See "The Continuance."
THE MERGER
If the Continuance is approved and becomes effective, the shareholders of
the Company, after it has been continued in Delaware, will be asked to approve
by written consent the Merger, pursuant to which the Company will be merged with
and into Mercury pursuant to the laws of the State of Delaware. Such written
consent will be executed pursuant to proxies solicited hereby. Accordingly, no
meeting of shareholders of the Company will be held with respect to the Merger
proposal. If the Merger is completed, holders of Continued Common Stock will
receive one share of Surviving Corporation Common Stock for each share of
Continued Common Stock held immediately prior to the Merger, and the warrants of
the Company outstanding immediately prior to the Merger will become equivalent
warrants of the Surviving Corporation. In addition, each outstanding share of
Mercury Common Stock and all options and warrants to acquire shares of Mercury
Common Stock will remain outstanding as one share of Surviving Corporation
Common Stock and options and warrants to acquire Surviving Corporation Common
Stock, as the case may be, upon consummation of the Merger. If the Merger is
approved by the shareholders of the Company pursuant to the Consent, immediately
following the Merger Mercury will change its name to MSR Exploration Ltd. It is
anticipated that the Merger, if approved by the shareholders of the Company
pursuant to the Consent, will become effective on or about , 1997,
or as soon as practicable after the completion of the Continuance. See "The
Merger."
CONSUMMATION OF THE MERGER
Upon consummation of the Merger, each share of Continued Common Stock issued
and outstanding on the Merger Record Date will be converted into the right to
receive one share of Surviving Corporation Common Stock (the "Exchange Ratio").
Each outstanding share of Mercury Common Stock will continue to remain
outstanding after the Merger as a share of Surviving Corporation Common Stock.
See "The
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Merger--General Description of the Merger." In addition, each outstanding
warrant or option to acquire shares of Company Common Stock or Mercury Common
Stock will become an equivalent right to acquire shares of Surviving Corporation
Common Stock.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the United
States Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports and other information with the United States
Securities and Exchange Commission (the "SEC"). Reports, proxy statements and
other information filed by the Company can be inspected and copied at the public
reference facilities maintained by the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the following Regional Offices of the SEC: New
York Regional Office, 7 World Trade Center, 13th Floor, New York, New York 10048
and Chicago Regional Office, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Copies of such material can also be obtained from the
Public Reference Section of the SEC, 450 Fifth Street, N.W., Washington, D.C.
20549, at the SEC's prescribed rates. In addition, material filed by the Company
can be inspected at the offices of the Alberta Securities Commission, Suite 410,
300 5th Avenue S.W., Calgary, Alberta T2P 3C4. Shares of the Company Common
Stock are quoted on the American Stock Exchange. Reports, proxy statements and
other information concerning the Company can also be inspected at The American
Stock Exchange, 86 Trinity Place, New York, New York 10006-1881. Upon completion
of the Continuance and the Merger, the Surviving Corporation will become subject
to such informational requirements.
The Company has filed with the SEC a registration statement on Form S-4
(together with any amendments thereto, the "Company Registration Statement")
under the Securities Act, of which this Proxy Statement/Prospectus forms a part,
with respect to the shares of Continued Common Stock to be held by shareholders
of the Company following the effective date of the Continuance in connection
with the Continuance and pursuant to this Proxy Statement/Prospectus. This Proxy
Statement/Prospectus does not contain all the information set forth in the
Company Registration Statement, certain portions of which have been omitted
pursuant to the rules and regulations of the SEC. A copy of the Company
Registration Statement may be inspected without charge at the principal offices
of the SEC in Washington D.C. or electronically by means of the SEC's home page
on the Internet (http://www.sec.gov).
Mercury has filed with the SEC a registration statement on Form S-4
(together with any amendments thereto, the "Mercury Registration Statement")
under the Securities Act, of which this Proxy Statement/ Prospectus forms a
part, with respect to the shares of Surviving Corporation Common Stock to be
held by shareholders of the Company following the effective date of the Merger
and pursuant to this Proxy Statement/Prospectus. This Proxy Statement/Prospectus
does not contain all the information set forth in the Mercury Registration
Statement, certain portions of which have been omitted pursuant to the rules and
regulations of the SEC. A copy of the Mercury Registration Statement may be
inspected without charge at the principal offices of the SEC in Washington D.C.
or electronically by means of the SEC's home page on the Internet
(http://www.sec.gov).
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS,
IN CONNECTION WITH THE OFFERING AND SOLICITATION MADE HEREBY AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS SHOULD NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE SECURITIES TO WHICH IT RELATES,
OR THE SOLICITATION OF A PROXY, IN ANY JURISDICTION IN WHICH, OR TO ANY PERSON
TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION OF AN OFFER OR PROXY
SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROXY
STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF THE SECURITIES OFFERED PURSUANT TO
THIS PROXY STATEMENT/PROSPECTUS SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION CONTAINED HEREIN OR
IN THE AFFAIRS OF THE COMPANY OR MERCURY SINCE THE DATE OF THIS PROXY
STATEMENT/PROSPECTUS.
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SUMMARY
The following is a brief summary of certain information contained elsewhere
in this Proxy Statement/ Prospectus. Reference is made to, and this summary is
qualified in its entirety by, the more detailed information contained in this
Proxy Statement/Prospectus and the Appendices hereto. Unless otherwise defined
herein, capitalized terms used in this summary have the respective meanings
ascribed to them elsewhere in this Proxy Statement/Prospectus. Unless otherwise
indicated, all dollar amounts are stated in U.S. dollars. Shareholders are urged
to read this Proxy Statement/Prospectus and the Appendices hereto in their
entirety.
THE COMPANIES
THE COMPANY. The Company is currently an Alberta, Canada registered public
company created in 1981 under Alberta law by the merger of two previous Canadian
public corporations, Mountain States Resources, Ltd. and Monte Grande
Exploration Limited, the shares of both of which were traded on the Vancouver
Stock Exchange. The Company's principal executive offices are located at 500
Main Street, Suite 210, Fort Worth, Texas 76102. The telephone number of the
Company at such office is (817) 877-3151. See "Business and Properties of the
Company."
The principal line of business of the Company is the exploration,
development, production and sale of crude oil and natural gas. The Company's oil
and gas operations are conducted primarily in Montana and Texas. All of the
Company's United States oil and gas property interests are owned and operated
directly through subsidiaries of the Company. The Company also has operations in
Canada pursuant to which the Company participates in properties primarily
through other oil and gas operators. The Company also engages in natural gas
gathering, processing and transmission operations in Northwest Montana.
The Company Common Stock was moved from the Vancouver Stock Exchange to the
Toronto Stock Exchange and then was listed for trading on the Nasdaq National
Market in 1982. The Company Common Stock was later moved to the American Stock
Exchange in September 1983. The Company Common Stock is currently traded on the
American Stock Exchange under the symbol "MSR". In September 1994, the Company
completed a private placement of Company Common Stock and used the proceeds to
retire debt payable to the Company's then secured primary lender and certain
other creditors. In conjunction with the private placement, the Company held a
special meeting of shareholders and elected a new board of directors,
effectively changing control of the Company to current management.
Management of the Company has identified Mercury as a suitable merger
candidate because of the similarity of the Mercury oil and gas properties and
the quality of such properties.
MERCURY. Mercury was organized on March 7, 1997 under the laws of the State
of Delaware for the purpose of acquiring from Parent and thereafter exploring,
developing and operating, all of Parent's oil and natural gas properties located
in Montana (the "Mercury Properties"). Upon formation of Mercury, Parent
conveyed to Mercury the Mercury Properties in exchange for a majority of the now
outstanding Mercury Common Stock and warrants to purchase additional shares of
Mercury Common Stock. Certain directors, officers and agents of Parent also
conveyed to Mercury certain contractual rights in the Mercury Properties in
exchange for shares of Mercury Common Stock and warrants. The Mercury Properties
constitute all of Mercury's oil and natural gas properties.
The principal business of Parent and its majority shareholder, Mercury
Production Company ("MPC"), is also the acquisition, exploration, development
and operation of oil and gas properties. Parent and MPC both expect to continue
such business subsequent to the Merger. The major oil and natural gas properties
and operations of Parent are in Michigan and Wyoming, and it has relatively
minor interests in Indiana, Kentucky, New Mexico and West Texas. The oil and gas
properties of MPC are principally located in New Mexico and West Texas.
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Management of Parent and Mercury have identified the Company as a suitable
merger candidate for the same reasons management of the Company favors the
Merger.
The principal executive office of Mercury is located at 1619 Pennsylvania
Avenue, Fort Worth, Texas 76104, and the telephone number at such office is
(817) 332-9133.
SURVIVING CORPORATION. The Merger has been approved by shareholders of
Mercury. If the Continuance and the Merger are approved by the Company's
shareholders at the Special Meeting and pursuant to the Consent, the Company
shall be merged with and into Mercury and Mercury shall be the surviving
corporation of the Merger (the "Surviving Corporation"). Pursuant to the Merger
Agreement, the Certificate of Incorporation of Mercury shall be the Certificate
of Incorporation of the Surviving Corporation (the "Surviving Corporation
Certificate"), the Bylaws of Mercury shall be the Bylaws of the Surviving
Corporation (the "Surviving Corporation Bylaws") and the name of the Surviving
Corporation will be changed to MSR Exploration Ltd. All five of the directors of
the Company elected at the Special Meeting and three of the current directors of
Mercury shall be the directors of the Surviving Corporation and one of the
current officers of the Company and two of the current officers of Mercury shall
be officers of the Surviving Corporation. In addition, the Board of Directors of
the Surviving Corporation will appoint an executive committee which will be
composed of two directors of the Surviving Corporation who are currently
directors of Mercury and one director of the Surviving Corporation who is
currently a director of the Company. See "The Merger."
THE SPECIAL MEETING
DATE, TIME AND PLACE. The Special Meeting will be held on , 1997
at the offices of , Fort Worth, Texas , at :00
.m., local time.
RECORD DATE; SHARES ENTITLED TO VOTE. Only holders of record of shares of
Company Common Stock at the close of business on , 1997 (the "Meeting
Record Date") are entitled to notice of and to vote at the Special Meeting. On
the Meeting Record Date, there were shares of Company Common Stock
outstanding, each of which will be entitled to vote on each matter to be acted
upon at the Special Meeting.
QUORUM; VOTE REQUIRED. The presence, in person or by proxy, at the Special
Meeting of the holders of only five percent of the shares of Company Common
Stock outstanding and entitled to vote at the Special Meeting is necessary to
constitute a quorum at the Special Meeting. The affirmative vote of the holders
of two-thirds of the shares present in person or by proxy at the Special Meeting
is required to approve and adopt the Continuance.
THE CONSENT
PURPOSE OF CONSENT. There will be no meeting of shareholders of the Company
to consider and vote upon the Merger. The only shareholder action regarding the
Merger will be taken, if at all, by way of execution of the Consent.
TIME AND DATE OF CONSENT. The Consent will be executed immediately after
the Continuance shall have become effective and the directors of the Company (as
continued as a Delaware corporation) shall have approved the Merger.
WHO MAY CONSENT. Holders of Company Common Stock at the time the
Continuance becomes effective (who will be the persons registered as
shareholders of MSR Exploration Ltd. once it is domiciled in Delaware) (the
"Merger Record Date") will be entitled to express their consent to the Merger by
means of the proxies solicited hereby. Any proxy relating to the Consent
executed by a holder who is no longer a shareholder of record at the time the
Continuance becomes effective and the Consent is executed shall become null and
void and of no further force and effect.
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SECURITY OWNERSHIP OF COMPANY MANAGEMENT
As of the Meeting Record Date, the directors and executive officers of the
Company beneficially owned shares of Company Common Stock representing
approximately 11.7 percent of the outstanding Company Common Stock. Such
persons, together with Pozo Resources, Inc. and Joseph V. Montalban, a former
director of the Company, collectively hold 38.9 percent, in the aggregate, of
the outstanding shares of Company Common Stock as of the Meeting Record Date,
and have agreed with Parent and Mercury to vote such shares in favor of the
Continuance and the Merger. See "Beneficial Ownership of Securities."
COMPANY ANNUAL MEETING MATTERS
In connection with considering Mercury's and the Company's application to
list the shares of Surviving Corporation Common Stock on the American Stock
Exchange, the Exchange has required that the Company conduct an election of the
Board of Directors of the Company at the Special Meeting. The Board of Directors
of the Company has proposed and recommends to shareholders of the Company that
the entire Board consist of five persons and has nominated five persons for
election at the Special Meeting. Three of the nominees--Otto J. Buis, Patrick M.
Montalban and Steven M. Morris--are currently directors of the Company. The
remaining current member of the Board of Directors of the Company, C. Al Buis,
will not stand for reelection. The other two nominees for election to the Board
of Directors-- D. Randall Kent and W. Yandell Rogers, III--are not currently
directors of the Company and are not affiliated with either the Company or
Mercury. The election of these two persons to the Board of Directors of the
Company will satisfy the requirement of the American Stock Exchange that at
least two directors elected at the Special Meeting be "independent directors."
If the Continuance and the Merger are consummated, these two independent
directors (together with the other directors of the Company elected at the
Special Meeting) will become directors of the Surviving Corporation and will
satisfy the independent director requirement applicable to the Surviving
Corporation. In light of the necessity to hold an election of directors at the
Special Meeting, the Merger Agreement has been amended so that the election of
Messrs. Buis, Montalban, Morris, Kent and Rogers at the Special Meeting is a
condition to the obligation of Parent and Mercury to consummate the Merger. See
"Election of Directors" and "Certain Terms of the Merger Agreement-- Conditions
to the Merger."
THE CONTINUANCE
The Company will change its jurisdiction from Alberta, Canada to Delaware,
U.S.A. by means of a process called a "continuance" under Alberta law and a
"domestication" under Delaware law. The Continuance will be effected upon
approval of the Certificate of Domestication to be filed by the Company with the
Secretary of State of the State of Delaware. A copy of the form of Certificate
of Domestication is attached to this Proxy Statement/Prospectus as Appendix "A".
Upon the effectiveness of the Continuance, the Company will become a Delaware
corporation as if it had originally been incorporated in that jurisdiction and
it will be discontinued in Alberta, Canada, with the Company's shareholders
becoming subject to the rights and privileges afforded under the Delaware
General Corporation Law. As a result of the Continuance, the Company will issue
an aggregate of 13,777,014 shares of Continued Common Stock to holders of
Company Common Stock, as of the Meeting Record Date. Effectiveness of the Merger
is expressly conditioned on approval and effectiveness of the Continuance; as a
result, a vote against the Continuance would have the effect of a vote against
the Merger.
The Company has elected to continue into the State of Delaware in order to
effect the Merger, as Alberta law does not permit the merger of an Alberta
public registered company with a Delaware corporation such as Mercury.
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THE MERGER AND THE MERGER AGREEMENT
TERMS OF THE MERGER. At the Effective Time (as hereinafter defined), the
Company (as a Delaware corporation) will merge with and into Mercury. Mercury
will be the surviving corporation in the Merger; no new company will result from
the Merger. In the Merger, each share of Company Common Stock outstanding at the
Effective Time will be converted into the right to receive one share of
Surviving Corporation Common Stock, and each warrant or option to acquire shares
of Company Common Stock will be converted into equivalent rights to acquire
Surviving Corporation Common Stock. Each share of Mercury Common Stock and each
option or warrant to acquire shares of Mercury Common Stock will remain
outstanding as one share of Surviving Corporation Common Stock or as an option
or warrant to acquire shares of Surviving Corporation Common Stock, as the case
may be. As a result of the Merger, the holders of Company Common Stock will be
issued 13,777,014 shares of Surviving Corporation Common Stock and the holders
of Mercury Common Stock will hold 12,000,000 shares of Surviving Corporation
Common Stock, representing approximately 53 percent and 47 percent,
respectively, of the total shares of Surviving Corporation Common Stock to be
outstanding after completion of the Continuance and the Merger. In addition,
holders of options and warrants to acquire shares of Mercury Common Stock will
hold options and warrants to acquire an aggregate of 11,228,570 shares of
Surviving Corporation Common Stock, and the holder of the Company Warrants will
hold warrants to acquire 280,000 shares of Surviving Corporation Common Stock.
RECOMMENDATION OF THE BOARD OF DIRECTORS. The Board of Directors of the
Company, three members of which will also constitute the Board of Directors of
the Company after the effectiveness of the Continuance, has determined that the
Continuance and the Merger are fair to, and in the best interests of, the
shareholders of the Company and recommends that the shareholders of the Company
approve the Continuance and the Merger.
Management of the Company believes that the Continuance and the Merger are
necessary to create an entity with business and assets sufficient to permit the
enterprise to remain viable, thereby allowing shareholders of such entity to
benefit by owning an interest therein. The Boards of Directors of the Company
and Mercury believe that an oil and gas exploration and production company must
be of a minimum size, in terms of assets, properties and revenues, in order to
remain viable and grow. Management of the Company also believes that the Merger
is fair to the Company's shareholders because of the manner in which the terms
of the Merger were reached and potential value the Merger may bring to the
Company's shareholders. As such, the Board of Directors of the Company has
unanimously approved the Merger as it believes that the combination of the
Company and Mercury will result in a viable enterprise which offers the
opportunity for growth. See "The Merger--The Company's Reasons for the Merger;
Recommendation of the Company's Board of Directors."
FAIRNESS OPINION NOT OBTAINED. Neither the Board of Directors of the
Company nor the Board of Directors of Mercury, has sought or obtained an opinion
from an independent party as to whether the consideration to be received in the
Merger by the Company's shareholders is fair from a financial point of view. In
accordance with the Merger Agreement, the Board of Directors of the Company
retained an investment banking firm to provide an opinion of the fair market
value of the outstanding Company Common Stock in order to analyze the possible
Canadian and United States federal income tax implications of the Continuance
and the Merger to the Company. See "Material Canadian Federal Income Tax
Consequences of the Continuance and the Merger," "Material United States Federal
Income Tax Consequences to the Company of the Continuance and the Merger" and
"Valuation for Tax Purposes."
EFFECTIVE TIME OF THE MERGER. It is anticipated that the Merger will become
effective (the "Effective Time") on or about , 1997, as promptly as
practicable after approval by the Company's shareholders of the Continuance and
the consummation of the Continuance in Alberta and Delaware. Assuming that the
Company obtains the requisite shareholder approval of the Merger, upon
consummation of the Continuance, the Board of Directors of the Company (as a
continued Delaware corporation)
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will approve the Merger, the Consent will be executed approving the Merger and
the Merger Agreement, and a Certificate of Merger will be filed with the
Secretary of State of the State of Delaware.
CERTAIN CONDITIONS TO THE CONSUMMATION OF THE MERGER. The obligations of
both the Company and/or Mercury to consummate the Merger are subject to the
satisfaction of certain conditions, including the following: (i) approval by the
shareholders of the Company of the Continuance and the Merger Agreement; (ii)
effectiveness of the Continuance; (iii) the absence of any order making the
Merger illegal or otherwise prohibiting consummation of the Merger; (iv) listing
on the American Stock Exchange of the shares of Surviving Corporation Common
Stock issuable in the Merger; (v) receipt by Parent and the Board of Directors
of the Company of an opinion from an investment banking firm that the net market
value of the Company is less than $14,156,000; (vi) agreement among the parties
to the Merger Agreement as to the terms of a Management Agreement to be entered
into between Parent and the Surviving Corporation upon the effectiveness of the
Merger; (vii) agreement of the Surviving Corporation to continue to be bound by
the guarantee of Mercury as to the repayment of $4.0 million of debt of Parent
or repayment by the Surviving Corporation of such debt, and the release of
Parent from any obligation to repay such debt; (viii) the election to the Board
of Directors of the Company at the Special Meeting of Otto J. Buis, Patrick M.
Montalban, Steven M. Morris, D. Randall Kent and W. Yandell Rogers, III; and
(ix) the absence of certain regulatory conditions. In addition, the obligations
of each of the Company and Mercury are subject to the accuracy of the
representations and warranties of the other party and to compliance with all
agreements and covenants on the part of the other party contained in the Merger
Agreement. See "The Merger" and "Certain Terms of the Merger Agreement."
If the Merger is not consummated, it is anticipated that the Company will
continue its current business activities and seek another suitable candidate
with which it can enter into a strategic alliance for the purpose of bringing
value to the Company Common Stock.
TERMINATION OF THE MERGER AGREEMENT. The Merger Agreement may be terminated
at any time prior to the Effective Time (i) by mutual consent of the Company and
Parent; (ii) by either the Company or Parent if the Merger has not been effected
by December 31, 1997; (iii) by the Company if there has been a material adverse
change in the business, financial condition or operations of Mercury, or by
Parent if there has been a material adverse change in the business, financial
condition or operations of the Company; (iv) by the Company if the Board of
Directors of the Company has determined to recommend another transaction to the
shareholders of the Company and the shareholders of the Company approve such
transaction, or by Parent at any time following the public announcement of such
recommendation and approval; (v) by the Company upon a material breach by
Mercury or Parent of any representation, warranty, covenant or agreement on the
part of Mercury or Parent set forth in the Merger Agreement, which is not cured
within five business days of receipt by Parent of notice thereof, or (vi) by
Parent upon a material breach by the Company of any material representation,
warranty, covenant or agreement on the part of the Company set forth in the
Merger Agreement, which is not cured within five business days of receipt by the
Company of notice thereof. See "Certain Terms of the Merger
Agreement--Conditions to the Merger."
ASSUMPTION OF STOCK OPTIONS, WARRANTS AND OTHER OBLIGATIONS. The Company
issued a warrant to Banque Paribas to acquire 280,000 shares of Company Common
Stock at an exercise price of $3.375 per share (the "Company Options") in
January 1995 in connection with the Company obtaining financing from such
lender. Mercury has granted to Thomas F. Darden and Glenn M. Darden, who are
shareholders, directors, officers and employees of Mercury, options to purchase
an aggregate of 228,570 shares of Mercury Common Stock at an exercise price of
$0.875 per share, which expire on March 31, 2002. Mercury has also issued
warrants to certain shareholders, officers and directors to acquire (i) an
aggregate of 5,500,000 shares of Mercury Common Stock at an exercise price of
$1.25 per share and (ii) an aggregate of 5,500,000 shares of Mercury Common
Stock at an exercise price of $2.00 per share. These warrants also will expire
on March 31, 2002. As of the Effective Time, each option and each warrant to
purchase
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Mercury Common Stock (the "Mercury Options"), and each of the Company Warrants,
that remains unexercised in whole or in part will become options and warrants to
acquire Surviving Corporation Common Stock. Accordingly, each Mercury Option and
each Company Option will be deemed to remain outstanding as an option to
purchase, in lieu of the shares of Mercury Common Stock or Company Common Stock,
as the case may be, previously subject thereto, an identical number of shares of
Surviving Corporation Common Stock. The exercise price per share of Surviving
Corporation Common Stock will also remain unchanged. See "Certain Terms of the
Merger Agreement."
Upon the effectiveness of the Merger, the Surviving Corporation will either
(i) continue to guarantee the repayment of $4.0 million of indebtedness of
Parent or (ii) repay such indebtedness. Subject to the terms and conditions of
the Merger Agreement, at the effective time of the Merger all of the assets of
the Company and Mercury will vest in the Surviving Corporation and all of the
liabilities and obligations of the Company and Mercury will attach to the
Surviving Corporation. Mercury will be the surviving corporation in the Merger.
BOARD OF DIRECTORS
The Board of Directors of the Company is currently comprised of four
members, Otto J.Buis, C. Al Buis, Patrick M. Montalban and Steven M. Morris.
Such persons, other than C. Al Buis, will stand for election to the Board of
Directors of the Company at the Special Meeting together with D. Randall Kent
and W. Yandell Rogers, III, and, if elected, will continue to serve as directors
of the Company upon effectiveness of the Continuance and until the Merger is
completed. Upon completion of the Continuance and the Merger, pursuant to the
Merger Agreement, Messrs. Otto Buis, Montalban, Morris, Kent and Rogers will
serve as directors of the Surviving Corporation.
Pursuant to the Merger Agreement, Frank Darden, Thomas F. Darden and Glenn
M. Darden, currently directors of Mercury and Parent, will serve as directors of
the Surviving Corporation.
Pursuant to the Merger Agreement, Thomas Darden, Glenn Darden and Patrick
Montalban will be appointed to the executive committee of the Board of Directors
of the Surviving Corporation.
For additional information regarding each of the foregoing persons and the
relationships of each with the Company, Mercury and Parent, and the proposed
relationship of each to the Surviving Corporation, see "Directors and Executive
Officers of the Surviving Corporation" and "The Merger--Interests of Certain
Persons in the Merger."
REGULATORY APPROVAL
The Company is in the process of filing for approval with the Registrar of
Corporations for the Province of Alberta to continue the Company into the State
of Delaware. Upon receipt of appropriate shareholder approval, the Company will
file a Certificate of Domestication with the Secretary of State of the State of
Delaware. Upon completion of the Continuance, the Company and Mercury will file
a Certificate of Merger with the Secretary of State of the State of Delaware.
Once the Continuance and the Merger are approved by applicable provincial and
state authorities, no other regulatory approvals are necessary for consummation
of the Continuance and the Merger, other than compliance with applicable
securities laws.
APPRAISAL RIGHTS WITH RESPECT TO THE CONTINUANCE AND THE MERGER
Pursuant to Section 184 of the Alberta Business Corporations Act (the
"ABCA"), a shareholder of the Company is entitled to dissent to the Continuance
and thereupon is entitled to be paid by the Company the fair value of his shares
of Company Common Stock determined as of the close of business on the last
business day before the Special Meeting. In order to dissent to the Continuance,
a shareholder must send a written objection to the Company on or before the date
of the Special Meeting at which the Continuance is
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to be approved. A shareholder intending to dissent to the Continuance must
either vote against the Continuance or abstain from voting.
Within 10 days following the date of the Special Meeting, the Company will
deliver to each shareholder who has filed an objection notice in respect of any
resolution, a notice stating the special resolutions authorizing the Continuance
have passed at the Special Meeting. After the Continuance has been approved,
application can be made to a court by either the Company or the dissenting
shareholder to fix the fair value of the shares. The Company, after application
has been made, shall send an offer to purchase the shares of Company Common
Stock to the dissenting shareholder for the fair value of the shares on the day
before the Special Meeting. The dissenting shareholder may either accept this
amount or proceed to court and have the court establish the fair value of the
shares. See "The Continuance--Right of Dissent."
If the Continuance becomes effective, shareholders of the Company, as
continued into Delaware, will have rights of dissent with respect to the Merger
pursuant to provisions to be contained in the certificate of incorporation of
the continued corporation intended to provide shareholders of the continued
corporation the same rights they would have under Section 184 of the ABCA. See
"The Merger--Right of Dissent." The rights of shareholders who dissent to the
Merger under the certificate of incorporation of the continued corporation will
be much the same as the rights of shareholders who dissent to the Continuance as
described above. In order to dissent to the Merger, a shareholder must send a
written objection to the Company on or before the date of execution of the
Consent, which is expected to occur immediately after the Continuance has become
effective, and must not authorize the execution of the Consent in respect of any
shares of Continued Common Stock owned by him.
No additional rights of appraisal or dissent under Delaware law will be
available in connection with the Merger.
CERTAIN CANADIAN FEDERAL INCOME TAX CONSEQUENCES OF THE CONTINUANCE AND THE
MERGER
For Canadian federal income tax purposes, shareholders of the Company will
not be considered to have disposed of their shares of Company Common Stock or to
have realized a taxable capital gain or loss by reason only of the Continuance.
The Continuance will also have no effect on the adjusted cost base to
shareholders of their shares of Company Common Stock. Generally, shareholders of
the Company who receive shares of Surviving Corporation Common Stock pursuant to
the Merger will be deemed to have disposed of their shares of Company Common
Stock, but will realize neither a capital gain nor a capital loss on the
disposition. Upon the Continuance, the Company will be deemed to have disposed
of all of its property for proceeds of disposition equal to the fair market
value of that property and will be subject to tax on any income and net taxable
capital gains arising from such deemed disposition. Additionally, the Company
will be subject to a corporate emigration tax at a rate of five percent of the
amount by which the fair market value of the Company's assets net of liabilities
exceeds the paid-up capital of the Company's issued and outstanding shares.
However, given the current value of the Company's assets, no Canadian federal
taxes should be due and payable by the Company under the Canadian Tax Act as a
result of the Continuance. See "Material Canadian Federal Income Tax
Consequences of the Continuance and the Merger" below for more details. The
Company is in receipt of the opinion of Blake, Cassels & Graydon, Canadian
counsel to the Company, with respect to the principal Canadian federal income
tax considerations under the Income Tax Act (Canada) with respect to the
Continuance and the Merger generally applicable to the Company and the holders
of Company Common Stock.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE CONTINUANCE AND THE
MERGER
The Continuance and the Merger are each intended to qualify as a
reorganization under Section 368(a) of the United States Internal Revenue Code
of 1986, as amended (the "Code"), and, U.S. Counsel (as defined below) has
opined that each should constitute a non-taxable transaction for holders of
Company Common Stock, provided certain requirements are met, as described
herein. Although the Continuance should qualify as a reorganization, U.S.
Counsel has opined that the Company will recognize gain, if any, realized on a
deemed liquidating distribution of Continued Common Stock to its shareholders.
Assuming that certain tax basis and fair market value determinations by the
Company are correct, U.S. Counsel has concluded that the Company will not
realize a gain on the Continuance. For a discussion of these and other United
States federal income tax considerations in connection with the Continuance and
the Merger, see "Material United States Federal Income Tax Consequences to
Shareholders and Warrant Holders of the Continuance and the Merger" and
"Material United States Federal Income Tax Consequences to the Company of the
Continuance and the Merger," below. The Company is in receipt of the opinion of
Thompson & Knight, P.C., United States counsel to the Company and special United
States tax counsel to Mercury ("U.S. Counsel"), with respect to the material
United States federal income tax considerations arising from and relating to the
Continuance and the Merger generally applicable to the Company, the holders of
Company Common Stock and holders of warrants to acquire Company Common Stock.
ANTICIPATED ACCOUNTING TREATMENT
The Merger will be accounted for by the Surviving Corporation under the
purchase method of accounting. See "The Merger--Accounting Treatment" and "Pro
Forma Consolidated Statements of Operations and Balance Sheet (Unaudited) of the
Surviving Corporation."
EXCHANGE OF STOCK CERTIFICATES
Promptly after the Effective Time of the Merger, the Surviving Corporation
will mail a letter of transmittal with instructions to each holder of record of
Continued Common Stock outstanding immediately before the Effective Time for use
in exchanging certificates formerly representing shares of Company Common Stock
for certificates representing shares of Surviving Corporation Common Stock. No
certificates representing Continued Common Stock will be prepared or delivered
to shareholders. Certificates should not be surrendered by the holder thereof
until they have received the letter of transmittal from the Surviving
Corporation. See "Certain Terms of the Merger Agreement-- Manner and Basis of
Converting Shares of Company Common Stock and Warrants." DO NOT SEND ANY
CERTIFICATES AT THIS TIME.
COMPARATIVE RIGHTS OF SHAREHOLDERS
After the Continuance, and upon consummation of the Merger, the Surviving
Corporation will be governed by and subject to the Delaware General Corporation
Law (the "DGCL"). Although similar to the ABCA, the DGCL differs in several
material respects, including the following:
Under the ABCA, continuances, sales of substantially all assets of a
corporation, amendments to the articles of incorporation and other extraordinary
actions generally require approval of two-thirds of the shares voted on such
action, while the DGCL generally requires that a majority of the outstanding
shares approve such action. Under the ABCA, either shareholders or directors may
make, amend or repeal bylaws (subject to any restrictions under the articles,
bylaws or any unanimous shareholder agreement), but any such action of the
directors with respect to the bylaws is subject to confirmation by a majority of
the votes cast by shareholders entitled to vote thereon. Under the DGCL, once a
corporation has received any payment for any of its stock, bylaws may be
adopted, amended or repealed by shareholders entitled to vote
8
<PAGE>
thereon, and where authorized by the certificate of incorporation, directors.
Under the ABCA, shareholder actions without a meeting may be taken by resolution
in writing signed by all of the shareholders entitled to vote. Under the DGCL,
shareholders may act by written consent without a meeting if holders of
outstanding stock, having not less than the minimum number of votes that would
be necessary to take such action at a meeting at which all shares entitled to
vote thereon were present and voting, execute a written consent providing for
such action unless otherwise provided in the corporation's certificate of
incorporation.
The DGCL does not provide appraisal rights in a merger or consolidation to
holders of stock which is, either (a) listed on a national securities exchange
or designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc., (the "NASD") or
(b) held of record by more than 2,000 shareholders, provided that such holders
receive shares of stock of the corporation surviving the merger or consolidation
which is either listed (as of the effective date of the merger or consolidation)
on a national securities exchange or designated as a national market system
security on an interdealer quotation system by the NASD or held of record by
more than 2,000 shareholders. Since the Surviving Corporation Common Stock will
be listed on the American Stock Exchange on the effective date of the Merger,
the Delaware appraisal rights will not be available to holders of Continued
Common Stock in connection with the Merger. See "The Merger--Right of Dissent."
The ABCA does not contain any similar exemption from its provisions relating to
dissenters' rights of appraisal for amalgamation.
Under the ABCA, at least one-third of the directors of Alberta companies,
the business of which is conducted largely outside of Canada, must be resident
Canadians. The DGCL has no comparable requirement. The DGCL permits the
certificate of incorporation of a Delaware corporation to contain a provision
limiting the personal liability of a director to the shareholders or the
corporation for monetary damages for breach of fiduciary duty, except in certain
circumstances, including when a director has breached his or her duty of
loyalty, when a director's actions involved intentional misconduct or a knowing
violation of laws, or when a director derived improper personal benefit. The
ABCA has no similar provisions limiting directors' liability. The ABCA creates a
cause of action for "oppression" and "unfairness" with respect to security
holders, creditors, directors and officers, and vests the courts with broad
remedial powers in connection therewith; the DGCL contains no comparable
provision. The Certificate of Incorporation of the Company as continued in
Delaware will contain provisions providing to shareholders of the Company as
continued the same rights with respect to "oppression" or "unfairness" that were
available to shareholders of the Company under the ABCA. The Surviving
Corporation Certificate also contains such provisions.
The certificate of incorporation of the Surviving Corporation includes
provisions limiting directors liability to shareholders or the corporation. See
"Differences Between the DGCL and the ABCA."
MARKET PRICE DATA
THE COMPANY. The Company Common Stock is quoted on the American Stock
Exchange under the trading symbol "MSR". On March 26, 1997, the last trading day
prior to the public announcement of the Merger by the Company, the closing sales
price for Company Common Stock was $.9375. On September 10, 1997, the closing
sales price for Company Common Stock was $0.81.
MERCURY. Neither the Mercury Common Stock nor the securities of Parent has
ever been publicly traded.
DIVIDENDS
No cash dividends have been paid by the Company on Company Common Stock and
no cash dividends have been paid by Mercury on the Mercury Common Stock. It is
anticipated that future earnings of the Surviving Corporation will be retained
to finance the continuing development of its business. In
9
<PAGE>
addition, the Company is prohibited under its credit agreement with a lender
from paying dividends. The Surviving Corporation will also be subject to such
prohibition. The payment of any future dividends will be at the discretion of
the Board of Directors of the Surviving Corporation and will depend upon, among
other things, future earnings, any contractual restrictions, the success of
business activities, regulatory and capital requirements, the general financial
condition of the Surviving Corporation and general business conditions.
RISK FACTORS PERTAINING TO THE CONTINUANCE AND THE MERGER
While the Boards of Directors of the Company and Mercury are of the opinion
that the transactions contemplated herein are in the best interests of the
Company, Mercury and their respective shareholders, there are business risks
related to such transactions, including, without limitation:
- the inherent volatility of oil and natural gas prices and the effect of
price changes on revenues;
- uncertainties in estimating the oil and natural gas reserves of the
Company and Mercury and the value thereof;
- the concentration of the properties of the Company and Mercury in Montana;
and
- other risks inherent in the oil and natural gas property acquisition,
development and operating business.
Shareholders of the Company are urged to read "Risk Factors" beginning on
page 15 for a more detailed discussion of certain risk factors that should be
considered by shareholders of the Company in evaluating the Continuance and the
Merger.
10
<PAGE>
SUMMARY HISTORICAL FINANCIAL INFORMATION
The following table sets forth certain summary historical financial data for
the Company and the Mercury Properties for each of the two years in the period
ended December 31, 1996, and for the six months ended June 30, 1997 and 1996,
respectively. The data presented below has been derived from and should be read
in conjunction with the consolidated financial statements of the Company and the
financial statements of the Mercury Properties, and the related notes thereto
set forth elsewhere in this Proxy Statement/Prospectus. Summary financial data
at June 30, 1997 and for the six months ended June 30, 1997 and 1996,
respectively, for the Company and the Mercury Properties are derived from the
unaudited financial statements of the Company and the Mercury Properties and
include all adjustments (consisting only of normally recurring adjustments) that
the Company and Mercury each consider necessary for a fair presentation of
operating results for such interim periods. Results for interim periods are not
necessarily indicative of results for the full year. See "Management's
Discussion and Analysis of the Company's Financial Condition and Results of
Operations" and "Management's Discussion and Analysis of Mercury's Financial
Condition and Results of Operations" for a discussion of matters that affect the
comparability of the information presented. All of the statements are in United
States dollars.
SUMMARY CONSOLIDATED HISTORICAL FINANCIAL DATA OF THE COMPANY
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------------- --------------------
1996 1995 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues...................................................... $ 4,376 $ 3,127 $ 2,135 $ 2,045
Net loss............................................................ $ 330 $ 641 $ 244 $ 138
Per share net income (loss)......................................... $ (0.02) $ (0.04) $ (0.02) $ (0.01)
Weighted average number of shares outstanding....................... 13,773 14,263 13,777 13,745
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, AT JUNE 30,
-------------------- -----------
1996 1995 1997
--------- --------- -----------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................................................... $ 313 $ 233 $ 344
Accounts receivable.......................................................... $ 937 $ 700 $ 491
Inventories.................................................................. $ 195 $ 184 $ 141
Total current assets......................................................... $ 1,460 $ 1,176 $ 1,015
Property, plant and equipment--net ("full cost")............................. $ 28,786 $ 29,041 $ 28,183
Total assets................................................................. $ 30,716 $ 30,754 $ 29,825
Current liabilities, including current portion of long-term debt............. $ 1,597 $ 962 $ 1,492
Long-term debt............................................................... $ 5,931 $ 6,252 $ 5,435
Deferred income taxes........................................................ $ 3,833 $ 4,003 $ 3,706
Stockholders' equity......................................................... $ 19,357 $ 19,537 $ 19,192
</TABLE>
11
<PAGE>
SUMMARY HISTORICAL FINANCIAL INFORMATION OF THE MERCURY PROPERTIES (1)
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER SIX MONTHS ENDED
31, JUNE 30,
-------------------- --------------------
1996 1995 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES:
Total revenues........................................................... $ 2,759 $ 2,205 $ 1,230 $ 1,267
Total direct operating expenses.......................................... $ 1,561 $ 1,335 $ 746 $ 836
Excess of revenues over direct operating expenses........................ $ 1,198 $ 870 $ 484 $ 431
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30,
1997
-----------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................................. $ 0
Working capital....................................................... $ 72
Total assets.......................................................... $ 4,398
Long-term debt........................................................ $ 4,000
Total stockholders' equity............................................ $ 303
</TABLE>
- ------------------------
(1) Historical financial statements reflecting the financial position and
results of operations required by generally accepted accounting principles
are not presented, as such information is neither readily available on an
individual property basis nor meaningful for the Mercury Properties.
Accordingly, the data shown above are derived from statements of revenues
and direct operating expenses. Amounts represent Mercury's net ownership
interest in the Mercury Properties and are presented on the full cost basis
of accounting. Depreciation, depletion and amortization, allocated general
and administrative expenses, interest expense and income taxes have been
excluded because Mercury is a newly formed business and the expenses are not
necessarily indicative of the expenses to be incurred by Mercury.
12
<PAGE>
SUMMARY PRO FORMA FINANCIAL INFORMATION
The following summary pro forma financial information has been derived from
and should be read in conjunction with the pro forma financial information and
notes thereto included elsewhere in this Proxy Statement/Prospectus. The
following summary pro forma consolidated statements of operations for the year
ended December 31, 1996 and the six months ended June 30, 1997 combine the
historical information of the Company adjusted to give effect to the Merger and
the related pro forma adjustments. The pro forma statements of operations for
the year ended December 31, 1996 and the six months ended June 30, 1997 reflect
the consolidated operations of the Company and Mercury as if the Merger had been
consummated at January 1, 1996. The pro forma balance sheet as of June 30, 1997
is presented as if the Merger had been consummated on that date. All of the
statements are in United States dollars. The following summary pro forma
financial information is presented for illustrative purposes only and is not
necessarily indicative of the results of operations and financial condition that
would have been achieved if the transactions included in the pro forma
adjustments had been consummated in accordance with the assumptions set forth
below under "Pro Forma Condensed Financial Information," nor is it necessarily
indicative of future operating results or financial condition.
<TABLE>
<CAPTION>
PRO FORMA COMBINED(1)
--------------------------------
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1996 JUNE 30, 1997
----------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C>
SELECTED STATEMENT OF OPERATIONS DATA:
Total revenues.............................................................. $ 7,135 $ 3,365
Net income (loss)........................................................... $ 18 $ (141)
Per share net income (loss)................................................. $ 0.00 $ (0.01)
Weighted average number of shares outstanding............................... 25,773 25,777
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30,
1997
---------------
<S> <C>
SELECTED BALANCE SHEET DATA:
Cash and cash equivalents...................................................................... $ 344
Accounts receivable............................................................................ $ 580
Inventories.................................................................................... $ 219
Total current assets........................................................................... $ 1,182
Property, plant and equipment--net ("full cost")............................................... $ 22,504
Total assets................................................................................... $ 24,177
Current liabilities, including current portion of long-term debt............................... $ 1,851
Long-term debt................................................................................. $ 9,435
Deferred income taxes.......................................................................... $ --
Stockholders' equity........................................................................... $ 12,891
</TABLE>
- ------------------------
(1) The Merger will be accounted for as a purchase under the provisions of
Accounting Principal Board Opinion Number 16 ("APB 16") Accounting for
Business Combinations. Under APB 16, Mercury will be considered the
"accounting acquirer" since the former Mercury shareholders will control the
Surviving Corporation through their holdings of approximately 47 percent of
the combined outstanding Surviving Corporation Common Stock, will have
control over the executive committee of the Board of Directors of the
Surviving Corporation and will have options to acquire 11 million additional
shares of Surviving Corporation Common Stock. Accordingly, the Company's net
assets will be revalued based upon the value of Company Common Stock at the
date the Merger was announced and Mercury's net assets will be based upon
their historical cost. See "Pro Forma Consolidated Statements of Operations
and Balance Sheet of the Surviving Corporation."
13
<PAGE>
COMPARATIVE PER SHARE DATA
Set forth below are the comparative net income and book value per common
share data of (i) each of the Company and Mercury on an historical basis, (ii)
the market value per share of the Company and (iii) the Surviving Corporation on
a pro forma combined basis giving effect to the Merger assuming it had occurred
as of January 1, 1996, in each case giving effect to the Merger as a purchase by
Mercury of all of the assets and liabilities of the Company, all on the basis
described in the unaudited pro forma financial information and notes thereto
included elsewhere in this Proxy Statement/Prospectus. The net income and book
value per common share of the Company Common Stock on an equivalent pro forma
combined basis giving effect to the Merger would be the same as is shown for the
Surviving Corporation since the Exchange Ratio is one-for-one. Neither company
paid any dividends to their shareholders during the periods presented.
The information set forth below should be read in conjunction with the
respective audited and unaudited financial statements and related notes of the
Company and Mercury included elsewhere in this Proxy Statement/Prospectus and
the unaudited summary pro forma financial information and notes thereto included
elsewhere in this Proxy Statement/Prospectus.
PER SHARE COMMON STOCK DATA
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1996 JUNE 30, 1997
----------------- -------------
<S> <C> <C>
THE COMPANY
Book value per share.......................................................... $ 1.40 $ 1.39
Net income (loss) per share................................................... $(0.02) $(0.02)
Market value per share........................................................ $ 0.75 $ 1.00
Average number of shares outstanding.......................................... 13,773,110 13,777,014
MERCURY
Book value per share.......................................................... -- $ 0.04
Net income (loss) per share................................................... -- $ 0.03
Average number of shares outstanding.......................................... -- 12,000,000
SURVIVING CORPORATION PRO FORMA PER SHARE DATA:
Book value per share.......................................................... -- $ 0.50
Net income (loss) per share................................................... $ 0.00 $(0.01)
Average number of shares outstanding.......................................... 25,773,110 25,777,014
</TABLE>
14
<PAGE>
RISK FACTORS
Shareholders of the Company should carefully consider the following risk
factors, in addition to the other information contained in this Proxy
Statement/Prospectus, in connection with their decision to approve the
Continuance and the Merger. Unless the context otherwise requires, the following
discussion concerns the business of the Surviving Corporation assuming the
Merger becomes effective.
This Proxy Statement/Prospectus contains forward-looking statements. The
words "anticipate," "believe," "expect," "plan," "intend," "estimate,"
"project," "will," "could," "may" and similar expressions are intended to
identify forward-looking statements. These statements include information
regarding oil and natural gas reserves, future drilling and operations, future
production of oil and natural gas and future net cash flows. Such statements
reflect the Company's and Mercury's current views with respect to future events
and financial performance and involve risks and uncertainties, including without
limitation the risks described below. Should one or more of these risks or
uncertainties occur, or should underlying assumptions prove incorrect, actual
results may vary materially and adversely from those anticipated, believed,
estimated or otherwise indicated.
EFFECTS OF THE CONTINUANCE AND THE MERGER ON SHAREHOLDERS' RIGHTS. As a
result of the Continuance, all shareholders of the Company will become
shareholders in a Delaware corporation. The Company, as continued, will be a
corporation organized under and governed by Delaware law, the Delaware
Certificate of Incorporation of the Company and the Bylaws of the Company. The
Company intends to merge with and into Mercury immediately after the Continuance
and as a result, the shareholders of the Company (other than those who exercise
dissenters' rights in connection with the Continuance) will become shareholders
in a Delaware corporation governed by Delaware law, and the Surviving
Corporation Certificate and Bylaws. However, the Delaware Certificate of
Incorporation and Bylaws of the Company will govern the manner of approving the
Merger and the rights of shareholders of the Company (as continued in Delaware)
in connection with the Merger. While the rights and privileges of shareholders
of a Delaware corporation under the DGCL are, in many instances, comparable to
those of shareholders of an Alberta corporation under the ABCA, there are
certain material differences, which are summarized below in "Differences Between
the DGCL and the ABCA." Shareholders of the Company are urged to carefully
consider such information. In general, the differences in shareholder rights
that may affect the rights of shareholders of the Company during the period
between the completion of the Continuance and the completion of the Merger are
summarized below.
SHAREHOLDER APPROVAL. Under the ABCA, the Merger would require the approval
of shareholders by special resolution. A special resolution is a resolution
passed by not less than two-thirds of the votes cast by the shareholders
entitled to vote on the resolution. Under the DGCL, the vote of a majority of
the outstanding shares of Company Common Stock is necessary to approve the
Merger. Since the Merger is conditioned upon the completion of the Continuance,
however, the vote of shareholders of the Company as to the Continuance is
effectively necessary to approve the Merger.
DISSENTERS' RIGHTS AND OPPRESSION REMEDIES. The ABCA provides that
shareholders of an Alberta corporation entitled to vote on certain matters are
entitled to exercise dissent rights and to be paid the fair value of their
shares in connection therewith. The ABCA does not distinguish for this purpose
between listed and unlisted shares. Under the ABCA, a shareholder may, in
addition to exercising dissent rights and in certain circumstances, apply to the
Alberta courts seeking an oppression remedy under the ABCA for any act or
omission of a corporation which is oppressive or unfairly prejudicial to or that
unfairly disregards a shareholder's interest. Under the DGCL, appraisal or
dissenters' rights are generally available in connection with a merger or
consolidation, except in certain circumstances. However, holders of Continued
Common Stock will not be entitled to appraisal rights under the DGCL, but will
be entitled to the dissenters' rights to be contained in the certificate of
incorporation of the continued corporation. See "The Merger--Right of Dissent."
15
<PAGE>
The DGCL does not provide for an oppression remedy similar to that of the
ABCA. However, the DGCL provides certain legal and equitable remedies to a
corporation's shareholders for improper acts or omissions of a corporation, its
officers and directors.
SHAREHOLDER CONSENT IN LIEU OF A MEETING. Under the ABCA, shareholder
action without a meeting may only be taken by written resolution signed by all
shareholders who would be entitled to vote thereon at a meeting. Under the DGCL,
unless otherwise provided in the certificate of incorporation, any action
required to be taken or which may be taken at an annual or special meeting of
shareholders may be taken without a meeting if a consent in writing is signed by
the holders of outstanding stock having not less than the minimum number of
votes that would be necessary to authorize such action at a meeting at which all
shares entitled to vote were present and voted. The Delaware Certificate of
Incorporation of the Company will provide that action of shareholders may be
taken by less than unanimous consent. As a result, the Company must obtain
proxies for the Consent from holders of a majority of the shares of Company
Common Stock outstanding after the Continuance in order to approve the Merger.
VOLATILITY OF OIL AND NATURAL GAS PRICES. The Surviving Corporation's
revenues, operating results, profitability and future growth and the carrying
value of its oil and natural gas properties will be substantially dependent upon
the prices received for its oil and natural gas. Historically, the markets for
oil and natural gas have been volatile and such volatility may continue or recur
in the future. Various factors beyond the control of the Surviving Corporation
will affect prices of oil and natural gas, including the worldwide and domestic
supplies of oil and natural gas, the ability of the members of the Organization
of Petroleum Exporting Countries ("OPEC") to agree to and maintain oil price and
production controls, political instability or armed conflict in oil or natural
gas producing regions, the price and level of foreign imports, the level of
consumer demand, the price, availability and acceptance of alternative fuels,
the availability of pipeline capacity, weather conditions, domestic and foreign
governmental regulations and taxes and the overall economic environment.
Any significant decline in the price of oil or natural gas would adversely
affect the Surviving Corporation's revenues and operating income and could
require an impairment in the carrying value of its oil and natural gas
properties.
UNCERTAINTY OF RESERVE INFORMATION AND FUTURE NET REVENUE ESTIMATES. There
are numerous uncertainties inherent in estimating quantities of proved oil and
natural gas reserves and their values, including many factors beyond the control
of the Company or Mercury. Estimates of proved undeveloped reserves and reserves
recoverable through enhanced oil recovery techniques are by their nature
uncertain. The reserve information set forth in this Proxy Statement/Prospectus
represents estimates only. Although the Company and Mercury each believes such
estimates as to its properties to be reasonable, reserve estimates are imprecise
and should be expected to change as additional information becomes available.
Estimates of oil and natural gas reserves, by necessity, are projections
based on engineering data, and there are uncertainties inherent in the
interpretation of such data as well as the projection of future rates of
production and the timing of development expenditures. Reserve engineering is a
subjective process of estimating underground accumulations of oil and natural
gas that are difficult to measure. The accuracy of any reserve estimate is a
function of the quality of available data, engineering and geological
interpretation and judgment. Estimates of economically recoverable oil and
natural gas reserves and of future net cash flows necessarily depend upon a
number of variable factors and assumptions, such as historical production from
the area compared with production from other producing areas, the assumed
effects of regulations by governmental agencies and assumptions concerning
future oil and natural gas prices, future operating costs, severance and excise
taxes, development costs and workover and remedial costs, all of which may in
fact vary considerably from actual results. For these reasons, estimates of the
economically recoverable quantities of oil and natural gas attributable to any
particular group of properties, classifications of such reserves based on risk
of recovery and estimates of the future net cash flows expected therefrom may
vary substantially. Any significant variance in the assumptions could materially
affect the estimated quantity and
16
<PAGE>
value of the reserves. Actual production, revenues and expenditures with respect
to the Surviving Corporation's reserves will likely vary from estimates, and
such variances may be material.
The PV-10 referred to in this Proxy Statement/Prospectus should not be
construed as the current market value of the estimated oil and natural gas
reserves attributable to the Company's or Mercury's properties. In accordance
with applicable requirements, the estimated discounted future net cash flows
from proved reserves are based on prices and costs as of the date of the
estimate, whereas actual future prices and costs may be materially higher or
lower. Actual future net cash flows also will be affected by factors such as the
amount and timing of actual production, supply and demand for oil and natural
gas, refinery capacity, curtailments or increases in consumption by natural gas
purchasers and changes in governmental regulations or taxation. The timing of
actual future net cash flows from proved reserves, and thus their actual present
value, will be affected by the timing of both the production and the incurrence
of expenses in connection with development and production of oil and natural gas
properties. In addition, the 10 percent discount factor, which is required to be
used to calculate discounted future net cash flows for reporting purposes, is
not necessarily the most appropriate discount factor based on interest rates in
effect from time to time and risks associated with Mercury, the Company or the
oil and natural gas industry in general.
HISTORY OF OPERATING LOSSES. The Company incurred net operating losses of
approximately $640,000 in 1995, $330,000 in 1996 and $244,000 for the six months
ended June 30, 1997. While the Company believes the Merger will increase the
operating efficiency of the Surviving Corporation, there can be no assurance
that the Surviving Corporation will be profitable in the future. See "Selected
Financial Data of the Company" and "Management's Discussion and Analysis of the
Company's Financial Condition and Results of Operations."
LIMITATION ON USE OF NET OPERATING LOSS CARRYFORWARDS. As of December 31,
1996, the Company had approximately $10,500,000 of net operating loss
carryforwards ("NOLs") (and certain other tax attributes), a significant portion
of which may be subject to a limitation on use as a result of certain ownership
changes. The Company believes that an ownership change with respect to the
Company may occur as a result of the Merger. The resulting Section 382
Limitation (as defined below) may limit the Surviving Corporation's ability to
use the Company's NOLs in future years, although the actual effect, if any, of
such limitation will depend on the Surviving Corporation's profitability in
future years. See "Material United States Federal Income Tax Consequences to the
Company of the Continuance and the Merger--Limitation on Use of Net Operating
Loss Carryforwards."
CONCENTRATION IN CUT BANK FIELD COMPLEX. Mercury's properties in the Cut
Bank Field complex in northwest Montana constitute the majority of Mercury's
existing inventory of producing properties and drilling locations. Likewise, the
Company's properties in the same area constitute a majority of the Company's
existing inventory and drilling locations. Substantially all of each of
Mercury's and the Company's 1997 drilling budget is associated with drilling in
this region. There can be no assurance that the Surviving Corporation's
operations in Montana will yield positive economic returns. Failure of the Cut
Field Bank complex properties to yield significant quantities of economically
attractive reserves and production would have a material adverse impact on the
Surviving Corporation's future financial condition and results of operations. In
addition, recent heavy drilling activity by a number of operators in the region
may increase the cost to acquire additional acreage in this area, reduce or
limit the availability of drilling and service rigs, equipment and supplies, or
reduce demand for production, any of which would impact the Surviving
Corporation more adversely than if it were more geographically diversified.
SUBSTANTIAL CAPITAL REQUIREMENTS AND POSSIBLE FUTURE DILUTION. The
Company's and Mercury's current development plans require substantial capital
expenditures in connection with the exploration, development and exploitation of
oil and natural gas properties. For the remainder of the year ending December
31, 1997, $50,000 in capital expenditures by the Surviving Corporation are
planned for the development or exploration of oil and natural gas properties.
During the year ending December 31, 1998, planned capital expenditures for
development are estimated to be $1,000,000. In subsequent years, in order
17
<PAGE>
to maintain production levels, capital expenditures for development will
increase. Historically, the Company and Parent have funded capital expenditures
through a combination of internally generated funds from sales of production or
properties, equity contributions and long-term debt financing, and short-term
financing arrangements. The Company and Mercury anticipate that cash flow from
operations will be sufficient to meet the Surviving Corporation's estimated
capital expenditure requirements for the remainder of 1997. The Company and
Mercury believe that after such six-month period the Surviving Corporation will
require a combination of additional financing and cash flow from operations to
implement future development plans. Neither the Company nor Mercury currently
has any arrangements with respect to, or sources of, additional financing other
than bank arrangements, and there can be no assurance that any additional
financing will be available to it on acceptable terms or at all. Future cash
flows and the availability of financing will be subject to a number of
variables, such as the level of production from existing wells, prices of oil
and natural gas and success in locating and producing new reserves. To the
extent that future financing requirements are satisfied through the issuance of
equity securities, shareholders of the Surviving Corporation may experience
dilution that could be substantial. The incurrence of debt financing could
result in a substantial portion of operating cash flow being dedicated to the
payment of principal and interest on such indebtedness, could render the
Surviving Corporation more vulnerable to competitive pressures and economic
downturns and could impose restrictions on operations. If revenue were to
decrease as a result of lower oil and natural gas prices, decreased production
or otherwise, and the Surviving Corporation had no availability under bank
arrangements or any other credit facility, the Surviving Corporation could have
a reduced ability to execute current development plans, replace reserves or to
maintain production levels, any of which could result in decreased production
and revenue over time.
DRILLING AND OPERATING HAZARDS AND UNINSURED RISKS. Oil and natural gas
drilling activities are subject to many risks, including the risk that no
commercially productive reservoirs will be encountered. There can be no
assurance that wells drilled by the Surviving Corporation will be productive or
that the Surviving Corporation will recover all or any portion of its drilling
costs. Drilling for oil and natural gas may involve unprofitable efforts, not
only from dry wells, but from wells that are productive but do not produce
sufficient net revenues to return a profit after drilling, operating and other
costs. The cost of drilling, completing and operating wells is often uncertain.
Drilling operations may be curtailed, delayed or canceled as a result of
numerous factors, many of which will be beyond the Surviving Corporation's
control, including economic conditions, title problems, weather conditions,
compliance with governmental requirements and shortages or delays in the
delivery of equipment and services. Future drilling activities may not be
successful and, if unsuccessful, such failure may have a material adverse effect
on future results of operations and financial condition.
Oil and natural gas operations are subject to hazards and risks inherent in
drilling for and producing and transporting oil and natural gas, such as fires,
natural disasters, explosions, encountering formations with abnormal pressures,
blowouts, cratering, pipeline ruptures and spills, any of which can result in
the loss of hydrocarbons, environmental pollution, personal injury claims and
other damage to properties. As protection against operating hazards, the Company
and Mercury currently maintain, and intend to cause the Surviving Corporation to
maintain in the future, insurance coverage against some, but not all, potential
losses. The Surviving Corporation may elect to self-insure in circumstances in
which management believes that the cost of insurance, although available, is
excessive relative to the risks presented. The occurrence of an event that is
not covered, or not fully covered, by third-party insurance could have a
material adverse effect on the Surviving Corporation's business, financial
condition and results of operations.
RELIANCE ON CONTRACT WITH MONTANA POWER COMPANY. Mercury, as a result of
its acquisition of the Mercury Properties from Parent, assumed rights and
obligations under an agreement with Montana Power Company (the "Wells
Agreement"). The Wells Agreement covers the oil and gas development of an area
of mutual interest that presently contains approximately 304,000 acres in the
Cut Bank Field in Montana, including the Montana Properties. Pursuant to the
Wells Agreement, Mercury holds 100 percent of the oil rights and 30 percent of
the revenue pertaining to liquids produced by gas wells while Montana Power
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Company has all the rights to natural gas. The area of mutual interest and the
agreement were originally created in 1944 and will remain in effect until all
mutual oil and gas leases in the area have expired. Management of the Company
and Mercury expect that activities conducted pursuant to the Wells Agreement and
revenues therefrom will account for a significant portion of the activities and
revenues of the Surviving Corporation. There can be no assurance that the
operations under the contract will be continued for any particular period of
time or that if operations are continued they will be conducted on a profitable
basis.
PRODUCTION PAYMENT AGREEMENT. In October 1996, Parent entered into a
Production Payment Agreement with Supply Development Group, Inc. ("SDG")
pursuant to which SDG was entitled to an aggregate of 320,000 barrels of oil
(the "Production Payment Amount") produced from certain properties of Parent,
including the Mercury Properties. Pursuant to the Merger Agreement, Parent is
entitled to all of the oil revenue and income attributable to the Mercury
Properties until the Production Payment Amount has been delivered to SDG;
provided that Parent must reimburse the Surviving Corporation for all costs and
expenses of oil production; and provided further that if the entire Production
Payment Amount is not delivered to SDG on or before December 31, 1997, then
Parent must reimburse the Surviving Corporation for any amount of the Production
Payment Amount the Surviving Corporation is required to deliver to SDG after
such date. Although Parent and Mercury anticipate that such obligation to SDG
will be satisfied on or before December 31, 1997, there can no assurance that
such obligation will be satisfied before such time.
TAX TREATMENT OF THE CONTINUANCE; POSSIBLE TAXATION OF THE COMPANY. Under
certain circumstances, the Continuance may result in taxation of the Company
under Canadian federal income tax laws and/or United States federal income tax
laws. Under Canadian income tax laws, the Company will be deemed to have
disposed of all of its property for proceeds of disposition equal to the fair
market value of that property upon the Continuance and will be subject to tax on
any income and net taxable capital gains arising from such deemed disposition.
Additionally, the Company will be subject to a corporate emigration tax at a
rate of five percent of the amount by which the fair market value of the
Company's assets net of liabilities exceeds the paid-up capital of the Company's
issued and outstanding shares. However, given the current value of the Company's
assets, no Canadian federal taxes should be due and payable by the Company under
the Canadian Tax Act as a result of the Continuance. There can be no assurance,
however, that Revenue Canada will agree with the valuation of the Company's
assets which supports the conclusion that no tax will be payable and any
disagreement could result in the Company owing Canadian income taxes. See
"Material Canadian Federal Income Tax Consequences of the Continuance and the
Merger-- The Continuance."
In addition, as discussed in more detail herein, U.S. Counsel is of the
opinion that the Company will be subject to United States federal income tax on
the excess, if any, of the fair market value of the Continued Common Stock
deemed to be distributed to its shareholders over the Company's basis in such
stock at the time of the deemed distribution. The Company's basis in the
Continued Common Stock will equal its basis in the assets being transferred to
the continued company reduced by the sum of the amount of the liabilities of the
Company deemed assumed by the continued company and the amount of liabilities to
which the assets of the Company being transferred are subject. The Company's
calculation of such basis exceeds the fair market value of the Continued Common
Stock, as determined by the Company based in part on a valuation prepared by
Rauscher Pierce Refsnes, Inc. Assuming that the tax basis and fair market value
determinations are correct, U. S. Counsel has concluded that the Company will
not realize a gain on the Continuance. There can be no assurance, however, that
the IRS will agree with the Company's calculation of such tax basis or the
result of the valuation performed by Rauscher Pierce Refsnes, Inc. or that the
fair market value of such stock will not change between the date of such
valuation (March 26, 1997) and the date of the Continuance. Any disagreement
could result in the Company owing United States federal income taxes as a result
of the Continuance. See "Material United States Federal Income Tax Consequences
to the Company of the Continuance and the Merger."
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COMPLIANCE WITH GOVERNMENTAL REGULATIONS. Oil and natural gas operations
are subject to extensive federal, state and local laws and regulations relating
to the exploration for, and the development, production and transportation of,
oil and natural gas, as well as safety matters, which may be changed from time
to time in response to economic or political conditions. Matters subject to
regulation by federal, state and local authorities include permits for drilling
operations, road and pipeline construction, reports concerning operations, the
spacing of wells, unitization and pooling of properties, taxation and
environmental protection. Any delays in obtaining approvals or material
alterations to the Surviving Corporation's development plans could have a
material adverse effect on operations. From time to time, regulatory agencies
have imposed price controls and limitations on production by restricting the
rate of flow of oil and natural gas wells below actual production capacity in
order to conserve supplies of oil and natural gas. Although the Company and
Mercury each believes that it is in substantial compliance with all applicable
laws and regulations, the requirements imposed by such laws and regulations are
frequently changed and subject to interpretation, and neither the Company nor
Mercury can predict the ultimate cost of compliance with these requirements or
their effect on operations. Significant expenditures may be required to comply
with governmental laws and regulations and may have a material adverse effect on
the Surviving Corporation's financial condition and results of operations.
COMPLIANCE WITH ENVIRONMENTAL REGULATIONS AND POTENTIAL ENVIRONMENTAL
INDEMNITY OBLIGATIONS. The Company's and Mercury's operations are now, and the
operations of the Surviving Corporation will be, subject to complex and
constantly changing environmental laws and regulations adopted by federal, state
and local governmental authorities. The implementation of new, or the
modification of existing, laws or regulations could have a material adverse
effect on the Surviving Corporation. The discharge of oil, natural gas or other
pollutants into the air, soil or water may give rise to significant liabilities
on the part of the Surviving Corporation to the government and third parties and
may require the Surviving Corporation to incur substantial costs of remediation.
Moreover, both the Company and Mercury have agreed to indemnify sellers of
certain properties purchased by them against certain liabilities for
environmental claims associated with such properties. The Surviving Corporation
will assume these obligations as a result of the Merger. No assurance can be
given that existing environmental laws or regulations, as currently interpreted
or reinterpreted in the future, or future laws or regulations will not
materially adversely affect the Surviving Corporation's results of operations
and financial condition or that material indemnity claims will not arise against
the Surviving Corporation with respect to properties acquired previously by the
Company or Mercury or that may be acquired in the future by the Surviving
Corporation.
LIMITED OPERATING HISTORY. Mercury, which was formed by Parent in March
1997, has a limited operating history upon which investors may base their
evaluation of Mercury's performance. In addition, Parent acquired the Mercury
Properties in October 1995, together with certain other oil and gas properties.
Out of the total purchase price of such acquisition of $15,114,796, $4,593,000
was allocated to the Mercury Properties. As a result of Mercury's recent
formation and the brief operating history of the Mercury Properties, the
operating results from Parent's operation of the Mercury Properties may not be
indicative of future results that may be obtained by the Surviving Corporation.
There can be no assurance that the Surviving Corporation will maintain the
current level of revenues, oil and natural gas reserves or production
attributable currently to the Mercury Properties or the Company. Any future
growth of the Surviving Corporation's oil and natural gas reserves, production
and operations could place significant demands on the Surviving Corporation's
financial, operational and administrative resources.
RESERVE REPLACEMENT RISK. The future success of the Surviving Corporation
will depend in large part upon its ability to find, develop or acquire
additional oil and natural gas reserves that are economically recoverable. The
Surviving Corporation's proved reserves will generally decline as reserves are
depleted, except to the extent that the Surviving Corporation conducts
successful exploration or development activities or acquires properties
containing proved reserves. At December 31, 1996, approximately 39 percent of
the Company's total proved reserves, and 66 percent of Parent's total proved
reserves associated with the Mercury Properties, were undeveloped. In order to
increase reserves and production, the
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Surviving Corporation must continue development and exploitation drilling
programs or undertake other replacement activities. Current development plans
include increasing the Surviving Corporation's reserve base through continued
drilling, development and exploitation of existing properties of the Company and
Mercury. There can be no assurance, however, that planned development and
exploitation projects will result in significant additional reserves or that the
Surviving Corporation will have success drilling productive wells at anticipated
finding and development costs.
NO FAIRNESS OPINION OBTAINED. Neither the Company nor Mercury engaged an
independent third party to determine the fairness from a financial point of view
of the terms of the Merger Agreement and the Exchange Ratio to shareholders of
the Company. Shareholders of the Company are being asked to approve the
Continuance and the Merger based on the information provided by and the
recommendation of the Board of Directors of the Company, without the benefit of
a fairness opinion. Shareholders are advised that certain directors of the
Company will benefit personally as a result of the Merger through their
continued employment by the Surviving Corporation. See "The Merger--Interests of
Certain Persons in the Merger."
DEPENDANCE ON KEY PERSONNEL. The Surviving Corporation will enter into a
management agreement with Parent pursuant to which Parent will agree to provide
certain property management services to the Surviving Corporation. The Surviving
Corporation's success will, therefore, be highly dependent on management of
Parent, principally Frank Darden, Thomas Darden and Glenn Darden, and a limited
number of other senior management and technical personnel. Loss of the services
of any of those individuals could have a material adverse effect on the
Surviving Corporation's operations. The Company does not intend to maintain key
man life insurance policies on any members of senior management. Furthermore,
demands on the time of Parent's employees in pursuing Parent's business could
reduce the time available to manage the business of the Surviving Corporation.
See "The Merger--Interests of Certain Persons in the Merger," "Business and
Properties of Mercury--Competition" and "Certain Transactions."
CONTROL BY EXISTING SHAREHOLDERS. Upon completion of the Merger, Parent and
the officers and directors of the Surviving Corporation will beneficially own
approximately 39.2 percent and 29.7 percent, respectively, of the Surviving
Corporation Common Stock. Accordingly, Parent and such persons would be able to
control the outcome of shareholder votes, including votes concerning the
election of directors, the adoption or amendment of provisions in the Surviving
Corporation Certificate or Bylaws and the approval of mergers and other
significant corporate transactions.
COMPETITION. The Surviving Corporation will operate in the highly
competitive areas of oil and natural gas acquisition, exploration, exploitation
and production with other companies, many of which have substantially larger
financial resources, operations, staffs and facilities. In seeking to acquire
desirable producing properties or new leases for future exploration and in
marketing its oil and natural gas production, the Surviving Corporation will
face intense competition from both major and independent oil and natural gas
companies. Many of these competitors have financial and other resources
substantially in excess of those available to the Surviving Corporation. Parent
and its affiliates and certain of the officers and directors of the Company and
their affiliates, including Pozo Resources, Inc., will also continue to conduct
their own oil and natural gas businesses, although these businesses are
presently conducted in geographic regions where the Company and Mercury do not
have significant properties. The effects of this highly competitive environment
could have a material adverse effect on the Surviving Corporation.
ACQUISITION RISKS. The Company has grown primarily through the acquisition,
development and exploitation of oil and natural gas properties. Although the
Company and Mercury expect the Surviving Corporation to concentrate on such
activities in the future, the Company and Mercury expect that the Surviving
Corporation may evaluate and pursue from time to time acquisitions in Montana
and in other areas that provide attractive investment opportunities for the
addition of production and reserves and that meet selection criteria. The
successful acquisition of producing properties and undeveloped acreage
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requires an assessment of recoverable reserves, future oil and natural gas
prices, operating costs, potential environmental and other liabilities and other
factors that will be beyond the Surviving Corporation's control. This assessment
is necessarily inexact and its accuracy is inherently uncertain. In connection
with such an assessment, the Surviving Corporation will perform a review of the
subject properties it believes will be generally consistent with industry
practices. This review, however, will not reveal all existing or potential
problems, nor will it permit a buyer to become sufficiently familiar with the
properties to assess fully their deficiencies and capabilities. Inspections may
not be performed on every well, and structural and environmental problems are
not necessarily observable even when an inspection is undertaken. The Surviving
Corporation will generally assume preclosing liabilities, including
environmental liabilities, and will generally acquire interests in the
properties on an "as is" basis. With respect to its acquisitions to date,
neither the Company nor Mercury has material commitments for capital
expenditures to comply with existing environmental requirements. There can be no
assurance that any acquisitions will be successful. Any unsuccessful acquisition
could have a material adverse effect on the Surviving Corporation.
ABSENCE OF DIVIDENDS ON COMMON STOCK. Neither the Company nor Mercury has
ever declared or paid cash dividends on its common stock and each anticipates
that future earnings, if any, of the Surviving Corporation will be retained for
development of its business. In addition, the Company's bank arrangement with a
lender prohibits the payment of cash dividends. The Surviving Corporation will
become the borrower under these arrangements and will be subject to the same
restrictions.
POSSIBLE DECLINE IN STOCK PRICE FROM FUTURE SALES OF SURVIVING CORPORATION
COMMON STOCK. Upon completion of the Continuance and the Merger, the Surviving
Corporation will have a total of 25,777,014 shares outstanding. Of these shares,
the 13,777,014 shares offered hereby to holders of Company Common Stock will be
freely tradeable without restriction or registration under the Securities Act of
1933, as amended (the "Securities Act"), by persons other than "affiliates" of
the Company, as defined under the Securities Act. The remaining 12,000,000
shares of Surviving Corporation Common Stock outstanding, being the currently
outstanding shares of Mercury Common Stock, will be "restricted securities" as
that term is defined by Rule 144 as promulgated under the Securities Act.
Under Rule 144 (and subject to the conditions thereof, including volume
limitations), the earliest date on which any of the shares of Surviving
Corporation Common Stock that will be outstanding upon completion of the Merger
and that are restricted securities will be eligible for sale under Rule 144 is
in March 1998. As a result of the Merger, the Surviving Corporation also will
have outstanding options and warrants to purchase an aggregate of 12,758,570
shares of Surviving Corporation Common Stock, of which options and warrants
entitling the holders thereof to acquire an aggregate of 11,508,570 shares of
Surviving Corporation Common Stock will be immediately exercisable. Holders of
certain of such warrants will have "piggyback" registration rights to register
11,000,000 shares of Surviving Corporation Common Stock underlying such
warrants. The preparation and filing of any registration statement filed in
connection with the exercise of registration rights will be at the expense of
the Surviving Corporation. Sales of substantial amounts of Surviving Corporation
Common Stock in the public market following the Merger, or the perception that
such sales could occur, could materially and adversely affect the prevailing
market price of the Surviving Corporation Common Stock and could impair the
Surviving Corporation's future ability to raise capital through an offering of
its equity securities. See "Description of Securities of the Surviving
Corporation."
NO PRIOR PUBLIC MARKET; POSSIBLE STOCK PRICE VOLATILITY. Before the Merger,
there has been no public market for the Surviving Corporation Common Stock.
Although Mercury has applied to have the Surviving Corporation Common Stock
approved for trading on the American Stock Exchange and the listing of the
shares of Surviving Corporation Common Stock on the American Stock Exchange is a
condition to the Merger, there can be no assurance that if the Surviving
Corporation Common Stock is approved for inclusion that it will be actively
traded on such market or that, if active trading does develop, it will be
sustained. The market price of the Surviving Corporation Common Stock and the
price at which the
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Surviving Corporation may sell securities in the future could be subject to
large fluctuations in response to changes and variations in the Surviving
Corporation's operating results, litigation, general market conditions, the
prices of oil and natural gas, the liquidity of the Surviving Corporation and
its ability to raise additional funds the number of market makers for the
Surviving Corporation Common Stock and other factors. In the event that the
Surviving Corporation's operating results are below the expectations of public
market analysts and investors in one or more future periods, it is likely that
the price of the Surviving Corporation Common Stock will be materially adversely
affected. In addition, the stock market has recently experienced significant
price and volume fluctuations that have particularly affected the market prices
of equity securities of many energy companies and that often have been unrelated
to the operating performance of such companies. General market fluctuations may
also adversely affect the market price of the Surviving Corporation Common
Stock.
Although the Company Common Stock has been listed on the American Stock
Exchange since 1983, there may be no correlation between the trading history and
historical prices of the Company Common Stock and future trading characteristics
and prices of the Surviving Corporation Common Stock.
ELECTION OF DIRECTORS
GENERAL
The American Stock Exchange has required that the Company conduct an
election of directors at the Special Meeting as a condition to listing the
Surviving Corporation Common Stock for trading on the Exchange. The American
Stock Exchange has also required that at least two of the directors elected at
the Special Meeting be persons who are not officers or employees of the Company
or Mercury and who do not otherwise have a relationship with the Company or
Mercury that would limit their ability to exercise independent judgment with
regard to management of the Company's or Mercury's affairs. These "independent"
persons must also become "independent" directors of the Surviving Corporation
after the Merger. Consequently, five persons, including two "independent"
persons, have been nominated by the Company to be elected as the directors of
the Company at the Special Meeting.
The nominees of the Board for election as directors of the Company are Otto
J. Buis, Patrick M. Montalban, Steven M. Morris, D. Randall Kent and W. Yandell
Rogers, III. Each of the nominees has consented to serve as a director if
elected. Certain information with respect to the nominees is set forth herein
under "Directors and Executive Officers of the Surviving Corporation." Messrs.
Buis, Montalban and Morris are presently directors of the Company. Messrs. Kent
and Rogers have not previously served as officers, directors or employees of the
Company and should constitute "independent" directors under the rules of the
American Stock Exchange. The Merger Agreement provides that three members of the
Board of Directors of the Surviving Corporation will be designated by the
Company, three will be designated by Mercury and two will be independent persons
acceptable to the Company and Mercury. The Merger Agreement also provides that
Mercury and Parent are not obligated to consummate the Merger unless Messrs.
Buis, Montalban, Morris, Kent and Rogers are elected at the Special Meeting. See
"The Merger Agreement--Conditions to the Merger."
The election of each nominee requires the affirmative vote of a majority of
the shares of Common Stock represented in person or by proxy at the Special
Meeting, and cumulative voting is not permitted. All duly submitted and
unrevoked proxies will be voted for the nominees for director selected by the
Board of Directors, except where authorization so to vote is withheld. If any
nominee should become unavailable for election for any presently unforeseen
reason, the persons designated as proxies will have full discretion to vote for
another person designated by the Board. Proxies cannot be voted for a greater
number of persons than the number of nominees for the office of director named
herein. Directors are elected to serve until the next annual meeting of
stockholders and until their successors have been elected and qualified. If the
Continuance is approved at the Special Meeting, the directors elected at the
Special Meeting will continue
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to serve as directors of the Company (as continued) until effectiveness of the
Merger and the termination of the corporate existence of the Company.
The Company will appoint one or more inspectors of election to act at the
Special Meeting and to make a written report thereof. Prior to the Special
Meeting, the election inspectors will sign an oath to perform their duties in an
impartial manner and to the best of their abilities. The inspectors will
ascertain the number of shares of Company Common Stock outstanding and the
voting power of each of such shares, determine the shares represented at the
Special Meeting and the validity of proxies and ballots, count all votes and
ballots and perform certain other duties.
There is no family relationship between any of the nominees or between any
of the nominees and any executive officer of the Company. There are no business
relationships between any of the nominees and the Company.
BOARD MEETINGS AND COMMITTEES
As permitted by the Bylaws of the Company, the Board of Directors has
designated from its members a compensation committee and an audit committee. The
Company does not have a standing nominating committee of the Board or any other
committee that performs a similar function. During 1996 and the first eight
months of 1997, the Board of Directors held five meetings. All directors
attended at least 75 percent of such meetings. The current committees of the
Board, the composition and functions thereof and the number of meetings held in
1996 and the first eight months of 1997 is set forth below.
COMPENSATION COMMITTEE. In 1996 and the first eight months of 1997, the
members of the compensation committee were C. Al Buis, Patrick M. Montalban
and Steven M. Morris. The committee met one time during 1996 and the first
eight months of 1997. The role of the compensation committee is to review
the performance of officers, including those officers who are also members
of the Board, and to set their compensation. The committee also supervises
and administers all compensation and benefit policies, practices and plans
of the Company.
AUDIT COMMITTEE. In 1996 and the first eight months of 1997, the
members of the audit committee were Otto J. Buis, C. Al Buis and Steven M.
Morris. During 1996 and the first eight months of 1997, the audit committee
met one time. The role of the committee is to review with the Company's
auditors the scope of the audit procedures to be applied in the conduct of
the annual audit as well as the results of the annual audit.
THE CONTINUANCE
GENERAL
In general, the Company is being continued and domesticated into the State
of Delaware in order to facilitate its merger with Mercury. The Continuance must
be completed before Mercury will be obligated to complete the Merger. In
addition, it is not possible under Alberta law to merge the Company with and
into Mercury in accordance with the terms of the Merger Agreement as the ABCA
does not permit an Alberta corporation to merge with a corporation incorporated
in a jurisdiction other than Alberta, except in limited circumstances not
applicable to the Merger. By taking these steps to accomplish the Continuance,
management is also of the opinion that the Company's internal procedures will
also be simplified in the areas of accounting, tax, securities and general
operations. After the Continuance, the Company will no longer be obligated to
comply with Canadian law that affects these matters.
If holders of record on the Meeting Record Date of at least five percent of
the Company Common Stock are represented in person or by proxy at the Special
Meeting, and if the Continuance is approved by at least two-thirds of the votes
cast by holders of Company Common Stock represented in person or by proxy at the
Special Meeting, the Continuance will result in a change in the Company's
jurisdiction of incorporation from the Province of Alberta to the State of
Delaware and will also result in the adoption of
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a new certificate of incorporation for the Company, which will govern the
Company under Delaware law. Upon the effectiveness of the Continuance, each
share of Company Common Stock and each outstanding warrant to acquire shares of
Company Common Stock will remain issued and outstanding as an equivalent
security of MSR Exploration Ltd., then a Delaware corporation. The Board of
Directors of the Company intends to terminate or abandon the Continuance if a
number of proxies for Consents sufficient to approve the Merger are not
obtained.
For those shareholders who are opposed to the Continuance, dissenters'
rights are set forth by law to govern the valuation process.
RIGHT OF DISSENT
Shareholders of the Company will be asked to consider and, if thought fit,
pass a special resolution authorizing the Continuance of the Company out of the
Province of Alberta and into the State of Delaware in accordance with Section
182 of the ABCA. The holders of Company Common Stock have the right under
Section 184 of the ABCA to dissent in connection with the Continuance.
Under the ABCA, each of the Company's shareholders is entitled to dissent
and be paid the fair value of such shareholder's shares if the shareholder
objects to the Continuance and the Continuance becomes effective. A shareholder
may dissent only with respect to all of the shares held by the shareholder on
behalf of any one beneficial owner and registered in the shareholder's name. A
shareholder is not entitled to dissent from the resolution with respect to any
shares beneficially owned by one owner if the shareholder votes any shares
beneficially owned by that owner in favor of the resolution that is adopted. In
order to dissent, a shareholder must send to the Company at 500 Main Street,
Suite 210, Fort Worth, Texas 76104, attention: Howard N. Boals, Vice
President--Finance, on or before the date of the Special Meeting, a written
objection (an "Objection Notice") to the Continuance in respect of which the
shareholder proposes to dissent. A vote against the Continuance or an abstention
in respect thereof does not constitute such an Objection Notice, but a
shareholder need not vote his shares against the Continuance in order to dissent
in respect of the Continuance. Similarly, the revocation of a proxy conferring
authority on the proxy holder to vote in favor of the Continuance does not
constitute an Objection Notice in respect of the Continuance, but any such proxy
granted by a shareholder who intends to dissent should be validly revoked.
Within 10 days following the date of the Special Meeting, the Company will
deliver to each shareholder who has filed an Objection Notice in respect of the
resolution passed at the Special Meeting, at the address specified for such
purpose in the Objection Notice, a notice stating the special resolution
authorizing the Continuance has been adopted.
PERSONS WHO ARE BENEFICIAL OWNERS OF COMPANY COMMON STOCK REGISTERED IN THE
NAME OF A BROKER, CUSTODIAN, NOMINEE OR OTHER INTERMEDIARY WHO WISH TO DISSENT
SHOULD BE AWARE THAT ONLY THE REGISTERED OWNER OF SUCH SHARES IS ENTITLED TO
DISSENT. A REGISTERED HOLDER SUCH AS A BROKER WHO HOLDS SHARES OF COMPANY COMMON
STOCK AS NOMINEE FOR BENEFICIAL OWNERS, SOME OF WHOM DESIRE TO DISSENT, MUST
EXERCISE DISSENT RIGHTS ON BEHALF OF SUCH BENEFICIAL OWNERS WITH RESPECT TO THE
SHARES HELD FOR SUCH BENEFICIAL HOLDERS. IN SUCH CASE, THE OBJECTION NOTICE
SHOULD SET FORTH THE NUMBER OF SHARES OF COMPANY COMMON STOCK TO WHICH IT
RELATES.
After the Continuance has been approved, an application may be made to the
Court of Queen's Bench of Alberta (the "Court") by the Company or by any
dissenting shareholder to fix the fair value of the shares of the Company Common
Stock held by the dissenting shareholder. It is unlikely that the Company will
make such an application; therefore, any dissenting shareholder who intends to
utilize the appraisal provisions of the ABCA should make application to the
Court. If an application is made to the Court, the Company shall, unless the
Court otherwise orders, send to each dissenting shareholder a written offer (the
"Offer to Purchase") to pay him an amount considered by the Board of Directors
of the
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Company to be the fair value of such shares as of the close of business on the
day before the Special Meeting accompanied by a statement showing how the fair
value was determined. The Offer to Purchase must be sent to each dissenting
shareholder within 10 days after the Company is served with notice that a
dissenting shareholder has applied to the Court to fix the fair value of the
shares of Company Common Stock. If the Company is an applicant, then the Offer
to Purchase must be sent at least 10 days prior to the date the Company has
fixed in its application to hold a hearing before the Court for the purpose of
fixing the fair value of such shares. Every Offer to Purchase shares of Company
Common Stock made to a shareholder of the Company Common Stock who dissents to
the Continuance shall be on the same terms as every other Offer to Purchase made
to other dissenting shareholders of the Company.
A dissenting shareholder may make an agreement with the Company for the
purchase of his shares by the Company in the amount of the Company's Offer to
Purchase or otherwise at any time before the Court fixes the fair value of the
shares. If a settlement cannot be reached, the parties will proceed to the
Court. All dissenting shareholders whose shares have not been purchased by the
Company will be joined as parties to the application and will be bound by the
decision of the Court. The Court order will fix the fair value of the shares of
all dissenting shareholders who are parties to the application, give judgment in
that amount against the Company in favor of each of the dissenting shareholders
and fix the time within which the Company must pay the amount to the dissenting
shareholders. Shareholders generally will not be liable for costs of application
to the Court or for the costs of appraisal of the shares.
On the earlier of: (i) the Company being continued into Delaware, (ii) the
Company and the dissenting shareholder entering into a settlement agreement, or
(iii) the pronouncement of a Court order giving judgment against the Company for
the fair value of the shares of the dissenting shareholder, a dissenting
shareholder ceases to have any rights as a shareholder of the Company other than
the right to be paid the fair value of his shares. The Company will not make a
payment to a dissenting shareholder if there are reasonable grounds for
believing that: (a) the Company is or would after the payment be unable to pay
its liabilities as they become due or (b) the realizable value of the Company's
assets would thereby be less than the aggregate amount of its liabilities. If
either of these tests cannot be met, the Company shall within 10 days of the
Court order or reaching its settlement with a dissenting shareholder send a
notice to each dissenting shareholder that the Company cannot lawfully make the
payment for the shares. Once this notice is received, a dissenting shareholder
may, by written notice delivered to the Company within 30 days after receiving
the Company's notice, withdraw his Objection Notice, in which case the
dissenting shareholder is returned his full rights as a shareholder. If the
dissenting shareholder does not withdraw his Objection Notice, he retains his
status as a claimant against the Company to be paid as soon as the Company is
lawfully able to do so or, in liquidation, to be ranked subordinate to the
rights of the creditors but in priority to its shareholders.
THE FOREGOING IS ONLY A SUMMARY OF THE RIGHTS OF DISSENTING SHAREHOLDERS AND
IS QUALIFIED IN ITS ENTIRETY BY THE PROVISIONS OF SECTION 184 OF THE ABCA, A
COPY OF WHICH IS ATTACHED AS APPENDIX "C". ANY SHAREHOLDER DESIRING TO EXERCISE
A RIGHT OF DISSENT SHOULD SEEK LEGAL ADVICE AND HIS FAILURE TO COMPLY STRICTLY
WITH THE PROVISIONS OF THAT SECTION MAY PREJUDICE THAT RIGHT. THE RIGHT OF
SHAREHOLDERS TO DISSENT IS NOT EXCLUSIVE OF ANY OTHER RIGHTS AVAILABLE TO
SHAREHOLDERS GENERALLY, SUCH AS RIGHTS IN RESPECT OF A CORPORATE DIRECTOR'S
DUTIES OF GOOD FAITH AND CARE UNDER THE ABCA, OR OTHERWISE.
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APPROVAL OF THE CONTINUANCE UNDER THE ABCA
Under the ABCA, the Continuance is subject to approval by the Company's
shareholders and the Alberta, Canada Registrar of Corporations (the
"Registrar"). Before the Registrar will permit the Continuance, the Company must
submit to the Registrar
(a) an opinion of counsel regarding the permissibility of the Continuance
under Delaware law and the effect of the Continuance upon the rights and
liabilities of the Company;
(b) a statutory declaration of a director or officer of the Company (i) that
the shareholders and creditors of the Company will not be adversely
affected by the Continuance, (ii) that the Continuance has been approved
by the required shareholder vote, (iii) that sufficient funds are
available to discharge any obligation to dissenting shareholders, (iv)
containing an undertaking to honor all dissent rights and to have any
actions respecting dissent rights heard by courts in Alberta and (v) if
the approval of the Continuance by shareholders is not unanimous, a
statement that the certificate of incorporation of the continued
corporation will provide remedies with respect to oppression, derivative
actions and dissent and appraisal that are equivalent to those available
to shareholders under the ABCA; and
(c) a copy of the Certificate of Incorporation of the continued corporation
to be filed in Delaware.
The Company expects to be able to satisfy the requirements of the Registrar
regarding the Continuance.
