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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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SCHEDULE 14D-1
AMENDMENT NO. 2
TENDER OFFER STATEMENT PURSUANT TO SECTION 14(d)(1)
OF THE SECURITIES EXCHANGE ACT OF 1934
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SUMMIT PETROLEUM CORPORATION
(Name of Subject Company)
MRI ACQUISITION CORP.
MIDLAND RESOURCES, INC.
DEAS H. WARLEY III
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(BIDDERS)
COMMON STOCK, $.01 PAR VALUE
(TITLE OF CLASS OF SECURITIES)
866228 307
(CUSIP NUMBER OF COMMON STOCK)
DEAS H. WARLEY III, PRESIDENT
MRI ACQUISITION CORP.
16701 GREENSPOINT PARK DRIVE, SUITE 200
HOUSTON, TEXAS 77060
713-873-4828
(NAME, ADDRESS AND TELEPHONE NUMBER OF PERSON AUTHORIZED TO
RECEIVE NOTICES AND COMMUNICATIONS ON BEHALF OF BIDDERS)
COPY:
WAYNE M. WHITAKER
MICHENER, LARIMORE, SWINDLE, WHITAKER,
FLOWERS, SAWYER, REYNOLDS & CHALK, L.L.P.
301 COMMERCE STREET
3500 CITY CENTER TOWER II
FORT WORTH, TEXAS 76102
817-878-0530
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This Statement relates to a tender offer by MRI Acquisition Corp., a Texas
corporation (the "Purchaser") and a wholly owned subsidiary of Midland
Resources, Inc., a Texas corporation ("Parent"), to purchase all outstanding
shares of common stock, par value $.01 per share (the "Common Stock"or the
"Shares"), of Summit Petroleum Corporation, a Colorado corporation (the
"Company"), at a purchase price of $0.70 per Share, net to the seller in cash,
without interest, upon the terms and subject to the conditions set forth in the
Offer to Purchase, dated July 17, 1996 (the "Offer to Purchase"), and in the
related Letter of Transmittal (which, together with any amendments or
supplements thereto, collectively constitute the "Offer"), copies of which are
filed as Exhibits (a)(1) and (a)(2) hereto, respectively, and which are
incorporated herein by reference. The Purchaser has been formed by Parent in
connection with the Offer and the transactions contemplated thereby. Mr. Deas
H. Warley III, by virtue of his 37% beneficial ownership of Parent's common
stock and 37.5% of the Company's common stock is included as a co-bidder. Mr.
Warley is not directly purchasing any of the Company's common stock pursuant to
the Offer.
ITEM 1. SECURITY AND SUBJECT COMPANY.
(a) The name of the subject company is Summit Petroleum Corporation,
Inc. The address of the principal executive offices of the
Company is set forth in Section 8 "Certain Information Concerning
the Company" of the Offer to Purchase and is incorporated herein
by reference.
(b) The information set forth in the Introduction to the Offer to
Purchase is incorporated herein by reference.
(c) The information set forth in Section 6 "Price Range of Shares;
Dividends" of the Offer to Purchase is incorporated herein by
reference.
ITEM 2. IDENTITY AND BACKGROUND.
(a) through (d), (g). This Amendment Number 2 to Schedule 14D-1 is
filed by MRI Acquisition Corp., a Texas corporation, the Purchaser,
Midland Resources, Inc., a Texas corporation, the Parent and Mr.
Warley. The information set forth in the Introduction and Section 9
"Certain Information Concerning Parent and the Purchaser" of the Offer
to Purchase and in Schedule I thereto is incorporated herein by
reference.
(e) and (f). None of the Purchaser, Parent, Warley or, to the best
of their knowledge, any of the persons listed in Schedule I of the
Offer to Purchase, has during the last five years (i) been convicted
in a criminal proceeding (excluding traffic violations or similar
misdemeanors) or (ii) been a party to a civil proceeding of a judicial
or administrative body of competent jurisdiction and as a result of
such proceeding was or is subject to a judgment, decree or final order
enjoining future violations of, or prohibiting activities subject to,
federal or state securities laws or finding any violation of such
laws.
ITEM 3. PAST CONTACTS, TRANSACTIONS OR NEGOTIATIONS WITH THE SUBJECT COMPANY.
(a) PRIOR TRANSACTIONS. Effective December 17, 1993, the Company entered
into a Stock Redemption and Purchase Agreement, whereby the Company redeemed,
and certain individuals acquired, an aggregate 1,169,549 shares (adjusted for a
1-for-20 reverse stock split) of Common Stock of the Company at $0.30 per share
(adjusted for the stock split) from unrelated shareholders and former directors
of the Company. At the time of the purchase, there was no established market
price for the Company's common stock. Of the 1,169,549 shares involved in the
transaction, the Company redeemed 924,816 shares, which the Company currently
holds as treasury stock, and the remaining 244,733 shares were purchased by
individual purchasers including Mr. Warley (1,000 shares), two officers, Ms.
Disch (6,700 shares) and Ms. Crass (500 shares), two trusts created by Mr.
Warley for the benefit of his children, Sharon N. Warley (15,000 shares) and
Christopher B. Warley (15,000 shares) and Mr. Whitaker, a director (25,000
shares). Mr. Warley does not serve as trustee of the two trusts and disclaims
beneficial ownership of those 30,000 shares. The purpose for the Stock
Redemption and Purchase transaction was for investment.
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Since 1989 the firm of Michener, Larimore, Swindle, Whitaker, Flowers,
Sawyer, Reynolds & Chalk, L.L.P. (or its predecessors) have represented the
Company. Mr. Whitaker, a director of the Company is a partner in this firm. In
1993, 1994, 1995 and through July 1, 1996 the firm received $2,116.54,
$12,964.74, $10,163.63 and $2,876.45, respectively, as legal fees and
reimbursable expenses (which did not amount to 5% of such firm's total fees
during such years). The firm continues to provide routine legal representation
for the Company.
During fiscal years 1991 through 1993 the Company's auditor was Darrell M.
Dillard who received auditing and income tax advice fees of $46,890, $14,600 and
$14,000, respectively. For fiscal years 1994, 1995 and 1996 the Company paid Mr.
Dillard $14,600, $18,485, and $4,000, respectively, for income tax and other
outside services. Mr. Dillard was elected to the board of directors of the
Company ("Board") in 1995.
The Company and Midland Resources Operating Company ("MRO") entered into a
management agreement ("Management Agreement") on August 28, 1989, which was
extended and amended by agreement on December 31, 1993, which provides that MRO
will provide day-to-day management, administrative, bookkeeping and accounting
services to the Company. Legal, auditing, income tax advice and other third
party provided services are either paid directly by the Company or reimbursed to
MRO. Under the Management Agreement as extended and amended, in exchange for
MRO providing such administrative services and management of the Company's
operations, the Company paid MRO a fee equal to $10,000 per month during 1993,
$9,000 per month during 1994, and $8,500 per month during 1995. This agreement
was amended effective January 1, 1996, whereby the Company pays a fee equal to
$5,000 per month during 1996 and will pay $4,500 per month during 1997. As a
result of the Management Agreement the Company does not maintain an
administrative staff or offices separate from those of MRO or Parent.
Management fees incurred under this agreement for the years ended July 31, 1993,
1994, 1995 and through April 30, 1996 were $120,000, $113,000, $104,500, and
$62,500, respectively. This agreement may be terminated by either party at any
time. The Company separately paid MRO for those wells MRO operated under written
well operating agreements.
MRO acts as operator of a substantial portion of the Company's oil and gas
properties. For all services performed as operator of those properties, MRO is
entitled to receive the compensation and reimbursements provided the operator
under the applicable written operating agreement. However, any charges by MRO
under an operating agreement in such a situation for the use of its personnel,
properties and equipment, as well as the prices of materials sold by it, must be
at rates equal to the competitive charges of unaffiliated third parties for
comparable services or materials in the same geographic area. Further, those
services can be provided only pursuant to a written agreement which precisely
describes the services to be rendered and the compensation to be paid. The
Company's share of operation and supervision charges incurred on these
properties for the years ended July 31, 1993, 1994, 1995 and through April 30,
1996 was $13,854, $18,852, $28,106, and $16,699, respectively. Until May, 1995,
the Company leased a truck for use by its field personnel, and at times prior
thereto, the Company had leased two trucks for such purpose, from MRO. In May,
1995 the Company purchased, at trade in value, the two trucks formerly being
leased. Lease expenses incurred under these agreements for the years ended July
31, 1993, 1994 and 1995 were $13,326, $8,283, and $4,200, respectively. Terms
of the lease agreement were determined from and are less than competitive market
leases in the area.
MRO had a similar management agreement with Parent until it was acquired by
Parent on December 31, 1993. Mr. Warley is President and Chairman of Parent,
owns approximately 36.2% of its common stock and formerly owned 80% of MRO prior
to its acquisition effective December 31, 1993 by Parent. Ms. Disch is
Secretary of Parent and Ms. Crass was Assistant Secretary and Controller of
Parent until June, 1996. Although Parent is unaware of similar management
arrangements with other companies, the services provided to the Company by
Parent are those the Company provided for itself prior to the Management
Agreement . The services provided by the Management Agreement are reflected as
general and administrative costs. Following the execution of the Management
Agreement, general and administrative costs were reduced from historical levels.
As of April 30, 1996 the Company owed MRO $130,537 for management,
unreimbursed expenses, operating and development costs.
On January 22, 1991, MRO acquired the Company's debt from Texas Commerce
Bank-Midland, the successor
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to United Bank of Midland for a cash payment equal to the outstanding
principal balance plus accrued interest for a total of $100,080. The final
installment on this note was made to MRO in February, 1992.
During 1992, the Company participated with MRO and Parent in one
acquisition of oil and gas properties. The Company purchased 5%, MRO purchased
10%, and Parent purchased 85% of that acquisition upon the same price basis,
terms and conditions. For its interest, the Company paid approximately
$223,400; MRO became operator of the property.
Effective January 1, 1994 the Company purchased a 10% working interest with
an approximate 8.75% revenue interest in certain oil and gas properties in Ward
County, Texas from Parent for $85,696, Parent's actual cost adjusted for
revenues and expenses through December 31, 1993.
Effective August 1, 1994 the Company acquired 10% of Parent's working
interest in certain oil and gas properties in Coke and Howard Counties, Texas
for $201,596, Parent's actual cost adjusted for revenues and expenses from
August 1, 1994 through August 15, 1994, the closing date, and transaction costs.
Effective May 26, 1995, the Company, in participation with Parent, acquired
a five percent working interest in certain oil and gas leases and seismic
options in the Sunburst Project, Terry County, Texas, and the Latigo Project,
Hockley County, Texas in exchange for a commitment to expend certain monies in
connection with certain oil and gas leases, seismic options, conducting 3-D
geophysical surveys, interpretation of 3-D seismic data and the drilling of two
or more test wells. MRO will operate the projects. Closing occurred on July
14, 1995.
Effective July 11, 1995, the Company acquired a five percent working
interest in certain oil and gas leases and seismic options in the Lakota
Project, Hockley County, Texas in exchange for a commitment to expend certain
monies in connection with certain oil and gas leases, seismic options,
conducting 3-D geophysical surveys, interpretation of 3-D seismic data and the
drilling of one or more test wells. As of April 30, 1996 the cost to the Company
for these projects was approximately $70,000. MRO will operate the project.
Effective September 1, 1995, the Company, in participation with Parent,
acquired a four percent working interest in certain Redfish Bay Field properties
in Nuecess County, Texas at a cost of approximately $82,000, which was at the
same cost basis per working interest percent as Parent.
(b) The information set forth in the Introduction and Section 11
"Background of the Offer", Section 8 "Certain Information Concerning the
Company", Section 9 "Certain Information Concerning the Purchaser" and Section
17 "Special Factors" of the Offer to Purchase is incorporated herein by
reference.
ITEM 4. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION.
(a) and (b). The information set forth in Section 10 "Source and Amount of
Funds" of the Offer to Purchase is incorporated herein by reference.
(c) Not applicable.
ITEM 5. PURPOSE OF THE TENDER OFFER AND PLANS OR PROPOSALS OF THE BIDDER.
(a) through (g). The information set forth in the Introduction, Section 7
"Effect of the Offer on Exchange Act Registration" and Section 12 "Purpose
of the Offer and the Merger; Plans for the Company; The Merger Agreement"
of the Offer to Purchase is incorporated herein by reference.
ITEM 6. INTEREST IN SECURITIES OF THE SUBJECT COMPANY.
(a) The information set forth in the Introduction, Section 9 "Certain
Information Concerning Parent and the Purchaser" and Section 17 "Special
Factors" of the Offer to Purchase and in Schedule I thereto is incorporated
herein by
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reference.
(b) Not applicable.
ITEM 7. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH RESPECT
TO THE SUBJECT COMPANY'S SECURITIES.
The information set forth in the Introduction, Section 9 "Certain
Information Concerning Parent and the Purchaser", Section 10 "Source and Amount
of Funds", Section 12 "Purpose of the Offer and the Merger; Plans for the
Company; The Merger Agreement" and Section 17 "Special Factors" of the Offer to
Purchase is incorporated herein by reference.
ITEM 8. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED.
The information set forth in the Introduction and in Section 16 "Fees and
Expenses" of the Offer to Purchase is incorporated herein by reference.
ITEM 9. FINANCIAL STATEMENTS OF CERTAIN BIDDERS.
Not applicable.
ITEM 10. ADDITIONAL INFORMATION.
(a) The information set forth in The Offer to Purchase, the
Introduction, Section 9 "Certain information Concerning Parent and the
Purchaser" and Section 12 "Purpose of the Offer and the Merger"; "Plans for the
Company"; "The Merger Agreement" is incorporated herein by reference.
(b),(c),(d),(e). Not applicable
ITEM 11. MATERIAL TO BE FILED AS EXHIBITS.
99.(a)(1) The "Offer to Purchase"
99.(a)(2)** Letter of Transmittal
99.(a)(3)** Agreement and Plan of Merger among Midland
Resources, Inc., MRI Acquisition Corp. and the
Company
99.(a)(4)** Press Release by Midland Resources and MRI Acquisition Corp.
announcing the extension of the tender offer until September 5,
1996.
99.(a)(5) Letter to Summit Petroleum Corporation stockholders transmitting
amended Offer dated September, 1996
99.(b)(1)* Loan Agreement with First Union National Bank of North Carolina
(Filed as Exhibit 10.1 to the Company's Form 10-KSB dated
December 31, 1995.)
99.(c) 10.1* Pike Petroleum Corporation Management Agreement between Miresco,
Inc. and Pike Petroleum Corporation, The Company and Deas H.
Warley III dated August 28, 1989 (Filed as Exhibit 10.4 to the
Company's Form 8-K dated August 28, 1989.)
99.(c) 10.2* Assignment and Bill of Sale between the Company and Midland
Resources, Inc. dated August 15, 1994 (Filed as Exhibit 10.11 to
the Company's Form 8-K/A dated August 15, 1994.)
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99.(c) 10.5* Partial Assignment of Oil and Gas Leases and Bill of Sale between
the Company and Midland Resources, Inc. dated January 11, 1994
(Filed as Exhibit 10.14 to the Company's Form 10-KSB dated
July 31, 1994.)
99.(c) 10.6* Assignment between the Company and Midland Resources, Inc.
dated August 1, 1995 (Filed as Exhibit 10.6 to the Company's
Form 10-KSB dated July 31, 1995.)
99.(c) 10.7* Assignment between the Company and Midland Resources, Inc.
dated August 1, 1995 (Filed as Exhibit 10.7 to the Company's
Form 10-KSB dated July 31, 1995.)
99.(c) 10.8* Purchase and Sale Agreement, Stipulation of Interest and
Exploration and Development Agreement between the Company,
Midland Resources, Inc., Midland Resources Operating Company,
Inc., AXEM - Blackbird L.L.C. and Pathfinder Oil & Gas, Inc.
(Filed as Exhibit 10.8 to the Company's Form 10-KSB dated
July 31, 1995.)
99.1* Stock Redemption and Purchase Agreement dated December 17, 1993
(Filed as an Exhibit of the same number to the Company's
Form 8-K dated December 17, 1993.)
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* Incorporated by reference as indicated.
** Previously filed
(d),(e),(f). Not applicable
SIGNATURE. After due inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete and
correct.
MRI ACQUISITION CORP.
August 30, 1996 Deas H. Warley III, President
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Date Signature, Name and Title
MIDLAND RESOURCES, INC.
August 30, 1996 Deas H. Warley III, President
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Date Signature, Name and Title
August 30, 1996 Deas H. Warley III
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Date DEAS H. WARLEY III
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INDEX TO EXHIBITS
EXHIBIT NO. PAGE NO.
99.(a)(1) The "Offer to Purchase" 8
99.(a)(2)** Letter of Transmittal
99.(a)(3)** Agreement and Plan of Merger among Midland Resources,
Inc., MRI Acquisition Corp. and the Company
99.(a)(4)** Press Release by Midland Resources and MRI Acquisition
Corp. announcing the extension of the tender offer until
September 5, 1996.
99.(a)(5) Letter to Summit Petroleum Corporation stockholders
transmitting amended Offer dated September, 1996 38
99.(b)(1)* Loan Agreement with First Union National Bank of
North Carolina (Filed as Exhibit 10.1 to the
Company's Form 10-KSB dated December 31, 1995.)
99.(c) 10.1* Pike Petroleum Corporation Management Agreement between
Miresco, Inc. and Pike Petroleum Corporation, The
Company and Deas H. Warley III dated August 28, 1989
(Filed as Exhibit 10.4 to the Company's Form 8-K dated
August 28, 1989.)
99.(c) 10.2* Assignment and Bill of Sale between the Company
and Midland Resources, Inc. dated August 15, 1994
(Filed as Exhibit 10.11 to the Company's Form 8-K/A
dated August 15, 1994.)
