<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 10, 1996 FILE NO.:
333-03195
_____
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
AMENDMENT NO. 1 TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------
SHEFFIELD EXPLORATION COMPANY, INC.
--------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------------------------------------
<TABLE>
<S> <C> <C>
Delaware 1311 06-1052062
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NO.) IDENTIFICATION NO.)
</TABLE>
1801 Broadway, Suite 600
Denver, Colorado 80202
(303) 296-1908
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
--------------------
David Milanesi, Treasurer
Sheffield Exploration Company, Inc.
1801 Broadway, Suite 600
Denver, Colorado 80202
(303) 296-1908
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
--------------------
Copies of all communications, including all communications sent to the agent for
service, should be sent to:
Lester Woodward, Esq. Nick Nimmo, Esq.
Davis Graham & Stubbs LLP Holme Roberts & Owen LLC
370 Seventeenth Street, Suite 4700 1700 Lincoln, Suite 4100
Denver, CO 80202 Denver, CO 80203
Tel. (303) 892-7392 Tel. (303) 861-7000
Fax (303) 893-1379 Fax (303) 866-0200
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
--------------------
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box: [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
<PAGE>
SHEFFIELD EXPLORATION COMPANY, INC.
CROSS REFERENCE SHEET
BETWEEN ITEMS IN PART I OF THE REGISTRATION STATEMENT
(FORM S-4) AND PROSPECTUS PURSUANT TO ITEM 501(B)
ITEM OF FORM S-4 LOCATION IN PROSPECTUS
A. INFORMATION ABOUT THE TRANSACTION
1. Forepart of Registration Statement and Outside Front Cover Page of Prospectus
Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of Prospectus
Inside Front Cover Page of Prospectus;
Available Information; Table of Contents
3. Risk Factors, Ratio of Earnings to Fixed Charges and Other Information
Summary; Summary-Risk Factors
and Cautionary Statements
4. Terms of the Transaction
Outside Front Cover Page of Prospectus;
Summary; Approval of the Merger; The
Merger; Certain Terms of the Merger
Agreement; Description of Sheffield
Capital Stock; Comparative Rights of
TransMontaigne and Sheffield
Stockholders
5. Pro Forma Financial Information.
Pro Forma Combined Financial Statements
6. Material Contacts with the Company Being Acquired
The Merger; Certain Terms of the Merger
Agreement
7. Additional Information Required for Reoffering by Persons and Parties Deemed
to be Underwriters
*
8. Interests of Named Experts and Counsel
*
9. Disclosure of Commission Position on Indemnification For Securities Act
Liabilities
*
B. INFORMATION ABOUT THE REGISTRANT
10. Information with Respect to S-3 Registrants
*
11. Incorporation of Certain Information by Reference
*
12. Information with Respect to S-2 or S-3 Registrants
*
13. Incorporation of Certain Information by Reference
*
14. Information with Respect to Registrants other than S-3 or S-2 Registrants
Sheffield; Description of Sheffield
Capital Stock; Outside Front Cover
Page of Prospectus; Summary; Approval
of the Merger; The Merger; Certain Terms
of the Merger Agreement
C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED
15. Information with Respect to S-3 Companies
*
16. Information with Respect to S-2 or S-3 Companies
*
<PAGE>
17. Information with Respect to Companies other than S-3 or S-2 Companies
Outside Front Cover Page of Prospectus;
Summary; TransMontaigne; Post-Merger Profile;
Approval of the Merger; The Merger; Certain
Terms of the Merger Agreement
D. VOTING AND MANAGEMENT INFORMATION
18. Information if Proxies, Consents or Authorizations are to be Solicited
Outside Front Cover Page of Prospectus;
Summary; Post-Merger Profile; Approval of the
Merger; The Merger; Certain Terms of the
Merger Agreement; Principal Stockholders of
TransMontaigne and Sheffield; Stockholders'
Proposals
19. Information if Proxies, Consents or Authorizations are not to be Solicited
in an Exchange Offer
*
- ----------------
* Not applicable or answer is negative.
<PAGE>
SHEFFIELD EXPLORATION COMPANY, INC.
1801 Broadway, Suite 600
Denver, Colorado 80202
May 13, 1996
To Our Stockholders:
You are cordially invited to attend a Special Meeting of Stockholders of
Sheffield Exploration Company, Inc. at the Forum Room, Norwest Bank Building,
1740 Broadway, Denver, Colorado, on Monday, June 3, 1996, at 2:00 p.m., local
time.
At the special meeting you will be asked to approve a Restated Agreement and
Plan of Merger dated as of February 6, 1996, between Sheffield and
TransMontaigne Oil Company. Under the Merger Agreement, TransMontaigne will
merge into Sheffield. Sheffield will be the surviving corporation of the
Merger, but the name of the corporation will be changed to TransMontaigne Oil
Company. Moreover, because TransMontaigne is much larger than Sheffield, the
TransMontaigne stockholders will receive approximately 93% of the stock of the
surviving corporation in the Merger, while the Sheffield stockholders will own
only 7% of the stock outstanding after the Merger. The Merger will therefore
constitute a reverse acquisition of Sheffield by TransMontaigne in that
Sheffield will survive the Merger but be 93% owned by former TransMontaigne
stockholders.
The effective exchange ratio of the Sheffield and TransMontaigne shares is
2.432599 shares of Sheffield common stock for each share of TransMontaigne
common stock. Upon effectiveness of the Merger each share of TransMontaigne
common stock will be converted into one share of Sheffield common stock while
the Sheffield stockholders will receive one share of Sheffield common stock for
each 2.432599 shares of Sheffield common stock presently owned. The
accompanying joint proxy statement/prospectus contains detailed information
about the Merger Agreement and the Merger, and about TransMontaigne and
Sheffield. Please review and consider the enclosed materials carefully.
The Board of Directors of Sheffield has retained the investment banking firm
of Rauscher Pierce Refsnes, Inc. to advise it with respect to the fairness of
the merger. Rauscher Pierce has delivered its written fairness opinion dated as
of May 10, 1996 to the effect that, as of the date of the opinion, based upon
the assumptions made, factors considered, the review undertaken and subject to
limitations and qualifications as described in the opinion, the terms of the
proposed Merger are fair to holders of Sheffield common stock from a financial
point of view. A copy of the opinion of Rauscher Pierce is included in the
enclosed Joint Proxy Statement/Prospectus as Appendix II thereto.
Although TransMontaigne stockholders will have dissenters' rights, Sheffield
stockholders will not, because Sheffield's stock is publicly traded.
YOUR BOARD OF DIRECTORS BELIEVES THAT THE MERGER IS FAIR TO AND IN THE BEST
INTERESTS OF THE STOCKHOLDERS OF SHEFFIELD AND RECOMMENDS THAT YOU VOTE IN FAVOR
OF THE MERGER.
The affirmative vote of the holders of a majority of the outstanding shares of
Sheffield common stock is required to approve and adopt the Merger Agreement, so
an abstention or failure to vote will have the same effect as a vote against the
Merger Agreement. Whether or not you plan to be at the Special Meeting, please
be sure to sign, date and return the enclosed proxy or voting instruction card
in the enclosed envelope as promptly as possible so that your shares may be
represented at the Special Meeting and voted in accordance with your wishes.
Your vote is important regardless of the number of shares you own.
Sincerely,
/s/ J. Samuel Butler
---------------------
J. Samuel Butler
President and Chief Executive Officer
<PAGE>
SHEFFIELD EXPLORATION COMPANY, INC.
1801 BROADWAY, SUITE 600
DENVER, COLORADO 80202
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 3, 1996
To the Stockholders of Sheffield Exploration Company, Inc.:
A Special Meeting of Stockholders of Sheffield Exploration Company, Inc., a
Delaware corporation ("Sheffield"), will be held on Monday, June 3, 1996 at
2:00 p.m., local time, at the Forum Room, Norwest Bank Building, 1740 Broadway,
Denver, Colorado, for the following purposes:
1. To consider and vote upon a proposal to approve and adopt the Restated
Agreement and Plan of Merger dated as of February 6, 1996 between Sheffield
and TransMontaigne Oil Company ("TransMontaigne"), pursuant to which, among
other things, TransMontaigne will merge into Sheffield, which will be the
surviving corporation of the merger, and (i) each share of common stock, $.10
par value per share, of TransMontaigne issued and outstanding immediately
prior to the closing of the merger not owned directly or indirectly by
TransMontaigne or Sheffield or their respective subsidiaries will be converted
at the closing into the right to receive at the Effective Time one share of
common stock, $.01 par value per share, of Sheffield ("New Common Stock"),
subject to the right of the holder of such share (a "Dissenting TransMontaigne
Stockholder") to seek an appraisal of the fair value thereof as described in
the attached Joint Proxy Statement/Prospectus, (ii) each 2.432599 shares of
Sheffield common stock issued and outstanding immediately prior to the
Effective Time will become at the Effective Time one share of New Common
Stock, (iii) the name of Sheffield will be changed to "TransMontaigne Oil
Company" and (iv) the number of authorized shares of New Common Stock will be
increased to 40,000,000, all as more fully set forth in the accompanying Joint
Proxy Statement/Prospectus and in the Merger Agreement, a copy of which is
included as Appendix I thereto; and
2. To transact such other business as may properly come before the meeting
or any adjournment thereof.
The Board of Directors has fixed the close of business on May 7, 1996 as the
record date for the determination of stockholders entitled to notice of and to
vote at the meeting or any adjournment thereof. Only holders of record of shares
of Sheffield common stock at the close of business on the record date are
entitled to notice of and to vote at the meeting. A complete list of such
stockholders will be available for examination at the offices of Sheffield in
Denver, Colorado during normal business hours by any Sheffield stockholder, for
any purpose germane to the Special Meeting, for a period of 10 days prior to the
meeting. Stockholders of Sheffield are not entitled to any appraisal or
dissenter's rights under the Delaware General Corporation Law in respect of the
transactions contemplated by the Merger Agreement
STOCKHOLDERS ARE URGED, WHETHER OR NOT THEY PLAN TO ATTEND THE MEETING, TO
SIGN, DATE AND MAIL THE ENCLOSED PROXY OR VOTING INSTRUCTION CARD IN THE
POSTAGE-PAID ENVELOPE PROVIDED. If a stockholder who has returned a proxy
attends the meeting in person, such stockholder may revoke the proxy and vote in
person on all matters submitted at the meeting.
By Order of the Board of Directors
/s/ David L. Milanesi
___________________________________
David L. Milanesi, Secretary
Denver, Colorado
May 13, 1996
<PAGE>
JOINT PROXY STATEMENT/PROSPECTUS
SHEFFIELD EXPLORATION COMPANY, INC.
AND
TRANSMONTAIGNE OIL COMPANY
____________________
This Joint Proxy Statement/Prospectus relates to the proposed merger (the
"Merger") of TransMontaigne Oil Company ("TransMontaigne") with and into
Sheffield Exploration Company, Inc., a Delaware corporation ("Sheffield"),
pursuant to the Restated Agreement and Plan of Merger dated as of February 6,
1996 between TransMontaigne and Sheffield (the "Merger Agreement").
As a result of the Merger, TransMontaigne will merge into Sheffield, which
will be the surviving corporation of the Merger (the "Surviving Corporation"),
and (i) each share of common stock, $.10 par value per share, of TransMontaigne
("TransMontaigne Common Stock") issued and outstanding immediately prior to the
closing of the merger not owned directly or indirectly by TransMontaigne or
Sheffield or their respective subsidiaries will be converted at the closing into
the right to receive one share of common stock, $.01 par value per share, of
Sheffield ("New Common Stock"), subject to the right of the holder of such share
to seek an appraisal of the fair value thereof as described in this Joint Proxy
Statement/Prospectus, (ii) each 2.432599 shares of Sheffield common stock issued
and outstanding immediately prior to the Effective Time ("Old Sheffield Common
Stock") will become at the Effective Time one share of New Common Stock, (iii)
the name of Sheffield will be changed to "TransMontaigne Oil Company" and (iv)
the number of authorized shares of New Common Stock will be increased to
40,000,000.
The Merger will constitute a reverse acquisition of Sheffield by
TransMontaigne, in that Sheffield will survive the Merger, but will be owned
approximately 93% by the former stockholders of TransMontaigne.
This Joint Proxy Statement/Prospectus is being furnished to holders of Old
Sheffield Common Stock and TransMontaigne Common Stock in connection with the
solicitation of proxies by the Board of Directors of Sheffield for use at a
special meeting of stockholders of Sheffield (the "Sheffield Special Meeting")
to be held on June 3, 1996 and in connection with the solicitation of written
consents of stockholders by the Board of Directors of TransMontaigne to be
effective June 3, 1996. This Joint Proxy Statement/Prospectus and the
accompanying forms of proxy and written consent are first being mailed to
stockholders of Sheffield and TransMontaigne on or about May 13, 1996. Holders
of TransMontaigne Common Stock and Old Sheffield Common Stock are being asked to
approve and adopt the Merger Agreement.
Any holder of TransMontaigne Common Stock who does not wish to approve the
Merger Agreement has the right under the Delaware General Corporation Law
("DGCL") to seek an appraisal of and be paid the fair cash value of his
TransMontaigne Common Stock. In order to perfect such right of appraisal, any
such TransMontaigne stockholder must make a written demand for such appraisal to
TransMontaigne before June 3, 1996. See "Rights of Dissenting Stockholders" and
Appendix V to this Joint Proxy Statement/Prospectus. Sheffield stockholders will
not have appraisal rights, because Sheffield's stock is publicly traded.
1
<PAGE>
For a discussion of certain risk factors to be considered by TransMontaigne
and Sheffield stockholders in determining whether to vote to approve the Merger,
see "Summary-Risk Factors and Cautionary Statements" on page 19.
On May 9, 1996, the closing price of Old Sheffield Common Stock, as reported
on the American Stock Exchange (Emerging Company Marketplace), was $4.75. The
shares of New Common Stock have been approved for listing on the American Stock
Exchange (Primary List) subject to completion of the Merger.
____________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS JOINT PROXY STATEMENT/PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS JOINT PROXY STATEMENT/PROSPECTUS IS MAY 13, 1996.
2
<PAGE>
No person has been authorized to give any information or to make any
representation other than those contained in this Joint Proxy
Statement/Prospectus in connection with the solicitation of proxies or the
offering of securities made hereby and, if given or made, such information or
representation must not be relied upon as having been authorized by
TransMontaigne or Sheffield. Neither the delivery of this Joint Proxy
Statement/Prospectus nor any distribution of the securities offered hereby shall
under any circumstances create an implication that there has been no change in
the affairs of TransMontaigne or Sheffield since the date hereof or that the
information set forth or incorporated by reference herein is correct as of any
time subsequent to its date. This Joint Proxy Statement/Prospectus does not
constitute an offer to sell, or a solicitation of an offer to purchase, any
securities, 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.
AVAILABLE INFORMATION
Sheffield is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files reports and other information with the Securities and Exchange
Commission (the "Commission"). Reports, proxy statements and other information
filed by Sheffield can be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's Regional Offices at Seven World Trade
Center, 13th Floor, New York, New York 10048 and CitiCorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60621-2511. Copies of such
material can be obtained by mail from the Public Reference Branch of the
Commission at 450 West Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. In addition, reports, proxy statements and other information concerning
Sheffield may be inspected at the offices of the American Stock Exchange, 86
Trinity Place, New York, NY 10006. TransMontaigne is not subject to the
information requirements of the Exchange Act.
Sheffield has filed with the Commission a Registration Statement on Form S-4
(together with all amendments, supplements and exhibits thereto, the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the New Common Stock to be issued pursuant to
the Merger Agreement to TransMontaigne stockholders. The information contained
herein with respect to Sheffield and its affiliates has been provided by
Sheffield, and the information contained herein with respect to TransMontaigne
and its affiliates has been provided by TransMontaigne. This Joint Proxy
Statement/Prospectus does not contain all of the information set forth in the
Registration Statement, certain parts of which were omitted in accordance with
the rules and regulations of the Commission. For further information, reference
is hereby made to the Registration Statement. Any statements contained herein
concerning the provisions of any document filed as an exhibit to the
Registration Statement or otherwise filed with the Commission are not
necessarily complete, and in each instance reference is made to the copy of such
document so filed. Each such statement is qualified by such reference.
3
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Available Information....................................................................................... 3
Summary..................................................................................................... 7
TransMontaigne....................................................................................... 7
Sheffield............................................................................................ 8
Post-Merger Profile.................................................................................. 8
Approval of the Merger............................................................................... 8
The Merger and the Merger Agreement.................................................................. 10
Opinion of Sheffield Financial Advisor............................................................... 11
Effective Time of the Merger......................................................................... 11
Certain Conditions to the Consummation of the Merger................................................. 12
Governmental Approvals............................................................................... 12
No Solicitation...................................................................................... 12
Termination of the Merger Agreement.................................................................. 13
Termination Fee...................................................................................... 14
Employee Retention Plan.............................................................................. 14
Indemnification...................................................................................... 14
Certain Federal Income Tax Consequences.............................................................. 15
Anticipated Accounting Treatment..................................................................... 15
Rights of Dissenting Stockholders.................................................................... 15
Exchange of Common Stock Certificates................................................................ 16
Trading Market for New Common Stock.................................................................. 16
Comparative Rights of TransMontaigne and Sheffield Stockholders...................................... 16
TransMontaigne Selected Historical Financial Information............................................. 18
Sheffield Selected Historical Financial Information.................................................. 19
Selected Pro Forma Combined Financial Information.................................................... 20
Comparative Per Share Data of TransMontaigne and Sheffield........................................... 21
Risk Factors and Cautionary Statements............................................................... 22
TransMontaigne.............................................................................................. 25
General.............................................................................................. 25
Business............................................................................................. 25
Employees............................................................................................ 34
Bank Debt............................................................................................ 34
Legal Proceedings.................................................................................... 36
TransMontaigne Selected Historical Financial Information............................................. 37
Management's Discussion and Analysis of Financial Condition and Results of Operations................ 38
Sheffield................................................................................................... 44
General.............................................................................................. 44
Recent Developments.................................................................................. 45
Bear Paw Operating Company, LLC...................................................................... 45
Post-Merger Profile......................................................................................... 45
Business Plan........................................................................................ 45
Management........................................................................................... 46
Approval of the Merger...................................................................................... 53
Time, Date, Place and Purpose of the Sheffield Special Meeting and TransMontaigne Written Consents... 53
Record Dates and Outstanding Shares.................................................................. 53
Voting and Revocation of Sheffield Proxies and TransMontaigne Written Consents....................... 54
Approval Required.................................................................................... 54
Solicitation of Proxies.............................................................................. 55
Other Matters........................................................................................ 55
The Merger.................................................................................................. 55
General Description of the Merger.................................................................... 55
Background........................................................................................... 56
Recommendation of TransMontaigne's Board; Reasons for the Merger..................................... 59
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Sheffield's Reasons for the Merger; Recommendation of Board of Directors of Sheffield................ 60
Opinion of Sheffield Financial Advisor............................................................... 61
Interests of Certain Persons in the Merger........................................................... 65
Certain Federal Income Tax Consequences.............................................................. 67
Accounting Treatment................................................................................. 70
Governmental and Regulatory Approvals................................................................ 70
Restrictions on Resales by Affiliates................................................................ 70
Rights of Dissenting Stockholders.................................................................... 71
Certain Terms of the Merger Agreement....................................................................... 72
Effective Time of the Merger......................................................................... 73
Manner and Basis of Converting Shares................................................................ 73
Conditions to the Merger............................................................................. 74
Representations and Warranties....................................................................... 76
Certain Covenants; Conduct of Business Prior to the Merger........................................... 77
No Solicitation...................................................................................... 79
Certain Post-Merger Matters.......................................................................... 80
Termination or Amendment of the Merger Agreement..................................................... 80
Expenses and Termination Fee......................................................................... 81
Indemnification...................................................................................... 82
Market Prices of Common Stock and Dividend Information...................................................... 83
Principal Stockholders of TransMontaigne and Sheffield...................................................... 84
TransMontaigne....................................................................................... 84
Sheffield............................................................................................ 87
Description of Sheffield Capital Stock...................................................................... 89
General.............................................................................................. 89
Common Stock......................................................................................... 89
Preferred Stock...................................................................................... 90
Section 203 of the Delaware General Corporation Law.................................................. 90
Restrictions on Dividends............................................................................ 90
Comparative Rights of Sheffield and TransMontaigne Stockholders............................................. 90
Certain Voting Requirements.......................................................................... 91
Power to Call Special Meetings....................................................................... 91
Amendments to Sheffield Charter...................................................................... 92
Independent Public Accountants.............................................................................. 92
Legal Matters............................................................................................... 92
Experts 92
Stockholders' Proposals..................................................................................... 92
Index to Financial Statements............................................................................... F-1
</TABLE>
Appendices:
I -- Merger Agreement
II -- Rauscher Pierce Refsnes, Inc. Fairness Opinion
III -- Sheffield Second Quarter 10-Q
IV -- Sheffield 1995 10-K
V -- Appraisal Rights
5
<PAGE>
SUMMARY
The following is a summary of certain information contained elsewhere in this
Joint Proxy Statement/Prospectus. Reference is made to, and this summary is
qualified by, the more detailed information contained in this Joint Proxy
Statement/Prospectus and the Appendices hereto. Stockholders are urged to
carefully read this Joint Proxy Statement/Prospectus and the Appendices hereto
in their entireties. As used in this Joint Proxy Statement/Prospectus, unless
otherwise required by the context, the term "Sheffield" means Sheffield
Exploration Company, Inc. and its consolidated subsidiaries and the term
"TransMontaigne" means TransMontaigne Oil Company and its consolidated
subsidiaries. Capitalized terms used herein without definition are, unless
otherwise indicated, defined in the Merger Agreement and used herein with such
meanings.
TRANSMONTAIGNE
TransMontaigne is a privately owned holding company which pursues, through its
subsidiaries, business opportunities in the downstream sector of the petroleum
industry. TransMontaigne privately placed $30 million of new common equity in
April 1995, of which $20 million was invested in and used to pay down debt of a
wholly-owned subsidiary, Continental Ozark, Inc. ("COZ"), which is engaged in
the transporting, storing and terminaling and the wholesale marketing of refined
petroleum products (principally unleaded gasoline, No. 2 diesel oil and jet
fuel) in the mid-continent region of the United States and in the gathering,
storing and transporting of crude oil in east Texas. COZ owns and operates 741
miles of pipeline (the NORCO pipeline, the Razorback pipeline and the CETEX
pipeline) and nine storage or terminal facilities in seven states with a
combined tank storage capacity of 3,633,500 barrels, serving over 500 customers.
A 65% owned subsidiary of COZ also owns a 27.75% interest in Lion Oil Company
("Lion") which owns a modern 65,000 barrels per day (BPD) refinery in El Dorado,
Arkansas, a 188-mile crude oil transportation pipeline in east Texas, a 1,100-
mile crude oil gathering and transmission system and two refined products
terminals. In February 1996, TransMontaigne participated with Sheffield in the
formation of Bear Paw Operating Company ("BPOC"), which is engaged in the
contract management and operation of downstream petroleum facilities, the owners
of which desire to reduce operating costs without disposing of their smaller
systems. BPOC is currently managing 15 such systems for a major interstate
pipeline company. TransMontaigne and Sheffield each own 45% of BPOC.
TransMontaigne completed a private placement of an additional $25 million of new
common equity at $5.50 per share in April 1996. TransMontaigne plans to make
further investments to support COZ's and BPOC's businesses, as well as
investments in other complementary businesses engaged in the downstream sector
of the petroleum industry. The executive offices of TransMontaigne, a Delaware
corporation, are located at 370 17th Street, Republic Plaza, Suite 900, Denver,
CO 80202, and its telephone number is (303) 605-1798.
SHEFFIELD
Sheffield engages in the acquisition, exploration, development, production and
sale of crude oil and natural gas and in the gathering and processing of "wet"
natural gas into residue ("dry") natural gas and natural gas liquids. Through
the fiscal year ended June 30, 1995, natural gas gathering, storing and
processing activities were located in North Dakota, Kansas and Oklahoma, but
Sheffield
6
<PAGE>
recently sold its holdings in Kansas and Oklahoma, leaving North Dakota as the
sole site for the Company's current natural gas processing and gathering
activities. Sheffield's development drilling activities have been conducted in
the Berry Cox Field and the Laredo Field in south Texas and more recently in the
Pinedale Field in Wyoming. Sheffield also engages in well recompletion work in
the Williston Basin (Montana and North Dakota). No new investment projects have
been committed to since initiation of merger discussions in December 1995. The
principal executive offices of Sheffield, a Delaware corporation, are located at
1801 Broadway, Suite 600, Denver, Colorado 80202, and its telephone number at
such offices is (303) 296-1908.
POST-MERGER PROFILE
The Merger of TransMontaigne and Sheffield will combine the two companies'
current operations. The Surviving Corporation (the name of which will be
changed to TransMontaigne Oil Company) will continue TransMontaigne's practice
of seeking appropriate expansion opportunities in the downstream sector of the
oil and gas industry. Management believes that many profitable opportunities
will develop as petroleum companies continue to downsize their operations.
TransMontaigne also believes that as a result of the Merger, more sources of
financing and acquisition opportunities will be available to it as a publicly
held company than may be available to it as a ``privately held company. As a
result of having operations in a larger number of geographic areas, it is
anticipated that the combined entity will be exposed to a greater number of
opportunities to expand its business. Following the Effective Time, the
officers and directors of TransMontaigne will become the officers and directors
of the Surviving Corporation, which will adopt the compensation arrangements and
benefit plans of TransMontaigne. The Surviving Corporation will adopt
TransMontaigne's fiscal year end of April 30.
APPROVAL OF THE MERGER
DATE, TIME AND PLACE
TransMontaigne. TransMontaigne stockholders of record on the TransMontaigne
Record Date are being asked to execute a written consent to approve the Merger,
to be effective on Monday, June 3, 1996.
Sheffield. The Sheffield Special Meeting will be held on Monday, June 3, 1996
at 2:00 p.m., local time, at the Forum Room, Norwest Bank Building, 1740
Broadway, Denver, Colorado.
PURPOSES OF THE SHEFFIELD SPECIAL MEETING AND TRANSMONTAIGNE WRITTEN CONSENTS
The purpose of the Sheffield Special Meeting and the solicitation of written
consents of stockholders by TransMontaigne is to consider and vote upon the
approval and adoption of the Merger Agreement, pursuant to which, among other
things, TransMontaigne will merge into Sheffield, which will be the Surviving
Corporation of the Merger and which will change its name to "TransMontaigne Oil
Company." The Merger will constitute a reverse acquisition of Sheffield by
7
<PAGE>
TransMontaigne, in that Sheffield will survive the Merger, but will be owned
approximately 93% by the former stockholders of TransMontaigne.
RECORD DATES; SHARES ENTITLED TO VOTE
TransMontaigne. Only holders of record of shares of TransMontaigne Common Stock
at the close of business on May 19, 1996 (the "TransMontaigne Record Date") will
be entitled to vote on the Merger. On the date hereof, there are 19,331,171
shares of TransMontaigne Common Stock outstanding and entitled to vote. Each
such share of TransMontaigne Common Stock will be entitled to one vote.
Sheffield. Only holders of record of shares of Old Sheffield Common Stock at
the close of business on May 7, 1996 (the "Sheffield Record Date") are entitled
to notice of and to vote at the Sheffield Special Meeting. On such date, there
were 3,459,512 shares of Old Sheffield Common Stock outstanding, each of which
will be entitled to one vote on each matter to be acted upon at the Sheffield
Special Meeting.
QUORUM; VOTE REQUIRED
TransMontaigne. The affirmative vote of the holders of two-thirds of the shares
of TransMontaigne Common Stock outstanding and entitled to vote thereon is
required to approve and adopt the Merger Agreement.
Sheffield. The presence, in person or by proxy, at the Sheffield Special
Meeting of the holders of a majority of the shares of Old Sheffield Common Stock
outstanding and entitled to vote at the Sheffield Special Meeting is necessary
to constitute a quorum at the meeting. The affirmative vote of the holders of a
majority of the shares of Old Sheffield Common Stock outstanding and entitled to
vote thereon at the Sheffield Special Meeting is required to approve and adopt
the Merger Agreement.
SECURITY OWNERSHIP OF MANAGEMENT
TransMontaigne. As of the TransMontaigne Record Date, the directors and
executive officers of TransMontaigne are expected to beneficially own
approximately 64.7% of the outstanding shares of TransMontaigne Common Stock
entitled to vote on the Merger. Each of such directors and executive officers
has indicated his or her present intention to consent to approve the Merger
Agreement.
Sheffield. As of the Sheffield Record Date, the directors and executive
officers of Sheffield beneficially owned approximately 17.9% of the outstanding
shares of Old Sheffield Common Stock entitled to vote at such meeting. Each of
such directors and executive officers has advised Sheffield that he or she plans
to vote or direct the vote of all such shares of Old Sheffield Common Stock
entitled to vote in favor of the proposals to approve the Merger Agreement.
8
<PAGE>
THE MERGER AND THE MERGER AGREEMENT
TERMS OF THE MERGER. At the Effective Time (as hereinafter defined),
TransMontaigne will merge with and into Sheffield, with Sheffield being the
surviving corporation (the "Surviving Corporation"). In the Merger, (i) each
share of TransMontaigne Common Stock issued and outstanding immediately prior to
the closing of the Merger not owned directly or indirectly by TransMontaigne or
Sheffield or their respective subsidiaries will be converted at the closing into
the right to receive one share of New Common Stock, subject to the right of the
holder of such share to seek an appraisal of the fair value thereof as described
in this Joint Proxy Statement/Prospectus, (ii) each 2.432599 shares of Old
Sheffield Common Stock issued and outstanding immediately prior to the Effective
Time will become at the Effective Time one share of New Common Stock, (iii) the
name of Sheffield will be changed to "TransMontaigne Oil Company" and (iv) the
number of authorized shares of New Common Stock will be increased to 40,000,000.
Outstanding warrants and options to purchase shares of TransMontaigne Common
Stock will become warrants and options to purchase an equal number of shares of
New Common Stock. The full text of the Merger Agreement is attached to this
Joint Proxy Statement/Prospectus as Appendix I.
The Merger will constitute a reverse acquisition of Sheffield by
TransMontaigne, in that Sheffield will survive the Merger, but based on the
number of shares of TransMontaigne Common Stock and Old Sheffield Common Stock
outstanding as of the Record Dates (assuming exercise prior to the Effective
Time of certain outstanding warrants to purchase Old Sheffield Common Stock and
that no other TransMontaigne or Sheffield options or warrants are exercised),
approximately 19,331,171 and 1,455,629 shares of New Common Stock are expected
to be issuable to holders of TransMontaigne Common Stock and Old Sheffield
Common Stock, respectively, representing approximately 93% and 7%, respectively,
of the total New Common Stock to be outstanding after such issuance.
RECOMMENDATIONS OF THE BOARDS OF DIRECTORS. THE BOARD OF DIRECTORS OF
TRANSMONTAIGNE HAS DETERMINED THAT THE MERGER IS FAIR TO, AND IN THE BEST
INTERESTS OF, THE STOCKHOLDERS OF TRANSMONTAIGNE AND RECOMMENDS THAT THE
STOCKHOLDERS OF TRANSMONTAIGNE APPROVE AND ADOPT THE MERGER AGREEMENT. See "The
Merger-Background" and "-TransMontaigne's Reasons for the Merger; Recommendation
of the Board of Directors of TransMontaigne."
THE BOARD OF DIRECTORS OF SHEFFIELD HAS DETERMINED THAT THE MERGER IS FAIR TO,
AND IN THE BEST INTERESTS OF, THE STOCKHOLDERS OF SHEFFIELD AND RECOMMENDS THAT
THE STOCKHOLDERS OF SHEFFIELD APPROVE AND ADOPT THE MERGER AGREEMENT. See "The
Merger-Background" and "-Sheffield's Reasons for the Merger; Recommendation of
Board of Directors of Sheffield." In considering the recommendation of the
Sheffield Board with respect to the Merger, Sheffield stockholders should be
aware that certain officers and directors of Sheffield have certain interests
respecting the Merger, apart from their interests as stockholders of Sheffield.