THE MERGER
GENERAL DESCRIPTION OF THE MERGER
The Merger Agreement provides that, at the Effective Time, the Company will
merge with and into Mercury with Mercury becoming the Surviving Corporation, and
each outstanding share of Company Common Stock and Mercury Common Stock will be
converted into one share of Surviving Corporation Common Stock. The Merger is
conditioned upon, among other things, the approval of the Continuance by the
shareholders of the Company.
Based on the number of shares of Common Stock outstanding as of the Meeting
Record Date, 13,777,014 shares of Surviving Corporation Common Stock will be
issuable to holders of shares of Company Common Stock pursuant to the Merger
Agreement, representing approximately 53.4 percent of the total Surviving
Corporation Common Stock to be issued and outstanding after such issuance.
Expenses to be incurred by the parties as a result of the Continuance and
the Merger are expected to be approximately $450,000 which expenses include
legal, accounting and printing costs associated with these transactions.
For those shareholders who are opposed to the Merger, dissenters' or
appraisal rights will be available pursuant to the certificate of incorporation
of the continued company. No appraisal rights under the DGCL will be available
with respect to the Merger.
RIGHT OF DISSENT
Even though the Company will no longer be governed by the ABCA after the
effectiveness of the Continuance, the certificate of incorporation of the
Company (as continued) will contain provisions based on Section 184 of the ABCA
(described above) entitling the holders of shares of Continued Common Stock to
dissent and be paid the fair value of such shareholder's shares if the
shareholder objects to the Merger and the Merger becomes effective. A
shareholder may dissent only with respect to all of the shares held by the
shareholder on behalf of any one beneficial owner and registered in the
shareholder's name. A shareholder is not entitled to dissent with respect to any
shares beneficially owned by one owner if the shareholder votes any shares
beneficially owned by that owner in favor of the Merger. In order to dissent, a
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shareholder must send to the Company at 500 Main Street, Suite 210, Fort Worth,
Texas 76104, attention: Howard N. Boals, Vice President--Finance, on or before
the date of execution of the Consent (which shall be as soon as possible after
the Special Meeting and the effectiveness of the Continuance), a written
objection (an "Objection Notice") to the Merger in respect of which the
shareholder proposes to dissent. A refusal to deliver a proxy for the Consent
does not constitute such an Objection Notice, but a shareholder need not vote
his shares against the Merger in order to dissent in respect of the Merger.
Similarly, the revocation of a proxy conferring authority on the proxy holder to
execute the Consent in favor of the Merger does not constitute an Objection
Notice in respect of the Continuance, but any such proxy granted by a
shareholder who intends to dissent should be validly revoked. Within 10 days
following the date of the execution of the Consent, the Surviving Corporation
will deliver to each shareholder who has filed an Objection Notice in respect of
the resolution adopted pursuant to the Consent, at the address specified for
such purpose in the Objection Notice, a notice stating the resolutions adopting
and approving the Merger and the Merger Agreement have been adopted pursuant to
the Consent.
PERSONS WHO ARE BENEFICIAL OWNERS OF CONTINUED COMMON STOCK THAT IS
REGISTERED IN THE NAME OF A BROKER, CUSTODIAN, NOMINEE OR OTHER INTERMEDIARY WHO
WISH TO DISSENT SHOULD BE AWARE THAT ONLY THE REGISTERED OWNER OF SUCH SHARES IS
ENTITLED TO DISSENT. A REGISTERED HOLDER SUCH AS A BROKER WHO HOLDS SHARES AS
NOMINEE FOR BENEFICIAL OWNERS, SOME OF WHOM DESIRE TO DISSENT, MUST EXERCISE
DISSENT RIGHTS ON BEHALF OF SUCH BENEFICIAL OWNERS WITH RESPECT TO THE SHARES
HELD FOR SUCH BENEFICIAL HOLDERS. IN SUCH CASE, THE OBJECTION NOTICE SHOULD SET
FORTH THE NUMBER OF SHARES OF CONTINUED COMMON STOCK TO WHICH IT RELATES.
After the Merger has been approved, an application may be made to the Court
of Queen's Bench of Alberta (the "Court") by the Surviving Corporation or by any
dissenting shareholder to fix the fair value of the shares of the Continued
Common Stock held by the dissenting shareholder. It is unlikely that the Company
will make such an application; therefore, any dissenting shareholder who intends
to utilize the appraisal provisions available in the Certificate of
Incorporation of the continued corporation should make application to the Court.
If an application is made to the Court, the Surviving Corporation shall, unless
the Court otherwise orders, send to each dissenting shareholder a written offer
(the "Offer to Purchase") to pay him an amount considered by the Board of
Directors of the Surviving Corporation to be the fair value of such shares as of
the close of business on the day before the Consent is executed accompanied by a
statement showing how the fair value was determined. The Offer to Purchase must
be sent to each dissenting shareholder within 10 days after the Company is
served with notice that a dissenting shareholder has applied to the Court to fix
the fair value of the shares of Continued Common Stock. If the Company is the
applicant, then the Offer to Purchase must be sent at least 10 days prior to the
date the Company has fixed in its application to hold a hearing before the Court
for the purpose of fixing the fair value of such shares. Every Offer to Purchase
shares of Continued Common Stock made to a holder of the Continued Common Stock
who dissents to the Merger shall be on the same terms as every other Offer to
Purchase made to other holders of Continued Common Stock who dissent to the
Merger.
A dissenting shareholder may make an agreement with the Surviving
Corporation for the purchase of his shares by the Surviving Corporation in the
amount of the Surviving Corporation's Offer to Purchase or otherwise at any time
before the Court fixes the fair value of the shares. If a settlement cannot be
reached, the parties will proceed to the Court. All dissenting shareholders
whose shares have not been purchased by the Surviving Corporation will be joined
as parties to the application and will be bound by the decision of the Court.
The Court order will fix the fair value of the shares of all dissenting
shareholders who are parties to the application, give judgment in that amount
against the Surviving Corporation in favor of each of the dissenting
shareholders and fix the time within which the Surviving Corporation must pay
the amount to the dissenting shareholders. Shareholders generally will not be
liable for costs of application to the Court or for the costs of appraisal of
shares.
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On the earlier of: (i) the effectiveness of the Merger, (ii) the Surviving
Corporation and the dissenting shareholder entering into a settlement agreement,
or (iii) the pronouncement of a Court order giving judgment against the
Surviving Corporation for the fair value of the shares of the dissenting
shareholder, a dissenting shareholder ceases to have any rights as a shareholder
of the Surviving Corporation other than the right to be paid the fair value of
his shares. The Surviving Corporation will not make a payment to a dissenting
shareholder if there are reasonable grounds for believing that: (a) the
Surviving Corporation is or would after the payment be unable to pay its
liabilities as they become due or (b) the realizable value of the Surviving
Corporation's assets would thereby be less than the aggregate amount of its
liabilities. If either of these tests cannot be met, the Surviving Corporation
shall within 10 days of the Court order or reaching its settlement with a
dissenting shareholder send a notice to each dissenting shareholder that the
Surviving Corporation cannot lawfully make the payment for the shares. Once this
notice is received, a dissenting shareholder may, by written notice delivered to
the Surviving Corporation within 30 days after receiving the Surviving
Corporation's notice, withdraw his Objection Notice, in which case the
dissenting shareholder is returned his full rights as a shareholder. If the
dissenting shareholder does not withdraw his Objection Notice, he retains his
status as a claimant against the Surviving Corporation to be paid as soon as the
Surviving Corporation is lawfully able to do so or, in liquidation, to be ranked
subordinate to the rights of the creditors of the Surviving Corporation but in
priority to its shareholders.
THE FOREGOING IS ONLY A SUMMARY OF THE RIGHTS OF DISSENTING SHAREHOLDERS
UNDER THE CERTIFICATE OF INCORPORATION OF THE COMPANY (AS CONTINUED) AND IS
QUALIFIED IN ITS ENTIRETY BY THE PROVISIONS OF SUCH CERTIFICATE OF
INCORPORATION, A COPY OF WHICH IS ATTACHED AS APPENDIX "B". ANY SHAREHOLDER
DESIRING TO EXERCISE A RIGHT OF DISSENT UNDER SUCH CERTIFICATE OF INCORPORATION
SHOULD SEEK LEGAL ADVICE AND HIS FAILURE TO COMPLY STRICTLY WITH THE PROVISIONS
OF SUCH CERTIFICATE OF INCORPORATION MAY PREJUDICE THAT RIGHT. THE RIGHT OF
SHAREHOLDERS TO DISSENT IS NOT EXCLUSIVE OF ANY OTHER RIGHTS AVAILABLE TO
SHAREHOLDERS GENERALLY.
HOLDERS OF CONTINUED COMMON STOCK WILL NOT BE ENTITLED TO ANY DISSENTERS' OR
APPRAISAL RIGHTS PROVIDED TO SHAREHOLDERS UNDER THE DGCL.
BACKGROUND TO THE MERGER
The primary business purpose of the Company is the acquisition, production
and sale of crude oil, condensate and natural gas. The Company's primary focus
has been the development and enhancement of oil and gas properties in its
present areas of operations and acquisitions of other producing properties or
the acquisition of other oil and gas companies of a similar size.
In pursuing acquisition properties or companies with proved producing
properties, management of the Company learned that Parent had purchased the
South Central Cut Bank Sand Unit (the "SCCBSU"). The SCCBSU is adjacent to the
Company's producing properties near the town of Cut Bank, Montana. When it
became known that Parent had obtained title to extensive oil and gas properties
adjacent to MSR's properties in Montana and that both company's headquarters
were located in the same city, management of both companies concluded that a
combination of the two companies' operations would create economies of scale and
operating efficiency. Prior to Parent's acquisition of the SCCBSU, MSR attempted
to purchase the properties from Unocal. Unocal, however, was offering the
properties together with properties located in other states and refused to
consider offers for only a portion of the properties offered.
In early 1996, representatives of the Company contacted Glenn M. Darden, who
was Vice President of Parent, regarding Parent's interest in selling the SCCBSU
or possibly uniting in a business combination. Discussions continued until
approximately mid-1996. Operating, financial and reserve information was
exchanged by the companies. Several times Company management met with Parent
representatives seeking to enter into a Letter of Intent to combine the
companies. Finally, both Parent and the Company withdrew from negotiations when
acceptable terms could not be agreed to. From July 1996 through
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December 1996, the Company considered merging with, or acquiring the properties
of, several other companies; however the Board of Directors of the Company did
not believe that any of the possible transactions considered would provide the
same potential benefits to shareholders as the MSR/Mercury combination.
In December 1996, the Company contacted Parent and determined that Parent
desired to re-open negotiations and possibly enter into a transaction regarding
the Montana properties. During the next several weeks each company updated its
due diligence and made various proposals regarding the form of acquisition
consideration, assumptions of liabilities, operations, confidentiality and other
terms of a possible transaction. As MSR and Mercury continued their due
diligence, each company further realized that a combination of each company's
properties and operations would be most beneficial to each company's
shareholders.
In analyzing the merits of a transaction involving the Mercury Properties,
Company management considered various reserve information regarding the
properties. The Company initially retained its independent petroleum engineers
to evaluate the Mercury Properties as of January 1, 1996 and retained such
engineers to update such evaluation as of January 1, 1997. The Company also
considered the information regarding the SCCBSU provided by UNOCAL in connection
with its marketing and ultimate sale of the properties to Parent. Finally,
Parent provided the Company with Parent's own internal information regarding the
Mercury Properties. Based upon the results of this extensive evaluation of the
Mercury Properties and Company management's own knowledge of the SCCBSU, Company
management determined that a business combination with Mercury could increase
the Company's reserves by up to five million BOE and could provide 50 additional
potential drilling sites. On the basis of the belief of Company management
regarding the potential value of the Mercury Properties, on January 9, 1997,
Messrs. Otto J. Buis, C. Al Buis and Steven M. Morris, directors of the Company,
met with Frank, Thomas and Glenn Darden, directors of Parent. A Letter of Intent
was agreed upon and entered into. The Letter of Intent, among other things,
called for both parties to endeavor to enter into a definitive agreement setting
forth the terms, provisions and conditions of the proposed business combination.
On March 24, 1997, the Board of Directors of Parent, Mercury and the
Company, and Joseph V. Montalban, former director and current shareholder of the
Company, met in Fort Worth, Texas to seek to finalize the remaining open
business issues and to review the near final definitive Merger Agreement. The
Company's Board of Directors and Joseph V. Montalban entered into an agreement,
as did representatives of Parent and Mercury, to vote in favor of the Merger at
the companies' respective requisite shareholders' meetings. When Parent's Board
of Directors discussed the merits of the Merger, the Board concluded that the
combination of two separate operations in this remote operating area would
result in greater earnings through (i) cost savings as a result of operating
efficiencies and (ii) increased sales as a result of marketing efficiencies
resulting from aggregating production.
On or about March 26, 1997, the Boards of Directors of Parent, Mercury and
the Company met, reviewed the factors discussed above, and in light of such
factors approved unanimously the Merger Agreement and the Merger Agreement was
executed.
Upon the effectiveness of the Merger, Otto Buis, Patrick Montalban and Steve
Morris, of the officers and directors of the Company, will continue with the
Surviving Corporation. Mr. Buis will serve as Chairman, Chief Executive Officer
and a director of the Surviving Corporation, while Messrs. Montalban and Morris
will serve as directors. With regard to the officers and directors of Mercury,
Frank Darden, Thomas Darden and Glenn Darden, all officers and directors of
Mercury currently, will serve as directors of the Surviving Corporation and
Thomas Darden will serve as President and Chief Operating Officer, and Glenn
Darden will serve as Vice President, of the Surviving Corporation. D. Randall
Kent and W. Yandell Rogers, III, neither of whom is currently affiliated with
the Company, Mercury or Parent, will serve as independent directors of the
Surviving Corporation.
In addition, pursuant to the Merger Agreement, Mr. Montalban, as designee of
the Company, and Thomas and Glenn Darden, as designees of Mercury, will serve as
members of the executive committee of
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the Board of Directors. Under Delaware law and the Bylaws of the Surviving
Corporation, the executive committee will have the power and authority to
exercise most of the powers of the Board of Directors of the Surviving
Corporation.
Other than (i) the continuation of their employment, (ii) assumption by the
Surviving Corporation of certain existing contractual obligations, (iii) the
conversion of the options and warrants of Messrs. Frank, Thomas and Glenn Darden
to purchase shares of Mercury Common Stock into options to purchase shares of
Surviving Corporation Common Stock and (iv) the interests of certain of such
officers and directors as shareholders of the Company or Mercury or as
shareholders of entities that are shareholders of the Company or Mercury, as the
case may be, the officers, directors and affiliates of Mercury and the Company
have no other interests in the Merger.
THE COMPANY'S REASONS FOR THE MERGER; RECOMMENDATION OF THE COMPANY'S BOARD OF
DIRECTORS
THE COMPANY'S REASONS FOR THE MERGER. The Company's Board of Directors
believes that the Merger is in the best interests of the Company and its
shareholders as the Company's Board of Directors believes that the Merger will
increase the operating efficiency of both the Company and Mercury by combining
the operations of the two and will increase the reserves of the combined entity.
Furthermore, management of the Company believes that the terms of the Merger are
fair given the current business prospects of the Company and Mercury and the
properties of the Company and Mercury. In reaching its conclusions to enter into
the Merger Agreement, the Company's Board of Directors solely considered the
following factors, which are listed in order of relevance as determined by the
Board of Directors of the Company:
(a) The results of operations of the Mercury Properties and the
financial condition and business of Mercury, both on a historical basis and
on a prospective basis giving effect to the Merger. This factor was deemed
the most significant factor by the Board of Directors of the Company given
the Company's desire to merge with an entity that has comparable property
and operations to the Company. The Company did assess the limited operating
history of Mercury; however, the consideration was mitigated in the
estimation of the Board of Directors of the Company by the operating and
production history of the properties contributed to Mercury from Parent.
(b) The Exchange Ratio, which the Company believes is fair given the
reserve evaluations of the properties and assets of Mercury and the Company.
The Exchange Ratio is based on a combination of historical net cash flow
from the properties of the Company and Mercury, oil and gas reserves
associated with such properties, Company management's belief as to the
potential value of the undeveloped acreage subject to the Wells Agreement
(discussed in "Business and Properties of Mercury--Development Areas") and
the outstanding debt obligations of the Company and Mercury. No opinion was
obtained by the Company from an independent third party as to the fairness
of the Exchange Ratio to shareholders of the Company.
(c) A review of possible alternatives available to the Company if the
Merger is not consummated, which the Company determined to be limited. The
Board of Directors of the Company did discuss the prospects of the Company
without an alliance with another oil and gas operating company and
determined that the alliance with Mercury by way of the Merger would be the
most efficient method of increasing the inventory of properties of the
combined entity. In addition, the Board concluded that the failure to
establish an alliance would limit the Company's operations as a result of a
lack of funding. Finally, the Board found that anticipated economies of
scale available through the combination of personnel and facilities would be
superior to the more limited growth that would be possible as a single
operator and producer of only the existing MSR properties of the Company.
(d) The financial condition, results of operations and business of the
Company, both on a historical basis and on a prospective basis without
giving effect to the Merger for the purpose of determining whether or not
the Company could survive and grow without a strategic alliance with another
oil and gas operating entity.
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(e) The pro forma combined revenues and expenses and the cost savings
that the Board of Directors believe could be achieved as a result of the
combination.
(f) The cost to the Company of an outright acquisition of additional
properties, which the Board believes would be much more expensive for the
Company and its shareholders than the Merger.
The factors listed above set forth all the issues determined by the Board of
Directors of the Company to be material in assessing whether or not to enter
into the Merger. Although each factor was considered by the Board of Directors
in detail, the Board deemed the potential value which may be brought to the
Company's Common Stock to be the most significant in determining to undertake
the Merger.
RECOMMENDATION OF THE BOARD OF DIRECTORS OF THE COMPANY. As the Merger may
bring value to the Company Common Stock, the Company's Board of Directors
believes that the Continuance and the Merger are fair to, and in the best
interests of, the Company and its shareholders and recommend that its
shareholders vote FOR the approval of the Continuance and the Merger.
MERCURY'S REASONS FOR THE MERGER
Mercury's Board of Directors believes that the Merger is in the best
interests of Mercury and its shareholders for many of the same reasons that the
Board of Directors of the Company believes that the Merger is in the best
interests of the Company and its shareholders. Mercury's Board of Directors
believes that the Merger will increase the operating efficiency of both the
Company and Mercury by combining the operations of the two and will increase the
reserves of the combined entity. Furthermore, management of Mercury believes
that the terms of the Merger are fair given the current business prospects of
the Company and Mercury and the properties of the Company and Mercury. In
reaching its conclusions to enter into the Merger Agreement, Mercury's Board of
Directors solely considered the following factors, which are listed in order of
relevance as determined by the Board of Directors of Mercury:
(a) The financial condition, results of operations and business of the
Company, both on a historical basis and on a prospective basis giving effect
to the Merger. This factor was deemed the most significant factor by the
Board of Directors of Mercury given the Mercury's desire to merge with an
entity that has comparable property and operations to Mercury.
(b) The Exchange Ratio, which Mercury believes is fair given the
properties and assets of the Company and Mercury.
(c) A review of possible alternatives available to Mercury if the Merger
is not consummated. The Board of Directors of Mercury determined that the
alliance with the Company by way of the Merger would be the most efficient
method of increasing the inventory of properties of the combined entity.
(d) The pro forma combined revenues and expenses and the cost savings
that the Board of Directors believe could be achieved as a result of the
combination.
(e) The cost to Mercury of an outright acquisition of additional
properties, which the Board believes would be much more expensive for
Mercury and its shareholders than the Merger.
The factors listed above set forth all the issues determined by the Board of
Directors of Mercury to be material in assessing whether or not to enter into
the Merger. Although each factor was considered by the Board of Directors in
detail, the Board deemed the potential value which may be brought to the
shareholders of Mercury to be the most significant in determining to undertake
the Merger.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendations of the Company's Board of Directors with
respect to the Merger, the Company's shareholders are advised that Otto J. Buis,
the Chairman, President and Chief Executive
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Officer of the Company, beneficially owns or controls 194,544 shares of Company
Common Stock, or 1.4 percent of the outstanding shares of Company Common Stock.
In addition, Patrick M. Montalban, Steven M. Morris and C. Al Buis, each a
director of the Company, beneficially own or control 279,100, 1,111,111 and
27,778 shares of Company Common Stock, respectively, or approximately 2.0, 8.1
and 0.2 percent, respectively, of the outstanding Company Common Stock. Otto
Buis, Al Buis and Steven Morris are the owners, and each is an officer and a
director, of Pozo Resources, Inc., which holds 1,931,444 shares of Company
Common Stock, or approximately 14.1 percent of the outstanding shares of Company
Common Stock. The Board of directors of the Company intends that Otto Buis,
Patrick Montalban, Steven Morris, D. Randall Kent and W. Yandell Rogers, III
will become directors of the Surviving Corporation if they are elected directors
of the Company at the Special Meeting. All directors and executive officers of
the Company, as a group, together with Pozo Resources, Inc., beneficially owned
or controlled an aggregate of 25.8 percent of the outstanding Company Common
Stock as of the Meeting Record Date. To the knowledge of both the Company and
Mercury, no executive officer or director of the Company owns any shares of
Mercury Common Stock and no executive officer or director of Mercury owns any
shares of Company Common Stock.
If the Merger is effected, certain of the officers and directors of the
Company and Mercury, respectively, will derive certain benefits which are in
addition to their interests as shareholders of the Surviving Corporation.
Specifically, the Employment Agreement of Patrick Montalban with the Company,
pursuant to which Mr. Montalban is entitled to receive annual compensation
(subject to cost of living adjustments) of $88,900 in addition to declared bonus
compensation and other perquisites, will be assigned to and assumed by the
Surviving Corporation. Furthermore, options to purchase 114,285 shares of
Mercury Common Stock at an exercise price of $0.875 per share owned by Thomas
Darden and Glenn Darden, each an officer and director of Mercury, and each of
whom will become officers and directors of the Surviving Corporation, will be
converted into options to purchase the identical number of shares of Surviving
Corporation Common Stock. Each of Messrs. Frank, Thomas and Glenn Darden also
own warrants to acquire 550,000 shares of Mercury Common Stock at an exercise
price of $1.25 per share, and warrants to acquire 550,000 shares of Mercury
Common Stock at an exercise price of $2.00 per share, all of which will be
converted into warrants to acquire a like number of shares of Surviving
Corporation Common Stock at identical exercise prices.
In addition to the interests outlined above, the parties to the Merger
Agreement have agreed that the Surviving Corporation and Parent will enter into
a Management Agreement upon effectiveness of the Merger. Pursuant to the
Management Agreement, Parent will manage the ongoing operations of the Surviving
Corporation. See "Certain Transactions." Furthermore, Mercury has guaranteed the
repayment of $4.0 million of debt owed by Parent to NationsBank of Texas, N.A.
(the "NationsBank Debt"). Such debt is due and payable by Parent on December 31,
2002, bears interest at 6.5625 percent per annum and is secured by a lien on the
Mercury Properties. Pursuant to the Merger Agreement, the Surviving Corporation
will either continue to guarantee such debt of Parent or repay $4.0 million of
the NationsBank Debt. It is expected that such amount of the NationsBank Debt
will be repaid upon consummation of the Merger. In order to repay such debt, the
Surviving Corporation will be required to borrow funds. Any such borrowing would
likely be secured by a lien on the properties of the Surviving Corporation.
The Merger Agreement provides that the Surviving Corporation shall issue to
Parent a Warrant to acquire 1,250,000 shares of Surviving Corporation Common
Stock at an exercise price of $0.01 per share exercisable prior to March 31,
2002 in the event of a "Tax Event". A "Tax Event" is a final, binding and
non-appealable determination by a governmental taxing authority or court of
appropriate jurisdiction that the Surviving Corporation has a liability for
taxes, or for failing to withhold taxes, under Canadian or United States tax
laws as a result of the Continuance. As discussed herein, U.S. Counsel has
opined that in the Continuance, the Company will recognize gain, if any,
realized on a deemed liquidating distribution of Continued Common Stock to its
shareholders. Similarly, Canadian counsel has opined that upon effectiveness of
the Continuance, the Company will be deemed to have disposed of all of its
property for proceeds
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of distribution equal to the fair market value of the property and will be
subject to tax on any income and net capital gains arising from such deemed
disposition, and that the Company will be subject to an additional corporate
emigration tax if the fair market value of the Company's assets, net of
liabilities, exceeds the paid-up capital of the Company's issued and outstanding
shares. Assuming that certain tax basis, fair market value, paid-up capital and
tax deduction determinations by the Company are correct, U.S. Counsel has
concluded that the Company will not realize a gain on the Continuance and
Canadian counsel has concluded that no Canadian tax will be payable on the
Continuance. Consequently, management of the Company does not believe that the
Warrant to be issued to Parent will have any market value. There can be no
assurance that the taxing authorities will concur with the conclusions reached
by the Company. See "Material Canadian Federal Income Tax Consequences of the
Continuance and the Merger--The Continuance" and "Material United States Federal
Income Tax Consequences to the Company of the Continuance and the
Merger--Continuance." The period of exercise of the warrant will be extended if
any litigation or administrative proceeding with respect to a possible Tax Event
is pending on March 31, 2002 to a date that is 90 days after the date of final
resolution of any such litigation or proceeding.
EMPLOYMENT ARRANGEMENT
At the Effective Time, the Employment Agreement between the Company and
Patrick Montalban will be assigned to and assumed by the Surviving Corporation.
ACCOUNTING TREATMENT
The Merger will be accounted for by the Surviving Corporation under the
purchase method of accounting in accordance with United States generally
accepted accounting principles. The effect of purchase accounting treatment is
that the assets and liabilities of the Company will be recorded at their fair
values at the effective time of the Merger. See "Pro Forma Consolidated
Statements of Operations and Balance Sheet (Unaudited) of the Surviving
Corporation."
MATERIAL CANADIAN FEDERAL INCOME TAX CONSEQUENCES
OF THE CONTINUANCE AND THE MERGER
GENERAL
In the opinion of Blake, Cassels & Graydon, Canadian counsel to the Company,
the following are the principal Canadian federal income tax considerations under
the Income Tax Act (Canada) (the "Canadian Tax Act") with respect to the
Continuance and Merger generally applicable to the Company and to shareholders
of the Company who, for purposes of the Canadian Tax Act, hold their shares of
Company Common Stock and will hold their Surviving Corporation Common Stock as
capital property, deal at arm's length with the Company, Mercury and the
Surviving Corporation and are not affiliated with the Company, Mercury or the
Surviving Corporation under the Tax Proposals (as defined below). This opinion
does not apply to a shareholder who is or will be a foreign affiliate within the
meaning of the Canadian Tax Act or who holds more than 10 percent of the Company
Common Stock.
Shares will generally be considered to be capital property to a shareholder
unless such shares are held in the course of carrying on a business, acquired in
a transaction considered to be an adventure in the nature of trade or held as
"mark-to-market" property for the purposes of the Canadian Tax Act. Shareholders
should consult their own tax advisors regarding whether, as a matter of fact,
they hold their shares of Company Common Stock as capital property and will hold
their Surviving Corporation Common Stock as capital property for the purposes of
the Canadian Tax Act. Shareholders who are resident in Canada and whose shares
of Company Common Stock or Surviving Corporation Common Stock might not
otherwise qualify as capital property may be entitled to obtain this
qualification by making an irrevocable election provided by Subsection 39(4) of
the Canadian Tax Act. Shareholders who do not hold their shares
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as capital property should consult their own tax advisors regarding their
particular circumstances and, in the case of certain "financial institutions"
(as defined in the Canadian Tax Act), the potential application to them of
special "mark-to-market" rules in the Canadian Tax Act. This opinion is based on
the current provisions of the Canadian Tax Act, the regulations thereunder, the
Canada-United States Income Tax Convention, 1980, as amended (the "Tax Treaty"),
and counsel's understanding of the current administrative practice published by
Revenue Canada, Customs, Excise and Taxation ("Revenue Canada"). This opinion
takes into account specific proposals to amend the Canadian Tax Act and
regulations publicly announced by the Minister of Finance prior to the date
hereof (the "Tax Proposals"), and assumes that all Tax Proposals will be enacted
in the present form. However, no assurances can be given that the Tax Proposals
will be enacted in the form presented, or at all. Except for the foregoing, this
opinion does not take into account or anticipate any changes in the law, whether
by judicial, administrative or legislative action or decision, nor does it take
into account provincial, territorial or foreign income tax legislation or
considerations, which may differ from the Canadian federal income tax
considerations described herein. No advance income tax ruling has been obtained
from Revenue Canada to confirm the tax consequences of any of the transactions
described herein.
This opinion is based on the assumptions that:
(a) the Company Common Stock will up to the effective date of the
Merger, and the Surviving Corporation Common Stock will from the effective
date of the Merger, be listed on the American Stock Exchange, at all times
when any shares of Company Common Stock or Surviving Corporation Common
Stock are issued and outstanding;
(b) after the effective date of Continuance, the management of the
Company will not reside in Canada at any time; and
(c) the Company Common Stock and the Surviving Corporation Common Stock
may not reasonably be considered to derive their value, directly or
indirectly, primarily from portfolio investment in shares, debt or any other
similar properties.
THE FOLLOWING OPINION DOES NOT DISCUSS ALL ASPECTS OF CANADIAN FEDERAL
INCOME TAXATION THAT MAY BE RELEVANT TO A PARTICULAR SHAREHOLDER. SHAREHOLDERS
SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES OF
THE TRANSACTIONS DESCRIBED HEREIN IN THEIR PARTICULAR CIRCUMSTANCES.
THE CONTINUANCE
THE COMPANY
Upon the Continuance, the Company will be deemed to have disposed of all of
its property for proceeds of disposition equal to the fair market value thereof
immediately prior to the Continuance. The Company will be subject to tax on any
income and net taxable capital gains arising thereby. The Company will also be
subject to an additional tax at the rate of five percent on the amount by which
the fair market value of the Company's assets, net of liabilities, exceeds the
paid-up capital of the Company's issued and outstanding shares, except that if
one of the main reasons for the Company changing its residence to the United
States was to reduce the amount of such additional tax or Canadian withholding
tax, the rate of such tax would be 25 percent. Provided the management of the
Company does not reside in Canada at any time thereafter, the Company will not
be resident in Canada after the Continuance. The management of the Company, in
consultation with certain of its advisors, has reviewed the Company's assets,
liabilities and paid-up capital and has advised counsel that no Canadian federal
taxes should be due and payable by the Company under the Canadian Tax Act as a
result of the Continuance. Based upon certain representations of fact which have
been made by the Company, (which representations are set forth below), counsel
is of
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the opinion that no Canadian tax liability will arise as a result of the
Continuance. The representations of the Company upon which this opinion is based
are as follows:
(i) the fair market value of the Company's assets is less than the aggregate
value of the paid-up capital of all of the Company's issued and
outstanding shares and all of the liabilities of the Company; and
(ii) the deemed disposition of all of the Company's assets at fair market
value upon the Continuance will not create income in excess of the
Canadian tax deductions (which include, but are not limited to,
applicable capital and non-capital loss carryforwards and the balances
of any relevant tax pools in respect of resource and depreciable
properties) which are available to the Company.
The Company's representations are based in part on a valuation obtained from
Rauscher Pierce Refsnes, Inc. and certain other factual matters, and counsel can
express no opinion on such matters of factual determination. See "Valuation for
Tax Purposes." No opinion has been sought in this matter, and facts underlying
the Company's assumptions and conclusions may also change prior to the effective
date of the Continuance. The Company has not applied to Canadian federal tax
authorities for a ruling as to the amount of federal taxes payable by the
Company under the Act as a result of the Continuance and does not intend to
apply for such a ruling given the factual nature of the determinations involved.
There can be no assurance that the Canadian federal tax authorities will accept
the valuations or the positions that the Company has adopted with respect to the
Canadian federal tax treatment of such amounts. Accordingly, there can be no
assurance that the Canadian federal tax authorities will conclude after the
effective date of the Continuance that no Canadian federal taxes are due under
the Canadian Tax Act as a result of the Continuance or that the amount of
Canadian federal taxes claimed or found to be due will not be significant.
SHAREHOLDERS RESIDENT IN CANADA
The following portion of the opinion applies to shareholders of the Company
who are resident in Canada for the purposes of the Canadian Tax Act.
Shareholders of the Company will not be considered to have disposed of their
shares of Company Common Stock or to have realized a taxable capital gain or
loss by reason only of the Continuance. The Continuance will also have no effect
on the adjusted cost base to shareholders of their shares of Company Common
Stock.
Following the Continuance, dividends received by a shareholder on shares of
the Company Common Stock will be included in computing income and will generally
not be deductible in computing taxable income of a shareholder that is a
corporation, and, in the case of a shareholder who is an individual, such
dividends will not receive the gross-up and dividend tax credit treatment
generally applicable to dividends on shares of taxable Canadian corporations.
Also, following the Continuance, shares of the Company Common Stock will be
a qualified investment for trusts governed by deferred profit sharing plans,
registered retirement saving plans and registered income funds (collectively,
"Deferred Income Plans"), provided such shares remain listed on the American
Stock Exchange or another prescribed stock exchange. However, such shares will
be foreign property after the effective date of the Continuance,and accordingly,
the holding of such shares by Deferred Income Plans or by certain other
tax-exempt entities including registered investments and registered pension
plans may subject such holders to penalty taxes under the Canadian Tax Act. Such
holders are urged to contact their own tax advisors to determine the potential
applicability of such penalty taxes to them.
DISSENTING SHAREHOLDERS. Pursuant to the administrative practices of
Revenue Canada, which are not binding upon Revenue Canada, the amount paid to a
dissenting shareholder should be treated as proceeds of his or her shares of
Company Common Stock. Accordingly, the dissenting shareholder would recognize a
capital gain (or a capital loss) to the extent that the amount received, net of
any reasonable costs of
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disposition, exceeds (or is less than) the adjusted cost base of such holder's
shares of Company Common Stock to the holder. If a holder is a corporation, any
capital loss arising on the disposition of a share of Company Common Stock may
in certain circumstances be reduced by the amount of any dividends which have
been received on such share. Analogous rules apply to a partnership or trust of
which a corporation is a member or beneficiary. The Tax Proposals will extend
these rules to apply where a trust or partnership is a member of a partnership
or a beneficiary of a trust that owns shares. A shareholder will be required to
include three-quarters of any capital gain (a "taxable capital gain") in
computing his or her income for purposes of the Canadian Tax Act and will be
entitled to deduct three-quarters of any capital loss only against taxable
capital gains in accordance with the detailed provisions of the Canadian Tax Act
in that regard.
SHAREHOLDERS NOT RESIDENT IN CANADA
The following portion of this opinion applies to shareholders who, for
purposes of the Canadian Tax Act: (i) are not resident or deemed to be resident
in Canada at any time when they held or hold Company Common Stock; (ii) do not
use or hold and are not deemed to use or hold their shares of Company Common
Stock in the course of carrying on a business in Canada; or (iii) in the case of
shareholders who carry on an insurance business in Canada and elsewhere,
establish that the Company Common Stock is not "designated insurance property"
under the Tax Proposals.
Shareholders will not be considered to have disposed of their Company Common
Stock or to have realized a taxable capital gain or loss by reason only of the
Continuance. The Continuance will also have no effect on the adjusted cost base
to shareholders of their shares of Company Common Stock. After the effective
date of the Continuance, dividends received by a shareholder on shares of
Company Common Stock will not be subject to Canadian withholding tax.
Provided that a share of Company Common Stock is not "taxable Canadian
property" to a shareholder at the time of disposition of such share, such
shareholder will not be subject to Canadian tax on any capital gain arising by
reason of the disposition of such share Company Common Stock. After the
effective date of the Continuance, shares of Company Common Stock will not
generally be taxable Canadian property to a shareholder at any particular time
unless at any time during the five-year period that ends at the particular time
the shareholder (together with persons not dealing at arm's length with the
shareholder) owned 25 percent or more of the shares of any class of the Company
and more than 50 percent of the fair market value of the shares of Company
Common Stock was derived directly or indirectly from one or any combination of
real property situated in Canada, Canadian resource properties and timber
resource properties. For the purposes of this test, a shareholder and any person
not dealing at arm's length with a shareholder will be considered to own any
share that the shareholder or person has a right to acquire.
DISSENTING SHAREHOLDERS. Pursuant to the administrative practices of
Revenue Canada, which are not binding upon Revenue Canada, the amount paid to a
dissenting shareholder should be treated as proceeds of disposition of his or
her shares of Company Common Stock. Provided that such shares are not taxable
Canadian property for the purposes of the Canadian Tax Act, such proceeds of
disposition will not be subject to Canadian tax. Such shareholder should consult
his or her own tax advisors in this regard.
THE MERGER
SHAREHOLDERS RESIDENT IN CANADA
The following portion of this opinion applies to shareholders of the Company
who are resident in Canada for the purposes of the Canadian Tax Act.
Shareholders of the Company who receive shares of the Surviving Corporation
Common Stock pursuant to the Merger will be deemed to have disposed of their
shares of Company Common Stock, but will realize neither a capital gain nor a
capital loss on the disposition.
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The shares of Surviving Corporation Common Stock received by a shareholder
of the Company pursuant to the Merger will be deemed to have been acquired at a
cost equal to the adjusted cost base of the shares of Company Common Stock held
immediately prior to the Merger. The cost of shares of Surviving Corporation
Common Stock so acquired will be averaged with the adjusted cost base of any
other common shares of the Surviving Corporation acquired by such holder
pursuant to the Merger and the resulting average will be the adjusted cost base
of each of the shareholder's shares of Surviving Corporation Common Stock.
Following the Merger, dividends received by a shareholder on shares of
Surviving Corporation Common Stock will be included in computing such
shareholder's income and will generally not be deductible in computing taxable
income of a shareholder that is a corporation, and, in the case of a shareholder
who is an individual, such dividends will not receive the gross-up and dividend
tax credit treatment generally applicable to dividends on shares of taxable
Canadian corporations. As will be discussed under "Material United States
Federal Income Tax Consequences to Shareholders and Warrant Holders of the
Continuance and the Merger," dividends paid to holders of Surviving Corporation
Common Stock who are Canadian residents will generally be subject to United
States withholding tax. Such shareholders generally will, however, be able to
claim a credit in an amount equal to the amount of such withholding tax against
their Canadian taxes otherwise payable in respect of such dividends.
Also, following the Merger, shares of Surviving Corporation Common Stock
will be a qualified investment for trusts governed by Deferred Income Plans,
provided such shares remain listed on the American Stock Exchange or another
prescribed stock exchange. However, such shares will be foreign property, and
accordingly, the holding of such shares by Deferred Income Plans or by certain
other tax exempt entities, including registered investments and registered
pension plans may subject such holders to penalty taxes under the Canadian Tax
Act. Such holders are urged to contact their own tax advisors to determine the
potential applicability of such penalty taxes to them.
DISSENTING SHAREHOLDERS. Pursuant to the administrative practices of
Revenue Canada, which are not binding upon Revenue Canada, the amount paid to a
dissenting shareholder should be treated as proceeds of disposition of his or
her shares of Company Common Stock. Accordingly, the dissenting shareholder
would recognize a capital gain (or a capital loss) to the extent that the amount
received, net of any reasonable costs of disposition, exceeds (or is less than)
the adjusted cost base of such holder's shares. If a holder is a corporation,
any capital loss arising on the disposition of a share of Company Common Stock
may, in certain circumstances, by reduced by the amount of any dividends which
have been received on such share. Analogous rules apply to a partnership or
trust of which a corporation is a member or a beneficiary. The Tax Proposals
will extend these rules to apply where a trust or partnership is a member of a
partnership or a beneficiary of a trust that owns shares. Shareholders will be
required to include three-quarters of any capital gain (a "Taxable Capital
Gain") in computing his or her income for the purposes of the Canadian Tax Act
and will be entitled to deduct three-quarters of any capital loss only against
taxable capital gains in accordance with the detailed provisions of the Canadian
Tax Act. Such shareholder should consult his or her own tax advisors in this
regard.
SHAREHOLDERS NOT RESIDENT IN CANADA
The following portion of this opinion applies to shareholders of the Company
who, for purposes of the Canadian Tax Act are (i) not resident or deemed to be
resident in Canada at any time when they held or hold shares of Company Common
Stock or shares of Surviving Corporation Common Stock; (ii) do not use or hold
and are not deemed to use or hold their shares of Company Common Stock or shares
of Surviving Corporation Common Stock in the course of carrying on a business in
Canada; or (iii) in the case of shareholders who carry on an insurance business
in Canada and elsewhere, establish that the shares of Company Common Stock or
Surviving Corporation Common Stock are not "designated insurance property" under
the Tax Proposals.
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The shares of Surviving Corporation Common Stock received by a shareholder
of the Company pursuant to the Merger will be deemed to have been acquired at a
cost equal to the adjusted cost base of the shares of Company Common Stock held
immediately prior to the Merger. The cost of shares of Surviving Corporation
Common Stock so acquired will be averaged with the adjusted cost base of any
other shares of Surviving Corporation Common Stock acquired by such holder
pursuant to the Merger and the resulting average will be the adjusted cost base
of each of the shareholder's shares of Surviving Corporation Common Stock.
After the effective date of Merger, dividends received by a shareholder on
shares of Surviving Corporation Common Stock will not be subject to Canadian
withholding tax.
Provided that a share of Surviving Corporation Common Stock is not "taxable
Canadian property" to a shareholder at the time of the disposition of such
share, such shareholder will not be subject to Canadian tax on any capital gain
arising by reason of the disposition of such share. After the Merger, shares of
Surviving Corporation Common Stock will not generally be taxable Canadian
property to a shareholder at any particular time unless such shares were issued
pursuant to the Merger in exchange for shares which were taxable Canadian
property or unless at any time during the five year period that ends at the
particular time the shareholder (together with persons not dealing at arm's
length with the shareholder) owned 25 percent or more of the shares of any class
of shares of Surviving Corporation Common Stock and more than 50 percent of the
fair market value of the shares was derived directly or indirectly from one or
any combination of real property situated in Canada, Canadian resource
properties and Timber resource properties. For the purposes of this test, a
shareholder and any person not dealing at arm's-length with a shareholder will
be considered to own any share that the shareholder or person has a right to
acquire.
DISSENTING SHAREHOLDERS. Pursuant to the administrative practices of
Revenue Canada, which are not binding upon Revenue Canada, the amount paid to a
dissenting shareholder should be treated as proceeds of disposition of his or
her shares of Company Common Stock. Provided that such shares are not taxable
Canadian property for the purposes of the Canadian Tax Act, such proceeds of
disposition will not be subject to Canadian tax. Such shareholder should consult
his or her own tax advisors in this regard.
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MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO SHAREHOLDERS
AND WARRANT HOLDERS OF THE CONTINUANCE AND THE MERGER
GENERAL
In the opinion of Thompson & Knight, P.C., United States counsel to the
Company and special United States tax counsel to Mercury ("U.S. counsel"), the
following are the material United States federal income tax considerations
arising from and relating to the Continuance and the Merger that are generally
applicable to shareholders of the Company that are United States citizens or
residents, domestic corporations, domestic partnerships, estates subject to
United States federal income tax on their income regardless of source, and
trusts, but only if a court within the United States is able to exercise primary
supervision over the administration of such trust and one or more United States
fiduciaries have the authority to control all substantial decisions of the trust
("U.S. Shareholders"), to certain shareholders of the Company that are not U.S.
Shareholders ("non-U.S. Shareholders") and to certain holders of warrants to
acquire shares of Company Common Stock. This opinion does not discuss all
aspects of United States federal income taxation that may be relevant to a
particular U.S. Shareholder (including, without limitation, potential
application of the alternative minimum tax), to a particular non-U.S.
Shareholder, to a particular warrant holder, or to certain types of investors
subject to special treatment under the United States federal income tax laws
(for example, banks, life insurance companies, tax-exempt organizations,
broker-dealers or holders who received their Company Common Stock as
compensation), nor does it discuss any aspect of state, local or foreign tax
laws.
This opinion is based on United States laws, regulations, rulings and
decisions currently in effect, all of which are subject to change, possibly with
retroactive effect. No advance income tax ruling has been sought or obtained
from the United States Internal Revenue Service (the "IRS") regarding the tax
consequences of any of the transactions described herein. Accordingly, it is
possible that the United States federal income tax consequences of the
Continuance and the Merger may differ from those described below.
THE FOLLOWING OPINION DOES NOT DISCUSS ALL ASPECTS OF FEDERAL INCOME
TAXATION THAT MAY BE RELEVANT TO A PARTICULAR SHAREHOLDER OR WARRANT HOLDER IN
LIGHT OF SUCH HOLDER'S PARTICULAR CIRCUMSTANCES AND INCOME TAX SITUATION.
SHAREHOLDERS AND WARRANT HOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS
TO THE PARTICULAR TAX CONSEQUENCES TO THEM OF THE TRANSACTIONS DESCRIBED HEREIN
INCLUDING THE APPLICATION OF STATE, LOCAL AND FOREIGN TAX LAWS AND POSSIBLE
FUTURE CHANGES IN FEDERAL TAX LAWS.
TAXATION OF U.S. SHAREHOLDERS
The following opinion is limited to U.S. Shareholders (i) who hold Company
Common Stock as "capital assets" within the meaning of Section 1221 of the Code,
(ii) who will hold Continued Common Stock (as defined below) and Surviving
Corporation Common Stock as "capital assets," (iii) whose ownership, receipt or
disposition of Company Common Stock, Continued Common Stock and/or Surviving
Corporation Common Stock is not attributable to a permanent establishment in a
country other than the United States for purposes of an income tax treaty to
which the United States is a party and (iv) who are not residents of a country
other than the United States for purposes of an income tax treaty to which the
United States is a party. U.S. Shareholders who do not meet one or more of the
foregoing criteria are urged to consult their tax advisors regarding their
particular United States federal income tax consequences.
THE CONTINUANCE
GENERAL. For United States federal income tax purposes, the Continuance
will result in a constructive exchange by the Company shareholders of their
Company Common Stock for stock in a new domestic corporation ("Continued Common
Stock"). Although the matter is not free from doubt, U.S. Counsel is of
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the opinion that the Continuance should qualify as a "reorganization" within the
meaning of Section 368(a) of the Code. This conclusion is based on certain
factual assumptions and reliance on representations from the Company and certain
principal shareholders of the Company. Such assumptions and representations
include, but are not limited to, (i) the Registration Statement adequately
reflects the Company's principal purposes and reasons for the Continuance,
including the fact that the Company, as an Alberta corporation, cannot merge
directly with a Delaware corporation, such as Mercury; (ii) there is no plan or
intention on the part of any shareholder of the Company to sell, exchange or
otherwise dispose of the Continued Common Stock received in the Continuance,
other than in the Merger; (iii) immediately following the Continuance, the
Continued Company will possess the same assets and liabilities, except for
assets used to pay dissenters to the Continuance, and assets used to pay
expenses incurred in connection with the Continuance, as those possessed by the
Company immediately prior to the Continuance; (iv) assets used to pay expenses,
assets used to pay dissenters to the Continuance, and all redemptions and
distributions (except for regular, normal dividends) made by the Company
immediately preceding the Continuance will, in the aggregate, constitute less
than one percent of the net assets of the Company; (v) dissenting shareholders
will own less than one percent of the Company Common Stock; and (vi) immediately
following the Continuance, the shareholders of the Company will own all of the
outstanding Continued Common Stock and will own such stock solely by reason of
their ownership of the Company Common Stock immediately prior to the
Continuance.
With respect to a U.S. Shareholder other than a Section 1248 Shareholder (as
defined below), based on the foregoing conclusion that the Continuance should
qualify as a reorganization, the following will be the material United States
federal income tax consequences:
(1) The U.S. Shareholder will recognize no gain or loss on the
constructive exchange of Company Common Stock solely for Continued Common
Stock;
(2) The tax basis of the Continued Common Stock constructively received
will be the same as the basis of the Company Common Stock constructively
surrendered in exchanged therefor;
(3) The holding period of the Continued Common Stock will include the
holding period of Company Common Stock constructively surrendered in
exchange therefor; and
(4) Any U.S. Shareholder who exercises his rights under Alberta law to
dissent from the Continuance should be treated as if his Company Common
Stock was redeemed for cash and should in general recognize capital gain or
loss in an amount equal to the difference between the amount of cash
received (less any amount constituting interest) and the U.S. Shareholder's
basis in the Company Common Stock surrendered therefor. Special rules may
apply to dissenting Company shareholders that actually or constructively
(pursuant to Section 318 of the Code) own shares of the Company (or possibly
shares of Mercury or Parent) as to which dissenters' rights are not being
exercised. Any amount constituting interest would be taxable as ordinary
income.
If a U.S. Shareholder of the Company actually or constructively owns (or has
at any time in the preceding five-year period actually owned or constructively
owned) 10 percent or more of the voting stock of the Company (a "Section 1248
Shareholder"), then upon the receipt of the Continued Common Stock pursuant to
the Continuance such Section 1248 Shareholder generally must include in gross
income either the "section 1248 amount" or the "all earnings and profits
amount," as such terms are defined in Section 1.367(b)-2 of the United States
Treasury regulations and which generally relate to the Section 1248
Shareholder's distributable share of the Company's earnings and profits.
Although the issue is not free from doubt, U.S. Counsel is of the opinion that
"Section 1248 amounts" and the "all earnings and profits amounts" should accrue
only while a foreign corporation is a "controlled foreign corporation" as such
term is defined in Section 957 of the Code (a "CFC"); in which case, if a
foreign corporation has never been a CFC, then a Section 1248 Shareholder's
distributable share of such a foreign corporation's earnings and profits is
zero.
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While there can be no assurance with respect to the classification of the
Company as a CFC, the Company believes that it has never been a CFC at any time
at or prior to consummation of the Continuance. In connection with the
transactions contemplated herein, U.S. counsel will not be rendering an opinion
with regard to the Company's status as a CFC at any time at or prior to the
Continuance. Thus, the amount, if any, which a Section 1248 Shareholder will
include in gross income as a result of the Continuance cannot be predicted with
certainty. Accordingly, Section 1248 Shareholders are urged to consult their tax
advisors regarding their United States federal income tax consequences from the
Continuance.
Under proposed Treasury regulations, the "section 1248 amount" and the "all
earnings and profits amount" would include all net positive earnings and
profits, if any, of the Company that would be attributable to such stock and
includible in income as a dividend under Section 1248 of the Code and the
regulations thereunder if the Section 1248 Shareholder had sold the stock,
regardless of whether the Company was ever a CFC. If these proposed regulations
are effective at the time of the Continuance in their current form, Section 1248
Shareholders likely will include greater amounts in income than they would under
current law. As currently proposed, these regulations generally will be
effective 30 days after they are finalized. No assurance can be given, however,
as to whether the regulations will be finalized, the precise terms such
regulations will include or their actual effective date (which may be sooner
than stated in the proposed regulations). Consequently, Section 1248
Shareholders are urged to consult their tax advisors regarding the potential
application of these proposed regulations.
Any U.S. Shareholder who receives the Continued Common Stock in exchange for
the Company Common Stock and takes the position that such exchange is eligible
for nonrecognition treatment is required to file a notice with the IRS on or
before the last day for filing a United States federal income tax return (taking
into account any extensions of time therefor) for the U.S. Shareholder's taxable
year in which the Continuance occurs. The notice must contain certain
information specifically enumerated in Section 7.367(b)-1 of the United States
Treasury regulations, and U.S. Shareholders are advised to consult their tax
advisors for assistance in preparing such notice. If a U.S. Shareholder required
to give notice as described above fails to give such notice, and if the U.S.
Shareholder further fails to establish reasonable cause for the failure, then
the IRS will be required to determine, based on all the facts and circumstances,
whether the conversion of Company Common Stock into Continued Common Stock is
eligible for nonrecognition treatment. In making the determination, the IRS may
conclude (i) that the conversion is eligible for nonrecognition treatment,
despite such noncompliance, (ii) that the conversion is eligible for
nonrecognition treatment, provided that certain other conditions imposed by the
United States Treasury regulations are satisfied, or (iii) that the conversion
is not eligible for nonrecognition treatment and that any gain recognized will
be taken into account for purposes of increasing the tax basis of the Continued
Common Stock received pursuant to the Continuance. Nevertheless, the failure of
any one U.S. Shareholder to satisfy the foregoing notice requirements should not
bar other U.S. Shareholders that do satisfy such requirements from receiving
nonrecognition treatment with respect to the conversion of their Company Common
Stock into Continued Common Stock pursuant to the Continuance.
PASSIVE FOREIGN INVESTMENT COMPANY CONSIDERATIONS. For United States
federal income tax purposes, the Company generally will be classified as a
passive foreign investment company (a "PFIC") for any taxable year during which
either (i) 75 percent or more of its gross income is passive income (as defined
for United States federal income tax purposes) or (ii) on average for such
taxable year, 50 percent or more of its assets (by value) produce or are held
for the production of passive income. For purposes of applying the foregoing
tests, all or some of the assets and gross income of the Company's subsidiaries
will be attributed to the Company.
While there can be no assurance with respect to the classification of the
Company as a PFIC, the Company believes that it did not constitute a PFIC during
any taxable year ending at or prior to consummation of the Continuance. In
connection with the transactions contemplated herein, U.S. counsel will not be
rendering an opinion with regard to the Company's status as a PFIC.
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Although the matter is not free from doubt, if the Company is a PFIC prior
to the consummation of the Continuance and the U.S. Shareholder does not make a
qualified electing fund election (a "QEF Election"), then (i) the U.S.
Shareholder would be required to allocate gain recognized upon the exchange of
Company Common Stock for Continued Common Stock ratably over the U.S.
Shareholder's holding period for such Company Common Stock, (ii) the amount
allocated to each year other than (x) the year of the disposition of the Company
Common Stock or (y) any year prior to the beginning of the first taxable year of
the Company for which it was a PFIC, would be subject to tax at the highest rate
applicable to individuals or corporations, as the case may be, for the taxable
year to which such income is allocated, and an interest charge would be imposed
upon the resulting tax attributable to each such year (which charge would accrue
from the due date of the return for the taxable year to which such tax was
allocated), and (iii) gain recognized upon the disposition of the Company Common
Stock (including upon the exchange of Company Common Stock for Continued Common
Stock in the Continuance) would be taxable as ordinary income.
If a U.S. Shareholder made a QEF Election, then the U.S. Shareholder
generally is currently taxable on such U.S. Shareholder's pro rata share of the
Company's ordinary earnings and net capital gains (at ordinary income and
capital gains rates, respectively) for each taxable year of the Company in which
the Company is classified as a PFIC, even if no dividend distributions are
received by such U.S. Shareholder unless such U.S. Shareholder made an election
to defer such taxes.
The foregoing summary of the possible application of the PFIC rules to the
Company and the U.S. Shareholders of Company Common Stock is only a summary of
certain material aspects of those rules. Because the United States federal
income tax consequences to a U.S. Shareholder under the PFIC provisions may be
significant, U.S. Shareholders of Company Common Stock are urged to discuss
those consequences with their tax advisors.
THE MERGER
Although the issue is not free from doubt, U.S. Counsel is of the opinion
that the Merger should qualify as a reorganization within the meaning of Section
368(a) of the Code. This conclusion is based on certain factual assumptions and
reliance on representations from Mercury, Parent, the Company and certain
principal shareholders of the Company. Such assumptions and representations
include, but are not limited to, (i) that Mercury has no plan or intention (and
the Surviving Corporation will have no plan or intention) to sell or otherwise
dispose of any of the assets of the Company acquired in the Merger, except for
dispositions made in the ordinary course of business; (ii) that the Surviving
Corporation will continue the Company's historic business or use a significant
portion of the Company's historic business assets in a business; and (iii) that
the historic shareholders of the Continued Corporation will maintain a
substantial continuing ownership interest in the stock they receive in the
Merger.
Based upon the foregoing conclusion that the Merger should qualify as a
reorganization under Section 368(a) of the Code, the following will be the
material United States federal income tax consequences to the U.S. Shareholders:
(1) A U.S. Shareholder will recognize no gain or loss upon the exchange
in the Merger of Continued Common Stock solely for Surviving Corporation
Common Stock.
(2) The basis of the shares of Surviving Corporation Common Stock
received by a U.S. Shareholder pursuant to the Merger will be the same as
the basis for such U.S. Shareholder's Continued Common Stock surrendered in
exchange therefor.
(3) The holding period of a U.S. Shareholder in the shares of Surviving
Corporation Common Stock received by such U.S. Shareholder as a result of
the Merger will include the period for which such U.S. Shareholder held the
shares of Continued Common Stock which are converted into such shares of
Surviving Corporation Common Stock. (A U.S. Shareholder's holding period for
the
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Continued Common Stock will include such shareholder's holding period for
the Company Common Stock, provided that the Continuance qualifies as a
reorganization, as described above.)
(4) Any U.S. Shareholder who exercises his rights pursuant to certain
provisions contained in the Company's certificate of incorporation intended
to give shareholders the same rights they would have under Section 184 of
the ABCA to dissent from the Merger should be treated as if his Continued
Common Stock was redeemed and should in general recognize capital gain or
loss in an amount equal to the difference between the amount of cash
received (less any amount constituting interest) and the shareholder's basis
in the Continued Common Stock surrendered therefor. Special rules may apply
to dissenting shareholders that actually or constructively (pursuant to
Section 318 of the Code) own either shares of the Company as to which
dissenters' rights are not being exercised or shares of Mercury or Parent.
Any amount constituting interest would be taxable as ordinary income.
Even if the Merger qualifies as a reorganization, a recipient of Surviving
Corporation Common Stock at the time of the Merger would recognize gain to the
extent that such shares were considered to be received in exchange for services
or property (other than solely in exchange for Continued Common Stock). Gain
would also have to be recognized to the extent that a U.S. Shareholder was
treated as receiving (directly or indirectly) consideration other than Surviving
Corporation Common Stock in exchange for Continued Common Stock. All or a
portion of such gain amounts may be taxable as ordinary income.
TAXATION OF NON-U.S. SHAREHOLDERS
The following opinion is applicable to non-U.S. Shareholders (i) who hold
Company Common Stock as "capital assets" within the meaning of Section 1221 of
the Code, (ii) who will hold Continued Common Stock and Surviving Corporation
Common Stock as "capital assets," (iii) who do not actually or constructively
own (and have not at any time in the preceding five-year period actually or
constructively owned) five percent or more (by vote or value) of the stock of
the Company, (iv) whose ownership, receipt or disposition of Company Common
Stock, Continued Common Stock and/or Surviving Corporation Common Stock is not
attributable either to the conduct of a trade or business in the United States
or to a permanent establishment in the United States, and (v) who are not
residents of the United States for purposes of United States federal income tax
law or an income tax treaty to which the United States is a party. Non-U.S.
Shareholders who do not meet one or more of the foregoing criteria are urged to
consult their tax advisors regarding their particular United States federal
income tax consequences.
THE CONTINUANCE. If, as expected, the Continuance qualifies as a
reorganization, then a non-U.S. Shareholder generally should have the same
United States federal income tax consequences as those described above for a
U.S. Shareholder regarding nonrecognition of gain or loss, tax basis and holding
period. Except as set forth in the following paragraph, a non-U.S. Shareholder
generally will not be required to file a notice with the IRS with respect to the
Continuance.
A non-U.S. Shareholder generally will not be subject to United States
federal income tax on gain recognized, if any, upon the exchange of the shares
of Company Common Stock for the shares of Continued Common Stock unless (i) the
gain is effectively connected with the conduct of a trade or business within the
United States by the non-U.S. Shareholder; (ii) the gain is attributable to a
permanent establishment in the United States, (iii) in the case of a non-U.S.
Shareholder who is a nonresident alien individual and holds the Company Common
Stock as a capital asset, such non-U.S. Shareholder is present in the United
States for 183 or more days in the taxable year and certain other circumstances
are present or (iv) the non-U.S. Shareholder is subject to tax pursuant to the
provisions of the Code applicable to certain United States expatriates. A
non-U.S. Shareholder that would be subject to United States federal income tax
on such gains and takes the position that the exchange of the Company Common
Stock for the Continued Common Stock is eligible for nonrecognition treatment
will be required to file a notice with the IRS. See "--Taxation of U.S.
Shareholders--The Continuance," above.
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THE MERGER. If, as expected, the Merger qualifies as a reorganization, a
non-U.S. Shareholder generally should have the same United States federal income
tax consequences as those described above for a U.S. Shareholder regarding
nonrecognition of gain or loss, tax basis and holding period. A dissenting
non-U.S. Shareholder generally should not be subject to United States federal
income tax on gain, if any, recognized on the receipt of cash in exchange for
his shares of Continued Common Stock. Nevertheless, a non-U.S. Shareholder who
exercises dissenters' rights may be subject to United States federal income tax
under the principles described in this section or if the redemption fails to
qualify for exchange treatment under Section 302(b) of the Code because the
non-U.S. Shareholder's interest is not sufficiently reduced.
If the shares of Continued Common Stock are a "United States real property
interest" (a "USRPI") within the meaning of Section 897(c) of the Code, the gain
or loss realized by a non-U.S. Shareholder in the Merger may be treated as
effectively connected with a United States trade or business subject to United
States federal income tax, which tax may be required to be withheld. Based on
representations obtained from the Company and Mercury, U.S. Counsel has
concluded that the new domestic corporation resulting from the Continuance will
be a "United States real property holding corporation" as such term is defined
in Section 897(c) of the Code and, absent an exception, the Continued Common
Stock will be a USRPI. One such exception is for certain publicly traded stock.
If any class of stock of a corporation is regularly traded on an established
securities market, stock of such class shall be treated as a USRPI only in the
case of a "five-percent owner," that is, a person who held more than five
percent of such class of stock at some time during the shorter of (a) the period
during which the taxpayer held such interest or (b) the five-year period ending
on the date of the disposition of such interest. For purposes of determining
whether a corporation's stock is regularly traded, a class of interests that is
traded on an established securities market (such as a national securities
exchange which is registered under Section 6 of the Securities Exchange Act of
1934 (15 U.S.C. Section 78f)) located in the United States is considered to be
regularly traded for any calendar quarter during which it is regularly quoted by
brokers or dealers making a market in these interests. Brokers or dealers are
considered market makers with respect to a class of interests only if they hold
themselves out to buy or sell interests in that class at the quoted price. Based
on representations obtained from the Company, U.S. Counsel has concluded that
the Continued Common Stock will be considered to be "regularly traded on an
established securities market"; therefore, the Merger should not be treated as
the sale or exchange of a USRPI with respect to a non-U.S. Shareholder that is
not a five-percent owner.
The amount withheld pursuant to these USRPI rules, if any, will be
creditable against such non-U.S. Shareholder's United States federal income tax
liability and may entitle such non-U.S. Shareholder to a refund upon furnishing
the required information to the IRS. Non-U.S. Shareholders should consult
applicable income tax treaties, which may provide different rules.
If gain or loss recognized by a non-U.S. Shareholder on the Continuance or
Merger is effectively connected with a United States trade or business or is
attributable to a permanent establishment in the United States, then the
non-U.S. Shareholder would be subject to United States federal income tax at the
graduated rates that are applicable to United States citizens, resident aliens
or domestic corporations, as applicable, and may be subject to withholding in
certain circumstances. Non-U.S. Shareholders may be entitled to a limited
foreign tax credit on non-United States source income that is effectively
connected with a United States trade or business. In addition, if the non-U.S.
Shareholder is a corporation, the United States branch profits tax also may
apply.
DIVIDENDS ON SURVIVING CORPORATION COMMON STOCK. Generally, dividends
received by a non-U.S. Shareholder with respect to Surviving Corporation Common
Stock will be subject to United States withholding tax at a rate of 30 percent,
which rate may be subject to reduction by an applicable income tax treaty
(generally 15 percent on dividends paid to residents of Canada who qualify for
the benefits of the income tax treaty between the United States and Canada). If
the dividends are effectively connected with the conduct of a United States
trade or business or are attributable to a permanent establishment in the United
States, they would be taxed at the graduated rates that are applicable to United
States citizens,
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resident aliens, and domestic corporations and would not be subject to United
States withholding tax if the non-U.S. Shareholder gives an appropriate
statement to the withholding agent in advance of the dividend payment. A
non-U.S. Shareholder that is a corporation may be subject to an additional
branch profits tax on effectively connected dividends.
SALE OF SURVIVING CORPORATION COMMON STOCK. A non-U.S. Shareholder
generally will not be subject to United States federal income tax on gain
recognized, if any, upon the sale of shares of Surviving Corporation Common
Stock unless (i) the gain is effectively connected with the conduct of a trade
or business within the United States by the non-U.S. Shareholder, including gain
deemed effectively connected with the conduct of a trade or business because the
Surviving Corporation Common Stock sold is a USRPI, (ii) in the case of a
non-U.S. Shareholder who is a nonresident alien individual and holds the
Surviving Corporation Common Stock as a capital asset, such non-U.S. Shareholder
is present in the United States for 183 or more days in the taxable year and
certain other circumstances are present, or (iii) the non-U.S. Shareholder is
subject to tax pursuant to the provisions of the Code applicable to certain
United States expatriates. Further, upon a disposition of a USRPI, the
transferee may be required to withhold a portion of the purchase price as a
prepayment of the transferor's income tax liability. Based on representations
obtained from the Company and Mercury, U.S. Counsel has concluded that the
Surviving Corporation will be a "United States real property holding
corporation" as such term is defined in Section 897(c) of the Code and that,
absent an exception, the Surviving Corporation Common Stock will be a USRPI. One
such exception is for certain publicly traded stock; that is, if the Surviving
Corporation Common Stock is regularly traded on an established securities
market, such stock is to be treated as a USRPI only in the case of a
"five-percent owner." See "--Taxation of Non-U.S. Shareholders--The Merger,"
above. U.S. Counsel has concluded that the sale of the Surviving Corporation
Common Stock will not be treated as the sale or exchange of a USRPI with respect
to a non-U.S. Shareholder that is not a five-percent owner if, at the time of
such sale, the Surviving Corporation Common Stock will be considered to be
"regularly traded on an established securities market."
ESTATE TAX. Continued Common Stock or Surviving Corporation Common Stock
owned (or treated as owned) by an individual may be includible in his or her
gross estate for United States federal estate tax purposes and thus may be
subject to United States federal estate tax, unless an applicable estate tax
treaty provides otherwise.
TAXATION OF WARRANT HOLDERS
Although the matter is not free from doubt, U.S. Counsel is of the opinion
that the Continuance should not result in the recognition of gain or loss to
holders of warrants to acquire Company Common Stock ("Company warrants"). Any
deemed exchange of Company warrants for warrants to acquire Continued Common
Stock ("Continued warrants") should not be treated as a realization event under
Section 1001 of the Code. The IRS or the courts could disagree with this
characterization of the results to warrant holders and instead treat the
transaction as a taxable exchange of Company warrants for Continued warrants. In
such a circumstance, a holder of Company warrants would recognize gain or loss
in an amount equal to the difference between the fair market value of the
Continued warrants constructively received in the exchange and the holder's
adjusted tax basis in the Company warrants surrendered. The gain or loss would
be capital gain or loss if the warrants being surrendered were a capital asset
in the hands of the holder and long-term gain or loss if the warrants being
surrendered have been held for more than one year at the time of the exchange.
Recently enacted legislation lowers the capital gains tax rate if the warrants
have been held for more than eighteen months at the time of the exchange.
In the Merger, a holder of Continued warrants will exchange such warrants
for warrants to acquire Surviving Corporation Common Stock ("Surviving
Corporation warrants"). Even if the Merger qualifies as a reorganization, the
exchange of Continued warrants for Surviving Corporation warrants may not
qualify for tax-free treatment, because current United States Treasury
regulations take the position that warrants
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are neither stock nor securities and hence generally do not qualify for tax-free
treatment in a reorganization if such warrants are surrendered in an otherwise
taxable exchange. Although contrary arguments exist, U.S. Counsel is of the
opinion that a holder of Continued warrants should recognize gain or loss in an
amount equal to the difference between the fair market value of the Surviving
Corporation warrants received in the exchange and the holder's adjusted tax
basis in the Continued warrants surrendered. Such gain or loss will be capital
gain or loss if the warrants being surrendered are a capital asset in the hands
of the holder and long-term gain or loss if the warrants being surrendered have
been held for more than one year at the time of the exchange. Recently enacted
legislation lowers the capital gains tax rate if the warrants have been held for
more than eighteen months at the time of the exchange.
Proposed United States Treasury regulations would alter the rule that
warrants are neither stock nor securities by treating warrants as securities. If
finalized in their current form, such regulations generally would provide that
an otherwise taxable exchange of warrants in a reorganization is tax-free to a
holder thereof. The regulations are proposed to be effective 60 days after the
Treasury decision adopting the rules as final regulations is filed with the
Office of the Federal Register. There can be no assurance as to whether the
proposed United States Treasury regulations will be adopted or as to the
provisions that they will include if and when adopted in temporary or final
form.
Notwithstanding the discussion above, a holder of Company warrants or
Continued warrants that is neither an individual nor a "United States person,"
as such term is defined in Section 7701 of the Code, generally will not be
subject to United States federal income tax on gain or loss recognized, if any,
upon an exchange of the warrants unless the gain or loss is effectively
connected with the conduct of a trade or business within the United States by
such holder, including gain or loss that is deemed effectively connected with
the conduct of a trade or business because the warrant transferred is a USRPI.
Based on representations obtained from the Company, U.S. Counsel has concluded
that the Company is, and the new domestic corporation resulting from the
Continuance will be, a "United States real property holding corporation" as such
term is defined in Section 897(c) of the Code. Therefore, unless an exception
applies, each of the Company warrants and the Continued warrants will be a USRPI
and the holder of such warrants will be subject to United States federal income
tax on gain or loss recognized, if any, on the exchange of such warrants. See
"--Taxation of Non-U.S. Shareholders--The Merger," above. One such exception is
for non-regularly traded interests (such as warrants) in a corporation whose
stock is publicly traded. Neither the Company warrants nor the Continued
warrants will be considered a USRPI if, during the calendar year of such
exchange, the Company Common Stock or the Continued Common Stock is "regularly
traded on an established securities market" as defined in "--Taxation of
Non-U.S. Shareholders--The Merger," above, and on the date the warrants were
acquired by its present holders such warrants had a fair market value less than
the fair market value on that date of five percent of the applicable common
stock. Based on representations obtained from the Company, U.S. Counsel has
concluded that the Company Common Stock is, and the Continued Company Stock will
be, considered to be "regularly traded on an established securities market."
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Surviving Corporation must report annually to the IRS and to each
shareholder the amount of cash proceeds paid as a result of the Merger, if any,
and dividends paid to, and the tax withheld with respect to, such shareholder.
These reporting requirements apply regardless of whether withholding was reduced
by an applicable tax treaty or not required. Copies of these information returns
may be made available under the provisions of a specific treaty or agreement
with the tax authorities in the country in which a non-U.S. Shareholder resides.
In general, information reporting requirements may apply to dividend
distributions on Continued Common Stock or Surviving Corporation Common Stock,
or the proceeds of a sale, exchange, retraction or redemption of Continued
Common Stock or of Surviving Corporation Common Stock. A 31 percent
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backup withholding tax may apply to such payments unless the holder (i) is a
corporation, non-U.S. Shareholder or comes within certain other exempt
categories and, when required, demonstrates its exemption, or (ii) provides a
correct taxpayer identification number, certifies as to no loss of exemption
from backup withholding and otherwise complies with applicable requirements of
the backup withholding rules. A holder of Continued Common Stock or of Surviving
Corporation Common Stock who is required to provide its correct taxpayer
identification number and fails to do so may be subject to penalties imposed by
the IRS. Any amounts withheld under the backup withholding rules from a payment
to a holder will be allowed as a credit against such holder's United States
federal income tax, provided that the required information is furnished to the
IRS.
Proposed United States Treasury regulations that would be effective January
1, 1998, provide for (i) certain presumptions in determining whether a person is
subject to backup withholding and (ii) changes to the certification of taxpayer
status. There can be no assurance as to whether the proposed United States
Treasury regulations will be adopted or as to the provisions that they will
include if and when adopted in temporary or final form.
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
TO THE COMPANY OF THE CONTINUANCE AND THE MERGER
GENERAL
In the opinion of U.S. counsel, the following are the material United States
federal income tax considerations arising from and relating to the Continuance
and the Merger that are applicable to the Company. As described in more detail
in the preceding section, each of the Continuance and the Merger should qualify
as a "reorganization" within the meaning of Section 368(a) of the Code. This
conclusion is based on certain factual assumptions and reliance on
representations from Mercury, Parent, the Company and certain principal
shareholders of the Company, some of which are described above. See "Material
United States Federal Income Tax Consequences to Shareholders and Warrant
Holders of the Continuance and the Merger--Taxation of U.S. Shareholders." The
Code generally provides the acquired corporation (in this case, the Company)
with non-recognition treatment in a reorganization. In certain circumstances,
however, this general rule of non-recognition may not apply, as discussed
immediately below.
This opinion is based upon United States laws, regulations, rulings and
decisions currently in effect, all of which are subject to change, possibly with
retroactive effect. No advance income tax ruling has been sought or obtained
from the IRS regarding the tax consequences of any of the transactions described
herein. Accordingly, it is possible that the United States federal income tax
consequences to the Company of the Continuance and the Merger may differ from
those described below.
CONTINUANCE
A domestication transaction, such as the Continuance, is generally treated
for federal income tax purposes as: (1) a transfer by the Company of all of its
assets and liabilities to a new domestic corporation (the "Continued Company")
in exchange for all of the stock of the Continued Company (Continued Common
Stock) followed by (2) a liquidating distribution by the Company to its
shareholders of the Continued Common Stock received in exchange for the
Company's assets and liabilities. Generally, the Code provides non-recognition
treatment to the acquired corporation in such a transaction if it otherwise
meets the requirements of a reorganization. In certain circumstances occurring
in an international reorganization, however, the operation of certain rules
overrides the non-recognition treatment normally afforded to the acquired
corporation in a reorganization. Such rules may cause the Company to recognize
gain on the deemed transfer and/or distribution, as described below.
The deemed transfer by the Company of all of its assets and liabilities to
the Continued Company will be treated as a nontaxable event if the Continued
Common Stock received by the Company is a USRPI. If the Continued Common Stock
is not a USRPI, then the Company may be subject to United States federal
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income tax on the gain or loss resulting from the disposition of its assets that
are USRPIs. As discussed above, under "Material United States Federal Income Tax
Consequences to Shareholders and Warrant Holders--Taxation of Non-U.S.
Shareholders," U.S. Counsel has concluded that the Continued Common Stock will
be a USRPI; therefore, the deemed transfer should not result in United States
federal income taxation.
Even though the Company's deemed transfer to the Continued Company should be
a non-recognition event for United States federal income tax purposes, the
deemed liquidating distribution by the Company of the Continued Common Stock to
its shareholders may be a taxable event if the Continued Common Stock is a
USRPI. As discussed above, U.S. Counsel has concluded that the Continued Common
Stock will be a USRPI.
In general, notwithstanding any non-recognition provision of the Code, a
foreign corporation (such as the Company) recognizes gain on the distribution
(including a deemed distribution in liquidation or redemption) of a USRPI (such
as the Continued Common Stock) in an amount equal to the excess of the fair
market value of such USRPI (as of the time of the distribution) over such
corporation's adjusted basis in the USRPI, and the Code requires such
corporation to deduct and withhold a tax equal to 35 percent of the gain
recognized on such distribution. Although the issue is not free from doubt, U.S.
Counsel is of the opinion that the Company should not be required to recognize
gain on the distribution of the Continued Common Stock if the distributee (that
is, a shareholder of the Company) would be subject to United States tax on a
subsequent disposition of the Continued Common Stock, the Company met certain
filing requirements and either (a) the basis of the Continued Common Stock in
the hands of the distributee would be no greater than the adjusted basis of such
stock before the distribution, increased by the amount of gain (if any)
recognized by the Company or (b) the Company paid an amount equal to any taxes
and interest that the Code would have imposed on all persons who disposed of
interests in the Company after June 18, 1980, as if the Company were a domestic
corporation on the dates of such dispositions. The Company does not believe that
it can comply with the above-described requirements for non-recognition of gain.
U.S. Counsel is of the opinion that noncompliance with such requirements
will result in recognition of gain, if any, realized by the Company on the
deemed liquidating distribution. The amount of such gain would equal the excess,
if any, of the fair market value of the Continued Common Stock on the date of
the Continuance over the Company's basis in such stock. The Company's basis in
the Continued Common Stock will equal its basis in the assets deemed transferred
to the Continued Company reduced by the sum of the amount of the liabilities of
the Company deemed assumed by the Continued Company and the amount of
liabilities to which the assets of the Company deemed transferred are subject.
The Company's calculation of this basis, which U.S. Counsel assumes to be
correct without independent verification, exceeds the fair market value of the
Continued Common Stock, as determined by the Company based in part on a
valuation prepared by Rauscher Pierce Refsnes, Inc. Assuming that the tax basis
and fair market value determinations are correct, U.S. Counsel has concluded
that the Company will not realize a gain on the Continuance. There can be no
assurance, however, that the IRS will agree with the Company's calculation of
such tax basis or with the result of the valuation performed by Rauscher Pierce
Refsnes, Inc. or that the fair market value of such stock will not change
between the date of such valuation (March 26, 1997) and the date of the
Continuance. Any such disagreement or change could result in the Company owing
United States federal income tax as a result of the Continuance. See "Valuation
for Tax Purposes."
MERGER
As discussed in more detail above, in the opinion of U.S. Counsel, the
Merger should qualify as a reorganization under Section 368(a) of the Code.
Therefore, an acquired corporation, such as the Continued Company, generally
will recognize no gain or loss upon the transfer of all of its assets to the
acquiring corporation (in this case, Mercury) in exchange for stock of the
acquiring corporation (I.E., Surviving Corporation Common Stock) and the
assumption by the acquiring corporation of all of the Continued Company's
liabilities. Notwithstanding this general rule of non-recognition, in certain
types of
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reorganizations, the acquired corporation must recognize gain to the extent that
the sum of its liabilities assumed by the acquiring corporation, plus the amount
of liabilities to which the transferred assets are subject, exceeds the total
adjusted basis of the transferred assets. Although the issue is not free from
doubt, it is likely that the Merger will be subject to this rule regarding the
excess of liabilities over basis. The Company, however, has represented to U.S.
Counsel that the total adjusted basis of the Continued Company's assets
transferred in the Merger will exceed the sum of the liabilities assumed plus
the amount of liabilities to which the transferred assets are subject on the
date of the Merger. Based on the foregoing, U.S. Counsel has concluded that the
Company should recognize no gain or loss upon the transfer of its assets in the
Merger.
LIMITATION ON USE OF NET OPERATING LOSS CARRYFORWARDS
If a corporation undergoes an "ownership change" within the meaning of
Section 382 of the Code, the corporation's right to use its then-existing NOLs
(and certain other tax attributes), for both regular tax and alternative minimum
tax purposes, during each future year is limited to a percentage (currently
approximately 5.6 percent) of the fair market value of such corporation's stock
immediately before the ownership change (the "Section 382 Limitation"). In
general, there is an "ownership change" under Section 382 if over a three-year
period certain stockholders increase their percentage ownership of a corporation
(with NOLs) by more than 50 percentage points. To the extent that taxable income
exceeds the Section 382 Limitation in any year subsequent to the ownership
change, such excess income may not be offset by NOLs from years prior to the
ownership change. To the extent that the amount of taxable income in any
subsequent year is less than the Section 382 Limitation for such year, the
Section 382 Limitation for future years is correspondingly increased. There is
generally no restriction on the use of NOLs arising after the ownership change,
although Section 382 applies anew each time there is an ownership change.
As of December 31, 1996, the Company had approximately $10,500,000 of NOLs,
a significant portion of which may be subject to a Section 382 Limitation
resulting from ownership changes. The Company believes that an ownership change
with respect to the Company may occur as a result of the Merger. The resulting
Section 382 Limitation may limit the Surviving Corporation's ability to use the
Company's NOLs in future years, although the actual effect, if any, of such
limitation will depend on the Surviving Corporation's profitability in future
years. In connection with the transactions contemplated herein, U.S. Counsel
will not be rendering an opinion with regard to whether an ownership change with
respect to the Company will occur as a result of the Merger or the effect of any
such ownership change on the Surviving Corporation's ability to utilize the
Company's NOLs.
VALUATION FOR TAX PURPOSES
The Company retained Rauscher Pierce Refsnes, Inc. ("Rauscher Pierce") to
conduct a valuation of the 13,777,000 shares of Company Common Stock outstanding
on the date of the valuation (March 26, 1997). Management of the Company has
relied in part on the valuation in connection with forming its opinion as to
whether the Company will incur Canadian and/or United States income tax as a
result of the Continuance. See "Material Canadian Federal Income Tax
Consequences of the Continuance and the Merger" and "Material United States
Federal Income Tax Consequences to the Company of the Continuance and the
Merger." Rauscher Pierce was not retained for the purpose of opining as to
whether the consideration to be received in the Merger by the shareholders of
the Company is fair, from a financial point of view, to the shareholders. A
brief summary of the valuation performed by Rauscher Pierce is set forth below.
Rauscher Pierce, as part of its investment banking business, is continually
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, secondary distributions of
listed and unlisted securities, private placements and valuations for estate,
corporate and other purposes.
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In connection with its valuation, Rauscher Pierce reviewed certain publicly
available business and financial information relating to the Company. In
addition, Rauscher Pierce, among other things, also (i) reviewed the Annual
Reports to Shareholders (including Form 10-KSBs) for the five years ended
December 31, 1996; (ii) reviewed the Company's proved reserved and proved
developed reserves of oil and gas and the standardized measure of discounted
future net cash flows relating to proved oil and gas reserves for the year ended
January 1, 1997 estimated by Citadel Engineering Ltd., independent petroleum
consultants; (iii) discussed with certain members of senior mangement of the
Company the past and current business operations, financial condition and future
prospects of the Company; (iv) reviewed certain internal financial analyses and
forcasts of the Company prepared by management; (v) visited certain of the
Company's operations; (vi) reviewed historical market prices and trading volumes
for the Company's common stock; and (vii) compared certain financial and stock
market information for the Company with similar information for certain other
companies the securities of which are publicly traded. Rauscher Pierce also
considered such other information and conducted such other analyses as they
deemed appropriate under the circumstances.
In connection with its review, Rauscher Pierce relied upon and assumed the
accuracy and completeness of the financial and other information publicly
available or furnished to it by the Company and its representatives. Rauscher
Pierce did not independently verify the accuracy or completeness of such
information. Rauscher Pierce did not make or obtain any independent evaluations
or appraisals of any of the properties, assets or facilities of the Company.
With respect to the Company's financial projections, it assumed that they have
been reasonably prepared on a basis reflecting the best currently available
estimates and judgments of the Company's management as to the future financial
performance of the Company, and Rauscher Pierce expressed no opinion with
respect to such forecasts or the assumptions on which they were based.
Rauscher Pierce's valuation was based on market, economic and other
conditions as they existed and could be evaluated as of the date of Rauscher
Pierce's valuation. The market price of the Company Common Stock will fluctuate
with changes in prevailing market conditions, the business and prospect of the
Company and other factors which generally influence the prices of securities.
Therefore, the opinion of Rauscher Pierce is not a guarantee or representation
to the Company or any other party of the level at which the Company Common Stock
will actually trade at any time, nor does it obligate Rauscher Pierce to bid
for, purchase or recommend the purchase of the Company Common Stock at any
price.
In performing its valuation, Rauscher Pierce primarily considered factors
that would have been logical items to be considered by an actual buyer of
Company Common Stock and used as a guideline the considerations outlined and
described in the IRS's Revenue Ruling 59-60. In accordance with Revenue Ruling
59-60, Rauscher Pierce considered the factors described therein, which include
the nature and history of the business enterprise; the economic outlook in
general and the condition and outlook of the specific industry in particular;
the financial condition of the business and the book value of its stock; the
earning capacity of the business; the dividends paid or dividends-paying
capacity of the business; the nature and value of the tangible and intangible
assets of the business; stock restrictions that are binding in nature and impose
limitations on the transferability of ownership; prior sales of stock and the
relative size of the block to be valued; and the stock market price of companies
engaged in the same or similar lines of business having their stocks actively
traded in a free and open market Rauscher Pierce did not discuss or analyze in
its valuation aspects of United States or Canadian federal income taxation that
may be relevant to the Company or a particular shareholder in light of his or
her particular circumstances and income tax situation. While Rauscher Pierce
believes the publicly traded stock price of the Company Common Stock to be the
best indication of the fair market value, Rauscher Pierce determined the value
of the Company on a going-concern basis using other valuation approaches,
including capitalization of net income, cash flow and earnings before interest,
taxes, depreciation, depletion, amortization and exploration costs approaches,
with consideration given to the net asset value, as well as the book value, of
the Company.
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In applying these valuation approaches, Rauscher Pierce determined that an
appropriate capitalization rate or multiple to be applied to net earnings; cash
flow; earnings before interest, taxes, depreciation, depletion, amortization and
exploration costs; net asset value and book value should reflect all risks of
ownership of Company Common Stock and the associated risks of realizing the
income stream. Rauscher Pierce selected publicly traded companies they believed
to be comparable to the Company and used the stock price/earnings per share;
stock price/cash flow per share; debt free market value/earnings before
interest, taxes, depreciation, depletion, amortization and exploration costs;
stock price/net asset value per share; and stock price/book value per share
ratios or capitalization rates for each such comparable company as a guide in
selecting appropriate capitalization rates for the Company. Rauscher Pierce then
multiplied the Company's net earnings, cash flow, and earnings before interest,
taxes, depreciation, depletion, amortization and exploration costs for 1996 and
estimated for 1997, and the Company's net asset value and book value at December
31, 1996, by the relevant capitalization rates or multiples chosen to arrive at
an implied enterprise value for the Company. The Company's net debt (defined as
the value of total funded debt and preferred stock liquidation value less cash
and cash equivalents) was subtracted from the implied enterprise value
determined under certain approaches and the resulting amounts were divided by
the number of outstanding shares of Company Common Stock at the valuation date.
The results were compared to the Company's stock price at the valuation date.
The median value calculated by Rauscher Pierce under the various valuation
approaches described above was $0.94 per share of Company Common Stock. The
trading price of the Company Common Stock on the valuation date was also $0.94
per share. On the basis of these approaches, Rauscher Pierce concluded that as
of March 26, 1997, the fair market value of 13,777,000 shares of Company Common
Stock was $0.94 per share or $12,922,826.
Pursuant to the terms of the engagement letter between the Company and
Rauscher Pierce dated May 19, 1997, the Company has paid Rauscher Pierce a fee
of $35,000 and has agreed to reimburse Rauscher Pierce for its out-of-pocket
expenses, and to indemnify Rauscher Pierce and certain related persons against
certain liabilities relating to or arising out of its engagement, including
certain liabilities under United States federal securities laws.
DIFFERENCES BETWEEN THE DGCL AND THE ABCA
After the Continuance shareholders of the Company will become subject to the
DGCL; and upon effectiveness of the Merger, shareholders of the Company will
become shareholders of the Surviving Corporation and will remain subject to the
DGCL. The DGCL is similar in many ways to the ABCA, to which the Company is now
subject, but differs in several material respects, including the following:
VOTE ON EXTRAORDINARY CORPORATE TRANSACTIONS
Under the ABCA, continuances, sales of substantially all of the assets of a
corporation, amendments to the articles of incorporation and other extraordinary
corporate actions require authorization by a special resolution, meaning a
resolution passed by two-thirds of the votes cast by the shareholders who voted
in respect of that resolution, or by an instrument signed by all shareholders
entitled to vote on that resolution. Under the DGCL, mergers or consolidations
require the approval of the holders of a majority of the outstanding stock of
the corporation entitled to vote thereon. A sale, lease or exchange of all or
substantially all the property and assets of a corporation requires the approval
of the holders of a majority of the outstanding stock of the corporation
entitled to vote thereon, and an amendment to the certificate of incorporation
of a corporation generally requires the approval of the holders of a majority of
the outstanding stock entitled to vote thereon.
BYLAW AMENDMENTS
Under the ABCA, either shareholders or directors may make, amend or repeal
bylaws (subject to any restrictions under the articles, bylaws or any unanimous
shareholder agreement), but any such action of the directors with respect to the
bylaws are subject to confirmation by resolution passed by a majority of the
votes cast by the shareholders entitled to vote on that resolution. Under the
DGCL, after a corporation has
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received any payment for any of its stock, the shareholders entitled to vote
thereon, and where authorized by the certificate of incorporation, the
directors, may adopt, amend or repeal the bylaws. The Surviving Corporation
Certificate authorizes the Board of Directors of the Surviving Corporation to
adopt, amend or repeal the Surviving Corporation Bylaws.
REMOVAL OF DIRECTORS
Directors generally may be removed under the ABCA by ordinary resolution,
meaning a resolution passed by a majority of the votes cast by the shareholders
who voted in respect of that resolution. Directors generally may be removed,
with or without cause, under the DGCL by holders of a majority of shares then
entitled to vote at an election of directors. Directors of an ABCA corporation
may be removed at any time without cause; directors of a Delaware corporation
may be removed without cause unless the board is classified, in which case
directors may be removed for cause only, unless the certificate of incorporation
provides otherwise. The Surviving Corporation Bylaws provide that any director
may be removed, either with or without cause, by the affirmative vote of the
holders of record of a majority of the issued and outstanding stock entitled to
vote thereon. The Board of Directors of the Surviving Corporation will not be
classified.