99.(c) 10.5* Partial Assignment of Oil and Gas Leases and Bill of Sale
between the Company and Midland Resources, Inc. dated
January 11, 1994 (Filed as Exhibit 10.14 to the Company's
Form 10-KSB dated July 31, 1994.)
99.(c) 10.6* Assignment between the Company and Midland Resources,
Inc. dated August 1, 1995 (Filed as Exhibit 10.6 to the
Company's Form 10-KSB dated July 31, 1995.)
99.(c) 10.7* Assignment between the Company and Midland Resources,
Inc. dated August 1, 1995 (Filed as Exhibit 10.7 to the
Company's Form 10-KSB dated July 31, 1995.)
99.(c) 10.8* Purchase and Sale Agreement, Stipulation of Interest and
Exploration and Development Agreement between the Company,
Midland Resources, Inc., Midland Resources Operating
Company, Inc., AXEM - Blackbird L.L.C. and Pathfinder
Oil & Gas, Inc.(Filed as Exhibit 10.8 to the Company's
Form 10-KSB dated July 31, 1995.)
99.1* Stock Redemption and Purchase Agreement dated December 17,
1993 (Filed as an Exhibit of the same number to the
Company's Form 8-K dated December 17, 1993.)
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* Incorporated by reference as indicated.
** Previously filed
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Exhibit 99.(a)(1) Dated: September 4, 1996
AMENDED STATEMENT OF
OFFER TO PURCHASE
By MRI Acquisition Corp.
For
All Common Stock of Summit Petroleum Corporation
At
$0.70 per Share
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THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF
SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED
IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
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THIS OFFER IS CONDITIONED UPON, AMONG OTHER THINGS, THERE BEING VALIDLY TENDERED
AND NOT WITHDRAWN PRIOR TO THE EXPIRATION DATE OF THE OFFER THAT NUMBER OF
SHARES WHICH WOULD REPRESENT AT LEAST A MAJORITY OF THE OUTSTANDING SHARES ON A
FULLY DILUTED BASIS (SUCH CONDITION THE "MINIMUM CONDITION", AND SUCH SHARES THE
"MINIMUM SHARES"). SEE SECTIONS 12 AND 14.
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THE OFFER HAS BEEN EXTENDED UNTIL 12:00 MIDNIGHT, SEPTEMBER 18, 1996
(THE "EXPIRATION DATE"). AS OF AUGUST 28, 1996 PURCHASER HAS RECEIVED
VALID TENDERS OF 1,688,233 SHARES. THIS AMOUNT OF SHARES REPRESENTS
MORE THAN A MAJORITY OF THE OUTSTANDING SHARES AND UNLESS A SUFFICIENT
NUMBER ARE WITHDRAWN PRIOR TO THE EXPIRATION DATE, WILL BE ENOUGH TO
MEET THE MINIMUM CONDITION.
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INTRODUCTION. This offer (the "Offer") is being made by MRI Acquisition Corp.
("Purchaser") for all of the outstanding common stock, $0.01 par value
("Shares") of Summit Petroleum Corporation ("Company") at $0.70 per share
pursuant to the Agreement and Plan of Merger, dated as of July 17, 1996 (the
"Merger Agreement"), among Midland Resources, Inc. ("Parent"), the Purchaser and
the Company. Pursuant to the Merger Agreement, as promptly as practicable
following the later of the consummation of the Offer and the satisfaction or
waiver of certain conditions, the Purchaser will be merged with and into the
Company (the "Merger"). Following the consummation of the Merger, the Company
will be the surviving corporation (the "Surviving Corporation") and the Company
will become a wholly owned subsidiary of Parent. In the Merger, each
outstanding Share (other than Shares held by the Company or owned by Parent or
the Purchaser or any other subsidiary of either Parent or the Purchaser and
other than Shares held by stockholders, if any, who perfect their appraisal
rights under Colorado law) will be converted into the right to receive $0.70,
without interest thereon, in cash (the "Merger Consideration"). See Section 12
"Purpose of the Offer and the Merger".
SPECIAL FACTORS--SUMMARY STATEMENT. THERE ARE NUMEROUS CONFLICTS OF INTEREST
INHERENT IN THE OFFER AND MERGER. WITH RESPECT TO EVALUATING AND ADOPTING THE
MERGER AGREEMENT AND RECOMMENDING THE OFFER, THE COMPANY'S BOARD OF DIRECTORS
("BOARD") ARE NOT INDEPENDENT. THE COMPANY DID NOT ENGAGE AN INDEPENDENT
REPRESENTATIVE TO REPRESENT THE STOCKHOLDERS OF THE COMPANY THAT ARE
UNAFFILIATED WITH THE PARENT. THE COMPANY'S BOARD, FOR THE REASONS DISCUSSED
IN SECTION 17 "SPECIAL FACTORS--FAIRNESS DISCUSSION," HAS CONCLUDED THAT THE
OFFER IS FAIR DESPITE THE FACT THAT: (1) ALL OF THE DIRECTORS REVIEWING THE
TRANSACTION HAVE CONFLICTS OF INTEREST IN CONNECTION WITH THE TRANSACTION, (2)
THERE HAS BEEN NO AUCTION FOR THE COMPANY, (3) THE TRANSACTION HAS NOT BEEN
STRUCTURED TO REQUIRE THE APPROVAL OF A MAJORITY OF UNAFFILIATED COMPANY
SECURITY HOLDERS; AND (4) THE COMPANY'S BOARD HAS NOT RETAINED AN UNAFFILIATED
REPRESENTATIVE TO ACT SOLELY ON BEHALF OF SECURITY HOLDERS FOR THE PURPOSES OF
NEGOTIATING THE TERMS OF THE OFFER AND/OR PREPARING AN ANALYSIS CONCERNING THE
FAIRNESS OF THE OFFER. FOR A MORE DETAILED DISCUSSION OF SUCH CONFLICTS, SEE
SECTION 17 "SPECIAL FACTORS--
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CONFLICTS OF INTEREST". Deas H. Warley III, is the President and Chairman
of the Company and owns directly and beneficially approximately 37.50% of the
outstanding Shares and he is the President and Chairman of Purchaser and
Parent and owns directly and beneficially approximately 37% of Parent. Prior
to its acquisition by Parent for common stock in December 1993, Mr. Warley
owned 80% of Midland Resources Operating Company ("MRO") the company that has
managed the Company under a management agreement since 1989. The two other
members of the Company's board of directors are Messrs. Darrell Dillard and
Wayne Whitaker. Mr. Dillard was the Company's independent auditor for fiscal
years 1991 through 1993, was the auditor for the Parent for fiscal years 1989
through 1993, was the auditor of MRO from 1989 until 1993, has been a
director of Parent since 1994 and been a director, vice president and Chief
Financial Officer of Parent since 1995. During fiscal years 1991 through
1993 the Company paid Mr. Dillard $46,890, $14,600 and $14,000, respectively,
for auditing and related accounting and tax advice and for fiscal years 1994
through 1996 the Company paid Mr. Dillard $14,600, $18,485, and $4,000,
respectively, for income tax and related services. Mr. Dillard owns options
to acquire 50,000 Shares at $0.0625 per share that will be canceled upon a
net payment of $0.6375 per option Share pursuant to the Offer. Mr. Dillard
owns beneficially less than 1% of Parent's outstanding common stock. Mr.
Whitaker and the law firm of which he is a partner has represented the
Company since 1989, Parent since 1990, MRO since 1990, and represents
Purchaser. Mr. Whitaker has been a director of the Company since 1995 and
Parent since 1996. The Company has paid Mr. Whitaker's law firm $2,116,
$12,964, $11,859 and $7,986 during 1993, 1994, 1995 and through July 31,
1996, respectively, for legal services. Mr. Whitaker owns directly and
beneficially 120,000 Shares (4.9% of outstanding Shares) through his direct
ownership of 25,000 Shares, options to acquire 50,000 Shares at $0.0625 per
share that will be canceled upon a net payment of $0.6375 per option Share
pursuant to the Offer, and as trustee of two trusts for Mr. Warley's children
that each own 22,500 Shares. Mr. Whitaker directly and beneficially owns
less than 1% of Parent's common stock. The Purchaser, Parent and Mr. Deas H.
Warley III filed a Schedule 14D-1 with the Securities and Exchange Commission
("Commission") as co-bidders for the Shares. See Section 17 "Special Factors".
GENERAL. Under the Merger Agreement, with the mutual agreement of the Parent
and the Company, the Merger may be restructured to be a merger of the Company
into the Purchaser, in which case the Purchaser would be the Surviving
Corporation. The Purchaser also has the right to assign its rights under the
Merger Agreement to an affiliate of the Purchaser. Subject to the terms of the
Merger Agreement and the applicable rules and regulations of the Securities and
Exchange Commission (the "Commission"), the Purchaser expressly reserves the
right, in its sole discretion, at any time and from time to time, and regardless
of whether or not any of the events set forth in Section 14 "Certain Conditions
to the Offer" hereof shall have occurred or shall have been determined by the
Purchaser to have occurred, (i) to extend the period of time during which the
offer is open, and thereby delay acceptance for payment of and the payment for
any Shares, by giving oral or written notice of such extension to the Depositary
and (ii) to amend the Offer in any other respect by giving oral or written
notice of such amendment to the Depositary. Any determination or waiver at the
sole discretion of Purchaser or Parent may be equivalent to a waiver requiring
there remain at least five business days in the Offer. If by 12:00 Midnight,
Houston, Texas time, on Tuesday, September 18, 1996 (or any other date or time
then set as the Expiration Date), any or all conditions to the Offer have not
been satisfied or waived, the Purchaser reserves the right (but shall not be
obligated), subject to the terms and conditions contained in the Merger
Agreement and to the applicable rules and regulations of the Commission, to (i)
terminate the Offer and not accept for payment any Shares and return all
tendered Shares to tendering stockholders, (ii) waive all the unsatisfied
conditions and, subject to complying with the terms of the Merger Agreement and
the applicable rules and regulations of the Commission, accept for payment and
pay for all Shares validly tendered prior to the Expiration Date and not
theretofore withdrawn, (iii) extend the Offer and, subject to the right of
stockholders to withdraw Shares until the Expiration Date or at any time after
September 15, 1996, retain the Shares that have been tendered during the period
or periods for which the Offer is extended or (iv) amend the Offer. The Merger
Agreement provides that, so long as the Merger Agreement is in effect and the
Offer conditions have not been satisfied or waived, at the request of the
Company, the Purchaser will, and Parent will cause the Purchaser to, extend the
Offer for an aggregate period of not more than 20 business days (for all such
extensions) beyond the originally scheduled expiration date of the Offer.
There can be no assurance that the Purchaser will exercise its right to extend
the Offer. Any extension, waiver, amendment or termination will be followed as
promptly as practicable by public announcement thereof. In the case of an
extension, Rule 14e-1(d) under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), requires that the announcement be issued no later than
9:00 a.m., New York City time, on the next business day after the previously
scheduled Expiration Date in accordance with the public announcement
requirements of Rule 14d-4(c) under the Exchange Act, subject to applicable law
(including Rules
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14d-4(c) and 14d-6(d) under the Exchange Act, which require that any material
change in the information published, sent or given to stockholders in
connection with the Offer be promptly disseminated to stockholders in a
manner reasonably designed to inform stockholders of such change). Without
limiting the obligation of the Purchaser under such rules or the manner in
which the Purchaser may choose to make any public announcement, the Purchaser
will not have any obligation to publish, advertise or otherwise communicate
any such public announcement other than by issuing a release to the Dow Jones
News Service.
In the Merger Agreement, the Purchaser has agreed that, except as otherwise
required by law, it will not, without the prior consent of the Company, extend
the Offer if all of the Offer conditions are satisfied or waived, except that
the Purchaser may, in its sole discretion, extend the Offer at any time and from
time to time (i) if at the then scheduled expiration date of the Offer any of
the conditions to the Purchaser's obligation to accept for payment and pay for
Shares shall not have been satisfied or waived, (ii) for any period required by
any rule, regulation, interpretation or position of the Commission or its staff
applicable to the Offer, (iii) for any period required by applicable law in
connection with an increase in the consideration to be paid pursuant to the
offer, and (iv) if all Offer conditions are satisfied or waived but the number
of Shares tendered is 85% or more, but less than 90%, of the then outstanding
number of Shares, for an aggregate period of not more than 5 business days (for
all such extensions under this clause (iv)) beyond the latest expiration date
that would be permitted under clause (i), (ii) or (iii) of this sentence. In
addition, the Purchaser has agreed that, without the prior written consent of
the Company it will not (i) waive the Minimum Condition, (ii) reduce the number
of Shares subject to the Offer, (iii) reduce the price per Share to be paid
pursuant to the Offer, (iv) change the form of consideration payable in the
Offer, or (v)amend or modify any term or condition of the Offer (including the
conditions described in Section 14 "Certain Conditions to the Offer") in any
manner adverse to the holders of Shares. Any determination or waiver at the sole
discretion of Purchaser or Parent may be equivalent to a waiver requiring there
remain at least five business days in the Offer.
If the Purchaser extends the Offer, or if the Purchaser (whether before or
after its acceptance for payment of Shares) is delayed in its acceptance for
payment of, or payment for, Shares or is unable to pay for Shares pursuant to
the Offer for any reason, then, without prejudice to the Purchaser's rights
under the Offer, the Depositary may retain tendered Shares on behalf of the
Purchaser, and such Shares may not be withdrawn except to the extent tendering
stockholders are entitled to withdrawal rights as described in Section 4
"Withdrawal Rights". However, the ability of the Purchaser to delay the payment
for Shares that the Purchaser has accepted for payment is limited by Rule
14e-1(c) under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), which requires that a bidder pay the consideration offered or return the
securities deposited by or on behalf of holders of securities promptly after the
termination or withdrawal of such bidder's offer.
If the Purchaser makes a material change in the terms of the Offer or the
information concerning the Offer or waives a material condition of the Offer
(including, with the consent of the Company, the Minimum Condition), the
Purchaser will disseminate additional tender offer materials and extend the
offer to the extent required by Rules 14d-4(c), 14d-6(d) and 14e-1 under the
Exchange Act. The minimum period during which an offer must remain open
following material changes in the terms of the offer or information concerning
the offer, other than a change in price or a change in the percentage of
securities sought, will depend upon the facts and circumstances then existing,
including the relative materiality of the changed terms or information. With
respect to a change in price or a change in the percentage of securities sought,
a minimum period of 10 business days is generally required to allow for adequate
dissemination to stockholders. As used in this Offer to Purchase, "business
day" has the meaning set forth in Rule 14d-1 under the Exchange Act. Based on
the representations and warranties of the Company contained in the merger
Agreement and information provided by the Company, as of July 15, 1996, (i)
2,400,184 Shares were outstanding and (ii) 300,000 Shares were reserved for
issuance upon the exercise of outstanding employee stock options. Based on the
foregoing, the Minimum Condition will be satisfied if 1,377,094 Shares are
validly tendered and not withdrawn prior to the Expiration Date. The number of
Shares required to be validly tendered and not withdrawn in order to satisfy the
Minimum Condition will increase to the extent more than 2,700,184 Shares are
deemed to be outstanding on a fully diluted basis under the Merger agreement.
For purposes of the Merger Agreement, "on a fully diluted basis" means, as of
any date, the number of Shares outstanding, together with Shares the Company is
then required to issue pursuant to obligations outstanding at that date under
employee stock option or other benefit plans or otherwise (assuming all options
and other rights to acquire Shares are fully vested and exercisable and all
Shares issuable at any time have been
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issued), including without limitation, pursuant to the Company's stock option
plans (the "Stock Option Plans").
The consummation of the Merger is subject to the satisfaction or waiver of
a number of conditions, including, if required, the approval of the Merger by
the requisite vote or consent of the stockholders of the Company. Under the
Colorado Business Corporation Act, as amended, of the State of Colorado
("Colorado Law") and the Company's Amended Certificate of Incorporation, the
stockholder vote necessary to approve the Merger will be the affirmative vote of
the holders of at least a majority of the outstanding Shares, including Shares
held by the Purchaser and its affiliates. The officers and directors of the
Company own directly and beneficially 1,144,600 of the currently outstanding
Shares (36.4%) and have indicated their intention to tender all of such shares
pursuant to the terms of the Offer. Accordingly, the Purchaser is likely to
acquire a majority of the outstanding Shares and will have the voting power
required to approve the Merger without the affirmative vote of any other
stockholders of the Company. Furthermore, if the Purchaser acquires at least
90% of the outstanding Shares pursuant to the Offer or otherwise, the Purchaser
would be able to effect the Merger pursuant to the "short-form" merger
provisions of Colorado Law, without prior notice to, or any action by, any
other stockholder of the Company. In such event, the Purchaser intends to
effect the Merger as promptly as practicable following the purchase of Shares in
the Offer. The Merger Agreement is fully described in Section 12 "Purpose of
the Offer and the Merger".
THIS OFFER TO PURCHASE AND THE RELATED LETTER OF TRANSMITTAL CONTAIN IMPORTANT
INFORMATION THAT SHOULD BE READ CAREFULLY BEFORE ANY DECISION IS MADE WITH
RESPECT TO THE OFFER.
1. TERMS OF THE OFFER. Upon the terms and subject to the conditions of the
Offer (including, if the Offer is extended or amended, the terms and conditions
of any such extension or amendment), the Purchaser will accept for payment and
pay for all Shares validly tendered prior to the Expiration Date and not
withdrawn in accordance with Section 4 "Withdrawal Rights". The term
"Expiration Date" means 12:00 Midnight, Houston, Texas time, on Tuesday,
September 18, 1996, unless and until the Purchaser (subject to the terms of the
Merger Agreement) shall have extended the period of time during which the Offer
is open, in which event the term "Expiration Date" shall mean the latest time
and date at which the Offer, as so extended by the Purchaser, shall expire.
