<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 20, 1997
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
MSR EXPLORATION LTD.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 1311 N/A
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification No.) Identification
incorporation or organization) No.)
</TABLE>
<TABLE>
<S> <C>
500 MAIN STREET OTTO J. BUIS
SUITE 210 500 MAIN STREET, SUITE 210
FORT WORTH, TEXAS 76102 FORT WORTH, TEXAS 76102
(817) 877-3151 (817) 877-3151
(Address, including zip code, and
telephone number, including area code, (Name, address, including zip code, and
of registrant's principal executive telephone number, including area code,
offices) of agent for service)
</TABLE>
------------------------
COPIES TO:
STEPHEN B. NORRIS
Thompson & Knight, P.C.
801 Cherry Street, Suite 1600
Fort Worth, Texas 76102
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: Upon the
effective date of the Continuance described in this Registration Statement of
MSR Exploration Ltd., an Alberta, Canada corporation, as a domestic corporation
under the laws of Delaware (the company, as continued being the "Registrant").
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PER SHARE OFFERING PRICE REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, no par value........... 13,777,014(1) $1.00(2) $13,777,014(2) $4,175
</TABLE>
(1) Consists of 13,777,014 shares of common stock of the continued company
issuable upon conversion of the currently outstanding shares of Common Stock
of the Registrant pursuant to the Continuance.
(2) Estimated solely for the purpose of determining the registration fee
pursuant to Rule 457(f), based on the average of the high and low sales
prices for the Company's Common Stock on the American Stock Exchange on June
18, 1997.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
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<PAGE>
MSR EXPLORATION LTD.
500 MAIN STREET, SUITE 210
FORT WORTH, TEXAS 76102
------------------------
NOTICE OF THE SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD , 1997
------------------------
NOTICE IS HEREBY GIVEN that a Special Meeting of the Shareholders (the
"Special Meeting") of MSR EXPLORATION LTD. (the "Company") will be held at
, Fort Worth, Texas, , on ,1997 at :00
.m. local time for the following purposes:
1. To consider and, if thought fit, to approve the following special
resolutions having the effect of approving the continuance (the "Continuance")
of the Company into the State of Delaware, U.S.A. The effectiveness of the
Continuance is expressly conditioned upon the approval by shareholders of the
Company of the subsequent merger (the "Merger") of the Company with and into
Mercury Montana, Inc., a Delaware corporation ("Mercury") and a majority-owned
subsidiary of Mercury Exploration Company.
BE IT RESOLVED, as special resolutions that:
(a) The Company be and is hereby authorized to apply to the Registrar of
Corporations for the Province of Alberta and the Secretary of State for the
State of Delaware for authorization to continue the Company into the State of
Delaware under section 182 of the Alberta Business Corporations Act (the "ABCA")
and section 388 of the Delaware General Corporation Law (the "DGCL") as if the
Company had been incorporated under the DGCL pursuant to section 101 of the DGCL
and amendments thereto;
(b) The Certificate of Domestication and Certificate of Incorporation of the
Company under the DGCL (collectively, the "Filing Documents") in the form
presented at the Special Meeting are hereby approved;
(c) Subject to the acceptance of the Filing Documents by the Delaware
Secretary of State, the Filing Documents and form of Bylaws presented at the
Special Meeting are adopted in substitution for the existing organizational
documents of the Company; and
(d) The officers and directors of the Company are hereby authorized and
directed to do such things and to execute such documents as may be necessary or
desirable in order to effect the Continuance.
2. To transact such other business as may properly come before the Special
Meeting or any adjournments thereof.
If the foregoing special resolution regarding the Continuance is approved
and the Continuance becomes effective, the shareholders of the Company, after it
has been domesticated in Delaware, will be asked to approve by written consent
the Merger pursuant to the laws of the State of Delaware. Such written consent
(the "Consent") will be executed pursuant to proxies also solicited by the
Company pursuant to the accompanying Proxy Statement/Joint Prospectus.
Accordingly, no shareholder meeting will be held with respect to the Merger
proposal. The effectiveness of the Merger is expressly conditioned upon the
effectiveness of the Continuance.
TAKE NOTICE that pursuant to the ABCA, you may until , 1997
(the day of the Meeting) give the Company a Notice of Dissent by registered mail
addressed to the Company at 500 Main Street, Suite 210, Fort Worth, Texas 76102,
with respect to the above special resolutions regarding the continuance of the
Company into the State of Delaware. Pursuant to section 184 of the ABCA, a
dissenting shareholder is entitled to be paid by the Company the fair value of
the shares held by him in respect of which he dissents, determined at the close
of business on the day before the Special Meeting. Details of your dissent
rights and a copy of section 184 of the ABCA are contained in the accompanying
Proxy Statement/Joint Prospectus.
<PAGE>
In addition, subsequent to the effectiveness of the Continuance, the
certificate of incorporation of the Company will contain provisions based on
section 184 of the ABCA that will entitle the holders of common stock of the
Company to exercise rights of dissent with respect to the Merger. These rights
must be exercised in the same manner and during the same time as shareholders'
rights under section 184 of the ABCA must be exercised as described in the
preceding paragraph. A description of such rights in connection with the Merger
is contained in the accompanying Proxy Statement/Joint Prospectus. NO
DISSENTERS' RIGHTS WILL BE AVAILABLE UNDER THE DGCL IN CONNECTION WITH THE
MERGER.
All of the foregoing matters are more fully described in the Proxy
Statement/Joint Prospectus accompanying this Notice. Shareholders of record of
the Company's common stock on the Company's stock transfer records at the close
of business on , 1997 are entitled to notice of and to vote at the
Special Meeting or any adjournment thereof. A list of shareholders entitled to
vote at the Special Meeting will be available for inspection at the offices of
the Company at 500 Main Street, Suite 210, Fort Worth, Texas 76102 at least ten
(10) days prior to the Special Meeting. Holders of record of the common stock of
the Company at the time the Continuance becomes effective will be entitled to
express or withhold their approval of the Merger by way of the Consent.
If you are unable to attend the Special Meeting in person, please read the
Proxy Statement/Joint Prospectus enclosed herewith and then complete and return
the Proxies within the time set forth in the Proxy Statement/Joint Prospectus.
The enclosed Proxies are solicited by the Board of Directors of the Company.
BY ORDER OF THE BOARD OF DIRECTORS
Otto J. Buis
CHAIRMAN, PRESIDENT AND CHIEF
EXECUTIVE OFFICER
Fort Worth, Texas
, 1997
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE, DATE,
SIGN AND RETURN THE ENCLOSED PROXIES IN THE ENCLOSED REPLY ENVELOPE. IF YOU
ATTEND THE SPECIAL MEETING, YOU MAY VOTE IN PERSON IF YOU WISH TO DO SO EVEN
THOUGH YOU HAVE SENT IN YOUR PROXY FOR THE SPECIAL MEETING. THERE WILL BE NO
MEETING OF SHAREHOLDERS OF THE COMPANY TO CONSIDER THE MERGER. THE ONLY WAY IN
WHICH A SHAREHOLDER OF THE COMPANY CAN EXPRESS HIS OR HER APPROVAL OF THE MERGER
IS BY EXECUTING THE CONSENT. THE FAILURE TO GRANT A PROXY OR THE WITHHOLDING OF
AUTHORITY TO EXECUTE THE CONSENT HAS THE SAME EFFECT AS A VOTE "AGAINST" THE
MERGER. THEREFORE, PLEASE COMPLETE THE ENCLOSED FORM OF PROXY FOR THE CONSENT
AND FORWARD IT TO THE COMPANY.
ii
<PAGE>
SUBJECT TO COMPLETION, DATED , 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PROXY STATEMENT/JOINT PROSPECTUS
---------------------
MSR EXPLORATION LTD.
MERCURY MONTANA, INC.
----------------
This Proxy Statement/Joint Prospectus ("Proxy Statement/Prospectus") is
being furnished to holders of shares of common stock, no par value (the "Company
Common Stock"), of MSR Exploration Ltd. (the "Company"), an Alberta, Canada
corporation, in connection with the proposed continuance of the Company from
Canada to the United States as a Delaware corporation (the "Continuance") and
the subsequent merger (the "Merger") of the Company with and into Mercury
Montana, Inc., a Delaware corporation ("Mercury") and a majority owned
subsidiary of Mercury Exploration Company, a Texas corporation ("Parent").
Pursuant to this Proxy Statement/Prospectus the Board of Directors of the
Company is soliciting proxies for use (i) at the Special Meeting of Shareholders
of the Company to be held on , 1997 at the , Fort Worth,
Texas , commencing at :00 .m., local time, and at any adjournment or
postponement thereof (the "Special Meeting"), to consider and vote upon the
Continuance, and (ii) in connection with the execution of shareholders' consents
approving the Merger (the "Consent").
Pursuant to the Consent, the shareholders of the Company will approve and
adopt the Merger and the Agreement and Plan of Merger dated as of March 26,
1997, by and among the Company, Mercury and Parent, as amended by Amendment No.
1 to Agreement and Plan of Merger dated as of June 17, 1997 (the "Merger
Agreement"), providing for the Merger. The Continuance will not be consummated
unless the Company receives proxies for Consents sufficient in number to approve
the Merger. Likewise, the effectiveness of the Continuance is a condition to the
Merger.
In the Merger (i) each share of common stock of the continued corporation
(the "Continued Common Stock") (other than shares as to which dissenters' or
appraisal rights have been exercised under the certificate of incorporation of
the continued corporation) will be converted automatically into the right to
receive one share of common stock, par value $0.01 per share, of the Surviving
Corporation (the "Surviving Corporation Common Stock"), (ii) each outstanding
share of common stock, par value $0.01 per share, of Mercury (the "Mercury
Common Stock"), will be converted automatically into the right to receive one
share of Surviving Corporation Common Stock, (iii) the Surviving Corporation
will change its name to "MSR Exploration Ltd.", (iv) the outstanding warrant to
acquire shares of Company Common Stock will be exchanged for an equivalent right
to acquire shares of Surviving Corporation Common Stock and (iv) each
outstanding option or warrant to acquire shares of Mercury Common Stock will be
exchanged for an equivalent right to acquire shares of Surviving Corporation
Common Stock, all as more fully described in this Proxy Statement/Prospectus.
This Proxy Statement/Prospectus constitutes a prospectus of the Company with
respect to 13,777,014 shares of common stock of the continued corporation to be
issued in connection with the Continuance and a prospectus of the Surviving
Corporation with respect to 13,777,014 shares of Surviving Corporation Common
Stock to be issued in the Merger.
SEE "RISK FACTORS" BEGINNING ON PAGE OF THIS PROXY STATEMENT/PROSPECTUS
FOR A DISCUSSION OF CERTAIN FACTORS TO BE CONSIDERED BY SHAREHOLDERS OF THE
COMPANY.
THE SECURITIES TO BE ISSUED PURSUANT TO THIS PROXY STATEMENT/PROSPECTUS HAVE
NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
NO REGULATORY AGENCY OR STOCK EXCHANGE HAS IN ANY WAY PASSED UPON
THE MERITS OF THE TRANSACTIONS DESCRIBED HEREIN AND ANY
REPRESENTATION TO THE CONTRARY IS AN OFFENSE.
This Proxy Statement/Prospectus and the accompanying proxy forms are first
being mailed to shareholders of the Company on or about , 1997.
The date of this Proxy Statement/Prospectus is , 1997.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
SOLICITATION OF PROXIES AND VOTING REQUIREMENTS........................... vii
APPOINTMENT AND REVOCATION OF PROXIES..................................... vii
VOTING OF SHARES AND EXERCISE OF DISCRETION OF PROXIES.................... viii
THE SPECIAL MEETING....................................................... viii
THE CONSENT............................................................... viii
THE CONTINUANCE........................................................... ix
THE MERGER................................................................ ix
CONSUMMATION OF THE MERGER................................................ ix
AVAILABLE INFORMATION..................................................... x
SUMMARY................................................................... 1
The Companies........................................................... 1
The Special Meeting..................................................... 2
The Consent............................................................. 2
Security Ownership of Company Management................................ 3
The Continuance......................................................... 3
The Merger and the Merger Agreement..................................... 3
Board of Directors...................................................... 5
Regulatory Approval..................................................... 5
Appraisal Rights with respect to the Continuance and the Merger......... 6
Certain Canadian Federal Income Tax Consequences of the Continuance and
the Merger............................................................ 6
Certain United States Federal Income Tax Consequences of the Continuance
and the Merger........................................................ 7
Anticipated Accounting Treatment........................................ 7
Exchange of Stock Certificates.......................................... 7
Comparative Rights of Shareholders...................................... 7
Market Price Data....................................................... 8
Dividends............................................................... 8
Risk Factors Pertaining to the Continuance and the Merger............... 9
Summary Historical Financial Information................................ 10
Summary Historical Financial Information of the Mercury Properties...... 11
Summary Pro Forma Financial Information................................. 12
Comparative Per Share Data.............................................. 13
RISK FACTORS.............................................................. 14
Effects of the Continuance and the Merger on Shareholders' Rights....... 14
Volatility of Oil and Natural Gas Prices................................ 15
Uncertainty of Reserve Information and Future Net Revenue Estimates..... 15
Concentration in Cut Bank Field Complex................................. 16
Substantial Capital Requirements........................................ 16
Drilling and Operating Risks............................................ 17
Reliance on Contract with Montana Power Company......................... 17
Tax Treatment of the Continuance........................................ 17
Compliance with Governmental Regulations................................ 18
Compliance with Environmental Regulations............................... 18
Limited Operating History............................................... 18
Reserve Replacement Risk................................................ 19
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Dependance on Key Personnel............................................. 19
Control by Existing Shareholders........................................ 19
Competition............................................................. 19
Acquisition Risks....................................................... 20
Absence of Dividends on Common Stock.................................... 20
Possible Decline in Stock Price from Future Sales of Surviving
Corporation Common Stock.............................................. 20
No Prior Public Market; Possible Stock Price Volatility................. 20
THE CONTINUANCE........................................................... 22
General................................................................. 22
Right of Dissent........................................................ 22
Approval of the Continuance under the ABCA.............................. 23
THE MERGER................................................................ 24
General Description of the Merger....................................... 24
Right of Dissent........................................................ 24
Background to the Merger................................................ 26
The Company's Reasons for the Merger; Recommendation of the Company's
Board of Directors.................................................... 27
Mercury's Reasons for the Merger........................................ 28
Interests of Certain Persons in the Merger.............................. 28
Employment Arrangement.................................................. 29
Accounting Treatment.................................................... 29
CERTAIN CANADIAN FEDERAL INCOME TAX CONSEQUENCES OF THE CONTINUANCE AND
THE MERGER.............................................................. 30
General................................................................. 30
The Continuance......................................................... 31
The Merger.............................................................. 33
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO SHAREHOLDERS AND
WARRANT HOLDERS OF THE CONTINUANCE AND THE MERGER....................... 34
General................................................................. 34
Taxation of U.S. Shareholders........................................... 35
Taxation of Non-U.S. Shareholders....................................... 38
Consequences to Warrant Holders......................................... 40
Information Reporting and Backup Withholding............................ 41
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO THE COMPANY OF
THE CONTINUANCE AND THE MERGER.......................................... 42
General................................................................. 42
Continuance............................................................. 42
Merger.................................................................. 43
Limitation on Use of Net Operating Loss Carryforwards................... 44
DIFFERENCES BETWEEN THE DGCL AND THE ABCA................................. 44
Vote on Extraordinary Corporate Transactions............................ 44
Bylaw Amendments........................................................ 44
Removal of Directors.................................................... 45
Quorum of Shareholders.................................................. 45
Notice and Call of Shareholder Meetings................................. 45
Shareholder Written Consent in lieu of Meeting.......................... 45
Appraisal Rights........................................................ 46
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Shareholder Register.................................................... 46
Dividends and Distributions............................................. 46
Director Qualifications and Number...................................... 46
Director Liability...................................................... 47
Indemnification of Officers, Directors and Others....................... 47
Oppression Relief and Equitable Remedies................................ 48
Business Combinations................................................... 49
STOCK EXCHANGE LISTING.................................................... 50
CERTAIN UNITED STATES FEDERAL SECURITIES LAW CONSEQUENCES................. 50
CANADIAN SECURITIES LAW CONSEQUENCES...................................... 50
CERTAIN TERMS OF THE MERGER AGREEMENT..................................... 50
Effective Time of the Merger............................................ 50
Manner and Basis of Converting Shares of Company Common Stock and
Warrants.............................................................. 51
Conversion of Mercury Common Stock and Options and Warrants............. 51
Conditions to the Merger................................................ 51
Representations and Warranties.......................................... 53
Certain Covenants; Conduct of Business Prior to the Merger.............. 53
Effect of the Merger.................................................... 54
Termination............................................................. 55
THE SPECIAL MEETING AND THE CONSENT....................................... 56
Date, Time and Place of the Special Meeting............................. 56
Time of Execution of Consent............................................ 56
Purposes of the Special Meeting......................................... 56
Purposes of the Consent................................................. 56
Record Date and Outstanding Shares...................................... 56
Voting and Revocation of Proxies........................................ 56
Vote Required........................................................... 57
Solicitation of Proxies................................................. 57
PRICE RANGE OF COMPANY COMMON STOCK AND DIVIDEND POLICY................... 58
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS AND BALANCE SHEET OF THE
SURVIVING CORPORATION................................................... 59
SELECTED FINANCIAL DATA OF THE COMPANY.................................... 60
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE COMPANY'S FINANCIAL CONDITION
AND RESULTS OF OPERATIONS............................................... 67
General................................................................. 67
Three months ended March 31, 1997 compared with three months ended March
31,1996............................................................... 67
Year ended December 31, 1996 compared with year ended December 31,
1995.................................................................. 67
Year ended December 31, 1995 compared with year ended December 31,
1994.................................................................. 68
Liquidity and Financial Resources....................................... 69
GeoResources, Inc....................................................... 69
Inflation............................................................... 69
SELECTED FINANCIAL DATA OF MERCURY........................................ 70
MANAGEMENT'S DISCUSSION AND ANALYSIS OF MERCURY'S FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................... 71
General................................................................. 71
Results of Operations................................................... 71
</TABLE>
iv
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Three Months Ended March 31, 1997 compared to Three Months Ended March
31,1996............................................................... 71
Year ended December 31, 1996 compared with year ended December 31,
1995.................................................................. 72
Liquidity and Capital Resources......................................... 72
Inflation and Changes in Prices......................................... 73
Hedging Transactions.................................................... 73
Forward Looking Statements.............................................. 74
BUSINESS AND PROPERTIES OF THE COMPANY.................................... 75
Business Development.................................................... 75
Prior Bankruptcy........................................................ 76
General................................................................. 76
Oil and Gas Reserves.................................................... 77
Productive Wells and Acreage as of December 31, 1996.................... 77
Title of Properties..................................................... 77
Production Results...................................................... 78
Drilling Results........................................................ 78
Reserves................................................................ 78
Acquisition of Additional Properties.................................... 78
Drilling Agreements and Operation of Wells.............................. 79
Timing of Acquisitions/Operations....................................... 80
Gas Gathering, Processing and Transmission.............................. 80
Insurance............................................................... 80
Competition............................................................. 81
Business Risks and Regulation........................................... 81
Environmental Regulation................................................ 81
Raw Materials........................................................... 82
Working Capital Practices............................................... 82
Major Customers......................................................... 82
Employees............................................................... 82
Financial Information About Foreign and Domestic Operations and Export
Sales................................................................. 82
Legal Proceedings....................................................... 82
BUSINESS AND PROPERTIES OF MERCURY........................................ 83
General................................................................. 83
Business Strategy....................................................... 83
Development Areas....................................................... 83
Marketing Arrangements.................................................. 83
Hedging Activities...................................................... 83
Reserves................................................................ 84
Exploration and Development Activities.................................. 85
Productive Well Summary................................................. 85
Volumes, Prices and Production Costs.................................... 86
Development, Exploration and Acquisition Expenditures................... 86
Acreage................................................................. 86
Acquisitions............................................................ 86
Competition............................................................. 87
Operating Hazards and Uninsured Risks................................... 87
Regulation.............................................................. 87
Abandonment Costs....................................................... 89
Title to Properties..................................................... 89
Other Facilities........................................................ 89
</TABLE>
v
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Employees............................................................... 89
Legal Proceedings....................................................... 89
DIRECTORS AND EXECUTIVE OFFICERS OF THE SURVIVING CORPORATION............. 90
General................................................................. 90
Compensation............................................................ 91
DESCRIPTION OF SECURITIES OF THE SURVIVING CORPORATION.................... 92
General................................................................. 92
Common Stock............................................................ 92
Preferred Stock......................................................... 92
Warrants and Convertible Securities..................................... 93
Stock Option Plan....................................................... 93
Provisions Having Possible Anti-Takeover Effects........................ 93
Exchange Agent, Transfer Agent and Registrar............................ 94
BENEFICIAL OWNERSHIP OF SECURITIES........................................ 95
CERTAIN TRANSACTIONS...................................................... 96
LEGAL MATTERS............................................................. 97
EXPERTS................................................................... 97
OTHER MATTERS WHICH MAY COME BEFORE THE SPECIAL MEETING................... 98
GLOSSARY OF OIL AND NATURAL GAS TERMS..................................... 99
INDEX TO FINANCIAL STATEMENTS............................................. F-1
</TABLE>
APPENDIX A--Certificate of Domestication
APPENDIX B--Certificate of Incorporation of Continued Company
APPENDIX C--Section 184 of the ABCA
APPENDIX D--Form of Consent
APPENDIX E--Merger Agreement
APPENDIX F--Certificate of Incorporation of Surviving Corporation
APPENDIX G--Bylaws of Surviving Corporation
APPENDIX H--Summary Reserve Report
vi
<PAGE>
SOLICITATION OF PROXIES AND VOTING REQUIREMENTS
The cost of soliciting proxies on behalf of the Company, including the cost
of preparing and mailing the notice of the Special Meeting and this Proxy
Statement/Prospectus, will be paid by the Company. Solicitation will be
primarily by mailing this Proxy Statement/Prospectus to all shareholders of the
Company entitled to vote at the Special Meeting and sign the Consent. Proxies
may be solicited by officers of the Company personally, but at no compensation
in addition to their regular compensation as officers. The Company may reimburse
brokers, banks and others holding shares in their names for others for the cost
of forwarding proxy materials and obtaining proxies from their principals.
Only holders of record of the Company Common Stock at the close of business
on , 1997 (the "Meeting Record Date") may vote at the Special
Meeting or at any adjournment thereof. Only holders of Continued Common Stock
immediately after the effectiveness of the Continuance are entitled to execute
the Consent. On the Meeting Record Date, there were 13,777,014 shares of Company
Common Stock outstanding, the only outstanding class of securities of the
Company, except for a warrant to purchase shares of Company Common Stock that
does not entitle the holder thereof to vote at the Special Meeting or execute
the Consent. Each holder of record of the Company Common Stock is entitled to
one vote for each share of Company Common Stock registered in his or her name.
Cumulative voting is not permitted. Meeting materials and Consent materials will
be mailed to the registered holders of Company Common Stock by the Company.
Beneficial shareholders will receive materials from intermediaries who hold
shares of Company Common Stock on their behalf. These materials will be
delivered to the intermediaries by the Company for redistribution to the
beneficial shareholders.
Five percent of the shares of Company Common Stock entitled to vote, present
in person or represented by proxy, will constitute a quorum at the Special
Meeting. Abstentions will be counted as shares that are present and entitled to
vote at the Special Meeting for purposes of determining the presence of a
quorum, but an abstention as to any particular matter does not constitute a vote
"for" or "against" and will be disregarded in calculating the votes cast as to
such matter. "Broker non-votes" (i.e., where a broker or nominee submits a proxy
specifically indicating the lack of discretionary authority to vote on a
matter), if any, will be treated in the same manner as abstentions. Subsequent
to the Continuance, approval by the Board of Directors of the Company (as
continued) and by a majority of the outstanding shares of Continued Common
Stock, by means of a Consent, executed pursuant to proxies solicited hereby, is
required to authorize the Merger.
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE,
SIGN, DATE AND RETURN PROMPTLY THE ACCOMPANYING PROXY IN THE ENVELOPE PROVIDED.
THERE WILL BE NO MEETING OF SHAREHOLDERS OF THE COMPANY TO CONSIDER THE MERGER.
THE ONLY WAY IN WHICH A SHAREHOLDER OF THE COMPANY CAN EXPRESS HIS OR HER
APPROVAL OF THE MERGER IS BY EXECUTING THE CONSENT. THE FAILURE TO GRANT A PROXY
OR THE WITHHOLDING OF AUTHORITY TO EXECUTE THE CONSENT HAS THE SAME EFFECT AS A
VOTE "AGAINST" THE MERGER. THEREFORE, PLEASE COMPLETE THE ENCLOSED FORM OF PROXY
FOR THE CONSENT AND FORWARD IT TO THE COMPANY.
APPOINTMENT AND REVOCATION OF PROXIES
THE INSTRUMENTS OF PROXY ARE BEING SOLICITED ON BEHALF OF THE BOARD OF
DIRECTORS OF THE COMPANY.
The proxy for the Special Meeting and the proxy for the Consent must each be
signed by an individual holder of Company Common Stock, or Continued Common
Stock in the case of the proxy for the Consent, or by his attorney authorized in
a writing executed by the shareholder. If the shareholder is a corporation, such
proxy must either be under its common seal or signed by a duly authorized
officer, or if the
vii
<PAGE>
shareholder is a partnership, it must be signed by either a general partner,
managing partner or duly authorized officer of the partnership.
A holder of Company Common Stock who has given a proxy may revoke it at any
time before it is exercised. In addition to revocation in any other manner
permitted by law, a proxy may be revoked by a later dated instrument in writing
executed by a shareholder of the Company or by his or her attorney authorized in
a writing executed by the shareholder. If the shareholder is a corporation, it
must either be under its common seal, or signed by a duly authorized officer, or
if the shareholder is a partnership it must be signed by either a general
partner, managing partner or duly authorized officer of the partnership. A
revocation of a proxy by a holder of shares of Company Common Stock should be
deposited with the Registrar and Transfer Agent of the Company, Chase Mellon
Shareholder Services L.L.C., Dallas, Texas. Revocation of a proxy for the
Special Meeting may be delivered at any time up to and including the day of the
Special Meeting or any adjournment thereof. Revocation of a proxy for a Consent
may be delivered at any time up to and including the date of execution of the
Consent. A proxy for the Special Meeting is also revoked if the shareholder is
present at the Special Meeting and elects to vote in person.
VOTING OF SHARES AND EXERCISE OF DISCRETION OF PROXIES
THE SHARES OF COMPANY COMMON STOCK OR CONTINUED COMMON STOCK REPRESENTED BY
A PROXY WILL BE VOTED OR WITHHELD FROM VOTING BY THE PROXY HOLDER IN ACCORDANCE
WITH THE INSTRUCTION OF THE SHAREHOLDER. IF THE SHAREHOLDER SPECIFIES A CHOICE
WITH RESPECT TO ANY MATTER TO BE ACTED UPON, THE SHARES WILL BE VOTED
ACCORDINGLY. IN THE ABSENCE OF ANY INSTRUCTIONS IN A PROXY, IT IS INTENDED THAT
SUCH PROXY WILL BE UTILIZED TO (i) VOTE IN FAVOR OF THE MOTIONS PROPOSED TO BE
MADE AT THE SPECIAL MEETING AUTHORIZING THE CONTINUANCE AND (ii) EXECUTE THE
CONSENT APPROVING AND ADOPTING THE MERGER AND THE MERGER AGREEMENT.
THE ACCOMPANYING INSTRUMENTS OF PROXY CONFER DISCRETIONARY AUTHORITY ON THE
PERSONS NAMED THEREIN WITH RESPECT TO AMENDMENTS OR VARIATIONS TO MATTERS
IDENTIFIED IN THE NOTICE OF SPECIAL MEETING AND IN THE CONSENT, AND WITH RESPECT
TO OTHER MATTERS WHICH MAY PROPERLY COME BEFORE THE SPECIAL MEETING. FOR THOSE
SHAREHOLDERS VOTING AGAINST THE PROPOSALS CONTAINED IN THE PROXY FOR THE SPECIAL
MEETING, THE DISCRETIONARY AUTHORITY OF THOSE NAMED THEREIN WILL NOT BE VOTED TO
ADJOURN ANY MEETING. AT THE DATE HEREOF, MANAGEMENT OF THE COMPANY KNOWS OF NO
SUCH AMENDMENTS, VARIATIONS OR OTHER MATTERS TO COME BEFORE THE SPECIAL MEETING
OR TO BE ACTED UPON PURSUANT TO THE CONSENT OTHER THAN THE MATTERS REFERRED TO
IN THE NOTICE OF SPECIAL MEETING AND/OR SET FORTH IN THE FORM OF CONSENT THAT IS
ATTACHED HERETO AS APPENDIX "D".
THE SPECIAL MEETING
At the Special Meeting, shareholders of record of Company Common Stock as of
the close of business on the Meeting Record Date will consider and vote upon (i)
a proposal to continue and domesticate the Company into the State of Delaware
and (ii) such other matters as may properly be brought before the Special
Meeting or any adjournment or postponement thereof.
THE CONSENT
If the Company receives proxies for Consents representing at least a
majority of the shares of Continued Common Stock, the Consent, substantially in
the form of Appendix "D" hereto, will be executed as soon as possible after the
Continuance shall have become effective and the directors of the
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Company (as continued) shall have approved the Merger. Holders of Company Common
Stock at the time the Continuance becomes effective (who will be the persons
registered as shareholders of the Company once it is domiciled in Delaware) will
be entitled to express their consent to the Merger by means of the proxy for the
Consent solicited hereby. Any proxy relating to the Consent executed by a holder
who is no longer a shareholder of record at the time the Continuance becomes
effective and the Consent is executed shall become null and void and of no
further force and effect.
THE CONTINUANCE
If holders of record on the Meeting Record Date of at least five percent of
the Company Common Stock are represented in person or by proxy at the Special
Meeting, and if the Continuance is approved by at least two-thirds of the votes
cast by holders of Company Common Stock represented in person or by proxy at the
Special Meeting, the Continuance will result in a change in the Company's
jurisdiction of incorporation from the Province of Alberta to the State of
Delaware and will also result in the adoption of a new certificate of
incorporation for the Company, which will govern the Company under Delaware law.
If approved by the shareholders and subject to requisite regulatory approval, it
is anticipated that the Continuance will become effective on or about
, 1997, or as soon as practicable after the Special Meeting. Upon
the effectiveness of the Continuance, each share of Company Common Stock and
each outstanding warrant to acquire shares of Company Common Stock will remain
issued and outstanding as an equivalent security of MSR Exploration Ltd., then a
Delaware corporation. The Board of Directors of the Company intends to terminate
or abandon the Continuance if a number of proxies for Consents sufficient to
approve the Merger are not obtained. See "The Continuance."
THE MERGER
If the Continuance is approved and becomes effective, the shareholders of
the Company, after it has been continued in Delaware, will be asked to approve
by written consent the Merger, pursuant to which the Company will be merged with
and into Mercury pursuant to the laws of the State of Delaware. Such written
consent will be executed pursuant to proxies solicited hereby. Accordingly, no
meeting of shareholders of the Company will be held with respect to the Merger
proposal. If the Merger is completed, holders of Continued Common Stock will
receive one share of Surviving Corporation Common Stock for each share of
Continued Common Stock held immediately prior to the Merger, and the warrants of
the Company outstanding immediately prior to the Merger will become equivalent
warrants of the Surviving Corporation. In addition, each outstanding share of
Mercury Common Stock and all options and warrants to acquire shares of Mercury
Common Stock will be converted into one share of Surviving Corporation Common
Stock and options and warrants to acquire Surviving Corporation Common Stock, as
the case may be, upon consummation of the Merger. If the Merger is approved by
the shareholders of the Company pursuant to the Consent, immediately following
the Merger the name of the Surviving Corporation will change to MSR Exploration
Ltd. It is anticipated that the Merger, if approved by the shareholders of the
Company pursuant to the Consent, will become effective on or about ,
1997, or as soon as practicable after the completion of the Continuance. See
"The Merger."
CONSUMMATION OF THE MERGER
Upon consummation of the Merger, each share of Continued Common Stock issued
and outstanding on the Merger Record Date and each outstanding share of Mercury
Common Stock will be converted into the right to receive one share of Surviving
Corporation Common Stock (the "Exchange Ratio"). See "The Merger--General
Description of the Merger." In addition, each outstanding warrant or option to
acquire shares of Company Common Stock or Mercury Common Stock will be converted
into an equivalent right to acquire shares of Surviving Corporation Common
Stock.
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the United
States Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports and other information with the United States
Securities and Exchange Commission (the "SEC"). Reports, proxy statements and
other information filed by the Company can be inspected and copied at the public
reference facilities maintained by the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the following Regional Offices of the SEC: New
York Regional Office, 7 World Trade Center, 13th Floor, New York, New York 10048
and Chicago Regional Office, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Copies of such material can also be obtained from the
Public Reference Section of the SEC, 450 Fifth Street, N.W., Washington, D.C.
20549, at the SEC's prescribed rates. In addition, material filed by the Company
can be inspected at the offices of the Alberta Securities Commission, Suite 410,
300 5th Avenue S.W., Calgary, Alberta T2P 3C4. Shares of the Company Common
Stock are quoted on the American Stock Exchange. Reports, proxy statements and
other information concerning the Company can also be inspected at The American
Stock Exchange, 86 Trinity Place, New York, New York 10006-1881. Upon completion
of the Continuance and the Merger, the Surviving Corporation will become subject
to such informational requirements.
The Company has filed with the SEC a registration statement on Form S-4
(together with any amendments thereto, the "Company Registration Statement")
under the Securities Act, of which this Proxy Statement/Prospectus forms a part,
with respect to the shares of Continued Common Stock to be held by shareholders
of the Company following the effective date of the Continuance in connection
with the Continuance and pursuant to this Proxy Statement/Prospectus. This Proxy
Statement/Prospectus does not contain all the information set forth in the
Company Registration Statement, certain portions of which have been omitted
pursuant to the rules and regulations of the SEC. A copy of the Company
Registration Statement may be inspected without charge at the principal offices
of the SEC in Washington D.C. or electronically by means of the SEC's home page
on the Internet (http://www.sec.gov).
Mercury has filed with the SEC a registration statement on Form S-4
(together with any amendments thereto, the "Mercury Registration Statement")
under the Securities Act, of which this Proxy Statement/ Prospectus forms a
part, with respect to the shares of Surviving Corporation Common Stock to be
held by shareholders of the Company following the effective date of the Merger
and pursuant to this Proxy Statement/Prospectus. This Proxy Statement/Prospectus
does not contain all the information set forth in the Mercury Registration
Statement, certain portions of which have been omitted pursuant to the rules and
regulations of the SEC. A copy of the Mercury Registration Statement may be
inspected without charge at the principal offices of the SEC in Washington D.C.
or electronically by means of the SEC's home page on the Internet
(http://www.sec.gov).
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS,
IN CONNECTION WITH THE OFFERING AND SOLICITATION MADE HEREBY AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS SHOULD NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE SECURITIES TO WHICH IT RELATES,
OR THE SOLICITATION OF A PROXY, IN ANY JURISDICTION IN WHICH, OR TO ANY PERSON
TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION OF AN OFFER OR PROXY
SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROXY
STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF THE SECURITIES OFFERED PURSUANT TO
THIS PROXY STATEMENT/PROSPECTUS SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION CONTAINED HEREIN OR
IN THE AFFAIRS OF THE COMPANY OR MERCURY SINCE THE DATE OF THIS PROXY
STATEMENT/PROSPECTUS.
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SUMMARY
The following is a brief summary of certain information contained elsewhere
in this Proxy Statement/ Prospectus. Reference is made to, and this summary is
qualified in its entirety by, the more detailed information contained in this
Proxy Statement/Prospectus and the Appendices hereto. Unless otherwise defined
herein, capitalized terms used in this summary have the respective meanings
ascribed to them elsewhere in this Proxy Statement/Prospectus. Unless otherwise
indicated, all dollar amounts are stated in U.S. dollars. Shareholders are urged
to read this Proxy Statement/Prospectus and the Appendices hereto in their
entirety.
THE COMPANIES
THE COMPANY. The Company is currently an Alberta, Canada registered public
company created in 1981 under Alberta law by the merger of two previous Canadian
public corporations, Mountain States Resources, Ltd. and Monte Grande
Exploration Limited, the shares of both of which were traded on the Vancouver
Stock Exchange. The Company's principal executive offices are located at 500
Main Street, Suite 210, Fort Worth, Texas 76102. The telephone number of the
Company at such office is (817) 877-3151. See "Business and Properties of the
Company."
The principal line of business of the Company is the exploration,
development, production and sale of crude oil and natural gas. The Company's oil
and gas operations are conducted primarily in Montana and Texas. All of the
Company's United States oil and gas property interests are owned and operated
directly through subsidiaries of the Company. The Company also has operations in
Canada pursuant to which the Company participates in properties primarily
through other oil and gas operators. The Company also engages in natural gas
gathering, processing and transmission operations in Northwest Montana.
The Company Common Stock was moved from the Vancouver Stock Exchange to the
Toronto Stock Exchange and then was listed for trading on the Nasdaq National
Market in 1982. The Company Common Stock was later moved to the American Stock
Exchange in September 1983. The Company Common Stock is currently traded on the
American Stock Exchange under the symbol "MSR". In September 1994, the Company
completed a private placement of Company Common Stock and used the proceeds to
retire debt payable to the Company's then secured primary lender and certain
other creditors. In conjunction with the private placement, the Company held a
special meeting of shareholders and elected a new board of directors,
effectively changing control of the Company to current management.
Management of the Company has identified Mercury as a suitable merger
candidate because of the similarity of the Mercury oil and gas properties and
the quality of such properties.
MERCURY. Mercury was organized on March 7, 1997 under the laws of the State
of Delaware for the purpose of acquiring from Parent and thereafter exploring,
developing and operating, all of Parent's oil and natural gas properties located
in Montana (the "Mercury Properties"). Upon formation of Mercury, Parent
conveyed to Mercury the Mercury Properties in exchange for a majority of the now
outstanding Mercury Common Stock and warrants to purchase additional shares of
Mercury Common Stock. Certain directors, officers and agents of Parent also
conveyed to Mercury certain contractual rights in the Mercury Properties in
exchange for shares of Mercury Common Stock and warrants. The Mercury Properties
constitute all of Mercury's oil and natural gas properties.
The principal business of Parent and its majority shareholder, Mercury
Production Company ("MPC"), is also the acquisition, exploration, development
and operation of oil and gas properties. Parent and MPC both expect to continue
such business subsequent to the Merger. The major oil and natural gas properties
and operations of Parent are in Michigan and Wyoming, and it has relatively
minor interests in Indiana, Kentucky, New Mexico and West Texas. The oil and gas
properties of MPC are principally located in New Mexico and West Texas.
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Management of Parent and Mercury have identified the Company as a suitable
merger candidate for the same reasons management of the Company favors the
Merger.
The principal executive office of Mercury is located at 1619 Pennsylvania
Avenue, Fort Worth, Texas 76104, and the telephone number at such office is
(817) 332-9133.
SURVIVING CORPORATION. The Merger has been approved by shareholders of
Mercury. If the Continuance and the Merger are approved by the Company's
shareholders at the Special Meeting and pursuant to the Consent, the Company
shall be merged with and into Mercury and Mercury shall be the surviving
corporation of the Merger (the "Surviving Corporation"). Pursuant to the Merger
Agreement, the Certificate of Incorporation of Mercury shall be the Certificate
of Incorporation of the Surviving Corporation (the "Surviving Corporation
Certificate"), the Bylaws of Mercury shall be the Bylaws of the Surviving
Corporation (the "Surviving Corporation Bylaws") and the name of the Surviving
Corporation will be changed to MSR Exploration Ltd. Three of the current
directors of the Company and three of the current directors of Mercury, together
with and , neither of which is affiliated with either the
Company or Mercury or Parent, shall be the directors of the Surviving
Corporation and one of the current officers of the Company and two of the
current officers of Mercury shall be officers of the Surviving Corporation. In
addition, the Board of Directors of the Surviving Corporation will appoint an
executive committee which will be composed of two directors of the Surviving
Corporation who are currently directors of Mercury and one director of the
Surviving Corporation who is currently a director of the Company. See "The
Merger."
THE SPECIAL MEETING
DATE, TIME AND PLACE. The Special Meeting will be held on , 1997
at the offices of , Fort Worth, Texas , at :00
.m., local time.
RECORD DATE; SHARES ENTITLED TO VOTE. Only holders of record of shares of
Company Common Stock at the close of business on , 1997 (the "Meeting
Record Date") are entitled to notice of and to vote at the Special Meeting. On
the Meeting Record Date, there were shares of Company Common Stock
outstanding, each of which will be entitled to vote on each matter to be acted
upon at the Special Meeting.
QUORUM; VOTE REQUIRED. The presence, in person or by proxy, at the Special
Meeting of the holders of only five percent of the shares of Company Common
Stock outstanding and entitled to vote at the Special Meeting is necessary to
constitute a quorum at the Special Meeting. The affirmative vote of the holders
of two-thirds of the shares present in person or by proxy at the Special Meeting
is required to approve and adopt the Continuance.
THE CONSENT
PURPOSE OF CONSENT. There will be no meeting of shareholders of the Company
to consider and vote upon the Merger. The only shareholder action regarding the
Merger will be taken, if at all, by way of execution of the Consent.
TIME AND DATE OF CONSENT. The Consent will be executed immediately after
the Continuance shall have become effective and the directors of the Company (as
continued as a Delaware corporation) shall have approved the Merger.
WHO MAY CONSENT. Holders of Company Common Stock at the time the
Continuance becomes effective (who will be the persons registered as
shareholders of MSR Exploration Ltd. once it is domiciled in Delaware) (the
"Merger Record Date") will be entitled to express their consent to the Merger by
means of the proxies solicited hereby. Any proxy relating to the Consent
executed by a holder who is no longer a
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shareholder of record at the time the Continuance becomes effective and the
Consent is executed shall become null and void and of no further force and
effect.
SECURITY OWNERSHIP OF COMPANY MANAGEMENT
As of the Meeting Record Date, the directors and executive officers of the
Company beneficially owned shares of Company Common Stock representing
approximately 11.7 percent of the outstanding Company Common Stock. Such
persons, together with Pozo Resources, Inc. and Joseph V. Montalban, a former
director of the Company, collectively hold 38.9 percent, in the aggregate, of
the outstanding shares of Company Common Stock as of the Meeting Record Date,
and have agreed with Parent and Mercury to vote such shares in favor of the
Continuance and the Merger. See "Beneficial Ownership of Securities."
THE CONTINUANCE
The Company will change its jurisdiction from Alberta, Canada to Delaware,
U.S.A. by means of a process called a "continuance" under Alberta law and a
"domestication" under Delaware law. The Continuance will be effected upon
approval of the Certificate of Domestication to be filed by the Company with the
Secretary of State of the State of Delaware. A copy of the form of Certificate
of Domestication is attached to this Proxy Statement/Prospectus as Appendix "A".
Upon the effectiveness of the Continuance, the Company will become a Delaware
corporation as if it had originally been incorporated in that jurisdiction and
it will be discontinued in Alberta, Canada, with the Company's shareholders
becoming subject to the rights and privileges afforded under the Delaware
General Corporation Law. As a result of the Continuance, the Company will issue
an aggregate of 13,777,014 shares of Continued Common Stock to holders of
Company Common Stock, as of the Meeting Record Date. Effectiveness of the Merger
is expressly conditioned on approval and effectiveness of the Continuance; as a
result, a vote against the Continuance would have the effect of a vote against
the Merger.
The Company has elected to continue into the State of Delaware in order to
effect the Merger, as Alberta law does not permit the merger of an Alberta
public registered company with a Delaware corporation such as Mercury.
THE MERGER AND THE MERGER AGREEMENT
TERMS OF THE MERGER. At the Effective Time (as hereinafter defined), the
Company (as a Delaware corporation) will merge with and into Mercury, with
Mercury being the Surviving Corporation. In the Merger, each share of Company
Common Stock and each share of Mercury Common Stock outstanding at the Effective
Time will be converted into the right to receive one share of Surviving
Corporation Common Stock, and each warrant or option to acquire shares of
Company Common Stock or Mercury Common Stock will be converted into equivalent
rights to acquire Surviving Corporation Common Stock. As a result of the Merger,
the holders of Company Common Stock will be issued 13,777,014 shares of
Surviving Corporation Common Stock and the holders of Mercury Common Stock will
be issued 12,000,000 shares of Surviving Corporation Common Stock, representing
approximately 53 percent and 47 percent, respectively, of the total shares of
Surviving Corporation Common Stock to be outstanding after completion of the
Continuance and the Merger. In addition, holders of options and warrants to
acquire shares of Mercury Common Stock will hold options and warrants to acquire
an aggregate of 11,228,570 shares of Surviving Corporation Common Stock, and the
holder of the Company Warrants will hold warrants to acquire 280,000 shares of
Surviving Corporation Common Stock.
RECOMMENDATION OF THE BOARD OF DIRECTORS. The Board of Directors of the
Company, which will also constitute the Board of Directors of the Company after
the effectiveness of the Continuance, has determined that the Continuance and
the Merger are fair to, and in the best interests of, the shareholders of the
Company and recommends that the shareholders of the Company approve the
Continuance and the Merger.
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Management of the Company believes that the Continuance and the Merger are
necessary to create an entity with business and assets sufficient to permit the
enterprise to remain viable, thereby allowing shareholders of such entity to
benefit by owning an interest therein. The Boards of Directors of the Company
and Mercury believe that an oil and gas exploration and production company must
be of a minimum size, in terms of assets, properties and revenues, in order to
remain viable and grow. Management of the Company also believes that the Merger
is fair to the Company's shareholders because of the manner in which the terms
of the Merger were reached and potential value the Merger may bring to the
Company's shareholders. As such, the Board of Directors of the Company has
unanimously approved the Merger as it believes that the combination of the
Company and Mercury will result in a viable enterprise which offers the
opportunity for growth. See "The Merger--The Company's Reasons for the Merger;
Recommendation of the Company's Board of Directors.
EFFECTIVE TIME OF THE MERGER. It is anticipated that the Merger will become
effective (the "Effective Time") on or about , 1997, as promptly as
practicable after approval by the Company's shareholders of the Continuance and
the consummation of the Continuance in Alberta and Delaware. Assuming that the
Company obtains the requisite shareholder approval of the Merger, upon
consummation of the Continuance, the Board of Directors of the Company (as a
continued Delaware corporation) will approve the Merger, the Consent will be
executed approving the Merger and the Merger Agreement, and a Certificate of
Merger will be filed with the Secretary of State of the State of Delaware.
CERTAIN CONDITIONS TO THE CONSUMMATION OF THE MERGER. The obligations of
both the Company and Mercury to consummate the Merger are subject to the
satisfaction of certain conditions, including the following: (i) approval by the
shareholders of the Company of the Continuance and the Merger Agreement; (ii)
effectiveness of the Continuance; (iii) the absence of any order making the
Merger illegal or otherwise prohibiting consummation of the Merger; (iv) listing
on the American Stock Exchange of the shares of Surviving Corporation Common
Stock issuable in the Merger; (v) receipt by Parent and the Board of Directors
of the Company of an opinion from an investment banking firm that the net market
value of the Company is less than $14,156,000; (vi) agreement among the parties
to the Merger Agreement as to the terms of a Management Agreement to be entered
into between Parent and the Surviving Corporation upon the effectiveness of the
Merger; (vii) assumption by the Surviving Corporation of a guarantee of Mercury
as to the repayment of $4.0 million of debt of Parent or repayment by the
Surviving Corporation of such debt; and (viii) the absence of certain regulatory
conditions. In addition, the obligations of each of the Company and Mercury are
subject to the accuracy of the representations and warranties of the other party
and to compliance with all agreements and covenants on the part of the other
party contained in the Merger Agreement. See "The Merger" and "Certain Terms of
the Merger Agreement."
If the Merger is not consummated, it is anticipated that the Company will
continue its current business activities and seek another suitable candidate
with which it can enter into a strategic alliance for the purpose of bringing
value to the Company Common Stock.
TERMINATION OF THE MERGER AGREEMENT. The Merger Agreement may be terminated
at any time prior to the Effective Time (i) by mutual consent of the Company and
Parent; (ii) by either party if the Merger has not been effected by December 31,
1997; (iii) by the Company if there has been a material adverse change in the
business, financial condition or operations of Mercury, or by Parent if there
has been a material adverse change in the business, financial condition or
operations of the Company; (iv) by the Company if the Board of Directors has
determined to recommend another transaction to the shareholders of the Company
and the shareholders of the Company approve such transaction, or by Parent at
any time following the public announcement of such recommendation and approval;
(v) by the Company upon a material breach by Mercury or Parent of any
representation, warranty, covenant or agreement on the part of Mercury or Parent
set forth in the Merger Agreement, which is not cured within five business days
of receipt by Parent of notice thereof, or (vi) by Parent upon a material breach
by the Company of any
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material representation, warranty, covenant or agreement on the part of the
Company set forth in the Merger Agreement, which is not cured within five
business days of receipt by the Company of notice thereof. See "Certain Terms of
the Merger Agreement--Conditions to the Merger."
ASSUMPTION OF STOCK OPTIONS, WARRANTS AND OTHER OBLIGATIONS. The Company
issued a warrant to Banque Paribas to acquire 280,000 shares of Company Common
Stock at an exercise price of $3.375 per share (the "Company Options") in
December 1994 in connection with the Company obtaining financing from such
lender. Mercury has granted to Thomas F. Darden and Glenn M. Darden, who are
shareholders, directors, officers and employees of Mercury, options to purchase
an aggregate of 228,570 shares of Mercury Common Stock at an exercise price of
$0.875 per share, which expire on March 31, 2002. Mercury has also issued
warrants to certain shareholders, officers and directors to acquire (i) an
aggregate of 5,500,000 shares of Mercury Common Stock at an exercise price of
$1.25 per share and (ii) an aggregate of 5,500,000 shares of Mercury Common
Stock at an exercise price of $2.00 per share. These warrants also will expire
on March 31, 2002. As of the Effective Time, the Surviving Corporation will
assume each option and each warrant to purchase Mercury Common Stock (the
"Mercury Options"), and each of the Company Warrants, that remains unexercised
in whole or in part. Accordingly, each Mercury Option and each Company Option
will be deemed to remain outstanding as an option to purchase, in lieu of the
shares of Mercury Common Stock or Company Common Stock, as the case may be,
previously subject thereto, an identical number of shares of Surviving
Corporation Common Stock. The exercise price per share of Surviving Corporation
Common Stock will also remain unchanged. See "Certain Terms of the Merger
Agreement."
Upon the effectiveness of the Merger, the Surviving Corporation will either
(i) assume the guarantee of Mercury of the repayment of $4.0 million of
indebtedness of Parent or (ii) repay such indebtedness. Subject to the terms and
conditions of the Merger Agreement, at the effective time of the Merger all of
the assets of the Company and Mercury will vest in the Surviving Corporation and
all of the liabilities and obligations of the Company and Mercury will attach to
the Surviving Corporation.
BOARD OF DIRECTORS
The Board of Directors of the Company is currently comprised of four
members, Otto J.Buis, C. Al Buis, Patrick M. Montalban and Steven M. Morris.
Such persons, other than C. Al Buis, will continue to serve as directors of the
Company upon effectiveness of the Continuance and until the Merger is completed.
Upon completion of the Continuance and the Merger, pursuant to the Merger
Agreement, Messrs. Otto Buis, Montalban and Morris will serve as directors of
the Surviving Corporation.
Pursuant to the Merger Agreement, Frank Darden, Thomas F. Darden and Glenn
M. Darden, currently directors of Mercury and Parent, will serve as directors of
the Surviving Corporation.
and , neither of whom is affiliated
with either the Company, Mercury or Parent, will serve as independent directors
of the Surviving Corporation.
Pursuant to the Merger Agreement, Thomas Darden, Glenn Darden and Patrick
Montalban will be appointed to the executive committee of the Board of Directors
of the Surviving Corporation.
For additional information regarding each of the foregoing persons and the
relationships of each with the Company, Mercury and Parent, and the proposed
relationship of each to the Surviving Corporation, see "Directors and Executive
Officers of the Surviving Corporation" and "The Merger--Interests of Certain
Persons in the Merger."
REGULATORY APPROVAL
The Company is in the process of filing for approval with the Registrar of
Corporations for the Province of Alberta to continue the Company into the State
of Delaware. Upon receipt of appropriate shareholder approval, the Company will
file a Certificate of Domestication with the Secretary of State of
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the State of Delaware. Upon completion of the Continuance, the Company and
Mercury will file a Certificate of Merger with the Secretary of State of the
State of Delaware. Once the Continuance and the Merger are approved by
applicable provincial and state authorities, no other regulatory approvals are
necessary for consummation of the Continuance and the Merger, other than
compliance with applicable securities laws.
APPRAISAL RIGHTS WITH RESPECT TO THE CONTINUANCE AND THE MERGER
Pursuant to Section 184 of the Alberta Business Corporations Act (the
"ABCA"), a shareholder of the Company is entitled to dissent and thereupon is
entitled to be paid by the Company the fair value of his shares of Company
Common Stock determined as of the close of business on the last business day
before the Special Meeting. In order to dissent, a shareholder must send a
written objection to the Company on or before the date of the Special Meeting at
which the Continuance is to be approved. Within 10 days following the date of
the Special Meeting, the Company will deliver to each shareholder who has filed
an objection notice in respect of any resolution, a notice stating the special
resolutions authorizing the Continuance have passed at the Special Meeting.
After the Continuance has been approved, application can be made to a court by
either the Company or the dissenting shareholder to fix the fair value of the
shares. The Company, after application has been made, shall send an offer to
purchase the shares of Company Common Stock to the dissenting shareholder for
the fair value of the shares on the day before the Special Meeting. The
dissenting shareholder may either accept this amount or proceed to court and
have the court establish the fair value of the shares. See "The
Continuance--Right of Dissent."
If the Continuance becomes effective, shareholders of the Company, as
continued into Delaware, will have rights of dissent with respect to the Merger
pursuant to provisions to be contained in the certificate of incorporation of
the continued corporation intended to provide shareholders of the continued
corporation the same rights they would have under Section 184 of the ABCA. See
"The Merger--Right of Dissent." The rights of shareholders who dissent to the
Merger under the certificate of incorporation of the continued corporation will
be much the same as the rights of shareholders who dissent to the Continuance as
described above.
No additional rights of appraisal or dissent under Delaware law will be
available in connection with the Merger.
CERTAIN CANADIAN FEDERAL INCOME TAX CONSEQUENCES OF THE CONTINUANCE AND THE
MERGER
For Canadian federal income tax purposes, shareholders of the Company will
not be considered to have disposed of their shares of Company Common Stock or to
have realized a taxable capital gain or loss by reason only of the Continuance.
The Continuance will also have no effect on the adjusted cost base to
shareholders of their shares of Company Common Stock. Generally, shareholders of
the Company who receive shares of Surviving Corporation Common Stock pursuant to
the Merger will be deemed to have disposed of their shares of Company Common
Stock, but will realize neither a capital gain nor a capital loss on the
disposition. Upon the Continuance, the Company will be deemed to have disposed
of all of its property for proceeds of disposition equal to the fair market
value of that property and will be subject to tax on any income and net taxable
capital gains arising from such deemed disposition. Additionally, the Company
will be subject to a corporate emigration tax at a rate of five percent of the
amount by which the fair market value of the Company's assets net of liabilities
exceeds the paid-up capital of the Company's issued and outstanding shares.
Based on the nature of the Company's assets and the capital structure of the
Company, management of the Company has advised that these provisions should not
result in any Canadian tax liability. See "Certain Canadian Federal Income Tax
Consequences of the Continuance and the Merger" below for more details.
6
<PAGE>
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE CONTINUANCE AND THE
MERGER
The Continuance and the Merger are each intended to qualify as a
reorganization under Section 368(a) of the United States Internal Revenue Code
of 1986, as amended (the "Code"), and, therefore, should constitute a
non-taxable transaction for holders of Company Common Stock, provided certain
requirements are met, as described herein. Although the Continuance should
qualify as a reorganization, a significant risk exists that the Company will
recognize gain, if any, on a deemed liquidating distribution of Continued Common
Stock to its shareholders. Based on an appraisal obtained from Rauscher Pierce
Refsnes, Inc., the Company believes that the fair market value of the Continued
Common Stock deemed distributed will be less than the Company's basis in such
stock on the date of the Continuance and, therefore, the Company will recognize
no gain on the deemed distribution. For a discussion of these and other United
States federal income tax considerations in connection with the Continuance and
the Merger, see "Certain United States Federal Income Tax Consequences to the
Shareholders and Warrant Holders of the Continuance and the Merger" and "Certain
United States Federal Income Tax Consequences to the Company of the Continuance
and the Merger," below.
ANTICIPATED ACCOUNTING TREATMENT
The Merger will be accounted for by the Surviving Corporation under the
purchase method of accounting. See "The Merger--Accounting Treatment" and "Pro
Forma Consolidated Statements of Operations and Balance Sheet (Unaudited) of the
Surviving Corporation."
EXCHANGE OF STOCK CERTIFICATES
Promptly after the Effective Time of the Merger, the Surviving Corporation
will mail a letter of transmittal with instructions to each holder of record of
Continued Common Stock and Mercury Common Stock outstanding immediately before
the Effective Time for use in exchanging certificates formerly representing
shares of Company Common Stock and Mercury Common Stock, as the case may be, for
certificates representing shares of Surviving Corporation Common Stock. No
certificates representing Continued Common Stock will be prepared or delivered
to shareholders. Certificates should not be surrendered by the holder thereof
until they have received the letter of transmittal from the Surviving
Corporation. See "Certain Terms of the Merger Agreement--Manner and Basis of
Converting Shares of Company Common Stock and Warrants." DO NOT SEND ANY
CERTIFICATES AT THIS TIME.
COMPARATIVE RIGHTS OF SHAREHOLDERS
After the Continuance, and upon consummation of the Merger, the Surviving
Corporation will be governed by and subject to the Delaware General Corporation
Law (the "DGCL"). Although similar to the ABCA, the DGCL differs in several
material respects, including the following:
Under the ABCA, continuances, sales of substantially all assets of a
corporation, amendments to the articles of incorporation and other extraordinary
actions generally require approval of two-thirds of the shares voted on such
action, while the DGCL generally requires that a majority of the outstanding
shares approve such action. Under the ABCA, either shareholders or directors may
make, amend or repeal bylaws (subject to any restrictions under the articles,
bylaws or any unanimous shareholder agreement), but any such action of the
directors with respect to the bylaws is subject to confirmation by a majority of
the votes cast by shareholders entitled to vote thereon. Under the DGCL, once a
corporation has received any payment for any of its stock, bylaws may be
adopted, amended or repealed by shareholders entitled to vote thereon, and where
authorized by the certificate of incorporation, directors. Under the ABCA,
shareholder actions without a meeting may be taken by resolution in writing
signed by all of the shareholders entitled to vote. Under the DGCL, shareholders
may act by written consent without a meeting if holders of outstanding stock,
having not less than the minimum number of votes that would be necessary to take
such action at a meeting at which all shares entitled to vote thereon were
present and voting, execute a written
7
<PAGE>
consent providing for such action unless otherwise provided in the corporation's
certificate of incorporation.
The DGCL does not provide appraisal rights in a merger or consolidation to
holders of stock which is, either (a) listed on a national securities exchange
or designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc., (the "NASD") or
(b) held of record by more than 2,000 shareholders, provided that such holders
receive shares of stock of the corporation surviving the merger or consolidation
which is either listed (as of the effective date of the merger or consolidation)
on a national securities exchange or designated as a national market system
security on an interdealer quotation system by the NASD or held of record by
more than 2,000 shareholders. Since the Surviving Corporation Common Stock will
be listed on the American Stock Exchange on the effective date of the Merger,
the Delaware appraisal rights will not be available to holders of Continued
Common Stock in connection with the Merger. See "The Merger--Right of Dissent."
The ABCA does not contain any similar exemption from its provisions relating to
dissenters' rights of appraisal for amalgamation.
Under the ABCA, at least one-third of the directors of Alberta companies,
the business of which is conducted largely outside of Canada, must be resident
Canadians. The DGCL has no comparable requirement. The DGCL permits the
certificate of incorporation of a Delaware corporation to contain a provision
limiting the personal liability of a director to the shareholders or the
corporation for monetary damages for breach of fiduciary duty, except in certain
circumstances, including when a director has breached his or her duty of
loyalty, when a director's actions involved intentional misconduct or a knowing
violation of laws, or when a director derived improper personal benefit. The
ABCA has no similar provisions limiting directors' liability. The ABCA creates a
cause of action for "oppression" and "unfairness" with respect to security
holders, creditors, directors and officers, and vests the courts with broad
remedial powers in connection therewith; the DGCL contains no comparable
provision. The Certificate of Incorporation of the Company as continued in
Delaware will contain provisions providing to shareholders of the Company as
continued the same rights with respect to "oppression" or "unfairness" that were
available to shareholders of the Company under the ABCA.
The certificate of incorporation of the Surviving Corporation will include
provisions limiting directors liability to shareholders or the corporation and
requiring super-majority voting in the event of certain corporate transactions
such as mergers, sale of all or substantially all of the corporation's assets,
and the like. See "Differences Between the DGCL and the ABCA."
MARKET PRICE DATA
THE COMPANY. The Company Common Stock is quoted on the American Stock
Exchange under the trading symbol "MSR". On March 26, 1997, the last trading day
prior to the public announcement of the Merger by the Company, the closing sales
price for Company Common Stock was $15/16 or $.9375. On , 1997, the
closing sales price for Company Common Stock was $ .
MERCURY. Neither the Mercury Common Stock nor the securities of Parent has
ever been publicly traded.
DIVIDENDS
No cash dividends have been paid by the Company on Company Common Stock and
no cash dividends have been paid by Mercury on the Mercury Common Stock. It is
anticipated that future earnings of the Surviving Corporation will be retained
to finance the continuing development of its business. In addition, the Company
is prohibited under its credit agreement with a lender from paying dividends.
The Surviving Corporation will also be subject to such prohibition. The payment
of any future dividends will be at the discretion of the Board of Directors of
the Surviving Corporation and will depend upon, among other things, future
earnings, any contractual restrictions, the success of business activities,
regulatory and
8
<PAGE>
capital requirements, the general financial condition of the Surviving
Corporation and general business conditions.
RISK FACTORS PERTAINING TO THE CONTINUANCE AND THE MERGER
While the Boards of Directors of the Company and Mercury are of the opinion
that the transactions contemplated herein are in the best interests of the
Company, Mercury and their respective shareholders, there are business risks
related to such transactions, including, without limitation:
- the inherent volatility of oil and natural gas prices and the effect of
price changes on revenues;
- uncertainties in estimating the oil and natural gas reserves of the
Company and Mercury and the value thereof;
- the concentration of the properties of the Company and Mercury in Montana;
and
- other risks inherent in the oil and natural gas property acquisition,
development and operating business.
Shareholders of the Company are urged to read "Risk Factors" beginning on
page 13 for a more detailed discussion of certain risk factors that should be
considered by shareholders of the Company in evaluating the Continuance and the
Merger.
9
<PAGE>
SUMMARY HISTORICAL FINANCIAL INFORMATION
The following table sets forth certain summary historical financial data for
the Company and the Mercury Properties for each of the two years in the period
ended December 31, 1996, and for the three months ended March 31, 1997 and 1996,
respectively. The data presented below has been derived from and should be read
in conjunction with the consolidated financial statements of the Company and the
financial statements of the Mercury Properties, and the related notes thereto
set forth elsewhere in this Proxy Statement/Prospectus. Summary financial data
at March 31, 1997 and for the three months ended March 31, 1997 and 1996,
respectively, for the Company and the Mercury Properties are derived from the
unaudited financial statements of the Company and the Mercury Properties and
include all adjustments (consisting only of normally recurring adjustments) that
the Company and Mercury each consider necessary for a fair presentation of
operating results for such interim periods. Results for interim periods are not
necessarily indicative of results for the full year. See "Management's
Discussion and Analysis of the Company's Financial Condition and Results of
Operations" and "Management's Discussion and Analysis of Mercury's Financial
Condition and Results of Operations" for a discussion of matters that affect the
comparability of the information presented. All of the statements are in United
States dollars.
SUMMARY CONSOLIDATED HISTORICAL FINANCIAL DATA OF THE COMPANY
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
-------------------- --------------------
1996 1995 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues...................................................... $ 4,376 $ 3,127 $ 1,220 $ 989
Net loss............................................................ $ 330 $ 641 $ 47 $ 76
Per share net income (loss)......................................... $ (0.02) $ (0.04) $ (0.00) $ (0.01)
Weighted average number of shares outstanding....................... 13,773 14,263 13,777 13,712
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, AT MARCH 31,
-------------------- ------------
1996 1995 1997
--------- --------- ------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................................... $ 313 $ 233 $ 348
Accounts receivable......................................................... $ 937 $ 700 $ 715
Inventories................................................................. $ 195 $ 184 $ 169
Total current assets........................................................ $ 1,460 $ 1,176 $ 1,290
Property, plant and equipment--net ("full cost")............................ $ 28,786 $ 29,041 $ 28,738
Total assets................................................................ $ 30,716 $ 30,754 $ 30,483
Current liabilities, including current portion of long-term debt............ $ 1,597 $ 962 $ 1,735
Long-term debt.............................................................. $ 5,931 $ 6,252 $ 5,653
Deferred income taxes....................................................... $ 3,833 $ 4,003 $ 3,807
Stockholders' equity........................................................ $ 19,357 $ 19,537 $ 19,288
</TABLE>
10
<PAGE>
SUMMARY HISTORICAL FINANCIAL INFORMATION OF THE MERCURY PROPERTIES (1)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER
31, MARCH 31,
-------------------- --------------------
1996 1995 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES:
Total revenues............................................................... $ 2,759 $ 2,205 $ 661 $ 591
Total direct operating expenses.............................................. $ 1,561 $ 1,335 $ 359 $ 401
Excess of revenues over direct operating expenses............................ $ 1,198 $ 870 $ 302 $ 190
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31,
1997
-------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................................... $ 0
Working capital..................................................... $ 165
Total assets........................................................ $ 4,432
Long-term debt...................................................... $ 4,000
Total stockholders' equity.......................................... $ 432
</TABLE>
- ------------------------
(1) Historical financial statements reflecting the financial position and
results of operations required by generally accepted accounting principles
are not presented, as such information is neither readily available on an
individual property basis nor meaningful for the Mercury Properties.
Accordingly, the data shown above are derived from statements of revenues
and direct operating expenses. Amounts represent Mercury's net ownership
interest in the Mercury Properties and are presented on the full cost basis
of accounting. Depreciation, depletion and amortization, allocated general
and administrative expenses, interest expense and income taxes have been
excluded because Mercury is a newly formed business and the expenses are not
necessarily indicative of the expenses to be incurred by Mercury.
11
<PAGE>
SUMMARY PRO FORMA FINANCIAL INFORMATION
The following summary pro forma financial information has been derived from
and should be read in conjunction with the pro forma financial information and
notes thereto included elsewhere in this Proxy Statement/Prospectus. The
following summary pro forma consolidated statements of operations for the year
ended December 31, 1996 and the three months ended March 31, 1997 combine the
historical information of the Company adjusted to give effect to the Merger and
the related pro forma adjustments. The pro forma statements of operations for
the year ended December 31, 1996 and the three months ended March 31, 1997
reflect the consolidated operations of the Company and Mercury as if the Merger
had been consummated at January 1, 1996. The pro forma balance sheet as of March
31, 1997 is presented as if the Merger had been consummated on that date. All of
the statements are in United States dollars. The following summary pro forma
financial information is presented for illustrative purposes only and is not
necessarily indicative of the results of operations and financial condition that
would have been achieved if the transactions included in the pro forma
adjustments had been consummated in accordance with the assumptions set forth
below under "Pro Forma Condensed Financial Information," nor is it necessarily
indicative of future operating results or financial condition.
<TABLE>
<CAPTION>
PRO FORMA COMBINED(1)
---------------------------------
YEAR ENDED THREE MONTHS
DECEMBER 31, 1996 MARCH 31, 1997
----------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C>
SELECTED STATEMENT OF OPERATIONS DATA:
Total revenues.............................................................. $ 7,135 $ 1,881
Net income.................................................................. $ 18 $ 42
Per share net income........................................................ $ 0.00 $ 0.00
Weighted average number of shares outstanding............................... 25,773 25,777
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31, 1997
-----------------
<S> <C>
SELECTED BALANCE SHEET DATA:
Cash and cash equivalents.................................................................... $ 348
Accounts receivable.......................................................................... $ 802
Inventories.................................................................................. $ 247
Total current assets......................................................................... $ 1,455
Property, plant and equipment--net ("full cost")............................................. $ 23,031
Total assets................................................................................. $ 24,991
Current liabilities, including current portion of long-term debt............................. $ 2,185
Long-term debt............................................................................... $ 9,653
Deferred income taxes........................................................................ $ --
Stockholders' equity......................................................................... $ 13,153
</TABLE>
- ------------------------
(1) The Merger will be accounted for as a purchase under the provisions of
Accounting Principal Board Opinion Number 16 ("APB 16") Accounting for
Business Combinations. Under APB 16, Mercury will be considered the
"accounting acquirer" since the former Mercury shareholders will control the
Surviving Corporation through their holdings of approximately 47 percent of
the combined outstanding Surviving Corporation Common Stock, will have
control over the executive committee of the Board of Directors of the
Surviving Corporation and will have options to acquire 11 million additional
shares of Surviving Corporation Common Stock. Accordingly, the Company's net
assets will be revalued based upon the value of Company Common Stock at the
date the Merger was announced and Mercury's net assets will be based upon
their historical cost. See "Pro Forma Consolidated Statements of Operations
and Balance Sheet of the Surviving Corporation."
12
<PAGE>
COMPARATIVE PER SHARE DATA
Set forth below are the comparative net income and book value per common
share data of (i) each of the Company and Mercury on an historical basis, (ii)
the market value per share of the Company and (iii) the Surviving Corporation on
a pro forma combined basis giving effect to the Merger assuming it had occurred
as of January 1, 1996, in each case giving effect to the Merger as a purchase by
Mercury of all of the assets and liabilities of the Company, all on the basis
described in the unaudited pro forma financial information and notes thereto
included elsewhere in this Proxy Statement/Prospectus. The net income and book
value per common share of the Company Common Stock on an equivalent pro forma
combined basis giving effect to the Merger would be the same as is shown for the
Surviving Corporation since the Exchange Ratio is one-for-one. Neither company
paid any dividends to their shareholders during the periods presented.
The information set forth below should be read in conjunction with the
respective audited and unaudited financial statements and related notes of the
Company and Mercury included elsewhere in this Proxy Statement/Prospectus and
the unaudited summary pro forma financial information and notes thereto included
elsewhere in this Proxy Statement/Prospectus.
PER SHARE COMMON STOCK DATA
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1996 MARCH 31, 1997
----------------- --------------
<S> <C> <C>
THE COMPANY
Book value per share........................................................ $1.40 $1.40
Net income (loss) per share................................................. $(0.02) $0.00
Market value per share...................................................... $0.75 $0.94
Average number of shares outstanding........................................ 13,773,110 13,777,014
MERCURY
Book value per share........................................................ -- $0.04
Net income (loss) per share................................................. -- $0.02
Average number of shares outstanding........................................ -- 12,000,000
SURVIVING CORPORATION PRO FORMA PER SHARE DATA:
Book value per share........................................................ -- $0.51
Net income (loss) per share................................................. $0.00 $0.00
Average number of shares outstanding........................................ 25,773,110 25,777,014
</TABLE>
13
<PAGE>
RISK FACTORS
Shareholders of the Company should carefully consider the following risk
factors, in addition to the other information contained in this Proxy
Statement/Prospectus, in connection with their decision to approve the
Continuance and the Merger. Unless the context otherwise requires, the following
discussion concerns the business of the Surviving Corporation assuming the
Merger becomes effective.
This Proxy Statement/Prospectus contains forward-looking statements. The
words "anticipate," "believe," "expect," "plan," "intend," "estimate,"
"project," "will," "could," "may" and similar expressions are intended to
identify forward-looking statements. These statements include information
regarding oil and natural gas reserves, future drilling and operations, future
production of oil and natural gas and future net cash flows. Such statements
reflect the Company's and Mercury's current views with respect to future events
and financial performance and involve risks and uncertainties, including without
limitation the risks described below. Should one or more of these risks or
uncertainties occur, or should underlying assumptions prove incorrect, actual
results may vary materially and adversely from those anticipated, believed,
estimated or otherwise indicated.
EFFECTS OF THE CONTINUANCE AND THE MERGER ON SHAREHOLDERS' RIGHTS. As a
result of the Continuance, all shareholders of the Company will become
shareholders in a Delaware corporation. The Company, as continued, will be a
corporation organized under and governed by Delaware law, the Delaware
Certificate of Incorporation of the Company and the Bylaws of the Company. The
Company intends to merge with and into Mercury immediately after the Continuance
and as a result, the shareholders of the Company (other than those who exercise
dissenters' rights in connection with the Continuance) will become shareholders
in a Delaware corporation governed by Delaware law, and the Surviving
Corporation Certificate and Bylaws. However, the Delaware Certificate of
Incorporation and Bylaws of the Company will govern the manner of approving the
Merger and the rights of shareholders of the Company (as continued in Delaware)
in connection with the Merger. While the rights and privileges of shareholders
of a Delaware corporation under the DGCL are, in many instances, comparable to
those of shareholders of an Alberta corporation under the ABCA, there are
certain material differences, which are summarized below in "Comparison of
Shareholders' Rights." Shareholders of the Company are urged to carefully
consider such information. In general, the differences in shareholder rights
that may affect the rights of shareholders of the Company during the period
between the completion of the Continuance and the completion of the Merger are
summarized below.
SHAREHOLDER APPROVAL. Under the ABCA, the Merger would require the approval
of shareholders by special resolution. A special resolution is a resolution
passed by not less than two-thirds of the votes cast by the shareholders
entitled to vote on the resolution. Under the DGCL, the vote of a majority of
the outstanding shares of Company Common Stock is necessary to approve the
Merger. Since the Merger is conditioned upon the completion of the Continuance,
however, the vote of shareholders of the Company as to the Continuance is
effectively necessary to approve the Merger.
DISSENTERS' RIGHTS AND OPPRESSION REMEDIES. The ABCA provides that
shareholders of an Alberta corporation entitled to vote on certain matters are
entitled to exercise dissent rights and to be paid the fair value of their
shares in connection therewith. The ABCA does not distinguish for this purpose
between listed and unlisted shares. Under the ABCA, a shareholder may, in
addition to exercising dissent rights and in certain circumstances, apply to the
Alberta courts seeking an oppression remedy under the ABCA for any act or
omission of a corporation which is oppressive or unfairly prejudicial to or that
unfairly disregards a shareholder's interest. Under the DGCL, appraisal or
dissenters' rights are generally available in connection with a merger or
consolidation, except in certain circumstances. However, holders of Continued
Common Stock will not be entitled to appraisal rights under the DGCL, but will
be entitled to the dissenters' rights to be contained in the certificate of
incorporation of the continued corporation. See "The Merger--Right of Dissent."
14
<PAGE>
The DGCL does not provide for an oppression remedy similar to that of the
ABCA. However, the DGCL provides a variety of legal and equitable remedies to a
corporation's shareholders for improper acts or omissions of a corporation, its
officers and directors.
SHAREHOLDER CONSENT IN LIEU OF A MEETING. Under the ABCA, shareholder
action without a meeting may only be taken by written resolution signed by all
shareholders who would be entitled to vote thereon at a meeting. Under the DGCL,
unless otherwise provided in the certificate of incorporation, any action
required to be taken or which may be taken at an annual or special meeting of
shareholders may be taken without a meeting if a consent in writing is signed by
the holders of outstanding stock having not less than the minimum number of
votes that would be necessary to authorize such action at a meeting at which all
shares entitled to vote were present and voted. The Delaware Certificate of
Incorporation of the Company will not provide otherwise. As a result, the
Company must obtain proxies for the Consent from holders of a majority of the
shares of Company Common Stock outstanding after the Continuance in order to
approve the Merger.
VOLATILITY OF OIL AND NATURAL GAS PRICES. The Surviving Corporation's
revenues, operating results, profitability and future growth and the carrying
value of its oil and natural gas properties will be substantially dependent upon
the prices received for its oil and natural gas. Historically, the markets for
oil and natural gas have been volatile and such volatility may continue or recur
in the future. Various factors beyond the control of the Surviving Corporation
will affect prices of oil and natural gas, including the worldwide and domestic
supplies of oil and natural gas, the ability of the members of the Organization
of Petroleum Exporting Countries ("OPEC") to agree to and maintain oil price and
production controls, political instability or armed conflict in oil or natural
gas producing regions, the price and level of foreign imports, the level of
consumer demand, the price, availability and acceptance of alternative fuels,
the availability of pipeline capacity, weather conditions, domestic and foreign
governmental regulations and taxes and the overall economic environment.
Any significant decline in the price of oil or natural gas would adversely
affect the Surviving Corporation's revenues and operating income and could
require an impairment in the carrying value of its oil and natural gas
properties.
UNCERTAINTY OF RESERVE INFORMATION AND FUTURE NET REVENUE ESTIMATES. There
are numerous uncertainties inherent in estimating quantities of proved oil and
natural gas reserves and their values, including many factors beyond the control
of the Company, Mercury or the Surviving Corporation. Estimates of proved
undeveloped reserves and reserves recoverable through enhanced oil recovery
techniques are by their nature uncertain. The reserve information set forth in
this Proxy Statement/Prospectus represents estimates only. Although the Company
and Mercury each believes such estimates as to its properties to be reasonable,
reserve estimates are imprecise and should be expected to change as additional
information becomes available.
Estimates of oil and natural gas reserves, by necessity, are projections
based on engineering data, and there are uncertainties inherent in the
interpretation of such data as well as the projection of future rates of
production and the timing of development expenditures. Reserve engineering is a
subjective process of estimating underground accumulations of oil and natural
gas that are difficult to measure. The accuracy of any reserve estimate is a
function of the quality of available data, engineering and geological
interpretation and judgment. Estimates of economically recoverable oil and
natural gas reserves and of future net cash flows necessarily depend upon a
number of variable factors and assumptions, such as historical production from
the area compared with production from other producing areas, the assumed
effects of regulations by governmental agencies and assumptions concerning
future oil and natural gas prices, future operating costs, severance and excise
taxes, development costs and workover and remedial costs, all of which may in
fact vary considerably from actual results. For these reasons, estimates of the
economically recoverable quantities of oil and natural gas attributable to any
particular group of properties, classifications of such reserves based on risk
of recovery and estimates of the future net cash flows expected therefrom may
vary
15
<PAGE>
substantially. Any significant variance in the assumptions could materially
affect the estimated quantity and value of the reserves. Actual production,
revenues and expenditures with respect to the Surviving Corporation's reserves
will likely vary from estimates, and such variances may be material.
The PV-10 referred to in this Proxy Statement/Prospectus should not be
construed as the current market value of the estimated oil and natural gas
reserves attributable to the Company's or Mercury's properties. In accordance
with applicable requirements, the estimated discounted future net cash flows
from proved reserves are based on prices and costs as of the date of the
estimate, whereas actual future prices and costs may be materially higher or
lower. Actual future net cash flows also will be affected by factors such as the
amount and timing of actual production, supply and demand for oil and natural
gas, refinery capacity, curtailments or increases in consumption by natural gas
purchasers and changes in governmental regulations or taxation. The timing of
actual future net cash flows from proved reserves, and thus their actual present
value, will be affected by the timing of both the production and the incurrence
of expenses in connection with development and production of oil and natural gas
properties. In addition, the 10 percent discount factor, which is required to be
used to calculate discounted future net cash flows for reporting purposes, is
not necessarily the most appropriate discount factor based on interest rates in
effect from time to time and risks associated with Mercury or the oil and
natural gas industry in general.
CONCENTRATION IN CUT BANK FIELD COMPLEX. Mercury's properties in the Cut
Bank Field complex in northwest Montana constitute the majority of Mercury's
existing inventory of producing properties and drilling locations. Likewise, the
Company's properties in the same area constitute a majority of the Company's
existing inventory and drilling locations. Substantially all of each of
Mercury's and the Company's 1997 drilling budget is associated with drilling in
this region. There can be no assurance that the Surviving Corporation's
operations in Montana will yield positive economic returns. Failure of the Cut
Field Bank complex properties to yield significant quantities of economically
attractive reserves and production would have a material adverse impact on the
Surviving Corporation's future financial condition and results of operations. In
addition, recent heavy drilling activity by a number of operators in the region
may increase the cost to acquire additional acreage in this area, reduce or
limit the availability of drilling and service rigs, equipment and supplies, or
reduce demand for production, any of which would impact the Surviving
Corporation more adversely than if it were more geographically diversified.
SUBSTANTIAL CAPITAL REQUIREMENTS. The Company's and Mercury's current
development plans require substantial capital expenditures in connection with
the exploration, development and exploitation of oil and natural gas properties.
Historically, the Company and Parent have funded capital expenditures through a
combination of internally generated funds from sales of production or
properties, equity contributions and long-term debt financing, and short-term
financing arrangements. The Company and Mercury anticipate that cash flow from
operations will be sufficient to meet the Surviving Corporation's estimated
capital expenditure requirements for the next six months. The Company and
Mercury believe that after such six-month period the Surviving Corporation will
require a combination of additional financing and cash flow from operations to
implement future development plans. Neither the Company nor Mercury currently
has any arrangements with respect to, or sources of, additional financing other
than bank arrangements, and there can be no assurance that any additional
financing will be available to it on acceptable terms or at all. Future cash
flows and the availability of financing will be subject to a number of
variables, such as the level of production from existing wells, prices of oil
and natural gas and success in locating and producing new reserves. To the
extent that future financing requirements are satisfied through the issuance of
equity securities, shareholders of the Surviving Corporation may experience
dilution that could be substantial. The incurrence of debt financing could
result in a substantial portion of operating cash flow being dedicated to the
payment of principal and interest on such indebtedness, could render the
Surviving Corporation more vulnerable to competitive pressures and economic
downturns and could impose restrictions on operations. If revenue were to
decrease as a result of lower oil and natural gas prices, decreased production
or otherwise, and the Surviving Corporation had no availability under bank
arrangements or any other credit facility, the Surviving Corporation could have
a reduced ability to execute
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current development plans, replace reserves or to maintain production levels,
any of which could result in decreased production and revenue over time.
DRILLING AND OPERATING RISKS. Oil and natural gas drilling activities are
subject to many risks, including the risk that no commercially productive
reservoirs will be encountered. There can be no assurance that wells drilled by
the Surviving Corporation will be productive or that the Surviving Corporation
will recover all or any portion of its drilling costs. Drilling for oil and
natural gas may involve unprofitable efforts, not only from dry wells, but from
wells that are productive but do not produce sufficient net revenues to return a
profit after drilling, operating and other costs. The cost of drilling,
completing and operating wells is often uncertain. Drilling operations may be
curtailed, delayed or canceled as a result of numerous factors, many of which
will be beyond the Surviving Corporation's control, including economic
conditions, title problems, weather conditions, compliance with governmental
requirements and shortages or delays in the delivery of equipment and services.
Future drilling activities may not be successful and, if unsuccessful, such
failure may have a material adverse effect on future results of operations and
financial condition.
Oil and natural gas operations are subject to hazards and risks inherent in
drilling for and producing and transporting oil and natural gas, such as fires,
natural disasters, explosions, encountering formations with abnormal pressures,
blowouts, cratering, pipeline ruptures and spills, any of which can result in
the loss of hydrocarbons, environmental pollution, personal injury claims and
other damage to properties. As protection against operating hazards, the Company
and Mercury currently maintain, and intend to cause the Surviving Corporation to
maintain in the future, insurance coverage against some, but not all, potential
losses. The Surviving Corporation may elect to self-insure in circumstances in
which management believes that the cost of insurance, although available, is
excessive relative to the risks presented. The occurrence of an event that is
not covered, or not fully covered, by third-party insurance could have a
material adverse effect on the Surviving Corporation's business, financial
condition and results of operations.
RELIANCE ON CONTRACT WITH MONTANA POWER COMPANY. Mercury, as a result of
its acquisition of the Mercury Properties from Parent, assumed rights and
obligations under an agreement with Montana Power Company (the "Wells
Agreement"). The Wells Agreement covers the oil and gas development of an area
of mutual interest that presently contains approximately 304,000 acres in the
Cut Bank Field in Montana, including the Montana Properties. Mercury holds 100
percent of the oil rights and 30 percent of the revenue pertaining to liquids
produced by gas wells while Montana Power Company has all the rights to natural
gas. The area of mutual interest and the agreement were originally created in
1944 and will remain in effect until all mutual oil and gas leases in the area
have expired. Management of the Company and Mercury expect that activities
conducted pursuant to the Wells Agreement and revenues therefrom will account
for a significant portion of the activities and revenues of the Surviving
Corporation. There can be no assurance that the operations under the contract
will be continued for any particular period of time or that if operations are
continued they will be conducted on a profitable basis.
TAX TREATMENT OF THE CONTINUANCE. Under certain circumstances, the
Continuance may result in taxation of the Company under Canadian federal income
tax laws and/or United States federal income tax laws. Under Canadian income tax
laws, the Company will be deemed to have disposed of all of its property for
proceeds of disposition equal to the fair market value of that property upon the
Continuance and will be subject to tax on any income and net taxable capital
gains arising from such deemed disposition. Additionally, the Company will be
subject to a corporate emigration tax at a rate of five percent of the amount by
which the fair market value of the Company's assets net of liabilities exceeds
the paid-up capital of the Company's issued and outstanding shares. Based upon
the valuation of the Company's assets and the capital structure of the Company,
management of the Company has advised that these provisions should not result in
any Canadian tax liability. There can be no assurance, however, that Revenue
Canada will agree with the results of such valuation and any disagreement could
result in the Company owing Canadian income taxes.
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In addition, there is a significant risk that the Company will be subject to
United States federal income tax on the excess, if any, of the fair market value
of the Continued Common Stock deemed to be distributed to its shareholders over
the Company's basis in such stock at the time of the deemed distribution. The
Company will have a basis in the Continued Common Stock equal to its basis in
the assets deemed transferred to the continued company pursuant to the
Continuance reduced by the sum of the amount of the liabilities of the Company
assumed by the continued company and the amount of liabilities to which the
former assets of the Company are subject. Based on an appraisal obtained from
Rauscher Pierce Refsnes, Inc. and the Company's determination of its tax basis
in the Continued Common Stock, the Company believes that the fair market value
of such stock on the date of the Continuance will be less than the Company's
basis in such stock on such date and, therefore, the Company will recognize no
gain on the deemed distribution. Consequently, based upon the foregoing, the
Company should recognize no gain for United States federal income tax purposes
on the Continuance. There can be no assurance, however, that the United States
Internal Revenue Service will agree with the method or result of the valuation
performed by Rauscher Pierce Refsnes, Inc. Any disagreement could result in the
Company owing United States federal income taxes as a result of the Continuance.
COMPLIANCE WITH GOVERNMENTAL REGULATIONS. Oil and natural gas operations
are subject to extensive federal, state and local laws and regulations relating
to the exploration for, and the development, production and transportation of,
oil and natural gas, as well as safety matters, which may be changed from time
to time in response to economic or political conditions. Matters subject to
regulation by federal, state and local authorities include permits for drilling
operations, road and pipeline construction, reports concerning operations, the
spacing of wells, unitization and pooling of properties, taxation and
environmental protection. Any delays in obtaining approvals or material
alterations to the Surviving Corporation's development plans could have a
material adverse effect on operations. From time to time, regulatory agencies
have imposed price controls and limitations on production by restricting the
rate of flow of oil and natural gas wells below actual production capacity in
order to conserve supplies of oil and natural gas. Although the Company and
Mercury each believes that it is in substantial compliance with all applicable
laws and regulations, the requirements imposed by such laws and regulations are
frequently changed and subject to interpretation, and neither the Company nor
Mercury can predict the ultimate cost of compliance with these requirements or
their effect on operations. Significant expenditures may be required to comply
with governmental laws and regulations and may have a material adverse effect on
the Surviving Corporation's financial condition and results of operations.