QUORUM OF SHAREHOLDERS
A quorum for a shareholder meeting under the ABCA consists of the holders of
a majority of shares entitled to vote present in person or represented by proxy
at the meeting unless the bylaws provide otherwise. The bylaws of the Company
provide that holders of at least five percent of the outstanding Company Common
Stock represented in person or by proxy at a shareholder meeting will constitute
a quorum. Under the DGCL, a quorum consists of a majority of shares entitled to
vote present in person or represented by proxy unless the certificate of
incorporation or bylaws provide otherwise, but in no event may a quorum consist
of less than one-third of shares entitled to vote at the meeting. The Surviving
Corporation Bylaws state that in the absence of a quorum, the holders of a
majority of the shares present in person or represented by proxy and entitled to
vote may adjourn the meeting to another date and time.
NOTICE AND CALL OF SHAREHOLDER MEETINGS
Under the ABCA, shareholder meetings may be called by the board of
directors, who must call a meeting when so requested by holders of not less than
five percent of the issued shares that carry the right to vote, on not less than
21 days and not more than 50 days notice. Under the DGCL, unless the certificate
of incorporation or bylaws authorize additional persons, only the board of
directors may call a special shareholders' meeting. Under the DGCL, written
notice of any meeting of shareholders shall be given not less than 10 nor more
than 60 days before the date of the meeting to each shareholder entitled to vote
at such meeting (provided that a minimum of 20 days notice is required for a
merger). Under the Surviving Corporation Bylaws, special meetings of the
shareholders may be called by the Chairman of the Board of Directors, the
President or the Board of Directors, unless otherwise prescribed by statute.
SHAREHOLDER WRITTEN CONSENT IN LIEU OF MEETING
Under the ABCA, shareholder actions without a meeting may be taken by
resolution in writing signed by all of the shareholders entitled to vote. Under
the DGCL, shareholders may act by written consent without a meeting if holders
of outstanding stock, having not less than the minimum number of votes that
would be necessary to take such action at a meeting at which all shares entitled
to vote thereon were present and voting, execute a written consent providing for
such action unless otherwise provided in the corporation's certificate of
incorporation.
APPRAISAL RIGHTS
The DGCL grants appraisal rights in a merger or consolidation to holders of
stock, unless such stock is either (a) listed on a national securities exchange
or designated as a national market system security on
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an interdealer quotation system by the National Association of Securities
Dealers, Inc., (the "NASD") or (b) held of record by more than 2,000
shareholders; provided that such holders receive shares of stock of the
corporation surviving the merger or consolidation which is, on the effective
date of the merger or consolidation, either listed on a national securities
exchange or designated as a national market system security on an interdealer
quotation system by the NASD or held of record by more than 2,000 shareholders.
The ABCA does not contain any similar exemption from its provisions relating to
dissenters' rights of appraisal for amalgamation. Notwithstanding the foregoing,
appraisal rights are available under the DGCL for sales of all or substantially
all of the corporation's assets, any merger or consolidation in which the
corporation is a constituent corporation, or for amendments to its certificate
of incorporation if the certificate of incorporation so provides. The Surviving
Corporation Certificate will not provide such appraisal rights.
Shareholders are entitled to dissent and appraisal rights under the ABCA in
connection with any sale of substantially all the assets of a corporation
outside the ordinary course of business, for amendments to its articles of
incorporation such as those affecting share issuance, transferability or
ownership of shares of the class held by a dissenting shareholder, or amendments
to its articles of incorporation to add, change or remove any restriction on the
business of the corporation, or relating to amalgamation, or continuance. Also,
the ABCA provides rights of appraisal to shareholders of a class of shares
entitled to vote on proposals to amend the articles of incorporation to vary the
number of authorized shares of the class, effect a reclassification or
cancellation of shares of the class, affect restrictions, right or privileges
attached to such shares, create a new class of shares, or constrain the issue or
transfer of ownership of such shares. The Surviving Corporation Certificate will
contain provisions based on the ABCA that are designed to provide shareholders
of the Surviving Corporation with dissent and appraisal rights that would be
available if the Surviving Corporation was governed by the ABCA.
SHAREHOLDER REGISTER
A Delaware corporation's stock list showing the names, addresses and the
number of shares registered in the name of each shareholder may be inspected by
shareholders of record for any purpose germane to a shareholder's meeting. Under
the ABCA, shareholders and creditors, where the corporation is a distributing
corporation, may inspect the list of shareholders.
DIVIDENDS AND DISTRIBUTIONS
The DGCL and ABCA treat dividends similarly. The DGCL permits a corporation,
unless otherwise restricted by the certificate of incorporation, to declare and
pay dividends out of surplus or, if there is no surplus, out of the net profits
for the fiscal year in which the dividend is declared and/or the preceding
fiscal year (provided that the amount of capital of the corporation is not less
than the aggregate amount of the capital represented by the issued and
outstanding stock of all classes having a preference upon the distribution of
assets). In addition, the DGCL generally provides that a corporation may redeem
or repurchase its shares only if such redemption or repurchase would not impair
the capital of the corporation and the capital of the corporation is not
impaired.
Under the ABCA, a corporation may not declare or pay a dividend or redeem or
repurchase its shares if the corporation is, or would after the payment be,
unable to pay its liabilities as they become due, or if the realizable value of
the corporation's assets would thereby be less than the aggregate of its
liabilities and share capital of all classes.
DIRECTOR QUALIFICATIONS AND NUMBER
Under the ABCA, at least one-half of the total number of directors of an
Alberta corporation must be resident Canadians and directors generally must not
transact business at a meeting of directors unless at least one-half of
directors present are resident Canadians; provided, however, that if the
corporation's business is conducted largely outside of Canada, only one-third of
the total number of directors must be
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resident Canadians. The DGCL has no comparable requirements. The DGCL provides
that the number of directors shall be fixed by, or in the manner provided in,
the bylaws unless the certificate of incorporation fixes the number of
directors. The articles of incorporation of an ABCA corporation must specify the
number or a range for number of directors (minimum and maximum), and reductions
in size within that range can only be effected by the shareholders. The
Surviving Corporation Certificate will be silent as to the number of directors.
The Surviving Corporation Bylaws provide that the Board of Directors or the
holders of a majority of the outstanding Surviving Corporation Common Stock may
fix the number of directors to a number not less than one nor more than eight.
DIRECTOR LIABILITY
The DGCL permits the certificate of incorporation of a Delaware corporation
to contain a provision limiting the personal liability of a director to the
shareholders or the corporation for monetary damages for breach of fiduciary
duty, except (i) for any breach of a directors' duty of loyalty to the
corporation or its shareholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of laws, (iii) for
paying a dividend or approving a stock repurchase in violation of statutory
limitations, or (iv) for any transaction from which a director derived an
improper personal benefit. Such a provision does not affect a director's
liability under United States federal securities laws. The Surviving Corporation
Certificate contains such a provision.
Under the ABCA, directors of a corporation who vote for or consent to a
resolution authorizing the issue of shares for consideration other than money
are jointly and severally liable to the corporation to make good any amount by
which the consideration received is less than the fair equivalent of the money
that the corporation would have received if the shares had been issued for
money. Directors of a corporation who authorize an improper purchase, redemption
or other acquisition of shares, authorize improper payments of dividends,
commissions, financial assistance, indemnities or other improper payments to a
shareholder are jointly and severally liable to restore to the corporation any
amounts so distributed. In addition, directors of a corporation may be jointly
and severally liable to employees for certain wages and salaries payable to each
employee for services performed for the corporation. The ABCA has no provision
limiting directors' liability as does the DGCL.
The liability limitations included in the Surviving Corporation Certificate
in order to enhance the ability of the corporation to attract and retain highly
qualified people to serve as outside directors, and not in response to any
resignation, threat of resignation or refusal to serve by a director or
potential director of the Surviving Corporation. Furthermore, although the
effect of this provision of the DGCL on the insurance market generally will be
determined in the future based on the insurance industry experience, the Boards
of Directors of the Company and Mercury believe that the inclusion of this
provision in the Surviving Corporation Certificate should help to make
directors' liability insurance available to the Surviving Corporation in the
future. To the extent that such provision would eliminate litigation for which
the Surviving Corporation would otherwise be obligated to indemnify directors
for defense or other costs, the Surviving Corporation would avoid director
indemnification expense.
There has been no recent litigation involving the Board of Directors of the
Company or Mercury or any of its members which might have been effected had such
a limitation of liability provision been in effect. Further, to the best
knowledge of the Company or Mercury, there is no litigation pending or
threatened against any director of either corporation which would be effected by
such provision of the Surviving Corporation Certificate.
INDEMNIFICATION OF OFFICERS, DIRECTORS AND OTHERS
Both the DGCL and the ABCA authorize a corporation to indemnify its
directors, officers, employees and agents against all reasonable expenses
(including legal fees) and, provided that such individual (the "indemnitee")
acted in good faith and for a purpose which he or she reasonably believed to be
in, or not opposed to, the best interests of the corporation and, in the case of
a criminal proceeding, had reasonable
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grounds to believe his or her conduct was lawful. The DGCL authorizes a
corporation to indemnify its directors, officers, employees and agents against
all reasonable expenses (including legal fees) in connection with a lawsuit by
or in the right of the corporation to procure a judgment in its favor if such
person acted in good faith and in a manner reasonably believed to be in or not
opposed to the best interests of the corporation, except that no indemnification
may be paid as to any claim, issue or matter as to which such person has been
adjudged liable to the corporation unless it is determined by the court making
such adjudication of liability that, despite such finding, such person is fairly
and reasonably entitled for such expenses deemed proper. The DGCL contemplates
that the determination of whether the indemnitee is entitled to indemnification
is to be made in the specific case by a majority vote of the directors who are
not parties to such action, even though less than a quorum, by independent legal
counsel in a written opinion or by the shareholders, unless otherwise determined
by a court of competent jurisdiction, whereas the ABCA contemplates a
determination exclusively by a court. The Surviving Corporation Bylaws provide
for indemnification of directors, officers, employees or agents of the Surviving
Corporation as described above.
Under the DGCL and the ABCA, there is a right of mandatory indemnification
to the extent that an indemnitee is successful on the merits or otherwise in
defense of any action, suit or proceeding or any claim, issue or matter therein.
The DGCL allows for the advance payment of an indemnitee's expenses prior to the
final disposition of an action (as do the Surviving Corporation Bylaws),
provided that the indemnitee, if an officer or director of the corporation,
undertakes to repay any such amount advanced if it is later determined that the
indemnitee is not entitled to indemnification with regard to the action for
which his or her expenses were advanced, whereas the ABCA does not expressly
contemplate such an advance payment.
The DGCL and the ABCA permit a corporation to maintain insurance on behalf
of an indemnitee against any liability asserted against such indemnitee by
reason of his or her having been a director or officer, whether or not the
corporation would have the power to indemnify him or her against such
liabilities under the applicable provisions of the respective act. The ABCA
limits this in that insurance is not available where the liability relates to a
director's failure to act honestly and in good faith with a view to the best
interests of the corporation. In addition, the DGCL provides that the
indemnification rights provided by the provisions described above are not
exclusive of any rights to indemnification or advancement of expenses to which
such indemnitee may be entitled under any bylaw, agreement, vote of shareholders
or disinterested directors or otherwise, but the ABCA does not contemplate such
arrangements. The Surviving Corporation Bylaws match the provisions of the DGCL.
OPPRESSION RELIEF AND EQUITABLE REMEDIES
The ABCA creates a cause of action for "oppression" and "unfairness" with
respect to security holders, creditors, directors and officers, and vests the
courts with broad remedial powers in connection therewith; the DGCL contains no
comparable provision, and the scope of the equitable powers of the DGCL as
defined by existing case law is less certain than the scope of the powers in
Canada.
Certain differences between the powers granted to corporations under the
DGCL and the powers granted under the ABCA may make a Delaware corporation
somewhat less vulnerable than a corporation governed by the ABCA to hostile
takeover attempts. These differences include the absence of power of
shareholders to call special meetings unless expressly granted as discussed
above, the power of the directors to ascribe attributes to a series of preferred
stock authorized by the certificate of incorporation which give the series a
priority over another series within the class, and the restrictions on business
combinations discussed below. On the other hand, because of such provisions as
the power of shareholders to take action without a meeting by less than
unanimous consent, the DGCL may, under such circumstances, facilitate a hostile
takeover attempt.
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BUSINESS COMBINATIONS
Section 203 of the DGCL provides that any person who acquires 15 percent or
more of a corporation's voting stock (thereby becoming an "interested
shareholder") may not engage in certain "business combinations" with the target
corporation for a period of three years following the date the person became an
interested shareholder, unless (i) the board of directors of the corporation has
approved, prior to the date such person acquires 15 percent or more of the
voting stock, either the business combination or the transaction that resulted
in the person becoming an interested shareholder, (ii) upon consummation of the
transaction that resulted in the person becoming an interested shareholder, that
person owns at least 85 percent of the corporations' voting stock outstanding at
the time the transaction is commenced (excluding shares owned by persons who are
both directors and officers and shares owned by employee stock plans in which
participants do not have the right to determine confidentially whether shares
will be tendered in a tender or exchange offer), or (iii) the business
combination is approved by the board of directors and authorized by the
affirmative vote (at an annual or special meeting and not by written consent) of
at least two-thirds of the outstanding voting stock not owned by the interested
shareholder.
For the purpose of determining whether a person is the "owner" of 15 percent
or more of a corporation's voting stock for these purposes, ownership is defined
broadly to include the right, directly or indirectly, to acquire the stock or to
control the voting or disposition of the stock. A "business combination" is also
defined broadly to include (i) merger and sales or other dispositions of 10
percent or more of the assets of a corporation with or to an interested
shareholder, (ii) certain transactions resulting in the issuance or transfer to
the interested shareholder of any stock of the corporation or its subsidiaries,
(iii) certain transactions which would result in increasing the proportionate
share of the stock of a corporation or its subsidiaries owned by the interested
shareholder, and (iv) receipt by the interested shareholder of the benefit
(except proportionately as a shareholder) or any loans, advances, guarantees,
pledges or other financial benefits.
These restrictions placed on interested shareholders do not apply under
certain circumstances, including, but not limited to, the following: (i) if the
corporation's original certificate of incorporation contains a provision
expressly electing not to be governed by the relevant section of the DGCL, or
(ii) if the corporation, by action of its shareholders, adopts an amendment to
its bylaws or certificate of incorporation expressly electing not to be governed
by such section, provided that such an amendment is approved by the affirmative
vote of not less than a majority of the outstanding shares entitled to vote and
that such an amendment will not be effective until 12 months after its adoption
and will not apply to any business combination with a person who became an
interested shareholder at or prior to such adoption. Pursuant to the Surviving
Corporation Certificate, the Surviving Corporation has elected to be governed by
Section 203 of the DGCL. Even though Parent will beneficially own 39.2 percent
of the Surviving Corporation Common Stock after the Merger, it will not be
subject to the restrictions contained in Section 203 of the DGCL.
The ABCA does not contain a comparable provision with respect to business
combinations. However, policies of certain Canadian securities regulatory
authorities, including Policy 9.1 of the Ontario Securities Commission ("Policy
9.1"), contain requirements in connection with related party transactions.
Related party transaction means, generally, any transaction by which an issuer,
directly or indirectly, acquires or transfers an asset or acquires or issues
treasury securities or assumes or transfers a liability from or to, as the case
may be, a related party by any means in any one or any combination of
transactions. "Related Party" is defined in Policy 9.1 and includes directors,
senior officers and holders of at least 10 percent of the voting securities of
the issuer.
Policy 9.1 requires more detailed disclosure in the proxy material sent to
security holders in connection with a related party transaction, and, subject to
certain exceptions, the preparation of a form of valuation of the subject matter
of the related party transaction and any non-cash consideration offered therefor
and the inclusion of a summary of the valuation in the proxy material. Policy
9.1 requires, subject
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to certain exceptions, that the minority shareholders of the issuer separately
approve the transaction, either by simple majority or two-thirds of the votes
cast, depending on the circumstances.
STOCK EXCHANGE LISTING
Mercury has made application to have the Surviving Corporation Common Stock
listed on the American Stock Exchange upon completion of the Continuance and the
Merger. The acceptance of such application and the admission of the Surviving
Corporation Common Stock for trading on the American Stock Exchange is a
condition to consummation of the Merger.
CERTAIN UNITED STATES FEDERAL SECURITIES LAW CONSEQUENCES
All Surviving Corporation Common Stock received by Company shareholders in
the Merger will be freely transferable, except that shares of Surviving
Corporation Common Stock received by persons who are deemed to be "affiliates"
(as such term is defined under the Securities Act) of the Company or Mercury
prior to the Merger may be resold by them only in transactions permitted by the
resale provisions of Rule 145 promulgated under the Securities Act (or Rule 144
in the case of such persons who become affiliates of the Surviving Corporation)
or as otherwise permitted under the Securities Act. Persons who may be deemed to
be affiliates of the Company or Mercury or the Surviving Corporation generally
include individuals or entities that control, are controlled by, or are under
common control with, such party and may include certain officers and directors
of such party as well as principal shareholders of such party.
CANADIAN SECURITIES LAW CONSEQUENCES
Shares of Surviving Corporation Common Stock held by Canadian residents are
subject to any applicable resale restrictions imposed by the securities laws of
the province in which the shareholder is a resident. The Company is not aware of
any present provincial resale restrictions on the issued shares of the Company
Common Stock. Alberta securities law provides that shares issued upon conclusion
of a merger such as the Merger being contemplated will be issued to Alberta
residents free of any additional resale restrictions, unless such issuance is to
a "control person," as defined in the Securities Act (Alberta). The Company
believes that the securities laws of the other provinces of Canada are
substantially similar to those of Alberta.
After the Continuance and Merger, the Surviving Corporation will continue to
be a "reporting issuer" pursuant to the Securities Act (Alberta) and the similar
legislation of certain other provinces and, as such, will be required to file
with the securities commissions or other regulatory authorities annual and
quarterly financial statements, proxy circulars, material change reports and
other similar continuous disclosure documents, and will be required to send
quarterly and annual financial statements and its proxy circular to shareholders
resident in those provinces. The Surviving Corporation will fulfill these
obligations by filing or mailing, as the case may be, the corresponding
documents that it is required to prepare pursuant to applicable United States
securities legislation.
CERTAIN TERMS OF THE MERGER AGREEMENT
A summary of the material terms of the Merger Agreement is set forth below.
However, the following description does not purport to be complete and is
qualified in its entirety by reference to the Merger Agreement, a copy of which
is attached as Appendix "E" to this Proxy Statement/Prospectus and is
incorporated herein by reference.
EFFECTIVE TIME OF THE MERGER
The Merger Agreement provides that, as promptly as practicable after the
satisfaction or waiver of the conditions to effecting the Merger, the parties
shall cause the Merger to be consummated by filing a Certificate of Merger with
the Secretary of State of the State of Delaware, in such form as required by,
and
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executed in accordance with, the relevant provisions of the DGCL. It is
anticipated that, if the Merger Agreement is approved and adopted pursuant to
the execution of the Consent, and all other conditions to the Merger have been
satisfied or waived, the Effective Time will occur on or about .
MANNER AND BASIS OF CONVERTING SHARES OF COMPANY COMMON STOCK AND WARRANTS
At the Effective Time, each outstanding share of Company Common Stock will
be converted into one share of Surviving Corporation Common Stock.
As soon as practicable following the Effective Time, the Surviving
Corporation will mail to each record holder of Company Common Stock immediately
prior to the Effective Time, a letter of transmittal and other information
advising such holder of the consummation of the Merger and for use in exchanging
Company Common Stock certificates for certificates representing Surviving
Corporation Common Stock. After the Effective Time, there will be no further
registration of transfers on the stock transfer books of the Company of shares
of Company Common Stock that were outstanding immediately prior to the Effective
Time. SHARE CERTIFICATES SHOULD NOT BE SURRENDERED FOR EXCHANGE BY SHAREHOLDERS
OF THE COMPANY PRIOR TO THE EFFECTIVE TIME AND THE RECEIPT OF A LETTER OF
TRANSMITTAL.
Until surrendered and exchanged, each certificate previously evidencing
Company Common Stock shall represent solely the right to receive Surviving
Corporation Common Stock. Unless and until any such certificates shall be so
surrendered and exchanged, no dividends or other distributions payable to the
holders of record of Company Common Stock as of any time after the Effective
Time shall be paid to the holders of such certificates previously evidencing
Company Common Stock; provided, however, that upon any such surrender and
exchange of such certificates, there shall be paid to the record holders of the
certificates issued and exchange therefor (i) the amount, without interest
thereon, of dividends and other distributions, if any, with a record date after
the Effective Time theretofore paid with respect to such shares of Surviving
Corporation Common Stock, and (ii) at the appropriate payment date, the amount
of dividends or other distributions, if any, with a record date after the
Effective Time but prior to surrender and a payment date occurring after
surrender, payable with respect to such shares of Surviving Corporation Common
Stock. The Surviving Corporation intends to retain ChaseMellon Shareholder
Services L.L.C., Dallas, Texas, to serve as Exchange Agent for the purpose of
effecting the exchange of certificates representing Company Common Stock.
As of the Effective Time, the outstanding warrant to acquire shares of
Company Common Stock issued to Banque Paribas shall be converted into an
equivalent warrant to purchase shares of Surviving Corporation Common Stock.
MERCURY COMMON STOCK AND OPTIONS AND WARRANTS
As of the Effective Time, each outstanding share of Mercury Common Stock
shall remain outstanding as one share of Surviving Corporation Common Stock. In
addition, each outstanding option or warrant to acquire shares of Mercury Common
Stock shall remain outstanding as an option or warrant, as the case may be, to
acquire shares of Surviving Corporation Common Stock.
CONDITIONS TO THE MERGER
The respective obligations of the Company and Mercury to consummate the
Merger are subject to the satisfaction of the following conditions, any or all
of which may be waived in writing by Mercury and the Company, in whole or in
part, to the extent permitted by applicable law:
(i) the Merger Agreement and the Merger shall have been approved and
adopted by the requisite vote of the shareholders of the Company;
59
<PAGE>
(ii) the Continuance shall have been approved by the requisite vote of
the shareholders of the Company;
(iii) no governmental entity or agency or federal or state court shall
have issued any order which is in effect that would prevent consummation of
the Merger or make the Merger illegal;
(iv) the registration statement registering the Surviving Corporation
Common Stock to be issued pursuant to the Merger Agreement shall have been
declared effective by the SEC under the Securities Act, no stop order
suspending the effectiveness of such registration statement shall have been
issued by the SEC and no proceedings for that purpose shall have been
initiated by the SEC;
(v) all governmental approvals or permits shall have been obtained that
are required in order to comply with applicable laws, except such approvals
or permits that are not material;
(vi) the shares of Surviving Corporation Common Stock issuable in the
Merger shall have been listed on the American Stock Exchange;
(vii) all material approvals of private persons or corporations shall
have been obtained;
(viii) Parent and the Board of Directors of the Company shall have
received an opinion from an investment banking firm that the net fair market
value of the Company is less than $14,156,000 (See "Valuation for Tax
Purposes" and for an explanation of the reasons for such valuation, See
"Material United States Federal Income Tax Consequences to the Company of
the Continuance and the Merger");
(ix) the parties to the Merger Agreement shall have agreed to the form
of Surviving Corporation Certificate and Bylaws;
(x) the parties to the Merger Agreement shall have agreed to the form
and terms of the Management Agreement to be entered into between the
Surviving Corporation and Parent;
(xi) the Surviving Corporation shall have continued to guarantee $4.0
million of the NationsBank Debt or repaid in full $4.0 million of the
NationsBank Debt and that Parent be released from that amount of such debt;
and
(xii) the Board of Directors of Mercury shall be reconstituted so that it
will consist of three designees of the Company, three designees of Mercury
and the two independent persons elected to the Board of Directors of the
Company at the Special Meeting.
The obligation of the Company to effect the Merger is also subject to the
satisfaction at or prior to the Effective Time of the following conditions, any
or all of which may be waived in writing by the Company, in whole or in part:
(i) each of the representations and warranties of Mercury and Parent
contained in the Merger Agreement shall be true and accurate in all material
respects as of the Effective Time as though made as of the Effective Time;
(ii) Mercury and Parent shall have performed or complied in all material
respects with all agreements and covenants required by the Merger Agreement
to be performed or complied with by them on or prior to the Effective Time;
(iii) since the date of the Merger Agreement, there shall not have been
any material adverse change in the financial condition, results of
operations or business of Mercury, and none of the properties or the
business of Mercury shall have suffered any material damage, destruction or
loss; and
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<PAGE>
(iv) the Company shall have received the proceeds of a financing
necessary to consummate the transactions contemplated by the Merger
Agreement and to pay all fees and expenses incurred in connection therewith.
The obligations of Mercury and Parent to effect the Merger are also subject
to the satisfaction at or prior to the Effective Time of the following
conditions, any or all of which may be waived in writing by Parent, in whole or
in part:
(i) each of the representations and warranties of the Company contained
in the Merger Agreement shall be true and accurate in all material respects
as of the Effective Time as though made as of the Effective Time;
(ii) the Company shall have performed or complied in all material
respects with all agreements and covenants required by the Merger Agreement
to be performed or complied with by it on or prior to the Effective Time;
(iii) Since the date of the Merger Agreement, there shall not have been
any material adverse change in the financial condition, results of
operations or business of the Company, and none of the properties or the
business of the Company shall have suffered any material damage, destruction
or loss;
(iv) the Company shall have received the proceeds of a financing
necessary to consummate the transactions contemplated by the Merger
Agreement and to pay all fees and expenses incurred in connection therewith;
and
(v) Otto J. Buis, Patrick M. Montalban, Steven M. Morris, D. Randall
Kent and W. Yandell Rogers, III shall be elected to the Board of Directors
of the Company at the Special Meeting.
There can be no assurance that all of the conditions to the Merger will be
satisfied.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties of the
Company, and Mercury and Parent relating to, among other things, (i) the
organization and similar corporate matters of each, (ii) the capitalization of
each, (iii) the authorization, execution, delivery, performance and
enforceability of the Merger Agreement and related matters, and the absence of
conflicts, violations and defaults under their respective charters and bylaws
and certain other agreements and documents, (iv) compliance with applicable
laws, (v) the documents and reports filed by the Company with the Commission and
the accuracy of the information contained therein, (vi) the absence of certain
changes and events, (vii) litigation, (viii) employee benefit and labor matters,
(ix) taxes and matters relating to a tax-free reorganization, (x) environmental
matters, (xi) the properties of each, (xii) the conduct of the business of each,
(xiii) the vote required to approve the Continuance and the Merger Agreement,
(xiv) brokers, (xv) the financial arrangements of each necessary to own their
assets and conduct their business, and (xvi) the accuracy of certain information
provided.
CERTAIN COVENANTS; CONDUCT OF BUSINESS PRIOR TO THE MERGER
Each of the Company on the one hand, and Mercury and Parent on the other
hand, has agreed that, prior to the Effective Time, unless expressly
contemplated by the Merger Agreement or otherwise consented to in writing by the
other, the Company and Mercury will each (i) operate its business in the usual
and ordinary course consistent with past practices; (ii) use all reasonable
efforts to preserve substantially intact its business organization, maintain its
material rights and franchises, retain the services of its respective officers
and key employees and preserve the goodwill of those having business
relationships with it; (iii) maintain and keep its properties and assets in as
good repair and condition as at present,
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<PAGE>
ordinary wear and tear excepted; and (iv) maintain in full force and effect
insurance comparable in amount and scope of coverage to that currently
maintained.
Each of the Company and Parent has agreed that, prior to the Effective Time,
unless expressly contemplated by the Merger Agreement or otherwise consented to
in writing by the other, neither the Company nor Mercury will do, nor will it
permit any of its subsidiaries to do, any of the following: (i) increase the
compensation or fringe benefits of any director, officer or employee; (ii) enter
into, adopt, amend or terminate any employment or severance agreement with, any
director, officer or employee, or any employee benefit plan or arrangement;
(iii) declare or pay any dividend on, or make any other distribution in respect
of, outstanding shares of capital stock; (iv) redeem, purchase or otherwise
acquire any shares of its stock or any securities or obligations convertible
into or exchangeable for any shares of its capital stock, or any options,
warrants or conversion or other rights to acquire any shares of its capital
stock or any such securities or obligations; (v) issue, sell, pledge, dispose or
encumber any of its capital stock, except pursuant to the exercise of
outstanding warrants or options; or (vi) agree in writing or otherwise to do any
of the foregoing.
In addition, both the Company and Mercury agreed (i) not to make any capital
expenditure exceeding $10,000 in the case of Mercury and $100,000 in the case of
the Company without the consent of the other; (ii) to perform their agreements
with others; (iii) to each provide the other reasonable access to its properties
and records; (iv) to prudently operate their respective properties; (v) to
refrain from transferring any properties, with certain exceptions (such as the
sale of production in the ordinary course of business); (vi) to discharge all
expenses and liabilities relating to the ownership or operation of its
properties; (vii) to refrain from taking more production from a property than it
is entitled to; and (viii) to refrain from taking any action that would cause
its representations and warranties contained in the Merger Agreement to become
untrue or that would prevent the conditions to closing set forth in the Merger
Agreement from being satisfied.
Each of Mercury and the Company also agreed (i) to cooperate in the
preparation and filing of this Proxy Statement/Prospectus; (ii) to file a
registration statement with the SEC, in the case of the Company for the purpose
of registering the shares of stock issuable in the Continuance, and in the case
of Mercury to register the shares of stock issuable in the Merger; (iii) to
indemnify the other for claims arising as a result of a breach by it of any of
its representations or agreements set forth in the Merger Agreement. The Company
agreed to pursue the acceptance of Mercury's application for listing of the
Surviving Corporation Common Stock on the American Stock Exchange and to use its
reasonable best efforts to obtain financing necessary to consummate the
transactions contemplated under the Merger Agreement and to pay all fees and
expenses incurred in connection therewith.
The Merger Agreement provides that nothing in the Merger Agreement prevents
the members of the Board of Directors of the Company, in the exercise of their
fiduciary duties and after consulting with counsel, from considering,
negotiating and approving an unsolicited bona fide proposal that the Board of
Directors of the Company determines in good faith, after consultation with its
financial advisors, may result in a transaction more favorable to the
shareholders of the Company than the transactions contemplated by the Merger
Agreement. If the Board of Directors of the Company receives a request for
confidential information by a potential bidder for the Company or its assets and
the Board of Directors of the Company determines, after consultation with
counsel, that the Board of Directors has a fiduciary obligation to provide such
information to a potential bidder, then the Company may, subject to a
confidentiality agreement substantially similar to that previously executed by
Parent, provide such potential bidder with access to information regarding the
Company. The Company will promptly notify Parent, orally and in writing, if any
such proposal or offer is made and will, in any such notice, indicate the
identity and terms and conditions of any proposal or offer, or any such inquiry
or contact. The Company will keep Parent advised of the progress and status of
any such proposals or offers. The obligation of the Board of Directors of the
Company to convene a meeting of its shareholders and to recommend the adoption
and approval of the Merger Agreement to the shareholders of the Company pursuant
to the Merger
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<PAGE>
Agreement will be subject to the fiduciary duties of the directors, and nothing
contained in the Merger Agreement will prevent the Board of Directors of the
Company from approving or recommending to the shareholders of the Company any
unsolicited offer or proposal by a third party if required in the exercise of
their fiduciary duties.
EFFECT OF THE MERGER
Once the Merger is consummated, the Company will cease to exist as a
corporation, and Mercury, as the Surviving Corporation, will succeed to all of
the assets, rights, powers, privileges and debts and obligations of the Company.
Pursuant to the Merger Agreement, the Surviving Corporation Certificate and the
Surviving Corporation Bylaws will be the certificate of incorporation and bylaws
of the Surviving Corporation until amended as provided therein and pursuant to
the DGCL and the name of the Surviving Corporation will be changed to MSR
Exploration Ltd.
TERMINATION
GENERAL. The Merger Agreement may be terminated and the Merger and the
other transactions contemplated thereby may be abandoned, at any time prior to
the Effective Time, whether prior to or after approval by the shareholders of
the Company or the shareholders of Mercury, under the following circumstances:
(i) by the mutual consent of the Company and Parent; (ii) by either the Company
or Parent if the Merger has not been consummated by December 31, 1997; (iii) by
either the Company or Parent if the conditions to closing are not satisfied;
(iv) by the Company if (A) since the date of the Merger Agreement there has been
a material adverse change in the results of operations, financial condition or
business of Mercury or (B) there has been a material breach of any
representation, warranty or covenant by Parent that is not remedied within five
business days of notice of such breach; (v) by Parent if (A) since the date of
the Merger Agreement there has been a material adverse change in the results of
operations, financial condition or business of the Company and its subsidiaries,
taken as a whole, or (B) there has been a material breach of any representation,
warranty or covenant by the Company that is not remedied within five business
days of notice of such breach; (vi) by the Company if the Board of Directors of
the Company shall have recommended to the shareholders of the Company a
transaction as an alternative to the Merger (an "Alternative Transaction")
pursuant to the provisions of the Merger Agreement described above under
"Certain Covenants; Conduct of Business Prior to the Merger"; or (vii) by Parent
at any time following the public announcement of such recommendation and
approval of such an alternative transaction.
TERMINATION FEE. In the event that either the Company or Parent terminates
the Merger Agreement because the Board of Directors of the Company has
recommended an Alternative Transaction to the shareholders of the Company and
the shareholders have approved such Alternative Transaction, then the Company
will pay to Parent the sum of $500,000 for its costs and expenses and loss of
opportunity cost.
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<PAGE>
THE SPECIAL MEETING AND THE CONSENT
DATE, TIME AND PLACE OF THE SPECIAL MEETING
The Special Meeting will be held on , 1997 at the offices of
, Fort Worth, Texas , commencing at :00
.m. local time.
TIME OF EXECUTION OF CONSENT
The Consent will be executed as soon as practicable after the Continuance is
completed.
PURPOSES OF THE SPECIAL MEETING
The purpose of the Special Meeting is to consider and vote upon (i) the
election of directors of the Company, (ii) a proposal to approve the
Continuance; and (iii) such other matters as may properly be brought before the
Special Meeting.
PURPOSES OF THE CONSENT
The purpose of the Consent is to adopt and approve the Merger Agreement and
the Merger.
RECORD DATE AND OUTSTANDING SHARES
FOR THE SPECIAL MEETING. Each person who was the holder of record of shares
of Company Common Stock at the close of business on the Meeting Record Date is
entitled to notice of, and to attend and vote at, the Special Meeting and any
adjournment or postponement thereof, provided that to the extent a person has
transferred any shares of Company Common Stock after the Record Date and the
transferee of such shares establishes that such transferee owns such shares and
demands not later than 10 days before the Special Meeting to be included in the
list of shareholders eligible to vote at the Special Meeting, such transferee
will be entitled to vote such shares at the Special Meeting.
On the Meeting Record Date, there were approximately [1,432] holders of
record of the 13,777,014 shares of Company Common Stock then issued and
outstanding. Each share of Company Common Stock entitles the holder thereof to
one vote on each matter submitted for shareholder approval. See "Beneficial
Ownership of Securities" for information regarding persons known to the
management of the Company to be the beneficial owners of more than five percent
of the outstanding Company Common Stock. A complete list of registered
shareholders entitled to notice of, and to vote at, the Meeting will be
available for examination at the offices of the Company, 500 Main Street, Suite
210, Fort Worth, Texas 76102, during normal business hours by any shareholder,
for any purpose germane to the Special Meeting for a period of 10 days prior
thereto.
FOR THE CONSENT. The record date with respect to shareholders entitled to
be included in the Consent to the Merger (the "Merger Record Date") will be
deemed to be the date the Consent is presented to the Company. This date will be
as soon as practicable after the Continuance becomes effective.
VOTING AND REVOCATION OF PROXIES
FOR USE AT THE SPECIAL MEETING. All properly executed proxies that are not
revoked will be voted at the Special Meeting in accordance with the instructions
contained therein. If a holder of Company Common Stock executes and returns a
proxy for the Special Meeting and does not specify otherwise, the shares
represented by such proxy will be voted "for" election to the Board of Directors
of the Company of the persons nominated by the Board of Directors and "for"
approval the Continuance. A shareholder of the Company who has executed and
returned a proxy for the Special Meeting may revoke it at any time before it is
voted at the Special Meeting by (i) executing and returning a proxy bearing a
later date, (ii) filing
64
<PAGE>
written notice of such revocation with the Secretary of the Company stating that
the proxy is revoked, or (iii) attending the Special Meeting and voting in
person.
FOR USE IN CONNECTION WITH THE CONSENT. A proxy from a shareholder for the
Consent in lieu of meeting received by management will be exercised in the
manner specified in the proxy by such shareholder, unless authority to exercise
the proxy is withheld or the proxy is left blank. If the proxy is left blank,
the proxies named in the proxy for the Consent in lieu of meeting will exercise
the authority with respect to the shares represented by such proxy by executing
a Consent "for" the Merger. Because the Consent is effective only if executed on
behalf of a majority of the total number of shares of Company Common Stock
outstanding, the failure to convey a proxy to express Consent or the withholding
of authority to express Consent has the same effect as a vote "against" the
Merger.
VOTE REQUIRED
TO ELECT DIRECTORS AND APPROVE THE CONTINUANCE AT THE SPECIAL MEETING. The
Company's current Bylaws provide that the presence at the Meeting, in person or
by proxy, of the holders of five percent of the outstanding shares of Company
Common Stock entitled to vote thereat will constitute a quorum for the
transaction of business. On the Meeting Record Date, there were 13,777,014
shares of Company Common Stock outstanding and entitled to vote at the Special
Meeting. The election to the Board of Directors of the Company of each nominee
for director requires the affirmative vote of a majority of the shares of
Company Common Stock represented in person or by proxy at the Special Meeting.
Approval of the Continuance requires the affirmative vote of at least 66 2/3
percent of the votes cast on the proposal.
TO APPROVE THE MERGER BY EXECUTION OF THE CONSENT. After the Continuance
becomes effective, pursuant to the DGCL, the Consent will be executed on behalf
of those shareholders who (i) have delivered proxies marked in favor of or not
against the Merger and (ii) are shareholders of the Company on the Merger Record
Date. Since a shareholder must hold shares of Continued Common Stock to be voted
in his name under the Consent on the date the Consent is executed, no proxy with
respect to the Consent will be effective if the holder executing the proxy is no
longer a holder of record at the time the Consent is executed. Accordingly,
holders of Company Common Stock who wish to have their shares represented in the
execution of the Consent to the Merger should refrain from selling or
transferring any shares of Company Common Stock or Continued Common Stock until
after the Merger becomes effective. Approval and adoption of the Merger and the
Merger Agreement requires the affirmative vote of the holders of at least a
majority of the Continued Common Stock outstanding on the Merger Record Date.
SOLICITATION OF PROXIES
In addition to solicitation by mail, the directors, officers, employees and
agents of the Company may solicit proxies from the shareholders of the Company
by personal interview, telephone, telegram or otherwise. The Company will bear
the costs of the solicitation of proxies from its shareholders. Arrangements
will also be made with brokerage firms and other custodians, nominees and
fiduciaries who hold of record voting securities of the Company for the
forwarding of solicitation materials to the beneficial owners thereof. The
Company will reimburse such brokers, custodians, nominees and fiduciaries for
the reasonable out-of-pocket expenses incurred by them in connection therewith.
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<PAGE>
PRICE RANGE OF COMPANY COMMON STOCK AND DIVIDEND POLICY
The Company Common Stock is traded in the United States on the American
Stock Exchange under the symbol "MSR". On March 26, 1997, the last trading day
prior to the public announcement of the Merger by the Company, the closing sales
price for Company Common Stock was $0.9375. On September 10, 1997, the closing
sales price for Company Common Stock was $0.81. The Mercury Common Stock has not
been registered with the Securities and Exchange Commission. As a result, no
public market exists for the Mercury Common Stock. The following table sets
forth, for the calendar periods indicated through September 11, 1997, the range
of high and low prices for the Company Common Stock as reported by the American
Stock Exchange.
<TABLE>
<CAPTION>
1997 1996 1995
---------------------- ---------------------- ----------------------
HIGH LOW HIGH LOW HIGH LOW
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
First Quarter............................ $ 11/16 $13/16 $ 11/4 $13/16 $ 2 $ 13/8
Second Quarter........................... 11/8 15/16 11/16 3/4 15/8 13/16
Third Quarter............................ 11/8 3/4 1 3/4 13/8 11/8
Fourth Quarter........................... 15/16 11/16 17/16 11/16
</TABLE>
As of August 31, 1997, the number of registered holders of the Company
Common Stock was 1,432. As of August 31, 1997, the number of registered holders
of Mercury Common Stock was seven.
Neither the Company nor Mercury has ever paid any cash dividends and the
Company and Mercury expect that the Surviving Corporation will retain earnings
in order to finance its operations and will not pay any dividends for the
foreseeable future. The Board of Directors of the Surviving Corporation may
review dividend policy from time to time in light of, among other things,
earnings and financial condition and limitations imposed by debt instruments.
There are no limitations under Canadian law or the Company's charter
documents on the right of non-Canadians to hold or vote securities of the
Company. There are no restrictions on the export or import of capital which
affect the remittance of dividends, interest or other payments to nonresident
holders of the Company's securities.
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<PAGE>
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS AND
BALANCE SHEET OF THE SURVIVING CORPORATION
The following pro forma consolidated statements of operations for the year
ended December 31, 1996 and six months ended June 30, 1997 combine the
historical information of the Company adjusted to give effect to the Merger and
the related pro forma adjustments which are based on estimates and assumptions
explained in further detail in Note 1 to these statements. The pro forma
statements of operations for the year ended December 31, 1996 and for the six
months ended June 30, 1997 reflect the consolidated operations of the Company
and Mercury as if the Merger had been consummated as of January 1, 1996. The pro
forma balance sheet as of June 30, 1997 is presented as if the Merger had been
consummated on that date. All of the presented pro forma statements are in U.S.
dollars.
The Merger will be accounted for as a purchase under the provisions of
Accounting Principal Board Opinion Number 16 ("APB 16") Accounting for Business
Combinations. Under APB 16, Mercury will be considered the "accounting acquirer"
since the former Mercury shareholders will control the Surviving Corporation
through their holdings of approximately 47 percent of the combined outstanding
shares of Surviving Corporation Common Stock, will have control over the
executive committee of the Board of Directors of the Surviving Corporation and
will have warrants to acquire 11 million additional shares of Surviving
Corporation Common Stock. Accordingly, the Company's net assets will be revalued
based upon the value of Company Common Stock based on the average closing price
for three trading days prior to the date the Merger was announced, such date and
the three trading days following such date, and Mercury's net assets will be
based upon their historical cost.
The statements of operations and balance sheet are provided for comparative
purposes only and should be read in conjunction with the historical consolidated
financial statements of the Company and historical statements of revenues and
direct operating expenses of Mercury included elsewhere in this Proxy
Statement/Joint Prospectus. The pro forma information presented is not
necessarily indicative of the combined financial results as they may be in the
future or as they might have been for the periods indicated had the Merger been
consummated as of January 1, 1996.
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<PAGE>
MSR EXPLORATION LTD. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MSR
HISTORICAL MERCURY(A) ADJUSTMENTS PRO FORMA
----------- ----------- ------------- ----------- PRODUCTION AS ADJUSTED
PAYMENT PRO FORMA
ADJUSTMENTS -----------
----------- (NOTE 2)
(NOTE 2)
<S> <C> <C> <C> <C> <C> <C>
REVENUES
Oil sales (Note 2.)............... $ 1,113 $ 1,124 $ 2,237 $ (1,124) $ 1,113
Gas sales......................... 968 106 1,074 1,074
Interest and other income......... 54 54 54
----------- ----------- ----- ----------- ----------- -----------
Total revenues................ 2,135 1,230 0 3,365 (1,124) 2,241
----------- ----------- ----- ----------- ----------- -----------
EXPENSES
Operating expenses................ 778 634 1,412 (634) 778
Production taxes.................. 132 112 244 (100) 144
Depletion and depreciation........ 721 $ 140(b) 861 (261) 600
General and administrative........ 509 0(c) 509 509
Interest.......................... 365 188(d) 553 553
----------- ----------- ----- ----------- ----------- -----------
Total expenses................ 2,505 746 328 3,579 (995) 2,584
----------- ----------- ----- ----------- ----------- -----------
Income (loss) before income taxes... (370) 484 (328) (214) (129) (343)
Income tax benefit (expense)........ 126 (157) 104(e) 73 44 117
----------- ----------- ----- ----------- ----------- -----------
Net income (loss)................... $ (244) $ 327 $ (224) $ (141) $ (85) $ (226)
----------- ----------- ----- ----------- ----------- -----------
----------- ----------- ----- ----------- ----------- -----------
Per share net income (loss)......... $ (0.02) $ 0.03 $ (0.01) $ (0.01)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average number of shares
outstanding....................... 13,777 12,000 25,777 25,777
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
68
<PAGE>
MSR EXPLORATION LTD. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MSR
HISTORICAL MERCURY(A) ADJUSTMENTS PRO FORMA
----------- ----------- ------------- ----------- PRODUCTION AS ADJUSTED
PAYMENT PRO FORMA
ADJUSTMENTS -----------
------------- (NOTE 2)
(NOTE 2)
<S> <C> <C> <C> <C> <C> <C>
REVENUES
Oil sales (Note 2.)............... $ 2,364 $ 2,544 $ 4,908 $ (689) $ 4,219
Gas sales......................... 1,953 215 2,168 2,168
Interest and other income......... 59 59 59
----------- ----------- ----- ----------- ----- -----------
Total revenues................ 4,376 2,759 7,135 (689) 6,446
----------- ----------- ----- ----------- ----- -----------
EXPENSES
Operating expenses................ 1,435 1,297 2,732 (243) 2,489
Production taxes.................. 312 264 576 (65) 511
Depletion and depreciation........ 1,378 $ 297(b) 1,675 (134) 1,541
General and administrative........ 1,018 0(c) 1,018 1,018
Interest.......................... 733 374(d) 1,107 1,107
----------- ----------- ----- ----------- ----- -----------
Total expenses................ 4,876 1,561 671 7,108 (442) 6,666
----------- ----------- ----- ----------- ----- -----------
Income (loss) before income taxes... (500) 1,198 (671) 27 (247) (220)
Income tax benefit (expense)........ 170 (407) 228(e) (9) 84 75
----------- ----------- ----- ----------- ----- -----------
Net income (loss)................... $ (330) $ 791 $ (443) $ 18 $ (163) $ (145)
----------- ----------- ----- ----------- ----- -----------
----------- ----------- ----- ----------- ----- -----------
Per share net income (loss)......... $ (0.02) $ 0.07 $ 0.00 $ (0.01)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average number of shares
outstanding....................... 13,773 12,000 25,773 25,773
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
69
<PAGE>
MSR EXPLORATION LTD. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
MSR COMPANY
HISTORICAL MERCURY(F) ADJUSTMENTS PRO FORMA
---------- ---------- ---------------- ----------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash, cash equivalents and time deposits... $ 344 $ 344
Accounts receivable........................ 491 $ 89 580
Inventories................................ 141 78 219
Prepaid expenses........................... 39 39
---------- ---------- -------- ----------
Total current assets................... 1,015 167 1,182
---------- ---------- -------- ----------
Properties, plant and equipment--net (full
cost)...................................... 28,183 4,181 $ (9,860)(g)(h) 22,504
Other assets................................. 627 50 (186)(h) 491
---------- ---------- -------- ----------
$29,825 $4,398 $(10,046) $24,177
---------- ---------- -------- ----------
---------- ---------- -------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt.......... $ 839 $ 839
Accounts payable........................... 157 $ 264(h) 421
Accrued liabilities........................ 496 $ 95 591
---------- ---------- -------- ----------
Total current liabilities.............. 1,492 $ 95 1,851
---------- ---------- -------- ----------
Long-term debt............................... 5,435 4,000 0(i) 9,435
Deferred income taxes........................ 3,706 (3,706)(g)(h) 0
Stockholders' equity:
Preferred stock, par value $0.01
Authorized 10,000,000 shares
Issued and outstanding--none............. 0 0
Common stock, without par value
Authorized 20,000,000 shares,
Issued and outstanding 13,777,014........ 17,861 (17,861)(g)(h) 0
Common stock, par value $0.01
Authorized 50,000,000 shares,
Issued and outstanding 12,000,000
(25,777,014 pro forma)................. 120 138(g)(h) 258
Additional paid in capital................. 272 12,574(g)(h) 12,846
Foreign currency translation adjustment.... (124) (124)
---------- ---------- -------- ----------
Retained earnings (deficit)................ 1,455 (89) 1,455(g)(h) (89)
---------- ---------- -------- ----------
Total stockholders' equity............. 19,192 303 (6,604) 12,891
---------- ---------- -------- ----------
$29,825 $4,398 $(10,046) $24,177
---------- ---------- -------- ----------
---------- ---------- -------- ----------
</TABLE>
The accompanying notes are an integral part of these statements.
70
<PAGE>
MSR EXPLORATION LTD. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
AND BALANCE SHEET
1. PRO FORMA ADJUSTMENTS
The accompanying unaudited pro forma consolidated statements of operations
reflect the following adjustments:
(a) The information reflected as "Mercury" pertains only to certain
producing working interest properties in Montana included in the Merger.
Mercury has approximately 75 producing wells. The Merger is subject to
Company shareholder approval.
(b) Depreciation, depletion and amortization expense (DD&A) for Mercury
has been computed using the units of production method for the Mercury
Properties, which amounts to $535,000 for 1996 and $285,000 for the six
months ended June 30, 1997. In addition, DD&A expense for the Company has
been recomputed based on the revaluation of the Company's properties (see
(g) below). The Company's DD&A expense was reduced $238,000 for 1996 and
$145,000 for the six months ended June 30, 1997.
(c) The general and administrative expenses of the combined entities are
not anticipated to increase. By bringing together both the Company's and
Mercury's Fort Worth, Texas offices and the Cut Bank, Montana offices,
general and administrative expenses are anticipated to be reduced by
approximately 25 percent.
(d) Adjustments were made to interest expense for the period at the
Company's present average interest rate of 9.35 percent, to reflect the
assumption of $4,000,000 of Mercury bank debt.
(e) Income taxes or tax benefits were computed on a pro forma basis
using the Company's effective rate of 34 percent.
The accompanying unaudited pro forma balance sheet reflects the
following adjustments:
(f) The information reflected as Mercury is the book basis balance sheet
at June 30, 1997 of Mercury. In March 1997, Parent transferred its Montana
oil and gas properties at its amortized cost basis to Mercury.
(g) The Company's net assets have been revalued based on the market
value of its common stock. The market value used in the valuation was based
on the average closing price for the Company's common stock for the three
trading days prior to the date the Merger Agreement was announced, such date
and the three trading days after such date. This revaluation of the
Company's net assets is the result of Mercury being considered the
accounting acquirer under the provisions of APB 16. As a result of the
revaluation, the carrying value of the Company property, plant and equipment
and deferred income taxes have been adjusted. Pro forma deferred income
taxes have been determined based on the differences between the book and tax
basis of net assets to be contributed by the Company. The revaluation of the
Company's assets, as a result of the purchase price allocation, has resulted
in a reduction in the book basis of its net assets, and, accordingly, a
reduction in the deferred tax liability relating to the basis differences.
Net operating loss carryforwards have not been eliminated, however, their
use in any one year has been restricted. See "Material United States Federal
Income Tax Consequences to the Company of the Continuance and the
Merger--Limitation on Use of Net Operating Loss Carryforwards."
(h) To eliminate the common stock and retained earnings of the Company
and reflect the adjusted value of the Company's shares, net of Merger costs
of $450,000. The following table
71
<PAGE>
MSR EXPLORATION LTD. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
AND BALANCE SHEET (CONTINUED)
reconciles the pro forma adjustments to stockholders' equity, deferred
income taxes and property, plant and equipment.
<TABLE>
<CAPTION>
$000'S
---------
<S> <C>
Stockholders' equity--MSR...................................................................... 19,192
Add items not changing
Foreign currency translation adjustment.................................................... 124
---------
Subtotal..................................................................................... 19,316
Less value of MSR equity (13,777,014 shares at $.955 per share).............................. 13,162
---------
Estimated transaction costs.................................................................. (450)
---------
Adjusted value of MSR equity............................................................... 12,712
---------
Total adjustment to equity..................................................................... 6,604
---------
---------
Other asset-transaction costs incurred....................................................... (186)
Estimated additional costs payable........................................................... (264)
Adjustment to deferred income taxes.......................................................... 3,706
---------
Total adjustment to property, plant and equipment.............................................. 9,860
---------
---------
</TABLE>
(i) Mercury's long-term debt consists of $4,000,000 of debt of Parent
guaranteed by Mercury. It is anticipated that the Surviving Corporation will
repay such debt utilizing borrowings by the Surviving Corporation under the
Company's present credit facility or a new revolving credit facility of
$4,000,000 bearing approximately the same interest rate as such debt.
2. FORWARD SALE OF OIL REVENUES.
Mercury's oil revenues and associated operating expenses included in the pro
forma statements of operations are subject to a prior production payment forward
sales agreement between Parent and a third party ("Agreement") for the period of
October 1996 until a certain amount of production (or the proceeds from the sale
thereof) has been delivered to such third party. The Agreement is the obligation
of Parent. Parent recorded the receipt of the sales proceeds under the Agreement
and the related deferred revenue.
Under the terms of the Agreement, Parent is required to provide additional
production from other sources (if available) to the extent that production from
the Mercury Properties is not sufficient to satisfy the volume specified in the
Agreement. Accordingly, no liability is recorded in the pro forma consolidated
balance sheet of the Surviving Corporation.
While Mercury's oil revenues and associated expenses will be excluded from
the Surviving Corporation's statements of operations for the year ended December
31, 1997, the revenues and expenses are included in the pro forma statements of
operations for 1996 and the six months ended June 30, 1997 to provide
information about the Surviving Corporation for 1998 and beyond. The oil
revenues and associated expenses will start accruing to the Surviving
Corporation on January 1, 1998.
Oil revenues and operating expenses relating to the Agreement have been
removed from the statements of operations for 1996 from the effective date of
the Agreement (October 1, 1996) to the end of 1996 and for the six months ended
June 30, 1997 under the Production Payment Adjustment column and reported as if
the Merger had been consummated on January 1, 1996 under the As Adjusted Pro
Forma column.
72
<PAGE>
MSR EXPLORATION LTD. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
AND BALANCE SHEET (CONTINUED)
Mercury's gas sales are from royalties which have no related production
expenses. An adjustment has been made for depletion that relates to the oil
revenues.
3. OIL AND GAS RESERVES INFORMATION (UNAUDITED)
The following pro forma information summarizes the Company's and Mercury's
estimated net quantities of proved and proved-developed oil and gas reserves.
The December 31, 1996 reserves are based on estimates of Citadel Engineering
Ltd., petroleum consultants, contained in a report dated March 1, 1997 for the
Company and dated March 25, 1997 for Mercury. Included in the Company's
quantities are Canadian proved reserves of 37,000 barrels of oil and 6,591,000
Mcf of gas and proved developed reserves of 34,000 barrels of oil and 1,831,000
Mcf of gas.
PROVED OIL AND GAS QUANTITIES
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------------
MSR
HISTORICAL MERCURY PRO FORMA
----------- ----------- -----------
<S> <C> <C> <C>
Proved Reserves
Oil (in thousands of barrels)................................................. 3,939 5,281 9,220
----------- ----------- -----------
----------- ----------- -----------
Natural Gas (MMcf)............................................................ 24,302 1,339 25,641
----------- ----------- -----------
----------- ----------- -----------
Barrels of oil equivalent (BOE) (MMcf on a 6:1 basis)......................... 7,989 5,505 13,494
----------- ----------- -----------
----------- ----------- -----------
Proved Developed Reserves
Oil (in thousands of barrels)................................................. 2,530 1,628 4,158
----------- ----------- -----------
----------- ----------- -----------
Natural Gas (MMcf)............................................................ 13,951 1,339 15,290
----------- ----------- -----------
----------- ----------- -----------
Barrels of oil equivalent (BOE) (MMcf on a 6:1 basis)......................... 4,855 1,851 6,706
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The following pro forma standardized measure of discounted future net cash
flows relating to proved oil and gas reserves has been computed using year-end
prices, except where contractual arrangements in place at year-end provide for
future price changes and costs. Included in the Company's standardized measure
of discounted future net cash flows is $1,844,000 relating to its Canadian
properties.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------------
MSR
HISTORICAL MERCURY PRO FORMA
---------- ---------- -----------
<S> <C> <C> <C>
(AMOUNTS IN THOUSANDS)
Future cash flows........................................................... $ 126,840 $ 119,585 $ 246,425
Future production and development costs..................................... (36,444) (71,893) (108,337)
Future income tax expense................................................... (20,410) (10,200) (30,610)
---------- ---------- -----------
Future net cash flows....................................................... 69,986 37,492 107,478
10 percent annual discount for estimated timing of cash flows............... (34,637) (20,445) (55,082)
---------- ---------- -----------
Standardized measure of discounted future net cash flows.................... $ 35,349 $ 17,047 $ 52,396
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
73
<PAGE>
MSR EXPLORATION LTD. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
AND BALANCE SHEET (CONTINUED)
Changes in the supply and demand for oil, natural gas liquids, hydrocarbon
price volatility, inflation, timing of production, reserve revisions and other
factors make these estimates inherently imprecise and subject to substantial
revision. As a result, these measures are not the Company's estimate of future
cash flows nor do these measures serve as an estimate of current market value.
4. STOCK OPTIONS AND WARRANTS
The Company issued a warrant to Banque Paribas to acquire 280,000 shares of
Company Common Stock at an exercise price of $3.375 per share (the "Company
Options") in January 1995 in connection with the Company obtaining financing
from such lender. Mercury has granted to Thomas F. Darden and Glenn M. Darden,
who are shareholders, directors, officers and employees of Mercury, options to
purchase an aggregate of 228,570 shares of Mercury Common Stock at an exercise
price of $0.875 per share, which expire on March 31, 2002. Mercury has also
issued warrants to certain shareholders, officers and directors to acquire (i)
an aggregate of 5,500,000 shares of Mercury Common Stock at an exercise price of
$1.25 per share and (ii) an aggregate of 5,500,000 shares of Mercury Common
Stock at an exercise price of $2.00 per share. These warrants also will expire
on March 31, 2002. As of the Effective Time, each option and each warrant to
purchase Mercury Common Stock (the "Mercury Options"), and each of the Company
Warrants, that remains unexercised in whole or in part will become options and
warrants to acquire Surviving Corporation Common Stock. Accordingly, each
Mercury Option and each Company Option will be deemed to remain outstanding as
an option to purchase, in lieu of the shares of Mercury Common Stock or Company
Common Stock, as the case may be, previously subject thereto, an identical
number of shares of Surviving Corporation Common Stock. The exercise price per
share of Surviving Corporation Common Stock will also remain unchanged.
74
<PAGE>
SELECTED FINANCIAL DATA OF THE COMPANY
The following sets forth certain historical consolidated financial data
relating to the Company. The selected financial data for each of the years in
the two-year period ended December 31, 1996 are derived from the audited
consolidated financial statements of the Company. The selected financial data
for the six-month periods ended June 30, 1997 and 1996 are derived from the
unaudited consolidated financial statements of the Company included elsewhere in
this Proxy Statement/Prospectus and include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of such data.
The consolidated financial statements of the Company as of December 31, 1996 and
1995 and for the two years in the period ended December 31, 1996, and the report
of Deloitte & Touche LLP thereon are included elsewhere in this Proxy
Statement/Prospectus. The selected financial data should be read in conjunction
with the information set forth herein under "Management's Discussion and
Analysis of the Company's Financial Condition and Results of Operations."
Operating results for the six-month period ended June 30, 1997 are not
necessarily indicative of future results or trends. All amounts are in U.S.
Dollars.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER SIX MONTHS ENDED
31, JUNE 30,
-------------------- --------------------
1996 1995 1997 1996
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Oil sales......................................................... $ 2,364 $ 2,039 $ 1,113 $ 1,156
Gas sales......................................................... 1,953 764 968 866
Interest and other income......................................... 59 324 54 23
--------- --------- --------- ---------
Total revenues.................................................. 4,376 3,127 2,135 2,045
--------- --------- --------- ---------
Expenses:
Operating expenses................................................ 1,435 1,349 778 682
Production taxes.................................................. 312 214 132 116
Depletion and depreciation........................................ 1,378 1,032 721 650
General and administrative........................................ 1,018 1,059 509 446
Interest.......................................................... 733 472 365 360
--------- --------- --------- ---------
Total expenses.................................................. 4,876 4,126 2,505 2,254
--------- --------- --------- ---------
Loss before income taxes.......................................... (500) (999) (370) (209)
Income tax benefit................................................ 170 359 126 71
--------- --------- --------- ---------
Net loss.......................................................... $ (330) $ (640) $ (244) $ (138)
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average shares outstanding............................... 13,773 14,263 13,777 13,745
Per share loss.................................................... $ (0.02) $ (0.04) $ (0.02) $ (0.01)
CONSOLIDATED STATEMENT OF CASH FLOWS DATA:
Net cash provided by (used in):
Operating activities.............................................. $ 709 $ (522) $ 579 $ 162
Investing activities.............................................. (974) (4,734) (185) (614)
Financing activities.............................................. 294 5,038 (363) 335
OTHER CONSOLIDATED FINANCIAL DATA:
Capital expenditures................................................ $ 1,024 $ 4,709 $ 318 $ 674
EBITDA(1)........................................................... 1,611 505 716 801
Operating cash flow(2).............................................. 946 32 351 441
</TABLE>
75
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER SIX MONTHS ENDED
31, JUNE 30,
-------------------- --------------------
1996 1995 1997 1996
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................................... $ 312 $ 280 $ 344 $ 163
Working capital (deficit)........................................... (137) 214 (477) 420
Total assets........................................................ 30,716 30,754 29,825 30,817
Long-term debt (includes current portion)........................... 6,638 6,343 6,274 6,678
Total stockholders' equity.......................................... 19,357 19,537 19,192 19,559
</TABLE>
- ------------------------
(1) EBITDA (as used herein) is calculated by adding interest, income taxes, and
depreciation, depletion and amortization to net income (loss). Interest
includes interest expense accrued and amortization of deferred financing
costs. EBITDA is presented here not as a measure of operating results, but
rather as a measure of the Company's operating performance and ability to
service debt. EBITDA should not be considered as an alternative to earnings
(loss), or operating earnings (loss), as defined by generally accepted
accounting principles, as an indicator of the Company's financial
performance, as an alternative to cash flow, as a measure of liquidity or as
being comparable to other similarly titled measures of other companies.
(2) Operating cash flow is defined as net income plus depreciation, depletion
and amortization and deferred taxes. Operating cash flow is presented to
provide additional information about the Company's ability to meet its
future capital expenditure and working capital requirements. The operating
cash flow presentation herein may not be comparable to similarly titled
measures reported by other companies and is not to be confused with cash
flows from operating activities as presented in the statements of cash
flows. Furthermore, operating cash flow is not an alternative to earnings
(loss) as measure to financial performance or to cash flow as a measure of
liquidity, as determined by generally accepted accounting principles.
76
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
THE COMPANY'S FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following discussion and analysis should be read in conjunction with the
Company's consolidated financial statements and the notes associated with them
contained elsewhere in this Proxy Statement/ Prospectus.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1996
REVENUE. Total revenue for the six months ended June 30, 1997 was
$2,135,000 a 4 percent increase compared to the $2,045,000 reported for the
first six months of 1996. The increase is primarily attributed to higher product
prices.
Oil sales for the first six months of 1997 were $1,113,000, a 4 percent
decrease compared to $1,156,000 of oil sales in the same period last year. The
average price received for oil during the first six months of 1997 increased 1
percent to $18.32 per barrel compared to the $18.09 average price for the same
period in 1996. Oil sales volumes for the quarters ended June 30, 1997 and 1996
were 60,800 barrels and 63,900 barrels, respectively. This decrease is primarily
due to normal production decline.
Gas sales for the six months ended June 30, 1997 were $968,000, an increase
of 12 percent compared to the $866,000 reported for the first six months of
1996. The average sale price the Company received for gas sold during the first
six months 1997 was $2.30 per Mcf an increase of 13 percent compared to the
$2.04 received in 1996. Gas sales volumes for the first six months of 1997 were
420,300 Mcf, compared to 424,100 Mcf sold in the comparable six months in 1996.
The increase in sales is primarily due to gas sales from the Company's gas plant
in Montana.
Interest and other income for the quarters ended June 30, 1997 and 1996 were
$54,000 and $23,000, respectively.
EXPENSES. Total expenses for the first six months of 1997 were $2,505,000,
an increase of 11 percent compared to $2,254,000 for the first six months of
1996. Operating expenses for the 1997 six months were $778,000, an increase of
$96,000, or 14 percent, compared to the comparable six months in 1996. Most of
the increase can be attributed to an increase in workover expenditures,
operating expenses of the Red River Gas Plant and the start-up expenses of the
Gypsy Highview Gas Plant. The Gypsy plant was placed in service in late March
1997 after being out of service for over five years. Production taxes for the
period ended June 30, 1997 and 1996 were $132,000 and $116,000, respectively, a
14 percent increase, which was primarily due to increased sales. Depletion and
depreciation expenses increased 11 percent to $721,000 for the first six months
of 1997 compared to $650,000 for the first six months of 1996, primarily due to
a higher depletion rate. General and administrative expenses increased 14
percent from $446,000 reported for the 1996 period to $509,000 reported in the
first six months 1997. The 1997 general and administrative expenses were up
principally due to increases in accounting, legal and engineering fees. Interest
expense for the quarters ended June 30, 1997 and 1996 was $365,000 and $360,000,
respectively.
NET INCOME (LOSS). The Company's results of operations for the quarter
ended June 30, 1997 was a net loss of $244,000, as compared to a net loss of
$138,000 for the same period in 1996. The decline was partly due to the start-up
of the Gypsy Highview gas plant and costs relating to the prospective merger.
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995
REVENUE. The Company's total revenue for 1996 was $4,376,325, an increase
of 40 percent compared to $3,126,700 for 1995. This increase was due primarily
to increases in product pricing and increased natural gas sales volumes.
Oil sales for 1996 were $2,364,440, an increase of 16 percent over the
$2,038,588 for 1995. Sales volume decreased 7 percent from 131,143 barrels sold
in 1995 to 123,088 barrels sold in 1996. The average
77
<PAGE>
price per barrel for crude oil in 1996 was $19.21, a 24 percent increase
compared to an average of $15.54 in 1995.
Gas sales for 1996 were $1,953,092 an increase of $1,189,394 or 156 percent
over the $763,698 reported in 1995. Natural gas sale volumes for 1996 were
890,530 Mcf an increase of 383,887 Mcf or 76 percent compared to the 506,643 Mcf
sold in 1995. The average price the Company received for its gas sales in 1996
was $2.19 per Mcf, an increase of 45 percent compared to $1.51 per Mcf for 1995.
Most of the increase in sales volumes was attributable to the three wells the
Company purchased in southeast Texas in July, 1995. Also contributing to the
1996 increase were sales from the Red River Gas Plant located in northwest
Montana. The plant was on line for approximately six months of calendar 1996.
During January and February, 1997 the Company overhauled its Gypsy-Highview Gas
Plant in Montana and began selling gas in March 1997. The plant had been idle
for over five years.
Interest and other income for 1996 was $58,793 compared to $324,414 in 1995.
In 1995 the Company reported a gain from sale of assets of $177,000.
EXPENSES. The Company's total expenses for 1996 were $4,876,011, an 18
percent increase compared to $4,126,254 in 1995. Operating expenses increased 6
percent from $1,349,151 in 1995 to $1,435,362 for 1996. Average production costs
per barrel of oil equivalent decreased from $6.26 in 1995 to $5.29 in 1996. The
decrease in cost per unit of production can be attributed to the increase in
natural gas sales volumes. Natural gas wells generally can be operated more
economically than crude oil wells. Production taxes increased 46 percent from
$213,793 in 1995 to $311,680 in 1996. Depletion and depreciation expense
increased $345,894 or 34 percent in 1996 compared to the prior year. The
increases in production taxes and depletion and depreciation expense are the
result of higher product sales. General and administrative expense decreased
$40,627 or 4 percent in 1996 compared to 1995. Interest expense in 1996 was
$732,910, an increase of 55 percent over the $472,519 for 1995. The increase was
primarily due to an increase in long term debt.
NET LOSS. The 1996 net loss was $329,686 ($0.02 per share), compared to the
1995 loss of $640,554 ($0.04 per share).
YEAR ENDED DECEMBER 31, 1995 COMPARED WITH YEAR ENDED DECEMBER 31, 1994
REVENUE. The Company's total revenue 1995 was $3,126,700, an increase of 23
percent compared to $2,543,990 for 1994. This increase was due primarily to
increased natural gas sales.
Oil sales for 1995 were $2,038,588, up slightly over the $2,033,916 in 1994.
Sales volumes decreased 12 percent, from 149,804 barrels sold in 1994 to 131,143
barrels sold in 1995. The average price per barrel sold increased 11 percent
from $14.03 in 1994 to $15.54 in 1995 which helped to offset reduced sales
volumes.
Gas sales of $763,698 for 1995 increased 97 percent compared to $388,183 for
1994. The increase in sales is attributable to three gas wells purchased in
Southeast Texas. Since the acquisition on July 28, 1995, these three wells
contributed $507,600 of gas sales during the last five months of 1995. Gas sales
volumes in 1995 were 506,643 Mcf, a 74 percent increase compared to the 291,631
Mcf for 1994. The average price for gas sold in 1995 was $1.51 per Mcf, an
increase of 3 percent compared to $1.47 per Mcf for 1994.
Interest and other income was $324,414 in 1995, a $200,523 increase compared
to 1994. Most of the 1995 increase was attributable to the $177,000 of gain
recognized on the sale of the GeoResources, Inc. common stock.
EXPENSES. The Company's total expenses for 1995 were $4,126,254, a 21
percent increase compared to $3,418,939 in 1994. Operating expenses increased 7
percent to $1,349,151 in 1995. However, the average production cost per unit
decreased from $6.33 in 1994 to $6.26 in 1995. Production taxes decreased 12
percent in 1995 to $213,793 compared to $241,780 in 1994, principally due to
reduced crude oil sales volumes and reduced tax rates. Depletion and
depreciation are up 13 percent in 1995 compared to 1994 primarily due to the
increased gas sales volumes from the new gas wells in Southeast Texas. General
78
<PAGE>
administrative expenses increased 55 percent in 1995 to $1,058,768 compared to
$683,552 in 1995. Most of the increase was in administrative salaries and office
expenses related to relocating the corporate headquarters to Fort Worth, Texas.
Interest expense has increased from $324,981 in 1994 to $472,519 in 1995 due to
an increase in long-term borrowing.
NET LOSS. The 1995 net loss was $640,554 ($0.04), compared to the 1994 loss
of $460,455 ($0.04 per share), which included extraordinary income from the
extinguishment of debt of $278,494 ($0.03 per share).
LIQUIDITY AND FINANCIAL RESOURCES
The Company's liquidity position at June 30, 1997 shows a current ratio of
0.7 to 1 with a negative working capital of approximately $477,000. This
compares to a current ratio of 0.9 to 1 and negative working capital of
approximately $137,000 at December 31, 1996. The change was primarily a result
of the Company beginning to pay down its long-term debt. To strengthen the
Company's liquidity position, it is in the process of restructuring its
long-term debt. This is in conjunction with the Company's prospective merger
with Mercury which should in the long-term provide a positive impact on working
capital. Until the Merger has been completed and the debt restructured, for the
short-term, the Company's working capital position will remain approximately the
same. The Company believes it has sufficient liquidity to meet operating and
capital needs for the remainder of 1997. No additional capital expenditures are
planned for the remainder of 1997.
Cash flow from operating activities for 1996 was $708,880, compared to
$522,415 of negative cash flow used for operating activities for 1995. This
significant increase of $1,231,000 was primarily the result of increases in
product sales. Cash used for investing was $1,074,068 for 1996 as compared to
$4,773,724 for 1995. The 1996 expenditures were for purchasing reserves in place
and for drilling, completing oil and gas wells, and additions to the Red River
Gas Plant, with most of the funding coming from working capital. The 1995
expenditures consisted of reserve acquisitions and reworking, drilling and
completing oil and gas wells.
Cash provided by operating activities for the first six months of 1997 was
$579,000, compared to $162,000 used for operating activity in the first six
months of 1996, an increase of $417,000. The increase was principally the result
of higher product prices during the period.
Cash provided from financing activities for 1996 was $394,744 compared to
$5,037,944 of funds from financing activities in 1995. During 1996 and 1995 the
Company borrowed $400,000 and $6.0 million respectively, under its revolving
credit agreement. Net cash used for financing activities was $363,000 for the
first six months of 1997, compared to $335,000 from financing activities for the
same period in 1996. Funds were used in 1997 to reduce long-term debt.
Investing activities for the first six months of 1997 used cash of $185,000
compared to $614,000 for the first six months of 1996. Most of the 1997 capital
expenditures were for reconditioning and overhauling the Gypsy Highview Gas
Plant.
In January 1995, the Company entered into a $15.0 million revolving credit
agreement. The proceeds from the facility were used primarily to fund the
Company's oil and gas reserve acquisition program and for development drilling
in the Company's present producing areas. The loan agreement is for seven years.
Only interest on principal amounts outstanding was required in the first two
years, with the balance of the loan at December 31, 1996 to be amortized in
quarterly installments over the remaining five years. The interest rate on the
loan is prime rate plus 1.0 percent. On August 15, 1996 the loan limit was set
at $6,500,000 and on January 1, 1997 the commitment shall be reduced by monthly
payments at a rate of $60,000 for 1997, $65,000 for 1998, $75,000 for 1999,
$70,000 for 2000 and $60,000 for 2001. The Company began making such payments on
the principal of the note in February 1997.
79
<PAGE>
DEFERRED TAX ASSETS
The Company expects to realize future benefit of the net deferred tax assets
recorded at December 31, 1996. Presuming that the book basis net losses for 1995
and 1996 continue in future periods at similar levels, the reversal of deferred
tax liabilities recorded by the Company at December 31, 1996 in future periods
is expected to result in tax basis net income in future periods (refer to
paragraph 21.(a) of SFAS 109). The Company could then utilize the operating loss
carryforwards to offset the tax basis net income in the future periods.
Accordingly, the Company feels that the reserve balance is adequate to provide
for the unrecoverable portion of the deferred tax assets based on the available
evidence at December 31, 1996.
GEORESOURCES, INC.
In November, 1995 the Company completed the sale of its holdings in 687,600
shares of GeoResources Common Stock and 44,000 shares of Big Sky Airlines Common
Stock to Joseph V. Montalban, a former director of the Company, in exchange for
700,000 shares of the Company's Common Stock. The sale or exchange was approved
by Shareholders at the Company's Annual General Meeting held on September 22,
1995. The Company recognized a $177,000 gain from the sale of the stock in 1995.
INFLATION
The Company's sales and operating expenses have not been significantly
affected by inflation.
80
<PAGE>
SELECTED FINANCIAL DATA OF MERCURY
The following sets forth certain historical financial data relating to the
Mercury Properties. The selected financial data for each of the years in the
two-year period ended December 31, 1996 are derived from the audited statements
of revenues and direct operating expenses attributable to the Mercury
Properties. The selected financial data for the six-month periods ended June 30,
1997 and 1996 are derived from the unaudited statements of revenues and direct
operating expenses attributable to the Mercury Properties included elsewhere in
this Proxy Statement/Prospectus. The statements of revenues and direct operating
expenses attributable to the Mercury Properties for the two years in the period
ended December 31, 1996, and the report of Deloitte & Touche LLP thereon are
included elsewhere in this Proxy Statement/Prospectus. The selected financial
data should be read in conjunction with the information set forth herein under
"Management's Discussion and Analysis of Mercury's Financial Condition and
Results of Operations." Operating results for the six-month period ended June
30, 1997 are not necessarily indicative of future results or trends. All amounts
are in U.S. Dollars.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------------- --------------------
1996 1995 1997 1996
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(1)
Revenues:
Oil sales.............................................................. $ 2,544 $ 2,020 $ 1,124 $ 1,173
Gas sales.............................................................. 215 185 106 94
--------- --------- --------- ---------
Total revenues....................................................... 2,759 2,205 1,230 1,267
--------- --------- --------- ---------
Expenses:
Operating expenses..................................................... 1,297 1,178 634 712
Production taxes....................................................... 264 157 112 124
--------- --------- --------- ---------
Total expenses....................................................... 1,561 1,335 746 836
--------- --------- --------- ---------
Excess of revenues over direct operating expenses........................ $ 1,198 $ 870 $ 484 $ 431
--------- --------- --------- ---------
--------- --------- --------- ---------
CONSOLIDATED BALANCE SHEET DATA(1)
Cash and cash equivalents................................................ $ 0
Working capital.......................................................... 72
Total assets............................................................. 4,398
Long-term debt (includes current portion)................................ 4,000
Total stockholders' equity............................................... 303
</TABLE>
- ------------------------
(1) Historical financial statements reflecting the financial position and
results of operations required by generally accepted accounting principles
are not presented, as such information is neither readily available on an
individual property basis nor meaningful for the Mercury Properties.
Accordingly, the data shown above are derived from statements of revenues
and direct operating expenses. Amounts represent Mercury's net ownership
interest in the Mercury Properties and are presented on the full cost
accrual basis of accounting. Depreciation, depletion and amortization,
allocated general and administrative expenses, interest expense and income
taxes have been excluded because Mercury is a newly formed business and the
expenses are not necessarily indicative of the expenses to be incurred by
Mercury. Revenues and expenses related to the Mercury Properties are subject
to a Production Payment Agreement. See "Management's Discussion and Analysis
of Mercury's Financial Condition and Results of Operations--Production
Payment."
81
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
MERCURY'S FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Mercury is an independent energy company engaged in the exploration,
development, production and sale of crude oil and natural gas properties with
current operations focused in the Cut Bank Field complex in northwest Montana.
Mercury's strategy is to increase oil and natural gas reserves, production and
cash flow through (i) the exploitation of its existing acreage positions in
Montana, (ii) the acquisition of additional properties in known producing areas
that provide significant development and exploratory drilling potential, (iii)
the exploration for oil and natural gas reserves and (iv) the maintenance of a
low operating and overhead cost structure.
Mercury was created by transferring the assets of Parent located in Montana,
at cost, into Mercury. Mercury was incorporated in the state of Delaware and is
authorized to issue 50 million shares of common stock with a par value of $0.01
and 10 million shares of preferred stock with a par value of $0.01. Mercury
currently has a total of 12 million shares of common stock outstanding.
Ownership of the outstanding shares of Mercury Common Stock is as follows:
<TABLE>
<S> <C>
Parent.......................................................... 6,480,000
Frank Darden.................................................... 1,200,000
Thomas F. Darden................................................ 1,200,000
Glenn M. Darden................................................. 1,200,000
Anne Darden Self................................................ 1,200,000
Jack Thurber.................................................... 600,000
Jeff Cook....................................................... 120,000
---------
Total......................................................... 12,000,000
---------
---------
</TABLE>
The following table sets forth certain operating data regarding the Mercury
Properties for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31
--------------------
1996 1995
--------- ---------
<S> <C> <C>
PRODUCTION:
Oil (Bbls)............................................................ 131,886 127,393
Natural gas (Mcf)..................................................... 86,672 87,758
Total (BOE)........................................................... 146,332 142,019
AVERAGE SALES PRICE PER UNIT(1):
Oil (per Bbl)......................................................... $19.29 $15.86
Natural gas (per Mcf)................................................. $2.63 $2.11
COSTS PER UNIT:
Production costs...................................................... $8.33 $8.29
Production and ad valorem taxes....................................... $1.83 $1.10
</TABLE>
- ------------------------
(1) Before deduction of production taxes.
Mercury uses the full cost method of accounting for its oil and natural gas
activities. Costs to acquire mineral interests in oil and natural gas
properties, to drill and equip exploratory wells and to drill and equip
development wells are capitalized. Costs of significant nonproducing properties,
wells in the process of being drilled and development projects are excluded from
depletion until such time as the related project is developed and proved
reserves are established or impairment is determined.
82
<PAGE>
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
Mercury's statements of revenues and direct operating expenses attributable to
the Mercury Properties which are contained elsewhere in this Proxy
Statement/Prospectus.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1996
REVENUE. Total revenues for the quarter ended June 30, 1997 were
$1,230,000, a three percent decrease compared to $1,267,000 recorded in the same
period in 1996. Oil sales were $1,124,000 for the 1997 six months, a decrease of
4 percent compared to $1,173,000 for the first quarter of 1996. The average sale
price Mercury received per barrel of oil for the six months ended June 30, 1997
was $18.14, a four percent decrease over $18.81 received during the 1996 period.
Mercury sold 61,900 barrels in the 1997 period compared to 62,400 barrels in
1996, a one percent decrease. Gas sales for the first six months of 1997 were
$106,000, compared to $94,000 in 1996. This increase was due to more favorable
natural gas prices.
DIRECT OPERATING EXPENSES. Direct operating expenses for the six months
ended June 30, 1997 were $746,000, a decrease of 11 percent compared to $835,000
for the 1996 period. Operating expenses decreased 11 percent to $634,000 in 1997
from $712,000 in 1996. In the six months ended June 30, 1996, additional
operating expenses were incurred to increase production levels and increase
operating efficiencies of newly acquired properties. This maintenance had been
delayed by the seller. Such expenditures did not need to be repeated in 1997.
Production taxes increased nine percent to $112,000 for the first six months of
1997 from $124,000 for the same period in 1996. The increase in taxes for 1997
is due to increases in revenue and property taxes.
The excess of revenues over direct operating expenses for the six months
ended June 30, 1997 was $484,000, an increase of 12 percent, compared to
$431,000 for the same period in 1996. The increase was the result of lower
operating expenses.
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995
REVENUE. Total revenues for 1996 were $2,759,000, an increase of 25 percent
compared to $2,205,000 for 1995. This increase was primarily due to increases in
product prices. Oil sales totaled $2,544,000 for 1996, an increase of 26 percent
compared to $2,020,000 for 1995. The average price per barrel for crude oil
Mercury sold in 1996 was $19.29, a 22 percent increase over the 1995 average
price of $15.86. Mercury sold 129,900 and 127,400 barrels of crude oil in 1996
and 1995, respectively. Gas sales for 1996 were $215,000 an increase of 16
percent compared to $185,000 in 1995. This increase is primarily due to an
increase in product pricing.
DIRECT OPERATING EXPENSES. Direct operating expenses for 1996 were
$1,561,000 an increase of 17 percent over $1,335,000 for 1995. Operating
expenses were $1,297,000 in 1996 compared to $1,178,000 in 1995. Included in
1996 operating expenses were workover costs of $93,000. Generally, well workover
costs are incurred to improve production. No workover costs were incurred in
1995. Production taxes for 1996 were $264,000 compared to $157,000 for 1995.
The excess of revenues over direct operating expenses for 1996 was
$1,198,000, an increase of 38 percent compared to $870,000 for 1995. The
increase was primarily due to favorable increases in product prices.
83
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
Mercury's sole source of liquidity is cash flow from operations. Mercury's
cash flow requirements other than for operations are generally for the
development of its oil and gas properties. Mercury's sole financial resource has
been its oil and gas reserves, both proved and probable, included in the Mercury
Properties.
Historically Parent has financed its operation of properties through cash
flow from operations and bank debt. Mercury expects in the future to do the
same, although it presently has no credit facility available. Under the Merger
Agreement, the Surviving Corporation must either assume Mercury's guarantee of
$4.0 million of Parent's NationsBank Debt or pay that amount of the debt, as a
condition to the Merger. That debt is secured by a lien on the Mercury
Properties which the lender has agreed to release upon payment of $4.0 million.
Whether the Surviving Corporation assumes the guarantee or pays $4.0 million of
the NationsBank Debt, the Merger Agreement requires that Parent be released from
that amount of the debt, and there can be no assurance that the lender would
release Parent upon the assumption of the guarantee by the Surviving
Corporation. Therefore, it is currently expected that the Surviving Corporation
will be required to repay $4.0 million of the NationsBank Debt. In order to
repay the $4.0 million, the Surviving Corporation will need to borrow the money,
and the borrowing would likely be secured by a lien on all of the Surviving
Corporation's properties, including the Mercury Properties.
The Company and Mercury have negotiated with a lender to establish a credit
facility with such lender to finance the repayment of the $4.0 million of the
NationsBank Debt and the operations of the Surviving Corporation. The Company
and Mercury believe that the facility will provide for up to $15.0 million of
revolving credit. Principal and interest payments would be made quarterly.
Interest on amounts outstanding would accrue at annual rates of LIBOR plus 1 to
2.5 percent, depending on the amount drawn on the facility. The term of the
facility would be for five years. There can be no assurance that the facility
will be made available from such lender on the terms described above, if at all.
CAPITAL EXPENDITURES
Mercury requires capital primarily for the exploration, exploitation and
acquisition of oil and natural gas properties, the repayment of indebtedness and
general working capital purposes. No additional capital expenditures are deemed
necessary for the year ended December 31, 1997.
The following table sets forth costs incurred by Mercury in its exploration,
exploitation and acquisition activities during the periods indicated. For all
periods prior to March 7, 1997, the data have been derived from the operating
results of Parent with respect to the Mercury Properties.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996
------------ ---------
<S> <C> <C>
Acquisition
Unproved Properties................................................ $ 300,000 $ 0
Proved Properties.................................................. 4,293,000 0
Development.......................................................... 0 84,000
------------ ---------
Total................................................................ $ 4,593,000 $ 84,000
------------ ---------
------------ ---------
</TABLE>
INFLATION AND CHANGES IN PRICES
Mercury's revenue and the value of its oil and gas properties have been, and
will continue to be, affected by changes in oil and gas prices. Mercury's
ability to obtain capital through borrowings and other means is also
substantially dependent on oil and gas prices. Oil and gas prices are subject to
significant
84
<PAGE>
seasonal and other fluctuations that are beyond Mercury's ability to control or
predict. In an attempt to manage this price risk, Parent, has periodically
engaged and Mercury may in the future engage in hedging transactions.
PRODUCTION PAYMENT
Parent and SDG entered into a Production Payment Agreement in October 1996.
Pursuant to the agreement, SDG was entitled to an aggregate of 320,000 barrels
of oil (the "Production Payment Amount") produced from certain properties of
Parent, including the Mercury Properties. Parent can satisfy this obligation by
delivering to SDG proceeds from the sale of oil produced rather than delivering
the oil "in kind," unless SDG elects to take oil "in kind." Pursuant to the
Merger Agreement, Parent is entitled to all of the oil revenue and income
attributable to the Mercury Properties until the Production Payment Amount has
been delivered to SDG; provided that Parent must reimburse the Surviving
Corporation for all costs and expenses of oil production; and provided further
that if the entire Production Payment Amount is not delivered to SDG on or
before December 31, 1997, then Parent must reimburse the Surviving Corporation
for any amount of the Production Payment Amount the Surviving Corporation is
required to deliver to SDG after such date. Parent and Mercury estimate that
based on current prices for crude oil, the amount remaining due to SDG under the
agreement as of June 30, 1997 was approximately $788,000. Parent and Mercury
anticipate that such obligation to SDG will be satisfied on or before December
31, 1997.
FORWARD LOOKING STATEMENTS
These financial statements may contain forward-looking statements. The words
"anticipate," "believe," "expect," "plan," "intend," "estimate," "project,"
"will," "could," "may" and similar expressions are intended to identify
forward-looking statements. These statements include information regarding oil
and natural gas reserves, future drilling and operations, future production of
oil and natural gas and future net cash flows. Such statements reflect Mercury's
current views with respect to future events and financial performance, and
involve risks and uncertainties, including without limitation the risks
described elsewhere in Mercury's Proxy Statement/Prospectus. Should one or more
of these risks or uncertainties occur, or should underlying assumptions prove
incorrect, actual results may vary materially and adversely from those
anticipated, believed, estimated or otherwise indicated. Readers of these
financial statements should carefully consider the risks and uncertainties
described elsewhere in this Proxy Statement/Prospectus, in addition to other
information contained in these financial statements.
85
<PAGE>
BUSINESS AND PROPERTIES OF THE COMPANY
BUSINESS DEVELOPMENT
The Company is an Alberta, Canada, registered public company created in 1981
under Alberta law by the merger of two previous Canadian public corporations,
Mountain States Resources Ltd. and Monte Grande Exploration Limited. The
Company's corporate offices are located at 500 Main Street, Suite 210, in Fort
Worth, Texas, 76102. The telephone number is (817) 877-3151. Unless the context
requires otherwise, all references herein to the "Company" are to MSR
Exploration Ltd. and its subsidiaries.
The Company's principal line of business is the exploration, development,
production and sale of crude oil and natural gas. The Company's oil and gas
operations are conducted primarily in Montana and Texas. All of the Company's
United States oil and gas property interests are owned and operated directly or
through its wholly-owned United States subsidiaries: Mountain States Resources,
Inc.; Monte Grande Exploration, Inc.; Gypsy Highview Gathering System, Inc.; and
MSR Exploration, Inc. The Company has operations in Canada and participates in
those properties principally through other oil and gas operators. The Company is
also engaged in the gathering, processing and transmission of natural gas in
Northwest Montana through its wholly-owned Gypsy Highview Gathering System, Inc.