Consummation of the Offer is conditioned upon satisfaction of the Minimum
Condition and the other conditions set forth in Section 14 "Certain Conditions
to the Offer". Subject to the terms and conditions contained in the Merger
Agreement, the Purchaser reserves the right (but shall not be obligated) to
waive any or all such conditions. The Company is providing the Purchaser with
its list of stockholders and security position listings for the purpose of
disseminating the Offer to holders of Shares. This Offer to Purchase and the
related Letter of Transmittal and other relevant materials will be mailed by the
Purchaser to record holders of Shares and will be furnished by the Purchaser to
brokers, dealers, commercial banks, trust companies and similar persons whose
names, or the names of whose nominees, appear on the stockholder lists or, if
applicable, who are listed as participants in a clearing agency's security
position listing, for subsequent transmittal to beneficial owners of Shares.
2. ACCEPTANCE FOR PAYMENT AND PAYMENT FOR SHARES. Upon the terms and subject
to the conditions of the Offer (including, if the Offer is extended or amended,
the terms and conditions of any such extension or amendment), the Purchaser will
accept for payment and will pay for all Shares validly tendered prior to the
Expiration Date, and not properly withdrawn in accordance with Section 4
"Withdrawal Rights", promptly after the Expiration Date. Any determination
concerning the satisfaction or waiver of such terms and conditions will be
within the sole discretion of the Purchaser, and such determination will be
final and binding on all tendering stockholders. Any determination or waiver at
the sole discretion of Purchaser or Parent may be equivalent to a waiver
requiring there remain at least five business days in the Offer. See Section
1 "Terms of the Offer" and Section 14 "Certain Conditions to the Offer". The
Purchaser expressly reserves the right, in its sole discretion, to delay
acceptance for payment of, or payment for, Shares in order to comply in whole or
in part with any applicable law. Any such delays will be effected in compliance
with Rule 14e-1(c) under the Exchange Act (relating to the Purchaser's
obligation to pay for or return tendered Shares promptly after the termination
or withdrawal of the Offer). In all cases, payment for Shares accepted for
payment pursuant to the Offer will be made only after timely receipt by the
Depositary of (i) certificates for such Shares (ii) a Letter of Transmittal (or
facsimile thereof) properly completed and duly executed, with any required
signature guarantees and (iii) any other documents required by the Letter of
Transmittal. The per Share consideration paid to any
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stockholder pursuant to the Offer will be the highest per Share consideration
paid to any other stockholder pursuant to the Offer.
For purposes of the Offer, the Purchaser will be deemed to have accepted
for payment, and thereby purchased, Shares properly tendered to the Purchaser
and not withdrawn as, if and when the Purchaser gives oral or written notice to
the Depositary of the Purchaser's acceptance for payment of such Shares pursuant
to the Offer. Upon the terms and subject to the conditions of the Offer,
payment for Shares accepted for payment pursuant to the Offer will be made by
deposit of the purchase price therefor with the Depositary, which will act as
agent for tendering stockholders for the purpose of receiving payment from the
Purchaser and transmitting payment to tendering stockholders.
UNDER NO CIRCUMSTANCES WILL INTEREST BE PAID ON THE PURCHASE PRICE OF THE SHARES
TO BE PAID BY THE PURCHASER, REGARDLESS OF ANY EXTENSION OF THE OFFER OR ANY
DELAY IN MAKING SUCH PAYMENT.
If the Purchaser is delayed in its acceptance for payment of, or payment
for, Shares or is unable to accept for payment or pay for Shares pursuant to the
Offer for any reason, then, without prejudice to the Purchaser's rights under
the Offer (but subject to compliance with Rule 14e-1(c) under the Exchange Act,
which requires that a tender offeror pay the consideration offered or return the
tendered securities promptly after the termination or withdrawal of a tender
offer), the Depositary may, nevertheless, on behalf of the Purchaser, retain
tendered Shares, and any such Shares may not be withdrawn except to the extent
tendering stockholders are entitled to exercise, and duly exercise, withdrawal
rights as described in Section 4 "Withdrawal Rights".
If any tendered Shares are not purchased pursuant to the Offer because of
an invalid tender or otherwise, certificates for any such Shares will be
returned, without expense to the tendering stockholder as promptly as
practicable after the expiration or termination of the Offer.
The Purchaser reserves the right to transfer or assign, in whole or from
time to time in part, to any of its affiliates (including Parent), the right to
purchase Shares tendered pursuant to the Offer, but any such transfer or
assignment will not relieve the Purchaser of its obligations under the Offer and
will in no way prejudice the rights of tendering stockholders to receive payment
for Shares validly tendered and accepted for payment pursuant to the Offer.
3. PROCEDURE FOR TENDERING SHARES.
VALID TENDER. For Shares to be validly tendered pursuant to the Offer, a
properly completed and duly executed Letter of Transmittal (or a manually signed
facsimile thereof), together with any required signature guarantees, and any
other documents required by the Letter of Transmittal, must be received by the
Depositary at its address set forth on the back cover of this Offer to Purchase
prior to the Expiration Date. In addition, either (i) certificates for tendered
Shares must be received by the Depositary along with the Letter of Transmittal
at one of such addresses, in each case prior to the Expiration Date, or (ii) the
tendering stockholder must comply with the guaranteed delivery procedure set
forth below.
THE METHOD OF DELIVERY OF SHARE CERTIFICATES, THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS, IS AT THE ELECTION AND RISK OF THE TENDERING
STOCKHOLDER. SHARES WILL BE DEEMED DELIVERED ONLY WHEN ACTUALLY RECEIVED BY THE
DEPOSITARY. IF DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT
REQUESTED, PROPERLY INSURED, IS RECOMMENDED. IN ALL CASES, SUFFICIENT TIME
SHOULD BE ALLOWED TO ENSURE TIMELY DELIVERY.
SIGNATURE GUARANTEES. No signature guarantee is required on the Letter of
Transmittal if (i) the Letter of Transmittal is signed by the registered holder
of Shares tendered therewith and such registered holder has not completed either
the box entitled "Special Delivery Instructions" or the box entitled "Special
Payment Instructions" on the Letter of Transmittal or (ii) such Shares are
tendered for the account of a bank, broker, dealer, credit union, savings
association or other entity that is a member in good standing of a recognized
Medallion Program approved by The Securities Transfer
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Association, Inc. (an "Eligible Institution"). In all other cases, all
signatures on the Letter of Transmittal must be guaranteed by an Eligible
Institution. See Instructions 1 and 5 to the Letter of Transmittal. If the
certificates for Shares are registered in the name of a person other than the
signer of the Letter of Transmittal, or if payment is to be made or
certificates for Shares not tendered or not accepted for payment are to be
issued to a person other than the registered holder of the certificates
surrendered, the tendered certificates must be endorsed or accompanied by
appropriate stock powers, in either case signed exactly as the name or names
of the registered holders or owners appear on the certificates, with the
signatures on the certificates or stock powers guaranteed as described above.
See Instruction 5 to the Letter of Transmittal.
GUARANTEED DELIVERY. If a stockholder desires to tender Shares pursuant to the
Offer and such stockholder's certificates for Shares are not immediately
available or time will not permit all required documents to reach the Depositary
prior to the Expiration Date, such stockholder's tender may be effected if all
the following conditions are met: (1) such tender is made by or through an
Eligible Institution; (2) a properly completed and duly executed Notice of
Guaranteed Delivery, substantially in the form provided by the Purchaser
herewith, is received by the Depositary as provided below, prior to the
Expiration Date; and (3) the certificates for all tendered Shares, in proper
form for transfer, together with a properly completed and duly executed Letter
of Transmittal (or a manually signed facsimile thereof), with any required
signature guarantees and any other documents required by the Letter of
Transmittal, are received by the Depositary within three New York Stock
Exchange, Inc. ("NYSE") trading days after the date of execution of such Notice
of Guaranteed Delivery. The Notice of Guaranteed Delivery may be delivered by
hand to the Depositary or transmitted by telegram, facsimile transmission or
mail to the Depositary and must include a signature guarantee by an Eligible
Institution in the form set forth in such Notice of Guaranteed Delivery.
Notwithstanding any other provision hereof, payment for Shares accepted for
payment pursuant to the Offer will in all cases be made only after timely
receipt by the Depositary of (i) certificates for the Shares, (ii) a properly
completed and duly executed Letter of Transmittal (or a manually signed
facsimile thereof), and (iii) any other documents required by the Letter of
Transmittal. Accordingly, tendering stockholders may be paid at different times
depending upon when certificates for Shares are actually received by the
Depositary.
UNDER NO CIRCUMSTANCES WILL INTEREST BE PAID ON THE PURCHASE PRICE OF THE SHARES
TO BE PAID BY THE PURCHASER, REGARDLESS OF ANY EXTENSION OF THE OFFER OR ANY
DELAY IN MAKING SUCH PAYMENT.
The valid tender of Shares pursuant to one of the procedures described
above will constitute a binding agreement between the tendering stockholder and
the Purchaser upon the terms and subject to the conditions of the Offer.
BACKUP WITHHOLDING. Payments in connection with the Offer or the Merger maybe
subject to "backup withholding" at a rate of 31%. Backup withholding generally
applies if the stockholder (a) fails to furnish his social security number, (b)
furnishes an incorrect taxpayer identification number ("TIN"), (c) fails to
properly include a reportable interest or dividend payment on his federal income
tax return, or (d) under certain circumstances, fails to provided a certified
statement, signed under penalties of perjury, that the TIN provided is his
correct number and that he is not subject to backup withholding. Backup
withholding is not an additional tax but merely an advance payment, which may be
refunded to the extent it results in an overpayment of tax. Certain persons
generally are entitled to exemption from backup withholding, including
corporations and financial institutions. Certain penalties apply for failure to
furnish correct information and for failure to include reportable payments in
income. Each stockholder should consult with his own tax advisor as to his
qualification for exemption from backup withholding and the procedure for
obtaining such exemption. Tendering stockholders may be able to prevent backup
withholding by completing the Substitute Form W-9 included in the appropriate
Letter of Transmittal. All stockholders surrendering Shares pursuant to the
Offer should complete and sign the main signature form and the Substitute Form
W-9 included as part of the Letter of Transmittal to provide the information and
certification necessary to avoid backup withholding (unless an applicable
exemption exists and is proved in a manner satisfactory to the Purchaser and the
Depositary). Noncorporate foreign stockholders should complete and sign the
main signature form and a Form W-8, Certificate of Foreign Status, a copy of
which may be obtained from the Depositary, in order to avoid backup withholding.
See Instruction 10 to the Letter of Transmittal.
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APPOINTMENT. By executing the Letter of Transmittal, the tendering stockholder
will irrevocably appoint designees of the Purchaser as such stockholder's
attorneys-in-fact and proxies in the manner set forth in the Letter of
Transmittal, each with full power of substitution, to the full extent of such
stockholder's rights with respect to the Shares tendered by such stockholder and
accepted for payment by the Purchaser and with respect to any and all other
Shares or other securities or rights issued or issuable in respect of such
Shares on or after July 18, 1996. All such proxies shall be considered coupled
with an interest in the tendered Shares. Such appointment will be effective
when, and only to the extent that, the Purchaser accepts for payment Shares
tendered by such stockholder as provided herein. Upon such acceptance for
payment, all prior powers of attorney and proxies given by such stockholder with
respect to such Shares or other securities or rights will, without further
action, be revoked and no subsequent powers of attorney and proxies may be given
(and, if given, will not be deemed effective). The designees of the Purchaser
will thereby be empowered to exercise all voting and other rights with respect
to such Shares or other securities or rights in respect of any annual, special
or adjourned meeting of the Company's stockholders, or otherwise, as they in
their sole discretion deem proper. The Purchaser reserves the right to require
that, in order for Shares to be deemed validly tendered, immediately upon the
Purchaser's acceptance for payment of such Shares, the Purchaser must be able to
exercise full voting and other rights with respect to such Shares and other
securities or rights, including voting at any meeting of stockholders then
scheduled.
DETERMINATION OF VALIDITY. All questions as to the validity, form, eligibility
(including time of receipt) and acceptance for payment of any tender of Shares
will be determined by the Purchaser, in its sole discretion, which determination
will be final and binding. The Purchaser reserves the absolute right to reject
any or all tenders determined by it not to be in proper form or the acceptance
for payment of or payment for which may, in the opinion of the Purchaser's
counsel, be unlawful. The Purchaser also reserves the absolute right, in its
sole discretion, subject to the terms and conditions of the Merger Agreement, to
waive any of the conditions of the Offer or any defect or irregularity in any
tender with respect to any particular Shares, whether or not similar defects or
irregularities are waived in the case of other Shares. Any determination or
waiver at the sole discretion of Purchaser or Parent may be equivalent to a
waiver requiring there remain at least five business days in the Offer. No
tender of Shares will be deemed to have been validly made until all defects or
irregularities relating thereto have been cured or waived. None of Parent, the
Purchaser, the Depositary, or any other person will be under any duty to give
notification of any defects or irregularities in tenders or incur any liability
for failure to give any such notification. The Purchaser's interpretation of
the terms and conditions of the Offer (including the Letter of Transmittal and
the instructions thereto) will be final and binding.
4. WITHDRAWAL RIGHTS.
Except as otherwise provided in this Section 4 "Withdrawal Rights", tenders of
Shares are irrevocable. Shares tendered pursuant to the Offer may be withdrawn
pursuant to the procedures set forth below at any time prior to the Expiration
Date and, unless accepted for payment and paid for by the Purchaser pursuant to
the Offer, may also be withdrawn at any time after September 15, 1996. For a
withdrawal to be effective, a written, telegraphic or facsimile transmission
notice of withdrawal must be timely received by the Depositary at one of its
addresses set forth on the back cover of this Offer to Purchase and must specify
the name of the person having tendered the Shares to be withdrawn, the number of
Shares to be withdrawn and the name of the registered holder of the Shares to be
withdrawn, if different from the name of the person who tendered the Shares. If
certificates for Shares have been delivered or otherwise identified to the
Depositary, then, prior to the physical release of such certificates, the serial
numbers shown on such certificates must be submitted to the Depositary and,
unless such Shares have been tendered by an Eligible Institution, the signatures
on the notice of withdrawal must be guaranteed by an Eligible Institution. If
Shares have been tendered pursuant to the procedures for book-entry transfer set
forth in Section 3 "Procedure for Tendering Shares", the notice of withdrawal
must specify the name and number of the account at the appropriate Book-Entry
Transfer Facility to be credited with the withdrawn Shares. Withdrawals of
tenders of Shares may not be rescinded, and any Shares properly withdrawn will
thereafter be deemed not validly tendered for any purposes of the Offer.
However, withdrawn Shares may be re-tendered by again following one of the
procedures described in Section 3 "Procedure for Tendering Shares" at any time
prior to the Expiration Date. All questions as to the form and validity
(including time of receipt) of notices of withdrawal will be determined by the
Purchaser in its sole discretion, which determination will be final and binding.
None of the Purchaser, Parent, the Depositary, or any other person will be under
any duty to give notification of any defects or irregularities in any notice of
withdrawal or incur any liability for failure to give any such notification.
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5. CERTAIN FEDERAL INCOME TAX CONSEQUENCES.
THE FOLLOWING IS A SUMMARY OF THE PRINCIPAL FEDERAL INCOME TAX CONSEQUENCES OF
THE OFFER AND THE MERGER TO HOLDERS WHOSE SHARES ARE PURCHASED PURSUANT TO THE
OFFER OR WHOSE SHARES ARE CONVERTED INTO THE RIGHT TO RECEIVE CASH IN THE MERGER
(INCLUDING PURSUANT TO THE EXERCISE OF APPRAISAL RIGHTS). THE DISCUSSION
APPLIES ONLY TO HOLDERS OF SHARES IN WHOSE HANDS SHARES ARE CAPITAL ASSETS, AND
MAY NOT APPLY TO SHARES RECEIVED UPON CONVERSION OF SECURITIES OR EXERCISE OF
WARRANTS OR OTHER RIGHTS TO ACQUIRE SHARES OR PURSUANT TO THE EXERCISE OF
EMPLOYEE STOCK OPTIONS OR OTHERWISE AS COMPENSATION, OR TO HOLDERS OF SHARES WHO
ARE IN SPECIAL TAX SITUATIONS (SUCH AS INSURANCE COMPANIES, TAX-EXEMPT
ORGANIZATIONS OR NON-U.S. PERSONS). THE FEDERAL INCOME TAX CONSEQUENCES SET
FORTH BELOW ARE INCLUDED FOR GENERAL INFORMATIONAL PURPOSES ONLY AND ARE BASED
UPON CURRENT LAW. BECAUSE INDIVIDUAL CIRCUMSTANCES MAY DIFFER, EACH HOLDER OF
SHARES SHOULD CONSULT SUCH HOLDER'S OWN TAX ADVISOR TO DETERMINE THE
APPLICABILITY OF THE RULES DISCUSSED BELOW TO SUCH STOCKHOLDER AND THE
PARTICULAR TAX EFFECTS OF THE OFFER AND THE MERGER, INCLUDING THE APPLICATION
AND EFFECT OF STATE, LOCAL AND OTHER INCOME TAX LAWS.
The receipt of cash for Shares pursuant to the Offer or the Merger
(including pursuant to the exercise of appraisal rights) will be a taxable
transaction for federal income tax purposes under the Internal Revenue Code of
1986, as amended (and also may be a taxable transaction under applicable state,
local and other income tax laws). In general, for federal income tax purposes,
a holder of Shares will recognize gain or loss equal to the difference between
his adjusted tax basis in the Shares sold pursuant to the Offer or converted
into the right to receive cash in the Merger and the amount of cash received
therefor. Gain or loss must be determined separately for each block of Shares
(i.e., Shares acquired at the same cost in a single transaction) sold pursuant
to the Offer or converted to cash in the Merger. Such gain or loss will be
capital gain or loss (other than, with respect to the exercise of appraisal
rights, amounts, if any, which are or are deemed to be interest for federal
income tax purposes, which amounts will be taxed as ordinary income) and will be
long-term gain or loss if, on the date of sale (or, if applicable, the date of
the Merger), the Shares were held for more than one year. In the case of an
individual, net long-term capital gain may be subject to a reduced rate of tax
and net capital losses may be subject to limits on deductibility. Payments in
connection with the Offer or the Merger may be subject to "backup withholding".