See "The Merger-Interests of Certain Persons in the Merger."
9
<PAGE>
OPINION OF SHEFFIELD FINANCIAL ADVISOR
Rauscher Pierce Refsnes, Inc. ("Rauscher Pierce") has delivered its opinion to
the effect that, as of the date of the opinion, based upon the assumptions made,
factors considered, the review undertaken and subject to limitations and
qualifications as described in the opinion, the terms of the proposed Merger are
fair to holders of Old Sheffield Common Stock from a financial point of view.
For information regarding the Rauscher Pierce opinion, including the
assumptions made, matters considered and limits of such opinion, see "The
Merger-Opinion of Sheffield Financial Advisor." Stockholders are urged to read
in its entirety the opinion, attached as Appendix II to this Joint Proxy
Statement/Prospectus.
EFFECTIVE TIME OF THE MERGER
The Merger will become effective upon the filing of a certificate of merger
(the "Certificate of Merger") with the Secretary of State of the State of
Delaware (the "Effective Time"), unless the Certificate of Merger specifies a
later Effective Time. Assuming all conditions to the Merger contained in the
Merger Agreement are satisfied or waived prior thereto, it is anticipated that
the Effective Time of the Merger will occur as soon as practicable following
approval by the stockholders of both Sheffield and TransMontaigne on June 3,
1996.
CERTAIN CONDITIONS TO THE CONSUMMATION OF THE MERGER
The respective obligations of Sheffield and TransMontaigne to consummate the
Merger are subject to the satisfaction of certain conditions, including the
following: (i) approval by the stockholders of Sheffield and TransMontaigne of
the Merger Agreement; (ii) the absence of any order making the Merger illegal or
otherwise prohibiting consummation of the Merger; (iii) the accuracy of the
representations and warranties of each party and compliance with all agreements
and covenants by each party; (iv) the absence of certain regulatory conditions;
(v) the receipt of certain tax and other opinions; (vi) outstanding warrants to
purchase 81,450 shares of Old Sheffield Common Stock must have been exercised;
(vii) the receipt of the consents of TransMontaigne's lenders to the Merger; and
(viii) the absence of certain material adverse changes.
Sheffield and TransMontaigne anticipate that all of the conditions to the
consummation of the Merger (other than obtaining the required approvals of the
stockholders of Sheffield and TransMontaigne) will be satisfied prior to or at
the time of stockholder approval. Either Sheffield or TransMontaigne may extend
the time for performance of any of the obligations of the other party or may
waive compliance with those obligations at its discretion. See "Certain Terms
of the Merger Agreement-Conditions to the Merger."
10
<PAGE>
GOVERNMENTAL APPROVALS
Sheffield and TransMontaigne are aware of no governmental or regulatory
approvals required for consummation of the Merger, other than compliance with
applicable securities laws.
NO SOLICITATION
The Merger Agreement provides that Sheffield will not initiate, solicit or
encourage any inquiries or the making of any proposal relating to any Competing
Transaction (as defined below), or enter into discussions or negotiations with
any person in furtherance of a Competing Transaction, or agree to endorse a
Competing Transaction; provided, however, that Sheffield may furnish information
or enter into discussions or negotiations with respect to an unsolicited bona
fide proposal in writing to acquire Sheffield pursuant to a merger,
consolidation, share exchange, business combination or similar transaction or to
acquire a substantial portion of the assets of Sheffield if, and only to the
extent that, the Board of Directors of Sheffield, after consultation with and
based upon the written opinion of independent legal counsel, determines in good
faith that such action is necessary for such Board to comply with its fiduciary
duties to stockholders under applicable law. Further, the Board of Directors of
Sheffield may determine not to solicit proxies in favor of the approval and
adoption of the Merger Agreement if such Board determines in good faith after
consultation with and based upon the written opinion of independent legal
counsel that other action is necessary due to applicable fiduciary duties of the
directors of Sheffield. A "Competing Transaction" is defined to mean any of the
following (other than the transactions contemplated by the Merger Agreement)
involving Sheffield or any of its subsidiaries: (i) any merger, consolidation,
share exchange, business combination or similar transaction; (ii) any sale,
lease, exchange, mortgage, pledge, transfer or other disposition of 20% or more
of the assets of Sheffield and its subsidiaries, taken as a whole; (iii) any
tender offer or exchange offer for 20% or more of the outstanding shares of
capital stock of Sheffield or the filing of a registration statement under the
Securities Act in connection therewith; (iv) any person having acquired
beneficial ownership of, or any group (as such term is defined under Section
13(d) of the Exchange Act and the rules and regulations promulgated thereunder)
having been formed which beneficially owns or has the right to acquire
beneficial ownership of, 20% or more of the outstanding shares of capital stock
of Sheffield; or (v) any public announcement of a proposal, plan or intention to
do any of the foregoing or any agreement to engage in any of the foregoing. See
"Certain Terms of the Merger Agreement-No Solicitation."
TERMINATION OF THE MERGER AGREEMENT
BY EITHER PARTY. The Merger Agreement may be terminated prior to the Effective
Time (i) by mutual consent of TransMontaigne and Sheffield, or (ii) by either
party if (a) the Merger has not been consummated on or before July 31, 1996, (b)
any court or governmental order shall have prohibited consummation of the Merger
or (c) the required approvals of the stockholders of TransMontaigne or Sheffield
are not received.
BY TRANSMONTAIGNE. TransMontaigne may terminate the Merger Agreement (i) upon a
material breach of any representation, warranty, covenant or agreement on the
part of Sheffield set forth in
11
<PAGE>
the Merger Agreement, or if any such representation or warranty shall have
become untrue, in either case such that TransMontaigne's conditions to closing
of the Merger would be incapable of being satisfied by July 31, 1996, or (ii) if
the Board of Directors of Sheffield withdraws, modifies or changes its
recommendation of the Merger in a manner adverse to TransMontaigne or recommends
to the stockholders of Sheffield any Competing Transaction, or resolves to do
so, or (iii) if a tender or exchange offer for 20% or more of the outstanding
shares of capital stock of Sheffield is commenced, and the Board of Directors of
Sheffield does not recommend that stockholders not tender their shares into such
offer, or (iv) if any person (other than TransMontaigne or its affiliates)
acquires beneficial ownership of, or any group shall have been formed which
beneficially owns, 20% or more of the outstanding capital stock of Sheffield.
BY SHEFFIELD. Sheffield may terminate the Merger Agreement (i) upon a material
breach of any representation, warranty, covenant or agreement on the part of
TransMontaigne set forth in the Merger Agreement, or if any such representation
or warranty shall have become untrue, in either case such that Sheffield's
conditions to closing of the Merger would be incapable of being satisfied by
July 31, 1996, or (ii) if the Board of Directors of Sheffield fails to make or
withdraws its recommendation of the Merger Agreement if there exists at such
time a Competing Transaction, or recommends to Sheffield's stockholders approval
or acceptance of a Competing Transaction, in each case only if, after
consultation with and based upon the written opinion of independent legal
counsel, Sheffield's Board of Directors determines in good faith that such
action is necessary for such Board to comply with its fiduciary duties to
stockholders under applicable law.
See "Certain Terms of the Merger Agreement-Termination or Amendment of the
Merger Agreement."
TERMINATION FEE
If the Merger Agreement is terminated pursuant to certain of the reasons
described above, and if such termination is a result of a Trigger Event (as
described under the caption "Certain Terms of the Merger Agreement-Termination
or Amendment of the Merger Agreement"), Sheffield will pay to TransMontaigne an
amount equal to $410,000, which amount is inclusive of all of TransMontaigne's
expenses in connection with the transactions contemplated by the Merger
Agreement.
EMPLOYEE RETENTION PLAN
Sheffield has adopted a Key Employee Retention Plan (the "Retention Plan") in
order to provide an incentive to certain of its key employees to remain in the
employ of Sheffield during periods when the future of Sheffield is uncertain due
to a potential change of control. Under the terms of the Retention Plan, a
committee of one or more persons appointed by the Chief Executive Officer of
Sheffield (the "Committee") determines the employees who are to participate in
the Retention Plan ("Participants"). The Committee determined that each present
employee of Sheffield, including the executive officers, J. Samuel Butler, Jerry
D. Smothermon and David L. Milanesi, could participate. As it relates to the
Merger, the provisions of the Retention Plan provide that each Participant who
remains with Sheffield through March 15, 1996 and thereafter experiences a
"Qualified Termination" as defined in the Retention Plan, will receive in cash
an amount equal to
12
<PAGE>
one-half of his Annual Base Salary (as defined in the Retention Plan), subject
to any applicable payroll or other withholding tax. If a Participant leaves the
Surviving Corporation's employ after March 15, 1996 for any reason other than a
Qualified Termination, such Participant will receive in cash an amount equal to
three months of his Annual Base Salary (subject to withholding). Generally, a
Qualified Termination would occur if a Participant is terminated by the
Surviving Corporation after March 15, 1996 other than for "Cause," or if a
Participant voluntarily leaves the Surviving Corporation after the Effective
Date for "Good Reason," as defined in the Retention Plan. In addition, the
Retention Plan provides that all outstanding stock options will become
exercisable March 14, 1996, and requires Sheffield to amend its profit-sharing
plan so that all account balances are 100% vested, and all allocations of the
company's contributions are made without regard to the service and employment
requirements under the profit-sharing plan.
INDEMNIFICATION
The Merger Agreement also provides that, for a period of five years after the
Effective Time, the Surviving Corporation will not amend certain indemnification
and liability limitation provisions of Sheffield's charter and bylaws in a
manner that would adversely affect the rights of individuals who were officers
or directors of Sheffield before the Merger. See "Certain Terms of the Merger
Agreement-Indemnification."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
TransMontaigne has received a tax opinion from its counsel that the Merger
will qualify as a reorganization under Section 368(a) of the Internal Revenue
Code of 1986, as amended (the "Code"), that Sheffield and TransMontaigne each
will be a party to the reorganization, that holders of TransMontaigne Common
Stock will not recognize any gain or loss on the exchange of TransMontaigne
Common Stock for New Common Stock, that the tax basis of the shares of New
Common Stock received by a TransMontaigne stockholder will be the same as the
tax basis of the TransMontaigne shares surrendered in exchange therefore, and
that the holding period of the shares of New Common Stock received by a
TransMontaigne stockholder will include the holding period for the
TransMontaigne shares surrendered in exchange therefore (provided the
TransMontaigne shares were held as a capital asset). It is also the opinion of
counsel that the holders of Old Sheffield Common Stock will not recognize any
gain or loss as a result of the reverse stock split accomplished by the Merger
except to the extent of cash received in lieu of fractional shares of New Common
Stock, that the tax basis of the shares of New Common Stock received by a
Sheffield stockholder will be the same as the tax basis of the shares of Old
Sheffield Common Stock surrendered in exchange therefore (adjusted to take into
account basis attributable to any fractional shares), and that the holding
period of the shares of New Common Stock received by a Sheffield stockholder
will include the holding period for the shares of Old Sheffield Common Stock
surrendered in exchange therefore (provided the shares of Old Sheffield Common
Stock were held as a capital asset). The tax opinion is based on current law
and is subject to a number of conditions and limitations. For a discussion of
these and other federal income tax considerations in connection with the Merger,
see "The Merger-Certain Federal Income Tax Consequences."
13
<PAGE>
ANTICIPATED ACCOUNTING TREATMENT
The Merger is expected to be accounted for as a "purchase" of Sheffield by
TransMontaigne for financial accounting purposes. See "The Merger-Accounting
Treatment."
RIGHTS OF DISSENTING STOCKHOLDERS
Any holder of TransMontaigne Common Stock has the right under the DGCL to seek
an appraisal of and be paid the fair value of his shares, together with a fair
rate of interest, if any, to be paid thereon. See "The Merger-Rights of
Dissenting Stockholders." Under Delaware law, Sheffield's stockholders will not
be entitled to any appraisal or dissenter's rights in connection with the Merger
because the Old Sheffield Common Stock is publicly traded. This Joint Proxy
Statement/Prospectus constitutes the notice to Dissenting TransMontaigne
Stockholders required by Section 262 of the DGCL.
EXCHANGE OF COMMON STOCK CERTIFICATES
Promptly after consummation of the Merger, Key Corporation Shareholder
Services (the "Transfer Agent") will mail a letter of transmittal with
instructions to the record holders of certificates which immediately prior to
the Effective Time evidenced shares of TransMontaigne Common Stock and Old
Sheffield Common Stock ("Converted Shares") for use in exchanging certificates
formerly representing Converted Shares for certificates representing shares of
New Common Stock and cash in lieu of any fractional shares. Each stockholder of
TransMontaigne or Sheffield entitled to a fractional share will receive an
amount in cash equal to the value of such fractional share based upon the last
sale price of Old Sheffield Common Stock on the American Stock Exchange
(Emerging Company Marketplace) prior to the Effective Time. No interest will be
paid on such amount, and all Converted Shares held by a record holder will be
aggregated for purposes of computing the amount of such payment. Certificates
should not be surrendered by the holders of Converted Shares until they have
received the letter of transmittal from the Transfer Agent. See "Certain Terms
of the Merger Agreement-Manner and Basis of Converting Shares."
Upon delivery of an executed transmittal letter and surrender of a Converted
Share certificate to the Transfer Agent for cancellation, the holders of such
certificates will be entitled to receive a certificate representing the number
of whole shares of New Common Stock which such holder has the right to receive
under the terms of the Merger Agreement.
TRADING MARKET FOR NEW COMMON STOCK
The Old Sheffield Common Stock has been traded on the American Stock Exchange
(Emerging Company Marketplace) since December 14, 1993 under the symbol "SHE."
There is no public market for TransMontaigne Common Stock. The shares of New
Common Stock have been approved for listing on the American Stock Exchange
(Primary List) subject to completion of the Merger. See "Market Prices of
Common Stock and Dividend Information."
14
<PAGE>
COMPARATIVE RIGHTS OF TRANSMONTAIGNE AND SHEFFIELD STOCKHOLDERS
Rights of stockholders of TransMontaigne are currently governed by Delaware
law, the Certificate of Incorporation of TransMontaigne (the "TransMontaigne
Charter") and TransMontaigne's Bylaws. Upon consummation of the Merger,
TransMontaigne stockholders will become stockholders of Sheffield and their
rights as stockholders of Sheffield will be governed by Delaware law, the
Restated Certificate of Incorporation of Sheffield (the "Sheffield Charter"), as
amended by the Certificate of Merger, and Sheffield's Bylaws. There are various
differences between the rights of TransMontaigne stockholders and the rights of
Sheffield stockholders. In addition, the rights of Sheffield stockholders will
be changed by the amendments to the Sheffield Charter effected by the
Certificate of Merger. See "Comparative Rights of TransMontaigne and Sheffield
Stockholders" and "Description of Sheffield Capital Stock."
15
<PAGE>
TRANSMONTAIGNE SELECTED HISTORICAL FINANCIAL INFORMATION
The selected historical financial data of TransMontaigne set forth below for
the year ended April 30, 1995, the seven months ended April 30, 1994 and the
years ended September 30, 1993, 1992, 1991 and 1990 has been derived from the
audited consolidated financial statements of TransMontaigne. The selected
historical financial data for TransMontaigne for the nine months ended January
31, 1996 and 1995 has been derived from unaudited consolidated financial
statements of TransMontaigne and includes, in the opinion of TransMontaigne's
management, all adjustments necessary to a fair statement of the financial
position and results of operations for the interim periods presented. All
adjustments, in the opinion of management, are of a normal recurring nature.
This historical data should be read in conjunction with Management's Discussion
and Analysis of Financial Condition and Results of Operations and the
consolidated financial statements and notes thereto of TransMontaigne included
herein.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEVEN MONTHS
JANUARY 31, YEAR ENDED APRIL ENDED YEARS ENDED SEPTEMBER 30,
------------------------ 30, APRIL 30, ------------------------------------------------
1996 1995 1995 1994 1993 1992 1991 1990
--------- ----------- ---------------- ------------ ----------- ----------- ----------- ----------
STATEMENT OF
OPERATIONS DATA:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue $347,974,850 236,169,346 324,591,409 296,086,981 507,936,810 515,547,695 417,834,881 443,860,068
Operating income
(loss) 3,267,286 2,867,363 406,042 (1,509,581) (1,710,242) (1,930,614) (3,368,105) 1,752,535
Net earnings (loss) 1,602,137 624,010 (3,217,635) (2,853,609) (4,490,468) (4,200,922) (4,150,161) 3,205,855
Earnings (loss)
per share $ .11 .23 (1.32) (1.15) (1.85) (1.73) (1.62) 1.19
APRIL 30 SEPTEMBER 30
JANUARY 31, ---------------------------- -------------------------------------------------
1996 1995 1994 1993 1992 1991 1990
----------- ----------- --------------- --------------- ----------- --------- ----------
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Working capital $32,640,911 37,989,205 11,554,715 11,470,225 20,685,446 16,601,819 6,278,119
Total assets 86,939,395 104,220,346 75,470,266 86,334,703 76,336,971 69,240,513 50,897,747
Long-term debt,
excluding current
installments 32,402,267 36,945,610 37,671,329 33,953,590 35,256,698 25,476,695 15,841,887
Stockholders' equity 29,822,888 28,470,702 2,480,835 5,334,500 9,825,060 14,026,063 12,444,514
</TABLE>
16
<PAGE>
SHEFFIELD SELECTED HISTORICAL FINANCIAL INFORMATION
The following table sets forth selected consolidated historical financial data
of Sheffield and has been derived from the audited consolidated financial
statements of Sheffield for each of the five fiscal years ended June 30, 1995,
and the unaudited interim consolidated financial statements of Sheffield for the
six months ended December 31, 1995 and 1994. In the opinion of management, all
adjustments, consisting of normal recurring accruals, considered necessary for
the fair presentation have been included in the unaudited interim data. This
historical data should be read in conjunction with the financial statements and
notes thereto which are included in Appendices III and IV. The historical
results are not necessarily indicative of results which may be expected for
future periods.
<TABLE>
<CAPTION>
SIX MONTHS ENDED DECEMBER
31, YEARS ENDED JUNE 30,
------------------------- -------------------------------------------------------------------------------
STATEMENT OF
OPERATIONS DATA: 1995 1994 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Gas gathering/
processing $2,590,323 3,584,912 6,972,380 10,277,680 4,384,747 2,743,868 ---
Oil and gas 506,416 617,933 1,156,745 1,264,568 1,530,940 1,382,315 1,124,454
---------- --------- --------- ---------- --------- --------- ---------
3,096,739 4,202,845 8,129,125 11,542,248 5,915,687 4,126,183 1,124,454
Net income (loss) 241,997 (494,178) (1,275,953) 75,658 743,269 204,344 (40,759)
Net income (loss)
per common share .07 (.15) (.38) .02 .23 .06 (.02)
<CAPTION>
JUNE 30,
DECEMBER 31, --------------------------------------------------------------------------------
1995 1995 1994 1993 1992 1991
----------- ---- ---- ---- ---- ----
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Working capital $ 3,210,593 4,145,927 880,184 1,061,206 1,824,032 3,433,292
Total Assets 7,818,866 10,035,766 10,789,503 10,961,038 6,298,459 4,927,655
Long-term debt,
excluding current
maturities 100,050 1,374,050 2,111,333 2,141,414 602,248 ---
Stockholders' equity 6,769,560 6,476,553 7,573,580 7,482,922 4,814,637 4,506,381
</TABLE>
17
<PAGE>
SELECTED PRO FORMA COMBINED FINANCIAL INFORMATION
The summary pro forma combined financial information has been derived from
the pro forma combined financial statements appearing elsewhere herein and
should be read in conjunction with those statements and the notes thereto. This
pro forma data is not necessarily indicative of the results to be expected after
the proposed Merger is consummated. The unaudited pro forma combined balance
sheet data at January 31, 1996 gives effect to the Merger and TransMontaigne's
private placement of $25 million of TransMontaigne Common Stock at $5.50 per
share, which occurred in April 1996, as if they had occurred at that date. The
unaudited pro forma combined statements of operations data for the nine months
ended January 31, 1996 and the year ended April 30, 1995 give effect to the
Merger and the private placement as if they had occurred on May 1, 1994.
<TABLE>
<CAPTION>
Nine months ended Year Ended
January 31, April 30,
1996 1995
----------------- -----------------
<S> <C> <C>
Pro forma statement of operations data:
Revenue $349,613,404 327,503,534
Operating income 2,688,853 (36,046)
Net earnings (loss) 1,037,488 (3,647,334)
Pro forma earnings (loss)
per common share $.06 (.51)
Pro forma weighted
average common shares
outstanding 16,253,676 7,115,342
Pro forma
January 31,
1996
-----------
PRO FORMA BALANCE SHEET DATA:
Working capital $60,551,412
Total assets 121,500,498
Long-term debt, excluding
current installments 32,502,317
Stockholders' equity 62,871,685
</TABLE>
18
<PAGE>
COMPARATIVE PER SHARE DATA OF TRANSMONTAIGNE AND SHEFFIELD
Set forth below are the net earnings and book value per common share data on a
pro forma per share basis for TransMontaigne, on an historical basis for
Sheffield, and on an equivalent pro forma per share basis for Sheffield. The
TransMontaigne pro forma combined data was derived by combining historical
financial information of TransMontaigne and Sheffield, after giving effect to
the Merger under the purchase method of accounting for business combinations,
and also reflects the sale of $25 million of TransMontaigne Common Stock which
occurred in April 1996. The per share equivalent pro forma data for Sheffield
was calculated by dividing the TransMontaigne pro forma combined per common
share data by 2.432599.
The information set forth below should be read in conjunction with the
respective audited and unaudited financial statements and related notes of
TransMontaigne and Sheffield included herein.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
JANUARY 31, APRIL 30,
1996 1995
-------------- ----------
<S> <C> <C>
TRANSMONTAIGNE PRO FORMA PER COMMON SHARE DATA:
Net earnings (loss) $ .06 (.51)
Book value (end of period) 3.02
NINE MONTHS
ENDED YEAR ENDED
DECEMBER 31, JUNE 30,
1995 1995
--------------- --------------
SHEFFIELD HISTORICAL PER COMMON SHARE DATA:
Net loss $ (.12) (.38)
Book value (end of period) 1.98
SHEFFIELD EQUIVALENT PRO FORMA PER COMMON SHARE DATA:
Net earnings (loss) .02 (.21)
Book value (end of period) 1.24
</TABLE>
19
<PAGE>
RISK FACTORS AND CAUTIONARY STATEMENTS
When used in this Joint Proxy Statement/Prospectus and in future filings by
the Surviving Corporation with the Commission, in the Surviving Corporation's
press releases and in oral statements made with the approval of an authorized
executive officer, the words or phrases "will likely result," "are expected to,"
"will continue," "is anticipated," "estimate," "project" or similar expressions
are intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements are subject
to certain risks and uncertainties that could cause actual results to differ
materially from historical earnings and those presently anticipated or
projected. TransMontaigne and Sheffield wish to caution readers not to place
undue reliance on any such forward-looking statements. TransMontaigne and
Sheffield wish to advise readers that the factors listed below could affect the
Surviving Corporation's financial performance and could cause the Surviving
Corporation's actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods in any current
statements. TransMontaigne and Sheffield will NOT undertake and specifically
decline any obligation to publicly release the result of any revisions which may
be made to any forward-looking statements to reflect events or circumstances
after the date of such statements or to reflect the occurrence of anticipated or
unanticipated events. Each of the following risks applies to the business of
BPOC, as well as the business of COZ.
PRICE VOLATILITY. TransMontaigne's wholly owned subsidiary, COZ, is engaged in
a products supply and distribution business involving the bulk purchase and sale
of refined petroleum products and the wholesale marketing of products at
terminal truck loading rack locations. This business is characterized by thin
margins. In recent years, prices of refined products have fluctuated
significantly and COZ has experienced losses resulting from its purchase of
inventory during periods of higher prices and its sale of portions of that
inventory at lower prices. Prices of refined petroleum products depend upon
numerous factors beyond COZ's control, including the supply of and demand for
gasoline and other refined products, which are affected by, among other things,
changes in domestic and foreign economies, political affairs, production levels,
the availability of imports, the marketing of gasoline and other refined
products by competitors, the marketing of competitive fuels, the impact of
energy conservation efforts and the extent of government regulation. The prices
which COZ receives for products are also affected by regional factors, such as
local market conditions, transportation costs and the operations of companies
providing competing services.
PRICE RISK MANAGEMENT. COZ attempts to minimize its exposure to the risk of
price volatility related to the purchase and sale of refined products by
selectively hedging through the purchase and sale of futures and options
contracts that are intended to offset the effects of price fluctuations. COZ
faces some risks that cannot be effectively hedged, including price risks on
products for which futures contracts are not traded on the New York Mercantile
Exchange (the "NYMEX"), such as mid-continent gasoline (as opposed to New York
Harbor reformulated unleaded gasoline, which is traded on the NYMEX) and basis
risks (the risk that price differentials between delivery points, delivery
periods or types of products will change). COZ experiences basis risk in its
mid-continent operations because of the differences between mid-continent spot
prices and NYMEX futures contract prices. COZ generally does not hedge the
price risk on certain portions of its inventory, consisting of pipeline fill,
tank bottoms and a minimum product supply required to satisfy exchange
obligations; this product is not held for sale because it is required in order
to maintain a "wet
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system" (a pipeline must be full of product, or "wet," at all times in order to
accept product volume at one end and deliver the same volume at the other end,
and minimum storage tank bottoms of approximately two feet of products are
required in order to assure that no vapor enters the piping system). COZ,
however, could be required to recognize a financial statement loss on a portion
of its inventory arising from market price fluctuations in order to reflect
lower of cost or market adjustments. COZ is also exposed to credit risks in the
event the other party to a futures contract is unable to perform its contractual
obligations. There can be no assurance that hedging will be effective in
limiting any adverse effects of refined products price fluctuations on COZ's
operations or its overall profitability.
COMPETITION. COZ competes with major and independent petroleum companies,
national, regional and local pipeline and terminaling companies and other
product suppliers and exchangers, many of which have larger facilities systems,
control substantially greater supplies of product and have significantly greater
financial resources than COZ.
EFFECT OF REDUCED DEMAND ON PIPELINE SHIPMENTS AND TERMINAL VOLUME. COZ's
pipeline and terminals business depends in large part on the level of demand for
refined petroleum products in the markets served. The demand for products by
the shippers, including COZ, fluctuates and can be adversely affected by
numerous factors, including weather conditions; local and regional economic
considerations; automobile, commercial and agricultural usage; product
availability and prices; seasonality; and alternative sources of supply. The
possible impact of future fuel conservation programs and related governmental
regulations, technological advances in fuel economy and alternative sources of
energy generation could also adversely affect the demand for products and reduce
COZ's revenue generated from pipeline tariffs and terminaling fees.
DEPENDENCE ON CRUDE OIL SUPPLIES. Refineries that produce the refined petroleum
products transported through COZ's pipeline systems and handled at COZ's
terminals are dependent on adequate supplies of suitable grades of crude oil. A
material decline in crude oil supplies could adversely affect COZ's tariff
revenues from pipeline shipments of refined petroleum products, terminaling and
storage fees and margins from bulk and truck loading rack product sales.
COZ'S OPERATIONS ARE SUBJECT TO CERTAIN OPERATIONAL HAZARDS AND UNFORESEEN
INTERRUPTIONS. COZ's operations are subject to the customary hazards of the
products transportation business, as well as those associated with terminal and
storage facilities, including leaks, spills, fires and injury to personnel.
Operations also could be interrupted by natural disasters, adverse weather or
other events beyond COZ's control. Furthermore, COZ transports volatile
petroleum products such as gasoline, diesel oil and jet fuel in areas of high
population density. COZ carries insurance for some, but not all, accidents and
disruptions, and there can be no assurance that coverage will be adequate to
cover all losses.
SEASONAL VARIATION IN PRODUCT DEMAND. The mix of refined petroleum products
delivered varies seasonally, with gasoline demand peaking in early summer and
diesel fuel demand peaking in the fall. This can cause fluctuations in
revenues, as can variations in weather patterns from year to year.
ENVIRONMENTAL, SAFETY AND OTHER REGULATORY MATTERS. The business of COZ is
subject to the jurisdiction of governmental agencies with respect to
environmental, safety and other regulatory matters. COZ could be adversely
affected by environmental costs and liabilities that may be
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incurred. Future environmental regulations might adversely impact COZ's products
and activities. Risks of substantial costs and liabilities are inherent in
pipeline, terminaling and storage operations, and there can be no assurance that
substantial costs and liabilities will not be incurred. COZ currently owns, and
has in the past owned, properties that have been used for terminaling or storage
of petroleum products. Hydrocarbons or other solid wastes may have been
previously disposed of or released on or under some of the properties owned by
COZ. It is possible that developments, such as increasingly strict environmental
laws, regulations and enforcement policies thereunder, and claims for damages to
property or persons resulting from the operations of COZ or previous owners or
operators, could result in substantial costs and liabilities to COZ. See
"TransMontaigne-Business-Business of COZ-Environmental Regulation." Lion's
operations are also subject to environmental regulation and risk. See
"TransMontaigne-Business-Business of COZ-Lion Oil Company Investment." Federal
and state agencies also could change the tariffs pipelines may charge or impose
additional safety requirements, any of which could affect profitability. See
"TransMontaigne-Business-Business of COZ-Rate Regulation."
DETERMINATION OF NUMBER OF SHARES TO BE RECEIVED IN THE MERGER. In determining
whether to vote to approve the Merger, the stockholders of Sheffield and
TransMontaigne should consider that the numbers of shares of New Common Stock to
be received in the Merger by the holders of TransMontaigne Common Stock and Old
Sheffield Common Stock were determined by negotiations between TransMontaigne
and Sheffield, and were based on a number of factors. See "The Merger-
Sheffield's Reasons for the Merger;" "-Recommendations of Board of Directors of
Sheffield" and "-TransMontaigne's Reasons for the Merger; Recommendations of
Board of Directors of TransMontaigne." The numbers of shares to be received do
not necessarily reflect the relative stock values, asset values, cash flow per
share, earnings per share or other attributes of either TransMontaigne or
Sheffield. The Merger Agreement does not provide for any adjustment in the
numbers of shares to be received in the event that either the TransMontaigne
Common Stock or Old Sheffield Common Stock should increase or decrease in value.
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TRANSMONTAIGNE
GENERAL
TransMontaigne is a privately owned holding company which pursues, through
its subsidiaries, business opportunities in the downstream sector of the
petroleum industry. TransMontaigne privately placed $30 million of new common
equity in April 1995, of which $20 million was invested in and used to pay down
debt of a wholly-owned subsidiary, Continental Ozark, Inc. ("COZ"), which is
engaged in the transporting, storing and terminaling and the wholesale marketing
of refined petroleum products (principally unleaded gasoline, No. 2 diesel oil
and jet fuel) in the mid-continent region of the United States and in the
gathering, storing and transporting of crude oil in east Texas.
In February 1996, TransMontaigne participated with Sheffield in the formation
of Bear Paw Operating Company ("BPOC"), which is engaged in the contract
management and operation of downstream petroleum facilities, the owners of which
desire to reduce operating costs without disposing of their smaller systems.
BPOC is currently managing 15 such systems for a major interstate pipeline
company. Sheffield and TransMontaigne each own 45% of BPOC.
TransMontaigne completed in April 1996 a private placement for $25 million of
common stock at $5.50 per share to existing stockholders and institutional
investors. TransMontaigne plans to make further investments to support COZ's
and BPOC's businesses, as well as investments in other complementary businesses
engaged in the downstream sector of the petroleum industry.
The executive offices of TransMontaigne, a Delaware corporation, are located
at 370 17th Street, Republic Plaza, Suite 900, Denver, CO 80202, and its
telephone number is (303) 605-1798.