The Company gathers, processes and transports gas produced from northern Montana
wells owned by the Company and by other producers.
In September 1994, the Company completed a private placement of its common
stock. In exchange for the issuance of 4,444,444 shares of its stock, the
Company received $4.0 million. The proceeds from this placement were used to
retire the debt of the Company's then secured primary lender and certain other
unsecured creditors. In conjunction with this private placement, the Company
held a Special Meeting of the Shareholders on October 25, 1994, to elect a new
Board of Directors which effectively changed control of the Company. This Board
of Directors elected Otto J. Buis as Chairman of the Board, Chief Executive
Officer and President of the Company.
The Company's primary focus has been the development and enhancement of oil
and gas properties in its present areas of operations and acquisitions of
additional properties. The Company believes its acquisition efforts should be
focused on properties where operational efficiencies can be achieved. To the
extent purchases can be made primarily within its operating areas, efficiencies
in operations, drilling, gas marketing and administration should be realized.
On March 26, 1997, the Company executed the Merger Agreement with Parent and
Mercury.
In July 1995, the Company acquired interests in three gas and condensate
producing properties located in southeast Texas for the approximate purchase
price of $3,547,000. The effective date of the purchase was April 1, 1995. The
specific interests acquired are as follows: 42 percent working interest in the
Schmidt Well #1, Brazoria County; 41 percent working interest in the Josey Ranch
Well #3, Harris County; and 53 percent working interest in the Cinco Ltd. Well
#1, Fort Bend County. An independent engineering consulting company estimated
that the Company's proved producing reserves were increased by 4.6 billion cubic
feet of gas and 78,000 barrels of condensate by this acquisition. On May 1,
1996, the Company purchased an additional 21 percent working interest in the
Cinco Ltd. #1 well.
During the first quarter of 1997, the Gypsy Highview Gas Plant was
reconditioned and placed into service. After sitting idle for over five years,
the plant began selling natural gas in early March 1997. During 1993, the
Company developed a gas project known as the Red River Prospect. Additional
acreage and wells in an area north of the town of Cut Bank, Montana were
acquired. During the fall of 1993, a gas plant, gathering lines and a
transmission line connected to a high pressure system were completed. In
December 1993, gas sales began under a long-term contract with Montana Power
Company. The plant was shut down during the second quarter of 1995 due to a lack
of product. Additional drilling in the area in late 1995 and 1996 provided
sufficient product to re-open the plant. After the installation of gathering
lines to the wells, the Red River plant sold natural gas for six months of
calendar 1996.
86
<PAGE>
PRIOR BANKRUPTCY
From September 1990 to May 1991, a separate group of officers and directors
were in control of the Company and were responsible for the Company's
operations. While under control of this management group, the Company incurred
various significant legal and other obligations that, coupled with a steep
reduction in product prices, diminished the Company's operating cash flow. In
addition, during this period, Manufacturers Hanover Trust Company, the Company's
then principal secured creditor, placed the Company's credit facility in default
for infractions of nonmonetary covenants.
In view of these circumstances, a new Board of Directors was elected at a
long-delayed Annual General Meeting held in December 1991. On February 7, 1992,
the Company and its five subsidiary corporations filed petitions for
reorganization under Chapter 11 in the United States Bankruptcy Court. Later, on
September 12, 1992, the Company filed a Plan of Reorganization with the
Bankruptcy Court, which was then amended on December 11, 1992, and March 2,
1993, to reflect agreements between the Company and its creditors. On March 2,
1993, the Company's Restated First Amended Joint Plan of Reorganization was
confirmed by the Bankruptcy Court.
GENERAL
The business purpose of the Company is to engage in two principal
activities: (1) the acquisition, production and sale of crude oil, condensate
and natural gas and (2) the gathering, processing and transmission of natural
gas. In most instances, the Company acts as operator of the oil and gas
properties in which it has acquired an interest.
The Company pursues its business through the acquisition of oil and gas
mineral leases, gas gathering systems, and producing oil and gas properties.
Based upon each specific mineral lease situation as well as geological and
engineering interpretations, the Company either develops its inventory of leases
through the drilling of an oil and/or gas well, redrills or recompletes an
existing well or manages and operates existing wells located on such leases for
the production of oil and/or gas reserves located thereon. The Company currently
has an interest in oil and gas mineral leases, gas gathering pipeline systems
and wells producing hydrocarbons that are located principally in the states of
Montana and Texas. The Company evaluates other opportunities for the development
of oil and gas reserves and related assets as they become available and given
the right circumstances, may become involved in these activities in other areas
other than those in which it is currently involved.
The Company currently acts as an "operator" of oil and gas properties,
through its wholly-owned subsidiaries, MSR Exploration, Inc., Mountain States
Resources, Inc., Monte Grande Exploration, Inc., and Gypsy Highview Gathering
System, Inc., primarily in Montana and Texas. In this capacity, the Company is
responsible for the daily activities of producing oil and/or gas from individual
wells and leases located within those states. The Company's functions are
focused primarily towards management of the properties to maximize profitability
and supervision of its field employees. Additionally, for some wells the Company
contracts with individuals doing business within the proximity of the wells,
more commonly referred to as "pumpers", for performing the various tasks that
are required to maintain the production of oil and/or gas of the wells. The
Company is not a user or refiner of the oil and/or gas produced, except as it
may relate to the operation of wells that may produce gas. Once extracted from
the ground, the Company either connects the production to a pipeline gathering
system, in the case of gas, or stores the crude oil in storage tanks located in
proximity of the producing field, for collection by an oil purchaser. The
properties that the Company operates are located in areas which are typically
serviced by more than one crude oil purchaser and a gas pipeline gathering
system is generally in proximity of the natural gas being produced.
The Company operates and holds working interests in over two hundred and
fifty producing oil and gas wells. The Company also holds or has acquired
interests in properties which contain proved undeveloped reserves that require
additional drilling, workovers, water flooding or other forms of enhancement to
87
<PAGE>
become productive. In addition to acquiring such properties, the Company has
also engaged in exploration and development activities by drilling new wells on
such properties during the past several years.
OIL AND GAS RESERVES
The Company operates crude oil and natural gas producing properties in
northwestern Montana, namely the North Central Cut Bank Sand Unit, Cut Bank
Field, Graben Coulee Field in Glacier County, Gypsy Basin Field in Pondera
County, Bills Coulee Field, Highview Field in Teton County, and the Red
River/Midnight Coulee Gas Field. Crude oil and natural gas are also produced in
the Winters Capps Field in Runnels County, Texas, and principally natural gas
from wells in Brazoria, Harris and Fort Bend Counties, Texas. Active areas of
exploration interest for the Company are Montana, Texas, North Dakota and
Western Canada. Acreage in Western Canada is still considered in its early
stages of development.
During 1993, the Company built the Red River project, which consists of an
eight mile gathering and transmission system, a compressor and a dehydration
unit. The Company purchases sweet gas from wells in the field, and dries and
transports it to the Montana Power System in the north Cut Bank area. The
Company also owns the Gypsy Highview Gas Plant and a natural gas gathering and
transmission pipeline system located in northwestern Montana. During January and
February, 1997 this plant was overhauled and placed in service. After setting
idle for over five years, the plant began selling natural gas in early March
1997.
PRODUCTIVE WELLS AND ACREAGE AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
GROSS NET
-------------------- --------------------
<S> <C> <C> <C> <C>
United States properties OIL GAS OIL GAS
--------- --------- --------- ---------
Productive Wells.................................................. 227 14 227 12.58
Developed Acreage................................................. 16,188 Acres 15,612 Acres
Undeveloped Acreage............................................... 27,370 Acres 27,370 Acres
GROSS NET
-------------------- --------------------
Canadian properties OIL GAS OIL GAS
--------- --------- --------- ---------
Productive Wells.................................................. 7 9 .27 1.60
Developed Acreage................................................. 2,290 Acres 712 Acres
Undeveloped Acreage............................................... 52,070 Acres 2,100 Acres
</TABLE>
Essentially all of the Company's oil and gas interests are working interests
or overriding royalty interests under standard onshore oil and gas leases,
rather than mineral ownership or fee title. The defensibility of the Company's
title to such interests in most cases is supported by written title opinions.
TITLE OF PROPERTIES
Title to the properties acquired by the Company is subject to royalty,
overriding royalty, carried and other similar interests, contractual
arrangements customary in the oil and gas industry, liens incident to operating
agreements, liens for current taxes not yet due and to other comparatively minor
encumbrances. Substantially all of the Company's oil and gas properties are
pledged to a financial institution under a revolving credit agreement. See
"Management's Discussion and Analysis of the Company's Financial Condition and
Results of Operations--Liquidity and Financial Resources" for a description of
the principle terms of such credit agreement.
88
<PAGE>
PRODUCTION RESULTS
The average sales price and average production (lifting) cost per equivalent
unit of oil for the three years ended December 31, 1996 were as follows:
<TABLE>
<CAPTION>
PRODUCTION AVERAGE PRICE AVERAGE
---------------------- ------------------------ PRODUCTION COST
YEAR ENDED DECEMBER 31 OIL (BBL) GAS (MCF) OIL (BBL) GAS (MCF) PER UNIT
- --------------------------------- --------- ----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
1996............................. 123,088 890,530 $ 19.21 $ 2.19 $ 5.29
1995............................. 131,143 506,643 $ 15.54 $ 1.51 $ 6.26
1994............................. 149,804 291,631 $ 14.03 $ 1.47 $ 6.33
</TABLE>
DRILLING RESULTS
Below is a summary of drilling activity for the three years ended December
31, 1996.
<TABLE>
<CAPTION>
WELLS DRILLED (GROSS): EXPLORATORY DEVELOPMENT
- ------------------------------------------------------ ------------------------ ------------------------
YEAR PRODUCTIVE DRY PRODUCTIVE DRY
- ------------------------------------------------------ ------------- --------- ------------- ---------
<S> <C> <C> <C> <C>
1996**................................................ 1 -- -- --
1996*................................................. -- -- -- 1
1995**................................................ 2 -- 4 --
1994**................................................ 3 -- -- --
</TABLE>
- ------------------------
* Canadian
** USA
RESERVES
The determination of reserves is a complex and interpretive process which is
subject to continued revisions as additional information becomes available.
Reserve estimates prepared by different engineers from the same data can vary
widely. Therefore, the reserve data for the Company appearing elsewhere in this
Proxy Statement/Prospectus should not be construed as being exact. Any reserve
estimate, especially when based upon volumetric calculations, depends in part on
the quality of available data, engineering and geologic interpretation and
judgment, and thus represents only an informed professional assessment.
Subsequent reservoir performance may justify upward or downward revision of the
estimate. The Company's proved reserves and proved developed reserves of oil and
gas and the standardized measure of discounted future net cash flows relating to
proved oil and gas reserves for the years ended December 31, 1996, and 1995,
were estimated by Citadel Engineering Ltd. ("Citadel"), independent petroleum
consultants located in Calgary Alberta, Canada. Such estimates were used in the
preparation of the Company's financial statements. The Company has not included
estimates of total proven oil and gas reserves comparable to those disclosed in
the Supplemental Financial Information in any reports filed with Federal
authorities or agencies other than the Securities and Exchange Commission. A
summary of the reserve report and the letter of Citadel with respect thereto is
included in Appendix "I" to this report.
ACQUISITION OF ADDITIONAL PROPERTIES
The Company will continue to evaluate and select additional prospects and
leases for acquisition and development, which management considers appropriate
for the purposes of the Company. Such prospects may be located anywhere in the
United States. The principal purpose of the Company in such acquisitions will be
to seek and acquire properties which presently are producing oil and/or gas and
are generating sufficient revenues from such properties to provide the Company
with the potential to significantly increase cash flow.
89
<PAGE>
To the extent the Company continues seeking additional acquisitions of
producing oil and gas properties, it competes with many other entities which
seek to acquire similar assets. The operations and expenditures on behalf of the
Company are minor in relation to total operations conducted and in comparison to
amounts expended by all entities operating within this industry. The total
number and identity of producing oil and gas properties and proved developed
leases acquired by the Company will depend upon, among other things, a
combination of the total amount of capital available to the Company, the latest
geological and geophysical data available, and the continuation of a sufficient
supply of properties which may become available for purchase.
Because management is responsible for selecting additional acquisitions, it
continually engages in a process of reviewing and analyzing prospects submitted
by oil and gas operating companies, investment bankers, geologists, engineers
and others within the energy industry. In some circumstances, prospects may, in
addition to the usual royalty paid to the landowner, have the burden of an
overriding royalty for the benefit of the entity or person submitting prospects
to the Company.
These royalty interests do not share in any expense of drilling,
development, completion, operating and other costs incident to the production
and sale of oil and gas. The Company seeks to acquire leasehold interests which
will create the maximum revenue interest attributable to the working interest
owners in leases acquired by the Company.
The following information and factors are considered by the management in
connection with each decision to acquire a property for the Company:
1. The amount of uncommitted funds then available;
2. The current production and expected future cash flow therefrom;
3. The geologic and geographic region in which the property is located; and
4. The nature and extent of geological and engineering data available
concerning the property.
Oil and gas production prospects, and leases have been and will continue to
be acquired by the Company from various industry sources, including, without
limitation, landowners, lease brokers, operating companies, investment bankers
and other persons or companies engaged in the business of acquiring and dealing
in oil and gas properties. In that regard, leases which are purchased by the
Company may be whole or fractional interests in oil and gas properties, and if
fractional, a portion of the costs of development may be borne by the parties
possessing the remaining fractional interests. The Company may also from time to
time enter into joint ventures or farmout arrangements to acquire or develop
properties.
DRILLING AGREEMENTS AND OPERATION OF WELLS
In addition to acquiring producing oil and gas properties, the Company may
use its working capital and available line of credit for drilling and other
development on the properties in which the Company has acquired interests, to
the extent funds permit. The Company sub-contracts the drilling, redrilling or
workover of wells for which it is designated the operator. When the Company is
acting as the operator, it will typically enter into a drilling agreement with
an independent drilling contractor. The Company either compensates the drilling
contractor on i) a footage contract, ii) an hourly arrangement during the
drilling, testing and completion phase of each well, or iii) seeks a fixed price
or sum-key agreement. The drilling contractor is typically allowed to utilize
other selected independent contractors, each of which is experienced in
providing drilling related services in the area, to conduct certain activities
on behalf of the Company.
The Company manages all day-to-day operations of the Company's wells, leases
and prospects for which it is the operator. While the Company may enter into
agreements with other parties for specific services, such agreements will keep
management functions within the control of the Company. The Company utilizes its
in-house technical personnel to provide geological, geophysical, engineering and
other
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services and when necessary, retains these services on a contractual basis from
within the industry. The Company reviews and analyzes all prospects, drilling
and logging data, engineering information and production data, and monitors all
expenditures made on behalf of the Company by any third party engaged as a
subcontractor.
The Company will from time to time determine that it is in its best interest
to drill either exploratory or development wells on properties in which it has
acquired an ownership interest. Management will have the responsibility to
determine whether any well should, at any point, be abandoned. In the event that
a well is lost at any depth, either vertically or horizontally, by reason of any
accident or casualty, or if igneous rock or other impenetrable substances are
encountered, or loss of circulation or other conditions rendering further
drilling impractical by methods to be employed, the Company may elect to plug
and abandon a well and cease operations on the prospect or to plug and abandon a
well and commence drilling an additional well on the prospect.
TIMING OF ACQUISITIONS/OPERATIONS
The Company is continually evaluating the acquisition of additional proven
oil and gas properties and other oil and gas companies. Additionally, the
Company may commence drilling on existing prospects as it deems appropriate. The
Company believes that it has available suitable prospects and leases for future
development.
GAS GATHERING, PROCESSING AND TRANSMISSION
Gypsy Highview Gathering System, Inc., a wholly-owned subsidiary of the
Company, owns and operates gas gathering pipeline systems and two gas plants
located in northwest Montana. During 1996 and 1995, the Red River Plant sold
87,250 Mcf and 24,100 Mcf, respectively, which was approximately 10 percent and
5 percent of the Company's total gas sales. The Gypsy Highview Gas Plant and the
Red River Gas Plant presently compress natural gas from Company leases. The Red
River Plant has a capacity of 8,000 Mcf per day and was delivering to the
purchasers approximately 500 Mcf per day from 12 Company wells. After a complete
overhaul, the Gypsy Highview Plant and system started delivering natural gas in
March 1997 from three Company wells into the Montana Power Company pipeline. The
Gypsy Highview Plant has a capacity of 8,000 Mcf per day and when operating was
delivering approximately 500 Mcf per day.
The Company has a five year natural gas sales contract with Montana Power
Company which expires on January 1, 1998. The agreement calls for an annual
price redetermination in January of each year with the 1997 base price set at
$1.60 per Mcf. For the past two years the purchaser has invoked its right not to
take gas during the months of June, July and August. Therefore, the Company's
gas plants have had no gas sales during those months.
The Company's gas plants have been qualified and permitted to operate by
Montana's Department of Environmental Quality. In addition, the Federal Energy
Regulatory Commission ("FERC") regulates interstate natural gas transportation
rates and service conditions, which affect the marketing of gas produced by the
Company, as well as the revenues received by the Company for the sales of such
productions. Since the mid-1980s, FERC has issued a series of orders,
culminating in Order Nos. 636, 636-A and 636-B ("Order 636"), that have
significantly altered the marketing and transportation of gas. Order 636
mandates a fundamental restructuring of interstate pipeline sales and
transportation service, including the unbundling by interstate pipelines of the
sale, transportation, storage and other components of the city-gate sales
services such pipelines previously performed. One of FERC's purposes in issuing
the orders is to increase competition within all phases of the gas industry.
Order 636 and subsequent FERC orders on rehearing have been appealed and are
pending judicial review. Because these orders may be modified as a result of the
appeals, it is difficult to predict the ultimate impact of the orders on the
Company and its gas marketing efforts. Generally, Order 636 has eliminated or
substantially reduced the
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interstate pipelines' traditional role as wholesalers of natural gas, and has
substantially increased competition and volatility in natural gas markets.
INSURANCE
The Company maintains insurance coverage generally as follows:
1. Employer's liability insurance in certain states covering injury or
death to any employee who may be outside the scope of the worker's
compensation statute;
2. Commercial general liability insurance for bodily injury and property
damage, including property damage by blow-out and cratering, completed
operations, and broad from contractual liability with respect to any
contract into which the operator may enter into;
3. Automobile liability insurance covering owned, non-owned and hired
automotive equipment;
4. Umbrella liability insurance; and
5. Operator's insurance covering the costs of controlling a blow-out, and
seepage and pollution liability, when deemed appropriate on certain
properties.
The Company attempts to obtain such insurance in amounts management believes
to be reasonable and standard. Such coverage will likely not fully protect the
Company from any specific casualty or loss. There is no assurance such insurance
will always be available to the Company and on terms the Company can afford.
The Company is subject to, and to the best of its knowledge and belief is
currently in compliance with all bonding requirements (such as those relating to
plugging and abandonment) that are imposed by each of the states in which the
properties for which the Company acts as operator are located.
COMPETITION
The oil and gas industry is a highly competitive industry. Competitors
include major oil companies, other independent oil and gas concerns, and
individual producers and operators, many of which have financing resources,
staffs and facilities substantially greater than those of the Company. The
principal means of competition are the amount and terms of the consideration
offered. When possible, the Company tries to avoid open competitive bidding for
acquisition opportunities. The principal means of competition with respect to
the sale of oil and natural gas production are product availability and price.
While it is not possible for the Company to state accurately its position in the
oil and gas industry, the Company believes that it represents a minor
competitive factor.
BUSINESS RISKS AND REGULATION
The Company's operations are affected in various degrees by political
developments, federal and state laws, and regulations. In particular, oil and
gas production operations and economics are affected by price controls, tax and
other laws relating to the petroleum industry. They are all affected by the
changes in such laws, by changing administrative regulations, and by the
interpretation and application of such rules and regulations.
Legislation affecting the oil and gas industry is under constant review for
amendment or expansion. Numerous departments and agencies, both federal and
state, are authorized by statute to issue and have issued rules and regulations
binding on the oil and gas industry and its individual members, some of which
carry substantial penalties for the failure to comply. The regulatory burden on
the oil and gas industry increases the Company's cost of doing business and,
consequently, affects its profitability. Sales of crude oil, condensate and
natural gas liquids by the Company can be made at uncontrolled market prices.
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Changing Oil and Natural Gas Prices and Markets-- The market for oil and
natural gas produced by the Company depends on factors beyond its control,
including the extent of domestic production and imports of oil and natural gas,
the proximity and capacity of natural gas pipelines and other transportation
facilities, demand for oil and natural gas, the marketing of competitive fuels,
and the effects of state and federal regulation of oil and natural gas
production and sales. The oil and gas industry as a whole also competes with
other industries in supplying the energy and fuel requirements of industrial,
commercial and individual consumers.
The Company's production revenues and the carrying value of its oil and
natural gas properties are affected by changes in oil and natural gas prices.
Moreover, the Company's current borrowings under certain credit facilities, its
borrowing capacity and its ability to obtain additional capital in the future
are directly affected by oil and natural gas prices.
ENVIRONMENTAL REGULATION
Various federal, state and local laws and regulations covering the discharge
of materials into the environment, or otherwise relating to the protection of
the environment, may affect the Company's operations and costs as a result of
the effect on oil and gas exploration, development and production operations. At
present, substantially all of the Company's United States production of crude
oil, condensate and natural gas is in states having conservation laws and
regulations. It is not anticipated that the Company will be required in the near
future to expend amounts that are material in relation to its total capital
expenditures program by reason of environmental laws and regulations, but
inasmuch as such laws and regulations are frequently changed, the Company is
unable to predict the ultimate cost of compliance. The Company is able to
control directly the operations of only those wells for which it acts as
operator. Notwithstanding the Company's lack of control over wells operated by
others, the failure of the operator to comply with applicable environmental
regulations may, in certain circumstances, be attributable to the Company.
RAW MATERIALS
The Company's raw materials are its oil and gas reserves. Many operators are
engaged in the exploration for oil and gas, and there is strong competition for
desirable leases. See "Disclosures about Oil and Gas Producing Activities
(Unaudited)" in the Company's consolidated financial statements, appearing
elsewhere in this Proxy Statement/Prospectus for certain information concerning
the Company's oil and gas properties, producing activities and proved reserves.
WORKING CAPITAL PRACTICES
The Company's working capital practices are common to the industry, with
crude oil and natural gas sold to purchasers under short-term payment
arrangements.
MAJOR CUSTOMERS
During the year ended December 31, 1996, three customers: Rio Vista Energy,
Ltd., Cenex, Inc. and Montana Refining Company, accounted for approximately 34
percent, 19 percent and 15 percent, respectively, of total consolidated oil and
gas sales. For year ended December 31, 1995, three customers: Montana Refining
Company, Cenex, Inc. and Hanson Production Company, accounted for approximately
26 percent, 23 percent and 21 percent, respectively, of total consolidated oil
and gas sales.
The Company does not anticipate that the loss of any of its present
purchasers would have a materially adverse effect on the Company's consolidated
business and believes that, in the event of a loss of a present purchaser, other
purchasers of oil and gas operating in the Company's areas would purchase the
production at competitive prices.
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EMPLOYEES
At July 31, 1997, the Company had 19 full-time employees, including
officers.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
For each of the Company's last five fiscal years it has produced and sold
oil and gas in the United States. At December 31, 1996, five wells were on
production in Canada. For information regarding the Company's United States and
Canadian revenues, operating profits and assets, see the Company's consolidated
financial statements appearing elsewhere in this Proxy Statement/Prospectus.
LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceeding.
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BUSINESS AND PROPERTIES OF MERCURY
GENERAL
Mercury is a majority owned subsidiary of Parent formed to acquire from
Parent, and engage in the exploration, exploitation, development and operation
of, crude oil and natural gas properties in the Cut Bank Field complex in
northwest Montana. At March 7, 1997, Mercury acquired from Parent a total
acreage position of approximately 77,638 total acres, including approximately
64,687 gross (64,687 net) undeveloped acres.
BUSINESS STRATEGY
Mercury was formed in March 1997 in anticipation of the Merger. Mercury's
properties have been operated, and Mercury and the Company expect that the
properties of the Surviving Corporation will be managed in the same manner and
utilizing the same business and operational strategies employed by the Company
in the management of its business and properties.
DEVELOPMENT AREAS
All of the Mercury Properties are located in the Cut Bank Field complex in
northwest Montana.
Mercury, as part of its acquisition of the Montana Properties from Parent,
assumed the rights and obligations in the Wells Agreement with Montana Power
Company. The Wells Agreement covers the oil and gas development of an area of
mutual interest that presently contains approximately 304,000 acres in the Cut
Bank Field in Montana, including the Mercury Properties. Mercury holds 100
percent of the oil rights and 30 percent of the revenue pertaining to liquids
produced by gas wells while Montana Power Company has all the rights to natural
gas. The area of mutual interest and the agreement were originally created in
1944 and will remain in effect until all mutual oil and gas leases in the area
have expired. Over 50 low-risk drilling locations have been identified in the
general area. Management of Mercury expect that activities conducted pursuant to
the Wells Agreement and revenues therefrom will account for a significant
portion of its future activities and revenues.
MARKETING ARRANGEMENTS
The marketability of Mercury's oil production depends in part upon the
availability, proximity and capacity of refineries, pipelines and processing
facilities. To the extent crude oil prices decline further or Mercury is unable
to market efficiently its oil production, Mercury's business, financial
condition and results of operations could be materially adversely affected.
The price received by Mercury for its oil and natural gas production depends
on numerous factors beyond Mercury's control, including seasonality, the
condition of the United States economy, particularly the manufacturing sector,
foreign imports, political conditions in other oil-producing and natural gas-
producing countries, the actions of OPEC and domestic government regulation,
legislation and policies. Decreases in the prices of oil and natural gas could
have an adverse effect on the carrying value of Mercury's proved reserves and
its revenues, profitability and cash flow.
PRODUCTION PAYMENT
Parent and SDG entered into a Production Payment Agreement in October 1996.
Pursuant to the agreement, SDG was entitled to the Production Payment Amount
produced from certain properties of Parent, including the Mercury Properties.
Parent can satisfy this obligation by delivering to SDG proceeds from the sale
of oil produced rather than delivering the oil "in kind," unless SDG elects to
take oil "in kind." Pursuant to the Merger Agreement, Parent is entitled to all
of the oil revenue and income attributable to the Mercury Properties until the
Production Payment Amount has been delivered to SDG;
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provided that Parent must reimburse the Surviving Corporation for all costs and
expenses of oil production; and provided further that if the entire Production
Payment Amount is not delivered to SDG on or before December 31, 1997, then
Parent must reimburse the Surviving Corporation for any amount of the Production
Payment Amount the Surviving Corporation is required to deliver to SDG after
such date. Parent and Mercury estimate that based on current prices for crude
oil, the amount remaining due to SDG under the agreement as of June 30, 1997 was
approximately $788,000. Parent and Mercury anticipate that such obligation to
SDG will be satisfied on or before December 31, 1997.
RESERVES
Mercury's estimated net proved developed and proved undeveloped oil and gas
reserves are summarized in the following table. The reserve and present value
data were prepared by MSR's independent petroleum engineers, Citadel Engineering
Ltd, as of December 31, 1996 and 1995 and calculated as of December 31, 1994 by
adding 1995 production to the December 31, 1995 amounts.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------------------------------------
1994 1995 1996
---------------------- ---------------------- ----------------------
OIL NATURAL GAS OIL NATURAL GAS OIL NATURAL GAS
(MBBLS) (MMCF) (MBBLS) (MMCF) (MBBLS) (MMCF)
--------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Total proved developed................... 1,761.2 1,488.7 1,637.9 1,400.9 1,627.6 1,338.7
Total proved undeveloped................. 3,653.3 -- 3,653.3 -- 3,653.8 --
--------- ----------- --------- ----------- --------- -----------
Total proved........................... 5,414.5 1,488.7 5,291.2 1,400.9 5,281.4 1,338.7
--------- ----------- --------- ----------- --------- -----------
--------- ----------- --------- ----------- --------- -----------
</TABLE>
The following table sets forth the future net cash flows from estimated
proved reserves of the Mercury Properties:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------
1995 1996
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Future cash flows......................................................................... $ 89,555 $ 119,585
Future production and development costs................................................... (47,752) (71,893)
Future income tax expense................................................................. (9,790) (10,200)
---------- ----------
Future net cash flows..................................................................... 32,013 37,492
10 percent annual discount for estimated timing of cash flows............................. (18,568) (20,445)
---------- ----------
Standardized measure of discounted future net cash flows.................................. $ 13,445 $ 17,047
---------- ----------
---------- ----------
</TABLE>
The reserve estimates reflected above were prepared by Mercury.
In accordance with applicable requirements of the Commission, estimates of
Mercury's proved reserves and future net revenues are made using sales prices
estimated to be in effect as of the date of such reserve estimates and are held
constant throughout the life of the properties (except to the extent a contract
specifically provides for escalation). Estimated quantities of proved reserves
and future net revenues therefrom are affected by oil and natural gas prices,
that have fluctuated widely in recent years. There are numerous uncertainties
inherent in estimating oil and natural gas reserves and their estimated values,
including many factors beyond the control of the producer. The reserve data set
forth in this Proxy Statement/Prospectus represents only estimates. Reservoir
engineering is a subjective process of estimating underground accumulations of
oil and natural gas that cannot be measured in an exact manner. The accuracy of
any reserve estimate is a function of the quality of available data and of
engineering and geological interpretation and judgment. In addition, Mercury's
use of improved oil recovery techniques requires greater development
expenditures than traditional drilling strategies. Mercury expects to drill a
number of wells utilizing waterflood technology in the future. Estimates of
different engineers, including
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those used by Mercury, may vary. In addition, estimates of reserves are subject
to revision based upon actual production, results of future development and
exploration activities, prevailing oil and natural gas prices, operating costs
and other factors, which revisions may be material. Accordingly, reserve
estimates are often different from the quantities of oil and natural gas that
are ultimately recovered and are highly dependent upon the accuracy of the
assumptions upon which they are based. Mercury's estimated proved reserves have
not been filed with or included in reports to any federal agency. See "Risk
Factors-- Uncertainty of Reserve Information and Future Net Revenue Estimates."
EXPLORATION AND DEVELOPMENT ACTIVITIES
Mercury (and Parent prior to the formation of Mercury with respect to the
Mercury Properties) did not drill, or participate in the drilling of, any wells
during the years 1994, 1995 or 1996.
Mercury does not own any drilling rigs; therefore, its drilling activities,
when undertaken, would be conducted by independent contractors under standard
drilling contracts.
PRODUCTIVE WELL SUMMARY
The following table sets forth Mercury's ownership interest as of March 7,
1997 in productive oil and natural gas wells in the development areas indicated.
<TABLE>
<CAPTION>
OIL NATURAL GAS TOTAL
---------------------- ---------------------- -----------
AREA GROSS NET GROSS NET GROSS
- ---------------------------------------------------------------------- ----------- --- ----------- --- -----------
<S> <C> <C> <C> <C> <C>
Cut Bank Field, Montana............................................... 73 62 178 45 251
<CAPTION>
AREA NET
- ---------------------------------------------------------------------- ---
<S> <C>
Cut Bank Field, Montana............................................... 107
</TABLE>
VOLUMES, PRICES AND PRODUCTION COSTS
The following table sets forth the production volumes, average prices
received and average production costs associated with oil and natural gas
produced from the Mercury Properties for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
1995 1996
---------- ----------
<S> <C> <C>
Net Production:
Oil (Bbl)........................................................... 127,393 131,886
Natural gas (Mcf)................................................... 87,758 86,672
Oil equivalent (BOE)................................................ 142,019 146,332
Average sales price:
Oil ($per Bbl)...................................................... $ 15.86 $ 19.29
Natural gas ($per Mcf).............................................. $ 2.11 $ 2.63
Average production expenses and taxes ($per BOE)...................... $ 9.39 $ 10.16
</TABLE>
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DEVELOPMENT, EXPLORATION AND ACQUISITION EXPENDITURES
The following table sets forth the costs incurred in the development,
exploration and acquisition activities relating to the Mercury Properties during
the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996
------------ ---------
<S> <C> <C>
Acquisition
Unproved Properties................................................ $ 300,000 $ 0
Proved Properties.................................................. 4,293,000 0
Development.......................................................... 0 84,000
------------ ---------
Total................................................................ $ 4,593,000 $ 84,000
------------ ---------
------------ ---------
</TABLE>
ACREAGE
The following table sets forth, as of March 7, 1997, the gross and net acres
of developed and undeveloped oil and natural gas leases which Mercury holds or
has the right to acquire.
<TABLE>
<CAPTION>
DEVELOPED UNDEVELOPED TOTAL
-------------------- -------------------- --------------------
FIELD GROSS NET GROSS NET GROSS NET
- ------------------------------------------------------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Cut Bank Field, Montana................................ 12,951 12,276 64,687 64,687 77,638 76,963
</TABLE>
ACQUISITIONS
Mercury expects that it may evaluate and pursue from time to time
acquisitions that provide attractive investment opportunities for the addition
of production and reserves and that meet Mercury's selection criteria. The
successful acquisition of producing properties and undeveloped acreage requires
an assessment of recoverable reserves, future oil and natural gas prices,
operating costs, potential environmental and other liabilities and other factors
beyond Mercury's control. This assessment is necessarily inexact and its
accuracy is inherently uncertain. In connection with such an assessment, Mercury
performs a review of the subject properties it believes to be generally
consistent with industry practices. This review, however, will not reveal all
existing or potential problems, nor will it permit a buyer to become
sufficiently familiar with the properties to assess fully their deficiencies and
capabilities. Inspections may not be performed on every well, and structural and
environmental problems are not necessarily observable even when an inspection is
undertaken. Mercury generally assumes preclosing liabilities, including
environmental liabilities, and generally acquires interests in the properties on
an "as is" basis.
COMPETITION
Mercury operates in the highly competitive areas of oil and natural gas
exploration, exploitation, acquisition and production with other companies, many
of which have substantially larger financial resources, operations, staffs and
facilities. In addition, Parent and its parent corporation, MPC, are also
engaged in the oil and natural gas exploration, exploitation, acquisition and
production business, although their respective operations are generally
conducted in geographic regions other than those in which Mercury conducts its
business. In seeking to acquire desirable producing properties or new leases for
future exploration and in marketing its oil and natural gas production, Mercury
faces intense competition from both major and independent oil and natural gas
companies, including Parent and companies, like Pozo Resources, Inc., that are
affiliated with officers, directors and shareholders of the Company. In addition
to the development of its existing proved reserves, Mercury expects that its
inventory of unproved drilling locations will be the primary source of new
reserves, production and cash flow over the next few years. In addition, recent
heavy drilling activity by a number of operators in the Cut Bank Field complex
in
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northwest Montana may reduce or limit the availability of equipment and supplies
or reduce demand for Mercury's production, either of which would impact Mercury
more adversely than if Mercury were geographically diversified. See
"Management's Discussion and Analysis of Mercury's Financial Condition and
Results of Operations--Liquidity and Capital Resources" and "Risk
Factors--Competition."
OPERATING HAZARDS AND UNINSURED RISKS
Oil and natural gas drilling activities are subject to many risks, including
the risk that no commercially productive reservoirs will be encountered. There
can be no assurance that new wells drilled by Mercury will be productive or that
Mercury will recover all or any portion of its investment. Drilling for oil and
natural gas may involve unprofitable efforts, not only from dry holes, but from
wells that are productive but do not produce sufficient net revenues to return a
profit after drilling, operating and other costs. The cost of drilling,
completing and operating wells is often uncertain. Mercury's drilling operations
may be curtailed, delayed or canceled as a result of numerous factors, many of
which are beyond Mercury's control, including economic conditions, title
problems, weather conditions, compliance with governmental requirements and
shortages or delays in the delivery of equipment and services. Mercury's future
drilling activities may not be successful and, if unsuccessful, such failure may
have a material adverse effect on Mercury's future results of operations and
financial condition.
Mercury's operations are subject to hazards and risks inherent in drilling
for and producing and transporting oil and natural gas, such as fires, natural
disasters, explosions, encountering formations with abnormal pressures,
blowouts, cratering, pipeline ruptures and spills, any of which can result in
the loss of hydrocarbons, environmental pollution, personal injury claims and
other damage to properties of Mercury and others. As protection against
operating hazards, Mercury maintains insurance coverage against some, but not
all, potential losses. Mercury may elect to self-insure in circumstances in
which management believes that the cost of insurance, although available, is
excessive relative to the risks presented. The occurrence of an event that is
not covered, or not fully covered, by third-party insurance could have a
material adverse effect on Mercury's business, financial condition and results
of operations. See "Risk Factors--Drilling and Operating Risks."
REGULATION
REGULATION OF OIL AND NATURAL GAS PRODUCTION. Mercury's oil and natural gas
exploration, production and related operations are subject to extensive rules
and regulations promulgated by federal, state and local authorities and
agencies. Failure to comply with such rules and regulations can result in
substantial penalties. The regulatory burden on the oil and natural gas industry
increases Mercury's cost of doing business and affects its profitability.
Although Mercury believes it is in substantial compliance with all applicable
laws and regulations, because such rules and regulations are frequently amended
or reinterpreted, Mercury is unable to predict the future cost or impact of
complying with such laws.
Montana and many other states require permits for drilling operations,
drilling bonds and reports concerning operations and impose other requirements
relating to the exploration and production of oil and natural gas. Such states
also have statutes or regulations addressing conservation matters, including
provisions for the unitization or pooling of oil and natural gas properties, the
establishment of maximum rates of production from wells, and the regulation of
spacing, plugging and abandonment of such wells.
FEDERAL REGULATION OF NATURAL GAS. The Federal Energy Regulatory Commission
("FERC") regulates interstate natural gas transportation rates and service
conditions, which affect the marketing of natural gas produced by Mercury, as
well as the revenues received by Mercury for sales of such production. Since the
mid-1980's, FERC has issued a series of orders, culminating in Order Nos. 636,
636-A and 636-B ("Order 636"), that have significantly altered the marketing and
transportation of natural gas. Order 636 mandates a fundamental restructuring of
interstate pipeline sales and transportation service, including the unbundling
by interstate pipelines of the sale, transportation, storage and other
components of the city-
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gate sales services such pipelines previously performed. One of FERC's purposes
in issuing the order was to increase competition within all phases of the
natural gas industry. In July 1996, the United States Court of Appeals for the
District of Columbia Circuit largely upheld Order 636. A number of parties have
appealed this ruling to the Supreme Court and proceedings on remanded issues are
currently ongoing at FERC. In addition, numerous parties have filed for review
of Order 636, as well as orders in individual pipeline restructuring
proceedings. Because these orders may be modified as a result of the appeals, it
is difficult to predict the ultimate impact of the orders on Mercury and its
natural gas marketing efforts. Generally, Order 636 has eliminated or
substantially reduced the interstate pipelines' traditional role as wholesalers
of natural gas in favor of providing only storage and transportation services,
and has substantially increased competition and volatility in natural gas
markets.
The price Mercury receives from the sale of oil and natural gas liquids is
affected by the cost of transporting products to markets. Effective January 1,
1995, FERC implemented regulations establishing an indexing system for
transportation rates for oil pipelines, which, generally, would index such rates
to inflation, subject to certain conditions and limitations. Mercury is not able
to predict with certainty the effect, if any, of these regulations on its
operations. However, the regulations may increase transportation costs or reduce
well head prices for oil and natural gas liquids.
ENVIRONMENTAL MATTERS. Mercury's operations and properties are subject to
extensive and changing federal, state and local laws and regulations relating to
environmental protection, including the generation, storage, handling, emission,
transportation and discharge of materials into the environment, and relating to
safety and health. The recent trend in environmental legislation and regulation
generally is toward stricter standards, and this trend will likely continue.
These laws and regulations may require the acquisition of a permit or other
authorization before construction or drilling commences and for certain other
activities; limit or prohibit construction, drilling and other activities on
certain lands lying within wilderness and other protected areas; and impose
substantial liabilities for pollution resulting from Mercury's operations. The
permits required for various of Mercury's operations are subject to revocation,
modification and renewal by issuing authorities. Governmental authorities have
the power to enforce compliance with their regulations, and violations are
subject to fines or injunction, or both. In the opinion of management, Mercury
is in substantial compliance with current applicable environmental laws and
regulations, and Mercury has no material commitments for capital expenditures to
comply with existing environmental requirements. Nevertheless, changes in
existing environmental laws and regulations or in interpretations thereof could
have a significant impact on Mercury, as well as the oil and natural gas
industry in general.
The Comprehensive Environmental, Response, Compensation, and Liability Act
("CERCLA") and comparable state statutes impose strict, joint and several
liability on owners and operators of sights and on persons who disposed of or
arranged for the disposal of "hazardous substances" found at such sights. It is
not uncommon for the neighboring land owners and other third parties to file
claims for personal injury and property damage allegedly caused by the hazardous
substances released into the environment. The Federal Resource Conservation and
Recovery Act ("RCRA") and comparable state statutes govern the disposal of
"solid waste" and "hazardous waste" and authorize a position of substantial
fines and penalties for noncompliance. Although CERCLA currently excludes
petroleum from its definition of "hazardous substance," state laws affecting
Mercury's operations impose clean-up liability relating to petroleum and
petroleum related products. In addition, although RCRA classifies certain oil
field wastes as "non-hazardous," such exploration and production wastes could be
reclassified as hazardous wastes thereby making such wastes subject to more
stringent handling and disposal requirements.
ABANDONMENT COSTS
Mercury is responsible for payment of plugging and abandonment costs on its
oil and natural gas properties pro rata to its working interest. Based on its
experience, Mercury anticipates that the ultimate aggregate salvage value of
lease and well equipment located on its properties will exceed the costs of
abandoning such properties. There can be no assurance, however, that Mercury
will be successful in
100
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avoiding additional expenses in connection with the abandonment of any of its
properties. In addition, abandonment costs and their timing may change due to
many factors including actual production results, inflation rates and changes in
environmental laws and regulations.
TITLE TO PROPERTIES
Mercury believes it has satisfactory title to all of its producing
properties in accordance with standards generally accepted in the oil and
natural gas industry. Mercury's properties are subject to customary royalty
interests, liens incident to operating agreements, liens for current taxes and
other burdens which Mercury believes do not materially interfere with the use of
or affect the value of such properties. The repayment of up to $4.0 million of
the NationsBank Debt is guaranteed by Mercury. The entirety of the NationsBank
Debt is also secured by a lien on the Mercury Properties. Although Mercury and
the Company expect that such lien in favor of the lender of the NationsBank Debt
will be released in connection with the repayment by the Surviving Corporation
of $4.0 million of such debt at the Effective Time of the Merger, the Company
and Mercury expect that the Surviving Corporation will incur other indebtedness
in order to repay such amount of the NationsBank Debt and that such new debt
will be secured by a lien on all of the properties of the Surviving Corporation,
which will include all of the properties currently owned by Mercury and the
Company. The Mercury Properties are also subject to a Production Payment
Agreement and provisions of the Merger Agreement pursuant to which all reserves
and income from the Mercury Properties through December 31, 1997 have been
transferred to Parent. See "Business and Properties of Mercury--Forward Sale
Agreement." The Mercury Properties are also subject to an agreement with Montana
Power Company whereby Montana Power Company has the right to all natural gas
produced from the Mercury Properties. See "Risk Factors--Reliance on Contract
with Montana Power Company."
Presently, Mercury keeps in force its leaseholds for 98 percent of its net
acreage by virtue of production. The remaining acreage is held by lease rentals
and similar provisions and requires production in paying quantities prior to
expiration of various time periods to avoid lease termination.
OTHER FACILITIES
Mercury currently subleases approximately 1,500 square feet of office space
in Fort Worth, Texas from Parent where its principal offices are located. The
Surviving Corporation will continue to sublease such space from Parent at market
rates subsequent to the Merger.
EMPLOYEES
Mercury has no full-time employees.
LEGAL PROCEEDINGS
Mercury is not a party to any material pending legal proceedings.
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DIRECTORS AND EXECUTIVE OFFICERS OF THE SURVIVING CORPORATION
GENERAL
Information concerning the person who are expected to serve as directors and
executive officers of the Surviving Corporation following the Merger is set
forth below as of June 1, 1997. Messrs. Buis, Montalban, Morris, Kent and Rogers
are the nominees of the Board of Directors of the Company for election to the
Board of Directors of the Company at the Special Meeting. If such persons are
elected, management of the Company intends that such persons will be designated
by the Company in accordance with the Merger Agreement to serve as directors of
the Surviving Corporation. Thomas, Glenn and Frank Darden are currently
directors of Mercury and have been designated by Mercury to serve as directors
of the Surviving Corporation upon effectiveness of the Merger.
<TABLE>
<CAPTION>
NAME AGE POSITION IN THE SURVIVING CORPORATION
- ------------------------------------------------ --- -----------------------------------------------------
<S> <C> <C>
Otto J. Buis.................................... 65 Chairman of the Board, Chief Executive Officer and
Director
Thomas F. Darden................................ 43 President, Chief Operating Officer and Director
Glenn M. Darden................................. 41 Vice President and Director
Frank Darden.................................... 70 Director
Patrick M. Montalban............................ 39 Director
Steven M. Morris................................ 44 Director
D. Randall Kent................................. 71 Director
W. Yandell Rogers, III.......................... 33 Director
</TABLE>
OTTO J. BUIS is a registered petroleum geologist and for more than 35 years
has held executive positions with domestic and international companies such as
OKC Limited Partnership, OKC Corp., Shenandoah Oil Corporation and Texaco, Inc.
Mr. Buis has been President and Chief Executive Officer of Pozo Resources, Inc.
since 1992. Mr. Buis was a director of MSR from September 1989 through July 1990
and he was a court appointed Director and Chief Executive Officer of the Company
from June 1991 through March 1992. At the Special Stockholders meeting of the
Company shareholders held on October 25, 1994, Mr. Buis was elected Director and
subsequently elected Chairman of the Board, President and Chief Executive
Officer of the Company.
THOMAS F. DARDEN has served as president of Parent for the last five years.
During that time, Parent has developed and acquired interests in over 1,200
producing wells in Michigan, Indiana, Kentucky, Wyoming, Montana, New Mexico and
Texas. A graduate of Tulane University with a B.A. in Economics in 1975, Mr.
Darden has been employed by Parent or its parent corporation, MPC, for
twenty-two years.
GLENN M. DARDEN has served with Parent for 14 years, the last five years as
the executive vice president of the company. Prior to working for Parent, Mr.
Darden worked as a geologist for Mitchell Energy Corporation. Mr. Darden
graduated from Tulane University in 1979 with a B.A. in Earth Sciences.
FRANK DARDEN is a registered professional engineer and Chairman of the Board
of Parent, a family owned private oil and gas company in Fort Worth, Texas. Mr.
Darden founded the parent corporation of Parent, MPC, and has served as its
Chairman since 1965 and as chairman of Parent since its founding in 1978. Mr.
Darden commenced his career in the oil and gas business with Humble Oil and
Refining Company in 1948. From 1954 through 1955 he was retained by Empresa
Colombiana de Petroleos to organize an engineering department and guide the
company's planning for the secondary recovery program in the La Cira Field in
the Magdelena Valley of Colombia. From 1956 through 1964 Mr. Darden served as
Manager of Operations for Newmont Oil Company, the energy subsidiary of Newmont
Mining Corporation, and as Executive Vice President and Director of Yucca Water
Company. Mr. Darden is the father of Thomas and Glenn Darden.
PATRICK M. MONTALBAN is a petroleum geologist who graduated from the
University of Montana in 1981. He joined the Company as a Staff Geologist in
1983 and became Vice President of Exploration and Production in October 1986. In
December 1990, he was named Executive Vice President of the Company and at the
December 1991 Annual General Meeting for the Company was elected Director and
has continued in these offices to the present.
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<PAGE>
STEVEN M. MORRIS is a certified public accountant and President of Morris &
Co., a private investment firm in Houston, Texas. From 1988 to 1991, he was Vice
President of Finance for ITEX Enterprises, Inc. From 1981 to 1988 Mr. Morris was
the Financial Vice President of Hanson Minerals Company, a Houston based oil and
gas exploration company. From 1978 to 1981, Mr. Morris was a Partner in the
Certified Public Accounting Firm of Haley & Morris. He served as Senior
Accountant with the Houston office of Arthur Young and Company from 1974 to
1977. Mr. Morris was elected a Director of the Company at the Special
Stockholders Meeting held on October 24, 1994.
D. RANDALL KENT is a retired vice president of the General Dynamics
Corporation. He joined General Dynamics/Ft. Worth division in 1949 and served in
various engineering management positions, including Vice President and Chief
Engineer of the F-16 Fighter Program. Following his retirement in 1991, Mr. Kent
has served as a consultant to the Lockheed-Martin Corporation. Mr. Kent
graduated from Louisiana State University in 1947 with a B.S. in Mechanical
Engineering and from Cornell University in 1949 with an M.S. in Engineering.
W. YANDELL ROGERS, III has served as Vice President and General Manager of
Ridgway's, Inc. since July 1997. For more than five years prior to that date he
served as Regional Manager for Ridgway's, Inc. Based in Houston, Texas,
Ridgway's, Inc. is the largest privately held reprographics firm in the U.S.
with more than 60 locations nationwide. Mr. Rogers graduated from Southern
Methodist University in 1986 with a B.B.A. in Finance.
Executive officers will be elected annually by, and serve at the discretion
of, the Board of Directors. There are no arrangements or understandings between
any of the persons to serve as officers of the Surviving Corporation or any
other person (other than arrangements or understandings with officers acting as
such) pursuant to which any person will be elected as an officer of the
Surviving Corporation. The Merger Agreement provides that Patrick Montalban, and
two persons designated by Mercury, will serve as members of an executive
committee of the Board of Directors of the Surviving Corporation. Mercury has
designated Thomas Darden and Glenn Darden to serve as members of the executive
committee.
COMPENSATION
The following table lists compensation paid to the persons who will serve as
chief executive officer and executive officers of the Surviving Corporation and
who were paid in excess of $100,000 for the two years ended December 31, 1996.
SUMMARY OF COMPENSATION
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------
NAME AND PRINCIPAL POSITION YEAR SALARY ALL OTHER
- -------------------------------------------------------------------------------- --------- ---------- ------------
<S> <C> <C> <C>
Otto J. Buis.................................................................... 1996 $ 116,667 --
Chairman of the Board, President, 1995 $ 101,000 --
Chief Executive Officer and Director
Patrick M. Montalban............................................................ 1996 $ 88,200 --
Executive Vice President 1995 $ 80,700 $ 28,000(1)
Chief Operating Officer and Director
</TABLE>
- ------------------------
(1) The additional amounts paid to Patrick M. Montalban were for four years of
scheduled raises that had not been paid.
In lieu of one year's cash compensation, on March 7, 1997, Thomas Darden and
Glenn Darden were each awarded options to acquire 114,285 shares of Mercury
Common Stock at an exercise price of $.875 per share, which approximated market
value at the date of grant, for their services as officers of Mercury. Thomas
Darden and Glenn Darden will each serve as officers and directors of the
Surviving Corporation.
Directors who are not employees of the Surviving Corporation will receive
$500 per day per meeting plus traveling and out-of-pocket expenses for each
meeting of the Board of Directors, or committee thereof, attended.
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<PAGE>
DESCRIPTION OF SECURITIES OF THE SURVIVING CORPORATION
The following summary description of the capital stock of the Surviving
Corporation does not purport to be complete and is qualified in its entirety by
reference to the Surviving Corporation Certificate and Bylaws, copies of which
are attached as Appendix "F" and "G", respectively. Furthermore, except as
noted, the following discussion describes the capital stock of the Surviving
Corporation assuming that the Continuance and Merger have already been effected.
GENERAL
The authorized capital stock of the Surviving Corporation will consist of
50,000,000 shares of Common Stock, $0.01 par value per share, 25,777,014 of
which will be issued and outstanding immediately following the Merger, and
10,000,000 shares of Preferred Stock, par value $.01 per share ("Preferred
Stock"), none of which will be issued and outstanding immediately following the
Merger.
COMMON STOCK
Subject to the rights of holders of Preferred Stock then outstanding,
holders of Surviving Corporation Common Stock are entitled to receive such
dividends as may from time to time be declared by the Board of Directors of the
Surviving Corporation. Holders of Surviving Corporation Common Stock are
entitled to one vote per share on all matters on which the holders of Surviving
Corporation Common Stock are entitled to vote. Because holders of Surviving
Corporation Common Stock do not have cumulative voting rights, the holders of a
majority of the shares of Surviving Corporation Common Stock represented at a
meeting for the election of directors can elect all of the directors. Holders of
Surviving Corporation Common Stock have no preemptive rights to subscribe for
any additional securities that the Surviving Corporation may issue. All shares
of Surviving Corporation Common Stock to be outstanding upon completion of the
Continuance and Merger will be legally issued, fully paid and nonassessable.
Upon the liquidation, dissolution or winding up of the Surviving Corporation,
holders of the shares of Surviving Corporation Common Stock are entitled to
share equally, share-for-share, in the assets available for distribution after
payment to all creditors of the Surviving Corporation, subject to the rights, if
any, of the holders of any outstanding shares of Preferred Stock.
PREFERRED STOCK
Pursuant to the Surviving Corporation Certificate, the Board of Directors of
the Surviving Corporation is authorized, subject to any limitations prescribed
by law, to provide for the issuance of shares of Preferred Stock from time to
time in one or more series and to establish the number of shares to be included
in each such series and to fix the designation, powers, preferences and
relative, participating, optional and other special rights of the shares of each
such series and any qualifications, limitations or restrictions thereof. Because
the Board of Directors has such power to establish the powers, preferences and
rights of each series, it may afford the holders of Preferred Stock preferences,
powers and rights (including voting rights) senior to the rights of the holders
of Surviving Corporation Common Stock. Although the Surviving Corporation has no
current intention to issue shares of Preferred Stock, the issuance of such
shares, or the issuance of rights to purchase such shares, could be used to
discourage an unsolicited acquisition proposal.
WARRANTS AND CONVERTIBLE SECURITIES
The following table describes the terms of certain warrants the Company and
Mercury have outstanding.
<TABLE>
<CAPTION>
NO. OF
SHARES EXERCISE
TYPE COVERED EXPIRATION DATE PRICE
- ----------------------------------------------- ------------ --------------- -------------
<S> <C> <C> <C>
COMPANY SECURITIES:
Warrant...................................... 280,000 1/12/2000 $ 3.375
MERCURY SECURITIES:
Warrants..................................... 5,500,000 3/31/2002 $ 1.25
Warrants..................................... 5,500,000 3/31/2002 $ 2.00
Options...................................... 228,570 3/31/2002 $ 0.875
</TABLE>
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<PAGE>
The Surviving Corporation has also agreed to issue a warrant to Parent
pursuant to the Merger Agreement to purchase up to 1,250,000 shares of Surviving
Corporation Common Stock at an exercise price of $0.01 per share at any time and
from time to time prior to March 31, 2002, subject to extension, in the event of
the creation of certain tax liabilities in the Surviving Corporation as a result
of the Continuance. See "The Merger-- Interests of Certain Persons in the
Merger."
STOCK OPTION PLAN
The 1997 Stock Option Plan of Mercury (the "Plan") was adopted by the Board
of Directors of Mercury and approved by the shareholders of Mercury effective as
of March 7, 1997. The Plan permits the granting of options to purchase shares of
Mercury Common Stock. All employees and directors of Mercury are eligible to
participate in the Plan. An aggregate of 250,000 shares of Mercury Common Stock
have been authorized and reserved for issuance under the Plan. As of June 1,
1997, options to purchase an aggregate of 228,570 shares of Mercury Common Stock
had been granted under the Plan at an exercise price of $0.875 per share. The
Stock Option Committee of the Board of Directors of Mercury determines who shall
be granted options under the Plan and the terms thereof, and administers the
Plan. No options may be granted under the Plan after March 7, 2007.
The Plan will become a stock option plan of the Surviving Corporation
pursuant to the Merger. The Company has no stock option or similar plans.
PROVISIONS HAVING POSSIBLE ANTI-TAKEOVER EFFECTS
The Surviving Corporation is subject to the provisions of Section 203 of the
DGCL. In general, Section 203 prohibits a publicly-held Delaware corporation
from engaging in a "business transaction" with an "interested stockholder" for a
period of three years after the date that the person became an interested
stockholder unless (with certain exceptions) the business combination or the
transaction in which the person became an interested stockholder is approved in
a prescribed manner. A "business combination" generally includes, without
limitation, a merger, assets or stock sale, or a transaction resulting in a
financial benefit to the interested stockholder. An "interested stockholder"
generally is a person who, together with affiliates and associates, owns (or
within three years prior, did own) 15 percent or more of a corporation's
outstanding voting stock. See "Differences Between the DGCL and the
ABCA--Business Combinations." Even though Parent will beneficially own 39.2
percent of the Surviving Corporation Common Stock after the Merger, it will not
be subject to the restrictions contained in Section 203 of the DGCL.
The Surviving Corporation Bylaws provide that special meetings of
shareholders may be called only by the Chairman of the Board of Directors, the
President or a majority of the Board of Directors of the Surviving Corporation.
Pursuant to the Certificate, the Board of Directors of the Surviving Corporation
is also authorized to issue shares of "blank check" preferred stock that may
have the effect of discouraging an unsolicited acquisition proposal. See
"--Preferred Stock."
EXCHANGE AGENT, TRANSFER AGENT AND REGISTRAR
The Exchange Agent for exchange of stock certificates following the Merger
will be ChaseMellon Shareholder Services L.L.C., at its principal offices at
Dallas, Texas. The Transfer Agent and Registrar for the Surviving Corporation
Common Stock will also be ChaseMellon Shareholder Services L.L.C.
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<PAGE>
BENEFICIAL OWNERSHIP OF SECURITIES
The following table sets forth with respect to the Company, Mercury, and the
Surviving Corporation (giving pro forma effect to the Merger), certain
information as of the Meeting Record Date with respect to the beneficial
ownership of Company Common Stock, Mercury Common Stock and Surviving
Corporation Common Stock, as the case may be, of (i) directors and nominees,
(ii) executive officers, (iii) executive officers and directors as a group and
(iv) holders of five percent or more of such securities.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED
------------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT
- --------------------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
COMPANY COMMON STOCK
DIRECTORS AND NOMINEES
Otto J. Buis (1)............................................................... 194,544 1.4
C. Al Buis (1)................................................................. 27,778 0.2
Patrick M. Montalban........................................................... 279,100 2.0
Steven M. Morris (1)........................................................... 1,111,111 8.1
D. Randall Kent................................................................ -0- 0.0
W. Yandell Rogers, III......................................................... 45,000 0.3
EXECUTIVE OFFICERS NOT NAMED ABOVE
None
DIRECTORS AND EXECUTIVE OFFICERS AS A GROUP...................................... 1,612,533 11.7
HOLDERS OF FIVE PERCENT OR MORE NOT NAMED ABOVE
Pozo Resources, Inc. (2)....................................................... 1,931,444 14.1
Joseph V. Montalban............................................................ 1,809,855 13.1
MERCURY COMMON STOCK
DIRECTORS
Frank Darden (3)............................................................... 2,300,000 17.6
Thomas F. Darden (3)........................................................... 2,414,285 18.3
Glenn M. Darden (3)............................................................ 2,414,285 18.3
EXECUTIVE OFFICERS NOT NAMED ABOVE
None
DIRECTORS AND EXECUTIVE OFFICERS AS A GROUP (4).................................. 7,128,570 45.9
HOLDERS OF FIVE PERCENT OR MORE NOT NAMED ABOVE
Parent (5)..................................................................... 12,420,000 69.2
Anne Darden Self (3)........................................................... 2,300,000 17.7
Jack L. Thurber (6)............................................................ 1,150,000 9.2
SURVIVING CORPORATION COMMON STOCK
DIRECTORS (7)
Otto J. Buis (1)............................................................... 194,544 0.8
Frank Darden (3)............................................................... 2,300,000 8.6
Glenn M. Darden (3)............................................................ 2,414,285 8.9
Thomas F. Darden (3)........................................................... 2,414,285 8.9
Patrick M. Montalban........................................................... 279,100 1.1
Steven M. Morris (1)........................................................... 1,111,111 4.3
D. Randall Kent................................................................ -0- 0.0
W. Yandell Rogers, III......................................................... 45,000 0.2
EXECUTIVE OFFICERS NOT NAMED ABOVE
None
DIRECTORS AND EXECUTIVE OFFICERS AS A GROUP (4).................................. 8,758,325 29.9
HOLDERS OF FIVE PERCENT OR MORE NOT NAMED ABOVE
Parent (5)..................................................................... 12,420,000 39.2
Joseph V. Montalban............................................................ 1,809,855 7.0
Pozo Resources, Inc. (1)....................................................... 1,931,444 7.5
Anne Darden Self (3)........................................................... 2,300,000 8.6
</TABLE>
- ------------------------
(1) Does not include shares beneficially owned by Pozo Resources, Inc. See
footnote (2) below.
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<PAGE>
(2) Pozo Resources, Inc. is owned by Otto J. Buis, C. Al Buis and Steven M.
Morris. Messrs. Buis, Buis and Morris may be deemed to share voting and
investment power with respect to the shares owned by Pozo Resources, Inc.
Each such person disclaims beneficial ownership of such shares.
(3) Does not include shares beneficially owned by Parent. See footnote (4)
below. Does include with respect to each person 1,100,000 shares subject to
immediately exercisable warrants. Also includes with respect to each of
Thomas F. Darden and Glenn M. Darden 114,285 shares subject to immediately
exercisable options.
(4) Includes 3,300,000 shares subject to immediately exercisable warrants and
228,570 shares subject to immediately exercisable options.
(5) Number of shares indicated includes 5,940,000 shares subject to immediately
exercisable warrants. Each of Frank Darden, Thomas F. Darden, Glenn M.
Darden and Anne Darden Self are directors, officers and shareholders of
Parent and share voting and investment power with respect to the 12,420,000
shares of Mercury Common Stock beneficially owned by Parent. Each such
person disclaims beneficial ownership of such shares.
(6) Includes 550,000 shares subject to currently exercisable warrants.
(7) Assumes that Otto J. Buis, Patrick M. Montalban, Steven M. Morris, D.
Randall Kent and W. Yandell Rogers, III are elected to the Board of
Directors of the Company at the Special Meeting and are subsequently
designated by the Company pursuant to the Merger Agreement to serve as
directors of the Surviving Corporation.
The address of each of the directors of the Company (other than Steven M.
Morris) and of Pozo Resources, Inc. is 500 Main Street, Suite 201, Fort Worth,
Texas 76102. The address of Steven M. Morris is 952 Echo Lane, Suite 335,
Houston, Texas 77024. The address of Joseph V. Montalban is East Lakeshore
Drive, Whitefish, Montana 59937.
The address of each of Parent, Frank Darden and Glenn M. Darden is 1619
Pennsylvania Avenue, Fort Worth, Texas 76104. The address of Thomas F. Darden is
720 South Otsego, Gaylord, Michigan 49735 and the address of Anne Darden Self is
2630 Fountainview, Suite 300, Houston, Texas 77057.
CERTAIN TRANSACTIONS
Lucas, Bowler & White, Barristers & Solicitors, Edmonton, Alberta, have
rendered legal services to the Company. Bruce Hirsche is a partner of such firm.
Mr. Hirsche served as Chairman and Director of the Interim Board of the Company
from June 1991 through December 1991. Thereafter, Mr. Hirsche served as a
Director and as Secretary and General Counsel of the Company through October 25,
1994, at which time he was re-elected as Secretary and General Counsel, which
positions he continues to hold. Legal fees and expenses totalling approximately
$25,777 and $2,523 were billed to the Company by Mr. Hirsche's law firm during
the years ended December 31, 1995 and 1996, respectively.
In 1994, the Company retained the services of Buis & Co., a private
investment banking firm in which C. Al Buis, a director of the Company, is an
owner, officer and director, to assist the Company in arranging credit
facilities. The Company paid Buis & Co $150,000 for the performance of such
services in connection with the Company obtaining its $15 million revolving
credit/term loan facility with a bank.
The Company subleases office space for its Fort Worth headquarters from Buis
& Co. The Company paid Buis & Co. $22,300 and $35,160 for annual rental for 1995
and 1996, respectively. The rent paid was at the same rate per square foot as
that paid by Buis & Co. to its lessor and is commensurate with rental rates in
the area.
In November 1995, the Company completed the sale of its holdings in 687,000
shares of GeoResources common stock and 44,000 shares of Big Sky Airlines common
stock to Joseph V.
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<PAGE>
Montalban, formerly a director of the Company, in exchange for 700,000 shares of
Company Common Stock. The sale or exchange was approved by shareholders of the
Company at the Company's Annual General Meeting of Shareholders held on
September 22, 1995. The Company recognized $177,000 gain on the sale of stock.
Mercury acquired the Mercury Properties on March 7, 1997 from Parent. Parent
conveyed to Mercury the Mercury Properties in exchange for a majority of the now
outstanding Mercury Common Stock and warrants to purchase additional shares of
Mercury Common Stock. The Mercury Properties were acquired by Parent in 1995.
Certain directors, officers and agents of Parent also conveyed to Mercury
certain contractual rights in the Mercury Properties in exchange for shares of
Mercury Common Stock and warrants.
The Surviving Corporation and Parent will enter into a Management Agreement
upon effectiveness of the Merger. Pursuant to the Management Agreement, Parent
will manage the ongoing operations of the various oil and gas properties and gas
gathering and compression facilities located in Montana and Texas of the
Surviving Corporation and its subsidiaries. The Surviving Corporation will agree
to reimburse Parent for its costs and expenses incurred in connection with
managing such operations and shall in addition pay to Parent a management fee
equal to 10 percent of such costs and expenses. The Surviving Corporation will
also agree to indemnify Parent and its officers, directors, shareholders,
employees and agents against losses incurred in connection with the performance
of the Management Agreement, except to the extent that such losses arise as a
result of the gross negligence or intentional misconduct of such indemnified
parties. The term of the Management Agreement is for two years from the
effective date of the Merger and thereafter for successive one-year terms unless
terminated by either party to the agreement at the end of the initial term or
any successive one-year term upon 30 days' advance notice.
Mercury has guaranteed the repayment of $4.0 million of the NationsBank Debt
owed by Parent. Such debt is due and payable by Parent on December 31, 2002 and
bears interest at 6.5625 percent per annum. The debt is secured by a lien on the
Mercury Properties. Pursuant to the Merger Agreement, the Company and Mercury
expect that the Surviving Corporation will repay $4.0 million of the NationsBank
Debt. See "Management's Discussion and Analysis of Mercury's Financial Condition
and Results of Operations-- Capital Resources and Financing," and "The
Merger--Interests of Certain Persons in the Merger."
COMPLIANCE WITH SECTION 16(A)
OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Exchange Act requires directors and officers of the
Company and persons who own more than 10 percent of the outstanding Company
Common Stock to file with the SEC initial reports of ownership and reports of
changes in ownership of the Company Common Stock by such persons. Directors,
officers and more than 10 percent shareholders are required by SEC regulations
to furnish the Company with copies of all Section 16(a) reports they file with
the SEC. To the Company's knowledge, based solely on its review of such reports
and representations that no other reports were required, during the year ended
December 31, 1996, all Section 16(a) filing requirements applicable to
directors, officers and more than 10 percent shareholders of the Company were
complied with.
LEGAL MATTERS
Certain matters of Canadian law in connection with the Continuance will be
passed upon by Blake, Cassels & Graydon, Calgary, Alberta. Certain legal matters
in connection with the shares of Company Common Stock to be issued in connection
with the Continuance will be passed upon for the Company by Thompson & Knight, A
Professional Corporation, Dallas, Texas, on behalf of the Company. Certain legal
matters in connection with the shares of Surviving Corporation Common Stock to
be issued in the Merger will be passed upon for Mercury by Cantey & Hanger,
L.L.P.
108
<PAGE>
EXPERTS
The consolidated financial statements and schedules of the Company as of
December 31, 1996 and 1995 and for each of the years in the two-year period
ended December 31, 1996, included in this Proxy Statement/Prospectus, and
elsewhere in the Registration Statement of which this Proxy Statement/
Prospectus forms a part, have been audited by Deloitte & Touche LLP, independent
auditors, as set forth in their report thereon appearing herein and elsewhere in
such Registration Statement. Such financial statements are included herein and
in such Registration Statement in reliance on the report of Deloitte & Touche
LLP, upon the authority of such firm as experts in accounting.
The statements of revenues and direct operating expenses attributable to the
Mercury Properties for each of the years in the two-year period ended December
31, 1996, included in this Proxy Statement/ Prospectus, and elsewhere in the
Registration Statement of which this Proxy Statement/Prospectus forms a part,
have been audited by Deloitte & Touche LLP, independent auditors, as set forth
in their report thereon appearing herein and elsewhere in such Registration
Statement. Such statements are included herein and in such Registration
Statement in reliance on the report of Deloitte & Touche LLP, upon the authority
of such firm as experts in accounting.
With respect to the unaudited interim financial information of MSR
Exploration Ltd. for the periods ended June 30, 1997 and 1996 which is included
in this Proxy Statement/Prospectus, and elsewhere in this Registration
Statement, Deloitte & Touch LLP have applied limited procedures in accordance
with professional standards for a review of such information. However, as stated
in their report included in MSR Exploration Ltd.'s Quarterly Report for the
quarter ended June 30, 1997 and included herein, they did not audit and they do
not express an opinion on that interim financial information. Accordingly, the
degree of reliance on their report on such information should be restricted in
light of the limited nature of the review procedures applied. Deloitte & Touche
LLP are not subject to the liability provisions of Section 11 of the Securities
Act of 1933 for their report on the unaudited interim financial information
because the report is not a "report" or a "part" of the registration statement
prepared or certified by an accountant within the meaning of Sections 7 and 11
of the Act.
The letters of Citadel Engineering, independent oil and gas consultants, set
forth in Appendix "I" have been included herein in reliance on such firm as
experts with respect to the matters contained in those letter. In addition, the
information with respect to the reserve reports prepared by Citadel Engineering
has been included herein in reliance on such firm as experts with respect to
such information.
OTHER MATTERS WHICH MAY COME BEFORE THE SPECIAL MEETING
Management of the Company knows of no matters to come before the Special
Meeting other than as set forth in the Notice of the Meeting. In addition,
Management of the Company knows of no other matters to be included in the
Consent except the approval of the Merger as set forth herein. However, if other
matters which are not now known to Management should properly come before the
Special Meeting or require approval of shareholders of the Company pursuant to
the Consent, the accompanying proxy for the Special Meeting and proxy for the
Consent will be voted on such matters in accordance with the best judgement of
the persons voting such proxies.
109
<PAGE>
GLOSSARY OF OIL AND NATURAL GAS TERMS
The following are abbreviations and definitions of terms commonly used in
the oil and natural gas industry and this Proxy Statement/Prospectus. Unless
otherwise indicated in this Proxy Statement/Prospectus, natural gas volumes are
stated at the legal pressure base of the state or area in which the reserves are
located and at 60 degrees Fahrenheit and in most instances are rounded to the
nearest major multiple.
BBL. One stock tank barrel, or 42 E.S.P. gallons liquid volume, used herein
in reference to crude oil or other liquid hydrocarbons.
BOE. Barrels of oil equivalent, determined using the ratio of six Mcf of
natural gas to one Bbl of crude oil, condensate or natural gas liquids.
COMPLETION. The installation of permanent equipment for the production of
oil or natural gas.
CONDENSATE. A hydrocarbon mixture that becomes liquid and separates from
natural gas when the natural gas is produced and is similar to crude oil.
DEVELOPED ACREAGE. The number of acres which are allocated or assignable to
producing wells or wells capable of production.
DEVELOPMENT WELL. A well drilled within the proved area of an oil or
natural gas reservoir to the depth of a stratigraphic horizon known to be
productive.
DRY WELL. A well found to be incapable of producing either oil or natural
gas in sufficient quantities to justify completion of an oil or natural gas
well.
EXPLORATORY WELL. A well drilled to find and produce oil or natural gas in
an unproved area, to find a new reservoir in a field previously found to be
productive of oil or natural gas in another reservoir, or to extend a known
reservoir.
GROSS ACRES or GROSS WELLS. The total acres or wells, as the case may be,
in which Mercury or the Company has a working interest.
MBBL. One thousand barrels of crude oil or other liquid hydrocarbons.
MCF. One thousand cubic feet of natural gas.
MMBBL. One million barrels of crude oil or other liquid hydrocarbons.
MMCF. One million cubic feet of natural gas.
NET ACRES or NET WELLS. Gross acres or wells multiplied, in each case, by
the percentage working interest owned by Mercury or the Company, as applicable.
NET PRODUCTION. Production that is owned less royalties and production due
others.
OPERATOR. The individual or company responsible for the exploration,
development, and production of an oil or natural gas well or lease.
PRESENT VALUE OF FUTURE NET REVENUES or PV-10. The present value of
estimated future net revenues to be generated from the production of proved
reserves, net of estimated production and ad valorem taxes, future capital costs
and operating expenses, using prices and costs in effect as of the date
indicated, without giving effect to federal income taxes. The future net
revenues have been discounted at an annual rate of 10 percent to determine their
"present value." The present value is shown to indicate the effect of time on
the value of the revenue stream and should not be construed as being the fair
market value of the properties.
110
<PAGE>
PROVED DEVELOPED RESERVES. Reserves that can be expected to be recovered
through existing wells with existing equipment and operating methods. Additional
oil and natural gas expected to be obtained through the application of fluid
injection or other improved recovery techniques for supplementing the natural
forces and mechanisms of primary recovery will be included as "proved developed
reserves" only after testing by a pilot project or after the operation of an
installed program has confirmed through production response that increased
recovery will be achieved.
PROVED RESERVES. The estimated quantities of crude oil, natural gas and
natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions, i.e., prices and costs as of
the date the estimate is made. Prices include consideration of changes in
existing prices provided only by contractual arrangements, but not on
escalations based upon future conditions.
i. Reservoirs are considered proved if economic producibility is
supported by either actual production or conclusive formation test. The area
of a reservoir considered proved includes (A) that portion delineated by
drilling and defined by natural gas-oil and/or oil-water contacts, if any;
and (B) the immediately adjoining portions not yet drilled, but which can be
reasonably judged as economically productive on the basis of available
geological and engineering data. In the absence of information on fluid
contacts, the lowest known structural occurrence of hydrocarbons controls
the lower proved limit of the reservoir.
ii. Reserves which can be produced economically through application of
improved recovery techniques (such as fluid injection) are included in the
"proved" classification when successful testing by a pilot project, or the
operation of an installed program in the reservoir, provides support for the
engineering analysis on which the project or program was based.
iii. Estimates of proved reserves do not include the following: (A) oil
that may become available from known reservoirs but is classified separately
as "indicated additional reserves"; (B) crude oil, natural gas and natural
gas liquids, the recovery of which is subject to reasonable doubt because of
uncertainty as to geology, reservoir characteristics, or economic factors;
(C) crude oil, natural gas and natural gas liquids that may occur in
undrilled prospects; and (D) crude oil, natural gas and natural gas liquids
that may be recovered from oil shales, coal, gilsonite and other such
sources.
PROVED UNDEVELOPED RESERVES. Reserves that are expected to be recovered
from new wells on undrilled acreage, or from existing wells where a relatively
major expenditure is required for recompletion. Reserves on undrilled acreage
shall be limited to those drilling units offsetting productive units that are
reasonably certain of production when drilled. Proved reserves for other
undrilled units can be claimed only where it can be demonstrated with certainty
that there is continuity of production from the existing productive formation.
Under no circumstances should estimates for proved undeveloped reserves be
attributable to any acreage for which an application of fluid injection or other
improved recovery technique is contemplated, unless such techniques have been
proved effective by actual tests in the area and in the same reservoir.
RECOMPLETION. The completion for production of an existing well bore in
another formation from that in which the well has been previously completed.
RESERVES. Proved reserves.
ROYALTY. An interest in an oil and natural gas lease that gives the owner
of the interest the right to receive a portion of the production from the leased
acreage (or of the proceeds of the sale thereof), but generally does not require
the owner to pay any portion of the costs of drilling or operating the wells on
the leased acreage. Royalties may be either landowner's royalties, which are
reserved by the owner of the leased acreage at the time the lease is granted, or
overriding royalties, which are usually reserved by an owner of the leasehold in
connection with a transfer to a subsequent owner.
111
<PAGE>
WATERFLOOD. The injection of water into a reservoir to fill pores vacated
by produced fluids, thus maintaining reservoir pressure and assisting
production.
WORKING INTEREST. An interest in an oil and natural gas lease that gives
the owner of the interest the right to drill for and produce oil and natural gas
on the leased acreage and requires the owner to pay a share of the costs of
drilling and production operations. The share of production to which a working
interest owner is entitled will always be smaller than the share of costs that
the working interest owner is required to bear, with the balance of the
production accruing to the owners of royalties. For example, the owner of a 100
percent working interest in a lease burdened only by a landowner's royalty of
12.5 percent would be required to pay 100 percent of the costs of a well but
would be entitled to retain 87.5 percent of the production.
WORKOVER. Operations on a producing well to restore or increase production.
112
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
MSR EXPLORATION LTD.
Annual Financial Statements:
Report of Independent Auditors........................................................................... F-2
Consolidated Balance Sheets at December 31, 1996 and 1995................................................ F-3
Consolidated Statements of Operations for the years ended December 31, 1996 and 1995..................... F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996 and 1995........... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1996 and 1995..................... F-6
Notes to Consolidated Financial Statements............................................................... F-7
Interim Financial Statements (Unaudited):
Report of Independent Accountants........................................................................ F-21
Consolidated Balance Sheets at June 30, 1997 and December 31, 1996....................................... F-22
Consolidated Statements of Operations for the six months ended June 30, 1997
and 1996............................................................................................... F-23
Consolidated Statements of Cash Flows for the six months ended June 30, 1997
and 1996............................................................................................... F-24
Condensed Notes to Consolidated Interim Financial Statements............................................. F-25
MERCURY MONTANA, INC.
Report of Independent Auditors........................................................................... F-27
Statements of Revenues and Direct Operating Expenses for the years ended December 31, 1996 and 1995 and
for the six months ended June 30, 1997 and 1996 (Unaudited)............................................ F-28
Notes to Statements of Revenues and Direct Operating Expenses............................................ F-29
Condensed Balance Sheet at June 30, 1997 (Unaudited)..................................................... F-33
Notes to Condensed Balance Sheet......................................................................... F-34
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
MSR Exploration Ltd. and Subsidiaries
Fort Worth, Texas
We have audited the accompanying consolidated balance sheets of MSR
Exploration Ltd. and subsidiaries (the Company) as of December 31, 1996 and
1995, and the related consolidated statements of operations, stockholders'
equity and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December 31,
1996 and 1995, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Fort Worth, Texas
March 26, 1997
F-2
<PAGE>
MSR EXPLORATION LTD. AND SUBSIDIARIES
(INCORPORATED UNDER THE LAWS OF ALBERTA)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
U.S. DOLLARS
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................................ $ 262,150 $ 232,594
Time deposits.................................................................... 51,035 46,975
Accounts receivable.............................................................. 936,639 700,069
Inventories...................................................................... 194,873 184,421
Prepaid expenses................................................................. 15,184 11,478
------------- -------------
Total current assets......................................................... 1,459,881 1,175,537
PROPERTIES, PLANT AND EQUIPMENT--NET
("full cost") (Note 4)........................................................... 28,786,443 29,040,594
OTHER ASSETS (Note 5).............................................................. 470,103 538,025
------------- -------------
$ 30,716,427 $ 30,754,156
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt (Note 6)....................................... $ 706,931 $ 90,707
Accounts payable................................................................. 277,141 368,630
Accrued liabilities.............................................................. 612,509 503,140
------------- -------------
Total current liabilities.................................................... 1,596,581 962,477
------------- -------------
LONG-TERM DEBT (Note 6)............................................................ 5,930,532 6,252,012
------------- -------------
DEFERRED INCOME TAXES (Note 7)..................................................... 3,832,635 4,003,000
------------- -------------
STOCKHOLDERS' EQUITY:
Common stock, without par value
Authorized 20,000,000 shares, issued and
outstanding 13,777,014 in 1996 and
13,712,014 in 1995............................................................. 17,861,264 17,796,264
Less notes receivable arising from the issuance of
common stock (Note 8)............................................................ (95,000) (190,000)
Foreign currency translation adjustment.......................................... (108,986) (98,684)
Retained earnings................................................................ 1,699,401 2,029,087
------------- -------------
19,356,679 19,536,667
------------- -------------
$ 30,716,427 $ 30,754,156
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
MSR EXPLORATION LTD. ANDSUBSIDIARIES
(INCORPORATED UNDER THE LAWS OF ALBERTA)
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995
U.S. DOLLARS
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
REVENUE
Oil sales........................................................................... $ 2,364,440 $ 2,038,588
Gas sales........................................................................... 1,953,092 763,698
Interest and other income........................................................... 58,793 324,414
------------ ------------
Total revenues.................................................................. 4,376,325 3,126,700
------------ ------------
EXPENSES
Operating expenses.................................................................. 1,435,362 1,349,151
Production taxes.................................................................... 311,680 213,793
Depletion and depreciation.......................................................... 1,377,917 1,032,023
General and administrative.......................................................... 1,018,141 1,058,768
Interest............................................................................ 732,911 472,519
------------ ------------
Total expenses.................................................................. 4,876,011 4,126,254
------------ ------------
Loss before income taxes.............................................................. (499,686) (999,554)
Income tax benefit (Note 7)........................................................... 170,000 359,000
------------ ------------
NET LOSS.............................................................................. $ (329,686) $ (640,554)
------------ ------------
------------ ------------
PER SHARE NET LOSS.................................................................... $ (0.02) $ (0.04)
------------ ------------
------------ ------------
Weighted average number of shares outstanding......................................... 13,773,110 14,262,973
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
MSR EXPLORATION LTD. AND SUBSIDIARIES
(INCORPORATED UNDER THE LAWS OF ALBERTA)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1995
U.S. DOLLARS
<TABLE>
<CAPTION>
CUMULATIVE
FOREIGN TOTAL
COMMON STOCK STOCK CURRENCY STOCK-
--------------------- OPTION TRANSLATION RETAINED HOLDERS'
SHARES AMOUNT LOANS ADJUSTMENT EARNINGS EQUITY
--------- ---------- --------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994............ 14,312,014 $18,621,264 $(300,000) $ 0 $2,669,641 $20,990,905
Net loss.............................. 0 0 0 0 (640,554) (640,554)
Purchase of 700,000 shares (Note 8)... (700,000) (875,000) 0 0 0 (875,000)
Issuance of 100,000 shares of common
stock as payment for services (Note
8).................................. 100,000 50,000 0 0 0 50,000
Translation adjustments............... 0 0 0 (98,684) 0 (98,684)
Proceeds from stock option loans...... 0 0 110,000 0 0 110,000
--------- ---------- --------- ----------- --------- ----------
Balance at December 31, 1995............ 13,712,014 17,796,264 (190,000) (98,684) 2,029,087 19,536,667
Net loss.............................. 0 0 0 0 (329,686) (329,686)
Issuance of 100,000 shares of common
stock for property acquisition (Note
8).................................. 100,000 100,000 0 0 0 100,000
Translation adjustments............... 0 0 0 (10,302) (10,302)
Repurchase of stock option shares (Note
8).................................... (35,000) (35,000) 0 0 0 (35,000)
Proceeds from stock option loans........ 0 0 95,000 0 0 95,000
--------- ---------- --------- ----------- --------- ----------
Balance at December 31, 1996............ 13,777,014 $17,861,264 $ (95,000) $(108,986) $1,699,401 $19,356,679
--------- ---------- --------- ----------- --------- ----------
--------- ---------- --------- ----------- --------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
MSR EXPLORATION LTD. AND SUBSIDIARIES
(INCORPORATED UNDER THE LAWS OF ALBERTA)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
U.S. DOLLARS
<TABLE>
<CAPTION>
1996 1995
----------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss............................................................................ $ (329,686) $ (640,554)
Charges and credits to net loss not affecting cash
Depletion and depreciation........................................................ 1,377,917 1,032,023
Amortization of deferred financing costs.......................................... 67,922 0
Common stock issued for payment of general and administrative expenses............ 0 50,000
Gain on property and securities available for sale................................ 0 (175,223)
Deferred income taxes............................................................. (170,365) (359,000)
Changes in assets and liabilities
Proceeds from sale of (invested in) time deposits................................. (4,060) 29,097
Receivables....................................................................... (236,570) (430,655)
Inventories and prepaid expenses.................................................. (14,158) 11,316
Accounts payable and accrued liabilities.......................................... 17,880 (39,419)
----------- -------------
NET CASH FROM (USED FOR) OPERATING ACTIVITIES......................................... 708,880 (522,415)
----------- -------------
INVESTING ACTIVITIES
Property, plant and equipment expenditures.......................................... (773,766) (1,086,635)
Acquisition of producing properties................................................. (250,000) (3,621,984)
Proceeds from sale of property and equipment........................................ 0 56,570
Proceeds on notes receivable arising from the issuance of common stock.............. 60,000 110,000
Change in cumulative foreign currency translation................................... (10,302)
Restricted cash..................................................................... 0 (191,675)
----------- -------------
NET CASH FROM (USED FOR) INVESTINGACTIVITIES.......................................... (974,068) (4,733,724)
----------- -------------
FINANCING ACTIVITIES
Principal payments on long-term debt................................................ (105,256) (615,706)
Proceeds from debt borrowings....................................................... 400,000 6,000,000
Payment of financing costs.......................................................... 0 (346,350)
----------- -------------
NET CASH FROM (USED FOR) FINANCING ACTIVITIES......................................... 294,744 5,037,944
----------- -------------
NET INCREASE (DECREASE) IN CASH....................................................... 29,556 (218,195)
CASH AT BEGINNING OF PERIOD........................................................... 232,594 450,789
----------- -------------
CASH AT END OF PERIOD................................................................. $ 262,150 $ 232,594
----------- -------------
----------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
MSR EXPLORATION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
MSR Exploration Ltd. (the Company) (incorporated under the laws of Alberta,
Canada), and its wholly-owned subsidiaries. All significant inter-company
transactions and balances have been eliminated in consolidation.
PRINCIPAL BUSINESS ACTIVITY AND REORGANIZATION
The Company and its subsidiaries are involved in oil and gas exploration,
development and production activities in the United States and Canada. On
February 7, 1992, the Company and its subsidiaries filed for protection under
Chapter 11 of the U.S. Bankruptcy Code. On March 2, 1993, the Company's Restated
First Amended Joint Plan of Reorganization was confirmed by the Bankruptcy
Court. See Note 2.
U.S. DOLLAR REPORTING
The majority of the Company's business is transacted in U.S. dollars and,
accordingly, the consolidated financial statements are expressed in that
currency.
SECURITIES AVAILABLE FOR SALE
The Company had investments in marketable equity securities. These consisted
of common stocks that were listed and traded on national stock exchanges.
The Company adopted Statement of Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities," at January 1, 1994.
Statement No. 115 requires that management classify securities at the date of
adoption, and thereafter at the date of acquisition, as trading, held-to-
maturity, or available-for-sale. The investments in marketable equity securities
had been classified as available-for-sale, and were stated at fair value each
balance sheet date, with unrealized gains and losses reported separately as a
component of stockholders' equity. During the fourth quarter of 1995, all
marketable securities held by the Company were sold.
ACCOUNTS RECEIVABLE
The Company's customers are large oil and natural gas purchasers. The
Company does not require collateral and receivables are generally due in 30-60
days. Management considers all accounts receivable current and collectible;
accordingly, no allowance for doubtful accounts has been established.
MAJOR CUSTOMERS
During the year ended December 31, 1996, three customers, Rio Vista Energy,
Ltd., Cenex, Inc. and Montana Refining Company, accounted for approximately 34
percent, 19 percent and 15 percent, respectively, of total consolidated oil and
gas sales. For the year ended December 31, 1995, three customers, Montana
Refining Company, Cenex, Inc. and Hanson Production Company, accounted for
approximately 26 percent, 23 percent and 21 percent, respectively, of total
consolidated oil and gas sales. The Company does not anticipate that the loss of
any of its present purchasers would adversely effect the Company's consolidated
business. The Company also believes that, in the event of a loss of a present
F-7
<PAGE>
MSR EXPLORATION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
purchaser, other oil and gas purchasers located in the Company's areas of
production would offer competitive prices for such production.
INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out method) or
market.
PROPERTIES, PLANT AND EQUIPMENT
The Company follows the "full cost" method of accounting for oil and gas
properties whereby all costs associated with acquiring, exploring for, and
developing oil and gas reserves are capitalized and accumulated in cost centers
established on a country-by-country basis. Such costs include land acquisition
costs, geological and geophysical expenses, carrying charges on non-producing
properties, costs of drilling both productive and non-productive wells, and
overhead charges directly related to acquisition, exploration and development
activities.
The capitalized costs related to each cost center, including the estimated
future costs to develop proved reserves and the costs of production equipment,
are amortized using the unit-of-production method based on the estimated net
proved reserves of each country as determined by independent petroleum
engineers. Investments in unproved properties are not amortized until proved
reserves associated with them can be determined or until impairment occurs. Oil
and natural gas reserves and production are converted into equivalent units
based upon estimated relative energy content.