6. PRICE RANGE OF SHARES; DIVIDENDS. According to the Company's Annual Report
on Form 10-KSB for the fiscal year ended December 31, 1995 (the "Company Form
10-KSB") and information supplied to the Purchaser by the Company, there is no
established public trading market for the Shares. There is only limited,
sporadic and infrequent trades of the Shares in the over-the-counter market,
consequently there are no reliable quotations of trading prices during the
fiscal years ended July 31,1994 and 1995 and the period from August 1, 1995 to
the date hereof. The Company's Shares have been quoted on the NASDAQ Bulletin
Board. Based upon information suppled to NASDAQ by the reporting brokers,
NASDAQ Trading Market Services reported the following trading history since
January 1, 1995 through August 23, 1996 (canceled trades are omitted):
Date Buy/Sell Price
06/08/95 Buy $0.625
Sell $0.10
08/25/95 Sell $0.125
09/13/95 Buy $0.10
10/04/95 Buy $0.10
11/29/95 Buy $0.11
12/11/95 Buy $0.125
12/19/95 Sell $0.125
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Buy $0.125
12/21/95 Buy $0.0001
12/22/95 Buy $0.125
01/15/96 Buy $0.125
01/29/96 Buy $0.125
Sell $0.125
02/15/96 Buy $0.125
04/01/96 Sell $0.375
04/17/96 Buy $0.125
04/22/96 Buy $0.125
04/29/96 Buy $0.125
05/08/96 Buy $0.125
07/11/96 Buy $0.125
07/18/96 Sell $0.25
For at least the past five years, the Company has not paid or declared cash or
other dividends on the Shares.
7. EFFECT OF THE OFFER ON THE MARKET FOR SHARES; STOCK QUOTATION; EXCHANGE ACT
REGISTRATION AND MARGIN SECURITIES.
The purchase of Shares pursuant to the Offer will reduce the number of holders
of Shares and the number of Shares that might otherwise trade publicly and could
adversely affect the liquidity and market value of the remaining Shares, if any,
held by the public. As of July 15,1996 the Company indicated there were 1073
shareholders of record. The Shares are not currently listed for trading on any
registered stock exchange nor are they listed for trading on NASDAQ.
The Shares are currently registered under the Exchange Act. Registration
of the Shares under the Exchange Act may be terminated upon application of the
Company to the Commission if the Shares are neither listed on a national
securities exchange nor held by 300 or more holders of record. Termination of
registration of the Shares under the Exchange Act would substantially reduce the
information required to be furnished by the Company to its stockholders and to
the Commission and would make certain provisions of the Exchange Act no longer
applicable to the Company, such as the short-swing profit recovery provisions of
Section 16(b) of the Exchange Act, the requirement of furnishing a proxy
statement pursuant to Section 14(a) of the Exchange Act in connection with
stockholders' meetings and the related requirement of furnishing an annual
report to stockholders, and the requirements of Rule 13e-3 under the Exchange
Act with respect to "going private" transactions. Furthermore, the ability of
"affiliates" of the Company and persons holding "restricted securities" of the
Company to dispose of such securities pursuant to Rule 144 or 144A promulgated
under the Securities Act of 1933, as amended (the "Securities Act"), may be
impaired or eliminated. The Purchaser intends to apply for termination of
registration of the Shares under the Exchange Act as soon after the completion
of the Offer as the requirements for such termination are met. If registration
of the Shares is not terminated prior to the Merger, then the registration of
the Shares under the Exchange Act will be terminated following the consummation
of the Merger. The Shares are not currently "margin securities" under the
regulations of the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board"), which has the effect, among other things, of not
allowing brokers to extend credit on the collateral of the Shares.
8. CERTAIN INFORMATION CONCERNING THE COMPANY.
The historical information concerning the Company contained in this Offer to
Purchase, including financial information, has been taken from or based upon
publicly available documents and records on file with the Commission and other
public sources. None of Parent, the Purchaser or the Depositary assumes any
responsibility for the accuracy or completeness of the information concerning
the Company contained in such documents and records or for any failure by the
Company to disclose events which may have occurred or may affect the
significance or accuracy of any such information to Parent or the Purchaser.
The Company is a Colorado corporation with its principal place of business
located at 16701 Greenspoint Park
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Drive, Suite 200, Houston, Texas 77060. This is the same address as Purchaser
and Parent. According to the Company's Form 10-KSB for its fiscal year ended
July 31, 1995, the Company is engaged in the production and sale of oil and gas.
Principal products are crude oil and natural gas which are sold to various
purchasers, including pipeline companies which service the areas in which the
producing wells are located. The Company also serves as operator for most of
the oil and gas properties in which it owns an interest. The Company has no
operations in foreign countries and no portion of its sales or revenues is
derived from sales to customers in foreign countries.
Set forth below is certain selected historical consolidated financial
information with respect to the Company excerpted or derived from the audited
consolidated financial statements included in the Company Form 10-KSB and from
the unaudited financial statements included in the Company's Quarterly Report on
Form 10-QSB for the quarter ended April 30, 1996. More comprehensive financial
information is included in such reports and other documents filed by the Company
with the Commission, and the following summary is qualified in its entirety by
reference to such reports and such other documents and all the financial
information (including any related notes) contained therein. The reports and
other documents filed with the Commission should be available for inspection and
copies thereof should be obtainable in the manner set forth below under
"Available Information".
SUMMIT PETROLEUM CORPORATION
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
<TABLE>
-------------------------------------- ---------------
-------------------------------------- ---------------
Year Ended Nine Months
July 31, Ended April 30,
-------------------------------------- ---------------
-------------------------------------- ---------------
<S> <C> <C> <C> <C>
1993 1994 1995 1996
Operating Revenues $ 691,022 $ 643,360 $ 627,930 $ 481,938
Total Revenues $ 704,081 $ 652,938 $ 652,938 $ 483,122
Income (loss) before cumulative effect and
extraordinary items $ 187,640 $ 85,417 $ 36,014 $ 49,700
Income (loss) per share before cumulative
effect and extraordinary items $ 0.056 $ 0.032 $ 0.015 $ 0.021
Weighted average number of commons shares
outstanding, adjusted for subsequent stock splits 3,325,000 2,708,456 2,400,184 2,400,185
Total Assets $ 792,266 $ 916,882 $1,013,170 $1,190,116
Net Working Capital (deficit) $ 238,329 $ 65,613 $ 15,891 $ 17,670
Term Debt, including current position $ 168,400 $ 202,854 $ 302,872 $ 299,790
Stockholders' Equity $ 486,662 $ 596,820 $ 632,834 $ 682,534
</TABLE>
COMPANY PROJECTIONS. To the knowledge of Parent and the Purchaser, the
Company does not as a matter of course make public forecasts as to its future
financial performance.
AVAILABLE INFORMATION.
The Company is subject to the reporting requirements of the Exchange Act
and, in accordance therewith, is required to file reports and other
information with the Commission relating to its business, financial condition
and other matters. Information as of particular dates concerning the
Company's directors and officers, their remuneration, options granted to
them, the principal holders of the Company's securities and any material
interests of such persons in transactions with the Company is required to be
disclosed in proxy statements distributed to the Company's stockholders
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and filed with the Commission. Such reports, proxy statements and other
information should be available for inspection at the public reference
facilities of the Commission located at 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the regional offices of the Commission located in the
Northwestern Atrium Center, 500 West Madison Street (Suite 1400), Chicago,
Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New York
10048. Copies should be obtainable, by mail, upon payment of the Commission's
customary charges, by writing to the Commission's principal office at 450
Fifth Street, N.W., Washington, D.C. 20549.
9. CERTAIN INFORMATION CONCERNING PARENT AND THE PURCHASER.
Parent is an independent oil and gas company engaged primarily in the
exploration and development of domestic oil and gas. Parent is subject to the
reporting requirements of the Exchange Act and, in accordance therewith, is
required to file reports and other information with the Commission relating
to its business, financial condition and other matters. Information as of
particular dates concerning Parent's directors and officers, their
remuneration, options granted to them, the principal holders of Parent's
securities and any material interests of such persons in transactions with
Parent is required to be disclosed in proxy statements distributed to the
Parent's stockholders and filed with the Commission. Parent owns all the
outstanding capital stock of the Purchaser. It is not anticipated that, prior
to the consummation of the Offer and the Merger, the Purchaser will have any
significant assets or liabilities or will engage in any activities other than
those incident to the Offer and the Merger and the financing thereof.
For certain information concerning the directors and executive officers
of the Purchaser, see Schedule I to this Offer to Purchase. Except as set
forth in this Offer to Purchase, including Schedule I: (i) none of Parent and
the Purchaser nor, to the best knowledge of any of the foregoing, any of the
persons listed in Schedule I to this Offer to Purchase or any associate or
majority owned subsidiary of any of the foregoing, beneficially owns or has a
right to acquire any Shares or any other equity securities of the Company;
(ii) to the best knowledge of Purchaser, neither the Purchaser nor any of
the persons or entities referred to in clause (i) above or any of their
executive officers, directors, or subsidiaries has effected any transaction
in the Shares or any other equity securities of the Company during the past
60 days; (iii) none of the Parent and the Purchaser nor, to the best
knowledge of any of the foregoing, any of the persons listed in Schedule I to
this Offer to Purchase has any contract, arrangement, understanding or
relationship with any other person with respect to any securities of the
Company, including but not limited to, contracts, arrangements,
understandings or relationships concerning the transfer or voting thereof,
joint ventures, loan or option arrangements, puts or calls, guaranties of
loans, guaranties against loss or the giving or withholding of proxies,
consents or authorizations; (iv) since January 1, 1993, all transactions and
business relationships which would be required to be disclosed under the
rules and regulations of the Commission between any of Parent and the
Purchaser or any of their respective subsidiaries or, to the best knowledge
of any of the Parent and the Purchaser, any of the persons listed in Schedule
I to this Offer to Purchase, on the one hand, and the Company or any of its
executive officers, directors or affiliates, on the other hand, are disclosed
in Schedule I to this Offer; and (v) since January 1, 1993, there have been
no contracts, negotiations or transactions between any of the Parent and the
Purchaser or any of their respective subsidiaries or, to the best knowledge
of any of the Parent and the Purchaser, any of the persons listed in Schedule
I to this Offer to Purchase, on the one hand, and the Company or its
subsidiaries or affiliates, on the other hand, concerning a merger,
consolidation or acquisition, tender offer or other acquisition of
securities, an election of directors or a sale or other transfer of a
material amount of assets of the Company or any of its subsidiaries. Except
as set forth in this Offer to Purchase and Schedule I to this Offer, none of
the Parent and the Purchaser had any relationship with the Company prior to
the commencement of the discussions which led to the execution of the Merger
Agreement. See Section 11 "Background of the Offer". Each of the Parent and
the Purchaser is an "affiliate" of the Company within the meaning of Rule
13e-3 under the Exchange Act by reason of (a) there being common members to
the board of directors of Parent, Purchaser and the Company, (b) the
president of Parent is also the president of the Company, (c) MRO, a wholly
owned subsidiary of Parent, manages certain of the operations of the Company
and (d) Company officers and Directors beneficially own a significant amount
of the Company's Shares and also own a significant amount of the Parent's
common stock.
10. SOURCE AND AMOUNT OF FUNDS.
The total amount of funds required by the Purchaser to purchase all of
the Shares pursuant to the Offer and the
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Merger and to pay related fees and expenses is expected to be approximately
$1,900,000. Of this amount approximately $669,000 will be paid to Mr. Warley
through a combination of approximately $215,359 in cash and cancellation of
a $453,641 note (amount to be adjusted for accrued interest at 7% per annum)
from Mr. Warley to Parent. Mr. Warley originally borrowed $582,805 under an
eighteen month term note to Parent and Mr. Warley has agreed in the Merger
Agreement to offset the current balance plus accrued interest from the total
amount due him for tendering the Company's shares and cancellation of his
Company stock options. In addition, the total amount of funds required by
the Company to repurchase or refinance certain of its existing indebtedness
is expected to be approximately $200,000. The Offer is not conditioned on
the obtaining of financing. The Parent and the Purchaser expect to obtain
the funds required to purchase the tendered Shares and the payment of the
consideration payable in the Merger to the holders of Shares from its
existing working capital, the sale of existing marketable securities, the
cancellation of Mr. Warley's note and the balance will be obtained from the
Parents existing bank facility. The Parent's current bank facility is a
$20,000,000 credit facility with First Union National Bank of North Carolina,
expiring October, 1997 and secured by oil and gas properties, requiring the
Parent to maintain certain financial and profitability ratios and restricting
the Parent's ability to incur debt, sell assets, substantially change the
ownership or management of Parent or pay dividends. This facility provides
for an $8,000,000 borrowing base with principal payments of $100,000 per
month and interest payable monthly at that banks prime rate plus 0.75%. As
of June 1, 1996 the Parent had $6,480,000 outstanding under this facility.
11. BACKGROUND OF THE OFFER. Messrs. Warley, Whitaker and Dillard comprise
all the members of the Board of the Company and each are members of the
board of directors of the Parent. At a board of directors meeting of Parent
held on May 31,1996 an agenda item was the discussion of an acquisition of an
unrelated publicly held oil and gas company. During this meeting, which was
attended by the full board of the Parent, Mr. Warley brought up for
discussion whether or not Parent should consider the acquisition of the
Company in light of the Parent's prior public announcement of its intention
to consider acquisitions of oil and gas companies. Mr. Warley indicated that
acquiring the Company would be beneficial to the Parent for several reasons.
First, it would remove a concern that had been expressed to him by members of
the investment community regarding the appearance of a conflict of interest
and dealings among related parties between the Parent and the Company.
Second, given the nature of the Parent's involvement in the Company's overall
operations resulting from the Management Agreement, as well as the
overlapping members on the boards of directors, the Parent was familiar with
the Company, its properties and operations. After a general discussion among
the board, the Parent's board agreed that an acquisition of the Company might
be beneficial. The Parent's board acknowledged the fact that the members of
the Company's entire board were also members of the Parent's board and any
potential offer to the Company would require a fairness opinion that would
independently arrive at a fair price. Further at this meeting the Parent's
board discussed whether or not to consider an offer that included Parent's
stock or cash or some combination of stock and cash. After a discussion of
the relative cost and length of time to pursue an offer using Parent stock,
the board concluded a cash offer was more appropriate. The Parent's board
then agreed to pursue the matter by authorizing the Parent to engage an
investment banking firm to arrive at a fair price to offer for the Company.
Messrs. Warley, Whitaker and Dillard informed the Parent's board at that
meeting that, given the fact of their being the entire board of directors of
the Company they would entertain a proposal for the Parent to acquire the
Company, provided Parent would share the fairness opinion with the Company
and make the investment banking firm available to meet with them separately
to discuss their opinion. The Parent's board agreed to this request.
On June 3, 1996 Parent engaged Southwest Merchant Group ("SMG"), Dallas,
Texas, to analyze the Company and provide an opinion as to a fair price to
offer. On July 3,1996, a representative of SMG met with the entire board of
Parent and orally presented their opinion that a cash price of $0.70 per
share for all of the Company's common stock, including outstanding options
net of exercise price, was fair to the Parent's stockholders from a financial
point of view. SMG's written opinion was delivered July 14, 1996. The
Parent's board inquired regarding the nature of certain of the assumptions
regarding oil and gas prices, oil and gas reserve estimates, as well as the
availability of comparable transactions involving entire companies, and
transactions that involved only the purchase of oil and gas properties both
with and without related well operations. The members of Parent' board, other
than Messrs. Warley, Whitaker and Dillard, then discussed whether or not
Parent should request certain lock up provisions with the Company such as an
option to acquire Company shares, a termination fee if the Merger did not
occur due to a competing offer, and reimbursement of transaction costs.
Messrs. Warley, Whitaker and Dillard, in their capacity as Company board
members indicated that the Company would only consider reimbursing Parent for
transaction costs in the event a competing offer resulted in the proposed
transaction not being consummated. Following this discussion the Parent's
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<PAGE>
board unanimously agreed to proceed to make the Offer to the Company to acquire
for cash all of the Company's outstanding common stock, including stock
options net of exercise price, at $0.70 per Share pursuant to a merger
agreement.
Also on July 3, 1996, and following the meeting of the Parent's board,
the Board of the Company met. At this meeting Mr. Warley informed the Board
that he has made prior attempts to locate potential purchasers for the
Company, but that he was unsuccessful in locating anyone who would agree to
acquire the entire Company. In late 1995, Mr. Warley said he was contacted
by Cosco Capital Management, New York, New York. Cosco indicated they had a
client interested in acquiring a control position in the Company and oil and
gas reserve information was supplied to Cosco, however no offer was received.
In March of 1996, the Company retained Bainbridge Partners, Dallas, Texas
pursuant to a non-exclusive agreement to secure a buyer for the Company. At
about that same time the Company indicated to First Union Bank Capital
Markets Group ("First Union") its desire to secure a buyer and asked First
Union to also seek a buyer. Bainbridge identified two undisclosed clients and
First Union identified one potential buyer. Financial and oil and gas reserve
information was supplied to both Bainbridge and First Union and informal
discussions indicated again only an interest in buying a control position in
the Company rather than acquiring the entire company. Mr. Warley also
indicated that upon receipt of the opinion of SMG, he again verbally
contacted Bainbridge Partners and asked if there might be any interest on the
part of any of their client in acquiring 100 percent of the Shares at or near
the fair price determined by SMG, and again Bainbridge declined.