COMPLIANCE WITH ENVIRONMENTAL REGULATIONS. The Company's and Mercury's
operations are now, and the operations of the Surviving Corporation will be,
subject to complex and constantly changing environmental laws and regulations
adopted by federal, state and local governmental authorities. The implementation
of new, or the modification of existing, laws or regulations could have a
material adverse effect on the Surviving Corporation. The discharge of oil,
natural gas or other pollutants into the air, soil or water may give rise to
significant liabilities on the part of the Surviving Corporation to the
government and third parties and may require the Surviving Corporation to incur
substantial costs of remediation. Moreover, both the Company and Mercury have
agreed to indemnify sellers of certain properties purchased by them against
certain liabilities for environmental claims associated with such properties.
The Surviving Corporation will assume these obligations as a result of the
Merger. No assurance can be given that existing environmental laws or
regulations, as currently interpreted or reinterpreted in the future, or future
laws or regulations will not materially adversely affect the Surviving
Corporation's results of operations and financial condition or that material
indemnity claims will not arise against the Surviving Corporation with respect
to properties acquired previously by the Company or Mercury or that may be
acquired in the future by the Surviving Corporation.
LIMITED OPERATING HISTORY. Mercury, which was formed by Parent in March
1997, has a limited operating history upon which investors may base their
evaluation of Mercury's performance. In addition, Parent acquired the Mercury
Properties in October 1995, together with certain other oil and gas
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properties. Out of the total purchase price of such acquisition of $15,114,796,
$4,593,000 was allocated to the Mercury Properties. As a result of Mercury's
recent formation and the brief operating history of the Mercury Properties, the
operating results from Parent's operation of the Mercury Properties may not be
indicative of future results that may be obtained by the Surviving Corporation.
There can be no assurance that the Surviving Corporation will maintain the
current level of revenues, oil and natural gas reserves or production
attributable currently to the Mercury Properties or the Company. Any future
growth of the Surviving Corporation's oil and natural gas reserves, production
and operations could place significant demands on the Surviving Corporation's
financial, operational and administrative resources.
RESERVE REPLACEMENT RISK. The future success of the Surviving Corporation
will depend in large part upon its ability to find, develop or acquire
additional oil and natural gas reserves that are economically recoverable. The
Surviving Corporation's proved reserves will generally decline as reserves are
depleted, except to the extent that the Surviving Corporation conducts
successful exploration or development activities or acquires properties
containing proved reserves. At December 31, 1996, approximately 39 percent of
the Company's total proved reserves, and 66 percent of Parent's total proved
reserves associated with the Mercury Properties, were undeveloped. In order to
increase reserves and production, the Surviving Corporation must continue
development and exploitation drilling programs or undertake other replacement
activities. Current development plans include increasing the Surviving
Corporation's reserve base through continued drilling, development and
exploitation of existing properties of the Company and Mercury. There can be no
assurance, however, that planned development and exploitation projects will
result in significant additional reserves or that the Surviving Corporation will
have success drilling productive wells at anticipated finding and development
costs.
DEPENDANCE ON KEY PERSONNEL. The Surviving Corporation will enter into a
management agreement with Parent pursuant to which Parent will agree to provide
certain property management services to the Surviving Corporation. The Surviving
Corporation's success will, therefore, be highly dependent on management of
Parent, principally Frank Darden, Thomas Darden and Glenn Darden, and a limited
number of other senior management and technical personnel. Loss of the services
of any of those individuals could have a material adverse effect on the
Surviving Corporation's operations. Furthermore, demands on the time of Parent's
employees in pursuing Parent's business could reduce the time available to
manage the business of the Surviving Corporation. See "The Merger--Interests of
Certain Persons in the Merger," "Business and Properties of
Mercury--Competition" and "Certain Transactions."
CONTROL BY EXISTING SHAREHOLDERS. Upon completion of the Merger, Parent and
the officers and directors of the Surviving Corporation will beneficially own
approximately 39.2 percent and 29.7 percent, respectively, of the outstanding
Surviving Corporation Common Stock. Accordingly, Parent and such persons would
be able to control the outcome of shareholder votes, including votes concerning
the election of directors, the adoption or amendment of provisions in the
Surviving Corporation Certificate or Bylaws and the approval of mergers and
other significant corporate transactions.
COMPETITION. The Surviving Corporation will operate in the highly
competitive areas of oil and natural gas acquisition, exploration, exploitation
and production with other companies, many of which have substantially larger
financial resources, operations, staffs and facilities. In seeking to acquire
desirable producing properties or new leases for future exploration and in
marketing its oil and natural gas production, the Surviving Corporation will
face intense competition from both major and independent oil and natural gas
companies. Many of these competitors have financial and other resources
substantially in excess of those available to the Surviving Corporation. Parent
and its affiliates and certain of the officers and directors of the Company and
their affiliates, including Pozo Resources, Inc., will also continue to conduct
their own oil and natural gas businesses, although these businesses are
presently conducted in geographic regions where the Company and Mercury do not
have significant properties. The effects of this highly competitive environment
could have a material adverse effect on the Surviving Corporation.
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ACQUISITION RISKS. The Company has grown primarily through the acquisition,
development and exploitation of oil and natural gas properties. Although the
Company and Mercury expect the Surviving Corporation to concentrate on such
activities in the future, the Company and Mercury expect that the Surviving
Corporation may evaluate and pursue from time to time acquisitions in Montana
and in other areas that provide attractive investment opportunities for the
addition of production and reserves and that meet selection criteria. The
successful acquisition of producing properties and undeveloped acreage requires
an assessment of recoverable reserves, future oil and natural gas prices,
operating costs, potential environmental and other liabilities and other factors
that will be beyond the Surviving Corporation's control. This assessment is
necessarily inexact and its accuracy is inherently uncertain. In connection with
such an assessment, the Surviving Corporation will perform a review of the
subject properties it believes will be generally consistent with industry
practices. This review, however, will not reveal all existing or potential
problems, nor will it permit a buyer to become sufficiently familiar with the
properties to assess fully their deficiencies and capabilities. Inspections may
not be performed on every well, and structural and environmental problems are
not necessarily observable even when an inspection is undertaken. The Surviving
Corporation will generally assume preclosing liabilities, including
environmental liabilities, and will generally acquire interests in the
properties on an "as is" basis. With respect to its acquisitions to date,
neither the Company nor Mercury has material commitments for capital
expenditures to comply with existing environmental requirements. There can be no
assurance that any acquisitions will be successful. Any unsuccessful acquisition
could have a material adverse effect on the Surviving Corporation.
ABSENCE OF DIVIDENDS ON COMMON STOCK. Neither the Company nor Mercury has
ever declared or paid cash dividends on its common stock and each anticipates
that future earnings, if any, of the Surviving Corporation will be retained for
development of its business. In addition, the Company's bank arrangement with a
lender prohibits the payment of cash dividends. The Surviving Corporation will
become the borrower under these arrangements and will be subject to the same
restrictions.
POSSIBLE DECLINE IN STOCK PRICE FROM FUTURE SALES OF SURVIVING CORPORATION
COMMON STOCK. Upon completion of the Continuance and the Merger, the Surviving
Corporation will have a total of 25,777,014 shares outstanding. Of these shares,
the 13,777,014 shares offered hereby to holders of Company Common Stock will be
freely tradeable without restriction or registration under the Securities Act of
1933, as amended (the "Securities Act"), by persons other than "affiliates" of
the Company, as defined under the Securities Act. The remaining 12,000,000
shares of Surviving Corporation Common Stock outstanding will be "restricted
securities" as that term is defined by Rule 144 as promulgated under the
Securities Act.
Under Rule 144 (and subject to the conditions thereof, including volume
limitations), the earliest date on which any of the shares of Surviving
Corporation Common Stock that will be outstanding upon completion of the Merger
will be eligible for sale under Rule 144 is in March 1998. As a result of the
Merger, the Surviving Corporation also will have outstanding options and
warrants to purchase an aggregate of 12,758,570 shares of Surviving Corporation
Common Stock, of which options and warrants entitling the holders thereof to
acquire an aggregate of 11,508,570 shares of Surviving Corporation Common Stock
will be immediately exercisable. Holders of certain of such warrants will have
"piggyback" registration rights to register 11,000,000 shares of Surviving
Corporation Common Stock underlying such warrants. The preparation and filing of
any registration statement filed in connection with the exercise of registration
rights will be at the expense of the Surviving Corporation. Sales of substantial
amounts of Surviving Corporation Common Stock in the public market following the
Merger, or the perception that such sales could occur, could materially and
adversely affect the prevailing market price of the Surviving Corporation Common
Stock and could impair the Surviving Corporation's future ability to raise
capital through an offering of its equity securities. See "Description of
Securities of the Surviving Corporation."
NO PRIOR PUBLIC MARKET; POSSIBLE STOCK PRICE VOLATILITY. Before the Merger,
there has been no public market for the Surviving Corporation Common Stock.
Although Mercury has applied to have the Surviving Corporation Common Stock
approved for trading on the American Stock Exchange and the listing of the
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shares of Surviving Corporation Common Stock on the American Stock Exchange is a
condition to the Merger, there can be no assurance that if the Surviving
Corporation Common Stock is approved for inclusion that it will be actively
traded on such market or that, if active trading does develop, it will be
sustained. The market price of the Surviving Corporation Common Stock and the
price at which the Surviving Corporation may sell securities in the future could
be subject to large fluctuations in response to changes and variations in the
Surviving Corporation's operating results, litigation, general market
conditions, the prices of oil and natural gas, the liquidity of the Surviving
Corporation and its ability to raise additional funds the number of market
makers for the Surviving Corporation Common Stock and other factors. In the
event that the Surviving Corporation's operating results are below the
expectations of public market analysts and investors in one or more future
periods, it is likely that the price of the Surviving Corporation Common Stock
will be materially adversely affected. In addition, the stock market has
recently experienced significant price and volume fluctuations that have
particularly affected the market prices of equity securities of many energy
companies and that often have been unrelated to the operating performance of
such companies. General market fluctuations may also adversely affect the market
price of the Surviving Corporation Common Stock.
Although the Company Common Stock has been listed on the American Stock
Exchange since 1983, there may be no correlation between the trading history and
historical prices of the Company Common Stock and future trading characteristics
and prices of the Surviving Corporation Common Stock.
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THE CONTINUANCE
GENERAL
In general, the Company is being continued and domesticated into the State
of Delaware in order to facilitate its merger with Mercury. The Continuance must
be completed before Mercury will be obligated to complete the Merger. In
addition, it is not possible under Alberta law to merge the Company with and
into Mercury in accordance with the terms of the Merger Agreement as the ABCA
does not permit an Alberta corporation to merge with a corporation incorporated
in a jurisdiction other than Alberta, except in limited circumstances not
applicable to the Merger. By taking these steps to accomplish the Continuance,
management is also of the opinion that the Company's internal procedures will
also be simplified in the areas of accounting, tax, securities and general
operations. After the Continuance, the Company will no longer be obligated to
comply with Canadian law that affects these matters.
For those shareholders who are opposed to the Continuance, dissenters'
rights are set forth by law to govern the valuation process. For more
information regarding dissenters' rights, see "-- Right of Dissent."
RIGHT OF DISSENT
Shareholders of the Company will be asked to consider and, if thought fit,
pass a special resolution authorizing the Continuance of the Company out of the
Province of Alberta and into the State of Delaware in accordance with Section
182 of the ABCA. The holders of Company Common Stock have the right to dissent
in connection with the Continuance.
Each of the Company's shareholders is entitled to dissent and be paid the
fair value of such shareholder's shares if the shareholder objects to the
Continuance and the Continuance becomes effective. A shareholder may dissent
only with respect to all of the shares held by the shareholder on behalf of any
one beneficial owner and registered in the shareholder's name. A shareholder is
not entitled to dissent from the resolution with respect to any shares
beneficially owned by one owner if the shareholder votes any shares beneficially
owned by that owner in favor of the resolution that is adopted. In order to
dissent, a shareholder must send to the Company at 500 Main Street, Suite 210,
Fort Worth, Texas 76104, attention: Howard N. Boals, Vice President--Finance, on
or before the date of the Special Meeting, a written objection (an "Objection
Notice") to the Continuance in respect of which the shareholder proposes to
dissent. A vote against the Continuance or an abstention in respect thereof does
not constitute such an Objection Notice, but a shareholder need not vote his
shares against the Continuance in order to dissent in respect of the
Continuance. Similarly, the revocation of a proxy conferring authority on the
proxy holder to vote in favor of the Continuance does not constitute an
Objection Notice in respect of the Continuance, but any such proxy granted by a
shareholder who intends to dissent should be validly revoked. Within 10 days
following the date of the Special Meeting, the Company will deliver to each
shareholder who has filed an Objection Notice in respect of the resolution
passed at the Special Meeting, at the address specified for such purpose in the
Objection Notice, a notice stating the special resolution authorizing the
Continuance has been adopted.
PERSONS WHO ARE BENEFICIAL OWNERS OF COMPANY COMMON STOCK REGISTERED IN THE
NAME OF A BROKER, CUSTODIAN, NOMINEE OR OTHER INTERMEDIARY WHO WISH TO DISSENT
SHOULD BE AWARE THAT ONLY THE REGISTERED OWNER OF SUCH SHARES IS ENTITLED TO
DISSENT. A REGISTERED HOLDER SUCH AS A BROKER WHO HOLDS SHARES OF COMPANY COMMON
STOCK AS NOMINEE FOR BENEFICIAL OWNERS, SOME OF WHOM DESIRE TO DISSENT, MUST
EXERCISE DISSENT RIGHTS ON BEHALF OF SUCH BENEFICIAL OWNERS WITH RESPECT TO THE
SHARES HELD FOR SUCH BENEFICIAL HOLDERS. IN SUCH CASE, THE OBJECTION NOTICE
SHOULD SET FORTH THE NUMBER OF SHARES OF COMPANY COMMON STOCK TO WHICH IT
RELATES.
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After the Continuance has been approved, an application may be made to the
Court of Queen's Bench of Alberta (the "Court") by the Company or by any
dissenting shareholder to fix the fair value of the shares of the Company Common
Stock held by the dissenting shareholder. If an application is made to the
Court, the Company shall, unless the Court otherwise orders, send to each
dissenting shareholder a written offer (the "Offer to Purchase") to pay him an
amount considered by the Board of Directors of the Company to be the fair value
of such shares as of the close of business on the day before the Special Meeting
accompanied by a statement showing how the fair value was determined. Every
Offer to Purchase shares of Company Common Stock made to a shareholder of the
Company Common Stock who dissents to the Continuance shall be on the same terms
as every other Offer to Purchase made to other dissenting shareholders of the
Company.
A dissenting shareholder may make an agreement with the Company for the
purchase of his shares by the Company in the amount of the Company's Offer to
Purchase or otherwise at any time before the Court fixes the fair value of the
shares. If a settlement cannot be reached, the parties will proceed to the
Court. All dissenting shareholders whose shares have not been purchased by the
Company will be joined as parties to the application and will be bound by the
decision of the Court. The Court order will fix the fair value of the shares of
all dissenting shareholders who are parties to the application, give judgment in
that amount against the Company in favor of each of the dissenting shareholders
and fix the time within which the Company must pay the amount to the dissenting
shareholders.
On the earlier of: (i) the Company being continued into Delaware, (ii) the
Company and the dissenting shareholder entering into a settlement agreement, or
(iii) the pronouncement of a Court order giving judgment against the Company for
the fair value of the shares of the dissenting shareholder, a dissenting
shareholder ceases to have any rights as a shareholder of the Company other than
the right to be paid the fair value of his shares. The Company will not make a
payment to a dissenting shareholder if there are reasonable grounds for
believing that: (a) the Company is or would after the payment be unable to pay
its liabilities as they become due or (b) the realizable value of the Company's
assets would thereby be less than the aggregate amount of its liabilities. If
either of these tests cannot be met, the Company shall within 10 days of the
Court order or reaching its settlement with a dissenting shareholder send a
notice to each dissenting shareholder that the Company cannot lawfully make the
payment for the shares. Once this notice is received, a dissenting shareholder
may, by written notice delivered to the Company within 30 days after receiving
the Company's notice, withdraw his Objection Notice, in which case the
dissenting shareholder is returned his full rights as a shareholder. If the
dissenting shareholder does not withdraw his Objection Notice, he retains his
status as a claimant against the Company to be paid as soon as the Company is
lawfully able to do so or, in liquidation, to be ranked subordinate to the
rights of the creditors but in priority to its shareholders.
THE FOREGOING IS ONLY A SUMMARY OF THE RIGHTS OF DISSENTING SHAREHOLDERS AND
IS QUALIFIED IN ITS ENTIRETY BY THE PROVISIONS OF SECTION 184 OF THE ABCA, A
COPY OF WHICH IS ATTACHED AS APPENDIX "C". ANY SHAREHOLDER DESIRING TO EXERCISE
A RIGHT OF DISSENT SHOULD SEEK LEGAL ADVICE AND HIS FAILURE TO COMPLY STRICTLY
WITH THE PROVISIONS OF THAT SECTION MAY PREJUDICE THAT RIGHT. THE RIGHT OF
SHAREHOLDERS TO DISSENT IS NOT EXCLUSIVE OF ANY OTHER RIGHTS AVAILABLE TO
SHAREHOLDERS GENERALLY, SUCH AS RIGHTS IN RESPECT OF A CORPORATE DIRECTOR'S
DUTIES OF GOOD FAITH AND CARE UNDER THE ABCA, OR OTHERWISE.
APPROVAL OF THE CONTINUANCE UNDER THE ABCA
Under the ABCA, a proposed continuance is subject to approval by the
Company's shareholders and the Registrar of Corporations (the "Registrar"). The
Company expects to be able to satisfy the requirements of the Registrar
regarding discontinuance/export.
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THE MERGER
GENERAL DESCRIPTION OF THE MERGER
The Merger Agreement provides that, at the Effective Time, the Company will
merge with and into Mercury with Mercury becoming the Surviving Corporation, and
each outstanding share of Company Common Stock and Mercury Common Stock will be
converted into one share of Surviving Corporation Common Stock. The Merger is
conditioned upon, among other things, the approval of the Continuance by the
shareholders of the Company.
Based on the number of shares of Common Stock outstanding as of the Meeting
Record Date, 13,777,014 shares of Surviving Corporation Common Stock will be
issuable to holders of shares of Company Common Stock pursuant to the Merger
Agreement, representing approximately 53.4 percent of the total Surviving
Corporation Common Stock to be issued and outstanding after such issuance.
Expenses to be incurred by the parties as a result of the Continuance and
the Merger are expected to be approximately $450,000 which expenses include
legal, accounting and printing costs associated with these transactions.
For those shareholders who are opposed to the Merger, dissenters' or
appraisal rights will be available pursuant to the certificate of incorporation
of the continued company and under the DGCL. For more information regarding
dissenters' rights, see "--Right of Dissent."
RIGHT OF DISSENT
Even though the Company will no longer be governed by the ABCA after the
effectiveness of the Continuance, the certificate of incorporation of the
Company (as continued) will contain provisions based on Section 184 of the ABCA
(described above) entitling the holders of shares of Continued Common Stock to
dissent and be paid the fair value of such shareholder's shares if the
shareholder objects to the Merger and the Merger becomes effective. A
shareholder may dissent only with respect to all of the shares held by the
shareholder on behalf of any one beneficial owner and registered in the
shareholder's name. A shareholder is not entitled to dissent with respect to any
shares beneficially owned by one owner if the shareholder votes any shares
beneficially owned by that owner in favor of the Merger. In order to dissent, a
shareholder must send to the Company at 500 Main Street, Suite 210, Fort Worth,
Texas 76104, attention: Howard N. Boals, Vice President--Finance, on or before
the date of execution of the Consent (which shall be as soon as possible after
the Special Meeting and the effectiveness of the Continuance), a written
objection (an "Objection Notice") to the Merger in respect of which the
shareholder proposes to dissent. A refusal to deliver a proxy for the Consent
does not constitute such an Objection Notice, but a shareholder need not vote
his shares against the Merger in order to dissent in respect of the Merger.
Similarly, the revocation of a proxy conferring authority on the proxy holder to
execute the Consent in favor of the Merger does not constitute an Objection
Notice in respect of the Continuance, but any such proxy granted by a
shareholder who intends to dissent should be validly revoked. Within 10 days
following the date of the execution of the Consent, the Surviving Corporation
will deliver to each shareholder who has filed an Objection Notice in respect of
the resolution adopted pursuant to the Consent, at the address specified for
such purpose in the Objection Notice, a notice stating the resolutions adopting
and approving the Merger and the Merger Agreement have been adopted pursuant to
the Consent.
PERSONS WHO ARE BENEFICIAL OWNERS OF CONTINUED COMMON STOCK THAT IS
REGISTERED IN THE NAME OF A BROKER, CUSTODIAN, NOMINEE OR OTHER INTERMEDIARY WHO
WISH TO DISSENT SHOULD BE AWARE THAT ONLY THE REGISTERED OWNER OF SUCH SHARES IS
ENTITLED TO DISSENT. A REGISTERED HOLDER SUCH AS A BROKER WHO HOLDS SHARES AS
NOMINEE FOR BENEFICIAL OWNERS, SOME OF WHOM DESIRE TO DISSENT, MUST EXERCISE
DISSENT RIGHTS ON BEHALF OF SUCH BENEFICIAL OWNERS WITH RESPECT TO THE SHARES
HELD FOR SUCH BENEFICIAL HOLDERS.
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IN SUCH CASE, THE OBJECTION NOTICE SHOULD SET FORTH THE NUMBER OF SHARES OF
CONTINUED COMMON STOCK TO WHICH IT RELATES.
After the Merger has been approved, an application may be made to the Court
of Queen's Bench of Alberta (the "Court") by the Surviving Corporation or by any
dissenting shareholder to fix the fair value of the shares of the Continued
Common Stock held by the dissenting shareholder. If an application is made to
the Court, the Surviving Corporation shall, unless the Court otherwise orders,
send to each dissenting shareholder a written offer (the "Offer to Purchase") to
pay him an amount considered by the Board of Directors of the Surviving
Corporation to be the fair value of such shares as of the close of business on
the day before the Consent is executed accompanied by a statement showing how
the fair value was determined. Every Offer to Purchase shares of Continued
Common Stock made to a holder of the Continued Common Stock who dissents to the
Merger shall be on the same terms as every other Offer to Purchase made to other
holders of Continued Common Stock who dissent to the Merger.
A dissenting shareholder may make an agreement with the Surviving
Corporation for the purchase of his shares by the Surviving Corporation in the
amount of the Surviving Corporation's Offer to Purchase or otherwise at any time
before the Court fixes the fair value of the shares. If a settlement cannot be
reached, the parties will proceed to the Court. All dissenting shareholders
whose shares have not been purchased by the Surviving Corporation will be joined
as parties to the application and will be bound by the decision of the Court.
The Court order will fix the fair value of the shares of all dissenting
shareholders who are parties to the application, give judgment in that amount
against the Surviving Corporation in favor of each of the dissenting
shareholders and fix the time within which the Surviving Corporation must pay
the amount to the dissenting shareholders.
On the earlier of: (i) the effectiveness of the Merger, (ii) the Surviving
Corporation and the dissenting shareholder entering into a settlement agreement,
or (iii) the pronouncement of a Court order giving judgment against the
Surviving Corporation for the fair value of the shares of the dissenting
shareholder, a dissenting shareholder ceases to have any rights as a shareholder
of the Surviving Corporation other than the right to be paid the fair value of
his shares. The Surviving Corporation will not make a payment to a dissenting
shareholder if there are reasonable grounds for believing that: (a) the
Surviving Corporation is or would after the payment be unable to pay its
liabilities as they become due or (b) the realizable value of the Surviving
Corporation's assets would thereby be less than the aggregate amount of its
liabilities. If either of these tests cannot be met, the Surviving Corporation
shall within 10 days of the Court order or reaching its settlement with a
dissenting shareholder send a notice to each dissenting shareholder that the
Surviving Corporation cannot lawfully make the payment for the shares. Once this
notice is received, a dissenting shareholder may, by written notice delivered to
the Surviving Corporation within 30 days after receiving the Surviving
Corporation's notice, withdraw his Objection Notice, in which case the
dissenting shareholder is returned his full rights as a shareholder. If the
dissenting shareholder does not withdraw his Objection Notice, he retains his
status as a claimant against the Surviving Corporation to be paid as soon as the
Surviving Corporation is lawfully able to do so or, in liquidation, to be ranked
subordinate to the rights of the creditors of the Surviving Corporation but in
priority to its shareholders.
THE FOREGOING IS ONLY A SUMMARY OF THE RIGHTS OF DISSENTING SHAREHOLDERS
UNDER THE CERTIFICATE OF INCORPORATION OF THE COMPANY (AS CONTINUED) AND IS
QUALIFIED IN ITS ENTIRETY BY THE PROVISIONS OF SUCH CERTIFICATE OF
INCORPORATION, A COPY OF WHICH IS ATTACHED AS APPENDIX "B". ANY SHAREHOLDER
DESIRING TO EXERCISE A RIGHT OF DISSENT UNDER SUCH CERTIFICATE OF INCORPORATION
SHOULD SEEK LEGAL ADVICE AND HIS FAILURE TO COMPLY STRICTLY WITH THE PROVISIONS
OF SUCH CERTIFICATE OF INCORPORATION MAY PREJUDICE THAT RIGHT. THE RIGHT OF
SHAREHOLDERS TO DISSENT IS NOT EXCLUSIVE OF ANY OTHER RIGHTS AVAILABLE TO
SHAREHOLDERS GENERALLY.
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HOLDERS OF CONTINUED COMMON STOCK WILL NOT BE ENTITLED TO ANY DISSENTERS' OR
APPRAISAL RIGHTS PROVIDED TO SHAREHOLDERS UNDER THE DGCL.
BACKGROUND TO THE MERGER
The primary business purpose of the Company is the acquisition, production
and sale of crude oil, condensate and natural gas. The Company's primary focus
has been the development and enhancement of oil and gas properties in its
present areas of operations and acquisitions of other producing properties.
In pursuing acquisition properties or companies with proved producing
properties, management of the Company learned that Parent had purchased the
South Central Cut Bank Sand Unit (the "SCCBSU"). The SCCBSU is adjacent to the
Company's producing properties near the town of Cut Bank, Montana.
In early 1996, representatives of the Company contacted Glenn Darden, who
was Vice President of Parent, regarding Parent's interest in selling the SCCBSU
or possibly uniting in a business combination. Discussions continued until
approximately mid-1996. Operating, financial and reserve information was
exchanged by the companies. Several times Company management met with Parent
representatives seeking to enter into a Letter of Intent to combine the
companies. Finally, both Parent and the Company withdrew from negotiations when
acceptable terms could not be agreed to.
In December 1996, the Company determined that Parent still had an interest
in entering into a transaction regarding and desired to re-open negotiations.
During the next several weeks each company updated its due diligence and made
various proposals regarding the form of acquisition consideration, assumptions
of liabilities, operations, confidentiality and other terms of a possible
transaction.
On January 9, 1997, Messrs. Otto J. Buis, C. Al Buis and Steven M. Morris,
directors of the Company, met with Frank, Thomas and Glenn Darden, directors of
Parent. A Letter of Intent was agreed upon and entered into. The Letter of
Intent, among other things, called for both parties to endeavor to enter into a
definitive agreement setting forth the terms, provisions and conditions of the
proposed business combination.
On March 24, 1997, the Board of Directors of Parent, Mercury and the
Company, and Joseph V. Montalban, former director and current shareholder of the
Company, met in Fort Worth, Texas to seek to finalize the remaining open
business issues and to review the near final definitive Merger Agreement. The
Company's Board of Directors and J. V. Montalban entered into an agreement, as
did representatives of Parent and Mercury, to vote in favor of the Merger at the
companies' respective requisite shareholders' meetings.
On or about March 26, 1997, the Boards of Directors of Parent, Mercury and
the Company met and approved unanimously the Merger Agreement and the Merger
Agreement was executed.
Upon the effectiveness of the Merger, Otto Buis, Patrick Montalban and Steve
Morris, of the officers and directors of the Company, will continue with the
Surviving Corporation. Mr. Buis will serve as Chairman, Chief Executive Officer
and a director of the Surviving Corporation, while Messrs. Montalban and Morris
will serve as directors. With regard to the officers and directors of Mercury,
Frank Darden, Thomas F. Darden and Glenn M. Darden, all officers and directors
of Mercury currently, will serve as directors of the Surviving Corporation and
Thomas F. Darden will serve as President and Chief Operating Officer, and Glenn
M. Darden will serve as Vice President, of the Surviving Corporation. and
, neither of whom is affiliated with the Company, Mercury nor Parent,
will serve as independent directors of the Surviving Corporation.
In addition, pursuant to the Merger Agreement, Mr. Montalban, as designee of
the Company, and Thomas and Glenn Darden, as designees of Mercury, will serve as
members of the executive committee of the Board of Directors. Under Delaware law
and the Bylaws of the Surviving Corporation, the executive
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committee will have the power and authority to exercise most of the powers of
the Board of Directors of the Surviving Corporation.
Other than (i) the continuation of their employment, (ii) assumption by the
Surviving Corporation of certain existing contractual obligations, (iii) the
conversion of the options and warrants of Messrs. Frank, Thomas and Glenn Darden
to purchase shares of Mercury Common Stock into options to purchase shares of
Surviving Corporation Common Stock and (iv) the interests of certain of such
officers and directors as shareholders of the Company or Mercury or as
shareholders of entities that are shareholders of the Company or Mercury, as the
case may be, the officers, directors and affiliates of Mercury and the Company
have no other interests in the Merger.
THE COMPANY'S REASONS FOR THE MERGER; RECOMMENDATION OF THE COMPANY'S BOARD OF
DIRECTORS
THE COMPANY'S REASONS FOR THE MERGER. The Company's Board of Directors
believes that the Merger is in the best interests of the Company and its
shareholders as the Company's Board of Directors believes that the Merger will
increase the operating efficiency of both the Company and Mercury by combining
the operations of the two and will increase the reserves of the combined entity.
Furthermore, management of the Company believes that the terms of the Merger are
fair given the current business prospects of the Company and Mercury and the
properties of the Company and Mercury. In reaching its conclusions to enter into
the Merger Agreement, the Company's Board of Directors solely considered the
following factors, which are listed in order of relevance as determined by the
Board of Directors of the Company:
(a) the results of operations of the Mercury Properties and the
financial condition and business of Mercury, both on a historical basis and
on a prospective basis giving effect to the Merger. This factor was deemed
the most significant factor by the Board of Directors of the Company given
the Company's desire to merge with an entity that has comparable property
and operations to the Company. The Company did assess the limited operating
history of Mercury; however, the consideration was mitigated in the
estimation of the Board of Directors of the Company by the operating and
production history of the properties contributed to Mercury from Parent;
(b) the Exchange Ratio, which the Company believes is fair given the
properties and assets of Mercury and the Company;
(c) a review of possible alternatives available to the Company if the
Merger is not consummated, which the Company determined to be limited. The
Board of Directors of the Company did discuss the prospects of the Company
without an alliance with another oil and gas operating company and
determined that the alliance with Mercury by way of the Merger would be the
most efficient method of increasing the inventory of properties of the
combined entity;
(d) the financial condition, results of operations and business of the
Company, both on a historical basis and on a prospective basis without
giving effect to the Merger for the purpose of determining whether or not
the Company could survive and grow without a strategic alliance with another
oil and gas operating entity; and
(e) the cost to the Company of an outright acquisition of additional
properties, which the Board believes would be much more expensive for the
Company and its shareholders than the Merger.
The factors listed above set forth all the issues determined by the Board of
Directors of the Company to be material in assessing whether or not to enter
into the Merger. Although each factor was considered by the Board of Directors
in detail, the Board deemed the potential value which may be brought to the
Company's Common Stock to be the most significant in determining to undertake
the Merger.
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RECOMMENDATION OF THE BOARD OF DIRECTORS OF THE COMPANY. As the Merger may
bring value to the Company Common Stock, the Company's Board of Directors
believes that the Continuance and the Merger are fair to, and in the best
interests of, the Company and its shareholders and recommend that its
shareholders vote FOR the approval of the Continuance and the Merger.
MERCURY'S REASONS FOR THE MERGER
Mercury's Board of Directors believes that the Merger is in the best
interests of Mercury and its shareholders for many of the same reasons that the
Board of Directors of the Company believes that the Merger is in the best
interests of the Company and its shareholders. Mercury's Board of Directors
believes that the Merger will increase the operating efficiency of both the
Company and Mercury by combining the operations of the two and will increase the
reserves of the combined entity. Furthermore, management of Mercury believes
that the terms of the Merger are fair given the current business prospects of
the Company and Mercury and the properties of the Company and Mercury. In
reaching its conclusions to enter into the Merger Agreement, Mercury's Board of
Directors solely considered the following factors, which are listed in order of
relevance as determined by the Board of Directors of Mercury:
(a) the financial condition, results of operations and business of the
Company, both on a historical basis and on a prospective basis giving effect
to the Merger. This factor was deemed the most significant factor by the
Board of Directors of Mercury given the Mercury's desire to merge with an
entity that has comparable property and operations to Mercury;
(b) the Exchange Ratio, which Mercury believes is fair given the
properties and assets of the Company and Mercury;
(c) a review of possible alternatives available to Mercury if the Merger
is not consummated. The Board of Directors of Mercury determined that the
alliance with the Company by way of the Merger would be the most efficient
method of increasing the inventory of properties of the combined entity; and
(d) the cost to Mercury of an outright acquisition of additional
properties, which the Board believes would be much more expensive for
Mercury and its shareholders than the Merger.
The factors listed above set forth all the issues determined by the Board of
Directors of Mercury to be material in assessing whether or not to enter into
the Merger. Although each factor was considered by the Board of Directors in
detail, the Board deemed the potential value which may be brought to the
shareholders of Mercury to be the most significant in determining to undertake
the Merger.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendations of the Company's Board of Directors with
respect to the Merger, the Company's shareholders are advised that Mr. Otto J.
Buis, the Chairman, President and Chief Executive Officer of the Company,
beneficially owns or controls 194,544 shares of Company Common Stock, or 1.4
percent of the outstanding shares of Company Common Stock. In addition, Mr.
Montalban, Mr. Morris and C. Al Buis, a director of the Company, beneficially
own or control 279,100, 1,111,111 and 27,778 shares of Company Common Stock,
respectively, or approximately 2.0, 8.1 and 0.2 percent, respectively, of the
outstanding Company Common Stock. Otto Buis, Al Buis and Steven Morris are the
owners, and each is an officer and a director, of Pozo Resources, Inc., which
held 1,931,444 shares of Company Common Stock as of the Meeting Record Date, or
approximately 14.1 percent of the outstanding shares of Company Common Stock.
All directors and executive officers of the Company, as a group, together with
Pozo Resources, Inc., beneficially owned or controlled an aggregate of 25.8
percent of the outstanding Company Common Stock as of the Meeting Record Date.
To the knowledge of both the Company and Mercury, no executive officer or
director of the Company owns any shares of Mercury
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Common Stock and no executive officer or director of Mercury owns any shares of
Company Common Stock.
If the Merger is effected, certain of the officers and directors of the
Company and Mercury, respectively, will derive certain benefits which are in
addition to their interests as shareholders of the Surviving Corporation.
Specifically, the Employment Agreement of Patrick Montalban with the Company,
pursuant to which Mr. Montalban is entitled to receive annual compensation
(subject to cost of living adjustments) of $88,900 in addition to declared bonus
compensation and other perquisites, will be assigned to and assumed by the
Surviving Corporation. Furthermore, options to purchase 114,285 shares of
Mercury Common Stock at an exercise price of $0.875 per share owned by Thomas
Darden and Glenn Darden, each an officer and director of Mercury, and each of
whom will become officers and directors of the Surviving Corporation, will be
converted into options to purchase the identical number of shares of Surviving
Corporation Common Stock. Each of Messrs. Frank, Thomas and Glenn Darden also
own warrants to acquire 550,000 shares of Mercury Common Stock at an exercise
price of $1.25 per share, and warrants to acquire 550,000 shares of Mercury
Common Stock at an exercise price of $2.00 per share, all of which will be
converted into warrants to acquire a like number of shares of Surviving
Corporation Common Stock at identical exercise prices.
In addition to the interests outlined above, the parties to the Merger
Agreement have agreed that the Surviving Corporation and Parent will enter into
a Management Agreement upon effectiveness of the Merger. Pursuant to the
Management Agreement, Parent will manage the ongoing operations of the Surviving
Corporation. See "Certain Transactions." Furthermore, Mercury has guaranteed the
repayment of $4.0 million of debt owed by Parent to NationsBank of Texas, N.A.
(the "NationsBank Debt"). Such debt is due and payable by Parent on December 31,
2002, bears interest at 6.5625 percent per annum and is secured by a lien on the
Mercury Properties. Pursuant to the Merger Agreement, the Surviving Corporation
will repay $4.0 million of the NationsBank Debt. In order to repay such debt,
the Surviving Corporation will be required to borrow funds. Any such borrowing
would likely be secured by a lien on the properties of the Surviving
Corporation.
The Merger Agreement provides that the Surviving Corporation shall issue to
Parent a Warrant to acquire 1,250,000 shares of Surviving Corporation Common
Stock at an exercise price of $0.01 per share exercisable prior to March 31,
2002 in the event of a "Tax Event". A "Tax Event" is a final, binding and
non-appealable determination by a governmental taxing authority or court of
appropriate jurisdiction that the Surviving Corporation has a liability for
taxes, or for failing to withhold taxes, under Canadian or United States tax
laws as a result of the Continuance. The period of exercise of the warrant will
be extended if any litigation or administrative proceeding with respect to a
possible Tax Event is pending on March 31, 2002 to a date that is 90 days after
the date of final resolution of any such litigation or proceeding.
EMPLOYMENT ARRANGEMENT
At the Effective Time, the Employment Agreement between the Company and
Patrick Montalban will be assigned to and assumed by the Surviving Corporation.
ACCOUNTING TREATMENT
The Merger will be accounted for by the Surviving Corporation under the
purchase method of accounting in accordance with United States generally
accepted accounting principles. The effect of purchase accounting treatment is
that the assets and liabilities of the Company will be recorded at their fair
values at the effective time of the Merger. See "Pro Forma Consolidated
Statements of Operations and Balance Sheet (Unaudited) of the Surviving
Corporation."
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CERTAIN CANADIAN FEDERAL INCOME TAX CONSEQUENCES
OF THE CONTINUANCE AND THE MERGER
GENERAL
In the opinion of Blake, Cassels & Graydon, Canadian counsel to the Company,
the following is a summary of the principal Canadian federal income tax
considerations under the Income Tax Act (Canada) (the "Canadian Tax Act") with
respect to the Continuance and Merger generally applicable to the Company and to
shareholders of the Company who, for purposes of the Canadian Tax Act, hold
their shares of Company Common Stock and will hold their Surviving Corporation
Common Stock as capital property, deal at arm's length with the Company, Mercury
and the Surviving Corporation and are not affiliated with the Company, Mercury
or the Surviving Corporation under the Tax Proposals (as defined below). This
summary does not apply to a shareholder who is or will be a foreign affiliate
within the meaning of the Canadian Tax Act or who holds more than 10 percent of
the Company Common Stock.
Shares will generally be considered to be capital property to a shareholder
unless such shares are held in the course of carrying on a business, acquired in
a transaction considered to be an adventure in the nature of trade or held as
"mark-to-market" property for the purposes of the Canadian Tax Act. Shareholders
should consult their own tax advisors regarding whether, as a matter of fact,
they hold their shares of Company Common Stock as capital property and will hold
their Surviving Corporation Common Stock as capital property for the purposes of
the Canadian Tax Act. Shareholders who are resident in Canada and whose shares
of Company Common Stock or Surviving Corporation Common Stock might not
otherwise qualify as capital property may be entitled to obtain this
qualification by making an irrevocable election provided by Subsection 39(4) of
the Canadian Tax Act. Shareholders who do not hold their shares as capital
property should consult their own tax advisors regarding their particular
circumstances and, in the case of certain "financial institutions" (as defined
in the Canadian Tax Act), the potential application to them of special
"mark-to-market" rules in the Canadian Tax Act. This summary is based on the
current provisions of the Canadian Tax Act, the regulations thereunder, the
Canada-United States Income Tax Convention, 1980, as amended (the "Tax Treaty"),
and counsel's understanding of the current administrative practice published by
Revenue Canada, Customs, Excise and Taxation ("Revenue Canada"). This summary
takes into account specific proposals to amend the Canadian Tax Act and
regulations publicly announced by the Minister of Finance prior to the date
hereof (the "Tax Proposals"), and assumes that all Tax Proposals will be enacted
in the present form. However, no assurances can be given that the Tax Proposals
will be enacted in the form presented, or at all. Except for the foregoing, this
summary does not take into account or anticipate any changes in the law, whether
by judicial, administrative or legislative action or decision, nor does it take
into account provincial, territorial or foreign income tax legislation or
considerations, which may differ from the Canadian federal income tax
considerations described herein. No advance income tax ruling has been obtained
from Revenue Canada to confirm the tax consequences of any of the transactions
described herein.
This summary is based on the assumptions that:
(a) the Company Common Stock will up to the effective date of the
Merger, and the Surviving Corporation Common Stock will from the effective
date of the Merger, remain listed on the American Stock Exchange, at all
times when any shares of Company Common Stock or Surviving Corporation
Common Stock are issued and outstanding;
(b) after the effective date of Continuance, the management of the
Company will not reside in Canada at any time; and
(c) the Company Common Stock and the Surviving Corporation Common Stock
may not reasonably be considered to derive their value, directly or
indirectly, primarily from portfolio investment in shares, debt or any other
similar properties.
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THIS SUMMARY IS OF A GENERAL NATURE ONLY AND IS NOT INTENDED TO BE, NOR
SHOULD IT BE CONSTRUED TO BE, LEGAL, BUSINESS OR TAX ADVICE TO ANY PARTICULAR
SHAREHOLDER. SHAREHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO
THE TAX CONSEQUENCES OF THE TRANSACTIONS DESCRIBED HEREIN IN THEIR PARTICULAR
CIRCUMSTANCES.
THE CONTINUANCE
THE COMPANY
Upon the Continuance, the Company will be deemed to have disposed of all of
its property for proceeds of disposition equal to the fair market value thereof
immediately prior to the Continuance. The Company will be subject to tax on any
income and net taxable capital gains arising thereby. The Company will also be
subject to an additional tax at the rate of five percent on the amount by which
the fair market value of the Company's assets, net of liabilities, exceeds the
paid-up capital of the Company's issued and outstanding shares, except that if
one of the main reasons for the Company changing its residence to the United
States was to reduce the amount of such additional tax or Canadian withholding
tax, the rate of such tax would be 25 percent. Provided the management of the
Company does not reside in Canada at any time thereafter, the Company will not
be resident in Canada after the Continuance. The management of the Company, in
consultation with certain of its advisors, has reviewed the Company's assets,
liabilities and paid-up capital and has advised counsel that no Canadian federal
taxes should be due and payable by the Company under the Canadian Tax Act as a
result of the Continuance. This conclusion is based in part on analyses of the
fair market value of the Company's property and certain other factual matters,
and counsel can express no opinion on such matters of factual determination. No
opinion has been sought in this matter, and facts underlying the Company's
assumptions and conclusions may also change prior to the effective date of the
Continuance. The Company has not applied to Canadian federal tax authorities for
a ruling as to the amount of federal taxes payable by the Company under the Act
as a result of the Continuance and does not intend to apply for such a ruling
given the factual nature of the determinations involved. There can be no
assurance that the Canadian federal tax authorities will accept the valuations
or the positions that the Company has adopted with respect to the Canadian
federal tax treatment of such amounts. Accordingly, there can be no assurance
that the Canadian federal tax authorities will conclude after the effective date
of the Continuance that no Canadian federal taxes are due under the Canadian Tax
Act as a result of the Continuance or that the amount of Canadian federal taxes
claimed or found to be due will not be significant.
SHAREHOLDERS RESIDENT IN CANADA
The following portion of the summary applies to shareholders of the Company
who are resident in Canada for the purposes of the Canadian Tax Act.
Shareholders of the Company will not be considered to have disposed of their
shares of Company Common Stock or to have realized a taxable capital gain or
loss by reason only of the Continuance. The Continuance will also have no effect
on the adjusted cost base to shareholders of their shares of Company Common
Stock.
Following the Continuance, dividends received by a shareholder on shares of
the Company Common Stock will be included in computing income and will generally
not be deductible in computing taxable income of a shareholder that is a
corporation, and, in the case of a shareholder who is an individual, such
dividends will not receive the gross-up and dividend tax credit treatment
generally applicable to dividends on shares of taxable Canadian corporations.
Also, following the Continuance, shares of the Company Common Stock will be
a qualified investment for trusts governed by deferred profit sharing plans,
registered retirement savings plans and registered income funds (collectively,
"Deferred Income Plans"), provided such shares remain listed on the
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American Stock Exchange or another prescribed stock exchange. However, such
shares will be foreign property after the effective date of the Continuance,and
accordingly, the holding of such shares by Deferred Income Plans or by certain
other tax-exempt entities including registered investments and registered
pension plans may subject such holders to penalty taxes under the Canadian Tax
Act. Such holders are urged to contact their own tax advisors to determine the
potential applicability of such penalty taxes to them.
DISSENTING SHAREHOLDERS. Although the matter is not free from doubt, the
amount paid to a dissenting shareholder should be treated as proceeds of his or
her shares of Company Common Stock. Accordingly, the dissenting shareholder
would recognize a capital gain (or a capital loss) to the extent that the amount
received, net of any reasonable costs of disposition, exceeds (or is less than)
the adjusted cost base of such holder's shares of Company Common Stock to the
holder. If a holder is a corporation, any capital loss arising on the
disposition of a share of Company Common Stock may in certain circumstances be
reduced by the amount of any dividends which have been received on such share.
Analogous rules apply to a partnership or trust of which a corporation is a
member or beneficiary. The Tax Proposals will extend these rules to apply where
a trust or partnership is a member of a partnership or a beneficiary of a trust
that owns shares. A shareholder will be required to include three-quarters of
any capital gain (a "taxable capital gain") in computing his or her income for
purposes of the Canadian Tax Act and will be entitled to deduct three-quarters
of any capital loss only against taxable capital gains in accordance with the
detailed provisions of the Canadian Tax Act in that regard.
SHAREHOLDERS NOT RESIDENT IN CANADA
The following portion of this summary applies to shareholders who, for
purposes of the Canadian Tax Act: (i) are not resident or deemed to be resident
in Canada at any time when they held or hold Company Common Stock; (ii) do not
use or hold and are not deemed to use or hold their shares of Company Common
Stock in the course of carrying on a business in Canada; or (iii) in the case of
shareholders who carry on an insurance business in Canada and elsewhere,
establish that the Company Common Stock is not "designated insurance property"
under the Tax Proposals.
Shareholders will not be considered to have disposed of their Company Common
Stock or to have realized a taxable capital gain or loss by reason only of the
Continuance. The Continuance will also have no effect on the adjusted cost base
to shareholders of their shares of Company Common Stock. After the effective
date of the Continuance, dividends received by a shareholder on shares of
Company Common Stock will not be subject to Canadian withholding tax.
Provided that a share of Company Common Stock is not "taxable Canadian
property" to a shareholder at the time of disposition of such share, such
shareholder will not be subject to Canadian tax on any capital gain arising by
reason of the disposition of such share Company Common Stock. After the
effective date of the Continuance, shares of Company Common Stock will not
generally be taxable Canadian property to a shareholder at any particular time
unless at any time during the five-year period that ends at the particular time
the shareholder (together with persons not dealing at arm's length with the
shareholder) owned 25 percent or more of the shares of any class of the Company
and more than 50 percent of the fair market value of the shares of Company
Common Stock was derived directly or indirectly from one or any combination of
real property situated in Canada, Canadian resource properties and timber
resource properties. For the purposes of this test, a shareholder and any person
not dealing at arm's length with a shareholder will be considered to own any
share that the shareholder or person has a right to acquire.
DISSENTING SHAREHOLDERS. Although the matter is not free from doubt, the
amount paid to a dissenting shareholder should be treated as proceeds of
disposition of his or her shares of Company Common Stock. Such shareholder
should consult his or her own tax advisors in this regard.
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THE MERGER
SHAREHOLDERS RESIDENT IN CANADA
The following portion of this summary applies to shareholders of the Company
who are resident in Canada for the purposes of the Canadian Tax Act.
Shareholders of the Company who receive shares of the Surviving Corporation
Common Stock pursuant to the Merger will be deemed to have disposed of their
shares of Company Common Stock, but will realize neither a capital gain nor a
capital loss on the disposition.
The shares of Surviving Corporation Common Stock received by a shareholder
of the Company pursuant to the Merger will be deemed to have been acquired at a
cost equal to the adjusted cost base of the shares of Company Common Stock held
immediately prior to the Merger. The cost of shares of Surviving Corporation
Common Stock so acquired will be averaged with the adjusted cost base of any
other common shares of the Surviving Corporation acquired by such holder
pursuant to the Merger and the resulting average will be the adjusted cost base
of each of the shareholder's shares of Surviving Corporation Common Stock.
Following the Merger, dividends received by a shareholder on shares of
Surviving Corporation Common Stock will be included in computing such
shareholder's income and will generally not be deductible in computing taxable
income of a shareholder that is a corporation, and, in the case of a shareholder
who is an individual, such dividends will not receive the gross-up and dividend
tax credit treatment generally applicable to dividends on shares of taxable
Canadian corporations. As will be discussed under "Certain United States Federal
Income Tax Consequences to Shareholders and Warrant Holders of the Continuance
and the Merger," dividends paid to holders of Surviving Corporation Common Stock
who are Canadian residents will generally be subject to United States
withholding tax. Such shareholders generally will, however, be able to claim a
credit in an amount equal to the amount of such withholding tax against their
Canadian taxes otherwise payable in respect of such dividends.
Also, following the Merger, shares of Surviving Corporation Common Stock
will be a qualified investment for trusts governed by Deferred Income Plans,
provided such shares remain listed on the American Stock Exchange or another
prescribed stock exchange. However, such shares will be foreign property, and
accordingly, the holding of such shares by Deferred Income Plans or by certain
other tax exempt entities, including registered investments and registered
pension plans may subject such holders to penalty taxes under the Canadian Tax
Act. Such holders are urged to contact their own tax advisors to determine the
potential applicability of such penalty taxes to them.
SHAREHOLDERS NOT RESIDENT IN CANADA
The following portion of this summary applies to shareholders of the Company
who, for purposes of the Canadian Tax Act are (i) not resident or deemed to be
resident in Canada at any time when they held or hold shares of Company Common
Stock or shares of Surviving Corporation Common Stock; (ii) do not use or hold
and are not deemed to use or hold their shares of Company Common Stock or shares
of Surviving Corporation Common Stock in the course of carrying on a business in
Canada; or (iii) in the case of shareholders who carry on an insurance business
in Canada and elsewhere, establish that the shares of Company Common Stock or
Surviving Corporation Common Stock are not "designated insurance property" under
the Tax Proposals.
The shares of Surviving Corporation Common Stock received by a shareholder
of the Company pursuant to the Merger will be deemed to have been acquired at a
cost equal to the adjusted cost base of the shares of Company Common Stock held
immediately prior to the Merger. The cost of shares of Surviving Corporation
Common Stock so acquired will be averaged with the adjusted cost base of any
other shares of Surviving Corporation Common Stock acquired by such holder
pursuant to the Merger and
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the resulting average will be the adjusted cost base of each of the
shareholder's shares of Surviving Corporation Common Stock.
After the effective date of Merger, dividends received by a shareholder on
shares of Surviving Corporation Common Stock will not be subject to Canadian
withholding tax.
Provided that a share of Surviving Corporation Common Stock is not "taxable
Canadian property" to a shareholder at the time of the disposition of such
share, such shareholder will not be subject to Canadian tax on any capital gain
arising by reason of the disposition of such share. After the Merger, shares of
Surviving Corporation Common Stock will not generally be taxable Canadian
property to a shareholder at any particular time unless such shares were issued
pursuant to the Merger in exchange for shares which were taxable Canadian
property or unless at any time during the five year period that ends at the
particular time the shareholder (together with persons not dealing at arm's
length with the shareholder) owned 25 percent or more of the shares of any class
of shares of Surviving Corporation Common Stock and more than 50 percent of the
fair market value of the shares was derived directly or indirectly from one or
any combination of real property situated in Canada, Canadian resource
properties and Timber resource properties. For the purposes of this test, a
shareholder and any person not dealing at arm's-length with a shareholder will
be considered to own any share that the shareholder or person has a right to
acquire.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO SHAREHOLDERS
AND WARRANT HOLDERS OF THE CONTINUANCE AND THE MERGER
GENERAL
In the opinion of Thompson & Knight, P.C., United States counsel to the
Company and special United States tax counsel to Mercury ("U.S. counsel"), the
following summarizes the material United States federal income tax
considerations arising from and relating to the Continuance and the Merger that
are generally applicable to shareholders of the Company that are United States
citizens or residents, domestic corporations, domestic partnerships, estates
subject to United States federal income tax on their income regardless of
source, and trusts, but only if a court within the United States is able to
exercise primary supervision over the administration of such trust and one or
more United States fiduciaries have the authority to control all substantial
decisions of the trust ("U.S. Shareholders"), to certain shareholders of the
Company that are not U.S. Shareholders ("non-U.S. Shareholders") and to certain
holders of warrants to acquire shares of Company Common Stock. This summary is
intended for general information only. It does not discuss all aspects of United
States federal income taxation that may be relevant to a particular U.S.
Shareholder (including, without limitation, potential application of the
alternative minimum tax), to a particular non-U.S. Shareholder, to a particular
warrant holder, or to certain types of investors subject to special treatment
under the United States federal income tax laws (for example, banks, life
insurance companies, tax-exempt organizations, broker-dealers or holders who
received their Company Common Stock as compensation), nor does it discuss any
aspect of state, local or foreign tax laws.
This summary is based on United States laws, regulations, rulings and
decisions currently in effect, all of which are subject to change, possibly with
retroactive effect. No advance income tax ruling has been sought or obtained
from the United States Internal Revenue Service (the "IRS") regarding the tax
consequences of any of the transactions described herein. Accordingly, it is
possible that the United States federal income tax consequences of the
Continuance and the Merger may differ from those described below.
SHAREHOLDERS AND WARRANT HOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS
WITH RESPECT TO THE UNITED STATES FEDERAL, STATE, LOCAL AND FOREIGN TAX
CONSEQUENCES OF THE CONTINUANCE AND THE MERGER, INCLUDING THE RECEIPT AND
OWNERSHIP OF CONTINUED COMMON STOCK AND SURVIVING CORPORATION COMMON STOCK OR
WARRANTS TO ACQUIRE SUCH STOCK.
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TAXATION OF U.S. SHAREHOLDERS
The following summary is limited to U.S. Shareholders (i) who hold Company
Common Stock as "capital assets" within the meaning of Section 1221 of the Code,
(ii) who will hold Continued Common Stock (as defined below) and Surviving
Corporation Common Stock as "capital assets," (iii) whose ownership, receipt or
disposition of Company Common Stock, Continued Common Stock and/or Surviving
Corporation Common Stock is not attributable to a permanent establishment in a
country other than the United States for purposes of an income tax treaty to
which the United States is a party and (iv) who are not residents of a country
other than the United States for purposes of an income tax treaty to which the
United States is a party. U.S. Shareholders who do not meet one or more of the
foregoing criteria are urged to consult their tax advisors regarding their
particular United States federal income tax consequences.
THE CONTINUANCE
GENERAL. For United States federal income tax purposes, the Continuance
results in a constructive exchange by the Company shareholders of their Company
Common Stock for stock in a new domestic corporation ("Continued Common Stock").
Although the matter is not free from doubt, the Continuance should qualify as a
"reorganization" within the meaning of Section 368(a) of the Code. This
conclusion is based on certain factual assumptions and reliance on
representations from the Company and certain principal shareholders of the
Company. Such assumptions and representations include, but are not limited to
(i) the Registration Statement adequately reflects the Company's principal
purposes and reasons for the Continuance, including the fact that the Company,
as an Alberta corporation, cannot merge directly with a Delaware corporation,
such as Mercury; (ii) there is no plan or intention on the part of any
shareholder of the Company to sell, exchange or otherwise dispose of the
Continued Common Stock received in the Continuance, other than in the Merger;
(iii) immediately following the Continuance, the Continued Company will possess
the same assets and liabilities, except for assets used to pay dissenters to the
Continuance, and assets used to pay expenses incurred in connection with the
Continuance, as those possessed by the Company immediately prior to the
Continuance; (iv) assets used to pay expenses, assets used to pay dissenters to
the Continuance, and all redemptions and distributions (except for regular,
normal dividends) made by the Company immediately preceding the Continuance
will, in the aggregate, constitute less than one percent of the net assets of
the Company; (v) dissenting shareholders will own less than one percent of the
Company Common Stock; and (vi) immediately following the Continuance, the
shareholders of the Company will own all of the outstanding Continued Common
Stock and will own such stock solely by reason of their ownership of the Company
Common Stock immediately prior to the Continuance.
With respect to a U.S. Shareholder other than a Section 1248 Shareholder (as
defined below), if the Continuance qualifies as a reorganization, the following
will be the material United States federal income tax consequences:
(1) The U.S. Shareholder will recognize no gain or loss on the
constructive exchange of Company Common Stock solely for Continued Common
Stock;
(2) The tax basis of the Continued Common Stock constructively received
will be the same as the basis of the Company Common Stock constructively
surrendered in exchanged therefor;
(3) The holding period of the Continued Common Stock will include the
holding period of Company Common Stock constructively surrendered in
exchange therefor; and
(4) Any U.S. Shareholder who exercises his rights under Alberta law to
dissent from the Continuance should be treated as if his Company Common
Stock was redeemed for cash and should in general recognize capital gain or
loss in an amount equal to the difference between the amount of cash
received (less any amount constituting interest) and the U.S. Shareholder's
basis in the Company
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Common Stock surrendered therefor. Special rules may apply to dissenting
Company shareholders that actually or constructively (pursuant to Section
318 of the Code) own shares of the Company (or possibly shares of Mercury or
Parent) as to which dissenters' rights are not being exercised. Any amount
constituting interest would be taxable as ordinary income.
If a U.S. Shareholder of the Company actually or constructively owns (or has
at any time in the preceding five-year period actually owned or constructively
owned) 10 percent or more of the voting stock of the Company (a "Section 1248
Shareholder"), then upon the receipt of the Continued Common Stock pursuant to
the Continuance such Section 1248 Shareholder generally must include in gross
income either the "section 1248 amount" or the "all earnings and profits
amount," as such terms are defined in Section 1.367(b)-2 of the United States
Treasury regulations and which generally relate to the Section 1248
Shareholder's distributable share of the Company's earnings and profits.
Although the issue is not free from doubt, "Section 1248 amounts" and the "all
earnings and profits amounts" should accrue only while a foreign corporation is
a "controlled foreign corporation" as such term is defined in Section 957 of the
Code (a "CFC"); in which case, if a foreign corporation has never been a CFC,
then a Section 1248 Shareholder's distributable share of such a foreign
corporation's earnings and profits is zero.
While there can be no assurance with respect to the classification of the
Company as a CFC, the Company believes that it has never been a CFC at any time
at or prior to consummation of the Continuance. In connection with the
transactions contemplated herein, U.S. counsel will not be rendering an opinion
with regard to the Company's status as a CFC at any time at or prior to the
Continuance. Thus, the amount, if any, which a Section 1248 Shareholder will
include in gross income as a result of the Continuance cannot be predicted with
certainty. Accordingly, Section 1248 Shareholders are urged to consult their tax
advisors regarding their United States federal income tax consequences from the
Continuance.
Under proposed Treasury regulations, the "section 1248 amount" and the "all
earnings and profits amount" would include all net positive earnings and
profits, if any, of the Company that would be attributable to such stock and
includible in income as a dividend under Section 1248 of the Code and the
regulations thereunder if the Section 1248 Shareholder had sold the stock,
regardless of whether the Company was ever a CFC. If these proposed regulations
are effective at the time of the Continuance in their current form, Section 1248
Shareholders likely will include greater amounts in income than they would under
current law. As currently proposed, these regulations generally will be
effective 30 days after they are finalized. No assurance can be given, however,
as to whether the regulations will be finalized, the precise terms such
regulations will include or their actual effective date (which may be sooner
than stated in the proposed regulations). Consequently, Section 1248
Shareholders are urged to consult their tax advisors regarding the potential
application of these proposed regulations.
Any U.S. Shareholder who receives the Continued Common Stock in exchange for
the Company Common Stock and takes the position that such exchange is eligible
for nonrecognition treatment is required to file a notice with the IRS on or
before the last day for filing a United States federal income tax return (taking
into account any extensions of time therefor) for the U.S. Shareholder's taxable
year in which the Continuance occurs. The notice must contain certain
information specifically enumerated in Section 7.367(b)-1 of the United States
Treasury regulations, and U.S. Shareholders are advised to consult their tax
advisors for assistance in preparing such notice. If a U.S. Shareholder required
to give notice as described above fails to give such notice, and if the U.S.
Shareholder further fails to establish reasonable cause for the failure, then
the IRS will be required to determine, based on all the facts and circumstances,
whether the conversion of Company Common Stock into Continued Common Stock is
eligible for nonrecognition treatment. In making the determination, the IRS may
conclude (i) that the conversion is eligible for nonrecognition treatment,
despite such noncompliance, (ii) that the conversion is eligible for
nonrecognition treatment, provided that certain other conditions imposed by the
United States Treasury regulations are satisfied, or (iii) that the conversion
is not eligible for nonrecognition treatment and that any gain recognized will
be taken into account for purposes of increasing the tax basis of the Continued
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Common Stock received pursuant to the Continuance. Nevertheless, the failure of
any one U.S. Shareholder to satisfy the foregoing notice requirements should not
bar other U.S. Shareholders that do satisfy such requirements from receiving
nonrecognition treatment with respect to the conversion of their Company Common
Stock into Continued Common Stock pursuant to the Continuance.
PASSIVE FOREIGN INVESTMENT COMPANY CONSIDERATIONS. For United States
federal income tax purposes, the Company generally will be classified as a
passive foreign investment company (a "PFIC") for any taxable year during which
either (i) 75 percent or more of its gross income is passive income (as defined
for United States federal income tax purposes) or (ii) on average for such
taxable year, 50 percent or more of its assets (by value) produce or are held
for the production of passive income. For purposes of applying the foregoing
tests, all or some of the assets and gross income of the Company's subsidiaries
will be attributed to the Company.
While there can be no assurance with respect to the classification of the
Company as a PFIC, the Company believes that it did not constitute a PFIC during
any taxable year ending at or prior to consummation of the Continuance. In
connection with the transactions contemplated herein, U.S. counsel will not be
rendering an opinion with regard to the Company's status as a PFIC.
Although the matter is not free from doubt, if the Company is a PFIC prior
to the consummation of the Continuance and the U.S. Shareholder does not make a
qualified electing fund election (a "QEF Election"), then (i) the U.S.
Shareholder would be required to allocate gain recognized upon the exchange of
Company Common Stock for Continued Common Stock ratably over the U.S.
Shareholder's holding period for such Company Common Stock, (ii) the amount
allocated to each year other than (x) the year of the disposition of the Company
Common Stock or (y) any year prior to the beginning of the first taxable year of
the Company for which it was a PFIC, would be subject to tax at the highest rate
applicable to individuals or corporations, as the case may be, for the taxable
year to which such income is allocated, and an interest charge would be imposed
upon the resulting tax attributable to each such year (which charge would accrue
from the due date of the return for the taxable year to which such tax was
allocated), and (iii) gain recognized upon the disposition of the Company Common
Stock (including upon the exchange of Company Common Stock for Continued Common
Stock in the Continuance) would be taxable as ordinary income.
If a U.S. Shareholder made a QEF Election, then the U.S. Shareholder
generally is currently taxable on such U.S. Shareholder's pro rata share of the
Company's ordinary earnings and net capital gains (at ordinary income and
capital gains rates, respectively) for each taxable year of the Company in which
the Company is classified as a PFIC, even if no dividend distributions are
received by such U.S. Shareholder unless such U.S. Shareholder made an election
to defer such taxes.
The foregoing summary of the possible application of the PFIC rules to the
Company and the U.S. Shareholders of Company Common Stock is only a summary of
certain material aspects of those rules. Further, there are current legislative
proposals that would affect income recognition under the PFIC rules. There can
be no assurance as to whether the proposed legislation will be enacted, the
effective date of any such legislation or the provisions that such legislation
will include if and when enacted. Because the United States federal tax
consequences to a U.S. Shareholder under the PFIC provisions may be significant,
U.S. Shareholders of Company Common Stock are urged to discuss those
consequences with their tax advisors.
THE MERGER
Although the issue is not free from doubt, the Merger should qualify as a
reorganization within the meaning of Section 368(a) of the Code. This conclusion
is based on certain factual assumptions and reliance on representations from
Mercury, Parent, the Company and certain principal shareholders of the Company.
Such assumptions and representations include, but are not limited to, (i) that
Mercury has no plan or intention (and the Surviving Corporation will have no
plan or intention) to sell or otherwise dispose of any of the assets of the
Company acquired in the Merger, except for dispositions made in the
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ordinary course of business; (ii) that the Surviving Corporation will continue
the Company's historic business or use a significant portion of the Company's
historic business assets in a business; and (iii) that the historic shareholders
of the Continued Corporation will maintain a substantial continuing ownership
interest in the stock they receive in the Merger.
Assuming the Merger is treated as a reorganization under Section 368(a) of
the Code, the following will be the material United States federal income tax
consequences to the U.S. Shareholders:
(1) A U.S. Shareholder will recognize no gain or loss upon the exchange
in the Merger of Continued Common Stock solely for Surviving Corporation
Common Stock.
(2) The basis of the shares of Surviving Corporation Common Stock
received by a U.S. Shareholder pursuant to the Merger will be the same as
the basis for such U.S. Shareholder's Continued Common Stock surrendered in
exchange therefor.
(3) The holding period of a U.S. Shareholder in the shares of Surviving
Corporation Common Stock received by such U.S. Shareholder as a result of
the Merger will include the period for which such U.S. Shareholder held the
shares of Continued Common Stock which are converted into such shares of
Surviving Corporation Common Stock. (A U.S. Shareholder's holding period for
the Continued Common Stock will include such shareholder's holding period
for the Company Common Stock, provided that the Continuance qualifies as a
reorganization as described above.)
(4) Any U.S. Shareholder who exercises his rights pursuant to certain
provisions contained in the Company's certificate of incorporation intended
to give shareholders the same rights they would have under Section 184 of
the ABCA to dissent from the Merger should be treated as if his Continued
Common Stock was redeemed and should in general recognize capital gain or
loss in an amount equal to the difference between the amount of cash
received (less any amount constituting interest) and the shareholder's basis
in the Continued Common Stock surrendered therefor. Special rules may apply
to dissenting shareholders that actually or constructively (pursuant to
Section 318 of the Code) own either shares of the Company as to which
dissenters' rights are not being exercised or shares of Mercury or Parent.
Any amount constituting interest would be taxable as ordinary income.
Even if the Merger qualifies as a reorganization, a recipient of Surviving
Corporation Common Stock at the time of the Merger would recognize gain to the
extent that such shares were considered to be received in exchange for services
or property (other than solely in exchange for Continued Common Stock). Gain
would also have to be recognized to the extent that a U.S. Shareholder was
treated as receiving (directly or indirectly) consideration other than Surviving
Corporation Common Stock in exchange for Continued Common Stock. All or a
portion of such gain amounts may be taxable as ordinary income.
TAXATION OF NON-U.S. SHAREHOLDERS
The following summary is applicable to non-U.S. Shareholders (i) who hold
Company Common Stock as "capital assets" within the meaning of Section 1221 of
the Code, (ii) who will hold Continued Common Stock and Surviving Corporation
Common Stock as "capital assets," (iii) who do not actually or constructively
own (and have not at any time in the preceding five-year period actually or
constructively owned) five percent or more (by vote or value) of the stock of
the Company, (iv) whose ownership, receipt or disposition of Company Common
Stock, Continued Common Stock and/or Surviving Corporation Common Stock is not
attributable either to the conduct of a trade or business in the United States
or to a permanent establishment in the United States, and (v) who are not
residents of the United States for purposes of United States federal income tax
law or an income tax treaty to which the United States is a party. Non-U.S.
Shareholders who do not meet one or more of the foregoing criteria are urged to
consult their tax advisors regarding their particular United States federal
income tax consequences.
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THE CONTINUANCE. If, as expected, the Continuance qualifies as a
reorganization, then a non-U.S. Shareholder generally should have the same
United States federal income tax consequences as those described above for a
U.S. Shareholder regarding nonrecognition of gain or loss, tax basis and holding
period. Except as set forth in the following paragraph, a non-U.S. Shareholder
generally will not be required to file a notice with the IRS with respect to the
Continuance.
A non-U.S. Shareholder generally will not be subject to United States
federal income tax on gain recognized, if any, upon the exchange of the shares
of Company Common Stock for the shares of Continued Common Stock unless (i) the
gain is effectively connected with the conduct of a trade or business within the
United States by the non-U.S. Shareholder, (ii) in the case of a non-U.S.
Shareholder who is a nonresident alien individual and holds the Company Common
Stock as a capital asset, such non-U.S. Shareholder is present in the United
States for 183 or more days in the taxable year and certain other circumstances
are present or (iii) the non-U.S. Shareholder is subject to tax pursuant to the
provisions of the Code applicable to certain United States expatriates. A
non-U.S. Shareholder that would be subject to United States federal income tax
on such gains and takes the position that the exchange of the Company Common
Stock for the Continued Common Stock is eligible for nonrecognition treatment
will be required to file a notice with the IRS. See "--Taxation of U.S.
Shareholders--The Continuance," above.
THE MERGER. If, as expected, the Merger qualifies as a reorganization, a
non-U.S. Shareholder generally should have the same United States federal income
tax consequences as those described above for a U.S. Shareholder regarding
nonrecognition of gain or loss, tax basis and holding period. A dissenting
non-U.S. Shareholder generally should not be subject to United States federal
income tax on gain, if any, recognized on the receipt of cash in exchange for
his shares of Continued Common Stock. Nevertheless, a non-U.S. Shareholder who
exercises dissenters' rights may be subject to United States federal income tax
under the principles described in this section or if the redemption fails to
qualify for exchange treatment under Section 302(b) of the Code because the
non-U.S. Shareholder's interest is not sufficiently reduced.
If the shares of Continued Common Stock are a "United States real property
interest" (a "USRPI") within the meaning of Section 897(c) of the Code, the gain
realized by a non-U.S. Shareholder in the Merger may be treated as effectively
connected with a United States trade or business subject to United States
federal income tax, which tax may be required to be withheld. The Company
believes that the new domestic corporation resulting from the Continuance will
be a "United States real property holding corporation" as such term is defined
in Section 897(c) of the Code and that, absent an exception, the Continued
Common Stock is a USRPI. One such exception is for certain publicly traded
stock. If any class of stock of a corporation is regularly traded on an
established securities market, stock of such class shall be treated as a USRPI
only in the case of a "five-percent owner," that is, a person who held more than
5 percent of such class of stock at some time during the shorter of (a) the
period during which the taxpayer held such interest or (b) the 5-year period
ending on the date of the disposition of such interest. For purposes of
determining whether a corporation's stock is regularly traded, a class of
interests that is traded on an established securities market (such as a national
securities exchange which is registered under Section 6 of the Securities
Exchange Act of 1934 (15 U.S.C. Section 78f)) located in the United States is
considered to be regularly traded for any calendar quarter during which it is
regularly quoted by brokers or dealers making a market in these interests.
Brokers or dealers are considered market makers with respect to a class of
interests only if they hold themselves out to buy or sell interests in that
class at the quoted price. The Company believes that the Continued Common Stock
will be considered to be "regularly traded on an established securities market";
therefore, the Merger should not be treated as the sale or exchange of a USRPI
with respect to a non-U.S. Shareholder that is not a five-percent owner.
The amount withheld pursuant to these USRPI rules, if any, will be
creditable against such non-U.S. Shareholder's United States federal income tax
liability and may entitle such non-U.S. Shareholder to a refund upon furnishing
the required information to the IRS. Non-U.S. Shareholders should consult
applicable income tax treaties, which may provide different rules.
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If gain recognized by a non-U.S. Shareholder on the Continuance or Merger is
effectively connected with a United States trade or business or is attributable
to a permanent establishment in the United States, then the non-U.S. Shareholder
would be subject to United States federal income tax at the graduated rates that
are applicable to United States citizens, resident aliens or domestic
corporations, as applicable, and may be subject to withholding in certain
circumstances. Non-U.S. Shareholders may be entitled to a limited foreign tax
credit on non-United States source income that is effectively connected with a
United States trade or business. In addition, if the non-U.S. Shareholder is a
corporation, the United States branch profits tax also may apply.
DIVIDENDS ON SURVIVING CORPORATION COMMON STOCK. Generally, dividends
received by a non-U.S. Shareholder with respect to Continued Common Stock or
Surviving Corporation Common Stock will be subject to United States withholding
tax at a rate of 30 percent, which rate may be subject to reduction by an
applicable income tax treaty (generally 15 percent on dividends paid to
residents of Canada who qualify for the benefits of the income tax treaty
between the United States and Canada). If the dividends are effectively
connected with the conduct of a United States trade or business or are
attributable to a permanent establishment in the United States, they would be
taxed at the graduated rates that are applicable to United States citizens,
resident aliens, and domestic corporations and would not be subject to United
States withholding tax if the non-U.S. Shareholder gives an appropriate
statement to the withholding agent in advance of the dividend payment. A
non-U.S. Shareholder that is a corporation may be subject to an additional
branch profits tax on effectively connected dividends.
SALE OF SURVIVING CORPORATION COMMON STOCK. A non-U.S. Shareholder
generally will not be subject to United States federal income tax on gain
recognized, if any, upon the sale of shares of Surviving Corporation Common
Stock unless (i) the gain is effectively connected with the conduct of a trade
or business within the United States by the non-U.S. Shareholder, including gain
deemed effectively connected with the conduct of a trade or business because the
Surviving Corporation Common Stock sold is a USRPI, (ii) in the case of a
non-U.S. Shareholder who is a nonresident alien individual and holds the
Surviving Corporation Common Stock as a capital asset, such non-U.S. Shareholder
is present in the United States for 183 or more days in the taxable year and
certain other circumstances are present, or (iii) the non-U.S. Shareholder is
subject to tax pursuant to the provisions of the Code applicable to certain
United States expatriates. Further, if the gain is the result of a the
disposition of a USRPI, the transferee may be required to withhold a portion of
the purchase price as a prepayment of the transferor's income tax liability. The
Company believes that the Surviving Corporation will be a "United States real
property holding corporation" as such term is defined in Section 897(c) of the
Code and that, absent an exception, the Surviving Corporation Common Stock will
be a USRPI. See "--Taxation of Non-U.S. Shareholders-- The Merger," above.
ESTATE TAX. Continued Common Stock or Surviving Corporation Common Stock
owned (or treated as owned) by an individual may be includible in his or her
gross estate for United States federal estate tax purposes and thus may be
subject to United States federal estate tax, unless an applicable estate tax
treaty provides otherwise.
CONSEQUENCES TO WARRANT HOLDERS
Although the matter is not free from doubt, the Continuance should not
result in the recognition of gain or loss to holders of warrants to acquire
Company Common Stock ("Company warrants"). The IRS or the courts could disagree
with this characterization of the results to warrant holders and instead treat
the transaction as a taxable exchange of Company warrants for warrants to
acquire Continued Common Stock ("Continued warrants"). In such a circumstance, a
holder of Company warrants would recognize gain or loss in an amount equal to
the difference between the fair market value of the Continued warrants
constructively received in the exchange and the holder's adjusted tax basis in
the Company warrants surrendered. The gain or loss would be capital gain or loss
if the warrants being surrendered were a capital
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asset in the hands of the holder and long-term gain or loss if the warrants
being surrendered have been held for more than one year at the time of the
exchange.
In the Merger, a holder of Continued warrants will exchange such warrants
for warrants to acquire Surviving Corporation Common Stock ("Surviving
Corporation warrants"). Even if the Merger qualifies as a reorganization, the
exchange of Continued warrants for Surviving Corporation warrants may not
qualify for tax-free treatment, because current United States Treasury
regulations take the position that warrants are neither stock nor securities and
hence generally do not qualify for tax-free treatment in a reorganization if
such warrants are surrendered in an otherwise taxable exchange. Although
contrary arguments exist, a holder of Continued warrants may be required to
recognize gain or loss in an amount equal to the difference between the fair
market value of the Surviving Corporation warrants received in the exchange and
the holder's adjusted tax basis in the Continued warrants surrendered. Such gain
or loss will be capital gain or loss if the warrants being surrendered are a
capital asset in the hands of the holder and long-term gain or loss if the
warrants being surrendered have been held for more than one year at the time of
the exchange. Given the uncertainty regarding the proper tax treatment of the
exchange of warrants, a holder of warrants is urged to consult its tax advisor.
Proposed United States Treasury regulations would alter the rule that
warrants are neither stock nor securities by treating warrants as securities. If
finalized in their current form, such regulations generally would provide that
an otherwise taxable exchange of warrants in a reorganization is tax-free to a
holder thereof. The regulations are proposed to be effective 60 days after the
Treasury decision adopting the rules as final regulations is filed with the
Office of the Federal Register. There can be no assurance as to whether the
proposed United States Treasury regulations will be adopted or as to the
provisions that they will include if and when adopted in temporary or final
form.
Notwithstanding the discussion above, a holder of warrants that is neither
an individual nor a "United States person," as such term is defined in Section
7701 of the Code, generally will not be subject to United States federal income
tax on gain or loss recognized, if any, upon an exchange of the warrants unless
the gain or loss is effectively connected with the conduct of a trade or
business within the United States by such holder, including gain or loss that is
deemed effectively connected with the conduct of a trade or business because the
warrant transferred is a USRPI. The Company believes that the Continued warrants
should be a USRPI; therefore, such a warrant holder should be subject to United
States federal income tax on gain or loss recognized, if any, on the exchange of
such warrants.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Surviving Corporation must report annually to the IRS and to each
shareholder the amount of cash proceeds paid as a result of the Merger, if any,
and dividends paid to, and the tax withheld with respect to, such shareholder.
These reporting requirements apply regardless of whether withholding was reduced
by an applicable tax treaty or not required. Copies of these information returns
may be made available under the provisions of a specific treaty or agreement
with the tax authorities in the country in which a non-U.S. Shareholder resides.
In general, information reporting requirements may apply to dividend
distributions on Continued Common Stock or Surviving Corporation Common Stock,
or the proceeds of a sale, exchange, retraction or redemption of Continued
Common Stock or of Surviving Corporation Common Stock. A 31 percent backup
withholding tax may apply to such payments unless the holder (i) is a
corporation, non-U.S. Shareholder or comes within certain other exempt
categories and, when required, demonstrates its exemption, or (ii) provides a
correct taxpayer identification number, certifies as to no loss of exemption
from backup withholding and otherwise complies with applicable requirements of
the backup withholding rules. A holder of Continued Common Stock or of Surviving
Corporation Common Stock who is required to provide its correct taxpayer
identification number and fails to do so may be subject to penalties imposed by
the IRS. Any amounts withheld under the backup withholding rules from a payment
to a holder will be
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allowed as a credit against such holder's United States federal income tax,
provided that the required information is furnished to the IRS.
Proposed United States Treasury regulations that would be effective January
1, 1998, provide for (i) certain presumptions in determining whether a person is
subject to backup withholding and (ii) changes to the certification of taxpayer
status. There can be no assurance as to whether the proposed United States
Treasury regulations will be adopted or as to the provisions that they will
include if and when adopted in temporary or final form.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
TO THE COMPANY OF THE CONTINUANCE AND THE MERGER
GENERAL
As described in more detail in the preceding section, each of the
Continuance and the Merger should qualify as a "reorganization" within the
meaning of Section 368(a) of the Code. This conclusion is based on certain
factual assumptions and reliance on representations from Mercury, Parent, the
Company and certain principal shareholders of the Company, some of which are
described above. See "Certain United States Federal Income Tax Consequences to
Shareholders and Warrant Holders of the Continuance and the Merger--Taxation of
U.S. Shareholders." The Code generally provides the acquired corporation (in
this case, the Company) with non-recognition treatment in a reorganization. In
certain circumstances, however, this general rule of non-recognition may not
apply, as discussed immediately below.
This summary is based upon United States laws, regulations, rulings and
decisions currently in effect, all of which are subject to change, possibly with
retroactive effect. No advance income tax ruling has been sought or obtained
from the IRS regarding the tax consequences of any of the transactions described
herein. Accordingly, it is possible that the United States federal income tax
consequences of the Continuance and the Merger may differ from those described
below.
CONTINUANCE
A domestication transaction, such as the Continuance, is generally treated
for federal income tax purposes as: (1) a transfer by the Company of all of its
assets and liabilities to a new domestic corporation (the "Continued Company")
in exchange for all of the stock of the Continued Company ("Continued Common
Stock") followed by (2) a liquidating distribution by the Company to its
shareholders of the Continued Common Stock received in exchange for the
Company's assets and liabilities. Generally, the Code provides non-recognition
treatment to the acquired corporation in such a transaction if it otherwise
meets the requirements of a reorganization. In certain circumstances occurring
in an international reorganization, however, the operation of certain rules
overrides the non-recognition treatment normally afforded to the acquired
corporation in a reorganization. Such rules may cause the Company to recognize
gain on the deemed transfer and/or distribution, as described below.
The deemed transfer by the Company of all of its assets and liabilities to
the Continued Company will be treated as a nontaxable event if the Continued
Common Stock received by the Company is a USRPI. If the Continued Common Stock
is not a USRPI, then the Company may be subject to United States federal income
tax on the gain or loss resulting from the disposition of its assets that are
USRPIs. As discussed above, under "Certain United States Federal Income Tax
Consequences to Shareholders and Warrant Holders--Taxation of Non-U.S.
Shareholders," the Company believes that the Continued Common Stock will be a
USRPI; therefore, the deemed transfer should not result in United States federal
income taxation.
Even though the Company's deemed transfer to the Continued Company should be
a non-recognition event for United States federal income tax purposes, the
deemed liquidating distribution by the Company of the Continued Common Stock to
its shareholders may be a taxable event if the Continued Common
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Stock is a USRPI. As discussed above, the Company believes that the Continued
Common Stock will be a USRPI.
In general, notwithstanding any non-recognition provision of the Code, a
foreign corporation (such as the Company) recognizes gain on the distribution
(including a deemed distribution in liquidation or redemption) of a USRPI (such
as the Continued Common Stock) in an amount equal to the excess of the fair
market value of such USRPI (as of the time of the distribution) over such
corporation's adjusted basis in the USRPI, and the Code requires such
corporation to deduct and withhold a tax equal to 35 percent of the gain
recognized on such distribution. Although the issue is not free from doubt, the
Company would not be required to recognize gain on the distribution of the
Continued Common Stock if the distributee (that is, a shareholder of the
Company) would be subject to United States tax on a subsequent disposition of
the Continued Common Stock, the Company met certain filing requirements and
either (a) the basis of the Continued Common Stock in the hands of the
distributee would be no greater than the adjusted basis of such stock before the
distribution, increased by the amount of gain (if any) recognized by the Company
or (b) the Company paid an amount equal to any taxes and interest that the Code
would have imposed on all persons who disposed of interests in the Company after
June 18, 1980, as if the Company were a domestic corporation on the dates of
such dispositions. The Company does not believe that it can comply with the
above-described requirements for non-recognition of gain. Although there may be
additional arguments for non-recognition treatment, there is a significant risk
that the Company will recognize gain, if any, on the deemed liquidating
distribution.
The amount of such gain would equal the excess, if any, of the fair market
value of the Continued Common Stock over the Company's basis in such stock. The
Company's basis in the Continued Common Stock will equal its basis in the assets
deemed transferred to the Continued Company reduced by the sum of the amount of
the liabilities of the Company assumed by the Continued Company and the amount
of liabilities to which the former assets of the Company are subject. Based on
the appraisal obtained from Rauscher Pierce Refsnes, Inc. and the Company's
determination of its tax basis in the Continued Common Stock, the Company
believes that the fair market value of such stock on the date of the Continuance
will be less than the Company's basis in such stock on such date and that,
therefore, the Company will recognize no gain on the deemed distribution. There
can be no assurance, however, that the IRS will agree with the method or result
of the valuation performed by Rauscher Pierce Refsnes, Inc. Any such
disagreement could result in the Company owing United States federal income tax
as a result of the Continuance.
If the Company is subject to United States and/or Canadian taxation as a
result of the Continuance, the terms of the Tax Treaty may entitle the Company
or the Surviving Corporation to obtain relief from double taxation by way of
either a credit against tax liability or a deduction in computing taxable
income.
MERGER
As discussed in more detail above, the Merger should qualify as a
reorganization under Section 368(a) of the Code. Therefore, an acquired
corporation, such as the Continued Company, generally will recognize no gain or
loss upon the transfer of all of its assets to the acquiring corporation (in
this case, Mercury) in exchange for stock of the acquiring corporation (I.E.,
Surviving Corporation Common Stock) and the assumption by the acquiring
corporation of all of the Continued Company's liabilities. Notwithstanding this
general rule of non-recognition, in certain types of reorganizations, the
acquired corporation must recognize gain to the extent that the sum of its
liabilities assumed by the acquiring corporation, plus the amount of liabilities
to which the transferred assets are subject, exceeds the total adjusted basis of
the transferred assets. Although the issue is not free from doubt, it is likely
that the Merger will be subject to this rule regarding the excess of liabilities
over basis. The Company, however, believes that the Continued Company will
recognize no gain in the Merger under this rule because it believes that the
total adjusted basis of the Continued Company's assets transferred in the Merger
will exceed the sum of the liabilities
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assumed plus the amount of liabilities to which the transferred assets are
subject on the date of the Merger.
LIMITATION ON USE OF NET OPERATING LOSS CARRYFORWARDS
If a corporation undergoes an "ownership change" within the meaning of
Section 382 of the Code, the corporation's right to use its then-existing net
operating loss carryforwards ("NOLs") (and certain other tax attributes), for
both regular tax and alternative minimum tax purposes, during each future year
is limited to a percentage (currently approximately 5.6 percent) of the fair
market value of such corporation's stock immediately before the ownership change
(the "Section 382 Limitation"). In general, there is an "ownership change" under
Section 382 if over a three-year period certain stockholders increase their
percentage ownership of a corporation (with NOLs) by more than 50 percentage
points. To the extent that taxable income exceeds the Section 382 Limitation in
any year subsequent to the ownership change, such excess income may not be
offset by NOLs from years prior to the ownership change. To the extent that the
amount of taxable income in any subsequent year is less than the Section 382
Limitation for such year, the Section 382 Limitation for future years is
correspondingly increased. There is generally no restriction on the use of NOLs
arising after the ownership change, although Section 382 applies anew each time
there is an ownership change.
As of December 31, 1996, the Company had approximately $10,500,000 of NOLs,
a significant portion of which may be subject to a Section 382 Limitation
resulting from ownership changes. The Company believes that another ownership
change with respect to the Company may occur as a result of the Merger. The
resulting Section 382 Limitation may limit the Surviving Corporation's ability
to use the Company's NOLs in future years, although the actual effect, if any,
of such limitation will depend on the Surviving Corporation's profitability in
future years.