The capitalized costs less accumulated depletion and depreciation in each
cost center are limited to an amount equal to the estimated future net revenue
from proved reserves discounted at a ten percent interest rate (based on prices
and costs at the balance sheet date) plus the lower of cost (net of impairments)
or fair market value of unproved properties.
Proceeds from the sale of oil and gas properties are applied against
capitalized costs, with no gain or loss recognized, unless such a sale would
significantly alter the relationship between capitalized costs and proved
reserves of oil and gas, in which case the gain or loss is recognized in income.
Other plant and equipment are depreciated on the straight-line basis as
follows:
Gas processing plants and gathering systems--over eight years
Other equipment--over three to five years
Potential impairment of producing properties and significant unproved
properties is assessed annually (unless economic events warrant more frequent
reviews). In addition, a quarterly impairment analysis of aggregated properties
is performed by the Company using discounted future net cash flows determined
based upon current prices and costs.
ENVIRONMENTAL COMPLIANCE AND REMEDIATION
Environmental compliance costs, including on-going maintenance and
monitoring, are expensed as incurred. Environmental remediation costs, which
improve the condition of a property, are capitalized.
The Accounting Standards Executive Committee of the American Institute of
Certified Public Accountants has adopted Statement of Position 96-1,
"Environmental Remediation Liabilities," which
F-8
<PAGE>
MSR EXPLORATION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
provides guidance on the recognition, measurement, display and disclosure of
environmental liabilities. The statement is effective for the Company's 1997
fiscal year. Management has evaluated such statement and believes that it will
not have a material effect on the financial condition, results of operations or
cash flows of the Company.
REVENUE RECOGNITION
The Company recognizes revenues as quantities of oil and gas sold or volumes
of gas transported, and utilizes the entitlement method of accounting for oil
and gas imbalances. Under this method, the Company recognizes revenue for its
proportionate share of volumes sold. Any over-produced amount is recorded as
deferred revenue and any under-produced amount is recorded as current revenue
and revenue receivable. The Company had no significant over or under-produced
positions as of December 31, 1996 and 1995.
DEFERRED CHARGES
Financing charges related to the acquisition of debt are deferred and
amortized over the term of that debt using the effective interest method. MSR
Exploration Ltd. and Subsidiaries
FOREIGN CURRENCY TRANSLATION
The functional currency for the Company's foreign operations is the
applicable local currency; therefore, translation is performed for balance sheet
accounts using current exchange rates in effect at the balance sheet date, and
for revenue and expense accounts using a weighted average exchange rate for the
year.
JOINT VENTURE OPERATIONS
Certain of the Company's exploration and development activities relating to
oil and gas are conducted jointly with others. The accompanying financial
statements reflect only the Company's proportionate interest in such activities.
INCOME TAXES
Income taxes provide for the tax effects of transactions reported in the
financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the basis of properties, plant and
equipment for financial and income tax reporting. The deferred tax assets and
liabilities represent the future tax return consequences of those differences,
which will either be taxable or deductible when the assets and liabilities are
recovered or settled.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share has been calculated based on the weighted
average number of common shares outstanding during the year.
F-9
<PAGE>
MSR EXPLORATION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH EQUIVALENTS AND TIME DEPOSITS
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents. Investments with an
original maturity in excess of three months are considered to be time deposits.
STOCK-BASED COMPENSATION
Compensation expense is recorded with respect to stock option grants to
employees using the intrinsic value method prescribed by Accounting Principles
Board Opinion No. 25. The Company has not elected the fair value method of
accounting for stock-based compensation encouraged, but not required, by
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation."
DISCLOSURE OF FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments under Statement of Financial Accounting
Standards No. 107, "Disclosure about Fair Value of Financial Instruments,"
include cash, accounts receivable, notes payable, accounts payable and long-term
debt. The Company believes that the carrying amount of these items is a
reasonable estimate of their fair value.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. BANKRUPTCY
Due to a series of events, which included a substantial net loss and the
inability to negotiate a mutually agreeable restructuring of indebtedness with
the Company's then primary lender, the Company and its subsidiaries elected on
February 7, 1992 to file voluntary petitions for protection under Chapter 11 of
the U.S. Bankruptcy Code.
On September 12, 1992, the Company filed a plan of reorganization with the
Bankruptcy Court which was subsequently amended on December 11, 1992 and March
2, 1993, to reflect agreements between the Company and its creditors.
On March 2, 1993, the Company's Restated First Amended Joint Plan of
Reorganization was confirmed by the Bankruptcy Court. The significant changes
resulting from the Plan include the following:
- A net reduction of $2,429,829 in recorded liabilities to secured and
unsecured creditors through settlement, disallowance or rejection of
claims.
- An increase of $5,143,170 in non-current, long-term debt through
establishment of installment payment terms for certain claims.
F-10
<PAGE>
MSR EXPLORATION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
2. BANKRUPTCY (CONTINUED)
As of December 31, 1996, the remaining amount due to pre-petition creditors
totaled $237,463 (see Note 6).
3. SECURITIES AVAILABLE FOR SALE
As discussed in Note 1, the Company elected to adopt FASB Statement No. 115
as of January 1, 1994. The December 31, 1994 balance of stockholder's equity
increased by $171,900 to recognize appreciation in the fair value of securities
available for sale. There was no deferred tax effect of that appreciation. All
marketable securities held by the Company were sold in November, 1995, at a gain
of $177,000.
4. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
U.S. proved oil and gas properties:
Rocky Mountain Region................................................. $ 28,245,283 $ 27,896,712
Texas Region.......................................................... 13,275,806 12,887,117
Accumulated depletion and depreciation.................................. (15,989,893) (14,740,907)
-------------- --------------
25,531,196 26,042,922
-------------- --------------
Canadian proved oil and gas properties.................................. 2,221,085 2,158,823
Accumulated depletion and depreciation.................................. (195,915) (150,572)
-------------- --------------
2,025,170 2,008,251
-------------- --------------
Gas processing plants and gathering systems............................. 3,623,687 3,388,459
Other equipment......................................................... 1,146,343 1,061,984
Accumulated depletion and depreciation.................................. (3,539,953) (3,461,022)
-------------- --------------
1,230,077 989,421
-------------- --------------
$ 28,786,443 $ 29,040,594
-------------- --------------
-------------- --------------
</TABLE>
5. OTHER ASSETS
Other assets included deferred charges related to the acquisition of
long-term debt (amortized over the life of that debt using the effective
interest method) and restricted cash (held in a letter of credit in lieu of a
plugging and abandonment bond required by the US Environmental Protection
Agency).
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
Deferred loan cost............................................................. $ 385,215 $ 397,440
Less accumulated amortization.................................................. (106,737) (51,040)
----------- ----------
Net deferred loan cost......................................................... $ 278,478 $ 346,400
Restricted cash................................................................ 191,625 191,625
----------- ----------
Total other assets............................................................. $ 470,103 $ 538,025
----------- ----------
----------- ----------
</TABLE>
F-11
<PAGE>
MSR EXPLORATION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
6. NOTE PAYABLE AND LONG-TERM DEBT
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Long-term debt consists of:
Prime rate plus 1.0% note payable to Banque Paribas (9.25% at December 31,
1996)..................................................................... $ 6,400,000 $ 6,000,000
Various pre-petition claims at interest rates ranging from 6% to 10%, due in
monthly, quarterly and annual installments, including interest............ 237,463 342,719
------------ ------------
6,637,463 6,342,719
Less current maturities..................................................... (706,931) (90,707)
------------ ------------
$ 5,930,532 $ 6,252,012
------------ ------------
------------ ------------
</TABLE>
<TABLE>
<CAPTION>
LONG-TERM DEBT MATURITIES ARE AS FOLLOWS:
YEARS ENDING DECEMBER 31, AMOUNT
- -------------------------------------------------------------------------------- ------------
<S> <C>
1997............................................................................ $ 706,931
1998............................................................................ 868,294
1999............................................................................ 928,892
2000............................................................................ 848,649
2001............................................................................ 744,697
Thereafter...................................................................... 2,540,000
------------
$ 6,637,463
------------
------------
</TABLE>
During the first quarter of 1995, the Company entered into a revolving
credit/term loan agreement with a bank. The agreement allowed the Company to
borrow up to $15,000,000 under a revolving credit arrangement for a two year
period. On August 15, 1996 the loan limit was set at $6,500,000 and on January
1, 1997 the commitment shall be reduced by monthly payments at a rate of $60,000
for 1997, $65,000 for 1998, $75,000 for 1999, $70,000 for 2000 and $60,000 for
2001. The Company can designate the interest rate on amounts outstanding as
either the London Interbank Offered Rate (LIBOR) + 2.5% or bank prime plus 1%.
As an additional incentive to provide the financing, the Company issued to the
bank a five-year warrant expiring January 13, 2000 to purchase 280,000 shares of
the Company's Common Stock at $3.375. The collateral for this loan agreement
consists of substantially all of the existing assets of the Company and any
future reserves acquired. The loan agreement contain certain restrictive
covenants which, among other things, require the maintenance of a minimum
current ratio, net worth and debt service ratio. As of December 31, 1996 the
Company was in compliance with all such requirements. MSR Exploration Ltd. and
Subsidiaries
7. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax
F-12
<PAGE>
MSR EXPLORATION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
7. INCOME TAXES (CONTINUED)
purposes. Significant components of the Company's deferred tax assets and
liabilities as of December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Deferred tax assets:
Operating loss carryforwards............................................ $ 3,565,000 $ 3,473,503
Investment tax credits.................................................. 428,000 428,765
------------- -------------
Total deferred tax assets............................................. 3,993,000 3,902,268
Less valuation allowance................................................ (2,002,635) (2,165,768)
------------- -------------
1,990,365 1,736,500
------------- -------------
Deferred tax liabilities:
Properties, plant and equipment......................................... 5,823,000 5,739,500
------------- -------------
Total deferred tax liabilities........................................ 5,823,000 5,739,500
------------- -------------
Net deferred tax liabilities........................................ $ 3,832,635 $ 4,003,000
------------- -------------
------------- -------------
</TABLE>
The income tax benefit for each of the years ended December 31, 1996 and
1995 consists of the following:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Deferred tax benefit.......................................................... $ (170,365) $ (359,000)
----------- -----------
----------- -----------
</TABLE>
The income tax provision differs from the amount of income tax determined by
applying the U.S. federal income tax rate to pre-tax income for the years ended
December 31, 1996 and 1995 due to the following:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Computed expected tax expense (benefit)....................................... $ (170,365) $ (340,500)
Increase (decrease) in income resulting from:
State income taxes, net of federal tax benefit.............................. (20,000) (40,000)
Other....................................................................... 20,365 21,500
----------- -----------
$ (170,000) $ (359,000)
----------- -----------
----------- -----------
</TABLE>
The Company has U.S. net operating loss carry-forwards of approximately
$10,500,000 potentially available to reduce future U.S. taxable income. These
U.S. net operating loss carry-forwards begin to expire in 2001. The Company also
has Canadian expense carry-forwards totaling approximately $2,200,000 available
to reduce future Canadian taxable income. These Canadian expense carry-forwards
have no expiration date. Use of these U.S. and Canadian carry-forwards is
dependent on future taxable income.
F-13
<PAGE>
MSR EXPLORATION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
8. COMMON STOCK TRANSACTIONS
The Company applies the intrinsic value method in accounting for stock
options prescribed by Accounting Principles Board Opinion No. 25. No pro forma
impact of the adoption of the optional accounting provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" is presented as the Company did not grant any options during 1995
or 1996.
In May, 1996 the Company issued 100,000 shares of common stock, valued at
$1.00 per share, with $250,000 to purchase an additional 21% working interest in
the Cinco Ltd No. 1 well in Southeast, Texas.
During 1994, the Company granted stock options for 600,000 shares of common
stock to the Board of Directors and employees. These options were exercisable at
a price of $0.50 per share. The options were later exercised and initially
funded by the Company. The Company accepted notes receivable totaling $300,000
from certain members of the Board of Directors and employees, and are
collateralized by the common stock issued. During 1996, the Company offered each
individual the opportunity to cancel the notes in exchange for Company stock
valued at $1.00 per share. 35,000 shares of common stock were presented to
reduce such notes. At December 31, 1996 notes receivable arising from the
issuance of common stock was $95,000.
On November 8, 1995 the Company completed the sale of its holdings in
687,600 shares of GeoResources Common Stock and 44,000 shares of Big Sky
Airlines Common Stock to Joseph V. Montalban, then a director of the Company, in
exchange for 700,000 shares (at $1.25 per share) of the Company's Common Stock.
The sale or exchange was approved by Shareholders at the Company's Annual
General Meeting held on September 22, 1995. At the time of the exchange, the
carrying (market) value of the GeoResources Common Stock and the Big Sky
Airlines Common Stock was $875,000. Prior to the exchange, the Company had
recorded for these securities, which were classified as available for sale, an
unrealized gain of $177,000 as a separate component of equity. The market value
of the Company's Common Stock was $875,000. The Company recorded as other
revenue the realization of this gain upon the exchange in September 1995.
During 1995, the Company issued 100,000 shares of common stock to Joseph V.
Montalban for services performed in 1994. These shares were issued at a value of
$0.50 per share.
STOCK OPTIONS OUTSTANDING
Company stock options outstanding at December 31, 1996 consist of a warrant
issued to Banque Paribas in January 1995 to acquire 280,000 shares of Company
common stock at an exercise price of $3.375 per share in connection with the
Company obtaining financing from such lender. The warrant is exercisable from
the date of grant to January 2000.
9. RELATED PARTY TRANSACTIONS
The law firm in which the corporate secretary of the Company is a senior
partner acted as Corporate Counsel during 1996 and 1995. Legal fees and
out-of-pocket costs totaling approximately $2,523 and $25,777 were billed to the
Company by the law firm during the years ended December 31, 1996 and 1995,
respectively.
The Company sub-leases office space for its Fort Worth headquarters from
Buis & Co. Buis & Co. is partially owned by C. Al Buis, a current Director of
the Company. The Company reimbursed Buis & Co.
F-14
<PAGE>
MSR EXPLORATION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
9. RELATED PARTY TRANSACTIONS (CONTINUED)
$35,160 and $22,300 for annual rental payments for 1996 and 1995, respectively,
and $14,644 and $12,428 for property taxes, telephone and utilities for 1996 and
1995. The rent paid for the Company's space was at the same rate per square foot
paid by Buis & Co. and is commensurate with rental rates in the area.
On November 8, 1995 the Company completed the sale of its holdings in
687,600 shares of GeoResources Common Stock and 44,000 shares of Big Sky
Airlines Common Stock to Joseph V. Montalban, then a director of the Company, in
exchange for 700,000 shares of the Company's Common Stock. The sale or exchange
was approved by Shareholders at the Company's Annual General Meeting held on
September 22, 1995.
In 1994, the Company retained the services of Buis & Co., a private
investment banking firm, to assist it in arranging credit facilities. The firm
is partially owned by C. Al Buis, a Director of the Company. In January 1995,
the Company paid Buis & Co. $150,000 for the performance of such services in
connection with the Company's $15,000,000 revolving credit/term agreement.
10. CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Cash paid during the year:
Interest................................................................................ $ 677,863 $ 430,156
---------- ----------
---------- ----------
Income taxes............................................................................ $ 365 $ --
---------- ----------
---------- ----------
Non-cash investing activities:
Exchange of equity securities available for sale for common stock....................... $ -- $ 875,000
---------- ----------
---------- ----------
Common stock received in payment of note receivable arising from issuance of stock...... $ (35,000) $ --
---------- ----------
---------- ----------
Non-cash financing activity:
Acquisition of producing property from issuance of common stock......................... $ 100,000 $ --
---------- ----------
---------- ----------
</TABLE>
11. SEGMENT INFORMATION
All of the Company's activities are in one business segment: oil and gas
exploration, development and production. The Company operates in the United
States and Canada as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
------------------------------------------
UNITED STATES CANADA TOTAL
------------- ------------ -------------
<S> <C> <C> <C>
Revenues......................................... $ 4,192,960 $ 183,365 $ 4,376,325
------------- ------------ -------------
------------- ------------ -------------
Operating income (loss).......................... $ (514,896) $ 15,210 $ (499,686)
------------- ------------ -------------
------------- ------------ -------------
Total assets..................................... $ 28,512,065 $ 2,204,362 $ 30,716,427
------------- ------------ -------------
------------- ------------ -------------
Depletion per equivalent unit of production...... $ 4.89 $ 2.59 $ 4.74
------------- ------------ -------------
------------- ------------ -------------
</TABLE>
F-15
<PAGE>
MSR EXPLORATION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
11. SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
------------------------------------------
UNITED STATES CANADA TOTAL
------------- ------------ -------------
<S> <C> <C> <C>
Revenues......................................... $ 2,962,031 $ 162,669 $ 3,124,700
------------- ------------ -------------
------------- ------------ -------------
Operating income (loss).......................... $ (994,718) $ (4,836) $ (999,554)
------------- ------------ -------------
------------- ------------ -------------
Total assets..................................... $ 28,486,026 $ 2,268,130 $ 30,754,156
------------- ------------ -------------
------------- ------------ -------------
Depletion per equivalent unit of production...... $ 5.01 $ 2.36 $ 4.79
------------- ------------ -------------
------------- ------------ -------------
</TABLE>
12. SUBSEQUENT EVENT
On March 26, 1997, the Company signed a definitive agreement with Mercury
Exploration Company and Mercury Montana, Inc. ("Mercury"), both of Fort Worth,
Texas, to combine all of the oil and gas assets of Mercury with all the oil and
gas assets of MSR Exploration Ltd. by way of the Merger of the Company with and
into Mercury, with Mercury being the Surviving Corporation (the Business
Combination).
Mercury has over 75 producing wells with proven reserves of more than 5
million barrels of oil, as well as rights and obligations under an agreement
with a utility relating to 304,000 acres of undeveloped oil and gas properties,
located in the Cut Bank Field complex in Montana. In the subject area, Mercury
holds 100% of the oil rights and 30% of the revenue pertaining to liquids
produced by gas wells.
In the Business Combination, the surviving corporation will issue (i) to MSR
shareholders, one share of common stock for each outstanding share of common
stock of MSR and (ii) to Mercury shareholders, one share of common stock for
each outstanding share of common stock of Mercury. In addition, the surviving
corporation will assume and/or pay $4,000,000 in bank debt of Mercury
Exploration Company. Mercury currently has outstanding 12,000,000 shares of
common stock and warrants to purchase an additional 5,500,000 common shares at
$1.25 per share and 5,500,000 common shares at $2.00 per share and stock options
to acquire 228,570 common shares at $.875 per share.
Mercury shareholders will effectively own approximately 46.6% of the total
issued and outstanding common stock of the surviving corporation. After approval
by shareholders of the Company of the continuance of the Company from Alberta to
Delaware and of the Business Combination; the Business Combination will become
effective and the common shares of the surviving corporation will be distributed
to the respective shareholders of the Company and Mercury. Shareholders owning
approximately 40% of MSR common stock have agreed to vote to approve this
transaction. Closing the transaction is expected immediately subsequent to
shareholder approval.
F-16
<PAGE>
DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED)
The following information about the Company's oil and gas producing
activities has been prepared in accordance with Statement of Financial Standards
No. 69, Disclosures about Oil and Gas Producing Activities.
The Company believes that the valuation method prescribed by Statement of
Financial Standards No. 69 does not provide the best estimate of current
economic value of its oil and gas reserves as unproved reserves are not
attributed any economic value and the use of year-end price assumptions and a
10% discount rate are arbitrary.
PROVED OIL AND GAS QUANTITIES
The following information summarizes the Company's estimated net quantities
of proved and proved-developed oil and gas reserves. The December 31, 1996
reserves are based on estimates of Citadel Engineering Ltd., petroleum
consultants, contained in a report dated March 1, 1997.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
------------------------------------------------
OIL (000'S BBLS) GAS(MMCF)
----------------------- -----------------------
UNITED UNITED
STATES CANADA TOTAL STATES CANADA TOTAL
------ ------ ----- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Proved reserves
Beginning of year........................................................ 4,448 22 4,470 17,220 5,840 23,060
Revisions of previous estimates.......................................... (466) 15 (451) (861) 857 (4)
Purchase of reserves in place............................................ 1 -- 1 181 -- 181
Extensions, discoveries, reworks and other additions..................... 42 -- 42 1,955 -- 1,955
Production............................................................... (123) -- (123) (784) (106) (890)
--
------ ----- ------ ------ ------
End of year.............................................................. 3,902 37 3,939 17,711 6,591 24,302
--
--
------ ----- ------ ------ ------
------ ----- ------ ------ ------
Proved developed reserves
Beginning of year........................................................ 2,621 19 2,640 11,593 5,767 17,360
--
--
------ ----- ------ ------ ------
------ ----- ------ ------ ------
End of year.............................................................. 2,496 34 2,530 12,120 1,831 13,951
--
--
------ ----- ------ ------ ------
------ ----- ------ ------ ------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
------------------------------------------------
OIL (000'S BBLS) GAS(MMCF)
----------------------- -----------------------
UNITED UNITED
STATES CANADA TOTAL STATES CANADA TOTAL
------ ------ ----- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Proved reserves
Beginning of year........................................................ 4,382 21 4,403 14,076 5,736 19,812
Revisions of previous estimates.......................................... 54 1 55 (1,081) 213 (868)
Purchase of reserves in place............................................ 78 -- 78 4,623 -- 4,623
Extensions, discoveries, reworks and other additions..................... 65 -- 65 -- -- --
Production............................................................... (131) -- (131) (398) (109) (507)
--
------ ----- ------ ------ ------
End of year.............................................................. 4,448 22 4,470 17,220 5,840 23,060
--
--
------ ----- ------ ------ ------
------ ----- ------ ------ ------
Proved developed reserves
Beginning of year........................................................ 2,563 18 2,581 8,502 5,664 14,166
--
--
------ ----- ------ ------ ------
------ ----- ------ ------ ------
End of year.............................................................. 2,621 19 2,640 11,593 5,767 17,360
--
--
------ ----- ------ ------ ------
------ ----- ------ ------ ------
</TABLE>
F-17
<PAGE>
DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES (CONTINUED)
(UNAUDITED)
The following standardized measure of discounted future net cash flows
relating to proved oil and gas reserves has been computed using year-end prices,
except where contractual arrangements in place at year-end provide for future
price changes and costs.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
---------------------------------------------
UNITED STATES CANADA TOTAL
-------------- ------------- --------------
<S> <C> <C> <C>
Future cash flows................................................ $ 116,139,000 $ 10,701,000 $ 126,840,000
Future production and development costs.......................... (31,135,000) (5,309,000) (36,444,000)
Future income tax expense........................................ (19,510,000) (900,000) (20,410,000)
-------------- ------------- --------------
65,494,000 4,492,000 69,986,000
10% annual discount for timing of cash flows..................... (31,989,000) (2,648,000) (34,637,000)
-------------- ------------- --------------
Standardized measure of discounted cash flows.................... $ 33,505,000 $ 1,844,000 $ 35,349,000
-------------- ------------- --------------
-------------- ------------- --------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
---------------------------------------------
UNITED STATES CANADA TOTAL
-------------- ------------- --------------
<S> <C> <C> <C>
Future cash flows................................................ $ 100,768,000 $ 9,301,000 $ 110,069,000
Future production and development costs.......................... (26,641,000) (5,481,000) (32,122,000)
Future income tax expense........................................ (16,651,000) (149,000) (16,800,000)
-------------- ------------- --------------
57,476,000 3,671,000 61,147,000
10% annual discount for timing of cash flows..................... (27,806,000) (1,974,000) (29,780,000)
-------------- ------------- --------------
Standardized measure of discounted cash flows.................... $ 29,670,000 $ 1,697,000 $ 31,367,000
-------------- ------------- --------------
-------------- ------------- --------------
</TABLE>
The standardized measure of discounted cash flows does not include any value
relating to the Company's gathering, processing and transmission of gas reserves
owned by other companies.
The following table sets out in aggregate the principle source of change in
the standardized measure of discounted future net cash flows for each of the two
years ended December 31, 1995 and 1994, respectively.
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Sales of oil and gas produced, net of production costs............................. $ (2,570,000) $ (1,239,000)
Net changes in price and production................................................ 7,740,000 6,176,000
Purchase of reserves in place...................................................... 350,000 4,453,000
Extensions, discoveries and improved recovery, less related costs.................. 36,000 148,000
Revisions of previous quantity estimates........................................... (637,000) (71,000)
Development costs incurred during the year......................................... 367,000 877,000
Accretion of discount.............................................................. 3,137,000 2,294,000
Net change in income taxes......................................................... (3,610,000) (2,960,000)
Other.............................................................................. (831,000) (1,248,000)
------------- -------------
Net increase....................................................................... 3,982,000 8,430,000
Balance at beginning of year....................................................... 31,367,000 22,937,000
------------- -------------
Balance at end of year............................................................. $ 35,349,000 $ 31,367,000
------------- -------------
------------- -------------
</TABLE>
F-18
<PAGE>
DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES (CONTINUED)
(UNAUDITED)
Costs incurred in oil and gas property acquisition, exploration and
development activities:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1996 1995
---------- ------------
<S> <C> <C>
Property acquisition costs
United States..................................................... $ 406,824 $ 3,621,984
Canada............................................................ -- --
---------- ------------
$ 406,824 $ 3,621,984
---------- ------------
---------- ------------
Exploration costs
United States..................................................... $ -- $ 116,973
Canada............................................................ 36,352 13,926
---------- ------------
$ 36,352 $ 130,899
---------- ------------
---------- ------------
Development costs
United States..................................................... $ 331,235 $ 259,360
Canada............................................................ 35,336 617,726
---------- ------------
$ 366,571 $ 877,086
---------- ------------
---------- ------------
</TABLE>
Results of operations from producing activities:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
----------------------------------------
UNITED STATES CANADA TOTAL
------------- ---------- -------------
<S> <C> <C> <C>
Oil and gas sales.................................. $ 4,134,515 $ 183,017 $ 4,317,532
Operating expenses................................. (1,369,326) (66,036) (1,435,362)
Production taxes................................... (310,679) (1,001) (311,680)
Depletion and depreciation......................... (1,331,917) (46,000) (1,377,917)
------------- ---------- -------------
1,122,593 69,980 1,192,573
Income taxes....................................... (381,682) (23,793) (405,475)
------------- ---------- -------------
Results of operations from producing activities
(excluding corporate overhead and interest
costs)........................................... $ 740,911 $ 46,187 $ 787,098
------------- ---------- -------------
------------- ---------- -------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
----------------------------------------
UNITED STATES CANADA TOTAL
------------- ---------- -------------
<S> <C> <C> <C>
Oil and gas sales................................... $ 2,651,281 $ 151,005 $ 2,802,286
Operating expenses.................................. (1,294,364) (54,787) (1,349,151)
Production taxes.................................... (213,677) (116) (213,793)
Depletion and depreciation.......................... (989,223) (42,800) (1,032,023)
------------- ---------- -------------
154,017 53,302 207,319
Income taxes........................................ (52,366) (18,123) (70,488)
------------- ---------- -------------
Results of operations from producing activities
(excluding corporate overhead and interest
costs)............................................ $ 101,651 $ 35,179 $ 136,831
------------- ---------- -------------
------------- ---------- -------------
</TABLE>
F-19
<PAGE>
SELECTED QUARTERLY FINANCIAL DATA
(UNAUDITED)
The following table summarizes selected quarterly financial data for each of
the two years ended December 31, 1996 and 1995, respectively.
<TABLE>
<CAPTION>
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
1996
Revenue............................................... $ 989,000 $ 1,056,000 $1,082,000 $1,249,000
Net income (loss)..................................... $ (76,000) $ (62,000) $ (99,000) $ (93,000)
Net income (loss)
per share........................................... $ (0.01) Nil (0.01) Nil
1995
Revenue............................................... $ 575,000 $ 576,000 $ 827,000 $1,147,000*
Net income (loss)..................................... $ (272,000) $ (286,000) $ (188,000) $ 105,000
Net income (loss)
per share........................................... $ (0.02) $ (0.02) (0.01) Nil
</TABLE>
- ------------------------
* Includes $177,000 of gain recognized on the sale of securities.
F-20
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Shareholders of
MSR Exploration Ltd. and Subsidiaries
Fort Worth, Texas
We have reviewed the accompanying condensed consolidated balance sheet of
MSR Exploration Ltd. and subsidiaries (the Company) as of June 30, 1997, and the
related condensed consolidated statements of operations and cash flows for the
six-month periods ended June 30, 1996 and 1997. These financial statements are
the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and of making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to such condensed consolidated financial statements for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of the Company as of December 31,
1996, and the related consolidated statements of operations, stockholders'
equity and cash flows for the year then ended (not presented herein); and in our
report dated March 26, 1997, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion the information set forth in
the accompanying condensed consolidated balance sheet as of December 31, 1996 is
fairly stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Fort Worth, Texas
August 8, 1997
F-21
<PAGE>
MSR EXPLORATION LTD. AND SUBSIDIARIES
(INCORPORATED UNDER THE LAWS OF ALBERTA)
CONDENSED CONSOLIDATED BALANCE SHEETS
U.S. DOLLARS
<TABLE>
<CAPTION>
JUNE 30,
1997 DECEMBER 31,
(UNAUDITED) 1996
------------- -------------
<S> <C> <C>
ASSETS
Cash and cash equivalents.......................................................... $ 344,000 $ 313,000
Accounts receivable................................................................ 491,000 937,000
Inventories........................................................................ 141,000 195,000
Prepaid expenses................................................................... 39,000 15,000
------------- -------------
Total current assets........................................................... 1,015,000 1,460,000
PROPERTIES, PLANT AND EQUIPMENT--NET
("full cost").................................................................... 28,183,000 28,786,000
OTHER ASSETS....................................................................... 627,000 470,000
------------- -------------
$ 29,825,000 $ 30,716,000
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt................................................ $ 839,000 $ 707,000
Accounts payable................................................................. 157,000 277,000
Accrued liabilities.............................................................. 496,000 613,000
------------- -------------
Total current liabilities...................................................... 1,492,000 1,597,000
------------- -------------
LONG-TERM DEBT..................................................................... 5,435,000 5,930,000
------------- -------------
DEFERRED INCOME TAXES.............................................................. 3,706,000 3,833,000
------------- -------------
STOCKHOLDERS' EQUITY
Common stock, without par value Authorized 20,000,000 shares, issued and
outstanding 13,777,014 in 1997 and 1996........................................ 17,861,000 17,861,000
Less notes receivable arising from the issuance of common stock.................. 0 (95,000)
Foreign currency translation adjustment.......................................... (124,000) (109,000)
Retained earnings................................................................ 1,455,000 1,699,000
------------- -------------
19,192,000 19,356,000
------------- -------------
$ 29,825,000 $ 30,716,000
------------- -------------
------------- -------------
</TABLE>
See Condensed Notes to Consolidated Financial Statements
F-22
<PAGE>
MSR EXPLORATION LTD. ANDSUBSIDIARIES
(INCORPORATED UNDER THE LAWS OF ALBERTA)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
U.S. DOLLARS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------------
1997 1996
------------- -------------
<S> <C> <C>
REVENUE
Oil sales........................................................................ $ 1,113,000 $ 1,156,000
Gas sales........................................................................ 968,000 866,000
Interest, dividends and other income............................................. 54,000 23,000
------------- -------------
Total revenues................................................................. 2,135,000 2,045,000
------------- -------------
EXPENSES
Operating expenses............................................................... 778,000 682,000
Production taxes................................................................. 132,000 116,000
Depletion and depreciation....................................................... 721,000 650,000
General and administrative....................................................... 509,000 446,000
Interest......................................................................... 365,000 360,000
------------- -------------
Total expenses................................................................. 2,505,000 2,254,000
------------- -------------
Loss before income taxes........................................................... (370,000) (209,000)
Income tax benefit................................................................. 126,000 71,000
------------- -------------
Net income (loss).................................................................. $ (244,000) $ (138,000)
------------- -------------
------------- -------------
Per share net income (loss)........................................................ $ (0.02) $ (0.01)
------------- -------------
------------- -------------
Weighted average number of shares outstanding...................................... 13,777,014 13,745,347
------------- -------------
------------- -------------
</TABLE>
See Condensed Notes to Consolidated Financial Statements
F-23
<PAGE>
MSR EXPLORATION LTD. AND SUBSIDIARIES
(INCORPORATED UNDER THE LAWS OF ALBERTA)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
U.S. DOLLARS
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
CASH PROVIDED BY (USED FOR):
OPERATING ACTIVITIES
Net (loss)............................................................................ $ (244,000) $ (138,000)
Charges and credits to net loss not affecting cash
Depletion and depreciation.......................................................... 721,000 650,000
(Gain) loss on disposition of property, plant and equipment......................... (24,000) --
Changes in assets and liabilities................................................... 126,000 (350,000)
----------- -----------
NET CASH FROM (USED FOR) OPERATING ACTIVITIES........................................... 579,000 (162,000)
----------- -----------
INVESTING ACTIVITIES
Acquisitions of Property and equipment................................................ (318,000) (674,000)
----------- -----------
Expenditures on prospective merger.................................................... (186,000) 0
Proceeds from sale of property, plant and equipment................................... 224,000 0
Proceeds on notes receivable arising from the issuance of common stock................ 95,000 60,000
----------- -----------
NET CASH FROM (USED FOR) INVESTING ACTIVITIES........................................... (185,000) (614,000)
----------- -----------
FINANCING ACTIVITIES
Principal payments on long-term debt.................................................. (363,000) (65,000)
Notes payable, bank proceeds.......................................................... 0 400,000
----------- -----------
NET CASH FROM (USED FOR) FINANCING ACTIVITIES........................................... (363,000) 335,000
----------- -----------
NET INCREASE (DECREASE) IN CASH......................................................... 31,000 (117,000)
CASH AT BEGINNING OF PERIOD............................................................. 313,000 280,000
----------- -----------
CASH AT END OF PERIOD................................................................... $ 344,000 $ 163,000
----------- -----------
----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for interest expense.................................................... $ 294,000 $ 296,000
----------- -----------
----------- -----------
Cash payments for income taxes........................................................ $ 0 $ 0
----------- -----------
----------- -----------
</TABLE>
See Condensed Notes to Consolidated Financial Statements
F-24
<PAGE>
MSR EXPLORATION LTD. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
NOTE 1. ACCOUNTING POLICIES AND DISCLOSURES
In the opinion of management of MSR Exploration, Ltd. (the "Company"), the
Company's Consolidated Financial Statements contain all adjustments (consisting
of only normal recurring accruals) necessary to present fairly the financial
position of the Company as of June 30, 1997, and the results of its operations
and its cash flows for the six months ended June 30, 1997 and 1996.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these financial statements
be read in conjunction with the financial statements and notes thereto included
in the Form 10-KSB for the year ended December 31, 1996. The results of
operations for the six month period ended June 30, 1997 and 1996 are not
necessarily indicative of the operating results to be expected for the full
fiscal year.
NOTE 2. PROSPECTIVE BUSINESS COMBINATION
On March 26, 1997, the Company signed a definitive agreement with Mercury
Exploration Company and Mercury Montana, Inc. ("Mercury"), both of Fort Worth,
Texas, to combine all of the oil and gas assets of Mercury with all the oil and
gas assets of the Company by way of the Merger of the Company with and into
Mercury, with Mercury being the surviving corporation (the Business
Combination).
Mercury has over 75 producing wells with proven reserves of more than 5
million barrels of oil, as well as rights and obligations under an agreement
with a utility relating to 304,000 acres of undeveloped oil and gas properties,
located in the Cut Bank Field complex in Montana. In the subject area, Mercury
holds 100% of the oil rights and 30% of the revenue pertaining to liquids
produced by gas wells. Through December 31, 1997, most of the revenues and
operating expenses from Mercury's producing oil and gas properties are subject
to a forward sale. A significant portion of the cash flow attendant to the
Mercury properties will not begin to accrue to the surviving corporation in the
Business Combination until January 1, 1998.
In the Business Combination, the surviving corporation will issue (i) to MSR
shareholders, one share of common stock for each outstanding share of Common
Stock of MSR and (ii) to Mercury shareholders, one share of common stock for
each outstanding share of common stock of Mercury. In addition, the surviving
corporation will assume and/or pay $4,000,000 in bank debt of Mercury
Exploration Company. Mercury currently has outstanding 12,000,000 shares of
common stock and warrants to purchase an additional 5,500,000 common shares at
$1.25 per share and 5,500,000 common shares at $2.00 per share and stock options
to purchase 228,570 shares of Common Stock at $0.875 per share.
In negotiating the exchange ratio in the Business Combination, consideration
was given to the value of the assets of the constituent companies, the estimated
proved oil and gas reserves of the constituent companies and the market value of
the Common Stock of the Company (prior to the date the Agreement was executed
and announced).
Closing the transaction is subject to certain precedent conditions,
including MSR shareholder approval of the Business Combination and the
redomestication and continuance of MSR as a Delaware corporation. MSR is
presently organized under the laws of Alberta, Canada. The closing is expected
to occur immediately subsequent to MSR's reincorporation in Delaware and such
stockholder approval. MSR shareholders owning approximately 40% of the Common
Stock have agreed to vote to approve this transaction. Mercury shareholders have
approved the Business Combination subject to MSR shareholder
F-25
<PAGE>
MSR EXPLORATION LTD. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
NOTE 2. PROSPECTIVE BUSINESS COMBINATION (CONTINUED)
approval and certain other conditions. After the Business Combination, Mercury
shareholders will effectively own approximately 46.6% of the total issued and
outstanding common stock of the surviving corporation and the present
shareholders of the Company will own approximately 53.4 percent of the surviving
corporation.
NOTE 3. NOTES PAYABLE
The notes payable and long-term debt consists of:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
(UNAUDITED) (AUDITED)
Prime rate plus 1.0% note payable to Banque Paribas (9.5% at June
30, 1997)...................................................... $ 6,080,000 $6,400,000
Various pre-petition claims at interest rates ranging from 6% to
10%, due in monthly, quarterly and annual installments......... 194,000 237,000
------------ ------------
6,274,000 6,637,000
Less current maturities........................................ (839,000) (707,000)
------------ ------------
$ 5,435,000 $5,930,000
------------ ------------
------------ ------------
</TABLE>
During the first quarter of 1995, the Company entered into a revolving
credit/term loan agreement with a bank. The agreement allowed the Company to
borrow up to $15,000,000 under a revolving credit arrangement for a two year
period. On August 15, 1996 the loan limit was set at $6,500,000 and on January
1, 1997 the commitment shall be reduced by monthly payments at a rate of $60,000
for 1997, $65,000 for 1998, $75,000 for 1999, $70,000 for 2000 and $60,000 for
2001. The Company can designate the interest rate on amounts outstanding as
either the London Interbank Offered Rate (LIBOR) + 2.5%, or bank prime plus 1%.
The collateral for this loan agreement consists of substantially all of the
existing assets of the Company and any future reserves acquired. The loan
agreement contains certain restrictive covenants which, among other things,
require the maintenance of a minimum current ratio, net worth and debt service
ratio. As of June 30, 1997 the Company was in compliance with all such
requirements.
F-26
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
MSR Exploration Ltd.
We have audited the accompanying statements of revenues and direct operating
expenses attributable to certain oil and gas properties ("Mercury Montana, Inc.
Properties") (see Note 1) acquired by MSR Exploration Ltd. for the years ended
December 31, 1996 and 1995. These statements are the responsibility of the
management of Mercury Exploration Company, as owner of the properties. Our
responsibility is to express an opinion on these statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
The accompanying statements of revenues and direct operating expenses
reflect the revenues and direct operating expenses attributable to the Mercury
Montana, Inc. Properties described in Note 2 to the statements and is not
intended to be a complete presentation of the revenues and expenses of the
Mercury Montana, Inc. Properties.
In our opinion, the accompanying statements present fairly, in all material
respects, the revenues and direct operating expenses of the Mercury Montana,
Inc. Properties described in Note 1 for the years ended December 31, 1996 and
1995 in accordance with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
April 18, 1997
Fort Worth, Texas
F-27
<PAGE>
MERCURY MONTANA, INC.
STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
IN THOUSANDS OF U.S. DOLLARS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
-------------------- --------------------
1996 1995 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
(UNAUDITED)
REVENUES
Oil sales................................................................ $ 2,544 $ 2,020 $ 1,124 $ 1,173
Gas sales................................................................ 215 185 106 94
--------- --------- --------- ---------
Total.................................................................. 2,759 2,205 1,230 1,267
--------- --------- --------- ---------
DIRECT OPERATING EXPENSES
Operating expenses....................................................... 1,297 1,178 634 712
Production taxes......................................................... 264 157 112 124
--------- --------- --------- ---------
Total.................................................................. 1,561 1,335 746 836
--------- --------- --------- ---------
EXCESS OF REVENUES OVER DIRECT OPERATING EXPENSES.......................... $ 1,198 $ 870 $ 484 $ 431
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these statements.
F-28
<PAGE>
MERCURY MONTANA, INC. PROPERTIES
NOTES TO STATEMENTS OF REVENUES AND
DIRECT OPERATING EXPENSES
1. BUSINESS COMBINATION
On March 26, 1997, MSR Exploration Ltd., (MSR) and Mercury Montana, Inc.,
(Mercury), a newly formed company created to hold certain oil and gas
properties, entered into an Agreement and Plan of Merger to combine Mercury's
oil and gas assets located in Montana with all of the assets of MSR (the
Business Combination).
The transaction includes the addition of approximately 75 producing wells
and includes the assumption of Mercury's position in a 304,000 acre area
designated the "Wells Agreement" which overlies a large portion of the giant Cut
Bank Field complex. In the subject area, 100% of the oil rights and 30% of the
revenue pertaining to liquids produced by gas wells will accrue to the combined
entities. In October 1996 Mercury Exploration Company (the Parent) entered into
a forward sale agreement effective October 1, 1996, which commits all of
Mercury's oil revenue for its Montana producing properties to a third party
until a certain amount of production (or the proceeds from the sale thereof) has
been delivered to such third party. Due to this prior agreement, oil revenues
and the associated operating expenses from the Mercury properties will not begin
to accrue to the Company until January 1, 1998.
In the Business Combination, the surviving corporation will issue (i) to MSR
shareholders, one share of common stock for each outstanding share of Common
Stock of MSR and (ii) to Mercury shareholders one share of common stock for each
outstanding share of Common Stock of Mercury. In addition, the surviving
corporation will assume and/or pay $4,000,000 in bank debt of Mercury
Exploration Company. Mercury currently has outstanding 12,000,000 shares of
common stock, warrants to purchase 5,500,000 shares of Common Stock at $1.25 per
share and 5,500,000 shares of Common Stock at $2.00 per share and stock options
to purchase 228,570 shares of Common Stock at $0.875 per share.
In negotiating the number of common shares to be issued to Mercury,
consideration was given to the value of the assets, the proved oil and gas
reserves and the market value of the Company's common shares (prior to the date
the Agreement was executed and announced).
The closing of this transaction is subject to a number of conditions
including MSR shareholder's approval which will be sought at a shareholder
meeting anticipated to be held in July of 1997. The closing is expected
immediately subsequent to such approval. Shareholders owning approximately 40%
of MSR common stock have agreed to vote to approve this transaction. Mercury
shareholders have approved the Business Combination subject to MSR shareholder
approval and certain other conditions. As a result of the effective issuance of
the common shares to Mercury by the Company, Mercury shareholders will
effectively own approximately 46.6% of the Company's total issued and
outstanding common stock and the present shareholders of the Company will own
approximately 53.4 percent of the surviving corporation.
2. BASIS OF PRESENTATION
Historical financial statements reflecting financial position, results of
operations and cash flows required by generally accepted accounting principles
are not presented, as such information is neither readily available on an
individual property basis nor meaningful for the properties included in the
Business Combination. Accordingly, these statements of revenues and direct
operating expenses are presented in lieu of the financial statements required
under Rule 3-05 of Securities and Exchange Commission Regulation S-X. All of the
statements and disclosures are stated in U.S. Dollars.
The accompanying statements of revenues and direct operating expenses
represent Mercury's net ownership interest in the properties included in the
Business Combination and are presented on the full
F-29
<PAGE>
MERCURY MONTANA, INC. PROPERTIES
NOTES TO STATEMENTS OF REVENUES AND
DIRECT OPERATING EXPENSES (CONTINUED)
2. BASIS OF PRESENTATION (CONTINUED)
cost accrual basis of accounting. Depreciation, depletion, and amortization,
allocated general and administrative expenses, interest expense, and income
taxes have been excluded because the property interests included in the Business
Combination are from a newly formed business and the expenses incurred are not
necessarily indicative of the expenses to be incurred by MSR.
3. FORWARD SALE OF OIL REVENUES
Mercury's oil revenues and associated operating expenses included in the
statements of revenues and direct operating expenses are subject to a Production
Payment Agreement entered into in October 1996 between Parent and Supply
Development Group, Inc. ("SDG") ("Agreement") for the period of October 1996
until a certain amount of production (or the proceeds from the sale thereof) has
been delivered to SDG. The Agreement is the obligation of Parent. Parent
recorded the receipt of the sales proceeds under the Agreement and the related
deferred revenue. Under the terms of the Agreement, Parent is required to
provide additional production from other sources (if available) to the extent
that production from the Mercury Properties is not sufficient to satisfy the
volume specified in the Agreement.
Pursuant to the Agreement SDG was entitled to an aggregate of 320,000
barrels of oil (the "Production Payment Amount") produced from certain
properties of Parent, including the Mercury Properties. Parent can satisfy this
obligation by delivering to SDG proceeds from the sale of oil produced rather
than delivering the oil "in kind," unless SDG elects to take oil "in kind."
Pursuant to the Merger Agreement Parent is entitled to all of the oil revenue
and income attributable to the Mercury Properties until the Production Payment
Amount is delivered to SDG; provided that Parent must reimburse the Surviving
Corporation for all costs and expenses of oil production; and provided further
that if the entire Production Payment Amount is not delivered to SDG on or
before December 31, 1997, then Parent must reimburse the Surviving Corporation
for any amount of the Production Payment Amount the Surviving Corporation is
required to deliver to SDG after such date. Parent and Mercury estimate that
based on current prices for crude oil, the amount remaining due to SDG under the
agreement as of June 30, 1997 was approximately $788,000. Parent and Mercury
anticipate that such obligation to SDG will be satisfied on or before December
31, 1997.
While Mercury's oil revenues and associated expenses will be excluded from
the Surviving Corporation's statement of operations for the year ended December
31, 1997, the revenues and expenses are included in the statements of revenues
and direct operating expenses to provide information about the Surviving
Corporation for 1998 and beyond. The oil revenues and associated expenses will
start accruing to the Surviving Corporation on January 1, 1998. Revenues subject
to the forward sales agreement amounted to $689,000 and $1,124,000, respectively
for 1996 and for the six-month period ended June 30, 1997. Direct operating
expenses subject to the sale were $308,000 and $734,000, respectively, for the
same periods.
4. OIL AND GAS RESERVES INFORMATION (UNAUDITED)
Unaudited reserve information related to the Mercury properties is presented
in the tables below and is based on a report prepared by MSR's independent
petroleum engineers as of December 31, 1996 and 1995 and calculated as of
December 31, 1994 by adding 1995 production to the December 31, 1995 amounts.
F-30
<PAGE>
MERCURY MONTANA, INC. PROPERTIES
NOTES TO STATEMENTS OF REVENUES AND
DIRECT OPERATING EXPENSES (CONTINUED)
4. OIL AND GAS RESERVES INFORMATION (UNAUDITED) (CONTINUED)
ESTIMATED QUANTITIES OF PROVED RESERVES
<TABLE>
<CAPTION>
OIL GAS
(MBBL) (MMCF)
--------- ---------
<S> <C> <C>
December 31, 1994........................................................ 5,414.5 1,488.7
Production for 1995.................................................... (123.3) (87.8)
--------- ---------
December 31, 1995........................................................ 5,291.2 1,400.9
Production for 1996.................................................... (129.9) (87.4)
Revisions of previous estimates........................................ 120.1 25.2
--------- ---------
December 31, 1996........................................................ 5,281.4 1,338.7
--------- ---------
--------- ---------
Proved Developed Reserves
As of December 31, 1994................................................ 1,761.2 1,488.7
As of December 31, 1995................................................ 1,637.9 1,400.9
As of December 31, 1996................................................ 1,627.6 1,338.7
</TABLE>
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL
AND GAS RESERVES
The standardized measure of discounted future net cash flows ("Standardized
Measure") is a disclosure required by the Financial Accounting Standards Board.
The Standardized Measure does not purport to present the fair market value of
the proved oil and gas reserves. This would require consideration of expected
future economic and operating conditions, which are not taken into account in
calculating the Standardized Measure.
Under the Standardized Measure, future cash inflows were estimated by
applying December 31, 1996 and 1995 prices to the estimated future production of
proved reserves. Future cash inflows were reduced by estimated future production
and development costs based on December 31, 1996 and 1995 costs to determine
pre-tax cash inflows. Future net cash inflows were discounted using a 10% annual
discount rate to arrive at the Standardized Measure. The following Standardized
Measure and changes in the Standardized Measure are based on the reserve
estimate prepared by the Company's independent petroleum engineers as of
December 31, 1996 and 1995.
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED
RESERVES
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
---------- ----------
<S> <C> <C>
(AMOUNTS IN THOUSANDS)
Future cash flows..................................................... $ 119,585 $ 89,555
Future production and development costs............................... (71,893) (47,752)
Future income tax expense............................................. (10,200) (9,790)
---------- ----------
Future net cash flows................................................. 37,492 32,013
10% annual discount for estimated timing of cash flows................ (20,445) (18,568)
---------- ----------
Standardized measure of discounted future net cash flows.............. $ 17,047 $ 13,445
---------- ----------
---------- ----------
</TABLE>
F-31
<PAGE>
MERCURY MONTANA, INC. PROPERTIES
NOTES TO STATEMENTS OF REVENUES AND
DIRECT OPERATING EXPENSES (CONTINUED)
4. OIL AND GAS RESERVES INFORMATION (UNAUDITED) (CONTINUED)
CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
(amounts in thousands)
<TABLE>
<S> <C> <C>
Standardized measure, January 1, 1996................... $ 13,445
---------
Sales of oil and gas produced, net of production
costs................................................. (1,198)
Net changes in price and production..................... 2,805
Revisions of previous quantity estimates................ 500
Accretion of discount................................... 1,345
Net change in income taxes.............................. (584)
Other................................................... 734
---------
Net increase.......................................... 3,602
---------
Standardized measure, December 31, 1996................. $ 17,047
---------
---------
</TABLE>
Changes in the supply and demand for oil, natural gas and natural gas
liquids, hydrocarbon price volatility, inflation, timing of production, reserve
revisions and other factors make these estimates inherently imprecise and
subject to substantial revision. As a result, these measures are not the
Company's estimate of future cash flows nor do these measures serve as an
estimate of current market value.
F-32
<PAGE>
MERCURY MONTANA, INC.
CONDENSED BALANCE SHEET
JUNE 30, 1997
IN THOUSANDS OF U.S. DOLLARS
(UNAUDITED)
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS
Cash, cash equivalents and time deposits.......................................... $ 0
Accounts receivable............................................................... 89
Inventories....................................................................... 78
---------
Total curent assets............................................................. 167
PROPERTIES, PLANT AND EQUIPMENT--NET ("full cost")(Note 1).......................... 4,181
OTHER ASSETS........................................................................ 50
---------
$ 4,398
---------
---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.................................................................. $ 95
---------
LONG-TERM DEBT (Note 2)............................................................. 4,000
---------
STOCKHOLDERS' EQUITY (Note 3)
Preferred stock, par value $0.01 Authorized 10,000,000 shares Issued and
outstanding--none............................................................... 0
Common stock, par value $0.01 Authorized 50,000,000 shares, Issued and outstanding
12,000,000 shares............................................................... 120
Additional paid in capital........................................................ 272
Retained earnings (deficit)....................................................... (89)
---------
Total stockholders' equity...................................................... 303
---------
$ 4,398
---------
---------
</TABLE>
The accompanying notes are an integral part of this statement.
F-33
<PAGE>
MERCURY MONTANA, INC
NOTES TO CONDENSED BALANCE SHEET
(UNAUDITED)
1. BUSINESS SUMMARY
Mercury Montana, Inc. ("Mercury") was organized on March 7, 1997 under the
laws of the State of Delaware for the purpose of acquiring from Mercury
Exploration Company ("Parent") and thereafter exploring, developing and
operating, all of Parent's oil and natural gas properties located in Montana
(the "Mercury Properties"). Upon formation of Mercury, Parent conveyed to
Mercury the Mercury Properties and associated debt (See Note 2) in exchange for
a majority of the now outstanding Mercury Common Stock and warrants to purchase
additional shares of Mercury Common Stock. Certain directors, officers and
agents of Parent also conveyed to Mercury certain contractual rights in the
Mercury Properties in exchange for shares of Mercury Common Stock and warrants.
The Mercury Properties constitute all of Mercury's oil and natural gas
properties.
PROPERTIES, PLANT AND EQUIPMENT
Mercury follows the "full cost" method of accounting for oil and gas
properties whereby all costs associated with acquiring, exploring for, and
developing oil and gas reserves are capitalized and accumulated in cost centers
established on a country-by-country basis. Such costs include land acquisition
costs, geological and geophysical expenses, carrying charges on non-producing
properties, costs of drilling both productive and non-productive wells, and
overhead charges directly related to acquisition, exploration and development
activities. The capitalized costs, including the estimated future cost to
develop proved reserves and the costs of production equipment, are amortized
using the unit-of-production method based on the estimated net proved reserves
as determined by independent petroleum engineers.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. NOTES PAYABLE
Mercury has guaranteed the repayment of $4.0 million of debt owed by Parent.
Such debt is due and payable by Parent on December 31, 2002 and bears interest
at 6.5625 percent per annum. The debt is secured by a lien on the Mercury
Properties.
3. STOCKHOLDERS' EQUITY
Mercury is authorized to issue 50,000,000 shares of common stock with a par
value of one cent ($0.01) and 10,000,000 shares of preferred stock with a par
value of one cent ($0.01). Mercury currently has outstanding 12,000,000 shares
of common stock, warrants to purchase an additional 5,500,000 common shares at
$1.25 per share and 5,500,000 shares of common stock at $2.00 per share, and
options to purchase 228,570 shares of common stock at $0.875 per share.
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<PAGE>
MERCURY MONTANA, INC
NOTES TO CONDENSED BALANCE SHEET
(UNAUDITED)
3. STOCKHOLDERS' EQUITY (CONTINUED)
Ownership of the outstanding shares is as follows:
<TABLE>
<CAPTION>
PERCENTAGE COMMON
DISTRIBUTION STOCK WARRANTS OPTIONS
------------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Mercury Exploration Company................. 54% 6,480,000 5,940,000
Frank Darden................................ 10% 1,200,000 1,100,000
Thomas Darden............................... 10% 1,200,000 1,100,000 114,285
Glen Darden................................. 10% 1,200,000 1,100,000 114,285
Anne Darden Self............................ 10% 1,200,000 1,100,000
Jack Thurber................................ 5% 600,000 550,000
Jeff Cook................................... 1% 120,000 110,000
</TABLE>
STOCK OPTION PLAN
The 1997 Stock Option Plan of Mercury (the "Plan") was adopted by the Board
of Directors of Mercury and approved by the shareholders of Mercury effective as
of March 7, 1997. The Plan permits the granting of options to purchase shares of
Mercury Common Stock. All employees and directors of Mercury are eligible to
participate in the Plan. An aggregate of 250,000 shares of Mercury Common Stock
have been authorized and reserved for issuance under the Plan. As of June 1,
1997, options to purchase an aggregate of 228,570 shares of Mercury Common Stock
had been granted under the Plan at an exercise price of $0.875 per share. The
Stock Option Committee of the Board of Directors of Mercury determines who shall
be granted options under the Plan and the terms thereof, and administers the
Plan. No options may be granted under the Plan after March 7, 2007.
4. PRODUCTION PAYMENT
Parent and SDG entered into a Production Payment Agreement in October 1996.
Pursuant to the agreement SDG was entitled to an aggregate of 320,000 barrels of
oil ("the Production Payment Amount") produced from certain properties of
Parent, including the Mercury Properties. Parent can satisfy this obligation by
delivering to SDG proceeds from the sale of oil produced rather than delivering
the oil "in kind", unless SDG elects to take oil "in kind". Pursuant to the
Merger Agreement among MSR Exploration Ltd., Mercury and Parent dated as of
March 26, 1997, as amended, Parent is entitled to all of the oil revenue and
income attributable to the Mercury Properties until the Production Payment
Amount has been delivered to SDG; provided that Parent must reimburse the
Surviving Corporation for all costs and expenses of oil production; and provided
further that if the entire Production Payment Amount is not delivered to SDG on
or before December 31, 1997, then Parent must reimburse the Surviving
Corporation for any amount of the Production Payment Amount the Surviving
Corporation is required to deliver to SDG after such date. Parent and Mercury
estimate that based on current prices for crude oil, the amount remaining due to
SDG under the agreement as of June 30, 1997 was approximately $788,000. Parent
and Mercury anticipate that such obligation to SDG will be satisfied on or
before December 31, 1997. No amounts associated with the Production Payment
Agreement are reflected in Mercury's balance sheet, as the Production Payment
Agreement is an obligation of Parent.
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<PAGE>
APPENDIX "A"
CERTIFICATE OF DOMESTICATION
OF
MSR EXPLORATION LTD.
MSR Exploration Ltd. (the "Corporation"), a corporation organized and
existing under the laws of the Province of Alberta, Country of Canada does
hereby certify as follows:
FIRST: The Corporation was continued as an Alberta, Canada corporation on
the 12th day of April 1985, and was first formed as a corporation
pursuant to the amalgamation on the day of 1981 of Monte Grande
Exploration Ltd., a Canadian corporation first incorporated on the 25th day of
July 1957, and Mountain States Resources Ltd., a Canadian corporation first
incorporated on the 1st day of September 1971.
SECOND: The name of the Corporation immediately prior to the filing of this
Certificate of Domestication was MSR Exploration Ltd.
THIRD: The name of the Corporation under which it is filing a Certificate
of Incorporation is MSR Exploration Ltd.
FOURTH: The principal place of business of the Corporation immediately
prior to the filing of this Certificate of Domestication was the Country of the
United States of America.
FIFTH: A Certificate of Incorporation of MSR Exploration Ltd. is being
filed contemporaneously with this Certificate of Domestication.
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Domestication to be signed by , its , who is
authorized to sign this Certificate of Domestication on behalf of the
Corporation, this day of , 1997.
MSR EXPLORATION LTD.
By: __________________________________
Name: _____________________________
Title: ____________________________
A-1
<PAGE>
APPENDIX "B"
CERTIFICATE OF INCORPORATION
OF
MSR EXPLORATION LTD.
FIRST: The name of the corporation is MSR EXPLORATION LTD. (the
"Corporation"). This certificate is filed in connection with the domestication
of the Corporation from Alberta, Canada to the State of Delaware in accordance
with Section 388 of the Delaware General Corporation Law (the "DGCL").
SECOND: The address of its registered office in the State of Delaware is
Corporation Trust Center, 1209 Orange Street, Wilmington, County of New Castle,
Delaware 19801. The name of its registered agent at such address is The
Corporation Trust Company.
THIRD: The nature of the business or purpose to be conducted or promoted is
to engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of the State of Delaware.
FOURTH: The total number of shares of all classes of stock which the
Corporation shall have the authority to issue is 20,000,000 shares of Common
Stock, par value $.01 per share. In the exercise of voting privileges, each
holder of shares of the Common Stock of the Corporation shall be entitled to one
(1) vote for each share held in his name on the books of the Corporation. In all
elections of Directors of the Corporation, cumulative voting is expressly
prohibited. As such, each holder of shares of capital stock of the Corporation
entitled to vote at the election of Directors shall have the right to vote, in
person or by proxy, all or any portion of such shares for or against each
individual Director to be elected and shall not be entitled to vote for or
against any one Director more than the aggregate number of shares held by such
holder which are entitled to vote on the election of such Directors. With
respect to any action to be taken by the stockholders of the Corporation as to
any matter other than the election of Directors, the affirmative vote of the
holders of a majority of the shares of the capital stock of the Corporation
entitled to vote thereon and represented in person or by proxy at a meeting of
the stockholders at which a quorum is present shall be sufficient to authorize,
affirm, ratify or consent to such action. Any action required by the DGCL to be
taken at any annual or special meeting of the stockholders may be taken without
a meeting, without prior notice, and without a vote, if a consent or consents in
writing, setting forth the action so taken, shall be signed by the holder or
holders of a majority of the outstanding shares of the capital stock of the
Corporation entitled to vote thereon and shall be delivered to the Corporation
by delivery to its registered office in Delaware, its principal place of
business or an officer or agent of the Corporation having custody of the
Corporation's minute book.
FIFTH: No director of the Corporation shall be personally liable to the
Corporation or any of its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (a) for any breach of the
director's duty of loyalty to the Corporation or its stockholders, (b) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (c) under Section 174 of the DGCL, or (d) for any
transaction from which the director derived any improper personal benefit.
Neither the amendment nor repeal of this ARTICLE FIFTH, nor the adoption of any
provision of the Corporation's Certificate of Incorporation inconsistent with
this ARTICLE FIFTH, shall eliminate or reduce the effect of this ARTICLE FIFTH
in respect of any matter occurring, or any cause of action, suit or claim that,
but for this ARTICLE FIFTH, would accrue or arise, prior to such amendment,
repeal or adoption of an inconsistent provision.
SIXTH: To the fullest extent permitted by applicable law, the Corporation
shall indemnify any officer or director as set forth in the Bylaws of the
Corporation, pursuant to Section 145 of the DGCL.
B-1
<PAGE>
SEVENTH: The Board of Directors is hereby expressly authorized, by
resolution or resolutions, to amend the Bylaws of the Corporation.
EIGHTH: The name of the incorporator of the corporation is David L. Emmons,
and his mailing address is 1700 Pacific Avenue, Suite 3300, Dallas, Texas 75201.
NINTH: The name and address of the persons who are to serve as directors of
the Corporation until the expiration of their term, as set forth in the Bylaws
of the Corporation, and until their respective successors are duly elected and
qualified, are as follows:
<TABLE>
<CAPTION>
NAME MAILING ADDRESS
- -------------------------------------------------- --------------------------------------------------
<S> <C>
Otto J. Buis 500 Main Street, Suite 210
Fort Worth, Texas 76102
Patrick M. Montalban 500 Main Street, Suite 210
Fort Worth, Texas 76102
Steven M. Morris 500 Main Street, Suite 210
Fort Worth, Texas 76102
</TABLE>
TENTH:
Section 1. OPPRESSION AND UNFAIRNESS
(1) A complainant may apply to the Court for an order under this section.
(2) If, on an application under subsection (1), the Court is satisfied that
in respect of the Corporation or any of its affiliates
(a) any act or omission of the Corporation or any of its affiliates
effects a result,
(b) the business or affairs of the Corporation or any of its affiliates
are or have been carried on or conducted in a manner, or
(c) the power of the directors of the Corporation or any of its
affiliates are or have been exercised in a manner that is oppressive
or unfairly prejudicial to or that unfairly disregards the interests
of any security holder, creditor, director or officer of the
Corporation, the Court may make an order to rectify the matters
complained of.
(3) In connection with an application under this section, the Court may make
any interim or final order it thinks fit including, without limiting the
generality of the foregoing, any or all of the following:
(a) an order restraining the conduct complained of;
(b) an order appointing a receiver or receiver-manager;
(c) an order to regulate the Corporation's affairs by amending the
articles of incorporation or bylaws of the Corporation;
(d) an order declaring that any amendment made to the articles of
incorporation or bylaws of the Corporation pursuant to clause (c)
operates notwithstanding any unanimous stockholder agreement made
before or after the date of the order, until the Court otherwise
orders;
(e) an order directing an issue or exchange of securities of the
Corporation;
(f) an order appointing directors of the Corporation in place of or in
addition to all or any of the directors then in office;
(g) an order directing the Corporation or any other person to purchase
securities of a stockholder of the Corporation;
B-2
<PAGE>
(h) an order directing the Corporation or any other person to pay to a
stockholder of the Corporation any part of the money paid by such
stockholder for securities of the Corporation;
(i) an order directing the Corporation to pay a dividend to its
stockholders or a class of its stockholders;
(j) an order varying or setting aside a transaction or contract to which
the Corporation is a party and compensating the Corporation or any
other party to the transaction or contract;
(k) an order requiring the Corporation, within a time specified by the
Court, to produce to the Court or an interested person financial
statements in the required form or an accounting in any form the
Court may determine;
(l) an order compensating an aggrieved person;
(m) an order directing rectification of the registered or other records
of the Corporation;
(n) an order for the liquidation and dissolution of the Corporation;
(o) an order directing an investigation to be made;
(p) an order requiring the trial of any issue; or
(q) an order granting leave to the applicant to
(i) bring an action in the name and on behalf of the Corporation or
any of its subsidiaries, or
(ii) intervene in an action to which the Corporation or any of its
subsidiaries is a party, for the purpose of prosecuting,
defending or discontinuing an action on behalf of the Corporation
or any of its subsidiaries.
(4) This section does not confer on the Court power to revoke a certificate
of amalgamation or merger.
(5) An applicant under this section may apply in the alternative under
applicable law for an order for the liquidation and dissolution of the
Corporation.
Section 2. COURT ORDER
In connection with an action brought or intervened in Section 1 of this ARTICLE
TENTH, the Court may at any time make any order it thinks fit, including,
without limiting the generality of the foregoing, any or all of the following:
(a) an order authorizing the complainant or any other person to control
the conduct of the action;
(b) an order giving directions for the conduct of the action;
(c) an order directing that any amount adjudged payable by a defendant in
the action shall be paid, in whole or in part, directly to former and
present stockholders of the Corporation instead of to the
Corporation;
(d) an order requiring the Corporation to pay reasonable legal fees
incurred by the complainant in connection with the action.
Section 3. RIGHT TO DISSENT
(1) A holder of shares of any class of stock of the Corporation may dissent
if the Corporation resolves to:
B-3
<PAGE>
(a) amend its articles of incorporation to add, change or remove any
provisions restricting or constraining the issue or transfer of
shares of that class;
(b) amend its articles of incorporation to add, change or remove any
restrictions on the business or businesses that the Corporation may
carry on;
(c) amalgamate, merger or consolidate with another corporation, other
than a wholly owned subsidiary corporation;
(d) be continued under the laws of the same jurisdiction; or
(e) sell, lease or exchange all or substantially all of the property of
the Corporation.
(2) A holder of shares of any class or series of stock of the Corporation
entitled to vote separately as a class or series on a proposal to amend
the articles of incorporation of the Corporation to:
(a) increase the maximum number of authorized shares of a class having
rights or privileges equal or superior to the rights or privileges
attached to the shares of that class;
(b) effect an exchange, reclassification or cancellation of all or part
of the shares of that class;
(c) add, change or remove the rights, privileges, restrictions or
conditions attached to the shares of that class and, without limiting
the generality of the foregoing
(i) remove or change prejudicially rights to accrued dividends or
rights to cumulative dividends;
(ii) add, remove or change prejudicially redemption rights;
(iii) reduce or remove a dividend preference or a liquidation
preference; or
(iv) add, remove or change prejudicially conversion privileges,
options, voting, transfer or preemptive rights, rights to acquire
securities of a corporation or sinking fund provisions,
(d) increase the rights or privileges of any class of shares having
rights or privileges equal or superior to the rights or privileges
attached to the shares of that class;
(e) create a new class of shares having rights or privileges equal or
superior to the rights or privileges attached to the shares of that
class;
(f) make the rights or privileges of any class of shares having rights or
privileges inferior to the rights or privileges of the shares of that
class;
(g) effect an exchange or create a right of exchange of all or part of
the shares of another class into the shares of that class; or
(h) constrain the issue or transfer of the shares of that class or extend
or remove that constraint
may dissent if the Corporation resolves to amend its articles of
incorporation in a matter described above.
(3) If a holder of shares of any class of stock of the Corporation dissents,
the procedure for dissent shall be as set out in Section 184 of the
BUSINESS CORPORATIONS ACT (Albert) as in effect on July 31, 1997, except
that, where the Corporation's articles of incorporation provide for
action to be taken by way of a written consent of less than all of the
stockholders of the Corporation, Section 184(5) of that Act shall be
deemed to read as follows:
"(5) A dissenting shareholder shall send to the corporation a written
objection to a resolution referred to in subsection (1) or (2);
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<PAGE>
(a) at or before any meeting of shareholders at which the resolution
has to be voted on, or
(b) (i) before the execution of a less than unanimous written consent
of shareholders in lieu of a meeting of shareholders adopting
such a resolution where the corporation has delivered prior
notice to a shareholder (A) soliciting a proxy of the shareholder
with respect to the execution of such written consent of
shareholders or (B) soliciting a written consent of the
shareholder to a less than unanimous consent of shareholders;
provided that in no event must the objection be sent to the
corporation prior to the expiration of 20 days after the notice
described in clause (A) or clause (B), as the case may be, is
first sent to the shareholder; or (ii) if no prior notice
described in clause (A) or clause (B) has been given to a
shareholder, within 20 days of the Corporation providing notice
to a shareholder of the adoption by shareholders of such a
resolution by less than unanimous consent to such a resolution,
or
(c) if the corporation did not send notice to the shareholder of the
purpose of a meeting, or his right to dissent or the less than
unanimous shareholder consent, then within a reasonable time
after he learns that the resolution was adopted and of his right
to dissent."
Section 4. DEFINED TERMS
Words and phrases used in this ARTICLE TENTH which were defined in the
Business Corporations Act (Alberta) in effect on July 31, 1997 shall have the
same meaning in this ARTICLE TENTH as in that Act.
THE UNDERSIGNED, being the incorporator hereinbefore named, for the purpose
of domesticating a corporation from Alberta, Canada to the State of Delaware
pursuant to the General Corporation Law of the State of Delaware, does make this
Certificate, hereby declaring and certifying that this is his act and deed and
that the facts herein stated are true, and accordingly has hereunto set his hand
as of the
day of , 1997.
--------------------------------------
David L. Emmons
B-5
<PAGE>
APPENDIX "C"
DISSENTERS' RIGHTS UNDER
ALBERTA BUSINESS CORPORATIONS ACT
SECTION 184
(1) Subject to sections 185 and 234, a holder of shares of any class of a
corporation may dissent if the corporation resolves to
(a) amend its articles under section 167 or 168 to add, change or remove any
provisions restricting or constraining the issue or transfer of shares of
that class,
(b) amend its articles under section 167 or 168 to add, change or remove any
restrictions on the business or businesses that the corporation may carry
on,
(c) amalgamate with another corporation, otherwise than under section 178 or
180.1,
(d) be continued under the laws of another jurisdiction under section 182,
or
(e) sell, lease or exchange all or substantially all its property under
section 183.
(2) A holder of shares of any class or series of shares entitled to subsection
(20), a shareholder entitled to vote under section 170, other than section
170(1)(a), may dissent if the corporation resolves to amend its articles in
a manner described in that section.
(3) In addition to any other right he may have, but subject to section (20), a
shareholder entitled to dissent under this section and who complies with
this section is entitled to be paid by the corporation the fair value of the
shares held by him in respect of which he dissents, determined as of the
close of business on the last business day before the day on which the
resolution from which he dissents was adopted.
(4) A dissenting shareholder may only claim under this section with respect to
all the shares of a class held by him or on behalf of any one beneficial
owner and registered in the name of the dissenting shareholder.
(5) A dissenting shareholder shall send to the corporation a written objection
to a resolution referred to in subsection (1) or (2)
(a) at or before any meeting of shareholders at which the resolution is to
be voted on, or
(b) if the corporation did not send notice to the shareholder of the purpose
of the meeting or of his right to dissent, within a reasonable time after
he learns that the resolution has been adopted.
(6) An application may be made to the Court by originating notice after the
adoption of a resolution referred to in subsection (1) or (2)
(a) by the corporation, or
(b) by a shareholder if he has sent an objection to the corporation under
subsection(5)
to fix the fair value in accordance with subsection (3) of the shares of a
shareholder who dissents under this section.
(7) If an application is made under subsection (6), the corporation shall,
unless the Court otherwise orders, send to each dissenting shareholder a
written offer to pay him an amount considered by the directors to be the
fair value of the shares.
C-1
<PAGE>
(8) Unless the Court otherwise orders, an offer referred to in subsection (7)
shall be sent to each dissenting shareholder
(a) at least 10 days before the date on which the application is returnable,
if the corporation is the applicant, or
(b) within 10 days after the corporation is served with a copy of the
originating notice, if a shareholder is the applicant.
(9) Every offer made under subsection (7) shall
(a) be made on the same terms, and
(b) contain or be accompanied by a statement showing how the fair value was
determined.
(10) A dissenting shareholder may make an agreement with the corporation for the
purchase of his shares by the corporation, in the amount of the
corporation's offer under subsection (7) or otherwise, at any time before
the Court pronounces an order fixing the fair value of the shares.
(11) A dissenting shareholder
(a) is not required to give security for costs in respect of an application
under subsection (6), and
(b) except in special circumstances shall not be required to pay the costs
of the application or appraisal.
(12) In connection with an application under subsection (6), the Court may give
directions for
(a) joining as parties all dissenting shareholders whose shares have not
been purchased by the corporation and for the representation of
dissenting shareholders who, in the opinion of the Court, are in need of
representation, and
(b) the trial of issues and interlocutory matters, including pleadings and
examinations for discovery.
(13) On an application under subsection (6), the Court shall make an order
(a) fixing the fair value of the shares in accordance with subsection (3) of
all dissenting shareholders who are parties to the application,
(b) giving judgment in that amount against the corporation and in favor of
each of those dissenting shareholders, and
(c) fixing the time within which the corporation must pay that amount to a
shareholder.
(14) On
(a) the action approved by the resolution from which the shareholder
dissents becoming effective,
(b) the making of an agreement under subsection (10) between the corporation
and the dissenting shareholder as to the payment to be made by the
corporation for his shares, whether by the acceptance of the
corporation's offer under subsection (7) or otherwise, or
(c) the pronouncement of an order under subsection (13),
whichever first occurs, the shareholder ceases to have any rights as a
shareholder other than the right to be paid the fair value of his shares in
the amount agreed to between the corporation and the shareholder or in the
amount of the judgment, as the case may be.
(15) Subsection 14(a) does not apply to a shareholder referred to in subsection
(5)(b).
(16) Until one of the events mentioned in subsection (14) occurs,
(a) the shareholder may withdraw his dissent, or
C-2
<PAGE>
(b) the corporation may rescind the resolution,
and in either event proceedings under this section shall be discontinued.
(17) The Court may in its discretion allow a reasonable rate of interest on the
amount payable to each dissenting shareholder, from the date on which the
shareholder ceases to have any rights as a shareholder by reason of
subsection (14) until the date of payment.
(18) If subsection (20) applies, the corporation shall, within 10 days after
(a) the pronouncement of an order under subsection (13), or
(b) the making of an agreement between the shareholder and the corporation
as to the payment to be made for his shares,
notify each dissenting shareholder that it is unable lawfully to pay
dissenting shareholders for their shares.
(19) Notwithstanding that a judgment has been given in favor of a dissenting
shareholder under subsection (13)(b), if subsection (20) applies, the
dissenting shareholder, by written notice delivered to the corporation
within 30 days after receiving the notice under subsection (18), may
withdraw his notice of objection, in which case the corporation is deemed to
consent to the withdrawal and the shareholder is reinstated to his full
rights as a shareholder, failing which he retains a status as a claimant
against the corporation, to be paid as soon as the corporation is lawfully
able to do so or, in a liquidation, to be ranked subordinate to the rights
of creditors of the corporation but prior to its shareholders.
(20) A corporation shall not make a payment to a dissenting shareholder under
this section if there are reasonable grounds for believing that
(a) the corporation is or would after the payment be unable to pay its
liabilities as they become due, or
(b) the realizable value of the corporation's assets would thereby be less
than the aggregate of its liabilities.
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<PAGE>
APPENDIX "D"
MSR EXPLORATION LTD.
WRITTEN CONSENT OF STOCKHOLDERS
IN LIEU OF SPECIAL MEETING
The undersigned, being the holders of at least a majority of the issued and
outstanding shares of Common Stock, no par value, of MSR Exploration Ltd., a
Delaware corporation (the "Company"), entitled to vote or take action if a
meeting of the stockholders was called for such purposes, hereby waive any and
all requirements for calling, giving notice of, and holding a special meeting of
the stockholders of the Company, and do hereby consent, pursuant to Section 228
of the Delaware General Corporation Law, to the adoption of the following
resolutions;
RESOLVED, that the undersigned do hereby approve the Agreement and Plan
of Merger dated as of March 26, 1997, by and among the Company (prior to its
continuance from Alberta, Canada and domestication into Delaware), Mercury
Montana, Inc., a Delaware corporation ("Mercury"), and Mercury Exploration
Company ("Parent"), a Texas corporation and the majority shareholder of
Mercury, as amended by Amendment No. 1 to Agreement and Plan of Merger dated
as of June 17, 1997 and Amendment No. 2 to Agreement and Plan of Merger
dated as of September 11, 1997 (the "Merger Agreement"), pursuant to which
the Company is to be merged with and into Mercury with Mercury being the
surviving corporation, and each share of common stock of the Company will be
converted into the right to receive one share of common stock, par value
$.01 per share, of the surviving corporation (the "Merger"), all upon the
terms and subject to the conditions set forth in the Merger Agreement, a
copy of which was included as an appendix to the Proxy Statement/Joint
Prospectus for this consent previously furnished to each stockholder of the
Company.
RESOLVED FURTHER, that the board of directors and the officers of the
Company are authorized to take or cause to be taken all such further action
and to sign and enter into such additional documents, instruments and
agreements as may be necessary or appropriate to consummate the Merger and
carry out the intent and purposes of the foregoing resolution.
IN WITNESS WHEREOF, the undersigned have executed this instrument dated as
of the day of 1997.
______________________________________
As Proxy on Behalf of the Stockholders
Whose
Names Appear on Schedule I Hereto
D-1
<PAGE>
APPENDIX "E"
AGREEMENT AND PLAN OF MERGER
AMONG
MSR EXPLORATION LTD.
MERCURY EXPLORATION COMPANY
AND
MERCURY MONTANA, INC.
MARCH 26, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C> <C>
ARTICLE I
THE MERGER.................................................................................................. E-1
1.1 THE MERGER....................................................................................... E-1
1.2 CLOSING DATE..................................................................................... E-1
1.3 CONSUMMATION OF THE MERGER....................................................................... E-1
1.4 EFFECTS OF THE MERGER............................................................................ E-1
1.5 ARTICLES OF INCORPORATION; BYLAWS................................................................ E-1
1.6 DIRECTORS AND OFFICERS........................................................................... E-2
1.7 CONVERSION OF SECURITIES......................................................................... E-2
1.8 DISSENTING SHARES................................................................................ E-2
1.9 PAYMENT OF MERGER CONSIDERATION TO HOLDERS OF SR COMMON STOCK.................................... E-2
1.10 PAYMENT OF MERGER CONSIDERATION TO MERCURY AND MINORITY STOCKHOLDERS............................. E-4
1.11 WITHHOLDING TAXES................................................................................ E-4
1.12 TAKING OF NECESSARY ACTION; FURTHER ACTION....................................................... E-4
ARTICLE II
REPRESENTATIONS AND WARRANTIES.............................................................................. E-5
2.1 REPRESENTATIONS AND WARRANTIES OF MSR............................................................ E-5
2.2 REPRESENTATIONS AND WARRANTIES OF MERCURY AND MERCURY SUB........................................ E-15
ARTICLE III
COVENANTS OF MERCURY AND MERCURY SUB PRIOR TO THE EFFECTIVE TIME............................................ E-26
3.1 CONDUCT OF BUSINESS BY MERCURY SUB PENDING THE MERGER............................................ E-26
3.2 PROXY STATEMENT.................................................................................. E-27
3.3 ACQUISITION PROPOSALS............................................................................ E-28
ARTICLE IV
COVENANTS OF MSR PRIOR TO THE EFFECTIVE TIME................................................................ E-28
4.1 CONDUCT OF BUSINESS BY MSR PENDING THE MERGER.................................................... E-28
4.2 PROXY STATEMENT.................................................................................. E-28
4.3 MEETING OF STOCKHOLDERS OF MSR................................................................... E-30
4.4 REGISTRATION STATEMENT........................................................................... E-30
4.5 STOCK EXCHANGE LISTING........................................................................... E-30
4.6 FINANCING........................................................................................ E-30
</TABLE>
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<TABLE>
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<S> <C> <C>
ARTICLE V
ADDITIONAL AGREEMENTS....................................................................................... E-31
5.1 ACCOUNTANTS LETTER............................................................................... E-31
5.2 FILINGS; CONSENTS; REASONABLE EFFORTS............................................................ E-31
5.3 NOTIFICATION OF CERTAIN MATTERS.................................................................. E-31
5.4 AGREEMENT TO DEFEND.............................................................................. E-31
5.5 EXPENSES......................................................................................... E-31
5.6 SURVIVING CORPORATION AND SUBSIDIARIES BOARDS OF DIRECTORS, EXECUTIVE COMMITTEES AND OFFICERS.... E-31
5.7 INDEMNIFICATION.................................................................................. E-32
5.8 CERTAIN TAX AND ACCOUNTING MATTERS............................................................... E-33
5.9 AGREEMENT REGARDING CERTAIN REVENUES AND EXPENSES................................................ E-34
5.10 ARTICLES OF INCORPORATION AND BYLAWS............................................................. E-35
5.11 ALTERNATIVE TRANSACTION.......................................................................... E-35
5.12 CONTINGENT WARRANT............................................................................... E-35
5.13 MANAGEMENT AGREEMENT............................................................................. E-35
ARTICLE VI
CONDITIONS.................................................................................................. E-36
6.1 CONDITIONS TO OBLIGATION OF EACH PARTY TO EFFECT THE MERGER...................................... E-36
6.2 ADDITIONAL CONDITIONS TO OBLIGATIONS OF MSR...................................................... E-37
6.3 ADDITIONAL CONDITIONS TO OBLIGATIONS OF MERCURY AND MERCURY SUB.................................. E-37
ARTICLE VII
MISCELLANEOUS............................................................................................... E-38
7.1 TERMINATION...................................................................................... E-38
7.2 EFFECT OF TERMINATION............................................................................ E-38
7.3 WAIVER AND AMENDMENT............................................................................. E-38
7.4 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS........................................... E-39
7.5 CERTAIN DEFINITIONS.............................................................................. E-39
7.6 PUBLIC STATEMENTS................................................................................ E-39
7.7 REMEDIES NOT EXCLUSIVE........................................................................... E-39
7.8 ASSIGNMENT....................................................................................... E-39
7.9 NOTICES.......................................................................................... E-39
7.10 GOVERNING LAW.................................................................................... E-40
7.11 SEVERABILITY..................................................................................... E-40
7.12 COUNTERPARTS..................................................................................... E-40
7.13 HEADINGS......................................................................................... E-40
7.14 CONFIDENTIALITY AGREEMENT........................................................................ E-40
7.15 ENTIRE AGREEMENT; THIRD PARTY BENEFICIARIES; COMMUNITY PROPERTY INTERESTS........................ E-41
7.16 DISCLOSURE LETTERS............................................................................... E-51
</TABLE>
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AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger, dated as of the 26th day of March, 1997
(this "AGREEMENT"), is among MSR Exploration Ltd., an Alberta, Canada
corporation which has agreed to redomesticate to the State of Delaware subject
to the terms hereof ("MSR"), Mercury Exploration Company, a Texas corporation
("MERCURY"), and Mercury Montana, Inc., a Delaware corporation ("MERCURY SUB").
WHEREAS, subject to and in accordance with the terms and conditions of this
Agreement, the respective Boards of Directors of MSR, Mercury and Mercury Sub,
and Mercury and the "MINORITY STOCKHOLDERS" (as such term is defined below), as
the owners and holders of all of the capital stock of Mercury Sub, have approved
the merger of MSR with and into Mercury Sub (the "MERGER"); and
WHEREAS, the parties hereto desire to set forth certain representations,
warranties and covenants made by each to the other as an inducement to the
consummation of the Merger;
NOW, THEREFORE, in consideration of the premises and of the mutual
representations, warranties and covenants herein contained, the parties hereto
hereby agree as follows:
ARTICLE I
THE MERGER
1.1 THE MERGER. Subject to and in accordance with the terms and conditions
of this Agreement and in accordance with the General Corporation Law of Delaware
(the "DGCL"), at the Effective Time (as defined in Section 1.3) MSR shall be
merged with and into Mercury Sub. As a result of the Merger, the separate
corporate existence of MSR shall cease and Mercury Sub shall continue as the
surviving corporation (sometimes referred to herein as the "SURVIVING
CORPORATION"), and all the properties, rights, privileges, powers and franchises
of Mercury Sub and MSR shall vest in the Surviving Corporation, without any
transfer or assignment having occurred, and all debts, liabilities and duties of
Mercury Sub and MSR shall attach to the Surviving Corporation, all in accordance
with the DGCL.
1.2 CLOSING DATE. The closing of the transactions contemplated by this
Agreement (the "CLOSING") shall take place at the offices of Thompson & Knight,
P.C., 801 Cherry Street, Fort Worth, Texas 75102, as soon as practicable after
the satisfaction or waiver of the conditions set forth in Article VI, or at such
other time or place or on such other date as MSR and Mercury shall agree,
provided that the closing conditions set forth in Article VI shall have been
satisfied or waived at or prior to such time. The date on which the Closing
occurs is herein referred to as the "CLOSING DATE".
1.3 CONSUMMATION OF THE MERGER. As soon as practicable on the Closing
Date, the parties hereto will cause the Merger to be consummated by filing with
the Secretary of State of Delaware a certificate of merger in such form as
required by, and executed in accordance with, the relevant provisions of the
DGCL. The "EFFECTIVE TIME" of the Merger as that term is used in this Agreement
shall mean such time as the certificate of merger is duly filed with the
Secretary of State of Delaware or at such later time (not to exceed 90 days from
the date the certificate is filed) as is specified in the certificate of merger
pursuant to the mutual agreement of MSR and Mercury.
1.4 EFFECTS OF THE MERGER. The Merger shall have the effects set forth in
the applicable provisions of the DGCL.
1.5 ARTICLES OF INCORPORATION; BYLAWS. The Articles of Incorporation of
Mercury Sub, as in effect immediately prior to the Effective Time, shall be the
Articles of Incorporation of the Surviving Corporation and thereafter shall
continue to be its Articles of Incorporation until amended as provided therein
and under the DGCL; provided, however, that the name of the Surviving
Corporation after the Effective Time shall be MSR Exploration Ltd., and the
Articles of Incorporation of the Surviving Corporation shall be amended to
reflect such name change. The bylaws of Mercury Sub, as in effect immediately
prior to the
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Effective Time, shall be the bylaws of the Surviving Corporation and thereafter
shall continue to be its bylaws until amended as provided therein and under the
DGCL.
1.6 DIRECTORS AND OFFICERS. At and after the Effective Time (a) the
respective boards of directors of the Surviving Corporation and its subsidiaries
shall be comprised of (i) three persons designated by MSR immediately prior to
the Effective Time (which such designees shall be Otto Buis, Steve Morris and
Patrick Montalban) and (ii) three persons designated by Mercury immediately
prior to the Effective Time, each to hold office in accordance with the Articles
of Incorporation and bylaws of the Surviving Corporation and its subsidiaries,
and (b) the officers of the MSR and its subsidiaries shall be as follows:
Chairman of the Board and Chief Executive Officer--Otto J. Buis, President and
Chief Operating Officer--Thomas F. Darden, Vice President--Glenn M. Darden, and
such other officers as shall be elected by the respective boards of directors of
the Surviving Corporation and its subsidiaries, in each case until their
respective successors are duly elected or appointed and qualified.
1.7 CONVERSION OF SECURITIES. Subject to the terms and conditions of this
Agreement, at the Effective Time, by virtue of the Merger and without any action
on the part of MSR, Mercury, Mercury Sub or their stockholders:
(a) Each share of common stock, no par value per share, of MSR issued
and outstanding immediately prior to the Effective Time ("MSR COMMON
STOCK"), shall be converted into the right to receive one share of common
stock, par value $.01 per share, of the Surviving Corporation ("SURVIVING
CORPORATION COMMON STOCK"), and each warrant to purchase shares of MSR
Common Stock issued and outstanding immediately prior to the Effective Time
shall be converted into a warrant to purchase the same number of shares of
Surviving Corporation Common Stock.
(b) Each share of common stock, par value $.01 per share, of Mercury Sub
issued and outstanding immediately prior to the Effective Time ("MERCURY SUB
COMMON STOCK"), shall be converted into one share of Surviving Corporation
Common Stock, and each warrant and option to purchase shares of Mercury Sub
Common Stock issued and outstanding immediately prior to the Effective Time
shall be converted into a warrant or option to purchase the same number of
shares of Surviving Corporation Common Stock.
The foregoing rights to receive shares of Surviving Corporation Common Stock
or warrants or options to purchase shares of Surviving Corporation Common Stock
are herein collectively referred to as the "Merger Consideration".