At the July 3, 1996 board meeting, the Company Board met with the
representative of SMG and inquired as to certain of their assumptions,
including the value of the Company's well operations and the approximate
$800,000 net operating loss carry forward for income tax purposes. After
these discussions, the Company's board agreed to recommend acceptance of the
Parent's offer and to proceed with the necessary documentation. See Section
17 "Special Factors--Fairness Discussion".
On July 3, 1996 the boards of Parent, Purchaser and the Company approved
the general terms of the Merger and the immediate commencing of the Offer.
Following the meetings on July 3, 1996, the Parent began preparing the
documentation to make the Offer, including the Merger Agreement.
12. PURPOSE OF THE OFFER AND THE MERGER
The purpose of the Offer is to enable Parent to acquire control of, and the
entire equity interest in, the Company. As a co-bidder Mr. Warley should be
considered as having as one of his purposes the gaining of control of the
Company and to sell his Shares pursuant to the Offer. The purpose of the
Merger is to acquire all outstanding Shares not purchased pursuant to the
Offer. The purchase of Shares pursuant to the Offer will increase the
likelihood that the Merger will be effected. Following the completion of the
Offer, Parent intends to acquire any remaining Shares not then owned by it by
consummating the Merger. In the Merger, each outstanding Share (other than
Shares held by the Company as treasury stock, or owned by Parent, the
Purchaser or any other subsidiary of either Parent or the Purchaser and other
than Shares held by stockholders who perfect appraisal rights, if any, under
Colorado Law), will be converted into the right to receive the Merger
Consideration, without interest, and the Company will become a wholly owned
subsidiary of Parent. The acquisition of the entire interest in the Company
is structured as a cash tender offer followed by a merger in order to
expedite the opportunity for Parent to obtain a controlling interest in the
Company. Under Colorado Law and the Company's Certificate of Incorporation,
the affirmative vote of the holders of a majority of the outstanding Shares
is required to approve the Merger. If the Minimum Condition is satisfied,
Parent would have sufficient voting power to approve the Merger without the
affirmative vote of any other stockholder of the Company.
PLANS FOR THE COMPANY. If and to the extent that the Purchaser acquires
control of the Company, the Parent intends to conduct a detailed review of
the Company assets, corporate structure, capitalization, operations and
properties and consider and determine what, if any, changes would be
desirable in light of the circumstances which then exist. The Purchaser and
Parent have no present plans nor proposals that would result in an
extraordinary corporate transaction, such as a merger, reorganization,
liquidation, or sale or transfer of a material amount of assets, involving
the Company. The Company is in the same business as the Parent and the Parent
in its normal course buys and sells properties and may do so with respect to
properties owned by the Company.
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THE MERGER AGREEMENT. The following is a summary of the material terms of
the Merger Agreement. This summary is not a complete description of the terms
and conditions thereof and is qualified in its entirety by reference to the
full text thereof, which is incorporated herein by reference and a copy of
which has been filed with the Commission as an exhibit to the Schedule 14D-1.
The Merger Agreement may be examined, and copies thereof may be obtained, as
set forth in Section 8 "Certain Information Concerning the Company".
THE OFFER. The Merger Agreement provides for the commencement of the Offer,
in connection with which Parent and the Purchaser have expressly reserved the
right to waive certain conditions of the Offer, but without the prior written
consent of the Company, the Purchaser has agreed not to (i) waive the Minimum
Condition, (ii) reduce the number of Shares subject to the Offer, (iii)
reduce the price per Share to be paid pursuant to the Offer, (iv) extend the
Offer if all of the Offer conditions are satisfied or waived, (v) change the
form of consideration payable in the Offer, or (vi) amend or modify any term
or condition of the Offer (including the conditions described in Section 14
"Certain Conditions to the Offer") in any manner adverse to the holders of
Shares. Notwithstanding the foregoing, the Purchaser may, in its sole
discretion without the consent of the Company, extend the Offer at any time
and from time to time (A) if at the then scheduled expiration date of the
Offer any of the conditions to the Purchaser's obligation to accept for
payment and pay for Shares shall not have been satisfied or waived; (B) for
any period required by any rule, regulation, interpretation or position of
the Commission or its staff applicable to the Offer; (C) for any period
required by applicable law in connection with an increase in the
consideration to be paid pursuant to the Offer; and (D) if all Offer
conditions are satisfied or waived but the number of Shares tendered is 85%
or more, but less than 90%, of the then outstanding number of Shares, for an
aggregate period of not more than 5 business days (for all such extensions
under this clause (D)) beyond the latest expiration date that would be
permitted under clause (A), (B) or (C) of this sentence. So long as the
Merger Agreement is in effect and the offer conditions have not been
satisfied or waived, at the request of the Company, the Purchaser will, and
Parent will cause the Purchaser to, extend the Offer for an aggregate period
of not more than 20 business days (for all such extensions) beyond the
originally scheduled expiration date of the Offer.
CONSIDERATION TO BE PAID IN THE MERGER. The Merger Agreement provides that
upon the terms (but subject to the conditions) set forth in the Merger
Agreement, the Purchaser will be merged with and into the Company and the
separate existence of the Purchaser will cease, and the Company shall be the
Surviving Corporation and shall be a wholly owned subsidiary of the Parent.
In the Merger, each share of common stock, $.01 par value per share, of the
Purchaser outstanding immediately prior to the time of filing of a
certificate of merger relating to the Merger with the Secretary of State of
the State of Colorado, or such later time as is agreed by the parties (the
"Effective Time"),shall be converted into and exchanged for one validly
issued, fully paid and non-assessable share of Common Stock, $.01 par value
per share, of the Surviving Corporation. In the Merger, each Share issued and
outstanding immediately prior to the Effective Time (other than Shares owned
by Parent or the Purchaser or held by the Company, all of which shall be
canceled, and Shares held by stockholders who perfect appraisal rights under
Colorado law) shall, by virtue of the Merger and without any action on the
part of the holder thereof, be converted into the right to receive the Merger
Consideration, without interest. The Merger Agreement provides that (subject
to the provisions of the Merger Agreement) the closing of the Merger shall
occur as soon as practicable following the satisfaction or, to the extent
permitted under the Merger Agreement, waiver of, the conditions to the Merger
set forth in Article 9 of the Merger Agreement. The Merger Agreement permits
Parent and Purchaser, in their sole discretion, to defer the closing of the
Merger for a period of 90 days following consummation of the Offer if, in
Parent's and Purchaser's sole judgment, the deferral is necessary to enable
the Company to meet a condition to the Merger. Any determination or waiver at
the sole discretion of Purchaser or Parent may be equivalent to a waiver
requiring there remain at least five business days in the Offer.
TREATMENT OF STOCK OPTIONS. The Merger Agreement provides that all options
(individually, an "Option" and collectively, the "Options") outstanding
immediately prior to the Effective Time under any of the Stock Option Plans,
whether or not then exercisable, shall be canceled and each holder of an
Option will be entitled to receive from the Surviving Corporation, for each
Share subject to an Option, an amount in cash equal to the excess, if any, of
the Merger Consideration over the per share exercise price of such Option,
without interest. The amounts payable pursuant to the Merger Agreement shall
be paid with respect to Shares subject to Options at the Effective Time. All
amounts payable in respect of Options shall be subject to all applicable
withholding of taxes.
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BOARD REPRESENTATION. The Merger Agreement provides that, promptly upon the
purchase of Shares pursuant to the Offer, Parent shall be entitled to
designate such number of directors, rounded up to the next whole number, as
will give Parent representation on the Board of Directors equal to the
product of (i) the number of directors on the Board of Directors and (ii) the
percentage that the number of Shares purchased by the Purchaser or Parent or
any affiliate bears to the number of Shares outstanding, and the Company
will, upon request by Parent, promptly increase the size of the Board of
Directors and/or exercise its best efforts to secure the resignations of such
number of directors as is necessary to enable Parent's designees to be
elected to the Board of Directors and will cause Parent's designees to be so
elected. The Company's obligations to appoint designees to the Board of
Directors are subject to Section 14(f) of the Exchange Act. The parties have
agreed to use their respective best efforts to ensure that at least two of
the members of the Board of Directors shall at all times prior to the
Effective Time be Continuing Directors (as defined in the Merger Agreement).
STOCKHOLDER MEETING. The Merger Agreement provides that, if required by
applicable law, the Company, acting through the Board of Directors, shall (i)
call a meeting of its stockholders (the "Stockholder Meeting") for the
purpose of voting on the Merger, (ii) hold the Stockholder Meeting as soon as
practicable after the purchase of Shares pursuant to the Offer and (iii)
subject to its fiduciary duties under applicable law as advised by outside
counsel, recommend to its stockholders the approval of the Merger. At the
Stockholder Meeting, Parent shall cause all the Shares then owned by Parent,
the Purchaser and any of their subsidiaries or affiliates to be voted in
favor of the Merger. The Merger Agreement provides that, notwithstanding the
foregoing, if the Purchaser, or any other direct or indirect subsidiary of
Parent, shall acquire at least 90% of the outstanding Shares, the parties
thereto shall take all necessary and appropriate action to cause the Merger
to become effective as soon as practicable after the expiration of the Offer
without a meeting of stockholders of the Company, in accordance with Colorado
Law. However, the Merger Agreement permits Parent and Purchaser, in their
sole discretion, to defer the closing of the Merger for a period of 90 days
following consummation of the Offer if, in Parent's and Purchaser's sole
judgment, the deferral is necessary to enable the Company to comply with a
covenant. Any determination or waiver at the sole discretion of Purchaser or
Parent may be equivalent to a waiver requiring there remain at least five
business days in the Offer.
REPRESENTATIONS AND WARRANTIES. The Merger Agreement contains various
representations and warranties of the parties thereto. These include
representations and warranties by the Company with respect to (i) the due
incorporation, existence and, subject to certain limitations, the
qualification, good standing, corporate power and authority of the Company
and certain significant subsidiaries; (ii) the due authorization, execution,
and delivery of the Merger Agreement and certain ancillary documents executed
in connection therewith and the consummation of transactions contemplated
thereby, and the validity and enforceability thereof; (iii) subject to
certain exceptions and limitations, the compliance by the Company with all
applicable foreign, federal, state or local laws, statutes, ordinances,
rules, regulations, orders, judgments, rulings and decrees ("Laws") of any
foreign, federal, state or local judicial, legislative, executive,
administrative or regulatory body or authority, or any court, arbitration,
board or tribunal ("Governmental Entity"); (iv) the capitalization of the
Company, including the number of shares of capital stock of the Company
outstanding, the number of shares reserved for issuance on the exercise of
options and similar rights to purchase shares; (v) the identity, ownership
(subject to certain exceptions and limitations) by the Company of interests
or investments in entities other than subsidiaries of the Company; (vi)
subject to certain exceptions and limitations, the absence of consents and
approvals necessary for consummation by the Company of the Merger and the
absence of any violations, breaches or defaults which would result from
compliance by the Company with any provision of the Merger Agreement; (vii)
compliance with the Securities Act and the Exchange Act, in connection with
each registration statement, report, proxy statement or information statement
(as defined under the Exchange Act) prepared by it since January 1, 1993,
each in the form (including exhibits and any amendments thereto) filed with
the SEC (collectively, the "Company Reports") and the financial statements
included therein filed by the Company with the Commission, the Schedule 14D-9
information statement, if any, filed by the Company in connection with the
Offer pursuant to Rule 14 f-1 under the Exchange Act; (viii) subject to
certain exceptions and limitations, the absence of pending or (to the
knowledge of the Company through receipt of written notice) threatened
claims, actions, suits, proceedings, arbitrations, investigations or
audits (collectively, "Litigation") or violation of any law by the Company
which would have a material adverse effect on the business, results of
operations, assets, or financial condition of the Company ("Material Adverse
Effect"); (ix) the absence of certain changes or effects; (x) certain tax
matters; (xi) certain employee benefit and ERISA matters; (xii) certain labor
and employment matters; (xiii) certain fees in connection with the
transactions contemplated by the Merger Agreement; (xiv) subject to certain
exceptions and limitations, the possession by the Company; (xv)
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subject to certain exceptions and limitations, title to assets; (xvi)
material contracts of the Company; and (xvii) the required vote of
stockholders of the Company with respect to the transactions contemplated by
the Merger Agreement. Parent and the Purchaser and have also made certain
representations and warranties, including with respect to (i) the due
incorporation, existence, good standing and, subject to certain limitations,
corporate power and authority of Parent and the Purchaser; (ii) the due
authorization, execution and delivery of the Merger Agreement and certain
ancillary documents executed in connection therewith and the consummation of
the transactions contemplated thereby, and the validity and enforceability
thereof; (iii) the accuracy and the adequacy of the information contained in
the Schedule 14D-1 and the documents therein pursuant to which the Offer is
being made, any Schedule required to be filed with the Commission, and any
amendment or supplement to any of the foregoing and the accuracy of the
information provided by Parent and the Purchaser for inclusion in the
Schedule 14D-9; (iv) subject to certain exceptions and limitations, the
absence of consents and approvals necessary for consummation by Parent and
the Purchaser, and the absence of any violations, breaches or defaults which
would result from compliance by Parent and the Purchaser with any provision
of the Merger Agreement; and (v) the sufficiency of funds available to Parent
and the Purchaser for the consummation of the Offer and the Merger.
CONDUCT OF BUSINESS PENDING MERGER. The Company has agreed that from the date
of the Merger Agreement to the Effective Time, with certain exceptions,
unless Parent has consented in writing thereto, the Company will (i) conduct
its operations according to its usual, regular and ordinary course of
business consistent with past practice; (ii) use its reasonable best efforts
to preserve intact its business organization and goodwill, maintain in effect
all existing qualifications, licenses, permits, approvals and other
authorizations, keep available the services of its officers and employees and
maintain satisfactory relationships with those persons having business
relationships with them; (iii) promptly upon the discovery thereof notify
Parent of the existence of any breach of any representation or warranty
contained in the Merger Agreement (or, in the case of any representation and
warranty that makes no reference to Material Adverse Effect, any breach of
such representation and warranty in any material respect) or the occurrence
of any event that would cause any representation or warranty contained in the
Merger Agreement no longer to be true and correct (or in the case of any
representation and warranty that makes no reference to Material Adverse
Effect, to no longer be true and correct in any material respect); and (iv)
promptly deliver to the Purchaser true and correct copies of any report,
statement or schedule filed with the Commission subsequent to the date of the
Merger Agreement, any internal monthly reports prepared for or delivered to
the Board of Directors after the date of the Merger Agreement and monthly
financial statements for the Company and its subsidiaries for and as of each
month end subsequent to the date of the Merger Agreement. The Company has
agreed that from the date of the Merger Agreement to the Effective Time, with
certain exceptions, unless the Parent has consented in writing thereto, the
Company shall not, and shall not permit any of its Subsidiaries to (i) amend
its Certificate of Incorporation or Bylaws or comparable governing
instruments; (ii) issue, sell or pledge any shares of its capital stock or
other ownership interest in the Company (other than issuances of shares of
Common Stock in respect of any exercise of Options outstanding on the date of
the Merger Agreement and disclosed to Parent) or any of the subsidiaries, or
any securities convertible into or exchangeable for any such shares or
ownership interest, or any rights, warrants or options to acquire or with
respect to any such shares of capital stock, ownership interest, or
convertible or exchangeable securities; or accelerate any right to convert or
exchange or acquire any securities of the Company or any of its subsidiaries
for any such shares or ownership interest; (iii) effect any stock split or
otherwise change its capitalization as it exists on the date of the Merger
Agreement; (iv) grant, confer or award any option, warrant, convertible
security or other right to acquire any shares of its capital stock or take
any action to cause to be exercisable any otherwise unexercisable option
under any existing stock option plan; (v) declare, set aside or pay any
dividend or make any other distribution or payment with respect to any shares
of its capital stock or other ownership interests (other than such payments
by a wholly owned subsidiary); (vi) sell, lease or otherwise dispose of any
of its assets, except in the ordinary course of business, none of which
dispositions individually or in the aggregate will be material; (vii) settle
or compromise any pending or threatened litigation, other than settlements
which involve solely the payment of money (without admission of liability)
not to exceed $5,000 in any one case; (viii) acquire by merger, purchase or
any other manner, any business or entity or otherwise acquire any assets that
are material, individually or in the aggregate, to the Company except for
purchases of inventory, supplies or capital equipment in the ordinary course
of business consistent with past practice; (ix) incur or assume any long-term
or short-term debt, except for working capital purposes in the ordinary
course of business under the Company's existing credit agreement; (x) assume,
guarantee or otherwise become liable or responsible (whether directly,
contingently or otherwise) for the obligations of any other person; (xi) with
certain exceptions, make or forgive any loans, advances or capital
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continuations to, or investments in, any other person; (xii) make any tax
election or settle any tax liability other than settlements involving solely
the payment of money which would be permitted by clause (vii); (xiii) except
in certain circumstances, grant any stock related or performance awards;
(xiv) enter into any new employment, severance, consulting or salary
continuation agreements with any officers, directors or employees or grant
any increases in compensation or benefits to employees other than
increases permitted under certain circumstances; (xv) adopt, amend in any
material respect or terminate any employee benefit plan or arrangement; (xvi)
amend, change or waive (or exempt any person or entity from the effect of)
the Rights Agreement, except in connection with the exercise of its fiduciary
duties by the Board of Directors or as set forth in the Merger Agreement;
(xvii) permit any insurance policy naming the Company or a loss payee to be
canceled or terminated other than in the ordinary course of business, or
(xiii) agree in writing or otherwise to take any of the foregoing actions.
CONDITIONS TO THE MERGER. The respective obligations of each party to effect
the Merger are subject to the satisfaction or waiver, where permissible,
prior to the Effective Time, of the following conditions: (i) if
approval of the Merger Agreement and the Merger by the holders of Shares is
required by applicable law, the Merger Agreement and the Merger shall have
been approved by the requisite vote of such holders; and (ii) there shall not
have been issued any injunction or issued or enacted any Law which prohibits
or has the effect of prohibiting the consummation of the Merger or making
such consummation illegal. The obligations of Parent and the Purchaser to
effect the Merger shall be further subject to the satisfaction or waiver on
or prior to the Effective Time of the condition that the Purchaser shall have
accepted for payment and paid for Shares tendered pursuant to the Offer,
provided the condition will be deemed satisfied if Purchaser's failure to
accept for payment and pay for such shares is a breach of the Merger
Agreement or violates the terms and conditions of the Offer.