BUSINESS
BUSINESS OF COZ.
General. TransMontaigne's principal operating subsidiary, COZ, is engaged in
the transporting, storing and terminaling and the wholesale marketing of refined
petroleum products (principally unleaded gasoline, No. 2 diesel oil and jet
fuel) in the mid-continent region of the United States and in the gathering,
storing and transporting of crude oil in east Texas. COZ owns and operates 741
miles of pipeline (the NORCO pipeline, the Razorback pipeline and the CETEX
pipeline) and nine storage or terminal facilities in seven states with a
combined tank storage capacity of 3,633,500 barrels, serving over 500 customers.
A 65% owned subsidiary of COZ also owns a 27.75% interest in Lion Oil Company
("Lion") which owns a modern 65,000 BPD refinery in El Dorado, Arkansas, a 188-
mile crude oil transportation pipeline in east Texas, a 1,100-mile crude oil
gathering and transmission system and two refined products terminals. COZ does
not explore for, or produce, crude oil or natural gas, and it owns no crude oil
or natural gas reserves.
Pipelines. COZ utilizes mid-continent refined petroleum product pipeline
systems to transport products to market destinations and to conduct exchange
transactions with major and independent
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petroleum companies. COZ owns and operates a 452-mile refined petroleum products
pipeline from Ft. Madison, Iowa through the Greater Chicago area, to Toledo,
Ohio (the "NORCO pipeline") and associated storage facilities located at
Hartsdale, Indiana and Toledo, Ohio. COZ also owns a 60% interest in a 67-mile
refined petroleum products pipeline operating from Mt. Vernon, Missouri to
Rogers, Arkansas (the "Razorback pipeline") and an associated storage facility
at Mt. Vernon. COZ also owns and operates a 220-mile crude oil gathering
pipeline system, with 807,500 barrels of tank storage capacity, located in east
Texas (the "CETEX pipeline").
The NORCO and Razorback pipelines are common carriers and are subject to
tariff regulation by the Federal Energy Commission (the "FERC"). CETEX is an
intrastate common carrier subject to Texas Railroad Commission regulations.
Transportation through the pipelines as common carriers is available, under
published tariffs filed with the FERC or the Texas Railroad Commission, as
appropriate, to any shipper requesting such services and satisfying the
conditions and specifications set forth in the tariff. See "-Regulation."
In general, a shipper, including COZ, owns the refined petroleum products or
crude oil and transfers custody of the products to the NORCO or Razorback
pipelines or the crude oil to the CETEX pipeline for shipment to a delivery
location at which point custody again transfers. Tariffs for the transportation
service are charged by COZ to shippers based upon the origination point on the
pipelines to the point of product delivery. These tariffs do not include fees
for the storage of products at the storage facilities of the NORCO or Razorback
pipelines or crude oil at the CETEX pipeline storage facilities, or for the
terminaling and storage of products at COZ terminals, any of which fees are
separately charged if those facilities are utilized.
The refineries providing products shipped on the NORCO pipeline obtain their
supplies of crude oil primarily from Gulf Coast, mid-continent and Canadian
sources. The refineries providing products shipped on the Razorback pipeline
obtain their supplies of crude oil, to a substantial extent, from foreign
sources and, to a lesser extent, from producing fields located in Alaska,
Oklahoma, Kansas and Texas. If operations at any one refinery were
discontinued, COZ believes (assuming unchanged demand for refined petroleum
products in the markets it serves) that any effect would be short-term and that
COZ's business would not be materially adversely affected over the long term
since such discontinued production could be replaced by other refineries or by
other sources.
COZ's pipeline business depends in large part on the level of demand for
refined petroleum products in the markets served by the pipelines and the
ability and willingness of refiners and marketers having access to the pipelines
to supply that demand by shipments through the pipelines. Pipelines are the
safest and lowest cost method for intermediate and long-haul overland
transportation of refined petroleum products. Several competing pipeline
systems are located in the NORCO pipeline service area and those pipelines
generally have capital and financial resources substantially greater than COZ.
The Razorback pipeline is the only refined petroleum products pipeline providing
transportation services to northwest Arkansas. Competition is based primarily
on pipeline operational dependability, quality of customer service provided and
proximity to end users, although product pricing at either the origin or
terminal destination on a pipeline may outweigh transportation cost
considerations. COZ believes that high capital costs, tariff regulation,
environmental considerations and problems in acquiring rights-of-way make it
unlikely that additional competing pipeline systems comparable in size to the
NORCO and Razorback pipelines
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will be built in April 1996, since the COZ pipelines have available capacity to
satisfy shipper product movement requirements and the tariffs will remain
competitive.
Terminals. COZ owns and operates seven terminals and associated storage
facilities, connecting products transportation facilities and products
distribution locations. These facilities are located in Rogers, Arkansas, two
in Little Rock, Arkansas, Indianapolis, Indiana, South Bend, Indiana, Bryan,
Ohio, and Mt. Vernon, Missouri. The South Bend, Indiana terminal is under
renovation and is scheduled to be reactivated in late 1996. The terminals
receive products in bulk quantities via connecting pipeline systems. Products
are stored in bulk at the terminals and made available to wholesale, shipment
and exchange customers for transport by truck to commercial and retail
destinations, and then to the end user. COZ markets products over truck loading
racks at owned terminals as well as through exchanges with numerous companies at
other non-owned terminals located throughout the COZ distribution area. In
addition, COZ owned terminals are used by major and independent petroleum
companies to distribute products outside their primary distribution systems.
In addition to products terminal and storage facilities owned by independent
operators such as COZ, major and independent petroleum companies also own
terminal and storage facilities. Although such facilities often may have the
same capabilities as those owned by independent operators, they generally do not
provide terminaling services to third parties. In many instances, the major
petroleum companies which own terminal and storage facilities are also
significant customers of independent terminal operators. These major petroleum
companies frequently provide strong demand for terminals owned by independent
operators, particularly when the independent terminals have more cost effective
locations near key transportation connections. The major petroleum companies
also utilize independent terminal storage when their proprietary storage
facilities are inadequate, either because of size constraints, the nature of the
products stored or specialized handling requirements.
Independent terminal and storage facility owners compete based on the
location and versatility of the facilities and services they provide. A well
located terminal will have access to cost effective transportation to and from
the terminal, including highways, railroads and pipelines.
Storage of products at COZ owned terminals pending delivery is considered by
COZ to be an integral but separate segment of the product handling service.
Ancillary services, including injection of shipper-furnished or COZ-furnished
additives, are also available for a fee at the COZ terminals. The terminal and
storage facilities include automatic tank alarm systems and have been designed
with preventative structural measures to minimize the occurrence and level of
damage in the event of a spill or fire. All loading areas, tanks, pipes and
pumping areas are contained in order to collect any spillage and water run-off.
Routine maintenance is performed on a regularly scheduled basis at the terminal
and storage facilities.
Products Supply and Distribution. COZ's products supply and distribution
activity involves the bulk purchase and sale of refined petroleum products and
the wholesale marketing of products at terminal truck loading rack locations.
Prices of refined petroleum products, the prices of which depend largely upon
factors beyond COZ's control, including the supply of and demand for gasoline,
distillates and other refined
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products, which in turn are affected by domestic and foreign economies,
political affairs, production levels, availability of imports, marketing by
competitors, alternative fuels, energy conservation efforts and government
regulation. The prices received by COZ for products are also affected by
regional factors, such as local market conditions, transportation costs and the
operations of competitors.
COZ attempts to minimize its exposure to price volatility related to the
purchase and sale of refined products by selectively hedging with futures and
options contracts that are intended to offset the effects of price fluctuations,
as well as real-time inventory monitoring and pricing computer programs which
provide accurate and timely transactional and forecasting information. COZ's
risk management strategies are subject to policies that control purchases and
sales on a daily basis in order to maintain designated inventory positions
subject to price risk, achieve prevailing margins and effectively hedge forward,
when appropriate. There can be no assurance, however, that COZ's risk
management strategies will be effective in limiting any adverse effects of
refined products price fluctuations on COZ's operations or its overall
profitability. See "Summary-Risk Factors-Price Volatility" and "-Price Risk
Management."
Generally, when COZ purchases refined products it also simultaneously enters
into corresponding sale or exchange transactions involving physical deliveries
of the product to a third party, or corresponding sales of futures contracts on
the NYMEX. This procedure gives COZ a stable and reliable product supply which
can be sold at prevailing market prices to customers having recurring and spot
purchase requirements. Exchange agreements are generally for 30 days and month-
to-month thereafter until terminated by either party. COZ believes these short-
term contracts minimize the effect of volatile market prices and regional
economic aberrations and considers them essential in order to retain the
flexibility to respond to local demands and to changing market prices,
conditions and seasonal variations. However, termination of short-term
contracts could result in a reduction of pipeline and terminal volumes. COZ's
operating policy imposes dollar limits on the acquisition of petroleum products
and futures contracts or other derivative products for the purpose of price
change trading.
Lion Oil Company Investment. In 1985, Continental Ozark Holding, Inc., a 65%
subsidiary of COZ, purchased 27.75% of the shares of Lion, which owns a modern
65,000 BPD refinery in El Dorado, Arkansas, a 188-mile crude oil transportation
pipeline in east Texas from Nederland on the U.S. Gulf Coast to Longview, a
1,100-mile crude oil gathering system in south Arkansas and north Louisiana, and
refined products terminals located at Memphis and Nashville, Tennessee. Lion is
operated under a management contract. The manager, Ergon, Inc., owns a 48.6%
interest in Lion. The remaining 24% interest in Lion is owned by others. The
last dividend distribution made by Lion to its shareholders was in 1992. Two
officers of COZ are directors of Lion.
The Lion refinery generates a product mix of gasoline, diesel and heating oil
and asphalt. Lion owns and has access to pipeline systems which permit the
purchase and shipment of crude oil feedstocks to its refinery from regional
independent producers, as well as from reliable foreign sources of supply. In
recent years Lion has made substantial capital improvements to upgrade its
refining facilities resulting in reduced routine maintenance costs, increased
facility utilization, and compliance with environmental and regulatory
requirements. COZ purchases refined petroleum products from Lion.
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An increase in crude oil prices could adversely affect Lion's operating
margins and sales volumes. Since the cost of crude oil and the prices of
refined products are subject to significant fluctuation, Lion's earnings and
cash flow have been and may continue to be adversely affected. The
profitability of Lion's operations is significantly influenced by the "crack
spread," which is the difference between the sales price of refined petroleum
products and the cost of associated feedstocks (principally crude oil) delivered
to the refinery for processing. Since COZ's interest in Lion is recorded for
financial statement purposes on the equity method of accounting, a significant
negative fluctuation in Lion's reported earnings would also have an adverse
effect on COZ's earnings.
Lion is subject to extensive regulation by local, state and federal
environmental laws, including the Clean Air Act, the Federal Water Pollution
Control Act, and the Resource Conservation and Recovery Act ("RCRA"). As a
result of the long history of operations at Lion's refinery, there has been some
impact on groundwater and soil. Lion has conducted and continues to conduct
studies to investigate the nature and extent of contamination at certain
locations on the refinery site. Remediation and corrective action are currently
being conducted. The continuing studies will determine the required additional
remediation and corrective action to be undertaken. While Lion's management
believes that the net cost of any remedial action will not have a material
adverse effect on Lion's financial condition or liquidity, there can be no
assurance that the impact of such matters on its results of operations for any
given reporting period will not be material.
Environmental Regulation.
General. The operations of COZ are subject to federal, state and local laws
and regulations relating to protection of the environment. Although COZ
believes that the operations of COZ are in general compliance with applicable
environmental regulations, and COZ has not budgeted any material amounts for
environmental compliance for the current fiscal year, risks of substantial costs
and liabilities are inherent in pipeline and terminal operations, and there can
be no assurance that significant costs and liabilities will not be incurred.
Moreover, it is possible that other developments, such as increasingly strict
environmental laws, regulations and enforcement policies thereunder, and claims
for damages to property or persons resulting from the operations of the
subsidiaries, could result in substantial costs and liabilities.
Water. The terminal and pipeline facilities are extensively regulated by the
Federal Water Pollution Control Act of 1972 (FWPCA), the Oil Pollution Act of
1990 (OPA), and other statutes relating to prevention of and response to oil
spills. In order to prevent and respond appropriately to spills, the facilities
have Spill Prevention Control and Countermeasure Plans and OPA 1990 Spill
Response Plans, as required. In addition, certain of the pipelines are
regulated by the Department of Transportation under regulations entitled
Transportation of Hazardous Liquids by Pipeline, which contain safety standards
and reporting requirements for certain spills and other accidents. As part of
spill response procedures, the facilities have internal and external
notification procedures for field and corporate emergency response management
teams to ensure that management, contractors, and governmental authorities are
properly notified. Contractual arrangements with emergency response contractors
are also in place.
OPA subjects owners of facilities to strict, joint and potentially unlimited
liability for removal costs and certain other consequences of an oil spill,
where such spill is into navigable waters, along
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shorelines or in the exclusive economic zone. In the event of an oil spill into
such locations, substantial liabilities could be imposed upon the subsidiaries.
States in which the subsidiaries operate have also enacted similar laws.
Regulations are currently being developed under OPA and state laws that may also
impose additional regulatory burdens.
COZ's pipelines cross several navigable rivers and streams. Some facilities
are also located near water bodies and sensitive areas, such as wetlands. The
FWPCA imposes strict controls against the discharge of oil and its derivatives
into navigable waters, provides possible penalties for any discharge of
petroleum products in reportable quantities, and imposes substantial potential
liability for the costs of removing an oil spill. Additionally, the OPA exposes
parties liable for spills to damages for loss of use or impairment of natural
resources. State laws for the control of water pollution also provide varying
possible civil and criminal penalties and liabilities in the case of a release
of petroleum.
Contamination resulting from spills or releases of refined petroleum products
are not unusual within the petroleum pipeline industry. Several facilities of
COZ have soil and groundwater contamination. COZ, however, is indemnified by
previous owners for most of the known contamination. Contamination resulting
from other spills has been handled in the normal course of business and is not
expected to have a material adverse effect on COZ, although there can be no
assurance that it will not have a material adverse effect on COZ. Petroleum
recovered from a spill site is typically transported to the nearest company
facility for further processing. If the recovered petroleum were required to be
sent to a disposal site instead, costs of addressing a spill would increase
substantially.
In the purchase agreements for the Little Rock south terminal and the CETEX
and NORCO pipelines, the sellers agreed to be responsible for certain defined
contamination that might have existed at the time of the sale. Under the
purchase agreement for the NORCO pipeline, the seller has addressed, or is
currently addressing, contamination at several sites, including conducting
monitoring and remediation activities. There can be no assurance that the
sellers of any of these sites will not dispute coverage and refuse to accept
responsibility for any discovered contamination.
On September 15, 1993, after the purchase of the pipeline system by a
subsidiary of COZ, NORCO Pipeline, Inc., a leak occurred in DeKalb County,
Indiana, when the operator of the control center at that time, ARCO, ordered the
field personnel to begin pumping without first verifying that the pipeline
valves were properly aligned. As a result, a line ruptured in a soy bean and
corn field surrounded by agricultural and rural residential land, and released
approximately 660 barrels of diesel fuel, contaminating soil and groundwater in
the field. Some of the fuel followed a drainage ditch for approximately one-
half mile, where it entered Fish Creek. Cleanup operations recovered about one-
half of the diesel fuel. Soil and groundwater were impacted and it is possible
that additional assessment and remediation could be required. In addition, the
Natural Resource Damage Assessment (NRDA) Trustees for the U.S. Fish and
Wildlife Service and for the states of Indiana and Ohio alleged that the release
caused natural resource damages in Fish Creek. NORCO Pipeline, Inc. has made a
claim regarding this incident to its insurance carrier. The insurance company
and ARCO have negotiated a settlement with the trustees, which will be issued
for public comment, regarding the NRDA claim.
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Many of the facilities are subject to permits regulating the discharge of
pollutants into navigable waters, called National Pollutant Discharge
Elimination System ("NPDES") permits. To meet NPDES requirements, COZ has in
place or access to wastewater treatment systems, as needed. As those permits
expire and are renewed, the facilities can come under increasingly stringent
requirements. The EPA and certain states have also promulgated regulations that
may trigger the need to apply for permits to discharge storm water runoff.
Where, and as, additional requirements become applicable, modifications to NPDES
permits and procurement of stormwater permits will be requested as appropriate.
Although no assurance in this regard can be given, COZ believes that any such
modifications or stormwater permits should not have a material effect on its
financial condition.
Regulation of Aboveground Storage Tanks. The states in which the facilities
operate regulate aboveground storage tanks containing liquid substances. While
state regulations require that such tanks be constructed and operated in
conjunction with industry standards that have been adopted by reference into
federal regulations, there is no uniform federal regulation of aboveground
storage tanks. However, bills have been introduced in the United States Senate
and House of Representatives this year which would require the administrator of
the Environmental Protection Agency to review existing regulations for
deficiencies and to issue a regulation that consolidates all environmental laws,
and health and safety laws, applicable to the design, construction, maintenance
and operation of aboveground storage tanks. These bills have been referred to
committee and it is not presently known if or when action will be taken. COZ
believes that it is in substantial compliance with all current requirements
applicable to aboveground storage tanks, and that the pending House and Senate
bills will not materially impact COZ's operations. Although no assurance can be
given, COZ believes that the future implementation of additional requirements
applicable to aboveground storage tank laws by either the states in which COZ
operates or by the federal government will not have a material adverse effect on
COZ's financial condition or results of operations.
Air Emissions. The operations of COZ are subject to the Federal Clean Air
Act and comparable state and local statutes. COZ believes that the operations
are in substantial compliance with such laws in all states in which it operates.
The gasoline facilities generally are subject to an air permit requirement. In
addition, many of the facilities are required to have vapor recovery or
combustion units. To the extent that any terminals are nearing volume
limitations, permit modifications could be required. Although no assurance in
this regard can be given, COZ believes that any such modifications should not
have a material effect on its financial condition.
Amendments to the Federal Clean Air Act enacted in late 1990 will require
most industrial operations in the United States to incur future capital
expenditures in order to meet the air emission control standards that are to be
developed and implemented by the EPA and state environmental agencies during the
next decade. Pursuant to these Clean Air Act Amendments, those facilities that
emit volatile organic compounds ("VOC") or nitrogen oxides and are located in
non-attainment areas will be subject to increasingly stringent regulations,
including requirements that certain sources install reasonably available control
technology. Several gasoline facilities may also be subject to new source
performance standards. The EPA is also required to promulgate new regulations
governing the emissions of hazardous air pollutants. Some of the facilities are
included within the categories of hazardous air pollutant sources that may be
affected by these regulations. In order to comply with applicable air pollution
laws, COZ may have to install additional vapor control equipment as necessary to
comply with the regulations.
Solid Waste. RCRA governs the generation and disposal of solid wastes,
including hazardous wastes. In 1990, the Environmental Protection Agency
("EPA") promulgated regulations expanding the definition of characteristic
hazardous waste by adding 25 organic constituents that were not
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previously included in determining that a waste is hazardous and by adding a new
testing procedure called the Toxicity Characteristic Leaching Procedure to
detect the concentrations of those constituents. These changes increase the
costs of handling certain wastes generated through the subsidiaries' operations.
Additional changes in the regulations or interpretation of these regulations may
result in increased capital expenditures or operating expenses.
Environmental Impact Statement. The National Environmental Policy Act of
1969 ("NEPA") applies to certain extensions or additions to a pipeline system.
Under NEPA, if any project that would significantly affect the quality of the
environment requires a permit or approval from any federal agency, a detailed
environmental impact statement must be prepared. The effect of NEPA may be to
delay or prevent construction of new facilities or to alter their location,
design or method of construction.
Rate Regulation.
Interstate Regulation. The interstate petroleum product pipeline operations
of COZ are subject to regulation by the FERC under the Interstate Commerce Act
(the "ICA") which requires, among other things, that pipeline transportation
rates be "just and reasonable" and not unduly discriminatory. New and changed
rates must be filed with the FERC, which may investigate their lawfulness on
shipper protest or its own motion. The FERC may suspend the effectiveness of
such rates for up to seven months. If the suspension expires before completion
of the investigation, the rates go into effect, but the pipeline can be required
to refund to shippers, with interest, any difference between the level the FERC
determines to be lawful and the filed rates under investigation. Rates that
have become final and effective may be challenged by complaint to a court or the
FERC filed by a shipper or on the FERC's own initiative, and reparations may be
recovered by the party filing the complaint for the two year period prior to the
complaint if the FERC finds the rate to be unlawful.
In general, petroleum product pipeline rates are required to be cost based to
be deemed just and reasonable. Cost based rates are permitted to generate
operating revenues, based on projected shipment volumes, not greater than the
total of the following components: (i) operating expenses, (ii) depreciation and
amortization, (iii) "normalized" federal and state income taxes and (iv) an
overall allowed rate of return on the pipeline's "rate base." Generally, rate
base is a measurement of the investment in, or value of, the pipeline's assets.
The Energy Policy Act of 1992 (the "EP Act") mandated simplified procedures
for FERC rate regulation under the ICA. In response to the EP Act, the FERC has
adopted indexation as a simplified rate making methodology for pipeline rate
changes. Current indexation is based on the annual change in the Producer Price
Index less one percent.
Just and reasonable pipeline rates in effect on December 31, 1994 are the
"Base Rates" for indexation. A pipeline may increase its rates to the ceiling
rate calculated by indexing without filing a formal cost based justification and
with limited shipper rights to protest. The index is cumulative, applying to
the applicable ceiling rate and not to the actual rate charged. Thus, a rate
that is not increased to the ceiling level in any year may still be increased to
the cumulative indexed ceiling in a later year. A rate decrease may be required
if the index lowers the ceiling. Shippers are still permitted to protest rates,
even if the rate change does not exceed the index ceiling, if the shipper
30
<PAGE>
can demonstrate that the "increase is so substantially in excess of the actual
cost increases incurred by the pipeline" that the proposed rate would be unjust
and unreasonable.
The indexing mechanism does not set initial rates for a pipeline, which still
generally must be cost based. However, a pipeline can file an initial rate
based upon the agreement of at least one non-affiliated shipper, without filing
full cost-of-service justification for the rate. If this negotiated rate is
protested by another shipper, the pipeline will be required to justify the
initial rate on a cost-of-service basis. The initial rate that is established
by a pipeline becomes the pipeline's "Base Rate" for indexation.
COZ's current rates are based on settlements with its then current shippers
in August 1995. COZ believes that its current rates are just and reasonable and
would withstand challenge under the FERC's cost based rate standards. Because
of the complexity of rate making, however, the lawfulness of any rate is never
assured.
The FERC orders establishing indexed pipeline rate ceilings are on appeal to
the District of Columbia Circuit Court of Appeals. COZ cannot predict the
result of those appeals, but believes that a modification or reversal of the
FERC indexing orders would not have a material adverse effect on COZ.
COZ cannot predict how future regulation of interstate petroleum product
pipelines may change or what impact such changes will have on COZ.
Intrastate Regulation.
The intrastate operations of the CETEX pipeline are subject to regulation by
the Texas Railroad Commission. Like interstate regulation, the Texas regulation
requires that proposed intrastate tariff increases be filed with the Railroad
Commission and allows shippers to challenge such increases.
BUSINESS OF BPOC. In February of 1996, TransMontaigne participated with
Sheffield in the formation of BPOC. Each company has a 45% interest in BPOC
with the balance held by BPOC's management. BPOC is currently managing 15 small
gathering systems for a major interstate pipeline company. In addition to
earning a fee for the management of these systems it will be compensated for
additional volumes which it connects to these systems.
The gathering, processing and marketing sector of the natural gas industry is
currently in a consolidation phase. As this consolidation takes place, it
becomes more difficult for many companies to earn acceptable returns on smaller
systems. Many producers that have operated their own facilities now realize
they lack the skills necessary to maximize the return on their investments and
prefer to monetize such assets in order to generate drilling capital.
BPOC believes that additional opportunities, similar to its existing
operations, will become available. Additionally, it believes that with the
capital available to it from TransMontaigne and Sheffield there will be
opportunities to acquire gathering, processing and marketing assets at
31
<PAGE>
competitive prices. Quality customer service is a key objective of BPOC with
new industry service standards being targeted for smaller downstream facilities.
EMPLOYEES
TransMontaigne had 112 employees at January 31, 1996. No employees are
subject to representation by unions for collective bargaining purposes.
BANK DEBT
CREDIT AGREEMENT. TransMontaigne is the borrower under a Credit Agreement dated
December 7, 1995 with The First National Bank of Boston. The loan is a
revolving credit agreement used principally to fund working capital requirements
of TransMontaigne and to issue letters of credit to persons with whom
TransMontaigne and its subsidiaries do business. The aggregate commitment for
outstanding letters of credit and revolving note advances cannot exceed $45
million.
Borrowings under the Credit Agreement bear interest at a rate per year equal
to the bank's announced Base Rate. TransMontaigne may elect to have a portion
of the loan be subject to a Eurodollar pricing option.
As of January 31, 1996, approximately $31 million was outstanding under the
Credit Agreement.
The Credit Agreement contains covenants by TransMontaigne and its
subsidiaries not to sell their assets and is secured only by the stock of the
subsidiaries. The Credit Agreement contains financial ratio tests relating to
consolidated income from operations, consolidated funded debt, liquidity and
consolidated tangible net worth. TransMontaigne is in compliance with all of
such tests. The Credit Agreement restricts the amount of indebtedness that may
be incurred by TransMontaigne and restricts the amount of investments in other
companies that can be made by TransMontaigne without the lender's consent.
The lender has consented to the Meger. TransMontaigne may not merge with another
company without the lender's consent. TransMontaigne's permanent net base
product inventory (that is, inventory needed for line-fill and tank bottom
requirements and exchange obligations) may not exceed one million barrels except
as may be necessary for future expanded operations, provided such expansion is
consistent with TransMontaigne's inventory policy then in effect.
Under the Credit Agreement, TransMontaigne may not make distributions to its
stockholders in excess of $6 million plus 50% of consolidated net income and
100% of additional equity contributed to TransMontaigne after December 7, 1995.
As of January 31, 1996, TransMontaigne could distribute approximately $6.7
million to its stockholders without the consent of the lender under the Credit
Agreement.
The Credit Agreement contains customary events of default, including, among
others, failure to pay, breach of agreement and insolvency. Upon the occurrence
of an event of default, the Credit Agreement permits the lender to declare all
outstanding borrowings to be due and payable
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<PAGE>
immediately. The lender is entitled to cease further advances upon a material
adverse change in TransMontaigne's business.
SUBORDINATED DEBT. TransMontaigne has outstanding $4 million of 12.75%
Guaranteed Senior Subordinated Debentures due December 15, 2000 (the
"Debentures"). The Debentures are subordinate to the debt due under the Credit
Agreement and certain purchase money debt.
The Debentures require TransMontaigne to maintain a consolidated net worth of
at least $15 million and COZ to maintain a consolidated net worth of at least $7
million. TransMontaigne and COZ are in compliance with such tests. The loan
agreement also contains covenants that, among other things, limit
TransMontaigne's ability to borrow money, make certain dividend payments, loans
and investments, merge, consolidate or sell certain assets and amend its
articles and bylaws.
The loan agreement contains customary events of default, including, among
others, failure to pay, breach of agreement and insolvency. Upon the occurrence
of an event of default, the loan agreement permits the lender to declare all
outstanding borrowings to be due and payable immediately.
The holders of the Debentures are affiliates of Massachusetts Mutual Life
Insurance Company, which hold approximately 5.4% of the TransMontaigne Common
Stock and warrants to purchase an additional 248,686 shares of TransMontaigne
Common Stock.
LEGAL PROCEEDINGS
There is no material pending or threatened litigation against
TransMontaigne.
33
<PAGE>
TRANSMONTAIGNE SELECTED HISTORICAL FINANCIAL INFORMATION
The selected historical financial data of TransMontaigne set forth below for
the year ended April 30, 1995, the seven months ended April 30, 1994 and the
years ended September 30, 1993, 1992, 1991 and 1990 has been derived from the
audited consolidated financial statements of TransMontaigne. The selected
historical financial data for TransMontaigne for the nine months ended January
31, 1996 and 1995 has been derived from unaudited consolidated financial
statements of TransMontaigne and includes, in the opinion of TransMontaigne's
management, all adjustments necessary to a fair statement of the financial
position and results of operations for the interim periods presented. All
adjustments, in the opinion of management, are of a normal recurring nature.
This historical data should be read in conjunction with Management's Discussion
and Analysis of Financial Condition and Results of Operations and the
consolidated financial statements and notes thereto of TransMontaigne included
herein.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEVEN MONTHS
JANUARY 31, YEAR ENDED APRIL ENDED YEARS ENDED SEPTEMBER 30,
------------------------ 30, APRIL 30, ------------------------------------------------
1996 1995 1995 1994 1993 1992 1991 1990
--------- ----------- ---------------- ------------ ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Revenue $347,974,850 236,169,346 324,591,409 296,086,981 507,936,810 515,547,695 417,834,881 443,860,068
Operating income
(loss) 3,267,286 2,867,363 406,042 (1,509,581) (1,710,242) (1,930,614) (3,368,105) 1,752,535
Net earnings
(loss) 1,602,137 624,010 (3,217,635) (2,853,609) (4,490,468) (4,200,922) (4,150,161) 3,205,855
Earnings (loss)
per share $.11 .23 (1.32) (1.15) (1.85) (1.73) (1.62) 1.19
January 31, APRIL 30 SEPTEMBER 30
1996 ------------------- --------------------------------------------------------------------
------------- 1995 1994 1993 1992 1991 1990
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital $32,640,911 37,989,205 11,554,715 11,470,225 20,685,446 16,601,819 6,278,119
Total assets 86,939,395 104,220,346 75,470,266 86,334,703 76,336,971 69,240,513 50,897,747
Long-term debt,
excluding current
installments 32,402,267 36,945,610 37,671,329 33,953,590 35,256,698 25,476,695 15,841,887
Stockholders' equity 29,822,888 28,470,702 2,480,835 5,334,500 9,825,060 14,026,063 12,444,514
</TABLE>
34
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL. TransMontaigne is a privately owned holding company which pursues,
through its subsidiaries, business opportunities in the downstream sector of the
petroleum industry. TransMontaigne's largest subsidiary is COZ, which is engaged
in the transporting, storing and terminaling and the wholesale marketing of
refined petroleum products (principally unleaded gasoline, No. 2 diesel oil and
jet fuel) in the mid-continent region of the United States and in the gathering,
storing and transporting of crude oil in east Texas. COZ owns and operates 741
miles of pipeline (the NORCO pipeline, the Razorback pipeline and the CETEX
pipeline) and nine storage or terminal facilities in seven states.
TransMontaigne incurred net losses from the year ended September 30 1992
through the year ended April 30, 1995, due primarily to the underutilization of
its pipelines and terminals, small or negative margins from bulk product sales
and wholesale marketing activities and a lack of adequate equity capital.
Pipeline utilization averaged 38% for the year ended April 30, 1995, 40% for the
seven months ended April 30, 1995 and 36% and 39%, respectively, for the years
ended September 30, 1993 and 1992. Terminal utilization averaged 50% for the
year ended April 30, 1995, 50% for the seven months ended April 30, 1994, and
55% and 52% for the years ended September 30, 1993 and 1992. The
underutilization of the pipelines and terminals was primarily the result of
TransMontaigne's inability to finance the inventory required to more fully
utilize these facilities. Net operating margins were insufficient to cover
general and administrative expense, depreciation and amortization, and interest
and other financing costs which were incurred to support and finance its
activities. Volatile market prices of refined petroleum products during this
period resulted in losses from inventory write downs and the sale of high cost
products at lower prices.
Since April 30, 1995, TransMontaigne has established new inventory
management policies, procedures and operating controls, and has also added
managerial personnel to supervise the products supply and distribution function
in an effort to reduce inventory levels and related carrying costs, and more
effectively manage inventory price risks. There can be no assurance that these
actions will serve to reduce the level of inventory and successfully manage
inventory price risks.