DIFFERENCES BETWEEN THE DGCL AND THE ABCA
After the Continuance shareholders of the Company will become subject to the
DGCL; and upon effectiveness of the Merger, shareholders of the Company will
become shareholders of the Surviving Corporation and will remain subject to the
DGCL. The DGCL is similar in many ways to the ABCA, to which the Company is now
subject, but differs in several material respects, including the following:
VOTE ON EXTRAORDINARY CORPORATE TRANSACTIONS
Under the ABCA, continuances, sales of substantially all of the assets of a
corporation, amendments to the articles of incorporation and other extraordinary
corporate actions require authorization by a special resolution, meaning a
resolution passed by two-thirds of the votes cast by the shareholders who voted
in respect of that resolution, or by an instrument signed by all shareholders
entitled to vote on that resolution. Under the DGCL, mergers or consolidations
require the approval of the holders of a majority of the outstanding stock of
the corporation entitled to vote thereon. A sale, lease or exchange of all or
substantially all the property and assets of a corporation requires the approval
of the holders of a majority of the outstanding stock of the corporation
entitled to vote thereon, and an amendment to the certificate of incorporation
of a corporation generally requires the approval of the holders of a majority of
the outstanding stock entitled to vote thereon.
BYLAW AMENDMENTS
Under the ABCA, either shareholders or directors may make, amend or repeal
bylaws (subject to any restrictions under the articles, bylaws or any unanimous
shareholder agreement), but any such action of the directors with respect to the
bylaws are subject to confirmation by resolution passed by a majority of the
votes cast by the shareholders entitled to vote on that resolution. Under the
DGCL, after a corporation has received any payment for any of its stock, the
shareholders entitled to vote thereon, and where authorized
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by the certificate of incorporation, the directors, may adopt, amend or repeal
the bylaws. The Surviving Corporation Certificate authorizes the Board of
Directors of the Surviving Corporation to adopt, amend or repeal the Surviving
Corporation Bylaws.
REMOVAL OF DIRECTORS
Directors generally may be removed under the ABCA by ordinary resolution,
meaning a resolution passed by a majority of the votes cast by the shareholders
who voted in respect of that resolution. Directors generally may be removed,
with or without cause, under the DGCL by holders of a majority of shares then
entitled to vote at an election of directors. Directors of an ABCA corporation
may be removed at any time without cause; directors of a Delaware corporation
may be removed without cause unless the board is classified, in which case
directors may be removed for cause only, unless the certificate of incorporation
provides otherwise. The Surviving Corporation Bylaws will provide that any
director may be removed, either with or without cause, by the affirmative vote
of the holders of record of a majority of the issued and outstanding stock
entitled to vote thereon.
QUORUM OF SHAREHOLDERS
A quorum for a shareholder meeting under the ABCA consists of the holders of
a majority of shares entitled to vote present in person or represented by proxy
at the meeting unless the bylaws provide otherwise. The bylaws of the Company
provide that holders of at least five percent of the outstanding Company Common
Stock represented in person or by proxy at a shareholder meeting will constitute
a quorum. Under the DGCL, a quorum consists of a majority of shares entitled to
vote present in person or represented by proxy unless the certificate of
incorporation or bylaws provide otherwise, but in no event may a quorum consist
of less than one-third of shares entitled to vote at the meeting. The Surviving
Corporation Bylaws will state that in the absence of a quorum, the holders of a
majority of the shares present in person or represented by proxy and entitled to
vote may adjourn the meeting to another date and time.
NOTICE AND CALL OF SHAREHOLDER MEETINGS
Under the ABCA, shareholder meetings may be called by the board of
directors, who must call a meeting when so requested by holders of not less than
five percent of the issued shares that carry the right to vote, on not less than
21 days and not more than 50 days notice. Under the DGCL, unless the certificate
of incorporation or bylaws authorize additional persons, only the board of
directors may call a special shareholders' meeting. Under the DGCL, written
notice of any meeting of shareholders shall be given not less than 10 nor more
than 60 days before the date of the meeting to each shareholder entitled to vote
at such meeting (provided that a minimum of 20 days notice is required for a
merger). Under the Surviving Corporation Bylaws, special meetings of the
shareholders may be called by the Chairman of the Board of Directors, the
President, the Board of Directors or by the holder(s) of at least 10 percent of
the outstanding Surviving Corporation Common Stock entitled to vote at such
meeting, unless otherwise prescribed by statute.
SHAREHOLDER WRITTEN CONSENT IN LIEU OF MEETING
Under the ABCA, shareholder actions without a meeting may be taken by
resolution in writing signed by all of the shareholders entitled to vote. Under
the DGCL, shareholders may act by written consent without a meeting if holders
of outstanding stock, having not less than the minimum number of votes that
would be necessary to take such action at a meeting at which all shares entitled
to vote thereon were present and voting, execute a written consent providing for
such action unless otherwise provided in the corporation's certificate of
incorporation.
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APPRAISAL RIGHTS
The DGCL grants appraisal rights in a merger or consolidation to holders of
stock, unless such stock is either (a) listed on a national securities exchange
or designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc., (the "NASD") or
(b) held of record by more than 2,000 shareholders; provided that such holders
receive shares of stock of the corporation surviving the merger or consolidation
which is, on the effective date of the merger or consolidation, either listed on
a national securities exchange or designated as a national market system
security on an interdealer quotation system by the NASD or held of record by
more than 2,000 shareholders. The ABCA does not contain any similar exemption
from its provisions relating to dissenters' rights of appraisal for
amalgamation. Notwithstanding the foregoing, appraisal rights are available
under the DGCL for sales of all or substantially all of the corporation's
assets, any merger or consolidation in which the corporation is a constituent
corporation, or for amendments to its certificate of incorporation if the
certificate of incorporation so provides.
Shareholders are entitled to dissent and appraisal rights under the ABCA in
connection with any sale of substantially all the assets of a corporation
outside the ordinary course of business, for amendments to its articles of
incorporation such as those affecting share issuance, transferability or
ownership of shares of the class held by a dissenting shareholder, or amendments
to its articles of incorporation to add, change or remove any restriction on the
business of the corporation, or relating to amalgamation, or continuance. Also,
the ABCA provides rights of appraisal to shareholders of a class of shares
entitled to vote on proposals to amend the articles of incorporation to vary the
number of authorized shares of the class, effect a reclassification or
cancellation of shares of the class, affect restrictions, right or privileges
attached to such shares, create a new class of shares, or constrain the issue or
transfer of ownership of such shares.
SHAREHOLDER REGISTER
A Delaware corporation's stock list showing the names, addresses and the
number of shares registered in the name of each shareholder may be inspected by
shareholders of record for any purpose germane to a shareholder's meeting. Under
the ABCA, shareholders and creditors, where the corporation is a distributing
corporation, may inspect the list of shareholders.
DIVIDENDS AND DISTRIBUTIONS
The DGCL and ABCA treat dividends similarly. The DGCL permits a corporation,
unless otherwise restricted by the certificate of incorporation, to declare and
pay dividends out of surplus or, if there is no surplus, out of the net profits
for the fiscal year in which the dividend is declared and/or the preceding
fiscal year (provided that the amount of capital of the corporation is not less
than the aggregate amount of the capital represented by the issued and
outstanding stock of all classes having a preference upon the distribution of
assets). In addition, the DGCL generally provides that a corporation may redeem
or repurchase its shares only if such redemption or repurchase would not impair
the capital of the corporation and the capital of the corporation is not
impaired.
Under the ABCA, a corporation may not declare or pay a dividend or redeem or
repurchase its shares if the corporation is, or would after the payment be,
unable to pay its liabilities as they become due, or if the realizable value of
the corporation's assets would thereby be less than the aggregate of its
liabilities and share capital of all classes.
DIRECTOR QUALIFICATIONS AND NUMBER
Under the ABCA, at least one-half of the total number of directors of an
Alberta corporation must be resident Canadians and directors generally must not
transact business at a meeting of directors unless at least one-half of
directors present are resident Canadians; provided, however, that if the
corporation's business is conducted largely outside of Canada, only one-third of
the total number of directors must be
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resident Canadians. The DGCL has no comparable requirements. The DGCL provides
that the number of directors shall be fixed by, or in the manner provided in,
the bylaws unless the certificate of incorporation fixes the number of
directors. The articles of incorporation of an ABCA corporation must specify the
number or a range for number of directors (minimum and maximum), and reductions
in size within that range can only be effected by the shareholders. The
Surviving Corporation Certificate will be silent as to the number of directors.
The Surviving Corporation Bylaws provide that the Board of Directors may fix the
number of directors to a number not less than eight.
DIRECTOR LIABILITY
The DGCL permits the certificate of incorporation of a Delaware corporation
to contain a provision limiting the personal liability of a director to the
shareholders or the corporation for monetary damages for breach of fiduciary
duty, except (i) for any breach of a directors' duty of loyalty to the
corporation or its shareholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of laws, (iii) for
paying a dividend or approving a stock repurchase in violation of statutory
limitations, or (iv) for any transaction from which a director derived an
improper personal benefit. Such a provision does not affect a director's
liability under United States federal securities laws. The Surviving Corporation
Certificate will contain such a provision.
Under the ABCA, directors of a corporation who vote for or consent to a
resolution authorizing the issue of shares for consideration other than money
are jointly and severally liable to the corporation to make good any amount by
which the consideration received is less than the fair equivalent of the money
that the corporation would have received if the shares had been issued for
money. Directors of a corporation who authorize an improper purchase, redemption
or other acquisition of shares, authorize improper payments of dividends,
commissions, financial assistance, indemnities or other improper payments to a
shareholder are jointly and severally liable to restore to the corporation any
amounts so distributed. In addition, directors of a corporation may be jointly
and severally liable to employees for certain wages and salaries payable to each
employee for services performed for the corporation. The ABCA has no provision
limiting directors' liability as does the DGCL.
The liability limitations will be included in the Surviving Corporation
Certificate in order to enhance the ability of the corporation to attract and
retain highly qualified people to serve as outside directors, and not in
response to any resignation, threat of resignation or refusal to serve by a
director or potential director of the Surviving Corporation. Furthermore,
although the effect of this provision of the DGCL on the insurance market
generally will be determined in the future based on the insurance industry
experience, the Boards of Directors of the Company and Mercury believe that the
inclusion of this provision in the Surviving Corporation Charter should help to
make directors' liability insurance available to the Surviving Corporation in
the future. To the extent that such provision would eliminate litigation for
which the Surviving Corporation would otherwise be obligated to indemnify
directors for defense or other costs, the Surviving Corporation would avoid
director indemnification expense.
There has been no recent litigation involving the Board of Directors of the
Company or Mercury or any of its members which might have been effected had such
a limitation of liability provision been in effect. Further, to the best
knowledge of the Company or Mercury, there is no litigation pending or
threatened against any director of either corporation which would be effected by
such provision of the Surviving Corporation Certificate.
INDEMNIFICATION OF OFFICERS, DIRECTORS AND OTHERS
Both the DGCL and the ABCA authorize a corporation to indemnify its
directors, officers, employees and agents against all reasonable expenses
(including legal fees) and, provided that such individual (the "indemnitee")
acted in good faith and for a purpose which he or she reasonably believed to be
in, or not opposed to, the best interests of the corporation and, in the case of
a criminal proceeding, had reasonable
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grounds to believe his or her conduct was lawful. The DGCL authorizes a
corporation to indemnify its directors, officers, employees and agents against
all reasonable expenses (including legal fees) in connection with a lawsuit by
or in the right of the corporation to procure a judgment in its favor if such
person acted in good faith and in a manner reasonably believed to be in or not
opposed to the best interests of the corporation, except that no indemnification
may be paid as to any claim, issue or matter as to which such person has been
adjudged liable to the corporation unless it is determined by the court making
such adjudication of liability that, despite such finding, such person is fairly
and reasonably entitled for such expenses deemed proper. The DGCL contemplates
that the determination of whether the indemnitee is entitled to indemnification
is to be made in the specific case by a majority vote of the directors who are
not parties to such action, even though less than a quorum, by independent legal
counsel in a written opinion or by the shareholders, unless otherwise determined
by a court of competent jurisdiction, whereas the ABCA contemplates a
determination exclusively by a court. The Surviving Corporation Bylaws provide
for indemnification of directors, officers, employees or agents of the Surviving
Corporation as described above.
Under the DGCL and the ABCA, there is a right of mandatory indemnification
to the extent that an indemnitee is successful on the merits or otherwise in
defense of any action, suit or proceeding or any claim, issue or matter therein.
The DGCL allows for the advance payment of an indemnitee's expenses prior to the
final disposition of an action (as do the Surviving Corporation Bylaws),
provided that the indemnitee, if an officer or director of the corporation,
undertakes to repay any such amount advanced if it is later determined that the
indemnitee is not entitled to indemnification with regard to the action for
which his or her expenses were advanced, whereas the ABCA does not expressly
contemplate such an advance payment.
The DGCL and the ABCA permit a corporation to maintain insurance on behalf
of an indemnitee against any liability asserted against such indemnitee by
reason of his or her having been a director or officer, whether or not the
corporation would have the power to indemnify him or her against such
liabilities under the applicable provisions of the respective act. The ABCA
limits this in that insurance is not available where the liability relates to a
director's failure to act honestly and in good faith with a view to the best
interests of the corporation. In addition, the DGCL provides that the
indemnification rights provided by the provisions described above are not
exclusive of any rights to indemnification or advancement of expenses to which
such indemnitee may be entitled under any bylaw, agreement, vote of shareholders
or disinterested directors or otherwise, but the ABCA does not contemplate such
arrangements. The Surviving Corporation Bylaws will match the provisions of the
DGCL.
OPPRESSION RELIEF AND EQUITABLE REMEDIES
The ABCA creates a cause of action for "oppression" and "unfairness" with
respect to security holders, creditors, directors and officers, and vests the
courts with broad remedial powers in connection therewith; the DGCL contains no
comparable provision, and the scope of the equitable powers of the DGCL as
defined by existing case law is less certain than the scope of the powers in
Canada.
Certain differences between the powers granted to corporations under the
DGCL and the powers granted under the ABCA may make a Delaware corporation
somewhat less vulnerable than a corporation governed by the ABCA to hostile
takeover attempts. These differences include the absence of power of
shareholders to call special meetings unless expressly granted as discussed
above, the power of the directors to ascribe attributes to a series of preferred
stock authorized by the certificate of incorporation which give the series a
priority over another series within the class, and the restrictions on business
combinations discussed below. On the other hand, because of such provisions as
the power of shareholders to take action without a meeting by less than
unanimous consent, the DGCL may, under such circumstances, facilitate a hostile
takeover attempt.
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BUSINESS COMBINATIONS
Section 203 of the DGCL provides that any person who acquires 15 percent or
more of a corporation's voting stock (thereby becoming an "interested
shareholder") may not engage in certain "business combinations" with the target
corporation for a period of three years following the date the person became an
interested shareholder, unless (i) the board of directors of the corporation has
approved, prior to the date such person acquires 15 percent or more of the
voting stock, either the business combination or the transaction that resulted
in the person becoming an interested shareholder, (ii) upon consummation of the
transaction that resulted in the person becoming an interested shareholder, that
person owns at least 85 percent of the corporations' voting stock outstanding at
the time the transaction is commenced (excluding shares owned by persons who are
both directors and officers and shares owned by employee stock plans in which
participants do not have the right to determine confidentially whether shares
will be tendered in a tender or exchange offer), or (iii) the business
combination is approved by the board of directors and authorized by the
affirmative vote (at an annual or special meeting and not by written consent) of
at least two-thirds of the outstanding voting stock not owned by the interested
shareholder.
For the purpose of determining whether a person is the "owner" of 15 percent
or more of a corporation's voting stock for these purposes, ownership is defined
broadly to include the right, directly or indirectly, to acquire the stock or to
control the voting or disposition of the stock. A "business combination" is also
defined broadly to include (i) merger and sales or other dispositions of 10
percent or more of the assets of a corporation with or to an interested
shareholder, (ii) certain transactions resulting in the issuance or transfer to
the interested shareholder of any stock of the corporation or its subsidiaries,
(iii) certain transactions which would result in increasing the proportionate
share of the stock of a corporation or its subsidiaries owned by the interested
shareholder, and (iv) receipt by the interested shareholder of the benefit
(except proportionately as a shareholder) or any loans, advances, guarantees,
pledges or other financial benefits.
These restrictions placed on interested shareholders do not apply under
certain circumstances, including, but not limited to, the following: (i) if the
corporation's original certificate of incorporation contains a provision
expressly electing not to be governed by the relevant section of the DGCL, or
(ii) if the corporation, by action of its shareholders, adopts an amendment to
its bylaws or certificate of incorporation expressly electing not to be governed
by such section, provided that such an amendment is approved by the affirmative
vote of not less than a majority of the outstanding shares entitled to vote and
that such an amendment will not be effective until 12 months after its adoption
and will not apply to any business combination with a person who became an
interested shareholder at or prior to such adoption. Pursuant to the Surviving
Corporation Certificate, the Surviving Corporation has elected to be governed by
Section 203 of the DGCL.
The ABCA does not contain a comparable provision with respect to business
combinations. However, policies of certain Canadian securities regulatory
authorities, including Policy 9.1 of the Ontario Securities Commission ("Policy
9.1"), contain requirements in connection with related party transactions.
Related party transaction means, generally, any transaction by which an issuer,
directly or indirectly, acquires or transfers an asset or acquires or issues
treasury securities or assumes or transfers a liability from or to, as the case
may be, a related party by any means in any one or any combination of
transactions. "Related Party" is defined in Policy 9.1 and includes directors,
senior officers and holders of at least 10 percent of the voting securities of
the issuer.
Policy 9.1 requires more detailed disclosure in the proxy material sent to
security holders in connection with a related party transaction, and, subject to
certain exceptions, the preparation of a form of valuation of the subject matter
of the related party transaction and any non-cash consideration offered therefor
and the inclusion of a summary of the valuation in the proxy material. Policy
9.1 requires, subject to certain exceptions, that the minority shareholders of
the issuer separately approve the transaction, either by simple majority or
two-thirds of the votes cast, depending on the circumstances.
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STOCK EXCHANGE LISTING
Mercury will make application to have the Surviving Corporation Common Stock
listed on the American Stock Exchange upon completion of the Continuance and the
Merger. The acceptance of such application and the admission of the Surviving
Corporation Common Stock for trading on the American Stock Exchange is a
condition to consummation of the Merger.
CERTAIN UNITED STATES FEDERAL SECURITIES LAW CONSEQUENCES
All Surviving Corporation Common Stock received by Company shareholders in
the Merger will be freely transferable, except that shares of Surviving
Corporation Common Stock received by persons who are deemed to be "affiliates"
(as such term is defined under the Securities Act) of the Company or Mercury
prior to the Merger may be resold by them only in transactions permitted by the
resale provisions of Rule 145 promulgated under the Securities Act (or Rule 144
in the case of such persons who become affiliates of the Surviving Corporation)
or as otherwise permitted under the Securities Act. Persons who may be deemed to
be affiliates of the Company or Mercury or the Surviving Corporation generally
include individuals or entities that control, are controlled by, or are under
common control with, such party and may include certain officers and directors
of such party as well as principal shareholders of such party.
CANADIAN SECURITIES LAW CONSEQUENCES
Shares of Surviving Corporation Common Stock held by Canadian residents are
subject to any applicable resale restrictions imposed by the securities laws of
the province in which the shareholder is a resident. The Company is not aware of
any present provincial resale restrictions on the issued shares of the Company
Common Stock. Alberta securities law provides that shares issued upon conclusion
of a merger such as the Merger being contemplated will be issued to Alberta
residents free of any additional resale restrictions, unless such issuance is to
a "control person," as defined in the Securities Act (Alberta). The Company
believes that the securities laws of the other provinces of Canada are
substantially similar to those of Alberta.
After the Continuance and Merger, the Surviving Corporation will continue to
be a "reporting issuer" pursuant to the Securities Act (Alberta) and the similar
legislation of certain other provinces and, as such, will be required to file
with the securities commissions or other regulatory authorities annual and
quarterly financial statements, proxy circulars, material change reports and
other similar continuous disclosure documents, and will be required to send
quarterly and annual financial statements and its proxy circular to shareholders
resident in those provinces. The Surviving Corporation will fulfill these
obligations by filing or mailing, as the case may be, the corresponding
documents that it is required to prepare pursuant to applicable United States
securities legislation.
CERTAIN TERMS OF THE MERGER AGREEMENT
A summary of the material terms of the Merger Agreement is set forth below.
However, the following description does not purport to be complete and is
qualified in its entirety by reference to the Merger Agreement, a copy of which
is attached as Appendix "E" to this Proxy Statement/Prospectus and is
incorporated herein by reference.
EFFECTIVE TIME OF THE MERGER
The Merger Agreement provides that, as promptly as practicable after the
satisfaction or waiver of the conditions to effecting the Merger, the parties
shall cause the Merger to be consummated by filing a Certificate of Merger with
the Secretary of State of the State of Delaware, in such form as required by,
and executed in accordance with, the relevant provisions of the DGCL. It is
anticipated that, if the Merger Agreement is approved and adopted pursuant to
the execution of the Consent, and all other conditions to the Merger have been
satisfied or waived, the Effective Time will occur on or about .
50
<PAGE>
MANNER AND BASIS OF CONVERTING SHARES OF COMPANY COMMON STOCK AND WARRANTS
At the Effective Time, each outstanding share of Company Common Stock will
be converted into one share of Surviving Corporation Common Stock.
As soon as practicable following the Effective Time, the Surviving
Corporation will mail to each record holder of Company Common Stock immediately
prior to the Effective Time, a letter of transmittal and other information
advising such holder of the consummation of the Merger and for use in exchanging
Company Common Stock certificates for certificates representing Surviving
Corporation Common Stock. After the Effective Time, there will be no further
registration of transfers on the stock transfer books of the Company of shares
of Company Common Stock that were outstanding immediately prior to the Effective
Time. SHARE CERTIFICATES SHOULD NOT BE SURRENDERED FOR EXCHANGE BY SHAREHOLDERS
OF THE COMPANY PRIOR TO THE EFFECTIVE TIME AND THE RECEIPT OF A LETTER OF
TRANSMITTAL.
Until surrendered and exchanged, each certificate previously evidencing
Company Common Stock shall represent solely the right to receive Surviving
Corporation Common Stock. Unless and until any such certificates shall be so
surrendered and exchanged, no dividends or other distributions payable to the
holders of record of Company Common Stock as of any time after the Effective
Time shall be paid to the holders of such certificates previously evidencing
Company Common Stock; provided, however, that upon any such surrender and
exchange of such certificates, there shall be paid to the record holders of the
certificates issued and exchange therefor (i) the amount, without interest
thereon, of dividends and other distributions, if any, with a record date after
the Effective Time theretofore paid with respect to such shares of Surviving
Corporation Common Stock, and (ii) at the appropriate payment date, the amount
of dividends or other distributions, if any, with a record date after the
Effective Time but prior to surrender and a payment date occurring after
surrender, payable with respect to such shares of Surviving Corporation Common
Stock. The Surviving Corporation intends to retain Chase Mellon Shareholder
Services L.L.C., Dallas, Texas, to serve as Exchange Agent for the purpose of
effecting the exchange of certificates representing Company Common Stock.
As of the Effective Time, the outstanding warrant to acquire shares of
Company Common Stock issued to Banque Paribas shall be converted into an
equivalent warrant to purchase shares of Surviving Corporation Common Stock.
CONVERSION OF MERCURY COMMON STOCK AND OPTIONS AND WARRANTS
As of the Effective Time, each outstanding share of Mercury Common Stock
shall be converted into one share of Surviving Corporation Common Stock. In
addition, each outstanding option or warrant to acquire shares of Mercury Common
Stock shall be converted into an equivalent option or warrant, as the case may
be, to acquire shares of Surviving Corporation Common Stock.
CONDITIONS TO THE MERGER
The respective obligations of the Company and Mercury to consummate the
Merger are subject to the satisfaction of the following conditions, any or all
of which may be waived in writing by Mercury and the Company, in whole or in
part, to the extent permitted by applicable law:
(i) the Merger Agreement and the Merger shall have been approved and
adopted by the requisite vote of the shareholders of the Company;
(ii) the Continuance shall have been approved by the requisite vote of
the shareholders of the Company;
(iii) no governmental entity or agency or federal or state court shall
have issued any order which is in effect that would prevent consummation of
the Merger or make the Merger illegal;
51
<PAGE>
(iv) the registration statement registering the Surviving Corporation
Common Stock to be issued pursuant to the Merger Agreement shall have been
declared effective by the SEC under the Securities Act, no stop order
suspending the effectiveness of such registration statement shall have been
issued by the SEC and no proceedings for that purpose shall have been
initiated by the SEC;
(v) all governmental approvals or permits shall have been obtained that
are required in order to comply with applicable laws, except such approvals
or permits that are not material;
(vi) the shares of Surviving Corporation Common Stock issuable in the
Merger shall have been listed on the American Stock Exchange;
(vii) all material approvals of private persons or corporations shall
have been obtained;
(viii) Parent and the Board of Directors of the Company shall have
received an opinion from Rauscher Pierce Refsnes, Inc. that the net market
value of the Company is less than $14,156,000 (for an explanation of the
reasons for such valuation, See "Certain United States Federal Income Tax
Consequences to the Company of the Continuance and the Merger");
(ix) the parties to the Merger Agreement shall have agreed to the form
of Surviving Corporation Certificate and Bylaws;
(x) the parties to the Merger Agreement shall have agreed to the form
and terms of the Management Agreement to be entered into between the
Surviving Corporation and Parent;
(xi) the Surviving Corporation shall have assumed the NationsBank Debt
or repaid in full the NationsBank Debt; and
(xii) the Board of Directors of Mercury shall be reconstituted so that it
will consist of three designees of the Company, three designees of Mercury
and two independent persons.
The obligation of the Company to effect the Merger is also subject to the
satisfaction at or prior to the Effective Time of the following conditions, any
or all of which may be waived in writing by the Company, in whole or in part:
(i) each of the representations and warranties of Mercury and Parent
contained in the Merger Agreement shall be true and accurate in all material
respects as of the Effective Time as though made as of the Effective Time;
(ii) Mercury and Parent shall have performed or complied in all material
respects with all agreements and covenants required by the Merger Agreement
to be performed or complied with by them on or prior to the Effective Time;
(iii) since the date of the Merger Agreement, there shall not have been
any material adverse change in the financial condition, results of
operations or business of Mercury, and none of the properties or the
business of Mercury shall have suffered any material damage, destruction or
loss; and
(iv) the Company shall have received the proceeds of a financing
necessary to consummate the transactions contemplated by the Merger
Agreement and to pay all fees and expenses incurred in connection therewith.
The obligations of Mercury and Parent to effect the Merger are also subject
to the satisfaction at or prior to the Effective Time of the following
conditions, any or all of which may be waived in writing by Parent, in whole or
in part:
(i) each of the representations and warranties of the Company contained
in the Merger Agreement shall be true and accurate in all material respects
as of the Effective Time as though made as of the Effective Time;
52
<PAGE>
(ii) the Company shall have performed or complied in all material
respects with all agreements and covenants required by the Merger Agreement
to be performed or complied with by it on or prior to the Effective Time;
(iii) Since the date of the Merger Agreement, there shall not have been
any material adverse change in the financial condition, results of
operations or business of the Company, and none of the properties or the
business of the Company shall have suffered any material damage, destruction
or loss; and
(iv) the Company shall have received the proceeds of a financing
necessary to consummate the transactions contemplated by the Merger
Agreement and to pay all fees and expenses incurred in connection therewith.
There can be no assurance that all of the conditions to the Merger will be
satisfied.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties of the
Company, and Mercury and Parent relating to, among other things, (i) the
organization and similar corporate matters of each, (ii) the capitalization of
each, (iii) the authorization, execution, delivery, performance and
enforceability of the Merger Agreement and related matters, and the absence of
conflicts, violations and defaults under their respective charters and bylaws
and certain other agreements and documents, (iv) compliance with applicable
laws, (v) the documents and reports filed by the Company with the Commission and
the accuracy of the information contained therein, (vi) the absence of certain
changes and events, (vii) litigation, (viii) employee benefit and labor matters,
(ix) taxes and matters relating to a tax-free reorganization, (x) environmental
matters, (xi) the properties of each, (xii) the conduct of the business of each,
(xiii) the vote required to approve the Continuance and the Merger Agreement,
(xiv) brokers, (xv) the financial arrangements of each necessary to own their
assets and conduct their business, and (xvi) the accuracy of certain information
provided.
CERTAIN COVENANTS; CONDUCT OF BUSINESS PRIOR TO THE MERGER
Each of the Company on the one hand, and Mercury and Parent on the other
hand, has agreed that, prior to the Effective Time, unless expressly
contemplated by the Merger Agreement or otherwise consented to in writing by the
other, the Company and Mercury will each (i) operate its business in the usual
and ordinary course consistent with past practices; (ii) use all reasonable
efforts to preserve substantially intact its business organization, maintain its
material rights and franchises, retain the services of its respective officers
and key employees and preserve the goodwill of those having business
relationships with it; (iii) maintain and keep its properties and assets in as
good repair and condition as at present, ordinary wear and tear excepted; and
(iv) maintain in full force and effect insurance comparable in amount and scope
of coverage to that currently maintained.
Each of the Company and Parent has agreed that, prior to the Effective Time,
unless expressly contemplated by the Merger Agreement or otherwise consented to
in writing by the other, neither the Company nor Mercury will do, nor will it
permit any of its subsidiaries to do, any of the following: (i) increase the
compensation or fringe benefits of any director, officer or employee; (ii) enter
into, adopt, amend or terminate any employment or severance agreement with, any
director, officer or employee, or any employee benefit plan or arrangement;
(iii) declare or pay any dividend on, or make any other distribution in respect
of, outstanding shares of capital stock; (iv) redeem, purchase or otherwise
acquire any shares of its stock or any securities or obligations convertible
into or exchangeable for any shares of its capital stock, or any options,
warrants or conversion or other rights to acquire any shares of its capital
stock or any such securities or obligations; (v) issue, sell, pledge, dispose or
encumber any of its capital stock, except pursuant to the exercise of
outstanding warrants or options; or (vi) agree in writing or otherwise to do any
of the foregoing.
53
<PAGE>
In addition, both the Company and Mercury agreed (i) not to make any capital
expenditure exceeding $10,000 in the case of Mercury and $100,000 in the case of
the Company without the consent of the other; (ii) to perform their agreements
with others; (iii) to each provide the other reasonable access to its properties
and records; (iv) to prudently operate their respective properties; (v) to
refrain from transferring any properties, with certain exceptions (such as the
sale of production in the ordinary course of business); (vi) to discharge all
expenses and liabilities relating to the ownership or operation of its
properties; (vii) to refrain from taking more production from a property than it
is entitled to; and (viii) to refrain from taking any action that would cause
its representations and warranties contained in the Merger Agreement to become
untrue or that would prevent the conditions to closing set forth in the Merger
Agreement from being satisfied.
Each of Mercury and the Company also agreed (i) to cooperate in the
preparation and filing of this Proxy Statement/Prospectus; (ii) to file a
registration statement with the SEC, in the case of the Company for the purpose
of registering the shares of stock issuable in the Continuance, and in the case
of Mercury to register the shares of stock issuable in the Merger; (iii) to
indemnify the other for claims arising as a result of a breach by it of any of
its representations or agreements set forth in the Merger Agreement. The Company
agreed to apply and pursue the acceptance of an application for listing of the
Surviving Corporation Common Stock on the American Stock Exchange and to use its
reasonable best efforts to obtain financing necessary to consummate the
transactions contemplated under the Merger Agreement and to pay all fees and
expenses incurred in connection therewith.
The Merger Agreement provides that nothing in the Merger Agreement prevents
the members of the Board of Directors of the Company, in the exercise of their
fiduciary duties and after consulting with counsel, from considering,
negotiating and approving an unsolicited bona fide proposal that the Board of
Directors of the Company determines in good faith, after consultation with its
financial advisors, may result in a transaction more favorable to the
shareholders of the Company than the transactions contemplated by the Merger
Agreement. If the Board of Directors of the Company receives a request for
confidential information by a potential bidder for the Company or its assets and
the Board of Directors of the Company determines, after consultation with
counsel, that the Board of Directors has a fiduciary obligation to provide such
information to a potential bidder, then the Company may, subject to a
confidentiality agreement substantially similar to that previously executed by
Parent, provide such potential bidder with access to information regarding the
Company. The Company will promptly notify Parent, orally and in writing, if any
such proposal or offer is made and will, in any such notice, indicate the
identity and terms and conditions of any proposal or offer, or any such inquiry
or contact. The Company will keep Parent advised of the progress and status of
any such proposals or offers. The obligation of the Board of Directors of the
Company to convene a meeting of its shareholders and to recommend the adoption
and approval of the Merger Agreement to the shareholders of the Company pursuant
to the Merger Agreement will be subject to the fiduciary duties of the
directors, and nothing contained in the Merger Agreement will prevent the Board
of Directors of the Company from approving or recommending to the shareholders
of the Company any unsolicited offer or proposal by a third party if required in
the exercise of their fiduciary duties.
EFFECT OF THE MERGER
Once the Merger is consummated, the Company will cease to exist as a
corporation, and the Surviving Corporation will succeed to all of the assets,
rights, powers, privileges and debts and obligations of the Company. Pursuant to
the Merger Agreement, the Surviving Corporation Certificate and the Surviving
Corporation Bylaws will be the certificate of incorporation and bylaws of the
Surviving Corporation until amended as provided therein and pursuant to the DGCL
and the name of the Surviving Corporation will be changed to MSR Exploration
Ltd.
54
<PAGE>
TERMINATION
GENERAL. The Merger Agreement may be terminated and the Merger and the
other transactions contemplated thereby may be abandoned, at any time prior to
the Effective Time, whether prior to or after approval by the shareholders of
the Company or the shareholders of Mercury, under the following circumstances:
(i) by the mutual consent of the Company and Parent; (ii) by either the Company
or Parent if the Merger has not been consummated by December 31, 1997; (iii) by
either the Company or Parent if the conditions to closing are not satisfied;
(iv) by the Company if (A) since the date of the Merger Agreement there has been
a material adverse change in the results of operations, financial condition or
business of Mercury or (B) there has been a material breach of any
representation, warranty or covenant by Parent that is not remedied within five
business days of notice of such breach; (v) by Parent if (A) since the date of
the Merger Agreement there has been a material adverse change in the results of
operations, financial condition or business of the Company and its subsidiaries,
taken as a whole, or (B) there has been a material breach of any representation,
warranty or covenant by the Company that is not remedied within five business
days of notice of such breach; (vi) by the Company if the Board of Directors of
the Company shall have recommended to the shareholders of the Company a
transaction as an alternative to the Merger (an "Alternative Transaction")
pursuant to the provisions of the Merger Agreement described above under
"Certain Covenants; Conduct of Business Prior to the Merger"; or (vii) by Parent
at any time following the public announcement of such recommendation and
approval of such an alternative transaction.
TERMINATION FEE. In the event that either the Company or Parent terminates
the Merger Agreement because the Board of Directors of the Company has
recommended an Alternative Transaction to the shareholders of the Company and
the shareholders have approved such Alternative Transaction, then the Company
will pay to Parent the sum of $500,000 for its costs and expenses and loss of
opportunity cost.
55
<PAGE>
THE SPECIAL MEETING AND THE CONSENT
DATE, TIME AND PLACE OF THE SPECIAL MEETING
The Special Meeting will be held on ,1997 at the offices of
, Fort Worth, Texas , commencing at :00
.m. local time.
TIME OF EXECUTION OF CONSENT
The Consent will be executed as soon as practicable after the Continuance is
completed.
PURPOSES OF THE SPECIAL MEETING
The purpose of the Special Meeting is to consider and vote upon (i) a
proposal to approve the Continuance; and (ii) such other matters as may properly
be brought before the Special Meeting.
PURPOSES OF THE CONSENT
The purpose of the Consent is to approve the Merger.
RECORD DATE AND OUTSTANDING SHARES
FOR THE SPECIAL MEETING. Each person who was the holder of record of shares
of Company Common Stock at the close of business on the Meeting Record Date is
entitled to notice of, and to attend and vote at, the Special Meeting and any
adjournment or postponement thereof, provided that to the extent a person has
transferred any shares of Company Common Stock after the Record Date and the
transferee of such shares establishes that such transferee owns such shares and
demands not later than 10 days before the Special Meeting to be included in the
list of shareholders eligible to vote at the Special Meeting, such transferee
will be entitled to vote such shares at the Special Meeting.
On the Meeting Record Date, there were approximately [1,432] holders of
record of the 13,777,014 shares of Company Common Stock then issued and
outstanding. Each share of Company Common Stock entitles the holder thereof to
one vote on each matter submitted for shareholder approval. See "Beneficial
Ownership of Securities" for information regarding persons known to the
management of the Company to be the beneficial owners of more than five percent
of the outstanding Company Common Stock. A complete list of registered
shareholders entitled to notice of, and to vote at, the Meeting will be
available for examination at the offices of , Fort
Worth, Texas , during normal business hours by any shareholder, for
any purpose germane to the Special Meeting for a period of 10 days prior
thereto.
FOR THE CONSENT. The record date with respect to shareholders entitled to
be included in the Consent to the Merger (the "Merger Record Date") will be
deemed to be the date the Consent is presented to the Company. This date will be
as soon as practicable after the Continuance becomes effective.
VOTING AND REVOCATION OF PROXIES
FOR USE AT THE SPECIAL MEETING. All properly executed proxies that are not
revoked will be voted at the Special Meeting in accordance with the instructions
contained therein. If a holder of Company Common Stock executes and returns a
proxy for the Special Meeting and does not specify otherwise, the shares
represented by such proxy will be voted "for" approval the Continuance. A
shareholder of the Company who has executed and returned a proxy for the Special
Meeting may revoke it at any time before it is voted at the Special Meeting by
(i) executing and returning a proxy bearing a later date, (ii) filing written
notice of such revocation with the Secretary of the Company stating that the
proxy is revoked, or (iii) attending the Special Meeting and voting in person.
56
<PAGE>
FOR USE IN CONNECTION WITH THE CONSENT. A proxy from a shareholder for the
Consent in lieu of meeting received by management will be exercised in the
manner specified in the proxy by such shareholder, unless authority to exercise
the proxy is withheld or the proxy is left blank. If the proxy is left blank,
the proxies named in the proxy for the Consent in lieu of meeting will exercise
the authority with respect to the shares represented by such proxy by executing
a Consent "for" the Merger. Because the Consent is effective only if executed on
behalf of a majority of the total number of shares of Company Common Stock
outstanding, the failure to convey a proxy to express Consent or the withholding
of authority to express Consent has the same effect as a vote "against" the
Merger.
VOTE REQUIRED
TO APPROVE THE CONTINUANCE AT THE SPECIAL MEETING. The Company's current
Bylaws provide that the presence at the Meeting, in person or by proxy, of the
holders of five percent of the outstanding shares of Company Common Stock
entitled to vote thereat will constitute a quorum for the transaction of
business. On the Meeting Record Date, there were 13,777,014 shares of Company
Common Stock outstanding and entitled to vote at the Special Meeting. Approval
of the Continuance requires the affirmative vote of at least 66 2/3 percent of
the votes cast on the proposal.
TO APPROVE THE MERGER BY EXECUTION OF THE CONSENT. After the Continuance
becomes effective, pursuant to the DGCL, the Consent will be executed on behalf
of those shareholders who (i) have delivered proxies marked in favor of or not
against the Merger and (ii) are shareholders of the Company on the Merger Record
Date. Since a shareholder must hold shares of Continued Common Stock to be voted
in his name under the Consent on the date the Consent is executed, no proxy with
respect to the Consent will be effective if the holder executing the proxy is no
longer a holder of record at the time the Consent is executed. Accordingly,
holders of Company Common Stock who wish to have their shares represented in the
execution of the Consent to the Merger should refrain from selling or
transferring any shares of Company Common Stock or Continued Common Stock until
after the Merger becomes effective. Approval and adoption of the Merger and the
Merger Agreement requires the affirmative vote of the holders of at least a
majority of the Continued Common Stock outstanding on the Merger Record Date.
SOLICITATION OF PROXIES
In addition to solicitation by mail, the directors, officers, employees and
agents of the Company may solicit proxies from the shareholders of the Company
by personal interview, telephone, telegram or otherwise. The Company will bear
the costs of the solicitation of proxies from its shareholders. Arrangements
will also be made with brokerage firms and other custodians, nominees and
fiduciaries who hold of record voting securities of the Company for the
forwarding of solicitation materials to the beneficial owners thereof. The
Company will reimburse such brokers, custodians, nominees and fiduciaries for
the reasonable out-of-pocket expenses incurred by them in connection therewith.
57
<PAGE>
PRICE RANGE OF COMPANY COMMON STOCK AND DIVIDEND POLICY
The Company Common Stock is traded in the United States on the American
Stock Exchange under the symbol "MSR". The Mercury Common Stock has not been
registered with the Securities and Exchange Commission. As a result, no public
market exists for the Mercury Common Stock. The following table sets forth, for
the calendar periods indicated, the range of high and low prices for the Company
Common Stock as reported by the American Stock Exchange.
<TABLE>
<CAPTION>
1996 1995
-------------------- --------------------
HIGH LOW HIGH LOW
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
First Quarter............................................... $1 1/4 $ 13/16 $2 $1 3/8
Second Quarter.............................................. 1 1/16 3/4 1 5/8 1 3/16
Third Quarter............................................... 1 3/4 1 3/8 1 1/8
Fourth Quarter.............................................. 15/16 11/16 1 7/16 11/16
</TABLE>
As of , 1997, the number of registered holders of the Company
Common Stock was . As of , 1997, the number of registered
holders of Mercury Common Stock was .
Neither the Company nor Mercury has ever paid any cash dividends and the
Company and Mercury expect that the Surviving Corporation will retain earnings
in order to finance its operations and will not pay any dividends for the
foreseeable future. The Board of Directors of the Surviving Corporation may
review dividend policy from time to time in light of, among other things,
earnings and financial condition and limitations imposed by debt instruments.
There are no limitations under Canadian law or the Company's charter
documents on the right of non-Canadians to hold or vote securities of the
Company. There are no restrictions on the export or import of capital which
affect the remittance of dividends, interest or other payments to nonresident
holders of the Company's securities.
58
<PAGE>
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS AND
BALANCE SHEET OF THE SURVIVING CORPORATION
The following pro forma consolidated statements of operations for the year
ended December 31, 1996 and three months ended March 31, 1997 combine the
historical information of the Company adjusted to give effect to the Merger and
the related pro forma adjustments which are based on estimates and assumptions
explained in further detail in Note 1 to these statements. The pro forma
statements of operations for the year ended December 31, 1996 and for the three
months ended March 31, 1997 reflect the consolidated operations of the Company
and Mercury as if the Merger had been consummated as of January 1, 1996. The pro
forma balance sheet as of March 31, 1997 is presented as if the Merger had been
consummated on that date. All of the presented pro forma statements are in U.S.
dollars.
The Merger will be accounted for as a purchase under the provisions of
Accounting Principal Board Opinion Number 16 ("APB 16") Accounting for Business
Combinations. Under APB 16, Mercury will be considered the "accounting acquirer"
since the former Mercury shareholders will control the Surviving Corporation
through their holdings of approximately 47 percent of the combined outstanding
shares of Surviving Corporation Common Stock, will have control over the
executive committee of the Board of Directors of the Surviving Corporation and
will have warrants to acquire 11 million additional shares of Surviving
Corporation Common Stock. Accordingly, the Company's net assets will be revalued
based upon the value of Company Common Stock at the date the Merger was
announced and Mercury's net assets will be based upon their historical cost.
The statements of operations and balance sheet are provided for comparative
purposes only and should be read in conjunction with the historical consolidated
financial statements of the Company and historical statements of revenues and
direct operating expenses of Mercury included elsewhere in this Proxy
Statement/Joint Prospectus. The pro forma information presented is not
necessarily indicative of the combined financial results as they may be in the
future or as they might have been for the periods indicated had the Merger been
consummated as of January 1, 1996.
59
<PAGE>
MSR EXPLORATION LTD. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MSR
HISTORICAL MERCURY(A) ADJUSTMENTS PRO FORMA
----------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
REVENUES
Oil sales (Note 2.)........................................... $ 615 $ 592 $ 1,207
Gas sales..................................................... 590 69 659
Interest and other income..................................... 15 15
----------- ----------- ----- -----------
Total revenues............................................ 1,220 661 0 1,881
----------- ----------- ----- -----------
EXPENSES
Operating expenses............................................ 397 297 694
Production taxes.............................................. 73 62 135
Depletion and depreciation.................................... 367 $ 73(b) 440
General and administrative.................................... 273 273
Interest...................................................... 182 94(c) 276
----------- ----------- ----- -----------
Total expenses............................................ 1,292 359 167 1,818
----------- ----------- ----- -----------
Income (loss) before income taxes............................... (72) 302 (167) 63
Income tax benefit (expense).................................... 25 (103) 57(d) (21)
----------- ----------- ----- -----------
Net income (loss)............................................... $ (47) $ 199 $ (110) $ 42
----------- ----------- ----- -----------
----------- ----------- ----- -----------
Per share net income (loss)..................................... $ (0.00) $ 0.02 $ 0.00
----------- ----------- -----------
----------- ----------- -----------
Weighted average number of shares outstanding................... 13,777 12,000 25,777
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
60
<PAGE>
MSR EXPLORATION LTD. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MSR
HISTORICAL MERCURY(A) ADJUSTMENTS PRO FORMA
----------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
REVENUES
Oil sales (Note 2.)........................................... $ 2,364 $ 2,544 $ 4,908
Gas sales..................................................... 1,953 215 2,168
Interest and other income..................................... 59 59
----------- ----------- ----- -----------
Total revenues............................................ 4,376 2,759 7,135
----------- ----------- ----- -----------
EXPENSES
Operating expenses............................................ 1,435 1,297 2,732
Production taxes.............................................. 312 264 576
Depletion and depreciation.................................... 1,378 $ 297(b) 1,675
General and administrative.................................... 1,018 1,018
Interest...................................................... 733 374(c) 1,107
----------- ----------- ----- -----------
Total expenses............................................ 4,876 1,561 671 7,108
----------- ----------- ----- -----------
Income (loss) before income taxes............................... (500) 1,198 (671) 27
Income tax benefit (expense).................................... 170 (407) 228(d) (9)
----------- ----------- ----- -----------
Net income (loss)............................................... $ (330) $ 791 $ (443) $ 18
----------- ----------- ----- -----------
----------- ----------- ----- -----------
Per share net income (loss)..................................... $ (0.02) $ 0.07 $ 0.00
----------- ----------- -----------
----------- ----------- -----------
Weighted average number of shares outstanding................... 13,773 12,000 25,773
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
61
<PAGE>
MSR EXPLORATION LTD. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
MARCH 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMPANY
------------------------
MSR
HISTORICAL MERCURY(E) ADJUSTMENTS PRO FORMA
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash, cash equivalents and time deposits...................... $ 348 $ 348
Accounts receivable........................................... 715 $ 87 802
Inventories................................................... 169 78 247
Prepaid expenses.............................................. 58 58
----------- ----------- ----------- -----------
Total current assets...................................... 1,290 165 1,455
----------- ----------- ----------- -----------
Properties, plant and equipment--net (full cost)................ 28,738 4,217 $ (9,924)(f) 23,031
Other assets.................................................... 455 50 505
----------- ----------- ----------- -----------
$ 30,483 $ 4,432 $ (9,924) $ 24,991
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt............................. $ 823 $ 823
Accounts payable.............................................. 361 $ 450(g) 811
Accrued liabilities........................................... 551 551
----------- ----------- ----------- -----------
Total current liabilities................................. 1,735 $ 0 2,185
----------- ----------- ----------- -----------
Long-term debt.................................................. 5,653 4,000 9,653
Deferred income taxes........................................... 3,807 (3,807)(f) 0
Stockholders' equity:
Common stock, without par value
Authorized 20,000,000 shares,
Issued and outstanding 13,777,014........................... 17,861 (17,861)(g) 0
Common stock, par value $0.01
Authorized 50,000,000 shares,
Issued and outstanding 25,777,014........................... 120 138(g) 258
Additional paid in capital.................................... 272 12,808(g) 13,080
Less notes receivable arising from the issuance of common
stock....................................................... (95) (95)
Foreign currency translation adjustment....................... (130) (130)
----------- ----------- ----------- -----------
Retained earnings (deficit)................................... 1,652 40 (1,652)(g) 40
----------- ----------- ----------- -----------
Total stockholders' equity................................ 19,288 432 13,153
----------- ----------- ----------- -----------
$ 30,483 $ 4,432 $ (9,924) $ 24,991
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
62
<PAGE>
MSR EXPLORATION LTD. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
AND BALANCE SHEET
1. PRO FORMA ADJUSTMENTS
The accompanying unaudited pro forma consolidated statements of operations
reflect the following adjustments:
(a) The information reflected as "Mercury" pertains only to certain
producing working interest properties in Montana included in the Merger.
Mercury has approximately 75 producing wells. The Merger is subject to
Company shareholder approval at a special meeting.
(b) Depreciation, depletion and amortization expense (DD&A) for Mercury
has been computed using the units of production method for the Mercury
Properties, which amounts to $535,000 for 1996 and $140,000 for the three
months ended March 31, 1997. In addition, DD&A expense for the Company has
been recomputed based on the revaluation of the Company's properties (see
(f) below). The Company's DD&A expense was reduced $238,000 for 1996 and
$67,000 for the three months ended March 31, 1997.
(c) Adjustments were made to interest expense for the period at the
Company's present average interest rate of 9.35 percent, to reflect the
assumption of $4,000,000 of Mercury bank debt.
(d) Income taxes or tax benefits were computed on a pro forma basis
using the Company's effective rate of 34 percent.
The accompanying unaudited pro forma balance sheet reflects the
following adjustments:
(e) The information reflected as Mercury is the book basis balance sheet
at March 31, 1997 of Mercury. In March 1997, Parent transferred its Montana
oil and gas properties at its amortized cost basis to Mercury.
(f) The Company's net assets have been revalued based on the market
value of its common stock on the date the Merger Agreement was announced.
This revaluation of the Company's net assets is the result of Mercury being
considered the accounting acquirer under the provisions of APB 16. As a
result of the revaluation, the carrying value of the Company property, plant
and equipment have been adjusted and deferred income taxes have been
effectively eliminated. Net operating loss carryforwards have not been
eliminated, however, their use in any one year has been restricted. See
"Certain United States Federal Income Tax Consequences to the Company of the
Continuance and the Merger--Limitation on Use of Net Operating Loss
Carryforwards."
(g) To eliminate the common stock and retained earnings of the Company
and reflect the adjusted value of the Company's shares, net of Merger costs
of $450,000.
2. FORWARD SALE OF OIL REVENUES.
Mercury's oil revenues and associated operating expenses included in the pro
forma statements of operations are subject to a prior forward sales agreement
for the period of October 1996 through December 1997. As a result, such revenues
and expenses will be excluded from the statements of operations for the calendar
year of 1997. The oil revenues and operating expenses will start accruing to the
Surviving Corporation on January 1, 1998.
Revenues and expenses subject to the forward sales agreement amounted to
$2,544,000 and $1,536,000, respectively, for 1996 and the three months ended
March 31, 1997. Direct operating expenses subject to the forward sales agreement
were $592,000 and $340,000 for the same periods. These amounts
63
<PAGE>
MSR EXPLORATION LTD. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
AND BALANCE SHEET (CONTINUED)
have been reflected in the pro forma statements of operations to disclose what
operations would have been if the forward sales contract had not been in effect.
3. OIL AND GAS RESERVE INFORMATION
The estimated proved reserves, as of December 31, 1996, relating to the
Mercury Properties, which total approximately 5.5 million barrels of oil
equivalents on a 6:1 basis ("BOE") would have represented approximately 69
percent of the Company's proved reserves as of December 31, 1996, which, after
the Merger, would have been approximately 13.5 million BOE. The reserve
quantities were computed by the Company's independent petroleum engineers in
accordance with guidelines established by the SEC. Most of the reserves are
located within the United States. Approximately 1.1 million BOE are located in
Canada. See Note 4 to Statements of Revenues and Direct Operating Expenses
attributable to the Mercury Properties included elsewhere in this Proxy
Statement/Prospectus, and for the Company, see the disclosures about oil and gas
producing activities included in the annual financial statements of the Company.
Changes in the supply and demand for oil, natural gas and natural gas
liquids, hydrocarbon price volatility, inflation, timing of production, reserve
revisions and other factors make these estimates inherently imprecise and
subject to substantial revision. As a result, these measures are not the
Company's estimate of future cash flows nor do these measures serve as an
estimate of current market value.
64
<PAGE>
SELECTED FINANCIAL DATA OF THE COMPANY
The following sets forth certain historical consolidated financial data
relating to the Company. The selected financial data for each of the years in
the two-year period ended December 31, 1996 are derived from the audited
consolidated financial statements of the Company. The selected financial data
for the three-month periods ended March 31, 1997 and 1996 are derived from the
unaudited consolidated financial statements of the Company included elsewhere in
this Proxy Statement/Prospectus and include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of such data.
The consolidated financial statements of the Company as of December 31, 1996 and
1995 and for the two years in the period ended December 31, 1996, and the report
of Deloitte & Touche LLP thereon are included elsewhere in this Proxy
Statement/Prospectus. The selected financial data should be read in conjunction
with the information set forth herein under "Management's Discussion and
Analysis of the Company's Financial Condition and Results of Operations."
Operating results for the three-month period ended March 31, 1997 are not
necessarily indicative of future results or trends. All amounts are in U.S.
Dollars.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER THREE MONTHS ENDED
31, MARCH 31,
-------------------- --------------------
1996 1995 1997 1996
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Oil sales......................................................... $ 2,364 $ 2,039 $ 615 $ 556
Gas sales......................................................... 1,953 764 590 415
Interest and other income......................................... 59 324 15 18
--------- --------- --------- ---------
Total revenues.................................................. 4,376 3,127 1,220 989
--------- --------- --------- ---------
Expenses:
Operating expenses................................................ 1,435 1,349 397 311
Production taxes.................................................. 312 214 73 56
Depletion and depreciation........................................ 1,378 1,032 367 316
General and administrative........................................ 1,018 1,059 273 221
Interest.......................................................... 733 472 182 180
--------- --------- --------- ---------
Total expenses.................................................. 4,876 4,126 1,292 1,084
--------- --------- --------- ---------
Loss before income taxes.......................................... (500) (999) (72) (95)
Income tax benefit................................................ 170 359 25 19
--------- --------- --------- ---------
Net loss.......................................................... $ (330) $ (640) $ (47) $ (76)
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average shares outstanding............................... 13,773 14,263 13,777 13,712
Per share loss.................................................... $ (0.02) $ (0.04) $ 0.00 $ (0.01)
CONSOLIDATED STATEMENT OF CASH FLOWS DATA:
Net cash provided by (used in):
Operating activities.............................................. $ 709 $ (522) $ 514 $ (81)
Investing activities.............................................. (974) (4,734) (318) (225)
Financing activities.............................................. 294 5,038 (161) 105
OTHER CONSOLIDATED FINANCIAL DATA:
Capital expenditures................................................ $ 1,024 $ 4,709 $ 318 $ 225
EBITDA(1)........................................................... 1,611 505 477 401
Operating cash flow(2).............................................. 946 32 294 231
</TABLE>
65
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER THREE MONTHS ENDED
31, MARCH 31,
-------------------- --------------------
1996 1995 1997 1996
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................................... $ 312 $ 280 $ 348 $ 78
Working capital (deficit)........................................... (137) 214 (445) 342
Total assets........................................................ 30,716 30,754 30,483 30,555
Long-term debt (includes current portion)........................... 6,638 6,343 6,476 6,448
Total stockholders' equity.......................................... 19,357 19,537 19,288 19,468
</TABLE>
- ------------------------
(1) EBITDA (as used herein) is calculated by adding interest, income taxes, and
depreciation, depletion and amortization to net income (loss). Interest
includes interest expense accrued and amortization of deferred financing
costs. EBITDA should not be considered as an alternative to earnings (loss),
or operating earnings (loss), as defined by generally accepted accounting
principles, as an indicator of the Company's financial performance, as an
alternative to cash flow, as a measure of liquidity or as being comparable
to other similarly titled measures of other companies.
(2) Operating cash flow is defined as net income plus depreciation, depletion
and amortization and deferred taxes.
66
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
THE COMPANY'S FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following discussion and analysis should be read in conjunction with the
Company's consolidated financial statements and the notes associated with them
contained elsewhere in this Proxy Statement/ Prospectus.
THREE MONTHS ENDED MARCH 31, 1997 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1996
REVENUE. Total revenue for the quarter ended March 31, 1997 was $1,220,000
a 23 percent increase compared to the $989,000 reported for the first quarter of
1996. The increase is primarily attributed to higher product prices.
Oil sales for the first quarter of 1997 were $615,000, an 11 percent
increase compared to $556,000 of oil sales in the same period last year. The
average price received for oil during the first quarter of 1997 increased 14
percent to $19.82 per barrel compared to the $17.34 average price for the same
period in 1996. Oil sales volumes for the quarters ended March 31, 1997 and 1996
were 31,011 barrels and 32,100 barrels, respectively. This decrease is primarily
due to normal production decline.
Gas sales for the quarter ended March 31, 1997 were $590,000, an increase of
42 percent compared to the $415,000 reported for the first quarter of 1996. The
average sale price the Company received for gas sold during the first quarter of
1997 was $2.71 per Mcf an increase of 34 percent compared to the $2.03 received
in 1996. Gas sales volumes for the first quarter of 1997 were 217,800 Mcf,
compared to 204,500 Mcf sold in the comparable quarter in 1996. The increase in
sales is primarily due to gas sales from the Red River Gas Plant in Montana.
During the same period in 1996 the plant was not in operation.
Interest and other income for the quarters ended March 31, 1997 and 1996
were $15,000 and $18,000, respectively.
EXPENSES. Total expenses for the first quarter of 1997 were $1,292,000, an
increase of 19 percent compared to $1,084,000 for the first quarter of 1996.
Operating expenses for the 1997 quarter were $397,000, an increase of $86,000,
or 28 percent, compared to the comparable quarter in 1996. Most of the increase
can be attributed to an increase in workover expenditures, operating expenses of
the Red River Gas Plant and the start-up expenses of the Gypsy Highview Gas
Plant. The Gypsy plant was placed in service in late March 1997 after being out
of service for over five years. Production taxes for the quarters ended March
31, 1997 and 1996 were $73,000 and $56,000, respectively, a 30 percent increase,
which was primarily due to increased sales. Depletion and depreciation expenses
increased 16 percent to $367,000 for the first quarter of 1997 compared to
$316,000 for the first quarter of 1996, primarily due to a higher depletion
rate. General and administrative expenses increased 24 percent from $221,000
reported for the 1996 period to $273,000 reported in the first quarter 1997. The
1997 general and administrative expenses were up principally due to increases in
accounting, legal and engineering fees. Interest expense for the quarters ended
March 31, 1997 and 1996 was $182,000 and $180,000, respectively.
NET INCOME (LOSS). The Company's results of operations for the quarter
ended March 31, 1997 was a net loss of $47,000, as compared to a net loss of
$76,000 for the same period in 1996. This improvement was primarily attributable
to the increase in product sales prices.
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995
REVENUE. The Company's total revenue for 1996 was $4,376,325, an increase
of 40 percent compared to $3,126,700 for 1995. This increase was due primarily
to increases in product pricing and increased natural gas sales volumes.
Oil sales for 1996 were $2,364,440, an increase of 16 percent over the
$2,038,588 for 1995. Sales volume decreased 7 percent from 131,143 barrels sold
in 1995 to 123,088 barrels sold in 1996. The average
67
<PAGE>
price per barrel for crude oil in 1996 was $19.21, a 24 percent increase
compared to an average of $15.54 in 1995.
Gas sales for 1996 were $1,953,092 an increase of $1,189,394 or 156 percent
over the $763,698 reported in 1995. Natural gas sale volumes for 1996 were
890,530 Mcf an increase of 383,887 Mcf or 76 percent compared to the 506,643 Mcf
sold in 1995. The average price the Company received for its gas sales in 1996
was $2.19 per Mcf, an increase of 45 percent compared to $1.51 per Mcf for 1995.
Most of the increase in sales volumes was attributable to the three wells the
Company purchased in southeast Texas in July, 1995. Also contributing to the
1996 increase were sales from the Red River Gas Plant located in northwest
Montana. The plant was on line for approximately six months of calendar 1996.
During January and February, 1997 the Company overhauled its Gypsy-Highview Gas
Plant in Montana and began selling gas in March 1997. The plant had been idle
for over five years.
Interest and other income for 1996 was $58,793 compared to $324,414 in 1995.
In 1995 the Company reported a gain from sale of assets of $177,000.
EXPENSES. The Company's total expenses for 1996 were $4,876,011, an 18
percent increase compared to $4,126,254 in 1995. Operating expenses increased 6
percent from $1,349,151 in 1995 to $1,435,362 for 1996. Average production costs
per barrel of oil equivalent decreased from $6.26 in 1995 to $5.29 in 1996. The
decrease in cost per unit of production can be attributed to the increase in
natural gas sales volumes. Natural gas wells generally can be operated more
economically than crude oil wells. Production taxes increased 46 percent from
$213,793 in 1995 to $311,680 in 1996. Depletion and depreciation expense
increased $345,894 or 34 percent in 1996 compared to the prior year. The
increases in production taxes and depletion and depreciation expense are the
result of higher product sales. General and administrative expense decreased
$40,627 or 4 percent in 1996 compared to 1995. Interest expense in 1996 was
$732,910, an increase of 55 percent over the $472,519 for 1995.
NET LOSS. The 1996 net loss was $329,686 ($0.02 per share), compared to the
1995 loss of $640,554 ($0.04 per share).
YEAR ENDED DECEMBER 31, 1995 COMPARED WITH YEAR ENDED DECEMBER 31, 1994
REVENUE. The Company's total revenue 1995 was $3,126,700, an increase of 23
percent compared to $2,543,990 for 1994. This increase was due primarily to
increased natural gas sales.
Oil sales for 1995 were $2,038,588, up slightly over the $2,033,916 in 1994.
Sales volumes decreased 12 percent, from 149,804 barrels sold in 1994 to 131,143
barrels sold in 1995. The average price per barrel sold increased 11 percent
from $14.03 in 1994 to $15.54 in 1995 which helped to offset reduced sales
volumes.
Gas sales of $763,698 for 1995 increased 97 percent compared to $388,183 for
1994. The increase in sales is attributable to three gas wells purchased in
Southeast Texas. Since the acquisition on July 28, 1995, these three wells
contributed $507,600 of gas sales during the last five months of 1995. Gas sales
volumes in 1995 were 506,643 Mcf, a 74 percent increase compared to the 291,631
Mcf for 1994. The average price for gas sold in 1995 was $1.51 per Mcf, an
increase of 3 percent compared to $1.47 per Mcf for 1994.
Interest and other income was $324,414 in 1995, a $200,523 increase compared
to 1994. Most of the 1995 increase was attributable to the $177,000 of gain
recognized on the sale of the GeoResources, Inc. common stock.
EXPENSES. The Company's total expenses for 1995 were $4,126,254, a 21
percent increase compared to $3,418,939 in 1994. Operating expenses increased 7
percent to $1,349,151 in 1995. However, the average production cost per unit
decreased from $6.33 in 1994 to $6.26 in 1995. Production taxes decreased 12
percent in 1995 to $213,793 compared to $241,780 in 1994, principally due to
reduced crude oil sales volumes and reduced tax rates. Depletion and
depreciation are up 13 percent in 1995 compared to 1994 primarily due to the
increased gas sales volumes from the new gas wells in Southeast Texas. General
administrative expenses increased 55 percent in 1995 to $1,058,768 compared to
$683,552 in 1995. Most of
68
<PAGE>
the increase was in administrative salaries and office expenses related to
relocating the corporate headquarters to Fort Worth, Texas. Interest expense has
increased from $324,981 in 1994 to $472,519 in 1995 due to an increase in
long-term borrowing.
NET LOSS. The 1995 net loss was $640,554 ($0.04), compared to the 1994 loss
of $460,455 ($0.04 per share), which included extraordinary income from the
extinguishment of debt of $278,494 ($0.03 per share).
LIQUIDITY AND FINANCIAL RESOURCES
The Company's liquidity position at March 31, 1997 shows a current ratio of
0.74 to 1 with a negative working capital of approximately $343,000. This
compares to a current ratio of 1.5 to 1 and working capital of approximately
$343,000 at December 31, 1996. The change was primarily a result of the Company
beginning to pay down its long-term debt. The Company believes it has sufficient
liquidity to meet operating and capital needs for the remainder of 1997.
Cash flow from operating activities for 1996 was $708,880, compared to
$522,415 of negative cash flow used for operating activities for 1995. This
significant increase of $1,231,000 was primarily the result of increases in
product sales. Cash used for investing was $1,074,068 for 1996 as compared to
$4,773,724 for 1995. The 1996 expenditures were for purchasing reserves in place
and for drilling, completing oil and gas wells, and additions to the Red River
Gas Plant, with most of the funding coming from working capital. The 1995
expenditures consisted of reserve acquisitions and reworking, drilling and
completing oil and gas wells.
Cash provided by operating activities for the first quarter of 1997 was
$514,000, compared to $81,000 used for operating activity in the first quarter
1996, an increase of $595,000.
Cash provided from financing activities for 1996 was $394,744 compared to
$5,037,944 of funds from financing activities in 1995. During 1996 and 1995 the
Company borrowed $400,000 and $6.0 million respectively, under its revolving
credit agreement. Net cash used for financing activities was $161,000 for the
first quarter 1997, compared to $105,000 from financing activities for the same
quarter in 1996.
Investing activities for the first quarter 1997 used cash of $318,000
compared to $225,000 for the first quarter 1996. Most of the 1997 capital
expenditures were for reconditioning and overhauling the Gypsy Highview Gas
Plant.
In January 1995, the Company entered into a $15.0 million revolving credit
agreement. The proceeds from the facility were used primarily to fund the
Company's oil and gas reserve acquisition program and for development drilling
in the Company's present producing areas. The loan agreement is for seven years.
Only interest on principal amounts outstanding was required in the first two
years, with the balance of the loan at December 31, 1996 to be amortized in
quarterly installments over the remaining five years. The interest rate on the
loan is prime rate plus 1.0 percent. On August 15, 1996 the loan limit was set
at $6,500,000 and on January 1, 1997 the commitment shall be reduced by monthly
payments at a rate of $60,000 for 1997, $65,000 for 1998, $75,000 for 1999,
$70,000 for 2000 and $60,000 for 2001. The Company began making such payments on
the principal of the note in February 1997.
GEORESOURCES, INC.
In November, 1995 the Company completed the sale of its holdings in 687,600
shares of GeoResources Common Stock and 44,000 shares of Big Sky Airlines Common
Stock to Joseph V. Montalban, a former director of the Company, in exchange for
700,000 shares of the Company's Common Stock. The sale or exchange was approved
by Shareholders at the Company's Annual General Meeting held on September 22,
1995. The Company recognized a $177,000 gain from the sale of the stock in 1995.
INFLATION
The Company's sales and operating expenses have not been significantly
affected by inflation.
69
<PAGE>
SELECTED FINANCIAL DATA OF MERCURY
The following sets forth certain historical financial data relating to the
Mercury Properties. The selected financial data for each of the years in the
two-year period ended December 31, 1996 are derived from the audited statements
of revenues and direct operating expenses attributable to the Mercury
Properties. The selected financial data for the three-month periods ended March
31, 1997 and 1996 are derived from the unaudited statements of revenues and
direct operating expenses attributable to the Mercury Properties included
elsewhere in this Proxy Statement/Prospectus. The statements of revenues and
direct operating expenses attributable to the Mercury Properties for the two
years in the period ended December 31, 1996, and the report of Deloitte & Touche
LLP thereon are included elsewhere in this Proxy Statement/Prospectus. The
selected financial data should be read in conjunction with the information set
forth herein under "Management's Discussion and Analysis of Mercury's Financial
Condition and Results of Operations." Operating results for the three-month
period ended March 31, 1997 are not necessarily indicative of future results or
trends. All amounts are in U.S. Dollars.
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
-------------------- --------------------
1996 1995 1997 1996
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(1)
Revenues:
Oil sales................................................................ $ 2,544 $ 2,020 $ 592 $ 541
Gas sales................................................................ 215 185 69 50
--------- --------- --------- ---------
Total revenues......................................................... 2,759 2,205 661 591
--------- --------- --------- ---------
Expenses:
Operating expenses....................................................... 1,297 1,178 297 343
Production taxes......................................................... 264 157 62 58
--------- --------- --------- ---------
Total expenses......................................................... 1,561 1,335 359 401
--------- --------- --------- ---------
Excess of revenues over direct operating expenses.......................... $ 1,198 $ 870 $ 302 $ 190
--------- --------- --------- ---------
--------- --------- --------- ---------
CONSOLIDATED BALANCE SHEET DATA(1)
Cash and cash equivalents.................................................. $ 0
Working capital............................................................ 165
Total assets............................................................... 4,432
Long-term debt (includes current portion).................................. 4,000
Total stockholders' equity................................................. 432
</TABLE>
- ------------------------
(1) Historical financial statements reflecting the financial position and
results of operations required by generally accepted accounting principles
are not presented, as such information is neither readily available on an
individual property basis nor meaningful for the Mercury Properties.
Accordingly, the data shown above are derived from statements of revenues
and direct operating expenses. Amounts represent Mercury's net ownership
interest in the Mercury Properties and are presented on the full cost
accrual basis of accounting. Depreciation, depletion and amortization,
allocated general and administrative expenses, interest expense and income
taxes have been excluded because Mercury is a newly formed business and the
expenses are not necessarily indicative of the expenses to be incurred by
Mercury.
70
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
MERCURY'S FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Mercury is an independent energy company engaged in the exploration,
development, production and sale of crude oil and natural gas properties with
current operations focused in the Cut Bank Field complex in northwest Montana.
Mercury's strategy is to increase oil and natural gas reserves, production and
cash flow through (i) the exploitation of its existing acreage positions in
Montana, (ii) the acquisition of additional properties in known producing areas
that provide significant development and exploratory drilling potential, (iii)
the exploration for oil and natural gas reserves and (iv) the maintenance of a
low operating and overhead cost structure.
The following table sets forth certain operating data regarding the Mercury
Properties for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31
--------------------
1996 1995
--------- ---------
<S> <C> <C>
PRODUCTION:
Oil (Bbls)............................................................ 131,886 127,393
Natural gas (Mcf)..................................................... 86,672 87,758
Total (BOE)........................................................... 146,332 142,019
AVERAGE SALES PRICE PER UNIT(1):
Oil (per Bbl)......................................................... $19.29 $15.86
Natural gas (per Mcf)................................................. $2.63 $2.11
COSTS PER UNIT:
Production costs...................................................... $8.33 $8.29
Production and ad valorem taxes....................................... $1.83 $1.10
</TABLE>
- ------------------------
(1) Before deduction of production taxes.
Mercury uses the full cost method of accounting for its oil and natural gas
activities. Costs to acquire mineral interests in oil and natural gas
properties, to drill and equip exploratory wells and to drill and equip
development wells are capitalized. Costs of significant nonproducing properties,
wells in the process of being drilled and development projects are excluded from
depletion until such time as the related project is developed and proved
reserves are established or impairment is determined.
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
Mercury's statements of revenues and direct operating expenses attributable to
the Mercury Properties which are contained elsewhere in this Proxy
Statement/Prospectus.
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996
REVENUE. Total revenues for the quarter ended March 31, 1997 were $661,000,
a 22 percent increase compared to $541,000 recorded in the same period in 1996.
Oil sales were $592,000 for the 1996 quarter, an increase of nine percent
compared to $541,000 for the first quarter of 1995. The average sale price
Mercury received per barrel of oil for the three months ended March 31, 1997 was
$19.79, a 15 percent increase over $17.22 received during the 1995 period.
Mercury sold 29,900 barrels in the 1996 period compared to 31,400 barrels in
1995, a five percent decrease. Gas sales for the first quarter of 1997 were
$69,000, compared to $50,000 in 1996. This increase was due to more favorable
natural gas prices.
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<PAGE>
DIRECT OPERATING EXPENSES. Direct operating expenses for the three months
ended March 31, 1997 were $359,000, a decrease of 10 percent compared to
$401,000 for the 1996 period. Operating expenses decreased 10 percent to
$297,000 in 1997 from $343,000 in 1996. Production taxes increased seven percent
to $62,000 for the first quarter of 1997 from $58,000 for the same period in
1996.
The excess of revenues over direct operating expenses for the three months
ended March 31, 1997 was $302,000, an increase of 59 percent, compared to
$190,000 for the same period in 1996. The increase was the result of lower
operating expenses and increases in product prices.
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995
REVENUE. Total revenues for 1996 were $2,759,000, an increase of 25 percent
compared to $2,205,000 for 1995. This increase was primarily due to increases in
product prices. Oil sales totaled $2,544,000 for 1996, an increase of 26 percent
compared to $2,020,000 for 1995. The average price per barrel for crude oil
Mercury sold in 1996 was $19.29, a 22 percent increase over the 1995 average
price of $15.86. Mercury sold 129,900 and 127,400 barrels of crude oil in 1996
and 1995, respectively. Gas sales for 1996 were $215,000 an increase of 16
percent compared to $185,000 in 1995. This increase is primarily due to an
increase in product pricing.
DIRECT OPERATING EXPENSES. Direct operating expenses for 1996 were
$1,561,000 an increase of 17 percent over $1,335,000 for 1995. Operating
expenses were $1,297,000 in 1996 compared to $1,178,000 in 1995. Included in
1996 operating expenses were workover costs of $93,000. Generally, well workover
costs are incurred to improve production. No workover costs were incurred in
1995. Production taxes for 1996 were $264,000 compared to $157,000 for 1995.
The excess of revenues over direct operating expenses for 1996 was
$1,198,000, an increase of 38 percent compared to $870,000 for 1995. The
increase was primarily due to favorable increases in product prices.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
Mercury's sole source of liquidity is cash flow from operations. Mercury's
cash flow requirements other than for operations are generally for the
development of its oil and gas properties. Mercury's sole financial resource has
been its oil and gas reserves, both proved and probable, included in the Mercury
Properties.
Historically Parent has financed its operation of properties through cash
flow from operations and bank debt. Mercury expects in the future to do the
same, although it presently has no credit facility available. Under the Merger
Agreement, the Surviving Corporation must either assume Mercury's guarantee of
$4.0 million of Parent's NationsBank Debt or pay that amount of the debt, as a
condition to the Merger. That debt is secured by a lien on the Mercury
Properties which the lender has agreed to release upon payment of $4.0 million.
Whether the Surviving Corporation assumes the guarantee or pays $4.0 million of
the NationsBank Debt, the Merger Agreement requires that Parent be released from
that amount of the debt, and there can be no assurance that the lender would
release Parent upon the assumption of the guarantee by the Surviving
Corporation. Therefore, it is currently expected that the Surviving Corporation
will be required to repay $4.0 million of the NationsBank Debt. In order to
repay the $4.0 million, the Surviving Corporation will need to borrow the money,
and the borrowing would likely be secured by a lien on all of the Surviving
Corporation's properties, including the Mercury Properties.
The Company and Mercury have negotiated with a lender to establish a credit
facility with such lender to finance the repayment of the $4.0 million of the
NationsBank Debt and the operations of the Surviving Corporation. The Company
and Mercury believe that the facility will provide for up to $15.0 million of
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<PAGE>
revolving credit. Principal and interest payments would be made quarterly.
Interest on amounts outstanding would accrue at annual rates of LIBOR plus 1 to
2.5 percent, depending on the amount drawn on the facility. The term of the
facility would be for five years. There can be no assurance that the facility
will be made available from such lender on the terms described above, if at all.
CAPITAL EXPENDITURES
Mercury requires capital primarily for the exploration, exploitation and
acquisition of oil and natural gas properties, the repayment of indebtedness and
general working capital purposes.
The following table sets forth costs incurred by Mercury in its exploration,
exploitation and acquisition activities during the periods indicated. For all
periods prior to March 7, 1997, the data have been derived from the operating
results of Parent with respect to the Mercury Properties.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
-----------------------
1995 1996
------------ ---------
<S> <C> <C>
Acquisition
Unproved Properties................................................ $ 300,000 $ 0
Proved Properties.................................................. 4,293,000 0
Development.......................................................... 0 84,000
------------ ---------
Total................................................................ $ 4,593,000 $ 84,000
------------ ---------
------------ ---------
</TABLE>
INFLATION AND CHANGES IN PRICES
Mercury's revenue and the value of its oil and gas properties have been, and
will continue to be, affected by changes in oil and gas prices. Mercury's
ability to obtain capital through borrowings and other means is also
substantially dependent on oil and gas prices. Oil and gas prices are subject to
significant seasonal and other fluctuations that are beyond Mercury's ability to
control or predict. In an attempt to manage this price risk, Mercury, and prior
to the formation of Mercury, Parent, has periodically engaged and Mercury will
continue to engage in hedging transactions.
HEDGING TRANSACTIONS
In the past, Parent has entered into hedging contracts of various types in
an attempt to manage price risk with regard to a portion of the crude and
natural gas production from the properties of Mercury. While use of these
hedging arrangements limit the downside risk of price declines, such
arrangements may also limit the benefits which may be derived from price
increases.
Parent historically has used various financial instruments such as collars,
swaps, and futures contracts in an attempt to manage its price risk. Monthly
settlements on these financial instruments are typically based on differences
between the fixed prices specified in the instruments and the settlement price
of certain future contracts quoted on the NYMEX or certain other indices. The
instruments which have been historically used have not had a contractual
obligation which requires or allows the future physical delivery of the hedged
products.
Parent and Supply Development Group, Inc. ("SDG") entered into a Production
Payment Agreement in October 1996. Pursuant to the agreement, SDG was entitled
to an aggregate of 320,000 barrels of oil (the "Production Payment Amount")
produced from certain properties of Parent, including the Mercury Properties.
Parent can satisfy this obligation by delivering to SDG proceeds from the sale
of oil produced rather than delivering the oil "in kind," unless SDG elects to
take oil "in kind." Pursuant to the Merger Agreement, Parent is entitled to all
of the oil revenue and income attributable to the Mercury Properties until the
Production Payment Amount has been delivered to SDG; provided that Parent must
reimburse
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the Surviving Corporation for all costs and expenses of oil production; and
provided further that if the Production Payment Amount is not fully delivered on
or before December 31, 1997, then Parent must pay the Surviving Corporation all
revenue and income attributable to the Mercury Properties until the Production
Payment Amount has been fully paid. Parent and Mercury estimate that based on
current prices for crude oil, the amount remaining due to SDG under the
agreement as of March 31, 1997 was approximately $1,101,000. Parent and Mercury
anticipate that such obligation to SDG will be satisfied on or before December
31, 1997.
FORWARD LOOKING STATEMENTS
These financial statements may contain forward-looking statements. The words
"anticipate," "believe," "expect," "plan," "intend," "estimate," "project,"
"will," "could," "may" and similar expressions are intended to identify
forward-looking statements. These statements include information regarding oil
and natural gas reserves, future drilling and operations, future production of
oil and natural gas and future net cash flows. Such statements reflect Mercury's
current views with respect to future events and financial performance, and
involve risks and uncertainties, including without limitation the risks
described elsewhere in Mercury's Proxy Statement/Prospectus. Should one or more
of these risks or uncertainties occur, or should underlying assumptions prove
incorrect, actual results may vary materially and adversely from those
anticipated, believed, estimated or otherwise indicated. Readers of these
financial statements should carefully consider the risks and uncertainties
described elsewhere in this Proxy Statement/Prospectus, in addition to other
information contained in these financial statements.
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BUSINESS AND PROPERTIES OF THE COMPANY
BUSINESS DEVELOPMENT
The Company is an Alberta, Canada, registered public company created in 1981
under Alberta law by the merger of two previous Canadian public corporations,
Mountain States Resources Ltd. and Monte Grande Exploration Limited. The
Company's corporate offices are located at 500 Main Street, Suite 210, in Fort
Worth, Texas, 76102. The telephone number is (817) 877-3151. Unless the context
requires otherwise, all references herein to the "Company" are to MSR
Exploration Ltd. and its subsidiaries.
The Company's principal line of business is the exploration, development,
production and sale of crude oil and natural gas. The Company's oil and gas
operations are conducted primarily in Montana and Texas. All of the Company's
United States oil and gas property interests are owned and operated directly or
through its wholly-owned United States subsidiaries: Mountain States Resources,
Inc.; Monte Grande Exploration, Inc.; Gypsy Highview Gathering System, Inc.; and
MSR Exploration, Inc. The Company has operations in Canada and participates in
those properties principally through other oil and gas operators. The Company is
also engaged in the gathering, processing and transmission of natural gas in
Northwest Montana through its wholly-owned Gypsy Highview Gathering System, Inc.
The Company gathers, processes and transports gas produced from northern Montana
wells owned by the Company and by other producers.
In September 1994, the Company completed a private placement of its common
stock. In exchange for the issuance of 4,444,444 shares of its stock, the
Company received $4.0 million. The proceeds from this placement were used to
retire the debt of the Company's then secured primary lender and certain other
unsecured creditors. In conjunction with this private placement, the Company
held a Special Meeting of the Shareholders on October 25, 1994, to elect a new
Board of Directors which effectively changed control of the Company. This Board
of Directors elected Otto J. Buis as Chairman of the Board, Chief Executive
Officer and President of the Company.
The Company's primary focus has been the development and enhancement of oil
and gas properties in its present areas of operations and acquisitions of
additional properties. The Company believes its acquisition efforts should be
focused on properties where operational efficiencies can be achieved. To the
extent purchases can be made primarily within its operating areas, efficiencies
in operations, drilling, gas marketing and administration should be realized.
On March 26, 1997, the Company executed the Merger Agreement with Parent and
Mercury.
In July 1995, the Company acquired interests in three gas and condensate
producing properties located in southeast Texas for the approximate purchase
price of $3,547,000. The effective date of the purchase was April 1, 1995. The
specific interests acquired are as follows: 42 percent working interest in the
Schmidt Well #1, Brazoria County; 41 percent working interest in the Josey Ranch
Well #3, Harris County; and 53 percent working interest in the Cinco Ltd. Well
#1, Fort Bend County. An independent engineering consulting company estimated
that the Company's proved producing reserves were increased by 4.6 billion cubic
feet of gas and 78,000 barrels of condensate by this acquisition. On May 1,
1996, the Company purchased an additional 21 percent working interest in the
Cinco Ltd. #1 well.
During the first quarter of 1997, the Gypsy Highview Gas Plant was
reconditioned and placed into service. After sitting idle for over five years,
the plant began selling natural gas in early March 1997. During 1993, the
Company developed a gas project known as the Red River Prospect. Additional
acreage and wells in an area north of the town of Cut Bank, Montana were
acquired. During the fall of 1993, a gas plant, gathering lines and a
transmission line connected to a high pressure system were completed. In
December 1993, gas sales began under a long-term contract with Montana Power
Company. The plant was shut down during the second quarter of 1995 due to a lack
of product. Additional drilling in the area in late 1995 and 1996 provided
sufficient product to re-open the plant. After the installation of gathering
lines to the wells, the Red River plant sold natural gas for six months of
calendar 1996.
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PRIOR BANKRUPTCY
From September 1990 to May 1991, a separate group of officers and directors
were in control of the Company and were responsible for the Company's
operations. While under control of this management group, the Company incurred
various significant legal and other obligations that, coupled with a steep
reduction in product prices, diminished the Company's operating cash flow. In
addition, during this period, Manufacturers Hanover Trust Company, the Company's
then principal secured creditor, placed the Company's credit facility in default
for infractions of nonmonetary covenants.
In view of these circumstances, a new Board of Directors was elected at a
long-delayed Annual General Meeting held in December 1991. On February 7, 1992,
the Company and its five subsidiary corporations filed petitions for
reorganization under Chapter 11 in the United States Bankruptcy Court. Later, on
September 12, 1992, the Company filed a Plan of Reorganization with the
Bankruptcy Court, which was then amended on December 11, 1992, and March 2,
1993, to reflect agreements between the Company and its creditors. On March 2,
1993, the Company's Restated First Amended Joint Plan of Reorganization was
confirmed by the Bankruptcy Court.
GENERAL
The business purpose of the Company is to engage in two principal
activities: (1) the acquisition, production and sale of crude oil, condensate
and natural gas and (2) the gathering, processing and transmission of natural
gas. In most instances, the Company acts as operator of the oil and gas
properties in which it has acquired an interest.
The Company pursues its business through the acquisition of oil and gas
mineral leases, gas gathering systems, and producing oil and gas properties.
Based upon each specific mineral lease situation as well as geological and
engineering interpretations, the Company either develops its inventory of leases
through the drilling of an oil and/or gas well, redrills or recompletes an
existing well or manages and operates existing wells located on such leases for
the production of oil and/or gas reserves located thereon. The Company currently
has an interest in oil and gas mineral leases, gas gathering pipeline systems
and wells producing hydrocarbons that are located principally in the states of
Montana and Texas. The Company evaluates other opportunities for the development
of oil and gas reserves and related assets as they become available and given
the right circumstances, may become involved in these activities in other areas
other than those in which it is currently involved.
The Company currently acts as an "operator" of oil and gas properties,
through its wholly-owned subsidiaries, MSR Exploration, Inc., Mountain States
Resources, Inc., Monte Grande Exploration, Inc., and Gypsy Highview Gathering
System, Inc., primarily in Montana and Texas. In this capacity, the Company is
responsible for the daily activities of producing oil and/or gas from individual
wells and leases located within those states. The Company's functions are
focused primarily towards management of the properties to maximize profitability
and supervision of its field employees. Additionally, for some wells the Company
contracts with individuals doing business within the proximity of the wells,
more commonly referred to as "pumpers", for performing the various tasks that
are required to maintain the production of oil and/or gas of the wells. The
Company is not a user or refiner of the oil and/or gas produced, except as it
may relate to the operation of wells that may produce gas. Once extracted from
the ground, the Company either connects the production to a pipeline gathering
system, in the case of gas, or stores the crude oil in storage tanks located in
proximity of the producing field, for collection by an oil purchaser. The
properties that the Company operates are located in areas which are typically
serviced by more than one crude oil purchaser and a gas pipeline gathering
system is generally in proximity of the natural gas being produced.
The Company operates and holds working interests in over two hundred and
fifty producing oil and gas wells. The Company also holds or has acquired
interests in properties which contain proved undeveloped reserves that require
additional drilling, workovers, water flooding or other forms of enhancement to
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become productive. In addition to acquiring such properties, the Company has
also engaged in exploration and development activities by drilling new wells on
such properties during the past several years.
OIL AND GAS RESERVES
The Company operates crude oil and natural gas producing properties in
northwestern Montana, namely the North Central Cut Bank Sand Unit, Cut Bank
Field, Graben Coulee Field in Glacier County, Gypsy Basin Field in Pondera
County, Bills Coulee Field, Highview Field in Teton County, and the Red
River/Midnight Coulee Gas Field. Crude oil and natural gas are also produced in
the Winters Capps Field in Runnels County, Texas, and principally natural gas
from wells in Brazoria, Harris and Fort Bend Counties, Texas. Active areas of
exploration interest for the Company are Montana, Texas, North Dakota and
Western Canada. Acreage in Western Canada is still considered in its early
stages of development.