ACCESS TO INFORMATION. Under the Merger Agreement, from the date of the
Merger Agreement to the Merger Closing Date, the Company shall (i) give the
Parent and its authorized representatives and lender banks full access to all
books, records, personnel, offices and other facilities and properties of the
Company and its accountants and accountants' work papers, (ii) permit the
Parent to make such copies and inspections thereof as the Parent may
reasonably request and (iii) furnish the Parent with such financial and
operating data and other information with respect to the business and
properties of the Company as the Parent may from time to time reasonably
request; provided that no investigation or information furnished pursuant to
the Merger Agreement shall affect any representations or warranties made by
the Company therein or the conditions to the obligations of the Parent to
consummate the transactions contemplated thereby.
NO SOLICITATION. The Company has agreed in the Merger Agreement that neither
it nor any of its subsidiaries, nor any of their respective officers,
directors, employees, representatives, agents or affiliates, shall, directly
or indirectly, encourage, solicit, initiate or, except as is required in the
exercise of the fiduciary duties of the Company's directors to the Company or
its stockholders after consultation with outside counsel to the Company,
participate in any way in any discussions or negotiations with, or provide
any information to, or afford any access to the properties, books or records
of the Company or any of its subsidiaries to, or otherwise assist, facilitate
or encourage, any corporation, partnership, person or other entity or group
(other than the Parent or any affiliate or associate of Parent) concerning
any merger, consolidation, business combination, liquidation, reorganization,
sale of substantial assets, sale of shares of capital stock or similar
transactions involving the Company (an "Alternative Proposal"), and shall
immediately cease and cause to be terminated any existing activities,
discussions or negotiations with any parties conducted theretofore with
respect to any of the foregoing; provided, however, that nothing contained in
the Merger Agreement shall prohibit the Company or the Board of Directors
from complying with Rule 14e-2(a) under the Exchange Act or taking such
action promulgated thereunder or from making such disclosure to the Company's
stockholders or taking such action which, in the judgment of the Board of
Directors with the advice of outside counsel, may be required under
applicable law. The Company has agreed promptly to notify Parent if any such
information is requested from it or any such negotiations or discussions are
sought to be initiated with the Company.
FEES AND EXPENSES. Except as provided in the Merger Agreement, whether or not
the Offer or the Merger is consummated, all costs and expenses incurred in
connection with the transactions contemplated by the Merger Agreement shall
be paid by the party incurring such expenses. The Merger Agreement provides
that, under certain circumstances, the Company will pay to Parent, in such
manner as is designated by Parent, the amount of the costs and
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expenses related to the Offer and the Merger and for their foregoing of the
opportunity to invest in the Company. The Company is obligated to pay the
costs and expenses of Parent under the following circumstances: (i) the
Company terminates the Merger Agreement because of an Alternative Proposal
which the Board of Directors in good faith determines is more favorable from
a financial point of view to the stockholders of the Company as compared to
the Offer and the Merger and the Board of Directors determines, after
consultation with its counsel that failure to terminate the Merger Agreement
would be inconsistent with the compliance by the Board of Directors with its
fiduciary duties, subject to certain provisos that would render such
termination right unavailable; (ii) Parent terminates the Merger Agreement
(x) because the Board of Directors failed to recommend, or withdraws,
modifies or amends in any material respect, its approval or recommendation of
the Offer or the Merger, or recommended acceptance of any Alternative
Proposal, or resolved to do any of the foregoing (unless the foregoing
occurred solely as a result of the Parent's willful breach in any material
respect of its representations, warranties or obligations under the Merger
Agreement) or (y) after December 31, 1996 if Purchaser has not purchased any
Shares by that date because of the Company's willful breach or willful
failure to comply in any material respect with any of its material
obligations under the Merger Agreement; (iii) Parent or the Company terminate
the Merger Agreement after December 31, 1996 because of the failure of any
condition to the Offer (which failure was not caused by Parent's failure to
fulfill its obligations under the Merger Agreement) at a time when the
Minimum Condition shall not have been satisfied and (x) during the term of
the Merger Agreement or within 12 months after the termination of the Merger
Agreement, the Board of Directors recommends an Alternative Proposal or the
Company enters into an agreement providing for an Alternative Proposal or a
majority of the outstanding Shares is acquired by a third party (including a
"group" as defined in the Exchange Act) (a "Stock Acquisition") which
Alternative Proposal (or another Alternative Proposal by the same or a
related person or entity) was made prior to the termination of the Merger
Agreement or (y) during the term of the Merger Agreement or within two months
after the termination of the Merger Agreement, the Board of Directors
recommends an Alternative Proposal or the Company enters into an agreement
providing for an Alternative Proposal or a Stock Acquisition occurs.
OTHER AGREEMENTS. The Merger Agreement provides that, subject to the terms
and conditions provided in the Merger Agreement, the Company, Parent, and the
Purchaser shall: (a) use their best efforts to cooperate with one another in
(i) determining which filings are required to be made prior to the Effective
Time with, and which consents, approvals, permits, authorizations or waivers
are required to be obtained prior to the Effective Time from, Governmental
Entities or other third parties in connection with the execution and delivery
of the Merger Agreement and certain other ancillary documents and the
consummation of the transactions contemplated thereby and (ii) timely making
all such filings and timely seeking all such consents, approvals, permits,
authorizations and waivers; and (b) use their best efforts to take, or cause
to be taken, all other action and do, or cause to be done, all other things
necessary, proper or appropriate to consummate and make effective the
transactions contemplated by the Merger Agreement. If, at any time after the
Effective Time, any further action is necessary or desirable to carry out the
purpose of the Merger Agreement, the proper officers and directors of Parent
and the Surviving Corporation shall take all such necessary action.
TERMINATION. The Merger Agreement may be terminated and the Merger
contemplated thereby may be abandoned at any time notwithstanding approval
thereof by the stockholders of the Company, but prior to the Effective Time:
(a) by mutual written consent of the Board of Directors of Parent and
the Company (which consent will require the approval of a majority of the
Continuing Directors if such termination occurs following the election or
appointment of Parent's designees, if applicable);
(b) by the Parent or the Company:
(i) if the Effective Time shall not have occurred on or before
December 31, 1996 (provided that the right to terminate the Merger Agreement
pursuant to this clause
(i) shall not be available to any party whose failure to
fulfill any obligation under the Merger Agreement has been the cause of or resul
ted in the failure of the Effective Time to occur on or before such date);
(ii) if there shall be any statute, law, rule or regulation that
makes consummation of the Offer or the Merger illegal or prohibited or if any
court of competent jurisdiction in the United States or other Governmental
Entity shall have issued an order, judgment, decree or ruling, or taken any
other action restraining, enjoining or otherwise
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prohibiting the Merger and such order, judgment, decree, ruling or other
action shall have become final and non-appealable;
(iii) after December 31, 1996 if, on account of the failure of any
condition specified in Section 14 "Certain Conditions to the Offer", the
Purchaser has not purchased any Shares thereunder by that date (provided that
the right to terminate the Merger Agreement pursuant to this clause (iii)
shall not be available to any party whose failure to fulfill any obligation
under the Merger Agreement has been the cause of or resulted in the failure
of any such condition); or
(iv) upon a vote at a duly held meeting or upon any adjournment
thereof, the stockholders of the Company shall have failed to give any
approval required by applicable law;
(c) by the Company if there is an Alternative Proposal which the Board
of Directors in good faith determines is more favorable from a financial
point of view to the stockholders of the Company as compared to the
Offer and the Merger, and the Board of Directors determines, after
consultation with its counsel that failure to terminate the Merger Agreement
would be inconsistent with the compliance by the Board of Directors with its
fiduciary duties to stockholders imposed by law; provided, however, that the
right to terminate the Merger Agreement in such event shall not be available
(i) if the Company has breached in any material respect its
obligations not to solicit Alternative Proposals, or
(ii) if the Alternative Proposal (x) is subject to a financing
condition or (y) involves consideration that is not entirely cash or does
not permit stockholders to receive the payment of the offered consideration
in respect of all Shares at the same time, unless the Board of Directors has
been furnished with a written opinion of an investment banking firm to the
effect that (in the case of clause (x)) the Alternative Proposal is readily
financeable and (in the case of clause (y)) that such offer provides a
higher value per share than the consideration per share pursuant to the
Offer or the Merger, or
(iii) if, prior to or concurrently with any purported termination
pursuant to this clause (c), the Company shall not have paid the Commitment
Fee and the Expenses, if applicable, or
(iv) if the Company has not provided Parent and the Purchaser with
prior written notice of its intent to so terminate the Merger Agreement and
delivered to Parent and the Purchaser a copy of the written agreement
embodying the Alternative Proposal in its then most definitive form
concurrently with the earlier of (x) the public announcement of, or (y)
filing with the Commission of any documents relating to, the Alternative
Proposal; and
(d) by Parent if the Board of Directors shall have failed to recommend,
or shall have withdrawn, modified or amended in any material respect, its
approval or recommendation of the Offer or the Merger or shall have
recommended acceptance of any Alternative Proposal, or shall have resolved
to do any of the foregoing.
INDEMNIFICATION. The Purchaser has agreed to cause the Surviving Corporation
to keep in effect in its By-Laws a provision for a period of not less than
three years from the Effective Time (or, in the case of matters occurring prior
to the Effective Time which have not been resolved prior to the third
anniversary of the Effective Time, until such matters are finally resolved)
which provides for indemnification of the past and present officers and
directors of the Company to the fullest extent permitted by Colorado Law. The
Merger Agreement provides that from and after the Effective Time, Parent shall
indemnify and hold harmless, to the fullest extent permitted under applicable
law, each person who is, or has been at any time prior to the date of the
Merger Agreement or who becomes prior to the Effective Time, an officer or
director of the Company or any subsidiary against all losses, claims, damages,
liabilities, costs or expenses (including attorneys' fees), judgments, fines,
penalties and amounts paid in settlement (collectively, "Losses") in connection
with any Litigation arising out of or pertaining to acts or omissions, or
alleged acts or omissions, by them in their capacities as such, which acts or
omissions existed or occurred prior to the Effective Time, whether commenced,
asserted or claimed before or after the Effective Time, including, without
limitation, liabilities arising under the Securities Act, the Exchange Act and
state corporation laws in connection with the transactions contemplated hereby.
The Company and, after the Effective Time, the Parent shall periodically advance
expenses as incurred with respect to the foregoing to the fullest extent
permitted under applicable law provided that the person to whom the expenses are
advanced provides an undertaking to repay such advance if it is ultimately
determined that such person is not entitled to indemnification. If the Merger
is consummated, the Surviving Corporation shall, to the fullest extent permitted
under applicable law, indemnify and hold harmless Parent and any person or
entity who was a stockholder, officer, director or affiliate of Parent prior to
the Effective Time against any losses in connection with any Litigation arising
out of or pertaining to any of the
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transactions contemplated by the Merger Agreement or certain ancillary
documents relating thereto. Parent is required to periodically advance
expenses as incurred with respect to the foregoing to the fullest extent
permitted under applicable law provided that the person to whom the expenses
are advanced provides an undertaking to repay such advance if it is
ultimately determined that such person is not entitled to indemnification.
The Surviving Corporation will control the defense, through its counsel, of
any action brought against any person seeking indemnification pursuant to the
preceding two paragraphs (an "Indemnified Party"). Counsel for the
Indemnified Party shall be selected by the Indemnified Party and will be
permitted to participate in the defense of such action at the Surviving
Corporation's expense.
CERTAIN EMPLOYEE MATTERS. The Merger Agreement provides that, from and after
the Effective Time, the Surviving Corporation will honor and assume, and
Parent will cause the Surviving Corporation to honor and assume, in
accordance with their terms all existing employment and severance agreements
between the Company or any of its subsidiaries and any officer, director, or
employee of the Company or any of its subsidiaries and all benefits or other
amounts earned or accrued to the extent vested or which becomes vested in the
ordinary course, through the Effective Time under all employee benefit plans
of the Company.
AMENDMENT. To the extent permitted by applicable law, the Merger Agreement
may be amended by action taken by or on behalf of the Board of Directors of
the Company (by action of a majority of the Continuing Directors if such
amendment occurs following the election or appointment of Parent's
designees, if applicable) and the Purchaser at any time before or after
adoption of the Merger Agreement by the stockholders of the Company but,
after any such stockholder approval, no amendment shall be made which
decreases the Merger Consideration or which adversely affects the rights of
the Company's stockholders hereunder without the approval of such
stockholders. The Merger Agreement may not be amended except by an instrument
in writing signed on behalf of all of the parties.
TIMING. The exact timing and details of the Merger will depend upon legal
requirements and a variety of other factors, including the number of Shares
acquired by the Purchaser pursuant to the Offer. Although Parent has agreed
to cause the Merger to be consummated on the terms contained in the Merger
Agreement, there can be no assurance as to the timing of the Merger.
OTHER MATTERS.--APPRAISAL RIGHTS. No appraisal rights are available to
holders of Shares in connection with the Offer. However, if the Merger is
consummated, holders of Shares will have certain rights under Colorado Law to
dissent and demand appraisal of, and payment in cash for the fair value of,
their Shares. Such rights, if the statutory procedures are complied with,
could lead to a judicial determination of the fair value (excluding any
element of value arising from accomplishment or expectation of the Merger)
required to be paid in cash to such dissenting holders for their Shares.
Any such judicial determination of the fair value of Shares could be based
upon considerations other than the Offer Price and the market value of the
Shares, including asset values and the investment value of the Shares. The
value so determined could be more or less than the Offer Price or the Merger
Consideration. If any holder of Shares who demands appraisal under Colorado
Law fails to perfect, or effectively withdraws or losses his right to
appraisal, as provided in Colorado Law, the shares of such holder will be
converted into the Merger Consideration in accordance with the Merger
Agreement. A stockholder may withdraw his demand for appraisal by delivery
to Parent of a written withdrawal of his demand for appraisal and acceptance
of the Merger. Failure to follow the steps required by Colorado Law for
perfecting appraisal rights may result in the loss of such rights.
- --RULE 13E-3. The Commission has adopted Rule 13e-3 under the Exchange
Act("Rule 13e-3"), which is applicable to certain "going private"
transactions. Rule 13e-3 requires, among other things, that certain financial
information concerning the Company and certain information relating to the
fairness of the proposed transaction and the consideration offered to
minority stockholders in such transaction be filed with the Commission and
disclosed to stockholders prior to consummation of the transaction. Parent,
Purchaser, Company and Deas H. Warley III have filed Schedule 13E-3. There
can be no assurance that the Merger will take place, even though each party
has agreed in the Merger Agreement to use its best efforts to cause the
Merger to occur, because the Merger is subject to certain conditions, some of
which are beyond the control of either the Purchaser or the Company. Since
the Purchaser's ultimate objective is to acquire ownership of all the Shares,
if the Merger does not take place, the Purchaser would consider the
acquisition, whether directly or through an affiliate of Shares through
private or open market purchases, or subsequent tender offers or a different
type of merger or other combination of the Company with the Purchaser or an
affiliate or
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subsidiary thereof, or by any other permissible means deemed advisable by it.
Except as described in the section captioned "The Merger Agreement", any of
these possible transactions might be on terms the same as, or more or less
favorable than, those of the Offer or the Merger.
- --RULE 13E-4. The Commission has adopted Rule 13e-4 under the Exchange
Act("Rule 13e-4"), which is applicable to certain "issuer tender offers".
Rule 13e-4 requires, among other things, that certain financial information
concerning the company and certain other information relating to the
proposed transaction be filed with the Commission and disclosed to
stockholders prior to consummation of the transaction. Parent has filed
Schedule 13E-4.
13. DIVIDENDS AND DISTRIBUTIONS. Pursuant to the terms of the Merger
Agreement, the Company is prohibited from taking any of the actions described
in the two following paragraphs, and nothing herein shall constitute a waiver
by the Purchaser or Parent of any of its rights under the Merger Agreement or
a limitation of remedies available to the Purchaser or Parent for any breach
of the Merger Agreement, including termination thereof. If on or after the
date of the Merger Agreement the Company should (a) split, combine or
otherwise change the Shares or its capitalization, (b) acquire currently
outstanding Shares or otherwise cause a reduction in the number of
outstanding Shares or (c) issue or sell additional Shares, shares of any
other class of capital stock, other voting securities or any securities
convertible into, or rights, warrants or options, conditional or otherwise,
to acquire, any of the foregoing, other than Shares issued pursuant to the
exercise of outstanding employee stock options, then subject to the
provisions of Section 14 "Certain Conditions to the Offer" below, the
Purchaser, in its sole discretion, may make such adjustments as it deems
appropriate in the Offer Price and other terms of the Offer, including,
without limitation, the number or type of securities offered to be purchased.
If on or after the date of the Merger Agreement the Company should declare
or pay any cash dividend on the Shares or other distribution on the Shares,
or issue with respect to the Shares any additional Shares, shares of any
other class of capital stock, other voting securities or any securities
convertible into, or rights, warrants or options, conditional or otherwise,
to acquire, any of the foregoing, payable or distributable to stockholders of
record on a date prior to the transfer of the Shares purchased pursuant to
the Offer to the Purchaser or its nominee or transferee on the Company's
stock transfer records, then, subject to the provisions of Section 14
"Certain Conditions to the Offer" below, (a) the Offer Price may, in the sole
discretion of the Purchaser, be reduced by the amount of any such cash
dividend or cash distribution and (b) the whole of any such noncash dividend,
distribution or issuance to be received by the tendering stockholders will
(i) be received and held by the tendering stockholders for the account of the
Purchaser and will be required to be promptly remitted and transferred by
each tendering stockholder to the Depositary for the account of the
Purchaser, accompanied by appropriate documentation of transfer, or (ii) at
the direction of the Purchaser, be exercised for the benefit of the
Purchaser, in which case the proceeds of such exercise will promptly be
remitted to the Purchaser. Pending such remittance and subject to applicable
law, the Purchaser will be entitled to all rights and privileges as owner of
any such noncash dividend, distribution, issuance or proceeds and may
withhold the entire Offer Price or deduct from the Offer Price the amount or
value thereof, as determined by the Purchaser in its sole discretion.