LIQUIDITY AND CAPITAL RESOURCES. TransMontaigne's practice is to secure
sources of long-term capital prior to committing to new projects. In April
1995, TransMontaigne sold $30 million of common stock to institutional and
individual investors. $20 million of this amount was advanced to COZ, which
used it to reduce its bank debt. The remaining $10 million was invested in
interest bearing instruments pending identification of further investment
opportunities.
In December 1995, TransMontaigne entered into a new bank credit agreement
with a money center bank which provides for revolving credit of up to $45
million, including cash advances and letters of credit. The credit agreement has
a final maturity date of November 30, 1999 and provides for interest at either
the bank's base rate or a designated premium over short-term Eurodollar rates.
As of January 31, 1996, approximately $31 million was outstanding under the
credit agreement.
In April 1996, TransMontaigne completed a private placement for $25 million
of common stock at $5.50 per share to existing stockholders and institutional
investors.
35
<PAGE>
Since April 1995, TransMontaigne has raised $55 million in common equity
and established a new $45 million revolving loan facility. These financings were
used to repay COZ's previous line of credit in the amount of approximately
$48,000,000. An additional $7,000,000 was used for working capital and to
support letters of credit for COZ. The balance of $45 million ($35 million in
cash and $10 million of unused borrowing capacity) is to be used to fund new
capital expenditures and acquisitions in the downstream petroleum industry.
Capital expenditures were $2,900,000, $750,000, $460,000, $4,700,000
million and $2,250,000 million for the nine months ended January 31, 1996, the
year ended April 30, 1995, the seven months ended April 30, 1994 and the years
ended September 30, 1993 and 1992, respectively.
TransMontaigne has tentatively budgeted approximately $5,800,000 for
capital expenditures for the fiscal year ended April 30, 1997, which includes
$3,200,000 for the renovation of the South Bend terminal, located on its NORCO
pipeline system. Actual future capital expenditures will depend on numerous
factors, some of which are beyond TransMontaigne's control, including the
availability of appropriate acquisitions; the demand for pipeline, terminaling
and storage services; local, state and federal governmental regulations;
environmental compliance requirements; fuel conservation efforts; and the
availability of financing on acceptable terms.
TransMontaigne had working capital of $32,640,000 at January 31, 1996.
Management believes TransMontaigne's current working capital position, future
cash provided by operating activities, borrowing capacity under its credit
agreement and its relations with institutional lenders and equity investors
should enable it to meet its future capital requirements, although there can be
no assurance that TransMontaigne will be able to obtain additional capital when
needed on acceptable terms.
RESULTS OF OPERATIONS.
TransMontaigne's revenues are derived from three activities: transporting
refined products and crude oil in pipelines (Pipelines), storing and terminaling
refined products (Terminals) and products supply and distribution (Products).
Pipeline revenues are based on the volume of refined petroleum products or
crude oil transported and the distance from the origin point to the delivery
point. The NORCO and Razorback pipelines transport refined products and their
rates are regulated by the FERC. The CETEX pipeline transports crude oil and
its rates are not regulated.
Terminal revenues are based on the volume of products handled, generally
at a standard industry fee of 1/2 of one cent per gallon. Terminal fees are not
regulated. Storage fees are generally based on a per gallon rate, which varies
with the duration of the storage arrangement, the product stored and special
handling requirements.
36
<PAGE>
Pipeline and terminal operating costs include wages and employee benefits,
utilities, communications, maintenance and repairs, property taxes, rent,
insurance, vehicle expenses, environmental protection costs, materials and
supplies.
The products supply and distribution business includes bulk sales of
products and the wholesale distribution of products from terminals. Bulk
purchase and sale transactions in quantities of 25,000 barrels to 50,000 barrels
are common and are generally made at very small margins. Wholesale distribution
of products from proprietary and nonproprietary terminal truck loading rack
locations are primarily represented by truck load sales of 8,000 gallons of
product. These sales are generally also made at small margins.
Nine Months Ended January 31, 1996 Compared to Nine Months Ended
January 31, 1995.
Revenue and operating information for the nine months ended January 31,
1996 and 1995 is summarized below.
<TABLE>
<CAPTION>
PIPELINES TERMINALS PRODUCTS TOTAL
--------- --------- -------- -------
(in thousands)
<S> <C> <C> <C> <C>
1996
----
Volumes (1) 14,399 433,600 650,000
Revenues $ 6,943 2,462 338,570 347,975
Net Operating Margin (2) 3,905 1,840 1,884 7,629
1995
----
Volumes (1) 9,966 421,700 455,000
Revenues $ 4,317 2,415 229,437 236,169
Net Operating Margin (2) 1,907 1,805 2,641 6,353
- -----------------
</TABLE>
(1) Pipeline volumes are expressed in barrels (42 gallons per barrel) and
terminaling and products sales volumes are expressed in gallons.
(2) Net operating margin represents revenues less direct operating expenses for
Pipelines and Terminals, and revenues less cost of refined products
purchased for Products.
The net operating margin from pipeline operations increased 104%, or
$1,998,000, to $3,905,000 for the nine months ended January 31, 1996 as compared
to $1,907,000 for the nine months ended January 31, 1995. This increase was due
primarily to a 44% increase in pipeline volumes shipped and increased pipeline
utilization, and which resulted in a 60% increase in revenues during the period.
The increase in revenues was partially offset by a $628,000 increase in pipeline
operating costs, primarily due to incremental power costs due to increased
volumes, additional personnel costs, and reductions in the reimbursement of
certain costs previously paid by third parties.
Terminal operations generated approximately a 2% increase in net operating
margins in 1996. This increase resulted from a 3% increase in terminal volumes
which resulted primarily from volume increases at the Little Rock, Arkansas
terminal. Terminal operating costs increased at a slightly greater rate.
37
<PAGE>
The net operating margin from product sales decreased 29% during the
nine months ended January 31, 1996 compared to the nine months ended January 31,
1995, while net products revenues increased $109,133,000 on additional volume of
195,000,000 gallons sold. The decrease in net margin for the period was caused
by the sale of bulk and rack products inventory at market prices which were
below inventory carrying costs. During much of the nine months ended January
31, 1996, product prices fell significantly.
During the nine months ended January 31, 1996, general and
administrative expenses increased approximately 34% over the nine months ended
January 31, 1995, primarily due to increases in salaries and related employee
benefits costs associated with additional management personnel.
Equity in earnings of affiliates primarily represent TransMontaigne's
share of the earnings of Lion Oil Company ("Lion"). TransMontaigne's 65% owned
subsidiary, Continental Ozark Holdings, Inc. ("COH"), owns a 27.75% interest in
Lion. Minority interest represents the other COH shareholders' interest in the
earnings of Lion. During the nine months ended January 31, 1996, equity in
earnings of affiliates (net of the related minority interests) decreased to
approximately $217,000 from approximately $370,000 in the nine months ended
January 31, 1995, primarily due to a decline in the gross margins ("crack
spread") of Lion.
Interest expense represents interest on advances under the revolving
bank line of credit used to finance inventory and accounts receivable and
interest on the Company's senior subordinated debentures. Interest expense
decreased $301,537, or 13%, primarily as a result of lower average balances
outstanding under the line of credit. Other financing costs include fees paid
for letters of credit issued to product suppliers and loan commitment fees paid
in connection with the revolving bank line of credit.
Interest income during the nine months ended January 31, 1996 was
attributable to the investment in interest bearing securities of approximately
$10 million of cash held for future investments.
Primarily as a result of the increase in pipeline and terminal net
operating margins, reduction in interest expense and the increase in interest
income, discussed above, net earnings for the nine months ended January 31, 1996
increased to $1,602,000 from $624,000 for the nine months ended January 31,
1995.
38
<PAGE>
Year Ended April 30, 1995 Compared to the Seven Months ended April 30, 1994
and the Years Ended September 30, 1993 and 1992.
Revenue and operating information for the year ended April 30, 1995, the
seven months ended April 30, 1994 and years ended September 30, 1993 and 1992
are summarized below:
<TABLE>
<CAPTION>
Pipelines (1) Terminals Products Total
------------- --------- --------- -------
(in thousands)
<S> <C> <C> <C> <C>
1995
- ----
Volumes (2) 13,721 547,000 620,000
Revenues 5,827 3,145 315,619 324,591
Net Operating Margin (3) 2,678 2,340 761 5,779
1994 (seven months)
- ----
Volumes (2) 8,654 321,100 645,000
Revenues 3,989 1,773 290,325 296,087
Net Operating Margin (loss) (3) 2,096 1,119 (1,902) 1,313
1993
- ----
Volumes (2) 12,245 433,200 941,000
Revenues 6,167 2,476 499,294 507,937
Net Operating Margin (loss) (3) 2,848 1,817 (2,077) 2,588
1992
- ----
Volumes (2) 2,878 326,900 920,000
Revenues 1,643 1,698 512,207 515,548
Net Operating Margin (loss) (3) 1,034 1,121 (483) 1,672
- ----------------------
</TABLE>
(1) The NORCO pipeline system was acquired in November 1992 and the CETEX
pipeline was acquired in April 1992.
(2) Pipeline volumes are expressed in barrels and terminaling and products sales
volumes are expressed in gallons.
(3) Net operating margin represents revenues less direct operating expenses for
Pipelines and Terminals, and revenues less cost of refined products
purchased for Products.
(4) The margin on products for the year ended April 30, 1995 includes a margin
of approximately $2,641,000 for the nine months ended January 31, 1995 and a
loss of $1,880,000 for the three months ended April 30, 1995.
Net operating margins from pipeline operations were $2,678,000 for the year
ended April 30, 1995, $2,096,000 for the seven months ended April 30, 1994,
$2,848,000 for the year ended September 30, 1993, and $1,034,000 for the year
ended September 30, 1992. The increase in margins during these periods was
primarily a result of the acquisition of the NORCO pipeline in November, 1992
which has contributed additional volumes of approximately 9,850,000 barrels per
year. Aggregate pipeline operating costs increased to $3,149,000 for the year
ended April 30, 1995 from $609,000 for the year ended September 30, 1992 also as
a result of the acquisition of the NORCO pipeline. Operating costs for the
periods subsequent to the acquisition of the NORCO pipeline were relatively
constant.
Terminal operations generated net operating margins of $2,340,000 for the year
ended April 30, 1995, $1,119,000 for the seven months ended April 30, 1994,
$1,817,000 for the year ended September 30, 1993, and $1,121,000 for the year
ended September 30, 1992. This increase in net operating margins during these
periods was due primarily to the increased volumes and revenues attributable to
the acquisition of the Little Rock south terminal in May 1993 and the increased
utilization of the Rogers terminal. As a result, terminal volumes handled
increased to 547,000,000 gallons for the year April 30, 1995 from 326,900,000
gallons for the twelve months ended September 30, 1992 and revenues increased to
$3,145,000 from $1,698,000 for the comparable
39
<PAGE>
periods. Although terminal volumes increased significantly during these periods,
terminal operating expenses remained relatively constant, thereby increasing the
net operating margins in these periods.
Net operating margins (losses) on product sales were $761,000 for the year
ended April 30, 1995, $(1,902,000) for the seven months ended April 30, 1994,
$(2,077,000) for the year ended September 30, 1993 and $(483,000) for the year
ended September 30, 1992. During these periods, there were significant
fluctuations in product purchase and sale prices reflecting the volatility in
the world-wide energy markets. In many cases this resulted in reduced or
negative margins on sales of products and an inventory write-down. During the
seven months ended April 30, 1994, TransMontaigne recorded a write-down of
approximately $3,640,000 to reduce inventories to the lower of cost or market
calculated as of December 31, 1993. The write-down was a result of a steep
decline in refined product prices in the latter part of 1993 which reached an
historic low in December of 1993. At that time, prices for unleaded gasoline
declined to less than $.40 per gallon.
Revenues from product sales declined subsequent to April 30, 1994 as a result
of discontinuing the business of a limited partnership in which TransMontaigne
owned a one-third interest and was the managing general partner. The
partnership conducted trading operations primarily in the cash market by
purchasing and selling refined petroleum products and crude oil. While
significant revenues were generated during the seven months ended April 30, 1994
and the years ended September 30, 1993 and 1992, the effect on net earnings
(losses) during these periods was not significant.
General and administrative expenses also increased approximately 15% annually
from the year ended September 30, 1992 through the year ended April 30, 1995 as
a result of acquisitions of the NORCO and CETEX pipelines, the growth of the
Razorback pipeline/Rogers terminal operations, the acquisition of the Little
Rock south terminal, and the expansion of product supply and distribution
activities, all of which increased personnel costs and related supporting
administrative expenses.
Depreciation and amortization increased from the amount recorded in 1992 in
subsequent periods, primarily due to the acquisitions of the NORCO and CETEX
pipelines in 1992 and the Little Rock south terminal in 1993.
Equity in earnings (losses) of affiliates, net of the related minority
interest, was $295,000 in the year ended April 30, 1995, $479,000 in the seven
months ended April 30, 1994, and $(59,000) and $157,000, respectively, in the
years ended September 30, 1993 and 1992. During these periods, the operating
results of Lion fluctuated widely as a result of volatile crude oil and refined
products prices and crack spreads. During periods of fluctuating prices, Lion
experiences reductions in crack spreads when market prices of refined products
do not change in correlation to changes in crude oil prices.
Interest expense during the periods from 1992 through 1995 fluctuated with
changes in the average outstanding loan balances and with changes in the
interest rates on the loans, which ranged from 7% to 9% during these periods.
The average outstanding loan balance increased from approximately $26,600,000
for the year ended September 30, 1992 to approximately $34,500,000, $37,100,000
and $35,700,000 for the year ended September 30, 1993, the seven months ended
April
40
<PAGE>
30, 1994 and the year ended April 30, 1995, respectively. Interest expense also
includes interest on outstanding senior subordinated debentures during these
periods.
The loss on cancellation of aircraft lease of $287,000 recorded in the fourth
quarter of the year ended April 30, 1995 was a nonrecurring expense in
connection with the termination of a long-term lease. TransMontaigne does not
own or have any lease obligations with respect to corporate aircraft.
TransMontaigne incurred net losses for the year ended April 30, 1995, the
seven months ended April 30, 1994, and the years ended September 30, 1993 and
1992, of $3,218,000, $2,854,0000, $4,490,000 and $4,201,000, respectively,
primarily as a result of the underutilization of its pipelines and terminals, a
lack of adequate capital and the fluctuations in the net operating margin,
discussed above.
SHEFFIELD
GENERAL
Sheffield is engaged in the acquisition, exploration, development, production
and sale of crude oil and natural gas and in the gathering and processing of
"wet" natural gas into residue ("dry") natural gas and natural gas liquids.
Through the fiscal year ended June 30, 1995, natural gas gathering, storing and
processing activities were located in North Dakota, Kansas and Oklahoma, but
Sheffield recently sold its holdings in Kansas and Oklahoma, leaving North
Dakota as the sole site for the Company's current natural gas processing and
gathering activities. Sheffield's development drilling activities have been
conducted in the Berry Cox Field and the Laredo Field in south Texas and more
recently in the Pinedale Field in Wyoming. Sheffield also engages in well
recompletion work in the Williston Basin (Montana and North Dakota). Additional
information regarding Sheffield can be found in the Sheffield Second Quarter 10-
Q and Sheffield 1995 10-K, attached as Appendices III and IV, respectively.
RECENT DEVELOPMENTS
During the first two quarters of fiscal 1996, Sheffield successfully
negotiated and completed the sale of its gas gathering and processing assets in
Kansas and Oklahoma for a pre-adjustment price of $5.5 million (the "Asset
Sale"). The purchase and sale agreement provided for an effective date of July
1, 1995. However, the agreement also specified that Sheffield was entitled to
all proceeds from the sale of natural gas from storage inventory, provided that
at closing (October 2, 1995), there be a minimum of 150,000 mmbtu in inventory.
In addition, the agreement provided that Sheffield would continue to operate the
assets until January 31, 1996. Sheffield used a portion of the proceeds from
the Asset Sale to substantially reduce bank debt.
Following the Asset Sale, Sheffield had a cash balance of approximately $3
million, an amount significantly greater than that needed for the capital
projects Sheffield planned to undertake in fiscal 1996. Accordingly, Sheffield
continued to evaluate potential acquisitions in exploration and production, as
well as the gas gathering and processing areas. In addition, Sheffield received
41
<PAGE>
proposals for various business combinations which it analyzed and considered.
Given the pending Merger with TransMontaigne, Sheffield does not anticipate
committing any funds to capital projects other than those to which it was
committed prior to the Merger announcement.
BEAR PAW OPERATING COMPANY, LLC
TransMontaigne and Sheffield each have a 45% interest in BPOC as discussed
under "TransMontaigne-General."
POST-MERGER PROFILE
BUSINESS PLAN
The Merger of TransMontaigne and Sheffield will combine the two companies'
current operations. The Surviving Corporation (the name of which will be
changed to TransMontaigne Oil Company) will continue TransMontaigne's practice
of seeking appropriate expansion opportunities in the downstream sector of the
oil and gas industry. Management believes that many profitable opportunities
will develop as petroleum companies continue to downsize their operations.
TransMontaigne also believes that as a result of the Merger, more sources of
financing and acquisition opportunities will be available to it as a publicly
held company than may be available to it as a privately held company. As a
result of having operations in a larger number of geographic areas, it is
anticipated that the combined entity will be exposed to a greater number of
opportunities to expand its business. Following the Effective Time, the
officers and directors of TransMontaigne will become the officers and directors
of the Surviving Corporation, which will adopt the compensation arrangements and
benefit plans of TransMontaigne. The Surviving Corporation will adopt
TransMontaigne's fiscal year end of April 30 and the principal office of the
Surviving Corporation will be at TransMontaigne's offices at 370 17th Street,
Suite 900, Denver, Colorado 80202.
MANAGEMENT
OFFICERS AND DIRECTORS. At the Effective Time, the Surviving Corporation's
Board of Directors will be increased from five to seven members, and will
consist of the current directors of TransMontaigne plus Edwin H. Morgens,
Chairman of Sheffield. The terms of all directors of TransMontaigne, including
Mr. Morgens, will expire at the next annual meeting of stockholders of the
Surviving Corporation. Because the Surviving Corporation will change its fiscal
year end to April 30 to be consistent with the fiscal year end of
TransMontaigne, the next annual meeting of stockholders of the Surviving
Corporation will be held after April 30, 1997. Following the Merger, the
officers of TransMontaigne will become the officers of the Surviving
Corporation, and the Board of Directors of the Surviving Corporation will make a
determination as to how to reconstitute the committees of Sheffield's Board of
Directors.
The following table sets forth, with respect to each person who will be a
director or executive officer of the Surviving Corporation at the Effective
Time, the person's age and the
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<PAGE>
person's positions and offices with the Surviving Corporation. Individual
background information concerning each of such persons follows the table.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Cortlandt S. Dietler 74 Chairman, Chief
Executive Officer, President
and Director
Richard E. Gathright 42 Executive Vice
President and
Director; President and Chief
Executive Officer of COZ
Harold R. Logan, Jr. 51 Executive Vice
President/Finance,
Treasurer and
Director
Frederick W. Boutin 40 Senior Vice President
John A. Hill 54 Director
Bryan A. Lawrence 53 Director
William E. Macaulay 50 Director
Edwin H. Morgens 55 Director
</TABLE>
CORTLANDT S. DIETLER has been the Chairman, Chief Executive Officer and
President of TransMontaigne since April 1995. He was the founder, Chairman, and
Chief Executive Officer of Associated Natural Gas Corporation prior to its 1994
merger with Panhandle Eastern Corporation (now PanEnergy Corporation) on whose
Board he serves as an Advisory Director. He also serves as a Director of
Hallador Petroleum Company, Key Production Company, Inc., and Grease Monkey
International, Inc. Industry affiliations include: Member, National Petroleum
Council; Director, American Petroleum Institute; past Director, Independent
Petroleum Association of America; Director, past President & Life Member, Rocky
Mountain Oil & Gas Association; Member, 25 Year Club of the Petroleum Industry.
RICHARD E. GATHRIGHT has been the Executive Vice President and a Director of
TransMontaigne since April 1995. He joined COZ in December, 1993 and is
currently President, Chief Executive Officer and a Director. From 1988 to 1993
he served as President and Director of North American Operations in Denver,
Colorado for Aberdeen Petroleum PLC, a London-based public company engaged in
international oil and gas operations, of which he was also a member of the Board
of Directors. Prior to joining Aberdeen, he held a number of positions in the
energy industry in the areas of procurement, operations and management of oil
and gas assets. Mr. Gathright is also a
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<PAGE>
Director of Lion Oil Company. He received undergraduate and J.D. degrees from
the University of Arkansas.
HAROLD R. LOGAN, JR. has been Executive Vice President/Finance and a Director of
TransMontaigne Oil Company since April 1995. Previously, from 1985 to 1994, Mr.
Logan was Senior Vice President/Finance and a Director of Associated Natural Gas
Corporation. Prior to joining Associated Natural Gas, Mr. Logan was with
Dillon, Read & Co. Inc. and Rothschild, Inc. In addition, Mr. Logan is a
Director of Suburban Propane Partners, L.P. He is a graduate of Oklahoma State
University with a BS in Economics and Columbia University Graduate School of
Business with an MBA in Finance.
FREDERICK W. BOUTIN has been the Senior Vice President of TransMontaigne since
April 1995. Prior to his employment with TransMontaigne, Mr. Boutin was a Vice
President of Associated Natural Gas Corporation. Prior to joining Associated
Natural Gas Corporation in 1985, Mr. Boutin was a tax specialist with KPMG Peat
Marwick LLP for five years. Mr. Boutin graduated from Colorado State University
with a Masters Degree in Accountancy and a Bachelors Degree in Electrical
Engineering.
JOHN A. HILL was appointed a director of TransMontaigne in April 1995. Mr. Hill
has been Chairman of the Board of First Reserve since 1983. Mr. Hill is a
trustee of the Putnam Funds and is a director of Weatherford Enterra, Inc.,
Snyder Oil Corporation, Maverick Tube Corporation and PetroCorp, Incorporated.
BRYAN H. LAWRENCE has been a Director of TransMontaigne since 1991. He has been
employed by Dillon, Read & Co. Inc., a New York-based investment banking firm,
since January 1966 and is a Managing Director. Mr. Lawrence also serves as a
Director of Vintage Petroleum, Inc., D&K Wholesale Drug, Inc., Benson Petroleum
Ltd. (a Canadian public company), Hallador Petroleum Company, and certain non-
public companies in which affiliates of Dillon Read hold equity interests
including Meenan Oil Co., L.P., Fintube Limited Partnership, Interenergy
Corporation, Willbros Group, Inc., Cavell Energy Corporation, PetroSantander
Inc., and Strega Energy Inc. Mr. Lawrence is a graduate of Hamilton College and
also has an M.B.A. from Columbia University.
WILLIAM E. MACAULAY was appointed a director of TransMontaigne Oil Company in
April 1995. Mr. Macaulay has been President and Chief Executive Officer of
First Reserve since 1983. Mr. Macaulay is a director of Weatherford Enterra,
Inc., Maverick Tube Corporation and Hugoton Energy Corporation.
EDWIN H. MORGENS has been a director of Sheffield since 1981 and served as
President of Sheffield from 1986 to September 1990. He has been Chairman of
Morgens, Waterfall, Vintiadis & Co., Inc., a financial services firm, since
1970. Mr. Morgens is also a general partner of Morgens Waterfall Income
Partners, L.P., a New York investment limited partnership, and serves as
president of Prime, Inc., the corporate general partner of a Delaware investment
partnership, and as managing member of MW Management, L.L.C., a Delaware
investment limited liability corporation.
44
<PAGE>
MANAGEMENT COMPENSATION. After the Merger, the Surviving Corporation will adopt
TransMontaigne's benefit plans and compensation arrangements, including its
option plans. Sheffield's 401(k) plan will survive until at least December 31,
1996 and Sheffield's existing options will stay in effect, adjusted to account
for the reverse stock split accomplished by the Merger. The following is a
description of TransMontaigne's benefit plans and compensation arrangements.
The only executive officer of TransMontaigne who will become an executive
officer of the Surviving Corporation and who earned in excess of $100,000 in the
fiscal year ended April 30, 1995 is Richard E. Gathright. Messrs. Dietler, Logan
and Boutin, who became officers of TransMontaigne after the end of that fiscal
year, earn salaries of $75,000, $140,000 and $115,000, respectively.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM
COMPENSATION
------------------- ------------
NAME AND PRINCIPAL YEAR
POSITION SALARY ($) Bonus AWARDS/OPTIONS/SARS
($)
- ------------------ ---- ---------- ----- -------------------
Richard E. Gathright, 1995 $192,000 $ -0- 250,000 options
Executive Vice
President 1994 66,000(1) -0- ---
- ------------------------
(1) Mr. Gathright became an officer of TransMontaigne on December 1, 1993.
OPTION/SAR GRANTS IN FISCAL YEAR ENDED APRIL 30, 1995
<TABLE>
<CAPTION>
Name and Principal Number of % of Total Exercise Expiration Potential Realizable Value
Position Securities Options or Base Date at Assumed Annual Rates
Underlying Granted to Price of Stock Price Appreciation
Options Employees ($/share) for Option Term
Granted in Fiscal
Year
5% 10%
<S> <C> <C> <C> <C> <C> <C>
Richard E. Gathright, 250,000 52.4% $2.70 1/17/02 $274,793 $640,384
Executive Vice
President
</TABLE>
45
<PAGE>
COMPENSATION OF DIRECTORS
Directors of TransMontaigne are paid their expenses for attending each
meeting of the Board of Directors that they attend.
STOCK OPTION PLANS.
1995 Employees' Stock Option Plan.
TransMontaigne's stockholders adopted the TransMontaigne Oil Company
Employees' Stock Option Plan (the "1995 Option Plan") effective as of January
17, 1995. The purpose of the 1995 Option Plan is to provide the key management
employees selected for participation in the 1995 Option Plan with additional
incentives to remain in the long-term service of TransMontaigne and to create in
such employees a more direct interest in the future success of TransMontaigne by
relating incentive compensation to increases in stockholder value.
Administration. The 1995 Option Plan is construed, interpreted and
administered by the Incentive Plan Committee (the "Committee"), which is
appointed by, and serves at the pleasure of, TransMontaigne's Board of
Directors. The Committee consists of the Chairman of the Board of Directors and
at least one other member who is disinterested within the meaning of Commission
Rule 16b-3 ("Rule 16b-3"). The 1995 Option Plan provides that the Committee
shall at all times be constituted so that it satisfies the disinterested
administration requirements of Rule 16b-3.
Options. The 1995 Option Plan provides for the grant of options ("Options")
to purchase shares of TransMontaigne Common Stock. The Options can either be
incentive options ("Incentive Options") within the meaning of Code section 422
or options that do not meet the requirements of Code section 422 ("Nonqualified
Options").
Number of Shares. TransMontaigne has reserved 1,000,000 shares of
TransMontaigne Common Stock for the grant of Options under the 1995 Option Plan,
less the 95,754 shares subject to options granted under the 1991 Option Plan (as
defined below). The number of shares reserved for the grant of Options under
the 1995 Option Plan is subject to adjustment by the Committee on account of
stock splits, stock dividends, recapitalizations and other dilutive changes in
the Company's capital structure. Options to purchase 542,500 shares have been
awarded under the 1995 Option Plan, leaving Options to purchase an additional
361,746 shares available for grant under the 1995 Option Plan.
Change in Control. Upon a change in control of TransMontaigne, all
outstanding Options fully vest. The Committee has the discretion to do any or
all of the following: (i) grant any participant a cash bonus in an amount
necessary to pay all or a portion of the Option price, (ii) pay cash to any or
all participants in cancellation of their Options in an amount equal to the
excess of the Option price over the greater of (A) the tender offer price for
the TransMontaigne Common Stock or (B) the fair market value of the
TransMontaigne Common Stock on the date the Options are canceled, or (iii) make
any other amendments or adjustments to the outstanding Options.
A change in control occurs if (i) 33-1/3% of TransMontaigne's voting stock is
acquired, without the consent of the Company's Board of Directors, by persons or
entities not related to
46
<PAGE>
TransMontaigne, (ii) at any time during any three consecutive year period,
individuals who constitute a majority of the Board at the beginning of the
period (including individuals whose election or nomination was approved by a
two-thirds majority of the Board) cease for any reason to be a majority of the
Board, or (iii) upon a stockholder vote in favor of the sale of all or
substantially all of TransMontaigne's assets, TransMontaigne's merger or
consolidation (other than a transaction in which the voting securities (or
securities in to which they are converted) continue to represent at least 80% of
the combined voting power of the surviving entity), or the complete liquidation
of TransMontaigne.
Reorganization. If TransMontaigne is merged or consolidated with another
corporation and either TransMontaigne is not the surviving entity or there is a
change in TransMontaigne's capital stock, or if more than 50% of
TransMontaigne's outstanding voting stock is acquired (other than a transaction
in which TransMontaigne continues as a holding company of an entity that
continues the business conducted by TransMontaigne), or if TransMontaigne is
reorganized (other than a bankruptcy reorganization) or liquidated, and the
transaction is not a change in control described in the preceding paragraphs,
the Committee has the power and discretion to provide for the adjustment or
exercise of any outstanding Options. The Committee may treat all outstanding
Options in the same manner or it may determine treatment on an individual Option
basis.
Eligibility for Participation. Options may be granted to full-time key
employees who are, or will be, important to the success of TransMontaigne's
business. Eligible employees include employees of TransMontaigne and any
affiliates or subsidiaries of TransMontaigne. The Committee has the sole
discretion to determine which eligible employees will participate in the 1995
Option Plan and the terms and conditions of each Option granted. An employee
may be granted either or both Incentive Options and Nonqualified Options.
Option Term. The Committee determines the maximum term of each Option. The
maximum term for an Option is seven years, except that an Incentive Option
granted to a participant who owns more than 10% of TransMontaigne's voting stock
is five years. An Option will expire prior to the end of its stated term upon
termination of employment, retirement, disability or death. If a participant's
employment is terminated for cause, the Option will be void for all purposes.
If a participant becomes disabled while employed or during the first three
months after termination of employment or if the participant dies, the Option
can be exercised within twelve months after the participant's death or
disability. If a participant terminates employment for any other reason, the
Option can be exercised during the three month period after employment. In all
cases, the Option can be exercised only to the extent the Option was vested when
the participant terminated employment and only to the extent the Option had not
otherwise expired by its terms.
Option Price. The Option price is determined by the Committee; however, the
Option price for an Incentive Option must be at least equal to the fair market
value of the TransMontaigne Common Stock on the date the Incentive Option is
granted. If the eligible employee owns more than 10% of TransMontaigne's voting
stock, the Option price must be at least 110% of the fair market value on the
date the Incentive Option is granted. The Committee may set the Option price
for a Nonqualified Option at an amount less than fair market value.
Fair market value is determined by the Committee in good faith after
consultation with legal, accounting and other experts as the Committee deems
appropriate. If the TransMontaigne Common
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<PAGE>
Stock is publicly traded, fair market value is based on the trading price on the
relevant exchange or market quotation system.
Exercise of Options. A participant may exercise an Option by written notice
to TransMontaigne and payment of the Option price (i) in cash, (ii) by cashier's
check payable to the order of the Company, (iii) by surrender of a number of
shares of TransMontaigne Common Stock having a fair market value equal to the
Option price, or (iv) through a broker's transaction by directing TransMontaigne
to issue the certificate for the TransMontaigne Common Stock to a broker who
will sell all or a portion of the TransMontaigne Common Stock to pay the Option
price. At the sole discretion of the Committee, TransMontaigne may guarantee a
third-party loan obtained by the participant to pay the Option price so long as
the loan or TransMontaigne's guaranty is secured by the TransMontaigne Common
Stock acquired upon exercise of the Option. Participants who are subject to the
withholding of federal and state income tax as the result of the exercise of an
Option may satisfy the income tax withholding obligation through the withholding
of a portion of the TransMontaigne Common Stock to be received on the exercise
of the Option.