During 1993, the Company built the Red River project, which consists of an
eight mile gathering and transmission system, a compressor and a dehydration
unit. The Company purchases sweet gas from wells in the field, and dries and
transports it to the Montana Power System in the north Cut Bank area. The
Company also owns the Gypsy Highview Gas Plant and a natural gas gathering and
transmission pipeline system located in northwestern Montana. During January and
February, 1997 this plant was overhauled and placed in service. After setting
idle for over five years, the plant began selling natural gas in early March
1997.
PRODUCTIVE WELLS AND ACREAGE AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
GROSS NET
-------------------- --------------------
<S> <C> <C> <C> <C>
United States properties OIL GAS OIL GAS
--------- --------- --------- ---------
Productive Wells.................................................. 227 14 227 12.58
Developed Acreage................................................. 16,188 Acres 15,612 Acres
Undeveloped Acreage............................................... 27,370 Acres 27,370 Acres
GROSS NET
-------------------- --------------------
Canadian properties OIL GAS OIL GAS
--------- --------- --------- ---------
Productive Wells.................................................. 7 9 .27 1.60
Developed Acreage................................................. 2,290 Acres 712 Acres
Undeveloped Acreage............................................... 52,070 Acres 2,100 Acres
</TABLE>
Essentially all of the Company's oil and gas interests are working interests
or overriding royalty interests under standard onshore oil and gas leases,
rather than mineral ownership or fee title. The defensibility of the Company's
title to such interests in most cases is supported by written title opinions.
TITLE OF PROPERTIES
Title to the properties acquired by the Company is subject to royalty,
overriding royalty, carried and other similar interests, contractual
arrangements customary in the oil and gas industry, liens incident to operating
agreements, liens for current taxes not yet due and to other comparatively minor
encumbrances. Substantially all of the Company's oil and gas properties are
pledged to a financial institution under certain credit agreements.
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PRODUCTION RESULTS
The average sales price and average production (lifting) cost per equivalent
unit of oil for the three years ended December 31, 1996 were as follows:
<TABLE>
<CAPTION>
PRODUCTION AVERAGE PRICE AVERAGE
---------------------- ------------------------ PRODUCTION COST
YEAR ENDED DECEMBER 31 OIL (BBL) GAS (MCF) OIL (BBL) GAS (MCF) PER UNIT
- --------------------------------- --------- ----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
1996............................. 123,088 890,530 $ 19.21 $ 2.19 $ 5.29
1995............................. 131,143 506,643 $ 15.54 $ 1.51 $ 6.26
1994............................. 149,804 291,631 $ 14.03 $ 1.47 $ 6.33
</TABLE>
DRILLING RESULTS
Below is a summary of drilling activity for the three years ended December
31, 1996.
<TABLE>
<CAPTION>
WELLS DRILLED (GROSS): EXPLORATORY DEVELOPMENT
- ------------------------------------------------------ ------------------------ ------------------------
YEAR PRODUCTIVE DRY PRODUCTIVE DRY
- ------------------------------------------------------ ------------- --------- ------------- ---------
<S> <C> <C> <C> <C>
1996**................................................ 1 -- -- --
1996*................................................. -- -- -- 1
1995**................................................ 2 -- 4 --
1994**................................................ 3 -- -- --
</TABLE>
- ------------------------
* Canadian
** USA
RESERVES
The determination of reserves is a complex and interpretive process which is
subject to continued revisions as additional information becomes available.
Reserve estimates prepared by different engineers from the same data can vary
widely. Therefore, the reserve data for the Company appearing elsewhere in this
Proxy Statement/Prospectus should not be construed as being exact. Any reserve
estimate, especially when based upon volumetric calculations, depends in part on
the quality of available data, engineering and geologic interpretation and
judgment, and thus represents only an informed professional assessment.
Subsequent reservoir performance may justify upward or downward revision of the
estimate. The Company's proved reserves and proved developed reserves of oil and
gas and the standardized measure of discounted future net cash flows relating to
proved oil and gas reserves for the years ended December 31, 1996, and 1995,
were estimated by Citadel Engineering Ltd. ("Citadel"), independent petroleum
consultants located in Calgary Alberta, Canada. Such estimates were used in the
preparation of the Company's financial statements. The Company has not included
estimates of total proven oil and gas reserves comparable to those disclosed in
the Supplemental Financial Information in any reports filed with Federal
authorities or agencies other than the Securities and Exchange Commission. A
summary of the reserve report and the letter of Citadel with respect thereto is
included in Appendix "I" to this report.
ACQUISITION OF ADDITIONAL PROPERTIES
The Company will continue to evaluate and select additional prospects and
leases for acquisition and development, which management considers appropriate
for the purposes of the Company. Such prospects may be located anywhere in the
United States. The principal purpose of the Company in such acquisitions will be
to seek and acquire properties which presently are producing oil and/or gas and
are generating sufficient revenues from such properties to provide the Company
with the potential to significantly increase cash flow.
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To the extent the Company continues seeking additional acquisitions of
producing oil and gas properties, it competes with many other entities which
seek to acquire similar assets. The operations and expenditures on behalf of the
Company are minor in relation to total operations conducted and in comparison to
amounts expended by all entities operating within this industry. The total
number and identity of producing oil and gas properties and proved developed
leases acquired by the Company will depend upon, among other things, a
combination of the total amount of capital available to the Company, the latest
geological and geophysical data available, and the continuation of a sufficient
supply of properties which may become available for purchase.
Because management is responsible for selecting additional acquisitions, it
continually engages in a process of reviewing and analyzing prospects submitted
by oil and gas operating companies, investment bankers, geologists, engineers
and others within the energy industry. In some circumstances, prospects may, in
addition to the usual royalty paid to the landowner, have the burden of an
overriding royalty for the benefit of the entity or person submitting prospects
to the Company.
These royalty interests do not share in any expense of drilling,
development, completion, operating and other costs incident to the production
and sale of oil and gas. The Company seeks to acquire leasehold interests which
will create the maximum revenue interest attributable to the working interest
owners in leases acquired by the Company.
The following information and factors are considered by the management in
connection with each decision to acquire a property for the Company:
1. The amount of uncommitted funds then available;
2. The current production and expected future cash flow therefrom;
3. The geologic and geographic region in which the property is located; and
4. The nature and extent of geological and engineering data available
concerning the property.
Oil and gas production prospects, and leases have been and will continue to
be acquired by the Company from various industry sources, including, without
limitation, landowners, lease brokers, operating companies, investment bankers
and other persons or companies engaged in the business of acquiring and dealing
in oil and gas properties. In that regard, leases which are purchased by the
Company may be whole or fractional interests in oil and gas properties, and if
fractional, a portion of the costs of development may be borne by the parties
possessing the remaining fractional interests. The Company may also from time to
time enter into joint ventures or farmout arrangements to acquire or develop
properties.
DRILLING AGREEMENTS AND OPERATION OF WELLS
In addition to acquiring producing oil and gas properties, the Company may
use its working capital and available line of credit for drilling and other
development on the properties in which the Company has acquired interests, to
the extent funds permit. The Company sub-contracts the drilling, redrilling or
workover of wells for which it is designated the operator. When the Company is
acting as the operator, it will typically enter into a drilling agreement with
an independent drilling contractor. The Company either compensates the drilling
contractor on i) a footage contract, ii) an hourly arrangement during the
drilling, testing and completion phase of each well, or iii) seeks a fixed price
or sum-key agreement. The drilling contractor is typically allowed to utilize
other selected independent contractors, each of which is experienced in
providing drilling related services in the area, to conduct certain activities
on behalf of the Company.
The Company manages all day-to-day operations of the Company's wells, leases
and prospects for which it is the operator. While the Company may enter into
agreements with other parties for specific services, such agreements will keep
management functions within the control of the Company. The Company utilizes its
in-house technical personnel to provide geological, geophysical, engineering and
other
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services and when necessary, retains these services on a contractual basis from
within the industry. The Company reviews and analyzes all prospects, drilling
and logging data, engineering information and production data, and monitors all
expenditures made on behalf of the Company by any third party engaged as a
subcontractor.
The Company will from time to time determine that it is in its best interest
to drill either exploratory or development wells on properties in which it has
acquired an ownership interest. Management will have the responsibility to
determine whether any well should, at any point, be abandoned. In the event that
a well is lost at any depth, either vertically or horizontally, by reason of any
accident or casualty, or if igneous rock or other impenetrable substances are
encountered, or loss of circulation or other conditions rendering further
drilling impractical by methods to be employed, the Company may elect to plug
and abandon a well and cease operations on the prospect or to plug and abandon a
well and commence drilling an additional well on the prospect.
TIMING OF ACQUISITIONS/OPERATIONS
The Company is continually evaluating the acquisition of additional proven
oil and gas properties and other oil and gas companies. Additionally, the
Company may commence drilling on existing prospects as it deems appropriate. The
Company believes that it has available suitable prospects and leases for future
development.
GAS GATHERING, PROCESSING AND TRANSMISSION
Gypsy Highview Gathering System, Inc., a wholly-owned subsidiary of the
Company, owns and operates gas gathering pipeline systems and two gas plants
located in northwest Montana. The Gypsy Highview Gas Plant and the Red River Gas
Plant presently compress natural gas from Company leases and from third party
leases. Approximately 12 wells are connected to the Red River Plant.
Approximately 538 Mcf per day is delivered through the system to Montana Power
Company. After a complete overhaul, the Gypsy Highview Plant and system started
delivering natural gas in March 1997 from three wells into the Montana Power
Company pipeline.
INSURANCE
The Company maintains insurance coverage generally as follows:
1. Employer's liability insurance in certain states covering injury or
death to any employee who may be outside the scope of the worker's
compensation statute;
2. Commercial general liability insurance for bodily injury and property
damage, including property damage by blow-out and cratering, completed
operations, and broad from contractual liability with respect to any
contract into which the operator may enter into;
3. Automobile liability insurance covering owned, non-owned and hired
automotive equipment;
4. Umbrella liability insurance; and
5. Operator's insurance covering the costs of controlling a blow-out, and
seepage and pollution liability, when deemed appropriate on certain
properties.
The Company attempts to obtain such insurance in amounts management believes
to be reasonable and standard. Such coverage will likely not fully protect the
Company from any specific casualty or loss. There is no assurance such insurance
will always be available to the Company and on terms the Company can afford.
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The Company is subject to, and to the best of its knowledge and belief is
currently in compliance with all bonding requirements (such as those relating to
plugging and abandonment) that are imposed by each of the states in which the
properties for which the Company acts as operator are located.
COMPETITION
The oil and gas industry is a highly competitive industry. Competitors
include major oil companies, other independent oil and gas concerns, and
individual producers and operators, many of which have financing resources,
staffs and facilities substantially greater than those of the Company. The
principal means of competition are the amount and terms of the consideration
offered. When possible, the Company tries to avoid open competitive bidding for
acquisition opportunities. The principal means of competition with respect to
the sale of oil and natural gas production are product availability and price.
While it is not possible for the Company to state accurately its position in the
oil and gas industry, the Company believes that it represents a minor
competitive factor.
BUSINESS RISKS AND REGULATION
The Company's operations are affected in various degrees by political
developments, federal and state laws, and regulations. In particular, oil and
gas production operations and economics are affected by price controls, tax and
other laws relating to the petroleum industry. They are all affected by the
changes in such laws, by changing administrative regulations, and by the
interpretation and application of such rules and regulations.
Legislation affecting the oil and gas industry is under constant review for
amendment or expansion. Numerous departments and agencies, both federal and
state, are authorized by statute to issue and have issued rules and regulations
binding on the oil and gas industry and its individual members, some of which
carry substantial penalties for the failure to comply. The regulatory burden on
the oil and gas industry increases the Company's cost of doing business and,
consequently, affects its profitability. Sales of crude oil, condensate and
natural gas liquids by the Company can be made at uncontrolled market prices.
Changing Oil and Natural Gas Prices and Markets-- The market for oil and
natural gas produced by the Company depends on factors beyond its control,
including the extent of domestic production and imports of oil and natural gas,
the proximity and capacity of natural gas pipelines and other transportation
facilities, demand for oil and natural gas, the marketing of competitive fuels,
and the effects of state and federal regulation of oil and natural gas
production and sales. The oil and gas industry as a whole also competes with
other industries in supplying the energy and fuel requirements of industrial,
commercial and individual consumers.
The Company's production revenues and the carrying value of its oil and
natural gas properties are affected by changes in oil and natural gas prices.
Moreover, the Company's current borrowings under certain credit facilities, its
borrowing capacity and its ability to obtain additional capital in the future
are directly affected by oil and natural gas prices.
ENVIRONMENTAL REGULATION
Various federal, state and local laws and regulations covering the discharge
of materials into the environment, or otherwise relating to the protection of
the environment, may affect the Company's operations and costs as a result of
the effect on oil and gas exploration, development and production operations. At
present, substantially all of the Company's United States production of crude
oil, condensate and natural gas is in states having conservation laws and
regulations. It is not anticipated that the Company will be required in the near
future to expend amounts that are material in relation to its total capital
expenditures program by reason of environmental laws and regulations, but
inasmuch as such laws and regulations are frequently changed, the Company is
unable to predict the ultimate cost of compliance. The Company is able to
control directly the operations of only those wells for which it acts as
operator.
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Notwithstanding the Company's lack of control over wells operated by others, the
failure of the operator to comply with applicable environmental regulations may,
in certain circumstances, be attributable to the Company.
RAW MATERIALS
The Company's raw materials are its oil and gas reserves. Many operators are
engaged in the exploration for oil and gas, and there is strong competition for
desirable leases. See Note I to the Company's Consolidated Financial Statements
Item 7, appearing elsewhere in this Proxy Statement/ Prospectus for certain
information concerning the Company's oil and gas properties, producing
activities and proved reserves.
WORKING CAPITAL PRACTICES
The Company's working capital practices are common to the industry, with
crude oil and natural gas sold to purchasers under short-term payment
arrangements.
MAJOR CUSTOMERS
During the year ended December 31, 1996, three customers: Rio Vista Energy,
Ltd., Cenex, Inc. and Montana Refining Company, accounted for approximately 34
percent, 19 percent and 15 percent, respectively, of total consolidated oil and
gas sales. For year ended December 31, 1995, three customers: Montana Refining
Company, Cenex, Inc. and Hanson Production Company, accounted for approximately
26 percent, 23 percent and 21 percent, respectively, of total consolidated oil
and gas sales.
The Company does not anticipate that the loss of any of its present
purchasers would have a materially adverse effect on the Company's consolidated
business and believes that, in the event of a loss of a present purchaser, other
purchasers of oil and gas operating in the Company's areas would purchase the
production at competitive prices.
EMPLOYEES
At December 31, 1996, the Company had 20 full-time employees, including
officers.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
For each of the Company's last five fiscal years it has produced and sold
oil and gas in the United States. At December 31, 1996, five wells were on
production in Canada. For information regarding the Company's United States and
Canadian revenues, operating profits and assets, see the Company's Consolidated
Financial Statements.
LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceeding.
82
<PAGE>
BUSINESS AND PROPERTIES OF MERCURY
GENERAL
Mercury is a majority owned subsidiary of Parent formed to acquire from
Parent, and engage in the exploration, exploitation, development and operation
of, crude oil and natural gas properties in the Cut Bank Field complex in
northwest Montana. At March 7, 1997, Mercury acquired from Parent a total
acreage position of approximately 77,638 total acres, including approximately
64,687 gross (64,687 net) undeveloped acres.
BUSINESS STRATEGY
Mercury was formed in March 1997 in anticipation of the Merger. Mercury's
properties have been operated, and Mercury and the Company expect that the
properties of the Surviving Corporation will be managed in the same manner and
utilizing the same business and operational strategies employed by the Company
in the management of its business and properties.
DEVELOPMENT AREAS
All of the Mercury Properties are located in the Cut Bank Field complex in
northwest Montana.
Mercury, as part of its acquisition of the Montana Properties from Parent,
assumed the rights and obligations in the Wells Agreement with Montana Power
Company. The Wells Agreement covers the oil and gas development of an area of
mutual interest that presently contains approximately 304,000 acres in the Cut
Bank Field in Montana, including the Mercury Properties. Mercury holds 100
percent of the oil rights and 30 percent of the revenue pertaining to liquids
produced by gas wells while Montana Power Company has all the rights to natural
gas. The area of mutual interest and the agreement were originally created in
1944 and will remain in effect until all mutual oil and gas leases in the area
have expired. Over 50 low-risk drilling locations have been identified in the
general area. Management of Mercury expect that activities conducted pursuant to
the Wells Agreement and revenues therefrom will account for a significant
portion of its future activities and revenues.
MARKETING ARRANGEMENTS
The marketability of Mercury's oil production depends in part upon the
availability, proximity and capacity of refineries, pipelines and processing
facilities. To the extent crude oil prices decline further or Mercury is unable
to market efficiently its oil production, Mercury's business, financial
condition and results of operations could be materially adversely affected.
The price received by Mercury for its oil and natural gas production depends
on numerous factors beyond Mercury's control, including seasonality, the
condition of the United States economy, particularly the manufacturing sector,
foreign imports, political conditions in other oil-producing and natural gas-
producing countries, the actions of OPEC and domestic government regulation,
legislation and policies. Decreases in the prices of oil and natural gas could
have an adverse effect on the carrying value of Mercury's proved reserves and
its revenues, profitability and cash flow.
HEDGING ACTIVITIES
In the past, Parent has entered into hedging contracts of various types in
an attempt to manage price risk with regard to a portion of its oil and natural
gas production, including production from the Mercury Properties. Mercury has
and will continue to use such arrangements. While use of these hedging
arrangements limits the downside risk of price declines, such arrangements may
also limit the benefits which may be derived from price increases.
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<PAGE>
Parent historically has used and Mercury will continue to use various
financial instruments such as collars, swaps and futures contracts in an attempt
to manage its price risk. Monthly settlements on these financial instruments are
typically based on differences between the fixed prices specified in the
instruments and the settlement price of certain future contracts quoted on the
NYMEX or certain other indices. The instruments which have been historically
used have not had a contractual obligation which requires or allows the future
physical delivery of the hedged products.
Parent and SDG entered into a Production Payment Agreement in October 1996.
Pursuant to the agreement, SDG was entitled to the Production Payment Amount
produced from certain properties of Parent, including the Mercury Properties.
Parent can satisfy this obligation by delivering to SDG proceeds from the sale
of oil produced rather than delivering the oil "in kind," unless SDG elects to
take oil "in kind." Pursuant to the Merger Agreement, Parent is entitled to all
of the oil revenue and income attributable to the Mercury Properties until the
Production Payment Amount has been delivered to SDG; provided that Parent must
reimburse the Surviving Corporation for all costs and expenses of oil
production; and provided further that if the Production Payment Amount is not
fully delivered on or before December 31, 1997, then Parent must pay the
Surviving Corporation all revenue and income attributable to the Mercury
Properties until the Production Payment Amount has been fully paid. Parent and
Mercury estimate that based on current prices for crude oil, the amount
remaining due to SDG under the agreement as of March 31, 1997 was approximately
$1,101,000. Parent and Mercury anticipate that such obligation to SDG will be
satisfied on or before December 31, 1997.
RESERVES
Parent's estimated total proved reserves of oil and natural gas as of
December 31, 1994, 1995 and 1996 with respect to the Mercury Properties were as
indicated in the following table. The Mercury Properties were acquired by Parent
in October 1995. Amounts indicated for December 31, 1994 were derived by adding
1995 production from the Mercury Properties to December 31, 1995 reserves.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------------------------------------
1994 1995 1996
---------------------- ---------------------- ----------------------
OIL NATURAL GAS OIL NATURAL GAS OIL NATURAL GAS
(MBBLS) (MMCF) (MBBLS) (MMCF) (MBBLS) (MMCF)
--------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Total proved developed................... 1,761.2 1,488.7 1,637.9 1,400.9 1,627.6 1,338.7
Total proved undeveloped................. 3,653.3 -- 3,653.3 -- 3,653.8 --
--------- ----------- --------- ----------- --------- -----------
Total proved........................... 5,414.5 1,488.7 5,291.2 1,400.9 5,281.4 1,338.7
--------- ----------- --------- ----------- --------- -----------
--------- ----------- --------- ----------- --------- -----------
</TABLE>
The following table sets forth the future net cash flows from estimated
proved reserves of the Mercury Properties:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------
1995 1996
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Future cash flows......................................................................... $ 89,555 $ 119,585
Future production and development costs................................................... (47,752) (71,893)
Future income tax expense................................................................. (9,790) (10,200)
---------- ----------
Future net cash flows..................................................................... 32,013 37,492
10 percent annual discount for estimated timing of cash flows............................. (18,568) (20,445)
---------- ----------
Standardized measure of discounted future net cash flows.................................. $ 13,445 $ 17,047
---------- ----------
---------- ----------
</TABLE>
The reserve estimates reflected above were prepared by Mercury.
84
<PAGE>
In accordance with applicable requirements of the Commission, estimates of
Mercury's proved reserves and future net revenues are made using sales prices
estimated to be in effect as of the date of such reserve estimates and are held
constant throughout the life of the properties (except to the extent a contract
specifically provides for escalation). Estimated quantities of proved reserves
and future net revenues therefrom are affected by oil and natural gas prices,
that have fluctuated widely in recent years. There are numerous uncertainties
inherent in estimating oil and natural gas reserves and their estimated values,
including many factors beyond the control of the producer. The reserve data set
forth in this Proxy Statement/Prospectus represents only estimates. Reservoir
engineering is a subjective process of estimating underground accumulations of
oil and natural gas that cannot be measured in an exact manner. The accuracy of
any reserve estimate is a function of the quality of available data and of
engineering and geological interpretation and judgment. In addition, Mercury's
use of improved oil recovery techniques requires greater development
expenditures than traditional drilling strategies. Mercury expects to drill a
number of wells utilizing waterflood technology in the future. Estimates of
different engineers, including those used by Mercury, may vary. In addition,
estimates of reserves are subject to revision based upon actual production,
results of future development and exploration activities, prevailing oil and
natural gas prices, operating costs and other factors, which revisions may be
material. Accordingly, reserve estimates are often different from the quantities
of oil and natural gas that are ultimately recovered and are highly dependent
upon the accuracy of the assumptions upon which they are based. Mercury's
estimated proved reserves have not been filed with or included in reports to any
federal agency. See "Risk Factors-- Uncertainty of Reserve Information and
Future Net Revenue Estimates."
EXPLORATION AND DEVELOPMENT ACTIVITIES
Mercury (and Parent prior to the formation of Mercury with respect to the
Mercury Properties) did not drill, or participate in the drilling of, any wells
during the years 1994, 1995 or 1996.
Mercury does not own any drilling rigs; therefore, its drilling activities,
when undertaken, would be conducted by independent contractors under standard
drilling contracts.
PRODUCTIVE WELL SUMMARY
The following table sets forth Mercury's ownership interest as of March 7,
1997 in productive oil and natural gas wells in the development areas indicated.
<TABLE>
<CAPTION>
OIL NATURAL GAS TOTAL
---------------------- ---------------------- -----------
AREA GROSS NET GROSS NET GROSS
- ---------------------------------------------------------------------- ----------- --- ----------- --- -----------
<S> <C> <C> <C> <C> <C>
Cut Bank Field, Montana............................................... 73 62 178 45 251
<CAPTION>
AREA NET
- ---------------------------------------------------------------------- ---
<S> <C>
Cut Bank Field, Montana............................................... 107
</TABLE>
85
<PAGE>
VOLUMES, PRICES AND PRODUCTION COSTS
The following table sets forth the production volumes, average prices
received and average production costs associated with oil and natural gas
produced from the Mercury Properties for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
1995 1996
---------- ----------
<S> <C> <C>
Net Production:
Oil (Bbl)........................................................... 127,393 131,886
Natural gas (Mcf)................................................... 87,758 86,672
Oil equivalent (BOE)................................................ 142,019 146,332
Average sales price:
Oil ($per Bbl)...................................................... $ 15.86 $ 19.29
Natural gas ($per Mcf).............................................. $ 2.11 $ 2.63
Average production expenses and taxes ($per BOE)...................... $ 9.39 $ 10.16
</TABLE>
DEVELOPMENT, EXPLORATION AND ACQUISITION EXPENDITURES
The following table sets forth the costs incurred in the development,
exploration and acquisition activities relating to the Mercury Properties during
the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996
------------ ---------
<S> <C> <C>
Acquisition
Unproved Properties................................................ $ 300,000 $ 0
Proved Properties.................................................. 4,293,000 0
Development.......................................................... 0 84,000
------------ ---------
Total................................................................ $ 4,593,000 $ 84,000
------------ ---------
------------ ---------
</TABLE>
ACREAGE
The following table sets forth, as of March 7, 1997, the gross and net acres
of developed and undeveloped oil and natural gas leases which Mercury holds or
has the right to acquire.
<TABLE>
<CAPTION>
DEVELOPED UNDEVELOPED TOTAL
-------------------- -------------------- --------------------
FIELD GROSS NET GROSS NET GROSS NET
- ------------------------------------------------------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Cut Bank Field, Montana................................ 12,951 12,276 64,687 64,687 77,638 76,963
</TABLE>
ACQUISITIONS
Mercury expects that it may evaluate and pursue from time to time
acquisitions that provide attractive investment opportunities for the addition
of production and reserves and that meet Mercury's selection criteria. The
successful acquisition of producing properties and undeveloped acreage requires
an assessment of recoverable reserves, future oil and natural gas prices,
operating costs, potential environmental and other liabilities and other factors
beyond Mercury's control. This assessment is necessarily inexact and its
accuracy is inherently uncertain. In connection with such an assessment, Mercury
performs a review of the subject properties it believes to be generally
consistent with industry practices. This review, however, will not reveal all
existing or potential problems, nor will it permit a buyer to become
sufficiently familiar with the properties to assess fully their deficiencies and
capabilities. Inspections may not be performed on every well, and structural and
environmental problems are not necessarily observable even when an
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<PAGE>
inspection is undertaken. Mercury generally assumes preclosing liabilities,
including environmental liabilities, and generally acquires interests in the
properties on an "as is" basis.
COMPETITION
Mercury operates in the highly competitive areas of oil and natural gas
exploration, exploitation, acquisition and production with other companies, many
of which have substantially larger financial resources, operations, staffs and
facilities. In addition, Parent and its parent corporation, MPC, are also
engaged in the oil and natural gas exploration, exploitation, acquisition and
production business, although their respective operations are generally
conducted in geographic regions other than those in which Mercury conducts its
business. In seeking to acquire desirable producing properties or new leases for
future exploration and in marketing its oil and natural gas production, Mercury
faces intense competition from both major and independent oil and natural gas
companies, including Parent and companies, like Pozo Resources, Inc., that are
affiliated with officers, directors and shareholders of the Company. In addition
to the development of its existing proved reserves, Mercury expects that its
inventory of unproved drilling locations will be the primary source of new
reserves, production and cash flow over the next few years. In addition, recent
heavy drilling activity by a number of operators in the Cut Bank Field complex
in northwest Montana may reduce or limit the availability of equipment and
supplies or reduce demand for Mercury's production, either of which would impact
Mercury more adversely than if Mercury were geographically diversified. See
"Management's Discussion and Analysis of Mercury's Financial Condition and
Results of Operations--Liquidity and Capital Resources" and "Risk
Factors--Competition."
OPERATING HAZARDS AND UNINSURED RISKS
Oil and natural gas drilling activities are subject to many risks, including
the risk that no commercially productive reservoirs will be encountered. There
can be no assurance that new wells drilled by Mercury will be productive or that
Mercury will recover all or any portion of its investment. Drilling for oil and
natural gas may involve unprofitable efforts, not only from dry holes, but from
wells that are productive but do not produce sufficient net revenues to return a
profit after drilling, operating and other costs. The cost of drilling,
completing and operating wells is often uncertain. Mercury's drilling operations
may be curtailed, delayed or canceled as a result of numerous factors, many of
which are beyond Mercury's control, including economic conditions, title
problems, weather conditions, compliance with governmental requirements and
shortages or delays in the delivery of equipment and services. Mercury's future
drilling activities may not be successful and, if unsuccessful, such failure may
have a material adverse effect on Mercury's future results of operations and
financial condition.
Mercury's operations are subject to hazards and risks inherent in drilling
for and producing and transporting oil and natural gas, such as fires, natural
disasters, explosions, encountering formations with abnormal pressures,
blowouts, cratering, pipeline ruptures and spills, any of which can result in
the loss of hydrocarbons, environmental pollution, personal injury claims and
other damage to properties of Mercury and others. As protection against
operating hazards, Mercury maintains insurance coverage against some, but not
all, potential losses. Mercury may elect to self-insure in circumstances in
which management believes that the cost of insurance, although available, is
excessive relative to the risks presented. The occurrence of an event that is
not covered, or not fully covered, by third-party insurance could have a
material adverse effect on Mercury's business, financial condition and results
of operations. See "Risk Factors--Drilling and Operating Risks."
REGULATION
REGULATION OF OIL AND NATURAL GAS PRODUCTION. Mercury's oil and natural gas
exploration, production and related operations are subject to extensive rules
and regulations promulgated by federal, state and local authorities and
agencies. Failure to comply with such rules and regulations can result in
substantial penalties. The regulatory burden on the oil and natural gas industry
increases Mercury's cost of doing
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<PAGE>
business and affects its profitability. Although Mercury believes it is in
substantial compliance with all applicable laws and regulations, because such
rules and regulations are frequently amended or reinterpreted, Mercury is unable
to predict the future cost or impact of complying with such laws.
Montana and many other states require permits for drilling operations,
drilling bonds and reports concerning operations and impose other requirements
relating to the exploration and production of oil and natural gas. Such states
also have statutes or regulations addressing conservation matters, including
provisions for the unitization or pooling of oil and natural gas properties, the
establishment of maximum rates of production from wells, and the regulation of
spacing, plugging and abandonment of such wells.
FEDERAL REGULATION OF NATURAL GAS. The Federal Energy Regulatory Commission
("FERC") regulates interstate natural gas transportation rates and service
conditions, which affect the marketing of natural gas produced by Mercury, as
well as the revenues received by Mercury for sales of such production. Since the
mid-1980's, FERC has issued a series of orders, culminating in Order Nos. 636,
636-A and 636-B ("Order 636"), that have significantly altered the marketing and
transportation of natural gas. Order 636 mandates a fundamental restructuring of
interstate pipeline sales and transportation service, including the unbundling
by interstate pipelines of the sale, transportation, storage and other
components of the city-gate sales services such pipelines previously performed.
One of FERC's purposes in issuing the order was to increase competition within
all phases of the natural gas industry. In July 1996, the United States Court of
Appeals for the District of Columbia Circuit largely upheld Order 636. A number
of parties have appealed this ruling to the Supreme Court and proceedings on
remanded issues are currently ongoing at FERC. In addition, numerous parties
have filed for review of Order 636, as well as orders in individual pipeline
restructuring proceedings. Because these orders may be modified as a result of
the appeals, it is difficult to predict the ultimate impact of the orders on
Mercury and its natural gas marketing efforts. Generally, Order 636 has
eliminated or substantially reduced the interstate pipelines' traditional role
as wholesalers of natural gas in favor of providing only storage and
transportation services, and has substantially increased competition and
volatility in natural gas markets.
The price Mercury receives from the sale of oil and natural gas liquids is
affected by the cost of transporting products to markets. Effective January 1,
1995, FERC implemented regulations establishing an indexing system for
transportation rates for oil pipelines, which, generally, would index such rates
to inflation, subject to certain conditions and limitations. Mercury is not able
to predict with certainty the effect, if any, of these regulations on its
operations. However, the regulations may increase transportation costs or reduce
well head prices for oil and natural gas liquids.
ENVIRONMENTAL MATTERS. Mercury's operations and properties are subject to
extensive and changing federal, state and local laws and regulations relating to
environmental protection, including the generation, storage, handling, emission,
transportation and discharge of materials into the environment, and relating to
safety and health. The recent trend in environmental legislation and regulation
generally is toward stricter standards, and this trend will likely continue.
These laws and regulations may require the acquisition of a permit or other
authorization before construction or drilling commences and for certain other
activities; limit or prohibit construction, drilling and other activities on
certain lands lying within wilderness and other protected areas; and impose
substantial liabilities for pollution resulting from Mercury's operations. The
permits required for various of Mercury's operations are subject to revocation,
modification and renewal by issuing authorities. Governmental authorities have
the power to enforce compliance with their regulations, and violations are
subject to fines or injunction, or both. In the opinion of management, Mercury
is in substantial compliance with current applicable environmental laws and
regulations, and Mercury has no material commitments for capital expenditures to
comply with existing environmental requirements. Nevertheless, changes in
existing environmental laws and regulations or in interpretations thereof could
have a significant impact on Mercury, as well as the oil and natural gas
industry in general.
The Comprehensive Environmental, Response, Compensation, and Liability Act
("CERCLA") and comparable state statutes impose strict, joint and several
liability on owners and operators of sights and on
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<PAGE>
persons who disposed of or arranged for the disposal of "hazardous substances"
found at such sights. It is not uncommon for the neighboring land owners and
other third parties to file claims for personal injury and property damage
allegedly caused by the hazardous substances released into the environment. The
Federal Resource Conservation and Recovery Act ("RCRA") and comparable state
statutes govern the disposal of "solid waste" and "hazardous waste" and
authorize a position of substantial fines and penalties for noncompliance.
Although CERCLA currently excludes petroleum from its definition of "hazardous
substance," state laws affecting Mercury's operations impose clean-up liability
relating to petroleum and petroleum related products. In addition, although RCRA
classifies certain oil field wastes as "non-hazardous," such exploration and
production wastes could be reclassified as hazardous wastes thereby making such
wastes subject to more stringent handling and disposal requirements.
ABANDONMENT COSTS
Mercury is responsible for payment of plugging and abandonment costs on its
oil and natural gas properties pro rata to its working interest. Based on its
experience, Mercury anticipates that the ultimate aggregate salvage value of
lease and well equipment located on its properties will exceed the costs of
abandoning such properties. There can be no assurance, however, that Mercury
will be successful in avoiding additional expenses in connection with the
abandonment of any of its properties. In addition, abandonment costs and their
timing may change due to many factors including actual production results,
inflation rates and changes in environmental laws and regulations.
TITLE TO PROPERTIES
Mercury believes it has satisfactory title to all of its producing
properties in accordance with standards generally accepted in the oil and
natural gas industry. Mercury's properties are subject to customary royalty
interests, liens incident to operating agreements, liens for current taxes and
other burdens which Mercury believes do not materially interfere with the use of
or affect the value of such properties. The repayment of up to $4.0 million of
the NationsBank Debt is guaranteed by Mercury. The entirety of the NationsBank
Debt is also secured by a lien on the Mercury Properties. Although Mercury and
the Company expect that such lien in favor of the lender of the NationsBank Debt
will be released in connection with the repayment by the Surviving Corporation
of $4.0 million of such debt at the Effective Time of the Merger, the Company
and Mercury expect that the Surviving Corporation will incur other indebtedness
in order to repay such amount of the NationsBank Debt and that such new debt
will be secured by a lien on all of the properties of the Surviving Corporation,
which will include all of the properties currently owned by Mercury and the
Company. The Mercury Properties are also subject to a Production Payment
Agreement and provisions of the Merger Agreement pursuant to which all reserves
and income from the Mercury Properties through December 31, 1997 have been
transferred to Parent. See "Business and Properties of Mercury--Forward Sale
Agreement." The Mercury Properties are also subject to an agreement with Montana
Power Company whereby Montana Power Company has the right to all natural gas
produced from the Mercury Properties. See "Risk Factors--Reliance on Contract
with Montana Power Company."
Presently, Mercury keeps in force its leaseholds for 98 percent of its net
acreage by virtue of production. The remaining acreage is held by lease rentals
and similar provisions and requires production in paying quantities prior to
expiration of various time periods to avoid lease termination.
OTHER FACILITIES
Mercury currently subleases approximately 1,500 square feet of office space
in Fort Worth, Texas from Parent where its principal offices are located. The
Surviving Corporation will continue to sublease such space from Parent at market
rates subsequent to the Merger.
EMPLOYEES
Mercury has no full-time employees.
LEGAL PROCEEDINGS
Mercury is not a party to any material pending legal proceedings.
89
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS OF THE SURVIVING CORPORATION
GENERAL
Information concerning the person who have been designated pursuant to the
Merger Agreement to serve as directors and executive officers of the Surviving
Corporation following the Merger is set forth below as of June 1, 1997.
<TABLE>
<CAPTION>
NAME AGE POSITION IN THE SURVIVING CORPORATION
- ------------------------------------------------ --- -----------------------------------------------------
<S> <C> <C>
Otto J. Buis.................................... 65 Chairman of the Board, Chief Executive Officer and
Director
Thomas F. Darden................................ 43 President, Chief Operating Officer and Director
Glenn M. Darden................................. 41 Vice President and Director
Frank Darden.................................... 70 Director
Patrick M. Montalban............................ 39 Director
Steven M. Morris................................ 44 Director
-- Director
-- Director
</TABLE>
OTTO J. BUIS is a registered petroleum geologist and for more than 35 years
has held executive positions with domestic and international companies such as
OKC Limited Partnership, OKC Corp., Shenandoah Oil Corporation and Texaco, Inc.
Mr. Buis has been President and Chief Executive Officer of Pozo Resources, Inc.
since 1992. Mr. Buis was a director of MSR from September 1989 through July 1990
and he was a court appointed Director and Chief Executive Officer of the Company
from June 1991 through March 1992. At the Special Stockholders meeting of the
Company shareholders held on October 25, 1994, Mr. Buis was elected Director and
subsequently elected Chairman of the Board, President and Chief Executive
Officer of the Company.
THOMAS F. DARDEN has served as president of Parent for the last five years.
During that time, Parent has developed and acquired interests in over 1,200
producing wells in Michigan, Indiana, Kentucky, Wyoming, Montana, New Mexico and
Texas. A graduate of Tulane University with a B.A. in Economics in 1975, Mr.
Darden has been employed by Parent or its parent corporation, MPC, for
twenty-two years.
GLENN M. DARDEN has served with Parent for 14 years, the last five years as
the executive vice president of the company. Prior to working for Parent, Mr.
Darden worked as a geologist for Mitchell Energy Corporation. Mr. Darden
graduated from Tulane University in 1979 with a B.A. in Earth Sciences. Frank
Darden is a registered professional engineer and Chairman of the Board of
Parent, a family owned private oil and gas company in Fort Worth, Texas. Mr.
Darden founded the parent corporation of Parent, MPC, and has served as its
Chairman since 1965 and as chairman of Parent since its founding in 1978. Mr.
Darden commenced his career in the oil and gas business with Humble Oil and
Refining Company in 1948. From 1954 through 1955 he was retained by Empresa
Colombiana de Petroleos to organize an engineering department and guide the
company's planning for the secondary recovery program in the La Cira Field in
the Magdelena Valley of Colombia. From 1956 through 1964 Mr. Darden served as
Manager of Operations for Newmont Oil Company, the energy subsidiary of Newmont
Mining Corporation, and as Executive Vice President and Director of Yucca Water
Company. Mr. Darden is the father of Thomas and Glenn Darden.
PATRICK M. MONTALBAN is a petroleum geologist who graduated from the
University of Montana in 1981. He joined the Company as a Staff Geologist in
1983 and became Vice President of Exploration and Production in October 1986. In
December 1990, he was named Executive Vice President of the Company and at the
December 1991 Annual General Meeting for the Company was elected Director and
has continued in these offices to the present.
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<PAGE>
STEVEN M. MORRIS is a certified public accountant and President of Morris &
Co., a private investment firm in Houston, Texas. From 1988 to 1991, he was Vice
President of Finance for ITEX Enterprises, Inc. From 1981 to 1988 Mr. Morris was
the Financial Vice President of Hanson Minerals Company, a Houston based oil and
gas exploration company. From 1978 to 1981, Mr. Morris was a Partner in the
Certified Public Accounting Firm of Haley & Morris. He served as Senior
Accountant with the Houston office of Arthur Young and Company from 1974 to
1977. Mr. Morris was elected a Director of the Company at the Special
Stockholders Meeting held on October 24, 1994.
DESIGNEE(S). TO COME.
Executive officers will be elected annually by, and serve at the discretion
of, the Board of Directors. There are no arrangements or understandings between
any of the persons to serve as officers of the Surviving Corporation or any
other person (other than arrangements or understandings with officers acting as
such) pursuant to which any person will be elected as an officer of the
Surviving Corporation. The Merger Agreement provides that Patrick Montalban, and
two persons designated by Mercury, will serve as members of an executive
committee of the Board of Directors of the Surviving Corporation. Mercury has
designated Thomas Darden and Glenn Darden to serve as members of the executive
committee.
COMPENSATION
The following table lists compensation paid to the persons who will serve as
chief executive officer and executive officers of the Surviving Corporation and
who were paid in excess of $100,000 for the two years ended December 31, 1996.
SUMMARY OF COMPENSATION
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------
NAME AND PRINCIPAL POSITION YEAR SALARY ALL OTHER
- -------------------------------------------------------------------------------- --------- ---------- ------------
<S> <C> <C> <C>
Otto J. Buis.................................................................... 1996 $ 116,667 --
Chairman of the Board, President,
Chief Executive Officer and Director........................................ 1995 $ 101,000 --
Patrick M. Montalban............................................................ 1996 $ 88,200 --
Executive Vice President
Chief Operating Officer and Director........................................ 1995 $ 80,700 $ 28,000(1)
</TABLE>
- ------------------------
(1) The additional amounts paid to Patrick M. Montalban were for four years of
scheduled raises that had not been paid.
In lieu of one year's cash compensation, on March 7, 1997, Thomas Darden and
Glenn Darden were each awarded options to acquire 114,285 shares of Mercury
Common Stock at an exercise price of $.875 per share, which approximated market
value at the date of grant, for their services as officers of Mercury. Thomas
Darden and Glenn Darden will each serve as officers and directors of the
Surviving Corporation.
Directors who are not employees of the Surviving Corporation will receive
$500 per day per meeting plus traveling and out-of-pocket expenses for each
meeting of the Board of Directors, or committee thereof, attended.
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<PAGE>
DESCRIPTION OF SECURITIES OF THE SURVIVING CORPORATION
The following summary description of the capital stock of the Surviving
Corporation does not purport to be complete and is qualified in its entirety by
reference to the Surviving Corporation Certificate and Bylaws, copies of which
are attached as Appendix "F" and "G", respectively. Furthermore, except as
noted, the following discussion describes the capital stock of the Surviving
Corporation assuming that the Continuance and Merger have already been effected.
GENERAL
The authorized capital stock of the Surviving Corporation will consist of
50,000,000 shares of Common Stock, $0.01 par value per share, 25,777,014 of
which will be issued and outstanding immediately following the Merger, and
10,000,000 shares of Preferred Stock, par value $.01 per share ("Preferred
Stock"), none of which will be issued and outstanding immediately following the
Merger.
COMMON STOCK
Subject to the rights of holders of Preferred Stock then outstanding,
holders of Surviving Corporation Common Stock are entitled to receive such
dividends as may from time to time be declared by the Board of Directors of the
Surviving Corporation. Holders of Surviving Corporation Common Stock are
entitled to one vote per share on all matters on which the holders of Surviving
Corporation Common Stock are entitled to vote. Because holders of Surviving
Corporation Common Stock do not have cumulative voting rights, the holders of a
majority of the shares of Surviving Corporation Common Stock represented at a
meeting for the election of directors can elect all of the directors. Holders of
Surviving Corporation Common Stock have no preemptive rights to subscribe for
any additional securities that the Surviving Corporation may issue. All shares
of Surviving Corporation Common Stock to be outstanding upon completion of the
Continuance and Merger will be legally issued, fully paid and nonassessable.
Upon the liquidation, dissolution or winding up of the Surviving Corporation,
holders of the shares of Surviving Corporation Common Stock are entitled to
share equally, share-for-share, in the assets available for distribution after
payment to all creditors of the Surviving Corporation, subject to the rights, if
any, of the holders of any outstanding shares of Preferred Stock.
PREFERRED STOCK
Pursuant to the Surviving Corporation Certificate, the Board of Directors of
the Surviving Corporation is authorized, subject to any limitations prescribed
by law, to provide for the issuance of shares of Preferred Stock from time to
time in one or more series and to establish the number of shares to be included
in each such series and to fix the designation, powers, preferences and
relative, participating, optional and other special rights of the shares of each
such series and any qualifications, limitations or restrictions thereof. Because
the Board of Directors has such power to establish the powers, preferences and
rights of each series, it may afford the holders of Preferred Stock preferences,
powers and rights (including voting rights) senior to the rights of the holders
of Surviving Corporation Common Stock. Although the Surviving Corporation has no
current intention to issue shares of Preferred Stock, the issuance of such
shares, or the issuance of rights to purchase such shares, could be used to
discourage an unsolicited acquisition proposal.
92
<PAGE>
WARRANTS AND CONVERTIBLE SECURITIES
The following table describes the terms of certain warrants the Company and
Mercury have outstanding.
<TABLE>
<CAPTION>
NO. OF
SHARES EXERCISE
TYPE COVERED EXPIRATION DATE PRICE
- ----------------------------------------------- ------------ --------------- -------------
<S> <C> <C> <C>
COMPANY SECURITIES:
Warrant...................................... 280,000 1/12/2000 $ 3.375
MERCURY SECURITIES:
Warrants..................................... 5,500,000 3/31/2002 $ 1.25
Warrants..................................... 5,500,000 3/31/2002 $ 2.00
Options...................................... 228,570 3/31/2002 $ 0.875
</TABLE>
The Surviving Corporation has also agreed to issue a warrant to Parent
pursuant to the Merger Agreement to purchase up to 1,250,000 shares of Surviving
Corporation Common Stock at an exercise price of $0.01 per share at any time and
from time to time prior to March 31, 2002, subject to extension, in the event of
the creation of certain tax liabilities in the Surviving Corporation as a result
of the Continuance. See "The Merger--Interests of Certain Persons in the
Merger."
STOCK OPTION PLAN
The 1997 Stock Option Plan of Mercury (the "Plan") was adopted by the Board
of Directors of Mercury and approved by the shareholders of Mercury effective as
of March 7, 1997. The Plan permits the granting of options to purchase shares of
Mercury Common Stock. All employees and directors of Mercury are eligible to
participate in the Plan. An aggregate of 250,000 shares of Mercury Common Stock
have been authorized and reserved for issuance under the Plan. As of June 1,
1997, options to purchase an aggregate of 228,570 shares of Mercury Common Stock
had been granted under the Plan at an exercise price of $0.875 per share. The
Stock Option Committee of the Board of Directors of Mercury determines who shall
be granted options under the Plan and the terms thereof, and administers the
Plan. No options may be granted under the Plan after March 7, 2007.
The Plan will become a stock option plan of the Surviving Corporation
pursuant to the Merger. The Company has no stock option or similar plans.
PROVISIONS HAVING POSSIBLE ANTI-TAKEOVER EFFECTS
The Surviving Corporation Certificate and Bylaws (for purposes of this
discussion, the "Certificate" and the "Bylaws") contain provisions that could
have an anti-takeover effect. These provisions are intended to enhance the
likelihood of continuity and stability in the composition of the Board of
Directors of the Surviving Corporation and in the policies formulated by the
Board of Directors and to discourage certain types of transactions which may
involve an actual or threatened change of control of the Surviving Corporation.
The provisions are designed to reduce the vulnerability of the Surviving
Corporation to an unsolicited proposal for a takeover of the Surviving
Corporation that does not contemplate the acquisition of all of its outstanding
shares or an unsolicited proposal for the restructuring or sale of all or part
of the Surviving Corporation. The provisions are also intended to discourage
certain tactics that may be used in proxy contests. Set forth below is a
description of such provisions in the Certificate and the Bylaws. Neither the
Company nor Mercury have any current plans to formulate or effect additional
measures that could have an anti-takeover effect with respect to the Surviving
Corporation.
Pursuant to the Certificate, directors, other than those, if any, elected by
the holders of Preferred Stock, can be removed from office by the affirmative
vote of the holders of 66 2/3 percent of the voting power of the then
outstanding shares of capital stock entitled to vote thereon ("Voting Stock").
Vacancies on the Board of Directors may be filled by the remaining directors
without shareholder approval.
93
<PAGE>
The Surviving Corporation is subject to the provisions of Section 203 of the
DGCL. In general, Section 203 prohibits a publicly-held Delaware corporation
from engaging in a "business transaction" with an "interested stockholder" for a
period of three years after the date that the person became an interested
stockholder unless (with certain exceptions) the business combination or the
transaction in which the person became an interested stockholder is approved in
a prescribed manner. A "business combination" generally includes, without
limitation, a merger, assets or stock sale, or a transaction resulting in a
financial benefit to the interested stockholder. An "interested stockholder"
generally is a person who, together with affiliates and associates, owns (or
within three years prior, did own) 15 percent or more of a corporation's
outstanding voting stock.
The Certificate provides that except as otherwise provided for with respect
to the rights of holders of Preferred Stock, no action that is required or
permitted to be taken by the shareholders of the Surviving Corporation at any
annual or special meeting of the shareholders may be effected by written consent
of the shareholders in lieu of a meeting of shareholders, unless the actions to
be effected by written consent of the shareholders and the taking of such action
by such written consent has been expressly approved in advance by the Board of
Directors. This provision makes it difficult for shareholders to initiate or
effect an action by written consent, and thereby effect an action opposed by the
Board of Directors. The Certificate and Bylaws also provide that special
meetings of shareholders may be called only by the President or a majority of
the Board of Directors of the Surviving Corporation. In addition, the Bylaws set
forth an advance notice procedure with regard to business to be brought before
an annual meeting of shareholders of the Surviving Corporation.
The Certificate further provides that the Board of Directors, by a majority
vote, may adopt, alter, amend or repeal provisions of the Bylaws. However,
shareholders may only adopt, alter, amend or repeal provisions of the Bylaws by
a vote of 66 2/3 percent or more of the combined voting power of the then
outstanding Voting Stock. In addition, the Certificate provides that whenever
any vote of Voting Stock is required by law to amend, alter, repeal or rescind
("Change") any provision thereof, then, in addition to any affirmative vote
required by law the affirmative vote of 66 2/3 percent or more of the combined
voting power of the then outstanding shares of Voting Stock is required to
Change certain provisions of the Certificate, including the provisions referred
to above relating to interested shareholder transactions, the filling of
vacancies on the Board of Directors, the removal of directors, the limitations
on shareholder action by written consent, the calling of special meetings by
shareholders and the approval of amendments to the Bylaws. Pursuant to the
Certificate, the Board of Directors of the Surviving Corporation is also
authorized to issue shares of "blank check" preferred stock that may have the
effect of discouraging an unsolicited acquisition proposal. See "--Preferred
Stock."
EXCHANGE AGENT, TRANSFER AGENT AND REGISTRAR
The Exchange Agent for exchange of stock certificates following the Merger
will be Chase Mellon Shareholder Services L.L.C., at its principal offices at
Dallas, Texas. The Transfer Agent and Registrar for the Surviving Corporation
Common Stock will also be Chase Mellon Shareholder Services L.L.C.
94
<PAGE>
BENEFICIAL OWNERSHIP OF SECURITIES
The following table sets forth with respect to the Company, Mercury, and the
Surviving Corporation (giving pro forma effect to the Merger), certain
information as of Meeting Record Date with respect to the beneficial ownership
of Company Common Stock, Mercury Common Stock and Surviving Corporation Common
Stock, as the case may be, of (i) directors, (ii) executive officers, (iii)
executive officers and directors as a group and (iv) holders of five percent or
more of such securities.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
-------------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT
- --------------------------------------------------------------------------------- ------------ -----------
<S> <C> <C>
COMPANY COMMON STOCK
DIRECTORS
Otto J. Buis (1)............................................................... 194,544 1.4
C. Al Buis (1)................................................................. 27,778 0.2
Patrick M. Montalban........................................................... 279,100 2.0
Steven M. Morris (1)........................................................... 1,111,111 8.1
EXECUTIVE OFFICERS NOT NAMED ABOVE
None
DIRECTORS AND EXECUTIVE OFFICERS AS A GROUP...................................... 1,612,533 11.7
HOLDERS OF FIVE PERCENT OR MORE NOT NAMED ABOVE
Pozo Resources, Inc. (2)....................................................... 1,931,444 14.1
Joseph V. Montalban............................................................ 1,809,855 13.1
MERCURY COMMON STOCK
DIRECTORS
Frank Darden (3)............................................................... 2,300,000 17.6
Thomas F. Darden (3)........................................................... 2,414,285 18.3
Glenn M. Darden (3)............................................................ 2,414,285 18.3
EXECUTIVE OFFICERS NOT NAMED ABOVE
None
DIRECTORS AND EXECUTIVE OFFICERS AS A GROUP (4).................................. 7,128,570 45.9
HOLDERS OF FIVE PERCENT OR MORE NOT NAMED ABOVE
Parent (5)..................................................................... 12,420,000 69.2
Anne Darden Self (3)........................................................... 2,300,000 17.7
Jack L. Thurber (6)............................................................ 1,150,000 9.2
SURVIVING CORPORATION COMMON STOCK
DIRECTORS
Otto J. Buis (1)............................................................... 194,544 0.8
Frank Darden (3)............................................................... 2,300,000 8.6
Glenn M. Darden (3)............................................................ 2,414,285 8.9
Thomas F. Darden (3)........................................................... 2,414,285 8.9
Patrick M. Montalban........................................................... 279,100 1.1
Steven M. Morris (1)........................................................... 1,111,111 4.3
....................................................................... -0- 0.0
....................................................................... -0- 0.0
EXECUTIVE OFFICERS NOT NAMED ABOVE
None
DIRECTORS AND EXECUTIVE OFFICERS AS A GROUP (4).................................. 8,713,325 29.7
HOLDERS OF FIVE PERCENT OR MORE NOT NAMED ABOVE
Parent (5)..................................................................... 12,420,000 39.2
Joseph M. Montalban............................................................ 1,809,855 7.0
Pozo Resources, Inc. (1)....................................................... 1,931,444 7.5
Anne Darden Self (3)........................................................... 2,300,000 8.6
</TABLE>
- ------------------------
(1) Does not include shares beneficially owned by Pozo Resources, Inc. See
footnote (2) below.
95
<PAGE>
(2) Pozo Resources, Inc. is owned by Otto J. Buis, C. Al Buis and Steven M.
Morris. Messrs. Buis, Buis and Morris may be deemed to share voting and
investment power with respect to the shares owned by Pozo Resources, Inc.
Each such person disclaims beneficial ownership of such shares.
(3) Does not include shares beneficially owned by Parent. See footnote (4)
below. Does include with respect to each person 1,100,000 shares subject to
immediately exercisable warrants. Also includes with respect to each of
Thomas F. Darden and Glenn M. Darden 114,285 shares subject to immediately
exercisable options.
(4) Includes 3,300,000 shares subject to immediately exercisable warrants and
228,570 shares subject to immediately exercisable options.
(5) Number of shares indicated includes 5,940,000 shares subject to immediately
exercisable warrants. Each of Frank Darden, Thomas F. Darden, Glenn M.
Darden and Anne Darden Self are directors, officers and shareholders of
Parent and share voting and investment power with respect to the 12,420,000
shares of Mercury Common Stock beneficially owned by Parent. Each such
person disclaims beneficial ownership of such shares.
(6) Includes 550,000 shares subject to currently exercisable warrants.
The address of each of the directors of the Company (other than Steven M.
Morris) and of Pozo Resources, Inc. is 500 Main Street, Suite 201, Fort Worth,
Texas 76102. The address of Steven M. Morris is 952 Echo Lane, Suite 335,
Houston, Texas 77024. The address of Joseph V. Montalban is East Lakeshore
Drive, Whitefish, Montana 59937.
The address of each of the directors of Mercury and of Parent is 1619
Pennsylvania Avenue, Fort Worth, Texas 76104. The address of Anne Darden Self is
2630 Fountainview, Suite 300, Houston, Texas 77057.
CERTAIN TRANSACTIONS
Lucas, Bowler & White, Barristers & Solicitors, Edmonton, Alberta, have
rendered legal services to the Company. Bruce Hirsche is a partner of such firm.
Mr. Hirsche served as Chairman and Director of the Interim Board of the Company
from June 1991 through December 1991. Thereafter, Mr. Hirsche served as a
Director and as Secretary and General Counsel of the Company through October 25,
1994, at which time he was re-elected as Secretary and General Counsel, which
positions he continues to hold. Legal fees and expenses totalling approximately
$25,777 and $2,523 were billed to the Company by Mr. Hirsche's law firm during
the years ended December 31, 1995 and 1996, respectively.
In 1994, the Company retained the services of Buis & Co., a private
investment banking firm in which C. Al Buis, a director of the Company, is an
owner, officer and director, to assist the Company in arranging credit
facilities. The Company paid Buis & Co $150,000 for the performance of such
services in connection with the Company obtaining its $15 million revolving
credit/term loan facility with a bank.
The Company subleases office space for its Fort Worth headquarters from Buis
& Co. The Company paid Buis & Co. $22,300 and $35,160 for annual rental for 1995
and 1996, respectively. The rent paid was at the same rate per square foot as
that paid by Buis & Co. to its lessor and is commensurate with rental rates in
the area.
In November 1995, the Company completed the sale of its holdings in 687,000
shares of GeoResources common stock and 44,000 shares of Big Sky Airlines common
stock to Joseph V. Montalban, formerly a director of the Company, in exchange
for 700,000 shares of Company Common Stock. The sale or exchange was approved by
shareholders of the Company at the Company's Annual General Meeting of
Shareholders held on September 22, 1995. The Company recognized $177,000 gain on
the sale of stock.
96
<PAGE>
Mercury acquired the Mercury Properties on March 7, 1997 from Parent. Parent
conveyed to Mercury the Mercury Properties in exchange for a majority of the now
outstanding Mercury Common Stock and warrants to purchase additional shares of
Mercury Common Stock. The Mercury Properties were acquired by Parent in 1995.
Certain directors, officers and agents of Parent also conveyed to Mercury
certain contractual rights in the Mercury Properties in exchange for shares of
Mercury Common Stock and warrants.
The Surviving Corporation and Parent will enter into a Management Agreement
upon effectiveness of the Merger. Pursuant to the Management Agreement, Parent
will manage the ongoing operations of the Surviving Corporation for
consideration intended to cover its costs and expenses.
Mercury has guaranteed the repayment of $4.0 million of the NationsBank Debt
owed by Parent. Such debt is due and payable by Parent on December 31, 2002 and
bears interest at 6.5625 percent per annum. The debt is secured by a lien on the
Mercury Properties. Pursuant to the Merger Agreement, the Company and Mercury
expect that the Surviving Corporation will repay $4.0 million of the NationsBank
Debt. See "Management's Discussion and Analysis of Mercury's Financial Condition
and Results of Operations-- Capital Resources and Financing," and "The
Merger--Interests of Certain Persons in the Merger."
LEGAL MATTERS
Certain matters of Canadian law in connection with the Continuance will be
passed upon by Blake, Cassels & Graydon, Calgary, Alberta. Certain legal matters
in connection with the shares of Company Common Stock to be issued in connection
with the Continuance will be passed upon for the Company by Thompson & Knight, A
Professional Corporation, Dallas, Texas, on behalf of the Company. Thompson &
Knight will also pass upon certain matters relating to the Surviving Corporation
Common Stock to be issued in the Merger pursuant to this Proxy
Statement/Prospectus.
EXPERTS
The consolidated financial statements and schedules of the Company as of
December 31, 1996 and 1995 and for each of the years in the two-year period
ended December 31, 1996, included in this Proxy Statement/Prospectus, and
elsewhere in the Registration Statement of which this Proxy Statement/
Prospectus forms a part, have been audited by Deloitte & Touche LLP, independent
auditors, as set forth in their report thereon appearing herein and elsewhere in
such Registration Statement. Such financial statements are included herein and
in such Registration Statement in reliance on the report of Deloitte & Touche
LLP, upon the authority of such firm as experts in accounting.
The statements of revenues and direct operating expenses attributable to the
Mercury Properties for each of the years in the two-year period ended December
31, 1996, included in this Proxy Statement/ Prospectus, and elsewhere in the
Registration Statement of which this Proxy Statement/Prospectus forms a part,
have been audited by Deloitte & Touche LLP, independent auditors, as set forth
in their report thereon appearing herein and elsewhere in such Registration
Statement. Such statements are included herein and in such Registration
Statement in reliance on the report of Deloitte & Touche LLP, upon the authority
of such firm as experts in accounting.
With respect to the unaudited interim financial information of MSR
Exploration Ltd. for the periods ended March 31, 1997 and 1996 which is included
in this Proxy Statement/Prospectus, and elsewhere in this Registration
Statement, Deloitte & Touch LLP have applied limited procedures in accordance
with professional standards for a review of such information. However, as stated
in their report included in MSR Exploration Ltd.'s Quarterly Report for the
quarter ended March 31, 1997 and included herein, they did not audit and they do
not express an opinion on that interim financial information. Accordingly, the
degree of reliance on their report on such information should be restricted in
light of the limited nature of the review procedures applied. Deloitte & Touche
LLP are not subject to the liability provisions of Section 11 of the Securities
Act of 1933 for their report on the unaudited interim financial information
97
<PAGE>
because the report is not a "report" or a "part" of the registration statement
prepared or certified by an accountant within the meaning of Sections 7 and 11
of the Act.
The letters of Citadel Engineering, independent oil and gas consultants, set
forth in Appendix "I" have been included herein in reliance on such firm as
experts with respect to the matters contained in those letter. In addition, the
information with respect to the reserve reports prepared by Citadel Engineering
has been included herein in reliance on such firm as experts with respect to
such information.
OTHER MATTERS WHICH MAY COME BEFORE THE SPECIAL MEETING
Management of the Company knows of no matters to come before the Special
Meeting other than as set forth in the Notice of the Meeting. In addition,
Management of the Company knows of no other matters to be included in the
Consent except the approval of the Merger as set forth herein. However, if other
matters which are not now known to Management should properly come before the
Special Meeting or require approval of shareholders of the Company pursuant to
the Consent, the accompanying proxy for the Special Meeting and proxy for the
Consent will be voted on such matters in accordance with the best judgement of
the persons voting such proxies.
98
<PAGE>
GLOSSARY OF OIL AND NATURAL GAS TERMS
The following are abbreviations and definitions of terms commonly used in
the oil and natural gas industry and this Proxy Statement/Prospectus. Unless
otherwise indicated in this Proxy Statement/Prospectus, natural gas volumes are
stated at the legal pressure base of the state or area in which the reserves are
located and at 60 degrees Fahrenheit and in most instances are rounded to the
nearest major multiple.
BBL. One stock tank barrel, or 42 E.S.P. gallons liquid volume, used herein
in reference to crude oil or other liquid hydrocarbons.
BOE. Barrels of oil equivalent, determined using the ratio of six Mcf of
natural gas to one Bbl of crude oil, condensate or natural gas liquids.
COMPLETION. The installation of permanent equipment for the production of
oil or natural gas.
CONDENSATE. A hydrocarbon mixture that becomes liquid and separates from
natural gas when the natural gas is produced and is similar to crude oil.
DEVELOPED ACREAGE. The number of acres which are allocated or assignable to
producing wells or wells capable of production.
DEVELOPMENT WELL. A well drilled within the proved area of an oil or
natural gas reservoir to the depth of a stratigraphic horizon known to be
productive.
DRY WELL. A well found to be incapable of producing either oil or natural
gas in sufficient quantities to justify completion of an oil or natural gas
well.
EXPLORATORY WELL. A well drilled to find and produce oil or natural gas in
an unproved area, to find a new reservoir in a field previously found to be
productive of oil or natural gas in another reservoir, or to extend a known
reservoir.
GROSS ACRES or GROSS WELLS. The total acres or wells, as the case may be,
in which Mercury or the Company has a working interest.
MBBL. One thousand barrels of crude oil or other liquid hydrocarbons.
MCF. One thousand cubic feet of natural gas.
MMBBL. One million barrels of crude oil or other liquid hydrocarbons.
MMCF. One million cubic feet of natural gas.
NET ACRES or NET WELLS. Gross acres or wells multiplied, in each case, by
the percentage working interest owned by Mercury or the Company, as applicable.
NET PRODUCTION. Production that is owned less royalties and production due
others.
OPERATOR. The individual or company responsible for the exploration,
development, and production of an oil or natural gas well or lease.
PRESENT VALUE OF FUTURE NET REVENUES or PV-10. The present value of
estimated future net revenues to be generated from the production of proved
reserves, net of estimated production and ad valorem taxes, future capital costs
and operating expenses, using prices and costs in effect as of the date
indicated, without giving effect to federal income taxes. The future net
revenues have been discounted at an annual rate of 10 percent to determine their
"present value." The present value is shown to indicate the effect of time on
the value of the revenue stream and should not be construed as being the fair
market value of the properties.
99
<PAGE>
PROVED DEVELOPED RESERVES. Reserves that can be expected to be recovered
through existing wells with existing equipment and operating methods. Additional
oil and natural gas expected to be obtained through the application of fluid
injection or other improved recovery techniques for supplementing the natural
forces and mechanisms of primary recovery will be included as "proved developed
reserves" only after testing by a pilot project or after the operation of an
installed program has confirmed through production response that increased
recovery will be achieved.
PROVED RESERVES. The estimated quantities of crude oil, natural gas and
natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions, i.e., prices and costs as of
the date the estimate is made. Prices include consideration of changes in
existing prices provided only by contractual arrangements, but not on
escalations based upon future conditions.
i. Reservoirs are considered proved if economic producibility is
supported by either actual production or conclusive formation test. The area
of a reservoir considered proved includes (A) that portion delineated by
drilling and defined by natural gas-oil and/or oil-water contacts, if any;
and (B) the immediately adjoining portions not yet drilled, but which can be
reasonably judged as economically productive on the basis of available
geological and engineering data. In the absence of information on fluid
contacts, the lowest known structural occurrence of hydrocarbons controls
the lower proved limit of the reservoir.
ii. Reserves which can be produced economically through application of
improved recovery techniques (such as fluid injection) are included in the
"proved" classification when successful testing by a pilot project, or the
operation of an installed program in the reservoir, provides support for the
engineering analysis on which the project or program was based.
iii. Estimates of proved reserves do not include the following: (A) oil
that may become available from known reservoirs but is classified separately
as "indicated additional reserves"; (B) crude oil, natural gas and natural
gas liquids, the recovery of which is subject to reasonable doubt because of
uncertainty as to geology, reservoir characteristics, or economic factors;
(C) crude oil, natural gas and natural gas liquids that may occur in
undrilled prospects; and (D) crude oil, natural gas and natural gas liquids
that may be recovered from oil shales, coal, gilsonite and other such
sources.
PROVED UNDEVELOPED RESERVES. Reserves that are expected to be recovered
from new wells on undrilled acreage, or from existing wells where a relatively
major expenditure is required for recompletion. Reserves on undrilled acreage
shall be limited to those drilling units offsetting productive units that are
reasonably certain of production when drilled. Proved reserves for other
undrilled units can be claimed only where it can be demonstrated with certainty
that there is continuity of production from the existing productive formation.
Under no circumstances should estimates for proved undeveloped reserves be
attributable to any acreage for which an application of fluid injection or other
improved recovery technique is contemplated, unless such techniques have been
proved effective by actual tests in the area and in the same reservoir.
RECOMPLETION. The completion for production of an existing well bore in
another formation from that in which the well has been previously completed.
RESERVES. Proved reserves.
ROYALTY. An interest in an oil and natural gas lease that gives the owner
of the interest the right to receive a portion of the production from the leased
acreage (or of the proceeds of the sale thereof), but generally does not require
the owner to pay any portion of the costs of drilling or operating the wells on
the leased acreage. Royalties may be either landowner's royalties, which are
reserved by the owner of the leased acreage at the time the lease is granted, or
overriding royalties, which are usually reserved by an owner of the leasehold in
connection with a transfer to a subsequent owner.
100
<PAGE>
WATERFLOOD. The injection of water into a reservoir to fill pores vacated
by produced fluids, thus maintaining reservoir pressure and assisting
production.
WORKING INTEREST. An interest in an oil and natural gas lease that gives
the owner of the interest the right to drill for and produce oil and natural gas
on the leased acreage and requires the owner to pay a share of the costs of
drilling and production operations. The share of production to which a working
interest owner is entitled will always be smaller than the share of costs that
the working interest owner is required to bear, with the balance of the
production accruing to the owners of royalties. For example, the owner of a 100
percent working interest in a lease burdened only by a landowner's royalty of
12.5 percent would be required to pay 100 percent of the costs of a well but
would be entitled to retain 87.5 percent of the production.
WORKOVER. Operations on a producing well to restore or increase production.
101
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
MSR EXPLORATION LTD.
Annual Financial Statements:
Report of Independent Auditors........................................................................... F-2
Consolidated Balance Sheets at December 31, 1996 and 1995................................................ F-3
Consolidated Statements of Operations for the years ended December 31, 1996 and 1995..................... F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996 and 1995........... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1996 and 1995..................... F-6
Notes to Consolidated Financial Statements............................................................... F-7
Interim Financial Statements (Unaudited):
Report of Independent Accountants........................................................................ F-21
Consolidated Balance Sheets at March 31, 1997 and December 31, 1996...................................... F-22
Consolidated Statements of Operations for the three months ended March 31, 1997
and 1996............................................................................................... F-23
Consolidated Statements of Cash Flows for the three months ended March 31, 1997
and 1996............................................................................................... F-24
Condensed Notes to Consolidated Interim Financial Statements............................................. F-25
MERCURY MONTANA, INC.
Report of Independent Auditors........................................................................... F-27
Statements of Revenues and Direct Operating Expenses for the years ended December 31, 1996 and 1995...... F-28
Statements of Revenues and Direct Operating Expenses for the three months ended March 31, 1997 and 1996
(Unaudited)............................................................................................ F-28
Notes to Statements of Revenues and Direct Operating Expenses............................................ F-29
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
MSR Exploration Ltd. and Subsidiaries
Fort Worth, Texas
We have audited the accompanying consolidated balance sheets of MSR
Exploration Ltd. and subsidiaries (the Company) as of December 31, 1996 and
1995, and the related consolidated statements of operations, stockholders'
equity and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December 31,
1996 and 1995, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Fort Worth, Texas
March 26, 1997
F-2
<PAGE>
MSR EXPLORATION LTD. AND SUBSIDIARIES
(INCORPORATED UNDER THE LAWS OF ALBERTA)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
U.S. DOLLARS
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................................ $ 262,150 $ 232,594
Time deposits.................................................................... 51,035 46,975
Accounts receivable.............................................................. 936,639 700,069
Inventories...................................................................... 194,873 184,421
Prepaid expenses................................................................. 15,184 11,478
------------- -------------
Total current assets......................................................... 1,459,881 1,175,537
PROPERTIES, PLANT AND EQUIPMENT--NET
("full cost") (Note 4)........................................................... 28,786,443 29,040,594
OTHER ASSETS (Note 5).............................................................. 470,103 538,025
------------- -------------
$ 30,716,427 $ 30,754,156
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt (Note 6)....................................... $ 706,931 $ 90,707
Accounts payable................................................................. 277,141 368,630
Accrued liabilities.............................................................. 612,509 503,140
------------- -------------
Total current liabilities.................................................... 1,596,581 962,477
------------- -------------
LONG-TERM DEBT (Note 6)............................................................ 5,930,532 6,252,012
------------- -------------
DEFERRED INCOME TAXES (Note 7)..................................................... 3,832,635 4,003,000
------------- -------------
STOCKHOLDERS' EQUITY:
Common stock, without par value
Authorized 20,000,000 shares, issued and
outstanding 13,777,014 in 1996 and
13,712,014 in 1995............................................................. 17,861,264 17,796,264
Less notes receivable arising from the issuance of
common stock (Note 8)............................................................ (95,000) (190,000)
Foreign currency translation adjustment.......................................... (108,986) (98,684)
Retained earnings................................................................ 1,699,401 2,029,087
------------- -------------
19,356,679 19,536,667
------------- -------------
$ 30,716,427 $ 30,754,156
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
MSR EXPLORATION LTD. ANDSUBSIDIARIES
(INCORPORATED UNDER THE LAWS OF ALBERTA)
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995
U.S. DOLLARS
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
REVENUE
Oil sales........................................................................... $ 2,364,440 $ 2,038,588
Gas sales........................................................................... 1,953,092 763,698
Interest and other income........................................................... 58,793 324,414
------------ ------------
Total revenues.................................................................. 4,376,325 3,126,700
------------ ------------
EXPENSES
Operating expenses.................................................................. 1,435,362 1,349,151
Production taxes.................................................................... 311,680 213,793
Depletion and depreciation.......................................................... 1,377,917 1,032,023
General and administrative.......................................................... 1,018,141 1,058,768
Interest............................................................................ 732,911 472,519
------------ ------------
Total expenses.................................................................. 4,876,011 4,126,254
------------ ------------
Loss before income taxes.............................................................. (499,686) (999,554)
Income tax benefit (Note 7)........................................................... 170,000 359,000
------------ ------------
NET LOSS.............................................................................. $ (329,686) $ (640,554)
------------ ------------
------------ ------------
PER SHARE NET LOSS.................................................................... $ (0.02) $ (0.04)
------------ ------------
------------ ------------
Weighted average number of shares outstanding......................................... 13,773,110 14,262,973
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
MSR EXPLORATION LTD. AND SUBSIDIARIES
(INCORPORATED UNDER THE LAWS OF ALBERTA)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1995
U.S. DOLLARS
<TABLE>
<CAPTION>
CUMULATIVE
FOREIGN TOTAL
COMMON STOCK STOCK CURRENCY STOCK-
--------------------- OPTION TRANSLATION RETAINED HOLDERS'
SHARES AMOUNT LOANS ADJUSTMENT EARNINGS EQUITY
--------- ---------- --------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994............ 14,312,014 $18,621,264 $(300,000) $ 0 $2,669,641 $20,990,905
Net loss.............................. 0 0 0 0 (640,554) (640,554)
Purchase of 700,000 shares (Note 8)... (700,000) (875,000) 0 0 0 (875,000)
Issuance of 100,000 shares of common
stock as payment for services (Note
8).................................. 100,000 50,000 0 0 0 50,000
Translation adjustments............... 0 0 0 (98,684) 0 (98,684)
Proceeds from stock option loans...... 0 0 110,000 0 0 110,000
--------- ---------- --------- ----------- --------- ----------
Balance at December 31, 1995............ 13,712,014 17,796,264 (190,000) (98,684) 2,029,087 19,536,667
Net loss.............................. 0 0 0 0 (329,686) (329,686)
Issuance of 100,000 shares of common
stock for property acquisition (Note
8).................................. 100,000 100,000 0 0 0 100,000
Translation adjustments............... 0 0 0 (10,302) (10,302)
Repurchase of stock option shares (Note
8).................................... (35,000) (35,000) 0 0 0 (35,000)
Proceeds from stock option loans........ 0 0 95,000 0 0 95,000
--------- ---------- --------- ----------- --------- ----------
Balance at December 31, 1996............ 13,777,014 $17,861,264 $ (95,000) $(108,986) $1,699,401 $19,356,679
--------- ---------- --------- ----------- --------- ----------
--------- ---------- --------- ----------- --------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
MSR EXPLORATION LTD. AND SUBSIDIARIES
(INCORPORATED UNDER THE LAWS OF ALBERTA)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
U.S. DOLLARS
<TABLE>
<CAPTION>
1996 1995
----------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss............................................................................ $ (329,686) $ (640,554)
Charges and credits to net loss not affecting cash
Depletion and depreciation........................................................ 1,377,917 1,032,023
Amortization of deferred financing costs.......................................... 67,922 0
Common stock issued for payment of general and administrative expenses............ 0 50,000
Gain on property and securities available for sale................................ 0 (175,223)
Deferred income taxes............................................................. (170,365) (359,000)
Changes in assets and liabilities
Proceeds from sale of (invested in) time deposits................................. (4,060) 29,097
Receivables....................................................................... (236,570) (430,655)
Inventories and prepaid expenses.................................................. (14,158) 11,316
Accounts payable and accrued liabilities.......................................... 17,880 (39,419)
----------- -------------
NET CASH FROM (USED FOR) OPERATING ACTIVITIES......................................... 708,880 (522,415)
----------- -------------
INVESTING ACTIVITIES
Property, plant and equipment expenditures.......................................... (773,766) (1,086,635)
Acquisition of producing properties................................................. (250,000) (3,621,984)
Proceeds from sale of property and equipment........................................ 0 56,570
Proceeds on notes receivable arising from the issuance of common stock.............. 60,000 110,000
Change in cumulative foreign currency translation................................... (10,302)
Restricted cash..................................................................... 0 (191,675)
----------- -------------
NET CASH FROM (USED FOR) INVESTINGACTIVITIES.......................................... (974,068) (4,733,724)
----------- -------------
FINANCING ACTIVITIES
Principal payments on long-term debt................................................ (105,256) (615,706)
Proceeds from debt borrowings....................................................... 400,000 6,000,000
Payment of financing costs.......................................................... 0 (346,350)
----------- -------------
NET CASH FROM (USED FOR) FINANCING ACTIVITIES......................................... 294,744 5,037,944
----------- -------------
NET INCREASE (DECREASE) IN CASH....................................................... 29,556 (218,195)
CASH AT BEGINNING OF PERIOD........................................................... 232,594 450,789
----------- -------------
CASH AT END OF PERIOD................................................................. $ 262,150 $ 232,594
----------- -------------
----------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
MSR EXPLORATION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
MSR Exploration Ltd. (the Company) (incorporated under the laws of Alberta,
Canada), and its wholly-owned subsidiaries. All significant inter-company
transactions and balances have been eliminated in consolidation.
PRINCIPAL BUSINESS ACTIVITY AND REORGANIZATION
The Company and its subsidiaries are involved in oil and gas exploration,
development and production activities in the United States and Canada. On
February 7, 1992, the Company and its subsidiaries filed for protection under
Chapter 11 of the U.S. Bankruptcy Code. On March 2, 1993, the Company's Restated
First Amended Joint Plan of Reorganization was confirmed by the Bankruptcy
Court. See Note 2.
U.S. DOLLAR REPORTING
The majority of the Company's business is transacted in U.S. dollars and,
accordingly, the consolidated financial statements are expressed in that
currency.
SECURITIES AVAILABLE FOR SALE
The Company had investments in marketable equity securities. These consisted
of common stocks that were listed and traded on national stock exchanges.
The Company adopted Statement of Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities," at January 1, 1994.
Statement No. 115 requires that management classify securities at the date of
adoption, and thereafter at the date of acquisition, as trading, held-to-
maturity, or available-for-sale. The investments in marketable equity securities
had been classified as available-for-sale, and were stated at fair value each
balance sheet date, with unrealized gains and losses reported separately as a
component of stockholders' equity. During the fourth quarter of 1995, all
marketable securities held by the Company were sold.
ACCOUNTS RECEIVABLE
The Company's customers are large oil and natural gas purchasers. The
Company does not require collateral and receivables are generally due in 30-60
days. Management considers all accounts receivable current and collectible;
accordingly, no allowance for doubtful accounts has been established.
MAJOR CUSTOMERS
For the years ended December 31, 1996 and 1995 three purchasers accounted
for approximately 66% and 70%, respectively of the Company's total consolidated
oil and gas sales. The Company does not anticipate that the loss of any of its
present purchasers would adversely effect the Company's consolidated business.
The Company also believes that, in the event of a loss of a present purchaser,
other oil and gas purchasers located in the Company's areas of production would
offer competitive prices for such production.
F-7
<PAGE>
MSR EXPLORATION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out method) or
market.
PROPERTIES, PLANT AND EQUIPMENT
The Company follows the "full cost" method of accounting for oil and gas
properties whereby all costs associated with acquiring, exploring for, and
developing oil and gas reserves are capitalized and accumulated in cost centers
established on a country-by-country basis. Such costs include land acquisition
costs, geological and geophysical expenses, carrying charges on non-producing
properties, costs of drilling both productive and non-productive wells, and
overhead charges directly related to acquisition, exploration and development
activities.
The capitalized costs related to each cost center, including the estimated
future costs to develop proved reserves and the costs of production equipment,
are amortized using the unit-of-production method based on the estimated net
proved reserves of each country as determined by independent petroleum
engineers. Investments in unproved properties are not amortized until proved
reserves associated with them can be determined or until impairment occurs. Oil
and natural gas reserves and production are converted into equivalent units
based upon estimated relative energy content.
The capitalized costs less accumulated depletion and depreciation in each
cost center are limited to an amount equal to the estimated future net revenue
from proved reserves discounted at a ten percent interest rate (based on prices
and costs at the balance sheet date) plus the lower of cost (net of impairments)
or fair market value of unproved properties.
Proceeds from the sale of oil and gas properties are applied against
capitalized costs, with no gain or loss recognized, unless such a sale would
significantly alter the relationship between capitalized costs and proved
reserves of oil and gas, in which case the gain or loss is recognized in income.
Other plant and equipment are depreciated on the straight-line basis as
follows:
Gas processing plants and gathering systems--over eight years
Other equipment--over three to five years
Potential impairment of producing properties and significant unproved
properties is assessed annually (unless economic events warrant more frequent
reviews). In addition, a quarterly impairment analysis of aggregated properties
is performed by the Company using discounted future net cash flows determined
based upon current prices and costs.
ENVIRONMENTAL COMPLIANCE AND REMEDIATION
Environmental compliance costs, including on-going maintenance and
monitoring, are expensed as incurred. Environmental remediation costs, which
improve the condition of a property, are capitalized.
The Accounting Standards Executive Committee of the American Institute of
Certified Public Accountants has adopted Statement of Position 96-1,
"Environmental Remediation Liabilities," which provides guidance on the
recognition, measurement, display and disclosure of environmental liabilities.
The statement is effective for the Company's 1997 fiscal year. Management has
evaluated such statement
F-8
<PAGE>
MSR EXPLORATION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
and believes that it will not have a material effect on the financial condition,
results of operations or cash flows of the Company.
DEFERRED CHARGES
Financing charges related to the acquisition of debt are deferred and
amortized over the term of that debt using the effective interest method. MSR
Exploration Ltd. and Subsidiaries
FOREIGN CURRENCY TRANSLATION
The functional currency for the Company's foreign operations is the
applicable local currency; therefore, translation is performed for balance sheet
accounts using current exchange rates in effect at the balance sheet date, and
for revenue and expense accounts using a weighted average exchange rate for the
year.
JOINT VENTURE OPERATIONS
Certain of the Company's exploration and development activities relating to
oil and gas are conducted jointly with others. The accompanying financial
statements reflect only the Company's proportionate interest in such activities.
INCOME TAXES
Income taxes provide for the tax effects of transactions reported in the
financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the basis of properties, plant and
equipment for financial and income tax reporting. The deferred tax assets and
liabilities represent the future tax return consequences of those differences,
which will either be taxable or deductible when the assets and liabilities are
recovered or settled.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share has been calculated based on the weighted
average number of common shares outstanding during the year.
CASH EQUIVALENTS AND TIME DEPOSITS
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents. Investments with an
original maturity in excess of three months are considered to be time deposits.
STOCK-BASED COMPENSATION
Compensation expense is recorded with respect to stock option grants to
employees using the intrinsic value method prescribed by Accounting Principles
Board Opinion No. 25. The Company has not elected the fair value method of
accounting for stock-based compensation encouraged, but not required, by
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation."
F-9
<PAGE>
MSR EXPLORATION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DISCLOSURE OF FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments under Statement of Financial Accounting
Standards No. 107, "Disclosure about Fair Value of Financial Instruments,"
include cash, accounts receivable, notes payable, accounts payable and long-term
debt. The Company believes that the carrying amount of these items is a
reasonable estimate of their fair value.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. BANKRUPTCY
Due to a series of events, which included a substantial net loss and the
inability to negotiate a mutually agreeable restructuring of indebtedness with
the Company's then primary lender, the Company and its subsidiaries elected on
February 7, 1992 to file voluntary petitions for protection under Chapter 11 of
the U.S. Bankruptcy Code.
On September 12, 1992, the Company filed a plan of reorganization with the
Bankruptcy Court which was subsequently amended on December 11, 1992 and March
2, 1993, to reflect agreements between the Company and its creditors.
On March 2, 1993, the Company's Restated First Amended Joint Plan of
Reorganization was confirmed by the Bankruptcy Court. The significant changes
resulting from the Plan include the following:
- A net reduction of $2,429,829 in recorded liabilities to secured and
unsecured creditors through settlement, disallowance or rejection of
claims.
- An increase of $5,143,170 in non-current, long-term debt through
establishment of installment payment terms for certain claims.
As of December 31, 1996, the remaining amount due to pre-petition creditors
totaled $237,463 (see Note 6).
3. SECURITIES AVAILABLE FOR SALE
As discussed in Note 1, the Company elected to adopt FASB Statement No. 115
as of January 1, 1994. The December 31, 1994 balance of stockholder's equity
increased by $171,900 to recognize appreciation in the fair value of securities
available for sale. There was no deferred tax effect of that appreciation. All
marketable securities held by the Company were sold in November, 1995, at a gain
of $177,000.
F-10
<PAGE>
MSR EXPLORATION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
4. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
U.S. proved oil and gas properties:
Rocky Mountain Region................................................. $ 28,245,283 $ 27,896,712
Texas Region.......................................................... 13,275,806 12,887,117
Accumulated depletion and depreciation.................................. (15,989,893) (14,740,907)
-------------- --------------
25,531,196 26,042,922
-------------- --------------
Canadian proved oil and gas properties.................................. 2,221,085 2,158,823
Accumulated depletion and depreciation.................................. (195,915) (150,572)
-------------- --------------
2,025,170 2,008,251
-------------- --------------
Gas processing plants and gathering systems............................. 3,623,687 3,388,459
Other equipment......................................................... 1,146,343 1,061,984
Accumulated depletion and depreciation.................................. (3,539,953) (3,461,022)
-------------- --------------
1,230,077 989,421
-------------- --------------
$ 28,786,443 $ 29,040,594
-------------- --------------
-------------- --------------
</TABLE>
5. OTHER ASSETS
Other assets included deferred charges related to the acquisition of
long-term debt (amortized over the life of that debt using the effective
interest method) and restricted cash (held in a letter of credit in lieu of a
plugging and abandonment bond required by the US Environmental Protection
Agency).
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
Deferred loan cost............................................................. $ 385,215 $ 397,440
Less accumulated amortization.................................................. (106,737) (51,040)
----------- ----------
Net deferred loan cost......................................................... $ 278,478 $ 346,400
Restricted cash................................................................ 191,625 191,625
----------- ----------
Total other assets............................................................. $ 470,103 $ 538,025
----------- ----------
----------- ----------
</TABLE>
F-11
<PAGE>
MSR EXPLORATION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
6. NOTE PAYABLE AND LONG-TERM DEBT
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Long-term debt consists of:
Prime rate plus 1.0% note payable to Banque Paribas (9.25% at December 31,
1996)..................................................................... $ 6,400,000 $ 6,000,000
Various pre-petition claims at interest rates ranging from 6% to 10%, due in
monthly, quarterly and annual installments, including interest............ 237,463 342,719
------------ ------------
6,637,463 6,342,719
Less current maturities..................................................... (706,931) (90,707)
------------ ------------
$ 5,930,532 $ 6,252,012
------------ ------------
------------ ------------
</TABLE>
<TABLE>
<CAPTION>
LONG-TERM DEBT MATURITIES ARE AS FOLLOWS:
YEARS ENDING DECEMBER 31, AMOUNT
- -------------------------------------------------------------------------------- ------------
<S> <C>
1997............................................................................ $ 706,931
1998............................................................................ 868,294
1999............................................................................ 928,892
2000............................................................................ 848,649
2001............................................................................ 744,697
Thereafter...................................................................... 2,540,000
------------
$ 6,637,463
------------
------------
</TABLE>
During the first quarter of 1995, the Company entered into a revolving
credit/term loan agreement with a bank. The agreement allowed the Company to
borrow up to $15,000,000 under a revolving credit arrangement for a two year
period. On August 15, 1996 the loan limit was set at $6,500,000 and on January
1, 1997 the commitment shall be reduced by monthly payments at a rate of $60,000
for 1997, $65,000 for 1998, $75,000 for 1999, $70,000 for 2000 and $60,000 for
2001. The Company can designate the interest rate on amounts outstanding as
either the London Interbank Offered Rate (LIBOR) + 2.5% or bank prime plus 1%.