14. CERTAIN CONDITIONS TO THE OFFER. Notwithstanding any other term of the
Offer, the Purchaser shall not be required to accept for payment or pay for,
subject to any applicable rules and regulations of the Commission, including
Rule 14e-1(c) of the Exchange Act, any Shares not theretofore accepted for
payment or paid for and may terminate or amend the Offer as to such Shares
unless there shall have been validly tendered and not withdrawn prior to the
expiration of the Offer that number of Shares which would represent at least
a majority of the outstanding Shares on a fully diluted basis. Furthermore,
notwithstanding any other term of the Offer or the Merger Agreement, the
Purchaser shall not be required to accept for payment or, subject as
aforesaid, to pay for any Shares not theretofore accepted for payment or paid
for, and may terminate or amend the Offer if at any time on or after the date
of the Merger Agreement and prior to the Expiration Date, any of the
following conditions exist or shall occur and remain in effect:
(a) there shall have been instituted or pending any litigation by the
Government of the United States of America or any agency or
instrumentality thereof
(i) which seeks to challenge the acquisition by Parent or the
Purchaser (or any of its affiliates) of Shares pursuant
to the Offer or restrain, prohibit or delay the making
or consummation of the Offer or the Merger,
(ii) which seeks to make the purchase of or payment for some
or all of the Shares pursuant to the Offer or the Merger
illegal,
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(iii) which seeks to impose limitations on the ability of
Parent or the Purchaser (or any of their affiliates)
effectively to acquire or hold, or to require Parent, the
Purchaser or the Company or any of their respective
affiliates or subsidiaries to dispose of or hold
separate, any material portion of their assets or business,
(iv) which seeks to impose limitations on the ability of
Parent, the Purchaser or their affiliates to exercise
full rights of ownership of the Shares purchased by it,
including, without limitation, the right to vote the
Shares purchased by it on all matters properly presented
to the stockholders of the Company, or
(v) which seeks to limit or prohibit any future business
activity by Parent, the Purchaser or any of their
affiliates, including, without limitation, requiring the
prior consent of any person or entity (including the
Government of the United States of America or any agency
or instrumentality thereof) to future transactions by
Parent, the Purchaser or any of their affiliates; or
(b) there shall have been promulgated, enacted, entered, enforced or
deemed applicable to the Offer or the Merger, by any Governmental
Entity, any Law or there shall have been issued any injunction that
results in any of the consequences referred to in subsection (a) above;
or
(c) the Merger Agreement shall have been terminated in accordance with its
terms; or
(d) (i) any of the representations and warranties made by the
Company in the Merger Agreement shall not have been true
and correct in all material respects when made, or shall
thereafter have ceased to be true and correct in all
material respects as if made as of such later date (other
than representations and warranties made as of a
specified date) or
(ii) the Company shall have breached or failed to comply in
any material respect with any of its obligations under
the Merger Agreement; or
(e) any corporation, entity, "group" or "person" (as defined in the
Exchange Act), other than Parent or the Purchaser, shall have acquired
beneficial ownership of more than 49% of the outstanding Shares; or
(f) except as set forth in the Company Reports thereto or the schedules to
the Merger Agreement, any change shall have occurred or be threatened
which individually or in the aggregate has had or is continuing to have
a material adverse effect on the prospects of the Company and its
Subsidiaries taken as a whole; or
(g) there shall have occurred
(i) any general suspension of, or limitation on prices for,
trading in securities on any national securities
exchange or in the over the counter market in the United
States,
(ii) a declaration of any banking moratorium by federal or
state authorities or any suspension of payments in
respect of banks or any limitation (whether or not
mandatory) imposed by federal or state authorities on the
extension of credit by lending institutions in the
United States,
(iii) a commencement of a war, armed hostilities or any other
international or national calamity directly or
indirectly involving the United States, other than any
war, armed hostilities or other international calamity
involving the former Yugoslavia,
(iv) any mandatory limitation by the federal government on
the extension of credit by banks or other financial
institutions generally,
(v) any increase of 500 or more basis points in the prime
rate as announced by Chemical Bank, measured from the
date of the Merger Agreement, or
(vi) in the case of the foregoing clause (iii), if existing
at the time of the commencement of the Offer, in the
reasonable judgment of Parent, a material acceleration
or worsening thereof.
The foregoing conditions are for the sole benefit of Parent and the Purchaser
and may be asserted by Parent or the Purchaser regardless of the
circumstances (including any action or inaction by Parent or the Company)
giving rise to any such condition and may be waived by Parent or the
Purchaser, in whole or in part, at any time and from time to time, in the
sole discretion of Parent. The failure by Parent or the Purchaser at any time
to exercise any of the foregoing rights
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will not be deemed a waiver of any right, the waiver of such right with
respect to any particular facts or circumstances shall not be deemed a waiver
with respect to any other facts or circumstances, and each right will be
deemed an ongoing right which may be asserted at any time and from time to
time. Should the Offer be terminated pursuant to the foregoing provisions,
all tendered Shares not theretofore accepted for payment shall forthwith be
returned by the depositary to the tendering stockholders.
15. CERTAIN REGULATORY AND LEGAL MATTERS. Except as described in this
Section 15 "Certain Regulatory and Legal Matters", based on a review of
publicly available filings made by the Company with the Commission and other
publicly available information concerning the Company, as well as certain
representations made to the Purchaser and Parent in the Merger Agreement by
the Company, neither the Purchaser nor Parent is aware of any license or
regulatory permit that appears to be material to the business of the Company
and its subsidiaries, taken as a whole, that might be adversely affected by
the Purchaser's acquisition of Shares as contemplated herein or of any
approval or other action by any Governmental Entity that would be required
for the acquisition or ownership of Shares by the Purchaser as contemplated
herein. Should any such approval or other action be required, the Purchaser
and Parent currently contemplate that such approval or other action will be
sought, except as described below under "State Takeover Laws". While, except
as otherwise expressly described in this Section 15 "Certain Regulatory and
Legal Matters", the Purchaser does not presently intend to delay the
acceptance for payment of, or payment for, Shares tendered pursuant to the
Offer, pending the outcome of any such matter, there can be no assurance that
any such approval or other action, if needed, would be obtained or would be
obtained without substantial conditions or that failure to obtain any such
approval or other action might not result in consequences adverse to the
Company's business, or that certain parts of the Company's business might not
have to be disposed of if such approvals were not obtained or such other
actions were not taken or in order to obtain any such approval or other
action. If certain types of adverse action are taken with respect to the
matters discussed below, the Purchaser could decline to accept for payment or
pay for any Shares tendered. See Section 14 "Certain Conditions to the Offer"
for certain conditions to the Offer.
STATE TAKEOVER LAWS. A number of states throughout the United States have
enacted takeover statutes that purport, in varying degrees, to be applicable
to attempts to acquire securities of corporations that are incorporated or
have assets, stockholders, executive offices or places of business in such
states. In EDGAR V. MITE CORP., the Supreme Court of the United States held
that the Illinois Business Takeover Act, which involved state securities laws
that made the takeover of certain corporations more difficult, imposed a
substantial burden on interstate commerce and therefore was unconstitutional.
In CTS CORP. V. DYNAMICS CORP. OF AMERICA, however, the Supreme Court of the
United States held that a state may, as a matter of corporate law and, in
particular, those laws concerning corporate governance, constitutionally
disqualify a potential acquiror from voting on the affairs of a target
corporation without prior approval of the remaining stockholders, provided
that such laws were applicable only under certain conditions.
The Board of Directors has unanimously approved the Merger Agreement and the
transactions contemplated thereby, including the Offer. Neither the Purchaser
nor Parent has currently complied with any state takeover statute or
regulation. The Purchaser reserves the right to challenge the applicability
or validity of any state law purportedly applicable to the Offer or the
Merger and nothing in this Offer to Purchase or any action taken in
connection with the Offer or the Merger is intended as a waiver of such
right. If it is asserted that any state takeover statute is applicable to the
Offer or the Merger and an appropriate court does not determine that it is
inapplicable or invalid as applied to the Offer or the Merger, the Purchaser
might be required to file certain information with, or to receive approvals
from, the relevant state authorities, and the Purchaser might be unable to
accept for payment or pay for Shares tendered pursuant to the Offer or be
delayed in consummating the Offer or the Merger. In such case, the Purchaser
may not be obliged to accept for payment or pay for any Shares tendered
pursuant to the Offer.
ANTITRUST. There are exemptions from requirements for filing under the
antitrust laws with the Federal Trade Commission (the "FTC") or the Antitrust
Division of the United States Department of Justice.
OTHER REGULATORY APPROVAL. The Company will seek to obtain all necessary
licenses or certifications as expeditiously as possible.
16. FEES AND EXPENSES. The Purchaser has retained Stock Transfer Company of
America, Inc. to serve as the
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Depositary in connection with the Offer. The Depositary will receive
reasonable and customary compensation for its services, be reimbursed for
certain reasonable out-of-pocket expenses and be indemnified against certain
liabilities and expenses in connection therewith, including certain
liabilities under the federal securities laws. Neither the Purchaser nor
Parent will pay any fees or commissions to any broker or dealer or other
person in connection with the solicitation of tenders of Shares pursuant to
the Offer, except as may be required to reimburse for forwarding information
to the beneficial owners by nominee holders reasonable out of pocket costs
for forwarding information to the beneficial owners.
17. SPECIAL FACTORS.
CONFLICTS OF INTEREST. There are numerous conflicts of interest
inherent in the Offer and Merger. With respect to evaluating and adopting
the Merger Agreement and recommending the Offer, the Company's Board is not
independent. The Company did not engage an independent representative to
represent the stockholders of the Company that are unaffiliated with the
Parent. The Company's Board, for the reasons discussed below under "Fairness
Discussion," has concluded that the Offer is fair despite the fact that: (1)
all of the directors reviewing the transaction have conflicts of interest in
connection with the transaction, (2) there has been no auction for the
Company, (3) the transaction has not been structured to require the approval
of a majority of unaffiliated Company security holders; and (4) the Company's
Board has not retained an unaffiliated representative to act solely on behalf
of security holders for the purposes of negotiating the terms of the
transaction and/or preparing an analysis concerning the fairness of the
transaction. Deas H. Warley III, is the President and Chairman of the Company
and owns directly and beneficially approximately 37.50% of the Shares through
direct ownership of 806,250 Shares and options granted June 1, 1995 to
acquire 150,000 Shares at $0.625 per Share. The options will be canceled
under the Offer upon payment of a net price of $0.6375 per Share. Mr. Warley
is the President and Chairman of Purchaser and Parent and owns directly and
beneficially approximately 37% of Parent. Prior to the acquisition of MRO by
Parent in December 1993 for common stock, Mr. Warley owned 80% of MRO. MRO
has managed the Company under a management agreement since 1989. The two
other members of the Company's board of directors are Messrs. Darrell Dillard
and Wayne Whitaker. Mr. Dillard was the Company's independent auditor for
fiscal years 1991 through 1993, was the auditor for the Parent for fiscal
years 1989 through 1993, was the auditor of MRO from 1989 through 1993, has
been a director of Parent since 1994 and been a director, vice president and
Chief Financial Officer of Parent since 1995. During fiscal years 1991
through 1993 the Company paid Mr. Dillard $46,890, $14,600 and $14,000,
respectively for auditing and related accounting and tax advice and for
fiscal years 1994 through 1996 the Company paid Mr. Dillard $14,600, $18,485
and $4,000, respectively, for accounting and tax advice. Mr. Dillard was
granted on June 1, 1995 options to acquire 50,000 Shares (2.04% of the
outstanding Shares after exercise) at $0.0625 per share that will be
canceled upon a net payment of $0.6375 per option Share pursuant to the
Offer. Mr. Dillard owns less than 1% of Parent's outstanding common stock.
Mr. Whitaker and the law firm of which he is a partner has represented the
Company since 1989, Parent since 1990, MRO since 1990, and represents
Purchaser. Mr. Whitaker has been a director of the Company since 1995 and
Parent since 1996. The Company has paid Mr. Whitaker's law firm $2,116,
$12,964, $11,859 and $7,986 during 1993, 1994, 1995 and through July 31,
1996, respectively, for legal services. Mr. Whitaker owns directly and
beneficially 120,000 Shares (4.9% of the outstanding Shares after exercises)
through his direct ownership of 25,000 Shares, options (granted June 1,1995)
to acquire 50,000 Shares at $0.0625 per share that will be canceled upon a
new payment of $0.6375 per option Share pursuant to the Offer, and as trustee
of two trusts for Mr. Warley's children that each own 22,500 Shares. Mr.
Whitaker beneficially owns less than 1% of Parent's common stock.
ADDITIONAL RELATED PARTY TRANSACTIONS. The Company and MRO entered into
the Management Agreement on August 28, 1989 which provides that MRO will
provide day-to-day management, administrative, bookkeeping and accounting
services to the Company. Legal, auditing, income tax advice and other
third party provided services, including well operation charges for those
wells MRO operated under written operating agreements with all of the working
interest owners, were either paid directly by the Company or reimbursed to
MRO. The Management Agreement was extended and amended on December 31, 1993
whereby the Company paid MRO a fee equal of $8,500 per month during 1995, and
was to pay $8,000 per month during 1996, and $7,500 per month during 1997 and
thereafter, if it was then further extended without amendment. However,
effective January 1, 1996 the Management Agreement was further amended
whereby the Company will pay a reduced fee equal to $5,000 per month during
1996, $4,500 per month during 1997 and $4,000 per month during 1998. As a
result of the Management Agreement the Company does not
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maintain offices separate from those of Parent and MRO, nor does it employ a
separate staff of administrative employees or compensate its officers or
directors. Management fees incurred under this agreement for the years ended
July 31, 1993, 1994 and 1995 were $120,000, $113,000, and $104,500,
respectively. This agreement may be terminated by either party at any time.
MRO acts as operator of a substantial portion of the Company's oil and
gas properties. For all services performed as operator of those properties,
MRO is entitled to receive the compensation and reimbursements provided the
operator under the applicable operating agreement. However, any charges by
MRO under an operating agreement in such a situation for the use of its
personnel, properties and equipment, as well as the prices of materials sold
by it, must be at rates equal to the competitive charges of unaffiliated
third parties for comparable services or materials in the same geographic
area. Further, those services can be provided only pursuant to a written
agreement which precisely describes the services to be rendered and the
compensation to be paid. The Company's share of operation and supervision
charges incurred on these properties for the years ended July 31, 1993, 1994,
and 1995 was $13,854, $18,852, and $28,106, respectively. Until May, 1995,
the Company leased a truck for use by its field personnel, and at times prior
thereto, the Company had leased two trucks for such purpose, from MRO. In
May, 1995 the Company purchased, at trade in value, the two trucks formerly
being leased. Lease expenses incurred under these agreements for the years
ended July 31, 1993, 1994 and 1995 were $13,326, $8,283, and $4,200,
respectively. Terms of the lease agreement were determined from and are less
than competitive market leases in the area.
Effective January 1, 1994 the Company purchased a 10% working interest
with an approximate 8.75% revenue interest in certain oil and gas properties
in Ward County, Texas from Parent for $85,696, which was Parent's actual cost
adjusted for revenues and expenses through December 31, 1993.
Effective August 1, 1994 the Company acquired 10% of Parent's working
interest in certain oil and gas properties in Coke and Howard Counties, Texas
for $201,596, which was Parent's actual cost adjusted for revenues and
expenses from August 1, 1994 through August 15, 1994, the closing date, and
transaction costs.
Effective May 26, 1995, the Company, in participation with Parent,
acquired a five percent working interest in certain oil and gas leases and
seismic options in the Sunburst Project, Terry County, Texas, and the Latigo
Project, Hockley County, Texas in exchange for a commitment to expend certain
monies in connection with certain oil and gas leases, seismic options,
conducting 3-D geophysical surveys, interpretation of 3-D seismic data and
the drilling of two or more test wells. MRO will operate the projects.
Closing occurred on July 14, 1995.
Effective July 11, 1995, the Company acquired a five percent working
interest in certain oil and gas leases and seismic options in the Lakota
Project, Hockley County, Texas in exchange for a commitment to expend certain
monies in connection with certain oil and gas leases, seismic options,
conducting 3-D geophysical surveys, interpretation of 3-D seismic data and
the drilling of one or more test wells. MRO will operate the project.
BACKGROUND OF OFFER. As previously discussed, each of Messrs. Warley,
Whitaker and Dillard are members of both the Board of Directors of the
Company and the Parent. At a Board of Directors meeting of Parent held on
May 31,1996 an agenda item was the discussion of an acquisition of an
unrelated publicly held oil and gas company. During this meeting, which was
attended by the full board of the Parent, Mr. Warley brought up for
discussion whether or not Parent should consider the acquisition of the
Company in light of the Parent's prior public announcement of its intention
to consider acquisitions of oil and gas companies. Mr. Warley indicated that
acquiring the Company would be beneficial to the Parent for several reasons.
First, it would remove a concern that had been expressed to him by members of
the investment community regarding the appearance of a conflict of interest
and dealings among related parties between the Parent and the Company.