Transferability. Options granted under the 1995 Option Plan are not
transferable except by will or the laws of descent and distribution, or by a
qualified domestic relations order issued in connection with the participant's
divorce.
Right of First Refusal. The Committee may provide that TransMontaigne Common
Stock acquired through the exercise of an Option will be subject to
TransMontaigne's right to purchase all or a portion of any shares of
TransMontaigne Common Stock that the participant may wish to transfer. The
right of first refusal may continue beyond the participant's termination of
employment.
Amendment and Termination of the 1995 Option Plan. TransMontaigne's Board of
Directors may amend or terminate the 1995 Option Plan at any time. However, no
amendment or modification of the 1995 Option Plan may become effective without
the approval of TransMontaigne's stockholders if stockholder approval is
required to satisfy any applicable statutory or regulatory requirements, or if
TransMontaigne, on the advice of counsel, determines that stockholder approval
is otherwise necessary or desirable. No amendment, modification, or termination
of the 1995 Option Plan may adversely affect any Option previously granted
without the consent of the participant holding the Option.
Federal Income Tax Consequences. TransMontaigne is not entitled to an income
tax deduction upon the grant or exercise of an Incentive Option and the
participant does not recognize income. If the participant sells the
TransMontaigne Common Stock acquired upon the exercise of an Incentive Option
within two years after the Incentive Option was granted or within one year after
the Incentive Option was exercised, TransMontaigne will be entitled, for federal
income tax purposes, to a deduction and the participant will recognize income.
The amount of the deduction and the income will be equal to the lesser of (i)
the excess of the fair market value of the TransMontaigne Common Stock on the
date the Incentive Option was exercised over the Option price or (ii) the excess
of the amount received upon the sale of the TransMontaigne Common Stock over the
Option price.
TransMontaigne is not entitled to an income tax deduction upon the grant of a
Nonqualified Option and the participant does not recognize income. Upon the
exercise of a Nonqualified Option, TransMontaigne will be entitled, for federal
income tax purposes, to a deduction and the participant
48
<PAGE>
will recognize income subject to withholding. The deduction and the income will
be equal to the amount by which the fair market value of the TransMontaigne
Common Stock acquired on the date the Nonqualified Option is exercised exceeds
the Option price of the shares.
Accounting Treatment. The accounting treatment for Options is different from
the federal income tax treatment for TransMontaigne. The grant of an Option
does not affect net income so long as the Option price is equal to or greater
than the market value on the date of grant. Options granted at a price less
than the market value on the date of grant are deemed to be compensatory and the
amount of the discount is deducted from net income of TransMontaigne during the
vesting period of the Option.
1991 Nonqualified Stock Option Plan.
In 1991 TransMontaigne adopted its Amended and Restated Employee Nonqualified
Stock Option Plan (the "1991 Option Plan"). There are 95,754 options
outstanding under the 1991 Option Plan. None of the directors or executive
officers of TransMontaigne have any options under the 1991 Option Plan and it is
expected that no further options will be issued under the 1991 Option Plan.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Richard Gathright, Executive Vice President and Director of TransMontaigne
and President and Chief Executive Officer of COZ, is a director and Corporate
Secretary of Lion, in which a 65% subsidiary of COZ owns 27.75% of the common
stock. COZ purchased $24,900,000 of refined petroleum products from Lion in the
nine months ended January 31, 1996, $29,000,000 of products in the year ended
April 30, 1995 and $15,700,000 of products in the seven months ended April 30,
1994, all of which product purchases were made at market prices negotiated
between COZ and Lion or through independent brokers. COZ believes the prices
paid by COZ to Lion were comparable to prices that would have been paid to
independent third parties.
APPROVAL OF THE MERGER
TIME, DATE, PLACE AND PURPOSE OF SHEFFIELD SPECIAL MEETING AND TRANSMONTAIGNE
WRITTEN CONSENTS
The TransMontaigne written consents of stockholders for the purpose of
approving and adopting the Merger Agreement will be effective on Monday, June 3,
1996. The Sheffield Special Meeting will be held on Monday, June 3, 1996 at
2:00 p.m., local time, at the Forum Room, Norwest Bank Building, 1740 Broadway,
Denver, Colorado, for the purpose of approving and adopting the Merger Agreement
as required under Delaware law.
49
<PAGE>
RECORD DATES AND OUTSTANDING SHARES
Only holders of record of TransMontaigne Common Stock at the close of
business on the TransMontaigne Record Date (May 19, 1996) are entitled to
consent to approve the Merger. Only holders of record of Old Sheffield Common
Stock at the close of business on the Sheffield Record Date (May 7, 1996) are
entitled to notice of, and to vote at, the Sheffield Special Meeting.
There are expected to be approximately 40 holders of record of TransMontaigne
Common Stock on the TransMontaigne Record Date, with 19,331,171 shares of
TransMontaigne Common Stock outstanding and entitled to vote. Each such share
of TransMontaigne Common Stock will be entitled to one vote on the Merger. See
"Principal Stockholders of TransMontaigne and Sheffield-TransMontaigne" for
information regarding persons known to the management of TransMontaigne to be
the beneficial owners of more than 5% of the outstanding TransMontaigne Common
Stock.
On the Sheffield Record Date, there were approximately 444 holders of record
of Old Sheffield Common Stock, with 3,459,512 shares of Old Sheffield Common
Stock issued and outstanding. Each share of Old Sheffield Common Stock entitles
the holder thereof to one vote on each matter submitted for stockholder
approval. See "Principal Stockholders of TransMontaigne and Sheffield-
Sheffield" for information regarding persons known to the management of
Sheffield to be the beneficial owners of more than 5% of the outstanding Old
Sheffield Common Stock.
VOTING AND REVOCATION OF SHEFFIELD PROXIES AND TRANSMONTAIGNE WRITTEN CONSENTS
A stockholder of TransMontaigne who has executed and returned a written
consent may revoke it at any time before June 3, 1996 by filing written notice
of such revocation with the Secretary of TransMontaigne stating that the written
consent is revoked. All properly executed proxies that are not revoked will be
voted at the Sheffield Special Meeting, in accordance with the instructions
contained therein. If a holder of Old Sheffield Common Stock executes and
returns a proxy and does not specify otherwise, the shares represented by such
proxy will be voted "for"approval and adoption of the Merger Agreement in
accordance with the recommendation of the Board of Directors of Sheffield. A
stockholder of Sheffield who has executed and returned a proxy may revoke it at
any time before it is voted at the Sheffield Special Meeting by (i) executing
and returning a proxy bearing a later date, (ii) filing written notice of such
revocation with the Secretary of Sheffield stating that the proxy is revoked or
(iii) attending the Sheffield Special Meeting and voting in person.
APPROVAL REQUIRED
TRANSMONTAIGNE. Approval and adoption of the Merger Agreement requires the
written consent of two-thirds of the issued and outstanding TransMontaigne
Common Stock entitled to vote thereon. On the date hereof, there were
19,331,171 shares of TransMontaigne Common Stock outstanding. In determining
whether the Merger Agreement has received the requisite number of written
consents, abstentions will have the same effect as a vote against the Merger
Agreement. On the TransMontaigne Record Date, it is expected that the directors
and executive officers of
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<PAGE>
TransMontaigne will beneficially own approximately 64.7% of the outstanding
shares of TransMontaigne Common Stock entitled to vote on the Merger. Each of
TransMontaigne's executive officers and directors has indicated his present
intention to approve the Merger Agreement.
SHEFFIELD. Sheffield's Bylaws provide that the presence at the Sheffield
Special Meeting, in person or by proxy, of the holders of a majority of the
outstanding shares of Old Sheffield Common Stock entitled to vote thereat will
constitute a quorum for the transaction of business, and approval and adoption
of the Merger Agreement requires the affirmative vote of a majority of the
issued and outstanding Old Sheffield Common Stock entitled to vote thereon. In
determining whether the Merger Agreement has received the requisite number of
affirmative votes, abstentions and broker non-votes will have the same effect as
a vote against the Merger Agreement. On the Sheffield Record Date, the
directors and executive officers of Sheffield held approximately 17.9% of the
outstanding shares of Old Sheffield Common Stock entitled to vote on each matter
to be acted upon at the Sheffield Special Meeting. Each of Sheffield's
executive officers and directors has indicated his present intention to vote or
direct the vote of all such shares of Old Sheffield Common Stock entitled to
vote in favor of the proposal to approve the Merger Agreement.
SOLICITATION OF PROXIES
In addition to solicitation by mail, the directors, officers, employees and
agents of Sheffield may solicit proxies from Sheffield stockholders by personal
interview, telephone, telegram or otherwise. Sheffield and TransMontaigne will
each bear the costs of the solicitation of proxies or written consents of
stockholders from their respective stockholders. Arrangements will also be made
with brokerage firms and other custodians, nominees and fiduciaries who hold of
record voting securities of Sheffield for the forwarding of solicitation
materials to the beneficial owners thereof. Sheffield will reimburse such
brokers, custodians, nominees and fiduciaries for the reasonable out-of-pocket
expenses incurred by them in connection therewith.
OTHER MATTERS
At the date of this Joint Proxy Statement/Prospectus, the Board of Directors
of Sheffield does not know of any business to be presented at the Sheffield
Special Meeting other than as set forth in the notices accompanying this Joint
Proxy Statement/Prospectus. If any other matters should properly come before
the Sheffield Special Meeting, it is intended that the shares represented by
proxies will be voted with respect to such matters in accordance with the
judgment of the persons voting such proxies.
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<PAGE>
THE MERGER
GENERAL DESCRIPTION OF THE MERGER
The Merger Agreement provides that, at the Effective Time, TransMontaigne
will merge with and into Sheffield with Sheffield becoming the Surviving
Corporation; (i) each outstanding share of TransMontaigne Common Stock (other
than shares of TransMontaigne Common Stock held in the treasury of
TransMontaigne or owned by Sheffield or by any direct or indirect wholly-owned
subsidiary of Sheffield or of TransMontaigne, all of which will be canceled)
will be converted into one share of New Common Stock, subject to the right of
the holder of such share to seek an appraisal of the fair value thereof as
described in this Joint Proxy Statement/Prospectus; (ii) each 2.432599
outstanding shares of Old Sheffield Common Stock will become one share of New
Common Stock; (iii) the name of Sheffield will be changed to "TransMontaigne Oil
Company;" and (iv) the number of authorized shares of New Common Stock will be
increased to 40,000,000. Any resulting fractional shares will be settled in
cash. Outstanding warrants to purchase 248,686 shares of TransMontaigne Common
Stock will become warrants to purchase an equal number of shares of New Common
Stock.
The Merger will constitute a reverse acquisition of Sheffield by
TransMontaigne, in that Sheffield will survive the Merger, but based on the
number of shares of Old Sheffield Common Stock and TransMontaigne Common Stock
outstanding as of the Record Dates (assuming exercise prior to the Effective
Time of the outstanding warrants to purchase 81,450 shares of Old Sheffield
Common Stock and that no other TransMontaigne or Sheffield options or warrants
are exercised), approximately 19,331,171 and 1,455,629 shares of New Common
Stock are expected to be issuable to holders of TransMontaigne Common Stock and
Old Sheffield Common Stock, respectively, representing approximately 93% and 7%,
respectively, of the total New Common Stock to be outstanding after such
issuance.
Pursuant to the Merger Agreement, each 2.432599 outstanding shares of Old
Sheffield Common Stock will become one share of New Common Stock, thus effecting
a reverse stock split of the Old Sheffield Common Stock. There are no shares of
Preferred Stock outstanding and the number of authorized shares of Preferred
Stock, 2,000,000, will not be affected. This will not change stockholders
equity of Sheffield. The New Common Stock issued pursuant to the Merger
Agreement will be fully paid and nonassessable. The voting rights and other
rights that accompany the Old Sheffield Common Stock will not be altered by the
Merger Agreement.
Under the terms of Sheffield's outstanding options, the Merger will reduce
the number of shares reserved for such plans by a factor of 2.432599, will
reduce the number of shares purchasable under outstanding options by a factor of
2.432599 and will increase the exercise price of outstanding options by a factor
of 2.432599.
BACKGROUND
Over a number of years the Board of Directors and management of Sheffield has
from time to time evaluated its long term business strategy. As a small
independent oil exploration and producing company, Sheffield's strategy had been
to be opportunistic in investments in the oil and gas industry, taking advantage
of its size to permit quick evaluation and prompt decisions with respect to
investment opportunities. In September 1991 and in May 1993, Sheffield acquired
gas
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<PAGE>
gathering and processing systems which ultimately represented a substantial part
of Sheffield's assets and accounted for most of its revenue.
From 1990 through 1994, Sheffield also effectively managed its overhead costs
by sharing executive and administrative personnel with another small oil and gas
exploration company. Late in 1994 the company which shared those personnel
costs was merged into a larger oil and gas company, thus leaving Sheffield with
larger administrative costs relative to its size.
In the spring of 1995, a gas gathering and processing company contacted
Sheffield and proposed to purchase a portion of Sheffield's gas gathering and
processing assets at a price above Sheffield's cost. Sheffield determined that
it would be an advantageous time to sell all or part of its gas gathering and
processing assets and offered those assets for bid by known potential buyers.
On October 1, 1995, Sheffield sold its gas gathering, processing and storage
facilities in Kansas and Oklahoma for a purchase price of approximately
$5,500,000, recognizing a gain of approximately $1,000,000. As a result of that
transaction Sheffield has approximately $3,000,000 of funds available for
investment, in addition to borrowing capacity of approximately $1,400,000 under
a bank line of credit; however, Sheffield's revenue is significantly reduced
from prior periods. In view of the improved cash position resulting from the
sale of assets, and the potential impact of higher overhead costs, Sheffield
management and the Board of Directors began considering alternative investment
opportunities in the oil and gas industry, as well as other strategies for the
future of Sheffield, including possible liquidation of its assets and
dissolution of Sheffield.
Early in November 1995, as part of its consideration of investment
opportunities in the energy business, management of Sheffield was introduced to
BP Energy Operating, LLC ("BP Energy") and received a draft of a proposed
business plan for the formation of a new entity in the gas service business. It
was proposed that Sheffield participate in the funding of this new venture.
During November, meetings between J. Samuel Butler, the president of Sheffield,
and the president of BP Energy were held, as well as meetings with officers of
TransMontaigne, at which a possible joint venture involving TransMontaigne,
Sheffield and BP Energy was discussed.
On December 4, 1995, Mr. Butler was informed that TransMontaigne might have
an interest in a business combination with Sheffield as well as the proposed
joint venture with BP Energy. That evening the Chairman of Sheffield met with
the CEO of TransMontaigne who informally discussed TransMontaigne's possible
interest in a business combination with Sheffield, as well as the proposed joint
venture between TransMontaigne, Sheffield and BP Energy. At the regularly
scheduled meeting of the Sheffield Board of Directors on December 5, Thomas
Petrie of Petrie Parkman & Co., Inc. ("Petrie Parkman") described to the Board
TransMontaigne's possible interest in a business combination, emphasizing the
very preliminary nature of TransMontaigne's consideration of such a transaction.
On December 7, Mr. Butler met with TransMontaigne's Chairman and informed him
that the Sheffield Board would be interested in obtaining information about
TransMontaigne so that it might evaluate the feasibility of a possible business
combination. On December 15, 1995, after informal discussions with the other
directors, Mr. Butler engaged Petrie Parkman to prepare an evaluation of
TransMontaigne and Sheffield and the possible benefits to be realized from a
combination of the two.
Additional conversations between officers of Sheffield and TransMontaigne
continued and on January 9, 1996, the two companies entered into a
Confidentiality Agreement and began to
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exchange financial and other business information. On January 11, 1996, a
telephone conference meeting of the Sheffield Board of Directors was held, at
which the Board ratified the engagement of Petrie Parkman to conduct the formal
evaluation of Sheffield and TransMontaigne, and authorized the officers of
Sheffield to pursue negotiations with TransMontaigne concerning a possible
business combination.
The Board of Directors recognized that, although Petrie Parkman was well
qualified to conduct the evaluation for which it was being retained, because
Randall King, a director of Sheffield is also a principal of Petrie Parkman, and
because Petrie Parkman and its principals own shares of Old Sheffield Common
Stock and warrants to purchase Old Sheffield Common Stock, it might not be
deemed to be independent for purposes of rendering an opinion as to the fairness
of the transaction to the Sheffield stockholders. The Board of Directors
therefore also directed Mr. Butler to engage an independent investment banking
firm to review any transaction that might be proposed between TransMontaigne and
Sheffield and advise the Sheffield Board concerning its fairness. Following
such authorization, Mr. Butler arranged for the engagement of Rauscher Pierce to
make such an evaluation and provide its fairness opinion to the Board of
Directors.
During the remainder of January, additional financial and operating
information was exchanged between TransMontaigne and Sheffield and made
available to Sheffield's investment bankers, Petrie Parkman and Rauscher Pierce,
to facilitate their review and evaluation of the two companies and the
desirability of a possible business combination. Concurrently, the Merger
Agreement was drafted and negotiated by counsel and the officers of the two
companies. On February 2, 1996, Petrie Parkman presented to the officers of
Sheffield its evaluation of Sheffield and TransMontaigne. At a meeting held
later that day among the executive officers of Sheffield, representatives of
Petrie Parkman and the executive officers of TransMontaigne, the management of
the two companies arrived at a tentative share exchange ratio for the Merger to
be presented to the respective Boards of Directors.
A meeting of the Sheffield Board of Directors was called and held on February
4 and 5, 1996. The Board received a report from Petrie Parkman concerning its
evaluation of the two companies and the desirability of a business combination,
and a report from Rauscher Pierce concerning its opinion about the fairness of
the proposed Merger from a financial point of view to the Sheffield
stockholders. The Board also reviewed the proposed form of Merger Agreement
which had been negotiated and, following additional negotiations with the
officers of TransMontaigne over certain provisions of the Agreement, the
directors unanimously approved the Merger Agreement for execution by Sheffield.
Following additional negotiation of certain details of the Merger Agreement, it
was signed on February 6, 1996, and a press release announcing the Merger
Agreement was issued after the close of trading on the American Stock Exchange
on that date.
In February 1996, Sheffield and TransMontaigne each executed the BPOC
Operating Agreement, in which Sheffield and TransMontaigne each committed to
invest at least $1,150,000 in exchange for a 45% interest. In addition,
Sheffield and TransMontaigne executed a put agreement by which TransMontaigne
agreed that if the Merger is not consummated and Sheffield publicly announces
its intention to liquidate, Sheffield will have the option to put its interest
in BPOC to TransMontaigne for a cash price equal to the cash contributions made
by Sheffield to BPOC prior to the date of purchase.
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RECOMMENDATION OF TRANSMONTAIGNE'S BOARD; REASONS FOR THE MERGER
TransMontaigne's Board believes that the terms of the Merger are fair to and
in the best interests of TransMontaigne and its stockholders and has unanimously
approved the Merger Agreement and recommends that TransMontaigne's stockholders
vote FOR approval and adoption of the Merger Agreement and the Merger.
In reaching its conclusion, TransMontaigne's Board considered, among other
factors, information concerning the value of Sheffield's assets, the financial
condition, business, operations, and future prospects of both TransMontaigne and
Sheffield and the recent and prior market prices of Old Sheffield Common Stock.
TransMontaigne also believes that more sources of financing and acquisition
opportunities will be available to it as a publicly held company than are
available to it as a privately held company. As a result of having operations
in a larger number of geographic areas, it is anticipated that the combined
entity will be exposed to a greater number of opportunities to expand its
business. The TransMontaigne Board also believes that the merger with Sheffield
could enhance stockholder value because TransMontaigne would become a public
company without incurring the significant expense and organizational effort
likely to accompany an initial public offering.
In determining that the Merger is fair to and in the best interest of
TransMontaigne's stockholders, TransMontaigne's Board of Directors considered
the factors above as a whole and did not assign specific or relative weights to
such factors.
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SHEFFIELD'S REASONS FOR THE MERGER; RECOMMENDATION OF BOARD OF DIRECTORS OF
SHEFFIELD
The Sheffield Board of Directors has unanimously approved the proposed Merger
pursuant to the Merger Agreement as being in the best interests of Sheffield and
its stockholders. In reaching their conclusion, the directors considered the
following factors and recommend that these factors also be considered by the
stockholders in voting on the Merger Agreement:
1. As a small independent oil and gas company, Sheffield faces an uncertain
future. Although it has attained some success with its strategy of
opportunistic investing in the industry, its resources are limited as compared
with most other companies in the industry and this necessarily restricts its
opportunities to participate in most exploration and production ventures. The
relatively high overhead expenses of Sheffield as a percentage of revenue or
cash flow also adversely affect Sheffield's ability to operate profitably. The
directors concluded that the opportunity to combine Sheffield's business with
that of the much larger business of TransMontaigne would permit more effective
utilization of Sheffield's assets and improve the prospects for profitable
operations.
2. Sheffield's investment bankers, Petrie Parkman, in its analysis of
Sheffield and TransMontaigne advised the directors that the value of a
TransMontaigne share to be exchanged for Sheffield shares in the Merger exceeded
the then market price of the Sheffield shares to be received in the exchange.
Moreover, Petrie Parkman advised that, unless Sheffield is able to successfully
participate in oil and gas exploration and development activities or otherwise
invest its cash resources in highly successful ventures, the outlook for an
increase in the market price for the Sheffield stock as an independent company
in the industry was not favorable.
3. The Sheffield Board of Directors was informed that TransMontaigne
intended to complete a financing of approximately $25 million prior to the
closing of the Merger in a private transaction at a price of $5.50 per share of
TransMontaigne Common Stock. The implied value of the New Common Stock
following the Merger, based upon an evaluation of $5.50 per share for the
TransMontaigne Common Stock, represented a premium over the then market price of
the Old Sheffield Common Stock
4. The opinion of Rauscher Pierce that, as of the date of the opinion, based
upon the assumptions made, factors considered, the review undertaken and subject
to limitations and qualifications as described in the opinion, the terms of the
proposed Merger are fair to holders of Old Sheffield Common Stock from a
financial point of view, and the analysis of Rauscher Pierce which led to that
conclusion, were considered by the directors.
5. The Board of Directors of Sheffield received from its investment bankers
and its President information concerning TransMontaigne's business, business
plans, management and other factors affecting the potential for TransMontaigne
to be and become a profitable investment for the Sheffield stockholders. The
principal executive officers of TransMontaigne also met with the Sheffield Board
of Directors on February 5, 1996, and described the business of TransMontaigne
and its management's plans for the future of TransMontaigne. The Board of
Directors believes that the outlook for TransMontaigne's future is good and that
the outlook for an increase in the market price of the New Common Stock is
better with TransMontaigne combined into Sheffield than for Sheffield as a
stand-alone company.
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6. The Sheffield Board of Directors considered financial and other terms of
the Merger, including: (a) that the Merger would generally be tax-free to the
Sheffield stockholders who will receive New Common Stock in the Merger (see "The
Merger-Certain Federal Income Tax Consequences"); and (b) that the Merger will
be subject to the approval of the Sheffield stockholders and, while the Merger
Agreement contains a "no shop" clause and a termination fee provision (see
"Certain Terms of the Merger Agreement-No Solicitation" and "-Termination"), the
Merger Agreement permits Sheffield to provide information to or enter into
discussions or negotiations with other persons if the Sheffield Board determines
that this is appropriate in the exercise of the directors' fiduciary duties.
7. In considering the proposed Merger, the Sheffield Board considered the
greater diversity of the businesses conducted by TransMontaigne and that
TransMontaigne may therefore be less vulnerable to adverse business developments
than Sheffield on a stand-alone basis. As a result, the Merger with
TransMontaigne may offer Sheffield stockholders a prospect of greater stability
and reduced risk in its future operations.
8. The Sheffield Board of Directors was advised that the proposed Merger
will significantly expand the equity market capitalization of Sheffield, as the
Surviving Corporation, thereby potentially attracting analyst coverage and
improved institutional interest in the New Common Stock. This increased market
capitalization may lead to expanding evaluation multiples for the Surviving
Corporation, and the shift of Sheffield's focus away from exploration and
production could also lead to some expansion of the multiple applied to valuing
the New Common Stock in the marketplace. Such expanded market capitalization
should also improve market liquidity which would provide Sheffield stockholders
with a better opportunity to liquidate their investments.
The foregoing discussion of the information and factors considered by the
Sheffield Board is not intended to be exhaustive but is believed to include the
material factors considered by the Sheffield Board. In reaching its
determination to approve and recommend the Merger, the Sheffield Board did not
assign any relative or specific weights to the foregoing factors and individual
directors may have given different weights to different factors. The Sheffield
Board is, however, unanimous in its recommendation to the Sheffield stockholders
that the Merger Agreement be approved and adopted.
OPINION OF SHEFFIELD FINANCIAL ADVISOR
In considering the proposed Merger, the Sheffield Board engaged Rauscher
Pierce to evaluate the fairness of the terms of the Merger, from a financial
point of view, to the Sheffield stockholders. On February 4 and 5, 1996, in
connection with the consideration of the proposed Merger by the Sheffield Board,
Rauscher Pierce made a presentation to the Board with respect to the proposed
Merger. The Sheffield Board received an oral opinion from Rauscher Pierce to
the effect that, at that time, and based upon and subject to certain matters
stated in its opinion, the terms of the proposed Merger were fair, from a
financial point of view, to the Sheffield stockholders. This oral opinion was
confirmed in writing as of February 6, 1996, and was substantially identical to
its opinion dated the date of this Joint Proxy Statement/Prospectus, the full
text of which is attached hereto as Appendix II. Sheffield stockholders are
urged to read the opinion carefully in its entirety
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for a description of the factors considered and the assumptions made by Rauscher
Pierce in rendering its opinion.
Rauscher Pierce informed the Sheffield directors that, in preparing its
opinion, Rauscher Pierce had assumed and relied upon the accuracy and
completeness of financial and other information supplied to it by Sheffield and
TransMontaigne or that was publicly available, and did not independently verify
such information. Rauscher Pierce had also relied upon the managements of
Sheffield and TransMontaigne, respectively, as to the reasonableness and
achieveability of financial forecasts of Sheffield and TransMontaigne (and the
assumptions and bases thereof) provided to it or prepared on the basis of
information and assumptions furnished to it. Rauscher Pierce was not requested
to make and did not make an independent appraisal or evaluation of assets,
properties, facilities or liabilities of either Sheffield or TransMontaigne, and
it was not furnished with any such evaluation or appraisal.
Rauscher Pierce was not requested to, and did not, make any recommendations
to the Sheffield Board as to the numbers of shares of New Common Stock to be
received in the Merger by Sheffield and TransMontaigne stockholders, which were
determined through arms' length negotiation among the parties. In arriving at
its opinion, Rauscher Pierce did not ascribe a specific range of fair value to
Sheffield, but made its determinations as to the fairness of the terms of the
Merger Agreement on the basis of financial and comparative analyses.
The factors taken into consideration by Rauscher Pierce in rendering its
opinion are set forth in the opinion that is attached to this Joint Proxy
Statement/Prospectus as Appendix II, and the limitation upon its investigation
of Sheffield and TransMontaigne is also described in the opinion. In the
presentation to the Sheffield directors, representatives of Rauscher Pierce also
described the methods of analysis that were used in arriving at its opinion with
respect to the relative evaluations of Sheffield and TransMontaigne for purposes
of determining the fairness of the terms of the Merger Agreement.
In connection with making its presentations to the Sheffield Board of
Directors and issuing its opinion, Rauscher Pierce performed a variety of
financial and comparative analyses, including those described below. The
preparation of a fairness opinion involves various determinations as to the most
appropriate and relevant methods of financial analysis and the application of
these methods to the particular circumstances. Accordingly, such an opinion is
not readily susceptible to summary description. The following summary does not
purport to be a complete description of the presentations by Rauscher Pierce to
the Sheffield Board or of the analyses performed by Rauscher Pierce in this
regard.
REFERENCE COMPANY ANALYSIS
In order to arrive at reference values for both Sheffield and TransMontaigne,
Rauscher Pierce compared the historical and projected relevant financial and
operating results of Sheffield and TransMontaigne with that of such financial
and operating results of two groups of selected publicly traded reference
companies that it deemed relevant (collectively, the "Reference Companies").
The Reference Companies were selected by Rauscher Pierce primarily because they
are engaged in operations substantially similar to those of Sheffield and
TransMontaigne. The first group of Reference Companies was used to evaluate
Sheffield's reference value and consisted of two subsets.
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The first subset was Natural Gas Gathering, Transportation & Marketing Companies
and included Aquila Gas Pipeline Corporation, KN Energy, Inc., NGC Corporation,
Tejas Gas Corporation, Tejas Power Corporation, USX-Delhi Group and Western Gas
Resources, Inc. The second subset was Exploration & Production Companies and
included Abraxas Petroleum Corporation, Coho Energy, Inc., Columbus Energy
Corp., HarCor Energy, Inc., Key Production Company, Inc., Maynard Oil Company,
Tipperary Corporation and The Wiser Oil Company. The second group of Reference
Companies were used to evaluate TransMontaigne's reference value and also
consisted of two subsets. The first subset was Natural Gas Gathering,
Transportation & Marketing Companies and was identical to the ones used to
evaluate Sheffield. The second subset was Petroleum Refining Companies and
included Crown Central Petroleum Corporation, FINA, Inc., Getty Petroleum Corp.,
Lyondell Petrochemical Company, MAPCO Inc., Quaker State Corporation and
Ultramar Corporation.
Rauscher Pierce compared latest twelve month and 1996 calendar year projected
operating results for the Reference Companies with their market capitalization.
Market value of capitalization is defined as the common stock price multiplied
by the number of common shares outstanding plus short- and long- term debt and
the value of its preferred stock (market value if publicly traded or liquidation
value or book value if not), less excess cash and equivalents (cash and cash
equivalents in excess of working capital requirements). In order to arrive at
relevant valuation ratios, a weighted average of the two subsets in each group
of Reference Companies was calculated. The weighted average percentage was
based upon gross profit contribution by both Sheffield and TransMontaigne to
each subset in their respective group of Reference Companies. The weighted
average ratio of market capitalization of the first group of Reference Companies
to: (i) latest twelve months and 1996 calendar year projected earnings before
interest, taxes and depreciation & amortization averaged 9.6 and 7.6,
respectively; and (ii) latest twelve months and 1996 calendar projected earnings
before interest and taxes averaged 14.3 and 12.3, respectively. The weighted
average ratio of market capitalization of the second group of Reference
Companies to: (i) latest twelve months and 1996 calendar year projected earnings
before interest, taxes and depreciation & amortization averaged 10.9 and 8.9,
respectively; and (ii) latest twelve months and 1996 calendar year projected
earnings before interest and taxes averaged 14.7 and 12.7, respectively.
Rauscher Pierce also compared latest twelve month and 1996 calendar year
projected operating results with the common stock price of the Reference
Companies. The weighted average ratio of common stock price of the first group
of Reference Companies to: (i) latest twelve months and 1996 calendar year
projected earnings per share averaged 19.8 and 18.0, respectively; and (ii)
latest twelve months and 1996 calendar year projected cash flow per share
averaged 8.7 and 6.3, respectively. The weighted average ratio of common stock
price of the second group of Reference Companies to: (i) latest twelve months
and 1996 calendar year projected earnings per share averaged 22.0 and 18.3,
respectively; and (ii) latest twelve months and 1996 calendar year projected
cash flow per share averaged 9.5 and 6.8, respectively.