The collateral for this loan agreement consists of substantially all of the
existing assets of the Company and any future reserves acquired. The loan
agreement contain certain restrictive covenants which, among other things,
require the maintenance of a minimum current ratio, net worth and debt service
ratio. As of December 31, 1996 the Company was in compliance with all such
requirements. MSR Exploration Ltd. and Subsidiaries
7. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax
F-12
<PAGE>
MSR EXPLORATION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
7. INCOME TAXES (CONTINUED)
purposes. Significant components of the Company's deferred tax assets and
liabilities as of December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Deferred tax assets:
Operating loss carryforwards............................................ $ 3,565,000 $ 3,473,503
Investment tax credits.................................................. 428,000 428,765
------------- -------------
Total deferred tax assets............................................. 3,993,000 3,902,268
Less valuation allowance................................................ (2,002,635) (2,165,768)
------------- -------------
1,990,365 1,736,500
------------- -------------
Deferred tax liabilities:
Properties, plant and equipment......................................... 5,823,000 5,739,500
------------- -------------
Total deferred tax liabilities........................................ 5,823,000 5,739,500
------------- -------------
Net deferred tax liabilities........................................ $ 3,832,635 $ 4,003,000
------------- -------------
------------- -------------
</TABLE>
The income tax benefit for each of the years ended December 31, 1996 and
1995 consists of the following:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Deferred tax benefit.......................................................... $ (170,365) $ (359,000)
----------- -----------
----------- -----------
</TABLE>
The income tax provision differs from the amount of income tax determined by
applying the U.S. federal income tax rate to pre-tax income for the years ended
December 31, 1996 and 1995 due to the following:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Computed expected tax expense (benefit)....................................... $ (170,365) $ (340,500)
Increase (decrease) in income resulting from:
State income taxes, net of federal tax benefit.............................. (20,000) (40,000)
Other....................................................................... 20,365 21,500
----------- -----------
$ (170,000) $ (359,000)
----------- -----------
----------- -----------
</TABLE>
The Company has U.S. net operating loss carry-forwards of approximately
$10,500,000 available to reduce future U.S. taxable income. These U.S. net
operating loss carry-forwards begin to expire in 2001. The Company also has
Canadian expense carry-forwards totaling approximately $2,200,000 available to
reduce future Canadian taxable income. These Canadian expense carry-forwards
have no expiration date. Use of these U.S. and Canadian carry-forwards is
dependent on future taxable income.
F-13
<PAGE>
MSR EXPLORATION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
8. COMMON STOCK TRANSACTIONS
In May, 1996 the Company issued 100,000 shares of common stock, valued at
$1.00 per share, with $250,000 to purchase an additional 21% working interest in
the Cinco Ltd No. 1 well in Southeast, Texas.
During 1994, the Company granted stock options for 600,000 shares of common
stock to the Board of Directors and employees. These options were exercisable at
a price of $0.50 per share. The options were later exercised and initially
funded by the Company. The Company accepted notes receivable totaling $300,000
from certain members of the Board of Directors and employees, and are
collateralized by the common stock issued. During 1996, the Company offered each
individual the opportunity to cancel the notes in exchange for Company stock
valued at $1.00 per share. 35,000 shares of common stock were presented to
reduce such notes. At December 31, 1996 notes receivable arising from the
issuance of common stock was $95,000.
On November 8, 1995 the Company completed the sale of its holdings in
687,600 shares of GeoResources Common Stock and 44,000 shares of Big Sky
Airlines Common Stock to Joseph V. Montalban, then a director of the Company, in
exchange for 700,000 shares of the Company's Common Stock. The sale or exchange
was approved by Shareholders at the Company's Annual General Meeting held on
September 22, 1995.
During 1995, the Company issued 100,000 shares of common stock to Joseph V.
Montalban for services performed in 1994. These shares were issued at a value of
$0.50 per share.
9. RELATED PARTY TRANSACTIONS
The law firm in which the corporate secretary of the Company is a senior
partner acted as Corporate Counsel during 1996 and 1995. Legal fees and
out-of-pocket costs totaling approximately $2,523 and $25,777 were billed to the
Company by the law firm during the years ended December 31, 1996 and 1995,
respectively.
The Company sub-leases office space for its Fort Worth headquarters from
Buis & Co. Buis & Co. is partially owned by C. Al Buis, a current Director of
the Company. The Company reimbursed Buis & Co. $35,160 and $22,300 for annual
rental payments for 1996 and 1995, respectively, and $14,644 and $12,428 for
property taxes, telephone and utilities for 1996 and 1995. The rent paid for the
Company's space was at the same rate per square foot paid by Buis & Co. and is
commensurate with rental rates in the area.
On November 8, 1995 the Company completed the sale of its holdings in
687,600 shares of GeoResources Common Stock and 44,000 shares of Big Sky
Airlines Common Stock to Joseph V. Montalban, then a director of the Company, in
exchange for 700,000 shares of the Company's Common Stock. The sale or exchange
was approved by Shareholders at the Company's Annual General Meeting held on
September 22, 1995.
In 1994, the Company retained the services of Buis & Co., a private
investment banking firm, to assist it in arranging credit facilities. The firm
is partially owned by C. Al Buis, a Director of the Company. In January 1995,
the Company paid Buis & Co. $150,000 for the performance of such services in
connection with the Company's $15,000,000 revolving credit/term agreement.
F-14
<PAGE>
MSR EXPLORATION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
10. CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Cash paid during the year:
Interest................................................................................ $ 677,863 $ 430,156
---------- ----------
---------- ----------
Income taxes............................................................................ $ 365 $ --
---------- ----------
---------- ----------
Non-cash investing activity:
Common stock received in payment of note receivable arising from issuance of stock...... $ (35,000) $ --
---------- ----------
---------- ----------
Non-cash financing activity:
Acquisition of producing property from issuance of common stock......................... $ 100,000 $ --
---------- ----------
---------- ----------
</TABLE>
11. SEGMENT INFORMATION
All of the Company's activities are in one business segment: oil and gas
exploration, development and production. The Company operates in the United
States and Canada as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
------------------------------------------
UNITED STATES CANADA TOTAL
------------- ------------ -------------
<S> <C> <C> <C>
Revenues......................................... $ 4,192,960 $ 183,365 $ 4,376,325
------------- ------------ -------------
------------- ------------ -------------
Operating income (loss).......................... $ (514,896) $ 15,210 $ (499,686)
------------- ------------ -------------
------------- ------------ -------------
Total assets..................................... $ 28,512,065 $ 2,204,362 $ 30,716,427
------------- ------------ -------------
------------- ------------ -------------
Depletion per equivalent unit of production...... $ 4.89 $ 2.59 $ 4.74
------------- ------------ -------------
------------- ------------ -------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
------------------------------------------
UNITED STATES CANADA TOTAL
------------- ------------ -------------
<S> <C> <C> <C>
Revenues......................................... $ 2,962,031 $ 162,669 $ 3,124,700
------------- ------------ -------------
------------- ------------ -------------
Operating income (loss).......................... $ (994,718) $ (4,836) $ (999,554)
------------- ------------ -------------
------------- ------------ -------------
Total assets..................................... $ 28,486,026 $ 2,268,130 $ 30,754,156
------------- ------------ -------------
------------- ------------ -------------
Depletion per equivalent unit of production...... $ 5.01 $ 2.36 $ 4.79
------------- ------------ -------------
------------- ------------ -------------
</TABLE>
12. SUBSEQUENT EVENT
On March 26, 1997, the Company signed a definitive agreement with Mercury
Exploration Company and Mercury Montana, Inc. ("Mercury"), both of Fort Worth,
Texas, to combine all of the oil and gas assets of Mercury with all the oil and
gas assets of MSR Exploration Ltd. by way of the Merger of the Company with and
into Mercury, with Mercury being the Surviving Corporation (the Business
Combination).
Mercury has over 75 producing wells with proven reserves of more than 5
million barrels of oil, as well as rights and obligations under an agreement
with a utility relating to 304,000 acres of undeveloped oil and
F-15
<PAGE>
MSR EXPLORATION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
12. SUBSEQUENT EVENT (CONTINUED)
gas properties, located in the Cut Bank Field complex in Montana. In the subject
area, Mercury holds 100% of the oil rights and 30% of the revenue pertaining to
liquids produced by gas wells.
In the Business Combination, the surviving corporation will issue (i) to MSR
shareholders, one share of common stock for each outstanding share of common
stock of MSR and (ii) to Mercury shareholders, one share of common stock for
each outstanding share of common stock of Mercury. In addition, the surviving
corporation will assume and/or pay $4,000,000 in bank debt of Mercury
Exploration Company. Mercury currently has outstanding 12,000,000 shares of
common stock and warrants to purchase an additional 5,500,000 common shares at
$1.25 per share and 5,500,000 common shares at $2.00 per share.
Mercury shareholders will effectively own approximately 46.6% of the total
issued and outstanding common stock of the surviving corporation. After approval
by shareholders of the Company of the continuance of the Company from Alberta to
Delaware and of the Business Combination; the Business Combination will become
effective and the common shares of the surviving corporation will be distributed
to the respective shareholders of the Company and Mercury. Shareholders owning
approximately 40% of MSR common stock have agreed to vote to approve this
transaction. Closing the transaction is expected immediately subsequent to
shareholder approval.
F-16
<PAGE>
DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED)
The following information about the Company's oil and gas producing
activities has been prepared in accordance with Statement of Financial Standards
No. 69, Disclosures about Oil and Gas Producing Activities.
The Company believes that the valuation method prescribed by Statement of
Financial Standards No. 69 does not provide the best estimate of current
economic value of its oil and gas reserves as unproved reserves are not
attributed any economic value and the use of year-end price assumptions and a
10% discount rate are arbitrary.
PROVED OIL AND GAS QUANTITIES
The following information summarizes the Company's estimated net quantities
of proved and proved-developed oil and gas reserves. The December 31, 1996
reserves are based on estimates of Citadel Engineering Ltd., petroleum
consultants, contained in a report dated March 1, 1997.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
------------------------------------------------
OIL (000'S BBLS) GAS(MMCF)
----------------------- -----------------------
UNITED UNITED
STATES CANADA TOTAL STATES CANADA TOTAL
------ ------ ----- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Proved reserves
Beginning of year........................................................ 4,448 22 4,470 17,220 5,840 23,060
Revisions of previous estimates.......................................... (466) 15 (451) (861) 857 (4)
Purchase of reserves in place............................................ 1 -- 1 181 -- 181
Extensions, discoveries, reworks and other additions..................... 42 -- 42 1,955 -- 1,955
Production............................................................... (123) -- (123) (784) (106) (890)
--
------ ----- ------ ------ ------
End of year.............................................................. 3,902 37 3,939 17,711 6,591 24,302
--
--
------ ----- ------ ------ ------
------ ----- ------ ------ ------
Proved developed reserves
Beginning of year........................................................ 2,621 19 2,640 11,593 5,767 17,360
--
--
------ ----- ------ ------ ------
------ ----- ------ ------ ------
End of year.............................................................. 2,496 34 2,530 12,120 1,831 13,951
--
--
------ ----- ------ ------ ------
------ ----- ------ ------ ------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
------------------------------------------------
OIL (000'S BBLS) GAS(MMCF)
----------------------- -----------------------
UNITED UNITED
STATES CANADA TOTAL STATES CANADA TOTAL
------ ------ ----- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Proved reserves
Beginning of year........................................................ 4,382 21 4,403 14,076 5,736 19,812
Revisions of previous estimates.......................................... 54 1 55 (1,081) 213 (868)
Purchase of reserves in place............................................ 78 -- 78 4,623 -- 4,623
Extensions, discoveries, reworks and other additions..................... 65 -- 65 -- -- --
Production............................................................... (131) -- (131) (398) (109) (507)
--
------ ----- ------ ------ ------
End of year.............................................................. 4,448 22 4,470 17,220 5,840 23,060
--
--
------ ----- ------ ------ ------
------ ----- ------ ------ ------
Proved developed reserves
Beginning of year........................................................ 2,563 18 2,581 8,502 5,664 14,166
--
--
------ ----- ------ ------ ------
------ ----- ------ ------ ------
End of year.............................................................. 2,621 19 2,640 11,593 5,767 17,360
--
--
------ ----- ------ ------ ------
------ ----- ------ ------ ------
</TABLE>
F-17
<PAGE>
DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES (CONTINUED)
(UNAUDITED)
The following standardized measure of discounted future net cash flows
relating to proved oil and gas reserves has been computed using year-end prices,
except where contractual arrangements in place at year-end provide for future
price changes and costs.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
---------------------------------------------
UNITED STATES CANADA TOTAL
-------------- ------------- --------------
<S> <C> <C> <C>
Future cash flows................................................ $ 116,139,000 $ 10,701,000 $ 126,840,000
Future production and development costs.......................... (31,135,000) (5,309,000) (36,444,000)
Future income tax expense........................................ (19,510,000) (900,000) (20,410,000)
-------------- ------------- --------------
65,494,000 4,492,000 69,986,000
10% annual discount for timing of cash flows..................... (31,989,000) (2,648,000) (34,637,000)
-------------- ------------- --------------
Standardized measure of discounted cash flows.................... $ 33,505,000 $ 1,844,000 $ 35,349,000
-------------- ------------- --------------
-------------- ------------- --------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
---------------------------------------------
UNITED STATES CANADA TOTAL
-------------- ------------- --------------
<S> <C> <C> <C>
Future cash flows................................................ $ 100,768,000 $ 9,301,000 $ 110,069,000
Future production and development costs.......................... (26,641,000) (5,481,000) (32,122,000)
Future income tax expense........................................ (16,651,000) (149,000) (16,800,000)
-------------- ------------- --------------
57,476,000 3,671,000 61,147,000
10% annual discount for timing of cash flows..................... (27,806,000) (1,974,000) (29,780,000)
-------------- ------------- --------------
Standardized measure of discounted cash flows.................... $ 29,670,000 $ 1,697,000 $ 31,367,000
-------------- ------------- --------------
-------------- ------------- --------------
</TABLE>
The standardized measure of discounted cash flows does not include any value
relating to the Company's gathering, processing and transmission of gas reserves
owned by other companies.
The following table sets out in aggregate the principle source of change in
the standardized measure of discounted future net cash flows for each of the two
years ended December 31, 1995 and 1994, respectively.
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Sales of oil and gas produced, net of production costs............................. $ (2,570,000) $ (1,239,000)
Net changes in price and production................................................ 7,740,000 6,176,000
Purchase of reserves in place...................................................... 350,000 4,453,000
Extensions, discoveries and improved recovery, less related costs.................. 36,000 148,000
Revisions of previous quantity estimates........................................... (637,000) (71,000)
Development costs incurred during the year......................................... 367,000 877,000
Accretion of discount.............................................................. 3,137,000 2,294,000
Net change in income taxes......................................................... (3,610,000) (2,960,000)
Other.............................................................................. (831,000) (1,248,000)
------------- -------------
Net increase....................................................................... 3,982,000 8,430,000
Balance at beginning of year....................................................... 31,367,000 22,937,000
------------- -------------
Balance at end of year............................................................. $ 35,349,000 $ 31,367,000
------------- -------------
------------- -------------
</TABLE>
F-18
<PAGE>
DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES (CONTINUED)
(UNAUDITED)
Costs incurred in oil and gas property acquisition, exploration and
development activities:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1996 1995
---------- ------------
<S> <C> <C>
Property acquisition costs
United States..................................................... $ 406,824 $ 3,621,984
Canada............................................................ -- --
---------- ------------
$ 406,824 $ 3,621,984
---------- ------------
---------- ------------
Exploration costs
United States..................................................... $ -- $ 116,973
Canada............................................................ 36,352 13,926
---------- ------------
$ 36,352 $ 130,899
---------- ------------
---------- ------------
Development costs
United States..................................................... $ 331,235 $ 259,360
Canada............................................................ 35,336 617,726
---------- ------------
$ 366,571 $ 877,086
---------- ------------
---------- ------------
</TABLE>
Results of operations from producing activities:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
----------------------------------------
UNITED STATES CANADA TOTAL
------------- ---------- -------------
<S> <C> <C> <C>
Oil and gas sales.................................. $ 4,134,515 $ 183,017 $ 4,317,532
Operating expenses................................. (1,369,326) (66,036) (1,435,362)
Production taxes................................... (310,679) (1,001) (311,680)
Depletion and depreciation......................... (1,331,917) (46,000) (1,377,917)
------------- ---------- -------------
1,122,593 69,980 1,192,573
Income taxes....................................... (381,682) (23,793) (405,475)
------------- ---------- -------------
Results of operations from producing activities
(excluding corporate overhead and interest
costs)........................................... $ 740,911 $ 46,187 $ 787,098
------------- ---------- -------------
------------- ---------- -------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
----------------------------------------
UNITED STATES CANADA TOTAL
------------- ---------- -------------
<S> <C> <C> <C>
Oil and gas sales................................... $ 2,651,281 $ 151,005 $ 2,802,286
Operating expenses.................................. (1,294,364) (54,787) (1,349,151)
Production taxes.................................... (213,677) (116) (213,793)
Depletion and depreciation.......................... (989,223) (42,800) (1,032,023)
------------- ---------- -------------
154,017 53,302 207,319
Income taxes........................................ (52,366) (18,123) (70,488)
------------- ---------- -------------
Results of operations from producing activities
(excluding corporate overhead and interest
costs)............................................ $ 101,651 $ 35,179 $ 136,831
------------- ---------- -------------
------------- ---------- -------------
</TABLE>
F-19
<PAGE>
SELECTED QUARTERLY FINANCIAL DATA
(UNAUDITED)
The following table summarizes selected quarterly financial data for each of
the two years ended December 31, 1996 and 1995, respectively.
<TABLE>
<CAPTION>
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
1996
Revenue............................................... $ 989,000 $ 1,056,000 $1,082,000 $1,249,000
Net income (loss)..................................... $ (76,000) $ (62,000) $ (99,000) $ (93,000)
Net income (loss)
per share........................................... $ (0.01) Nil (0.01) Nil
1995
Revenue............................................... $ 575,000 $ 576,000 $ 827,000 $1,147,000*
Net income (loss)..................................... $ (272,000) $ (286,000) $ (188,000) $ 105,000
Net income (loss)
per share........................................... $ (0.02) $ (0.02) (0.01) Nil
</TABLE>
- ------------------------
* Includes $177,000 of gain recognized on the sale of securities.
F-20
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Shareholders of
MSR Exploration Ltd. and Subsidiaries
Fort Worth, Texas
We have reviewed the accompanying condensed consolidated balance sheet of
MSR Exploration Ltd. and subsidiaries (the Company) as of March 31, 1997, and
the related condensed consolidated statements of operations and cash flows for
the three-month periods ended March 31, 1996 and 1997. These financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and of making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to such condensed consolidated financial statements for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of the Company as of December 31,
1996, and the related consolidated statements of operations, stockholders'
equity and cash flows for the year then ended (not presented herein); and in our
report dated March 26, 1997, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion the information set forth in
the accompanying condensed consolidated balance sheet as of December 31, 1996 is
fairly stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Fort Worth, Texas
May 5, 1997
F-21
<PAGE>
MSR EXPLORATION LTD. AND SUBSIDIARIES
(INCORPORATED UNDER THE LAWS OF ALBERTA)
CONDENSED CONSOLIDATED BALANCE SHEETS
U.S. DOLLARS
<TABLE>
<CAPTION>
MARCH 31,
1997 DECEMBER 31,
(UNAUDITED) 1996
------------- -------------
<S> <C> <C>
ASSETS
Cash and cash equivalents.......................................................... $ 348,000 $ 313,000
Accounts receivable................................................................ 715,000 937,000
Inventories........................................................................ 169,000 195,000
Prepaid expenses................................................................... 58,000 15,000
------------- -------------
Total current assets........................................................... 1,290,000 1,460,000
PROPERTIES, PLANT AND EQUIPMENT--NET
("full cost").................................................................... 28,738,000 28,786,000
OTHER ASSETS....................................................................... 455,000 470,000
------------- -------------
$ 30,483,000 $ 30,716,000
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt................................................ $ 823,000 $ 707,000
Accounts payable................................................................. 361,000 277,000
Accrued liabilities.............................................................. 551,000 613,000
------------- -------------
Total current liabilities...................................................... 1,735,000 1,597,000
------------- -------------
LONG-TERM DEBT..................................................................... 5,653,000 5,930,000
------------- -------------
DEFERRED INCOME TAXES.............................................................. 3,807,000 3,833,000
------------- -------------
STOCKHOLDERS' EQUITY
Common stock, without par value Authorized 20,000,000 shares, issued and
outstanding 13,777,014 in 1997 and 13,712,014in 1996........................... 17,861,000 17,861,000
Less notes receivable arising from the issuance of common stock.................. (95,000) (95,000)
Foreign currency translation adjustment.......................................... (130,000) (109,000)
Retained earnings................................................................ 1,652,000 1,699,000
------------- -------------
19,288,000 19,356,000
------------- -------------
$ 30,483,000 $ 30,716,000
------------- -------------
------------- -------------
</TABLE>
See Condensed Notes to Consolidated Financial Statements
F-22
<PAGE>
MSR EXPLORATION LTD. ANDSUBSIDIARIES
(INCORPORATED UNDER THE LAWS OF ALBERTA)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
U.S. DOLLARS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
1997 1996
------------- -------------
<S> <C> <C>
REVENUE
Oil sales........................................................................ $ 615,000 $ 556,000
Gas sales........................................................................ 590,000 415,000
Interest, dividends and other income............................................. 15,000 18,000
------------- -------------
Total revenues................................................................. 1,220,000 989,000
------------- -------------
EXPENSES
Operating expenses............................................................... 397,000 311,000
Production taxes................................................................. 73,000 56,000
Depletion and depreciation....................................................... 367,000 316,000
General and administrative....................................................... 273,000 221,000
Interest......................................................................... 182,000 180,000
------------- -------------
Total expenses................................................................. 1,292,000 1,084,000
------------- -------------
Loss before income taxes........................................................... (72,000) (95,000)
Income tax benefit................................................................. 25,000 19,000
------------- -------------
Net income (loss).................................................................. $ (47,000) $ (76,000)
------------- -------------
------------- -------------
Per share net income (loss)........................................................ $ (0.00) $ (0.01)
------------- -------------
------------- -------------
Weighted average number of shares outstanding...................................... 13,777,014 13,712,014
------------- -------------
------------- -------------
</TABLE>
See Condensed Notes to Consolidated Financial Statements
F-23
<PAGE>
MSR EXPLORATION LTD. AND SUBSIDIARIES
(INCORPORATED UNDER THE LAWS OF ALBERTA)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
U.S. DOLLARS
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
CASH PROVIDED BY (USED FOR):
OPERATING ACTIVITIES
Net (loss)............................................................................ $ (47,000) $ (76,000)
Charges and credits to net loss not affecting cash
Depletion and depreciation.......................................................... 366,000 326,000
Changes in assets and liabilities................................................... 195,000 (331,000)
----------- -----------
NET CASH FROM (USED FOR) OPERATING ACTIVITIES........................................... 514,000 (81,000)
----------- -----------
INVESTING ACTIVITIES
Property, plant and equipment expenditures............................................ (318,000) (225,000)
----------- -----------
FINANCING
Principal payments on long-term debt.................................................. (161,000) (45,000)
Notes payable, bank proceeds.......................................................... 0 150,000
----------- -----------
NET CASH FROM (USED FOR) FINANCING ACTIVITIES........................................... (161,000) 105,000
----------- -----------
NET INCREASE (DECREASE) IN CASH......................................................... 35,000 (201,000)
CASH AT BEGINNING OF PERIOD............................................................. 313,000 280,000
----------- -----------
CASH AT END OF PERIOD................................................................... $ 348,000 $ 79,000
----------- -----------
----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for interest expense.................................................... $ 149,000 $ 159,000
----------- -----------
----------- -----------
Cash payments for income taxes........................................................ $ 0 $ 0
----------- -----------
----------- -----------
</TABLE>
See Condensed Notes to Consolidated Financial Statements
F-24
<PAGE>
MSR EXPLORATION LTD. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
NOTE 1. ACCOUNTING POLICIES AND DISCLOSURES
In the opinion of management of MSR Exploration, Ltd. (the "Company"), the
Company's Consolidated Financial Statements contain all adjustments (consisting
of only normal recurring accruals) necessary to present fairly the financial
position of the Company as of March 31, 1997, and the results of its operations
and its cash flows for the three months ended March 31, 1997 and 1996.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these financial statements
be read in conjunction with the financial statements and notes thereto included
in the Form 10-KSB for the year ended December 31, 1996. The results of
operations for the three month period ended March 31, 1997 and 1996 are not
necessarily indicative of the operating results to be expected for the full
fiscal year.
NOTE 2. PROSPECTIVE BUSINESS COMBINATION
On March 26, 1997, the Company signed a definitive agreement with Mercury
Exploration Company and Mercury Montana, Inc. ("Mercury"), both of Fort Worth,
Texas, to combine all of the oil and gas assets of Mercury with all the oil and
gas assets of the Company by way of the Merger of the Company with and into
Mercury, with Mercury being the surviving corporation (the Business
Combination).
Mercury has over 75 producing wells with proven reserves of more than 5
million barrels of oil, as well as rights and obligations under an agreement
with a utility relating to 304,000 acres of undeveloped oil and gas properties,
located in the Cut Bank Field complex in Montana. In the subject area, Mercury
holds 100% of the oil rights and 30% of the revenue pertaining to liquids
produced by gas wells. Through December 31, 1997, most of the revenues and
operating expenses from Mercury's producing oil and gas properties are subject
to a forward sale. A significant portion of the cash flow attendant to the
Mercury properties will not begin to accrue to the surviving corporation in the
Business Combination until January 1, 1998.
In the Business Combination, the surviving corporation will issue (i) to MSR
shareholders, one share of common stock for each outstanding share of Common
Stock of MSR and (ii) to Mercury shareholders, one share of common stock for
each outstanding share of common stock of Mercury. In addition, the surviving
corporation will assume and/or pay $4,000,000 in bank debt of Mercury
Exploration Company. Mercury currently has outstanding 12,000,000 shares of
common stock and warrants to purchase an additional 5,500,000 common shares at
$1.25 per share and 5,500,000 common shares at $2.00 per share.
In negotiating the exchange ratio in the Business Combination, consideration
was given to the value of the assets of the constituent companies, the estimated
proved oil and gas reserves of the constituent companies and the market value of
the Common Stock of the Company (prior to the date the Agreement was executed
and announced).
Closing the transaction is subject to certain precedent conditions,
including MSR shareholder approval of the Business Combination and the
redomestication and continuance of MSR as a Delaware corporation. MSR is
presently organized under the laws of Alberta, Canada. The closing is expected
to occur immediately subsequent to MSR's reincorporation in Delaware and such
stockholder approval. MSR shareholders owning approximately 40% of the Common
Stock have agreed to vote to approve this transaction. Mercury shareholders have
approved the Business Combination subject to MSR shareholder approval and
certain other conditions. After the Business Combination, Mercury shareholders
will
F-25
<PAGE>
MSR EXPLORATION LTD. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
NOTE 2. PROSPECTIVE BUSINESS COMBINATION (CONTINUED)
effectively own approximately 46.6% of the total issued and outstanding common
stock of the surviving corporation.
The notes payable and long-term debt consists of:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
(UNAUDITED) (AUDITED)
Prime rate plus 1.0% note payable to Banque Paribas (9.5% at
March 31, 1997)................................................ $ 6,260,000 $6,400,000
Various pre-petition claims at interest rates ranging from 6% to
10%, due in monthly, quarterly and annual installments......... 214,000 237,000
------------ ------------
6,476,000 6,637,000
Less current maturities........................................ (823,000) (707,000)
------------ ------------
$ 5,653,000 $5,930,000
------------ ------------
------------ ------------
</TABLE>
During the first quarter of 1995, the Company entered into a revolving
credit/term loan agreement with a bank. The agreement allowed the Company to
borrow up to $15,000,000 under a revolving credit arrangement for a two year
period. On August 15, 1996 the loan limit was set at $6,500,000 and on January
1, 1997 the commitment shall be reduced by monthly payments at a rate of $60,000
for 1997, $65,000 for 1998, $75,000 for 1999, $70,000 for 2000 and $60,000 for
2001. The Company can designate the interest rate on amounts outstanding as
either the London Interbank Offered Rate (LIBOR) + 2.5%, or bank prime plus 1%.
The collateral for this loan agreement consists of substantially all of the
existing assets of the Company and any future reserves acquired. The loan
agreement contains certain restrictive covenants which, among other things,
require the maintenance of a minimum current ratio, net worth and debt service
ratio. As of March 31, 1997 the Company was in compliance with all such
requirements.
F-26
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
MSR Exploration Ltd.
We have audited the accompanying statements of revenues and direct operating
expenses attributable to certain oil and gas properties ("Mercury Montana, Inc.
Properties") (see Note 1) acquired by MSR Exploration Ltd. for the years ended
December 31, 1996 and 1995. These statements are the responsibility of the
management of Mercury Exploration Company, as owner of the properties. Our
responsibility is to express an opinion on these statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
The accompanying statements of revenues and direct operating expenses
reflect the revenues and direct operating expenses attributable to the Mercury
Montana, Inc. Properties described in Note 2 to the statements and is not
intended to be a complete presentation of the revenues and expenses of the
Mercury Montana, Inc. Properties.
In our opinion, the accompanying statements present fairly, in all material
respects, the revenues and direct operating expenses of the Mercury Montana,
Inc. Properties described in Note 1 for the years ended December 31, 1996 and
1995 in accordance with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
April 18, 1997
Dallas, Texas
F-27
<PAGE>
MERCURY MONTANA, INC.
STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
IN THOUSANDS OF U.S. DOLLARS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
-------------------- --------------------
1996 1995 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
(UNAUDITED)
REVENUES
Oil sales.................................................................... $ 2,544 $ 2,020 $ 592 $ 541
Gas sales.................................................................... 215 185 69 50
--------- --------- --------- ---------
Total...................................................................... 2,759 2,205 661 591
--------- --------- --------- ---------
DIRECT OPERATING EXPENSES
Operating expenses........................................................... 1,297 1,178 297 343
Production taxes............................................................. 264 157 62 58
--------- --------- --------- ---------
Total...................................................................... 1,561 1,335 359 401
--------- --------- --------- ---------
EXCESS OF REVENUES OVER DIRECT OPERATING EXPENSES.............................. $ 1,198 $ 870 $ 302 $ 190
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these statements.
F-28
<PAGE>
MERCURY MONTANA, INC. PROPERTIES
NOTES TO STATEMENTS OF REVENUES AND
DIRECT OPERATING EXPENSES
1. BUSINESS COMBINATION
On March 26, 1997, MSR Exploration Ltd., (MSR) and Mercury Montana, Inc.,
(Mercury), a newly formed company created to hold certain oil and gas
properties, entered into an Agreement and Plan of Merger to combine Mercury's
oil and gas assets located in Montana with all of the assets of MSR (the
Business Combination).
The transaction includes the addition of approximately 75 producing wells
and includes the assumption of Mercury's position in a 304,000 acre area
designated the "Wells Agreement" which overlies a large portion of the giant Cut
Bank Field complex. In the subject area, 100% of the oil rights and 30% of the
revenue pertaining to liquids produced by gas wells will accrue to the combined
entities. In October 1996 Mercury entered into a forward sale agreement
effective October 1, 1996, which commits all of Mercury's oil revenue for its
Montana producing properties to a third party through December 31, 1997. Due to
this prior agreement, oil revenues and the associated operating expenses from
the Mercury properties will not begin to accrue to the Company until January 1,
1998.
In consideration for the Business Combination, MSR will issue to Mercury
shareholders 12,000,000 shares of common stock valued at $0.75 per share and
assume and/or pay $4,000,000 in Mercury bank debt. Mercury shareholders will
receive warrants to purchase 5,500,000 common shares at $1.25 per share and
5,500,000 common shares at $2.00 per share.
In negotiating the number of common shares to be issued to Mercury,
consideration was given to the value of the assets, the proved oil and gas
reserves and the market value of the Company's common shares (prior to the date
the Agreement was executed and announced).
The closing of this transaction is subject to a number of conditions
including MSR shareholder's approval which will be sought at a shareholder
meeting anticipated to be held in July of 1997. The closing is expected
immediately subsequent to such approval. Shareholders owning approximately 40%
of MSR common stock have agreed to vote to approve this transaction. Mercury
shareholders have approved the Business Combination subject to MSR shareholder
approval and certain other conditions. As a result of the effective issuance of
the common shares to Mercury by the Company, Mercury shareholders will
effectively own approximately 46.6% of the Company's total issued and
outstanding common stock.
2. BASIS OF PRESENTATION
Historical financial statements reflecting financial position, results of
operations and cash flows required by generally accepted accounting principles
are not presented, as such information is neither readily available on an
individual property basis nor meaningful for the properties included in the
Business Combination. Accordingly, these statements of revenues and direct
operating expenses are presented in lieu of the financial statements required
under Rule 3-05 of Securities and Exchange Commission Regulation S-X. All of the
statements and disclosures are stated in U.S. Dollars.
The accompanying statements of revenues and direct operating expenses
represent Mercury's net ownership interest in the properties included in the
Business Combination and are presented on the full cost accrual basis of
accounting. Depreciation, depletion, and amortization, allocated general and
administrative expenses, interest expense, and income taxes have been excluded
because the property interests included in the Business Combination are from a
newly formed business and the expenses incurred are not necessarily indicative
of the expenses to be incurred by MSR.
F-29
<PAGE>
MERCURY MONTANA, INC. PROPERTIES
NOTES TO STATEMENTS OF REVENUES AND
DIRECT OPERATING EXPENSES (CONTINUED)
3. FORWARD SALE OF OIL REVENUES
Mercury Montana, Inc.'s oil revenues and associated operating expenses
included in the statements of revenues and direct operating expenses are subject
to a prior forward sales agreement for the period of October 1996 through
December 1997. As a result, such revenue and expenses for those periods belong
to the Parent (Mercury Exploration Company) and will be excluded from Mercury
Montana, Inc.'s statements of operations for the calendar year of 1997. The oil
revenue and operating expenses will start accruing to Mercury Montana, Inc. on
January 1, 1998.
Revenues subject to the forward sales agreement amounted to $2,544,000 and
$1,536,000, respectively for 1996 and for the three month period ended March 31,
1997. Direct operating expenses subject to the sale were $592,000 and $340,000
respectively, for the same periods. These amounts have been reflected in the
statements of revenues and direct operating expenses to disclose what operations
would have been if the forward sales contract had not been in effect.
4. OIL AND GAS RESERVES INFORMATION (UNAUDITED)
Unaudited reserve information related to the Mercury properties is presented
in the tables below and is based on a report prepared by MSR's independent
petroleum engineers as of December 31, 1996 and 1995 and calculated as of
December 31, 1994 by adding 1995 production to the December 31, 1995 amounts.
ESTIMATED QUANTITIES OF PROVED RESERVES
<TABLE>
<CAPTION>
OIL GAS
(MBBL) (MMCF)
--------- ---------
<S> <C> <C>
December 31, 1994........................................................ 5,414.5 1,488.7
Production for 1995.................................................... (123.3) (87.8)
--------- ---------
December 31, 1995........................................................ 5,291.2 1,400.9
Production for 1996.................................................... (129.9) (87.4)
Revisions of previous estimates........................................ 120.1 25.2
--------- ---------
December 31, 1996........................................................ 5,281.4 1,338.7
--------- ---------
--------- ---------
Proved Developed Reserves
As of December 31, 1994................................................ 1,761.2 1,488.7
As of December 31, 1995................................................ 1,637.9 1,400.9
As of December 31, 1996................................................ 1,627.6 1,338.7
</TABLE>
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL
AND GAS RESERVES
The standardized measure of discounted future net cash flows ("Standardized
Measure") is a disclosure required by the Financial Accounting Standards Board.
The Standardized Measure does not purport to present the fair market value of
the proved oil and gas reserves. This would require consideration of expected
future economic and operating conditions, which are not taken into account in
calculating the Standardized Measure.
F-30
<PAGE>
MERCURY MONTANA, INC. PROPERTIES
NOTES TO STATEMENTS OF REVENUES AND
DIRECT OPERATING EXPENSES (CONTINUED)
4. OIL AND GAS RESERVES INFORMATION (UNAUDITED) (CONTINUED)
Under the Standardized Measure, future cash inflows were estimated by
applying December 31, 1996 and 1995 prices to the estimated future production of
proved reserves. Future cash inflows were reduced by estimated future production
and development costs based on December 31, 1996 and 1995 costs to determine
pre-tax cash inflows. Future net cash inflows were discounted using a 10% annual
discount rate to arrive at the Standardized Measure. The following Standardized
Measure and changes in the Standardized Measure are based on the reserve
estimate prepared by the Company's independent petroleum engineers as of
December 31, 1996 and 1995.
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED
RESERVES
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
---------- ----------
<S> <C> <C>
(AMOUNTS IN THOUSANDS)
Future cash flows..................................................... $ 119,585 $ 89,555
Future production and development costs............................... (71,893) (47,752)
Future income tax expense............................................. (10,200) (9,790)
---------- ----------
Future net cash flows................................................. 37,492 32,013
10% annual discount for estimated timing of cash flows................ (20,445) (18,568)
---------- ----------
Standardized measure of discounted future net cash flows.............. $ 17,047 $ 13,445
---------- ----------
---------- ----------
</TABLE>
CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
(amounts in thousands)
<TABLE>
<S> <C> <C>
Standardized measure, January 1, 1996................... $ 13,445
---------
Sales of oil and gas produced, net of production
costs................................................. (1,198)
Net changes in price and production..................... 2,805
Revisions of previous quantity estimates................ 500
Accretion of discount................................... 1,345
Net change in income taxes.............................. (584)
Other................................................... 734
---------
Net increase.......................................... 3,602
---------
Standardized measure, December 31, 1996................. $ 17,047
---------
---------
</TABLE>
Changes in the supply and demand for oil, natural gas and natural gas
liquids, hydrocarbon price volatility, inflation, timing of production, reserve
revisions and other factors make these estimates inherently imprecise and
subject to substantial revision. As a result, these measures are not the
Company's estimate of future cash flows nor do these measures serve as an
estimate of current market value.
F-31
<PAGE>
APPENDIX "A"
CERTIFICATE OF DOMESTICATION
OF
MSR EXPLORATION LTD.
MSR Exploration Ltd. (the "Corporation"), a corporation organized and
existing under the laws of the Province of Alberta, Country of Canada does
hereby certify as follows:
FIRST: The Corporation was continued as an Alberta, Canada corporation on
the 12th day of April 1985, and was first formed as a corporation
pursuant to the amalgamation on the day of 1981 of Monte Grande
Exploration Ltd., a Canadian corporation first incorporated on the 25th day of
July 1957, and Mountain States Resources Ltd., a Canadian corporation first
incorporated on the 1st day of September 1971.
SECOND: The name of the Corporation immediately prior to the filing of this
Certificate of Domestication was MSR Exploration Ltd.
THIRD: The name of the Corporation under which it is filing a Certificate
of Incorporation is MSR Exploration Ltd.
FOURTH: The principal place of business of the Corporation immediately
prior to the filing of this Certificate of Domestication was the Country of the
United States of America.
FIFTH: A Certificate of Incorporation of MSR Exploration Ltd. is being
filed contemporaneously with this Certificate of Domestication.
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Domestication to be signed by , its , who is
authorized to sign this Certificate of Domestication on behalf of the
Corporation, this day of , 1997.
MSR EXPLORATION LTD.
By: __________________________________
Name: _____________________________
Title: ____________________________
A-1
<PAGE>
APPENDIX "B"
[To be filed by amendment]
<PAGE>
APPENDIX "C"
DISSENTERS' RIGHTS UNDER
ALBERTA BUSINESS CORPORATIONS ACT
SECTION 184
(1) Subject to sections 185 and 234, a holder of shares of any class of a
corporation may dissent if the corporation resolves to
(a) amend its articles under section 167 or 168 to add, change or remove any
provisions restricting or constraining the issue or transfer of shares of
that class,
(b) amend its articles under section 167 or 168 to add, change or remove any
restrictions on the business or businesses that the corporation may carry
on,
(c) amalgamate with another corporation, otherwise than under section 178 or
180.1,
(d) be continued under the laws of another jurisdiction under section 182,
or
(e) sell, lease or exchange all or substantially all its property under
section 183.
(2) A holder of shares of any class or series of shares entitled to subsection
(20), a shareholder entitled to vote under section 170, other than section
170(1)(a), may dissent if the corporation resolves to amend its articles in
a manner described in that section.
(3) In addition to any other right he may have, but subject to section (20), a
shareholder entitled to dissent under this section and who complies with
this section is entitled to be paid by the corporation the fair value of the
shares held by him in respect of which he dissents, determined as of the
close of business on the last business day before the day on which the
resolution from which he dissents was adopted.
(4) A dissenting shareholder may only claim under this section with respect to
all the shares of a class held by him or on behalf of any one beneficial
owner and registered in the name of the dissenting shareholder.
(5) A dissenting shareholder shall send to the corporation a written objection
to a resolution referred to in subsection (1) or (2)
(a) at or before any meeting of shareholders at which the resolution is to
be voted on, or
(b) if the corporation did not send notice to the shareholder of the purpose
of the meeting or of his right to dissent, within a reasonable time after
he learns that the resolution has been adopted.
(6) An application may be made to the Court by originating notice after the
adoption of a resolution referred to in subsection (1) or (2)
(a) by the corporation, or
(b) by a shareholder if he has sent an objection to the corporation under
subsection(5)
to fix the fair value in accordance with subsection (3) of the shares of a
shareholder who dissents under this section.
(7) If an application is made under subsection (6), the corporation shall,
unless the Court otherwise orders, send to each dissenting shareholder a
written offer to pay him an amount considered by the directors to be the
fair value of the shares.
C-1
<PAGE>
(8) Unless the Court otherwise orders, an offer referred to in subsection (7)
shall be sent to each dissenting shareholder
(a) at least 10 days before the date on which the application is returnable,
if the corporation is the applicant, or
(b) within 10 days after the corporation is served with a copy of the
originating notice, if a shareholder is the applicant.
(9) Every offer made under subsection (7) shall
(a) be made on the same terms, and
(b) contain or be accompanied by a statement showing how the fair value was
determined.
(10) A dissenting shareholder may make an agreement with the corporation for the
purchase of his shares by the corporation, in the amount of the
corporation's offer under subsection (7) or otherwise, at any time before
the Court pronounces an order fixing the fair value of the shares.
(11) A dissenting shareholder
(a) is not required to give security for costs in respect of an application
under subsection (6), and
(b) except in special circumstances shall not be required to pay the costs
of the application or appraisal.
(12) In connection with an application under subsection (6), the Court may give
directions for
(a) joining as parties all dissenting shareholders whose shares have not
been purchased by the corporation and for the representation of
dissenting shareholders who, in the opinion of the Court, are in need of
representation, and
(b) the trial of issues and interlocutory matters, including pleadings and
examinations for discovery.
(13) On an application under subsection (6), the Court shall make an order
(a) fixing the fair value of the shares in accordance with subsection (3) of
all dissenting shareholders who are parties to the application,
(b) giving judgment in that amount against the corporation and in favor of
each of those dissenting shareholders, and
(c) fixing the time within which the corporation must pay that amount to a
shareholder.
(14) On
(a) the action approved by the resolution from which the shareholder
dissents becoming effective,
(b) the making of an agreement under subsection (10) between the corporation
and the dissenting shareholder as to the payment to be made by the
corporation for his shares, whether by the acceptance of the
corporation's offer under subsection (7) or otherwise, or
(c) the pronouncement of an order under subsection (13),
whichever first occurs, the shareholder ceases to have any rights as a
shareholder other than the right to be paid the fair value of his shares in
the amount agreed to between the corporation and the shareholder or in the
amount of the judgment, as the case may be.
(15) Subsection 14(a) does not apply to a shareholder referred to in subsection
(5)(b).
(16) Until one of the events mentioned in subsection (14) occurs,
(a) the shareholder may withdraw his dissent, or
C-2
<PAGE>
(b) the corporation may rescind the resolution,
and in either event proceedings under this section shall be discontinued.
(17) The Court may in its discretion allow a reasonable rate of interest on the
amount payable to each dissenting shareholder, from the date on which the
shareholder ceases to have any rights as a shareholder by reason of
subsection (14) until the date of payment.
(18) If subsection (20) applies, the corporation shall, within 10 days after
(a) the pronouncement of an order under subsection (13), or
(b) the making of an agreement between the shareholder and the corporation
as to the payment to be made for his shares,
notify each dissenting shareholder that it is unable lawfully to pay
dissenting shareholders for their shares.
(19) Notwithstanding that a judgment has been given in favor of a dissenting
shareholder under subsection (13)(b), if subsection (20) applies, the
dissenting shareholder, by written notice delivered to the corporation
within 30 days after receiving the notice under subsection (18), may
withdraw his notice of objection, in which case the corporation is deemed to
consent to the withdrawal and the shareholder is reinstated to his full
rights as a shareholder, failing which he retains a status as a claimant
against the corporation, to be paid as soon as the corporation is lawfully
able to do so or, in a liquidation, to be ranked subordinate to the rights
of creditors of the corporation but prior to its shareholders.
(20) A corporation shall not make a payment to a dissenting shareholder under
this section if there are reasonable grounds for believing that
(a) the corporation is or would after the payment be unable to pay its
liabilities as they become due, or
(b) the realizable value of the corporation's assets would thereby be less
than the aggregate of its liabilities.
C-3
<PAGE>
APPENDIX "D"
MSR EXPLORATION LTD.
WRITTEN CONSENT OF STOCKHOLDERS
IN LIEU OF SPECIAL MEETING
The undersigned, being the holders of at least a majority of the issued and
outstanding shares of Common Stock, no par value, of MSR Exploration Ltd., a
Delaware corporation (the "Corporation"), entitled to vote or take action if a
meeting of the stockholders was called for such purposes, hereby waive any and
all requirements for calling, giving notice of, and holding a special meeting of
the stockholders of the Corporation, and do hereby consent, pursuant to Section
228 of the Delaware General Corporation Law, to the adoption of the following
resolutions;
RESOLVED, that the undersigned do hereby approve the Agreement and Plan
of Merger dated as of March 26, 1997, by and among the Company, Mercury
Montana, Inc., a Delaware corporation ("Mercury"), and Mercury Exploration
Company ("Parent"), a Texas corporation and the majority shareholder of
Mercury, as amended by Amendment No. 1 to Agreement and Plan of Merger dated
as of June 17, 1997 (the "Merger Agreement"), pursuant to which the Company
is to be merged with and into Mercury with Mercury being the surviving
corporation, and each share of common stock of the Company will be converted
into the right to receive one share of common stock, par value $.01 per
share, of the surviving corporation (the "Merger"), all upon the terms and
subject to the conditions set forth in the Merger Agreement, a copy of which
was included as an appendix to the Proxy Statement/Joint Prospectus for this
consent previously furnished to each shareholder of the Company.
RESOLVED FURTHER, that the board of directors and the officers of the
Company are authorized to take or cause to be taken all such further action
and to sign and enter into such additional documents, instruments and
agreements as may be necessary or appropriate to consummate the Merger and
carry out the intent and purposes of the foregoing resolution.
IN WITNESS WHEREOF, the undersigned have executed this instrument dated as
of the day of 1997.
______________________________________
As proxy on behalf of the Stockholders
Whose
Names Appear on Schedule I hereto
D-1
<PAGE>
SCHEDULE I
NAMES AND HOLDINGS OF SHAREHOLDERS
ON BEHALF OF WHOM THIS CONSENT HAS BEEN EXECUTED
<TABLE>
<CAPTION>
NO. OF
NAME SHARES
- ------------------------------------------------------------------------------------------------------- ---------
<S> <C>
</TABLE>
D-2
<PAGE>
APPENDIX "E"
AGREEMENT AND PLAN OF MERGER
AMONG
MSR EXPLORATION LTD.
MERCURY EXPLORATION COMPANY
AND
MERCURY MONTANA, INC.
MARCH 26, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C> <C>
ARTICLE I
THE MERGER.................................................................................................. E-1
1.1 THE MERGER....................................................................................... E-1
1.2 CLOSING DATE..................................................................................... E-1
1.3 CONSUMMATION OF THE MERGER....................................................................... E-1
1.4 EFFECTS OF THE MERGER............................................................................ E-1
1.5 ARTICLES OF INCORPORATION; BYLAWS................................................................ E-1
1.6 DIRECTORS AND OFFICERS........................................................................... E-2
1.7 CONVERSION OF SECURITIES......................................................................... E-2
1.8 DISSENTING SHARES................................................................................ E-2
1.9 PAYMENT OF MERGER CONSIDERATION TO HOLDERS OF SR COMMON STOCK.................................... E-2
1.10 PAYMENT OF MERGER CONSIDERATION TO MERCURY AND MINORITY STOCKHOLDERS............................. E-4
1.11 WITHHOLDING TAXES................................................................................ E-4
1.12 TAKING OF NECESSARY ACTION; FURTHER ACTION....................................................... E-4
ARTICLE II
REPRESENTATIONS AND WARRANTIES.............................................................................. E-5
2.1 REPRESENTATIONS AND WARRANTIES OF MSR............................................................ E-5
2.2 REPRESENTATIONS AND WARRANTIES OF MERCURY AND MERCURY SUB........................................ E-15
ARTICLE III
COVENANTS OF MERCURY AND MERCURY SUB PRIOR TO THE EFFECTIVE TIME............................................ E-26
3.1 CONDUCT OF BUSINESS BY MERCURY SUB PENDING THE MERGER............................................ E-26
3.2 PROXY STATEMENT.................................................................................. E-27
3.3 ACQUISITION PROPOSALS............................................................................ E-28
ARTICLE IV
COVENANTS OF MSR PRIOR TO THE EFFECTIVE TIME................................................................ E-28
4.1 CONDUCT OF BUSINESS BY MSR PENDING THE MERGER.................................................... E-28
4.2 PROXY STATEMENT.................................................................................. E-28
4.3 MEETING OF STOCKHOLDERS OF MSR................................................................... E-30
4.4 REGISTRATION STATEMENT........................................................................... E-30
4.5 STOCK EXCHANGE LISTING........................................................................... E-30
4.6 FINANCING........................................................................................ E-30
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C> <C>
ARTICLE V
ADDITIONAL AGREEMENTS....................................................................................... E-31
5.1 ACCOUNTANTS LETTER............................................................................... E-31
5.2 FILINGS; CONSENTS; REASONABLE EFFORTS............................................................ E-31
5.3 NOTIFICATION OF CERTAIN MATTERS.................................................................. E-31
5.4 AGREEMENT TO DEFEND.............................................................................. E-31
5.5 EXPENSES......................................................................................... E-31
5.6 SURVIVING CORPORATION AND SUBSIDIARIES BOARDS OF DIRECTORS, EXECUTIVE COMMITTEES AND OFFICERS.... E-31
5.7 INDEMNIFICATION.................................................................................. E-32
5.8 CERTAIN TAX AND ACCOUNTING MATTERS............................................................... E-33
5.9 AGREEMENT REGARDING CERTAIN REVENUES AND EXPENSES................................................ E-34
5.10 ARTICLES OF INCORPORATION AND BYLAWS............................................................. E-35
5.11 ALTERNATIVE TRANSACTION.......................................................................... E-35
5.12 CONTINGENT WARRANT............................................................................... E-35
5.13 MANAGEMENT AGREEMENT............................................................................. E-35
ARTICLE VI
CONDITIONS.................................................................................................. E-36
6.1 CONDITIONS TO OBLIGATION OF EACH PARTY TO EFFECT THE MERGER...................................... E-36
6.2 ADDITIONAL CONDITIONS TO OBLIGATIONS OF MSR...................................................... E-37
6.3 ADDITIONAL CONDITIONS TO OBLIGATIONS OF MERCURY AND MERCURY SUB.................................. E-37
ARTICLE VII
MISCELLANEOUS............................................................................................... E-38
7.1 TERMINATION...................................................................................... E-38
7.2 EFFECT OF TERMINATION............................................................................ E-38
7.3 WAIVER AND AMENDMENT............................................................................. E-38
7.4 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS........................................... E-39
7.5 CERTAIN DEFINITIONS.............................................................................. E-39
7.6 PUBLIC STATEMENTS................................................................................ E-39
7.7 REMEDIES NOT EXCLUSIVE........................................................................... E-39
7.8 ASSIGNMENT....................................................................................... E-39
7.9 NOTICES.......................................................................................... E-39
7.10 GOVERNING LAW.................................................................................... E-40
7.11 SEVERABILITY..................................................................................... E-40
7.12 COUNTERPARTS..................................................................................... E-40
7.13 HEADINGS......................................................................................... E-40
7.14 CONFIDENTIALITY AGREEMENT........................................................................ E-40
7.15 ENTIRE AGREEMENT; THIRD PARTY BENEFICIARIES; COMMUNITY PROPERTY INTERESTS........................ E-41
7.16 DISCLOSURE LETTERS............................................................................... E-51
</TABLE>
ii
<PAGE>
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger, dated as of the 26th day of March, 1997
(this "AGREEMENT"), is among MSR Exploration Ltd., an Alberta, Canada
corporation which has agreed to redomesticate to the State of Delaware subject
to the terms hereof ("MSR"), Mercury Exploration Company, a Texas corporation
("MERCURY"), and Mercury Montana, Inc., a Delaware corporation ("MERCURY SUB").
WHEREAS, subject to and in accordance with the terms and conditions of this
Agreement, the respective Boards of Directors of MSR, Mercury and Mercury Sub,
and Mercury and the "MINORITY STOCKHOLDERS" (as such term is defined below), as
the owners and holders of all of the capital stock of Mercury Sub, have approved
the merger of MSR with and into Mercury Sub (the "MERGER"); and
WHEREAS, the parties hereto desire to set forth certain representations,
warranties and covenants made by each to the other as an inducement to the
consummation of the Merger;
NOW, THEREFORE, in consideration of the premises and of the mutual
representations, warranties and covenants herein contained, the parties hereto
hereby agree as follows:
ARTICLE I
THE MERGER
1.1 THE MERGER. Subject to and in accordance with the terms and conditions
of this Agreement and in accordance with the General Corporation Law of Delaware
(the "DGCL"), at the Effective Time (as defined in Section 1.3) MSR shall be
merged with and into Mercury Sub. As a result of the Merger, the separate
corporate existence of MSR shall cease and Mercury Sub shall continue as the
surviving corporation (sometimes referred to herein as the "SURVIVING
CORPORATION"), and all the properties, rights, privileges, powers and franchises
of Mercury Sub and MSR shall vest in the Surviving Corporation, without any
transfer or assignment having occurred, and all debts, liabilities and duties of
Mercury Sub and MSR shall attach to the Surviving Corporation, all in accordance
with the DGCL.
1.2 CLOSING DATE. The closing of the transactions contemplated by this
Agreement (the "CLOSING") shall take place at the offices of Thompson & Knight,
P.C., 801 Cherry Street, Fort Worth, Texas 75102, as soon as practicable after
the satisfaction or waiver of the conditions set forth in Article VI, or at such
other time or place or on such other date as MSR and Mercury shall agree,
provided that the closing conditions set forth in Article VI shall have been
satisfied or waived at or prior to such time. The date on which the Closing
occurs is herein referred to as the "CLOSING DATE".
1.3 CONSUMMATION OF THE MERGER. As soon as practicable on the Closing
Date, the parties hereto will cause the Merger to be consummated by filing with
the Secretary of State of Delaware a certificate of merger in such form as
required by, and executed in accordance with, the relevant provisions of the
DGCL. The "EFFECTIVE TIME" of the Merger as that term is used in this Agreement
shall mean such time as the certificate of merger is duly filed with the
Secretary of State of Delaware or at such later time (not to exceed 90 days from
the date the certificate is filed) as is specified in the certificate of merger
pursuant to the mutual agreement of MSR and Mercury.
1.4 EFFECTS OF THE MERGER. The Merger shall have the effects set forth in
the applicable provisions of the DGCL.
1.5 ARTICLES OF INCORPORATION; BYLAWS. The Articles of Incorporation of
Mercury Sub, as in effect immediately prior to the Effective Time, shall be the
Articles of Incorporation of the Surviving Corporation and thereafter shall
continue to be its Articles of Incorporation until amended as provided therein
and under the DGCL; provided, however, that the name of the Surviving
Corporation after the Effective Time shall be MSR Exploration Ltd., and the
Articles of Incorporation of the Surviving Corporation shall be amended to
reflect such name change. The bylaws of Mercury Sub, as in effect immediately
prior to the
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Effective Time, shall be the bylaws of the Surviving Corporation and thereafter
shall continue to be its bylaws until amended as provided therein and under the
DGCL.
1.6 DIRECTORS AND OFFICERS. At and after the Effective Time (a) the
respective boards of directors of the Surviving Corporation and its subsidiaries
shall be comprised of (i) three persons designated by MSR immediately prior to
the Effective Time (which such designees shall be Otto Buis, Steve Morris and
Patrick Montalban) and (ii) three persons designated by Mercury immediately
prior to the Effective Time, each to hold office in accordance with the Articles
of Incorporation and bylaws of the Surviving Corporation and its subsidiaries,
and (b) the officers of the MSR and its subsidiaries shall be as follows:
Chairman of the Board and Chief Executive Officer--Otto J. Buis, President and
Chief Operating Officer--Thomas F. Darden, Vice President--Glenn M. Darden, and
such other officers as shall be elected by the respective boards of directors of
the Surviving Corporation and its subsidiaries, in each case until their
respective successors are duly elected or appointed and qualified.
1.7 CONVERSION OF SECURITIES. Subject to the terms and conditions of this
Agreement, at the Effective Time, by virtue of the Merger and without any action
on the part of MSR, Mercury, Mercury Sub or their stockholders:
(a) Each share of common stock, no par value per share, of MSR issued
and outstanding immediately prior to the Effective Time ("MSR COMMON
STOCK"), shall be converted into the right to receive one share of common
stock, par value $.01 per share, of the Surviving Corporation ("SURVIVING
CORPORATION COMMON STOCK"), and each warrant to purchase shares of MSR
Common Stock issued and outstanding immediately prior to the Effective Time
shall be converted into a warrant to purchase the same number of shares of
Surviving Corporation Common Stock.
(b) Each share of common stock, par value $.01 per share, of Mercury Sub
issued and outstanding immediately prior to the Effective Time ("MERCURY SUB
COMMON STOCK"), shall be converted into one share of Surviving Corporation
Common Stock, and each warrant and option to purchase shares of Mercury Sub
Common Stock issued and outstanding immediately prior to the Effective Time
shall be converted into a warrant or option to purchase the same number of
shares of Surviving Corporation Common Stock.
The foregoing rights to receive shares of Surviving Corporation Common Stock
or warrants or options to purchase shares of Surviving Corporation Common Stock
are herein collectively referred to as the "Merger Consideration".
1.8 DISSENTING SHARES. Notwithstanding anything in this Agreement to the
contrary, shares of MSR Common Stock outstanding immediately prior to the
Effective Time and held by a holder who has not voted in favor of the Merger and
who has demanded appraisal of such shares in accordance with the DGCL, if the
DGCl provides for appraisal rights for such shares in the Merger ("DISSENTING
SHARES"), shall not be converted into a right to receive the applicable Merger
Consideration, but, instead, such holder shall be entitled to appraisal rights
for his Dissenting Shares in accordance with the provisions of the DGCL;
provided, however, that if such holder fails to perfect or effectively withdraws
or loses his right to appraisal of his Dissenting Shares under the DGCL, such
Dissenting Shares shall be treated as if they had been converted as of the
Effective Time into a right to receive the applicable Merger Consideration. MSR
shall give Mercury prompt notice of any demands received by MSR for appraisal of
shares of MSR Common Stock, and, prior to the Effective Time, Mercury shall have
the right to participate in all negotiations and proceedings with respect to
such demands. Prior to the Effective Time, MSR shall not, except with the prior
written consent of Mercury, make any payment with respect to, or settle or offer
to settle, any such demands.
1.9 PAYMENT OF MERGER CONSIDERATION TO HOLDERS OF MSR COMMON STOCK.
(a) Pursuant to an agreement to be entered into on or before the Closing
Date among MSR, Mercury, and such designee, MSR shall designate a bank or trust
company reasonably acceptable to
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Mercury to act as exchange agent in the Merger (the "EXCHANGE AGENT") for
purposes of effecting the exchange for the Merger Consideration of certificates
that, immediately prior to the Effective Time, representing shares of MSR Common
Stock, or warrants to purchase MSR Common Stock, entitled to receive the Merger
Consideration pursuant to Section 1.7 ("CERTIFICATES"). Upon the surrender to
the Exchange Agent of each Certificate, the Exchange Agent shall pay the holder
of such Certificate the applicable Merger Consideration multiplied by the number
of shares of MSR Common Stock formerly represented by such Certificate in
exchange therefor (or, in the case of a warrant to purchase shares of MSR Common
Stock, a warrant to purchase a like amount of shares of Surviving Corporation
Common Stock in exchange therefor), and such Certificate shall forthwith be
cancelled. Until so surrendered and exchanged, each such Certificate shall
represent solely the right to receive the applicable Merger Consideration. No
interest shall be paid or accrue on the Merger Consideration. If the Merger
Consideration (or any portion thereof) is to be delivered to any person other
than the person in whose name the Certificate surrendered in exchange therefor
is registered, it shall be a condition to such exchange that (i) the Certificate
so surrendered shall be properly endorsed or otherwise be in proper form for
transfer and (ii) the person requesting such exchange shall pay to the Exchange
Agent any transfer or other Taxes (as defined below) required by reason of the
payment of the Merger Consideration to a person other than the registered holder
of the Certificate surrendered or establish to the satisfaction of the Exchange
Agent that such Tax has been paid or is not applicable. MSR may impose such
other reasonable conditions upon the exchange of Certificates as it may deem
necessary or desirable and as are consistent with the provisions of this
Agreement. Surviving Corporation Common Stock into which MSR Common Stock shall
be converted pursuant to the Merger shall be deemed to have been issued at the
Effective Time; provided, however, that, subject to Applicable Laws (as defined
below), no holder of an unsurrendered Certificate shall be entitled, until the
surrender of such Certificate, to vote the shares of Surviving Corporation
Common Stock into which his MSR Common Stock shall have been converted.
(b) At or immediately prior to the Closing, MSR shall deposit, or cause to
be deposited, in trust with the Exchange Agent stock certificates representing
the aggregate stock Merger Consideration to which holders of shares of MSR
Common Stock shall be entitled at the Effective Time pursuant to Section 1.7
(the "PAYMENT FUND"). The Exchange Agent shall, pursuant to irrevocable
instructions, make the exchanges referred to in Section 1.9(a) out of the
Payment Fund. The Payment Fund shall not be used for any other purpose except as
expressly provided in this Agreement.
(c) Unless and until a Certificate is surrendered to the Exchange Agent,
dividends/distributions payable to the holders of record of Surviving
Corporation Common Stock shall not be paid to the holder of such Certificate in
respect of the Surviving Corporation Common Stock represented thereby, but,
subject to applicable abandoned property, escheat, and similar laws, there shall
be paid to the holder thereof (i) upon surrender of such Certificate, the amount
of any dividends/distributions, the record date for the determination of the
holders entitled to which shall be after the Effective Time, which theretofore
shall have become payable with respect to the shares of Surviving Corporation
Common Stock represented by such Certificate and issued in exchange upon its
surrender, but without interest on such dividends/ distributions, and (ii) after
surrender of such Certificate, the amount of any dividends/distributions with
respect to such shares of Surviving Corporation Common Stock, the record date
for the determination of the holders entitled to which shall be after the
Effective Time but prior to the surrender of such Certificate, and the payment
date of which shall be subsequent to such surrender, such amount to be paid on
such payment date.
(d) Promptly following the date which is one year after the Effective Time,
the Exchange Agent shall deliver to the Surviving Corporation all certificates
other documents and instruments in its possession relating to the transactions
described in this Agreement, and the Exchange Agent's duties shall terminate.
Thereafter, each holder of a Certificate may surrender such Certificate to the
Surviving Corporation and (subject to applicable abandoned property, escheat,
and similar laws) receive in exchange therefor the
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applicable Merger Consideration and any amounts to which such holder is entitled
pursuant to Sections 1.9(c), but such holder shall have no greater rights
against the Surviving Corporation than may be accorded to general creditors of
the Surviving Corporation under Applicable Law. Notwithstanding anything in this
Agreement to the contrary, neither the Exchange Agent nor any party hereto shall
be liable to a holder of shares of MSR Common Stock for any cash or other
property delivered to a public official pursuant to applicable abandoned
property, escheat, or similar laws.
(e) Promptly after the Effective Time, the Exchange Agent shall mail to each
record holder of a Certificate a form of letter of transmittal (which shall
specify that delivery of a Certificate shall be effected, and risk of loss and
title to a Certificate shall pass, only upon proper delivery of the Certificate
to the Exchange Agent and shall be in such form and contain such other
provisions, as MSR shall specify) and instructions for use in surrendering such
Certificate and receiving the applicable Merger Consideration in exchange
therefor.
(f) At the Effective Time, the stock transfer books of MSR shall be closed
and no transfers of MSR Common Stock shall thereafter be made. If, after the
Effective Time, Certificates are presented to the Surviving Corporation or the
Exchange Agent, they shall be cancelled and exchanged for the applicable Merger
Consideration as provided in Section 1.7, subject to Applicable Law in the case
of Dissenting Shares.
(g) In the event any Certificate shall have been lost, stolen, or destroyed,
upon the making of an affidavit of that fact by the person claiming such
Certificate to be lost, stolen, or destroyed, the Surviving Corporation shall
issue or cause to be issued in exchange for such lost, stolen, or destroyed
Certificate the Merger Consideration deliverable in respect thereof as
determined in accordance with Section 1.7. When authorizing such issue of the
Merger Consideration in exchange therefor, the Board of Directors of the
Surviving Corporation may, in its discretion and as a condition precedent to the
issuance thereof, require the owner of such lost, stolen, or destroyed
Certificate to give the Surviving Corporation a bond in such sum as it may
direct as indemnity against any claim that may be made against the Surviving
Corporation with respect to the Certificate alleged to have been lost, stolen,
or destroyed.
1.10 PAYMENT OF MERGER CONSIDERATION TO MERCURY AND MINORITY
STOCKHOLDERS. On the Closing Date, immediately following the Effective Time,
Mercury and the Minority Stockholders, as the owners and holders of the
certificate or certificates that prior thereto represented all of the Mercury
Sub Common Stock and warrants and options to purchase Mercury Common Stock,
shall surrender such certificates to the Surviving Corporation or its transfer
agent. Upon the surrender by Mercury and the Minority Stockholders to the
Surviving Corporation or its transfer agent of all of such certificates, the
Surviving Corporation shall pay and deliver to Mercury and the Minority
Stockholders the aggregate amount of the applicable Merger Consideration to
which Mercury and the Minority Stockholders are entitled in accordance with
Section 1.7 above, and such certificates shall forthwith be cancelled.
1.11 WITHHOLDING TAXES. The distribution of the Merger Consideration will
be subject to all applicable withholding requirements under federal and foreign
tax laws.
1.12 TAKING OF NECESSARY ACTION; FURTHER ACTION. The parties hereto shall
take all such reasonable and lawful action as may be necessary or appropriate in
order to effectuate the Merger as promptly as possible. If, at any time after
the Effective Time, any such further action is necessary or desirable to carry
out the purposes of this Agreement and to vest the Surviving Corporation with
full right, title and possession to all assets, property, rights, privileges,
powers and franchises of Mercury Sub or MSR, such corporations shall direct
their respective officers and directors to take all such lawful and necessary
action.
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ARTICLE II
REPRESENTATIONS AND WARRANTIES
2.1 REPRESENTATIONS AND WARRANTIES OF MSR. MSR hereby represents and
warrants to Mercury, Mercury Sub and the Minority Stockholders that:
(a) ORGANIZATION AND COMPLIANCE WITH LAW. Each of MSR and its
consolidated subsidiaries (the "MSR SUBSIDIARIES") is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction in which it is chartered or organized and has all requisite
corporate power and corporate authority and all necessary governmental
authorizations to own, lease and operate all of its properties and assets
and to carry on its business as now being conducted, and the name of each
MSR Subsidiary, and the jurisdiction in which each is chartered or organized
are set forth in Section 2.1(a) of the disclosure letter delivered by MSR to
Mercury as of March 10, 1997 (the "MSR DISCLOSURE LETTER"). Except as set
forth in Section 2.1(a) of the MSR Disclosure Letter, each of MSR and the
MSR Subsidiaries is duly qualified as a foreign corporation to do business,
and is in good standing, in each jurisdiction in which the property owned,
leased or operated by it or the nature of the business conducted by it makes
such qualification necessary.
(b) CAPITALIZATION.
(i) The authorized capital stock of MSR consists of 20,000,000
shares of MSR Common Stock, no par value shares. As of March 10, 1997,
there were issued and outstanding 13,777,014 shares of MSR Common Stock,
and no shares of MSR Common Stock were held as treasury shares. As of
March 10, 1997, a total of 280,000 shares of MSR Common Stock were
reserved for issuance pursuant to the stock options and rights to
purchase referred to in Section 2.1(b)(ii). All issued shares of MSR
Common Stock are validly issued, fully paid and nonassessable, and no
holder thereof is entitled to preemptive rights. All shares of MSR Common
Stock to be issued pursuant to the Merger, when issued in accordance with
this Agreement, will be validly issued, fully paid and nonassessable and
will not violate the preemptive rights of any person. Except as set forth
in Section 2.1(b) of the MSR Disclosure Letter, MSR is not a party to,
and is not aware of, any voting agreement, voting trust or similar
agreement or arrangement relating to any class or series of its capital
stock or any agreement or arrangement providing for registration rights
with respect to any capital stock or other securities of MSR.
(ii) As of the date hereof, there are outstanding options or other
rights (the "MSR OPTIONS") to purchase an aggregate of 280,000 shares of
MSR Common Stock under that certain warrant in favor of Bank Paribas
dated as of January 13, 1995. Other than as set forth in this Section
2.1(b) and except for issuances contemplated by this Agreement in
connection with the Merger, there are not now, and at the Effective Time
there will not be, any (A) shares of capital stock or other equity
securities of MSR outstanding (other than MSR Common Stock issued
pursuant to the exercise of MSR Options) or (B) outstanding options,
warrants, scrip, rights to subscribe for, calls or commitments of any
character whatsoever relating to, or securities or rights convertible
into or exchangeable for, shares of any class of capital stock of MSR, or
contracts, understandings or arrangements to which MSR is a party, or by
which it is or may be bound, to issue additional shares of its capital
stock or options, warrants, scrip or rights to subscribe for, or
securities or rights convertible into or exchangeable for, any additional
shares of its capital stock.
(iii) Except as set forth in Section 2.1(b) of the MSR Disclosure
Letter, all outstanding shares of capital stock of the MSR Subsidiaries
are owned by MSR or a wholly-owned subsidiary of MSR, free and clear of
all liens, charges, encumbrances, adverse claims and options of any
nature.
(c) AUTHORIZATION AND VALIDITY OF AGREEMENT. MSR has all requisite
corporate power and authority to enter into this Agreement and to perform
its obligations hereunder. The execution and
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delivery by MSR of this Agreement and the consummation by it of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action (subject only, with respect to the Merger and the approval
of this Agreement as provided for in Section 4.3). On or prior to the date
hereof, the Board of Directors of MSR has determined to recommend the
approval of this Agreement to the stockholders of MSR, and such
determination is in effect as of the date hereof. This Agreement has been
duly executed and delivered by MSR is the valid and binding obligation of
MSR, enforceable against MSR in accordance with its terms.
(d) NO APPROVALS OR NOTICES REQUIRED; NO CONFLICT WITH INSTRUMENTS TO
WHICH MSR OR ANY OF THE MSR SUBSIDIARIES IS A PARTY. Neither the execution
and delivery of this Agreement by MSR, nor the performance by MSR of its
obligations hereunder, nor the consummation of the transactions contemplated
hereby by MSR, will (i) conflict with the MSR Certificate or the bylaws of
MSR or the charter or bylaws of any of the MSR Subsidiaries; (ii) assuming
satisfaction of the requirements set forth in clause (iii) below, violate
any provision of law applicable to MSR or any of the MSR Subsidiaries; (iii)
except for (A) requirements of foreign, Federal or state securities laws,
(B) requirements of notice filings in such foreign jurisdictions as may be
applicable, (C) the filing of (1) articles of continuance with the Corporate
Registry of Alberta and (2) a certificate of incorporation and certificate
of domestication pursuant to the DGCL, and (D) the filing of a certificate
of merger by MSR in accordance with the DGCL, require any consent or
approval of, or filing with or notice to, any public body or authority,
domestic or foreign, under any provision of law applicable to MSR or any of
the MSR Subsidiaries; or (iv) require any consent, approval or notice under,
or violate, breach, be in conflict with or constitute a default (or an event
that, with notice or lapse of time or both, would constitute a default)
under, or permit the termination of any provision of, or result in the
creation or imposition of any lien upon any properties, assets or business
of MSR or any of the MSR Subsidiaries under, any note, bond, indenture,
mortgage, deed of trust, lease, franchise, permit, authorization, license,
contract, instrument or other agreement or commitment or any order, judgment
or decree to which MSR or any of the MSR Subsidiaries is a party or by which
MSR or any of the MSR Subsidiaries or any of its or their assets or
properties is bound or encumbered, except (A) those that have already been
given, obtained or filed, (B) those that are required pursuant to bank loan
agreements, as set forth in Section 2.1(d) of the MSR Disclosure Letter, (C)
those that are customarily obtained from governmental or tribal authorities
after Closing.
(e) COMMISSION FILINGS; FINANCIAL STATEMENTS. MSR and each of the MSR
Subsidiaries have filed all reports, registration statements and other
filings, together with any amendments required to be made with respect
thereto, that they have been required to file with the Securities and
Exchange Commission (the "COMMISSION") under the Securities Act of 1933, as
amended (the "SECURITIES ACT"), and the Securities Exchange Act of 1934, as
amended (the "EXCHANGE ACT"). All reports, registration statements and other
filings (including all notes, exhibits and schedules thereto and documents
incorporated by reference therein) filed by MSR with the Commission since
January 1, 1996, through the date of this Agreement, together with any
amendments thereto, are sometimes collectively referred to as the "MSR
COMMISSION FILINGS". MSR has heretofore delivered to Mercury copies of the
MSR Commission Filings. As of the respective dates of their filing with the
Commission, the MSR Commission Filings complied in all material respects
with the Securities Act, the Exchange Act and the rules and regulations of
the Commission thereunder, and did not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein
or necessary to make the statements made therein, in light of the
circumstances under which they were made, not misleading.
Each of the consolidated financial statements (including any related
notes or schedules) included in the MSR Commission Filings was prepared in
accordance with generally accepted accounting principles applied on a
consistent basis (except as may be noted therein or in the notes or
schedules thereto) and complied with all applicable rules and regulations of
the Commission. Such consolidated
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financial statements fairly present the consolidated financial position of
MSR and the MSR Subsidiaries as of the dates thereof and the results of
operations, cash flows and changes in shareholders' equity for the periods
then ended (subject, in the case of the unaudited interim financial
statements, to normal year-end audit adjustments on a basis comparable with
past periods). As of the date hereof, neither MSR nor any MSR Subsidiaries
have any liabilities, absolute or contingent, that may reasonably be
expected to have a material adverse effect on MSR and the MSR Subsidiaries
taken as a whole that are not reflected in the MSR Commission Filings,
except those set forth in Section 2.1(e) of the MSR Disclosure Letter.
(f) CONDUCT OF BUSINESS IN THE ORDINARY COURSE; ABSENCE OF CERTAIN
CHANGES AND EVENTS. Since January 1, 1997, except as contemplated by this
Agreement or as disclosed in the MSR Commission Filings filed with the
Commission prior to the date hereof or as set forth in Section 2.1(f) of the
MSR Disclosure Letter, MSR and the MSR Subsidiaries have conducted their
business only in the ordinary and usual course, and there has not been (i)
any material adverse change in the financial condition, results of
operations or business of MSR and the MSR Subsidiaries, taken as a whole, or
any condition, event or development that reasonably may be expected to
result in any such material adverse change; (ii) any material change by MSR
in its accounting methods, principles or practices; (iii) any revaluation by
MSR or any of the MSR Subsidiaries of any of its or their assets, including,
without limitation, writing down the value of inventory or writing off notes
or accounts receivable other than in the ordinary course of business; (iv)
any entry by MSR or any of the MSR Subsidiaries into any commitment or
transaction material to MSR and the MSR Subsidiaries, taken as a whole; (v)
any declaration, setting aside or payment of any dividends or distributions
in respect of the MSR Common Stock, or any redemption, purchase or other
acquisition of any of its securities or any securities of any of the MSR
Subsidiaries; (vi) any damage, destruction or loss (whether or not covered
by insurance) materially adversely affecting the properties or business of
MSR and the MSR Subsidiaries, taken as a whole; (vii) any increase in
indebtedness for borrowed money; (viii) any granting of a security interest
or lien on any material property or assets of MSR and the MSR Subsidiaries,
taken as a whole, other than (A) liens for taxes not due and payable or
which are being contested in good faith; (B) liens and security interests
created under joint operating agreements or similar agreements, to the
extent relating to amounts not yet due and payable; (C) mechanics',
warehousemen's and other statutory liens incurred in the ordinary course of
business, to the extent relating to amounts not yet due and payable; and (D)
defects and irregularities in title and encumbrances which are not
substantial in character or amount and do not materially impair the use of
the property or asset in question (collectively, "PERMITTED LIENS"); or (ix)
any increase in or establishment of any bonus, insurance, severance,
deferred compensation, pension, retirement, profit sharing, stock option
(including, without limitation, the granting of stock options, stock
appreciation rights, performance awards or restricted stock awards), stock
purchase or other employee benefit plan or any other increase in the
compensation payable or to become payable to any officers or key employees
of MSR or any of the MSR Subsidiaries.
(g) LITIGATION. Except as set forth in Section 2.1(g) of the MSR
Disclosure Letter, there are no claims, actions, suits, investigations,
inquiries or proceedings pending or, to the knowledge of MSR, overtly
threatened against or affecting MSR or any MSR Subsidiaries or any of their
respective properties at law or in equity, or before or by any federal,
state, municipal or other governmental agency or authority, or before any
arbitration board or panel, wherever located, that individually or in the
aggregate if adversely determined would have material adverse effect on MSR
and the MSR Subsidiaries, taken as a whole, or that involve the risk of
criminal liability.
(h) COMPLIANCE WITH LAWS. Except as set forth in Section 2.1(h) of the
MSR Disclosure Letter, MSR and the MSR Subsidiaries have complied with all
applicable Federal, foreign, state and local laws, statutes, ordinances,
rules, regulations and orders ("APPLICABLE LAWS") (including without
limitation Applicable Laws relating to securities, properties, manufacturing
processes, sales practices,
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employment practices, terms and conditions of employment, wages and hours,
safety, occupational safety, health, environmental protection, product
safety, and civil rights), the non-compliance with which would have a
material adverse effect on MSR and the MSR Subsidiaries, taken as a whole.
Neither MSR nor any MSR Subsidiary has received any written notice, which
has not been dismissed or otherwise disposed of, that any such party has not
so complied. Neither MSR nor any MSR Subsidiary is charged or, to the best
knowledge of MSR, threatened with, or, to the best knowledge of MSR, under
investigation with respect to, any violation of any Applicable Law relating
to any aspect of the business of MSR or any MSR Subsidiaries.
(i) EMPLOYEE BENEFIT PLANS.
(i) Section 2.1(i) of the MSR Disclosure Letter provides a
description of each Plan or Benefit Program or Agreement which is
sponsored, maintained or contributed to by MSR or any corporation, trade,
business or entity under common control with MSR Sub within the meaning
of Section 414(b), (c), (m) or (o) of the Internal Revenue Code of 1986,
as amended (the "CODE") or Section 4001 of ERISA (a "MSR ERISA
AFFILIATE") for the benefit of its employees, or has been so sponsored,
maintained or contributed to within six years prior to the Closing Date.
True and complete copies of each of the Plans, Benefit Programs or
Agreements, related trusts, if applicable, and all amendments thereto,
have been furnished to Mercury.
(ii) Except as otherwise set forth in Section 2.1(i) of the MSR
Disclosure Letter:
(A) Neither MSR nor any MSR ERISA Affiliate contributes to or has
an obligation to contribute to, or has at any time contributed to or
had an obligation to contribute to, a plan subject to Title IV of
ERISA, including, without limitation, a multiemployer plan within the
meaning of Section 3(37) of ERISA:
(B) Each Plan and each Benefit Program or Agreement has been
administered, maintained and operated in all material respects in
accordance with the terms thereof and in compliance with its
governing documents and applicable law (including, where applicable,
ERISA and the Code);
(C) There is no matter pending with respect to any of the Plans
before any governmental agency, and there are no actions, suits or
claims pending (other than routine claims for benefits) or, to the
knowledge of MSR, threatened against, or with respect to, any of the
Plans or Benefit Programs or Agreements or their assets;
(D) No act, omission or transaction has occurred which would
result in imposition on MSR or any MSR ERISA Affiliate of breach of
fiduciary duty liability damages under Section 409 of ERISA, a civil
penalty assessed pursuant to subsections (c), (i) or (1) of Section
502 of ERISA or a tax imposed pursuant to Chapter 43 of Subtitle D of
the Code; and
(E) The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby will not require
MSR or any MSR ERISA Affiliate to make a larger contribution to, or
pay greater benefits under, any Plan, Benefit Program or Agreement
than it otherwise would or create or give rise to any additional
vested rights or service credits under any Plan or Benefit Program or
Agreement.
(iii) Termination of employment of any employee of MSR or any MSR
ERISA Affiliate immediately after consummation of the transactions
contemplated by this Agreement would not result in payments under the
Plans, Benefit Programs or Agreements which, in the aggregate, would
result in imposition of the sanctions imposed under Sections 280G and
4999 of the Code.
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(iv) Each Plan which is an "employee welfare benefit plan," as such
term is defined in Section 3(1) of ERISA, may be unilaterally amended or
terminated in its entirety without liability except as to benefits
accrued thereunder prior to such amendment or termination.
(j) TAXES. Except as set forth in Section 2.1(j) of the MSR Disclosure
Letter:
(i) All tax returns of or relating to any income taxes or similar
assessments or any sales, excise, occupation, use, ad valorem, property,
production, severance, transportation, employment, payroll, franchise, or
other tax imposed by any United States federal, state, or local (or any
foreign or provincial) taxing authority, including any interest,
penalties, or additions attributable thereto (any "TAX") that are
required to be filed on or before the Closing Date by or with respect to
MSR or any MSR Subsidiaries, or any other corporation that is or was a
member of an affiliated group (within the meaning of Section 1504 (a) of
the Code) of corporations of which MSR was a member for any period ending
on or prior to the Closing Date, have been or will be duly and timely
filed, and all Taxes, including interest and penalties, due and payable
pursuant to such Tax Returns have been paid or adequately provided for in
reserves established by MSR in the consolidated financial statements
included in the MSR Commission Filings.
(ii) All U.S. Federal income Tax Returns of or with respect to MSR
or any of the MSR Subsidiaries have been audited by the applicable
governmental authority, or the applicable statute of limitations has
expired, for all periods up to and including the taxable year ended
December 31, 1992.
(iii) There is no material claim against MSR or any of the MSR
Subsidiaries with respect to any Taxes, and no material assessment,
deficiency or adjustment has been asserted or proposed with respect to
any Tax Return of or with respect to MSR or any of the MSR Subsidiaries
that has not been adequately provided for in reserves established by MSR
in the consolidated financial statements included in the MSR Commission
Filings.
(iv) The total amounts set up as liabilities for current and
deferred Taxes in the consolidated financial statements included in the
MSR Commission Filings have been prepared in accordance with generally
accepted accounting principles and are sufficient to cover the payment of
all material Taxes, including any penalties or interest thereon and
whether or not assessed or disputed, that are, or are hereafter found to
be, or to have been, due with respect to the operations of MSR and the
MSR Subsidiaries through the periods covered thereby.
(v) MSR and each of the MSR Subsidiaries have (and as of the Closing
Date will have) made all deposits (including estimated tax payments for
taxable years for which the consolidated federal income tax return is not
yet due) required with respect to Taxes.
(vi) No waiver or extension of any statute of limitations as to any
federal, local or foreign Tax matter has been given by or requested from
MSR or any of the MSR Subsidiaries.
(vii) Except for statutory liens for current Taxes not yet due, no
liens for Taxes exist upon the assets of either MSR or the MSR
Subsidiaries.
(viii) Neither MSR nor any of the MSR Subsidiaries has filed
consolidated income Tax Returns with any corporation, other than
consolidated federal and state income Tax Returns by MSR, for any taxable
period which is not now closed by the applicable statute of limitations.
(ix) Neither MSR nor the MSR Subsidiaries has any deferred
intercompany gain as defined in Treasury Regulation Section 1.1502-13.
(x) MSR has not made any election to be treated as a U.S. domestic
corporation for federal Tax purposes pursuant to Section 897(i) of the
Code.
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(k) ENVIRONMENTAL MATTERS. Except for matters disclosed in Section
2.1(k) of the MSR Disclosure Letter:
(i) to the best knowledge of MSR all of the properties, operations
and activities of MSR and the MSR Subsidiaries comply with all applicable
Environmental Laws;
(ii) None of MSR, the MSR Subsidiaries or their properties and
operations are subject to any existing, pending or, to the knowledge of
MSR, threatened action, suit, investigation, inquiry or proceeding by or
before any Governmental Authority or third party under any Environmental
Law;
(iii) to the best knowledge of MSR all notices, permits, licenses or
similar authorizations, if any, required to be obtained or filed by MSR
or any MSR Subsidiaries under any Environmental Law in connection with
any aspect of the business of MSR or the MSR Subsidiaries, including
without limitation those relating to the treatment, storage, disposal or
release of a hazardous substance or solid waste, have been duly obtained
or filed and will remain valid and in effect after the Merger, and MSR
and the MSR Subsidiaries are in compliance with the terms and conditions
of all such notices, permits, licenses and similar authorizations;
(iv) to the best knowledge of MSR, MSR and the MSR Subsidiaries have
satisfied and are currently in compliance with all financial
responsibility requirements applicable to its operations and imposed by
any Governmental Authority under any Environmental Law, and neither MSR
nor any MSR Subsidiary has received any notice of noncompliance with any
such financial responsibility requirements;
(v) to the best knowledge of MSR, there are no physical or
environmental conditions existing on any property of MSR or any MSR
Subsidiary or resulting from MSR or any MSR Subsidiary's operations or
activities with respect to any MSR Properties, past or present, at any
location, that would give rise to any on-site or off-site investigative,
remedial, response, contribution or similar obligations under any
Environmental Laws;
(vi) to the best knowledge of MSR, since the effective date of the
relevant requirements of applicable Environmental Laws, all hazardous
substances or solid wastes generated by MSR or any MSR Subsidiary or used
in connection with any of their properties or operations have to the
extent required by Environmental Laws been transported only by carriers
authorized under Environmental Laws to transport such substances and
wastes, and disposed of only at treatment, storage and disposal
facilities authorized under Environmental Laws to treat, store or dispose
of such substances and wastes, and, to the best knowledge of MSR and with
respect to such substances and wastes, such carriers and facilities have
been and are operating in compliance with such authorizations, are not
subject to any material unperformed investigative, remedial, response,
contribution or similar obligations under, and are not the subject of any
existing, pending or overtly threatened action, investigation or inquiry
by any Governmental Authority or third party in connection with, any
Environmental Laws;
(vii) there has been no exposure of any person or property to
hazardous substances, solid waste or any pollutant or contaminant, nor
has there been any release of hazardous substances, solid waste or any
pollutant or contaminant into the environment by MSR or any MSR
Subsidiary in connection with their properties or operations that could
reasonably be expected to give rise to any claim for damages or
compensation; and
(viii) MSR shall make available to Mercury all internal and external
environmental audits and studies and all correspondence on substantial
environmental matters in the possession of MSR relating to any of the
current or former properties or operations of MSR or any MSR Subsidiary.