1.8 DISSENTING SHARES. Notwithstanding anything in this Agreement to the
contrary, shares of MSR Common Stock outstanding immediately prior to the
Effective Time and held by a holder who has not voted in favor of the Merger and
who has demanded appraisal of such shares in accordance with the DGCL, if the
DGCl provides for appraisal rights for such shares in the Merger ("DISSENTING
SHARES"), shall not be converted into a right to receive the applicable Merger
Consideration, but, instead, such holder shall be entitled to appraisal rights
for his Dissenting Shares in accordance with the provisions of the DGCL;
provided, however, that if such holder fails to perfect or effectively withdraws
or loses his right to appraisal of his Dissenting Shares under the DGCL, such
Dissenting Shares shall be treated as if they had been converted as of the
Effective Time into a right to receive the applicable Merger Consideration. MSR
shall give Mercury prompt notice of any demands received by MSR for appraisal of
shares of MSR Common Stock, and, prior to the Effective Time, Mercury shall have
the right to participate in all negotiations and proceedings with respect to
such demands. Prior to the Effective Time, MSR shall not, except with the prior
written consent of Mercury, make any payment with respect to, or settle or offer
to settle, any such demands.
1.9 PAYMENT OF MERGER CONSIDERATION TO HOLDERS OF MSR COMMON STOCK.
(a) Pursuant to an agreement to be entered into on or before the Closing
Date among MSR, Mercury, and such designee, MSR shall designate a bank or trust
company reasonably acceptable to
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Mercury to act as exchange agent in the Merger (the "EXCHANGE AGENT") for
purposes of effecting the exchange for the Merger Consideration of certificates
that, immediately prior to the Effective Time, representing shares of MSR Common
Stock, or warrants to purchase MSR Common Stock, entitled to receive the Merger
Consideration pursuant to Section 1.7 ("CERTIFICATES"). Upon the surrender to
the Exchange Agent of each Certificate, the Exchange Agent shall pay the holder
of such Certificate the applicable Merger Consideration multiplied by the number
of shares of MSR Common Stock formerly represented by such Certificate in
exchange therefor (or, in the case of a warrant to purchase shares of MSR Common
Stock, a warrant to purchase a like amount of shares of Surviving Corporation
Common Stock in exchange therefor), and such Certificate shall forthwith be
cancelled. Until so surrendered and exchanged, each such Certificate shall
represent solely the right to receive the applicable Merger Consideration. No
interest shall be paid or accrue on the Merger Consideration. If the Merger
Consideration (or any portion thereof) is to be delivered to any person other
than the person in whose name the Certificate surrendered in exchange therefor
is registered, it shall be a condition to such exchange that (i) the Certificate
so surrendered shall be properly endorsed or otherwise be in proper form for
transfer and (ii) the person requesting such exchange shall pay to the Exchange
Agent any transfer or other Taxes (as defined below) required by reason of the
payment of the Merger Consideration to a person other than the registered holder
of the Certificate surrendered or establish to the satisfaction of the Exchange
Agent that such Tax has been paid or is not applicable. MSR may impose such
other reasonable conditions upon the exchange of Certificates as it may deem
necessary or desirable and as are consistent with the provisions of this
Agreement. Surviving Corporation Common Stock into which MSR Common Stock shall
be converted pursuant to the Merger shall be deemed to have been issued at the
Effective Time; provided, however, that, subject to Applicable Laws (as defined
below), no holder of an unsurrendered Certificate shall be entitled, until the
surrender of such Certificate, to vote the shares of Surviving Corporation
Common Stock into which his MSR Common Stock shall have been converted.
(b) At or immediately prior to the Closing, MSR shall deposit, or cause to
be deposited, in trust with the Exchange Agent stock certificates representing
the aggregate stock Merger Consideration to which holders of shares of MSR
Common Stock shall be entitled at the Effective Time pursuant to Section 1.7
(the "PAYMENT FUND"). The Exchange Agent shall, pursuant to irrevocable
instructions, make the exchanges referred to in Section 1.9(a) out of the
Payment Fund. The Payment Fund shall not be used for any other purpose except as
expressly provided in this Agreement.
(c) Unless and until a Certificate is surrendered to the Exchange Agent,
dividends/distributions payable to the holders of record of Surviving
Corporation Common Stock shall not be paid to the holder of such Certificate in
respect of the Surviving Corporation Common Stock represented thereby, but,
subject to applicable abandoned property, escheat, and similar laws, there shall
be paid to the holder thereof (i) upon surrender of such Certificate, the amount
of any dividends/distributions, the record date for the determination of the
holders entitled to which shall be after the Effective Time, which theretofore
shall have become payable with respect to the shares of Surviving Corporation
Common Stock represented by such Certificate and issued in exchange upon its
surrender, but without interest on such dividends/ distributions, and (ii) after
surrender of such Certificate, the amount of any dividends/distributions with
respect to such shares of Surviving Corporation Common Stock, the record date
for the determination of the holders entitled to which shall be after the
Effective Time but prior to the surrender of such Certificate, and the payment
date of which shall be subsequent to such surrender, such amount to be paid on
such payment date.
(d) Promptly following the date which is one year after the Effective Time,
the Exchange Agent shall deliver to the Surviving Corporation all certificates
other documents and instruments in its possession relating to the transactions
described in this Agreement, and the Exchange Agent's duties shall terminate.
Thereafter, each holder of a Certificate may surrender such Certificate to the
Surviving Corporation and (subject to applicable abandoned property, escheat,
and similar laws) receive in exchange therefor the
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applicable Merger Consideration and any amounts to which such holder is entitled
pursuant to Sections 1.9(c), but such holder shall have no greater rights
against the Surviving Corporation than may be accorded to general creditors of
the Surviving Corporation under Applicable Law. Notwithstanding anything in this
Agreement to the contrary, neither the Exchange Agent nor any party hereto shall
be liable to a holder of shares of MSR Common Stock for any cash or other
property delivered to a public official pursuant to applicable abandoned
property, escheat, or similar laws.
(e) Promptly after the Effective Time, the Exchange Agent shall mail to each
record holder of a Certificate a form of letter of transmittal (which shall
specify that delivery of a Certificate shall be effected, and risk of loss and
title to a Certificate shall pass, only upon proper delivery of the Certificate
to the Exchange Agent and shall be in such form and contain such other
provisions, as MSR shall specify) and instructions for use in surrendering such
Certificate and receiving the applicable Merger Consideration in exchange
therefor.
(f) At the Effective Time, the stock transfer books of MSR shall be closed
and no transfers of MSR Common Stock shall thereafter be made. If, after the
Effective Time, Certificates are presented to the Surviving Corporation or the
Exchange Agent, they shall be cancelled and exchanged for the applicable Merger
Consideration as provided in Section 1.7, subject to Applicable Law in the case
of Dissenting Shares.
(g) In the event any Certificate shall have been lost, stolen, or destroyed,
upon the making of an affidavit of that fact by the person claiming such
Certificate to be lost, stolen, or destroyed, the Surviving Corporation shall
issue or cause to be issued in exchange for such lost, stolen, or destroyed
Certificate the Merger Consideration deliverable in respect thereof as
determined in accordance with Section 1.7. When authorizing such issue of the
Merger Consideration in exchange therefor, the Board of Directors of the
Surviving Corporation may, in its discretion and as a condition precedent to the
issuance thereof, require the owner of such lost, stolen, or destroyed
Certificate to give the Surviving Corporation a bond in such sum as it may
direct as indemnity against any claim that may be made against the Surviving
Corporation with respect to the Certificate alleged to have been lost, stolen,
or destroyed.
1.10 PAYMENT OF MERGER CONSIDERATION TO MERCURY AND MINORITY
STOCKHOLDERS. On the Closing Date, immediately following the Effective Time,
Mercury and the Minority Stockholders, as the owners and holders of the
certificate or certificates that prior thereto represented all of the Mercury
Sub Common Stock and warrants and options to purchase Mercury Common Stock,
shall surrender such certificates to the Surviving Corporation or its transfer
agent. Upon the surrender by Mercury and the Minority Stockholders to the
Surviving Corporation or its transfer agent of all of such certificates, the
Surviving Corporation shall pay and deliver to Mercury and the Minority
Stockholders the aggregate amount of the applicable Merger Consideration to
which Mercury and the Minority Stockholders are entitled in accordance with
Section 1.7 above, and such certificates shall forthwith be cancelled.
1.11 WITHHOLDING TAXES. The distribution of the Merger Consideration will
be subject to all applicable withholding requirements under federal and foreign
tax laws.
1.12 TAKING OF NECESSARY ACTION; FURTHER ACTION. The parties hereto shall
take all such reasonable and lawful action as may be necessary or appropriate in
order to effectuate the Merger as promptly as possible. If, at any time after
the Effective Time, any such further action is necessary or desirable to carry
out the purposes of this Agreement and to vest the Surviving Corporation with
full right, title and possession to all assets, property, rights, privileges,
powers and franchises of Mercury Sub or MSR, such corporations shall direct
their respective officers and directors to take all such lawful and necessary
action.
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ARTICLE II
REPRESENTATIONS AND WARRANTIES
2.1 REPRESENTATIONS AND WARRANTIES OF MSR. MSR hereby represents and
warrants to Mercury, Mercury Sub and the Minority Stockholders that:
(a) ORGANIZATION AND COMPLIANCE WITH LAW. Each of MSR and its
consolidated subsidiaries (the "MSR SUBSIDIARIES") is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction in which it is chartered or organized and has all requisite
corporate power and corporate authority and all necessary governmental
authorizations to own, lease and operate all of its properties and assets
and to carry on its business as now being conducted, and the name of each
MSR Subsidiary, and the jurisdiction in which each is chartered or organized
are set forth in Section 2.1(a) of the disclosure letter delivered by MSR to
Mercury as of March 10, 1997 (the "MSR DISCLOSURE LETTER"). Except as set
forth in Section 2.1(a) of the MSR Disclosure Letter, each of MSR and the
MSR Subsidiaries is duly qualified as a foreign corporation to do business,
and is in good standing, in each jurisdiction in which the property owned,
leased or operated by it or the nature of the business conducted by it makes
such qualification necessary.
(b) CAPITALIZATION.
(i) The authorized capital stock of MSR consists of 20,000,000
shares of MSR Common Stock, no par value shares. As of March 10, 1997,
there were issued and outstanding 13,777,014 shares of MSR Common Stock,
and no shares of MSR Common Stock were held as treasury shares. As of
March 10, 1997, a total of 280,000 shares of MSR Common Stock were
reserved for issuance pursuant to the stock options and rights to
purchase referred to in Section 2.1(b)(ii). All issued shares of MSR
Common Stock are validly issued, fully paid and nonassessable, and no
holder thereof is entitled to preemptive rights. All shares of MSR Common
Stock to be issued pursuant to the Merger, when issued in accordance with
this Agreement, will be validly issued, fully paid and nonassessable and
will not violate the preemptive rights of any person. Except as set forth
in Section 2.1(b) of the MSR Disclosure Letter, MSR is not a party to,
and is not aware of, any voting agreement, voting trust or similar
agreement or arrangement relating to any class or series of its capital
stock or any agreement or arrangement providing for registration rights
with respect to any capital stock or other securities of MSR.
(ii) As of the date hereof, there are outstanding options or other
rights (the "MSR OPTIONS") to purchase an aggregate of 280,000 shares of
MSR Common Stock under that certain warrant in favor of Bank Paribas
dated as of January 13, 1995. Other than as set forth in this Section
2.1(b) and except for issuances contemplated by this Agreement in
connection with the Merger, there are not now, and at the Effective Time
there will not be, any (A) shares of capital stock or other equity
securities of MSR outstanding (other than MSR Common Stock issued
pursuant to the exercise of MSR Options) or (B) outstanding options,
warrants, scrip, rights to subscribe for, calls or commitments of any
character whatsoever relating to, or securities or rights convertible
into or exchangeable for, shares of any class of capital stock of MSR, or
contracts, understandings or arrangements to which MSR is a party, or by
which it is or may be bound, to issue additional shares of its capital
stock or options, warrants, scrip or rights to subscribe for, or
securities or rights convertible into or exchangeable for, any additional
shares of its capital stock.
(iii) Except as set forth in Section 2.1(b) of the MSR Disclosure
Letter, all outstanding shares of capital stock of the MSR Subsidiaries
are owned by MSR or a wholly-owned subsidiary of MSR, free and clear of
all liens, charges, encumbrances, adverse claims and options of any
nature.
(c) AUTHORIZATION AND VALIDITY OF AGREEMENT. MSR has all requisite
corporate power and authority to enter into this Agreement and to perform
its obligations hereunder. The execution and
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delivery by MSR of this Agreement and the consummation by it of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action (subject only, with respect to the Merger and the approval
of this Agreement as provided for in Section 4.3). On or prior to the date
hereof, the Board of Directors of MSR has determined to recommend the
approval of this Agreement to the stockholders of MSR, and such
determination is in effect as of the date hereof. This Agreement has been
duly executed and delivered by MSR is the valid and binding obligation of
MSR, enforceable against MSR in accordance with its terms.
(d) NO APPROVALS OR NOTICES REQUIRED; NO CONFLICT WITH INSTRUMENTS TO
WHICH MSR OR ANY OF THE MSR SUBSIDIARIES IS A PARTY. Neither the execution
and delivery of this Agreement by MSR, nor the performance by MSR of its
obligations hereunder, nor the consummation of the transactions contemplated
hereby by MSR, will (i) conflict with the MSR Certificate or the bylaws of
MSR or the charter or bylaws of any of the MSR Subsidiaries; (ii) assuming
satisfaction of the requirements set forth in clause (iii) below, violate
any provision of law applicable to MSR or any of the MSR Subsidiaries; (iii)
except for (A) requirements of foreign, Federal or state securities laws,
(B) requirements of notice filings in such foreign jurisdictions as may be
applicable, (C) the filing of (1) articles of continuance with the Corporate
Registry of Alberta and (2) a certificate of incorporation and certificate
of domestication pursuant to the DGCL, and (D) the filing of a certificate
of merger by MSR in accordance with the DGCL, require any consent or
approval of, or filing with or notice to, any public body or authority,
domestic or foreign, under any provision of law applicable to MSR or any of
the MSR Subsidiaries; or (iv) require any consent, approval or notice under,
or violate, breach, be in conflict with or constitute a default (or an event
that, with notice or lapse of time or both, would constitute a default)
under, or permit the termination of any provision of, or result in the
creation or imposition of any lien upon any properties, assets or business
of MSR or any of the MSR Subsidiaries under, any note, bond, indenture,
mortgage, deed of trust, lease, franchise, permit, authorization, license,
contract, instrument or other agreement or commitment or any order, judgment
or decree to which MSR or any of the MSR Subsidiaries is a party or by which
MSR or any of the MSR Subsidiaries or any of its or their assets or
properties is bound or encumbered, except (A) those that have already been
given, obtained or filed, (B) those that are required pursuant to bank loan
agreements, as set forth in Section 2.1(d) of the MSR Disclosure Letter, (C)
those that are customarily obtained from governmental or tribal authorities
after Closing.
(e) COMMISSION FILINGS; FINANCIAL STATEMENTS. MSR and each of the MSR
Subsidiaries have filed all reports, registration statements and other
filings, together with any amendments required to be made with respect
thereto, that they have been required to file with the Securities and
Exchange Commission (the "COMMISSION") under the Securities Act of 1933, as
amended (the "SECURITIES ACT"), and the Securities Exchange Act of 1934, as
amended (the "EXCHANGE ACT"). All reports, registration statements and other
filings (including all notes, exhibits and schedules thereto and documents
incorporated by reference therein) filed by MSR with the Commission since
January 1, 1996, through the date of this Agreement, together with any
amendments thereto, are sometimes collectively referred to as the "MSR
COMMISSION FILINGS". MSR has heretofore delivered to Mercury copies of the
MSR Commission Filings. As of the respective dates of their filing with the
Commission, the MSR Commission Filings complied in all material respects
with the Securities Act, the Exchange Act and the rules and regulations of
the Commission thereunder, and did not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein
or necessary to make the statements made therein, in light of the
circumstances under which they were made, not misleading.
Each of the consolidated financial statements (including any related
notes or schedules) included in the MSR Commission Filings was prepared in
accordance with generally accepted accounting principles applied on a
consistent basis (except as may be noted therein or in the notes or
schedules thereto) and complied with all applicable rules and regulations of
the Commission. Such consolidated
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financial statements fairly present the consolidated financial position of
MSR and the MSR Subsidiaries as of the dates thereof and the results of
operations, cash flows and changes in shareholders' equity for the periods
then ended (subject, in the case of the unaudited interim financial
statements, to normal year-end audit adjustments on a basis comparable with
past periods). As of the date hereof, neither MSR nor any MSR Subsidiaries
have any liabilities, absolute or contingent, that may reasonably be
expected to have a material adverse effect on MSR and the MSR Subsidiaries
taken as a whole that are not reflected in the MSR Commission Filings,
except those set forth in Section 2.1(e) of the MSR Disclosure Letter.
(f) CONDUCT OF BUSINESS IN THE ORDINARY COURSE; ABSENCE OF CERTAIN
CHANGES AND EVENTS. Since January 1, 1997, except as contemplated by this
Agreement or as disclosed in the MSR Commission Filings filed with the
Commission prior to the date hereof or as set forth in Section 2.1(f) of the
MSR Disclosure Letter, MSR and the MSR Subsidiaries have conducted their
business only in the ordinary and usual course, and there has not been (i)
any material adverse change in the financial condition, results of
operations or business of MSR and the MSR Subsidiaries, taken as a whole, or
any condition, event or development that reasonably may be expected to
result in any such material adverse change; (ii) any material change by MSR
in its accounting methods, principles or practices; (iii) any revaluation by
MSR or any of the MSR Subsidiaries of any of its or their assets, including,
without limitation, writing down the value of inventory or writing off notes
or accounts receivable other than in the ordinary course of business; (iv)
any entry by MSR or any of the MSR Subsidiaries into any commitment or
transaction material to MSR and the MSR Subsidiaries, taken as a whole; (v)
any declaration, setting aside or payment of any dividends or distributions
in respect of the MSR Common Stock, or any redemption, purchase or other
acquisition of any of its securities or any securities of any of the MSR
Subsidiaries; (vi) any damage, destruction or loss (whether or not covered
by insurance) materially adversely affecting the properties or business of
MSR and the MSR Subsidiaries, taken as a whole; (vii) any increase in
indebtedness for borrowed money; (viii) any granting of a security interest
or lien on any material property or assets of MSR and the MSR Subsidiaries,
taken as a whole, other than (A) liens for taxes not due and payable or
which are being contested in good faith; (B) liens and security interests
created under joint operating agreements or similar agreements, to the
extent relating to amounts not yet due and payable; (C) mechanics',
warehousemen's and other statutory liens incurred in the ordinary course of
business, to the extent relating to amounts not yet due and payable; and (D)
defects and irregularities in title and encumbrances which are not
substantial in character or amount and do not materially impair the use of
the property or asset in question (collectively, "PERMITTED LIENS"); or (ix)
any increase in or establishment of any bonus, insurance, severance,
deferred compensation, pension, retirement, profit sharing, stock option
(including, without limitation, the granting of stock options, stock
appreciation rights, performance awards or restricted stock awards), stock
purchase or other employee benefit plan or any other increase in the
compensation payable or to become payable to any officers or key employees
of MSR or any of the MSR Subsidiaries.
(g) LITIGATION. Except as set forth in Section 2.1(g) of the MSR
Disclosure Letter, there are no claims, actions, suits, investigations,
inquiries or proceedings pending or, to the knowledge of MSR, overtly
threatened against or affecting MSR or any MSR Subsidiaries or any of their
respective properties at law or in equity, or before or by any federal,
state, municipal or other governmental agency or authority, or before any
arbitration board or panel, wherever located, that individually or in the
aggregate if adversely determined would have material adverse effect on MSR
and the MSR Subsidiaries, taken as a whole, or that involve the risk of
criminal liability.
(h) COMPLIANCE WITH LAWS. Except as set forth in Section 2.1(h) of the
MSR Disclosure Letter, MSR and the MSR Subsidiaries have complied with all
applicable Federal, foreign, state and local laws, statutes, ordinances,
rules, regulations and orders ("APPLICABLE LAWS") (including without
limitation Applicable Laws relating to securities, properties, manufacturing
processes, sales practices,
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employment practices, terms and conditions of employment, wages and hours,
safety, occupational safety, health, environmental protection, product
safety, and civil rights), the non-compliance with which would have a
material adverse effect on MSR and the MSR Subsidiaries, taken as a whole.
Neither MSR nor any MSR Subsidiary has received any written notice, which
has not been dismissed or otherwise disposed of, that any such party has not
so complied. Neither MSR nor any MSR Subsidiary is charged or, to the best
knowledge of MSR, threatened with, or, to the best knowledge of MSR, under
investigation with respect to, any violation of any Applicable Law relating
to any aspect of the business of MSR or any MSR Subsidiaries.
(i) EMPLOYEE BENEFIT PLANS.
(i) Section 2.1(i) of the MSR Disclosure Letter provides a
description of each Plan or Benefit Program or Agreement which is
sponsored, maintained or contributed to by MSR or any corporation, trade,
business or entity under common control with MSR Sub within the meaning
of Section 414(b), (c), (m) or (o) of the Internal Revenue Code of 1986,
as amended (the "CODE") or Section 4001 of ERISA (a "MSR ERISA
AFFILIATE") for the benefit of its employees, or has been so sponsored,
maintained or contributed to within six years prior to the Closing Date.
True and complete copies of each of the Plans, Benefit Programs or
Agreements, related trusts, if applicable, and all amendments thereto,
have been furnished to Mercury.
(ii) Except as otherwise set forth in Section 2.1(i) of the MSR
Disclosure Letter:
(A) Neither MSR nor any MSR ERISA Affiliate contributes to or has
an obligation to contribute to, or has at any time contributed to or
had an obligation to contribute to, a plan subject to Title IV of
ERISA, including, without limitation, a multiemployer plan within the
meaning of Section 3(37) of ERISA:
(B) Each Plan and each Benefit Program or Agreement has been
administered, maintained and operated in all material respects in
accordance with the terms thereof and in compliance with its
governing documents and applicable law (including, where applicable,
ERISA and the Code);
(C) There is no matter pending with respect to any of the Plans
before any governmental agency, and there are no actions, suits or
claims pending (other than routine claims for benefits) or, to the
knowledge of MSR, threatened against, or with respect to, any of the
Plans or Benefit Programs or Agreements or their assets;
(D) No act, omission or transaction has occurred which would
result in imposition on MSR or any MSR ERISA Affiliate of breach of
fiduciary duty liability damages under Section 409 of ERISA, a civil
penalty assessed pursuant to subsections (c), (i) or (1) of Section
502 of ERISA or a tax imposed pursuant to Chapter 43 of Subtitle D of
the Code; and
(E) The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby will not require
MSR or any MSR ERISA Affiliate to make a larger contribution to, or
pay greater benefits under, any Plan, Benefit Program or Agreement
than it otherwise would or create or give rise to any additional
vested rights or service credits under any Plan or Benefit Program or
Agreement.
(iii) Termination of employment of any employee of MSR or any MSR
ERISA Affiliate immediately after consummation of the transactions
contemplated by this Agreement would not result in payments under the
Plans, Benefit Programs or Agreements which, in the aggregate, would
result in imposition of the sanctions imposed under Sections 280G and
4999 of the Code.
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(iv) Each Plan which is an "employee welfare benefit plan," as such
term is defined in Section 3(1) of ERISA, may be unilaterally amended or
terminated in its entirety without liability except as to benefits
accrued thereunder prior to such amendment or termination.
(j) TAXES. Except as set forth in Section 2.1(j) of the MSR Disclosure
Letter:
(i) All tax returns of or relating to any income taxes or similar
assessments or any sales, excise, occupation, use, ad valorem, property,
production, severance, transportation, employment, payroll, franchise, or
other tax imposed by any United States federal, state, or local (or any
foreign or provincial) taxing authority, including any interest,
penalties, or additions attributable thereto (any "TAX") that are
required to be filed on or before the Closing Date by or with respect to
MSR or any MSR Subsidiaries, or any other corporation that is or was a
member of an affiliated group (within the meaning of Section 1504 (a) of
the Code) of corporations of which MSR was a member for any period ending
on or prior to the Closing Date, have been or will be duly and timely
filed, and all Taxes, including interest and penalties, due and payable
pursuant to such Tax Returns have been paid or adequately provided for in
reserves established by MSR in the consolidated financial statements
included in the MSR Commission Filings.
(ii) All U.S. Federal income Tax Returns of or with respect to MSR
or any of the MSR Subsidiaries have been audited by the applicable
governmental authority, or the applicable statute of limitations has
expired, for all periods up to and including the taxable year ended
December 31, 1992.
(iii) There is no material claim against MSR or any of the MSR
Subsidiaries with respect to any Taxes, and no material assessment,
deficiency or adjustment has been asserted or proposed with respect to
any Tax Return of or with respect to MSR or any of the MSR Subsidiaries
that has not been adequately provided for in reserves established by MSR
in the consolidated financial statements included in the MSR Commission
Filings.
(iv) The total amounts set up as liabilities for current and
deferred Taxes in the consolidated financial statements included in the
MSR Commission Filings have been prepared in accordance with generally
accepted accounting principles and are sufficient to cover the payment of
all material Taxes, including any penalties or interest thereon and
whether or not assessed or disputed, that are, or are hereafter found to
be, or to have been, due with respect to the operations of MSR and the
MSR Subsidiaries through the periods covered thereby.
(v) MSR and each of the MSR Subsidiaries have (and as of the Closing
Date will have) made all deposits (including estimated tax payments for
taxable years for which the consolidated federal income tax return is not
yet due) required with respect to Taxes.
(vi) No waiver or extension of any statute of limitations as to any
federal, local or foreign Tax matter has been given by or requested from
MSR or any of the MSR Subsidiaries.
(vii) Except for statutory liens for current Taxes not yet due, no
liens for Taxes exist upon the assets of either MSR or the MSR
Subsidiaries.
(viii) Neither MSR nor any of the MSR Subsidiaries has filed
consolidated income Tax Returns with any corporation, other than
consolidated federal and state income Tax Returns by MSR, for any taxable
period which is not now closed by the applicable statute of limitations.
(ix) Neither MSR nor the MSR Subsidiaries has any deferred
intercompany gain as defined in Treasury Regulation Section 1.1502-13.
(x) MSR has not made any election to be treated as a U.S. domestic
corporation for federal Tax purposes pursuant to Section 897(i) of the
Code.
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(k) ENVIRONMENTAL MATTERS. Except for matters disclosed in Section
2.1(k) of the MSR Disclosure Letter:
(i) to the best knowledge of MSR all of the properties, operations
and activities of MSR and the MSR Subsidiaries comply with all applicable
Environmental Laws;
(ii) None of MSR, the MSR Subsidiaries or their properties and
operations are subject to any existing, pending or, to the knowledge of
MSR, threatened action, suit, investigation, inquiry or proceeding by or
before any Governmental Authority or third party under any Environmental
Law;
(iii) to the best knowledge of MSR all notices, permits, licenses or
similar authorizations, if any, required to be obtained or filed by MSR
or any MSR Subsidiaries under any Environmental Law in connection with
any aspect of the business of MSR or the MSR Subsidiaries, including
without limitation those relating to the treatment, storage, disposal or
release of a hazardous substance or solid waste, have been duly obtained
or filed and will remain valid and in effect after the Merger, and MSR
and the MSR Subsidiaries are in compliance with the terms and conditions
of all such notices, permits, licenses and similar authorizations;
(iv) to the best knowledge of MSR, MSR and the MSR Subsidiaries have
satisfied and are currently in compliance with all financial
responsibility requirements applicable to its operations and imposed by
any Governmental Authority under any Environmental Law, and neither MSR
nor any MSR Subsidiary has received any notice of noncompliance with any
such financial responsibility requirements;
(v) to the best knowledge of MSR, there are no physical or
environmental conditions existing on any property of MSR or any MSR
Subsidiary or resulting from MSR or any MSR Subsidiary's operations or
activities with respect to any MSR Properties, past or present, at any
location, that would give rise to any on-site or off-site investigative,
remedial, response, contribution or similar obligations under any
Environmental Laws;
(vi) to the best knowledge of MSR, since the effective date of the
relevant requirements of applicable Environmental Laws, all hazardous
substances or solid wastes generated by MSR or any MSR Subsidiary or used
in connection with any of their properties or operations have to the
extent required by Environmental Laws been transported only by carriers
authorized under Environmental Laws to transport such substances and
wastes, and disposed of only at treatment, storage and disposal
facilities authorized under Environmental Laws to treat, store or dispose
of such substances and wastes, and, to the best knowledge of MSR and with
respect to such substances and wastes, such carriers and facilities have
been and are operating in compliance with such authorizations, are not
subject to any material unperformed investigative, remedial, response,
contribution or similar obligations under, and are not the subject of any
existing, pending or overtly threatened action, investigation or inquiry
by any Governmental Authority or third party in connection with, any
Environmental Laws;
(vii) there has been no exposure of any person or property to
hazardous substances, solid waste or any pollutant or contaminant, nor
has there been any release of hazardous substances, solid waste or any
pollutant or contaminant into the environment by MSR or any MSR
Subsidiary in connection with their properties or operations that could
reasonably be expected to give rise to any claim for damages or
compensation; and
(viii) MSR shall make available to Mercury all internal and external
environmental audits and studies and all correspondence on substantial
environmental matters in the possession of MSR relating to any of the
current or former properties or operations of MSR or any MSR Subsidiary.
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(l) PROPERTIES.
(i) The oil, gas and/or mineral leases, interests in which comprise
part of the "MSR PROPERTIES" (as defined below), and all other material
contracts, agreements, licenses, permits and easements, rights-of-way and
other rights-of-surface use comprising any part of or otherwise relating
to the MSR Properties (such leases and such material contracts,
agreements, licenses, permits, easements, rights-of-way and other
rights-of-surface use being herein called the "MSR BASIC DOCUMENTS"), are
in full force and effect and constitute valid and binding obligations of
the parties thereto; all contracts and agreements which are MSR Basic
Documents are disclosed in Section 2.1(l)(i) of the MSR Disclosure
Letter. Neither MSR nor any MSR Subsidiary is in breach or default (and
no situation exists which with the passing of time or giving of notice
would create such a breach or default) of its obligations under the MSR
Basic Documents, and no breach or default by any third party (or
situation which with the passage of time or giving of notice would create
such a breach or default) exists, to the extent such breach or default
(whether by MSR, any MSR Subsidiary or such a third party) could
materially adversely affect (after the date hereof) the ownership,
operation, value or use of any MSR Properties. All payments (including,
without limitation, all delay rentals, royalties, shut-in royalties and
valid calls for payment or prepayment under operating agreements) owing
under MSR Basic Documents have been and are being made (timely and
properly, and before the same became delinquent) by MSR or a MSR
Subsidiary in all material respects and, where the non-payment of same by
a third party could materially adversely affect the ownership, operation,
value or use of a MSR Property after the date hereof, have been and are
being made, by such third party in all material respects.
(ii) Except as set forth in Section 2.1(l)(ii) of the MSR Disclosure
Letter, neither MSR nor any MSR Subsidiary has incurred any expenses, or
made commitments to make expenditures, in connection with (and no other
obligations or liabilities have been incurred) which would materially
adversely affect the ownership or operation of the MSR Properties after
the date hereof, other than routine expenses incurred in the normal
operation of existing wells on the MSR Properties. Except as set forth in
Section 2.1(o)(ii) of the MSR Disclosure Letter, no proposals are
currently outstanding (whether made by MSR, any MSR Subsidiary or by any
other party) to drill additional wells, or to deepen, plug back, abandon,
or rework existing wells, or to conduct other operations for which
consent is required under the applicable operating agreement, or to
conduct any other material operations, other than normal operation of
existing wells on the MSR Properties.
(iii) There exist no agreements or arrangements for the sale,
gathering, transportation, compression, treating, processing or other
marketing of a material volume of production from the MSR Properties
(including without limitation, calls on, or other rights to purchase,
production, whether or not the same are currently being exercised) other
than (A) the agreements set forth in Section 2.1(l)(iii) of the MSR
Disclosure Letter, (B) agreements or arrangements which are cancelable on
120 days notice or less without penalty or detriment and (C) calls on, or
other rights to purchase, production, subject to which MSR or any MSR
Subsidiary acquired one or more MSR Properties and which individually, or
in the aggregate, do not affect a material volume of the production of
oil or gas from the MSR Properties. Any contracts or other arrangements
under which MSR or any MSR Subsidiary is processing, gathering,
transporting or otherwise marketing any material volume of oil, gas or
other minerals (whether or not attributable to the MSR Properties) for
the account of a third party include terms that represent an arm's
length, commercially reasonable trade for MSR or any MSR Subsidiary.
(iv) Except as set forth in Section 2.1(l)(iv) of the MSR Disclosure
Letter, neither MSR nor any MSR Subsidiary has received prepayments
(including, but not limited to, payments for oil and gas not taken
pursuant to "take-or-pay" arrangements) for any oil or gas produced from
the MSR Properties as a result of which the obligation does (or may)
exist to deliver oil or gas
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produced from the MSR Properties after the date hereof without then
receiving payment (or without then receiving full payment) therefor or to
make repayments in cash. For each MSR Property listed in Section
2.1(l)(iv) of the MSR Disclosure Letter, such section reflects (A) the
total amount of prepayment received as of the date hereof, (and the
amount of any recoupment thereof heretofore made), and (B) whether or not
a cash payment can be required in the event recoupment out of production
proves to be inadequate. Except as set forth in Section 2.1(l)(iv) of the
MSR Disclosure Letter, there is no MSR Property with respect to which
MSR, any MSR Subsidiary, and/or their respective predecessors in title,
have collectively taken more (referred to herein as "OVER-PRODUCED") or
materially less (referred to herein as "UNDERPRODUCED") production from
such MSR Property (or on the units in which such MSR Property
participates), or any product thereof, than the ownership of MSR or any
MSR Subsidiary and such predecessors in such MSR Property would entitle
MSR or any MSR Subsidiary and such predecessors (absent any balancing
agreement or arrangement) to receive, to the extent such overproduced or
underproduced position has not, as of the date hereof, been fully made up
or otherwise extinguished. For each MSR Property listed in Section
2.1(l)(iv) of the MSR Disclosure Letter, such section reflects, on a
well-by-well or any other basis as may be dictated by any applicable
balancing agreement, (A) whether MSR or any MSR Subsidiary is in an
over-produced or under-produced position, (B) the amount of such
over-production or under-production, (C) a description of the written
balancing agreement (if any) pertaining to such MSR Property (or a
statement that no such agreement exists) and (D) a statement as to
whether royalties, overriding royalties or other burdens against MSR's or
any MSR Subsidiaries's net revenue interest in the affected MSR
Properties were, during the period the subject imbalance accrued, paid
based upon receipts or entitlements. Except as set forth in Section
2.1(l)(iv) of the MSR Disclosure Letter, there are no pipeline imbalances
that have arisen due to the failure of nominations made by MSR or any MSR
Subsidiary to match actual deliveries of production from any one or more
MSR Properties.
(v) MSR and each MSR Subsidiary has all governmental licenses and
permits necessary to own and operate the MSR Properties as presently
being owned and operated, and such licenses, permits and filings are in
full force and effect, and neither MSR nor any MSR Subsidiary has
received written notice of any material violations in respect of any such
licenses or permits.
(vi) Except as set forth in Section 2.1(l)(vi) of the MSR Disclosure
Letter, neither MSR nor any MSR Subsidiary is subject to (A) any area of
mutual interest agreements or non-compete agreements, (B) any farm-out or
farm-in agreement under which any party thereto is entitled to receive
assignments not yet made, or could earn additional assignments after the
date hereof or (C) any tax partnership, to the extent being so subject
could have a material adverse effect on MSR or any MSR Subsidiary or on
any MSR Property.
(vii) All severance, production, ad valorem, windfall profit and
other similar taxes relating to the ownership or operation of the MSR
Properties have been, and are being, paid (timely, and before the same
become delinquent) by MSR and each MSR Subsidiary in all respects.
(viii) The ownership and operation of the MSR Properties has, to the
extent that non-conformance could materially adversely affect the
ownership, operation, value or use thereof after the date hereof, been in
conformity with all applicable laws, and all applicable rules,
regulations and orders of all governmental agencies having jurisdiction.
(ix) Except as set forth in Section 2.1(l)(ix) of the MSR Disclosure
Letter, there are no Preferential Rights or Consents, other than Routine
"GOVERNMENTAL APPROVALS" (as defined below), that affect any material MSR
Property or Properties and that will be triggered by the Merger.
(x) Except as set forth in Section 2.1(l)(x) of the MSR Disclosure
Letter, there exist no agreements or other arrangements whereunder MSR or
any MSR Subsidiary undertakes to
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<PAGE>
perform gathering, transportation, processing or other marketing services
for any third party, including without limitation the owner of a royalty
or overriding royalty interest burdening a lease included in the MSR
Properties, for a fee or other consideration that is now, or may
hereafter be, unrepresentative of commercial rates being received by
third parties in comparable, arm's length transactions.
(xi) MSR and/or the MSR Subsidiaries have good and defensible title
to the MSR Property, free and clear of all liens, security interests, and
encumbrances except for (a) the contracts, agreements, burdens,
encumbrances and other matters set forth in the descriptions of certain
of the MSR Properties in Section 2.1(l) of the MSR Disclosure Letter, (b)
statutory liens for taxes which are not yet delinquent, (c) liens under
operating agreements, pooling orders and unitization agreements, and
mechanics' materialmen's liens, with respect to obligations which are not
yet due, and (d) minor defects and irregularities in title to any MSR
Property, so long as such defects and irregularities do not materially
impair the value of such MSR Property or the use thereof for the purposes
for which such MSR Property is held. With respect to each MSR Property
described in Section 2.1(l) of the MSR Disclosure Letter, the ownership
of MSR and/or the MSR Subsidiaries in such MSR Property does and will,
(A) with respect to each tract of land described in Section 2.1(l) of the
MSR Disclosure Letter (whether described directly in such section or
described by reference to another instrument) in connection with such MSR
Property, (1) entitle MSR and/or a MSR Subsidiary to receive a decimal or
percentage share of the oil, gas and other hydrocarbons produced from, or
allocated to, such tract equal to not less than the decimal or percentage
share set forth in Section 2.1(l) of the MSR Disclosure Letter in
connection with such tract opposite the words "Net Revenue Interest" (or
words of similar import), (2) cause MSR or any MSR Subsidiary to be
obligated to bear a decimal or percentage share of the cost of
exploration, development and operation of such tract of land not greater
than the decimal or percentage share set forth in Section 2.1(l) of the
MSR Disclosure Letter in connection with such tract opposite the words
"Working Interest" (or words of similar import) and (B) if such MSR
Property is shown in Section 2.1(l) of the MSR Disclosure Letter to be
subject to a unit or units, with respect to each such unit, (1) entitle
MSR and/or the MSR Subsidiaries to receive a decimal or percentage share
of all substances covered by such unit which are produced from, or
allocated to, such unit equal to not less than the decimal or percentage
share set forth in Section 2.1(l) of the MSR Disclosure Letter in
connection with such MSR Property opposite the words "Unit Net Revenue
Interest" or words of similar import (and if such MSR Property is subject
to more than one unit, words identifying such interest with such unit),
and (2) obligate MSR and/or the MSR Subsidiaries to bear a decimal or
percentage share set forth in Section 2.1(l) of the MSR Disclosure Letter
in connection with such MSR Property opposite the words "Unit Working
Interest" or words of similar import (and if such MSR Property is subject
to more than one unit, words identifying such interest with such unit).
With respect to each MSR Property described in Section 2.1(l) of the MSR
Disclosure Letter which is subject to a voluntary or involuntary pooling,
unitization or communication agreement and/or order, the term "tract of
land" as used in this subsection (xi) shall mean the pooled, unitized or
communitized area as an entirety and shall not be deemed to refer to any
individual tract committed to said pooled, unitized or communitized area.
Without limitation of the foregoing, the ownership by MSR and/or the MSR
Subsidiaries of the MSR Properties does and will, with respect to each
well or unit identified in Section 2.1(l) of the MSR Disclosure Letter,
entitle MSR and/or the MSR Subsidiaries to receive a decimal or
percentage share of the oil, gas and other hydrocarbons produced from, or
allocated to, such well or unit equal to not less than the decimal or
percentage share set forth, for such well or unit, in the column headed
"Net Revenue Interest" in Section 2.1(l) of the MSR Disclosure Letter,
and cause MSR and/or MSR Subsidiaries to be obligated to bear a decimal
or percentage share of the cost of operation of such well or unit equal
to not more than the decimal or percentage share set forth, for such well
or unit, in the column
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<PAGE>
headed "Working Interest" in such section. The above-described shares of
production which MSR and/or the MSR Subsidiaries are entitled to receive
and shares of expenses which MSR and/or MSR Subsidiaries are obligated to
bear are not and will not be subject to change other than such changes
which arise pursuant to non-consent provisions of operating agreements
described in Section 2.1(l) of the MSR Disclosure Letter in connection
with operations hereafter proposed, or such changes are reflected in
Section 2.1(l) of the MSR Disclosure Letter.
(m) AGREEMENTS. All agreements, arrangements, and understandings of
any nature (written or oral, formal or informal) (collectively, for purposes
of this Section, "agreements") to which MSR or any MSR Subsidiary is a party
or by which it or any of its properties is otherwise bound, regardless of
amount or subject matter, that are material to the business, assets, results
of operations, condition (financial or otherwise), or prospects of MSR or
any MSR Subsidiary are listed in Section 2.1(m) of the MSR Disclosure
Letter. MSR has delivered to Mercury, accurate and complete copies of such
agreements. Each of such agreements is a valid and binding agreement of the
parties thereto enforceable against them in accordance with its terms. No
breach or default exists with respect to any of such agreements, and no
event has occurred which, after the giving of notice or the passage of time
or otherwise, will result in any such breach or default.
(n) EMPLOYEES; LABOR RELATIONS.
(i) Set forth in Section 2.1(n)(i) of the MSR Disclosure Letter is a
list of (i) all directors and officers of MSR and the MSR Subsidiaries,
and (ii) the name of each employee, agent, and consultant of MSR and the
MSR Subsidiaries as of the date hereof, together with the total amounts
of salary, bonuses, and other compensation paid or payable by MSR and the
MSR Subsidiaries to each such person for the current fiscal year and the
immediately preceding fiscal year.
(ii) Except as set forth in Section 2.1(n)(ii) of the MSR Disclosure
Letter, (a) there are no collective bargaining agreements or other
similar agreements, arrangements, or understandings, written or oral,
with employees as a group to or by which MSR or any MSR Subsidiary is a
party or is bound; (b) no employees of MSR or any MSR Subsidiary are
represented by any labor organization, collective bargaining
representative, or group of employees; (c) no labor organization,
collective bargaining representative, or group of employees claims to
represent a majority of the employees of MSR or any MSR Subsidiary in an
appropriate unit of MSR or MSR Subsidiary; (d) neither MSR nor any MSR
Subsidiary has been involved with any representational campaign by any
union or other organization or group seeking to become the collective
bargaining representative of any of their employees or been subject to
or, to the best knowledge of MSR, threatened with any strike or other
concerted labor activity or dispute; and (e) neither MSR nor any MSR
Subsidiary is obligated to bargain collectively with respect to wages,
hours, and other terms and conditions of employment with any recognized
or certified labor organization, collective bargaining representative, or
group of employees, with respect to any of their employees.
(o) INSIDER INTERESTS. Except as disclosed in Section 2.1(o) of the
MSR Disclosure Letter, no shareholder, director, officer, or employee of MSR
or any MSR Subsidiary or any associate of any such shareholder, director,
officer, or employee is presently, directly or indirectly, a party to any
transaction with MSR or any MSR Subsidiary, including, without limitation,
any agreement, arrangement, or understanding, written or oral, providing for
the employment of, furnishing of services by, rental of real or personal
property from, or otherwise requiring payments to any such shareholder,
director, officer, employee, or associate. To the best knowledge of MSR, no
shareholder, director, officer, or employee of MSR or any MSR Subsidiary or
any associate of any such shareholder, director, officer, or employee owns,
directly or indirectly, any material interest in, or serves as a director,
officer, or employee of, any customer, supplier, or competitor of MSR or any
MSR
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Subsidiary. For purposes of this Section only, an "associate" of any
shareholder, director, officer, or employee means any member of the
immediate family of such shareholder, director, officer, or employee or any
corporation, partnership, trust, or other entity in which such shareholder,
director, officer, or employee has a substantial ownership or beneficial
interest (other than an interest in a public corporation which does not
exceed three percent of its outstanding securities) or is a director,
officer, partner, or trustee or person holding a similar position.
(p) FINANCIAL REQUIREMENTS. Set forth in Section 2.1(p) of the MSR
Disclosure Letter is a list of all bonds, deposits, financial assurance
requirements, and insurance coverage required to be submitted to any
Federal, foreign, state or local governmental agencies or authorities for
the continued ownership and operation of the business and assets of MSR or
any MSR Subsidiaries.
(q) VOTING REQUIREMENTS. The affirmative vote of the holders of a
two-thirds of the outstanding shares of MSR Common Stock is the only vote of
the holders of any class or series of the capital stock of MSR necessary to
approve the "REDOMESTICATION OF MSR" (as defined in Section 4.3 below); and
the affirmative vote of the holders of a majority of the shares of MSR
Common Stock present at the MSR special stockholders' meeting convened in
accordance with Section 4.3 and entitled to vote thereon is the only vote of
the holders of any class or series of the capital stock of MSR necessary to
approve this Agreement.
(r) BROKERAGE FEES. Except for the engagement by MSR of an investment
banker for the purposes of rendering an opinion as contemplate by Section
6.1 below, neither MSR nor any of its affiliates has retained any financial
advisor, broker, agent, or finder or paid or agreed to pay any financial
advisor, broker, agent, or finder on account of this Agreement or any
transaction contemplated hereby. MSR shall indemnify and hold harmless
Mercury from and against any and all losses, claims, damages, and
liabilities (including legal and other expenses reasonably incurred in
connection with investigating or defending any claims or actions) with
respect to any finder's fee, brokerage commission, or similar payment in
connection with any transaction contemplated hereby asserted by any person
on the basis of any act or statement made or alleged to have been made by
MSR or any of its affiliates.
(s) DISCLOSURE. No representation or warranty made by MSR in this
Agreement, and no statement of MSR contained in any document, certificate,
or other writing furnished or to be furnished by MSR to Mercury or Mercury
Sub pursuant hereto or in connection herewith, contains or will contain, at
the time of delivery, any untrue statement of a material fact or omits or
will omit, at the time of delivery, to state any material fact necessary in
order to make the statements contained therein, in light of the
circumstances under which they are made, not misleading. MSR knows of no
matter (other than matters of a general economic character not relating
solely to MSR in any specific manner) which has not been disclosed to
Mercury and Mercury Sub pursuant to this Agreement or the MSR Disclosure
Letter which materially and adversely affects, or, so far as MSR can now
reasonably foresee, will materially and adversely affect, the business,
assets, results of operations, condition (financial or otherwise), or
prospects of MSR or the ability of MSR to consummate the transactions
contemplated hereby.
2.2 REPRESENTATIONS AND WARRANTIES OF MERCURY AND MERCURY SUB. Mercury and
Mercury Sub hereby jointly and severally represent and warrant to MSR that:
(a) ORGANIZATION AND COMPLIANCE WITH LAW. Each of Mercury and Mercury
Sub is a corporation duly organized, validly existing and in good standing
under the laws of the jurisdiction in which it is chartered or organized and
has all requisite corporate power and corporate authority and all necessary
governmental authorizations to own, lease and operate all of its properties
and assets and to carry on its business as now being conducted. The
jurisdiction in which Mercury and Mercury Sub are chartered or organized is
set forth in Section 2.2(a) of the disclosure letter delivered by Mercury to
MSR on March 17, 1997 (the "MERCURY DISCLOSURE LETTER"). Except as set forth
in Section 2.2(a) of the
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Mercury Disclosure Letter, each of Mercury and Mercury Sub is duly qualified
as a foreign corporation to do business, and is in good standing, in each
jurisdiction in which the property owned, leased or operated by it or the
nature of the business conducted by it makes such qualification necessary.
(b) ORGANIZATION AND COMPLIANCE WITH LAW. Mercury has delivered to MSR
accurate and complete copies of (i) the Articles of Incorporation (the
"MERCURY SUB ARTICLES") and bylaws of Mercury Sub as currently in effect,
(ii) the stock records of Mercury Sub, and (iii) the minutes of all meetings
of Mercury Sub's Board of Directors, any committees of such Board, and
Mercury Sub's shareholders (and all consents in lieu of such meetings). Such
records, minutes, and consents accurately reflect the stock ownership of
Mercury Sub and all actions taken by Mercury Sub's Board, any committees of
such Board, and Mercury Sub's shareholders. Mercury Sub is not in violation
of any provision of its Articles of Incorporation or Bylaws.
(c) CAPITALIZATION.
(i) The authorized capital stock of Mercury Sub consists solely of
50,000,000 shares of Mercury Sub Common Stock, $.01 par value. As of the
date hereof, there were issued and outstanding 12,000,000 shares of
Mercury Sub Common Stock, and no shares of Mercury Sub Common Stock are
held as treasury shares. All issued shares of Mercury Sub Common Stock
are validly issued, fully paid and nonassessable, and no holder thereof
is entitled to preemptive rights. Except as contemplated by this
Agreement, neither Mercury nor Mercury Sub are a party to, and or aware
of, any voting agreement, voting trust or similar agreement or
arrangement relating to any class or series of any capital stock or other
securities of Mercury Sub.
(ii) Except for warrants to purchase 11,000,000 shares of Mercury
Sub Common Stock and options to purchase 228,570 shares of Mercury Sub
Common Stock, all as described in Section 2.2 of the Mercury Disclosure
Letter, there are not now, and at the Effective Time there will not be,
any outstanding options, warrants, scrip, rights to subscribe for, calls
or commitments of any character whatsoever relating to, or securities or
rights convertible into or exchangeable for, shares of any class of
capital stock of Mercury Sub, or contracts, understandings or
arrangements to which Mercury or Mercury Sub is a party, or by which
either is or may be bound, to issue or sell additional shares of Mercury
Sub capital stock or options, warrants, scrip or rights to subscribe for,
or securities or rights convertible into or exchangeable for, any
additional shares of Mercury Sub capital stock.
(iii) All outstanding shares of capital stock of the Mercury Sub are
owned by Mercury and persons designated as "MINORITY STOCKHOLDERS" in
Section 2.2(c) of the Mercury Disclosure Letter, and the number of shares
of capital stock of Mercury Sub owned by each such party is as designated
for such party in such section. All such shares of capital stock are
owned by the designated party free and clear of all liens, charges,
encumbrances, adverse claims and options of any nature.
(d) NO SUBSIDIARIES. Mercury Sub has no subsidiaries. In addition,
except as set forth in Section 2.2(d) of the Mercury Disclosure Letter,
Mercury Sub does not own, directly or indirectly, any capital stock or other
equity securities of any corporation or have any direct or indirect equity
or ownership interest in any other person.
(e) AUTHORIZATION AND VALIDITY OF AGREEMENT. Mercury and Mercury Sub
have all requisite corporate power and authority to enter into this
Agreement and to perform their obligations hereunder. The execution and
delivery by Mercury and Mercury Sub of this Agreement and the consummation
by them of the transactions contemplated hereby have been duly authorized by
all necessary corporate action. On or prior to the date hereof, the Boards
of Directors of Mercury and Mercury Sub have determined to recommend
approval of the Merger to the stockholders of Mercury Sub, and the
stockholders of Mercury Sub have approved the Merger, and such
determinations and
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approvals are in effect as of the date hereof. This Agreement has been duly
executed and delivered by Mercury and Mercury Sub, and is the valid and
binding obligation of Mercury and Mercury Sub, enforceable against Mercury
and Mercury Sub in accordance with its terms.
(f) NO APPROVALS OR NOTICES REQUIRED; NO CONFLICT WITH INSTRUMENTS TO
WHICH MERCURY OR MERCURY SUB IS A PARTY. Except as set forth in Section
2.2(f) of the Mercury Disclosure Letter, neither the execution and delivery
of this Agreement by Mercury or Mercury Sub, nor the performance by Mercury
or Mercury Sub of their obligations hereunder, nor the consummation of the
transactions contemplated hereby by Mercury or Mercury Sub, will (i)
conflict with the Articles of Incorporation or bylaws of Mercury or Mercury
Sub; (ii) assuming satisfaction of the requirements set forth in clause
(iii) below, violate any provision of law applicable to Mercury or Mercury
Sub; (iii) except for (A) requirements of Federal or state securities laws,
and (B) the filing of a certificate of merger by Mercury Sub in accordance
with the DGCL, require any consent or approval of, or filing with or notice
to, any public body or authority, domestic or foreign, under any provision
of law applicable to Mercury or Mercury Sub; or (iv) require any consent,
approval or notice under, or violate, breach, be in conflict with or
constitute a default (or an event that, with notice or lapse of time or
both, would constitute a default) under, or permit the termination of any
provision of, or result in the creation or imposition of any lien upon any
properties, assets or business of Mercury or Mercury Sub under, any note,
bond, indenture, mortgage, deed of trust, lease, franchise, permit,
authorization, license, contract, instrument or other agreement or
commitment or any order, judgment or decree to which Mercury or Mercury Sub
is a party or by which Mercury or Mercury Sub or any of their assets or
properties is bound or encumbered, except (A) those that have already been
given, obtained or filed and (B) those that are customarily obtained from
governmental or tribal authorities after Closing.
(g) FINANCIAL STATEMENTS. Mercury has delivered to MSR accurate and
complete copies of Mercury Sub's unaudited balance sheet as of March 7, 1997
Balance Sheet"). The Balance Sheet (i) represents actual bona fide
transactions, (ii) has been prepared from the books and records of Mercury
Sub in conformity with generally accepted accounting principles applied on a
basis consistent with preceding years throughout the periods involved,
except that it is not accompanied by notes or other textual disclosure
required by generally accepted accounting principles, and (iii) accurately,
completely, and fairly presents Mercury Sub's financial position as of the
date thereof and its results of operations for the period then ended.
(h) ABSENCE OF UNDISCLOSED LIABILITIES. Mercury Sub has no liabilities
or obligations (whether accrued, absolute, contingent, unliquidated, or
otherwise, whether or not known to Mercury or Mercury Sub, and whether due
or to become due), except (i) liabilities reflected on the Balance Sheet,
(ii) liabilities which have arisen since the date of the Balance Sheet in
the ordinary course of business (none of which is a material liability for
breach of contract, breach of warranty, tort, or infringement), (iii)
liabilities arising under executory contracts entered into in the ordinary
course of business (none of which is a material liability for breach of
contract), and (iv) liabilities specifically set forth in Section 2.2(h) of
the Mercury Disclosure Letter.
(i) CONDUCT OF BUSINESS IN THE ORDINARY COURSE; ABSENCE OF CERTAIN
CHANGES AND EVENTS. Since January 1, 1997, except as contemplated by this
Agreement or as set forth in Section 2.2(i) of the Mercury Disclosure
Letter, Mercury Sub has conducted its business and the Mercury Properties
have been operated only in the ordinary and usual course, and there has not
been (i) any material adverse change in the financial condition, results of
operations or business of Mercury Sub or the Mercury Properties, or any
condition, event or development that reasonably may be expected to result in
any such material adverse change; (ii) any material change by Mercury Sub in
its accounting methods, principles or practices; (iii) any revaluation of
any of the Mercury Properties, including, without limitation, writing down
the value of inventory or writing off notes or accounts receivable other
than in the ordinary course of business; (iv) any entry by Mercury or
Mercury Sub into any commitment or transaction material to Mercury Sub; (v)
any declaration, setting aside or payment of any dividends or
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<PAGE>
distributions in respect of the Mercury Sub Common Stock or any redemption,
purchase or other acquisition of any of securities of Mercury Sub; (vi) any
damage, destruction or loss (whether or not covered by insurance) materially
adversely affecting the properties or business of Mercury Sub; (vii) any
increase in indebtedness for borrowed money; (viii) any granting of a
security interest or lien on any material property or assets of Mercury Sub,
other than Permitted Liens; or (ix) any increase in or establishment of any
bonus, insurance, severance, deferred compensation, pension, retirement,
profit sharing, stock option (including, without limitation, the granting of
stock options, stock appreciation rights, performance awards or restricted
stock awards), stock purchase or other employee benefit plan or any other
increase in the compensation payable or to become payable to any officers or
employees of Mercury Sub.
(j) LITIGATION. Except as set forth in Section 2.2(j) of the Mercury
Disclosure Letter, there are no claims, actions, suits, investigations,
inquiries or proceedings pending or, to the knowledge of Mercury or Mercury
Sub, overtly threatened against or affecting Mercury Sub or any of its
properties, including without limitation the Mercury Properties, at law or
in equity, or before or by any federal, state, municipal or other
governmental agency or authority, or before any arbitration board or panel,
wherever located.
(k) COMPLIANCE WITH LAWS. Except as set forth in Section 2.2(k) of the
Mercury Disclosure Letter, Mercury Sub has complied with all Applicable Laws
(including without limitation Applicable Laws relating to securities,
properties, manufacturing processes, sales practices, employment practices,
terms and conditions of employment, wages and hours, safety, occupational
safety, health, environmental protection, product safety, and civil rights).
Neither Mercury nor Mercury Sub has received any written notice, which has
not been dismissed or otherwise disposed of, that Mercury Sub has not so
complied. Mercury Sub is not charged or, to the best knowledge of Mercury
and Mercury Sub, threatened with, or, to the best knowledge of Mercury Sub
and Mercury, under investigation with respect to, any violation of any
Applicable Law relating to any aspect of the business of Mercury Sub.
(l) EMPLOYEE BENEFIT PLANS.
(i) Section 2.2(l) of the Mercury Disclosure Letter provides a
description of each Plan or Benefit Program or Agreement which is
sponsored, maintained or contributed to by Mercury Sub or any
corporation, trade, business or entity under common control with Mercury
Sub within the meaning of Section 414(b), (c), (m) or (o) of the Code or
Section 4001 of ERISA (a "MERCURY ERISA AFFILIATE") for the benefit of
its employees, or has been so sponsored, maintained or contributed to
within six years prior to the Closing Date. True and complete copies of
each of the Plans, Benefit Programs or Agreements, related trusts, if
applicable, and all amendments thereto, have been furnished to MSR.
(ii) Except as otherwise set forth in Section 2.2(l) of the Mercury
Disclosure Letter:
(A) None of Mercury Sub or any Mercury ERISA Affiliate
contributes to or has an obligation to contribute to, or has at any
time contributed to or had an obligation to contribute to, a plan
subject to Title IV of ERISA, including, without limitation, a
multiemployer plan within the meaning of Section 3(37) of ERISA:
(B) Each Plan and each Benefit Program or Agreement has been
administered, maintained and operated in all material respects in
accordance with the terms thereof and in compliance with its
governing documents and applicable law (including, where applicable,
ERISA and the Code);
(C) There is no matter pending with respect to any of the Plans
before any governmental agency, and there are no actions, suits or
claims pending (other than routine claims for benefits) or, to the
knowledge of Mercury, threatened against, or with respect to, any of
the Plans or Benefit Programs or Agreements or their assets;
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(D) No act, omission or transaction has occurred which would
result in imposition on Mercury Sub or any Mercury ERISA Affiliate of
breach of fiduciary duty liability damages under Section 409 of
ERISA, a civil penalty assessed pursuant to subsections (c), (i) or
(1) of Section 502 of ERISA or a tax imposed pursuant to Chapter 43
of Subtitle D of the Code; and
(E) The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby will not require
Mercury Sub or any Mercury ERISA Affiliate to make a larger
contribution to, or pay greater benefits under, any Plan, Benefit
Program or Agreement than it otherwise would or create or give rise
to any additional vested rights or service credits under any Plan or
Benefit Program or Agreement.
(iii) Termination of employment of any employee of Mercury Sub or any
Mercury ERISA Affiliate immediately after consummation of the
transactions contemplated by this Agreement would not result in payments
under the Plans, Benefit Programs or Agreements which, in the aggregate,
would result in imposition of the sanctions imposed under Sections 280G
and 4999 of the Code.
(iv) Each Plan which is an "employee welfare benefit plan," as such
term is defined in Section 3(1) of ERISA, may be unilaterally amended or
terminated in its entirety without liability except as to benefits
accrued thereunder prior to such amendment or termination.
(m) TAXES. Except as set forth in Section 2.2(m) of the Mercury
Disclosure Letter:
(i) All tax returns of or relating to any Tax that are required to
be filed on or before the Closing Date by or with respect to Mercury Sub
have been or will be duly and timely filed, and all Taxes, including
interest and penalties, due and payable by Mercury Sub pursuant to such
Tax Returns have been paid or adequately provided for in reserves
established by Mercury Sub in the Balance Sheet. Mercury Sub is not now
and has never been a member of an affiliated group (within the meaning of
Section 1504 (a) of the Code) of corporations.
(ii) None of the U.S. Federal income Tax Returns of or with respect
to Mercury Sub have been audited by the applicable governmental
authority, or the applicable statute of limitations has expired.
(iii) There is no material claim against Mercury Sub with respect to
any Taxes, and no material assessment, deficiency or adjustment has been
asserted or proposed with respect to any Tax Return of or with respect to
Mercury Sub that has not been adequately provided for in reserves
established by Mercury Sub in the Balance Sheet.
(iv) The total amounts set up as liabilities for current and
deferred Taxes in the Balance Sheet have been prepared in accordance with
generally accepted accounting principles and are sufficient to cover the
payment of all material Taxes, including any penalties or interest
thereon and whether or not assessed or disputed, that are, or are
hereafter found to be, or to have been, due with respect to the
operations of Mercury Sub through the periods covered thereby.
(v) Mercury Sub has (and as of the Closing Date will have) made all
deposits (including estimated tax payments for taxable years for which
the consolidated federal income tax return is not yet due) required with
respect to Taxes.
(vi) No waiver or extension of any statute of limitations as to any
federal, local or foreign Tax matter has been given by or requested from
Mercury Sub.
(vii) Except for statutory liens for current Taxes not yet due, no
liens for Taxes exist upon the assets of Mercury Sub.
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<PAGE>
(viii) Mercury Sub does not have any deferred intercompany gain as
defined in Treasury Regulation Section 1.1502-13.
(n) ENVIRONMENTAL MATTERS. Except for matters disclosed in Section
2.2(n) of the Mercury Disclosure Letter:
(i) to the best knowledge of Mercury and Mercury Sub all of the
properties, operations and activities of Mercury Sub comply with all
applicable Environmental Laws;
(ii) Mercury Sub and the properties and operations of Mercury Sub
are not subject to any existing, pending or, to the knowledge of Mercury
or Mercury Sub, threatened action, suit, investigation, inquiry or
proceeding by or before any Governmental Authority or third party under
any Environmental Law;
(iii) to the best knowledge of Mercury and Mercury Sub all notices,
permits, licenses or similar authorizations, if any, required to be
obtained or filed by Mercury or Mercury Sub under any Environmental Law
in connection with any aspect of the business of Mercury Sub, including
without limitation those relating to the treatment, storage, disposal or
release of a hazardous substance or solid waste, have been duly obtained
or filed and will remain valid and in effect after the Merger, and
Mercury and Mercury Sub are in compliance with the terms and conditions
of all such notices, permits, licenses and similar authorizations;
(iv) to the best knowledge of Mercury and Mercury Sub, Mercury Sub
has satisfied and is currently in compliance with all financial
responsibility requirements applicable to its operations and imposed by
any Governmental Authority under any Environmental Law, and Mercury and
Mercury Sub have not received any notice of noncompliance with any such
financial responsibility requirements;
(v) to the best knowledge of Mercury and Mercury Sub, there are no
physical or environmental conditions existing on any property of Mercury
Sub or resulting from Mercury's or Mercury Sub's operations or activities
with respect to any Mercury Properties, past or present, at any location,
that would give rise to any on-site or off-site investigative, remedial,
response, contribution or similar obligations under any Environmental
Laws;
(vi) to the best knowledge of Mercury and Mercury Sub, since the
effective date of the relevant requirements of applicable Environmental
Laws, all hazardous substances or solid wastes generated by Mercury or
Mercury Sub or used in connection with Mercury Sub's properties or
operations have to the extent required by Environmental Laws been
transported only by carriers authorized under Environmental Laws to
transport such substances and wastes, and disposed of only at treatment,
storage and disposal facilities authorized under Environmental Laws to
treat, store or dispose of such substances and wastes, and, to the best
knowledge of Mercury or Mercury Sub and with respect to such substances
and wastes, such carriers and facilities have been and are operating in
compliance with such authorizations, are not subject to any material
unperformed investigative, remedial, response, contribution or similar
obligations under, and are not the subject of any existing, pending or
overtly threatened action, investigation or inquiry by any Governmental
Authority or third party in connection with, any Environmental Laws;
(vii) there has been no exposure of any person or property to
hazardous substances, solid waste or any pollutant or contaminant, nor
has there been any release of hazardous substances, solid waste or any
pollutant or contaminant into the environment by Mercury Sub or Mercury
in connection with the properties or operations of Mercury Sub that could
reasonably be expected to give rise to any claim for damages or
compensation; and
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(viii) Mercury and Mercury Sub shall make available to MSR all
internal and external environmental audits and studies and all
correspondence on substantial environmental matters in the possession of
Mercury or Mercury Sub relating to any of the current or former
properties or operations of Mercury Sub.
(o) PROPERTIES.
(i) The oil, gas and/or mineral leases, interests in which comprise
part of the Mercury Properties (as defined in Section 7.5), and all other
material contracts, agreements, licenses, permits and easements,
rights-of-way and other rights-of-surface use comprising any part of or
otherwise relating to the Mercury Properties (such leases and such
material contracts, agreements, licenses, permits, easements,
rights-of-way and other rights-of-surface use being herein called the
"MERCURY BASIC DOCUMENTS"), are in full force and effect and constitute
valid and binding obligations of the parties thereto; all contracts and
agreements which are Mercury Basic Documents are disclosed in Section
2.2(o)(i) of the Mercury Disclosure Letter. Neither Mercury nor any
Mercury Subsidiary is in breach or default (and no situation exists which
with the passing of time or giving of notice would create such a breach
or default) of its obligations under the Mercury Basic Documents, and no
breach or default by any third party (or situation which with the passage
of time or giving of notice would create such a breach or default)
exists, to the extent such breach or default (whether by Mercury, any
Mercury Subsidiary or such a third party) could materially adversely
affect (after the date hereof) the ownership, operation, value or use of
any Mercury Properties or Mercury Sub. All payments (including, without
limitation, all delay rentals, royalties, shut-in royalties and valid
calls for payment or prepayment under operating agreements) owing under
Mercury Basic Documents have been and are being made (timely and
properly, and before the same became delinquent) by Mercury or a Mercury
Subsidiary in all material respects and, where the non-payment of same by
a third party could materially adversely affect the ownership, operation,
value or use of a Mercury Property after the date hereof, have been and
are being made, by such third party in all material respects.
(ii) Except as set forth in Section 2.2(o)(ii) of the Mercury
Disclosure Letter, neither Mercury nor any Mercury Subsidiary has
incurred any expenses, or made commitments to make expenditures, in
connection with (and no other obligations or liabilities have been
incurred) which would materially adversely affect the ownership or
operation of the Mercury Properties after the date hereof, other than
routine expenses incurred in the normal operation of existing wells on
the Mercury Properties. Except as set forth in Section 2.1(o)(ii) of the
Mercury Disclosure Letter, no proposals are currently outstanding
(whether made by Mercury, any Mercury Subsidiary or by any other party)
to drill additional wells, or to deepen, plug back, abandon, or rework
existing wells, or to conduct other operations for which consent is
required under the applicable operating agreement, or to conduct any
other material operations, other than normal operation of existing wells
on the Mercury Properties.
(iii) There exist no agreements or arrangements for the sale,
gathering, transportation, compression, treating, processing or other
marketing of a material volume of production from the Mercury Properties
(including without limitation, calls on, or other rights to purchase,
production, whether or not the same are currently being exercised) other
than (A) the agreements set forth in Section 2.2(o)(iii) of the Mercury
Disclosure Letter, (B) agreements or arrangements which are cancelable on
120 days notice or less without penalty or detriment and (C) calls on, or
other rights to purchase, production, subject to which Mercury or any
Mercury Subsidiary acquired one or more Mercury Properties and which
individually, or in the aggregate, do not affect a material volume of the
production of oil or gas from the Mercury Properties. Any contracts or
other arrangements under which Mercury or any Mercury Subsidiary is
processing, gathering, transporting or otherwise marketing any material
volume of oil, gas or other minerals (whether or not attributable to the
Mercury Properties) for the account of a third party include
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terms that represent an arm's length, commercially reasonable trade for
Mercury or any Mercury Subsidiary.
(iv) Except as set forth in Section 2.2(o)(iv) of the Mercury
Disclosure Letter, neither Mercury nor any Mercury Subsidiary has
received prepayments (including, but not limited to, payments for oil and
gas not taken pursuant to "take-or-pay" arrangements) for any oil or gas
produced from the Mercury Properties as a result of which the obligation
does (or may) exist to deliver oil or gas produced from the Mercury
Properties after the date hereof without then receiving payment (or
without then receiving full payment) therefor or to make repayments in
cash. For each Mercury Property listed in Section 2.2(o)(iv) of the
Mercury Disclosure Letter, such section reflects (A) the total amount of
prepayment received as of the date hereof (and the amount of any
recoupment thereof heretofore made), and (B) whether or not a cash
payment can be required in the event recoupment out of production proves
to be inadequate. Except as set forth in Section 2.2(o)(iv) of the
Mercury Disclosure Letter, there is no Mercury Property with respect to
which Mercury, any Mercury Subsidiary, and/or their respective
predecessors in title, have collectively taken more (referred to herein
as "OVER-PRODUCED") or materially less (referred to herein as
"UNDERPRODUCED") production from such Mercury Property (or on the units
in which such Mercury Property participates), or any product thereof,
than the ownership of Mercury or any Mercury Subsidiary and such
predecessors in such Mercury Property would entitle Mercury or any
Mercury Subsidiary and such predecessors (absent any balancing agreement
or arrangement) to receive, to the extent such overproduced or
underproduced position has not, as of the date hereof, been fully made up
or otherwise extinguished. For each Mercury Property listed in Section
2.2(o)(iv) of the Mercury Disclosure Letter, such section reflects, on a
well-by-well or any other basis as may be dictated by any applicable
balancing agreement, (A) whether Mercury or any Mercury Subsidiary is in
an over-produced or under-produced position, (B) the amount of such
over-production or under-production, (C) a description of the written
balancing agreement (if any) pertaining to such Mercury Property (or a
statement that no such agreement exists) and (D) a statement as to
whether royalties, overriding royalties or other burdens against
Mercury's or any Mercury Subsidiaries's net revenue interest in the
affected Mercury Properties were, during the period the subject imbalance
accrued, paid based upon receipts or entitlements. Except as set forth in
Section 2.2(o)(iv) of the Mercury Disclosure Letter, there are no
pipeline imbalances that have arisen due to the failure of nominations
made by Mercury or any Mercury Subsidiary to match actual deliveries of
production from any one or more Mercury Properties.
(v) Mercury and each Mercury Subsidiary has all governmental
licenses and permits necessary to own and operate the Mercury Properties
as presently being owned and operated, and such licenses, permits and
filings are in full force and effect, and neither Mercury nor any Mercury
Subsidiary has received written notice of any material violations in
respect of any such licenses or permits.
(vi) Except as set forth in Section 2.2(o)(vi) of the Mercury
Disclosure Letter, neither Mercury nor any Mercury Subsidiary is subject
to (A) any area of mutual interest agreements or non-compete agreements,
(B) any farm-out or farm-in agreement under which any party thereto is
entitled to receive assignments not yet made, or could earn additional
assignments after the date hereof or (C) any tax partnership, to the
extent being so subject could have a material adverse effect on Mercury
or any Mercury Subsidiary or on any Mercury Property.
(vii) All severance, production, ad valorem, windfall profit and
other similar taxes relating to the ownership or operation of the Mercury
Properties have been, and are being, paid (timely, and before the same
become delinquent) by Mercury and each Mercury Subsidiary in all
respects.
(viii) The ownership and operation of the Mercury Properties has, to
the extent that non-conformance could materially adversely affect the
ownership, operation, value or use thereof
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after the date hereof, been in conformity with all applicable laws, and
all applicable rules, regulations and orders of all governmental agencies
having jurisdiction.
(ix) Except as set forth in Section 2.2(o)(iv) of the Mercury
Disclosure Letter, there are no Preferential Rights or Consents, other
than Routine Governmental Approvals (each as defined in Section 7.5),
that affect any material Mercury Property or Properties and that will be
triggered by the Merger.
(x) Except as set forth in Section 2.2(o)(x) of the Mercury
Disclosure Letter, there exist no agreements or other arrangements
whereunder Mercury or any Mercury Subsidiary undertakes to perform
gathering, transportation, processing or other marketing services for any
third party, including without limitation the owner of a royalty or
overriding royalty interest burdening a lease included in the Mercury
Properties, for a fee or other consideration that is now, or may
hereafter be, unrepresentative of commercial rates being received by
third parties in comparable, arm's length transactions.
(xi) Mercury Sub has good and defensible title to the Mercury
Property, free and clear of all liens, security interests, and
encumbrances except for (a) the contracts, agreements, burdens,
encumbrances and other matters set forth in the descriptions of certain
of the Mercury Properties in Section 2.2(o) of the Mercury Disclosure
Letter, (b) statutory liens for taxes which are not yet delinquent, (c)
liens under operating agreements, pooling orders and unitization
agreements, and mechanics' materialmen's liens, with respect to
obligations which are not yet due, and (d) minor defects and
irregularities in title to any Mercury Property, so long as such defects
and irregularities do not materially impair the value of such Mercury
Property or the use thereof for the purposes for which such Mercury
Property is held. With respect to each Mercury Property described in
Section 2.2(o) of the Mercury Disclosure Letter, the ownership of Mercury
Sub in such Mercury Property does and will, (A) with respect to each
tract of land described in Section 2.2(o) of the Mercury Disclosure
Letter (whether described directly in such section or described by
reference to another instrument) in connection with such Mercury
Property, (1) entitle Mercury Sub to receive a decimal or percentage
share of the oil, gas and other hydrocarbons produced from, or allocated
to, such tract equal to not less than the decimal or percentage share set
forth in Section 2.2(o) of the Mercury Disclosure Letter in connection
with such tract opposite the words "Net Revenue Interest" (or words of
similar import), (2) cause Mercury Sub to be obligated to bear a decimal
or percentage share of the cost of exploration, development and operation
of such tract of land not greater than the decimal or percentage share
set forth in Section 2.2(o) of the Mercury Disclosure Letter in
connection with such tract opposite the words "Working Interest" (or
words of similar import) and (B) if such Mercury Property is shown in
Section 2.2(o) of the Mercury Disclosure Letter to be subject to a unit
or units, with respect to each such unit, (1) entitle Mercury Sub to
receive a decimal or percentage share of all substances covered by such
unit which are produced from, or allocated to, such unit equal to not
less than the decimal or percentage share set forth in Section 2.2(o) of
the Mercury Disclosure Letter in connection with such Mercury Property
opposite the words "Unit Net Revenue Interest" or words of similar import
(and if such Mercury Property is subject to more than one unit, words
identifying such interest with such unit), and (2) obligate Mercury Sub
to bear a decimal or percentage share set forth in Section 2.2(o) of the
Mercury Disclosure Letter in connection with such Mercury Property
opposite the words "Unit Working Interest" or words of similar import
(and if such Mercury Property is subject to more than one unit, words
identifying such interest with such unit). With respect to each Mercury
Property described in Section 2.2(o) of the Mercury Disclosure Letter
which is subject to a voluntary or involuntary pooling, unitization or
communication agreement and/or order, the term "tract of land" as used in
this subsection (xi) shall mean the pooled, unitized or communitized area
as an entirety and shall not be deemed to refer to any individual tract
committed to said pooled, unitized or communitized
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area. Without limitation of the foregoing, the ownership by Mercury Sub
of the Mercury Properties does and will, with respect to each well or
unit identified in Section 2.2(o) of the Mercury Disclosure Letter
entitle Mercury Sub to receive a decimal or percentage share of the oil,
gas and other hydrocarbons produced from, or allocated to, such well or
unit equal to not less than the decimal or percentage share set forth,
for such well or unit, in the column headed "Net Revenue Interest" in
Section 2.2(o) of the Mercury Disclosure Letter, and cause Mercury Sub to
be obligated to bear a decimal or percentage share of the cost of
operation of such well or unit equal to not more than the decimal or
percentage share set forth, for such well or unit, in the column headed
"Working Interest" in Section 2.2(o) of the Mercury Disclosure Letter.
The above-described shares of production which Mercury Sub is entitled to
receive and shares of expenses which Mercury Sub is obligated to bear are
not and will not be subject to change other than such changes which arise
pursuant to non-consent provisions of operating agreements described in
Section 2.2(o) of the Mercury Disclosure Letter in connection with
operations hereafter proposed, or such changes are reflected in Section
2.2(o) of the Mercury Disclosure Letter.
(xii) Set forth in Section 2.2(o) of the Mercury Disclosure Letter is
a list of the current reserve reports covering the Mercury Properties,
true and complete copies of which have been delivered to MSR by Mercury.
(p) AGREEMENTS. All agreements, arrangements, and understandings of
any nature (written or oral, formal or informal) (collectively, for purposes
of this Section, "agreements") to which Mercury Sub is a party or by which
it or any of its properties is otherwise bound, regardless of amount or
subject matter, that are material to the business, assets, results of
operations, condition (financial or otherwise), or prospects of Mercury Sub
are listed in Sections 2.2(o) or 2.2(p) of the Mercury Disclosure Letter.
Mercury has delivered to MSR, accurate and complete copies of such
agreements. Each of such agreements is a valid and binding agreement of the
parties thereto enforceable against them in accordance with its terms. No
breach or default exists with respect to any of such agreements, and no
event has occurred which, after the giving of notice or the passage of time
or otherwise, will result in any such breach or default.
(q) EMPLOYEES; LABOR RELATIONS.
(i) Set forth in Section 2.2(q)(i) is a list of (i) all directors
and officers of Mercury Sub, and (ii) the name of each employee, agent,
and consultant of Mercury Sub as of the date hereof, together with the
total amounts of salary, bonuses, and other compensation paid or payable
by Mercury Sub and Mercury to each such person for the current fiscal
year and the immediately preceding fiscal year.
(ii) Except as set forth in Section 2.2(q)(ii) of the Mercury
Disclosure Letter, (a) there are no collective bargaining agreements or
other similar agreements, arrangements, or understandings, written or
oral, with employees as a group to or by which Mercury Sub is a party or
is bound; (b) no employees of Mercury Sub are represented by any labor
organization, collective bargaining representative, or group of
employees; (c) no labor organization, collective bargaining
representative, or group of employees claims to represent a majority of
the employees of Mercury Sub in an appropriate unit of Mercury or Mercury
Sub; (d) neither Mercury nor Mercury Sub has been involved with any
representational campaign by any union or other organization or group
seeking to become the collective bargaining representative of any of
Mercury Sub's employees or been subject to or, to the best knowledge of
Mercury and Mercury Sub, threatened with any strike or other concerted
labor activity or dispute; and (e) neither Mercury nor Mercury Sub is
obligated to bargain collectively with respect to wages, hours, and other
terms and conditions of employment with any recognized or certified labor
organization, collective bargaining representative, or group of
employees, with respect to any employees of Mercury Sub.
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(r) INSIDER INTERESTS. Except as disclosed in Section 2.2(r) of the
Mercury Disclosure Letter, no shareholder, director, officer, or employee of
Mercury or any Mercury Subs or any associate of any such shareholder,
director, officer, or employee is presently, directly or indirectly, a party
to any transaction with Mercury Sub, including, without limitation, any
agreement, arrangement, or understanding, written or oral, providing for the
employment of, furnishing of services by, rental of real or personal
property from, or otherwise requiring payments to any such shareholder,
director, officer, employee, or associate. To the best knowledge of Mercury
and Mercury Sub, no shareholder, director, officer, or employee of Mercury
or Mercury Sub or any associate of any such shareholder, director, officer,
or employee owns, directly or indirectly, any material interest in, or
serves as a director, officer, or employee of, any customer, supplier, or
competitor of Mercury Sub. For purposes of this Section only, an "associate"
of any shareholder, director, officer, or employee means any member of the
immediate family of such shareholder, director, officer, or employee or any
corporation, partnership, trust, or other entity in which such shareholder,
director, officer, or employee has a substantial ownership or beneficial
interest (other than an interest in a public corporation which does not
exceed three percent of its outstanding securities) or is a director,
officer, partner, or trustee or person holding a similar position.
(s) FINANCIAL REQUIREMENTS. Set forth in Section 2.2(s) of the Mercury
Disclosure Letter is a list of all bonds, deposits, financial assurance
requirements, and insurance coverage required to be submitted to any
Federal, foreign, state or local governmental agencies or authorities for
the continued ownership and operation of the business and assets of Mercury
Sub.
(t) BANK ACCOUNTS AND POWERS OF ATTORNEY. Set forth in Section 2.2(t)
are (i) the name and address of each bank or other financial institution in
which Mercury Sub has an account or a safe deposit box, the account and safe
deposit box numbers thereof, and the names of all persons authorized to draw
thereon or to have access thereto, (ii) the names of all persons authorized
to borrow funds on behalf of Mercury Sub and the names of all entities from
which they are authorized to borrow funds, and (iii) the names of all
persons, if any, holding powers of attorney from Mercury Sub.
(u) VOTING REQUIREMENTS. The affirmative votes of a majority of the
shares of Mercury Sub Common Stock held by Mercury and the Minority
Shareholders, as the owners and holders of all of the outstanding shares of
Mercury Sub Common Stock, is the only vote of the holders of any class or
series of the capital stock of Mercury Sub necessary to approve this
Agreement and the Merger.
(v) BROKERAGE FEES. Neither Mercury nor any of its affiliates has
retained any financial advisor, broker, agent, or finder or paid or agreed
to pay any financial advisor, broker, agent, or finder on account of this
Agreement or any transaction contemplated hereby. Mercury shall indemnify
and hold harmless MSR from and against any and all losses, claims, damages,
and liabilities (including legal and other expenses reasonably incurred in
connection with investigating or defending any claims or actions) with
respect to any finder's fee, brokerage commission, or similar payment in
connection with any transaction contemplated hereby asserted by any person
on the basis of any act or statement made or alleged to have been made by
Mercury or any of its affiliates.
(w) DISCLOSURE. No representation or warranty made by Mercury or
Mercury Sub in this Agreement, and no statement of Mercury or Mercury Sub
contained in any document, certificate, or other writing furnished or to be
furnished by Mercury or Mercury Sub to MSR or MSR Sub pursuant hereto or in
connection herewith, contains or will contain, at the time of delivery, any
untrue statement of a material fact or omits or will omit, at the time of
delivery, to state any material fact necessary in order to make the
statements contained therein, in light of the circumstances under which they
are made, not misleading. Mercury and Mercury Sub know of no matter (other
than matters of a general economic character not relating solely to Mercury
and Mercury Sub in any specific manner) which has not been disclosed to MSR
and MSR Sub pursuant to this Agreement
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which materially and adversely affects, or, so far as Mercury and Mercury
Sub can now reasonably foresee, will materially and adversely affect, the
business, assets, results of operations, condition (financial or otherwise),
or prospects of Mercury Sub or the ability of Mercury and Mercury Sub to
consummate the transactions contemplated hereby.
ARTICLE III
COVENANTS OF MERCURY AND MERCURY SUB
PRIOR TO THE EFFECTIVE TIME
3.1 CONDUCT OF BUSINESS BY MERCURY SUB PENDING THE MERGER. Mercury and
Mercury Sub covenant and agree that, from the date of this Agreement until the
Effective Time, unless MSR shall otherwise agree in writing or as otherwise
expressly contemplated by this Agreement:
(a) The business of Mercury Sub shall be conducted only in, and Mercury
Sub shall not take any action except in, the ordinary course of business and
consistent with past practice;
(b) Mercury and Mercury Sub shall not directly or indirectly do any of
the following: (i) issue, sell, pledge, dispose of or encumber (A) any
capital stock of Mercury Sub (except for capital stock issuable upon the
exercise of any warrants or options issued by Mercury Sub described in the
Mercury Disclosure Letter) or (B) other than in the ordinary course of
business and consistent with past practice and not relating to the borrowing
of money, any assets of Mercury Sub; (ii) amend or propose to amend the
charter or bylaws of Mercury Sub; (iii) split, combine or reclassify any
outstanding capital stock, or declare, set aside or pay any dividend payable
in cash, stock, property or otherwise with respect to any Mercury Sub
capital stock; (iv) redeem, purchase or acquire or offer to acquire any
Mercury Sub capital stock; (v) enter into, adopt or (except as may be
required by law) amend or terminate any bonus, profit sharing, performance
unit, stock equivalent, stock purchase, pension, retirement, deferred
compensation, employment, severance or other employee benefit agreement,
trust, plan, fund or other arrangement for the benefit or welfare of any
director, officer or employee of Mercury Sub; (vi) increase in any manner
the compensation or fringe benefits of any director, officer or employee of
Mercury Sub; (vii) pay to any director, officer or employee of Mercury Sub
any benefit not required by any employee benefit agreement, trust, plan,
fund or other arrangement as in effect on the date hereof; or (viii) enter
into any contract, agreement, commitment or arrangement with respect to any
of the matters set forth in this Section 3.1(b).
(c) Mercury and Mercury Sub shall use their reasonable efforts (i) to
preserve intact the business organization of Mercury Sub, (ii) to maintain
in effect any authorizations or similar rights of Mercury Sub, (iii) to keep
available the services of Mercury Sub's current officers and key employees,
(iv) to preserve the goodwill of those having business relationships with
Mercury Sub, (v) to maintain and keep its properties and the properties of
Mercury Sub in as good a repair and condition as presently exists, except
for deterioration due to ordinary wear and tear and damage due to casualty,
and (vi) to maintain in full force and effect insurance comparable in amount
and scope of coverage to that currently maintained by Mercury Sub or
maintained by Mercury for the benefit of Mercury Sub;
(d) Mercury Sub shall not agree to or enter into any commitments to
make, and Mercury shall not permit Mercury Sub to agree or enter into any
commitments to make, new capital expenditures that in the aggregate exceed
$10,000;
(e) Mercury Sub shall perform its respective obligations under any
contracts and agreements to which it is a party or to which any of its
assets is subject, except for such obligations as Mercury Sub in good faith
may dispute;
(f) Mercury and Mercury Sub will give MSR and its attorneys and other
representatives access at all reasonable times to the Mercury Properties and
to the Mercury's and Mercury Sub's records (including, without limitation,
title files, division order files, well files, production records, equipment
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<PAGE>
inventories, windfall profit tax records and production, severance and ad
valorem tax records) pertaining to the ownership and/or operation of the
Mercury Properties;
(g) Mercury and Mercury Sub will or, to the extent third parties operate
the Mercury Properties, will take such steps as would a prudent non-operator
to cause the operator to (i) continue the routine operation of the Mercury
Properties in the ordinary course of business and as would a prudent
operator, (ii) operate the Mercury Properties in conformity (in all material
respects) with all Mercury Basic Documents, and all applicable rules,
regulations and orders of all Governmental Authorities having jurisdiction,
and (iii) maintain the machinery, improvements, equipment and other personal
property and fixtures forming a part of the Mercury Properties in at least
as good of a condition as they are on the date of this Agreement; where
Mercury or Mercury Sub is the operator of a Mercury Property, Mercury and
Mercury Sub will (unless removed without its consent) remain the operator of
such Mercury Property;
(h) Neither Mercury nor Mercury Sub will sell, transfer or abandon any
portion of the Mercury Properties other than (i) items of materials,
supplies, machinery, equipment, improvements or other personal property or
fixtures forming a part of the Mercury Properties (and then only if the same
is replaced with an item of equal suitability and value free of liens and
security interests, which replacement item will then, for the purposes of
this Agreement, become part of the Mercury Properties) or (ii) production of
oil, gas and/or other minerals, or the products therefrom, in the ordinary
course of business under arrangements that do not cause the representations
and warranties set forth elsewhere herein to be untrue; neither Mercury nor
Mercury Sub will, without MSR's consent, release, permit to terminate,
modify or reduce its rights under any oil, gas and/or mineral lease forming
a material part of the Mercury Properties, or any other material Mercury
Basic Document, or enter into any new agreements which would be Mercury
Basic Documents;
(i) Mercury and Mercury Sub will cause all material expenses (including,
without limitation, all bills for labor, materials and supplies used or
furnished for use in connection with the Mercury Properties and all ad
valorem, severance, production, windfall profit and similar taxes) and
liabilities relating to the ownership or operation of the Mercury Properties
to be promptly paid and discharged;
(j) Mercury and Mercury Sub will request, from the appropriate parties
(and in accordance with the documents creating such rights and/or
requirements), all Consents relating to any Mercury Property and waivers of
any Preferential Rights relating to any material Mercury Property;
(k) Mercury and Mercury Sub will not take materially more of the oil or
gas produced from the wells located on any Mercury Property (or on units in
which such properties participate) than Mercury Sub's ownership of such
Mercury Property would entitle Mercury Sub (absent any oil or gas balancing
agreement or arrangement) to take; and
(l) Mercury shall not, and shall not permit Mercury Sub to, take any
action that would, or that reasonably could be expected to, result in any of
the representations and warranties set forth in this Agreement becoming
untrue or any of the conditions to the Merger set forth in Article VI not
being satisfied. Mercury promptly shall advise MSR orally and in writing of
any change or event having, or which, insofar as reasonably can be foreseen,
would have, a material adverse effect on Mercury, Mercury Sub or the Mercury
Properties.