REFERENCE MERGER & ACQUISITION ANALYSIS
In order to arrive at additional reference values for Sheffield, Rauscher
Pierce compared the historical and projected relevant financial and operating
results of Sheffield with that of such financial and operating results of
selected reference merger and acquisition transactions (the "Reference
Transactions"). The Reference Transactions also contained two subsets. The
first
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subset was Natural Gas Gathering, Transportation & Marketing Company
transactions and included the acquisition of Valero Natural Gas Partners, L.P.
by Valero Energy Corp.; the acquisition of Grand Valley Gas Company by
Associated Natural Gas Corp; the acquisition of American Oil & Gas Corp. by K N
Energy, Inc.; the acquisition of Associated Natural Gas Corporation by Panhandle
Eastern Corp.; the acquisition of Trident NGL Holding by Natural Gas
Clearinghouse; the acquisition of Transco Energy Company by the Williams
Companies; the acquisition of Hadson Corp. by LG&E Energy Corp.; and the
acquisition of Eastex Energy Inc. by El Paso Natural Gas Co. The second subset
was Exploration & Production Company transactions and included the acquisition
of Washington Energy Resources by Cabot Oil & Gas Corporation; the acquisition
of Alta Energy Corporation by Devon Energy Corporation; the acquisition of
American Natural Energy by Alexander Energy Corporation; the acquisition of
Diamond Shamrock Offshore Partners, L.P. by Burlington Resources Inc.; the
acquisition of Diamond A & Diamond Operating by Coda Energy Inc.; the
acquisition of Bridge Oil Limited by Parker & Parsley Petroleum; the acquisition
of General Atlantic Resources by United Meridian Corporation; the acquisition of
Hampton Resources Corporation by Bellwether Exploration Company; the acquisition
of Dekalb Energy Company by Apache Corporation; the acquisition of Dalen
Corporation by Enserch Exploration Inc.; the acquisition of Edisto Exploration &
Production by Convest Energy Corporation; and the acquisition of Plains
Petroleum Company by Barrett Resources Corporation.
Rauscher Pierce compared latest twelve month and 1996 calendar year projected
operating results for the acquired companies in the Reference Transactions with
their enterprise purchase prices. Enterprise purchase price is defined as the
equity purchase price plus short- and long-term debt and the value of its
preferred stock, less excess cash and equivalents. In order to arrive at
relevant valuation ratios, a weighted average of the two subsets of Reference
Transactions was calculated. The weighted average percentage was based upon
gross profit contribution by Sheffield to each subset of the Reference
Transactions. The weighted average ratio of enterprise purchase price to: (i)
latest twelve months and 1996 calendar year projected earnings before interest,
taxes and depreciation & amortization averaged 9.2 and 7.2, respectively; and
(ii) latest twelve months and 1996 calendar year earnings before interest and
taxes averaged 17.3 and 15.3, respectively.
Rauscher Pierce also compared latest twelve month and 1996 calendar year
projected operating results for the acquired companies in the Reference
Transactions with their equity purchase prices. The weighted average ratio of
equity purchase price to: (i) latest twelve months and 1996 calendar year net
income from continuing operations averaged 20.3 and 18.3, respectively; and (
ii) latest twelve months and 1996 calendar year cash flow averaged 8.3 and 6.3,
respectively.
IMPLIED NET ASSET VALUE ANALYSIS
Rauscher Pierce also calculated an implied net asset value per share for
Sheffield. Implied net asset value was calculated by adding working capital
(excluding short-term debt), the pretax value of estimated proved oil and gas
reserves discounted at the following percentages: 10% for proved developed
producing reserves, 30% for proved developed non-producing reserves and 50% for
proved undeveloped reserves, the value of undeveloped acreage (valued at $50.00
per net acre) and the book value of non-oil and gas assets, less short- and
long-term debt, preferred stock and other long-term liabilities. The implied net
asset value calculation resulted in a net asset value of $7.1 million or $2.11
per share for Sheffield.
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PREMIUM / DISCOUNT ANALYSIS
Rauscher Pierce compared the reference values calculated for Sheffield
employing the Reference Company, Reference Transactions and implied net asset
value analyses and current common stock price, one week average common stock
price and four week average common stock price to the reference values
calculated for TransMontaigne employing the Reference Company analysis.
Sheffield's reference values were compared to TransMontaigne's reference values
discounted at the following percentages: 5%, 10% and 30%. In each comparison
except for one, which was only slightly dilutive, the consideration offered to
Sheffield's Common Stockholders was a premium. The premium being offered was
also compared to a selected list of reference energy industry stock - for -
stock transactions (the "Reference Stock - For - Stock Transactions"). The
premium being received by Sheffield Common Stockholders compared favorably to
premiums received in the Reference Stock - For - Stock Transactions.
Rauscher Pierce is a recognized investment banking firm with substantial
energy industry expertise and experience in transactions similar to the Merger
and was familiar with Sheffield and its business. As part of its investment
banking business, Rauscher Pierce is continually engaged in the assessment of
businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, competitive bidding, secondary distributions of listed
and unlisted securities, private placements and valuations for estate, corporate
and other purposes. Sheffield selected Rauscher Pierce because of its
expertise, reputation and familiarity with the energy industry and its
independence of both parties to the proposed Merger.
As compensation for its financial advisory services in connection with the
Merger, Rauscher Pierce will receive a fee of $75,000 from Sheffield, whether or
not the Merger is consummated. Sheffield has agreed to indemnify Rauscher
Pierce and certain related persons against certain liabilities to which Rauscher
Pierce may become subject as a result of its engagement, including liabilities
under the federal securities laws.
Rauscher Pierce does not intend to make any review or analysis with respect
to the Merger after the date of this Joint Proxy Statement/Prospectus.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of TransMontaigne's Board of Directors with
respect to the Merger, TransMontaigne's stockholders should be aware that
certain members of TransMontaigne's Board and management have certain interests
respecting the Merger separate from their interests as holders of TransMontaigne
Common Stock. Following the Effective Time, the officers and directors of
TransMontaigne will become the officers of the Surviving Corporation, and the
Surviving Corporation will adopt the compensation arrangements and benefit plans
of TransMontaigne. Cortlandt S. Dietler, the Chairman, Chief Executive Officer
and President of TransMontaigne, owns 14,623 shares of Old Sheffield Common
Stock. Bryan G. Lawrence, a director of TransMontaigne, is also a director and
an affiliate of the majority shareholder of Interenergy Corporation, which
participates in a partnership with Sheffield formed in 1991 for the purpose of
purchasing certain gas gathering and processing assets near Lignite, North
Dakota. Day-to-day management of the partnership is provided by Interenergy for
a managment fee of $15,000 per month while major decisions are made by a
management committee consisting of two members each from Sheffield and
Interenergy. Interenergy purchased $1,268,000, $1,482,000 and $1,536,000
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of gas from the partnership during fiscal 1995, 1994 and 1993, respectively.
Sheffield believes that the prices received by the partnership were no less than
the prices that would have been received from an independent third party. The
partnership and its business are further described in the Sheffield 1995 10-K,
attached hereto as Appendix IV, at pages IV-3 and IV-26.
In considering the recommendation of Sheffield's Board of Directors with
respect to the Merger, Sheffield's stockholders should be aware that certain
members of Sheffield's Board and management have certain interests respecting
the Merger separate from their interests as holders of Old Sheffield Common
Stock, including those referred to below.
If the Merger occurs, the currently unvested portion of Sheffield's employee
options will become vested and exercisable in full the day immediately preceding
the Effective Time of the Merger. Options to purchase Old Sheffield Common
Stock are held by the following directors and officers of Sheffield:
<TABLE>
<CAPTION>
Shares Subject to
Name Options and Warrants Price
- ---- -------------------- -----
<S> <C> <C>
J. Samuel Butler 100,000 $1.50
David A. Melman 14,000 $1.50
McLain J. Forman 14,000 $1.50
Randall E. King 33,506 $2.00
David L. Milanesi 30,000 $1.50
Jerry D. Smothermon 35,000 $1.50
</TABLE>
The number of shares subject to options warrants and the exercise prices will be
adjusted at the Effective Time to reflect the reverse stock split accomplished
by the Merger.
In addition to serving as a director of Sheffield, Mr. King is a principal in
the investment banking firm of Petrie Parkman. Petrie Parkman received a
payment of $50,000 for financial advisory services upon execution of the Merger
Agreement. At the closing of the Merger, Petrie Parkman will receive an
additional payment of $50,000 for its financial services, as well as 12,332
shares of New Common Stock.
Sheffield adopted the Key Employee Retention Plan in order to provide an
incentive to certain of its key employees to remain in the employ of Sheffield
during periods when the future of Sheffield is uncertain due to a potential
change of control. Under the terms of the Retention Plan, the Committee
determines the Participants in the Retention Plan. The Committee determined
that each present employee of Sheffield, including the executive officers, J.
Samuel Butler, Jerry D. Smothermon and David L. Milanesi, could participate. As
it relates to the Merger, the provisions of the Retention Plan provide that each
Participant who remains with Sheffield through the Effective Date and thereafter
experiences a "Qualified Termination" as defined in the Retention Plan, will
receive in cash an amount equal to one-half of his Annual Base Salary (as
defined in the Retention Plan), subject to any applicable payroll or other
withholding tax. If a Participant leaves the Surviving Corporation's employ
after March 15, 1996 for any reason other than a Qualified Termination, such
Participant will receive in cash an amount equal to three months of his Annual
Base Salary (subject to withholding). Generally, a Qualified Termination would
occur if a
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Participant is terminated by the Surviving Corporation after March 15, 1996
other than for "Cause," or if a Participant voluntarily leaves the Surviving
Corporation after March 15, 1996 for "Good Reason." As defined in the Retention
Plan, "Cause" generally means serious, willful misconduct in respect of a
Participant's obligations to his or her employer or gross violation of the
employer's established policies and precedures. "Good Reason" is defined, in
general, to mean the occurrence of any of certain events over which the employer
is responsible, such as a reduction of a Participant's responsiblities or base
salary, a failure to continue a Particpant's compensation (including
perquisites) or welfare plan, or a change in a Participant's base location by
seventy miles. In addition, the Retention Plan provides that all outstanding
stock options will become exercisable March 14, 1996, and requires Sheffield to
amend its profit-sharing plan so that all account balances are 100% vested, and
all allocations of Sheffield's contributions are made without regard to the
service and employment requirements under the profit-sharing plan.
For purposes of the Retention Plan, the Annual Base Salaries of Messrs.
Butler, Milanesi and Smothermon were $130,000, $80,000 and $100,000,
respectively.
After the Effective Time, Mr. Morgens will be a director of the Surviving
Corporation.
The Merger Agreement provides that the Surviving Corporation will maintain
certain indemnification and limitation of liability provisions in Sheffield's
Charter and Bylaws for a period of five years after the Effective Time. See
"Certain Terms of the Merger Agreement-Indemnification."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
In the opinion of Holme Roberts & Owen LLC, counsel to TransMontaigne, the
following summarizes the material federal income tax consequences expected to
result to the stockholders of TransMontaigne from the Merger, subject to the
conditions and limitations described herein. The following discussion and the
tax opinions described below are based on the current provisions of the Internal
Revenue Code of 1986 (the "Code"), the applicable Treasury Regulations (the
"Regulations") and the public administrative and judicial interpretations of the
Code and Regulations, all of which are subject to change, which changes could be
applied retroactively. The discussion and the opinions address only those
stockholders who hold TransMontaigne Common Stock, and who hold (or will hold if
the Merger is consummated) the New Common Stock as a capital asset within the
meaning of Section 1221 of the Code.
No attempt has been made to comment on all federal income tax consequences of
the Merger that may be relevant to particular TransMontaigne and Sheffield
stockholders, including holders that are subject to special tax rules such as
dealers in securities, foreign persons, mutual funds, insurance companies, tax-
exempt entities and holders who acquired their shares as compensation or who do
not hold their shares as capital assets. The description and the tax opinions
do not address state, local and foreign tax consequences.
HOLDERS OF THE TRANSMONTAIGNE COMMON STOCK ARE ADVISED AND URGED TO CONSULT
THEIR OWN TAX ADVISORS REGARDING THE FEDERAL INCOME TAX CONSEQUENCES OF THE
MERGER IN LIGHT OF THEIR PERSONAL CIRCUMSTANCES AND THE CONSEQUENCES UNDER
STATE, LOCAL AND FOREIGN TAX LAWS, INCLUDING ANY POTENTIAL CHANGES IN TAX LAWS.
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No ruling from the Internal Revenue Service (the "Service") has been or will
be requested in connection with the Merger. TransMontaigne and Sheffield have
received from TransMontaigne's counsel, Holme Roberts & Owen LLC, an opinion
that, subject to the conditions and limitations described therein, the Merger
will be treated for federal income tax purposes as a reorganization within the
meaning of Section 368(a) of the Code, TransMontaigne and Sheffield will each be
a party to the reorganization within the meaning of Section 368(b) of the Code,
and the tax consequences described in paragraphs (a) through (d) below will
result. It is a condition to the obligation of TransMontaigne and Sheffield to
close the Merger that such opinion shall not have been withdrawn or modified in
any material respect.
The tax opinion is subject to a number of assumptions and is based on certain
representations from TransMontaigne, Sheffield and the TransMontaigne
stockholders. Among other representations, the opinion is based on
representations from certain stockholders of TransMontaigne as to their plans
and intentions with respect to the disposition of the Sheffield Stock to be
received in the Merger. If any of the assumptions or representations are not
accurate, counsel's opinion may be different.
If the Merger qualifies as a reorganization under Section 368(a) of the Code
as expressed in the tax opinion, the following federal income tax consequences
will result:
(a) no gain or loss will be recognized by TransMontaigne in connection with
the Merger;
(b) no gain or loss will be recognized by a holder of TransMontaigne Common
Stock upon the exchange of all of such holder's shares of TransMontaigne Common
Stock solely for shares of New Common Stock in the Merger;
(c) the aggregate tax basis of the shares of New Common Stock received by a
Trans-Montaigne stockholder in the Merger will be the same as the aggregate tax
basis of the shares of TransMontaigne Common Stock surrendered in exchange
therefor;
(d) the holding period of the shares of New Common Stock received by a
TransMontaigne stockholder in the Merger will include the holding period of the
shares of TransMontaigne Common Stock surrendered in exchange therefor, provided
that such shares of TransMontaigne Common Stock are held as capital assets at
the Effective Time; and
If a holder of TransMontaigne Common Stock who exchanges shares in the Merger
were to receive any consideration for his TransMontaigne Common Stock other than
New Common Stock, such holder would recognize taxable income equal to the fair
market value of such additional consideration (but not in excess of the amount,
if any, by which the sum of the fair market value of such consideration plus the
fair market value of the New Common Stock received by such holder exceeds the
tax basis for the TransMontaigne shares surrendered in exchange therefor).
TransMontaigne does not believe that there is any material additional
consideration.
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It is also the opinion of counsel that: the holders of the Old Sheffield
Common Stock will not recognize any gain or loss as a result of the reverse
stock split accomplished by the Merger except to the extent of cash received in
lieu of fractional shares of New Common Stock; the aggregate tax basis of the
shares of New Common Stock received in the exchange will be the same as the
aggregate tax basis of the shares of Old Sheffield Common Stock surrendered in
exchange therefore (adjusted to take into account basis attributable to any
fractional shares); and the holding period for the shares of New Common Stock
will include the holding period of the shares of Old Sheffield Common Stock
surrendered in exchange therefore (provided that such shares of Old Sheffield
Common Stock are held as a capital asset at the effective time).
An opinion of counsel does not provide the same degree of assurance with
respect to the tax consequences of a transaction as a private letter ruling from
the Service. An opinion of counsel, unlike a private letter ruling from the
Service, has no binding effect on the Service but rather represents counsel's
legal judgment based on current law. The Service could take a position contrary
to counsel's opinion and, if the matter is litigated, a court may reach a
decision contrary to the opinion.
If the Merger were a taxable transaction, TransMontaigne stockholders would
recognize gain or loss on the disposition of their TransMontaigne shares in the
Merger. In addition, TransMontaigne would recognize the taxable gain inherent
in its assets, and the Surviving Corporation would become obligated for
TransMontaigne's tax liability resulting from such gain.
Stockholders of TransMontaigne who effectively exercise their "dissenters'
rights" will receive cash payments that represent the "fair value" of their
shares. The cash payments will be treated as having been received as a
distribution in redemption of their stock under Section 302 of the Code. Under
section 302 the redemption will be treated as a sale for tax purposes (rather
than a dividend distribution) if the redemption of the shares: (a) qualifies as
a "substantially disproportionate" redemption with respect to such stockholder's
interest in the redeeming corporation, or (b) results in a complete termination
of such stockholder's interest in the redeeming corporation, or (c) is "not
essentially equivalent to a dividend" with respect to such stockholder. In
determining whether any of these three tests has been met, both the shares
actually owned by the stockholder and any shares constructively owned by such
stockholder by reason of the constructive ownership rules of Section 318 of the
Code must be taken into account. If the redemption is not treated as a sale
under these rules, it will be considered a dividend to the extent paid out of
the undistributed earnings and profits of the redeeming corporation. Under the
Clark case (489 U.S. 726 (1989)), it is unclear whether TransMontaigne or
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Sheffield will be considered the redeeming corporation for purposes of applying
the rules of Section 302 of the Code to a dissenting stockholder as described
above. The effect of which corporation is considered the redeeming corporation
is that if Sheffield (rather than TransMontaigne) is considered the redeeming
corporation it may be easier for the stockholder to satisfy one or more of the
three section 302 tests described above so that the redemption will be treated
as a sale for tax purposes. However, the three section 302 tests described
above are based, in part, on the particular factual circumstance of the
stockholder. Dissenting stockholders should consult their personal tax advisors
on these matters.
Under Section 3406 of the Code, the TransMontaigne stockholders may be
subject to "backup withholding" at the rate of 31% on "reportable payments" to
be received by them if they fail to furnish their correct taxpayer
identification numbers or for certain other reasons. The Surviving
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Corporation will report to these persons and to the Service for each calendar
year the amount of any reportable payments during that year and the amount of
tax withheld, if any, with respect to those reportable payments.
ACCOUNTING TREATMENT
The Merger is expected to be accounted as a "purchase" of Sheffield's assets
by TransMontaigne in a reverse acquisition. TransMontaigne will record the
assets and liabilities of Sheffield at their fair values, based on the price of
the TransMontaigne Common Stock issued in the private placement that
TransMontaigne completed in April 1996. See the Pro Forma Combined Financial
Information and notes thereto included elsewhere in this Joint Proxy
Statement/Prospectus.
GOVERNMENTAL AND REGULATORY APPROVALS
Sheffield and TransMontaigne are aware of no governmental or regulatory
approvals required for consummation of the Merger, other than compliance with
applicable securities laws.
RESTRICTIONS ON RESALES BY AFFILIATES
The shares of New Common Stock to be received by TransMontaigne stockholders
in connection with the Merger have been registered under the Securities Act and,
except as set forth in this paragraph, may be traded without restriction. The
shares of New Common Stock to be issued in connection with the Merger and
received by persons who are deemed to be "affiliates" (as that term is defined
in Rule 144 under the Securities Act) of TransMontaigne prior to the Merger may
be resold by them only in transactions permitted by the resale provisions of
Rule 145 under the Securities Act (or, in the case of such persons who become
affiliates of the Surviving Corporation, Rule 144 under the Securities Act) or
as otherwise permitted under the Securities Act.
RIGHTS OF DISSENTING STOCKHOLDERS
Under Delaware law, Sheffield's stockholders will not be entitled to any
appraisal or dissenter's rights in connection with the Merger because the Old
Sheffield Common Stock is publicly traded.
Dissenting TransMontaigne Stockholders who hold TransMontaigne Common Stock
("TransMontaigne Dissenting Shares") of record as of the Effective Time of the
Merger are entitled to appraisal rights under Section 262 of the DGCL ("Section
262"). Section 262 is reprinted in its entirety in Appendix V to this Joint
Proxy Statement Prospectus. All references in Section 262 and in this
discussion to a "stockholder" are to the record holder of TransMontaigne
Dissenting Shares as to which appraisal rights are asserted. A person having a
beneficial interest in TransMontaigne Dissenting Shares that are held of record
in the name of another person, such as a broker or nominee, must act promptly to
cause the record holder to follow the steps summarized below properly and in a
timely manner to perfect whatever appraisal rights the beneficial owner may
have.
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The following discussion and Appendix V should be reviewed carefully by any
Dissenting TransMontaigne Stockholder who wishes to exercise statutory appraisal
rights or who wishes to preserve the right to do so, since failure to comply
with the procedures set forth herein or therein will result in the loss of
appraisal rights.
Dissenting TransMontaigne Stockholders of record who desire to exercise their
appraisal rights must satisfy the following conditions. A written demand for
appraisal of TransMontaigne Dissenting Shares must be mailed or delivered to
TransMontaigne at the following address: 370 17th Street, Suite 900, Denver,
Colorado 80202, Attention: Secretary. In order to constitute a valid exercise
of appraisal rights, the written demand must be received by TransMontaigne
before June 3, 1996. The failure to execute a written consent of stockholders
for the Merger by a holder of TransMontaigne Common Stock will not be deemed to
satisfy such notice requirement. The written demand for appraisal must specify
the Dissenting TransMontaigne Stockholder's name and mailing address, the number
of TransMontaigne Dissenting Shares for which appraisal is demanded, and that
the Dissenting TransMontaigne Stockholder is thereby demanding appraisal of such
TransMontaigne Dissenting Shares. The demand for appraisal must be executed by
or for the Dissenting TransMontaigne Stockholder of record, fully and correctly,
as such Dissenting Stockholder's name appears on the certificate or certificates
representing his TransMontaigne Dissenting Shares. If the TransMontaigne
Dissenting Shares are owned of record in a fiduciary capacity, such as by a
trustee, guardian, or custodian, such demand must be executed by the fiduciary.
If the TransMontaigne Dissenting Shares are owned of record by more than one
person, as in a joint tenancy or tenancy in common, such demand must be executed
by all record owners. An authorized agent, including an agent for two or more
record owners, may execute the demand for appraisal for a stockholder of record;
however, the agent must identify the record owner and expressly disclose the
fact that, in exercising the demand, such person is acting as agent for the
record owner.
A record owner who holds TransMontaigne Dissenting Shares as a nominee for
others, may exercise appraisal rights with respect to the TransMontaigne
Dissenting Shares held for all or less than all beneficial owners of
TransMontaigne Dissenting Shares as to which such person is the record owner.
In such case, the written demand for appraisal must set forth the number of
TransMontaigne Dissenting Shares covered by such demand. Where the number of
TransMontaigne Dissenting Shares is not expressly stated, the demand will be
presumed to cover all TransMontaigne Dissenting Shares outstanding in the name
of such record owner. Beneficial owners who are not record owners and who
intend to exercise appraisal rights should instruct their record owners to
comply strictly with the statutory requirements with respect to the exercise of
appraisal rights, before the taking of the vote on the Merger.
Within 120 days after the Effective Time, either the Surviving Corporation or
any Dissenting TransMontaigne Stockholder who has complied with the requirements
of Section 262 may file a petition in the Delaware Court of Chancery (the
"Delaware Chancery Court") demanding a determination of the fair value of the
TransMontaigne Dissenting Shares of all of the stockholders demanding appraisal
rights. If a petition for an appraisal is timely filed, after a hearing on such
petition, the Delaware Chancery Court will determine which stockholders are
entitled to appraisal rights and will appraise the TransMontaigne Dissenting
Shares owned by such persons, determining the fair value of such TransMontaigne
Dissenting Shares, exclusive of any element of value arising from the
accomplishment or expectation of the Merger, together with a fair rate of
interest to be
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paid, if any, upon the amount determined to be fair value. In determining fair
value, the Delaware Chancery Court is to take into account all relevant factors.
The costs of the appraisal proceeding may be determined by the Delaware
Chancery Court and assessed against such parties as the Delaware Chancery Court
deems equitable in the circumstances. Upon application of a stockholder seeking
appraisal, the Delaware Chancery Court may order that all or a portion of the
expenses incurred by any such stockholder in connection with the appraisal
proceeding, including without limitation reasonable attorneys' fees and the fees
and expenses of experts, be assessed pro rata against the value of all
TransMontaigne Dissenting Shares entitled to appraisal.
Any TransMontaigne Dissenting Stockholder who has duly demanded appraisal in
compliance with Section 262 will not, after the Effective Time, be entitled to
vote for any purpose the shares subject to such demand or to receive any
dividends or other distributions on such TransMontaigne Dissenting Shares,
except for dividends or distributions payable to Dissenting TransMontaigne
Stockholders of record at a date prior to the Effective Time.
CERTAIN TERMS OF THE MERGER AGREEMENT
The following description does not purport to be complete and is qualified by
reference to the Merger Agreement, a copy of which is attached as Appendix I to
this Joint Proxy Statement/Prospectus.
EFFECTIVE TIME OF THE MERGER
The Merger Agreement provides that, as promptly as practicable after the
satisfaction or waiver of the conditions to closing the Merger, the parties will
cause the Merger to be consummated by filing the 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, Delaware law (the date
and time of such filing, or such later date or time agreed upon by Sheffield and
TransMontaigne and set forth therein, being the "Effective Time"). It is
anticipated that, if the Merger Agreement is approved and adopted on June 3,
1996 and all other conditions to the Merger have been satisfied or waived, the
Effective Time will occur on June 3, 1996 or as soon thereafter as practicable.
MANNER AND BASIS OF CONVERTING SHARES
At the Effective Time, TransMontaigne will be merged with and into Sheffield,
which will be the surviving corporation of the Merger, and (i) each outstanding
share of TransMontaigne Common Stock, other than certificates which immediately
prior to the Effective Time evidenced shares of TransMontaigne Common Stock held
in the treasury of TransMontaigne or owned by Sheffield or any direct or
indirect wholly-owned subsidiary of either Sheffield or TransMontaigne, which
shares will be canceled at the Effective Time, will be converted into one share
of New Common Stock, subject to the right of the holder of such share to seek an
appraisal of the fair value thereof as described in this Joint Proxy
Statement/Prospectus; (ii) each 2.432599 outstanding shares of Old
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Sheffield Common Stock will become one share of New Common Stock; (iii) the name
of Sheffield will be changed to "TransMontaigne Oil Company;" and (iv) the
number of authorized shares of New Common Stock will be increased to 40,000,000.
Outstanding warrants and options to purchase shares of TransMontaigne Common
Stock will become warrants and options to purchase shares of New Common Stock.
Notwithstanding the foregoing, if between the date of the Merger Agreement and
the Effective Time the outstanding shares of Old Sheffield Common Stock or
TransMontaigne Common Stock will have been changed into a different number of
shares or a different class, by reason of any stock dividend, subdivision,
reclassification, recapitalization, split, combination or exchange of shares,
the numbers of shares to be received in the Merger by TransMontaigne and
Sheffield stockholders will be correspondingly adjusted to reflect such stock
dividend, subdivision, reclassification, recapitalization, split, combination or
exchange of shares.
As soon as practicable following the Effective Time, the Transfer Agent will
mail to each record holder of Converted Shares 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 Converted
Share certificates for Old Sheffield Common Stock certificates and cash in lieu
of a fractional share. Letters of transmittal will also be available following
the Effective Time at the offices of Sheffield in Denver, Colorado. Upon
delivery of an executed transmittal letter and surrender of a Converted Share
certificate to the Transfer Agent for cancellation, the holders of such
certificates will be entitled to receive a certificate representing the number
of whole shares of New Common Stock which such holder has the right to receive
under the terms of the Merger Agreement. After the Effective Time, there will
be no further registration of transfers on the stock transfer books of
TransMontaigne of shares of TransMontaigne Common Stock that were outstanding
immediately prior to the Effective Time. Share certificates should not be
surrendered for exchange prior to the Effective Time and the receipt of a letter
of transmittal.
No fractional shares of New Common Stock will be issued in the Merger. Each
stockholder of TransMontaigne or Sheffield entitled to a fractional share will
receive an amount in cash equal to the value of such fractional share based upon
the last sale price of Old Sheffield Common Stock on the American Stock Exchange
(Emerging Company Marketplace) prior to the Effective Time. No interest will be
paid on such amount, and all Converted Shares held by a record holder will be
aggregated for purposes of computing the amount of such payment.
Until so surrendered and exchanged, each certificate previously evidencing
Converted Shares will represent solely the right to receive shares of New Common
Stock and cash in lieu of fractional shares. Unless and until any such
certificates will be so surrendered and exchanged, no dividends or other
distributions payable to the holders of record of New Common Stock as of any
time on or after the Effective Time will be paid to the holders of such
certificates evidencing Converted Shares prior to the Merger; provided, however,
that, upon any such surrender and exchange of such certificates, there will be
paid to the record holders of the certificates issued and exchanged therefor (i)
the amount, without interest thereon, of dividends and other distributions, if
any, with a record date on or after the Effective Time theretofore paid with
respect to such whole shares of New Common Stock, and (ii) at the appropriate
payment date, the amount of dividends or other distributions, if any, with a
record date on or after the Effective Time but prior to surrender and a payment
date occurring after surrender, payable with respect to such whole shares of New
Common Stock.
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The Merger Agreement provides that any issued and outstanding Dissenting
TransMontaigne Shares held by a Dissenting TransMontaigne Stockholder will not
be converted as described above but will become, at the Effective Date, by
virtue of the Merger and without any further action, the right to receive such
consideration as may be determined to be due to such Dissenting TransMontaigne
Stockholder pursuant to the DGCL; provided, however, that TransMontaigne Common
Stock outstanding immediately prior to the Effective Date and held by a
Dissenting TransMontaigne Stockholder who will, after the Effective Date,
withdraw his demand for appraisal or lose his right of appraisal, in either case
pursuant to the DGCL, will be deemed to be converted as of the Effective Date,
into the right to receive New Common Stock.
CONDITIONS TO THE MERGER
The respective obligations of Sheffield and TransMontaigne to consummate the
Merger are subject to the satisfaction of the following conditions, any or all
of which may be waived in writing by the parties hereto, in whole or in part, to
the extent permitted by applicable law: (a) the Merger Agreement and the Merger
will have been approved and adopted by the requisite vote of the stockholders of
TransMontaigne and Sheffield; (b) no Governmental Entity (as defined in the
Merger Agreement) or federal or state court of competent jurisdiction will have
enacted, issued, promulgated, enforced or entered any statute, rule, regulation,
executive order, decree, injunction or other order (whether temporary,
preliminary or permanent) which is in effect and which has the effect of making
the Merger illegal or otherwise prohibiting consummation of the Merger; and (c)
TransMontaigne's lenders must have given their consents to the Merger.
The obligation of TransMontaigne to effect the Merger is also subject to the
satisfaction at or prior to the Closing Date of the following conditions, any or
all of which may be waived in writing by TransMontaigne, in whole or in part, to
the extent permitted by applicable law: (a) except when the failure of
representations made by Sheffield in the Merger Agreement to be true and correct
(without regard to any exception in any representation for matters that would
not constitute a material adverse effect on the assets, liabilities, financial
condition, results of operations or current or future business of Sheffield and
its subsidiaries, taken as a whole (a "Sheffield Material Adverse Effect"))
would not result in an aggregate liability to Sheffield or reduction in value of
Sheffield in excess of $350,000, each of the representations and warranties of
Sheffield contained in the Merger Agreement must be true and correct as of the
Closing Date as though made on and as of the Closing Date (except to the extent
such representations and warranties specifically relate to an earlier date, in
which case such representations and warranties must be true and correct as of
such earlier date); (b) Sheffield must have performed or complied with all
agreements and covenants required by the Merger Agreement to be performed or
complied with by it on or prior to the Closing Date; (c) since the date of the
Merger Agreement, there must have been no change, occurrence or circumstance in
the current or future business, financial condition or results of operations of
Sheffield or any of its subsidiaries having or reasonably likely to have,
individually or in the aggregate, a Sheffield Material Adverse Effect; (d) there
must not be any action taken, or any statute, rule, regulation or order enacted,
entered, enforced or deemed applicable to the Merger, by any Governmental Entity
in connection with the grant of a regulatory approval necessary, in the
reasonable business judgment of TransMontaigne, to the continuing operation of
the current or future business of Sheffield, which imposes any condition or
restriction upon Sheffield or the business or operations of Sheffield which, in
the reasonable business judgment of TransMontaigne, would be materially
burdensome in the
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context of the transactions contemplated by the Merger Agreement; (e) Holme
Roberts & Owen LLC must have delivered to TransMontaigne its written opinion
substantially to the effect that (w) the Merger will constitute a reorganization
within the meaning of Section 368(a) of the Code, (x) Sheffield and
TransMontaigne will each be a party to that reorganization within the meaning of
Section 368(b) of the Code, (y) Sheffield and TransMontaigne will not recognize
any gain or loss for U.S. federal income tax purposes as a result of the Merger,
and (z) no gain or loss will be recognized by the holders of TransMontaigne
Common Stock upon receipt of shares of New Common Stock in the Merger, except
with respect to any cash received in lieu of a fractional share interest in the
New Common Stock; and such opinion must not have been withdrawn or modified in
any material respect; (f) Davis Graham & Stubbs LLP must have delivered its
written opinion to TransMontaigne, in form and substance reasonably satisfactory
to TransMontaigne, to the effect that the New Common Stock, when issued as
contemplated by the Merger Agreement, will be duly authorized, fully paid and
validly issued; and (g) warrants to purchase 81,450 shares of Old Sheffield
Common Stock must have been exercised.