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(l) PROPERTIES.
(i) The oil, gas and/or mineral leases, interests in which comprise
part of the "MSR PROPERTIES" (as defined below), and all other material
contracts, agreements, licenses, permits and easements, rights-of-way and
other rights-of-surface use comprising any part of or otherwise relating
to the MSR Properties (such leases and such material contracts,
agreements, licenses, permits, easements, rights-of-way and other
rights-of-surface use being herein called the "MSR BASIC DOCUMENTS"), are
in full force and effect and constitute valid and binding obligations of
the parties thereto; all contracts and agreements which are MSR Basic
Documents are disclosed in Section 2.1(l)(i) of the MSR Disclosure
Letter. Neither MSR nor any MSR Subsidiary is in breach or default (and
no situation exists which with the passing of time or giving of notice
would create such a breach or default) of its obligations under the MSR
Basic Documents, and no breach or default by any third party (or
situation which with the passage of time or giving of notice would create
such a breach or default) exists, to the extent such breach or default
(whether by MSR, any MSR Subsidiary or such a third party) could
materially adversely affect (after the date hereof) the ownership,
operation, value or use of any MSR Properties. All payments (including,
without limitation, all delay rentals, royalties, shut-in royalties and
valid calls for payment or prepayment under operating agreements) owing
under MSR Basic Documents have been and are being made (timely and
properly, and before the same became delinquent) by MSR or a MSR
Subsidiary in all material respects and, where the non-payment of same by
a third party could materially adversely affect the ownership, operation,
value or use of a MSR Property after the date hereof, have been and are
being made, by such third party in all material respects.
(ii) Except as set forth in Section 2.1(l)(ii) of the MSR Disclosure
Letter, neither MSR nor any MSR Subsidiary has incurred any expenses, or
made commitments to make expenditures, in connection with (and no other
obligations or liabilities have been incurred) which would materially
adversely affect the ownership or operation of the MSR Properties after
the date hereof, other than routine expenses incurred in the normal
operation of existing wells on the MSR Properties. Except as set forth in
Section 2.1(o)(ii) of the MSR Disclosure Letter, no proposals are
currently outstanding (whether made by MSR, any MSR Subsidiary or by any
other party) to drill additional wells, or to deepen, plug back, abandon,
or rework existing wells, or to conduct other operations for which
consent is required under the applicable operating agreement, or to
conduct any other material operations, other than normal operation of
existing wells on the MSR Properties.
(iii) There exist no agreements or arrangements for the sale,
gathering, transportation, compression, treating, processing or other
marketing of a material volume of production from the MSR Properties
(including without limitation, calls on, or other rights to purchase,
production, whether or not the same are currently being exercised) other
than (A) the agreements set forth in Section 2.1(l)(iii) of the MSR
Disclosure Letter, (B) agreements or arrangements which are cancelable on
120 days notice or less without penalty or detriment and (C) calls on, or
other rights to purchase, production, subject to which MSR or any MSR
Subsidiary acquired one or more MSR Properties and which individually, or
in the aggregate, do not affect a material volume of the production of
oil or gas from the MSR Properties. Any contracts or other arrangements
under which MSR or any MSR Subsidiary is processing, gathering,
transporting or otherwise marketing any material volume of oil, gas or
other minerals (whether or not attributable to the MSR Properties) for
the account of a third party include terms that represent an arm's
length, commercially reasonable trade for MSR or any MSR Subsidiary.
(iv) Except as set forth in Section 2.1(l)(iv) of the MSR Disclosure
Letter, neither MSR nor any MSR Subsidiary has received prepayments
(including, but not limited to, payments for oil and gas not taken
pursuant to "take-or-pay" arrangements) for any oil or gas produced from
the MSR Properties as a result of which the obligation does (or may)
exist to deliver oil or gas
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<PAGE>
produced from the MSR Properties after the date hereof without then
receiving payment (or without then receiving full payment) therefor or to
make repayments in cash. For each MSR Property listed in Section
2.1(l)(iv) of the MSR Disclosure Letter, such section reflects (A) the
total amount of prepayment received as of the date hereof, (and the
amount of any recoupment thereof heretofore made), and (B) whether or not
a cash payment can be required in the event recoupment out of production
proves to be inadequate. Except as set forth in Section 2.1(l)(iv) of the
MSR Disclosure Letter, there is no MSR Property with respect to which
MSR, any MSR Subsidiary, and/or their respective predecessors in title,
have collectively taken more (referred to herein as "OVER-PRODUCED") or
materially less (referred to herein as "UNDERPRODUCED") production from
such MSR Property (or on the units in which such MSR Property
participates), or any product thereof, than the ownership of MSR or any
MSR Subsidiary and such predecessors in such MSR Property would entitle
MSR or any MSR Subsidiary and such predecessors (absent any balancing
agreement or arrangement) to receive, to the extent such overproduced or
underproduced position has not, as of the date hereof, been fully made up
or otherwise extinguished. For each MSR Property listed in Section
2.1(l)(iv) of the MSR Disclosure Letter, such section reflects, on a
well-by-well or any other basis as may be dictated by any applicable
balancing agreement, (A) whether MSR or any MSR Subsidiary is in an
over-produced or under-produced position, (B) the amount of such
over-production or under-production, (C) a description of the written
balancing agreement (if any) pertaining to such MSR Property (or a
statement that no such agreement exists) and (D) a statement as to
whether royalties, overriding royalties or other burdens against MSR's or
any MSR Subsidiaries's net revenue interest in the affected MSR
Properties were, during the period the subject imbalance accrued, paid
based upon receipts or entitlements. Except as set forth in Section
2.1(l)(iv) of the MSR Disclosure Letter, there are no pipeline imbalances
that have arisen due to the failure of nominations made by MSR or any MSR
Subsidiary to match actual deliveries of production from any one or more
MSR Properties.
(v) MSR and each MSR Subsidiary has all governmental licenses and
permits necessary to own and operate the MSR Properties as presently
being owned and operated, and such licenses, permits and filings are in
full force and effect, and neither MSR nor any MSR Subsidiary has
received written notice of any material violations in respect of any such
licenses or permits.
(vi) Except as set forth in Section 2.1(l)(vi) of the MSR Disclosure
Letter, neither MSR nor any MSR Subsidiary is subject to (A) any area of
mutual interest agreements or non-compete agreements, (B) any farm-out or
farm-in agreement under which any party thereto is entitled to receive
assignments not yet made, or could earn additional assignments after the
date hereof or (C) any tax partnership, to the extent being so subject
could have a material adverse effect on MSR or any MSR Subsidiary or on
any MSR Property.
(vii) All severance, production, ad valorem, windfall profit and
other similar taxes relating to the ownership or operation of the MSR
Properties have been, and are being, paid (timely, and before the same
become delinquent) by MSR and each MSR Subsidiary in all respects.
(viii) The ownership and operation of the MSR Properties has, to the
extent that non-conformance could materially adversely affect the
ownership, operation, value or use thereof after the date hereof, been in
conformity with all applicable laws, and all applicable rules,
regulations and orders of all governmental agencies having jurisdiction.
(ix) Except as set forth in Section 2.1(l)(ix) of the MSR Disclosure
Letter, there are no Preferential Rights or Consents, other than Routine
"GOVERNMENTAL APPROVALS" (as defined below), that affect any material MSR
Property or Properties and that will be triggered by the Merger.
(x) Except as set forth in Section 2.1(l)(x) of the MSR Disclosure
Letter, there exist no agreements or other arrangements whereunder MSR or
any MSR Subsidiary undertakes to
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<PAGE>
perform gathering, transportation, processing or other marketing services
for any third party, including without limitation the owner of a royalty
or overriding royalty interest burdening a lease included in the MSR
Properties, for a fee or other consideration that is now, or may
hereafter be, unrepresentative of commercial rates being received by
third parties in comparable, arm's length transactions.
(xi) MSR and/or the MSR Subsidiaries have good and defensible title
to the MSR Property, free and clear of all liens, security interests, and
encumbrances except for (a) the contracts, agreements, burdens,
encumbrances and other matters set forth in the descriptions of certain
of the MSR Properties in Section 2.1(l) of the MSR Disclosure Letter, (b)
statutory liens for taxes which are not yet delinquent, (c) liens under
operating agreements, pooling orders and unitization agreements, and
mechanics' materialmen's liens, with respect to obligations which are not
yet due, and (d) minor defects and irregularities in title to any MSR
Property, so long as such defects and irregularities do not materially
impair the value of such MSR Property or the use thereof for the purposes
for which such MSR Property is held. With respect to each MSR Property
described in Section 2.1(l) of the MSR Disclosure Letter, the ownership
of MSR and/or the MSR Subsidiaries in such MSR Property does and will,
(A) with respect to each tract of land described in Section 2.1(l) of the
MSR Disclosure Letter (whether described directly in such section or
described by reference to another instrument) in connection with such MSR
Property, (1) entitle MSR and/or a MSR Subsidiary to receive a decimal or
percentage share of the oil, gas and other hydrocarbons produced from, or
allocated to, such tract equal to not less than the decimal or percentage
share set forth in Section 2.1(l) of the MSR Disclosure Letter in
connection with such tract opposite the words "Net Revenue Interest" (or
words of similar import), (2) cause MSR or any MSR Subsidiary to be
obligated to bear a decimal or percentage share of the cost of
exploration, development and operation of such tract of land not greater
than the decimal or percentage share set forth in Section 2.1(l) of the
MSR Disclosure Letter in connection with such tract opposite the words
"Working Interest" (or words of similar import) and (B) if such MSR
Property is shown in Section 2.1(l) of the MSR Disclosure Letter to be
subject to a unit or units, with respect to each such unit, (1) entitle
MSR and/or the MSR Subsidiaries to receive a decimal or percentage share
of all substances covered by such unit which are produced from, or
allocated to, such unit equal to not less than the decimal or percentage
share set forth in Section 2.1(l) of the MSR Disclosure Letter in
connection with such MSR Property opposite the words "Unit Net Revenue
Interest" or words of similar import (and if such MSR Property is subject
to more than one unit, words identifying such interest with such unit),
and (2) obligate MSR and/or the MSR Subsidiaries to bear a decimal or
percentage share set forth in Section 2.1(l) of the MSR Disclosure Letter
in connection with such MSR Property opposite the words "Unit Working
Interest" or words of similar import (and if such MSR Property is subject
to more than one unit, words identifying such interest with such unit).
With respect to each MSR Property described in Section 2.1(l) of the MSR
Disclosure Letter which is subject to a voluntary or involuntary pooling,
unitization or communication agreement and/or order, the term "tract of
land" as used in this subsection (xi) shall mean the pooled, unitized or
communitized area as an entirety and shall not be deemed to refer to any
individual tract committed to said pooled, unitized or communitized area.
Without limitation of the foregoing, the ownership by MSR and/or the MSR
Subsidiaries of the MSR Properties does and will, with respect to each
well or unit identified in Section 2.1(l) of the MSR Disclosure Letter,
entitle MSR and/or the MSR Subsidiaries to receive a decimal or
percentage share of the oil, gas and other hydrocarbons produced from, or
allocated to, such well or unit equal to not less than the decimal or
percentage share set forth, for such well or unit, in the column headed
"Net Revenue Interest" in Section 2.1(l) of the MSR Disclosure Letter,
and cause MSR and/or MSR Subsidiaries to be obligated to bear a decimal
or percentage share of the cost of operation of such well or unit equal
to not more than the decimal or percentage share set forth, for such well
or unit, in the column
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<PAGE>
headed "Working Interest" in such section. The above-described shares of
production which MSR and/or the MSR Subsidiaries are entitled to receive
and shares of expenses which MSR and/or MSR Subsidiaries are obligated to
bear are not and will not be subject to change other than such changes
which arise pursuant to non-consent provisions of operating agreements
described in Section 2.1(l) of the MSR Disclosure Letter in connection
with operations hereafter proposed, or such changes are reflected in
Section 2.1(l) of the MSR Disclosure Letter.
(m) AGREEMENTS. All agreements, arrangements, and understandings of
any nature (written or oral, formal or informal) (collectively, for purposes
of this Section, "agreements") to which MSR or any MSR Subsidiary is a party
or by which it or any of its properties is otherwise bound, regardless of
amount or subject matter, that are material to the business, assets, results
of operations, condition (financial or otherwise), or prospects of MSR or
any MSR Subsidiary are listed in Section 2.1(m) of the MSR Disclosure
Letter. MSR has delivered to Mercury, accurate and complete copies of such
agreements. Each of such agreements is a valid and binding agreement of the
parties thereto enforceable against them in accordance with its terms. No
breach or default exists with respect to any of such agreements, and no
event has occurred which, after the giving of notice or the passage of time
or otherwise, will result in any such breach or default.
(n) EMPLOYEES; LABOR RELATIONS.
(i) Set forth in Section 2.1(n)(i) of the MSR Disclosure Letter is a
list of (i) all directors and officers of MSR and the MSR Subsidiaries,
and (ii) the name of each employee, agent, and consultant of MSR and the
MSR Subsidiaries as of the date hereof, together with the total amounts
of salary, bonuses, and other compensation paid or payable by MSR and the
MSR Subsidiaries to each such person for the current fiscal year and the
immediately preceding fiscal year.
(ii) Except as set forth in Section 2.1(n)(ii) of the MSR Disclosure
Letter, (a) there are no collective bargaining agreements or other
similar agreements, arrangements, or understandings, written or oral,
with employees as a group to or by which MSR or any MSR Subsidiary is a
party or is bound; (b) no employees of MSR or any MSR Subsidiary are
represented by any labor organization, collective bargaining
representative, or group of employees; (c) no labor organization,
collective bargaining representative, or group of employees claims to
represent a majority of the employees of MSR or any MSR Subsidiary in an
appropriate unit of MSR or MSR Subsidiary; (d) neither MSR nor any MSR
Subsidiary has been involved with any representational campaign by any
union or other organization or group seeking to become the collective
bargaining representative of any of their employees or been subject to
or, to the best knowledge of MSR, threatened with any strike or other
concerted labor activity or dispute; and (e) neither MSR nor any MSR
Subsidiary is obligated to bargain collectively with respect to wages,
hours, and other terms and conditions of employment with any recognized
or certified labor organization, collective bargaining representative, or
group of employees, with respect to any of their employees.
(o) INSIDER INTERESTS. Except as disclosed in Section 2.1(o) of the
MSR Disclosure Letter, no shareholder, director, officer, or employee of MSR
or any MSR Subsidiary or any associate of any such shareholder, director,
officer, or employee is presently, directly or indirectly, a party to any
transaction with MSR or any MSR Subsidiary, including, without limitation,
any agreement, arrangement, or understanding, written or oral, providing for
the employment of, furnishing of services by, rental of real or personal
property from, or otherwise requiring payments to any such shareholder,
director, officer, employee, or associate. To the best knowledge of MSR, no
shareholder, director, officer, or employee of MSR or any MSR Subsidiary or
any associate of any such shareholder, director, officer, or employee owns,
directly or indirectly, any material interest in, or serves as a director,
officer, or employee of, any customer, supplier, or competitor of MSR or any
MSR
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<PAGE>
Subsidiary. For purposes of this Section only, an "associate" of any
shareholder, director, officer, or employee means any member of the
immediate family of such shareholder, director, officer, or employee or any
corporation, partnership, trust, or other entity in which such shareholder,
director, officer, or employee has a substantial ownership or beneficial
interest (other than an interest in a public corporation which does not
exceed three percent of its outstanding securities) or is a director,
officer, partner, or trustee or person holding a similar position.
(p) FINANCIAL REQUIREMENTS. Set forth in Section 2.1(p) of the MSR
Disclosure Letter is a list of all bonds, deposits, financial assurance
requirements, and insurance coverage required to be submitted to any
Federal, foreign, state or local governmental agencies or authorities for
the continued ownership and operation of the business and assets of MSR or
any MSR Subsidiaries.
(q) VOTING REQUIREMENTS. The affirmative vote of the holders of a
two-thirds of the outstanding shares of MSR Common Stock is the only vote of
the holders of any class or series of the capital stock of MSR necessary to
approve the "REDOMESTICATION OF MSR" (as defined in Section 4.3 below); and
the affirmative vote of the holders of a majority of the shares of MSR
Common Stock present at the MSR special stockholders' meeting convened in
accordance with Section 4.3 and entitled to vote thereon is the only vote of
the holders of any class or series of the capital stock of MSR necessary to
approve this Agreement.
(r) BROKERAGE FEES. Except for the engagement by MSR of an investment
banker for the purposes of rendering an opinion as contemplate by Section
6.1 below, neither MSR nor any of its affiliates has retained any financial
advisor, broker, agent, or finder or paid or agreed to pay any financial
advisor, broker, agent, or finder on account of this Agreement or any
transaction contemplated hereby. MSR shall indemnify and hold harmless
Mercury from and against any and all losses, claims, damages, and
liabilities (including legal and other expenses reasonably incurred in
connection with investigating or defending any claims or actions) with
respect to any finder's fee, brokerage commission, or similar payment in
connection with any transaction contemplated hereby asserted by any person
on the basis of any act or statement made or alleged to have been made by
MSR or any of its affiliates.
(s) DISCLOSURE. No representation or warranty made by MSR in this
Agreement, and no statement of MSR contained in any document, certificate,
or other writing furnished or to be furnished by MSR to Mercury or Mercury
Sub pursuant hereto or in connection herewith, contains or will contain, at
the time of delivery, any untrue statement of a material fact or omits or
will omit, at the time of delivery, to state any material fact necessary in
order to make the statements contained therein, in light of the
circumstances under which they are made, not misleading. MSR knows of no
matter (other than matters of a general economic character not relating
solely to MSR in any specific manner) which has not been disclosed to
Mercury and Mercury Sub pursuant to this Agreement or the MSR Disclosure
Letter which materially and adversely affects, or, so far as MSR can now
reasonably foresee, will materially and adversely affect, the business,
assets, results of operations, condition (financial or otherwise), or
prospects of MSR or the ability of MSR to consummate the transactions
contemplated hereby.
2.2 REPRESENTATIONS AND WARRANTIES OF MERCURY AND MERCURY SUB. Mercury and
Mercury Sub hereby jointly and severally represent and warrant to MSR that:
(a) ORGANIZATION AND COMPLIANCE WITH LAW. Each of Mercury and Mercury
Sub is a corporation duly organized, validly existing and in good standing
under the laws of the jurisdiction in which it is chartered or organized and
has all requisite corporate power and corporate authority and all necessary
governmental authorizations to own, lease and operate all of its properties
and assets and to carry on its business as now being conducted. The
jurisdiction in which Mercury and Mercury Sub are chartered or organized is
set forth in Section 2.2(a) of the disclosure letter delivered by Mercury to
MSR on March 17, 1997 (the "MERCURY DISCLOSURE LETTER"). Except as set forth
in Section 2.2(a) of the
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Mercury Disclosure Letter, each of Mercury and Mercury Sub is duly qualified
as a foreign corporation to do business, and is in good standing, in each
jurisdiction in which the property owned, leased or operated by it or the
nature of the business conducted by it makes such qualification necessary.
(b) ORGANIZATION AND COMPLIANCE WITH LAW. Mercury has delivered to MSR
accurate and complete copies of (i) the Articles of Incorporation (the
"MERCURY SUB ARTICLES") and bylaws of Mercury Sub as currently in effect,
(ii) the stock records of Mercury Sub, and (iii) the minutes of all meetings
of Mercury Sub's Board of Directors, any committees of such Board, and
Mercury Sub's shareholders (and all consents in lieu of such meetings). Such
records, minutes, and consents accurately reflect the stock ownership of
Mercury Sub and all actions taken by Mercury Sub's Board, any committees of
such Board, and Mercury Sub's shareholders. Mercury Sub is not in violation
of any provision of its Articles of Incorporation or Bylaws.
(c) CAPITALIZATION.
(i) The authorized capital stock of Mercury Sub consists solely of
50,000,000 shares of Mercury Sub Common Stock, $.01 par value. As of the
date hereof, there were issued and outstanding 12,000,000 shares of
Mercury Sub Common Stock, and no shares of Mercury Sub Common Stock are
held as treasury shares. All issued shares of Mercury Sub Common Stock
are validly issued, fully paid and nonassessable, and no holder thereof
is entitled to preemptive rights. Except as contemplated by this
Agreement, neither Mercury nor Mercury Sub are a party to, and or aware
of, any voting agreement, voting trust or similar agreement or
arrangement relating to any class or series of any capital stock or other
securities of Mercury Sub.
(ii) Except for warrants to purchase 11,000,000 shares of Mercury
Sub Common Stock and options to purchase 228,570 shares of Mercury Sub
Common Stock, all as described in Section 2.2 of the Mercury Disclosure
Letter, there are not now, and at the Effective Time there will not be,
any outstanding options, warrants, scrip, rights to subscribe for, calls
or commitments of any character whatsoever relating to, or securities or
rights convertible into or exchangeable for, shares of any class of
capital stock of Mercury Sub, or contracts, understandings or
arrangements to which Mercury or Mercury Sub is a party, or by which
either is or may be bound, to issue or sell additional shares of Mercury
Sub capital stock or options, warrants, scrip or rights to subscribe for,
or securities or rights convertible into or exchangeable for, any
additional shares of Mercury Sub capital stock.
(iii) All outstanding shares of capital stock of the Mercury Sub are
owned by Mercury and persons designated as "MINORITY STOCKHOLDERS" in
Section 2.2(c) of the Mercury Disclosure Letter, and the number of shares
of capital stock of Mercury Sub owned by each such party is as designated
for such party in such section. All such shares of capital stock are
owned by the designated party free and clear of all liens, charges,
encumbrances, adverse claims and options of any nature.
(d) NO SUBSIDIARIES. Mercury Sub has no subsidiaries. In addition,
except as set forth in Section 2.2(d) of the Mercury Disclosure Letter,
Mercury Sub does not own, directly or indirectly, any capital stock or other
equity securities of any corporation or have any direct or indirect equity
or ownership interest in any other person.
(e) AUTHORIZATION AND VALIDITY OF AGREEMENT. Mercury and Mercury Sub
have all requisite corporate power and authority to enter into this
Agreement and to perform their obligations hereunder. The execution and
delivery by Mercury and Mercury Sub of this Agreement and the consummation
by them of the transactions contemplated hereby have been duly authorized by
all necessary corporate action. On or prior to the date hereof, the Boards
of Directors of Mercury and Mercury Sub have determined to recommend
approval of the Merger to the stockholders of Mercury Sub, and the
stockholders of Mercury Sub have approved the Merger, and such
determinations and
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approvals are in effect as of the date hereof. This Agreement has been duly
executed and delivered by Mercury and Mercury Sub, and is the valid and
binding obligation of Mercury and Mercury Sub, enforceable against Mercury
and Mercury Sub in accordance with its terms.
(f) NO APPROVALS OR NOTICES REQUIRED; NO CONFLICT WITH INSTRUMENTS TO
WHICH MERCURY OR MERCURY SUB IS A PARTY. Except as set forth in Section
2.2(f) of the Mercury Disclosure Letter, neither the execution and delivery
of this Agreement by Mercury or Mercury Sub, nor the performance by Mercury
or Mercury Sub of their obligations hereunder, nor the consummation of the
transactions contemplated hereby by Mercury or Mercury Sub, will (i)
conflict with the Articles of Incorporation or bylaws of Mercury or Mercury
Sub; (ii) assuming satisfaction of the requirements set forth in clause
(iii) below, violate any provision of law applicable to Mercury or Mercury
Sub; (iii) except for (A) requirements of Federal or state securities laws,
and (B) the filing of a certificate of merger by Mercury Sub in accordance
with the DGCL, require any consent or approval of, or filing with or notice
to, any public body or authority, domestic or foreign, under any provision
of law applicable to Mercury or Mercury Sub; or (iv) require any consent,
approval or notice under, or violate, breach, be in conflict with or
constitute a default (or an event that, with notice or lapse of time or
both, would constitute a default) under, or permit the termination of any
provision of, or result in the creation or imposition of any lien upon any
properties, assets or business of Mercury or Mercury Sub under, any note,
bond, indenture, mortgage, deed of trust, lease, franchise, permit,
authorization, license, contract, instrument or other agreement or
commitment or any order, judgment or decree to which Mercury or Mercury Sub
is a party or by which Mercury or Mercury Sub or any of their assets or
properties is bound or encumbered, except (A) those that have already been
given, obtained or filed and (B) those that are customarily obtained from
governmental or tribal authorities after Closing.
(g) FINANCIAL STATEMENTS. Mercury has delivered to MSR accurate and
complete copies of Mercury Sub's unaudited balance sheet as of March 7, 1997
Balance Sheet"). The Balance Sheet (i) represents actual bona fide
transactions, (ii) has been prepared from the books and records of Mercury
Sub in conformity with generally accepted accounting principles applied on a
basis consistent with preceding years throughout the periods involved,
except that it is not accompanied by notes or other textual disclosure
required by generally accepted accounting principles, and (iii) accurately,
completely, and fairly presents Mercury Sub's financial position as of the
date thereof and its results of operations for the period then ended.
(h) ABSENCE OF UNDISCLOSED LIABILITIES. Mercury Sub has no liabilities
or obligations (whether accrued, absolute, contingent, unliquidated, or
otherwise, whether or not known to Mercury or Mercury Sub, and whether due
or to become due), except (i) liabilities reflected on the Balance Sheet,
(ii) liabilities which have arisen since the date of the Balance Sheet in
the ordinary course of business (none of which is a material liability for
breach of contract, breach of warranty, tort, or infringement), (iii)
liabilities arising under executory contracts entered into in the ordinary
course of business (none of which is a material liability for breach of
contract), and (iv) liabilities specifically set forth in Section 2.2(h) of
the Mercury Disclosure Letter.
(i) CONDUCT OF BUSINESS IN THE ORDINARY COURSE; ABSENCE OF CERTAIN
CHANGES AND EVENTS. Since January 1, 1997, except as contemplated by this
Agreement or as set forth in Section 2.2(i) of the Mercury Disclosure
Letter, Mercury Sub has conducted its business and the Mercury Properties
have been operated only in the ordinary and usual course, and there has not
been (i) any material adverse change in the financial condition, results of
operations or business of Mercury Sub or the Mercury Properties, or any
condition, event or development that reasonably may be expected to result in
any such material adverse change; (ii) any material change by Mercury Sub in
its accounting methods, principles or practices; (iii) any revaluation of
any of the Mercury Properties, including, without limitation, writing down
the value of inventory or writing off notes or accounts receivable other
than in the ordinary course of business; (iv) any entry by Mercury or
Mercury Sub into any commitment or transaction material to Mercury Sub; (v)
any declaration, setting aside or payment of any dividends or
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<PAGE>
distributions in respect of the Mercury Sub Common Stock or any redemption,
purchase or other acquisition of any of securities of Mercury Sub; (vi) any
damage, destruction or loss (whether or not covered by insurance) materially
adversely affecting the properties or business of Mercury Sub; (vii) any
increase in indebtedness for borrowed money; (viii) any granting of a
security interest or lien on any material property or assets of Mercury Sub,
other than Permitted Liens; or (ix) any increase in or establishment of any
bonus, insurance, severance, deferred compensation, pension, retirement,
profit sharing, stock option (including, without limitation, the granting of
stock options, stock appreciation rights, performance awards or restricted
stock awards), stock purchase or other employee benefit plan or any other
increase in the compensation payable or to become payable to any officers or
employees of Mercury Sub.
(j) LITIGATION. Except as set forth in Section 2.2(j) of the Mercury
Disclosure Letter, there are no claims, actions, suits, investigations,
inquiries or proceedings pending or, to the knowledge of Mercury or Mercury
Sub, overtly threatened against or affecting Mercury Sub or any of its
properties, including without limitation the Mercury Properties, at law or
in equity, or before or by any federal, state, municipal or other
governmental agency or authority, or before any arbitration board or panel,
wherever located.
(k) COMPLIANCE WITH LAWS. Except as set forth in Section 2.2(k) of the
Mercury Disclosure Letter, Mercury Sub has complied with all Applicable Laws
(including without limitation Applicable Laws relating to securities,
properties, manufacturing processes, sales practices, employment practices,
terms and conditions of employment, wages and hours, safety, occupational
safety, health, environmental protection, product safety, and civil rights).
Neither Mercury nor Mercury Sub has received any written notice, which has
not been dismissed or otherwise disposed of, that Mercury Sub has not so
complied. Mercury Sub is not charged or, to the best knowledge of Mercury
and Mercury Sub, threatened with, or, to the best knowledge of Mercury Sub
and Mercury, under investigation with respect to, any violation of any
Applicable Law relating to any aspect of the business of Mercury Sub.
(l) EMPLOYEE BENEFIT PLANS.
(i) Section 2.2(l) of the Mercury Disclosure Letter provides a
description of each Plan or Benefit Program or Agreement which is
sponsored, maintained or contributed to by Mercury Sub or any
corporation, trade, business or entity under common control with Mercury
Sub within the meaning of Section 414(b), (c), (m) or (o) of the Code or
Section 4001 of ERISA (a "MERCURY ERISA AFFILIATE") for the benefit of
its employees, or has been so sponsored, maintained or contributed to
within six years prior to the Closing Date. True and complete copies of
each of the Plans, Benefit Programs or Agreements, related trusts, if
applicable, and all amendments thereto, have been furnished to MSR.
(ii) Except as otherwise set forth in Section 2.2(l) of the Mercury
Disclosure Letter:
(A) None of Mercury Sub or any Mercury ERISA Affiliate
contributes to or has an obligation to contribute to, or has at any
time contributed to or had an obligation to contribute to, a plan
subject to Title IV of ERISA, including, without limitation, a
multiemployer plan within the meaning of Section 3(37) of ERISA:
(B) Each Plan and each Benefit Program or Agreement has been
administered, maintained and operated in all material respects in
accordance with the terms thereof and in compliance with its
governing documents and applicable law (including, where applicable,
ERISA and the Code);
(C) There is no matter pending with respect to any of the Plans
before any governmental agency, and there are no actions, suits or
claims pending (other than routine claims for benefits) or, to the
knowledge of Mercury, threatened against, or with respect to, any of
the Plans or Benefit Programs or Agreements or their assets;
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<PAGE>
(D) No act, omission or transaction has occurred which would
result in imposition on Mercury Sub or any Mercury ERISA Affiliate of
breach of fiduciary duty liability damages under Section 409 of
ERISA, a civil penalty assessed pursuant to subsections (c), (i) or
(1) of Section 502 of ERISA or a tax imposed pursuant to Chapter 43
of Subtitle D of the Code; and
(E) The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby will not require
Mercury Sub or any Mercury ERISA Affiliate to make a larger
contribution to, or pay greater benefits under, any Plan, Benefit
Program or Agreement than it otherwise would or create or give rise
to any additional vested rights or service credits under any Plan or
Benefit Program or Agreement.
(iii) Termination of employment of any employee of Mercury Sub or any
Mercury ERISA Affiliate immediately after consummation of the
transactions contemplated by this Agreement would not result in payments
under the Plans, Benefit Programs or Agreements which, in the aggregate,
would result in imposition of the sanctions imposed under Sections 280G
and 4999 of the Code.
(iv) Each Plan which is an "employee welfare benefit plan," as such
term is defined in Section 3(1) of ERISA, may be unilaterally amended or
terminated in its entirety without liability except as to benefits
accrued thereunder prior to such amendment or termination.
(m) TAXES. Except as set forth in Section 2.2(m) of the Mercury
Disclosure Letter:
(i) All tax returns of or relating to any Tax that are required to
be filed on or before the Closing Date by or with respect to Mercury Sub
have been or will be duly and timely filed, and all Taxes, including
interest and penalties, due and payable by Mercury Sub pursuant to such
Tax Returns have been paid or adequately provided for in reserves
established by Mercury Sub in the Balance Sheet. Mercury Sub is not now
and has never been a member of an affiliated group (within the meaning of
Section 1504 (a) of the Code) of corporations.
(ii) None of the U.S. Federal income Tax Returns of or with respect
to Mercury Sub have been audited by the applicable governmental
authority, or the applicable statute of limitations has expired.
(iii) There is no material claim against Mercury Sub with respect to
any Taxes, and no material assessment, deficiency or adjustment has been
asserted or proposed with respect to any Tax Return of or with respect to
Mercury Sub that has not been adequately provided for in reserves
established by Mercury Sub in the Balance Sheet.
(iv) The total amounts set up as liabilities for current and
deferred Taxes in the Balance Sheet have been prepared in accordance with
generally accepted accounting principles and are sufficient to cover the
payment of all material Taxes, including any penalties or interest
thereon and whether or not assessed or disputed, that are, or are
hereafter found to be, or to have been, due with respect to the
operations of Mercury Sub through the periods covered thereby.
(v) Mercury Sub has (and as of the Closing Date will have) made all
deposits (including estimated tax payments for taxable years for which
the consolidated federal income tax return is not yet due) required with
respect to Taxes.
(vi) No waiver or extension of any statute of limitations as to any
federal, local or foreign Tax matter has been given by or requested from
Mercury Sub.
(vii) Except for statutory liens for current Taxes not yet due, no
liens for Taxes exist upon the assets of Mercury Sub.
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<PAGE>
(viii) Mercury Sub does not have any deferred intercompany gain as
defined in Treasury Regulation Section 1.1502-13.
(n) ENVIRONMENTAL MATTERS. Except for matters disclosed in Section
2.2(n) of the Mercury Disclosure Letter:
(i) to the best knowledge of Mercury and Mercury Sub all of the
properties, operations and activities of Mercury Sub comply with all
applicable Environmental Laws;
(ii) Mercury Sub and the properties and operations of Mercury Sub
are not subject to any existing, pending or, to the knowledge of Mercury
or Mercury Sub, threatened action, suit, investigation, inquiry or
proceeding by or before any Governmental Authority or third party under
any Environmental Law;
(iii) to the best knowledge of Mercury and Mercury Sub all notices,
permits, licenses or similar authorizations, if any, required to be
obtained or filed by Mercury or Mercury Sub under any Environmental Law
in connection with any aspect of the business of Mercury Sub, including
without limitation those relating to the treatment, storage, disposal or
release of a hazardous substance or solid waste, have been duly obtained
or filed and will remain valid and in effect after the Merger, and
Mercury and Mercury Sub are in compliance with the terms and conditions
of all such notices, permits, licenses and similar authorizations;
(iv) to the best knowledge of Mercury and Mercury Sub, Mercury Sub
has satisfied and is currently in compliance with all financial
responsibility requirements applicable to its operations and imposed by
any Governmental Authority under any Environmental Law, and Mercury and
Mercury Sub have not received any notice of noncompliance with any such
financial responsibility requirements;
(v) to the best knowledge of Mercury and Mercury Sub, there are no
physical or environmental conditions existing on any property of Mercury
Sub or resulting from Mercury's or Mercury Sub's operations or activities
with respect to any Mercury Properties, past or present, at any location,
that would give rise to any on-site or off-site investigative, remedial,
response, contribution or similar obligations under any Environmental
Laws;
(vi) to the best knowledge of Mercury and Mercury Sub, since the
effective date of the relevant requirements of applicable Environmental
Laws, all hazardous substances or solid wastes generated by Mercury or
Mercury Sub or used in connection with Mercury Sub's properties or
operations have to the extent required by Environmental Laws been
transported only by carriers authorized under Environmental Laws to
transport such substances and wastes, and disposed of only at treatment,
storage and disposal facilities authorized under Environmental Laws to
treat, store or dispose of such substances and wastes, and, to the best
knowledge of Mercury or Mercury Sub and with respect to such substances
and wastes, such carriers and facilities have been and are operating in
compliance with such authorizations, are not subject to any material
unperformed investigative, remedial, response, contribution or similar
obligations under, and are not the subject of any existing, pending or
overtly threatened action, investigation or inquiry by any Governmental
Authority or third party in connection with, any Environmental Laws;
(vii) there has been no exposure of any person or property to
hazardous substances, solid waste or any pollutant or contaminant, nor
has there been any release of hazardous substances, solid waste or any
pollutant or contaminant into the environment by Mercury Sub or Mercury
in connection with the properties or operations of Mercury Sub that could
reasonably be expected to give rise to any claim for damages or
compensation; and
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<PAGE>
(viii) Mercury and Mercury Sub shall make available to MSR all
internal and external environmental audits and studies and all
correspondence on substantial environmental matters in the possession of
Mercury or Mercury Sub relating to any of the current or former
properties or operations of Mercury Sub.
(o) PROPERTIES.
(i) The oil, gas and/or mineral leases, interests in which comprise
part of the Mercury Properties (as defined in Section 7.5), and all other
material contracts, agreements, licenses, permits and easements,
rights-of-way and other rights-of-surface use comprising any part of or
otherwise relating to the Mercury Properties (such leases and such
material contracts, agreements, licenses, permits, easements,
rights-of-way and other rights-of-surface use being herein called the
"MERCURY BASIC DOCUMENTS"), are in full force and effect and constitute
valid and binding obligations of the parties thereto; all contracts and
agreements which are Mercury Basic Documents are disclosed in Section
2.2(o)(i) of the Mercury Disclosure Letter. Neither Mercury nor any
Mercury Subsidiary is in breach or default (and no situation exists which
with the passing of time or giving of notice would create such a breach
or default) of its obligations under the Mercury Basic Documents, and no
breach or default by any third party (or situation which with the passage
of time or giving of notice would create such a breach or default)
exists, to the extent such breach or default (whether by Mercury, any
Mercury Subsidiary or such a third party) could materially adversely
affect (after the date hereof) the ownership, operation, value or use of
any Mercury Properties or Mercury Sub. All payments (including, without
limitation, all delay rentals, royalties, shut-in royalties and valid
calls for payment or prepayment under operating agreements) owing under
Mercury Basic Documents have been and are being made (timely and
properly, and before the same became delinquent) by Mercury or a Mercury
Subsidiary in all material respects and, where the non-payment of same by
a third party could materially adversely affect the ownership, operation,
value or use of a Mercury Property after the date hereof, have been and
are being made, by such third party in all material respects.
(ii) Except as set forth in Section 2.2(o)(ii) of the Mercury
Disclosure Letter, neither Mercury nor any Mercury Subsidiary has
incurred any expenses, or made commitments to make expenditures, in
connection with (and no other obligations or liabilities have been
incurred) which would materially adversely affect the ownership or
operation of the Mercury Properties after the date hereof, other than
routine expenses incurred in the normal operation of existing wells on
the Mercury Properties. Except as set forth in Section 2.1(o)(ii) of the
Mercury Disclosure Letter, no proposals are currently outstanding
(whether made by Mercury, any Mercury Subsidiary or by any other party)
to drill additional wells, or to deepen, plug back, abandon, or rework
existing wells, or to conduct other operations for which consent is
required under the applicable operating agreement, or to conduct any
other material operations, other than normal operation of existing wells
on the Mercury Properties.
(iii) There exist no agreements or arrangements for the sale,
gathering, transportation, compression, treating, processing or other
marketing of a material volume of production from the Mercury Properties
(including without limitation, calls on, or other rights to purchase,
production, whether or not the same are currently being exercised) other
than (A) the agreements set forth in Section 2.2(o)(iii) of the Mercury
Disclosure Letter, (B) agreements or arrangements which are cancelable on
120 days notice or less without penalty or detriment and (C) calls on, or
other rights to purchase, production, subject to which Mercury or any
Mercury Subsidiary acquired one or more Mercury Properties and which
individually, or in the aggregate, do not affect a material volume of the
production of oil or gas from the Mercury Properties. Any contracts or
other arrangements under which Mercury or any Mercury Subsidiary is
processing, gathering, transporting or otherwise marketing any material
volume of oil, gas or other minerals (whether or not attributable to the
Mercury Properties) for the account of a third party include
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<PAGE>
terms that represent an arm's length, commercially reasonable trade for
Mercury or any Mercury Subsidiary.
(iv) Except as set forth in Section 2.2(o)(iv) of the Mercury
Disclosure Letter, neither Mercury nor any Mercury Subsidiary has
received prepayments (including, but not limited to, payments for oil and
gas not taken pursuant to "take-or-pay" arrangements) for any oil or gas
produced from the Mercury Properties as a result of which the obligation
does (or may) exist to deliver oil or gas produced from the Mercury
Properties after the date hereof without then receiving payment (or
without then receiving full payment) therefor or to make repayments in
cash. For each Mercury Property listed in Section 2.2(o)(iv) of the
Mercury Disclosure Letter, such section reflects (A) the total amount of
prepayment received as of the date hereof (and the amount of any
recoupment thereof heretofore made), and (B) whether or not a cash
payment can be required in the event recoupment out of production proves
to be inadequate. Except as set forth in Section 2.2(o)(iv) of the
Mercury Disclosure Letter, there is no Mercury Property with respect to
which Mercury, any Mercury Subsidiary, and/or their respective
predecessors in title, have collectively taken more (referred to herein
as "OVER-PRODUCED") or materially less (referred to herein as
"UNDERPRODUCED") production from such Mercury Property (or on the units
in which such Mercury Property participates), or any product thereof,
than the ownership of Mercury or any Mercury Subsidiary and such
predecessors in such Mercury Property would entitle Mercury or any
Mercury Subsidiary and such predecessors (absent any balancing agreement
or arrangement) to receive, to the extent such overproduced or
underproduced position has not, as of the date hereof, been fully made up
or otherwise extinguished. For each Mercury Property listed in Section
2.2(o)(iv) of the Mercury Disclosure Letter, such section reflects, on a
well-by-well or any other basis as may be dictated by any applicable
balancing agreement, (A) whether Mercury or any Mercury Subsidiary is in
an over-produced or under-produced position, (B) the amount of such
over-production or under-production, (C) a description of the written
balancing agreement (if any) pertaining to such Mercury Property (or a
statement that no such agreement exists) and (D) a statement as to
whether royalties, overriding royalties or other burdens against
Mercury's or any Mercury Subsidiaries's net revenue interest in the
affected Mercury Properties were, during the period the subject imbalance
accrued, paid based upon receipts or entitlements. Except as set forth in
Section 2.2(o)(iv) of the Mercury Disclosure Letter, there are no
pipeline imbalances that have arisen due to the failure of nominations
made by Mercury or any Mercury Subsidiary to match actual deliveries of
production from any one or more Mercury Properties.
(v) Mercury and each Mercury Subsidiary has all governmental
licenses and permits necessary to own and operate the Mercury Properties
as presently being owned and operated, and such licenses, permits and
filings are in full force and effect, and neither Mercury nor any Mercury
Subsidiary has received written notice of any material violations in
respect of any such licenses or permits.
(vi) Except as set forth in Section 2.2(o)(vi) of the Mercury
Disclosure Letter, neither Mercury nor any Mercury Subsidiary is subject
to (A) any area of mutual interest agreements or non-compete agreements,
(B) any farm-out or farm-in agreement under which any party thereto is
entitled to receive assignments not yet made, or could earn additional
assignments after the date hereof or (C) any tax partnership, to the
extent being so subject could have a material adverse effect on Mercury
or any Mercury Subsidiary or on any Mercury Property.
(vii) All severance, production, ad valorem, windfall profit and
other similar taxes relating to the ownership or operation of the Mercury
Properties have been, and are being, paid (timely, and before the same
become delinquent) by Mercury and each Mercury Subsidiary in all
respects.
(viii) The ownership and operation of the Mercury Properties has, to
the extent that non-conformance could materially adversely affect the
ownership, operation, value or use thereof
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after the date hereof, been in conformity with all applicable laws, and
all applicable rules, regulations and orders of all governmental agencies
having jurisdiction.
(ix) Except as set forth in Section 2.2(o)(iv) of the Mercury
Disclosure Letter, there are no Preferential Rights or Consents, other
than Routine Governmental Approvals (each as defined in Section 7.5),
that affect any material Mercury Property or Properties and that will be
triggered by the Merger.
(x) Except as set forth in Section 2.2(o)(x) of the Mercury
Disclosure Letter, there exist no agreements or other arrangements
whereunder Mercury or any Mercury Subsidiary undertakes to perform
gathering, transportation, processing or other marketing services for any
third party, including without limitation the owner of a royalty or
overriding royalty interest burdening a lease included in the Mercury
Properties, for a fee or other consideration that is now, or may
hereafter be, unrepresentative of commercial rates being received by
third parties in comparable, arm's length transactions.
(xi) Mercury Sub has good and defensible title to the Mercury
Property, free and clear of all liens, security interests, and
encumbrances except for (a) the contracts, agreements, burdens,
encumbrances and other matters set forth in the descriptions of certain
of the Mercury Properties in Section 2.2(o) of the Mercury Disclosure
Letter, (b) statutory liens for taxes which are not yet delinquent, (c)
liens under operating agreements, pooling orders and unitization
agreements, and mechanics' materialmen's liens, with respect to
obligations which are not yet due, and (d) minor defects and
irregularities in title to any Mercury Property, so long as such defects
and irregularities do not materially impair the value of such Mercury
Property or the use thereof for the purposes for which such Mercury
Property is held. With respect to each Mercury Property described in
Section 2.2(o) of the Mercury Disclosure Letter, the ownership of Mercury
Sub in such Mercury Property does and will, (A) with respect to each
tract of land described in Section 2.2(o) of the Mercury Disclosure
Letter (whether described directly in such section or described by
reference to another instrument) in connection with such Mercury
Property, (1) entitle Mercury Sub to receive a decimal or percentage
share of the oil, gas and other hydrocarbons produced from, or allocated
to, such tract equal to not less than the decimal or percentage share set
forth in Section 2.2(o) of the Mercury Disclosure Letter in connection
with such tract opposite the words "Net Revenue Interest" (or words of
similar import), (2) cause Mercury Sub to be obligated to bear a decimal
or percentage share of the cost of exploration, development and operation
of such tract of land not greater than the decimal or percentage share
set forth in Section 2.2(o) of the Mercury Disclosure Letter in
connection with such tract opposite the words "Working Interest" (or
words of similar import) and (B) if such Mercury Property is shown in
Section 2.2(o) of the Mercury Disclosure Letter to be subject to a unit
or units, with respect to each such unit, (1) entitle Mercury Sub to
receive a decimal or percentage share of all substances covered by such
unit which are produced from, or allocated to, such unit equal to not
less than the decimal or percentage share set forth in Section 2.2(o) of
the Mercury Disclosure Letter in connection with such Mercury Property
opposite the words "Unit Net Revenue Interest" or words of similar import
(and if such Mercury Property is subject to more than one unit, words
identifying such interest with such unit), and (2) obligate Mercury Sub
to bear a decimal or percentage share set forth in Section 2.2(o) of the
Mercury Disclosure Letter in connection with such Mercury Property
opposite the words "Unit Working Interest" or words of similar import
(and if such Mercury Property is subject to more than one unit, words
identifying such interest with such unit). With respect to each Mercury
Property described in Section 2.2(o) of the Mercury Disclosure Letter
which is subject to a voluntary or involuntary pooling, unitization or
communication agreement and/or order, the term "tract of land" as used in
this subsection (xi) shall mean the pooled, unitized or communitized area
as an entirety and shall not be deemed to refer to any individual tract
committed to said pooled, unitized or communitized
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area. Without limitation of the foregoing, the ownership by Mercury Sub
of the Mercury Properties does and will, with respect to each well or
unit identified in Section 2.2(o) of the Mercury Disclosure Letter
entitle Mercury Sub to receive a decimal or percentage share of the oil,
gas and other hydrocarbons produced from, or allocated to, such well or
unit equal to not less than the decimal or percentage share set forth,
for such well or unit, in the column headed "Net Revenue Interest" in
Section 2.2(o) of the Mercury Disclosure Letter, and cause Mercury Sub to
be obligated to bear a decimal or percentage share of the cost of
operation of such well or unit equal to not more than the decimal or
percentage share set forth, for such well or unit, in the column headed
"Working Interest" in Section 2.2(o) of the Mercury Disclosure Letter.
The above-described shares of production which Mercury Sub is entitled to
receive and shares of expenses which Mercury Sub is obligated to bear are
not and will not be subject to change other than such changes which arise
pursuant to non-consent provisions of operating agreements described in
Section 2.2(o) of the Mercury Disclosure Letter in connection with
operations hereafter proposed, or such changes are reflected in Section
2.2(o) of the Mercury Disclosure Letter.
(xii) Set forth in Section 2.2(o) of the Mercury Disclosure Letter is
a list of the current reserve reports covering the Mercury Properties,
true and complete copies of which have been delivered to MSR by Mercury.
(p) AGREEMENTS. All agreements, arrangements, and understandings of
any nature (written or oral, formal or informal) (collectively, for purposes
of this Section, "agreements") to which Mercury Sub is a party or by which
it or any of its properties is otherwise bound, regardless of amount or
subject matter, that are material to the business, assets, results of
operations, condition (financial or otherwise), or prospects of Mercury Sub
are listed in Sections 2.2(o) or 2.2(p) of the Mercury Disclosure Letter.
Mercury has delivered to MSR, accurate and complete copies of such
agreements. Each of such agreements is a valid and binding agreement of the
parties thereto enforceable against them in accordance with its terms. No
breach or default exists with respect to any of such agreements, and no
event has occurred which, after the giving of notice or the passage of time
or otherwise, will result in any such breach or default.
(q) EMPLOYEES; LABOR RELATIONS.
(i) Set forth in Section 2.2(q)(i) is a list of (i) all directors
and officers of Mercury Sub, and (ii) the name of each employee, agent,
and consultant of Mercury Sub as of the date hereof, together with the
total amounts of salary, bonuses, and other compensation paid or payable
by Mercury Sub and Mercury to each such person for the current fiscal
year and the immediately preceding fiscal year.
(ii) Except as set forth in Section 2.2(q)(ii) of the Mercury
Disclosure Letter, (a) there are no collective bargaining agreements or
other similar agreements, arrangements, or understandings, written or
oral, with employees as a group to or by which Mercury Sub is a party or
is bound; (b) no employees of Mercury Sub are represented by any labor
organization, collective bargaining representative, or group of
employees; (c) no labor organization, collective bargaining
representative, or group of employees claims to represent a majority of
the employees of Mercury Sub in an appropriate unit of Mercury or Mercury
Sub; (d) neither Mercury nor Mercury Sub has been involved with any
representational campaign by any union or other organization or group
seeking to become the collective bargaining representative of any of
Mercury Sub's employees or been subject to or, to the best knowledge of
Mercury and Mercury Sub, threatened with any strike or other concerted
labor activity or dispute; and (e) neither Mercury nor Mercury Sub is
obligated to bargain collectively with respect to wages, hours, and other
terms and conditions of employment with any recognized or certified labor
organization, collective bargaining representative, or group of
employees, with respect to any employees of Mercury Sub.
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(r) INSIDER INTERESTS. Except as disclosed in Section 2.2(r) of the
Mercury Disclosure Letter, no shareholder, director, officer, or employee of
Mercury or any Mercury Subs or any associate of any such shareholder,
director, officer, or employee is presently, directly or indirectly, a party
to any transaction with Mercury Sub, including, without limitation, any
agreement, arrangement, or understanding, written or oral, providing for the
employment of, furnishing of services by, rental of real or personal
property from, or otherwise requiring payments to any such shareholder,
director, officer, employee, or associate. To the best knowledge of Mercury
and Mercury Sub, no shareholder, director, officer, or employee of Mercury
or Mercury Sub or any associate of any such shareholder, director, officer,
or employee owns, directly or indirectly, any material interest in, or
serves as a director, officer, or employee of, any customer, supplier, or
competitor of Mercury Sub. For purposes of this Section only, an "associate"
of any shareholder, director, officer, or employee means any member of the
immediate family of such shareholder, director, officer, or employee or any
corporation, partnership, trust, or other entity in which such shareholder,
director, officer, or employee has a substantial ownership or beneficial
interest (other than an interest in a public corporation which does not
exceed three percent of its outstanding securities) or is a director,
officer, partner, or trustee or person holding a similar position.
(s) FINANCIAL REQUIREMENTS. Set forth in Section 2.2(s) of the Mercury
Disclosure Letter is a list of all bonds, deposits, financial assurance
requirements, and insurance coverage required to be submitted to any
Federal, foreign, state or local governmental agencies or authorities for
the continued ownership and operation of the business and assets of Mercury
Sub.
(t) BANK ACCOUNTS AND POWERS OF ATTORNEY. Set forth in Section 2.2(t)
are (i) the name and address of each bank or other financial institution in
which Mercury Sub has an account or a safe deposit box, the account and safe
deposit box numbers thereof, and the names of all persons authorized to draw
thereon or to have access thereto, (ii) the names of all persons authorized
to borrow funds on behalf of Mercury Sub and the names of all entities from
which they are authorized to borrow funds, and (iii) the names of all
persons, if any, holding powers of attorney from Mercury Sub.
(u) VOTING REQUIREMENTS. The affirmative votes of a majority of the
shares of Mercury Sub Common Stock held by Mercury and the Minority
Shareholders, as the owners and holders of all of the outstanding shares of
Mercury Sub Common Stock, is the only vote of the holders of any class or
series of the capital stock of Mercury Sub necessary to approve this
Agreement and the Merger.
(v) BROKERAGE FEES. Neither Mercury nor any of its affiliates has
retained any financial advisor, broker, agent, or finder or paid or agreed
to pay any financial advisor, broker, agent, or finder on account of this
Agreement or any transaction contemplated hereby. Mercury shall indemnify
and hold harmless MSR from and against any and all losses, claims, damages,
and liabilities (including legal and other expenses reasonably incurred in
connection with investigating or defending any claims or actions) with
respect to any finder's fee, brokerage commission, or similar payment in
connection with any transaction contemplated hereby asserted by any person
on the basis of any act or statement made or alleged to have been made by
Mercury or any of its affiliates.
(w) DISCLOSURE. No representation or warranty made by Mercury or
Mercury Sub in this Agreement, and no statement of Mercury or Mercury Sub
contained in any document, certificate, or other writing furnished or to be
furnished by Mercury or Mercury Sub to MSR or MSR Sub pursuant hereto or in
connection herewith, contains or will contain, at the time of delivery, any
untrue statement of a material fact or omits or will omit, at the time of
delivery, to state any material fact necessary in order to make the
statements contained therein, in light of the circumstances under which they
are made, not misleading. Mercury and Mercury Sub know of no matter (other
than matters of a general economic character not relating solely to Mercury
and Mercury Sub in any specific manner) which has not been disclosed to MSR
and MSR Sub pursuant to this Agreement
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which materially and adversely affects, or, so far as Mercury and Mercury
Sub can now reasonably foresee, will materially and adversely affect, the
business, assets, results of operations, condition (financial or otherwise),
or prospects of Mercury Sub or the ability of Mercury and Mercury Sub to
consummate the transactions contemplated hereby.
ARTICLE III
COVENANTS OF MERCURY AND MERCURY SUB
PRIOR TO THE EFFECTIVE TIME
3.1 CONDUCT OF BUSINESS BY MERCURY SUB PENDING THE MERGER. Mercury and
Mercury Sub covenant and agree that, from the date of this Agreement until the
Effective Time, unless MSR shall otherwise agree in writing or as otherwise
expressly contemplated by this Agreement:
(a) The business of Mercury Sub shall be conducted only in, and Mercury
Sub shall not take any action except in, the ordinary course of business and
consistent with past practice;
(b) Mercury and Mercury Sub shall not directly or indirectly do any of
the following: (i) issue, sell, pledge, dispose of or encumber (A) any
capital stock of Mercury Sub (except for capital stock issuable upon the
exercise of any warrants or options issued by Mercury Sub described in the
Mercury Disclosure Letter) or (B) other than in the ordinary course of
business and consistent with past practice and not relating to the borrowing
of money, any assets of Mercury Sub; (ii) amend or propose to amend the
charter or bylaws of Mercury Sub; (iii) split, combine or reclassify any
outstanding capital stock, or declare, set aside or pay any dividend payable
in cash, stock, property or otherwise with respect to any Mercury Sub
capital stock; (iv) redeem, purchase or acquire or offer to acquire any
Mercury Sub capital stock; (v) enter into, adopt or (except as may be
required by law) amend or terminate any bonus, profit sharing, performance
unit, stock equivalent, stock purchase, pension, retirement, deferred
compensation, employment, severance or other employee benefit agreement,
trust, plan, fund or other arrangement for the benefit or welfare of any
director, officer or employee of Mercury Sub; (vi) increase in any manner
the compensation or fringe benefits of any director, officer or employee of
Mercury Sub; (vii) pay to any director, officer or employee of Mercury Sub
any benefit not required by any employee benefit agreement, trust, plan,
fund or other arrangement as in effect on the date hereof; or (viii) enter
into any contract, agreement, commitment or arrangement with respect to any
of the matters set forth in this Section 3.1(b).
(c) Mercury and Mercury Sub shall use their reasonable efforts (i) to
preserve intact the business organization of Mercury Sub, (ii) to maintain
in effect any authorizations or similar rights of Mercury Sub, (iii) to keep
available the services of Mercury Sub's current officers and key employees,
(iv) to preserve the goodwill of those having business relationships with
Mercury Sub, (v) to maintain and keep its properties and the properties of
Mercury Sub in as good a repair and condition as presently exists, except
for deterioration due to ordinary wear and tear and damage due to casualty,
and (vi) to maintain in full force and effect insurance comparable in amount
and scope of coverage to that currently maintained by Mercury Sub or
maintained by Mercury for the benefit of Mercury Sub;
(d) Mercury Sub shall not agree to or enter into any commitments to
make, and Mercury shall not permit Mercury Sub to agree or enter into any
commitments to make, new capital expenditures that in the aggregate exceed
$10,000;
(e) Mercury Sub shall perform its respective obligations under any
contracts and agreements to which it is a party or to which any of its
assets is subject, except for such obligations as Mercury Sub in good faith
may dispute;
(f) Mercury and Mercury Sub will give MSR and its attorneys and other
representatives access at all reasonable times to the Mercury Properties and
to the Mercury's and Mercury Sub's records (including, without limitation,
title files, division order files, well files, production records, equipment
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inventories, windfall profit tax records and production, severance and ad
valorem tax records) pertaining to the ownership and/or operation of the
Mercury Properties;
(g) Mercury and Mercury Sub will or, to the extent third parties operate
the Mercury Properties, will take such steps as would a prudent non-operator
to cause the operator to (i) continue the routine operation of the Mercury
Properties in the ordinary course of business and as would a prudent
operator, (ii) operate the Mercury Properties in conformity (in all material
respects) with all Mercury Basic Documents, and all applicable rules,
regulations and orders of all Governmental Authorities having jurisdiction,
and (iii) maintain the machinery, improvements, equipment and other personal
property and fixtures forming a part of the Mercury Properties in at least
as good of a condition as they are on the date of this Agreement; where
Mercury or Mercury Sub is the operator of a Mercury Property, Mercury and
Mercury Sub will (unless removed without its consent) remain the operator of
such Mercury Property;
(h) Neither Mercury nor Mercury Sub will sell, transfer or abandon any
portion of the Mercury Properties other than (i) items of materials,
supplies, machinery, equipment, improvements or other personal property or
fixtures forming a part of the Mercury Properties (and then only if the same
is replaced with an item of equal suitability and value free of liens and
security interests, which replacement item will then, for the purposes of
this Agreement, become part of the Mercury Properties) or (ii) production of
oil, gas and/or other minerals, or the products therefrom, in the ordinary
course of business under arrangements that do not cause the representations
and warranties set forth elsewhere herein to be untrue; neither Mercury nor
Mercury Sub will, without MSR's consent, release, permit to terminate,
modify or reduce its rights under any oil, gas and/or mineral lease forming
a material part of the Mercury Properties, or any other material Mercury
Basic Document, or enter into any new agreements which would be Mercury
Basic Documents;
(i) Mercury and Mercury Sub will cause all material expenses (including,
without limitation, all bills for labor, materials and supplies used or
furnished for use in connection with the Mercury Properties and all ad
valorem, severance, production, windfall profit and similar taxes) and
liabilities relating to the ownership or operation of the Mercury Properties
to be promptly paid and discharged;
(j) Mercury and Mercury Sub will request, from the appropriate parties
(and in accordance with the documents creating such rights and/or
requirements), all Consents relating to any Mercury Property and waivers of
any Preferential Rights relating to any material Mercury Property;
(k) Mercury and Mercury Sub will not take materially more of the oil or
gas produced from the wells located on any Mercury Property (or on units in
which such properties participate) than Mercury Sub's ownership of such
Mercury Property would entitle Mercury Sub (absent any oil or gas balancing
agreement or arrangement) to take; and
(l) Mercury shall not, and shall not permit Mercury Sub to, take any
action that would, or that reasonably could be expected to, result in any of
the representations and warranties set forth in this Agreement becoming
untrue or any of the conditions to the Merger set forth in Article VI not
being satisfied. Mercury promptly shall advise MSR orally and in writing of
any change or event having, or which, insofar as reasonably can be foreseen,
would have, a material adverse effect on Mercury, Mercury Sub or the Mercury
Properties.
3.2 PROXY STATEMENT. Promptly after the date of this Agreement, Mercury
and Mercury Sub shall cooperate with MSR in preparing the Proxy Statement (as
defined in Section 4.2) and the Registration Statement (as defined in Section
4.4). Mercury and Mercury Sub agree all information concerning Mercury and
Mercury Sub furnished by or on their behalf specifically for use in the Proxy
Statement and the Registration Statement will comply as to form in all material
respects with the requirements of the Exchange Act and the rules and regulations
adopted thereunder, and will not contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary to
make the
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statements therein not misleading. Mercury and Mercury Sub will advise MSR
promptly in writing if prior to the Effective Time it shall obtain knowledge of
any facts that would make it necessary to amend or supplement the Proxy
Statement or the Registration Statement in order to make the statements therein
not misleading or to comply with applicable law.
3.3 ACQUISITION PROPOSALS. From and after the date of this Agreement,
neither Mercury nor Mercury Sub shall, directly or indirectly, through any
officer, director, employee, representative or agent of Mercury or Mercury Sub,
(i) solicit or initiate discussions or negotiations with any person (other than
MSR), or participate in any discussions or negotiations with any person (other
than MSR) regarding, any merger, consolidation, sale of assets, tender offer,
sale of shares of capital stock or similar transaction involving Mercury Sub (an
"ACQUISITION PROPOSAL"), (ii) disclose to any person preparing to make or
considering an Acquisition Proposal any confidential information regarding
Mercury Sub or (iii) enter into any agreement, arrangement, understanding or
commitment regarding any Acquisition Proposal. Mercury and Mercury Sub shall
notify MSR promptly of the receipt of any Acquisition Proposal after the date of
this Agreement.
ARTICLE IV
COVENANTS OF MSR PRIOR TO THE EFFECTIVE TIME
4.1 CONDUCT OF BUSINESS BY MSR PENDING THE MERGER. MSR covenants and
agrees that, from the date of this Agreement until the Effective Time, unless
Mercury shall otherwise agree in writing or as otherwise expressly contemplated
by this Agreement or set forth in Section 4.1 of the MSR Disclosure Letter:
(a) The business of MSR and the MSR Subsidiaries shall be conducted only
in, and MSR and the MSR Subsidiaries shall not take any action except in,
the ordinary course of business and consistent with past practice;
(b) Except as set forth in Section 4.1(b) of the MSR Disclosure Letter,
MSR shall not directly or indirectly do any of the following: (i) issue,
sell, pledge, dispose of or encumber, or permit any MSR Subsidiary to issue,
sell, pledge, dispose of or encumber, (A) any capital stock of MSR or any
MSR Subsidiary except upon the exercise of MSR Options or (B) other than in
the ordinary course of business and consistent with past practice and not
relating to the borrowing of money, any assets of MSR or any MSR Subsidiary;
(ii) amend or propose to amend the respective charters or bylaws of MSR or
any MSR Subsidiary; (iii) split, combine or reclassify any outstanding
capital stock, or declare, set aside or pay any dividend payable in cash,
stock, property or otherwise with respect to its capital stock whether now
or hereafter outstanding; (iv) redeem, purchase or acquire or offer to
acquire, or permit any of the MSR Subsidiaries to redeem, purchase or
acquire or offer to acquire, any of its or their capital stock; or (v)
except in the ordinary course of business and consistent with past practice
and except as contemplated by Section 5.12, enter into any contract,
agreement, commitment or arrangement with respect to any of the matters set
forth in this Section 4.1(b);
(c) Except as set forth in Section 4.1(c) of the MSR Disclosure Letter,
MSR shall use its reasonable efforts (i) to preserve intact the business
organization of MSR and each of the MSR Subsidiaries, (ii) to maintain in
effect any authorizations or similar rights of MSR and each of the MSR
Subsidiaries, (iii) to keep available the services of its and their current
officers and key employees, (iv) to preserve the goodwill of those having
business relationships with it and the MSR Subsidiaries, (v) to maintain and
keep its properties and the properties of the MSR Subsidiaries in as good a
repair and condition as presently exists, except for deterioration due to
ordinary wear and tear and damage due to casualty, and (vi) to maintain in
full force and effect insurance comparable in amount and scope of coverage
to that currently maintained by it and the MSR Subsidiaries;
(d) MSR shall not make or agree to make, or permit any of the MSR
Subsidiaries to make or agree to make, any capital expenditure in the
aggregate in excess of $100,000;
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(e) MSR shall, and shall cause the MSR Subsidiaries to, perform their
respective obligations under any contracts and agreements to which any of
them is a party or to which any of their assets is subject, except to the
extent such failure to perform would not have a material adverse effect on
MSR and the MSR Subsidiaries, taken as a whole, and except for such
obligations as MSR or the MSR Subsidiaries in good faith may dispute;
(f) MSR will, to the extent legally and contractually authorized to do
so, give Mercury and its attorneys and other representatives access at all
reasonable times to the MSR Properties and to the MSR and any MSR
Subsidiaries' records (including, without limitation, title files, division
order files, well files, production records, equipment inventories, windfall
profit tax records and production, severance and ad valorem tax records)
pertaining to the ownership and/or operation of the MSR Properties;
(h) MSR and the MSR Subsidiaries will or, to the extent third parties
operate the MSR Properties, will take such steps as would a prudent
non-operator to cause the operator to (i) continue the routine operation of
the MSR Properties in the ordinary course of business and as would a prudent
operator, (ii) operate the MSR Properties in conformity (in all material
respects) with all MSR Basic Documents and all applicable rules, regulations
and orders of all Governmental Authorities having jurisdiction, and (iii)
maintain the machinery, improvements, equipment and other personal property
and fixtures forming a part of the MSR Properties in at least as good of a
condition as they are on the date of this Agreement; where MSR or any MSR
Subsidiary is the operator of a MSR Property, they will (unless removed
without its consent) remain the operator of such MSR Property;
(i) Except as set forth in Section 4.1(i) of the MSR Disclosure Letter,
neither MSR nor any MSR Subsidiaries will sell, transfer or abandon any
portion of the MSR Properties other than (i) items of materials, supplies,
machinery, equipment, improvements or other personal property or fixtures
forming a part of the MSR Properties (and then only if the same is replaced
with an item of equal suitability and value free of liens and security
interests, which replacement item will then, for the purposes of this
Agreement, become part of the MSR Properties) or (ii) production of oil, gas
and/or other minerals, or the products therefrom, in the ordinary course of
business under arrangements that do not cause the representations and
warranties set forth elsewhere herein to be untrue; Neither MSR nor any MSR
Subsidiary will, without Mercury's consent, release, permit to terminate,
modify or reduce its rights under any oil, gas and/or mineral lease forming
a material part of the MSR Properties, or any other material MSR Basic
Document, or enter into any new agreements which would be MSR Basic
Documents;
(j) MSR and the MSR Subsidiaries will cause all material expenses
(including, without limitation, all bills for labor, materials and supplies
used or furnished for use in connection with the MSR Properties and all ad
valorem, severance, production, windfall profit and similar taxes) and
liabilities relating to the ownership or operation of the MSR Properties to
be promptly paid and discharged;
(k) Neither MSR nor any MSR Subsidiary will take materially more of the
oil or gas produced from the wells located on any MSR Property (or on units
in which such properties participate) than their ownership of such MSR
Property would entitle them (absent any oil or gas balancing agreement or
arrangement) to take; and
(l) MSR shall not, and shall not permit any of the MSR Subsidiaries to,
take any action that would, or that reasonably could be expected to, result
in any of the representations and warranties set forth in this Agreement
becoming untrue or any of the conditions to the Merger set forth in Article
VI not being satisfied. MSR promptly shall advise Mercury orally and in
writing of any change or event having, or which, insofar as reasonably can
be foreseen, would have, a material adverse effect on MSR and the MSR
Subsidiaries, taken as a whole.
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4.2 PROXY STATEMENT. Promptly after the date of this Agreement, MSR shall
prepare and file with the Commission under the Exchange Act, and shall use its
reasonable efforts to have cleared by the Commission, the Proxy Statement (the
"PROXY STATEMENT") with respect to the meeting of the stockholders of MSR
referred to in Section 4.3. MSR agrees that the Proxy Statement (except with
respect to information concerning Mercury and the Mercury Subsidiaries furnished
by or on behalf of Mercury specifically for use therein, for which information
Mercury shall be responsible) will comply as to form in all material respects
with the requirements of the Exchange Act and the rules and regulations adopted
thereunder, and the Proxy Statement (except with respect to information
concerning Mercury and the Mercury Subsidiaries furnished by or on behalf of
Mercury specifically for use therein, for which information Mercury shall be
responsible) will not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading. Subject to the provisions of Section 5.11,
the Proxy Statement shall contain the recommendation of the Board of Directors
of MSR that the stockholders of MSR vote to approve this Agreement.
4.3 MEETING OF STOCKHOLDERS OF MSR. Subject to the provisions of Section
5.11, MSR shall promptly take all action reasonably necessary in accordance with
Canadian law, the DGCL and the MSR Certificate and bylaws to convene a meeting
of its stockholders to consider and vote upon (a) approval of this Agreement and
(b) approval of the redomestication of MSR in Delaware (the "REDOMESTICATION OF
MSR"). Subject to the provisions of Section 5.11, the Board of Directors of MSR
(i) shall recommend at such meeting that the stockholders of MSR vote to adopt
and approve the matters referenced in the preceding sentence; (ii) shall use its
reasonable efforts to solicit from stockholders of MSR proxies in favor of such
adoption and approval; and (iii) shall take all other action reasonably
necessary to secure a vote of its stockholders in favor of such adoption and
approval.
4.4 REGISTRATION STATEMENT. Promptly after the date of this Agreement, MSR
shall file an appropriate registration statement with the Commission under the
Securities Act with respect to the Redomestication of MSR, and Mercury Sub shall
file an appropriate registration statement with the Commission with respect to
offering, sale and delivery of the shares of Surviving Corporation Common Stock
to be issued pursuant to the Merger (such registration statements, collectively,
the "REGISTRATION STATEMENT"); and each party shall cooperate with each other in
connection with the preparation of the Registration Statement and will use its
reasonable efforts to cause such Registration Statement to become effective as
soon as practicable after filing. Each party agrees that the Registration
Statement to be prepared by it (except with respect to information concerning
the other party or the other party's affiliates furnished by or on behalf of the
other party specifically for use therein, for which information the other party
shall be responsible) will comply as to form in all material respects with the
requirements of the Securities Act and the Exchange Act and the respective rules
and regulations adopted thereunder, and will not contain any untrue statement of
any material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading. Each party
will advise the other in writing if prior to the Effective Time it shall obtain
knowledge of any fact that would, in its opinion, make it necessary to amend or
supplement the Registration Statement in order to make the statements therein
not misleading or to comply with applicable law.
4.5 STOCK EXCHANGE LISTING. MSR shall use all reasonable efforts to cause
the shares of the Surviving Corporation Common Stock to be issued in the Merger
to be approved for listing on the American Stock Exchange, subject to official
notice of issuance, prior to the Closing Date.
4.6 FINANCING. MSR shall use its reasonable best efforts to obtain the
financing required to effect the transactions contemplated by this Agreement and
to pay all related fees and expenses (the "Financing"). In the event that any
portion of the Financing becomes unavailable, regardless of the reason therefor,
MSR shall, upon learning thereof, promptly so advise Mercury and use its
reasonable best efforts to obtain alternative financing from other sources, on
and subject to substantially the same terms and conditions as the portion of the
Financing that has become unavailable. The definitive agreements to provide the
Financing will contain conditions, including the accuracy of the representations
and warranties
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therein concerning the business of Mercury Sub and the Mercury Properties as
shall be agreed to by the parties to such agreements. The parties hereto shall
each use its reasonable best efforts to satisfy on or before the Closing all
requirements of the definitive agreements to provide the Financing relating to
such party which are conditions to closing all transactions contemplated by this
Agreement; provided, however, Mercury shall not be required to undertake any
financial obligations in connection with the Financing. The obligations
contained in this Section are not intended, nor shall they be construed, to
benefit or confer any rights upon any person other than the parties hereto.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 ACCOUNTANTS LETTER. Mercury shall use its reasonable efforts to cause
Weaver and Tidwell LLP to deliver a letter dated as of the date of the Proxy
Statement and a letter dated as of the Closing Date, and addressed to itself and
MSR, in form and substance reasonably satisfactory to MSR and customary in scope
and substance for agreed upon procedures letters delivered by independent public
accountants in connection with registration statements and proxy statements
similar to the Registration Statement and Proxy Statement.
5.2 FILINGS; CONSENTS; REASONABLE EFFORTS. Subject to the terms and
conditions of this Agreement, Mercury and MSR shall (i) make all necessary
filings with respect to the Merger and this Agreement under the Securities Act,
the Exchange Act and applicable blue sky or similar securities laws and shall
use all reasonable efforts to obtain required approvals and clearances with
respect thereto; (ii) obtain all consents, waivers, approvals, authorizations
and orders required in connection with the authorization, execution and delivery
of this Agreement and the consummation of the Merger; and (iii) take, or cause
to be taken, all appropriate action, and do, or cause to be done, all things
necessary, proper or advisable to consummate and make effective as promptly as
practicable the transactions contemplated by this Agreement.
5.3 NOTIFICATION OF CERTAIN MATTERS. Mercury shall give prompt notice to
MSR, and MSR shall give prompt notice to Mercury, orally and in writing, of (i)
the occurrence, or failure to occur, of any event which occurrence or failure
would be likely to cause any representation or warranty contained in this
Agreement to be untrue or inaccurate at any time from the date hereof to the
Effective Time, and (ii) any material failure of Mercury or MSR, as the case may
be, or any officer, director, employee or agent thereof, to comply with or
satisfy any covenant, condition or agreement to be complied with or satisfied by
it hereunder.
5.4 AGREEMENT TO DEFEND. In the event any claim, action, suit,
investigation or other proceeding by any governmental body or other person or
other legal or administrative proceeding is commenced that questions the
validity or legality of the transactions contemplated hereby or seeks damages in
connection therewith, the parties hereto agree to cooperate and use their
reasonable efforts to defend against and respond thereto.
5.5 EXPENSES. Whether or not the Merger is consummated, all costs and
expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring such expense, except
that expenses incurred in connection with printing and mailing the Registration
Statement and the Proxy Statement shall be borne by MSR; provided, however, that
if this Agreement shall have been terminated pursuant to Section 7.1 as a result
of the willful breach by a party of any of its representations, warranties,
covenants or agreements set forth in this Agreement, such breaching party shall
pay the costs and expenses of the other parties in connection with the
transactions contemplated by this Agreement.
5.6 SURVIVING CORPORATION AND SUBSIDIARIES BOARDS OF DIRECTORS, EXECUTIVE
COMMITTEES AND OFFICERS.
(a) MSR BOARD OF DIRECTORS. At the Effective Time, the respective
Boards of Directors of the Surviving Corporation and each Surviving
Corporation subsidiary shall be comprised of (i) Otto Buis,
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Steve Morris and Patrick Montalban, and (ii) three additional members
designated in writing by the Board of Directors of Mercury prior to the date
of mailing of the Proxy Statement to the Mercury stockholders; provided that
the persons designated by the Board of Directors of Mercury must be persons
possessing suitable business and educational qualifications and personal
characteristics and must be approved by the Board of Directors of MSR in its
reasonable discretion. If, prior to the Effective Time, (i) Otto Buis, Steve
Morris or Patrick Montalban shall decline or be unable to serve, the Board
of Directors of MSR shall designate another person to serve in such person's
stead, and (ii) any such designees of Mercury shall decline or be unable to
serve, the Board of Directors of Mercury shall designate another person to
serve in such person's stead in accordance with the provisions of the
proviso contained in the immediately preceding sentence.
(b) SURVIVING CORPORATION AND SUBSIDIARIES EXECUTIVE COMMITTEES. At
the Effective Time, the respective three person executive committees of the
Boards of Directors of the Surviving Corporation and each Surviving
Corporation subsidiary have shall be comprised of (i) Patrick Montalban, or
if he shall decline or be unable to serve, the Board of Directors of MSR
shall designate another person to serve in his place and (ii) two of the
persons selected by the Board of Directors of Mercury to be members of the
Board of Directors of the Surviving Corporation after the Effective Time.
(c) SURVIVING CORPORATION AND SUBSIDIARY EXECUTIVE OFFICERS. At the
Effective Time, the respective principal executive officers of the Surviving
Corporation and each Surviving Corporation subsidiary have shall be as
follows: Chairman of the Board and chief executive officer--Otto J. Buis,
President and chief operating officer--Thomas F. Darden, and Vice
President--Glenn M. Darden.
5.7 INDEMNIFICATION.
(a) INDEMNIFICATION BY MERCURY. Subject to the terms and conditions of
this Section 5.7, Mercury shall indemnify, defend, and hold harmless the
Surviving Corporation, the Surviving Corporation subsidiaries, MSR, the MSR
Subsidiaries, each director and officer thereof, and each affiliate thereof,
and their respective heirs, legal representatives, successors, and assigns
(collectively, the "MSR GROUP"), from and against any and all claims,
actions, causes of action, demands, assessments, losses, damages,
liabilities, judgments, settlements, penalties, costs, and expenses
(including reasonable attorneys' fees and expenses), of any nature
whatsoever, whether actual or consequential (collectively, "DAMAGES"),
asserted against, resulting to, imposed upon, or incurred by any member of
the MSR Group, directly or indirectly, by reason of or resulting from any
breach by Mercury or Mercury Sub of any of their respective representations,
warranties, covenants, or agreements contained in this Agreement or in any
certificate, instrument, or document delivered pursuant hereto.
(b) INDEMNIFICATION BY MSR. Subject to the terms and conditions of
this Section 5.7, MSR shall indemnify, defend, and hold harmless Mercury,
the subsidiaries and parent corporations of Mercury, each director and
officer of Mercury or any of its subsidiaries or parent corporations, and
each affiliate thereof, and their respective heirs, legal representatives,
successors, and assigns (collectively, the "MERCURY GROUP"), from and
against any and all Damages asserted against, resulting to, imposed upon, or
incurred by any member of the Mercury Group, directly or indirectly, by
reason of or resulting from any breach by MSR or MSR Sub of any of its
representations, warranties, covenants, or agreements contained in this
Agreement or in any certificate, instrument, or document delivered pursuant
hereto.
(c) PROCEDURE FOR INDEMNIFICATION. Promptly after receipt by an
indemnified party under Section 5.7(a) or 5.7(b) of notice of the
commencement of any action, such indemnified party shall, if a claim in
respect thereof is to be made against an indemnifying party under such
Section, give written notice to the indemnifying party of the commencement
thereof, but the failure so to notify the indemnifying party shall not
relieve it of any liability that it may have to any indemnified party except
to the extent the indemnifying party demonstrates that the defense of such
action is prejudiced thereby. In case any such action shall be brought
against an indemnified party and it shall give written
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notice to the indemnifying party of the commencement thereof, the
indemnifying party shall be entitled to participate therein and, to the
extent that it may wish, to assume the defense thereof with counsel
reasonably satisfactory to such indemnified party. If the indemnifying party
elects to assume the defense of such action, the indemnified party shall
have the right to employ separate counsel at its own expense and to
participate in the defense thereof. If the indemnifying party elects not to
assume (or fails to assume) the defense of such action, the indemnified
party shall be entitled to assume the defense of such action with counsel of
its own choice, at the expense of the indemnifying party. If the action is
asserted against both the indemnifying party and the indemnified party and
there is a conflict of interests which renders it inappropriate for the same
counsel to represent both the indemnifying party and the indemnified party,
the indemnifying party shall be responsible for paying for separate counsel
for the indemnified party; provided, however, that if there is more than one
indemnified party, the indemnifying party shall not be responsible for
paying for more than one separate firm of attorneys to represent the
indemnified parties, regardless of the number of indemnified parties. If the
indemnifying party elects to assume the defense of such action, (a) no
compromise or settlement thereof may be effected by the indemnifying party
without the indemnified party's written consent (which shall not be
unreasonably withheld) unless the sole relief provided is monetary damages
that are paid in full by the indemnifying party and (b) the indemnifying
party shall have no liability with respect to any compromise or settlement
thereof effected without its written consent (which shall not be
unreasonably withheld).
(d) LIMITATIONS. The indemnification obligations of the parties hereto
pursuant to this Section 5.7 shall be subject to the following limitations:
(i) No indemnification shall be required to be made by Mercury
pursuant to Section 5.7(a) with respect to any claims made by any member
of the MSR Group except to the extent that the aggregate amount of
Damages incurred by members of the MSR Group with respect to all claims
under Section 5.7(a) (whether asserted, resulting, imposed, or incurred
before, on, or after the Closing Date) exceeds $200,000.
(ii) No indemnification shall be required to be made by MSR pursuant
to Section 5.7(b) with respect to any claims made by any member of the
Mercury Group except to the extent that the aggregate amount of Damages
incurred by members of the Mercury Group with respect to all claims under
Section 5.7(b) (whether asserted, resulting, imposed, or incurred before,
on, or after the Closing Date) exceeds $200,000.
(iii) Notwithstanding anything to the contrary provided in this
Section 5.7 or otherwise in this Agreement, except for the obligations of
the Surviving Corporation, if any, under the "CONTINGENT WARRANT" (as
such term is defined below), neither MSR nor the Surviving Corporation
shall have any liability or obligation to any member of the Mercury Group
for, or make any representation or warranty with respect to, any
liability of MSR, the Surviving Corporation, or any member of the Mercury
Group for or with respect to, any Taxes arising out of or related to the
Redomestication of MSR or the Merger. In connection with the foregoing,
Mercury acknowledges and agrees that the representations and warranties
set forth in Section 2.1 above shall not cover any such Taxes
notwithstanding any provisions of such representations and warranties to
the contrary.
5.8 CERTAIN TAX AND ACCOUNTING MATTERS.
(a) TAXABLE PERIODS ENDING ON OR BEFORE THE CLOSING DATE. Mercury
shall be solely liable for all Taxes of Mercury Sub due for all taxable
years and periods ending on or before the Closing Date. Mercury shall cause
to be prepared and duly filed all federal income tax returns and all other
tax returns required to be filed by or with respect to the Mercury Sub for
all taxable years and periods ending on or before the Closing Date. Mercury
shall pay all Taxes shown to be due on such tax returns for all periods
covered by such returns. Mercury warrants that Mercury Sub has not and will
not file,
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<PAGE>
and is not eligible for filing a consolidated federal income tax return with
Mercury or any affiliated group of which Mercury is a member for any taxable
years and periods ending on or before the Closing Date. MSR will prepare and
file all federal income tax returns and all other returns required to be
filed by or with respect to MSR and the MSR Subsidiaries for all taxable
years ending on or before the Closing Date. MSR's taxable year will end for
federal income tax purposes on the date of its redomestication in Delaware.
MSR shall be liable for all Taxes shown to be due on such returns for the
periods covered thereby, except to the extent previously paid or shown as a
reserve on its Financial Statements.
(b) TAXABLE PERIODS COMMENCING AFTER THE CLOSING DATE. The Surviving
Corporation shall be solely liable for all Taxes of the Surviving
Corporation for all taxable years and periods commencing after the Closing
Date. The Surviving Corporation shall cause to be prepared and duly filed
all tax returns of the Surviving Corporation for taxable periods commencing
after the Closing Date. Surviving Corporation shall pay all Taxes shown to
be due on such returns for all periods covered by such returns.
(c) TAXABLE PERIODS COMMENCING BEFORE AND ENDING AFTER THE CLOSING
DATE. Surviving Corporation shall pay or cause to be paid all Taxes due for
any taxable year or period commencing before and ending after the Closing
Date (the "Straddle Period").
(d) REFUNDS OR CREDITS. Any refunds or credits with respect to Taxes
paid by Mercury Sub or the Surviving Corporation attributable to taxable
periods ending on or before the Closing Date shall belong to Mercury. Any
refunds or credits with respect to Taxes paid by the Surviving Corporation
or Mercury Sub or MSR shall belong to the Surviving Corporation. Any refunds
or credits with respect to Taxes paid by Mercury Sub or the Surviving
Corporation or MSR attributable to the Straddle Period shall belong to the
Surviving Corporation, provided however, such refunds and credits shall be
taken into account in determining the net Taxes that would have been due by
MSR and the MSR subsidiaries if the Straddle Period had ended on the Closing
Date, pursuant to Section 5.8(c). The Surviving Corporation shall reimburse
Mercury for any refunds and credits belonging to Mercury within two days
from receipt thereof by the Surviving Corporation. To the extent that any
such refund or credit is properly includable in the taxable income of the
Surviving Corporation, the amount forwarded or reimbursed to Mercury shall
be reduced by a percentage of the amount of such refund or credit equal to
the highest marginal federal Income Tax rate for the tax period in which the
refund or credit is received.
(e) TAX AND ACCOUNTING TREATMENT. Each of the parties hereto
undertakes and agrees to use its reasonable efforts to cause the Merger, and
to take no action which would cause the Merger not, to qualify for treatment
as a "reorganization" within the meaning of Section 368(a) of the Code for
federal income tax purposes.
5.9 AGREEMENT REGARDING CERTAIN REVENUES AND EXPENSES. The parties agree
that all revenue and income (minus the costs and expenses of production incurred
by Mercury) attributable to the Mercury Properties (other than the "Properties
Subject to Production Payment" (as defined below)) during the period commencing
January 1, 1997 and ending on the Closing Date, shall be deemed to have been
earned by Surviving Corporation, and within five (5) days after the Closing
Date, Mercury shall pay to the Surviving Corporation any such revenue and income
(minus the costs and expenses of production incurred by Mercury) received by it.
With respect to the Mercury Properties referred to in Section 2.2(o) of the
Mercury Disclosure Letter as being subject to a production payment (the
"PROPERTIES SUBJECT TO PRODUCTION PAYMENT"), the parties agree that (a) all
revenue and income attributable to the Properties Subject to Production Payment
until the production payment concerning such properties described in Section
2.2(o) of the Mercury Disclosure Letter (the "PRODUCTION PAYMENT") has been
fully paid shall be deemed to be earned by and the property of Mercury, and
within five (5) days after receipt of any such revenue by the Surviving
Corporation, all such revenue and income received by the Surviving Corporation,
if any, shall be
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<PAGE>
paid to Mercury, and (b) Mercury shall reimburse the Surviving Corporation for
all costs and expenses of production incurred by them during the period
commencing January 1, 1997 and ending when the Production Payment has been fully
paid; provided, however, in the event Production Payment has not been fully paid
on or before December 31, 1997, then Mercury shall pay to the Surviving
Corporation an amount equal to all revenue and income attributable to such
properties for the period commencing January 1, 1998, and ending when the
Production Payment is fully paid, as if the Production Payment had been fully
paid on or before December 31, 1997. Notwithstanding the provisions of Section
5.8 above to the contrary, each party shall pay and be responsible for, and
indemnify and hold the other responsible for all Taxes due with respect to the
revenue and income to be paid to (or to be deemed earned by) it in accordance
with the provisions of this Section 5.9.