3.2 PROXY STATEMENT. Promptly after the date of this Agreement, Mercury
and Mercury Sub shall cooperate with MSR in preparing the Proxy Statement (as
defined in Section 4.2) and the Registration Statement (as defined in Section
4.4). Mercury and Mercury Sub agree all information concerning Mercury and
Mercury Sub furnished by or on their behalf specifically for use in the Proxy
Statement and the Registration Statement will comply as to form in all material
respects with the requirements of the Exchange Act and the rules and regulations
adopted thereunder, and will not contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary to
make the
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<PAGE>
statements therein not misleading. Mercury and Mercury Sub will advise MSR
promptly in writing if prior to the Effective Time it shall obtain knowledge of
any facts that would make it necessary to amend or supplement the Proxy
Statement or the Registration Statement in order to make the statements therein
not misleading or to comply with applicable law.
3.3 ACQUISITION PROPOSALS. From and after the date of this Agreement,
neither Mercury nor Mercury Sub shall, directly or indirectly, through any
officer, director, employee, representative or agent of Mercury or Mercury Sub,
(i) solicit or initiate discussions or negotiations with any person (other than
MSR), or participate in any discussions or negotiations with any person (other
than MSR) regarding, any merger, consolidation, sale of assets, tender offer,
sale of shares of capital stock or similar transaction involving Mercury Sub (an
"ACQUISITION PROPOSAL"), (ii) disclose to any person preparing to make or
considering an Acquisition Proposal any confidential information regarding
Mercury Sub or (iii) enter into any agreement, arrangement, understanding or
commitment regarding any Acquisition Proposal. Mercury and Mercury Sub shall
notify MSR promptly of the receipt of any Acquisition Proposal after the date of
this Agreement.
ARTICLE IV
COVENANTS OF MSR PRIOR TO THE EFFECTIVE TIME
4.1 CONDUCT OF BUSINESS BY MSR PENDING THE MERGER. MSR covenants and
agrees that, from the date of this Agreement until the Effective Time, unless
Mercury shall otherwise agree in writing or as otherwise expressly contemplated
by this Agreement or set forth in Section 4.1 of the MSR Disclosure Letter:
(a) The business of MSR and the MSR Subsidiaries shall be conducted only
in, and MSR and the MSR Subsidiaries shall not take any action except in,
the ordinary course of business and consistent with past practice;
(b) Except as set forth in Section 4.1(b) of the MSR Disclosure Letter,
MSR shall not directly or indirectly do any of the following: (i) issue,
sell, pledge, dispose of or encumber, or permit any MSR Subsidiary to issue,
sell, pledge, dispose of or encumber, (A) any capital stock of MSR or any
MSR Subsidiary except upon the exercise of MSR Options or (B) other than in
the ordinary course of business and consistent with past practice and not
relating to the borrowing of money, any assets of MSR or any MSR Subsidiary;
(ii) amend or propose to amend the respective charters or bylaws of MSR or
any MSR Subsidiary; (iii) split, combine or reclassify any outstanding
capital stock, or declare, set aside or pay any dividend payable in cash,
stock, property or otherwise with respect to its capital stock whether now
or hereafter outstanding; (iv) redeem, purchase or acquire or offer to
acquire, or permit any of the MSR Subsidiaries to redeem, purchase or
acquire or offer to acquire, any of its or their capital stock; or (v)
except in the ordinary course of business and consistent with past practice
and except as contemplated by Section 5.12, enter into any contract,
agreement, commitment or arrangement with respect to any of the matters set
forth in this Section 4.1(b);
(c) Except as set forth in Section 4.1(c) of the MSR Disclosure Letter,
MSR shall use its reasonable efforts (i) to preserve intact the business
organization of MSR and each of the MSR Subsidiaries, (ii) to maintain in
effect any authorizations or similar rights of MSR and each of the MSR
Subsidiaries, (iii) to keep available the services of its and their current
officers and key employees, (iv) to preserve the goodwill of those having
business relationships with it and the MSR Subsidiaries, (v) to maintain and
keep its properties and the properties of the MSR Subsidiaries in as good a
repair and condition as presently exists, except for deterioration due to
ordinary wear and tear and damage due to casualty, and (vi) to maintain in
full force and effect insurance comparable in amount and scope of coverage
to that currently maintained by it and the MSR Subsidiaries;
(d) MSR shall not make or agree to make, or permit any of the MSR
Subsidiaries to make or agree to make, any capital expenditure in the
aggregate in excess of $100,000;
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(e) MSR shall, and shall cause the MSR Subsidiaries to, perform their
respective obligations under any contracts and agreements to which any of
them is a party or to which any of their assets is subject, except to the
extent such failure to perform would not have a material adverse effect on
MSR and the MSR Subsidiaries, taken as a whole, and except for such
obligations as MSR or the MSR Subsidiaries in good faith may dispute;
(f) MSR will, to the extent legally and contractually authorized to do
so, give Mercury and its attorneys and other representatives access at all
reasonable times to the MSR Properties and to the MSR and any MSR
Subsidiaries' records (including, without limitation, title files, division
order files, well files, production records, equipment inventories, windfall
profit tax records and production, severance and ad valorem tax records)
pertaining to the ownership and/or operation of the MSR Properties;
(h) MSR and the MSR Subsidiaries will or, to the extent third parties
operate the MSR Properties, will take such steps as would a prudent
non-operator to cause the operator to (i) continue the routine operation of
the MSR Properties in the ordinary course of business and as would a prudent
operator, (ii) operate the MSR Properties in conformity (in all material
respects) with all MSR Basic Documents and all applicable rules, regulations
and orders of all Governmental Authorities having jurisdiction, and (iii)
maintain the machinery, improvements, equipment and other personal property
and fixtures forming a part of the MSR Properties in at least as good of a
condition as they are on the date of this Agreement; where MSR or any MSR
Subsidiary is the operator of a MSR Property, they will (unless removed
without its consent) remain the operator of such MSR Property;
(i) Except as set forth in Section 4.1(i) of the MSR Disclosure Letter,
neither MSR nor any MSR Subsidiaries will sell, transfer or abandon any
portion of the MSR Properties other than (i) items of materials, supplies,
machinery, equipment, improvements or other personal property or fixtures
forming a part of the MSR Properties (and then only if the same is replaced
with an item of equal suitability and value free of liens and security
interests, which replacement item will then, for the purposes of this
Agreement, become part of the MSR Properties) or (ii) production of oil, gas
and/or other minerals, or the products therefrom, in the ordinary course of
business under arrangements that do not cause the representations and
warranties set forth elsewhere herein to be untrue; Neither MSR nor any MSR
Subsidiary will, without Mercury's consent, release, permit to terminate,
modify or reduce its rights under any oil, gas and/or mineral lease forming
a material part of the MSR Properties, or any other material MSR Basic
Document, or enter into any new agreements which would be MSR Basic
Documents;
(j) MSR and the MSR Subsidiaries will cause all material expenses
(including, without limitation, all bills for labor, materials and supplies
used or furnished for use in connection with the MSR Properties and all ad
valorem, severance, production, windfall profit and similar taxes) and
liabilities relating to the ownership or operation of the MSR Properties to
be promptly paid and discharged;
(k) Neither MSR nor any MSR Subsidiary will take materially more of the
oil or gas produced from the wells located on any MSR Property (or on units
in which such properties participate) than their ownership of such MSR
Property would entitle them (absent any oil or gas balancing agreement or
arrangement) to take; and
(l) MSR shall not, and shall not permit any of the MSR Subsidiaries to,
take any action that would, or that reasonably could be expected to, result
in any of the representations and warranties set forth in this Agreement
becoming untrue or any of the conditions to the Merger set forth in Article
VI not being satisfied. MSR promptly shall advise Mercury orally and in
writing of any change or event having, or which, insofar as reasonably can
be foreseen, would have, a material adverse effect on MSR and the MSR
Subsidiaries, taken as a whole.
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4.2 PROXY STATEMENT. Promptly after the date of this Agreement, MSR shall
prepare and file with the Commission under the Exchange Act, and shall use its
reasonable efforts to have cleared by the Commission, the Proxy Statement (the
"PROXY STATEMENT") with respect to the meeting of the stockholders of MSR
referred to in Section 4.3. MSR agrees that the Proxy Statement (except with
respect to information concerning Mercury and the Mercury Subsidiaries furnished
by or on behalf of Mercury specifically for use therein, for which information
Mercury shall be responsible) will comply as to form in all material respects
with the requirements of the Exchange Act and the rules and regulations adopted
thereunder, and the Proxy Statement (except with respect to information
concerning Mercury and the Mercury Subsidiaries furnished by or on behalf of
Mercury specifically for use therein, for which information Mercury shall be
responsible) will not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading. Subject to the provisions of Section 5.11,
the Proxy Statement shall contain the recommendation of the Board of Directors
of MSR that the stockholders of MSR vote to approve this Agreement.
4.3 MEETING OF STOCKHOLDERS OF MSR. Subject to the provisions of Section
5.11, MSR shall promptly take all action reasonably necessary in accordance with
Canadian law, the DGCL and the MSR Certificate and bylaws to convene a meeting
of its stockholders to consider and vote upon (a) approval of this Agreement and
(b) approval of the redomestication of MSR in Delaware (the "REDOMESTICATION OF
MSR"). Subject to the provisions of Section 5.11, the Board of Directors of MSR
(i) shall recommend at such meeting that the stockholders of MSR vote to adopt
and approve the matters referenced in the preceding sentence; (ii) shall use its
reasonable efforts to solicit from stockholders of MSR proxies in favor of such
adoption and approval; and (iii) shall take all other action reasonably
necessary to secure a vote of its stockholders in favor of such adoption and
approval.
4.4 REGISTRATION STATEMENT. Promptly after the date of this Agreement, MSR
shall file an appropriate registration statement with the Commission under the
Securities Act with respect to the Redomestication of MSR, and Mercury Sub shall
file an appropriate registration statement with the Commission with respect to
offering, sale and delivery of the shares of Surviving Corporation Common Stock
to be issued pursuant to the Merger (such registration statements, collectively,
the "REGISTRATION STATEMENT"); and each party shall cooperate with each other in
connection with the preparation of the Registration Statement and will use its
reasonable efforts to cause such Registration Statement to become effective as
soon as practicable after filing. Each party agrees that the Registration
Statement to be prepared by it (except with respect to information concerning
the other party or the other party's affiliates furnished by or on behalf of the
other party specifically for use therein, for which information the other party
shall be responsible) will comply as to form in all material respects with the
requirements of the Securities Act and the Exchange Act and the respective rules
and regulations adopted thereunder, and will not contain any untrue statement of
any material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading. Each party
will advise the other in writing if prior to the Effective Time it shall obtain
knowledge of any fact that would, in its opinion, make it necessary to amend or
supplement the Registration Statement in order to make the statements therein
not misleading or to comply with applicable law.
4.5 STOCK EXCHANGE LISTING. MSR shall use all reasonable efforts to cause
the shares of the Surviving Corporation Common Stock to be issued in the Merger
to be approved for listing on the American Stock Exchange, subject to official
notice of issuance, prior to the Closing Date.
4.6 FINANCING. MSR shall use its reasonable best efforts to obtain the
financing required to effect the transactions contemplated by this Agreement and
to pay all related fees and expenses (the "Financing"). In the event that any
portion of the Financing becomes unavailable, regardless of the reason therefor,
MSR shall, upon learning thereof, promptly so advise Mercury and use its
reasonable best efforts to obtain alternative financing from other sources, on
and subject to substantially the same terms and conditions as the portion of the
Financing that has become unavailable. The definitive agreements to provide the
Financing will contain conditions, including the accuracy of the representations
and warranties
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therein concerning the business of Mercury Sub and the Mercury Properties as
shall be agreed to by the parties to such agreements. The parties hereto shall
each use its reasonable best efforts to satisfy on or before the Closing all
requirements of the definitive agreements to provide the Financing relating to
such party which are conditions to closing all transactions contemplated by this
Agreement; provided, however, Mercury shall not be required to undertake any
financial obligations in connection with the Financing. The obligations
contained in this Section are not intended, nor shall they be construed, to
benefit or confer any rights upon any person other than the parties hereto.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 ACCOUNTANTS LETTER. Mercury shall use its reasonable efforts to cause
Weaver and Tidwell LLP to deliver a letter dated as of the date of the Proxy
Statement and a letter dated as of the Closing Date, and addressed to itself and
MSR, in form and substance reasonably satisfactory to MSR and customary in scope
and substance for agreed upon procedures letters delivered by independent public
accountants in connection with registration statements and proxy statements
similar to the Registration Statement and Proxy Statement.
5.2 FILINGS; CONSENTS; REASONABLE EFFORTS. Subject to the terms and
conditions of this Agreement, Mercury and MSR shall (i) make all necessary
filings with respect to the Merger and this Agreement under the Securities Act,
the Exchange Act and applicable blue sky or similar securities laws and shall
use all reasonable efforts to obtain required approvals and clearances with
respect thereto; (ii) obtain all consents, waivers, approvals, authorizations
and orders required in connection with the authorization, execution and delivery
of this Agreement and the consummation of the Merger; and (iii) take, or cause
to be taken, all appropriate action, and do, or cause to be done, all things
necessary, proper or advisable to consummate and make effective as promptly as
practicable the transactions contemplated by this Agreement.
5.3 NOTIFICATION OF CERTAIN MATTERS. Mercury shall give prompt notice to
MSR, and MSR shall give prompt notice to Mercury, orally and in writing, of (i)
the occurrence, or failure to occur, of any event which occurrence or failure
would be likely to cause any representation or warranty contained in this
Agreement to be untrue or inaccurate at any time from the date hereof to the
Effective Time, and (ii) any material failure of Mercury or MSR, as the case may
be, or any officer, director, employee or agent thereof, to comply with or
satisfy any covenant, condition or agreement to be complied with or satisfied by
it hereunder.
5.4 AGREEMENT TO DEFEND. In the event any claim, action, suit,
investigation or other proceeding by any governmental body or other person or
other legal or administrative proceeding is commenced that questions the
validity or legality of the transactions contemplated hereby or seeks damages in
connection therewith, the parties hereto agree to cooperate and use their
reasonable efforts to defend against and respond thereto.
5.5 EXPENSES. Whether or not the Merger is consummated, all costs and
expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring such expense, except
that expenses incurred in connection with printing and mailing the Registration
Statement and the Proxy Statement shall be borne by MSR; provided, however, that
if this Agreement shall have been terminated pursuant to Section 7.1 as a result
of the willful breach by a party of any of its representations, warranties,
covenants or agreements set forth in this Agreement, such breaching party shall
pay the costs and expenses of the other parties in connection with the
transactions contemplated by this Agreement.
5.6 SURVIVING CORPORATION AND SUBSIDIARIES BOARDS OF DIRECTORS, EXECUTIVE
COMMITTEES AND OFFICERS.
(a) MSR BOARD OF DIRECTORS. At the Effective Time, the respective
Boards of Directors of the Surviving Corporation and each Surviving
Corporation subsidiary shall be comprised of (i) Otto Buis,
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Steve Morris and Patrick Montalban, and (ii) three additional members
designated in writing by the Board of Directors of Mercury prior to the date
of mailing of the Proxy Statement to the Mercury stockholders; provided that
the persons designated by the Board of Directors of Mercury must be persons
possessing suitable business and educational qualifications and personal
characteristics and must be approved by the Board of Directors of MSR in its
reasonable discretion. If, prior to the Effective Time, (i) Otto Buis, Steve
Morris or Patrick Montalban shall decline or be unable to serve, the Board
of Directors of MSR shall designate another person to serve in such person's
stead, and (ii) any such designees of Mercury shall decline or be unable to
serve, the Board of Directors of Mercury shall designate another person to
serve in such person's stead in accordance with the provisions of the
proviso contained in the immediately preceding sentence.
(b) SURVIVING CORPORATION AND SUBSIDIARIES EXECUTIVE COMMITTEES. At
the Effective Time, the respective three person executive committees of the
Boards of Directors of the Surviving Corporation and each Surviving
Corporation subsidiary have shall be comprised of (i) Patrick Montalban, or
if he shall decline or be unable to serve, the Board of Directors of MSR
shall designate another person to serve in his place and (ii) two of the
persons selected by the Board of Directors of Mercury to be members of the
Board of Directors of the Surviving Corporation after the Effective Time.
(c) SURVIVING CORPORATION AND SUBSIDIARY EXECUTIVE OFFICERS. At the
Effective Time, the respective principal executive officers of the Surviving
Corporation and each Surviving Corporation subsidiary have shall be as
follows: Chairman of the Board and chief executive officer--Otto J. Buis,
President and chief operating officer--Thomas F. Darden, and Vice
President--Glenn M. Darden.
5.7 INDEMNIFICATION.
(a) INDEMNIFICATION BY MERCURY. Subject to the terms and conditions of
this Section 5.7, Mercury shall indemnify, defend, and hold harmless the
Surviving Corporation, the Surviving Corporation subsidiaries, MSR, the MSR
Subsidiaries, each director and officer thereof, and each affiliate thereof,
and their respective heirs, legal representatives, successors, and assigns
(collectively, the "MSR GROUP"), from and against any and all claims,
actions, causes of action, demands, assessments, losses, damages,
liabilities, judgments, settlements, penalties, costs, and expenses
(including reasonable attorneys' fees and expenses), of any nature
whatsoever, whether actual or consequential (collectively, "DAMAGES"),
asserted against, resulting to, imposed upon, or incurred by any member of
the MSR Group, directly or indirectly, by reason of or resulting from any
breach by Mercury or Mercury Sub of any of their respective representations,
warranties, covenants, or agreements contained in this Agreement or in any
certificate, instrument, or document delivered pursuant hereto.
(b) INDEMNIFICATION BY MSR. Subject to the terms and conditions of
this Section 5.7, MSR shall indemnify, defend, and hold harmless Mercury,
the subsidiaries and parent corporations of Mercury, each director and
officer of Mercury or any of its subsidiaries or parent corporations, and
each affiliate thereof, and their respective heirs, legal representatives,
successors, and assigns (collectively, the "MERCURY GROUP"), from and
against any and all Damages asserted against, resulting to, imposed upon, or
incurred by any member of the Mercury Group, directly or indirectly, by
reason of or resulting from any breach by MSR or MSR Sub of any of its
representations, warranties, covenants, or agreements contained in this
Agreement or in any certificate, instrument, or document delivered pursuant
hereto.
(c) PROCEDURE FOR INDEMNIFICATION. Promptly after receipt by an
indemnified party under Section 5.7(a) or 5.7(b) of notice of the
commencement of any action, such indemnified party shall, if a claim in
respect thereof is to be made against an indemnifying party under such
Section, give written notice to the indemnifying party of the commencement
thereof, but the failure so to notify the indemnifying party shall not
relieve it of any liability that it may have to any indemnified party except
to the extent the indemnifying party demonstrates that the defense of such
action is prejudiced thereby. In case any such action shall be brought
against an indemnified party and it shall give written
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notice to the indemnifying party of the commencement thereof, the
indemnifying party shall be entitled to participate therein and, to the
extent that it may wish, to assume the defense thereof with counsel
reasonably satisfactory to such indemnified party. If the indemnifying party
elects to assume the defense of such action, the indemnified party shall
have the right to employ separate counsel at its own expense and to
participate in the defense thereof. If the indemnifying party elects not to
assume (or fails to assume) the defense of such action, the indemnified
party shall be entitled to assume the defense of such action with counsel of
its own choice, at the expense of the indemnifying party. If the action is
asserted against both the indemnifying party and the indemnified party and
there is a conflict of interests which renders it inappropriate for the same
counsel to represent both the indemnifying party and the indemnified party,
the indemnifying party shall be responsible for paying for separate counsel
for the indemnified party; provided, however, that if there is more than one
indemnified party, the indemnifying party shall not be responsible for
paying for more than one separate firm of attorneys to represent the
indemnified parties, regardless of the number of indemnified parties. If the
indemnifying party elects to assume the defense of such action, (a) no
compromise or settlement thereof may be effected by the indemnifying party
without the indemnified party's written consent (which shall not be
unreasonably withheld) unless the sole relief provided is monetary damages
that are paid in full by the indemnifying party and (b) the indemnifying
party shall have no liability with respect to any compromise or settlement
thereof effected without its written consent (which shall not be
unreasonably withheld).
(d) LIMITATIONS. The indemnification obligations of the parties hereto
pursuant to this Section 5.7 shall be subject to the following limitations:
(i) No indemnification shall be required to be made by Mercury
pursuant to Section 5.7(a) with respect to any claims made by any member
of the MSR Group except to the extent that the aggregate amount of
Damages incurred by members of the MSR Group with respect to all claims
under Section 5.7(a) (whether asserted, resulting, imposed, or incurred
before, on, or after the Closing Date) exceeds $200,000.
(ii) No indemnification shall be required to be made by MSR pursuant
to Section 5.7(b) with respect to any claims made by any member of the
Mercury Group except to the extent that the aggregate amount of Damages
incurred by members of the Mercury Group with respect to all claims under
Section 5.7(b) (whether asserted, resulting, imposed, or incurred before,
on, or after the Closing Date) exceeds $200,000.
(iii) Notwithstanding anything to the contrary provided in this
Section 5.7 or otherwise in this Agreement, except for the obligations of
the Surviving Corporation, if any, under the "CONTINGENT WARRANT" (as
such term is defined below), neither MSR nor the Surviving Corporation
shall have any liability or obligation to any member of the Mercury Group
for, or make any representation or warranty with respect to, any
liability of MSR, the Surviving Corporation, or any member of the Mercury
Group for or with respect to, any Taxes arising out of or related to the
Redomestication of MSR or the Merger. In connection with the foregoing,
Mercury acknowledges and agrees that the representations and warranties
set forth in Section 2.1 above shall not cover any such Taxes
notwithstanding any provisions of such representations and warranties to
the contrary.
5.8 CERTAIN TAX AND ACCOUNTING MATTERS.
(a) TAXABLE PERIODS ENDING ON OR BEFORE THE CLOSING DATE. Mercury
shall be solely liable for all Taxes of Mercury Sub due for all taxable
years and periods ending on or before the Closing Date. Mercury shall cause
to be prepared and duly filed all federal income tax returns and all other
tax returns required to be filed by or with respect to the Mercury Sub for
all taxable years and periods ending on or before the Closing Date. Mercury
shall pay all Taxes shown to be due on such tax returns for all periods
covered by such returns. Mercury warrants that Mercury Sub has not and will
not file,
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and is not eligible for filing a consolidated federal income tax return with
Mercury or any affiliated group of which Mercury is a member for any taxable
years and periods ending on or before the Closing Date. MSR will prepare and
file all federal income tax returns and all other returns required to be
filed by or with respect to MSR and the MSR Subsidiaries for all taxable
years ending on or before the Closing Date. MSR's taxable year will end for
federal income tax purposes on the date of its redomestication in Delaware.
MSR shall be liable for all Taxes shown to be due on such returns for the
periods covered thereby, except to the extent previously paid or shown as a
reserve on its Financial Statements.
(b) TAXABLE PERIODS COMMENCING AFTER THE CLOSING DATE. The Surviving
Corporation shall be solely liable for all Taxes of the Surviving
Corporation for all taxable years and periods commencing after the Closing
Date. The Surviving Corporation shall cause to be prepared and duly filed
all tax returns of the Surviving Corporation for taxable periods commencing
after the Closing Date. Surviving Corporation shall pay all Taxes shown to
be due on such returns for all periods covered by such returns.
(c) TAXABLE PERIODS COMMENCING BEFORE AND ENDING AFTER THE CLOSING
DATE. Surviving Corporation shall pay or cause to be paid all Taxes due for
any taxable year or period commencing before and ending after the Closing
Date (the "Straddle Period").
(d) REFUNDS OR CREDITS. Any refunds or credits with respect to Taxes
paid by Mercury Sub or the Surviving Corporation attributable to taxable
periods ending on or before the Closing Date shall belong to Mercury. Any
refunds or credits with respect to Taxes paid by the Surviving Corporation
or Mercury Sub or MSR shall belong to the Surviving Corporation. Any refunds
or credits with respect to Taxes paid by Mercury Sub or the Surviving
Corporation or MSR attributable to the Straddle Period shall belong to the
Surviving Corporation, provided however, such refunds and credits shall be
taken into account in determining the net Taxes that would have been due by
MSR and the MSR subsidiaries if the Straddle Period had ended on the Closing
Date, pursuant to Section 5.8(c). The Surviving Corporation shall reimburse
Mercury for any refunds and credits belonging to Mercury within two days
from receipt thereof by the Surviving Corporation. To the extent that any
such refund or credit is properly includable in the taxable income of the
Surviving Corporation, the amount forwarded or reimbursed to Mercury shall
be reduced by a percentage of the amount of such refund or credit equal to
the highest marginal federal Income Tax rate for the tax period in which the
refund or credit is received.
(e) TAX AND ACCOUNTING TREATMENT. Each of the parties hereto
undertakes and agrees to use its reasonable efforts to cause the Merger, and
to take no action which would cause the Merger not, to qualify for treatment
as a "reorganization" within the meaning of Section 368(a) of the Code for
federal income tax purposes.
5.9 AGREEMENT REGARDING CERTAIN REVENUES AND EXPENSES. The parties agree
that all revenue and income (minus the costs and expenses of production incurred
by Mercury) attributable to the Mercury Properties (other than the "Properties
Subject to Production Payment" (as defined below)) during the period commencing
January 1, 1997 and ending on the Closing Date, shall be deemed to have been
earned by Surviving Corporation, and within five (5) days after the Closing
Date, Mercury shall pay to the Surviving Corporation any such revenue and income
(minus the costs and expenses of production incurred by Mercury) received by it.
With respect to the Mercury Properties referred to in Section 2.2(o) of the
Mercury Disclosure Letter as being subject to a production payment (the
"PROPERTIES SUBJECT TO PRODUCTION PAYMENT"), the parties agree that (a) all
revenue and income attributable to the Properties Subject to Production Payment
until the production payment concerning such properties described in Section
2.2(o) of the Mercury Disclosure Letter (the "PRODUCTION PAYMENT") has been
fully paid shall be deemed to be earned by and the property of Mercury, and
within five (5) days after receipt of any such revenue by the Surviving
Corporation, all such revenue and income received by the Surviving Corporation,
if any, shall be
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paid to Mercury, and (b) Mercury shall reimburse the Surviving Corporation for
all costs and expenses of production incurred by them during the period
commencing January 1, 1997 and ending when the Production Payment has been fully
paid; provided, however, in the event Production Payment has not been fully paid
on or before December 31, 1997, then Mercury shall pay to the Surviving
Corporation an amount equal to all revenue and income attributable to such
properties for the period commencing January 1, 1998, and ending when the
Production Payment is fully paid, as if the Production Payment had been fully
paid on or before December 31, 1997. Notwithstanding the provisions of Section
5.8 above to the contrary, each party shall pay and be responsible for, and
indemnify and hold the other responsible for all Taxes due with respect to the
revenue and income to be paid to (or to be deemed earned by) it in accordance
with the provisions of this Section 5.9.
5.10 ARTICLES OF INCORPORATION AND BYLAWS. Prior to the Closing Date, MSR
and Mercury shall agree as to the form of the articles of incorporation and
bylaws of Mercury Sub to be in effect as the new articles of incorporation and
bylaws of Mercury Sub effective immediately prior to the Effective Time.
5.11 ALTERNATIVE TRANSACTION. Nothing in this Agreement shall prevent the
members of the Board of Directors of MSR, in the exercise of their fiduciary
duties and after consulting with counsel, from considering, negotiating and
approving an unsolicited bona fide proposal that the Board of Directors of MSR
determines in good faith, after consultation with its financial advisors, may
result in a transaction more favorable to MSR's stockholders than the
transactions contemplated by this Agreement (an "ALTERNATIVE TRANSACTION"). If
the Board of Directors of MSR receives a request for confidential information by
a potential bidder for MSR and the Board of Directors determines, after
consultation with counsel, that the Board of Directors has a fiduciary
obligation to provide such information to a potential bidder, then MSR may,
subject to a confidentiality agreement substantially similar to that previously
executed by Mercury, provide such potential bidder with access to information
regarding MSR. MSR shall promptly notify Mercury, orally and in writing, if any
such proposal described in the first sentence of this Section 5.11 is made and
shall, in any such notice, indicate the identity and terms and conditions of
such proposal. MSR shall keep Mercury advised of the progress and status of any
such proposals. The obligation of the Board of Directors of MSR to convene a
meeting of the stockholders of MSR and to recommend the approval of this
Agreement to the MSR stockholders pursuant to Sections 4.2 and 4.3 shall be
subject to the fiduciary duties of the directors, as determined by the directors
after consultation with counsel, and nothing contained in this Agreement shall
prevent the Board of Directors of MSR from approving or recommending to the
stockholders of MSR any unsolicited proposal by a third party with respect to an
Alternative Transaction if required in the exercise of its fiduciary duties, as
determined by the directors after consultation with counsel; provided, however,
in the event the Board of Directors of MSR recommends an Alternative Transaction
to the stockholders of MSR and such Alternative Transaction is approved by the
stockholders of MSR, MSR shall pay to Mercury a fee of $500,000 to compensate
Mercury for its costs and expenses and loss of opportunity cost in connection
with the transaction contemplated by this Agreement.
5.12 CONTINGENT WARRANT. At or immediately prior to the Closing the
Surviving Corporation shall have issued a contingent warrant agreement to
Mercury in substantially the form set forth as Exhibit A hereto (the "CONTINGENT
WARRANT").
5.13 MANAGEMENT AGREEMENT. Prior to the Closing Date, MSR and Mercury
shall agree as to the form of a management agreement between the Surviving
Corporation and Mercury (the "MANAGEMENT AGREEMENT") with respect to certain
management services to be provided by Mercury to the Surviving Corporation after
the Closing.
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ARTICLE VI
CONDITIONS
6.1 CONDITIONS TO OBLIGATION OF EACH PARTY TO EFFECT THE MERGER. The
respective obligations of each party to effect the Merger shall be subject to
the fulfillment at or prior to the Closing Date of the following conditions:
(a) This Agreement and the Redomestication of MSR shall have been
approved and adopted by the requisite vote of the stockholders of MSR, as
may be required by law, and by the rules of the American Stock Exchange, and
the Redomestication of MSR shall have been effected;
(b) No order shall have been entered and remain in effect in any action
or proceeding before any foreign, federal or state court or governmental
agency or other foreign, federal or state regulatory or administrative
agency or commission that would prevent or make illegal the consummation of
the Merger or the other transactions contemplated hereby;
(c) The Registration Statement shall be effective on the Closing Date,
and all post-effective amendments filed shall have been declared effective
or shall have been withdrawn; and no stop order suspending the effectiveness
thereof shall have been issued and no proceedings for that purpose shall
have been initiated or, to the knowledge of the parties, threatened by the
Commission;
(d) There shall have been obtained any and all material permits,
approvals and consents of securities or blue sky commissions of any
jurisdiction, and of any other governmental body or agency, that reasonably
may be deemed necessary so that the consummation of the Merger and the other
transactions contemplated hereby will be in compliance with applicable laws,
the failure to comply with which would have a material adverse effect on the
business, financial condition or results of operations of MSR, the Surviving
Corporation and their subsidiaries, taken as a whole after consummation of
the Merger;
(e) The shares of Surviving Corporation Common Stock issuable upon
consummation of the Merger shall have been approved for listing on the
American Stock Exchange, subject to official notice of issuance; and
(f) All approvals of private persons or corporations, (i) the granting
of which is necessary for the consummation of the Merger or the transactions
contemplated in connection therewith and (ii) the non-receipt of which would
have a material adverse effect on the business, financial condition or
results of operations of MSR, the Surviving Corporation and their
subsidiaries, taken as a whole after consummation of the Merger, shall have
been obtained.
(g) Mercury and the Board of Directors of MSR shall have received a
written opinion, in form and substance reasonably satisfactory to Mercury
and the Board of MSR, of a mutually acceptable investment banking firm, to
the effect that the net fair market value of the assets and properties of
MSR is less than $14,156,000, and such opinion shall not have been amended
or withdrawn.
(h) The parties shall have agreed on the forms of the articles of
incorporation and bylaws of Mercury Sub to be in effect immediately prior to
the Effective Time, and such new articles and bylaws shall be effective as
the articles and bylaws of Mercury Sub.
(i) The parties shall have agreed on the form of the Management
Agreement, and the Management Agreement shall have been duly executed and
delivered by Mercury and the Surviving Corporation at the Closing.
(j) Effective as of the Closing, the Surviving Corporation shall have
(i) assumed the obligations of Mercury Sub under that certain limited
guaranty executed by Mercury Sub dated as of March 7, 1997, in favor of
NationsBank of Texas, N.A. and certain other financial institutions named
therein (the "GUARANTY"), which guarantees the payment of bank debt of
Mercury in the principal amount of
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$4,000,000 (the "BANK DEBT"), or (ii) repaid in full the Bank Debt
guaranteed by the Guaranty, and the Guaranty and the lien on the Mercury
Properties securing the Bank Debt shall have been released, and in the case
of either clause (i) or (ii) above, any obligation of Mercury to repay such
Bank Debt shall have been released.
6.2 ADDITIONAL CONDITIONS TO OBLIGATIONS OF MSR. The obligation of MSR to
effect the Merger is, at the option of MSR, also subject to the fulfillment at
or prior to the Closing Date of the following conditions:
(a) The representations and warranties of Mercury and Mercury Sub
contained in Section 2.2 shall be accurate in all material respects as of
the date of this Agreement and (except to the extent such representations
and warranties speak specifically as of an earlier date) as of the Closing
Date as though such representations and warranties had been made at and as
of that time; all the agreements, terms, covenants and conditions of this
Agreement to be complied with and performed by Mercury, Mercury Sub and the
Minority Stockholders on or before the Closing Date shall have been duly
complied with and performed in all material respects; and a certificate to
the foregoing effect dated the Closing Date and signed by the chief
executive officer of Mercury shall have been delivered to MSR;
(b) Since the date of this Agreement, no material adverse change in the
financial condition, results of operations or business of Mercury Sub shall
have occurred, and Mercury Sub shall not have suffered any damage,
destruction or loss materially adversely affecting the properties or
business of Mercury Sub, and MSR shall have received a certificate signed by
the chief executive officer of Mercury dated the Closing Date to such
effect;
(d) The proceeds of the Financing necessary to consummate the
transactions contemplated hereby shall have been received by MSR;
(e) MSR shall have received from Cantey & Hanger LLP, counsel to
Mercury, an opinion dated the Closing Date in form and substance as shall be
reasonably satisfactory to MSR; and
(f) MSR shall have received such other certificates, instruments, and
documents as may be reasonably requested by it to carry out the intent and
purposes of this Agreement.
6.3 ADDITIONAL CONDITIONS TO OBLIGATIONS OF MERCURY AND MERCURY SUB. The
obligations of Mercury and Mercury Sub to effect the Merger are, at the option
of Mercury and Mercury Sub, also subject to the fulfillment at or prior to the
Closing Date of the following conditions:
(a) The representations and warranties of MSR contained in Section 2.1
shall be accurate in all material respects as of the date of this Agreement
and (except to the extent such representations and warranties speak
specifically as of an earlier date) as of the Closing Date as though such
representations and warranties had been made at and as of that time; all the
agreements, terms, covenants and conditions of this Agreement to be complied
with and performed by MSR on or before the Closing Date shall have been duly
complied with and performed in all material respects; and a certificate to
the foregoing effect dated the Closing Date and signed by the chief
executive officer of MSR shall have been delivered to Mercury;
(b) Since the date of this Agreement, no material adverse change in the
financial condition, results of operations or business of MSR and the MSR
Subsidiaries, taken as a whole, shall have occurred, and MSR and the MSR
Subsidiaries shall not have suffered any damage, destruction or loss
materially adversely affecting the properties or business of MSR and the MSR
Subsidiaries, taken as a whole, and Mercury shall have received a
certificate signed by the chief executive officer of MSR dated the Closing
Date to such effect;
(c) The Board of Directors of MSR shall have taken such action as
necessary (and the shareholders shall have voted on or approved such
actions, required by law) to reconstitute the
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respective Boards of Directors, executive committees and principal executive
officers of MSR and the MSR Subsidiaries effective as of the Effective Time
in accordance with Section 5.6;
(d) The proceeds of the Financing necessary to consummate the
transactions contemplated hereby shall have been received by MSR;
(e) Mercury shall have received from Thompson & Knight, P.C., counsel to
MSR, an opinion dated the Closing Date in form and substance as shall be
reasonably satisfactory to Mercury; and
(f) Mercury shall have received such other certificates, instruments,
and documents as may be reasonably requested by it to carry out the intent
and purposes of this Agreement.
ARTICLE VII
MISCELLANEOUS
7.1 TERMINATION. This Agreement may be terminated and the Merger and the
other transactions contemplated herein may be abandoned at any time prior to the
Effective Time, whether prior to or after approval by the stockholders of MSR:
(a) by mutual consent of MSR and Mercury;
(b) by either MSR or Mercury if the Merger has not been effected on or
before December 31, 1997;
(c) by MSR if the conditions set forth in Sections 6.1 or 6.2 are not
satisfied;
(d) by Mercury if the conditions set forth in Section 6.1 or 6.3 are not
satisfied;
(e) by MSR if (i) since the date of this Agreement there has been a
material adverse change in the results of operations, financial condition or
business of Mercury Sub, or (ii) there has been a material breach of any
representation, warranty or covenant set forth in this Agreement by Mercury
which breach has not been cured within five business days following receipt
by Mercury of notice of such breach;
(f) by Mercury if (i) since the date of this Agreement there has been a
material adverse change in the results of operations, financial condition or
business of MSR and the MSR Subsidiaries, taken as a whole, or (ii) there
has been a material breach of any representation, warranty or covenant set
forth in this Agreement by MSR which breach has not been cured within five
business days following receipt by MSR of notice of such breach; or
(g) by MSR if the Board of Directors of MSR shall have recommended to
the stockholders of MSR an Alternative Transaction, and the stockholders of
MSR have approved such Alternative Transaction, or by Mercury at any time
following a public announcement by MSR of such recommendation and approval.
7.2 EFFECT OF TERMINATION. In the event of any termination of this
Agreement pursuant to Section 7.1, (i) the provisions of the Confidentiality
Agreement (as defined in Section 7.13) and the provisions of Section 5.7 shall
survive any such termination, and (ii) such termination shall not relieve any
party from liability for any breach of this Agreement.
7.3 WAIVER AND AMENDMENT. Any provision of this Agreement may be waived at
any time by the party that is, or whose stockholders are, entitled to the
benefits thereof. This Agreement may not be amended or supplemented at any time,
except by an instrument in writing signed on behalf of each party hereto,
provided that after this Agreement has been approved and adopted by the
stockholders of MSR, this Agreement may be amended only as may be permitted by
applicable provisions of the DGCL. The waiver by any party hereto of any
condition or of a breach of another provision of this Agreement shall not
operate or be construed as a waiver of any other condition or subsequent breach.
The waiver by any party
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<PAGE>
hereto of any of the conditions precedent to its obligations under this
Agreement shall not preclude it from seeking redress for breach of this
Agreement other than with respect to the condition so waived.
7.4 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. The
representations, warranties agreements of the parties hereto contained in this
Agreement or in any certificate, instrument, or document delivered pursuant
hereto shall survive the Closing without contractual limitation, regardless of
any investigation made by or on behalf of any party.
7.5 CERTAIN DEFINITIONS. For purposes of this Agreement, the term:
(a) "CONSENT" means any consent to assign or transfer or any other
limitation on transferability.
(b) "MERCURY PROPERTIES" means the properties, rights and interests
listed in Exhibit B hereto.
(c) "MSR PROPERTIES" means the properties, rights and interests listed
in Exhibit C hereto.
(d) "PREFERENTIAL RIGHT" means any preferential right or option to
purchase or otherwise to acquire a thing.
(e) "ROUTINE GOVERNMENTAL APPROVALS" mean approvals required to be
obtained from any governmental or tribal authority that are customarily
obtained after consummation of a transaction.
7.6 PUBLIC STATEMENTS. Mercury and MSR agree to consult with each other
prior to issuing any press release or otherwise making any public statement with
respect to the transactions contemplated hereby, and shall not issue any such
press release or make any such public statement prior to such consultation,
except as may be required by law or applicable stock exchange policy.
7.7 REMEDIES NOT EXCLUSIVE. The rights and remedies herein provided shall
be cumulative and not exclusive of any rights or remedies provided by law. The
rights and remedies of any party based upon, arising out of, or otherwise in
respect of any inaccuracy in or breach of any representation, warranty,
covenant, or agreement contained in this Agreement shall in no way be limited by
the fact that the act, omission, occurrence, or other state of facts upon which
any claim of any such inaccuracy or breach is based may also be the subject
matter of any other representation, warranty, covenant, or agreement contained
in this Agreement (or in any other agreement between the parties) as to which
there is no inaccuracy or breach.
7.8 ASSIGNMENT. This Agreement shall inure to the benefit of and will be
binding upon the parties hereto and their respective legal representatives,
successors and permitted assigns. Except as set forth in this Agreement, this
Agreement shall not be assignable by the parties hereto.
7.9 NOTICES. All notices, requests, demands, claims and other
communications which are required to be or may be given under this Agreement
shall be in writing and shall be deemed to have been duly given if (i) delivered
in person or by courier, (ii) sent by telecopy or facsimile transmission, answer
back
E-39
<PAGE>
requested, or (iii) mailed, certified first class mail, postage prepaid, return
receipt requested, to the parties hereto at the following addresses:
<TABLE>
<CAPTION>
if to Mercury Mercury Exploration Company
or 1619 Pennsylvania Avenue
Mercury Sub: Fort Worth, Texas 76104
Attention: Glenn M. Darden
<S> <C>
with a copy to: Cantey & Hanger, L.L.P.
801 Cherry Street, Suite
2100
Forth Worth, Texas 76102
Attention: Sloan B. Blair
if to MSR or MSR Exploration Ltd.
MSR Sub: 500 Main Street, Suite 210
Fort Worth, Texas 76102
Attention: Otto J. Buis
with a copy to: Thompson & Knight, P.C.
801 Cherry Street, Suite
1600
Fort Worth, Texas 75102
Attention: Stephen B. Norris
</TABLE>
or to such other address as any party shall have furnished to the other by
notice given in accordance with this Section 7.9. Such notices shall be
effective, (i) if delivered in person or by courier upon actual receipt by the
intended recipient, (ii) if sent by telecopy or facsimile transmission, when the
answer back is received, or (iii) if mailed, upon the earlier of five days after
deposit in the mail and the date of delivery as shown by the return receipt
therefor.
7.10 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the substantive law of the State of Texas without giving effect
to the principles of conflicts of law thereof.
7.11 SEVERABILITY. If any term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction to be invalid, void or
unenforceable, the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall continue in full force and effect and shall
in no way be affected, impaired or invalidated.
7.12 COUNTERPARTS. This Agreement may be executed in counterparts, each of
which shall be an original, but all of which together shall constitute one and
the same agreement.
7.13 HEADINGS. The Section headings herein are for convenience only and
shall not affect the construction hereof.
7.14 CONFIDENTIALITY AGREEMENT.
(a) Each party hereto agrees that all Confidential Information (as defined
below) received by such party (the "RECEIVING PARTY") from the any other party
hereto (the "DISCLOSING PARTY") shall be kept confidential by the receiving
party and shall not be disclosed by the receiving party in any manner
whatsoever; provided, however, that (i) any of such Confidential Information may
be disclosed to such directors, officers, employees, and authorized
representatives (including without limitation attorneys, accountants,
consultants, bankers, and financial advisors) of the receiving party
(collectively, the "RECEIVING PARTY'S REPRESENTATIVES") as need to know such
information for the purpose of evaluating the Merger (it being understood that
such receiving party's representatives shall be informed by the receiving party
of the
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<PAGE>
confidential nature of such information and shall be required to treat such
information confidentially), (ii) any disclosure of Confidential Information may
be made to the extent to which the disclosing party consents in writing, (iii)
Confidential Information may be disclosed by the receiving party or any
receiving party's representatives to the extent that, in the opinion of counsel
for the receiving party or such receiving party's representatives is legally
compelled to do so, provided that, prior to making such disclosure, the party
being legally compelled to disclose such information advises and consults with
the disclosing party regarding such disclosure and provided further that the
party being legally compelled to disclose such information discloses only that
portion of the Confidential Information as is legally required, and (iv) any of
such Confidential Information may be disclosed to any banks or other financial
institutions or other prospective investors that may provide the Financing if
such banks or other financial institutions or other prospective investors agree
to comply with the provisions of this Section. The term "CONFIDENTIAL
INFORMATION", as used herein, means all information (irrespective of the form of
communication) obtained by or on behalf of a receiving party from a disclosing
party or its representatives, other than information which (i) was or becomes
generally available to the public other than as a result of disclosure by the
receiving party or any receiving party's representative, (ii) was or becomes
available to the receiving party on a nonconfidential basis prior to disclosure
to the receiving party or its representatives, or (iii) was or becomes available
to the receiving party from a source other than the disclosing party or its
representatives, provided that such source is not known by the receiving party
to be bound by a confidentiality agreement with the disclosing party.
(b) If this Agreement is terminated, each receiving party shall promptly
return, and shall use their reasonable best efforts to cause all receiving party
representatives to promptly return, all Confidential Information to the
disclosing party without retaining any copies thereof, provided that such
portion of the Confidential Information as consists of notes, compilations,
analyses, reports, studies, or other documents prepared by the receiving party
or the receiving party's representatives shall be destroyed.
7.15 ENTIRE AGREEMENT; THIRD PARTY BENEFICIARIES; COMMUNITY PROPERTY
INTERESTS. This Agreement and the Confidentiality Agreement constitute the
entire agreement and supersede all other prior agreements and understandings,
both oral and written, among the parties or any of them, with respect to the
subject matter hereof, and neither this Agreement nor any document delivered in
connection with this Agreement confers upon any person not a party hereto any
rights or remedies hereunder except as provided in Sections 5.7.
7.16 DISCLOSURE LETTERS.
(a) The Mercury Disclosure Letter, executed by Mercury as March 17, 1997,
and delivered to MSR on such date, contains all disclosures required to be made
by Mercury under the various terms and provisions of this Agreement. Each item
of disclosure set forth in the Mercury Disclosure Letter specifically refers to
the Article and Section of this Agreement to which such disclosure responds, and
shall not be deemed to be disclosed with respect to any other Article or Section
of this Agreement.
(b) The MSR Disclosure Letter, executed by MSR as of March 10, 1997, and
delivered to Mercury on such date, contains all disclosures required to be made
by MSR under the various terms and provisions of this Agreement. Each item of
disclosure set forth in the MSR Disclosure Letter specifically refers to the
Article and Section of this Agreement to which such disclosure responds, and
shall not be deemed to be disclosed with respect to any other Article or Section
of this Agreement.
E-41
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed on its behalf by its officer thereunto duly authorized, all as of the
date first above written.
MSR Exploration Ltd.
By: /s/ OTTO J. BUIS
------------------------------------
Otto J. Buis, Chairman of the Board
Mercury Exploration Company
By: /s/ GLENN M. DARDEN
------------------------------------
Glenn M. Darden, Vice President
Mercury Montana, Inc.
By: /s/ GLENN M. DARDEN
------------------------------------
Glenn M. Darden, Vice President
E-42
<PAGE>
AMENDMENT NO. 1
TO AGREEMENT AND PLAN OF MERGER
This Amendment No. 1 (this "Amendment") to that certain Agreement and Plan
of Merger, dated as of the 26th day of March, 1997 (the "Agreement"), by and
among MSR Exploration Ltd., an Alberta, Canada corporation which has agreed to
redomesticate to the State of Delaware subject to the terms hereof ("MSR"),
Mercury Exploration Company, a Texas corporation ("Mercury"), and Mercury
Montana, Inc., a Delaware corporation ("Mercury Sub").
W I T N E S S E T H:
WHEREAS the parties hereto desire to amend certain of the terms and
provisions of the Agreement as more particularly described below;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree that the
Agreement is hereby amended as follows:
1. DEFINED TERMS. Except as otherwise specifically defined herein, all
capitalized terms used herein as defined terms shall have the meanings assigned
to such terms in the Agreement.
2. AMENDMENTS.
(a) Section 1.6 of the Agreement is hereby amended by deleting subclause
(a) of such section and substituting the following therefor:
(a) the respective boards of directors of the Surviving Corporation
and its subsidiaries shall be comprised of (i) three persons designated
by MSR immediately prior to the Effective Time (which such designees are
currently Otto J. Buis, Steve Morris and Patrick Montalban), (ii) three
persons designated by Mercury immediately prior to the Effective Time
(which such designees are currently Frank Darden, Thomas F. Darden and
Glenn M. Darden) and (iii) two persons to be agreed by MSR and Mercury
prior to the effective time, and
(b) Section 5.6 of the Agreement is hereby amended by deleting
subclause (a) of such section and substituting the following therefor:
(a) SURVIVING CORPORATION BOARD OF DIRECTORS. At the Effective Time,
the respective Boards of Directors of the Surviving Corporation and each
Surviving Corporation subsidiary shall be comprised of (i) Otto Buis, Steve
Morris and Patrick Montalban, (ii) Frank Darden, Thomas F. Darden and Glenn
M. Darden and (iii) two additional members to be agreed by MSR and Mercury.
If, prior to the Effective Time, (i) Otto Buis, Steve Morris or Patrick
Montalban shall decline or be unable to serve, the Board of Directors of MSR
shall designate another person to serve in such person's stead, or (ii)
Frank Darden, Thomas F. Darden or Glenn M. Darden shall decline or be unable
to serve, the Board of Directors of Mercury shall designate another person
to serve in such person's stead.
(c) Section 6.1 of the Agreement is hereby amended by deleting
subclause (g) of such section and substituting the following therefor:
(g) Mercury and the Board of Directors of MSR shall have received
a written opinion, in form and substance reasonably satisfactory to
Mercury and the Board of MSR, of a mutually acceptable investment
banking firm, to the effect that the net fair market value of MSR is
less than $14,156,000, and such opinion shall not have been amended
or withdrawn.
3. RATIFICATION. Except as amended and modified hereby, the Agreement is
unchanged and is hereby ratified and affirmed, as amended and modified hereby,
in all respects.
4. COUNTERPARTS. This Amendment may be executed in counterparts, all of
which shall be considered one and the same agreement and shall become effective
when a counterpart shall have been signed by
E-43
<PAGE>
each of the parties and delivered to the other party or to its counsel, it being
understood that each of the parties need not sign the same counterpart.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
signed by their respective officers thereunto duly authorized, all as of June
17, 1997.
MSR EXPLORATION LTD.
By: /s/ OTTO J. BUIS
-----------------------------------------
Otto J. Buis
CHAIRMAN OF THE BOARD
Mercury Exploration Company
By: /s/ GLENN M. DARDEN
-----------------------------------------
Glenn M. Darden
VICE PRESIDENT
Mercury Montana, Inc.
By: /s/ GLENN M. DARDEN
-----------------------------------------
Glenn M. Darden
VICE PRESIDENT
E-44
<PAGE>
AMENDMENT NO. 2
TO AGREEMENT AND PLAN OF MERGER
This Amendment No. 2 (this "Amendment") to that certain Agreement and Plan
of Merger, dated as of the 26th day of March, 1997, as amended by Amendment No.
1 to Agreement and Plan of Merger dated as of June 17, 1997 (the "Agreement"),
by and among MSR Exploration Ltd., an Alberta, Canada corporation which has
agreed to redomesticate to the State of Delaware subject to the terms hereof
("MSR"), Mercury Exploration Company, a Texas corporation ("Mercury"), and
Mercury Montana, Inc., a Delaware corporation ("Mercury Sub").
W I T N E S S E T H:
WHEREAS the parties hereto desire to amend certain of the terms and
provisions of the Agreement as more particularly described below;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree that the
Agreement is hereby amended as follows:
1. DEFINED TERMS. Except as otherwise specifically defined herein, all
capitalized terms used herein as defined terms shall have the meanings assigned
to such terms in the Agreement.
2. AMENDMENTS.
(a) Section 1.6 of the Agreement is hereby amended by inserting in
sub-subclause (iii) of subclause (a) of such section, after the word "time"
and prior to the comma, the following:
"(which such persons are currently D. Randall Kent and W. Yandell
Rogers, III)".
(b) Section 5.6 of the Agreement is hereby amended in the following
respects:
(i) Delete sub-subclause (iii) in the first sentence of subclause (a)
of such section and substitute therefor the following:
"(iii) D. Randall Kent and W. Yandell Rogers, III."
(ii) Insert the following in the second sentence of subclause (a) of
such section after the word "stead" and prior to the period
", or D. Randall Kent or W. Yandell Rogers, III shall decline or
be unable to serve, MSR and Mercury shall agree to another person to
serve in such person's stead".
(c) Section 6.3 of the Agreement is hereby amended by (i) deleting the
word "and" after the semicolon in subclause (e) of such section, (ii)
deleting the period at the end of subclause (f) of such section and
substituting "; and" therefor, and (iii) adding a new subclause (g) to such
section to read in its entirety as follows:
"(g) Otto J. Buis, Patrick M. Montalban, Steven M. Morris, D. Randall
Kent and W. Yandell Rogers, III shall have been elected as directors of
MSR at the combined annual and special meeting of stockholders of MSR to
be held in accordance with Section 4.3 of this Agreement."
3. RATIFICATION. Except as amended and modified hereby, the Agreement is
unchanged and is hereby ratified and affirmed, as amended and modified hereby,
in all respects.
4. COUNTERPARTS. This Amendment may be executed in counterparts, all of
which shall be considered one and the same agreement and shall become effective
when a counterpart shall have been signed by each of the parties and delivered
to the other party or to its counsel, it being understood that each of the
parties need not sign the same counterpart.
E-45
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
signed by their respective officers thereunto duly authorized, all as of
September 11, 1997.
<TABLE>
<S> <C> <C>
MSR EXPLORATION LTD.
By: /s/ OTTO J. BUIS
-----------------------------------------
Otto J. Buis
CHAIRMAN OF THE BOARD
Mercury Exploration Company
By: /s/ GLENN M. DARDEN
-----------------------------------------
Glenn M. Darden
VICE PRESIDENT
Mercury Montana, Inc.
By: /s/ GLENN M. DARDEN
-----------------------------------------
Glenn M. Darden
VICE PRESIDENT
</TABLE>
E-46
<PAGE>
APPENDIX "F"
CERTIFICATE OF INCORPORATION
OF
MERCURY MONTANA, INC.
* * * * *
1. The name of the corporation is Mercury Montana, Inc.
2. The address of its registered office in the State of Delaware is
Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County
of New Castle. The name of its registered agent at such address is The
Corporation Trust Company.
3. The nature of the business or purposes to be conducted or promoted is:
To engage in any lawful act or activity for which corporations may be
organized under the General Corporation Law of Delaware.
4. The total number of shares of stock which the corporation shall have
authority to issue is Fifty Million (50,000,000) and the par value of each of
such shares is No Dollars and One Cents ($0.01), amounting in the aggregate to
Five Hundred Thousand Dollars and No Cents ($500,000.00).
5. The name and mailing address of each incorporator is as follows:
<TABLE>
<CAPTION>
NAME MAILING ADDRESS
- ---------------------- ------------------------------------------------------
<S> <C>
Carla D. Crawford 350 N. St. Paul, Dallas, Texas 75201
Steven C. Patterson 350 N. St. Paul, Dallas, Texas 75201
Shane Shelley 350 N. St. Paul, Dallas, Texas 75201
</TABLE>
The name and mailing address of each person who is to serve as a director
until the first annual meeting of the stockholders or until a successor is
elected and qualified, is as follows:
<TABLE>
<CAPTION>
NAME MAILING ADDRESS
- ---------------------- ------------------------------------------------------
<S> <C>
Frank Darden 1619 Pennsylvania Ave., Fort Worth, Texas 76104
Glenn M. Darden 1619 Pennsylvania Ave., Fort Worth, Texas 76104
Thomas F. Darden 720 S. Otsego, Gaylord, Michigan 49735
</TABLE>
6. The corporation is to have perpetual existence.
7. In furtherance and not in limitation of the powers conferred by statute,
the board of directors is expressly authorized to make, alter or repeal the
by-laws of the corporation.
8. Elections of directors need not be by written ballot unless the by-laws
of the corporation shall so provide.
Meetings of stockholders may be held within or without the State of
Delaware, as the by-laws may provide. The books of the corporation may be kept
(subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
board of directors or in the by-laws of the corporation.
F-1
<PAGE>
9. The corporation reserves the right to amend, alter, change or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by statute, and all rights conferred upon stockholders
herein are granted subject to this reservation.
10. A director of the corporation shall not be personally liable to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director except for liability (i) for any breach of the director's
duty of loyalty to the corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law, or (iv) for any transaction from which the director derived any improper
personal benefit.
WE, THE UNDERSIGNED, being each of the incorporators hereinbefore named, for
the purpose of forming a corporation pursuant to the General Corporation Law of
the State of Delaware, do make this Certificate, hereby declaring and certifying
that this is our act and deed and the facts herein stated are true, and
accordingly have hereunto set our hands this Nineteenth day of February, 1997.
/s/ CLARK D. CRAWFORD
--------------------------------------
Carla D. Crawford
/s/ STEVEN C. PATTERSON
--------------------------------------
Steven C. Patterson
/s/ SHANE SHELLEY
--------------------------------------
Shane Shelley
F-2
<PAGE>
CERTIFICATE OF AMENDMENT TO THE
CERTIFICATE OF INCORPORATION
OF
MERCURY MONTANA, INC.
Pursuant to the provisions of Section 242 of the General Corporation Law of
the State of Delaware, Mercury Montana, Inc., a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware (the "Corporation"), does hereby certify:
First: That the Board of Directors of the Corporation, by unanimous consent
pursuant to Section 141(f) of the General Corporation Law of the State of
Delaware, adopted the following resolutions setting forth and declaring
advisable the following proposed amendments to the Certificate of Incorporation
of the Corporation.
RESOLVED, that the Certificate of Incorporation of the Corporation, be
amended to delete Article 4 in its entirety and to substitute in lieu
thereof, the following new Article 4:
ARTICLE 4
The aggregate number of shares of all classes of stock which the
Corporation shall be authorized to issue is 60,000,000, divided into the
following: 50,000,000 shares of Common Stock, and the par value of each
of such shares is no dollars and one cent ($0.01), amounting in the
aggregate to Five Hundred Thousand Dollars and No/100 ($500,000.00) (the
"Common Stock") and 10,000,000 shares of capital Preferred Stock, and
the par value of each of such shares is no dollars and one cent ($0.01),
amounting in the aggregate to One Hundred Thousand Dollars and No/100
($100,000.00) (the "Preferred Stock").
The following is a statement of the relative rights, preferences and
limitations in respect of the shares of each class of capital stock of
the Corporation, insofar as the same are fixed in this Certificate of
Incorporation, and of the authority expressly vested in the Board of
Directors of the Corporation to divide the Preferred Stock into series
and to fix and determine the variations in the relative rights and
preference as between series:
A. PREFERRED STOCK
1. The Preferred Stock may from time to time be divided into and
issued in one or more series with each series to be so designated as to
distinguish the shares thereof from the shares of all other series and
classes, the shares of each series to have such designations,
preferences, limitations and relative rights as are stated and expressed
herein and in a resolution or resolutions providing for the issue of such
series, adopted by the Board of Directors as hereinafter provided.
2. To the extent that this Certificate of Incorporation shall not
have fixed and determined the variations in the relative rights and
preferences of the Preferred Stock and as between series, the Board of
Directors of the Corporation is expressly vested with the authority to
divide the Preferred Stock into one or more series and, within the
limitations set forth in this Certificate of Incorporation, to fix and
determine the relative rights and preferences of the shares of any series
so established, and, with respect to each such series, to fix by
resolution or resolutions providing for the issue of such series, the
following:
(a) The maximum number of shares to constitute such series and
the distinctive designation thereof;
F-3
<PAGE>
(b) The annual dividend rate, if any, on the shares of such
series and the date or dates from which dividends shall commence to
accrue or to accumulate as herein provided, or provision that
dividends shall not be cumulative;
(c) The price at and the terms and conditions on which the shares
of such series may be redeemed, including the time during which
shares of the series may be redeemed and the premium, if any, over
and above the par value thereof and any accumulated dividends thereon
which the holders of shares of such series shall be entitled to
receive upon the redemption thereof, which premium may vary at
different dates and may also be different with respect to shares
redeemed through the operation of any retirement or sinking fund;
(d) The liquidation preference, if any, over and above the par
value thereof, and any accumulated dividends thereon, which the
holders of shares of such series shall be entitled to receive upon
the voluntary or involuntary liquidation, dissolution or winding up
of the affairs of the Corporation;
(e) Whether or not the shares of such series shall be subject to
the operation of a retirement or sinking fund, and, if so, the extent
to and manner in which any such retirement or sinking fund shall be
applied to the purchase or redemption of the shares of such series
for retirement or for other corporate purposes and the terms and
provisions relative to the operations of the said fund;
(f) The terms and conditions, if any, on which the shares of such
series shall be convertible into, or exchangeable for, share of
capital stock of any other class or classes of the Corporation or any
series of any other class or classes, or of any other series of the
same class, including the price or prices or the rate or rates of
conversion or exchange and the method, if any, of adjusting the same;
(g) The voting rights, if any, on the shares of such series; and
(h) Any other preferences and relative, participating, optional
or other special rights, or qualifications, limitations or
restrictions thereof, as shall not be inconsistent with the law or
with this Article.
3. All shares of any one series of Preferred Stock shall be
identical with each other in all respects, except that shares of any one
series issued at different times may differ as to the dates from which
dividends thereon shall be cumulative; and all series shall rank equally
and be identical in all respects, except as provided in paragraph 1 of
this Section A and except as permitted by the foregoing provisions of
paragraph 2 hereof.
4. Nothing herein contained shall limit any legal right of the
Corporation to purchase any shares of the Preferred Stock.
B. COMMON STOCK
1. Subject to the prior rights and preferences of the Preferred
Stock and subject to the provisions and on the conditions set forth in
the foregoing Section A of this Article 4, or in any resolution or
resolutions providing for the issue of a series of Preferred Stock, and
to the extent permitted by the laws of the State of Delaware, the holders
of Common Stock shall be entitled to receive such cash dividends as may
be declared and made payable by the Board of Directors.
2. After payment shall have been made in full to the holders of the
Preferred Stock in the event of any liquidation, dissolution or winding
up of the affairs of the Corporation, the remaining assets and funds of
the Corporation shall be distributed among the holders of the Common
Stock according to their respective shares.
F-4
<PAGE>
RESOLVED, that the Certificate of Incorporation of the Corporation be
amended to add a new Article 11 to read as follows:
ARTICLE 11
Section 1. OPPRESSION AND UNFAIRNESS
(1) A complainant may apply to the Court for an order under this section.
(2) If, on an application under subsection (1), the Court is satisfied
that in respect of the Corporation or any of its affiliates
(a) any act or omission of the Corporation or any of its affiliates
effects a result,
(b) the business or affairs of the Corporation or any of its
affiliates are or have been carried on or conducted in a manner,
or
(c) the power of the directors of the Corporation or any of its
affiliates are or have been exercised in a manner
that is oppressive or unfairly prejudicial to or that unfairly
disregards the interests of any security holder, creditor, director or
officer of the Corporation, the Court may make an order to rectify the
matters complained of.
(3) In connection with an application under this section, the Court may
make any interim or final order it thinks fit including, without
limiting the generality of the foregoing, any or all of the
following:
(a) an order restraining the conduct complained of;
(b) an order appointing a receiver or receiver-manager;
(c) an order to regulate the Corporation's affairs by amending the
articles of incorporation or bylaws of the Corporation;
(d) an order declaring that any amendment made to the articles of
incorporation or bylaws of the Corporation pursuant to clause (c)
operates notwithstanding any unanimous stockholder agreement made
before or after the date of the order, until the Court otherwise
orders;
(e) an order directing an issue or exchange of securities of the
Corporation;
(f) an order appointing directors of the Corporation in place of or
in addition to all or any of the directors then in office;
(g) an order directing the Corporation or any other person to
purchase securities of a stockholder of the Corporation;
(h) an order directing the Corporation or any other person to pay to
a stockholder of the Corporation any part of the money paid by
such stockholder for securities of the Corporation;
(i) an order directing the Corporation to pay a dividend to its
stockholders or a class of its stockholders;
(j) an order varying or setting aside a transaction or contract to
which the Corporation is a party and compensating the Corporation
or any other party to the transaction or contract;
F-5
<PAGE>
(k) an order requiring the Corporation, within a time specified by
the Court, to produce to the Court or an interested person
financial statements in the required form or an accounting in any
form the Court may determine;
(l) an order compensating an aggrieved person;
(m) an order directing rectification of the registered or other
records of the Corporation;
(n) an order for the liquidation and dissolution of the Corporation;
(o) an order directing an investigation to be made;
(p) an order requiring the trial of any issue; or
(q) an order granting leave to the applicant to
(i) bring an action in the name and on behalf of the Corporation
or any of its subsidiaries, or
(ii) intervene in an action to which the Corporation or any of
its subsidiaries is a party, for the purpose of
prosecuting, defending or discontinuing an action on behalf
of the Corporation or any of its subsidiaries.
(4) This section does not confer on the Court power to revoke a
certificate of amalgamation or merger.
(5) An applicant under this section may apply in the alternative under
applicable law for an order for the liquidation and dissolution of
the Corporation.
Section 2. COURT ORDER
In connection with an action brought or intervened in Section 1 of this
Article 11, the Court may at any time make any order it thinks fit,
including, without limiting the generality of the foregoing, any or all
of the following:
(a) an order authorizing the complainant or any other person to
control the conduct of the action;
(b) an order giving directions for the conduct of the action;
(c) an order directing that any amount adjudged payable by a
defendant in the action shall be paid, in whole or in part,
directly to former and present stockholders of the Corporation
instead of to the Corporation;
(d) an order requiring the Corporation to pay reasonable legal fees
incurred by the complainant in connection with the action.
Section 3. RIGHT TO DISSENT
(1) A holder of shares of any class of stock of the Corporation may
dissent if the Corporation resolves to:
(a) amend its articles of incorporation to add, change or remove any
provisions restricting or constraining the issue or transfer of
shares of that class;
(b) amend its articles of incorporation to add, change or remove any
restrictions on the business or businesses that the Corporation
may carry on;
(c) amalgamate, merger or consolidate with another corporation, other
than a wholly owned subsidiary corporation;
(d) be continued under the laws of the same jurisdiction; or
F-6
<PAGE>
(e) sell, lease or exchange all or substantially all of the property
of the Corporation.
(2) A holder of shares of any class or series of stock of the Corporation
entitled to vote separately as a class or series on a proposal to
amend the articles of incorporation of the Corporation to:
(a) increase the maximum number of authorized shares of a class
having rights or privileges equal or superior to the rights or
privileges attached to the shares of that class;
(b) effect an exchange, reclassification or cancellation of all or
part of the shares of that class;
(c) add, change or remove the rights, privileges, restrictions or
conditions attached to the shares of that class and, without
limiting the generality of the foregoing
(i) remove or change prejudicially rights to accrued dividends
or rights to cumulative dividends;
(ii) add, remove or change prejudicially redemption rights;
(iii) reduce or remove a dividend preference or a liquidation
preference; or
(iv) add, remove or change prejudicially conversion privileges,
options, voting, transfer or preemptive rights, rights to
acquire securities of a corporation or sinking fund
provisions,
(d) increase the rights or privileges of any class of shares having
rights or privileges equal or superior to the rights or
privileges attached to the shares of that class;
(e) create a new class of shares having rights or privileges equal or
superior to the rights or privileges attached to the shares of
that class;
(f) make the rights or privileges of any class of shares having
rights or privileges inferior to the rights or privileges of the
shares of that class;
(g) effect an exchange or create a right of exchange of all or part
of the shares of another class into the shares of that class; or
(h) constrain the issue or transfer of the shares of that class or
extend or remove that constraint
may dissent if the Corporation resolves to amend its articles of
incorporation in a matter described above.
(3) If a holder of shares of any class of stock of the Corporation
dissents, the procedure for dissent shall be as set out in Section
184 of the BUSINESS CORPORATIONS ACT (Albert) as in effect on July
31, 1997.
Section 4. DEFINED TERMS
Words and phrases used in this Article 11 which were defined in the
BUSINESS CORPORATIONS ACT (Alberta) in effect on July 31, 1997 shall
have the same meaning in this Article 11 as in that Act.
Second: That thereafter, pursuant to resolution of the Board of Directors,
the proposed Amendments were submitted to the Stockholders of the Corporation,
and the necessary number of shares as required by statute was voted in favor of
the Amendments by written consent of the holders thereof.
Third: That said Amendments were duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
Fourth: That this Certificate of Amendment shall be effective upon the
filing hereof.
F-7
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Amendment to its
Certificate of Incorporation to be signed by Frank Darden, its Chairman, on this
13th day of August, 1997.
<TABLE>
<S> <C> <C>
MERCURY MONTANA, INC.
By /s/ FRANK DARDEN
-----------------------------------------
Frank Darden, CHAIRMAN
</TABLE>
<TABLE>
<S> <C> <C>
THE STATE OF TEXAS
COUNTY OF TARRANT
</TABLE>
This instrument was acknowledged before me on the 13th day of August, 1997,
by Frank Darden, Chairman of Mercury Montana, Inc., a Delaware corporation, on
behalf of said corporation.
/s/ CYNTHIA J. CARPENTER
--------------------------------------
Notary Public - State of Texas
F-8
<PAGE>
APPENDIX "G"
BY-LAWS
OF
MERCURY MONTANA, INC.
(A DELAWARE CORPORATION)
<PAGE>
TABLE OF CONTENTS
<TABLE>
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<S> <C> <C>
ARTICLE I
OFFICES
Section 1. REGISTERED OFFICE........................................................................ G-1
Section 2. OTHER OFFICES............................................................................ G-1
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. TIME AND PLACE OF MEETINGS............................................................... G-1
Section 2. ANNUAL MEETINGS.......................................................................... G-1
Section 3. NOTICE OF ANNUAL MEETINGS................................................................ G-1
Section 4. SPECIAL MEETINGS......................................................................... G-1
Section 5. NOTICE OF SPECIAL MEETINGS............................................................... G-1
Section 6. QUORUM................................................................................... G-1
Section 7. ORGANIZATION............................................................................. G-2
Section 8. VOTING................................................................................... G-2
Section 9. LIST OF STOCKHOLDERS..................................................................... G-2
Section 10. INSPECTORS OF VOTES...................................................................... G-3
Section 11. ACTIONS WITHOUT A MEETING................................................................ G-3
ARTICLE III
BOARD OF DIRECTORS
Section 1. POWERS................................................................................... G-3
Section 2. NUMBER, QUALIFICATION, AND TERM OF OFFICE................................................ G-3
Section 3. RESIGNATIONS............................................................................. G-3
Section 4. REMOVAL OF DIRECTORS..................................................................... G-3
Section 5. VACANCIES................................................................................ G-4
MEETINGS OF THE BOARD OF DIRECTORS
Section 6. PLACE OF MEETINGS........................................................................ G-4
Section 7. ANNUAL MEETINGS.......................................................................... G-4
Section 8. REGULAR MEETINGS......................................................................... G-4
Section 9. SPECIAL MEETINGS; NOTICE................................................................. G-4
Section 10. QUORUM AND MANNER OF ACTING.............................................................. G-4
Section 11. REMUNERATION............................................................................. G-4
COMMITTEES OF DIRECTORS
Section 12. EXECUTIVE COMMITTEE; HOW CONSTITUTED AND POWERS.......................................... G-4
Section 13. ORGANIZATION............................................................................. G-5
Section 14. MEETINGS................................................................................. G-5
Section 15. QUORUM AND MANNER OF ACTING.............................................................. G-5
Section 16. OTHER COMMITTEES......................................................................... G-5
Section 17. ALTERNATE MEMBERS OF COMMITTEES.......................................................... G-6
Section 18. MINUTES OF COMMITTEES.................................................................... G-6
GENERAL
Section 19. ACTIONS WITHOUT A MEETING................................................................ G-6
Section 20. PRESENCE AT MEETINGS BY MEANS OF COMMUNICATIONS EQUIPMENT................................ G-6
</TABLE>
i
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<TABLE>
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<S> <C> <C>
ARTICLE IV
NOTICES
Section 1. TYPE OF NOTICE........................................................................... G-6
Section 2. WAIVER OF NOTICE......................................................................... G-6
Section 3. WHEN NOTICE UNNECESSARY.................................................................. G-6
ARTICLE V
OFFICERS
Section 1. ELECTED AND APPOINTED OFFICERS........................................................... G-7
Section 2. TIME OF ELECTION OR APPOINTMENT.......................................................... G-7
Section 3. SALARIES OF ELECTED OFFICERS............................................................. G-7
Section 4. TERM..................................................................................... G-7
Section 5. DUTIES OF THE CHAIRMAN OF THE BOARD...................................................... G-7
Section 6. DUTIES OF THE PRESIDENT.................................................................. G-7
Section 7. DUTIES OF VICE PRESIDENTS................................................................ G-8
Section 8. DUTIES OF ASSISTANT VICE PRESIDENTS...................................................... G-8
Section 9. DUTIES OF THE SECRETARY.................................................................. G-8
Section 10. DUTIES OF ASSISTANT SECRETARIES.......................................................... G-8
Section 11. DUTIES OF THE TREASURER.................................................................. G-8
Section 12. DUTIES OF ASSISTANT TREASURERS........................................................... G-9
Section 13. DUTIES OF THE CONTROLLER................................................................. G-9
Section 14. DUTIES OF ASSISTANT CONTROLLERS.......................................................... G-9
ARTICLE VI
INDEMNIFICATION
Section 1. ACTIONS OTHER THAN BY OR IN THE RIGHT OF THE CORPORATION................................. G-9
Section 2. ACTIONS BY OR IN THE RIGHT OF THE CORPORATION............................................ G-9
Section 3. DETERMINATION OF RIGHT TO INDEMNIFICATION................................................ G-10
Section 4. RIGHT TO INDEMNIFICATION................................................................. G-10
Section 5. PREPAID EXPENSES......................................................................... G-10
Section 6. RIGHT TO INDEMNIFICATION UPON APPLICATION; PROCEDURE UPON APPLICATION.................... G-10
Section 7. OTHER RIGHTS AND REMEDIES................................................................ G-10
Section 8. INSURANCE................................................................................ G-11
Section 9. MERGERS.................................................................................. G-11
Section 10. SAVINGS PROVISION........................................................................ G-11
ARTICLE VII
CERTIFICATES REPRESENTING STOCK
Section 1. RIGHT TO CERTIFICATE..................................................................... G-11
Section 2. FACSIMILE SIGNATURES..................................................................... G-11
Section 3. NEW CERTIFICATES......................................................................... G-12
Section 4. TRANSFERS................................................................................ G-12
Section 5. RECORD DATE.............................................................................. G-12
Section 6. REGISTERED STOCKHOLDERS.................................................................. G-12
</TABLE>
ii
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<TABLE>
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<S> <C> <C>
ARTICLE VIII
GENERAL PROVISIONS
Section 1. DIVIDENDS................................................................................ G-13
Section 2. RESERVES................................................................................. G-13
Section 3. ANNUAL STATEMENT......................................................................... G-13
Section 4. CHECKS................................................................................... G-13
Section 5. FISCAL YEAR.............................................................................. G-13
Section 6. CORPORATE SEAL........................................................................... G-13
ARTICLE IX
AMENDMENTS................................................................................................ G-13
</TABLE>
iii
<PAGE>
ARTICLE I
OFFICES
Section 1. REGISTERED OFFICE. The registered office of the Corporation
shall be in the City of Wilmington, County of New Castle, State of Delaware.
Section 2. OTHER OFFICES. The Corporation may also have offices at such
other place or places, both within and without the State of Delaware, as the
Board of Directors may from time to time determine or the business of the
Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. TIME AND PLACE OF MEETINGS. All meetings of the stockholders
for the election of directors shall be held at such time and place, either
within or without the State of Delaware, as shall be designated from time to
time by the Board of Directors and stated in the notice of the meeting. Meetings
of stockholders for any other purpose may be held at such time and place, within
or without the State of Delaware, as shall be stated in the notice of the
meeting or in a duly executed waiver of notice thereof.
Section 2. ANNUAL MEETINGS. Annual meetings of stockholders, commencing
with the year 1998, shall be held on such date and at such time as shall be
designated from time to time by the Board of Directors and stated in the notice
of the meeting, at which meeting the stockholders shall elect by a plurality
vote a Board of Directors and transact such other business as may properly be
brought before the meeting.
Section 3. NOTICE OF ANNUAL MEETINGS. Written notice of the annual
meeting, stating the place, date, and hour of the meeting, shall be given to
each stockholder of record entitled to vote at such meeting not less than 10 or
more than 60 days before the date of the meeting.
Section 4. SPECIAL MEETINGS. Special meetings of the stockholders for any
purpose or purposes, unless otherwise prescribed by statute or by the
Certificate of Incorporation, may be called at any time by order of the Board of
Directors, the Chairman of the Board or the President. Such request shall state
the purpose or purposes of the proposed special meeting. Business transacted at
any special meeting of stockholders shall be limited to the purposes stated in
the notice.
Section 5. NOTICE OF SPECIAL MEETINGS. Written notice of a special
meeting, stating the place, date, and hour of the meeting and the purpose or
purposes for which the meeting is called, shall be given to each stockholder of
record entitled to vote at such meeting not less than 10 or more than 60 days
before the date of the meeting.
Section 6. QUORUM. Except as otherwise provided by statute or the
Certificate of Incorporation, the holders of stock having a majority of the
voting power of the stock entitled to be voted thereat, present in person or
represented by proxy, shall constitute a quorum for the transaction of business
at all meetings of the stockholders. If, however, such quorum shall not be
present or represented at any meeting of the stockholders, the stockholders
entitled to vote thereat, present in person or represented by proxy, shall have
power to adjourn the meeting from time to time without notice (other than
announcement at the meeting at which the adjournment is taken of the time and
place of the adjourned meeting) until a quorum shall be present or represented.
At such adjourned meeting at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at the meeting as
originally notified. If the adjournment is for more than 30 days, or if after
the adjournment a new record date is fixed for the adjourned meeting, notice of
the adjourned meeting shall be given to each stockholder of record entitled to
vote at the meeting.
G-1
<PAGE>
Section 7. ORGANIZATION. At each meeting of the stockholders, the Chairman
of the Board or the President, determined as provided in Article V of these
By-Laws, or if those officers shall be absent therefrom, another officer of the
Corporation chosen as chairman present in person or by proxy and entitled to
vote thereat, or if all the officers of the Corporation shall be absent
therefrom, a stockholder holding of record shares of stock of the Corporation so
chosen, shall act as chairman of the meeting and preside thereat. The Secretary,
or if he shall be absent from such meeting or shall be required pursuant to the
provisions of this Section 7 to act as chairman of such meeting, the person (who
shall be an Assistant Secretary, if an Assistant Secretary shall be present
thereat) whom the chairman of such meeting shall appoint, shall act as secretary
of such meeting and keep the minutes thereof.
Section 8. VOTING. Except as otherwise provided in the Certificate of
Incorporation, each stockholder shall, at each meeting of the stockholders, be
entitled to one vote in person or by proxy for each share of stock of the
Corporation held by him and registered in his name on the books of the
Corporation on the date fixed pursuant to the provisions of Section 5 of Article
VII of these By-Laws as the record date for the determination of stockholders
who shall be entitled to notice of and to vote at such meeting. Shares of its
own stock belonging to the Corporation or to another corporation, if a majority
of the shares entitled to vote in the election of directors of such other
corporation is held directly or indirectly by the Corporation, shall not be
entitled to vote. Any vote by stock of the Corporation may be given at any
meeting of the stockholders by the stockholder entitled thereto, in person or by
his proxy appointed by an instrument in writing subscribed by such stockholder
or by his attorney thereunto duly authorized and delivered to the Secretary of
the Corporation or to the secretary of the meeting; provided, however, that no
proxy shall be voted or acted upon after three years from its date, unless said
proxy shall provide for a longer period. Each proxy shall be revocable unless
expressly provided therein to be irrevocable and unless otherwise made
irrevocable by law. At all meetings of the stockholders all matters, except
where other provision is made by law, the Certificate of Incorporation, or these
By-Laws, shall be decided by the vote of a majority of the votes cast by the
stockholders present in person or by proxy and entitled to vote thereat, a
quorum being present. Unless demanded by a stockholder of the Corporation
present in person or by proxy at any meeting of the stockholders and entitled to
vote thereat, or so directed by the chairman of the meeting, the vote thereat on
any question other than the election or removal of directors need not be by
written ballot. Upon a demand of any such stockholder for a vote by written
ballot on any question or at the direction of such chairman that a vote by
written ballot be taken on any question, such vote shall be taken by written
ballot. On a vote by written ballot, each ballot shall be signed by the
stockholder voting, or by his proxy, if there be such proxy, and shall state the
number of shares voted.
Section 9. LIST OF STOCKHOLDERS. It shall be the duty of the Secretary or
other officer of the Corporation who shall have charge of its stock ledger,
either directly or through another officer of the Corporation designated by him
or through a transfer agent appointed by the Board of Directors, to prepare and
make, at least 10 days before every meeting of the stockholders, a complete list
of the stockholders entitled to vote thereat, arranged in alphabetical order,
and showing the address of each stockholder and the number of shares registered
in the name of each stockholder. Such list shall be open to the examination of
any stockholder, for any purpose germane to the meeting, during ordinary
business hours, for a period of at least 10 days before said meeting, either at
a place within the city where said meeting is to be held, which place shall be
specified in the notice of said meeting, or, if not so specified, at the place
where said meeting is to be held. The list shall also be produced and kept at
the time and place of said meeting during the whole time thereof, and may be
inspected by any stockholder of record who shall be present thereat. The stock
ledger shall be the only evidence as to who are the stockholders entitled to
examine the stock ledger, such list or the books of the Corporation, or to vote
in person or by proxy at any meeting of stockholders.
Section 10. INSPECTORS OF VOTES. At each meeting of the stockholders, the
chairman of such meeting may appoint two Inspectors of Votes to act thereat,
unless the Board of Directors shall have theretofore made such appointments.
Each Inspector of Votes so appointed shall first subscribe an oath or
affirmation
G-2
<PAGE>
faithfully to execute the duties of an Inspector of Votes at such meeting with
strict impartiality and according to the best of his ability. Such Inspectors of
Votes, if any, shall take charge of the ballots, if any, at such meeting and,
after the balloting thereat on any question, shall count the ballots cast
thereon and shall make a report in writing to the secretary of such meeting of
the results thereof. An Inspector of Votes need not be a stockholder of the
Corporation, and any officer of the Corporation may be an Inspector of Votes on
any question other than a vote for or against his election to any position with
the Corporation or on any other question in which he may be directly interested.
Section 11. ACTIONS WITHOUT A MEETING. Any action required to be taken at
any annual or special meeting of stockholders of the Corporation, or any action
which may by taken at any annual or special meeting of stockholders, may be
taken without a meeting, without prior notice, and without a vote if a consent
in writing, setting forth the action so taken, shall be signed by the holders of
outstanding stock having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereat were present and voted. Prompt notice of the taking of
the corporate action without a meeting by less than unanimous written consent
shall be given to those stockholders who have not consented in writing.
ARTICLE III
BOARD OF DIRECTORS
Section 1. POWERS. The business and affairs of the Corporation shall be
managed by its Board of Directors, which shall have and may exercise all such
powers of the Corporation and do all such lawful acts and things as are not by
statute, the Certificate of Incorporation, or these By-Laws directed or required
to be exercised or done by the stockholders.
Section 2. NUMBER, QUALIFICATION, AND TERM OF OFFICE. The number of
directors which shall constitute the whole Board of Directors shall not be less
than one (1) or more than eight (8). Within the limits above specified, the
number of directors which shall constitute the whole Board of Directors shall be
determined by resolution of the Board of Directors or by the stockholders at any
annual or special meeting or otherwise pursuant to action of the stockholders.
Directors need not be stockholders. The directors shall be elected at the annual
meeting of the stockholders, except as provided in Sections 4 and 5 of this
Article III, and each director elected shall hold office until the annual
meeting next after his election and until his successor is duly elected and
qualified, or until his death or retirement or until he resigns or is removed in
the manner hereinafter provided. Directors shall be elected by a plurality of
the votes of the shares present in person or represented by proxy and entitled
to vote on the election of directors at any annual or special meeting of
stockholders. Such election shall be by written ballot.
Section 3. RESIGNATIONS. Any director may resign at any time by giving
written notice of his resignation to the Corporation. Any such resignation shall
take effect at the time specified therein, or if the time when it shall become
effective shall not be specified therein, then it shall take effect immediately
upon its receipt by the Secretary. Unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it effective.
Section 4. REMOVAL OF DIRECTORS. Any director may be removed, either with
or without cause, at any time, by the affirmative vote by written ballot of a
majority in voting interest of the stockholders of record of the Corporation
entitled to vote, given at an annual meeting or at a special meeting of the
stockholders called for that purpose or otherwise. The vacancy in the Board of
Directors caused by any such removal shall be filled by the stockholders at such
meeting or, if not so filled, by the Board of Directors as provided in Section 5
of this Article III.
Section 5. VACANCIES. Vacancies and newly created directorships resulting
from any increase in the authorized number of directors may be filled by a
majority of the directors then in office though less than a quorum, or by a sole
remaining director, and the directors so chosen shall hold office until the
annual
G-3
<PAGE>
meeting next after their election and until their successors are elected and
qualified, unless sooner displaced. If there are no directors in office, then an
election of directors may be held in the manner provided by statute.
MEETINGS OF THE BOARD OF DIRECTORS
Section 6. PLACE OF MEETINGS. The Board of Directors of the Corporation
may hold meetings, both regular and special, either within or without the State
of Delaware.
Section 7. ANNUAL MEETINGS. The first meeting of each newly elected Board
of Directors shall be held immediately following the annual meeting of
stockholders, and no notice of such meeting to the newly elected directors shall
be necessary in order legally to constitute the meeting, provided a quorum shall
be present. In the event such meeting is not held immediately following the
annual meeting of stockholders, the meeting may be held at such time and place
as shall be specified in a notice given as hereinafter provided for special
meetings of the Board of Directors, or as shall be specified in a written waiver
signed by all of the directors.
Section 8. REGULAR MEETINGS. Regular meetings of the Board of Directors
may be held without notice at such time and at such place as shall from time to
time be determined by the Board of Directors.
Section 9. SPECIAL MEETINGS; NOTICE. Special meetings of the Board of
Directors may be called by the Chairman of the Board, the President, or the
Secretary on 24 hours' notice to each director, either personally or by
telephone or by mail, telegraph, telex, cable, wireless, or other form of
recorded communication; special meetings shall be called by the Chairman of the
Board, the President, or the Secretary in like manner and on like notice on the
written request of two directors. Notice of any such meeting need not be given
to any director, however, if waived by him in writing or by telegraph, telex,
cable, wireless, or other form of recorded communication, or if he shall be
present at such meeting.
Section 10. QUORUM AND MANNER OF ACTING. At all meetings of the Board of
Directors, a majority of the directors at the time in office (but not less than
one-third of the whole Board of Directors) shall constitute a quorum for the
transaction of business, and the act of a majority of the directors present at
any meeting at which a quorum is present shall be the act of the Board of
Directors, except as may be otherwise specifically provided by statute or by the
Certificate of Incorporation. If a quorum shall not be present at any meeting of
the Board of Directors, the directors present thereat may adjourn the meeting
from time to time, without notice other than announcement at the meeting, until
a quorum shall be present.
Section 11. REMUNERATION. Unless otherwise expressly provided by
resolution adopted by the Board of Directors, none of the directors shall, as
such, receive any stated remuneration for his services; but the Board of
Directors may at any time and from time to time by resolution provide that a
specified sum shall be paid to any director of the Corporation, either as his
annual remuneration as such director or member of any committee of the Board of
Directors or as remuneration for his attendance at each meeting of the Board of
Directors or any such committee. The Board of Directors may also likewise
provide that the Corporation shall reimburse each director for any expenses paid
by him on account of his attendance at any meeting. Nothing in this Section 11
shall be construed to preclude any director from serving the Corporation in any
other capacity and receiving remuneration therefor.
COMMITTEES OF DIRECTORS
Section 12. EXECUTIVE COMMITTEE; HOW CONSTITUTED AND POWERS. The Board of
Directors, by majority vote of the whole Board of Directors, may designate an
Executive Committee consisting of three of the directors of the Corporation.
Subject to the provisions of Section 141 of the Delaware General Corporation
Law, the Executive Committee shall have and may exercise all the powers and
authority of the Board of Directors in the management of the business and
affairs of the Corporation, and may authorize the seal
G-4
<PAGE>
of the Corporation to be affixed to all papers which may require it. The Board
of Directors shall have the power at any time, by majority vote of the whole
Board of Directors, to change the membership of the Executive Committee, to fill
all vacancies in it, or to dissolve it, either with or without cause.