The obligation of Sheffield to effect the Merger is also subject to the
satisfaction at or prior to the Closing Date of the following conditions, any or
all of which may be waived in writing by Sheffield, in whole or in part, to the
extent permitted by applicable law: (a) except when the failure of
representations made by TransMontaigne in the Merger Agreement to be true and
correct (without regard to any exception in any representation for matters that
would not constitute a change, occurrence or circumstance in the current or
future business, financial condition or results of operations of TransMontaigne
or any of its subsidiaries having or reasonably likely to have, individually or
in the aggregate, a material adverse effect on the financial condition, results
of operations or current or future business of TransMontaigne and its
subsidiaries, taken as a whole (a "TransMontaigne Material Adverse Effect"))
would not result in an aggregate liability to TransMontaigne or reduction in
value of TransMontaigne in excess of $3,500,000, each of the representations and
warranties of TransMontaigne contained in the Merger Agreement must be true and
correct as of the Closing Date as though made on and as of the Closing Date
(except to the extent such representations and warranties specifically relate to
an earlier date, in which case such representations and warranties must be true
and correct as of such earlier date); (b) TransMontaigne must have performed or
complied with all agreements and covenants required by the Merger Agreement to
be performed or complied with by it on or prior to the Closing Date; (c) since
the date of the Merger Agreement, there must have been no TransMontaigne
Material Adverse Effect; (d) Holme Roberts & Owen LLC must have delivered its
written opinion to Sheffield, in form and substance reasonably satisfactory to
Sheffield, to the effect that: (w) the Merger will constitute a reorganization
within the meaning of section 368(a) of the Code; (x) TransMontaigne and
Sheffield must each be a party to that reorganization within the meaning of
section 368(b) of the Code; (y) TransMontaigne will not recognize any gain or
loss for federal income tax purposes as a result of the Merger; and (z) for
federal income tax purposes no gain or loss will be recognized by the holders of
TransMontaigne stock upon receipt of shares of New Common Stock in the Merger,
except with respect to any cash received in lieu of a fractional share interest
in the New Common Stock; and such tax opinion must not have been withdrawn or
modified in any material respect prior to the Closing Date; and (e) each
stockholder of TransMontaigne must have provided to Sheffield a certificate of
nonforeign status pursuant to Regulations under Section 1445 of the Code.
There can be no assurance that all of the conditions to the Merger will be
satisfied.
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REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties of
TransMontaigne and Sheffield relating to, among other things, (i) each of their
organization and similar corporate matters, (ii) each of their capitalization,
(iii) 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 law, (v) the documents and
reports filed by Sheffield with the Commission and TransMontaigne's financial
statements and the accuracy of the information contained therein, (vi) the
absence of certain changes and events, (vii) litigation, (viii) employee benefit
matters, (ix) taxes and matters relating to a tax-free reorganization, (x)
certain business practices, (xi) environmental matters, (xii) vote required,
(xiii) brokers, (xiv) insurance, (xv) properties, (xvi) certain contracts and
restrictions, (xvii) certain regulatory matters, (xviii) futures trading and
(xix) the accuracy of certain information provided. The representations and
warranties expire at the Effective Time.
CERTAIN COVENANTS; CONDUCT OF BUSINESS PRIOR TO THE MERGER
Each of TransMontaigne and Sheffield has agreed that, prior to the Effective
Time, unless otherwise expressly contemplated by the Merger Agreement or
consented to in writing by the other, it will and will cause its subsidiaries to
(a) 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 employees and maintain its relationships with its
material customers and suppliers; (b) maintain and keep its material properties
and assets in as good repair and condition as at present, ordinary wear and tear
excepted, and maintain supplies and inventories in quantities consistent with
its customary business practice; and (c) use all reasonable efforts to keep in
full force and effect insurance and bonds comparable in amount and scope of
coverage to that currently maintained. Sheffield has also agreed that, prior to
the Effective Time, unless otherwise expressly contemplated by the Merger
Agreement or consented to in writing by TransMontaigne, it will and will cause
its subsidiaries to operate its business in all material respects in the usual
and ordinary course consistent with past practices.
Sheffield has agreed that, prior to the Effective Time, except as expressly
contemplated by the Merger Agreement or otherwise consented to in writing by
TransMontaigne, it will not do, and will not permit any of its subsidiaries to
do, any of the following: (a)(i) increase the compensation payable to or to
become payable to any director or executive officer; (ii) grant any severance or
termination pay to, or enter into or amend any employment or severance agreement
with, any director, officer or employee; (iii) establish, adopt or enter into
any employee benefit plan or arrangement; or (iv) amend, or take any other
actions with respect to, any of its benefit plans, subject to certain
exceptions; (b) declare or pay any dividend on, or make any other distribution
in respect of, outstanding shares of capital stock, except for dividends by a
wholly owned subsidiary of Sheffield to Sheffield or another wholly owned
subsidiary of Sheffield; (c)(i) except for certain matters, redeem, purchase or
otherwise acquire any shares of its or any of its subsidiaries' capital stock or
any securities or obligations convertible into or exchangeable for any shares of
its or its subsidiaries' capital stock, or any options, warrants or conversion
or other rights to acquire any shares of its or its subsidiaries' capital stock
or any such securities or obligations; (ii) effect any
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reorganization or recapitalization; or (iii) split, combine or reclassify any of
its or its subsidiaries' capital stock or issue or authorize or propose the
issuance of any other securities in respect of, in lieu of or in substitution
for, shares of its or its subsidiaries' capital stock; (d)(i) except for certain
matters, issue, deliver, award, grant or sell, or authorize or propose the
issuance, delivery, award, grant or sale of, any shares of any class of its or
its subsidiaries' capital stock, any securities convertible into or exercisable
or exchangeable for any such shares, or any rights, warrants or options to
acquire any such shares; (ii) amend or otherwise modify the terms of any such
rights, warrants or options the effect of which shall be to make such terms more
favorable to the holders thereof; or (iii) take any action to optionally
accelerate the exercisability of stock options; (e) acquire or agree to acquire
any business or other entity, or otherwise acquire or agree to acquire any
assets of any other person (with certain exceptions); (f) sell or otherwise
dispose of any of its material assets or any material assets of any of its
subsidiaries, with certain exceptions; (g) release any third party from its
obligations, or grant any consent, under any existing standstill provision
relating to a Competing Transaction or otherwise under any confidentiality or
other agreement, or fail to fully enforce any such agreement; (h) adopt or
propose to adopt certain amendments to its charter or bylaws, which would alter
the terms of its capital stock or would have an adverse impact on the
consummation of the transactions contemplated by the Merger Agreement; (i)
change any of its methods of accounting or take certain actions with respect to
taxes; (j) incur any obligation for borrowed money or purchase money
indebtedness, except in the ordinary course of business consistent with past
practice and in no event in excess of $100,000 in the aggregate; (k) take any
action other than actions required by the Merger Agreement, which would result
in a failure to maintain the trading of the Old Sheffield Common Stock on the
American Stock Exchange (Emerging Company Marketplace); (l) enter into any
material arrangement, agreement or contract with any third party which provides
for an exclusive arrangement with that third party or is substantially more
restrictive on Sheffield or substantially less advantageous to Sheffield than
arrangements, agreements or contracts existing on the date hereof; (m) enter
into certain material contracts; (n) adopt a plan of complete or partial
liquidation, dissolution, merger, consolidation, restructuring, recapitalization
or other material reorganization of Sheffield or any of its subsidiaries; (o)
pay, discharge or satisfy any claims, liabilities or obligations (absolute,
accrued, asserted or unasserted, contingent or otherwise), other than the
payment, discharge or satisfaction of any such claims, liabilities or
obligations, (x) reflected or reserved against in, or contemplated by, the
financial statements (or the notes thereto) of Sheffield and its subsidiaries,
(y) incurred in the ordinary course of business consistent with past practice or
(z) which are legally required to be paid, discharged or satisfied; (p)
knowingly take, or agree to commit to take, any action that would make any
representation or warranty of Sheffield contained in the Merger Agreement
inaccurate in any respect at, or as of any time prior to, the Effective Time;
(q) other than between or among wholly-owned subsidiaries of Sheffield which
remain wholly-owned or between Sheffield and its wholly-owned subsidiaries which
remain wholly-owned, neither Sheffield nor any of its subsidiaries will engage
in any transaction with, or enter into any agreement, arrangement, or
understanding with, directly or indirectly, any of Sheffield's affiliates,
including, without limitation, any transactions, agreements, arrangements or
understandings with any affiliate or other person covered under Item 404 of
Regulation S-K under the Securities Act that would be required to be disclosed
under such Item 404, other than pursuant to such agreements, arrangements, or
understandings existing on the date of this Agreement or as disclosed in writing
to TransMontaigne; provided, however, that any such agreement, arrangement or
understanding disclosed in such writing must be approved by at least two
independent directors of Sheffield, after having received an appraisal or
valuation from an independent appraiser or expert (reasonably acceptable to
TransMontaigne) that
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the terms are fair to Sheffield and are no less favorable to Sheffield than
could be obtained in an arms-length transaction with an unaffiliated party, and,
provided, further, that Sheffield provides TransMontaigne with all information
concerning any such agreement, arrangement or understanding that TransMontaigne
may reasonably request; (r) agree to or approve any commitment, including any
authorization for expenditure or agreement to acquire property, obligating
Sheffield for an amount in excess of $10,000; (s) engage in any natural gas or
other futures or options trading or be a party to any price swaps, hedges,
futures or similar instruments, except for hedging purposes in accordance with
past practices; or (t) agree in writing or otherwise to do any of the foregoing.
TransMontaigne has agreed that, prior to the Effective Time, except as
expressly contemplated by the Merger Agreement or otherwise consented to in
writing by TransMontaigne, it will not do, and will not permit any of its
subsidiaries to do, any of the following: (i) adopt or propose to adopt any
amendments to its charter or bylaws, which would have an adverse impact on the
consummation of the transactions contemplated by the Merger Agreement; (ii)
knowingly take, or agree to commit to take, any action that would make any
representation or warranty of TransMontaigne contained in the Merger Agreement
inaccurate in any respect at, or as of any time prior to, the Effective Time; or
(c) cause the Sheffield Exploration Company, Inc. 401(k) Plan to be terminated
or merged with any other plan until after the close of the 1996 plan year.
NO SOLICITATION
Additionally, Sheffield has agreed not to initiate, solicit or encourage
(including by way of furnishing information or assistance), or take any other
action to facilitate, any inquiries or the making of any proposal relating to,
or that may reasonably be expected to lead to, any Competing Transaction, or
enter into discussions or negotiate with any person or entity in furtherance of
such inquiries or to obtain a Competing Transaction, or agree to or endorse any
Competing Transaction, or authorize or permit any of the officers, directors or
employees of Sheffield or any of its subsidiaries or any investment banker,
financial advisor, attorney, accountant or other representative retained by
Sheffield or any of Sheffield's subsidiaries to take any such action, and
Sheffield will promptly notify TransMontaigne of all relevant terms of any such
inquiries and proposals received by Sheffield or any of its subsidiaries or by
any such officer, director, investment banker, financial advisor, attorney,
accountant or other representative relating to any of such matters and if such
inquiry or proposal is in writing, Sheffield will promptly deliver or cause to
be delivered to TransMontaigne a copy of such inquiry or proposal; provided,
however, that the Board of Directors of Sheffield may (i) furnish information
to, or enter into discussions or negotiations with, any person or entity in
connection with an unsolicited bona fide proposal in writing by such person or
entity to acquire Sheffield pursuant to a merger, consolidation, share exchange,
business combination or other similar transaction or to acquire a substantial
portion of the assets of Sheffield or any of its subsidiaries, if, and only to
the extent that (A) the Board of Directors of Sheffield, after consultation with
and based upon the written opinion of independent legal counsel (who may be
Sheffield's regularly engaged independent legal counsel), determines in good
faith that such action is necessary for such Board of Directors to comply with
its fiduciary duties to stockholders under applicable law and (B) prior to
furnishing such information to, or entering into discussions or negotiations
with, such person or entity Sheffield (x) provides written notice to
TransMontaigne to the effect that it is furnishing information to, or entering
into discussions or negotiations with, such person or entity and (y) enters into
with such person or entity a confidentiality agreement in reasonably customary
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<PAGE>
form on terms not more favorable to such person or entity than the terms
contained in the Confidentiality Agreement between Sheffield and TransMontaigne;
(ii) comply with Rule 14e-2 promulgated under the Exchange Act with regard to a
Competing Transaction; or (iii) fail to make or withdraw or modify its
recommendation of the Merger and the Merger Agreement if there exists a
Competing Transaction and the Board of Directors of Sheffield, after
consultation with and based upon the written opinion of independent legal
counsel (who may be Sheffield's regularly engaged independent legal counsel),
determines in good faith that such action is necessary for such Board of
Directors to comply with its fiduciary duties to stockholders under applicable
law.
CERTAIN POST-MERGER MATTERS
Pursuant to the Merger Agreement, the Sheffield Charter and the Sheffield
Bylaws, as in effect immediately prior to the Effective Time (except that the
name of Sheffield will be changed to "TransMontaigne Oil Company;" and the
number of authorized shares of New Common Stock will be increased to 40,000,000)
will be the certificate of incorporation and bylaws of the Surviving Corporation
until amended as provided therein and pursuant to the DGCL.
TERMINATION OR AMENDMENT OF THE MERGER AGREEMENT
The Merger Agreement may be terminated at any time prior to the Effective
Time, whether before or after approval of the Merger Agreement and the Merger by
the stockholders of TransMontaigne and Sheffield: (a) by mutual consent of
Sheffield and TransMontaigne; (b) by Sheffield, upon a material breach of any
representation, warranty, covenant or agreement on the part of TransMontaigne
set forth in the Merger Agreement, or if any representation or warranty of
TransMontaigne will have become untrue, in either case such that Sheffield's
conditions to closing would be incapable of being satisfied by July 31, 1996;
(c) by TransMontaigne, upon a material breach of any representation, warranty,
covenant or agreement on the part of Sheffield set forth in the Merger
Agreement, or if any representation or warranty of Sheffield will have become
untrue, in either case such that TransMontaigne's conditions to closing would be
incapable of being satisfied by July 31, 1996; (d) by either Sheffield or
TransMontaigne, if there is any order of a Governmental Entity which is final
and nonappealable preventing the consummation of the Merger, subject to a
limited exception; (e) by either Sheffield or TransMontaigne, if the Merger is
not consummated before July 31, 1996; (f) by either Sheffield or TransMontaigne,
if the Merger Agreement and the Merger fails to receive the requisite vote for
approval and adoption by the stockholders of Sheffield at the Sheffield Special
Meeting; (g) by TransMontaigne, if (1) the Board of Directors of Sheffield
withdraws, modifies or changes its recommendation of the Merger Agreement or the
Merger in a manner adverse to TransMontaigne or has resolved to do any of the
foregoing; (2) the Board of Directors of Sheffield has recommended to the
stockholders of Sheffield any Competing Transaction or has resolved to do so;
(3) a tender offer or exchange offer for 20% or more of the outstanding shares
of capital stock of Sheffield is commenced, and the Board of Directors of
Sheffield does not recommend that stockholders not tender their shares into such
tender or exchange offer, or (4) any person (other than TransMontaigne or an
affiliate thereof) has acquired beneficial ownership or the right to acquire
beneficial ownership of, or any "group" (as such term is defined under Section
13(d) of the Exchange Act and the rules and regulations promulgated thereunder),
has been formed which beneficially owns, or has the right to acquire beneficial
ownership of, 20% or
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<PAGE>
more of the then outstanding shares of capital stock of Sheffield; or (h) by
Sheffield, if the Board of Directors of Sheffield (x) fails to make or withdraws
its recommendation to Sheffield's stockholders of the Merger Agreement if there
exists at such time a Competing Transaction, or (y) recommends to Sheffield's
stockholders approval or acceptance of a Competing Transaction, in each case
only if the Board of Directors of Sheffield, after consultation with and based
upon the written opinion of independent legal counsel (who may be Sheffield's
regularly engaged independent legal counsel), determines in good faith that such
action is necessary for such Board of Directors to comply with its fiduciary
duties to stockholders under applicable law.
Subject to limited exceptions, including the survival of Sheffield's
agreement to pay a termination fee to TransMontaigne under certain circumstances
as discussed below, in the event of the termination of the Merger Agreement, the
Merger Agreement will become void, there will be no liability on the part of
Sheffield or TransMontaigne to the other and all rights and obligations of the
parties thereto will cease, except that no party will be relieved of any
liability for (i) any breach of such party's covenants or agreements contained
in the Merger Agreement, or (ii) any willful breach of such party's
representations or warranties contained in the Merger Agreement.
The Merger Agreement may be amended by the parties by action taken by or on
behalf of their respective Boards of Directors at any time prior to the
Effective Time; provided, however, that, after approval of the Merger by the
stockholders of Sheffield, (i) no amendment, which under applicable law may not
be made without the approval of the stockholders of TransMontaigne or Sheffield,
may be made without such approval, and (ii) no amendment, which under the
applicable rules of the American Stock Exchange (Emerging Company Marketplace),
may not be made without the approval of the stockholders of Sheffield, may be
made without such approval. At any time prior to the Effective Time, any party
to the Merger Agreement may (a) extend the time for the performance of any of
the obligations or other acts of the other party thereto, (b) waive any
inaccuracies in the representations and warranties of the other party contained
therein or in any document delivered pursuant thereto and (c) waive compliance
by the other party with any of the agreements or conditions contained therein.
EXPENSES AND TERMINATION FEE
All expenses incurred by Sheffield and TransMontaigne will be borne by the
party incurring such expenses.
The Merger Agreement also provides that Sheffield will pay to TransMontaigne
a fee equal to $410,000, which amount will be inclusive of all of
TransMontaigne's expenses, if the Merger Agreement is terminated in accordance
with its terms by any of the following (a "Trigger Event"): (a) by
TransMontaigne after a wilful breach by Sheffield, if Sheffield has had contacts
or entered into negotiations after the date of the Merger Agreement regarding a
Competing Transaction, and within twelve months of the termination of the Merger
Agreement Sheffield consummates a Business Combination (as defined below) or
enters into a definitive agreement providing for a Business Combination with any
person with whom such contacts had been made; (b) by either Sheffield or
TransMontaigne if the Merger Agreement fails to receive the requisite vote for
approval and adoption by the stockholders of Sheffield at the Sheffield Special
Meeting, and at the time of such meeting there exists a Competing Transaction;
(c) by TransMontaigne if the Board of Directors
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<PAGE>
of Sheffield withdraws, modifies or changes its recommendation of the Merger
Agreement or the Merger in a manner adverse to TransMontaigne (or resolves to do
so) and, at such time, there exists a Competing Transaction; (d) by
TransMontaigne, if the Board of Directors of Sheffield recommends any Competing
Transaction to Sheffield's stockholders (or resolves to do so); (e) by
TransMontaigne, if a tender or exchange offer for 20% or more of the capital
stock of Sheffield is commenced, and Sheffield's Board of Directors does not
recommend that its stockholders not tender their shares into such tender offer
or exchange offer; or (f) by Sheffield, if the Board of Directors of Sheffield
(i) fails to recommend (or withdraws its recommendation of) approval and
adoption by its stockholders of the Merger and the Merger Agreement and there
exists a Competing Transaction, or (ii) recommends a Competing Transaction, in
each case upon a determination in good faith, after consultation with and based
on the written opinion of independent legal counsel, that such action is
necessary for such Board to comply with its fiduciary duties under applicable
law.
The Merger Agreement defines "Business Combination" as (i) a merger,
consolidation, share exchange, business combination or similar transaction
involving Sheffield, (ii) a sale, lease, exchange, transfer or other disposition
of 20% or more of the assets of Sheffield and its subsidiaries, taken as a
whole, in a single transaction or a series of transactions, or (iii) the
acquisition, by a person (other than TransMontaigne or any affiliate thereof) or
group (as such term is defined under Section 13(d) of the Exchange Act and the
rules and regulations thereunder) of beneficial ownership (as defined in Rule
13d-3 under the Exchange Act) of 20% or more of the Old Sheffield Common Stock
whether by tender or exchange offer or otherwise.
INDEMNIFICATION
The Merger Agreement provides that, for a period of five years after the
Effective Time, the Surviving Corporation will not amend or otherwise modify
certain limitation of liability and indemnification provisions of its Charter
and By-laws in a manner that would adversely affect the rights thereunder of any
individuals who at any time prior to the Effective Time were directors or
officers of Sheffield in respect of acts or omissions occurring at or prior to
the Effective Time (including, without limitation, the transactions contemplated
by the Merger Agreement), unless such amendment or modification is required by
law.
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MARKET PRICES OF COMMON STOCK AND DIVIDEND INFORMATION
The Old Sheffield Common Stock has been traded on the American Stock Exchange
(Emerging Company Marketplace) since December 14, 1993 under the symbol "SHE."
There is no public market for TransMontaigne Common Stock. The shares of New
Common Stock have been approved for listing on the American Stock Exchange
(Primary List) subject to completion of the Merger. The following table sets
forth, for the periods indicated, the range of high and low per share sale
prices for Old Sheffield Common Stock as reported on the American Stock Exchange
(Emerging Company Marketplace). No dividends were paid in 1994 or in 1995 on
either the Old Sheffield Common Stock or the TransMontaigne Common Stock.
For the Quarter Ended Low High
----------------------------------------- ----- -----
FISCAL 1994
December 31, 1993 (beginning December 14) $2.87 $3.25
March 31, 1994 $2.87 $3.62
June 30, 1994 $1.87 $2.87
FISCAL 1995
September 30, 1994 $1.88 $2.25
December 31, 1994 $1.38 $1.94
March 31, 1995 $1.19 $1.44
June 30, 1995 $1.25 $1.63
FISCAL 1996
September 30, 1995 $1.50 $1.63
December 31, 1995 $1.38 $1.81
March 31, 1996 $1.63 $4.44
Fourth Quarter, through May 8, 1996 $4.13 $7.38
On February 6, 1996, the last trading day prior to the announcement by
Sheffield and TransMontaigne that they had executed the Merger Agreement, the
closing per share sale prices of Old Sheffield Common Stock, as reported on the
American Stock Exchange (Emerging Company Marketplace), was $1.75. The Merger
Agreement does not provide for any adjustment in the numbers of shares of New
Common Stock to be received by TransMontaigne or Sheffield stockholders in the
event that either the Old Sheffield Common Stock or TransMontaigne Common Stock
should increase or decrease in value. See the cover page of this Joint Proxy
Statement/Prospectus for a recent closing price of Old Sheffield Common Stock.
No dividends were paid in 1995 or in 1994 on either the Old Sheffield Common
Stock or the TransMontaigne Common Stock and neither company has any present
intention of paying dividends in the immediate future. TransMontaigne's current
revolving credit facility contains restrictions on the payment of dividends.
Under its Credit Agreement with Norwest Bank, Sheffield may not make dividend
payments.
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PRINCIPAL STOCKHOLDERS OF TRANSMONTAIGNE AND SHEFFIELD
TRANSMONTAIGNE
The following table indicates the beneficial ownership as of the date hereof
of the TransMontaigne Common Stock, and of New Common Stock after the Merger, by
each director of TransMontaigne, by each person known by TransMontaigne to own
more than 5% of the outstanding shares of TransMontaigne Common Stock,
TransMontaigne's Chief Executive Officer and TransMontaigne's other executive
officers whose total annual salary and bonus exceeds $100,000 and by all
directors and executive officers of TransMontaigne as a group. Except as
otherwise indicated below, the ownership reflects sole voting and investment
power by the beneficial owner.
<TABLE>
<CAPTION>
Percent of Percent of Percent of
Name and Address Amount and Nature Outstanding New
of Beneficial Owner Beneficial Owner (1) Shares (2) Common Stock
- ------------------------------------------- -------------------- ------------ -------------
<S> <C> <C> <C>
Cortlandt S. Dietler 1,894,529 9.8% 9.1%
Richard E. Gathright (3) 533,000 2.7% 2.5%
Harold R. Logan, Jr. 343,056 1.8% 1.6%
Frederick W. Boutin 237,500 1.2% 1.1%
TransMontaigne Oil Company
370 Seventeenth Street, Suite 900
Denver, CO 80202
First Reserve Fund VI, 6,582,830 34.1% 31.6%
Limited Partnership and other
partnerships managed by
First Reserve Corporation (4)
475 Steamboat Road
Greenwich, CT 06830
Yorktown Energy Partners, L.P. 3,154,961 16.3% 15.2%
and other venture capital funds managed
by, and shares owned by officers of
Dillon, Read & Co. Inc. (5)
535 Madison Avenue
New York, New York 10022
Waterwagon & Co.(6) 3,117,000 16.1% 15.0%
c/o Merrill Lynch Growth Fund
800 Scudders Mill Road
Plainsborough, NJ 08536
Massachusetts Mutual Life(7) 1,296,277 6.6% 6.2%
Insurance Company and
funds managed by Massachusetts Mutual
Life Insurance Co.
1295 State Street
Springfield, MA 01111
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Edwin G. Bradberry, Trustee 1,104,082 5.7% 5.3%
One West Mountain
Fayetteville, AR 72701
John A. Hill (4) 6,582,830 34.1% 31.6%
475 Steamboat Road
Greenwich, CT 06830
Bryan H. Lawrence (5) 3,154,961 16.3% 15.2%
535 Madison Avenue
New York, New York 10022
William E. Macaulay (4) 6,582,830 34.1% 31.7%
475 Steamboat Road
Greenwich, CT 06830
All Directors and Executive 12,745,876 64.7% 60.3%
Officers as a Group (7 Persons) (8)
</TABLE>
_____________________
* Less than one percent.
(1) All shares are owned both of record and beneficially unless otherwise
specified by footnote to this table.
(2) Calculated pursuant to Rule 13d-3(d) of the Securities Exchange Act of 1934,
as amended. Under Rule 13d-3(d), shares not outstanding that are subject to
options, warrants, rights, or conversion privileges exercisable within sixty
days are deemed outstanding for the purpose of calculating the number and
percentage owned by such person, but not deemed outstanding for the purpose
of calculating the percentage owned by any other person.
(3) Includes 18,300 shares held by The Richard E. Gathright IRA Rollover
Account.
(4) First Reserve Corporation is an affiliate of John A. Hill and William E.
Macaulay, directors of TransMontaigne. The directors of First Reserve
Corporation, Messrs. Macaulay and Hill and David H. Kennedy, exercise sole
voting and dispositive control over these shares. Messrs. Hill and Macaulay
disclaim beneficial ownership of these shares.
(5) Yorktown Energy Partners, L.P. and Dillon, Read & Co. Inc. are affiliates of
Bryan H. Lawrence, a director of TransMontaigne. Dillon, Read & Co. Inc. has
sole voting and dispositive control over these shares. Mr. Lawrence owns
44,923 shares individually and disclaims beneficial ownership of the
remaining shares.
(6) TransMontaigne has granted to Waterwagon & Co. the right to maintain its 15%
ownership of New Common Stock if TransMontaigne issues stock in the future.
See "Description of Sheffield Capital Stock-General." Merrill Lynch & Co.,
Inc., a widely-held public company, has sole voting and dispositive control
over these shares.
(7) Massachusetts Mutual Life Insurance Company, a widely-held mutual insurance
company, has sole voting and dispositive control over these shares.
(8) Includes 9,692,868 shares held by affiliates, beneficial ownership of which
are disclaimed by the officers and directors.
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SHEFFIELD
The following table indicates the beneficial ownership as of the Sheffield
Record Date of the Old Sheffield Common Stock, and of New Common Stock after the
Merger, by each director, by each person known by Sheffield to own more than 5%
of the outstanding shares of Old Sheffield Common Stock, Sheffield's Chief
Executive Officer and Sheffield's other executive officers whose total annual
salary and bonus exceeds $100,000 and by all directors and executive officers of
Sheffield as a group. Except as otherwise indicated below, the ownership
reflects sole voting and investment power by the beneficial owner.
<TABLE>
<CAPTION>
Percent of Percent of
Name and Address Amount and Nature Outstanding New
of Beneficial Owner Beneficial Owner (1) Shares (2) Common Stock (11)
- --------------------------------- ------------------------ ------------ -----------------
<S> <C> <C> <C>
Edwin H. Morgens 151,038 (3) 4.4% *
10 East 50th Street
SheffieldYork, NY 10022
The Edwin H. Morgens and
Linda H. Morgens 1993 Trust 486,050 (4) 14.0% 1.0%
9510 East 71st Street
Chicago, IL 60649
J. Samuel Butler 307,345 (5) 8.6% *
1801 Broadway, Suite 600
Denver, CO 80202
Randall E. King 58,506 (6) 1.7% *
1801 Broadway, Suite 600
Denver, CO 80202
David A. Melman 24,094 (7)(9) * *
1801 Broadway, Suite 600
Denver, CO 80202
McLain J. Forman 16,000 (8)(9) * *
1801 Broadway, Suite 600
Denver, CO 80202
All Directors and Executive
Officers as a Group (6 persons) 658,983 (9)(10) 17.9% 1.3%
</TABLE>
- --------------------
* Less than one percent.
(1) All shares are owned both of record and beneficially unless otherwise
specified by footnote to this table.
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<PAGE>
(2) Calculated pursuant to Rule 13d-3(d) of the Securities Exchange Act of
1934, as amended. Under Rule 13d-3(d), shares not outstanding that are
subject to options, warrants, rights, or conversion privileges exercisable
within sixty days are deemed outstanding for the purpose of calculating the
number and percentage owned by such person, but not deemed outstanding for
the purpose of calculating the percentage owned by any other person.
(3) Includes 19,394 shares held by the Jane A. Waterfall 1994 Trust, Edwin H.
Morgens and Susan Waterfall, Trustees, and 19,394 shares held by the John
C. Waterfall, Jr. 1994 Trust, Edwin H. Morgens and Susan Waterfall,
Trustees. Mr. Morgens shares voting and investment power over the shares
with his co-trustee, but specifically disclaims beneficial ownership of
such 38,788 shares.
(4) The trust is irrevocable for the benefit of certain descendants of Edwin H.
and Linda H Morgens. Anne Bretz Carpenter, a non-resident niece of Mr.
Morgens, serves as trustee, with sole voting and investment power over the
shares.
(5) Includes 100,000 shares issuable upon exercise of stock options granted
under the Amended and Restated 1990 Stock Option Plan. See also footnote
(9). Also includes 12,000 shares held in trust for Mr. Butler's
grandchildren for which Mr. Butler serves as Trustee, and 24,501 shares
held in Sheffield's 401(k) profit sharing plan, for which Mr. Butler serves
as Trustee. Mr. Butler disclaims beneficial ownership of such 36,501
shares.