5.10 ARTICLES OF INCORPORATION AND BYLAWS. Prior to the Closing Date, MSR
and Mercury shall agree as to the form of the articles of incorporation and
bylaws of Mercury Sub to be in effect as the new articles of incorporation and
bylaws of Mercury Sub effective immediately prior to the Effective Time.
5.11 ALTERNATIVE TRANSACTION. Nothing in this Agreement shall prevent the
members of the Board of Directors of MSR, in the exercise of their fiduciary
duties and after consulting with counsel, from considering, negotiating and
approving an unsolicited bona fide proposal that the Board of Directors of MSR
determines in good faith, after consultation with its financial advisors, may
result in a transaction more favorable to MSR's stockholders than the
transactions contemplated by this Agreement (an "ALTERNATIVE TRANSACTION"). If
the Board of Directors of MSR receives a request for confidential information by
a potential bidder for MSR and the Board of Directors determines, after
consultation with counsel, that the Board of Directors has a fiduciary
obligation to provide such information to a potential bidder, then MSR may,
subject to a confidentiality agreement substantially similar to that previously
executed by Mercury, provide such potential bidder with access to information
regarding MSR. MSR shall promptly notify Mercury, orally and in writing, if any
such proposal described in the first sentence of this Section 5.11 is made and
shall, in any such notice, indicate the identity and terms and conditions of
such proposal. MSR shall keep Mercury advised of the progress and status of any
such proposals. The obligation of the Board of Directors of MSR to convene a
meeting of the stockholders of MSR and to recommend the approval of this
Agreement to the MSR stockholders pursuant to Sections 4.2 and 4.3 shall be
subject to the fiduciary duties of the directors, as determined by the directors
after consultation with counsel, and nothing contained in this Agreement shall
prevent the Board of Directors of MSR from approving or recommending to the
stockholders of MSR any unsolicited proposal by a third party with respect to an
Alternative Transaction if required in the exercise of its fiduciary duties, as
determined by the directors after consultation with counsel; provided, however,
in the event the Board of Directors of MSR recommends an Alternative Transaction
to the stockholders of MSR and such Alternative Transaction is approved by the
stockholders of MSR, MSR shall pay to Mercury a fee of $500,000 to compensate
Mercury for its costs and expenses and loss of opportunity cost in connection
with the transaction contemplated by this Agreement.
5.12 CONTINGENT WARRANT. At or immediately prior to the Closing the
Surviving Corporation shall have issued a contingent warrant agreement to
Mercury in substantially the form set forth as Exhibit A hereto (the "CONTINGENT
WARRANT").
5.13 MANAGEMENT AGREEMENT. Prior to the Closing Date, MSR and Mercury
shall agree as to the form of a management agreement between the Surviving
Corporation and Mercury (the "MANAGEMENT AGREEMENT") with respect to certain
management services to be provided by Mercury to the Surviving Corporation after
the Closing.
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<PAGE>
ARTICLE VI
CONDITIONS
6.1 CONDITIONS TO OBLIGATION OF EACH PARTY TO EFFECT THE MERGER. The
respective obligations of each party to effect the Merger shall be subject to
the fulfillment at or prior to the Closing Date of the following conditions:
(a) This Agreement and the Redomestication of MSR shall have been
approved and adopted by the requisite vote of the stockholders of MSR, as
may be required by law, and by the rules of the American Stock Exchange, and
the Redomestication of MSR shall have been effected;
(b) No order shall have been entered and remain in effect in any action
or proceeding before any foreign, federal or state court or governmental
agency or other foreign, federal or state regulatory or administrative
agency or commission that would prevent or make illegal the consummation of
the Merger or the other transactions contemplated hereby;
(c) The Registration Statement shall be effective on the Closing Date,
and all post-effective amendments filed shall have been declared effective
or shall have been withdrawn; and no stop order suspending the effectiveness
thereof shall have been issued and no proceedings for that purpose shall
have been initiated or, to the knowledge of the parties, threatened by the
Commission;
(d) There shall have been obtained any and all material permits,
approvals and consents of securities or blue sky commissions of any
jurisdiction, and of any other governmental body or agency, that reasonably
may be deemed necessary so that the consummation of the Merger and the other
transactions contemplated hereby will be in compliance with applicable laws,
the failure to comply with which would have a material adverse effect on the
business, financial condition or results of operations of MSR, the Surviving
Corporation and their subsidiaries, taken as a whole after consummation of
the Merger;
(e) The shares of Surviving Corporation Common Stock issuable upon
consummation of the Merger shall have been approved for listing on the
American Stock Exchange, subject to official notice of issuance; and
(f) All approvals of private persons or corporations, (i) the granting
of which is necessary for the consummation of the Merger or the transactions
contemplated in connection therewith and (ii) the non-receipt of which would
have a material adverse effect on the business, financial condition or
results of operations of MSR, the Surviving Corporation and their
subsidiaries, taken as a whole after consummation of the Merger, shall have
been obtained.
(g) Mercury and the Board of Directors of MSR shall have received a
written opinion, in form and substance reasonably satisfactory to Mercury
and the Board of MSR, of a mutually acceptable investment banking firm, to
the effect that the net fair market value of the assets and properties of
MSR is less than $14,156,000, and such opinion shall not have been amended
or withdrawn.
(h) The parties shall have agreed on the forms of the articles of
incorporation and bylaws of Mercury Sub to be in effect immediately prior to
the Effective Time, and such new articles and bylaws shall be effective as
the articles and bylaws of Mercury Sub.
(i) The parties shall have agreed on the form of the Management
Agreement, and the Management Agreement shall have been duly executed and
delivered by Mercury and the Surviving Corporation at the Closing.
(j) Effective as of the Closing, the Surviving Corporation shall have
(i) assumed the obligations of Mercury Sub under that certain limited
guaranty executed by Mercury Sub dated as of March 7, 1997, in favor of
NationsBank of Texas, N.A. and certain other financial institutions named
therein (the "GUARANTY"), which guarantees the payment of bank debt of
Mercury in the principal amount of
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<PAGE>
$4,000,000 (the "BANK DEBT"), or (ii) repaid in full the Bank Debt
guaranteed by the Guaranty, and the Guaranty and the lien on the Mercury
Properties securing the Bank Debt shall have been released, and in the case
of either clause (i) or (ii) above, any obligation of Mercury to repay such
Bank Debt shall have been released.
6.2 ADDITIONAL CONDITIONS TO OBLIGATIONS OF MSR. The obligation of MSR to
effect the Merger is, at the option of MSR, also subject to the fulfillment at
or prior to the Closing Date of the following conditions:
(a) The representations and warranties of Mercury and Mercury Sub
contained in Section 2.2 shall be accurate in all material respects as of
the date of this Agreement and (except to the extent such representations
and warranties speak specifically as of an earlier date) as of the Closing
Date as though such representations and warranties had been made at and as
of that time; all the agreements, terms, covenants and conditions of this
Agreement to be complied with and performed by Mercury, Mercury Sub and the
Minority Stockholders on or before the Closing Date shall have been duly
complied with and performed in all material respects; and a certificate to
the foregoing effect dated the Closing Date and signed by the chief
executive officer of Mercury shall have been delivered to MSR;
(b) Since the date of this Agreement, no material adverse change in the
financial condition, results of operations or business of Mercury Sub shall
have occurred, and Mercury Sub shall not have suffered any damage,
destruction or loss materially adversely affecting the properties or
business of Mercury Sub, and MSR shall have received a certificate signed by
the chief executive officer of Mercury dated the Closing Date to such
effect;
(d) The proceeds of the Financing necessary to consummate the
transactions contemplated hereby shall have been received by MSR;
(e) MSR shall have received from Cantey & Hanger LLP, counsel to
Mercury, an opinion dated the Closing Date in form and substance as shall be
reasonably satisfactory to MSR; and
(f) MSR shall have received such other certificates, instruments, and
documents as may be reasonably requested by it to carry out the intent and
purposes of this Agreement.
6.3 ADDITIONAL CONDITIONS TO OBLIGATIONS OF MERCURY AND MERCURY SUB. The
obligations of Mercury and Mercury Sub to effect the Merger are, at the option
of Mercury and Mercury Sub, also subject to the fulfillment at or prior to the
Closing Date of the following conditions:
(a) The representations and warranties of MSR contained in Section 2.1
shall be accurate in all material respects as of the date of this Agreement
and (except to the extent such representations and warranties speak
specifically as of an earlier date) as of the Closing Date as though such
representations and warranties had been made at and as of that time; all the
agreements, terms, covenants and conditions of this Agreement to be complied
with and performed by MSR on or before the Closing Date shall have been duly
complied with and performed in all material respects; and a certificate to
the foregoing effect dated the Closing Date and signed by the chief
executive officer of MSR shall have been delivered to Mercury;
(b) Since the date of this Agreement, no material adverse change in the
financial condition, results of operations or business of MSR and the MSR
Subsidiaries, taken as a whole, shall have occurred, and MSR and the MSR
Subsidiaries shall not have suffered any damage, destruction or loss
materially adversely affecting the properties or business of MSR and the MSR
Subsidiaries, taken as a whole, and Mercury shall have received a
certificate signed by the chief executive officer of MSR dated the Closing
Date to such effect;
(c) The Board of Directors of MSR shall have taken such action as
necessary (and the shareholders shall have voted on or approved such
actions, required by law) to reconstitute the
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<PAGE>
respective Boards of Directors, executive committees and principal executive
officers of MSR and the MSR Subsidiaries effective as of the Effective Time
in accordance with Section 5.6;
(d) The proceeds of the Financing necessary to consummate the
transactions contemplated hereby shall have been received by MSR;
(e) Mercury shall have received from Thompson & Knight, P.C., counsel to
MSR, an opinion dated the Closing Date in form and substance as shall be
reasonably satisfactory to Mercury; and
(f) Mercury shall have received such other certificates, instruments,
and documents as may be reasonably requested by it to carry out the intent
and purposes of this Agreement.
ARTICLE VII
MISCELLANEOUS
7.1 TERMINATION. This Agreement may be terminated and the Merger and the
other transactions contemplated herein may be abandoned at any time prior to the
Effective Time, whether prior to or after approval by the stockholders of MSR:
(a) by mutual consent of MSR and Mercury;
(b) by either MSR or Mercury if the Merger has not been effected on or
before December 31, 1997;
(c) by MSR if the conditions set forth in Sections 6.1 or 6.2 are not
satisfied;
(d) by Mercury if the conditions set forth in Section 6.1 or 6.3 are not
satisfied;
(e) by MSR if (i) since the date of this Agreement there has been a
material adverse change in the results of operations, financial condition or
business of Mercury Sub, or (ii) there has been a material breach of any
representation, warranty or covenant set forth in this Agreement by Mercury
which breach has not been cured within five business days following receipt
by Mercury of notice of such breach;
(f) by Mercury if (i) since the date of this Agreement there has been a
material adverse change in the results of operations, financial condition or
business of MSR and the MSR Subsidiaries, taken as a whole, or (ii) there
has been a material breach of any representation, warranty or covenant set
forth in this Agreement by MSR which breach has not been cured within five
business days following receipt by MSR of notice of such breach; or
(g) by MSR if the Board of Directors of MSR shall have recommended to
the stockholders of MSR an Alternative Transaction, and the stockholders of
MSR have approved such Alternative Transaction, or by Mercury at any time
following a public announcement by MSR of such recommendation and approval.
7.2 EFFECT OF TERMINATION. In the event of any termination of this
Agreement pursuant to Section 7.1, (i) the provisions of the Confidentiality
Agreement (as defined in Section 7.13) and the provisions of Section 5.7 shall
survive any such termination, and (ii) such termination shall not relieve any
party from liability for any breach of this Agreement.
7.3 WAIVER AND AMENDMENT. Any provision of this Agreement may be waived at
any time by the party that is, or whose stockholders are, entitled to the
benefits thereof. This Agreement may not be amended or supplemented at any time,
except by an instrument in writing signed on behalf of each party hereto,
provided that after this Agreement has been approved and adopted by the
stockholders of MSR, this Agreement may be amended only as may be permitted by
applicable provisions of the DGCL. The waiver by any party hereto of any
condition or of a breach of another provision of this Agreement shall not
operate or be construed as a waiver of any other condition or subsequent breach.
The waiver by any party
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hereto of any of the conditions precedent to its obligations under this
Agreement shall not preclude it from seeking redress for breach of this
Agreement other than with respect to the condition so waived.
7.4 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. The
representations, warranties agreements of the parties hereto contained in this
Agreement or in any certificate, instrument, or document delivered pursuant
hereto shall survive the Closing without contractual limitation, regardless of
any investigation made by or on behalf of any party.
7.5 CERTAIN DEFINITIONS. For purposes of this Agreement, the term:
(a) "CONSENT" means any consent to assign or transfer or any other
limitation on transferability.
(b) "MERCURY PROPERTIES" means the properties, rights and interests
listed in Exhibit B hereto.
(c) "MSR PROPERTIES" means the properties, rights and interests listed
in Exhibit C hereto.
(d) "PREFERENTIAL RIGHT" means any preferential right or option to
purchase or otherwise to acquire a thing.
(e) "ROUTINE GOVERNMENTAL APPROVALS" mean approvals required to be
obtained from any governmental or tribal authority that are customarily
obtained after consummation of a transaction.
7.6 PUBLIC STATEMENTS. Mercury and MSR agree to consult with each other
prior to issuing any press release or otherwise making any public statement with
respect to the transactions contemplated hereby, and shall not issue any such
press release or make any such public statement prior to such consultation,
except as may be required by law or applicable stock exchange policy.
7.7 REMEDIES NOT EXCLUSIVE. The rights and remedies herein provided shall
be cumulative and not exclusive of any rights or remedies provided by law. The
rights and remedies of any party based upon, arising out of, or otherwise in
respect of any inaccuracy in or breach of any representation, warranty,
covenant, or agreement contained in this Agreement shall in no way be limited by
the fact that the act, omission, occurrence, or other state of facts upon which
any claim of any such inaccuracy or breach is based may also be the subject
matter of any other representation, warranty, covenant, or agreement contained
in this Agreement (or in any other agreement between the parties) as to which
there is no inaccuracy or breach.
7.8 ASSIGNMENT. This Agreement shall inure to the benefit of and will be
binding upon the parties hereto and their respective legal representatives,
successors and permitted assigns. Except as set forth in this Agreement, this
Agreement shall not be assignable by the parties hereto.
7.9 NOTICES. All notices, requests, demands, claims and other
communications which are required to be or may be given under this Agreement
shall be in writing and shall be deemed to have been duly given if (i) delivered
in person or by courier, (ii) sent by telecopy or facsimile transmission, answer
back
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<PAGE>
requested, or (iii) mailed, certified first class mail, postage prepaid, return
receipt requested, to the parties hereto at the following addresses:
<TABLE>
<CAPTION>
if to Mercury Mercury Exploration Company
or 1619 Pennsylvania Avenue
Mercury Sub: Fort Worth, Texas 76104
Attention: Glenn M. Darden
<S> <C>
with a copy to: Cantey & Hanger, L.L.P.
801 Cherry Street, Suite
2100
Forth Worth, Texas 76102
Attention: Sloan B. Blair
if to MSR or MSR Exploration Ltd.
MSR Sub: 500 Main Street, Suite 210
Fort Worth, Texas 76102
Attention: Otto J. Buis
with a copy to: Thompson & Knight, P.C.
801 Cherry Street, Suite
1600
Fort Worth, Texas 75102
Attention: Stephen B. Norris
</TABLE>
or to such other address as any party shall have furnished to the other by
notice given in accordance with this Section 7.9. Such notices shall be
effective, (i) if delivered in person or by courier upon actual receipt by the
intended recipient, (ii) if sent by telecopy or facsimile transmission, when the
answer back is received, or (iii) if mailed, upon the earlier of five days after
deposit in the mail and the date of delivery as shown by the return receipt
therefor.
7.10 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the substantive law of the State of Texas without giving effect
to the principles of conflicts of law thereof.
7.11 SEVERABILITY. If any term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction to be invalid, void or
unenforceable, the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall continue in full force and effect and shall
in no way be affected, impaired or invalidated.
7.12 COUNTERPARTS. This Agreement may be executed in counterparts, each of
which shall be an original, but all of which together shall constitute one and
the same agreement.
7.13 HEADINGS. The Section headings herein are for convenience only and
shall not affect the construction hereof.
7.14 CONFIDENTIALITY AGREEMENT.
(a) Each party hereto agrees that all Confidential Information (as defined
below) received by such party (the "RECEIVING PARTY") from the any other party
hereto (the "DISCLOSING PARTY") shall be kept confidential by the receiving
party and shall not be disclosed by the receiving party in any manner
whatsoever; provided, however, that (i) any of such Confidential Information may
be disclosed to such directors, officers, employees, and authorized
representatives (including without limitation attorneys, accountants,
consultants, bankers, and financial advisors) of the receiving party
(collectively, the "RECEIVING PARTY'S REPRESENTATIVES") as need to know such
information for the purpose of evaluating the Merger (it being understood that
such receiving party's representatives shall be informed by the receiving party
of the
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confidential nature of such information and shall be required to treat such
information confidentially), (ii) any disclosure of Confidential Information may
be made to the extent to which the disclosing party consents in writing, (iii)
Confidential Information may be disclosed by the receiving party or any
receiving party's representatives to the extent that, in the opinion of counsel
for the receiving party or such receiving party's representatives is legally
compelled to do so, provided that, prior to making such disclosure, the party
being legally compelled to disclose such information advises and consults with
the disclosing party regarding such disclosure and provided further that the
party being legally compelled to disclose such information discloses only that
portion of the Confidential Information as is legally required, and (iv) any of
such Confidential Information may be disclosed to any banks or other financial
institutions or other prospective investors that may provide the Financing if
such banks or other financial institutions or other prospective investors agree
to comply with the provisions of this Section. The term "CONFIDENTIAL
INFORMATION", as used herein, means all information (irrespective of the form of
communication) obtained by or on behalf of a receiving party from a disclosing
party or its representatives, other than information which (i) was or becomes
generally available to the public other than as a result of disclosure by the
receiving party or any receiving party's representative, (ii) was or becomes
available to the receiving party on a nonconfidential basis prior to disclosure
to the receiving party or its representatives, or (iii) was or becomes available
to the receiving party from a source other than the disclosing party or its
representatives, provided that such source is not known by the receiving party
to be bound by a confidentiality agreement with the disclosing party.
(b) If this Agreement is terminated, each receiving party shall promptly
return, and shall use their reasonable best efforts to cause all receiving party
representatives to promptly return, all Confidential Information to the
disclosing party without retaining any copies thereof, provided that such
portion of the Confidential Information as consists of notes, compilations,
analyses, reports, studies, or other documents prepared by the receiving party
or the receiving party's representatives shall be destroyed.
7.15 ENTIRE AGREEMENT; THIRD PARTY BENEFICIARIES; COMMUNITY PROPERTY
INTERESTS. This Agreement and the Confidentiality Agreement constitute the
entire agreement and supersede all other prior agreements and understandings,
both oral and written, among the parties or any of them, with respect to the
subject matter hereof, and neither this Agreement nor any document delivered in
connection with this Agreement confers upon any person not a party hereto any
rights or remedies hereunder except as provided in Sections 5.7.
7.16 DISCLOSURE LETTERS.
(a) The Mercury Disclosure Letter, executed by Mercury as March 17, 1997,
and delivered to MSR on such date, contains all disclosures required to be made
by Mercury under the various terms and provisions of this Agreement. Each item
of disclosure set forth in the Mercury Disclosure Letter specifically refers to
the Article and Section of this Agreement to which such disclosure responds, and
shall not be deemed to be disclosed with respect to any other Article or Section
of this Agreement.
(b) The MSR Disclosure Letter, executed by MSR as of March 10, 1997, and
delivered to Mercury on such date, contains all disclosures required to be made
by MSR under the various terms and provisions of this Agreement. Each item of
disclosure set forth in the MSR Disclosure Letter specifically refers to the
Article and Section of this Agreement to which such disclosure responds, and
shall not be deemed to be disclosed with respect to any other Article or Section
of this Agreement.
E-41
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed on its behalf by its officer thereunto duly authorized, all as of the
date first above written.
MSR Exploration Ltd.
By: /s/ OTTO J. BUIS
------------------------------------
Otto J. Buis, Chairman of the Board
Mercury Exploration Company
By: /s/ GLENN M. DARDEN
------------------------------------
Glenn M. Darden, Vice President
Mercury Montana, Inc.
By: /s/ GLENN M. DARDEN
------------------------------------
Glenn M. Darden, Vice President
E-42
<PAGE>
AMENDMENT NO. 1
TO AGREEMENT AND PLAN OF MERGER
This Amendment No. 1 (this "Amendment") to that certain Agreement and Plan
of Merger, dated as of the 26th day of March, 1997 (the "Agreement"), by and
among MSR Exploration Ltd., an Alberta, Canada corporation which has agreed to
redomesticate to the State of Delaware subject to the terms hereof ("MSR"),
Mercury Exploration Company, a Texas corporation ("Mercury"), and Mercury
Montana, Inc., a Delaware corporation ("Mercury Sub").
W I T N E S S E T H:
WHEREAS the parties hereto desire to amend certain of the terms and
provisions of the Agreement as more particularly described below;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree that the
Agreement is hereby amended as follows:
1. DEFINED TERMS. Except as otherwise specifically defined herein, all
capitalized terms used herein as defined terms shall have the meanings assigned
to such terms in the Agreement.
2. AMENDMENTS.
(a) Section 1.6 of the Agreement is hereby amended by deleting subclause
(a) of such section and substituting the following therefor:
(a) the respective boards of directors of the Surviving Corporation
and its subsidiaries shall be comprised of (i) three persons designated
by MSR immediately prior to the Effective Time (which such designees are
currently Otto J. Buis, Steve Morris and Patrick Montalban), (ii) three
persons designated by Mercury immediately prior to the Effective Time
(which such designees are currently Frank Darden, Thomas F. Darden and
Glenn M. Darden) and (iii) two persons to be agreed by MSR and Mercury
prior to the effective time, and
(b) Section 5.6 of the Agreement is hereby amended by deleting
subclause (a) of such section and substituting the following therefor:
(a) SURVIVING CORPORATION BOARD OF DIRECTORS. At the Effective Time,
the respective Boards of Directors of the Surviving Corporation and each
Surviving Corporation subsidiary shall be comprised of (i) Otto Buis, Steve
Morris and Patrick Montalban, (ii) Frank Darden, Thomas F. Darden and Glenn
M. Darden and (iii) two additional members to be agreed by MSR and Mercury.
If, prior to the Effective Time, (i) Otto Buis, Steve Morris or Patrick
Montalban shall decline or be unable to serve, the Board of Directors of MSR
shall designate another person to serve in such person's stead, or (ii)
Frank Darden, Thomas F. Darden or Glenn M. Darden shall decline or be unable
to serve, the Board of Directors of Mercury shall designate another person
to serve in such person's stead.
(c) Section 6.1 of the Agreement is hereby amended by deleting
subclause (g) of such section and substituting the following therefor:
(g) Mercury and the Board of Directors of MSR shall have received
a written opinion, in form and substance reasonably satisfactory to
Mercury and the Board of MSR, of a mutually acceptable investment
banking firm, to the effect that the net fair market value of MSR is
less than $14,156,000, and such opinion shall not have been amended
or withdrawn.
3. RATIFICATION. Except as amended and modified hereby, the Agreement is
unchanged and is hereby ratified and affirmed, as amended and modified hereby,
in all respects.
4. COUNTERPARTS. This Amendment may be executed in counterparts, all of
which shall be considered one and the same agreement and shall become effective
when a counterpart shall have been signed by
1
<PAGE>
each of the parties and delivered to the other party or to its counsel, it being
understood that each of the parties need not sign the same counterpart.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
signed by their respective officers thereunto duly authorized, all as of June
17, 1997.
MSR EXPLORATION LTD.
By: /s/ OTTO J. BUIS
-----------------------------------------
Otto J. Buis
CHAIRMAN OF THE BOARD
Mercury Exploration Company
By: /s/ GLENN M. DARDEN
-----------------------------------------
Glenn M. Darden
VICE PRESIDENT
Mercury Montana, Inc.
By: /s/ GLENN M. DARDEN
-----------------------------------------
Glenn M. Darden
VICE PRESIDENT
2
<PAGE>
APPENDIX "F"
[To be filed by amendment]
<PAGE>
APPENDIX "G"
[To be filed by amendment]
<PAGE>
APPENDIX H
[LETTERHEAD]
March 1, 1997
MSR Exploration Ltd.
Suite 210, 500 - Main Street File No. 5323
Fort Worth, Texas
U.S.A. 76102
ATTENTION: MR. OTTO J. BUIS, CHAIRMAN OF BOARD, C.E.O.
Gentlemen:
In accordance with your authorization, Citadel Engineering Ltd. has
appraised the petroleum and natural gas reserves and prospective land holdings
owned by MSR Exploration Ltd. (referred to as the "Company" herein). This report
has been prepared for submission to the Securities Commission. The effective
date of this report is January 1, 1997. Reserves and associated economics on a
constant dollar basis, are summarized as follows:
TABLE A
TOTAL U.S. RESERVES
NET TO APPRAISED INTEREST (CONSTANT DOLLARS)
CASHFLOW IN THOUSANDS OF DOLLARS (U.S.)
<TABLE>
<CAPTION>
W.I.O. NET
---------------------- ---------------------- DISCOUNTED
GAS GAS ------------------------------------------
ROCKY MOUNTAIN REGION (4) OIL MSTB MMSCF(2) OIL MSTB MMSCF(2) UNDISC. 10% 12% 15% 20%
- ------------------------- --------- ----------- --------- ----------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Proved Producing......... 1,717 3,016 1,481 2,595 24,659 11,362 10,251 8,954 7,423
Proved Developed
(NonProducing)......... 701 7,741 587 6,608 18,920 8,456 7,513 6,396 5,060
Proved Undeveloped....... 1,511 6,390 1,298 5,492 29,324 14,237 12,653 10,722 8,340
Probable (3)............. 811 4,498 697 3,861 16,120 6,969 6,090 5,045 3,798
Land (Acres)............. (17,192) 480 480 480 480 480
PLANT REVENUE
Proved Developed
(Nonproducing)......... 846 624 590 544 478
Proved Undeveloped....... 599 432 407 372 323
Sub Total Plant.......... 1,445 1,056 997 916 801
TOTAL ROCKY MOUNTAIN..... 4,740 21,645 4,063 18,556 90,948 42,560 37,984 32,513 25,902
</TABLE>
H-1
<PAGE>
Page 2
MSR Exploration Ltd.
March 1, 1997
TABLE B
NET TO APPRAISED INTEREST (CONSTANT DOLLARS)
CASHFLOW IN THOUSANDS OF DOLLARS (U.S.)
<TABLE>
<CAPTION>
W.I.O NET
EASTERN SHELF UP. ------------------------ ------------------------ DISCOUNTED
TEXAS GULF OIL GAS OIL GAS -------------------------------
COAST (4) MSTB(1) MMSCF(2) MSTB(1) MMSCF(2) UNDISC. 10% 12% 15%
- ------------------------- ----------- ----------- ----------- ----------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Proved Producing......... 512 3,596 418 2,917 9,449 6,213 5,840 5,366
Proved Developed
(NonProducing)......... 12 -- 10 -- 100 59 54 47
Proved Undeveloped....... 130 120 108 99 1,108 421 350 266
Probable (3)............. 297 165 245 136 3,259 1,503 1,312 1,077
TOTAL PERMIAN BASIN)..... 951 3,881 781 3,152 13,916 8,196 7,556 6,756
<CAPTION>
EASTERN SHELF UP.
TEXAS GULF
COAST (4) 20%
- ------------------------- ---------
<S> <C>
Proved Producing......... 4,744
Proved Developed
(NonProducing)......... 38
Proved Undeveloped....... 167
Probable (3)............. 786
TOTAL PERMIAN BASIN)..... 5,735
</TABLE>
TABLE C
TOTAL CANADIAN RESERVES
NET TO APPRAISED INTEREST (CONSTANT DOLLARS)
CASHFLOW IN THOUSANDS OF DOLLARS (CDN.)
<TABLE>
<CAPTION>
W.I.O NET
------------------------ ------------------------ DISCOUNTED
CANADIAN OIL GAS OIL GAS -------------------------------
REGION (4) MSTB(1) MMSCF(2) MSTB(1) MMSCF(2) UNDISC. 10% 12% 15%
- ------------------------- ----------- ----------- ----------- ----------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Proved Producing......... 11 1,120 9 946 1,746 1,147 1,079 993
Proved Developed (Non-
Producing)............. 33 1,037 25 885 1,477 598 521 433
Proved Undeveloped....... 4 5,645 3 4,760 4,162 1,077 837 566
Probable (3)............. 9 155 6 129 324 119 102 82
Land (Acres)............. (1,778) 333 333 333 333
TOTAL ($CDN)............. 57 7,957 43 6,720 8,042 3,274 2,872 2,407
TOTAL (CAN) ($US) (5).... 57 7,957 43 6,720 5,898 2,401 2,106 1,765
GRAND TOTAL $(U.S.)...... 5,748 33,483 4,887 28,428 110,762 53,157 47,646 41,034
<CAPTION>
CANADIAN
REGION (4) 20%
- ------------------------- ---------
<S> <C>
Proved Producing......... 881
Proved Developed (Non-
Producing)............. 329
Proved Undeveloped....... 266
Probable (3)............. 60
Land (Acres)............. 333
TOTAL ($CDN)............. 1,869
TOTAL (CAN) ($US) (5).... 1,371
GRAND TOTAL $(U.S.)...... 33,008
</TABLE>
Notes:
(1) Oil volume and cash flow includes NGL's and condensates.
(2) Sales gas volume measured at 14.65 psia and 60 DEG. F.
(3) It is Citadel's opinion that the probable additional reserves and associated
economics herein would be subject to a weighted average risk factor of 50.0
percent. The economic and reserve values shown have been adjusted for this
50.0 percent risk.
(4) The Rocky Mountain Region encompasses Montana & North Dakota; the Permian
Basin Region includes the Wilcox Field and the Winters Capps Field, Texas,
and the Canadian Region encompasses fields in Alberta and British Columbia.
(5) The Canadian Region economic projections have been converted to $U.S.
utilizing a factor of 0.7334$U.S./1.0$Cdn.
(6) The values quoted herein do not necessarily represent fair-market-value.
Working Interest Ownership (W.I.O.) means those reserves accruing to the
Company after deduction of all working interests, but before deduction of all
overriding and lessor royalties and before Crown
H-2
<PAGE>
Page 3
MSR Exploration Ltd.
March 1, 1997
royalties. Net reserves as used herein mean those reserves accruing to the
Company after deduction of all outside working interests, overriding, freehold
and lessor royalties and Crown royalties. The net cash flow forecasts are after
direct lifting costs, normal allocated overhead and future investments, and
after State Taxes, but before income taxes. Crown royalties in the provinces of
Alberta and British Columbia, as applicable to petroleum and natural gas, as
revised from time to time, have also been utilized. The values assigned the
individual prospective acreage blocks are based upon recent land auction prices
effected in the respective areas, known local and regional geological features
and exploration activities. Accordingly, prospective land values as quoted
herein should be regarded as valid on a current basis only. In view of the fact
that the majority of the properties studied herein are on production, depletion
analysis was employed to estimate remaining reserves.
In accordance with the financial institution Regulations, prices, operating
and capital costs utilized herein were not escalated. The product prices used in
the report are summarized on Table 2. These price forecasts were based upon
product prices January 2, 1997. Political and economic uncertainties
domestically and internationally may result in prices different from those used
in the report. Operating costs are summarized on Table 3. Capital costs for
future well workovers and eventual well abandonment have been included in the
economics herein and are summarized on Table 4.
Estimates of reserves and production forecasts were prepared on the basis of
prevailing conditions, and generally accepted engineering methods. Although
these estimates are considered reasonable, future performance may vary from the
forecasts presented herein and may justify either an increase or decrease in the
reserves.
Monitoring of the producing properties indicates that measures instituted in
the past to arrest the decline rates have been successful. Indeed, almost all
the properties have reached relative stability. The North Central Cut Bank Sand
Unit continues to operate at maximum capacity with few complications. As in the
past, no unpleasant surprises are anticipated in the coming year.
All working and royalty interests and other factual data concerning land
ownership used in the preparation of this report have been accepted as
represented by the Company. Citadel Engineering Ltd. has not verified ownership
of the properties studied herein by virtue of a title search. All basic reserve
data, economic parameters, including price and cash flow projections have been
based upon the personal interpretation of Citadel Engineering Ltd. staff members
and represent their opinion. As Citadel Engineering Ltd. has not been apprised
of internal costs, economic projections do not include general and
administration costs (G&A) or capital costs other than lease related capital
expenditures. All basic data employed to derive the values quoted herein is kept
in our permanent files and will be made available to you upon request.
H-3
<PAGE>
Page 4
MSR Exploration Ltd.
March 1, 1997
It has been a pleasure to prepare this report and the opportunity to be of
service is appreciated. At such time as you wish to discuss the report in
detail, we would be pleased to do so.
Yours very truly,
CITADEL ENGINEERING LTD.
By: /s/ E.P. WEBB, P. ENG.
-----------------------------------------
Per: E.P. Webb, P. Eng.
PRESIDENT
By: /s/ P.E. DOUGLAS, C.E.T.
-----------------------------------------
Per: P.E. Douglas, C.E.T.
By: /s/ L.E. WEBB, P. ENG.
-----------------------------------------
Per: L.E. Webb, P. Eng.
H-4
<PAGE>
COMPANY CERTIFICATE OF QUALIFICATION
This is to certify that:
(1) Citadel Engineering Ltd. with offices located at Suite 1000, SunLife
Plaza II, 140--4th Avenue S.W., Calgary, Alberta, Canada, prepared an appraisal
report on petroleum and natural gas reserves and prospective land holdings dated
March 1, 1997 (effective date January 1, 1997) for MSR Exploration Ltd.
(2) Citadel Engineering Ltd. is a company of consulting petroleum engineers
engaged in the appraisal and supervision of petroleum and natural gas
properties.
(3) A field inspection of the Company's equipment and wells has been
conducted. Basic data utilized in the appraisal was derived from Company files,
Citadel Engineering files, applicable Regulatory Authority data systems and
contract data base systems and was personally inspected by the authors of this
report. Reserves and economic projections are based upon the author's
interpretation of the data and represents his opinion.
(4) Citadel Engineering Ltd. does not have an interest directly or
indirectly, nor do they expect to receive an interest directly or indirectly, in
any of the properties or securities owned or issued by MSR Exploration Ltd.,
their personnel, associates and/or any affiliates thereof.
(5) The properties studied in this report are located in Canada and the
U.S.A.
CITADEL ENGINEERING LTD.
By: /s/ E.P. WEBB, P. ENG.
-----------------------------------------
E.P. Webb, P. Eng.
PRESIDENT
Calgary, Alberta
January 1, 1997
H-5
<PAGE>
CERTIFICATE OF QUALIFICATION
This is to certify that:
(1) I, Edward P. Webb, was co-author of an appraisal report on petroleum and
natural gas reserves and prospective land holdings dated March 1, 1997
(effective date January 1, 1997) for MSR Exploration Ltd.
(2) I am employed by Citadel Engineering Ltd. and am located at Citadel's
offices at Suite 1000, 140--4th Avenue S.W., Calgary, Alberta, Canada.
(3) I am a Petroleum Engineer and have in excess of thirty-five (35) years
experience in Petroleum Engineering extending throughout Canada, the United
States, the United Kingdom and Europe. I am a petroleum engineering graduate
from the University of Alberta, Edmonton, Canada, and have completed
postgraduate courses in applied reservoir engineering at the University of
Calgary, Alberta, Canada. I am a registered member of the Association of
Professional Engineers in the Provinces of Alberta, British Columbia and
Saskatchewan and am a member of the Society of Petroleum Engineers of CIM. Basic
data utilized in the appraisal was personally inspected by me. Reserve and
economic projections are based upon mine and Citadel's interpretation of the
data and represents those opinions.
(4) I do not have an interest, directly or indirectly, nor do I expect to
receive an interest, directly or indirectly, in any of the properties or
securities owned or issued by MSR Exploration Ltd., their personnel, associates
and/or any affiliates thereof.
CITADEL ENGINEERING LTD.
By: /s/ E.P. WEBB, P. ENG.
-----------------------------------------
E.P. Webb, P. Eng.
PRESIDENT
Calgary, Alberta
January 1, 1997
H-6
<PAGE>
CERTIFICATE OF QUALIFICATION
This is to certify that:
(1) I, Loy E. Webb, was co-author of an appraisal report on petroleum and
natural gas reserves and prospective land holdings dated March 1, 1997
(effective date January 1, 1997) for MSR Exploration Ltd.
(2) I am employed by Citadel Engineering Ltd. and am located at Citadel's
offices at Suite 1000, SunLife Plaza II, 140--4th Avenue S.W., Calgary, Alberta,
Canada.
(3) I am a Petroleum Engineer and have in excess of eight (8) years
experience in Petroleum Engineering extending throughout Canada and the United
States. I am a petroleum engineering graduate from the University of Oklahoma,
Norman, Oklahoma, U.S.A. I am a registered professional engineer in the Province
of Alberta, and a registered professional engineer intern of the Society of
Professional Engineers in the State of Oklahoma, U.S.A. and am a member of the
Society of Petroleum Engineers of AIME. Basic data utilized in the appraisal was
personally inspected by me. Reserve and economic projections are based upon mine
and Citadel's interpretation of the data and represents those opinions.
(4) I do not have an interest, directly or indirectly, nor do I expect to
receive an interest, directly or indirectly, in any of the properties or
securities owned or issued by MSR Exploration Ltd., their personnel, associates
and/or any affiliates thereof.
CITADEL ENGINEERING LTD.
By: /s/ E.P. WEBB, P. ENG.
-----------------------------------------
E.P. Webb, P. Eng.
Calgary, Alberta
January 1, 1997
H-7
<PAGE>
CERTIFICATE OF QUALIFICATION
This is to certify that:
(1) I, Pamela E. Douglas, was co-author of an appraisal report on petroleum
and natural gas reserves and prospective land holdings dated March 1, 1997
(effective date January 1, 1997) for MSR Exploration Ltd.
(2) I am employed by Citadel Engineering Ltd. and am located at Citadel's
offices at Suite 1000, 140--4th Avenue S.W., Calgary, Alberta, Canada.
(3) I am a Petroleum Engineering Technologist and have in excess of eight
(8) years experience in Petroleum Engineering extending throughout Canada and
the United States. I am a petroleum engineering technology graduate from the
Southern Alberta Institute of Technology, Calgary, Alberta, Canada, and am a
certified member of the Alberta Society of Engineering Technologists in the
Province of Alberta. Basic data utilized in the appraisal was personally
inspected by me. Reserve and economic projections are based upon mine and
Citadel's interpretation of the data and represents those opinions.
(4) I do not have an interest, directly or indirectly, nor do I expect to
receive an interest, directly or indirectly, in any of the properties or
securities owned or issued by MSR Exploration Ltd., their personnel, associates
and/or any affiliates thereof.
CITADEL ENGINEERING LTD.
By: /s/ P.E. DOUGLAS, C.E.T.
-----------------------------------------
P.E. Douglas, C.E.T.
Calgary, Alberta
January 1, 1997
H-8
<PAGE>
[Letterhead]
March 25, 1997
MSR Exploration Ltd. File No. 5323
Suite 210, 500 - Main Street
Fort Worth, Texas
U.S.A. 76102
ATTENTION: MR. OTTO J. BUIS, CHAIRMAN OF BOARD, C.E.O.
Gentlemen:
In accordance with your authorization, Citadel Engineering Ltd. has
appraised the petroleum and natural gas reserves in the State of Montana, U.S.A
owned by Mercury Exploration Company (referred to as "the Company" herein) for
MSR Exploration Ltd. The effective date of this report is January 1, 1997.
Reserves and associated economics on a constant dollar basis, are summarized as
follows:
TABLE A
APPRAISED INTEREST (CONSTANT DOLLAR VALUES)
CASHFLOW IN THOUSANDS OF DOLLARS (U.S.)
<TABLE>
<CAPTION>
W.I.O. NET
-------------------------- -------------------------- DISCOUNTED
OIL(1)(2) OIL(1)(2) ------------------------------------------
MSTB GAS MMSCF(3) MSTB GAS MMSCF(3) UNDISC. 10% 12% 15% 20%
----------- ------------- ----------- ------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Proved Producing.... 1,947 -- 1,760 -- 18,737 10,010 9,195 8,213 7,003
Proved Developed
(NonProducing).... 3 629 2 553 670 398 366 325 271
Proved Undeveloped.. 4,020 -- 3,654 -- 28,285 11,698 10,093 8,189 5,993
Total Proved........ 5,970 629 5,416 533 47,692 22,106 19,654 16,727 13,207
Probable
Additional........ 5,197 -- 5,379 -- 42,848 12,317 10,061 7,563 4,874
GRAND TOTAL......... 11,887 629 10,795 533 90,540 34,423 29,715 24,290 18,081
</TABLE>
Notes:
(1) Oil reserves and cashflow include condensate production
(2) Oil cashflow values include revenue derived from liquids production pursuant
to the Mercury-Montana Power "Wells Agreement".
(3) Sales gas volumes measured at 60 F and 14.65 Psia.
H-9
<PAGE>
Page 10
MSR Exploration Ltd.
March 25, 1997
(4) It is Citadel's opinion that the Probable Additional reserves and related
cashflow would be subject to a 50.0 percent weighted average risk factor.
The values quoted herein have been adjusted for this 50.0 percent risk
factor.
(5) The values quoted herein represent the opinion of Citadel Engineering Ltd.
staff members and do not necessarily represent fair-market-value.
Working Interest (W.I.O.) as used herein, mean those reserves accruing to
the Company after deduction of all outside working interests; but before
deduction of lessor and overriding royalties and before State Taxes.
Net reserves used herein are net to the working interest after freehold and
gross overriding royalties. The net cashflow forecasts are after direct lifting
costs, normal allocated overhead and future investments, and after State Taxes,
but before income taxes. In view of the fact that the majority of the properties
studied herein are on production, depletion analysis was employed to estimate
remaining reserves.
The product prices used in the report are summarized on Table 2. These price
forecasts were based upon product prices effective January 3, 1997. Political
and economic uncertainties, both domestically and internationally may result in
prices different from those used in the report. Operating costs are summarized
on Table 3. Capital costs for future workovers, abandonment and lease
reclamation have also been included in the economics, and are summarized on
Table 4.
Estimates of reserves and production forecasts were prepared on the basis of
prevailing conditions, and generally accepted engineering methods. Although
these estimates are considered reasonable, future performance may vary from the
forecasts presented herein and may justify either an increase or decrease in the
reserves.
All working and royalty interests and other factual data concerning land
ownership used in the preparation of this report have been accepted as
represented by the Company. Citadel Engineering Ltd. has not verified ownership
of the properties studied herein by virtue of a title search. All basic reserve
data, economic parameters, including price and cashflow projections have been
based upon the personal interpretation of Citadel Engineering Ltd. staff members
and represents their opinion. All basic data employed to derive the values
quoted herein is kept in our permanent files and will be made available to you
upon request.
It has been a pleasure to prepare this report and the opportunity to be of
service is appreciated. At such time as you wish to discuss the report in
detail, we would be pleased to do so.
H-10
<PAGE>
Page 11
MSR Exploration Ltd.
March 25, 1997
Yours very truly,
CITADEL ENGINEERING LTD.
By: /s/ E.P. WEBB, P. ENG.
-----------------------------------------
Per: E.P. Webb, P. Eng.
PRESIDENT
By: /s/ P.E. DOUGLAS, C.E.T.
-----------------------------------------
Per: P.E. Douglas, C.E.T.
H-11
<PAGE>
COMPANY CERTIFICATE OF QUALIFICATION
This is to certify that:
(1) Citadel Engineering Ltd., with offices located at Suite 1000, SunLife
Plaza II, 140--4th Avenue S.W., Calgary, Alberta, Canada, prepared an appraisal
report on petroleum and natural gas reserves dated March 25, 1997 (effective
date January 1, 1997) for MSR Exploration Ltd.
(2) Citadel Engineering Ltd. is a company of consulting petroleum engineers
engaged in the appraisal and supervision of petroleum and natural gas
properties.
(3) A field inspection of the Company's equipment and wells has not been
conducted. Basic data utilized in the appraisal was derived from Company files,
Citadel Engineering files, applicable Regulatory Authority data systems and
contract data base systems and was personally inspected by the authors of this
report. Reserves and economic projections are based upon the authors'
interpretation of the data and represents their opinion.
(4) Citadel Engineering Ltd. does not have an interest, directly or
indirectly, nor do they expect to receive an interest, directly or indirectly,
in any of the properties or securities owned or issued by MSR Exploration Ltd.
or Mercury Exploration Company, their personnel, associates and/or and
affiliates thereof.
(5) The properties studied in this report are located in Montana, U.S.A.
CITADEL ENGINEERING LTD.
By: /s/ E.P. WEBB. P. ENG.
-----------------------------------------
E.P. Webb. P. Eng.
PRESIDENT
Calgary, Alberta
January 1, 1997
H-12
<PAGE>
CERTIFICATE OF QUALIFICATION
This is to certify that:
(1) I, Edward P. Webb, was co-author of an appraisal report on petroleum and
natural gas reserves dated March 25, 1997 (effective date January 1, 1997) for
MSR Exploration Ltd.
(2) I am employed by Citadel Engineering Ltd. and am located at Citadel's
offices at Suite 1000, 140--4th Avenue S.W., Calgary, Alberta, Canada.
(3) I am a Petroleum Engineer and have in excess of thirty-five (35) years
experience in Petroleum Engineering extending throughout Canada, the United
States, the United Kingdom and Europe. I am a petroleum engineering graduate
from the University of Alberta, Edmonton, Canada, and have completed
postgraduate courses in applied reservoir engineering at the University of
Calgary, Alberta, Canada. I am a registered member of the Association of
Professional Engineers in the Provinces of Alberta, British Columbia and
Saskatchewan and am a member of the Society of Petroleum Engineers of CIM. Basic
data utilized in the appraisal was personally inspected by me. Reserve and
economic projections are based upon mine and Citadel's interpretation of the
data and represents those opinions.
(4) I do not have an interest, directly or indirectly, nor do I expect to
receive an interest, directly or indirectly, in any of the properties or
securities owned or issued by MSR Exploration Ltd., or Mercury Exploration
Company, their personnel, associates and/or any affiliates thereof.
CITADEL ENGINEERING LTD.
By: /s/ E.P. WEBB. P. ENG.
-----------------------------------------
E.P. Webb. P. Eng.
PRESIDENT
Calgary, Alberta
January 1, 1997
H-13
<PAGE>
CERTIFICATE OF QUALIFICATION
This is to certify that:
(1) I, Pamela E. Douglas, was co-author of an appraisal report on petroleum
and natural gas reserves dated March 25, 1997 (effective date January 1, 1997)
for MSR Exploration Ltd.
(2) I am employed by Citadel Engineering Ltd. and am located at Citadel's
offices at Suite 1000, 140--4th Avenue S.W., Calgary, Alberta, Canada.
(3) I am a Petroleum Engineering Technologist and have in excess of eight
(8) years experience in Petroleum Engineering extending throughout Canada and
the United States. I am a petroleum engineering technology graduate from the
Southern Alberta Institute of Technology, Calgary, Alberta, Canada, and am a
certified member of the Alberta Society of Engineering Technologists in the
Province of Alberta. Basic data utilized in the appraisal was personally
inspected by me. Reserve and economic projections are based upon mine and
Citadel's interpretation of the data and represents those opinions.
(4) I do not have an interest, directly or indirectly, nor do I expect to
receive an interest, directly or indirectly, in any of the properties or
securities owned or issued by MSR Exploration Ltd., or Mercury Exploration
Company, their personnel, associates and/or any affiliates thereof.
CITADEL ENGINEERING LTD.
By: /s/ P.E. DOUGLAS, C.E.T.
-----------------------------------------
Per: P.E. Douglas, C.E.T.
Calgary, Alberta
January 1, 1997
H-14
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
THE COMPANY. Prior to the effectiveness of the Continuance, the Company's
Bylaws provide that, subject to the ABCA, the Company shall indemnify a director
or officer of the Company, a former director or officer of the Company or a
person who acts or acted at the Company's request as a director or officer of a
body corporate of which the Company is or was a shareholder or creditor, and his
heirs and legal representatives, against all costs, charges and expenses,
including an amount paid to settle an action or satisfy a judgment, reasonably
incurred by him in respect of any civil, criminal or administrative action or
proceeding to which he is made a party by reason of his office if he acted
honestly and in good faith with a view to the best interests of the Company,
and, in the case of a criminal or administrative action or proceeding that is
enforced by a monetary penalty, he had reasonable grounds for believing that his
conduct was lawful. The Company shall also indemnify any such person in such
other circumstances as the Act or law permits or requires.
Section 136 of the ABCA provides:
(1) Indemnification of directors.--A corporation may indemnify a director or
officer of the corporation, a former director or officer of the corporation or a
person who acts or acted at the corporation's request as a director or officer
of a body corporate of which the corporation is or was a shareholder or
creditor, and his or her heirs and legal representatives, against all costs,
charges and expenses, including an amount paid to settle an action or satisfy a
judgment, reasonably incurred by him or her in respect of any civil, criminal or
administrative action or proceeding to which he or she is made a party by reason
of being or having been a director or officer of such corporation or body
corporate, if,
(a) he or she acted honestly and in good faith with a view to the best
interests of the corporation; and
(b) in the case of a criminal or administrative action or proceeding
that is enforced by a monetary penalty, he or she had reasonable
grounds for believing that his or her conduct was lawful.
(2) Idem.--A corporation may, with the approval of the court, indemnify a
person referred to in subsection (1) in respect of an action by or on behalf of
the corporation or body corporate to procure a judgment in its favor, to which
the person is made a party by reason of being or having been a director or an
officer of the corporation or body corporate, against all costs, charges and
expenses reasonably incurred by the person in connection with such action if he
or she fulfills the conditions set out in clauses (1)(a) and (b).
(3) Idem.--Despite anything in this section, a person referred to in
subsection (1) is entitled to indemnity from the corporation in respect of all
costs, charges and expenses reasonably incurred by him in connection with the
defence of any civil, criminal or administrative action or proceeding to which
he or she is made a party by reason of being or having been a director or
officer of the corporation or body corporate, if the person seeking indemnity,
(a) was substantially successful on the merits in his or her defence of
the action or proceeding; and
(b) fulfills the conditions set out in clauses (1)(a) and (b).
(4) Liability insurance.--A corporation may purchase and maintain insurance
for the benefit of any person referred to in subsection (1) against any
liability incurred by the person,
(a) in his or her capacity as a director or officer of the corporation,
except where the liability relates to the person's failure to act
honestly and in good faith with a view to the best interests of the
corporation; or
II-1
<PAGE>
(b) in his or her capacity as a director or officer of another body
corporate where the person acts or acted in that capacity at the
corporation's request, except where the liability relates to the
person's failure to act honestly and in good faith with a view to
the best interests of the body corporate.
(5) Application to court.--A corporation or a person referred to in
subsection (1) may apply to the court for an order approving an indemnity under
this section and the court may so order and make any further order it thinks
fit.
(6) Idem.--Upon an application under subsection (5), the court may order
notice to be given to any interested person and such person is entitled to
appear and be heard in person or by counsel.
The Company does not provide directors and officers liability to officers
and directors of the Company.
THE COMPANY (AS DOMESTICATED IN DELAWARE). Section 145 of the DGCL permits a
corporation to indemnify any of its directors or officers who was or is a party,
or is threatened to be made a party to any third party proceeding by reason of
the fact that such person is or was a director or officer of the corporation,
against expenses (including attorney's fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by such person in connection with
such action, suit or proceeding, if such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reason to believe that such person's conduct was unlawful. In
a derivative action, i.e., one by or in the right of the corporation, the
corporation is permitted to indemnify directors and officers against expenses
(including attorneys' fees) actually and reasonably incurred by them in
connection with the defense or settlement of an action or suit if they acted in
good faith and in a manner that they reasonably believed to be in or not opposed
to the best interests of the corporation, except that no indemnification shall
be made if such person shall have been adjudged liable to the corporation,
unless and only to the extent that the court in which the action or suit was
brought shall determine upon application that the defendant directors or
officers are fairly and reasonably entitled to indemnity for such expenses
despite such adjudication of liability.
The Certificate of Incorporation of the Comapny (as domesticated) provides
that no director of the Company (as domesticated) shall be liable to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the DGCL or (iv) for any
transaction from which the director derived an improper personal benefit.
The By-Laws of the Company (as domesticated) also provide that the Company
(as domesticated) may purchase and maintain insurance on behalf of any person
who is or was a director, officer, employee or agent of the corporation, or is
or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against the person and incurred
by the person in any such capacity, or arising out of his status as such,
whether or not the corporation would have the power or the obligation to
indemnify such person against such liability under the provisions of the
Certificate of Incorporation of the Company (as domesticated).
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or persons controlling the
Company pursuant to the foregoing provisions, the Company has been informed that
in the opinion of the SEC such indemnification is against public policy as
expressed in the Securities Act of 1933, as amended and is therefore
unenforceable.
II-2
<PAGE>
ITEM 21. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<S> <C>
2.1* Form of Certificate of Domestication (included as Appendix "A" to the Proxy Statement/ Prospectus).
2.2* Agreement and Plan of Merger dated as of March 26, 1997, among MSR Exploration Ltd., Mercury Montana,
Inc. and Mercury Exploration Company, as amended by Amendment No. 1 to Agreement and Plan of Merger
dated as of June 17, 1997 (included as Appendix "E" to the Proxy Statement/Prospectus).
3.1** Form of Delaware Certificate of Incorporation of continued corporation (included as Appendix "B" to the
Proxy Statement/Prospectus).
3.2** Form of Delaware Bylaws of continued corporation.
3.3** Form of Surviving Corporation Certificate of Incorporation (included as Appendix "F" to the Proxy
Statement/Prospectus).
3.4** Form of Surviving Corporation Bylaws (included as Appendix "G" to the Proxy Statement/ Prospectus).
4.1* Common Stock Warrant dated January 13, 1995 issued to Banque Paribas by MSR Exploration Ltd.
4.2* Form of Common Stock Warrants issued to Mercury Exploration Company, Frank Darden, Thomas F. Darden,
Glenn M. Darden, Anne Darden Self, Jack L. Thurber and Jeff Cook by Mercury Montana, Inc., each dated
March 7, 1997 and each having an exercise price per share of $1.25.
4.3* Form of Common Stock Warrants issued to Mercury Exploration Company, Frank Darden, Thomas F. Darden,
Glenn M. Darden, Anne Darden Self, Jack L. Thurber and Jeff Cook by Mercury Montana, Inc., each dated
March 7, 1997 and each having an exercise price per share of $2.00.
4.4* Form of Stock Purchase Warrant to be issued to Mercury Exploration Company at the Effective Time of the
Merger by the Surviving Corporation.
5.1** Opinion of Thompson & Knight, P.C. regarding validity of Continued Common Stock being registered for
issuance in connection with the Continuance.
8.1** Opinion of Thompson & Knight, P.C. regarding United States tax matters.
8.2** Opinion of Blake, Cassels and Graydon regarding Canadian tax matters.
10.1** Form of Management Agreement to be entered into between the Surviving Corporation and Mercury
Exploration Company.
10.2* Guarantee of Mercury Montana, Inc. in favor of NationsBank of Texas, N.A.
10.3* 1997 Stock Option Plan of Mercury Montana, Inc.
10.4* Employment Agreement between MSR Exploration Ltd. and Patrick M. Montalban.
10.5** Wells Agreement.
10.6** Production Payment Agreement between Mercury Exploration Company and Supply Development Group, Inc.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<S> <C>
15.1* Letter of Deloitte & Touche, LLP, independent auditors, regarding interim financial information.
21* Subsidiaries of MSR Exploration Ltd.
23.1* Consent of Deloitte & Touche, LLP, independent auditors.
23.2** Consent of Thompson & Knight, P.C. (included in the opinion filed as Exhibit 5.1 to this Registration).
23.3** Consent of Thompson & Knight, P.C. (included in the opinion filed as Exhibit 8.1 to this Registration
Statement).
23.4** Consent of Blake, Cassels & Graydon (included in the opinion filed as Exhibit 8.2 to this Registration
Statement).
23.5* Consent of Citadel Engineering Ltd.
24.1* Power of Attorney (included on the signature page of this Registration Statement).
99.1* Form of Proxy for Special Meeting.
</TABLE>
- ------------------------
* Filed herewith.
** To be filed by amendment.
II-4
<PAGE>
ITEM 22. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(a) That, for purposes of determining any liability under the Securities Act
of 1933, each filing of the registrant's annual report pursuant to section 13(a)
or section 15(d) of the Securities Exchange Act of 1934 that is incorporated by
reference in the registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(c) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus
will contain the information called for by the applicable registration form with
respect to reofferings by persons who may be deemed underwriters, in addition to
the information called for by the other Items of the applicable form.
(d) That every prospectus (i) that is filed pursuant to paragraph (c)
immediately preceding, or (ii) that purports to meet the requirements of section
10(a)(3) of the Act and is used in connection with an offering of securities
subject to Rule 415, will be filed as a part of an amendment to the registration
statement and will not be used until such amendment is effective, and that, for
purposes of determining any liability under the Securities Act of 1933, each
such post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(e) To respond to requests for information that is incorporated by reference
into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this Form, within
one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of the
registration statement through the date of responding to the request.
(f) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein, that
was not the subject of and included in the registration statement when it became
effective.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement on Form S-4 to be signed on its
behalf by the undersigned, thereunto duly authorized, in Fort Worth, Texas, on
June 20, 1997.
MSR EXPLORATION LTD.
By: /s/ OTTO J. BUIS
-----------------------------------------
Otto J. Buis
CHAIRMAN OF THE BOARD, PRESIDENT
AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated. Each person whose signature appears below
constitutes and appoints Otto J. Buis and Howard N. Boals, and each of them
(with full power to each of them to act alone), his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities to sign on
his behalf individually and in each capacity stated below, any amendment,
including post-effective amendments, to this Registration Statement, and to file
the same, with all exhibits thereto and other documents in connection therewith
with the Securities and Exchange Commission, granting into said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents and either of them, or their substitutes, may
lawfully do or cause to be done by virtue hereof.
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
Chairman of the Board,
/s/ OTTO J. BUIS President and Chief
- ------------------------------ Executive Officer and June 20, 1997
Otto J. Buis Director (Principal
Executive Officer)
Vice President--Finance,
/s/ HOWARD N. BOALS Chief Accounting Officer
- ------------------------------ (Principal Accounting June 20, 1997
Howard N. Boals and Financial Officer)
/s/ PATRICK M. MONTALBAN Executive Vice President,
- ------------------------------ Chief Operating Officer June 20, 1997
Patrick M. Montalban and Director
/s/ C. AL BUIS
- ------------------------------ Director June 20, 1997
C. Al Buis
/s/ STEVEN M. MORRIS
- ------------------------------ Director June 20, 1997
Steven M. Morris
II-6
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ----------- ------------------------------------------------------------------------------------------------- -----
<S> <C> <C>
2.1* Form of Certificate of Domestication (included as Appendix "A" to the Proxy
Statement/Prospectus).
2.2* Agreement and Plan of Merger dated as of March 26, 1997, among MSR Exploration Ltd., Mercury
Montana, Inc. and Mercury Exploration Company, as amended by Amendment No. 1 to Agreement and
Plan of Merger dated as of June 17, 1997 (included as Appendix "E" to the Proxy
Statement/Prospectus).
3.1* Form of Delaware Certificate of Incorporation of continued corporation (included as Appendix "B"
to the Proxy Statement/Prospectus).
3.2** Form of Delaware Bylaws of continued corporation.
3.3** Form of Surviving Corporation Certificate of Incorporation (included as Appendix "F" to the Proxy
Statement/Prospectus).
3.4** Form of Surviving Corporation Bylaws (included as Appendix "G" to the Proxy
Statement/Prospectus).
4.1* Common Stock Warrant dated January 13, 1995 issued to Banque Paribas by MSR Exploration Ltd.
4.2* Form of Common Stock Warrants issued to Mercury Exploration Company, Frank Darden, Thomas F.
Darden, Glenn M. Darden, Anne Darden Self, Jack L. Thurber and Jeff Cook by Mercury Montana,
Inc., each dated March 7, 1997 and each having an exercise price per share of $1.25.
4.3* Form of Common Stock Warrants issued to Mercury Exploration Company, Frank Darden, Thomas F.
Darden, Glenn M. Darden, Anne Darden Self, Jack L. Thurber and Jeff Cook by Mercury Montana,
Inc., each dated March 7, 1997 and each having an exercise price per share of $2.00.
4.4* Form of Stock Purchase Warrant to be issued to Mercury Exploration Company at the Effective Time
of the Merger by the Surviving Corporation.
5.1** Opinion of Thompson & Knight, P.C. regarding validity of Continued Common Stock being registered
for issuance in connection with the Continuance.
8.1** Opinion of Thompson & Knight, P.C. regarding United States tax matters.
8.2** Opinion of Blake, Cassels and Graydon regarding Canadian tax matters.
10.1** Form of Management Agreement to be entered into between the Surviving Corporation and Mercury
Exploration Company.
10.2* Guarantee of Mercury Montana, Inc. in favor of NationsBank of Texas, N.A.
10.3* 1997 Stock Option Plan of Mercury Montana, Inc.
10.4* Employment Agreement between MSR Exploration Ltd. and Patrick M. Montalban.
10.5** Wells Agreement.
10.6** Production Payment Agreement between Mercury Exploration Company and Supply Development Group,
Inc.
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ----------- ------------------------------------------------------------------------------------------------- -----
<S> <C> <C>
15.1* Letter of Deloitte & Touche, LLP, independent auditors, regarding interim financial information.
21* Subsidiaries of MSR Exploration Ltd.
23.1* Consent of Deloitte & Touche, LLP, independent auditors.
23.2** Consent of Thompson & Knight, P.C. (included in the opinion filed as Exhibit 5.1 to this
Registration).
23.3** Consent of Thompson & Knight, P.C. (included in the opinion filed as Exhibit 8.1 to this
Registration Statement).
23.4** Consent of Blake, Cassels & Graydon (included in the opinion filed as Exhibit 8.2 to this
Registration Statement).
23.5* Consent of Citadel Engineering Ltd.
24.1* Power of Attorney (included on the signature page of this Registration Statement).
99.1* Form of Proxy for Special Meeting.
</TABLE>
- ------------------------
* Filed herewith.
** To be filed by amendment.
II-8
<PAGE>
MSR EXPLORATION LTD.
- --------------------------------------------------------------------------------
January 13, 1995
Banque Paribas
2121 San Jacinto Street
Suite 930
Dallas, Texas 75201
Attention: Robert S. Bowers, II
Re: Warrant to Purchase Common Shares
Gentlemen:
The purpose of this letter is to confirm the commitment of MSR Exploration,
Ltd. to issue a warrant to purchase Common Shares to Banque Paribas, which
warrant shall include the following terms and conditions:
Number of Shares: 280,000.
Exercise Price: US$3.375 per share.
Warrantholder: Banque Paribas.
Exercise Period: Five years, commencing January 13, 1995.
Anti-Dilution
Provisions: None.
Registration
Rights: One demand registration right exercisable during the
warrant exercise period.
If you have any questions, please feel free to call.
Yours very truly,
MSR Exploration, Ltd.
By: /s/ Otto J. Buis
----------------
Otto J. Buis
Chairman and
Chief Executive Officer
<PAGE>
THIS WARRANT AND ANY SHARES ACQUIRED UPON THE EXERCISE OF THIS WARRANT HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR UNDER ANY STATE SECURITIES
OR BLUE SKY LAWS. NEITHER THIS WARRANT NOR ANY OF SUCH SHARES MAY BE SOLD,
ASSIGNED, TRANSFERRED, OR OTHERWISE DISPOSED OF IN THE ABSENCE OF REGISTRATION
UNDER SAID ACT AND UNDER APPLICABLE STATE SECURITIES OR BLUE SKY LAWS OR
EXEMPTIONS FROM SUCH REGISTRATION. THIS WARRANT MAY NOT BE SOLD, ASSIGNED,
TRANSFERRED, OR OTHERWISE DISPOSED OF EXCEPT UPON THE CONDITIONS SPECIFIED IN
THIS WARRANT, AND NO SALE, ASSIGNMENT, TRANSFER, OR OTHER DISPOSITION OF THIS
WARRANT SHALL BE VALID OR EFFECTIVE UNLESS AND UNTIL SUCH CONDITIONS SHALL HAVE
BEEN COMPLIED WITH.
No. Right to Purchase Shares
--------- ----------
STOCK PURCHASE WARRANT
THIS CERTIFIES THAT, for value received, ______________________________,
or registered assigns, is entitled to purchase from Mercury Montana, Inc., a
Delaware corporation (the "Company"), at any time or from time to time during
the period specified in Paragraph 2 hereof,___________________________________
(___________) fully paid andnonassessable shares of the Company's Common
Stock, par value $.01 per share (the "Common Stock"), at an exercise price per
share of $1.25 (the "Exercise Price"). The term "Warrant Shares", as used
herein, refers to the shares of Common Stock purchasable hereunder. The
Warrant Shares and the Exercise Price are subject to adjustment as provided in
Paragraph 4 hereof. The term "Warrants", as used herein, shall mean this Stock
Purchase Warrant and all Stock Purchase Warrants issued in connection with any
transfer, exchange, or replacement thereof.
This Warrant is subject to the following terms, provisions, and conditions:
1. MANNER OF EXERCISE; ISSUANCE OF CERTIFICATES; PAYMENT FOR SHARES.
Subject to the provisions hereof, this Warrant may be exercised by the holder
hereof, in whole or in part (but not as to a fractional Warrant Share), by the
surrender of this Warrant, together with a completed Exercise Agreement in the
form attached hereto, to the Company during normal business hours on any
business day at the Company's principal office in Fort Worth, Texas (or such
other office or agency of the Company as it may designate by notice to the
holder hereof), and upon payment to the Company in cash or by certified or
official bank check of the Exercise Price for the Warrant Shares specified in
said Exercise Agreement. The Warrant Shares so purchased shall be deemed to be
issued to the holder hereof or its designee as the record owner of such shares
as of the close of business on the date on which this Warrant shall have been
surrendered, the completed Exercise Agreement delivered, and payment made for
such shares as aforesaid. Certificates for the Warrant Shares so purchased,
representing the aggregate number of shares specified in said Exercise
Agreement, shall be delivered to the
<PAGE>
holder hereof within a reasonable time, not exceeding seven business days, after
this Warrant shall have been so exercised. The certificates so delivered shall
be in such denominations as may be requested by the holder hereof and shall be
registered in the name of said holder or such other name as shall be designated
by said holder. If this Warrant shall have been exercised only in part, then,
unless this Warrant has expired, the Company shall, at its expense, at the time
of delivery of said certificates, deliver to said holder a new Warrant
representing the number of shares with respect to which this Warrant shall not
then have been exercised. The Company shall pay all taxes and other expenses
and charges payable in connection with the preparation, execution, and delivery
of stock certificates (and any new Warrants) pursuant to this Paragraph 1 except
that, in case such stock certificates shall be registered in a name or names
other than the holder of this Warrant, funds sufficient to pay all stock
transfer taxes which shall be payable in connection with the execution and
delivery of such stock certificates shall be paid by the holder hereof to the
Company at the time of the delivery of such stock certificates by the Company as
mentioned above.
2. PERIOD OF EXERCISE. This Warrant is exercisable at any time or from
time to time after the date hereof and before 5:00 p.m. Fort Worth, Texas local
time on March 31, 2002.
3. CERTAIN AGREEMENTS OF THE COMPANY. The Company hereby covenants and
agrees as follows:
(a) SHARES TO BE FULLY PAID. All Warrant Shares will, upon issuance, be
validly issued, fully paid, and nonassessable and free from all taxes, liens,
and charges with respect to the issue thereof.
(b) RESERVATION OF SHARES. During the period within which this Warrant
may be exercised, the Company will at all times have authorized, and reserved
for the purpose of issue upon exercise of this Warrant, a sufficient number of
shares of Common Stock to provide for the exercise of this Warrant.
4. PROTECTION AGAINST DILUTION. The number of shares of Common Stock
purchasable pursuant to the exercise of the rights under this Warrant and the
Exercise Price shall be adjusted as hereinafter set forth:
(a) STOCK DIVIDENDS, SUBDIVISIONS, RECLASSIFICATIONS, ETC. In case at any
time or from time to time after the date hereof the Company shall:
(i) fix a record date for the holders of its issued and outstanding
Common Stock for the purposes of entitling them to receive a dividend
payable in, or other distribution of, Common Stock, or
(ii) subdivide its outstanding shares of Common Stock into a larger
number of shares of Common Stock, or
2
<PAGE>
(iii) combine its outstanding shares of Common Stock into a
smaller number of shares of Common Stock;
then, and in each such case the Exercise Price shall be adjusted to that price
determined by multiplying the Exercise Price in effect immediately prior to such
event by a fraction (i) the numerator of which shall be the total number of
outstanding shares of Common Stock immediately prior to such event, and (ii) the
denominator of which shall be the total number of outstanding shares of Common
Stock immediately after such event.
(b) ADJUSTMENT OF NUMBER OF SHARES PURCHASABLE. Upon each adjustment in
the Exercise Price, pursuant to Paragraph 4(a) above, such number of shares of
Common Stock purchasable hereunder shall be adjusted by multiplying the number
of shares of Common Stock by a fraction, the numerator of which shall be the
Exercise Price immediately prior to such adjustment and the denominator of which
shall be the Exercise Price in effect upon such adjustment.
5. ADJUSTMENT FOR REORGANIZATION, CONSOLIDATION, MERGER, ETC.
(a) Prior to the expiration date of this Warrant, the Company shall not
consolidate with or merge into another corporation, or convey all or
substantially all of its assets to any other corporation or corporations,
whether affiliated or unaffiliated (any such corporation being included within
the meaning of the term "successor corporation"), or agree to so consolidate,
merge or convey assets unless and until prior to consummation of such
consolidation, merger or conveyance the successor corporation thereto shall
assume, by written instrument executed and mailed to the holder of this Warrant
at such time, the obligation to issue and deliver to such holder such shares of
stock, securities or property as, in accordance with the provisions of Paragraph
5(b) below, such holder shall be entitled to purchase or receive.
(b) In case of any capital reorganization or reclassification of the
Common Stock of the Company (or any other corporation the stock or other
securities of which are at the time receivable on the exercise of this Warrant)
after the date of execution of this Warrant or in case, after such date, the
Company (or any such other corporation) shall consolidate with or merge into
another corporation or convey all or substantially all its assets to another
corporation, then and in each such case the holder of this Warrant, upon
exercise, at any time after the consummation of such reorganization,
consolidation, merger or conveyance, shall be entitled to receive, in lieu of
the Common Stock of the Company (or such other corporation) the proportionate
share of all stock, securities or other property issued, paid or delivered for
or on all of the Common Stock of the Company (or such other corporation) as is
allocable to the shares of Common Stock then called for by this Warrant, as if
such holder had exercised this Warrant immediately prior thereto.
3
<PAGE>
6. REGISTRATION RIGHTS.
(a) RIGHT TO PARTICIPATE IN REGISTRATIONS. If, at any time prior to the
expiration of two years from the last date on which this Warrant is validly
exercised, the Company proposes to register shares of Common Stock (as defined
in Paragraph 4 hereof) under the Securities Act of 1933, as amended (the
"Securities Act"), on Form S-1, S-2, or S-3 (or any form which replaces or is
substantially similar to such form), the Company shall each such time give
notice of such proposed registration to the holder of this Warrant, if this
Warrant has not yet expired, and to all holders of shares of Common Stock
acquired by reason of exercise of this Warrant. Subject to the terms and
provisions of this Paragraph 6, upon the request of any such holder ("Holder")
made within 20 days after the giving of such notice by the Company, the Company
shall use its best efforts to cause all shares of Common Stock that have been
acquired by such Holder pursuant to the exercise of this Warrant, and all shares
of Common Stock that will be acquired by such Holder pursuant to the exercise of
this Warrant not later than the fifth day prior to the filing of the
registration statement under the Securities Act, which shares such Holder shall
have requested to be included in the proposed registration ("Registrable
Shares"), to be included in such registration to the extent requisite to permit
the sale or other disposition by such Holder of such Registrable Shares. In the
event the offering to be conducted pursuant to the proposed registration is to
be an underwritten public offering, the registration rights provided in this
Paragraph 6 shall be subject to the approval of the managing underwriter or
underwriters of such offering, who shall determine the number of Registrable
Shares, if any, that may be included in such registration without adversely
affecting such offering.
(b) REGISTRATION PROCEDURES. If and whenever the Company is required by
the provisions of this Paragraph 6 to use its best efforts to cause Registrable
Shares to be included in the registration of securities of the Company under the
Securities Act, the Company will, as expeditiously as possible:
(i) prepare and file with the Securities and Exchange Commission (the
"Commission") a registration statement (the "Registration Statement")
covering such Registrable Shares and use its best efforts to cause the
Registration Statement to become effective and to remain effective for so
long as may reasonably be necessary to complete the sale or other
disposition of such Registrable Shares, provided that the Company shall not
in any event be required to use its best efforts to maintain the
effectiveness of the Registration Statement for a period in excess of 90
days;
(ii) prepare and file with the Commission such amendments and
supplements to the Registration Statement and the prospectus contained
therein as may be necessary to keep the Registration Statement effective,
and comply with the provisions of the Securities Act, with respect to the
sale or other disposition of such Registrable Shares whenever the Holders
thereof shall desire to sell or otherwise dispose of the same but only to
the extent provided in this Paragraph 6(b);
4
<PAGE>
(iii) furnish to each Holder of such Registrable Shares such numbers of
copies of the Registration Statement, the prospectus contained therein
(including each preliminary prospectus), and each amendment and supplement
to the Registration Statement and such prospectus, in conformity with the
requirements of the Securities Act, and such other documents, as such
Holder may reasonably request in order to facilitate the sale or other
disposition of such Registrable Shares; and
(iv) before filing the Registration Statement, any prospectus to be
used in connection with the offering to be conducted pursuant to such
registration, or any amendments or supplements to the Registration
Statement or such prospectus with the Commission, furnish counsel to the
Holders of such Registrable Shares with copies of all such documents
proposed to be filed, which shall be subject to the reasonable approval of
such counsel.
(c) REQUIRED INFORMATION. The Company shall not be required to use its
best efforts to include any Registrable Shares in a proposed registration of its
securities under the Securities Act unless and until (i) the Holder of such
Registrable Shares furnishes to the Company such information regarding such
Holder and such Registrable Shares and the intended method of disposition of
such Registrable Shares as the Company shall reasonably request in order to
satisfy the requirements applicable to such registration, and (ii) in the event
the offering to be conducted pursuant to such registration is to be an
underwritten public offering, such Holder agrees to the terms of the
underwriting agreed to between the Company and the underwriter or underwriters
of such offering and executes all documents reasonably required to effect such
offering.
(d) EXPENSES OF REGISTRATION. In the event of the inclusion pursuant to
the provisions of this Paragraph 6 of Registrable Shares in a registration by
the Company of its securities under the Securities Act, the Holder of such
Registrable Shares shall pay any federal and blue sky filing and registration or
qualification fees attributable to such Holder's Registrable Shares, any
brokerage and underwriting discounts and commissions payable in respect of
Registrable Shares sold on such Holder's behalf, all fees and expenses of any
attorneys and accountants employed by such Holder, and any other costs directly
incurred by such Holder, and the Company shall pay or cause to be paid and shall
indemnify and hold harmless such Holder from and against any and all other costs
and expenses incurred in connection with such registration and related blue sky
registrations and qualifications.
(e) INDEMNIFICATION. In connection with any registration of Registrable
Shares pursuant to the provisions of this Paragraph 6, the Company shall
indemnify and hold harmless the Holder of such Registrable Shares to the extent
that companies generally indemnify and hold harmless underwriters in connection
with public offerings under the Securities Act, and such Holder shall indemnify
and hold harmless the Company, each director and officer of the Company, and
each person who controls the Company within the meaning of the Securities Act to
the extent that selling shareholders generally indemnify and hold harmless
issuers of securities in connection with public offerings under the Securities
Act
5
<PAGE>
with respect to the written information provided by such Holder for use by the
Company in the preparation of the Registration Statement.
7. ISSUE TAX. The issuance of certificates for Warrant Shares upon the
exercise of this Warrant shall be made without charge to the holder of this
Warrant or such shares for any issuance tax in respect thereof.
8. NO RIGHTS OR LIABILITIES AS A SHAREHOLDER. This Warrant shall not
entitle the holder hereof to any voting rights or other rights as a shareholder
of the Company. No provision of this Warrant, in the absence of affirmative
action by the holder hereof to purchase Warrant Shares, and no mere enumeration
herein of the rights or privileges of the holder hereof, shall give rise to any
liability of such holder for the Exercise Price or as a shareholder of the
Company, whether such liability is asserted by the Company or by creditors of
the Company.
9. TRANSFER, EXCHANGE, AND REPLACEMENT OF WARRANT.
(a) REPLACEMENT OF WARRANT. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction, or mutilation of
this Warrant and, in the case of any such loss, theft, or destruction, upon
delivery of an indemnity agreement reasonably satisfactory in form and amount to
the Company, or, in the case of any such mutilation, upon surrender and
cancellation of this Warrant, the Company, at its expense, will execute and
deliver, in lieu thereof, a new Warrant of like tenor.
(b) CANCELLATION; PAYMENT OF EXPENSES. Upon the surrender of this Warrant
in connection with any transfer, exchange, or replacement as provided in this
Paragraph 9, this Warrant shall be promptly cancelled by the Company. The
Company shall pay all taxes (other than securities transfer taxes) and all other
expenses and charges payable in connection with the preparation, execution, and
delivery of Warrants pursuant to this Paragraph 9.
(c) REGISTER. The Company shall maintain, at its principal office in Fort
Worth, Texas (or such other office or agency of the Company as it may designate
by notice to the holder hereof), a register for this Warrant, in which the
Company shall record the name and address of the person in whose name this
Warrant has been issued, as well as the name and address of each transferee and
each prior owner of this Warrant.
(d) EXERCISE OR TRANSFER WITHOUT REGISTRATION. Anything in this Warrant
to the contrary notwithstanding, if, at the time of the surrender of this
Warrant in connection with any exercise, transfer, or exchange of this Warrant,
this Warrant or the Warrant Shares shall not be registered under the Securities
Act of 1933, as amended, and under applicable state securities or blue sky laws,
the Company may require, as a condition of allowing such exercise, transfer, or
exchange, that (i) the holder or transferee of this Warrant, as the case may be,
furnish to the Company a written opinion of counsel, which opinion and counsel
are acceptable to the Company, to the effect that such exercise, transfer, or
exchange may be
6
<PAGE>
made without registration under said Act and under applicable state securities
or blue sky laws and (ii) the holder or transferee execute and deliver to the
Company an investment letter in form and substance acceptable to the Company.
The holder of this Warrant, by taking and holding the same, represents to the
Company that such holder is acquiring this Warrant for investment and not with a
view to the distribution thereof.
10. NOTICES. All notices, requests, and other communications required or
permitted to be given or delivered hereunder to the holder of this Warrant shall
be in writing, and shall be personally delivered, or shall be sent by certified
or registered mail, postage prepaid and addressed, to such holder at the address
shown for such holder on the books of the Company, or at such other address as
shall have been furnished to the Company by notice from such holder. All
notices, requests, and other communications required or permitted to be given or
delivered hereunder to the Company shall be in writing, and shall be personally
delivered, or shall be sent by certified or registered mail, postage prepaid and
addressed, to the office of the Company at 1619 Pennsylvania Avenue, Fort Worth,
Texas 76104, Attention: President, or at such other address as shall have been
furnished to the holder of this Warrant by notice from the Company. Any such
notice, request, or other communication may be sent by telegram or telex, but
shall in such case be subsequently confirmed by a writing personally delivered
or sent by certified or registered mail as provided above. All notices,
requests, and other communications shall be deemed to have been given either at
the time of the delivery thereof to (or the receipt by, in the case of a
telegram or telex) the person entitled to receive such notice at the address of
such person for purposes of this Paragraph 10, or, if mailed, at the completion
of the third full day following the time of such mailing thereof to such
address, as the case may be.
11. GOVERNING LAW. THIS WARRANT SHALL BE GOVERNED BY AND CONSTRUED AND
ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS.
12. REMEDIES. The Company stipulates that the remedies at law of the
holder of this Warrant in the event of any default or threatened default by the
Company in the performance of or compliance with any of the terms of this
Warrant are not and will not be adequate, and that such terms may be
specifically enforced by a decree for the specific enforcement of any agreement
contained herein or by an injunction against a violation of any of the terms
hereof or otherwise.
13. MISCELLANEOUS.
(a) AMENDMENTS. This Warrant and any provision hereof may not be changed,
waived, discharged, or terminated orally, but only by an instrument in writing
signed by the party (or any predecessor in interest thereof) against which
enforcement of the same is sought.
7
<PAGE>
(b) DESCRIPTIVE HEADINGS. The descriptive headings of the several
paragraphs of this Warrant are inserted for purposes of reference only, and
shall not affect the meaning or construction of any of the provisions hereof.
(c) SUCCESSORS AND ASSIGNS. This Warrant shall be binding upon any entity
succeeding to the Company by merger, consolidation, or acquisition of all or
substantially all the Company's assets. This warrant is not assignable or
transferable except upon the death of the holder hereof.
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed as
of March ____, 1997.
Mercury Montana, Inc.
By
-----------------------------------------
8
<PAGE>
FORM OF EXERCISE AGREEMENT
Dated: , 19 .
----------- --
To:
---------------------
The undersigned, pursuant to the provisions set forth in the within
Warrant, hereby agrees to purchase __________ shares of Common Stock covered by
such Warrant, and makes payment herewith in full therefor at the price per share
provided by such Warrant in cash or by certified or official bank check in the
amount of $____________. Please issue a certificate or certificates for such
shares of Common Stock in the name of the undersigned and pay any cash for any
fractional share to the undersigned.
Name:
--------------------------------
Signature:
---------------------------
Title of Signing Officer or Agent (if
any):
--------------------------------
Note: The above signature should correspond exactly
with the name on the face of the within
Warrant or with the name of the assignee
appearing in the assignment form.
9
<PAGE>
FORM OF ASSIGNMENT
FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and transfers
all the rights of the undersigned under the within Warrant, with respect to the
number of shares of Common Stock covered thereby set forth hereinbelow, to:
Name of Assignee Address No. Of Shares
- ---------------- ------- -------------
, and hereby irrevocably constitutes and appoints ____________________________
as agent and attorney-in-fact to transfer said Warrant on the books of the
within-named corporation, with full power of substitution in the premises.
Dated: , 19 .
-------------------- --
In the presence of
- ------------------
Name:
--------------------------------
Signature:
---------------------------
Title of Signing Officer or Agent
(if any):
----------------------------
Address:
----------------------
----------------------
Note: The above signature should correspond
exactly with the name on the face of the
within Warrant.
10
<PAGE>
THIS WARRANT AND ANY SHARES ACQUIRED UPON THE EXERCISE OF THIS WARRANT HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR UNDER ANY STATE SECURITIES
OR BLUE SKY LAWS. NEITHER THIS WARRANT NOR ANY OF SUCH SHARES MAY BE SOLD,
ASSIGNED, TRANSFERRED, OR OTHERWISE DISPOSED OF IN THE ABSENCE OF REGISTRATION
UNDER SAID ACT AND UNDER APPLICABLE STATE SECURITIES OR BLUE SKY LAWS OR
EXEMPTIONS FROM SUCH REGISTRATION. THIS WARRANT MAY NOT BE SOLD, ASSIGNED,
TRANSFERRED, OR OTHERWISE DISPOSED OF EXCEPT UPON THE CONDITIONS SPECIFIED IN
THIS WARRANT, AND NO SALE, ASSIGNMENT, TRANSFER, OR OTHER DISPOSITION OF THIS
WARRANT SHALL BE VALID OR EFFECTIVE UNLESS AND UNTIL SUCH CONDITIONS SHALL HAVE
BEEN COMPLIED WITH.
No.______ Right to Purchase_______ Shares
STOCK PURCHASE WARRANT
THIS CERTIFIES THAT, for value received, ______________________________, or
registered assigns, is entitled to purchase from Mercury Montana, Inc., a
Delaware corporation (the "Company"), at any time or from time to time during
the period specified in Paragraph 2 hereof,_________________________________
_________________________ (__________) fully paid and nonassessable shares of
the Company's Common Stock, par value $.01 per share (the "Common Stock"), at
an exercise price per share of $2.00 (the "Exercise Price"). The term "Warrant
Shares", as used herein, refers to the shares of Common Stock purchasable
hereunder. The Warrant Shares and the Exercise Price are subject to adjustment
as provided in Paragraph 4 hereof. The term "Warrants", as used herein, shall
mean this Stock Purchase Warrant and all Stock Purchase Warrants issued in
connection with any transfer, exchange, or replacement thereof.
This Warrant is subject to the following terms, provisions, and conditions:
1. MANNER OF EXERCISE; ISSUANCE OF CERTIFICATES; PAYMENT FOR SHARES.
Subject to the provisions hereof, this Warrant may be exercised by the holder
hereof, in whole or in part (but not as to a fractional Warrant Share), by the
surrender of this Warrant, together with a completed Exercise Agreement in the
form attached hereto, to the Company during normal business hours on any
business day at the Company's principal office in Fort Worth, Texas (or such
other office or agency of the Company as it may designate by notice to the
holder hereof), and upon payment to the Company in cash or by certified or
official bank check of the Exercise Price for the Warrant Shares specified in
said Exercise Agreement. The Warrant Shares so purchased shall be deemed to be
issued to the holder hereof or its designee as the record owner of such shares
as of the close of business on the date on which this Warrant shall have been
surrendered, the completed Exercise Agreement delivered, and payment made for
such shares as aforesaid. Certificates for the Warrant Shares so purchased,
representing the aggregate number of shares specified in said Exercise
Agreement, shall be delivered to the
<PAGE>
holder hereof within a reasonable time, not exceeding seven business days, after
this Warrant shall have been so exercised. The certificates so delivered shall
be in such denominations as may be requested by the holder hereof and shall be
registered in the name of said holder or such other name as shall be designated
by said holder. If this Warrant shall have been exercised only in part, then,
unless this Warrant has expired, the Company shall, at its expense, at the time
of delivery of said certificates, deliver to said holder a new Warrant
representing the number of shares with respect to which this Warrant shall not
then have been exercised. The Company shall pay all taxes and other expenses
and charges payable in connection with the preparation, execution, and delivery
of stock certificates (and any new Warrants) pursuant to this Paragraph 1 except
that, in case such stock certificates shall be registered in a name or names
other than the holder of this Warrant, funds sufficient to pay all stock
transfer taxes which shall be payable in connection with the execution and
delivery of such stock certificates shall be paid by the holder hereof to the
Company at the time of the delivery of such stock certificates by the Company as
mentioned above.
2. PERIOD OF EXERCISE. This Warrant is exercisable at any time or from
time to time after the date hereof and before 5:00 p.m. Fort Worth, Texas local
time on March 31, 2002.