Section 13. ORGANIZATION. The Chairman of the Executive Committee, to be
selected by the Board of Directors, shall act as chairman at all meetings of the
Executive Committee and the Secretary shall act as secretary thereof. In case of
the absence from any meeting of the Executive Committee of the Chairman of the
Executive Committee or the Secretary, the Executive Committee may appoint a
chairman or secretary, as the case may be, of the meeting.
Section 14. MEETINGS. Regular meetings of the Executive Committee, of
which no notice shall be necessary, may be held on such days and at such places,
within or without the State of Delaware, as shall be fixed by resolution adopted
by a majority of the Executive Committee and communicated in writing to all its
members. Special meetings of the Executive Committee shall be held whenever
called by the Chairman of the Executive Committee or a majority of the members
of the Executive Committee then in office. Notice of each special meeting of the
Executive Committee shall be given by mail, telegraph, telex, cable, wireless,
or other form of recorded communication or be delivered personally or by
telephone to each member of the Executive Committee not later than the day
before the day on which such meeting is to be held. Notice of any such meeting
need not be given to any member of the Executive Committee, however, if waived
by him in writing or by telegraph, telex, cable, wireless, or other form of
recorded communication, or if he shall be present at such meeting; and any
meeting of the Executive Committee shall be a legal meeting without any notice
thereof having been given, if all the members of the Executive Committee shall
be present thereat. Subject to the provisions of this Article III, the Executive
Committee, by resolution adopted by a majority of the whole Executive Committee,
shall fix its own rules of procedure.
Section 15. QUORUM AND MANNER OF ACTING. A majority of the Executive
Committee shall constitute a quorum for the transaction of business, and the act
of a majority of those present at a meeting thereof at which a quorum is present
shall be the act of the Executive Committee.
Section 16. OTHER COMMITTEES. The Board of Directors may, by resolution or
resolutions passed by a majority of the whole Board of Directors, designate one
or more other committees consisting of one or more directors of the Corporation,
which, to the extent provided in said resolution or resolutions, shall have and
may exercise, subject to the provisions of Section 141 of the General
Corporation Law of the State of Delaware, the Certificate of Incorporation, and
these By-Laws, the powers and authority of the Board of Directors in the
management of the business and affairs of the Corporation, and shall have the
power to authorize the seal of the Corporation to be affixed to all papers which
may require it; but no such committee shall have the power to fill vacancies in
the Board of Directors, the Executive Committee, or any other committee or in
their respective membership, to appoint or remove officers of the Corporation,
or to authorize the issuance of shares of the capital stock of the Corporation,
except that such a committee may, to the extent provided in said resolutions,
grant and authorize options and other rights with respect to the common stock of
the Corporation pursuant to and in accordance with any plan approved by the
Board of Directors. Such committee or committees shall have such name or names
as may be determined from time to time by resolution adopted by the Board of
Directors. A majority of all the members of any such committee may determine its
action and fix the time and place of its meetings and specify what notice
thereof, if any, shall be given, unless the Board of Directors shall otherwise
provide. The Board of Directors shall have power to change the members of any
such committee at any time to fill vacancies, and to discharge any such
committee, either with or without cause, at any time.
Section 17. ALTERNATE MEMBERS OF COMMITTEES. The Board of Directors may
designate one or more directors as alternate members of the Executive Committee
or any other committee, who may replace any absent or disqualified member at any
meeting of the committee, or if none be so appointed, the member or members
thereof present at any meeting and not disqualified from voting, whether or not
he or they
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constitute a quorum, may unanimously appoint another member of the Board of
Directors to act at the meeting in the place of any such absent or disqualified
member.
Section 18. MINUTES OF COMMITTEES. Each committee shall keep regular
minutes of its meetings and proceedings and report the same to the Board of
Directors at the next meeting thereof.
GENERAL
Section 19. ACTIONS WITHOUT A MEETING. Unless otherwise restricted by the
Certificate of Incorporation or these By-Laws, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting, if all members of the Board of Directors or
committee, as the case may be, consent thereto in writing and the writing or
writings are filed with the minutes of proceedings of the Board of Directors or
the committee.
Section 20. PRESENCE AT MEETINGS BY MEANS OF COMMUNICATIONS
EQUIPMENT. Members of the Board of Directors, or of any committee designated by
the Board of Directors, may participate in a meeting of the Board of Directors
or such committee by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and participation in a meeting conducted pursuant to this Section 20
shall constitute presence in person at such meeting.
ARTICLE IV
NOTICES
Section 1. TYPE OF NOTICE. Whenever, under the provisions of any
applicable statute, the Certificate of Incorporation, or these By-Laws, notice
is required to be given to any director or stockholder, it shall not be
construed to mean personal notice, but such notice may be given in writing, in
person or by mail, addressed to such director or stockholder, at his address as
it appears on the records of the Corporation, with postage thereon prepaid, and
such notice shall be deemed to be given at the time when the same shall be
deposited in the United States mail. Notice to directors may also be given in
any manner permitted by Article III hereof and shall be deemed to be given at
the time when first transmitted by the method of communication so permitted.
Section 2. WAIVER OF NOTICE. Whenever any notice is required to be given
under the provisions of any applicable statute, the Certificate of
Incorporation, or these By-Laws, a waiver thereof in writing, signed by the
person or persons entitled to said notice, whether before or after the time
stated therein, shall be deemed equivalent thereto, and transmission of a waiver
of notice by a director or stockholder by mail, telegraph, telex, cable,
wireless, or other form of recorded communication may constitute such a waiver.
Section 3. WHEN NOTICE UNNECESSARY. Whenever, under the provisions of the
Act, the Certificate of Incorporation or these Bylaws, any notice is required to
be given to any stockholder, such notice need not be given to the stockholder
if:
(a) notice of two consecutive annual meetings and all notices of meetings
held during the period between those annual meetings, if any, or
(b) all (but in no event less than two) payments (if sent by first class
mail) of distributions or interest on securities during a 12-month
period,
have been mailed to that person, addressed at his address as shown on the
records of the Corporation, and have been returned undeliverable. Any action or
meeting taken or held without notice to such a person shall have the same force
and effect as if the notice had been duly given. If such a person delivers to
the Corporation a written notice setting forth his then current address, the
requirement that notice be given to that person shall be reinstated.
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ARTICLE V
OFFICERS
Section 1. ELECTED AND APPOINTED OFFICERS. The elected officers of the
Corporation shall be a President, one or more Vice Presidents, with or without
such descriptive titles as the Board of Directors shall deem appropriate, a
Secretary, and a Treasurer, and, if the Board of Directors so elects, a Chairman
of the Board (who shall be a director) and a Controller. The Board of Directors
or the Executive Committee of the Board of Directors by resolution also may
appoint one or more Assistant Vice Presidents, Assistant Treasurers, Assistant
Secretaries, Assistant Controllers, and such other officers and agents as from
time to time may appear to be necessary or advisable in the conduct of the
affairs of the Corporation.
Section 2. TIME OF ELECTION OR APPOINTMENT. The Board of Directors at its
annual meeting shall elect or appoint, as the case may be, the officers to fill
the positions designated in or pursuant to Section 1 of this Article V. Officers
of the Corporation may also be elected or appointed, as the case may be, at any
other time.
Section 3. SALARIES OF ELECTED OFFICERS. The salaries of all elected
officers of the Corporation shall be fixed by the Board of Directors.
Section 4. TERM. Each officer of the Corporation shall hold his office
until his successor is duly elected or appointed and qualified or until his
earlier resignation or removal. Any officer may resign at any time upon written
notice to the Corporation. Any officer elected or appointed by the Board of
Directors or the Executive Committee may be removed at any time by the
affirmative vote of a majority of the whole Board of Directors. Any vacancy
occurring in any office of the Corporation by death, resignation, removal, or
otherwise may be filled by the Board of Directors or the appropriate committee
thereof.
Section 5. DUTIES OF THE CHAIRMAN OF THE BOARD. The Chairman of the Board,
if one be elected, shall be the chief executive officer of the Corporation and
shall have all of the powers and duties as are provided for the chief executive
officer of the Corporation as specified in Section 6 below, in the absence of
any person designated and elected to be the Chairman of the Board, and shall
preside when present at all meetings of the Board of Directors and at all
meetings of the stockholders. In addition, he shall advise and counsel the
President and other officers of the Corporation, and shall exercise such powers
and perform such duties as shall be assigned to or required of him from time to
time by the Board of Directors.
Section 6. DUTIES OF THE PRESIDENT. In the absence of any person
designated and elected to be the Chairman of the Board, the President shall be
the chief executive officer of the Corporation and, subject to the provisions of
these By-Laws, shall have the general supervision of the affairs of the
Corporation and shall have general and active control of all of its business. He
shall preside, when present, at all meetings of stockholders and all meetings of
the Board of Directors, except when the Chairman of the Board presides and as
may otherwise be provided by statute or by the By-Laws. The chief executive
officer shall see that all orders and resolutions of the Board of Directors and
the stockholders are carried into effect. The chief executive officer shall have
general authority to execute bonds, deeds, and contracts in the name of the
Corporation and affix the corporate seal thereto; to sign stock certificates; to
cause the employment or appointment of such employees and agents of the
Corporation as the proper conduct of operations may require, and to fix their
compensation, subject to the provisions of the By-Laws; to remove or suspend any
employee or agent who shall have been employed or appointed under his authority
or under authority of an officer subordinate to him; to suspend for cause,
pending final action by the authority which shall have elected or appointed him,
any officer subordinate to the chief executive officer; and, in general, to
exercise all powers and authority usually appertaining to the chief executive
officer of a corporation and except as otherwise provided in these By-Laws. The
President shall advise and counsel the Chairman of the Board and the officers of
the Corporation, and shall exercise such powers and perform such duties as shall
be
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assigned to or required of him from time to time by the Board of Directors and
the Chairman of the Board.
Section 7. DUTIES OF VICE PRESIDENTS. In the absence of the President or
in the event of his inability or refusal to act, the Vice President (or in the
event there be more than one Vice President, the Vice Presidents in the order
designated, or in the absence of any designation, then in the order of their
election) shall perform the duties of the President and, when so acting, shall
have all the powers of and be subject to all the restrictions upon the
President. The Vice Presidents shall perform such other duties and have such
other powers as the Board of Directors or the President may from time to time
prescribe.
Section 8. DUTIES OF ASSISTANT VICE PRESIDENTS. In the absence of a Vice
President or in the event of his inability or refusal to act, the Assistant Vice
President (or in the event there shall be more than one, the Assistant Vice
Presidents in the order designated by the Board of Directors, or in the absence
of any designation, then in the order of their appointment) shall perform the
duties and exercise the powers of that Vice President, and shall perform such
other duties and have such other powers as the Board of Directors, the
President, or the Vice President under whose supervision he is appointed may
from time to time prescribe.
Section 9. DUTIES OF THE SECRETARY. The Secretary shall attend all
meetings of the Board of Directors and all meetings of the stockholders and
record all the proceedings of the meetings of the Corporation and of the Board
of Directors in a book to be kept for that purpose and shall perform like duties
for the Executive Committee or other standing committees when required. He shall
give, or cause to be given, notice of all meetings of the stockholders and
special meetings of the Board of Directors, and shall perform such other duties
as may be prescribed by the Board of Directors or the President, under whose
supervision he shall be. He shall have custody of the corporate seal of the
Corporation, and he, or an Assistant Secretary, shall have authority to affix
the same to any instrument requiring it, and when so affixed, it may be attested
by his signature or by the signature of such Assistant Secretary. The Board of
Directors may give general authority to any other officer to affix the seal of
the Corporation and to attest the affixing by his signature. The Secretary shall
keep and account for all books, documents, papers, and records of the
Corporation, except those for which some other officer or agent is properly
accountable. He shall have authority to sign stock certificates and shall
generally perform all the duties usually appertaining to the office of the
secretary of a corporation.
Section 10. DUTIES OF ASSISTANT SECRETARIES. In the absence of the
Secretary or in the event of his inability or refusal to act, the Assistant
Secretary (or, if there shall be more than one, the Assistant Secretaries in the
order designated by the Board of Directors, or in the absence of any
designation, then in the order of their appointment) shall perform the duties
and exercise the powers of the Secretary and shall perform such other duties and
have such other powers as the Board of Directors, the President, or the
Secretary may from time to time prescribe.
Section 11. DUTIES OF THE TREASURER. The Treasurer shall have the custody
of the corporate funds and securities and shall keep full and accurate accounts
of receipts and disbursements in books belonging to the Corporation and shall
deposit all moneys and other valuable effects in the name and to the credit of
the Corporation in such depositories as may be designated by the Board of
Directors. He shall disburse the funds of the Corporation as may be ordered by
the Board of Directors, taking proper vouchers for such disbursements, and shall
render to the President and the Board of Directors, at its regular meetings or
when the Board of Directors so requires, an account of all his transactions as
Treasurer and of the financial condition of the Corporation. If required by the
Board of Directors, he shall give the Corporation a bond (which shall be renewed
every six years) in such sum and with such surety or sureties as shall be
satisfactory to the Board of Directors for the faithful performance of the
duties of his office and for the restoration to the Corporation, in case of his
death, resignation, retirement, or removal from office, of all books, papers,
vouchers, money, and other property of whatever kind in his possession or under
his control belonging to the Corporation. The Treasurer shall be under the
supervision of the Vice President in charge of finance, if
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one is so designated, and he shall perform such other duties as may be
prescribed by the Board of Directors, the President, or any such Vice President
in charge of finance.
Section 12. DUTIES OF ASSISTANT TREASURERS. The Assistant Treasurer or
Assistant Treasurers shall assist the Treasurer, and in the absence of the
Treasurer or in the event of his inability or refusal to act, the Assistant
Treasurer (or in the event there shall be more than one, the Assistant
Treasurers in the order designated by the Board of Directors, or in the absence
of any designation, then in the order of their appointment) shall perform the
duties and exercise the powers of the Treasurer and shall perform such other
duties and have such other powers as the Board of Directors, the President, or
the Treasurer may from time to time prescribe.
Section 13. DUTIES OF THE CONTROLLER. The Controller, if one is appointed,
shall have supervision of the accounting practices of the Corporation and shall
prescribe the duties and powers of any other accounting personnel of the
Corporation. He shall cause to be maintained an adequate system of financial
control through a program of budgets and interpretive reports. He shall initiate
and enforce measures and procedures whereby the business of the Corporation
shall be conducted with the maximum efficiency and economy. If required, he
shall prepare a monthly report covering the operating results of the
Corporation. The Controller shall be under the supervision of the Vice President
in charge of finance, if one is so designated, and he shall perform such other
duties as may be prescribed by the Board of Directors, the President, or any
such Vice President in charge of finance.
Section 14. DUTIES OF ASSISTANT CONTROLLERS. The Assistant Controller or
Assistant Controllers shall assist the Controller, and in the absence of the
Controller or in the event of his inability or refusal to act, the Assistant
Controller (or, if there shall be more than one, the Assistant Controllers in
the order designated by the Board of Directors, or in the absence of any
designation, then in the order of their appointment) shall perform the duties
and exercise the powers of the Controller and perform such other duties and have
such other powers as the Board of Directors, the President, or the Controller
may from time to time prescribe.
ARTICLE VI
INDEMNIFICATION
Section 1. ACTIONS OTHER THAN BY OR IN THE RIGHT OF THE CORPORATION. The
Corporation shall indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending, or completed action, suit, or
proceeding, whether civil, criminal, administrative, or investigative (other
than an action by or in the right of the Corporation), by reason of the fact
that he is or was a director, officer, employee, or agent of the Corporation, or
is or was serving at the request of the Corporation as a director, officer,
employee, or agent of another corporation, partnership, joint venture, trust, or
other enterprise (all of such persons being hereafter referred to in this
Article as a "Corporate Functionary"), against expenses (including attorneys'
fees), judgments, fines, and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit, or proceeding, if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the Corporation and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit, or proceeding by judgment, order, settlement,
or conviction, or upon a plea of nolo contendere or its equivalent, shall not,
of itself, create a presumption that the person did not act in good faith and in
a manner which he reasonably believed to be in or not opposed to the best
interests of the Corporation or, with respect to any criminal action or
proceeding, that he had reasonable cause to believe that his conduct was
unlawful.
Section 2. ACTIONS BY OR IN THE RIGHT OF THE CORPORATION. The Corporation
shall indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending, or completed action or suit by or in the right
of the Corporation to procure a judgment in its favor by reason of the fact that
he is or was a Corporate Functionary against expenses (including attorneys'
fees) actually and reasonably
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incurred by him in connection with the defense or settlement of such action or
suit, if he acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the Corporation, except that no
indemnification shall be made in respect of any claim, issue, or matter as to
which such person shall have been adjudged to be liable to the Corporation,
unless and only to the extent that the Court of Chancery or the court in which
such action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other court shall deem proper.
Section 3. DETERMINATION OF RIGHT TO INDEMNIFICATION. Any indemnification
under Sections 1 or 2 of this Article VI (unless ordered by a court) shall be
made by the Corporation only as authorized in the specific case upon a
determination that indemnification of the Corporate Functionary is proper in the
circumstances because he has met the applicable standard of conduct set forth in
Sections 1 or 2 of this Article VI. Such determination shall be made (i) by the
Board of Directors by a majority vote of a quorum consisting of directors who
were not parties to such action, suit, or proceeding, or (ii) if such a quorum
is not obtainable, or, even if obtainable if a quorum of disinterested directors
so directs, by independent legal counsel in a written opinion, or (iii) by the
stockholders.
Section 4. RIGHT TO INDEMNIFICATION. Notwithstanding the other provisions
of this Article VI, to the extent that a Corporate Functionary has been
successful on the merits or otherwise in defense of any action, suit, or
proceeding referred to in Sections 1 or 2 of this Article VI (including the
dismissal of a proceeding without prejudice or the settlement of a proceeding
without admission of liability), or in defense of any claim, issue, or matter
therein, he shall be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection therewith.
Section 5. PREPAID EXPENSES. Expenses incurred in defending a civil or
criminal action, suit, or proceeding shall be paid by the Corporation in advance
of the final disposition of such action, suit, or proceeding, upon receipt of an
undertaking by or on behalf of the Corporate Functionary to repay such amount if
it shall ultimately be determined he is not entitled to be indemnified by the
Corporation as authorized in this Article VI.
Section 6. RIGHT TO INDEMNIFICATION UPON APPLICATION; PROCEDURE UPON
APPLICATION. Any indemnification under Sections 2, 3 and 4, or any advance
under Section 5, of this Article VI shall be made promptly upon, and in any
event within 60 days after, the written request of the Corporate Functionary,
unless with respect to applications under Sections 2, 3 or 5 of this Article VI,
a determination is reasonably and promptly made by the Board of Directors by
majority vote of a quorum consisting of disinterested directors that such
Corporate Functionary acted in a manner set forth in such Sections as to justify
the Corporation in not indemnifying or making an advance of expenses to the
Corporate Functionary. If no quorum of disinterested directors is obtainable,
the Board of Directors shall promptly direct that independent legal counsel
shall decide whether the Corporate Functionary acted in a manner set forth in
such Sections as to justify the Corporation's not indemnifying or making an
advance of expenses to the Corporate Functionary. The right to indemnification
or advance of expenses granted by this Article VI shall be enforceable by the
Corporate Functionary in any court of competent jurisdiction if the Board of
Directors or independent legal counsel denies his claim, in whole or in part, or
if no disposition of such claim is made within 60 days. The expenses of the
Corporate Functionary incurred in connection with successfully establishing his
right to indemnification, in whole or in part, in any such proceeding shall also
be indemnified by the Corporation.
Section 7. OTHER RIGHTS AND REMEDIES. The indemnification and advancement
of expenses or provided by or granted pursuant to this Article VI shall not be
deemed exclusive of any other rights to which any person seeking indemnification
and advancement of expenses or may be entitled under any by-law, agreement, vote
of stockholders or disinterested directors, or otherwise, both as to action in
his official capacity and as to action in another capacity while holding such
office, and shall, unless otherwise provided
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when authorized or ratified, continue as to a person who has ceased to be a
Corporate Functionary and shall inure to the benefit of the heirs, executors,
and administrators of such a person. Any repeal or modification of these by-laws
or relevant provisions of the Delaware General Corporation Law and other
applicable law, if any, shall not affect any then existing rights of a Corporate
Functionary to indemnification or advancement of expenses.
Section 8. INSURANCE. Upon resolution passed by the Board of Directors,
the Corporation may purchase and maintain insurance on behalf of any person who
is or was a director, officer, employee, or agent of the Corporation, or is or
was serving at the request of the Corporation as a director, officer, employee,
or agent of another corporation, partnership, joint venture, trust, or other
enterprise against any liability asserted against him and incurred by him in any
such capacity, or arising out of his status as such, whether or not the
Corporation would have the power to indemnify him against such liability under
the provisions of this Article VI.
Section 9. MERGERS. For purposes of this Article VI, references to "the
Corporation" shall include, in addition to the resulting or surviving
corporation, constituent corporations (including any constituent of a
constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors, officers, employees, or agents, so that any person who is or was a
director, officer, employee, or agent of such constituent corporation or is or
was serving at the request of such constituent corporation as a director,
officer, employee, or agent of another corporation, partnership, joint venture,
trust, or other enterprise shall stand in the same position under the provisions
of this Article VI with respect to the resulting or surviving corporation as he
would have with respect to such constituent corporation if its separate
existence had continued.
Section 10. SAVINGS PROVISION. If this Article VI or any portion hereof
shall be invalidated on any ground by a court of competent jurisdiction, the
Corporation shall nevertheless indemnify each Corporate Functionary as to
expenses (including attorneys' fees), judgments, fines, and amounts paid in
settlement with respect to any action, suit, proceeding, or investigation,
whether civil, criminal, or administrative, including a grand jury proceeding or
action or suit brought by or in the right of the Corporation, to the full extent
permitted by any applicable portion of this Article VI that shall not have been
invalidated.
ARTICLE VII
CERTIFICATES REPRESENTING STOCK
Section 1. RIGHT TO CERTIFICATE. Every holder of stock in the Corporation
shall be entitled to have a certificate, signed by, or in the name of the
Corporation by, the Chairman of the Board, the President, or a Vice President
and by the Secretary or an Assistant Secretary of the Corporation, certifying
the number of shares owned by him in the Corporation. If the Corporation shall
be authorized to issue more than one class of stock or more than one series of
any class, the powers, designations, preferences, and relative, participating,
optional, or other special rights of each class of stock or series thereof and
the qualifications, limitations, or restrictions of such preferences or rights
shall be set forth in full or summarized on the face or back of the certificate
which the Corporation shall issue to represent such class or series of stock;
provided, that, except as otherwise provided in Section 202 of the General
Corporation Law of the State of Delaware, in lieu of the foregoing requirements,
there may be set forth on the face or back of the certificate which the
Corporation shall issue to represent such class or series of stock a statement
that the Corporation will furnish without charge to each stockholder who so
requests the powers, designations, preferences, and relative, participating,
optional, or other special rights of each class of stock or series thereof and
the qualifications, limitations, or restrictions of such preferences or rights.
Section 2. FACSIMILE SIGNATURES. Any of or all the signatures on the
certificate may be facsimile. In case any officer, transfer agent, or registrar
who has signed or whose facsimile signature has been placed upon a certificate
shall have ceased to be such officer, transfer agent, or registrar before such
certificate is
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issued, it may be issued by the Corporation with the same effect as if he were
such officer, transfer agent, or registrar at the date of issue.
Section 3. NEW CERTIFICATES. The Board of Directors may direct a new
certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the Corporation and alleged to have been
lost, stolen, or destroyed, upon the making of an affidavit of that fact by the
person claiming the certificate of stock to be lost, stolen, or destroyed. When
authorizing such issue of a new certificate or certificates, the Board of
Directors may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen, or destroyed certificate or
certificates, or his legal representative, to advertise the same in such manner
as it shall require or to give the Corporation a bond in such sum as it may
direct as indemnity against any claim that may be made against the Corporation
with respect to the certificate alleged to have been lost, stolen, or destroyed
or the issuance of such new certificate.
Section 4. TRANSFERS. Upon surrender to the Corporation or the transfer
agent of the Corporation of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignation, or authority to
transfer, it shall be the duty of the Corporation, subject to any proper
restrictions on transfer, to issue a new certificate to the person entitled
thereto, cancel the old certificate, and record the transaction upon its books.
Section 5. RECORD DATE. The Board of Directors may fix in advance a date,
not preceding the date on which the resolution fixing the record date is
adopted, and
(i) not more than 60 days nor less than 10 days preceding the date of any
meeting of stockholders, as a record date for the determination of the
stockholders entitled to notice of, and to vote at, any such meeting and
any adjournment thereof,
(ii) not more than 10 days after the date on which the resolution fixing the
record date is adopted, as a record date in connection with obtaining a
consent of the stockholders in writing to corporate action without a
meeting, or
(iii) not more than 60 days before the date for payment of any dividend or
distribution, or the date for the allotment of rights, or the date when
any change, or conversion or exchange of capital stock shall go into
effect, or the date on which any other lawful action shall be taken, as
the record date for determining the stockholders entitled to receive
payment of any such dividend or distribution, or to receive any such
allotment of rights, or to exercise the rights in respect of any such
change, conversion or exchange of capital stock or other lawful action
of the corporation,
and in such case such stockholders and only such stockholders as shall be
stockholders of record on the date so fixed shall be entitled to such notice of,
and to vote at, any such meeting and any adjournment thereof (provided, however,
that the Board of Directors may fix a new record date for an adjourned meeting),
or to give such consent, or to receive payment of such dividend or distribution,
or to receive such allotment of rights, or to exercise such rights, as the case
may be, notwithstanding any transfer of any stock on the books of the
corporation after any such record date fixed as aforesaid.
Section 6. REGISTERED STOCKHOLDERS. The Corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and to hold liable
for calls and assessments a person registered on its books as the owner of
shares, and shall not be bound to recognize any equitable or other claim to or
interest in such share or shares on the part of any other person, whether or not
provided by the laws of the State of Delaware.
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ARTICLE VIII
GENERAL PROVISIONS
Section 1. DIVIDENDS. Dividends upon the capital stock of the Corporation,
if any, subject to the provisions of the Certificate of Incorporation, may be
declared by the Board of Directors (but not any committee thereof) at any
regular meeting, pursuant to law. Dividends may be paid in cash, in property, or
in shares of the capital stock, subject to the provisions of the Certificate of
Incorporation.
Section 2. RESERVES. Before payment of any dividend, there may be set
aside out of any funds of the Corporation available for dividends such sum or
sums as the Board of Directors from time to time, in their absolute discretion,
thinks proper as a reserve or reserves to meet contingencies, or for equalizing
dividends, or for repairing or maintaining any property of the Corporation, or
for such other purpose as the Board of Directors shall think conducive to the
interest of the Corporation, and the Board of Directors may modify or abolish
any such reserve in the manner in which it was created.
Section 3. ANNUAL STATEMENT. The Board of Directors shall present at each
annual meeting, and at any special meeting of the stockholders when called for
by vote of the stockholders, a full and clear statement of the business and
condition of the Corporation.
Section 4. CHECKS. All checks or demands for money and promissory notes of
the Corporation shall be signed by such officer or officers or such other person
or persons as the Board of Directors may from time to time prescribe.
Section 5. FISCAL YEAR. The fiscal year of the Corporation shall be
determined by the Board of Directors.
Section 6. CORPORATE SEAL. The corporate seal shall have inscribed thereon
the name of the Corporation, the year of its organization, and the word
"Delaware." The seal may be used by causing it or a facsimile thereof to be
impressed, affixed, reproduced, or otherwise.
ARTICLE IX
AMENDMENTS
These By-Laws may be altered, amended, or repealed or new By-Laws may be
adopted by the stockholders or by the Board of Directors at any regular meeting
of the stockholders or the Board of Directors or at any special meeting of the
stockholders or the Board of Directors if notice of such alteration, amendment,
repeal, or adoption of new By-Laws be contained in the notice of such special
meeting.
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APPENDIX H
[LETTERHEAD]
March 1, 1997
MSR Exploration Ltd.
Suite 210, 500 - Main Street File No. 5323
Fort Worth, Texas
U.S.A. 76102
ATTENTION: MR. OTTO J. BUIS, CHAIRMAN OF BOARD, C.E.O.
Gentlemen:
In accordance with your authorization, Citadel Engineering Ltd. has
appraised the petroleum and natural gas reserves and prospective land holdings
owned by MSR Exploration Ltd. (referred to as the "Company" herein). This report
has been prepared for submission to the Securities Commission. The effective
date of this report is January 1, 1997. Reserves and associated economics on a
constant dollar basis, are summarized as follows:
TABLE A
TOTAL U.S. RESERVES
NET TO APPRAISED INTEREST (CONSTANT DOLLARS)
CASHFLOW IN THOUSANDS OF DOLLARS (U.S.)
<TABLE>
<CAPTION>
W.I.O. NET
---------------------- ---------------------- DISCOUNTED
GAS GAS ------------------------------------------
ROCKY MOUNTAIN REGION (4) OIL MSTB MMSCF(2) OIL MSTB MMSCF(2) UNDISC. 10% 12% 15% 20%
- ------------------------- --------- ----------- --------- ----------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Proved Producing......... 1,717 3,016 1,481 2,595 24,659 11,362 10,251 8,954 7,423
Proved Developed
(NonProducing)......... 701 7,741 587 6,608 18,920 8,456 7,513 6,396 5,060
Proved Undeveloped....... 1,511 6,390 1,298 5,492 29,324 14,237 12,653 10,722 8,340
Probable (3)............. 811 4,498 697 3,861 16,120 6,969 6,090 5,045 3,798
Land (Acres)............. (17,192) 480 480 480 480 480
PLANT REVENUE
Proved Developed
(Nonproducing)......... 846 624 590 544 478
Proved Undeveloped....... 599 432 407 372 323
Sub Total Plant.......... 1,445 1,056 997 916 801
TOTAL ROCKY MOUNTAIN..... 4,740 21,645 4,063 18,556 90,948 42,560 37,984 32,513 25,902
</TABLE>
H-1
<PAGE>
Page 2
MSR Exploration Ltd.
March 1, 1997
TABLE B
NET TO APPRAISED INTEREST (CONSTANT DOLLARS)
CASHFLOW IN THOUSANDS OF DOLLARS (U.S.)
<TABLE>
<CAPTION>
W.I.O NET
EASTERN SHELF UP. ------------------------ ------------------------ DISCOUNTED
TEXAS GULF OIL GAS OIL GAS -------------------------------
COAST (4) MSTB(1) MMSCF(2) MSTB(1) MMSCF(2) UNDISC. 10% 12% 15%
- ------------------------- ----------- ----------- ----------- ----------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Proved Producing......... 512 3,596 418 2,917 9,449 6,213 5,840 5,366
Proved Developed
(NonProducing)......... 12 -- 10 -- 100 59 54 47
Proved Undeveloped....... 130 120 108 99 1,108 421 350 266
Probable (3)............. 297 165 245 136 3,259 1,503 1,312 1,077
TOTAL PERMIAN BASIN)..... 951 3,881 781 3,152 13,916 8,196 7,556 6,756
<CAPTION>
EASTERN SHELF UP.
TEXAS GULF
COAST (4) 20%
- ------------------------- ---------
<S> <C>
Proved Producing......... 4,744
Proved Developed
(NonProducing)......... 38
Proved Undeveloped....... 167
Probable (3)............. 786
TOTAL PERMIAN BASIN)..... 5,735
</TABLE>
TABLE C
TOTAL CANADIAN RESERVES
NET TO APPRAISED INTEREST (CONSTANT DOLLARS)
CASHFLOW IN THOUSANDS OF DOLLARS (CDN.)
<TABLE>
<CAPTION>
W.I.O NET
------------------------ ------------------------ DISCOUNTED
CANADIAN OIL GAS OIL GAS -------------------------------
REGION (4) MSTB(1) MMSCF(2) MSTB(1) MMSCF(2) UNDISC. 10% 12% 15%
- ------------------------- ----------- ----------- ----------- ----------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Proved Producing......... 11 1,120 9 946 1,746 1,147 1,079 993
Proved Developed (Non-
Producing)............. 33 1,037 25 885 1,477 598 521 433
Proved Undeveloped....... 4 5,645 3 4,760 4,162 1,077 837 566
Probable (3)............. 9 155 6 129 324 119 102 82
Land (Acres)............. (1,778) 333 333 333 333
TOTAL ($CDN)............. 57 7,957 43 6,720 8,042 3,274 2,872 2,407
TOTAL (CAN) ($US) (5).... 57 7,957 43 6,720 5,898 2,401 2,106 1,765
GRAND TOTAL $(U.S.)...... 5,748 33,483 4,887 28,428 110,762 53,157 47,646 41,034
<CAPTION>
CANADIAN
REGION (4) 20%
- ------------------------- ---------
<S> <C>
Proved Producing......... 881
Proved Developed (Non-
Producing)............. 329
Proved Undeveloped....... 266
Probable (3)............. 60
Land (Acres)............. 333
TOTAL ($CDN)............. 1,869
TOTAL (CAN) ($US) (5).... 1,371
GRAND TOTAL $(U.S.)...... 33,008
</TABLE>
Notes:
(1) Oil volume and cash flow includes NGL's and condensates.
(2) Sales gas volume measured at 14.65 psia and 60 DEG. F.
(3) It is Citadel's opinion that the probable additional reserves and associated
economics herein would be subject to a weighted average risk factor of 50.0
percent. The economic and reserve values shown have been adjusted for this
50.0 percent risk.
(4) The Rocky Mountain Region encompasses Montana & North Dakota; the Permian
Basin Region includes the Wilcox Field and the Winters Capps Field, Texas,
and the Canadian Region encompasses fields in Alberta and British Columbia.
(5) The Canadian Region economic projections have been converted to $U.S.
utilizing a factor of 0.7334$U.S./1.0$Cdn.
(6) The values quoted herein do not necessarily represent fair-market-value.
Working Interest Ownership (W.I.O.) means those reserves accruing to the
Company after deduction of all working interests, but before deduction of all
overriding and lessor royalties and before Crown
H-2
<PAGE>
Page 3
MSR Exploration Ltd.
March 1, 1997
royalties. Net reserves as used herein mean those reserves accruing to the
Company after deduction of all outside working interests, overriding, freehold
and lessor royalties and Crown royalties. The net cash flow forecasts are after
direct lifting costs, normal allocated overhead and future investments, and
after State Taxes, but before income taxes. Crown royalties in the provinces of
Alberta and British Columbia, as applicable to petroleum and natural gas, as
revised from time to time, have also been utilized. The values assigned the
individual prospective acreage blocks are based upon recent land auction prices
effected in the respective areas, known local and regional geological features
and exploration activities. Accordingly, prospective land values as quoted
herein should be regarded as valid on a current basis only. In view of the fact
that the majority of the properties studied herein are on production, depletion
analysis was employed to estimate remaining reserves.
In accordance with the financial institution Regulations, prices, operating
and capital costs utilized herein were not escalated. The product prices used in
the report are summarized on Table 2. These price forecasts were based upon
product prices January 2, 1997. Political and economic uncertainties
domestically and internationally may result in prices different from those used
in the report. Operating costs are summarized on Table 3. Capital costs for
future well workovers and eventual well abandonment have been included in the
economics herein and are summarized on Table 4.
Estimates of reserves and production forecasts were prepared on the basis of
prevailing conditions, and generally accepted engineering methods. Although
these estimates are considered reasonable, future performance may vary from the
forecasts presented herein and may justify either an increase or decrease in the
reserves.
Monitoring of the producing properties indicates that measures instituted in
the past to arrest the decline rates have been successful. Indeed, almost all
the properties have reached relative stability. The North Central Cut Bank Sand
Unit continues to operate at maximum capacity with few complications. As in the
past, no unpleasant surprises are anticipated in the coming year.
All working and royalty interests and other factual data concerning land
ownership used in the preparation of this report have been accepted as
represented by the Company. Citadel Engineering Ltd. has not verified ownership
of the properties studied herein by virtue of a title search. All basic reserve
data, economic parameters, including price and cash flow projections have been
based upon the personal interpretation of Citadel Engineering Ltd. staff members
and represent their opinion. As Citadel Engineering Ltd. has not been apprised
of internal costs, economic projections do not include general and
administration costs (G&A) or capital costs other than lease related capital
expenditures. All basic data employed to derive the values quoted herein is kept
in our permanent files and will be made available to you upon request.
H-3
<PAGE>
Page 4
MSR Exploration Ltd.
March 1, 1997
It has been a pleasure to prepare this report and the opportunity to be of
service is appreciated. At such time as you wish to discuss the report in
detail, we would be pleased to do so.
Yours very truly,
CITADEL ENGINEERING LTD.
By: /s/ E.P. WEBB, P. ENG.
-----------------------------------------
Per: E.P. Webb, P. Eng.
PRESIDENT
By: /s/ P.E. DOUGLAS, C.E.T.
-----------------------------------------
Per: P.E. Douglas, C.E.T.
By: /s/ L.E. WEBB, P. ENG.
-----------------------------------------
Per: L.E. Webb, P. Eng.
H-4
<PAGE>
TABLE 2
PRODUCT PRICE SCHEDULE
JANUARY 1, 1997
MSR EXPLORATION LTD.
U.S.A. AND CANADA
A. OIL PRICING
<TABLE>
<CAPTION>
ROCKY MTN.
REGION (2) PERMIAN BASIN CANADIAN REGION NGL CONDENSATE
YEAR $(US/BBL) $(US/BBL)(3) (4) $(CDN/BBL) $CDN/BBL(5) $CDN/BBL(5)
- --------- ------------- ----------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
1997(1) 21.54 25.90 35.10 27.30 34.00
</TABLE>
Notes:
(1) Prices held constant for Securities Commission purposes.
(2) Prices quoted for the Rocky Mountain Region have been adjusted for gravity.
(3) U.S. oil prices based upon 40 DEG. API rating. Prices adjusted herein for
quality.
(4) Canadian oil price based upon D(2)S(3) rating (40 DEG. API 0.3% sulphur).
Prices adjusted herein for quality.
(5) F.O.B. Edmonton.
H-5
<PAGE>
TABLE 2
PRODUCT PRICE SCHEDULE
JANUARY 1, 1997
MSR EXPLORATION LTD.
U.S.A. AND CANADA
B. GAS PRICING
<TABLE>
<CAPTION>
ROCKY MTN. REGION (2) PERMIAN BASIN REGION (3) CDN. REGION (4)
$U.S./MSCF $U.S./MSCF $CDN/MSCF
------------------------- --------------------------- -------------------
<S> <C> <C> <C>
1997(1) 1.45 1.88 1.75
</TABLE>
Notes:
(1) Prices held constant for Securities Commission purposes.
(2) Gas price Rocky Mountain Region quoted F.O.B. Opal, Wyoming. Prices adjusted
for heat content herein.
(3) Gas price quoted for West Texas at the wellhead. Prices adjusted herein for
heat content.
(4) Gas price quoted for Aeco "C" one (1) year contract. Prices adjusted herein
for heat content.
H-6
<PAGE>
COMPANY CERTIFICATE OF QUALIFICATION
This is to certify that:
(1) Citadel Engineering Ltd. with offices located at Suite 1000, SunLife
Plaza II, 140--4th Avenue S.W., Calgary, Alberta, Canada, prepared an appraisal
report on petroleum and natural gas reserves and prospective land holdings dated
March 1, 1997 (effective date January 1, 1997) for MSR Exploration Ltd.
(2) Citadel Engineering Ltd. is a company of consulting petroleum engineers
engaged in the appraisal and supervision of petroleum and natural gas
properties.
(3) A field inspection of the Company's equipment and wells has been
conducted. Basic data utilized in the appraisal was derived from Company files,
Citadel Engineering files, applicable Regulatory Authority data systems and
contract data base systems and was personally inspected by the authors of this
report. Reserves and economic projections are based upon the author's
interpretation of the data and represents his opinion.
(4) Citadel Engineering Ltd. does not have an interest directly or
indirectly, nor do they expect to receive an interest directly or indirectly, in
any of the properties or securities owned or issued by MSR Exploration Ltd.,
their personnel, associates and/or any affiliates thereof.
(5) The properties studied in this report are located in Canada and the
U.S.A.
CITADEL ENGINEERING LTD.
By: /s/ E.P. WEBB, P. ENG.
-----------------------------------------
E.P. Webb, P. Eng.
PRESIDENT
Calgary, Alberta
January 1, 1997
H-7
<PAGE>
CERTIFICATE OF QUALIFICATION
This is to certify that:
(1) I, Edward P. Webb, was co-author of an appraisal report on petroleum and
natural gas reserves and prospective land holdings dated March 1, 1997
(effective date January 1, 1997) for MSR Exploration Ltd.
(2) I am employed by Citadel Engineering Ltd. and am located at Citadel's
offices at Suite 1000, 140--4th Avenue S.W., Calgary, Alberta, Canada.
(3) I am a Petroleum Engineer and have in excess of thirty-five (35) years
experience in Petroleum Engineering extending throughout Canada, the United
States, the United Kingdom and Europe. I am a petroleum engineering graduate
from the University of Alberta, Edmonton, Canada, and have completed
postgraduate courses in applied reservoir engineering at the University of
Calgary, Alberta, Canada. I am a registered member of the Association of
Professional Engineers in the Provinces of Alberta, British Columbia and
Saskatchewan and am a member of the Society of Petroleum Engineers of CIM. Basic
data utilized in the appraisal was personally inspected by me. Reserve and
economic projections are based upon mine and Citadel's interpretation of the
data and represents those opinions.
(4) I do not have an interest, directly or indirectly, nor do I expect to
receive an interest, directly or indirectly, in any of the properties or
securities owned or issued by MSR Exploration Ltd., their personnel, associates
and/or any affiliates thereof.
CITADEL ENGINEERING LTD.
By: /s/ E.P. WEBB, P. ENG.
-----------------------------------------
E.P. Webb, P. Eng.
PRESIDENT
Calgary, Alberta
January 1, 1997
H-8
<PAGE>
CERTIFICATE OF QUALIFICATION
This is to certify that:
(1) I, Loy E. Webb, was co-author of an appraisal report on petroleum and
natural gas reserves and prospective land holdings dated March 1, 1997
(effective date January 1, 1997) for MSR Exploration Ltd.
(2) I am employed by Citadel Engineering Ltd. and am located at Citadel's
offices at Suite 1000, SunLife Plaza II, 140--4th Avenue S.W., Calgary, Alberta,
Canada.
(3) I am a Petroleum Engineer and have in excess of eight (8) years
experience in Petroleum Engineering extending throughout Canada and the United
States. I am a petroleum engineering graduate from the University of Oklahoma,
Norman, Oklahoma, U.S.A. I am a registered professional engineer in the Province
of Alberta, and a registered professional engineer intern of the Society of
Professional Engineers in the State of Oklahoma, U.S.A. and am a member of the
Society of Petroleum Engineers of AIME. Basic data utilized in the appraisal was
personally inspected by me. Reserve and economic projections are based upon mine
and Citadel's interpretation of the data and represents those opinions.
(4) I do not have an interest, directly or indirectly, nor do I expect to
receive an interest, directly or indirectly, in any of the properties or
securities owned or issued by MSR Exploration Ltd., their personnel, associates
and/or any affiliates thereof.
CITADEL ENGINEERING LTD.
By: /s/ E.P. WEBB, P. ENG.
-----------------------------------------
E.P. Webb, P. Eng.
Calgary, Alberta
January 1, 1997
H-9
<PAGE>
CERTIFICATE OF QUALIFICATION
This is to certify that:
(1) I, Pamela E. Douglas, was co-author of an appraisal report on petroleum
and natural gas reserves and prospective land holdings dated March 1, 1997
(effective date January 1, 1997) for MSR Exploration Ltd.
(2) I am employed by Citadel Engineering Ltd. and am located at Citadel's
offices at Suite 1000, 140--4th Avenue S.W., Calgary, Alberta, Canada.
(3) I am a Petroleum Engineering Technologist and have in excess of eight
(8) years experience in Petroleum Engineering extending throughout Canada and
the United States. I am a petroleum engineering technology graduate from the
Southern Alberta Institute of Technology, Calgary, Alberta, Canada, and am a
certified member of the Alberta Society of Engineering Technologists in the
Province of Alberta. Basic data utilized in the appraisal was personally
inspected by me. Reserve and economic projections are based upon mine and
Citadel's interpretation of the data and represents those opinions.
(4) I do not have an interest, directly or indirectly, nor do I expect to
receive an interest, directly or indirectly, in any of the properties or
securities owned or issued by MSR Exploration Ltd., their personnel, associates
and/or any affiliates thereof.
CITADEL ENGINEERING LTD.
By: /s/ P.E. DOUGLAS, C.E.T.
-----------------------------------------
P.E. Douglas, C.E.T.
Calgary, Alberta
January 1, 1997
H-10
<PAGE>
[Letterhead]
March 25, 1997
MSR Exploration Ltd. File No. 5323
Suite 210, 500 - Main Street
Fort Worth, Texas
U.S.A. 76102
ATTENTION: MR. OTTO J. BUIS, CHAIRMAN OF BOARD, C.E.O.
Gentlemen:
In accordance with your authorization, Citadel Engineering Ltd. has
appraised the petroleum and natural gas reserves in the State of Montana, U.S.A
owned by Mercury Exploration Company (referred to as "the Company" herein) for
MSR Exploration Ltd. The effective date of this report is January 1, 1997.
Reserves and associated economics on a constant dollar basis, are summarized as
follows:
TABLE A
APPRAISED INTEREST (CONSTANT DOLLAR VALUES)
CASHFLOW IN THOUSANDS OF DOLLARS (U.S.)
<TABLE>
<CAPTION>
W.I.O. NET
-------------------------- -------------------------- DISCOUNTED
OIL(1)(2) OIL(1)(2) ------------------------------------------
MSTB GAS MMSCF(3) MSTB GAS MMSCF(3) UNDISC. 10% 12% 15% 20%
----------- ------------- ----------- ------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Proved Producing.... 1,947 -- 1,760 -- 18,737 10,010 9,195 8,213 7,003
Proved Developed
(NonProducing).... 3 629 2 553 670 398 366 325 271
Proved Undeveloped.. 4,020 -- 3,654 -- 28,285 11,698 10,093 8,189 5,993
Total Proved........ 5,970 629 5,416 533 47,692 22,106 19,654 16,727 13,207
Probable
Additional........ 5,197 -- 5,379 -- 42,848 12,317 10,061 7,563 4,874
GRAND TOTAL......... 11,887 629 10,795 533 90,540 34,423 29,715 24,290 18,081
</TABLE>
Notes:
(1) Oil reserves and cashflow include condensate production
(2) Oil cashflow values include revenue derived from liquids production pursuant
to the Mercury-Montana Power "Wells Agreement".
(3) Sales gas volumes measured at 60 F and 14.65 Psia.
H-11
<PAGE>
Page 2
MSR Exploration Ltd.
March 25, 1997
(4) It is Citadel's opinion that the Probable Additional reserves and related
cashflow would be subject to a 50.0 percent weighted average risk factor.
The values quoted herein have been adjusted for this 50.0 percent risk
factor.
(5) The values quoted herein represent the opinion of Citadel Engineering Ltd.
staff members and do not necessarily represent fair-market-value.
Working Interest (W.I.O.) as used herein, mean those reserves accruing to
the Company after deduction of all outside working interests; but before
deduction of lessor and overriding royalties and before State Taxes.
Net reserves used herein are net to the working interest after freehold and
gross overriding royalties. The net cashflow forecasts are after direct lifting
costs, normal allocated overhead and future investments, and after State Taxes,
but before income taxes. In view of the fact that the majority of the properties
studied herein are on production, depletion analysis was employed to estimate
remaining reserves.
The product prices used in the report are summarized on Table 2. These price
forecasts were based upon product prices effective January 3, 1997. Political
and economic uncertainties, both domestically and internationally may result in
prices different from those used in the report. Operating costs are summarized
on Table 3. Capital costs for future workovers, abandonment and lease
reclamation have also been included in the economics, and are summarized on
Table 4.
Estimates of reserves and production forecasts were prepared on the basis of
prevailing conditions, and generally accepted engineering methods. Although
these estimates are considered reasonable, future performance may vary from the
forecasts presented herein and may justify either an increase or decrease in the
reserves.
All working and royalty interests and other factual data concerning land
ownership used in the preparation of this report have been accepted as
represented by the Company. Citadel Engineering Ltd. has not verified ownership
of the properties studied herein by virtue of a title search. All basic reserve
data, economic parameters, including price and cashflow projections have been
based upon the personal interpretation of Citadel Engineering Ltd. staff members
and represents their opinion. All basic data employed to derive the values
quoted herein is kept in our permanent files and will be made available to you
upon request.
It has been a pleasure to prepare this report and the opportunity to be of
service is appreciated. At such time as you wish to discuss the report in
detail, we would be pleased to do so.
H-12
<PAGE>
Page 3
MSR Exploration Ltd.
March 25, 1997
Yours very truly,
CITADEL ENGINEERING LTD.
By: /s/ E.P. WEBB, P. ENG.
-----------------------------------------
Per: E.P. Webb, P. Eng.
PRESIDENT
By: /s/ P.E. DOUGLAS, C.E.T.
-----------------------------------------
Per: P.E. Douglas, C.E.T.
H-13
<PAGE>
TABLE 2
SUMMARY OF PRODUCT PRICES
JANUARY 1, 1997
MERCURY EXPLORATION COMPANY
<TABLE>
<CAPTION>
OIL GAS COND.
YEAR $/BBL $/MSCF $/BBL
- --------- --------- ----------- ---------
<S> <C> <C> <C>
1996 21.54 1.45 20.50
</TABLE>
Notes:
(1) Price used as quoted by CENEX (Farmers Union Central Exchange) effective
January 3, 1997. Prices adjusted herein for quality.
(2) Prices remain constant thereafter.
H-14
<PAGE>
COMPANY CERTIFICATE OF QUALIFICATION
This is to certify that:
(1) Citadel Engineering Ltd., with offices located at Suite 1000, SunLife
Plaza II, 140--4th Avenue S.W., Calgary, Alberta, Canada, prepared an appraisal
report on petroleum and natural gas reserves dated March 25, 1997 (effective
date January 1, 1997) for MSR Exploration Ltd.
(2) Citadel Engineering Ltd. is a company of consulting petroleum engineers
engaged in the appraisal and supervision of petroleum and natural gas
properties.
(3) A field inspection of the Company's equipment and wells has not been
conducted. Basic data utilized in the appraisal was derived from Company files,
Citadel Engineering files, applicable Regulatory Authority data systems and
contract data base systems and was personally inspected by the authors of this
report. Reserves and economic projections are based upon the authors'
interpretation of the data and represents their opinion.
(4) Citadel Engineering Ltd. does not have an interest, directly or
indirectly, nor do they expect to receive an interest, directly or indirectly,
in any of the properties or securities owned or issued by MSR Exploration Ltd.
or Mercury Exploration Company, their personnel, associates and/or and
affiliates thereof.
(5) The properties studied in this report are located in Montana, U.S.A.
CITADEL ENGINEERING LTD.
By: /s/ E.P. WEBB. P. ENG.
-----------------------------------------
E.P. Webb. P. Eng.
PRESIDENT
Calgary, Alberta
January 1, 1997
H-15
<PAGE>
CERTIFICATE OF QUALIFICATION
This is to certify that:
(1) I, Edward P. Webb, was co-author of an appraisal report on petroleum and
natural gas reserves dated March 25, 1997 (effective date January 1, 1997) for
MSR Exploration Ltd.
(2) I am employed by Citadel Engineering Ltd. and am located at Citadel's
offices at Suite 1000, 140--4th Avenue S.W., Calgary, Alberta, Canada.
(3) I am a Petroleum Engineer and have in excess of thirty-five (35) years
experience in Petroleum Engineering extending throughout Canada, the United
States, the United Kingdom and Europe. I am a petroleum engineering graduate
from the University of Alberta, Edmonton, Canada, and have completed
postgraduate courses in applied reservoir engineering at the University of
Calgary, Alberta, Canada. I am a registered member of the Association of
Professional Engineers in the Provinces of Alberta, British Columbia and
Saskatchewan and am a member of the Society of Petroleum Engineers of CIM. Basic
data utilized in the appraisal was personally inspected by me. Reserve and
economic projections are based upon mine and Citadel's interpretation of the
data and represents those opinions.
(4) I do not have an interest, directly or indirectly, nor do I expect to
receive an interest, directly or indirectly, in any of the properties or
securities owned or issued by MSR Exploration Ltd., or Mercury Exploration
Company, their personnel, associates and/or any affiliates thereof.
CITADEL ENGINEERING LTD.
By: /s/ E.P. WEBB. P. ENG.
-----------------------------------------
E.P. Webb. P. Eng.
PRESIDENT
Calgary, Alberta
January 1, 1997
H-16
<PAGE>
CERTIFICATE OF QUALIFICATION
This is to certify that:
(1) I, Pamela E. Douglas, was co-author of an appraisal report on petroleum
and natural gas reserves dated March 25, 1997 (effective date January 1, 1997)
for MSR Exploration Ltd.
(2) I am employed by Citadel Engineering Ltd. and am located at Citadel's
offices at Suite 1000, 140--4th Avenue S.W., Calgary, Alberta, Canada.
(3) I am a Petroleum Engineering Technologist and have in excess of eight
(8) years experience in Petroleum Engineering extending throughout Canada and
the United States. I am a petroleum engineering technology graduate from the
Southern Alberta Institute of Technology, Calgary, Alberta, Canada, and am a
certified member of the Alberta Society of Engineering Technologists in the
Province of Alberta. Basic data utilized in the appraisal was personally
inspected by me. Reserve and economic projections are based upon mine and
Citadel's interpretation of the data and represents those opinions.
(4) I do not have an interest, directly or indirectly, nor do I expect to
receive an interest, directly or indirectly, in any of the properties or
securities owned or issued by MSR Exploration Ltd., or Mercury Exploration
Company, their personnel, associates and/or any affiliates thereof.
CITADEL ENGINEERING LTD.
By: /s/ P.E. DOUGLAS, C.E.T.
-----------------------------------------
Per: P.E. Douglas, C.E.T.
Calgary, Alberta
January 1, 1997
H-17
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the DGCL permits a corporation to indemnify any of its
directors or officers who was or is a party, or is threatened to be made a party
to any third party proceeding by reason of the fact that such person is or was a
director or officer of the corporation, against expenses (including attorney's
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding, if
such person acted in good faith and in a manner such person reasonably believed
to be in or not opposed to the best interests of the corporation, and, with
respect to any criminal action or proceeding, had no reason to believe that such
person's conduct was unlawful. In a derivative action, i.e., one by or in the
right of the corporation, the corporation is permitted to indemnify directors
and officers against expenses (including attorneys' fees) actually and
reasonably incurred by them in connection with the defense or settlement of an
action or suit if they acted in good faith and in a manner that they reasonably
believed to be in or not opposed to the best interests of the corporation,
except that no indemnification shall be made if such person shall have been
adjudged liable to the corporation, unless and only to the extent that the court
in which the action or suit was brought shall determine upon application that
the defendant directors or officers are fairly and reasonably entitled to
indemnity for such expenses despite such adjudication of liability.
The Certificate of Incorporation of the Company provides that no director of
the Company shall be liable to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, except for liability (i) for
any breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174 of
the DGCL or (iv) for any transaction from which the director derived an improper
personal benefit.
The By-Laws of the Company also provide that the Company may purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against any liability
asserted against the person and incurred by the person in any such capacity, or
arising out of his status as such, whether or not the corporation would have the
power or the obligation to indemnify such person against such liability under
the provisions of the Certificate of Incorporation of the Company.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or persons controlling the
Company pursuant to the foregoing provisions, the Company has been informed that
in the opinion of the SEC such indemnification is against public policy as
expressed in the Securities Act of 1933, as amended and is therefore
unenforceable.
II-1
<PAGE>
ITEM 21. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<S> <C>
2.1+ Form of Certificate of Domestication (included as Appendix "A" to the Proxy Statement/ Prospectus).
2.2* Agreement and Plan of Merger dated as of March 26, 1997, among MSR Exploration Ltd., Mercury Montana,
Inc. and Mercury Exploration Company, as amended by Amendment No. 1 to Agreement and Plan of Merger
dated as of June 17,1997 and Amendment No. 2 to Agreement and Plan of Merger dated as of September 11,
1997 (included as Appendix "E" to the Proxy Statement/Prospectus).
3.1+ Form of Delaware Certificate of Incorporation of continued corporation (included as Appendix "B" to the
Proxy Statement/Prospectus).
3.2+ Form of Delaware Bylaws of continued corporation.
3.3+ Surviving Corporation Certificate of Incorporation (included as Appendix "F" to the Proxy
Statement/Prospectus).
3.4* Surviving Corporation Bylaws (included as Appendix "G" to the Proxy Statement/Prospectus).
4.1+ Common Stock Warrant dated January 13, 1995 issued to Banque Paribas by MSR Exploration Ltd.
4.2+ Form of Common Stock Warrants issued to Mercury Exploration Company, Frank Darden, Thomas F. Darden,
Glenn M. Darden, Anne Darden Self, Jack L. Thurber and Jeff Cook by Mercury Montana, Inc., each dated
March 7, 1997 and each having an exercise price per share of $1.25.
4.3+ Form of Common Stock Warrants issued to Mercury Exploration Company, Frank Darden, Thomas F. Darden,
Glenn M. Darden, Anne Darden Self, Jack L. Thurber and Jeff Cook by Mercury Montana, Inc., each dated
March 7, 1997 and each having an exercise price per share of $2.00.
4.4+ Form of Stock Purchase Warrant to be issued to Mercury Exploration Company at the Effective Time of the
Merger by the Surviving Corporation.
5.1* Opinion of Cantey & Hanger, L.L.P. regarding validity of shares of Surviving Corporation Common Stock
being registered for issuance in connection with the Merger.
8.1* Opinion of Thompson & Knight, P.C. regarding United States tax matters.
8.2+ Opinion of Blake, Cassels and Graydon regarding Canadian tax matters.
10.1* Form of Management Agreement to be entered into between the Surviving Corporation and Mercury
Exploration Company.
10.2+ Guarantee of Mercury Montana, Inc. in favor of NationsBank of Texas, N.A.
10.3+ 1997 Stock Option Plan of Mercury Montana, Inc.
10.4+ Employment Agreement between MSR Exploration Ltd. and Patrick M. Montalban.
10.5+ Wells Agreement.
10.6+ Purchase and Sale Agreement between Mercury Exploration Company and Supply Development Group, Inc.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<S> <C>
10.7+ Production and Delivery Agreement between Mercury Exploration Company and MCNIC Oil & Gas f/k/a Supply
Development Group, Inc.
10.8+ Conveyance of Production Payment from Mercury Exploration Company to MCNIC Oil & Gas f/k/a Supply
Development Group, Inc.
15.1* Letter from Deloitte & Touche, LLP, independent auditors, regarding interim financial information.
23.1* Consent of Deloitte & Touche, LLP, independent auditors.
23.2* Consent of Cantey & Hanger, L.L.P. (included in the opinion filed as Exhibit 5.1 to this Registration
Statement).
23.3* Consent of Thompson & Knight, P.C. (included in the opinion filed as Exhibit 8.1 to this Registration
Statement).
23.4+ Consent of Blake, Cassels & Graydon (included in the opinion filed as Exhibit 8.2 to this Registration
Statement).
23.5+ Consent of Citadel Engineering Ltd.
23.6* Consent of Rauscher Pierce Refsnes, Inc.
23.7* Consent of D. Randall Kent.
23.8* Consent of W. Yandell Rogers, III.
24.1+ Power of Attorney.
27+ Financial Data Schedule.
99.1* Form of Proxy for Special Meeting.
99.2+ Form of Proxy for Consent.
99.3+ Valuation Report of Rauscher Pierce Refsnes, Inc.
99.4+ Form of Consent (included as Appendix "D" to the Proxy Statement/Prospectus).
</TABLE>
- ------------------------
* Filed herewith.
+ Previously filed.
II-3
<PAGE>
ITEM 22. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(a) That, for purposes of determining any liability under the Securities Act
of 1933, each filing of the registrant's annual report pursuant to section 13(a)
or section 15(d) of the Securities Exchange Act of 1934 that is incorporated by
reference in the registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(c) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus
will contain the information called for by the applicable registration form with
respect to reofferings by persons who may be deemed underwriters, in addition to
the information called for by the other Items of the applicable form.
(d) That every prospectus (i) that is filed pursuant to paragraph (c)
immediately preceding, or (ii) that purports to meet the requirements of section
10(a)(3) of the Act and is used in connection with an offering of securities
subject to Rule 415, will be filed as a part of an amendment to the registration
statement and will not be used until such amendment is effective, and that, for
purposes of determining any liability under the Securities Act of 1933, each
such post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(e) To respond to requests for information that is incorporated by reference
into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this Form, within
one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of the
registration statement through the date of responding to the request.
(f) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein, that
was not the subject of and included in the registration statement when it became
effective.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 to Registration Statement on Form S-4 to be
signed on its behalf by the undersigned, thereunto duly authorized, in Fort
Worth, Texas, on September 11, 1997.
MERCURY MONTANA, INC.
BY: /S/ GLENN M. DARDEN
-----------------------------------------
Glenn M. Darden
VICE PRESIDENT, TREASURER AND SECRETARY
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
Chairman of the Board,
* Chief Executive Officer
- ------------------------------ and Director (Principal September 11, 1997
Frank Darden Executive Officer)
*
- ------------------------------ President and Director September 11, 1997
Thomas F. Darden
/s/ GLENN M. DARDEN
- ------------------------------ Vice President, Treasurer, September 11, 1997
Glenn M. Darden Secretary and Director
* Controller (Principal
- ------------------------------ Accounting and Financial September 11, 1997
Keith Wright Officer)
*By: /s/ GLENN M. DARDEN
-------------------------
Glenn M. Darden
ATTORNEY-IN-FACT
II-5
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------------
<S> <C> <C>
2.1+ Form of Certificate of Domestication (included as Appendix "A" to the Proxy
Statement/Prospectus).
2.2* Agreement and Plan of Merger dated as of March 26, 1997, among MSR Exploration Ltd., Mercury
Montana, Inc. and Mercury Exploration Company, as amended by Amendment No. 1 to Agreement and
Plan of Merger dated as of June 17,1997 and Amendment No. 2 to Agreement and Plan of Merger
dated as of September 11, 1997 (included as Appendix "E" to the Proxy Statement/Prospectus).
3.1+ Form of Delaware Certificate of Incorporation of continued corporation (included as Appendix "B"
to the Proxy Statement/Prospectus).
3.2+ Form of Delaware Bylaws of continued corporation.
3.3+ Surviving Corporation Certificate of Incorporation (included as Appendix "F" to the Proxy
Statement/Prospectus).
3.4* Surviving Corporation Bylaws (included as Appendix "G" to the Proxy Statement/ Prospectus).
4.1+ Common Stock Warrant dated January 13, 1995 issued to Banque Paribas by MSR Exploration Ltd.
4.2+ Form of Common Stock Warrants issued to Mercury Exploration Company, Frank Darden, Thomas F.
Darden, Glenn M. Darden, Anne Darden Self, Jack L. Thurber and Jeff Cook by Mercury Montana,
Inc., each dated March 7, 1997 and each having an exercise price per share of $1.25.
4.3+ Form of Common Stock Warrants issued to Mercury Exploration Company, Frank Darden, Thomas F.
Darden, Glenn M. Darden, Anne Darden Self, Jack L. Thurber and Jeff Cook by Mercury Montana,
Inc., each dated March 7, 1997 and each having an exercise price per share of $2.00.
4.4+ Form of Stock Purchase Warrant to be issued to Mercury Exploration Company at the Effective Time
of the Merger by the Surviving Corporation.
5.1* Opinion of Cantey & Hanger, L.L.P. regarding validity of shares of Surviving Corporation Common
Stock being registered for issuance in connection with the Merger.
8.1* Opinion of Thompson & Knight, P.C. regarding United States tax matters.
8.2+ Opinion of Blake, Cassels and Graydon regarding Canadian tax matters.
10.1* Form of Management Agreement to be entered into between the Surviving Corporation and Mercury
Exploration Company.
10.2+ Guarantee of Mercury Montana, Inc. in favor of NationsBank of Texas, N.A.
10.3+ 1997 Stock Option Plan of Mercury Montana, Inc.
10.4+ Employment Agreement between MSR Exploration Ltd. and Patrick M. Montalban.
10.5+ Wells Agreement.
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------------
<S> <C> <C>
10.6+ Purchase and Sale Agreement between Mercury Exploration Company and Supply Development Group,
Inc.
10.7+ Production and Delivery Agreement between Mercury Exploration Company and MCNIC Oil & Gas f/k/a
Supply Development Group, Inc.
10.8+ Conveyance of Production Payment from Mercury Exploration Company to MCNIC Oil & Gas f/k/a Supply
Development Group, Inc.
15.1* Letter of Deloitte & Touche, LLP, independent auditors, regarding interim financial information.
23.1* Consent of Deloitte & Touche, LLP, independent auditors.
23.2* Consent of Cantey & Hanger, L.L.P. (included in the opinion filed as Exhibit 5.1 to this
Registration Statement).
23.3* Consent of Thompson & Knight, P.C. (included in the opinion filed as Exhibit 8.1 to this
Registration Statement).
23.4+ Consent of Blake, Cassels & Graydon (included in the opinion filed as Exhibit 8.2 to this
Registration Statement).
23.5+ Consent of Citadel Engineering Ltd.
23.6* Consent of Rauscher Pierce Refsnes, Inc.
23.7* Consent of D. Randall Kent.
23.8* Consent of W. Yandell Rogers, III.
24.1+ Power of Attorney.
27+ Financial Data Schedule.
99.1* Form of Proxy for Special Meeting.
99.2+ Form of Proxy for Consent.
99.3+ Valuation Report of Rauscher Pierce Refsnes, Inc.
99.4+ Form of Consent (included as Appendix "D" to the Proxy Statement/Prospectus).
</TABLE>
- ------------------------
* Filed herewith.
+ Previously filed.
II-7
<PAGE>
September 11, 1997
Mercury Montana, Inc.
1619 Pennsylvania Avenue
Fort Worth, Texas 76104
Gentlemen:
We have acted as counsel to Mercury Montana, Inc., a Delaware corporation,
("Mercury") in connection with the registration of 13,777,014 shares of its
common stock, $.01 par value per share (the "Shares"), pursuant to a
Registration Statement on Form S-4 (No. 333-29783) under the Securities Act of
1933, as amended (the "Registration Statement") and in connection with the
issuance of the Shares pursuant to the Merger Agreement as therein defined.
Unless otherwise defined herein, capitalized terms used in this opinion have the
same meanings as in the Registration Statement.
Our opinion is limited in all respects to the substantive law of the State
of Texas, the federal law of the United States and the Delaware General
Corporation Law, and we assume no responsibility as to the applicability
thereto, or the effect thereon, of the laws of any other jurisdiction.
BASIS OF OPINION
As counsel to Mercury, we have examined the Registration Statement, the
Merger Agreement, Mercury's Certificate of Incorporation and all amendments
thereto, its Bylaws and all amendments thereto, and other corporate records of
Mercury and have made such other investigations as we have deemed necessary in
connection with the opinion hereinafter set forth.
ASSUMPTIONS AND QUALIFICATIONS
For purposes of this opinion we have assumed the genuineness of all
signatures on all documents, the authenticity of all documents submitted to us
as originals, the conformity to the originals of all documents submitted to us
as copies, and the
<PAGE>
Mercury Montana, Inc.
September 11, 1997
Page 2
correctness and accuracy of all facts set forth in all certificates and
documents that we have examined.
We have also assumed that at the time the Shares are issued the Merger
Agreement will have been consummated in accordance with its terms and Mercury
will have become the Surviving Corporation.
OPINION
Based upon and subject to the foregoing, it is our opinion that the Shares
to be issued have been duly authorized and will be, when the Registration
Statement has become effective and the Shares are issued in accordance with the
Merger Agreement, legally issued, fully paid and non-assessable.
This opinion is limited to the matters stated herein and no opinion is
implied or may be inferred beyond the matters expressly stated. We consent to
the filing of this opinion as an exhibit to the Registration Statement.
CANTEY & HANGER, L.L.P.
By: /s/ Sloan B. Blair
-----------------------------
Sloan B. Blair, a Partner
<PAGE>
September 11, 1997
MSR Exploration, Ltd.
500 Main Street, Suite 210
Fort Worth, Texas 76102
Mercury Montana, Inc.
1619 Pennsylvania Avenue
Fort Worth, Texas 76107
Re: Tax Summary in Registration Statement on Form S-4
Ladies and Gentlemen:
We have acted as United States counsel to MSR Exploration, Ltd. (the
"Company") and special United States tax counsel to Mercury Montana, Inc.
("Mercury") in connection with the preparation of the proxy
statement/prospectus forming a part of the registration statement on Form S-4
(collectively, the "Registration Statement"), to be filed with the Securities
and Exchange Commission (the "Commission") in connection with the Continuance
and the Merger pursuant to that certain Merger Agreement dated March 26,
1997, among the Company, Mercury and Mercury Exploration Company (the
"Agreement"). In particular, we have aided in the preparation of the
discussion in the Registration Statement under the heading "Material United
States Federal Income Tax Consequences to Shareholders and Warrant Holders of
the Continuance and the Merger" and "Material United States Federal Income
Tax Consequences to the Company of the Continuance and the Merger"
(collectively, the "Tax Summary").
In our capacity as stated above, we have been asked to render our
opinion with respect to the material United States federal income tax
considerations arising from and relating to the Continuance and the Merger
that are generally applicable to Company shareholders that are U.S. citizens
or residents, domestic corporations, domestic partnerships, and estates
subject to United States federal income tax on their income regardless of
source, and trusts, but only if a court within the United States is able to
exercise primary supervision over the administration of such trust and one or
more United States fiduciaries have the authority to control all substantial
decisions or the trust (collectively, "U.S. Shareholders"), to certain
Company shareholders that are not U.S. Shareholders ("Non-U.S. Shareholders"),
to certain holders of warrants to acquire shares of Company Common Stock and
to the Company. As the basis for the opinions expressed hereinafter, we have
examined the Agreement and the Registration Statement and have conducted such
factual and legal research as we have deemed appropriate. In rendering the
opinions expressed below, we have assumed that the Company shareholders and
warrant holders will be treated in accordance with the terms and provisions
of the Agreement and the Registration Statement and that there are no changes
in the facts, representations and assumptions stated herein or in the
Agreement or in the Registration Statement. In addition, we have assumed
with your consent that the representations
<PAGE>
MSR Exploration, Ltd.
September 11, 1997
Page 2
contained in the letters of representation from the Company dated June 17,
1997, from Mercury and Mercury Exploration Company dated June 20, 1997, and
from certain shareholders of the Company are true, correct and complete and
will continue to be true, correct and complete as of the Effective Time of
the Merger. Except as otherwise provided, capitalized terms shall have the
same meaning as set forth in the Agreement and the Registration Statement.
We hereby confirm, in all material respects, that the Tax Summary
expresses our opinions as to the matters addressed therein, based upon current
law and the assumptions stated or referred to therein. This opinion represents
and is based upon our best judgment regarding the application of United States
federal income tax laws arising under the Code, existing judicial decisions,
administrative regulations and published rulings and procedures. It is possible
that contrary positions may be taken by the Internal Revenue Service and that a
court may agree with such contrary positions. Furthermore, no assurance can
be given that future legislation, judicial or administrative changes, either
on a prospective or retroactive basis, would not adversely affect the
accuracy of the conclusions stated herein.
This opinion is furnished to you solely for use in connection with the
Registration Statement and, except as set forth below, is not to be used,
circulated, quoted or otherwise referred to for any other purpose or relied
upon by any other person for any purpose without our prior written consent.
We hereby consent to the filing of this opinion with the Commission as an
exhibit to the Registration Statement and the use of our name in the Tax
Summary. In giving this consent, we do not thereby admit that we are within
the category of persons whose consent is required under Section 7 of the
Securities Act of 1933, as amended, or the rules and regulations of the
Commission promulgated thereunder.
Very truly yours,
THOMPSON & KNIGHT, P.C.
By: /s/ R. David Wheat
------------------------------------
R. David Wheat, Shareholder
By: /s/ John R. Cohn
------------------------------------
John R. Cohn, Shareholder
<PAGE>
MANAGEMENT AGREEMENT
This Management Agreement ("Agreement") is entered into as of ____________,
1997, by and between MSR Exploration Ltd., a Delaware corporation ("MSR"), its
subsidiaries Mountain States Resources, Inc., a Colorado corporation, Monte
Grande Exploration, Inc., a Montana corporation, Gypsy-Highview Gathering System
(G-HGS), Inc., a Montana corporation and MSR Exploration, Inc., a Texas
corporation (collectively "Subsidiaries" and individually "Subsidiary"), and
Mercury Exploration Company, a Texas corporation ("Manager").
RECITALS
MSR owns, directly or indirectly, all of the outstanding stock of
Subsidiaries. MSR and Subsidiaries own various oil and gas properties and gas
gathering and compression facilities located in the States of Montana and Texas
(collectively the "Properties"). Manager owns a substantial equity interest in
MSR and has the ability and staff to manage the Properties. The purpose of this
Agreement is to provide for the management by Manager of the Properties.
AGREEMENT
Now, therefore, in consideration of the mutual covenants herein contained
and other good and valuable consideration, the parties agree as follows.
1. The term of this Agreement will be for two years, and thereafter for
successive terms of one year each unless terminated at the end of the initial or
any extended term by either party upon written notice to the other within 30
days before the end of the initial term or any extended term.
2. During the term of this Agreement, Manager will have the exclusive
right and obligation to manage the Properties, to provide all services necessary
in connection therewith and also with the operation, repair and maintenance of
equipment located thereon, to direct the acquisition of services, supplies and
equipment necessary or desirable for all of such purposes, and to control the
expenditure of funds. Manager will perform its services in a good workmanlike
manner in conformity with (a) good
<PAGE>
oil field practices, (b) all applicable laws and rules, regulations and orders
of duly constituted authorities having jurisdiction, and (c) all applicable
leases, contracts and agreements.
3. In performing its services hereunder, Manager may incur expenses in
the ordinary course of business in the name and for the account of MSR and
Subsidiaries including, but not limited to, the fees and expenses of independent
consultants. Manager may use the services of its own employees and employees of
MSR and Subsidiaries. All expenditures on behalf of MSR and Subsidiaries will
require the approval of Manager. Manager will have no financial obligation
beyond the usual compensation and expenses of its employees who perform the
services.
4. MSR and Subsidiaries will reimburse Manager for that portion of the
compensation and reasonable out-of-pocket expenses of its personnel and
independent consultants that is allocable to the time devoted by those personnel
and consultants to the services of Manager hereunder and will pay Manager in
addition management fees in an amount equal to 10% thereof, such payments to be
made monthly against invoices submitted by Manager. For services during any
calendar month payment will be made no later than the 15th day of the succeeding
month. All payments will be made in Tarrant County, Texas.
5. MSR and Subsidiaries will promptly pay when due all expenses of third
parties incurred on their behalf by Manager and will indemnify Manager against
any liability therefor.
6. NOTWITHSTANDING ANY OTHER PROVISION OF THIS AGREEMENT, MSR AND
SUBSIDIARIES RELEASE MANAGER, ITS OFFICERS, DIRECTORS, EMPLOYEES, AND AGENTS
FROM, AND AGREE TO INDEMNIFY AND HOLD HARMLESS ALL OF THEM AGAINST, ALL CLAIMS,
ACTIONS, CAUSES OF ACTION, LIABILITIES, DAMAGES, LOSSES, COSTS OR EXPENSES
(INCLUDING, WITHOUT LIMITATION, COURT COSTS AND ATTORNEYS' FEES) IN ANY MANNER
ARISING OUT OF, CONNECTED WITH, OR CAUSED BY THE PERFORMANCE BY MANAGER OF ITS
OBLIGATIONS HEREUNDER REGARDLESS OF WHETHER SUCH CLAIMS, ACTIONS, CAUSES OF
ACTION, LIABILITIES, DAMAGES, LOSSES, COSTS OR EXPENSES ARISE OUT OF OR ARE
BASED ON (i) NEGLIGENCE (INCLUDING SOLE NEGLIGENCE, SINGLE NEGLIGENCE,
2
<PAGE>
CONCURRENT NEGLIGENCE, ACTIVE OR PASSIVE NEGLIGENCE, BUT EXPRESSLY NOT INCLUDING
GROSS NEGLIGENCE) OF MANAGER OR ANY OTHER INDEMNIFIED PARTY OR (ii) STRICT
LIABILITY.
7. This Agreement shall be governed by and construed in accordance with
the laws of the State of Texas, without reference to its conflict of laws
rules. MSR and each Subsidiary agree to submit to the jurisdiction of any
state or federal court in Texas in any suit brought by Manager in connection
with this Agreement and further agree that service of process may be obtained
by certified mail at their respective addresses for service as shown by the
records of their jurisdictions of incorporation.
8. This Agreement may be amended or modified only by an instrument in
writing signed on behalf of all parties hereto.
9. This Agreement sets forth the entire agreement between MSR,
Subsidiaries and Manager with reference to the subject matter hereof.
3
<PAGE>
Executed effective as of the date first set forth above.
MSR EXPLORATION LTD.,
MOUNTAIN STATES RESOURCES, INC.,
MSR EXPLORATION, INC.
MONTE GRANDE EXPLORATION, INC., AND
GYPSY-HIGHVIEW GATHERING SYSTEMS
(G-HGS), INC.
By:
------------------------------
Otto J. Buis, Chairman
and Chief Executive Officer
MERCURY EXPLORATION COMPANY
By:
------------------------------
Glenn M. Darden,
Executive Vice President
4
<PAGE>
September 11, 1997
MSR Exploration Ltd.
500 Main Street
Fort Worth, Texas
We have made a review, in accordance with standards established by the
American Institute of Certified Public Accountants, of the unaudited interim
financial information of MSR Exploration Ltd. and subsidiaries for the
periods ended June 30, 1997 and 1996, as indicated in our report dated August
8, 1997; because we did not perform an audit, we expressed no opinion on that
information.
We are aware that our report referred to above is being used in this
Amendment No. 2 to Registration Statement No. 333-29783 of Mercury Montana, Inc.
on Form S-4 and Amendment No. 2 to Registration Statement No. 333-29769
of MSR Exploration Ltd. on Form S-4.
We also are aware that the aforementioned report, pursuant to Rule 436(c) under
the Securities Act of 1933, is not considered a part of the Registration
Statement prepared or certified by an accountant or a report prepared or
certified by an accountant within the meaning of Sections 7 and 11 of that Act.
DELOITTE & TOUCHE LLP
Fort Worth, Texas
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 2 to Registration Statement
No. 333-29783 of Mercury Montana, Inc. on Form S-4 of our report dated March
26, 1997, appearing in the Prospectus, which is part of this Registration
Statement.
We also consent to the use in this Amendment No. 2 to Registration Statement
No. 333-29783 of Mercury Montana, Inc. on Form S-4 of our report dated April
18, 1997 appearing in the Prospectus, which is part of this Registration
Statement.
We also consent to the reference to us under the headings "Selected Financial
Data" and "Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
Fort Worth, Texas
September 11,1997
<PAGE>
CONSENT OF RAUSCHER PIERCE REFSNES, INC.
We hereby consent to the use of our name, to the summarization of our
letter dated July 31, 1997 and to the other references to us in the Proxy
Statement/Joint Prospectus of MSR Exploration Ltd. and Mercury Montana, Inc.,
and to the filing of such letter as an exhibit to this Registration Statement on
Form S-4 of Mercury Montana, Inc. By giving such consent, we do not hereby
admit that we are experts with respect to any part of such Registration
Statement within the meaning of the term "expert" as used in the Securities Act
of 1933, as amended, or the rules and regulations of the Securities and
Exchange Commission promulgated thereunder, or are within the class of persons
whose consent is required thereunder.
RAUSCHER PIERCE REFSNES, INC.
Dallas, Texas
September 11, 1997
<PAGE>
September 11, 1997
I, the undersigned, hereby consent
(1) to act as a director of MSR Exploration Ltd., an Alberta, Canada
corporation, and upon effectiveness of the continuance and
domestication of such corporation into Delaware, U.S.A. (the
"Continuance"), a Delaware corporation (the "Company"), if I am
elected to serve in such capacity;
(2) to the use of my name as a person who is about to become a director of
the Company in the Registration Statement on Form S-4 of the Company
relating to the deemed issuance of shares of common stock of the
Company in connection with the Continuance;
(3) to the use of my name as a person who may be designated by the Company
to serve as a director of Mercury Montana, Inc., a Delaware
corporation ("Mercury"), upon effectiveness of the merger of the
Company with and into Mercury, in the Registration Statement on Form
S-4 of Mercury relating to the shares of common stock of Mercury to be
issued in connection with such merger; and
(4) to act as a director of Mercury Montana, Inc. if the aforementioned
merger becomes effective and I am designated to serve as a director of
such company.
/s/ D. Randall Kent
------------------------------
D. Randall Kent
<PAGE>
September 11, 1997
I, the undersigned, hereby consent
(1) to act as a director of MSR Exploration Ltd., an Alberta, Canada
corporation, and upon effectiveness of the continuance and
domestication of such corporation into Delaware, U.S.A. (the
"Continuance"), a Delaware corporation (the "Company"), if I am
elected to serve in such capacity;
(2) to the use of my name as a person who is about to become a director of
the Company in the Registration Statement on Form S-4 of the Company
relating to the deemed issuance of shares of common stock of the
Company in connection with the Continuance;
(3) to the use of my name as a person who may be designated by the Company
to serve as a director of Mercury Montana, Inc., a Delaware
corporation ("Mercury"), upon effectiveness of the merger of the
Company with and into Mercury, in the Registration Statement on Form
S-4 of Mercury relating to the shares of common stock of Mercury to be
issued in connection with such merger; and
(4) to act as a director of Mercury Montana, Inc. if the aforementioned
merger becomes effective and I am designated to serve as a director of
such company.
/s/ W. Yandell Rogers, III
-------------------------------------
W. Yandell Rogers, III
<PAGE>
MSR EXPLORATION LTD.
500 Main Street, Suite 210
Fort Worth, Texas 76102
INSTRUMENT OF PROXY
This Proxy for the Combined Annual and Special Meeting of
Shareholders of the Company to be Held on ________________, 1997
is Solicited on Behalf of Management of the Company
The Undersigned, being a Shareholder of MSR EXPLORATION LTD., hereby
appoints Otto J. Buis, the Chairman of the Board of Directors, President and
Chief Executive Officer, or failing him, Howard N. Boals, Vice President-
Finance of the Company, or failing him, _________________ as the Undersigned's
Proxy, to vote for the Undersigned at the Combined Annual and Special Meeting
of Shareholders of the Company, to be held on the ___ day of _______________,
1997 and at any adjournment thereof and to vote the shares of the capital stock
of the Company registered in the name of the Undersigned with respect to the
matters set forth in Items 1, 2 and 3 as follows:
1. For all nominees listed as follows: Otto J. Buis, Patrick M. Montalban,
Steven M. Morris, D. Randall Kent and W. Yandell Rogers, III.
----------- FOR ALL THE ----------- WITHHOLD AUTHORITY
NOMINEES TO VOTE FOR ALL
LISTED ABOVE NOMINEES LISTED ABOVE
INSTRUCTION RELATING TO 1: To withhold authority to vote for any individual
nominee, place an "X" on the line next to the nominee's name below:
Otto J. Buis Patrick M. Montalban Steven M. Morris
----- ----- -----
D. Randall Kent W. Yandell Rogers, III
----- -----
2. To approve the following special resolutions:
"BE IT RESOLVED, as special resolutions that:
(a) The Company be and is hereby authorized to apply to the Registrar
of Corporations for the Province of Alberta and the Secretary of State for
the State of Delaware for authorization to continue the Company into the
State of Delaware under section 182 of the Alberta Business Corporations
Act and section 388 of the Delaware General Corporation Law (the "DGCL") as
if the Company had been incorporated under the DGCL pursuant to section 101
of the DGCL and amendments thereto;
(b) The Certificate of Domestication and Certificate of Incorporation
of the Company under the DGCL (collectively, the "Filing Documents") in the
form presented at the Special Meeting are hereby approved;
(c) Subject to the acceptance of the Filing Documents by the Delaware
Secretary of State, the Filing Documents and form of Bylaws presented at
the Special Meeting are adopted in substitution for the existing
organizational documents of the Company; and
(d) The officers and directors of the Company are hereby authorized
and directed to do such things and to execute such documents as may be
necessary or desirable in order to effect the Continuance."
FOR AGAINST ABSTAIN
----- ----- -----
3. To transact such other business as may properly be brought before the
Special Meeting, or any adjournment thereof, without notice.
The Undersigned hereby revokes any Proxy previously given.
WITNESS my hand this _____ day of ________________, 1997.
- ------------------------------------- ----------------------------------
(Name of Shareholder - Please Print) (Shareholder's Signature)
Address:
-----------------------------
- -------------------------------------
- -------------------------------------
<PAGE>
NOTES AS TO INSTRUMENT OF PROXY
- -------------------------------------------------------------------------------
1. THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED ON ITEMS 1 AND 2 AS THE
SHAREHOLDER MAY HAVE SPECIFIED BY MARKING AN "X" IN THE SPACES PROVIDED FOR
THAT PURPOSE. IF NO CHOICE IS SPECIFIED, THE SHARES WILL BE VOTED AS IF THE
SHAREHOLDER HAD SPECIFIED AN AFFIRMATIVE VOTE.
2. IF THE SHAREHOLDER DOES NOT WANT TO APPOINT THE PERSON NAMED IN THE
INSTRUMENT OF PROXY, HE/SHE SHOULD STRIKE OUT SUCH NAME AND INSERT IN THE
BLANK SPACE PROVIDED, THE NAME OF THE PERSON HE/SHE WISHES TO ACT AS HIS/HER
PROXY. SUCH OTHER PERSON NEED NOT BE A SHAREHOLDER OF THE COMPANY.
3. THE INSTRUMENT OF PROXY WILL NOT BE VALID UNLESS IT IS DATED AND SIGNED
BY THE SHAREHOLDER OR BY HIS ATTORNEY DULY AUTHORIZED BY HIM IN WRITING, OR,
IN THE CASE OF A CORPORATION, IS EXECUTED UNDER ITS CORPORATE SEAL OR BY AN
OFFICER OR OFFICIALS OR ATTORNEY FOR THE COMPANY DULY AUTHORIZED. IF
UNDATED, THIS PROXY SHALL BE CONSIDERED TO BEAR THE DATE ON WHICH IT WAS
MAILED TO SHAREHOLDERS.
4. THE INSTRUMENT OF PROXY TO BE EFFECTIVE MUST BE RETURNED TO THE COMPANY
AT 500 MAIN STREET, SUITE 210, FORT WORTH, TEXAS, 76102 SO THAT IT CAN BE
DEPOSITED WITH THE REGISTRAR AND TRANSFER AGENT, CHASEMELLON SHAREHOLDER
SERVICES L.L.C., 2323 BRYAN STREET, DALLAS, TEXAS 75201, AT LEAST 48 HOURS
BEFORE THE TIME OF THE SPECIAL MEETING OR ADJOURNMENT THEREOF.
5. THIS PROXY IS SOLICITED ON BEHALF OF MANAGEMENT OF THE COMPANY.
6. THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED OR WITHHELD FROM
VOTING IN ACCORDANCE WITH THE INSTRUCTIONS OF THE SHAREHOLDER ON ANY BALLOT
THAT MAY BE CALLED FOR. IF THE SHAREHOLDER SPECIFIES A CHOICE WITH RESPECT
TO ANY MATTER TO BE ACTED ON, THE SHARES WILL BE VOTED ACCORDINGLY. IF THE
SHAREHOLDER FAILS TO SPECIFY THE CHOICE WITH RESPECT TO THE MATTER TO BE
ACTED UPON, THE SHARES SHALL BE VOTED IN FAVOR OR FOR THE RESOLUTION. THIS
PROXY CONFERS DISCRETIONARY AUTHORITY ON THE PERSONS NAMED HEREIN WITH
RESPECT TO AMENDMENTS OR VARIATIONS TO THE MATTERS IDENTIFIED IN THE NOTICE
OF THE COMBINED ANNUAL AND SPECIAL MEETING AND WITH RESPECT TO SUCH OTHER
MATTERS WHICH MAY PROPERLY COME BEFORE THE COMBINED ANNUAL AND SPECIAL MEETING.
AS OF ____________, 1997, THE TIME OF PRINTING THE PROXY STATEMENT/PROSPECTUS,
MANAGEMENT OF THE COMPANY KNOWS OF NO SUCH AMENDMENTS, VARIATIONS OR OTHER
MATTERS TO COME BEFORE THE COMBINED ANNUAL AND SPECIAL MEETING OTHER THAN THE
MATTERS REFERRED TO IN THE NOTICE OF THE COMBINED ANNUAL AND SPECIAL MEETING.
THIS FORM SHOULD BE READ IN CONJUNCTION WITH THE ACCOMPANYING NOTICE OF
COMBINED ANNUAL AND SPECIAL MEETING AND PROXY STATEMENT/PROSPECTUS.