Second, given the nature of the Parent's involvement in the Company's overall
operations resulting from the management contract, as well as the overlapping
members on the boards of directors, the Parent was familiar with the Company,
its properties and operations. After a general discussion among the board,
the Parent's board agreed that an acquisition of the Company might be
beneficial. The Parent's board acknowledged the fact that the members of
the Company's entire board were also members of the Parent's board and any
potential offer to the Company would require a fairness opinion that would
independently arrive at a fair price. Further at this meeting, the Parent's
board discussed whether or not to consider an offer that included Parent's
stock or cash or some combination of
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stock and cash. After a discussion of the relative cost and length of time
to pursue an offer using Parent stock, the board concluded a cash offer was
more appropriate. The Parent's board then agreed to pursue the matter by
authorizing the Parent to engage an investment banking firm to arrive at a
fair price to offer for the Company. Messrs. Warley, Whitaker and Dillard
informed the Parent's board at that meeting that, given the fact of their
being the entire board of directors of the Company they would entertain a
proposal for the Parent to acquire the Company, provided Parent would share
the fairness opinion with the Company and make the investment banking firm
available to meet with them separately to discuss their opinion. The
Parent's board agreed to this request.
On June 3, 1996 Parent engaged SMG to analyze the Company and provide an
opinion as to a fair price to offer. On July 3,1996, a representative of
SMG met with the entire board of Parent and presented their oral opinion that
a cash offer of $0.70 per share for all of the Company's common stock,
including outstanding options, was fair to the Parent from a financial point
of view. The Parent's board inquired regarding the nature of certain of the
assumptions regarding oil and gas prices, oil and gas reserve estimates, as
well as the availability of comparable transactions involving entire
companies, and transactions that involved only the purchase of oil and gas
properties both with and without related well operations. The members of
Parent's board, other than Messrs. Warley, Whitaker and Dillard, then
discussed whether or not Parent should request certain lock up provisions
with the Company such as an option to acquire Company shares, a termination
fee if the Merger did not occur due to a competing offer, and reimbursement
of transaction costs. Messrs. Warley, Whitaker and Dillard, in their
capacity as Company board members indicated that the Company would only
consider reimbursing Parent for transaction costs in the event a competing
offer resulted in the proposed transaction not being consummated. Following
this discussion the Parent's board unanimously agreed to proceed to make the
offer to the Company acquire for cash all of the Company's outstanding common
stock, including stock options, at $0.70 per share pursuant to a merger
agreement. SMG delivered their written opinion to Parent on July 14,1996.
Also on July 3, 1996, and following the meeting of the Parent's board,
the board of the Company met. At this meeting Mr. Warley informed the board
that he has made prior attempts to locate potential purchasers for the
Company, but that he was unsuccessful in locating anyone who would agree to
acquire the entire Company. The Company' board then met with the
representative of SMG and further inquired as to certain of their
assumptions, including the value of the Company's $800,000 net operating loss
carry forward for income tax purposes and whether some value had been given
to efficiencies that may be realized as a result of the fact MRO currently
operated the Company. The Board further discussed that Parent's willingness
to continue to offer to include the Company in future acquisitions might be
restricted or eliminated due to the appearance of a conflict and Parent may
not be willing in the future to permit the Company to owe amounts to Parent
for well operations. Mr. Warley also indicated that due to increasing demands
on his and Parent's staff to focus on Parent's operations, it could result
in a restriction on the Company's ability to grow or replace existing
production. The Board also discussed the relative cost of employing a
separate staff to provide those services currently provided by MRO, including
administrative, geological and engineering, together with associated costs
such as a separate office lease and equipment and utility costs and concluded
that such action would likely result in administrative costs greater than
those being charged by MRO. The Board concluded that the value of the
Company's operations was more likely to be worth more to Parent than anyone
else for a number of reasons the most significant of which related to the
fact that the two companies owned interests in the same properties and
Parent already had, by virtue of the MRO Management Agreement, all of the
accounting and production records of the Company's wells on its accounting
systems and was familiar with each of the Company's well operations that were
separate from those of the Parent. The Board felt the price per share value
reached by SMG appeared to take this fact into account. Further, since the
SMG value was in part based upon oil and gas reserve and production
information provided it by Parent, the Board felt this information was
accurate since it was prepared by the same personnel of Parent that prepared
the Company's production and oil and gas reserve reports. After these
discussions, the Company's board agreed to recommend acceptance of the
Parent's offer and to proceed with the necessary documentation.
On July 3, 1996 the boards of Parent, Purchaser and the Company approved
the preparation and execution of a merger agreement and the immediate
commencing of the Offer. Following the meetings on July 3, 1996, the Parent
began preparing the documentation to make the Offer, including the Merger
Agreement that was executed on July 17, 1996.
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FAIRNESS DISCUSSION. As referenced above, after discussions with the
representative of SMG regarding the analysis, methods and assumptions
utilized in arriving its opinion as to a fair per share value, the Board of
the Company, including Mr. Warley, adopted the conclusion and analysis of SMG
and agreed with the Share value of $.70. Although SMG was retained by Parent
solely for its benefit, inasmuch as the Company's Board and Mr. Warley have
adopted its conclusion and analysis, a further discussion of the SMG opinion
is given below. Parent retained for its benefit SMG to provide a fairness
opinion regarding the price to offer the shareholders of the Company. SMG
was selected because of the experience of its principals in providing
investment banking services and evaluating businesses, their familiarity with
the Parent, their ability to promptly begin the engagement and their
estimated fee to provide the requested opinion. On July 14, 1996 SMG
delivered to the Parent's Board it written opinion to the effect that a cash
offer of $0.70 per share for the Company's common stock and for each share
subject to a stock option less the exercise price thereof, was fair, from a
financial point of view to the stockholders of Parent.
THE FULL TEXT OF THE SMG OPINION HAS BEEN FILED AS EXHIBIT 99(b)(1) TO THE
SCHEDULE 13E-3, FILED WITH THE COMMISSION BY PARENT, PURCHASER, COMPANY AND
MR. WARLEY.
The SMG opinion was prepared for Parent's Board and is directed only to the
fairness, from a financial point of view, of the offer price of $.70 per
Share to the stockholders of Parent. The SMG opinion does not constitute a
recommendation to any stockholder of the Company as to whether to tender any
Shares pursuant to the Offer. SMG was not requested by Parent's Board to make,
nor did it make any recommendation as to the form of consideration. No
restrictions or limitations were imposed by Parent's Board upon SMG with
respect to the investigation made or the procedures followed by SMG in
rendering its opinion. SMG was not requested to nor did SMG, solicit the
interest of any other party in acquiring the Company. SMG was apprised, and
did agree to permit its opinion to be examined by the Board of the Company
and to discuss its opinion with the Board of the Company. SMG was aware of
the high degree of affiliation between the Company and Parent. SMG does not
have any obligation to update its opinion past the date it was given on July
14, 1996.
As part of its procedures in arriving at its opinion of a fair price to offer
for the Company's Shares, SMG discussed current prices for oil and gas
properties with industry executives it believes have current knowledge with
respect to market transactions involving the general type properties owned by
the Company. In rendering its opinion SMG relied upon and assumed, without
independent verification, the accuracy, completeness and fairness of all of
the financial, operational and petroleum reserve and other information that
was available to it from public sources, that was provided to it by Parent
and the Company or their representatives, or that was otherwise reviewed by
it. In addition SMG relied upon the estimates and assumed operating
synergies achievable by Parent after acquiring the Company.
Prices paid for oil and gas properties can vary significantly. There are
numerous factors that impact pricing variables for oil and gas reserves,
including those that are of a technical nature, such as those that relate to
the particulars of the applicable geology and related engineering factors, as
well as those that relate to prevailing market prices for the sale of oil and
gas production in the open market. Further with respect to both the
technical factors as well as market issues, numerous assumptions are made
often based upon the particular evaluators' experiences. Two significant
assumptions relate to (i) the estimated escalation of the cost to produce
and the future selling prices of the oil and gas, and (ii) a risk factor of
future recoverability inherently associated with the future production of oil
and gas.
Based on information it obtained and certain assumptions it made, SMG created
certain pricing matrices for the petroleum reserves owned by the Company
which it believes reflects accepted methods of valuing oil and gas
properties.
One set of assumptions was based upon oil and gas reserves that included
proved developed producing properties ("PDP"), proved developed non-producing
properties ("PDNP"), and proved undeveloped properties ("PUD"). The reserve
prices utilized in the calculations ranged from $3.00 to $4.50 per barrel of
oil, and from $.40 to $.70 per MCF of gas. The result of these assumptions
yielded a Share price range, net of $165,118 of Company debt, of from $.50 to
$.76. A second set of assumptions, also using PDP, PDNP and PUD was based
upon estimated future revenues and expenses being escalated at 3% per year
and the PDNP reserves being discounted by 20% and the PUD reserves being
discounted by 50% for the risks recoverability . SMG believes that the
percentages for both the escalations and the risks are within the normal
ranges currently utilized within the industry. The result of these
assumptions yielded a Share price,
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net of Company debt, of between $.46 and $.70. A third set of assumptions,
using only PDP reserves at $6.00 per barrel and PDNP reserves at $3.00 per
barrel and gas reserves at $1.00 and $.50 per MCF, respectively yielded a
Share price, net of Company debt, of $.50. A fourth set of assumptions,
using the values of the third assumption but with 3% price and revenue
escalations and risk discounts on PDNP and PUD of 20% and 50%, respectively,
yielded a Share price, net of Company debt, of $.56. A fifth set of
assumptions utilized the Company's reserve reports for PDP, PDNP and PUD that
were neither escalated nor risked, but applied time value of money discounts
of 10%, 12% and 15%. These calculations yielded Share prices, net of Company
debt, of $.51, $.46 and $.39, respectively. A sixth set of assumptions,
using the values of the fifth assumptions but with 3% escalations and 20% and
50% risk discounts applied to PDNP and PUD respectively, yielded Share
prices, again discounted for the time value of money at the 10%, 12% and 15%
rates, of $.54, $.48 and $.40, respectively.
As one means of testing the reasonableness of its assumptions SMG made a
calculation as to what the price per equivalent barrel of oil would be based
upon an assumed Share price being paid. The assumed Share price was $.50,
which was then multiplied times the number of fully diluted Shares to arrive
at a gross purchase price, which amount was then divided by the Company's
reserves of equivalent barrels based upon PDP, PDNP and PUD with expenses and
revenues escalated at 3% and risk discounts of 20% and 50% applied to PDNP
and PUD, respectively. This calculation resulted in a per equivalent barrel
price of $3.39, which is in the range of assumed per barrel prices. A similar
calculation was made using only PDP and PDNP, also with the same expenses and
revenues escalations and risk discounts applied. This calculation resulted
in a per equivalent barrel price of $4.88, which is also in the range of
assumed per barrel prices.
The Company receives revenues from acting as operator of wells pursuant to
operating agreements with the working interest owners. SMG valued this stream
of revenue based upon representations from the Parent that it would realize,
on an incremental basis, a pre tax profit margin of 75%. In assigning a value
to operating revenues, SMG assumed that the revenues for the nine month
period of $143,283 would approximate the pre tax amount for the entire fiscal
1996 period. Since well operations depends upon the economic life of a well
which can vary depending upon a number of factors, SMG assumed level
operations for a period of between three and six years at the fiscal 1996
rate. SMG then calculated the present value of these various streams of
revenue using discount factors of 10%, 15% and 20%. The resulting Share
value ranged from $.11 based upon a three year period and a discount factor
of 15%, to $.19.based upon a five year period and a discount factor of 10%.
The Company also has a net operating loss carry forward for income tax
purposes of approximately $800,000 which SMG assumed would result in a tax
benefit of approximately $200,000. Since the ability of any purchaser to
utilize any such benefit varies, SMG made a Share value calculation assuming
a 100%, 75% and 50% utilization. On a Share basis this resulted in a value of
$.07, $.06 and $.04, respectively.
Another value examined by SMG was the adjusted book value, generally referred
to as break up value in the oil industry. Adjusted book value is equivalent
to liquidation value. Book value generally is not relevant for asset based
companies, such as oil and gas exploration and production companies because
the value assigned to assets for accounting purposes is based on the cost of
acquiring the assets, rather than the actual value which could be received in
the marketplace for those assets. Nevertheless SMG did examine the most
recent audited balance sheet which was for fiscal 1995. Based upon this
balance sheet information and the oil and gas reserve numbers contained
therein, a Share break up value was calculated as $0.325.
Valuation of the Company as a separate, fully staffed operating entity was
considered, but was discarded due to the fact that operating costs that would
be incurred (which would include an administrative staff not currently
maintained by the Company due to the Management Agreement) would be higher
than they would be on an incremental basis if the Company were acquired and
operated by someone with a pre existing staff with similar operations.
Stock market prices are also indications of value where active share trading
exists since these prices reflect actual trades where an exchange of cash has
occurred, rather than an academic valuation. The Company is listed on the OTC
Bulletin Board sponsored by NASDAQ under the symbol SMMP. Based upon
information supplied by NASDAQ, SMG concluded that due to very limited
trading, shareholders of the Company effectively owned stock in a semi
privately held
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company, and that the infrequent market trades do not reflect actual values
which would be realized upon liquidation. Low market prices are not
surprising, because minority shares of a small closely held company generally
sell at discounts to the overall value of the enterprise.
Other considerations taken into account in arriving at SMG's opinion of a
fair per share price included:
1. A third party, non operator of the Company's properties would likely
incur overhead in excess of that incurred by Parent.
2. A sale to a single purchaser eliminates the cost of separate SEC and
regulatory filings.
3. An unrelated third party may place higher risk factors on the non
producing reserves due to not having as much familiarity with the
properties as Parent.
4. Many of the Company's properties are operated by Parent and a third
party may give little or no value to future development since it would
not operate or control the properties.
5. Parent has been loaning money to the Company in the form of carrying a
receivable due from the Company relating to funding the Company's share
of property development costs.
6. Other parties may have different pricing assumptions.
7. Well operation revenues would incrementally represent significantly
higher profit margins to Parent than to another purchaser who had not
historically provided services under a similar Management Agreement.
In determining a fair Share value the definition utilized by SMG was "fair
market value" defined as "the price at which willing buyers and sellers, each
cognizant of all relevant information, would pay for all of the Shares of the
Company in a transaction where neither was obligated to participate." No pure
mechanical determination of value was made. All factors deemed relevant were
taken into consideration, including reserve values based on present value,
estimated selling prices for similar reserves in the marketplace utilizing
reasonable assumptions relating to escalations and risks, values of the
estimated cash flows from well operations, and value of the tax loss carry
forward. Share values resulting from each of these items was ranged, and
incorporated into a final estimate, based on the judgment of SMG. No
particular valuation method or calculation was weighed more heavily than
another. SMG's opinion that a price of $.70 per Share for all Shares takes
into account that any of the three elements of value.... oil and gas
reserves, revenues from well operations, and the estimated value of the tax
loss carry forward each may be slightly higher or lower, but that in
combining all of the factors, a price of $.70 per share is realistic, and
produces fair value from a financial point of view to the stockholders of
Parent.
18. MISCELLANEOUS. The Offer is not being made to (nor will tenders be
accepted from or on behalf of) holders of Shares in any jurisdiction in which
the making of the Offer or the acceptance thereof would not be in compliance
with the laws of such jurisdiction. Neither the Purchaser, Parent nor Mr.
Warley is aware of any jurisdiction in which the making of the Offer or the
tender of Shares in connection therewith would not be in compliance with the
laws of such jurisdiction. If the Purchaser, Parent or Mr. Warley becomes
aware of any state law prohibiting the making of the Offer or the acceptance
of Shares pursuant thereto in such state, the Purchaser will make a good
faith effort to comply with any such state statute or seek to have such state
statute declared inapplicable to the Offer. If, after such good faith effort,
the Purchaser cannot comply with any such state statute, the Offer will not
be made to (nor will tenders be accepted from or on behalf of) the holders of
Shares in such jurisdiction.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION ON BEHALF OF THE PURCHASER, PARENT OR MR. WARLEY NOT CONTAINED
HEREIN OR IN THE LETTER OF TRANSMITTAL AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. NEITHER THE DELIVERY OF THIS OFFER TO PURCHASE NOR ANY PURCHASE
PURSUANT TO THE OFFER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF PARENT, THE PURCHASER OR THE
COMPANY SINCE THE DATE AS OF WHICH INFORMATION IS FURNISHED OR THE DATE OF
THIS OFFER TO PURCHASE.
The Purchaser, Parent and Mr. Warley have filed with the Commission the
Schedule 14D-1 pursuant to Rule 14d-3 under the Exchange Act, furnishing
certain additional information with respect to the Offer. In addition, the
Company
29
<PAGE>
has filed with the Commission the Schedule 14D-9 pursuant to Rule
14d-9 under the Exchange Act, setting forth its recommendation with respect
to the Offer and the reasons for such recommendation and furnishing certain
additional related information. Such Schedules and any amendments thereto,
including exhibits, should be available for inspection and copies should be
obtainable in the manner set forth in Section 8 "Certain Information
Concerning the Company" and Section 9 "Certain Information Concerning Parent
and the Purchaser (except that they will not be available at the regional
offices of the Commission).
30
<PAGE>
Exhibit 99.(a)(5)
[MIDLAND RESOURCES, INC. LETTERHEAD]
August 29, 1996
Dear Summit Shareholders,
Over the past few weeks, I have had the opportunity to talk to a great
number of you. There have been quite a few questions concerning the materials
sent to you regarding the tender offer by Midland Resources to buy your Summit
stock. Enclosed is an Amended Statement of Offer to Purchase that accomplished
two important points; first, it includes additional disclosures, and second, it
extends the offer until September 18, 1996.
Mr. Deas H. Warley, Chairman of the Board for Midland Resources, commented,
"We are making every effort possible to locate lost shareholders, as well as
make it possible for all the shareholders to understand the offer."
If you have not tendered your Summit stock and would like to receive a copy
of the Letter of Transmittal or have any questions, please do not hesitate to
call me at the number above.
Sincerely,
/s/ Mark A. Kahill