3. CERTAIN AGREEMENTS OF THE COMPANY. The Company hereby covenants and
agrees as follows:
(a) SHARES TO BE FULLY PAID. All Warrant Shares will, upon issuance, be
validly issued, fully paid, and nonassessable and free from all taxes, liens,
and charges with respect to the issue thereof.
(b) RESERVATION OF SHARES. During the period within which this Warrant
may be exercised, the Company will at all times have authorized, and reserved
for the purpose of issue upon exercise of this Warrant, a sufficient number of
shares of Common Stock to provide for the exercise of this Warrant.
4. PROTECTION AGAINST DILUTION. The number of shares of Common Stock
purchasable pursuant to the exercise of the rights under this Warrant and the
Exercise Price shall be adjusted as hereinafter set forth:
(a) STOCK DIVIDENDS, SUBDIVISIONS, RECLASSIFICATIONS, ETC. In case at any
time or from time to time after the date hereof the Company shall:
(i) fix a record date for the holders of its issued and outstanding
Common Stock for the purposes of entitling them to receive a dividend
payable in, or other distribution of, Common Stock, or
(ii) subdivide its outstanding shares of Common Stock into a larger
number of shares of Common Stock, or
2
<PAGE>
(iii) combine its outstanding shares of Common Stock into a
smaller number of shares of Common Stock;
then, and in each such case the Exercise Price shall be adjusted to that price
determined by multiplying the Exercise Price in effect immediately prior to such
event by a fraction (i) the numerator of which shall be the total number of
outstanding shares of Common Stock immediately prior to such event, and (ii) the
denominator of which shall be the total number of outstanding shares of Common
Stock immediately after such event.
(b) ADJUSTMENT OF NUMBER OF SHARES PURCHASABLE. Upon each adjustment in
the Exercise Price, pursuant to Paragraph 4(a) above, such number of shares of
Common Stock purchasable hereunder shall be adjusted by multiplying the number
of shares of Common Stock by a fraction, the numerator of which shall be the
Exercise Price immediately prior to such adjustment and the denominator of which
shall be the Exercise Price in effect upon such adjustment.
5. ADJUSTMENT FOR REORGANIZATION, CONSOLIDATION, MERGER, ETC.
(a) Prior to the expiration date of this Warrant, the Company shall not
consolidate with or merge into another corporation, or convey all or
substantially all of its assets to any other corporation or corporations,
whether affiliated or unaffiliated (any such corporation being included within
the meaning of the term "successor corporation"), or agree to so consolidate,
merge or convey assets unless and until prior to consummation of such
consolidation, merger or conveyance the successor corporation thereto shall
assume, by written instrument executed and mailed to the holder of this Warrant
at such time, the obligation to issue and deliver to such holder such shares of
stock, securities or property as, in accordance with the provisions of Paragraph
5(b) below, such holder shall be entitled to purchase or receive.
(b) In case of any capital reorganization or reclassification of the
Common Stock of the Company (or any other corporation the stock or other
securities of which are at the time receivable on the exercise of this Warrant)
after the date of execution of this Warrant or in case, after such date, the
Company (or any such other corporation) shall consolidate with or merge into
another corporation or convey all or substantially all its assets to another
corporation, then and in each such case the holder of this Warrant, upon
exercise, at any time after the consummation of such reorganization,
consolidation, merger or conveyance, shall be entitled to receive, in lieu of
the Common Stock of the Company (or such other corporation) the proportionate
share of all stock, securities or other property issued, paid or delivered for
or on all of the Common Stock of the Company (or such other corporation) as is
allocable to the shares of Common Stock then called for by this Warrant, as if
such holder had exercised this Warrant immediately prior thereto.
3
<PAGE>
6. REGISTRATION RIGHTS.
(a) RIGHT TO PARTICIPATE IN REGISTRATIONS. If, at any time prior to the
expiration of two years from the last date on which this Warrant is validly
exercised, the Company proposes to register shares of Common Stock (as defined
in Paragraph 4 hereof) under the Securities Act of 1933, as amended (the
"Securities Act"), on Form S-1, S-2, or S-3 (or any form which replaces or is
substantially similar to such form), the Company shall each such time give
notice of such proposed registration to the holder of this Warrant, if this
Warrant has not yet expired, and to all holders of shares of Common Stock
acquired by reason of exercise of this Warrant. Subject to the terms and
provisions of this Paragraph 6, upon the request of any such holder ("Holder")
made within 20 days after the giving of such notice by the Company, the Company
shall use its best efforts to cause all shares of Common Stock that have been
acquired by such Holder pursuant to the exercise of this Warrant, and all shares
of Common Stock that will be acquired by such Holder pursuant to the exercise of
this Warrant not later than the fifth day prior to the filing of the
registration statement under the Securities Act, which shares such Holder shall
have requested to be included in the proposed registration ("Registrable
Shares"), to be included in such registration to the extent requisite to permit
the sale or other disposition by such Holder of such Registrable Shares. In the
event the offering to be conducted pursuant to the proposed registration is to
be an underwritten public offering, the registration rights provided in this
Paragraph 6 shall be subject to the approval of the managing underwriter or
underwriters of such offering, who shall determine the number of Registrable
Shares, if any, that may be included in such registration without adversely
affecting such offering.
(b) REGISTRATION PROCEDURES. If and whenever the Company is required by
the provisions of this Paragraph 6 to use its best efforts to cause Registrable
Shares to be included in the registration of securities of the Company under the
Securities Act, the Company will, as expeditiously as possible:
(i) prepare and file with the Securities and Exchange Commission
(the "Commission") a registration statement (the "Registration Statement")
covering such Registrable Shares and use its best efforts to cause the
Registration Statement to become effective and to remain effective for so
long as may reasonably be necessary to complete the sale or other
disposition of such Registrable Shares, provided that the Company shall not
in any event be required to use its best efforts to maintain the
effectiveness of the Registration Statement for a period in excess of 90
days;
(ii) prepare and file with the Commission such amendments and
supplements to the Registration Statement and the prospectus contained
therein as may be necessary to keep the Registration Statement effective,
and comply with the provisions of the Securities Act, with respect to the
sale or other disposition of such Registrable Shares whenever the Holders
thereof shall desire to sell or otherwise dispose of the same but only to
the extent provided in this Paragraph 6(b);
4
<PAGE>
(iii) furnish to each Holder of such Registrable Shares such
numbers of copies of the Registration Statement, the prospectus contained
therein (including each preliminary prospectus), and each amendment and
supplement to the Registration Statement and such prospectus, in conformity
with the requirements of the Securities Act, and such other documents, as
such Holder may reasonably request in order to facilitate the sale or other
disposition of such Registrable Shares; and
(iv) before filing the Registration Statement, any prospectus to
be used in connection with the offering to be conducted pursuant to such
registration, or any amendments or supplements to the Registration
Statement or such prospectus with the Commission, furnish counsel to the
Holders of such Registrable Shares with copies of all such documents
proposed to be filed, which shall be subject to the reasonable approval of
such counsel.
(c) REQUIRED INFORMATION. The Company shall not be required to use its
best efforts to include any Registrable Shares in a proposed registration of its
securities under the Securities Act unless and until (i) the Holder of such
Registrable Shares furnishes to the Company such information regarding such
Holder and such Registrable Shares and the intended method of disposition of
such Registrable Shares as the Company shall reasonably request in order to
satisfy the requirements applicable to such registration, and (ii) in the event
the offering to be conducted pursuant to such registration is to be an
underwritten public offering, such Holder agrees to the terms of the
underwriting agreed to between the Company and the underwriter or underwriters
of such offering and executes all documents reasonably required to effect such
offering.
(d) EXPENSES OF REGISTRATION. In the event of the inclusion pursuant to
the provisions of this Paragraph 6 of Registrable Shares in a registration by
the Company of its securities under the Securities Act, the Holder of such
Registrable Shares shall pay any federal and blue sky filing and registration or
qualification fees attributable to such Holder's Registrable Shares, any
brokerage and underwriting discounts and commissions payable in respect of
Registrable Shares sold on such Holder's behalf, all fees and expenses of any
attorneys and accountants employed by such Holder, and any other costs directly
incurred by such Holder, and the Company shall pay or cause to be paid and shall
indemnify and hold harmless such Holder from and against any and all other costs
and expenses incurred in connection with such registration and related blue sky
registrations and qualifications.
(e) INDEMNIFICATION. In connection with any registration of Registrable
Shares pursuant to the provisions of this Paragraph 6, the Company shall
indemnify and hold harmless the Holder of such Registrable Shares to the extent
that companies generally indemnify and hold harmless underwriters in connection
with public offerings under the Securities Act, and such Holder shall indemnify
and hold harmless the Company, each director and officer of the Company, and
each person who controls the Company within the meaning of the Securities Act to
the extent that selling shareholders generally indemnify and hold harmless
issuers of securities in connection with public offerings under the Securities
Act
5
<PAGE>
with respect to the written information provided by such Holder for use by the
Company in the preparation of the Registration Statement.
7. ISSUE TAX. The issuance of certificates for Warrant Shares upon the
exercise of this Warrant shall be made without charge to the holder of this
Warrant or such shares for any issuance tax in respect thereof.
8. NO RIGHTS OR LIABILITIES AS A SHAREHOLDER. This Warrant shall not
entitle the holder hereof to any voting rights or other rights as a shareholder
of the Company. No provision of this Warrant, in the absence of affirmative
action by the holder hereof to purchase Warrant Shares, and no mere enumeration
herein of the rights or privileges of the holder hereof, shall give rise to any
liability of such holder for the Exercise Price or as a shareholder of the
Company, whether such liability is asserted by the Company or by creditors of
the Company.
9. TRANSFER, EXCHANGE, AND REPLACEMENT OF WARRANT.
(a) REPLACEMENT OF WARRANT. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction, or mutilation of
this Warrant and, in the case of any such loss, theft, or destruction, upon
delivery of an indemnity agreement reasonably satisfactory in form and amount to
the Company, or, in the case of any such mutilation, upon surrender and
cancellation of this Warrant, the Company, at its expense, will execute and
deliver, in lieu thereof, a new Warrant of like tenor.
(b) CANCELLATION; PAYMENT OF EXPENSES. Upon the surrender of this Warrant
in connection with any transfer, exchange, or replacement as provided in this
Paragraph 9, this Warrant shall be promptly cancelled by the Company. The
Company shall pay all taxes (other than securities transfer taxes) and all other
expenses and charges payable in connection with the preparation, execution, and
delivery of Warrants pursuant to this Paragraph 9.
(c) REGISTER. The Company shall maintain, at its principal office in Fort
Worth, Texas (or such other office or agency of the Company as it may designate
by notice to the holder hereof), a register for this Warrant, in which the
Company shall record the name and address of the person in whose name this
Warrant has been issued, as well as the name and address of each transferee and
each prior owner of this Warrant.
(d) EXERCISE OR TRANSFER WITHOUT REGISTRATION. Anything in this Warrant
to the contrary notwithstanding, if, at the time of the surrender of this
Warrant in connection with any exercise, transfer, or exchange of this Warrant,
this Warrant or the Warrant Shares shall not be registered under the Securities
Act of 1933, as amended, and under applicable state securities or blue sky laws,
the Company may require, as a condition of allowing such exercise, transfer, or
exchange, that (i) the holder or transferee of this Warrant, as the case may be,
furnish to the Company a written opinion of counsel, which opinion and counsel
are acceptable to the Company, to the effect that such exercise, transfer, or
exchange may be
6
<PAGE>
made without registration under said Act and under applicable state securities
or blue sky laws and (ii) the holder or transferee execute and deliver to the
Company an investment letter in form and substance acceptable to the Company.
The holder of this Warrant, by taking and holding the same, represents to the
Company that such holder is acquiring this Warrant for investment and not with a
view to the distribution thereof.
10. NOTICES. All notices, requests, and other communications required or
permitted to be given or delivered hereunder to the holder of this Warrant shall
be in writing, and shall be personally delivered, or shall be sent by certified
or registered mail, postage prepaid and addressed, to such holder at the address
shown for such holder on the books of the Company, or at such other address as
shall have been furnished to the Company by notice from such holder. All
notices, requests, and other communications required or permitted to be given or
delivered hereunder to the Company shall be in writing, and shall be personally
delivered, or shall be sent by certified or registered mail, postage prepaid and
addressed, to the office of the Company at 1619 Pennsylvania Avenue, Fort Worth,
Texas 76104, Attention: President, or at such other address as shall have been
furnished to the holder of this Warrant by notice from the Company. Any such
notice, request, or other communication may be sent by telegram or telex, but
shall in such case be subsequently confirmed by a writing personally delivered
or sent by certified or registered mail as provided above. All notices,
requests, and other communications shall be deemed to have been given either at
the time of the delivery thereof to (or the receipt by, in the case of a
telegram or telex) the person entitled to receive such notice at the address of
such person for purposes of this Paragraph 10, or, if mailed, at the completion
of the third full day following the time of such mailing thereof to such
address, as the case may be.
11. GOVERNING LAW. THIS WARRANT SHALL BE GOVERNED BY AND CONSTRUED AND
ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS.
12. REMEDIES. The Company stipulates that the remedies at law of the
holder of this Warrant in the event of any default or threatened default by the
Company in the performance of or compliance with any of the terms of this
Warrant are not and will not be adequate, and that such terms may be
specifically enforced by a decree for the specific enforcement of any agreement
contained herein or by an injunction against a violation of any of the terms
hereof or otherwise.
13. MISCELLANEOUS.
(a) AMENDMENTS. This Warrant and any provision hereof may not be changed,
waived, discharged, or terminated orally, but only by an instrument in writing
signed by the party (or any predecessor in interest thereof) against which
enforcement of the same is sought.
7
<PAGE>
(b) DESCRIPTIVE HEADINGS. The descriptive headings of the several
paragraphs of this Warrant are inserted for purposes of reference only, and
shall not affect the meaning or construction of any of the provisions hereof.
(c) SUCCESSORS AND ASSIGNS. This Warrant shall be binding upon any entity
succeeding to the Company by merger, consolidation, or acquisition of all or
substantially all the Company's assets. This warrant is not assignable or
transferable except upon the death of the holder hereof.
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed as
of March ____, 1997.
Mercury Montana, Inc.
By_________________________________
8
<PAGE>
FORM OF EXERCISE AGREEMENT
Dated: , 19 .
To: __________________
The undersigned, pursuant to the provisions set forth in the within
Warrant, hereby agrees to purchase shares of Common Stock covered by
such Warrant, and makes payment herewith in full therefor at the price per share
provided by such Warrant in cash or by certified or official bank check in the
amount of $ . Please issue a certificate or certificates for such
shares of Common Stock in the name of the undersigned and pay any cash for any
fractional share to the undersigned.
Name:________________________________
Signature:___________________________
Title of Signing Officer or Agent (if
any):________________________________
Note: The above signature should correspond exactly
with the name on the face of the within
Warrant or with the name of the assignee
appearing in the assignment form.
9
<PAGE>
FORM OF ASSIGNMENT
FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and transfers
all the rights of the undersigned under the within Warrant, with respect to the
number of shares of Common Stock covered thereby set forth hereinbelow, to:
Name of Assignee Address No. of Shares
- ---------------- ------- -------------
, and hereby irrevocably constitutes and appoints
as agent and attorney-in-fact to transfer said Warrant on the books of
the within-named corporation, with full power of substitution in the premises.
Dated: , 19 .
In the presence of
Name:________________________________
Signature:___________________________
Title of Signing Officer or Agent
(if any):____________________________
Address:________________________
______________________
Note: The above signature should
correspond exactly with the name on
the face of the within Warrant.
10
<PAGE>
THIS WARRANT AND ANY SHARES ACQUIRED UPON THE EXERCISE OF THIS WARRANT HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR UNDER ANY STATE SECURITIES
OR BLUE SKY LAWS. NEITHER THIS WARRANT NOR ANY OF SUCH SHARES MAY BE SOLD,
ASSIGNED, TRANSFERRED, OR OTHERWISE DISPOSED OF IN THE ABSENCE OF REGISTRATION
UNDER SAID ACT AND UNDER APPLICABLE STATE SECURITIES OR BLUE SKY LAWS OR
EXEMPTIONS FROM SUCH REGISTRATION. THIS WARRANT MAY NOT BE SOLD, ASSIGNED,
TRANSFERRED, OR OTHERWISE DISPOSED OF EXCEPT UPON THE CONDITIONS SPECIFIED IN
THIS WARRANT, AND NO SALE, ASSIGNMENT, TRANSFER, OR OTHER DISPOSITION OF THIS
WARRANT SHALL BE VALID OR EFFECTIVE UNLESS AND UNTIL SUCH CONDITIONS SHALL HAVE
BEEN COMPLIED WITH.
No._____________ Right to Purchase Up to __________ Shares
STOCK PURCHASE WARRANT
THIS CERTIFIES THAT, for value received, Mercury Exploration Company, or
registered assigns, is entitled to purchase from MSR Exploration Ltd., a
Delaware corporation (the "Company"), at any time or from time to time during
the period specified in Paragraph 2 hereof, of up to_________________________
(________) fully paid and nonassessable shares of the Company's Common Stock,
par value $.01 per share (the "Common Stock"), at an exercise price per share
of $.01 (the "Exercise Price"). The term "Warrant Shares", as used herein,
refers to the shares of Common Stock purchasable hereunder. The Warrant
Shares and the Exercise Price are subject to adjustment as provided in
Paragraphs 3 and 5 hereof. The term "Warrants", as used herein, shall mean
this Stock Purchase Warrant and all Stock Purchase Warrants issued in
connection with any transfer, exchange, or replacement thereof.
This Warrant is subject to the following terms, provisions, and conditions:
1. MANNER OF EXERCISE; ISSUANCE OF CERTIFICATES; PAYMENT FOR SHARES.
Subject to the provisions hereof, this Warrant may be exercised by the holder
hereof, in whole or in part (but not as to a fractional Warrant Share), by the
surrender of this Warrant, together with a completed Exercise Agreement in the
form attached hereto, to the Company during normal business hours on any
business day at the Company's principal office in Fort Worth, Texas (or such
other office or agency of the Company as it may designate by notice to the
holder hereof), and upon payment to the Company in cash or by certified or
official bank check of the Exercise Price for the Warrant Shares specified in
said Exercise Agreement. The Warrant Shares so purchased shall be deemed to be
issued to the holder hereof or its designee as the record owner of such shares
as of the close of business on the date on which this Warrant shall have been
surrendered, the completed Exercise Agreement delivered, and payment made for
such shares as aforesaid. Certificates for the Warrant Shares so purchased,
representing the aggregate number of shares specified in said Exercise
Agreement, shall be delivered to the holder hereof within a reasonable time, not
exceeding seven business days, after this Warrant
<PAGE>
shall have been so exercised. The certificates so delivered shall be in such
denominations as may be requested by the holder hereof and shall be registered
in the name of said holder or such other name as shall be designated by said
holder. If this Warrant shall have been exercised only in part, then, unless
this Warrant has expired, the Company shall, at its expense, at the time of
delivery of said certificates, deliver to said holder a new Warrant representing
the number of shares with respect to which this Warrant shall not then have been
exercised. The Company shall pay all taxes and other expenses and charges
payable in connection with the preparation, execution, and delivery of stock
certificates (and any new Warrants) pursuant to this Paragraph 1 except that, in
case such stock certificates shall be registered in a name or names other than
the holder of this Warrant, funds sufficient to pay all stock transfer taxes
which shall be payable in connection with the execution and delivery of such
stock certificates shall be paid by the holder hereof to the Company at the time
of the delivery of such stock certificates by the Company as mentioned above.
2. PERIOD OF EXERCISE. Subject to the satisfaction of the conditions
specified in Paragraph 3 below, this Warrant is only exercisable during the
period commencing on the date (the "Initial Exercise Date") on which a "Tax
Event" (as defined below) occurs and ending on March 31, 2002 at 5:00 p.m. Fort
Worth, Texas local time; provided, however, such date shall automatically be
extended in the event any litigation or administrative proceeding with respect
to a possible Tax Event is pending as of such date to a date that is 90 days
after the final resolution of such administrative proceeding or litigation (the
"Termination Date").
3. DETERMINATION OF NUMBER OF WARRANT SHARES; CONDITIONS TO EXERCISE.
(a) The number of Warrant Shares with respect to which this Warrant is
exercisable shall be an amount equal to the lesser of (i) _________________
______________ (____________) or (ii) an amount determined by dividing the
amount of any "Tax Liability" (as defined below) by the "Market Price" per share
of Common Stock (as defined below) as of the date of the Tax Event.
(b) This Warrant is exercisable only if a Tax Event shall have occurred
prior to the Termination Date, and then only in the amount of Warrant Shares
determined pursuant to Paragraph 3(a) above. If a Tax Event shall not have
occurred on or before the Termination Date, this Warrant shall terminate and be
of no further force or effect.
2
<PAGE>
(c) For purposes of this Warrant, the following terms shall haver the
meanings set forth below:
"Tax Event" shall mean a final, binding and non-appealable determination by
a governmental taxing authority or court of appropriate jurisdiction that
the Company has a liability for taxes, or for failure to withhold taxes,
under Canadian or United States tax laws as a result of the continuance of
MSR Exploration Ltd., an Alberta, Canada corporation and predecessor in
interest to the Company, from the Province of Alberta to the State of
Delaware.
"Tax Liability" shall mean the amount of the taxes, including fines,
penalties and interest, if any, required to be paid by the Company as a
result of a Tax Event.
"Market Price" shall mean the average of the last reported per share sale
prices for Common Stock for the 20 consecutive Trading Days (as defined
below) commencing 30 Trading Days before the day in question. The last
reported sale price for each day shall be (i) the last reported sale price
of the Common Stock on the National Market of the National Association of
Securities Dealers, Inc. Automated Quotation System, or any similar system
of automated dissemination of quotations of securities prices then in
common use, if so quoted, or (ii) if not quoted as described in clause (i)
above, the mean between the high bid and low asked quotations for the
Common Stock as reported by the National Quotation Bureau, Inc. if at least
two securities dealers have inserted both bid and asked quotations for such
security on at least 10 of such 20 consecutive Trading Days, or (iii) if
the Common Stock is listed or admitted for trading on any national
securities exchange, the last sale price, or the closing bid price if no
sale occurred, of the Common Stock on the principal securities exchange on
which the Common Stock is listed or admitted to trading. If the Common
Stock is quoted on a national securities or central market system, in lieu
of a market or quotation system described above, the last reported sale
price shall be determined in the manner set forth in clause (ii) of the
preceding sentence if bid and asked quotations are reported but actual
transactions are not, and in the manner set forth in clause (iii) of the
preceding sentence if actual transactions are reported. If none of the
conditions set forth above is met, the last reported sale price of the
Common Stock on any day or the average of such last reported sale prices
for any period shall be the fair market value of such security as
determined by a member firm of the New York Stock Exchange, Inc. selected
by the Company. The term "Trading Days", as used herein, means (i) if the
Common Stock is quoted on the National Market of the National Association
of Security Dealers, Inc. Automated Quotation System, or any similar system
of automated dissemination of quotations of securities prices, days on
which trades may be made on such system or (ii) if the Common Stock is
listed or admitted for trading on any national securities exchange, days on
which such national securities exchange is open for business.
3
<PAGE>
4. CERTAIN AGREEMENTS OF THE COMPANY. The Company hereby covenants and
agrees as follows:
(a) SHARES TO BE FULLY PAID. All Warrant Shares will, upon issuance, be
validly issued, fully paid, and nonassessable and free from all taxes, liens,
and charges with respect to the issue thereof.
(b) RESERVATION OF SHARES. During the period commencing on the date
hereof and ending on the Termination Date, the Company will at all times have
authorized, and reserved for the purpose of issue upon exercise of this Warrant,
a sufficient number of shares of Common Stock to provide for the exercise of
this Warrant.
5. PROTECTION AGAINST DILUTION. The number of shares of Common Stock
purchasable pursuant to the exercise of the rights under this Warrant and the
Exercise Price shall be adjusted as hereinafter set forth:
(a) STOCK DIVIDENDS, SUBDIVISIONS, RECLASSIFICATIONS, ETC. In case at any
time or from time to time after the date hereof the Company shall:
(i) fix a record date for the holders of its issued and outstanding
Common Stock for the purposes of entitling them to receive a dividend
payable in, or other distribution of, Common Stock, or
(ii) subdivide its outstanding shares of Common Stock into a larger
number of shares of Common Stock, or
(iii)combine its outstanding shares of Common Stock into a
smaller number of shares of Common Stock;
then, and in each such case the Exercise Price shall be adjusted to that price
determined by multiplying the Exercise Price in effect immediately prior to such
event by a fraction (i) the numerator of which shall be the total number of
outstanding shares of Common Stock immediately prior to such event, and (ii) the
denominator of which shall be the total number of outstanding shares of Common
Stock immediately after such event.
(b) ADJUSTMENT OF NUMBER OF SHARES PURCHASABLE. Upon each adjustment in
the Exercise Price, pursuant to Paragraph 5(a) above, such number of shares of
Common Stock purchasable hereunder shall be adjusted by multiplying the number
of shares of Common Stock by a fraction, the numerator of which shall be the
Exercise Price immediately prior to such adjustment and the denominator of which
shall be the Exercise Price in effect upon such adjustment.
4
<PAGE>
6. ADJUSTMENT FOR REORGANIZATION, CONSOLIDATION, MERGER, ETC.
(a) Prior to the expiration date of this Warrant, the Company shall not
consolidate with or merge into another corporation, or convey all or
substantially all of its assets to any other corporation or corporations,
whether affiliated or unaffiliated (any such corporation being included within
the meaning of the term "successor corporation"), or agree to so consolidate,
merge or convey assets unless and until prior to consummation of such
consolidation, merger or conveyance the successor corporation thereto shall
assume, by written instrument executed and mailed to the holder of this Warrant
at such time, the obligation to issue and deliver to such holder such shares of
stock, securities or property as, in accordance with the provisions of Paragraph
6(b) below, such holder shall be entitled to purchase or receive.
(b) In case of any capital reorganization or reclassification of the
Common Stock of the Company (or any other corporation the stock or other
securities of which are at the time receivable on the exercise of this Warrant)
after the date of execution of this Warrant or in case, after such date, the
Company (or any such other corporation) shall consolidate with or merge into
another corporation or convey all or substantially all its assets to another
corporation, then and in each such case the holder of this Warrant, upon
exercise, at any time after the consummation of such reorganization,
consolidation, merger or conveyance, shall be entitled to receive, in lieu of
the Common Stock of the Company (or such other corporation) the proportionate
share of all stock, securities or other property issued, paid or delivered for
or on all of the Common Stock of the Company (or such other corporation) as is
allocable to the shares of Common Stock then called for by this Warrant, as if
such holder had exercised this Warrant immediately prior thereto.
7. REGISTRATION RIGHTS.
(a) RIGHT TO PARTICIPATE IN REGISTRATIONS. If, at any time prior to the
expiration of two years from the last date on which this Warrant is validly
exercised, the Company proposes to register shares of Common Stock under the
Securities Act of 1933, as amended (the "Securities Act"), on Form S-1, S-2, or
S-3 (or any form which replaces or is substantially similar to such form), the
Company shall each such time give notice of such proposed registration to the
holder of this Warrant, if this Warrant has not yet expired, and to all holders
of shares of Common Stock acquired by reason of exercise of this Warrant.
Subject to the terms and provisions of this Paragraph 6, upon the request of any
such holder ("Holder") made within 20 days after the giving of such notice by
the Company, the Company shall use its best efforts to cause all shares of
Common Stock that have been acquired by such Holder pursuant to the exercise of
this Warrant, and all shares of Common Stock that will be acquired by such
Holder pursuant to the exercise of this Warrant not later than the fifth day
prior to the filing of the registration statement under the Securities Act,
which shares such Holder shall have requested to be included in the proposed
registration ("Registrable Shares"), to be included in such registration to the
extent requisite to permit the sale or other disposition by such Holder of such
Registrable Shares. In the event the offering
5
<PAGE>
to be conducted pursuant to the proposed registration is to be an underwritten
public offering, the registration rights provided in this Paragraph 6 shall be
subject to the approval of the managing underwriter or underwriters of such
offering, who shall determine the number of Registrable Shares, if any, that may
be included in such registration without adversely affecting such offering.
(b) REGISTRATION PROCEDURES. If and whenever the Company is required by
the provisions of this Paragraph 6 to use its best efforts to cause Registrable
Shares to be included in the registration of securities of the Company under the
Securities Act, the Company will, as expeditiously as possible:
(i) prepare and file with the Securities and Exchange Commission (the
"Commission") a registration statement (the "Registration Statement")
covering such Registrable Shares and use its best efforts to cause the
Registration Statement to become effective and to remain effective for so
long as may reasonably be necessary to complete the sale or other
disposition of such Registrable Shares, provided that the Company shall not
in any event be required to use its best efforts to maintain the
effectiveness of the Registration Statement for a period in excess of 90
days;
(ii) prepare and file with the Commission such amendments and
supplements to the Registration Statement and the prospectus contained
therein as may be necessary to keep the Registration Statement effective,
and comply with the provisions of the Securities Act, with respect to the
sale or other disposition of such Registrable Shares whenever the Holders
thereof shall desire to sell or otherwise dispose of the same but only to
the extent provided in this Paragraph 7(b);
(iii) furnish to each Holder of such Registrable Shares such
numbers of copies of the Registration Statement, the prospectus contained
therein (including each preliminary prospectus), and each amendment and
supplement to the Registration Statement and such prospectus, in conformity
with the requirements of the Securities Act, and such other documents, as
such Holder may reasonably request in order to facilitate the sale or other
disposition of such Registrable Shares; and
(iv) before filing the Registration Statement, any prospectus to be
used in connection with the offering to be conducted pursuant to such
registration, or any amendments or supplements to the Registration
Statement or such prospectus with the Commission, furnish counsel to the
Holders of such Registrable Shares with copies of all such documents
proposed to be filed, which shall be subject to the reasonable approval of
such counsel.
(c) REQUIRED INFORMATION. The Company shall not be required to use its
best efforts to include any Registrable Shares in a proposed registration of its
securities under the Securities Act unless and until (i) the Holder of such
Registrable Shares furnishes to the Company such information regarding such
Holder and such Registrable Shares and the
6
<PAGE>
intended method of disposition of such Registrable Shares as the Company shall
reasonably request in order to satisfy the requirements applicable to such
registration, and (ii) in the event the offering to be conducted pursuant to
such registration is to be an underwritten public offering, such Holder agrees
to the terms of the underwriting agreed to between the Company and the
underwriter or underwriters of such offering and executes all documents
reasonably required to effect such offering.
(d) EXPENSES OF REGISTRATION. In the event of the inclusion pursuant to
the provisions of this Paragraph 7 of Registrable Shares in a registration by
the Company of its securities under the Securities Act, the Holder of such
Registrable Shares shall pay any federal and blue sky filing and registration or
qualification fees attributable to such Holder's Registrable Shares, any
brokerage and underwriting discounts and commissions payable in respect of
Registrable Shares sold on such Holder's behalf, all fees and expenses of any
attorneys and accountants employed by such Holder, and any other costs directly
incurred by such Holder, and the Company shall pay or cause to be paid and shall
indemnify and hold harmless such Holder from and against any and all other costs
and expenses incurred in connection with such registration and related blue sky
registrations and qualifications.
(e) INDEMNIFICATION. In connection with any registration of Registrable
Shares pursuant to the provisions of this Paragraph 7, the Company shall
indemnify and hold harmless the Holder of such Registrable Shares to the extent
that companies generally indemnify and hold harmless underwriters in connection
with public offerings under the Securities Act, and such Holder shall indemnify
and hold harmless the Company, each director and officer of the Company, and
each person who controls the Company within the meaning of the Securities Act to
the extent that selling shareholders generally indemnify and hold harmless
issuers of securities in connection with public offerings under the Securities
Act with respect to the written information provided by such Holder for use by
the Company in the preparation of the Registration Statement.
8. ISSUE TAX. The issuance of certificates for Warrant Shares upon the
exercise of this Warrant shall be made without charge to the holder of this
Warrant or such shares for any issuance tax in respect thereof.
9. NO RIGHTS OR LIABILITIES AS A SHAREHOLDER. This Warrant shall not
entitle the holder hereof to any voting rights or other rights as a shareholder
of the Company. No provision of this Warrant, in the absence of affirmative
action by the holder hereof to purchase Warrant Shares, and no mere enumeration
herein of the rights or privileges of the holder hereof, shall give rise to any
liability of such holder for the Exercise Price or as a shareholder of the
Company, whether such liability is asserted by the Company or by creditors of
the Company.
7
<PAGE>
10. TRANSFER, EXCHANGE, AND REPLACEMENT OF WARRANT.
(a) REPLACEMENT OF WARRANT. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction, or mutilation of
this Warrant and, in the case of any such loss, theft, or destruction, upon
delivery of an indemnity agreement reasonably satisfactory in form and amount to
the Company, or, in the case of any such mutilation, upon surrender and
cancellation of this Warrant, the Company, at its expense, will execute and
deliver, in lieu thereof, a new Warrant of like tenor.
(b) CANCELLATION; PAYMENT OF EXPENSES. Upon the surrender of this Warrant
in connection with any transfer, exchange, or replacement as provided in this
Paragraph 10, this Warrant shall be promptly cancelled by the Company. The
Company shall pay all taxes (other than securities transfer taxes) and all other
expenses and charges payable in connection with the preparation, execution, and
delivery of Warrants pursuant to this Paragraph 10.
(c) REGISTER. The Company shall maintain, at its principal office in Fort
Worth, Texas (or such other office or agency of the Company as it may designate
by notice to the holder hereof), a register for this Warrant, in which the
Company shall record the name and address of the person in whose name this
Warrant has been issued, as well as the name and address of each transferee and
each prior owner of this Warrant.
(d) EXERCISE OR TRANSFER WITHOUT REGISTRATION. Anything in this Warrant
to the contrary notwithstanding, if, at the time of the surrender of this
Warrant in connection with any exercise, transfer, or exchange of this Warrant,
this Warrant or the Warrant Shares shall not be registered under the Securities
Act of 1933, as amended, and under applicable state securities or blue sky laws,
the Company may require, as a condition of allowing such exercise, transfer, or
exchange, that (i) the holder or transferee of this Warrant, as the case may be,
furnish to the Company a written opinion of counsel, which opinion and counsel
are acceptable to the Company, to the effect that such exercise, transfer, or
exchange may be made without registration under said Act and under applicable
state securities or blue sky laws and (ii) the holder or transferee execute and
deliver to the Company an investment letter in form and substance acceptable to
the Company. The holder of this Warrant, by taking and holding the same,
represents to the Company that such holder is acquiring this Warrant for
investment and not with a view to the distribution thereof.
11. NOTICES. All notices, requests, and other communications required or
permitted to be given or delivered hereunder to the holder of this Warrant shall
be in writing, and shall be personally delivered, or shall be sent by certified
or registered mail, postage prepaid and addressed, to such holder at the address
shown for such holder on the books of the Company, or at such other address as
shall have been furnished to the Company by notice from such holder. All
notices, requests, and other communications required or permitted to be given or
delivered hereunder to the Company shall be in writing, and shall be personally
delivered, or shall be sent by certified or registered mail, postage prepaid and
addressed, to the office of the Company at 1619 Pennsylvania Avenue, Fort Worth,
Texas 76104, Attention: President, or at
8
<PAGE>
such other address as shall have been furnished to the holder of this Warrant by
notice from the Company. Any such notice, request, or other communication may
be sent by telegram or telex, but shall in such case be subsequently confirmed
by a writing personally delivered or sent by certified or registered mail as
provided above. All notices, requests, and other communications shall be deemed
to have been given either at the time of the delivery thereof to (or the receipt
by, in the case of a telegram or telex) the person entitled to receive such
notice at the address of such person for purposes of this Paragraph 11, or, if
mailed, at the completion of the third full day following the time of such
mailing thereof to such address, as the case may be.
12. GOVERNING LAW. THIS WARRANT SHALL BE GOVERNED BY AND CONSTRUED AND
ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS.
13. REMEDIES. The Company stipulates that the remedies at law of the
holder of this Warrant in the event of any default or threatened default by the
Company in the performance of or compliance with any of the terms of this
Warrant are not and will not be adequate, and that such terms may be
specifically enforced by a decree for the specific enforcement of any agreement
contained herein or by an injunction against a violation of any of the terms
hereof or otherwise.
14. MISCELLANEOUS.
(a) AMENDMENTS. This Warrant and any provision hereof may not be changed,
waived, discharged, or terminated orally, but only by an instrument in writing
signed by the party (or any predecessor in interest thereof) against which
enforcement of the same is sought.
(b) DESCRIPTIVE HEADINGS. The descriptive headings of the several
paragraphs of this Warrant are inserted for purposes of reference only, and
shall not affect the meaning or construction of any of the provisions hereof.
(c) SUCCESSORS AND ASSIGNS. This Warrant shall be binding upon any entity
succeeding to the Company by merger, consolidation, or acquisition of all or
substantially all the Company's assets.
9
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed as
of __________, 1997.
MSR Exploration Ltd.
By
------------------------------------
10
<PAGE>
FORM OF EXERCISE AGREEMENT
Dated:______________, 19__.
To: __________________
The undersigned, pursuant to the provisions set forth in the within
Warrant, hereby agrees to purchase ___________ shares of Common Stock covered by
such Warrant, and makes payment herewith in full therefor at the price per share
provided by such Warrant in cash or by certified or official bank check in the
amount of $____________. Please issue a certificate or certificates for such
shares of Common Stock in the name of the undersigned and pay any cash for any
fractional share to the undersigned.
Name:
--------------------------------
Signature:
---------------------------
Title of Signing Officer or Agent (if
any):
--------------------------------
Note: The above signature should
correspond exactly with the name on
the face of the within Warrant or
with the name of the assignee
appearing in the assignment form.
11
<PAGE>
FORM OF ASSIGNMENT
FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and transfers
all the rights of the undersigned under the within Warrant, with respect to the
number of shares of Common Stock covered thereby set forth hereinbelow, to:
Name of Assignee Address No. Of Shares
- ---------------- ------- -------------
, and hereby irrevocably constitutes and appoints ___________________________
as agent and attorney-in-fact to transfer said Warrant on the books of the
within-named corporation, with full power of substitution in the premises.
Dated: , 19 .
--------------------- --
In the presence of
- ------------------
Name:
--------------------------------
Signature:
---------------------------
Title of Signing Officer or Agent
(if any):
----------------------------
Address:
-----------------------------
-----------------------------
Note: The above signature should
correspond exactly with the name on
the face of the within Warrant.
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<PAGE>
LIMITED GUARANTY
THIS LIMITED GUARANTY (this "GUARANTY") is dated as of the 7th day of
March, 1997, by MERCURY MONTANA, INC., a Delaware corporation ("GUARANTOR"), in
favor of NATIONSBANK OF TEXAS, N.A. and each of the other financial institutions
listed on Schedule 1 to the Credit Agreement (as hereinafter defined) as Banks,
and each of their successors and assigns as permitted pursuant to the Credit
Agreement (NationsBank of Texas, N.A. acting as a Bank but not as Agent, each of
the other Banks listed on Schedule 1 of the Credit Agreement, and each of their
successors and assigns are collectively referred to herein as "NOTEHOLDERS").
W I T N E S S E T H:
WHEREAS, Mercury Exploration Company, a Texas corporation ("BORROWER"),
Noteholders, and NationsBank of Texas, N.A., as Agent ("AGENT") are parties to
that certain Credit Agreement (herein so called) dated as of January 31, 1997,
pursuant to which Noteholders have agreed to make a revolving credit loan and a
term loan to Borrower and issue and participate in letters of credit issued on
behalf of Borrower (unless otherwise defined herein, all terms used herein with
their initial letter capitalized shall have the meaning given such terms in the
Credit Agreement); and
WHEREAS, Noteholders have required, as a condition to the further extension
of credit under the Credit Agreement, that Guarantor execute and deliver this
Guaranty; and
WHEREAS, Guarantor has determined that valuable benefits will be derived by
it as a result of the Credit Agreement and the extension of credit made by
Noteholders thereunder; and
WHEREAS, Guarantor has further determined that the benefits accruing to it
from the Credit Agreement exceed Guarantor's anticipated liability under this
Guaranty.
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of
which are hereby acknowledged and confessed, Guarantor hereby covenants and
agrees as follows:
1. Subject to PARAGRAPHS 24 and 25 hereof, Guarantor hereby absolutely
and unconditionally guarantees the prompt, complete and full payment when due,
no matter how such shall become due, of the Obligations, and further guarantees
that Borrower will properly and timely perform the Obligations.
2. If Guarantor is or becomes liable for any indebtedness owing by
Borrower to any Noteholder by endorsement or otherwise than under this Guaranty,
such liability shall not be in any manner impaired or affected hereby, and the
rights of Noteholders hereunder shall be cumulative of any and all other rights
that Noteholders may ever have against Guarantor. The exercise by any
Noteholder of any right or remedy hereunder or under any other instrument, at
law or in equity, shall not preclude the concurrent or subsequent exercise of
any other right or remedy.
<PAGE>
3. In the event of default by Borrower in payment of the Obligations, or
any part thereof, when such Obligations become due, either by their terms or as
the result of the exercise of any power to accelerate, Guarantor shall, on
demand, and without further notice of dishonor and without any notice having
been given to Guarantor previous to such demand of the acceptance by Noteholders
of this Guaranty, and without any notice having been given to such Guarantor
previous to such demand of the creating or incurring of such Obligations, pay
the amount due thereon to Noteholders at Agent's office as set forth in the
Credit Agreement, and it shall not be necessary for any Noteholder, in order to
enforce such payment by Guarantor, first, to institute suit or exhaust its
remedies against Borrower or others liable on such Obligations, to have Borrower
joined with Guarantor in any suit brought under this Guaranty or to enforce
their rights against any security which shall ever have been given to secure
such indebtedness; provided, however, that in the event any Noteholder elects to
enforce and/or exercise any remedies they may possess with respect to any
security for the Obligations prior to demanding payment from Guarantor,
Guarantor shall nevertheless be obligated hereunder for any and all sums still
owing to Noteholders on the Obligations and not repaid or recovered incident to
the exercise of such remedies.
4. Notice to Guarantor of the acceptance of this Guaranty and of the
making, renewing or assignment of the Obligations and each item thereof, are
hereby expressly waived by Guarantor.
5. Each payment on the Obligations shall be deemed to have been made by
Borrower unless express written notice is given to Noteholders at the time of
such payment that such payment is made by Guarantor as specified in such notice.
6. If all or any part of the Obligations at any time are secured,
Guarantor agrees that Agent and/or Noteholders may at any time and from time to
time, at their discretion and with or without valuable consideration, allow
substitution or withdrawal of collateral or other security and release
collateral or other security or compromise or settle any amount due or owing
under the Credit Agreement or amend or modify in whole or in part the Credit
Agreement or any Loan Paper executed in connection with same without impairing
or diminishing the obligations of Guarantor hereunder. Guarantor further agrees
that if Borrower executes in favor of any Noteholder any collateral agreement,
mortgage or other security instrument, the exercise by any Noteholder of any
right or remedy thereby conferred on such Noteholder shall be wholly
discretionary with such Noteholder, and that the exercise or failure to exercise
any such right or remedy shall in no way impair or diminish the obligation of
Guarantor hereunder. Guarantor further agrees that Noteholders and Agent shall
not be liable for their failure to use diligence in the collection of the
Obligations or in preserving the liability of any person liable for the
Obligations, and Guarantor hereby waives presentment for payment, notice of
nonpayment, protest and notice thereof (including, notice of acceleration), and
diligence in bringing suits against any Person liable on the Obligations, or any
part thereof.
7. Guarantor agrees that Noteholders, in their discretion, may (i) bring
suit against all guarantors (including, without limitation, Guarantor hereunder)
of the Obligations jointly and
2
<PAGE>
severally or against any one or more of them, (ii) compound or settle with any
one or more of such guarantors for such consideration as Noteholders may deem
proper, and (iii) release one or more of such guarantors from liability
hereunder, and that no such action shall impair the rights of Noteholders to
collect the Obligations (or the unpaid balance thereof) from other such
guarantors of the Obligations, or any of them, not so sued, settled with or
released. Guarantor agrees, however, that nothing contained in this paragraph,
and no action by Noteholders permitted under this paragraph, shall in any way
affect or impair the rights or obligations of such guarantors among themselves.
8. Guarantor represents and warrants to each Noteholder that (i)
Guarantor is a corporation duly organized and validly existing under the laws of
the jurisdiction of its incorporation or formation; and (ii) Guarantor possesses
all requisite authority and power to authorize, execute, deliver and comply with
the terms of this Guaranty; this Guaranty has been duly authorized and approved
by all necessary action on the part of Guarantor and constitutes a valid and
binding obligation of Guarantor enforceable in accordance with its terms, except
as the enforcement thereof may be limited by applicable Debtor Relief Laws; and
no approval or consent of any court or governmental entity is required for the
authorization, execution, delivery or compliance with this Guaranty which has
not been obtained (and copies thereof delivered to Noteholders). As used in
this PARAGRAPH 8, "DEBTOR RELIEF LAWS" means the Bankruptcy Code of the United
States of America and all other applicable liquidation, conservatorship,
bankruptcy, moratorium, rearrangement, receivership, insolvency, reorganization,
suspension of payments or similar debtor relief laws from time to time in effect
affecting the rights of creditors generally.
9. Guarantor covenants and agrees that until the Obligations are paid and
performed in full, except as otherwise provided in the Credit Agreement or
unless Noteholders give their prior written consent to any deviation therefrom,
it will (i) at all times maintain its existence and authority to transact
business in any State or jurisdiction where Guarantor has assets and operations,
(ii) promptly deliver to Noteholders and to Agent such information respecting
its business affairs, assets and liabilities as Noteholders may reasonably
request, and (iii) duly and punctually observe and perform all covenants
applicable to Guarantor under the Credit Agreement and the other Loan Papers.
The failure of Guarantor to comply with the terms of this paragraph shall be an
Event of Default under the Credit Agreement.
10. This Guaranty is for the benefit of Noteholders, their successors and
assigns, and in the event of an assignment by Noteholders (or their successors
or assigns) of the Obligations, or any part thereof, the rights and benefits
hereunder, to the extent applicable to the Obligations so assigned, may be
transferred with such Obligations. This Guaranty is binding upon Guarantor and
its successors and assigns.
11. No modification, consent, amendment or waiver of any provision of this
Guaranty, nor consent to any departure by Guarantor therefrom, shall be
effective unless the same shall be in writing and signed by each Noteholder, and
then shall be effective only in the specific instance and for the purpose for
which given. No notice to or demand on Guarantor in any case shall, of itself,
entitle Guarantor to any other or further notice or demand in similar or other
3
<PAGE>
circumstances. No delay or omission by Noteholders in exercising any power or
right hereunder shall impair any such right or power or be construed as a waiver
thereof or any acquiescence therein, nor shall any single or partial exercise of
any such power preclude other or further exercise thereof, or the exercise of
any other right or power hereunder. All rights and remedies of Noteholders
hereunder are cumulative of each other and of every other right or remedy which
Noteholders may otherwise have at law or in equity or under any other contract
or document, and the exercise of one or more rights or remedies shall not
prejudice or impair the concurrent or subsequent exercise of other rights or
remedies.
12. No provision herein or in any promissory note, instrument or any other
Loan Paper executed by Borrower or Guarantor evidencing the Obligations shall
require the payment or permit the collection of interest in excess of the
Maximum Lawful Rate. If any excess of interest in such respect is provided for
herein or in any such promissory note, instrument, or any other Loan Paper, the
provisions of this paragraph shall govern, and neither Borrower nor Guarantor
shall be obligated to pay the amount of such interest to the extent that it is
in excess of the amount permitted by law. The intention of the parties being to
conform strictly to any applicable federal or state usury laws now in force, all
promissory notes, instruments and other Loan Papers executed by Borrower or
Guarantor evidencing the Obligations shall be held subject to reduction to the
amount allowed under said usury laws as now or hereafter construed by the courts
having jurisdiction.
13. If Guarantor should breach or fail to perform any provision of this
Guaranty, Guarantor agrees to pay Noteholders all costs and expenses (including
court costs and reasonable attorneys fees) incurred by Noteholders in the
enforcement hereof.
14. (a) The liability of Guarantor under this Guaranty shall in no manner
be impaired, affected or released by the insolvency, bankruptcy, making of an
assignment for the benefit of creditors, arrangement, compensation, composition
or readjustment of Borrower, or any proceedings affecting the status, existence
or assets of Borrower or other similar proceedings instituted by or against
Borrower and affecting the assets of Borrower.
(b) Guarantor acknowledges and agrees that any interest on any
portion of the Obligations which accrues after the commencement of any
proceeding referred to in clause (a) above (or, if interest on any portion of
the Obligations ceases to accrue by operation of law by reason of the
commencement of said proceeding, such interest as would have accrued on such
portion of the Obligations if said proceedings had not been commenced) shall be
included in the Obligations because it is the intention of Guarantor, Agent and
Noteholders that the Obligations which are guaranteed by Guarantor pursuant to
this Guaranty should be determined without regard to any rule of law or order
which may relieve Borrower of any portion of such Obligations. Guarantor will
permit any trustee in bankruptcy, receiver, debtor in possession, assignee for
the benefit of creditors or similar person to pay Noteholders or Agent, or allow
the claim of Noteholders or Agent in respect of, any such interest accruing
after the date on which such proceeding is commenced.
4
<PAGE>
(c) In the event that all or any portion of the Obligations are paid
by Borrower, the obligations of Guarantor hereunder shall continue and remain in
full force and effect or be reinstated, as the case may be, in the event that
all or any part of such payment(s) are rescinded or recovered directly or
indirectly from Agent or any Noteholder as a preference, fraudulent transfer or
otherwise, and any such payments which are so rescinded or recovered shall
constitute Obligations for all purposes under this Guaranty.
15. Guarantor understands and agrees that any amounts of Guarantor on
account with any Noteholder may be offset to satisfy the obligations of
Guarantor hereunder.
16. Guarantor hereby subordinates and makes inferior any and all
indebtedness now or at any time hereafter owed by Borrower to Guarantor to the
Obligations evidenced by the Credit Agreement and agrees after the occurrence of
a Default under the Credit Agreement, or any event which with notice, lapse of
time, or both, would constitute a Default under the Credit Agreement, not to
permit Borrower to repay, or to accept payment from Borrower of, such
indebtedness or any part thereof without the prior written consent of
Noteholders.
17. During the period that Banks have any commitment to lend or
participate in Letter of Credit Exposure under the Loan Papers, or any amount
payable under any Note remains unpaid or any Letter of Credit remains
outstanding, and throughout any additional preferential period subsequent
thereto, Guarantor hereby waives any and all rights of subrogation to which
Guarantor may otherwise be entitled against Borrower, or any other guarantor of
the Obligations, as a result of any payment made by Guarantor pursuant to this
Guaranty.
18. As of the date hereof, the fair saleable value of the property of
Guarantor is greater than the total amount of liabilities (including contingent
and unliquidated liabilities) of Guarantor, and Guarantor is able to pay all of
its liabilities as such liabilities mature and Guarantor does not have
unreasonably small capital within the meaning of Section 548, Title 11, United
States Code, as amended. In computing the amount of contingent or liquidated
liabilities, such liabilities have been computed at the amount which, in light
of all the facts and circumstances existing as of the date hereof, represents
the amount that can reasonably be expected to become an actual or matured
liability.
19. If any provision of this Guaranty is held to be illegal, invalid, or
unenforceable, such provision shall be fully severable; this Guaranty shall be
construed and enforced as if such illegal, invalid, or unenforceable provision
had never comprised a part hereof; and the remaining provisions hereof shall
remain in full force and effect and shall not be affected by the illegal,
invalid, or unenforceable provision or by its severance herefrom. Furthermore,
in lieu of such illegal, invalid, or unenforceable provision there shall be
added automatically as a part of this Guaranty a provision as similar in terms
to such illegal, invalid, or unenforceable provision as may be possible and be
legal, valid and enforceable.
20. (a) Except to the extent required for the exercise of the remedies
provided in the other security instruments, Guarantor hereby irrevocably submits
to the nonexclusive
5
<PAGE>
jurisdiction of any Texas state or federal court over any action or proceeding
arising out of or relating to this Guaranty or any other Loan Paper, and
Guarantor hereby irrevocably agrees that all claims in respect of such action or
proceeding may be heard and determined in such Texas state or federal court.
Guarantor hereby irrevocably waives, to the fullest extent permitted by Law, any
objection which it may now or hereafter have to the laying of venue of any
Litigation arising out of or in connection with this Guaranty or any of the Loan
Papers brought in district courts of Dallas County, Texas, or in the United
States District Court for the Northern District of Texas, Dallas Division.
Guarantor hereby irrevocably waives any claim that any Litigation brought in any
such court has been brought in an inconvenient forum. Guarantor hereby
irrevocably consents to the service of process out of any of the aforementioned
courts in any such Litigation by the mailing of copies thereof by certified
mail, return receipt requested, postage prepaid, to Guarantor's office c/o
Mercury Exploration Company, 1619 Pennsylvania Avenue, Ft. Worth, Texas 76104,
(817) 877-3829. Guarantor irrevocably agrees that any legal proceeding against
Noteholders shall be brought in the district courts of Dallas County, Texas, or
in the United States District Court for the Northern District of Texas, Dallas
Division. Nothing herein shall affect the right of Noteholder to commence legal
proceedings or otherwise proceed against Guarantor in any jurisdiction or to
serve process in any manner permitted by applicable law. As used herein, the
term "LITIGATION" means any proceeding, claim, lawsuit or investigation (i)
conducted or threatened by or before any court or governmental department,
commission, board, bureau, agency or instrumentality of the United States or of
any state, commonwealth, nation, territory, possession, county, parish, or
municipality, whether now or hereafter constituted or existing, or (ii) pending
before any public or private arbitration board or panel.
(b) Nothing in this PARAGRAPH 20 shall affect any right of any
Noteholder to serve legal process in any other manner permitted by law or affect
the right of any Noteholder to bring any action or proceeding against Guarantor
in the courts of any other jurisdictions.
(c) To the extent that Guarantor has or hereafter may acquire any
immunity from jurisdiction of any court or from any legal process (whether
through service or notice, attachment prior to judgment, attachment in aid of
execution, execution or otherwise) with respect to itself or its property,
Guarantor hereby irrevocably waives such immunity in respect of its obligations
under this Guaranty and the other Loan Papers.
21. THIS GUARANTY AND THE OTHER LOAN PAPERS COLLECTIVELY REPRESENT THE
FINAL AGREEMENT BY AND AMONG NOTEHOLDERS, AGENT AND GUARANTOR AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS OF NOTEHOLDERS, AGENT AND GUARANTOR. THERE ARE NO UNWRITTEN ORAL
AGREEMENTS AMONG NOTEHOLDERS, AGENT AND GUARANTOR.
22. GUARANTOR, FOR ITSELF, ITS SUCCESSORS AND ASSIGNS, HEREBY IRREVOCABLY
WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ITS RIGHT TO A JURY TRIAL, IN
ANY LITIGATION ARISING OUT OF OR IN CONNECTION WITH THIS GUARANTY OR ANY OF THE
OTHER LOAN PAPERS.
6
<PAGE>
23. THIS GUARANTY AND THE OTHER LOAN PAPERS SHALL BE CONSTRUED IN
ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS.
24. Notwithstanding anything to the contrary contained herein, Guarantor's
liability under this Guaranty for the payment of any of the Obligations shall be
limited to $4,000,000.
25. Notwithstanding anything to the contrary contained herein, upon the
Mercury Montana Release Date (as defined in the Credit Agreement), Guarantor's
liability under this Guaranty shall automatically be released without the
necessity of any further act on the part of Borrower, Guarantor, Agent and/or
Noteholders.
EXECUTED and effective as of the date first above written.
GUARANTOR:
MERCURY MONTANA, INC.
By: /s/ Glenn Darden
-----------------------------------------
Glenn Darden,
Vice President
7
<PAGE>
MERCURY MONTANA, INC.
1997 STOCK OPTION PLAN
1. PURPOSE. The purpose of this Plan is to advance the interest of
Mercury Montana, Inc. (the COMPANY) by providing an additional incentive to
attract and retain qualified and competent employees and Directors, upon whose
efforts and judgment the success of the Company and its Subsidiaries is largely
dependent, through the encouragement of stock ownership in the Company by
employees and Directors.
2. DEFINITIONS. As used herein, the following terms have the meaning
indicated:
(a) BOARD means the Board of Directors of the Company.
(b) COMMITTEE means the Stock Option Committee appointed by the Board
under Section 15 hereof.
(c) DIRECTOR means a member of the Board.
(d) FAIR MARKET VALUE of a Share on any date of reference shall be
the Closing Price on the business day immediately preceding the date, unless the
Committee in its sole discretion determines otherwise in a fair and uniform
manner. Any restriction on a Share shall be disregarded unless by its terms it
does not lapse. For this purpose, the Closing Price of the Shares on any
business day shall be (i) if the Shares are listed or admitted for trading on
any United States national securities exchange, the last reported sale price of
Shares on the exchange as reported in any newspaper of general circulation, (ii)
if Shares are not traded on any United States national securities exchange but
are quoted on the National Association of Securities Dealers, Inc. Automated
Quotation System, or any similar system of automated dissemination of quotations
of securities prices in common use, the mean between the closing high bid and
low asked quotations for that day of Shares on the system, (iii) if neither
clause (i) or (ii) is applicable, the mean between the high bid and low asked
quotations for Shares as reported by the National Quotation Bureau, Incorporated
if at least two securities dealers have inserted both bid and asked quotations
for Shares on at least five of the ten preceding days, or (iv) in lieu of the
above, if actual transactions in the Shares are reported on a consolidated
transaction reporting system, the last sale price of the Shares on the system.
===============================================================================
MERCURY MONTANA, INC. - 1997 STOCK OPTION PLAN PAGE 1
<PAGE>
(e) DISINTERESTED PERSON means one who, at the time he acts on the
granting of any Option or any Limited SAR is not eligible, and within one year
prior thereto has not been eligible, to receive Shares, options for Shares or
any rights with respect to Shares under this Plan or any other plan of the
Company or any of its affiliates.
(f) INCENTIVE STOCK OPTION means an incentive stock option as defined
in Section 422 of the Internal Revenue Code.
(g) INTERNAL REVENUE CODE means the Internal Revenue Code of 1986, as
amended from time to time.
(h) INTENTIONALLY OMITTED.
(i) NON-INCENTIVE STOCK OPTION means an Option which is not an
Incentive Stock Option.
(j) OPTION (when capitalized) means any option granted under this
Plan.
(k) OPTIONEE means a person to whom a stock option is granted under
this Plan or any person who succeeds to the rights of that person under this
Plan by reason of the death of the person.
(l) PLAN means this 1997 Stock Option Plan for Mercury Montana, Inc.
(m) SHARE(S) mean(s) a share or shares of the common stock, One Cent
($.01) par value per share, of the Company.
(n) SUBSIDIARY means any corporation (other than the Company) in any
unbroken chain of corporations beginning with the Company if, at the time of the
granting of the Option, each of the corporations other than the last corporation
in the unbroken chain owns stock possessing 50% or more of the total combined
voting power of all classes of stock in one of the other corporations in the
chain.
3. SHARES OF STOCK SUBJECT TO OPTIONS. (a) The Company may grant to
Optionees from time to time Options to purchase an aggregate of up to Two
Hundred Fifty Thousand (250,000) Shares from Shares held in the Company's
treasury or from authorized and unissued Shares. If any Option granted under
the Plan is terminated, expires, or is canceled as to any Shares, new Options
may thereafter be granted covering those Shares.
(b) The maximum aggregate fair market value (determined at the date
of grant) of the Shares with respect to which an Optionee may be granted one or
more Incentive Stock
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MERCURY MONTANA, INC. - 1997 STOCK OPTION PLAN PAGE 2
<PAGE>
Options (under this Plan and all such plans of the Company and any parent and
subsidiary of the Company [as defined in section 424 of the Internal Revenue
Code] at the date of grant) which are exercisable for the first time during any
calendar year shall not exceed $100,000.
For this purpose, Incentive Stock Options shall be taken into account
in the sequence that they were granted.
4. OPTIONS AND EMPLOYMENT PROVISIONS. (a) Optionees shall be those
persons selected by the Committee from among the class of regular employees and
Directors of the Company and of any Subsidiary; provided, however, that no
Incentive Stock Option may be granted to a Director who is not also an employee
of the Company or a Subsidiary. Any person who files with the Committee, in a
form satisfactory to the Committee, a written waiver of eligibility to receive
any Option under this Plan shall not be eligible to receive any Option under
this Plan for the duration of the waiver.
(b) Notwithstanding any other provision of the Plan, and in addition
to any other requirements of the Plan, Options may not be granted to a Director
unless (1) the grant of the Options is authorized by, and all of the terms of
the Options are determined by, a Committee that is appointed in accordance with
Section 15 of this Plan and all of whose members are Disinterested Persons, or
(2) approved by a majority of the Shareholders of the Corporation, or (3) the
Options are granted in conformity with all of the following requirements:
(i) The maximum number of Shares for which any one Director may
be granted an Option in any calendar year must not exceed five percent (5%)
of the total number of Shares for which Options may be granted under the
Plan.
(ii) Options may be granted only on the date on which the Plan is
adopted or, thereafter, only during the first three business days of any
month.
(iii) Any Option may be exercised only after the expiration
of 12 calendar months from the date the Option is granted.
(iv) Regardless whether the Option is an Incentive Stock Option
or a Non-incentive Stock Option, the exercise price per Share of the Option
must not be less than the Fair Market Value per Share on the date the
Option is granted.
(v) Any Option granted under this Plan is considered a Non-
incentive Stock Option unless the Option is designated and specifically
identified as an "Incentive Stock Option" upon issuance.
(c) In granting Options, the Committee shall take into consideration
the contribution the employee has made or may make to the success of the Company
or its
===============================================================================
MERCURY MONTANA, INC. - 1997 STOCK OPTION PLAN PAGE 3
<PAGE>
Subsidiaries and such other factors as the Committee may determine. The
Committee shall also have the authority to consult with and receive
recommendations from officers and other personnel of the Company and its
Subsidiaries with regard to these matters. The Committee may from time to time
in granting Options under the Plan prescribe such other terms and conditions
concerning the Options as it deems appropriate, including, without limitation,
relating an Option to achievement of specific goals established by the Committee
or to the continued employment of the optionee for a specified period of time,
provided that the terms and conditions are not more favorable to an Optionee
than those expressly permitted herein.
(d) The Options granted to employees under this Plan shall be in
addition to regular salaries, pension, life insurance or other benefits related
to their employment with the Company or its Subsidiaries. Neither the Plan nor
any Option granted under the Plan shall confer upon any person any right to
continuance of employment by the Company or its Subsidiaries.
(e) The Committee in its sole discretion shall determine in each case
whether periods of military or government service shall constitute a
continuation of employment for the purposes of this Plan or any Option.
5. OPTION PRICE. Subject to Section 12 below, the option price per Share
of any Option shall be any price determined by the Committee; provided, however,
that the option price per Share of an Incentive Stock Option must not be less
than the Fair Market Value per Share on the date the Option is granted.
6. EXERCISE OF OPTIONS. An Option shall be deemed exercised when the
Company has received written notice of the exercise in accordance with the terms
of the Option, and full payment of the aggregate option price of the Shares as
to which the Option is exercised has been made. Unless further limited by the
Board in any Option, the option price of any Shares purchased shall be paid
solely in cash, by certified or cashier's check, by money order, with Shares or
by a combination of the above; provided, however, that the Committee in its sole
discretion may accept a personal check in full or partial payment of any Shares.
If paid in whole or in part with Shares, the value of the Shares surrendered
shall be their Fair Market Value. Nothing herein shall prohibit the Company, in
its sole discretion, from lending to an Optionee, guaranteeing a loan to an
Optionee, or otherwise assisting an Optionee to obtain the cash necessary to
exercise all or a portion of an Option granted hereunder.
7. EXERCISABILITY OF OPTIONS. Any Option shall become exercisable in
such amounts and at such intervals at the Committee shall provide in the Option,
except as otherwise provided in this section 7.
===============================================================================
MERCURY MONTANA, INC. - 1997 STOCK OPTION PLAN PAGE 4
<PAGE>
(a) The expiration date of an Option shall be determined by the
Committee at the time of grant, but in no event may an Option be exercisable
after the expiration of ten (10) years from the date of grant of the Option.
(b) Unless otherwise provided in any Option, each outstanding Option
shall become immediately fully exercisable:
(i) if the shareholders of the Company approve a plan of merger,
consolidation, reorganization, liquidation or dissolution in which the
Company does not survive (unless the approved merger, consolidation,
reorganization, liquidation or dissolution is subsequently abandoned); or
(ii) if the shareholders of the Company approve a plan for the
sale, lease, exchange or other disposition of all or substantially all the
property and assets of the Company (unless the plan is subsequently
abandoned).
(c) The Committee may in its sole discretion accelerate the date on
which any Option may be exercised, subject to Section 12 below.
8. TERMINATION OF OPTION PERIOD. (a) The unexercised portion of any
Option shall automatically and without notice terminate and become void at the
time of the earliest to occur of the following:
(i) the date on which the Optionee's employment is terminated
for cause;
(ii) three months after the date on which the Optionee's
employment is terminated for any reason other than for cause (in which case
(i) applies).
(b) After the occurrence of any event described in Section 7(b)(i) or
(ii), the Committee in its sole discretion, may, after giving appropriate
written notice to any Optionee holding one or more outstanding unexercised
Options, cancel any Option that has not been exercised within thirty (30) days
(or such other period as the Committee may determine) after the date of the
notice.
9. ADJUSTMENT OF SHARES. (a) If at any time while the Plan is in effect
or unexercised Options are outstanding, there shall be any increase or decrease
in the number of issued and outstanding Shares through the declaration of a
stock dividend or through any recapitalization resulting in a stock split-up,
combination or exchange of Shares, then:
===============================================================================
MERCURY MONTANA, INC. - 1997 STOCK OPTION PLAN PAGE 5
<PAGE>
(i) appropriate adjustment shall be made in the maximum number of
Shares then subject to being optioned under the Plan, so that the same
proportion of the Company's issued and outstanding Shares shall continue to
be subject to being optioned; and
(ii) appropriate adjustment shall be made in the number of Shares and
the exercise price per Share then subject to any outstanding Option, so
that the same proportion of the Company's issued and outstanding Shares
shall remain subject to purchase at the same aggregate exercise price.
The Committee may change the terms of Options outstanding under this Plan, with
respect to the option price or the number of Shares subject to the Options, or
both, when, in the Committee's sole discretion, the adjustments become
appropriate by reason of a corporate transaction (as defined in Treasury
Regulation Section 1.425-1(a)(l)(ii). Except as otherwise expressly provided
herein, the issuance by the Company of shares of its capital stock of any class,
or securities convertible into shares of capital stock of any class, either in
connection with direct sale or upon the exercise of rights or warrants to
subscribe therefor, or upon conversion of shares or obligations of the Company
convertible into the shares or other securities, shall not affect, and no
adjustment by reason thereof shall be made with respect to the number of or
exercise price of Shares then subject to outstanding Options granted under the
Plan.
(b) Without limiting the generality of the foregoing, the existence
of outstanding Options granted under the Plan shall not affect in any manner the
right or power of the Company to make, authorize or consummate (1) any or all
adjustments, recapitalizations, reorganizations or other changes in the
Company's capital structure or its business; (2) any merger or consolidation of
the Company; (3) any issue by the Company of debt securities, or preferred or
preference stock which would rank above the Shares subject to outstanding
Options; (4) the dissolution or liquidation of the Company; (5) any sale,
transfer or assignment of all or any part of the assets or business of the
Company; or (6) any other corporate act or proceeding, whether of a similar
character or otherwise.
10. NONTRANSFERABILITY OF OPTIONS. Each Option shall provide that the
Option is not transferable by the Optionee otherwise than by will or the laws of
descent and distribution, and each Option shall be exercisable during the
Optionee's lifetime only by the Optionee.
11. ISSUANCE OF SHARES. (a) No person shall be, or have any of the rights
or privileges of a shareholder of the Company with respect to any of the Shares
issuable upon the exercise of any Option, unless and until certificates
representing the Shares have been issued and delivered.
(b) Notwithstanding anything contained herein to the contrary, the
Company shall not be required to sell or issue Shares under any Option if the
sale or issuance of the
===============================================================================
MERCURY MONTANA, INC. - 1997 STOCK OPTION PLAN PAGE 6
<PAGE>
Shares without registration of the Shares would constitute (as determined by
the Committee in its sole discretion) a violation by the optionee or the
Company of any provisions of any law or regulation of any governmental
authority or any national securities exchange or other forum in which Shares
are traded; and, as a condition of any sale or issuance of Shares under any
Option, the Committee may obtain such agreements or undertakings, if any, as
the Committee may deem necessary or advisable to assure compliance with any
such law or regulation.
(c) Shares issued upon the exercise of any Option without
registration of those Shares under the Securities Act of 1933 (the ACT) shall be
restricted securities subject to the terms of Rule 144 under the Act. The
certificates representing these Shares shall bear an appropriate legend
restricting transfer and the transfer agent of the Company must be given stop
transfer instructions with respect to the Shares.
12. OPTIONS FOR 10% SHAREHOLDERS. Notwithstanding any other provisions of
the Plan to the contrary, an Incentive Stock Option must not be granted to any
person owning directly (or indirectly through attribution under section 424(d)
of the Code) at the date of grant, stock possessing more than 10% of the total
combined voting power of all classes of stock of the Company (or of its parent
or subsidiary [as defined in section 424 of the Internal Revenue Code] at the
date of grant) unless the option price of the Option is at least 110% of the
Fair Market Value of the Shares subject to the Option on the date the Option is
granted, and the period during which the Option may be exercised does not exceed
five (5) years from the date of grant.
13. NON-INCENTIVE STOCK OPTIONS. Non-incentive Stock Options shall be
subject to all terms and provisions hereof except that each Non-incentive Stock
Option (i) must be clearly designated as a Non-incentive Stock Option; (ii) may
be granted for Shares in excess of the limits contained in Subsection 3(b) of
this Plan; (iii) shall not be subject to Section 12 of this Plan; (iv) may be
exercisable even though an Option is outstanding and the Fair Market Value
(determined at the date of the grant of the Shares with respect to Incentive
Stock Option(s) granted to an Optionee that can first be exercised by the
Optionee in any calendar year is greater than $100,000; and (v) may require the
Optionee to pay to the Company the amount which the Committee reasonably
determines is necessary for the Company or Subsidiary employing the Optionee to
withhold in accordance with applicable income tax withholding requirements. If
both Incentive Stock Options and Non-incentive Stock Options are granted to an
Optionee, the right to exercise, to the full extent thereof, Options of either
type shall not be contingent in whole or in part upon the exercise of, or
failure to exercise, Options of the other type.
14. INTENTIONALLY OMITTED.
15. ADMINISTRATION OF THE PLAN. (a) The Plan shall be administered by a
committee (herein called the COMMITTEE) consisting of not less than three (3)
members of the Board; provided, however, that if no Committee is appointed, the
Board shall administer the Plan. Except for the powers set forth in Section 17,
the Committee shall have all of the powers of the
===============================================================================
MERCURY MONTANA, INC. - 1997 STOCK OPTION PLAN PAGE 7
<PAGE>
Board with respect to the Plan. Any member of the Committee may be removed at
any time, with or without cause, by resolution of the Board and any vacancy
occurring in the membership of the Committee may be filled by Board
appointment.
(b) The Committee, from time to time, may adopt rules and regulations
for carrying out the purposes of the Plan. The determinations and the
interpretation and construction of any provision of the Plan by the Committee
shall be final and conclusive.
(c) Any decisions or determinations of the Committee may be made
either (i) by a majority vote of the members of the Committee at a meeting or
(ii) without a meeting by the written approval of a majority of the members of
the Committee.
(d) The Committee shall have the authority to grant in its discretion
to the holder of an outstanding Option in exchange for the surrender and
cancellation of the Option either a new Incentive Stock Option or a new Non-
incentive Stock Option providing for the purchase of more or fewer Shares and
having a purchase price per Share higher or lower than provided in the
surrendered Option and containing such other terms and conditions as the
Committee may prescribe in accordance with the provisions of the Plan.
16. INTERPRETATION. (a) The Plan must be administered and interpreted so
that all Incentive Stock Options granted under the Plan will qualify as
Incentive Stock Options under section 422 of the Internal Revenue Code. If any
provision of the Plan is held invalid for the granting of Incentive Stock
Options or illegal for any reason, that determination shall not affect the
remaining provisions hereof, but instead the Plan shall be construed and
enforced as if that provision had never been included in the Plan.
(b) This Plan shall be governed by the laws of the State of Delaware.
(c) Headings contained in this Agreement are for convenience only and
shall in no manner be construed as part of this Plan.
(d) Any reference to the masculine, feminine, or neuter gender shall
be a reference to such other gender as is appropriate.
17. AMENDMENT AND DISCONTINUATION OF THE PLAN. The Committee, subject to
the approval of the Board of Directors, may from time to time amend the Plan or
any Option; provided, however, that [except to the extent provided in Section 9]
no amendment may (a) without approval by the shareholders of the Company
increase the number of Shares reserved for Options or change the class of
employees eligible to receive Options, (b) permit the granting of any Incentive
Stock Option at an option price less than that determined in accordance with
Sections 5 and 12, (c) permit the granting of Options that expire beyond the
maximum 10-year period described in Section 7(a), or (d) extend the termination
date of the Plan as set forth in
===============================================================================
MERCURY MONTANA, INC. - 1997 STOCK OPTION PLAN PAGE 8
<PAGE>
Section 18; and provided, further, that [except to the extent provided in
Section 8] no amendment or suspension of the Plan or any Option issued hereunder
shall modify [within the meaning of Section 424(h) of the Code] any Incentive
Stock Option, or substantially impair any Option, previously granted to any
Optionee without the consent of the Optionee.
18. EFFECTIVE DATE AND TERMINATION DATE. The effective date of the Plan
is March 7, 1997, and the Plan shall terminate on the 10th anniversary of the
effective date.
===============================================================================
MERCURY MONTANA, INC. - 1997 STOCK OPTION PLAN PAGE 9
<PAGE>
EMPLOYMENT AGREEMENT
PARTIES:
MSR EXPLORATION LTD. an Alberta Corporation
and U. S. Subsidiaries ("Company")
Mountain States Resources, Inc.
Monte Grande Exploration, Inc.
Gypsy Highview Gathering System, Inc.
MSR Exploration, Inc.
MSR Drilling, Inc. ("Subsidiary Companies")
and
Patrick M. Montalban
of Cut Bank, Montana 59427 ("Montalban")
RECITALS:
A. The Company wishes to employ Montalban as Vice President and Chief
Operating Officer in charge of Exploration and Production, as well as,
President and Chief Executive Officer of the subsidiary companies, and
Montalban is willing to be so employed, on the terms and conditions of this
Agreement.
AGREEMENTS:
1. EMPLOYMENT OF MONTALBAN: The Company hereby employs Montalban as Vice
President and Chief Operating Officer in charge of Exploration and
Production ("Vice President"), as well as, President and Chief Executive
Officer of the subsidiary companies and Montalban hereby accepts such
employment for the terms and on the conditions hereinafter set forth.
2. TERM OF EMPLOYMENT: The term of Montalban's employment as Vice President
and Chief Operating Officer of MSR Exploration Ltd. and President and Chief
Executive Officer of MSR EXPLORATION LTD and President and Chief Executive
Officer of all subsidiary companies (MSR, INC., MGE, INC., MSR EXPL, INC.,
GHGS, INC., MSR Drilling, INC.) under this Agreement shall commence on the
date hereof and shall continue through and terminate on December 31, 1998,
at which time this Employment Agreement shall be subject to renegotiation
and renewal.
3. DUTIES: Montalban's duties, responsibilities and authority with the
Companies shall include management and supervision of all field operations
along with all other duties, responsibilities and authority ordinarily
reserved to the Vice President and Chief Operating Officer in charge of
Exploration and Production of MSR Exploration Ltd. and President and Chief
Executive Officer of all subsidiary companies. Included in these
<PAGE>
duties, specifically, Montalban shall bear the sole responsibility of
choosing an engineering firm to prepare yearly reserve evaluations on the
Montana, North Dakota and Texas properties for the Securities and Exchange
Commission and year end audit numbers. As Vice President and President,
Montalban shall devote his full-time efforts to the duties hereunder. He
shall report to and be under the supervision of the President, Chief
Executive Officer of the Company.
4. COMPENSATION AND STOCK OPTION:
(a) The Company shall pay cash compensation to Montalban in the amount of
Six Thousand Four Hundred ($6,400.00) per month, provided that
beginning on each January 1, following the date of this Agreement,
Montalban's monthly compensation shall be increased by a minimum of 5%
of the monthly compensation paid during the previous year. The
Companies shall pay such compensation on the regular monthly pay days.
The Board of Director's need to compensate Montalban for wages lost due the
Chapter 11 Reorganization and Management's decision to cut wages 10 percent
across the board.
(b) The Companies will also make available to Montalban all employee
fringe benefits which are provided for salaried employees (including
but not limited to major medical group Insurance, pension fund, stock
options, bonuses, etc.).
(c) Montalban shall be entitled to a total of two (2) weeks paid vacation
during the first twelve (12) month period. Thereafter, Montalban shall
be entitled to three (3) weeks vacation for each twelve (12) month
period. The time and duration of vacation taken from time-to-time
shall be pro rated. Any unused vacation may be accrued and used within
the next twelve (12) month period or may be paid as wages.
(d) Within 180 days of the date of this Agreement, the Company shall grant
to Montalban an Incentive Stock Option for the purchase of a minimum
of 25,000 shares of the Company common stock, exercisable at a price
allowed by the rules and regulations of the regulatory bodies and
approved by the shareholders of the Company.
5. TERMINATION OF EMPLOYMENT:
(a) Montalban's employment as Vice President and President under this
Agreement shall terminate upon the occurrence of any of the following
events:
(i) Expiration of the term of this Agreement as set forth in Section
2 above.
(ii) The physical or mental disability of Montalban to such an extent
that he is incapable of performing his normal duties and
responsibilities as Vice President and Chief Operating Officer of
MSR Exploration Ltd. and President and Chief Executive Officer of
the Subsidiary companies for a
<PAGE>
period of six consecutive months. Such disability shall be deemed
to exist from and after the date of certification by a qualified
physician that Montalban is so disabled or
(iii)The death of Montalban
(iv) Gross negligence or gross misconduct by Montalban in the
performance of his duties.
(b) In the event of termination of Montalban's employment, as Vice
President and Chief Operating Officer in charge of Exploration and
Production for MSR Exploration Ltd. and President and Chief Executive
Officer for all subsidiary companies, as a result of Montalban's death
or disability as covered in paragraphs 5(a) (ii) and 5 (a) (iii) of
this Employment Agreement, the Companies shall pay to Montalban's
Estate or Montalban the compensation provided for under Section 4
prorated through the date of death or disability, plus six months
compensation and benefits as consideration for the years of service to
the Companies.
(c) If Montalban is terminated for reason other than provided herein, the
balance of this Employment Agreement amount becomes immediately due
and payable.
6. MISCELLANEOUS BUSINESS EXPENSES: In addition to the compensation provided
above and in order to enable Montalban to better perform services for MSR
Exploration Ltd. as Vice President and Chief Operating Officer and
President and Chief Executive Officer of the subsidiary companies, the
companies shall pay, or reimburse Montalban for miscellaneous business,
travel and entertainment expenses.
7. MODIFICATIONS: This Agreement supersedes all prior agreements and
understanding between the parties relating to the employment of Montalban
by the Companies, and it may not be changed or terminated orally. No
modification, termination or attempted waiver of any of the provisions of
this Agreement shall be valid unless in writing signed by the party against
whom the same is sought to be enforced.
8. ENFORCEABILITY AND SEVERABILITY: If any term of this Agreement is deemed
unenforceable, void, voidable or illegal, such unenforceable, void,
voidable or illegal term shall be deemed severable from all other terms of
this Agreement, which shall otherwise continue in full force and effect,
and the Companies and Montalban expressly acknowledge that a court of
competent jurisdiction may, at the Companies' or at Montalban's request,
modify and thereafter enforce any otherwise unenforceable term, condition
or covenant contained in this Agreement.
9. BINDING AGREEMENT: The terms of this Agreement shall bind and inure to the
benefit of the parties and their respective successors and assigns, heirs
and legal representatives.
10. GOVERNING LAW: This Agreement shall be construed and enforced in
accordance with the statutes and common law of the State of Montana.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on and caused
it to be dated as of January 1, 1994.
MSR EXPLORATION LTD.
By: /s/ J. V. Montalban
--------------------
Its: President and Ceo
--------------------
/s/ Patrick M. Montalban
- ------------------------
Patrick M. Montalban
- ------------------------
<PAGE>
SUMMARY OF GROSS WAGES FOR PATRICK M. MONTALBAN
ACTUALLY DUE UNDER 5% INCREASE
PAID CONTRACT AFTER RAISE IN 1991
----------- ----------- -------------------
1990 $ 72,800.00 $ 72,800.00 $ --
1991 66,500.00 76,440.00 66,500.00
1992 64,670.48 80,262.00 69,825.00
1993 63,000.00 84,275.10 73,316.25
Difference in Actual Pay after raise in 1990 and Due Under Contract:
1991 9,940.00
1992 15,591.52
1993 21,275.10
---------
$ 46,806.62
Difference in Actual Paid and 5% Increase After Raise in 1991:
1991 $ --
1992 5,154.52
1993 10,316.25
----------
$ 15,470.77
<PAGE>
To the Board of Directors or
MSR Exploration Ltd.
We have made a review, in accordance with standards established by the American
Institute of Certified Public Accountants, of the unaudited interim financial
information of MSR Exploration Ltd. and subsidiaries for the periods ended March
31, 1997 and 1996, as indicated in our report dated May 5, 1997; because we did
not perform an audit, we expressed no opinion on that information.
We are aware that our report referred to above is being used in this
Registration Statement.
We also are aware that the aforementioned report, pursuant to Rule 436(c) under
the Securities Act of 1933, is not considered a part of the Registration
Statement prepared or certified by an accountant or a report prepared or
certified by an accountant within the meaning of Sections 7 and 11 of that Act.
DELOITTE & TOUCHE LLP
Forth Worth, Texas
June 20, 1997
<PAGE>
SUBSIDIARIES OF MSR EXPLORATION LTD.
Subsidiary Jurisdiction
- ---------- ------------
Mountain States Resources, Inc. Colorado
MSR Exploration, Inc. Texas
Gypsy Highview Gathering System, Inc. Montana
Monte Grande Exploration, Inc. Montana
MSR Drilling, Inc. Montana
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of MSR Exploration Ltd. on
Form S-4 of our report dated March 26, 1997, appearing in the Prospectus, which
is part of this Registration Statement.
We also consent to the use in this Registration Statement of Mercury Montana,
Inc. on Form S-4 of our report dated April 18, 1997, appearing in the
Prospectus,. which is part of this Registration Statement.
We also consent to the reference to us under the headings "Selected Financial
Data" and "Exports" in such Prospectus.
DELOITTE & TOUCHE LLP
Forth Worth, Texas
June 20, 1997
<PAGE>
April 9, 1997 File No. 5323
Securities and Exchange Commission
RE: LETTER OF CONSENT
Gentlemen:
SUBJECT: MERCURY EXPLORATION COMPANY - MONTANA, U.S.A. PROPERTY APPRAISAL
Whereas Citadel Engineering Ltd. prepared a reservoir-economic appraisal of
Montana, U.S.A. properties owned by Mercury Exploration Company for MSR
Exploration Ltd. entitled "Appraisal Report - Petroleum and Natural Gas Reserves
Montana, U.S.A." dated March 25, 1997 (effective date January 1, 1997);
And Whereas Citadel Engineering Ltd., Citadel's employees and the authors of the
"Appraisal Report" are independent appraisal engineers and do not own an
interest directly or indirectly in any of the properties or securities owned or
issued by MSR Exploration Ltd., their personnel, associates and/or affiliates
thereof; By This Document Citadel Engineering Ltd. Hereby:
A. Consents to being named as an expert in documents being issued by MSR
Exploration Ltd.;
B. Consents to the use of its Report, or excerpts therefrom, dated March 25,
1997 in documents being issued by MSR Exploration Ltd.;
C. States that it has no reason to believe there are any misrepresentations in
the information contained in documents issued by MSR Exploration Ltd. that
is derived from the Report dated March 25, 1997, or that is within the
knowledge of Citadel Engineering as a result of its employment.
Yours very truly,
CITADEL ENGINEERING LTD.
Per: E.P. WEBB, P. Eng.
President
<PAGE>
PROXY AND POWER OF ATTORNEY SOLICITED
BY THE BOARD OF DIRECTORS OF
OF MSR EXPLORATION LTD.
To Be Continued as
MSR EXPLORATION LTD., a Delaware corporation
FOR A WRITTEN CONSENT
TO BE EXECUTED ON OR ABOUT ____________, 1997
The undersigned holder of shares of common stock of MSR Exploration Ltd.,
hereby appoint Otto J. Buis and/or C. Al Buis or *____________________________
_______________ as my proxy and attorney-in-fact to execute a written consent
for me and on my behalf after the Continuance (as defined in the accompanying
Proxy Statement/Prospectus) becomes effective, on____________, 1997 or on such
later date, not later than December 31, 1997, that the said proxy and attorney
- -in-fact determines to execute such consent. The said proxy and attorney-in-
fact is directed to express consent on behalf of the undersigned as follows:
FOR [_] or AGAINST [_] the merger of MSR Exploration Ltd. with and into
Mercury Montana, Inc., a Delaware corporation, as described in the
accompanying Proxy Statement/Prospectus.
THIS PROXY WILL BE EXERCISED IN THE MANNER DIRECTED BY THE UNDERSIGNED
STOCKHOLDER. IF NO DIRECTION IS MADE, THE PROXY WILL BE EXERCISED TO CONSENT FOR
THE MERGER.
DATED______________________________, 1997.
__________________________________________
(Signature of Shareholder(s) of Record)
__________________________________________
(Printed Name(s))
*NOTE: IF THE SHAREHOLDER DESIRES TO APPOINT
A PROXY OTHER THAN OTTO J. BUIS AND/OR C. AL
BUIS, HE SHOULD CROSS OUT THEIR NAMES AND
PRINT THE NAME OF HIS PROXY IN THE SPACE
PROVIDED FOR THAT PURPOSE. A PERSON SO
DESIGNATED NEED NOT BE A SHAREHOLDER.
The abovesigned hereby revokes any proxy heretofore given and ratifies all
things said proxy may do by virtue hereof.
Please sign exactly as your shares are registered and return in the
enclosed envelope. Indicate your full title if signing as attorney, executor,
administrator, trustee or guardian. When shares are held by joint tenants, both
should sign. If the shareholder is a partnership, sign partnership name by
authorized person. If the shareholder is a corporation, this proxy must be
executed by an authorized officer who must sign the full corporate name.
To be valid, this form of proxy and the power of attorney, if any, under
which it is signed must arrive duly signed at the office of the registrar and
transfer agent of the corporation, Chase Mellon Shareholder Services L.L.C.,
__________________________, Dallas, Texas 75____, not later than 10:00 a.m.
(Central
<PAGE>
Time) on ____________, 1997, or, in the case of any adjournment of the Special
Meeting, on the second business day immediately preceding the date of such
adjournment.
If this proxy is not dated in the designated space, it is deemed to bear
the date on which it is mailed by the Corporation to the shareholder.
PLEASE NOTE THAT A PROXY AND POWER OF ATTORNEY TO "ABSTAIN FROM" THE CONSENT ON
THE MERGER OR THE FAILURE TO GRANT A PROXY AND POWER OF ATTORNEY HAS THE SAME
EFFECT AS A VOTE "AGAINST" THE MERGER.