(6) Includes 25,000 shares issuable upon exercise of presently-exercisable
stock options granted under the Amended and Restated 1990 Stock Option
Plan, and 8,506 shares issuable upon exercise of a warrant, originally
issued to Petrie Parkman & Co. in 1991 in connection with a private
placement of stock and thereafter assigned, in part, to Mr. King. The
Merger Agreement requires that the warrant be exercised prior to the
Effective Time of the Merger.
(7) Includes 14,000 shares issuable upon exercise of stock options granted
under the Amended and Restated 1990 Stock Option Plan. See also footnote
(9).
(8) Includes 14,000 shares issuable upon exercise of presently exercisable
stock options granted under the Amended and Restated 1990 Stock Option
Plan. See also footnote (9).
(9) Stock options do not vest until the first anniversary of the date of grant,
December 5, 1996, at which time such options will be one-third vested, and
thereafter will vest in increments of one-third each on the second and
third anniversaries of the date of grant. However, Sheffield's Key Employee
Retention Plan provides that such options will vest and be exercisable in
full on the day immediately preceding the Effective Time of the Merger.
(10) Includes 65,000 shares issuable upon exercise of stock options granted
under the Amended and Restated 1990 Stock Option Plan and not included in
prior footnotes.
(11) Includes 12,332 shares of New Common Stock issuable to Petrie Parkman upon
closing of the Merger, as compensation for financial advisory services
rendered to Sheffield. Also includes 81,450 shares of Old Sheffield Common
Stock (converted to 33,483 shares of New Common
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Stock) issuable pursuant to the exercise of an outstanding warrant, which
exercise is required by the Merger Agreement as a condition to closing the
Merger.
Certain information relating to the management, executive compensation and
certain relationships and related transactions pertaining to Sheffield is set
forth in the Sheffield 1995 10-K which has been attached to this Joint Proxy
Statement/Prospectus as Appendix IV.
DESCRIPTION OF SHEFFIELD CAPITAL STOCK
GENERAL
At the Sheffield Record Date, the authorized capital stock of Sheffield
consisted of 10,000,000 shares of common stock, $.01 par value per share, of
which 3,459,512 shares were outstanding, and 2,000,000 shares of preferred
stock, $.01 par value per share, of which no shares were outstanding.
After the Merger, the number of authorized shares of New Common Stock will be
increased to 40,000,000. In addition, (i) Waterwagon & Co. will have the right
to maintain its 15% ownership of New Common Stock if the Surviving Corporation
issues stock in the future, pursuant to an agreement between Waterwagon & Co.
and TransMontaigne; and (ii) certain institutional investors that own
TransMontaigne Common Stock will have the right after the Merger to require the
Surviving Corporation to register their shares under the Securities Act.
The description set forth below of the New Common Stock constitutes a brief
summary of certain provisions of Sheffield's Charter and By-Laws, all of which
are filed as exhibits to the Registration Statement of which this Joint Proxy
Statement/Prospectus is a part. Such summary does not purport to be complete
and is qualified by reference to such documents.
COMMON STOCK
Each share of New Common Stock has one vote on all matters on which
stockholders are entitled or permitted to vote, including the election or
removal of directors. Holders of the New Common Stock have no redemption or
conversion rights, participate ratably in any distribution of assets to
stockholders in liquidation, and have no preemptive or other subscription
rights. Cumulative voting is not permitted in the election of directors.
Holders of the New Common Stock are entitled to receive such dividends as may be
declared by the Board of Directors of the Surviving Corporation out of funds
legally available therefor. All outstanding shares of New Common Stock are, and
the shares to be issued pursuant to the Merger Agreement will be, fully paid and
nonassessable. Key Corporation Shareholder Services is the Transfer Agent and
Registrar for the New Common Stock.
83
<PAGE>
PREFERRED STOCK
The Board of Directors of the Surviving Corporation, without further action
by the stockholders, is authorized to issue shares of preferred stock in one or
more series and, with certain limitations, to determine preferences as to
dividends and in liquidation, and voting, conversion, redemption and other
rights of each series. The Board could issue a series or series of preferred
stock with rights more favorable with respect to dividends and liquidation than
those held by the holders of New Common Stock.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
Sheffield is and the Surviving Corporation will be subject to Section 203 of
the DGCL, which generally prohibits a publicly held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless (i) prior to such date the Board of
Directors of the corporation approved either the business combination or the
transaction in which the person became an interested stockholder, (ii) upon
consummation of the transaction that resulted in the stockholder becoming an
interested stockholder, the interested stockholder owns at least 85% of the
outstanding voting stock of the corporation excluding shares owned by officers
or directors of the corporation and by certain employee stock plans, or (iii) on
or after such date the business combination is approved by the Board of
Directors of the corporation and by the affirmative vote of at least 66-3/4% of
the outstanding voting stock of the corporation that is not owned by the
interested stockholder. A "business combination" generally includes mergers,
asset sales and similar transactions between the corporation and the interested
stockholder, and other transactions resulting in a financial benefit to the
stockholder. An "interested stockholder" is a person who, together with
affiliates and associates, owns 15% or more of the corporation's voting stock or
who is an affiliate or associate of the corporation and, together with his
affiliates and associates, has owned 15% or more of the corporation's voting
stock within three years.
RESTRICTIONS ON DIVIDENDS
Under its Credit Agreement with Norwest Bank, Sheffield may not make dividend
payments. No dividends were paid in 1995 or in 1994 on the Old Sheffield Common
Stock.
COMPARATIVE RIGHTS OF TRANSMONTAIGNE
AND SHEFFIELD STOCKHOLDERS
If the Merger is consummated, the stockholders of TransMontaigne will become
stockholders of the Surviving Corporation. The rights of the stockholders of
both Sheffield and TransMontaigne are governed by and subject to the provisions
of the DGCL. The rights of current TransMontaigne stockholders following the
Merger will be governed by Sheffield's Charter, as amended by the Certificate of
Merger, and Sheffield's By-Laws, rather than the provisions of the
TransMontaigne Charter and TransMontaigne's By-Laws; and the rights of current
Sheffield stockholders following the Merger will be governed by Sheffield's
Charter, as amended by the Certificate of Merger, rather than the provisions of
the present Charter. The following is a brief summary of certain differences
between the rights of Sheffield's and TransMontaigne's stockholders before and
after the Merger,
84
<PAGE>
and is qualified by reference to the relevant provisions of the DGCL, the
Sheffield Charter, the Certificate of Merger, Sheffield's By-Laws, the
TransMontaigne Charter and TransMontaigne's By-Laws.
CERTAIN VOTING REQUIREMENTS
TransMontaigne's Certificate of Incorporation and By-Laws provide that the
act of the majority of the directors present at a meeting at which a quorum is
present shall be the act of the Board of Directors, except that the affirmative
vote of at least five of six directors is required to (i) with the approval of
the holders of two-thirds of TransMontaigne's voting stock, amend or repeal the
By-laws, or adopt new By-laws, (ii) with the approval of the holders of two-
thirds of TransMontaigne's outstanding voting stock, amend TransMontaigne's
certificate of incorporation, (iii) with the approval of the holders of two-
thirds of TransMontaigne's voting stock, approve a merger, consolidation
dissolution, liquidation or recapitalization of TransMontaigne or the sale,
transfer or other disposition in any single or related series of transactions of
assets having a fair market value in excess of 25% of the fair market value of
all of the assets of TransMontaigne and its subsidiaries, (iv) approve the
issuance in any single or related series of transactions of additional voting
stock of TransMontaigne (and/or options, warrants or other rights to acquire
such voting stock) with more than 20% of the voting power of all outstanding
voting stock of TransMontaigne, with such voting power to be measured before
such issuance, (v) approve any single or related series of debt or preferred
stock financings in excess of $10,000,000, (vi) approve any single or related
series of acquisitions of businesses, assets or investments with a value,
determined by the purchase price or by another fair measurement of value,
greater than 25% of TransMontaigne's assets, measured before the acquisition on
a consolidated basis, (vii) approve any public offering by TransMontaigne of
equity or debt securities, (viii) approve any amendment to TransMontaigne's
Stockholders Agreement or (ix) approve the issuance of any preferred stock, or
the filing of a certificate designating the designations, preferences, powers,
rights, qualifications, limitations and restrictions in accordance with Section
151(g) of the DGCL. None of such provisions may be overruled or avoided by
taking action indirectly, whether through a subsidiary of the corporation or
otherwise.
Sheffield's Charter and By-Laws permit the Board of Directors to act by a
majority of the directors present at a meeting at which a quorum is present, and
permit the stockholders to act by a majority of the stockholders present at a
meeting at which a quorum is present, except for certain matters which under the
DGCL require the approval of a majority of the outstanding shares.
POWER TO CALL SPECIAL MEETINGS
TransMontaigne's By-Laws provide that a special meeting of stockholders may
be called by the president, the Board of Directors or by the holders of at least
10% of the stock entitled to vote at the meeting. Sheffield's By-Laws provide
that a special meeting of stockholders may be called by the Board of Directors
or by the president of Sheffield or by the holders of a majority of the stock
entitled to vote at the meeting.
85
<PAGE>
AMENDMENTS TO SHEFFIELD CHARTER
In connection with the Merger, the number of authorized shares of New Common
Stock will be increased to 40,000,000 and Sheffield's name will be changed to
"TransMontaigne Oil Company." Presently the Sheffield Charter authorizes
10,000,000 shares of Old Sheffield Common Stock and the TransMontaigne Charter
authorizes 30,000,000 shares of TransMontaigne Common Stock.
See also "Description of Sheffield Capital Stock."
INDEPENDENT PUBLIC ACCOUNTANTS
It is expected that representatives of Coopers & Lybrand L.L.P. will be
present at the Sheffield Special Meeting to respond to appropriate questions of
stockholders and to make a statement if they so desire.
LEGAL MATTERS
The validity of the New Common Stock offered hereby has been passed upon for
Sheffield by Davis Graham & Stubbs LLP, Denver, Colorado. Certain tax
consequences of the Merger have been passed upon for TransMontaigne by Holme
Roberts & Owen LLC, Denver, Colorado.
EXPERTS
The consolidated financial statements of TransMontaigne Oil Company as of
April 30, 1995 and 1994 and for the year ended April 30, 1995, the seven months
ended April 30, 1994 and the years ended September 30, 1993 and 1992 have been
included herein in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of such firm as experts in accounting and auditing.
The consolidated financial statements and financial statement schedule of
Sheffield Exploration Company, Inc. as of June 30, 1995 and 1994 and for each of
the three years in the period ended June 30, 1995, included in Sheffield's
Annual Report on Form 10-K for the year ended June 30, 1995, incorporated by
reference in this prospectus and elsewhere in the registration statement, have
been incorporated herein in reliance on the reports, which include an
explanatory paragraph with respect to the adoption of SFAS No. 109, "Accounting
for Income Taxes" in 1993 and SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of" in 1995, of
Coopers & Lybrand L.L.P., independent accountants, given on the authority of
that firm as experts in accounting and auditing.
The consolidated financial statements of Lion Oil Company as of April 30,
1995 and 1994 and for each of the years in the three-year period ended April 30,
1995 have been included herein in reliance upon the report of KPMG Peat Marwick
LLP, independent certified public accountants, appearing elsewhere herein, and
upon the authority of such firm as experts in accounting and auditing.
STOCKHOLDERS' PROPOSALS
If the Merger occurs, the Surviving Corporation will adopt the April 30
fiscal year end of TransMontaigne and the next annual meeting of the Surviving
Corporation will be after April 30, 1997. In that case, any proposals of
stockholders of the Surviving Corporation intended to be presented at the annual
meeting of Stockholders of the Surviving Corporation to be held after April 30,
1997 must have been received by the Surviving Corporation, addressed to the
Corporate Secretary at 370 17th Street,
86
<PAGE>
Republic Plaza, Suite 900, Denver, CO 80202, no later than April 15, 1996, to be
considered for inclusion in the proxy statement and form of proxy relating to
that meeting.
If the Merger does not occur, any proposals of Sheffield stockholders
intended to be presented at the annual meeting of Stockholders of Sheffield to
be held in December 1996 must have been received by Sheffield, addressed to the
Corporate Secretary at 1801 Broadway, Suite 600, Denver, Colorado 80202, no
later than July 9, 1996, to be considered for inclusion in the proxy statement
and form of proxy relating to that meeting.
87
<PAGE>
Index to Financial Statements
TRANSMONTAIGNE OIL COMPANY
Pro Forma Combined Financial Statements Page
----
Introduction............................................................... F-3
Condensed Pro Forma Combined Balance Sheet, January 31, 1996 (Unaudited).. F-4
Condensed Pro Forma Combined Statements of Operations, nine months
ended January 31, 1996 (Unaudited)....................................... F-6
Condensed Pro Forma Combined Statements of Operations,
year ended April 30, 1995 (Unaudited).................................... F-7
Notes to Condensed Pro Forma Combined Financial Statements (Unaudited).... F-8
Interim Consolidated Financial Statements
Consolidated Balance Sheets, January 31, 1996 and April 30, 1995
(Unaudited).............................................................. F-10
Consolidated Statements of Operations, nine months ended
January 31, 1996 and 1995 (Unaudited).................................... F-11
Consolidated Statements of Stockholders' Equity, nine months ended
January 31, 1996 and year ended April 30, 1995 (Unaudited)............... F-12
Consolidated Statements of Cash Flows, nine months ended
January 31, 1996 and 1995 (Unaudited).................................... F-13
Notes to Consolidated Financial Statements (Unaudited).................... F-14
Annual Consolidated Financial Statements
Independent Auditors' Report.............................................. F-16
Consolidated Balance Sheets, April 30, 1995 and 1994...................... F-17
Consolidated Statements of Operations, year ended April 30, 1995, seven
months ended April 30, 1994 and years ended September 30, 1993 and 1992.. F-18
Consolidated Statements of Stockholders' Equity, year ended April 30,
1995, seven months ended April 30, 1994 and years ended September 30,
1993 and 1992............................................................ F-19
Consolidated Statements of Cash Flows, year ended April 30, 1995, seven
months ended April 30, 1994 and years ended September 30, 1993 and 1992.. F-20
Note to Consolidated Financial Statements................................ F-21
F-1
<PAGE>
LION OIL COMPANY
Interim and Annual Consolidated Financial Statements Page
----
Independent Auditors' Report.............................................. F-30
Consolidated Balance Sheets, January 31, 1996 (unaudited)
and April 30, 1995 and 1994.............................................. F-31
Consolidated Statements of Earnings, nine months ended January 31, 1996
and 1995 (unaudited) and years ended April 30, 1995, 1994 and 1993....... F-32
Consolidated Statements of Stockholders' Equity, nine months ended
January 31, 1996 (unaudited) and years ended April 30, 1995, 1994 and
1993.................................................................... F-33
Consolidated Statements of Cash Flows, nine months ended January 31, 1996
and 1995 (unaudited) and years ended April 30, 1995, 1994 and 1993....... F-34
Notes to Consolidated Financial Statements................................ F-36
SHEFFIELD EXPLORATION COMPANY, INC.
The following financial statements of Sheffield Exploration Company, Inc. are
included in Sheffield's Second Quarter 10-Q and Sheffields' 1995 10-K attached
to this Joint Proxy Statement/Prospectus.
Interim Financial Statements (Appendix III)
Consolidated Balance Sheets, December 31, 1995 and June 30, 1995 (Unaudited)
Consolidated Statements of Operations, three and six months ended
December 31, 1995 and 1994 (Unaudited)
Consolidated Statements of Cash Flows, six months ended
December 31, 1995 and 1994 (Unaudited)
Notes to Consolidated Financial Statements (Unaudited)
Annual Consolidated Financial Statements (Appendix IV)
Report of Independent Accountants
Consolidated Balance Sheets, June 30, 1995 and 1994
Consolidated Statements of Operations, years ended
June 30, 1995, 1994 and 1993
Consolidated Statements of Changes in Stockholders' Equity, years ended
June 30, 1995, 1994 and 1993
Consolidated Statements of Cash Flows, years ended
June 30, 1995, 1994 and 1993
Notes to Consolidated Financial Statements
F-2
<PAGE>
TRANSMONTAIGNE OIL COMPANY AND SUBSIDIARIES
Condensed Pro Forma Combined Financial Information
- --------------------------------------------------------------------------------
TransMontaigne Oil Company ("TransMontaigne") and Sheffield Exploration Company,
Inc. ("Sheffield") have entered into an agreement dated February 6, 1996 (the
"Merger Agreement") that provides for the merger of TransMontaigne with and into
Sheffield. Under the terms of the Merger Agreement each 2.432599 shares of
common stock of Sheffield ("Old Sheffield Common Stock") will be exchanged for
one share of common stock, $.01 par value per share, of Sheffield ("New Common
Stock"). TransMontaigne will then merge into Sheffield and TransMontaigne's
shareholders will receive one share of New Common Stock for each share of common
stock of TransMontaigne. The Merger will constitute a reverse acquisition of
Sheffield by TransMontaigne, in that Sheffield will survive the Merger, but will
be owned approximately 93% by the former stockholders of TransMontaigne.
Consequently, the transaction will be accounted for as a purchase of Sheffield
by TransMontaigne. TransMontaigne's fiscal year ends April 30 and Sheffield's
fiscal year ends June 30. The year end of the combined entity will be April 30.
On April 17, 1996, TransMontaigne completed the private placement of an
additional $25 million of common equity.
On October 2, 1995, Sheffield sold its Oklahoma and Kansas gas gathering,
processing and storage assets for approximately $5,500,000 (Sheffield Asset
Sale) and recognized a gain on the sale of approximately $1,060,000.
The following unaudited condensed pro forma combined balance sheet as of
January 31, 1996 assumes that the Merger occurred as of that date and reflects
the combination of the historical balance sheet of TransMontaigne as of
January 31, 1996 with the historical balance sheet of Sheffield as of
December 31, 1995, with pro forma adjustments to give effect to (1) purchase
accounting adjustments to the cost of certain assets of Sheffield, (2) estimated
costs incurred related to the Merger, (3) the exercise of all of Sheffield's
warrants for cash, and (4) the issuance of 4,545,456 shares of TransMontaigne
common stock for $24,975,008, net of offering costs (the "Private Placement").
The following unaudited condensed pro forma combined statements of operations
for the nine months ended January 31, 1996 and the year ended April 30, 1995
combines the historical results of operations of TransMontaigne for the nine
months ended January 31, 1996 and the year ended April 30, 1995 with the
pro forma results of operations of Sheffield for the nine months ended
December 31, 1995 and the year ended June 30, 1995, respectively. The pro forma
results of operations of Sheffield include the pro forma effects of the
Sheffield Asset Sale as if it had occurred on July 1, 1994. The pro forma
combined results of operations of Transmontaigne assume that the Merger occurred
as of May 1, 1994 and includes pro forma adjustments to depreciation and
amortization expense as a result of the purchase accounting adjustments to
property, plant and equipment and goodwill.
The historical results of operations of Sheffield for the three months ended
June 30, 1995 are included in the pro forma combined results of operations of
Transmontaigne for both the year ended April 30, 1995 and the nine months ended
January 31, 1996. Sheffield reported revenue of $1,885,977 and a net loss of
$643,308 for the three months ended June 30, 1995 (revenue of approximately
$710,000 and a net loss of approximately $549,000 as adjusted for the pro forma
effects of the Sheffield Asset Sale).
The pro forma results of operations are not necessarily indicative of the
results that would have been obtained if the Merger had occurred as of the
beginning of the periods presented nor are they indicative of future operating
results of the combined companies. These unaudited condensed pro forma combined
financial statements should be read in conjunction with the historical financial
statements and related notes of TransMontaigne and Sheffield.
F-3
<PAGE>
TRANSMONTAIGNE OIL COMPANY
AND SUBSIDIARIES
Condensed Pro Forma Combined Balance Sheet
(Unaudited)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Sheffield TransMontaigne
historical historical Pro forma adjustments Pro forma
December 31, January 31, --------------------- combined
Assets 1995 1996 Debit Credit TransMontaigne
- ------ ---- ---- ----- ------ --------------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 2,885,261 10,729,401 (d) 162,900 - 38,777,570
(i) 25,000,008
Trade accounts receivable 1,116,607 15,441,798 - - 16,558,405
Inventories - 25,001,116 - - 25,001,116
Prepaid expenses and other 157,981 958,281 - - 1,116,262
------------ ---------- ---------- --------- -----------
4,159,849 52,130,596 25,162,908 - 81,453,353
------------ ---------- ---------- --------- -----------
Property, plant and equipment:
Land - 1,072,798 - - 1,072,798
Plant and equipment - 23,745,515 (e) 161,312 - 23,906,827
Oil and gas properties 5,049,903 - - 2,849,903 (e) 2,200,000
Gas plant and related equipment 2,351,094 - - 151,094 (e) 2,200,000
Accumulated depreciation (4,101,723) (6,170,639)(e) 4,101,723 - (6,170,639)
------------ ---------- ---------- --------- -----------
3,299,274 18,647,674 4,263,035 3,000,997 23,208,986
------------ ---------- ---------- --------- -----------
Investments and other assets:
Investments - 14,828,706 - - 14,828,706
Other assets 359,743 921,152 (e) 317,291 - 1,598,186
Deferred debt issuance costs - 411,267 - - 411,267
------------ ---------- ---------- --------- -----------
359,743 16,161,125 317,291 - 16,838,159
------------ ---------- ---------- --------- -----------
$ 7,818,866 86,939,395 29,743,234 3,000,997 121,500,498
============ ========== ========== ========= ===========
</TABLE>
F-4
<PAGE>
TRANSMONTAIGNE OIL COMPANY
AND SUBSIDIARIES
Condensed Pro Forma Combined Balance Sheet, Continued
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Sheffield TransMontaigne
historical historical Pro forma adjustments Pro forma
Liabilities and December 31, January 31, ---------------------- combined
Stockholders' Equity 1995 1996 Debit Credit TransMontaigne
- -------------------- ---- ---- ----- ------ --------------
<S> <C> <C> <C> <C> <C>
Current liabilities:
Current portion of long-term debt $ - - - - -
Trade accounts payable 836,103 9,395,047 - - 10,231,150
Inventory due under exchange
agreements - 3,659,572 - - 3,659,572
Accrued liabilities 113,153 6,435,066 - 438,000 (e) 7,011,219
25,000 (i)
--------------- ------------- ---------- ---------- ---------------
949,256 19,489,685 - 463,000 20,901,941
--------------- ------------- ---------- ---------- ---------------
Long-term debt, less current portion 100,050 32,402,267 - - 32,502,317
Minority interest - 5,224,555 - - 5,224,555
Stockholders' equity:
Common stock 34,236 1,478,572 (e) 35,051 815 (d) 207,991
(j) 1,739,806 14,679 (e)
454,546 (i)
Capital in excess of par value 6,856,217 36,661,550 (e) 7,018,302 162,085 (d) 70,980,928
8,059,110 (e)
24,520,462 (i)
1,739,806 (j)
Accumulated deficit (120,893) (8,317,234)(e) 120,893 (j) (8,317,234)
-------------- ----------- ---------- ---------- -----------
$ 6,769,560 29,822,888 8,793,159 35,072,396 62,871,685
-------------- ----------- ---------- ---------- -----------
$ 7,818,866 86,939,395 8,793,159 35,535,396 121,500,498
============== =========== ========== ========== ===========
</TABLE>
F-5
<PAGE>
TRANSMONTAIGNE OIL COMPANY
AND SUBSIDIARIES
Condensed Pro Forma Combined Statement of Operations
Nine Months Ended January 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Sheffield Sheffield TransMontaigne
historical nine pro forma nine historical nine
months ended months ended months ended Pro forma
December 31, Pro forma December 31, January 31, Pro forma combined
1995 adjustments 1995 1996 adjustments TransMontaigne
---- ----------- ---- ---- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Product sales, pipeline tariffs
and terminaling fees $ - - - 347,974,850 - 347,974,850
Gas processing and gathering 4,203,330 (3,344,159)(a) 859,171 - - 859,171
Oil and gas sales 779,383 - 779,383 - - 779,383
--------- --------- --------- ----------- ---------- -----------
4,982,713 (3,344,159) 1,638,554 347,974,850 - 349,613,404
--------- --------- --------- ----------- ---------- -----------
Costs and expenses:
Product costs and direct
operating expenses - - - 340,346,282 - 340,346,282
Gas processing and gathering 3,341,341 (2,870,281)(a) 471,060 - - 471,060
Operation of producing properties 314,942 - 314,942 - - 314,942
Production taxes 82,788 - 82,788 - - 82,788
General and administrative 792,241 - 792,241 3,507,967 - 4,300,208
Depreciation, depletion and
amortization 606,753 (163,257)(a) 443,496 853,315 48,515 (f) 1,345,326
Impairments 456,750 - 456,750 - (456,750)(g) -
Other 63,945 - 63,945 - - 63,945
--------- --------- --------- ----------- ---------- -----------
5,658,760 (3,033,538) 2,625,222 344,707,564 (408,235) 346,924,551
--------- --------- --------- ----------- ---------- -----------
Operating income (676,047) (310,621) (986,668) 3,267,286 408,235 2,688,853
Other income (expense):
Equity in earnings of affiliates,
net of minority interest - - - 207,396 - 207,396
Interest expense (135,170) 128,720 (b) (6,450) (1,916,297) - (1,922,747)
Other financing costs - - - (232,290) - (232,290)
Interest income 20,234 - 20,234 380,544 - 400,778
Gain on sales of assets 1,059,669 (1,059,669)(c) - - - -
--------- --------- --------- ----------- ---------- -----------
944,733 (930,949) 13,784 (1,560,647) - (1,546,863)
--------- --------- --------- ----------- ---------- -----------
Earnings before income taxes 268,686 (1,241,570) (972,884) 1,706,639 408,235 1,141,990
Provision for income taxes 670,000 (670,000)(c) - 104,502 - (h) 104,502
--------- --------- --------- ----------- ---------- -----------
Net earnings (loss) $ (401,314) (571,570) (972,884) 1,602,137 408,235 1,037,488
========= ========= ========= =========== ========== ===========
Weighted average number of
common shares outstanding 14,713,980 16,253,676
========== ==========
Primary and fully diluted earnings
per share $ 0.11 0.06
====== ====
</TABLE>
F-6
<PAGE>
TRANSMONTAIGNE OIL COMPANY
AND SUBSIDIARIES
Condensed Pro Forma Combined Statement of Operations
For the Year Ended April 30, 1995
(Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Sheffield Sheffield TransMontaigne
historical pro forma historical
year ended year ended year ended Pro forma
June 30, Pro forma June 30, April 30, Pro forma combined
1995 adjustments 1995 1995 adjustments TransMontaigne
---- ----------- ---- ---- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Product sales, pipeline tariffs
and terminaling fees $ - - - 324,591,409 - 324,591,409
Gas processing and gathering 6,972,380 (5,217,000) (a) 1,755,380 - - 1,755,380
Oil and gas sales 1,156,745 - 1,156,745 - - 1,156,745
----------- ---------- ---------- ----------- ---------- -----------
8,129,125 (5,217,000) 2,912,125 324,591,409 - 327,503,534
----------- ---------- ---------- ----------- ---------- -----------
Costs and expenses:
Product costs and direct
operating expenses - - - 318,811,953 318,811,953
Gas processing and gathering 5,991,614 (4,756,000) (a) 1,235,614 - - 1,235,614
Operation of producing properties 385,526 - 385,526 - - 385,526
Production taxes 114,685 - 114,685 - - 114,685
General and administrative 717,897 117,000 (a) 834,897 4,226,123 - 5,061,020
Depreciation, depletion and
amortization 883,202 (318,000) (a) 565,202 1,147,291 150,794 (f) 1,863,287
Impairments 1,069,048 - 1,069,048 - (1,069,048) -
Other 67,495 - 67,495 - - (g) 67,495
----------- ---------- ---------- ----------- ---------- -----------
9,229,467 (4,957,000) 4,272,467 324,185,367 (918,254) 327,539,580
----------- ---------- ---------- ----------- ---------- -----------
Operating income (1,100,342) (260,000) (1,360,342) 406,042 918,254 (36,046)
Other income (expense):
Equity in earnings of affiliates,
net of minority interest - - - 294,653 - 294,653
Interest expense (196,507) 188,000 (b) (8,507) (3,119,019) - (3,127,526)
Other financing costs - - - (393,031) - (393,031)
Interest income 12,181 - 12,181 - - 12,181
Gain on sales of assets 8,715 - 8,715 (286,735) - (278,020)
----------- ---------- ---------- ----------- ---------- -----------
(175,611) 188,000 12,389 (3,504,132) - (3,491,743)
----------- ---------- ---------- ----------- ---------- -----------
Earnings before income taxes (1,275,953) (72,000) (1,347,953) (3,098,090) 918,254 (3,527,789)
Provision for income taxes - - - 119,545 - (h) 119,545
----------- ---------- ---------- ----------- ---------- -----------
Net earnings (loss) $(1,275,953) (72,000) (1,347,953) (3,217,635) 918,254 (3,647,334)
=========== ========== ========== =========== ========== ===========
Weighted average number of
common shares outstanding 2,860,390 7,115,342
=========== ===========
Primary and fully diluted loss
per share $(1.32) (0.51)
====== ====
</TABLE>
F-7
<PAGE>
TRANSMONTAIGNE OIL COMPANY AND SUBSIDIARIES
Condensed Pro Forma Combined Financial Information
- --------------------------------------------------------------------------------
(1) Basis of Presentation
The Merger Agreement provides that, at the Effective Time, TransMontaigne
will merge with and into Sheffield with Sheffield becoming the Surviving
Corporation; (i) each outstanding share of TransMontaigne Common Stock will
be converted into one share of New Common Stock; (ii) each 2.432599
outstanding shares of Old Sheffield Common Stock will become one share of
New Common Stock; (iii) the name of Sheffield will be changed to
"TransMontaigne Oil Company;" and (iv) the number of authorized shares of
New Common Stock will be increased to 40,000,000. Any resulting fractional
shares will be settled in cash. Outstanding warrants to purchase 248,686
shares of TransMontaigne Common Stock will become warrants to purchase an
equal number of shares of New Common Stock. Outstanding options to purchase
995,000 shares of TransMontaigne Common Stock will become options to
purchase an equal number of shares of New Common Stock. Outstanding options
to purchase shares of Old Sheffield Common Stock will be converted into
options to purchase 89,616 shares of New Common Stock.
Under the terms of the Merger Agreement, 1,455,629 shares of New Common
Stock will be issued to the Sheffield shareholders (assuming that warrants
to purchase 81,450 shares of Old Sheffield Common Stock are exercised prior
to the Effective Time and that no Sheffield options are exercised prior to
the Effective Time). The shares issued to the Sheffield shareholders will
be valued at $5.50 per share (based on the price of the shares issued in
the Private Placement) or a total of $8,005,960.
Estimated costs of the Merger are $505,830, including the value of 12,332
shares of New Common Stock to be issued to Sheffield's investment advisor
of approximately $67,829.
The pro forma condensed financial statements also reflect the exercise of
warrants to purchase shares of Old Sheffield Common Stock and the proceeds
therefrom of $162,900. These warrants originally were to expire in March
1996, but have been extended to the Effective Time.
The pro forma condensed financial statements also reflect the issuance of
4,545,456 shares of common stock of TransMontaigne for $5.50 per share for
total proceeds of $24,975,008, net of offering costs of $25,000.
F-8
<PAGE>
TRANSMONTAIGNE OIL COMPANY AND SUBSIDIARIES
Condensed Pro Forma Combined Financial Information, Continued
- --------------------------------------------------------------------------------
(2) Pro Forma Adjustments for the Sheffield Asset Sale
Pro forma adjustments have been made to the historical statements of
operations of Sheffield for the nine months ended December 31, 1995 and the
year ended June 30, 1995 to give effect to the sale of Sheffield's Oklahoma
and Kansas gas gathering, processing and storage assets for approximately
$5,500,000 as follows:
(a) To eliminate the revenue and expenses attributable to the assets sold.
(b) To reflect the reduction in interest expense resulting from the
application of proceeds from the sale to reduce long-term debt.
(c) To eliminate the gain on sale of assets as it is a nonrecurring credit
directly attributable to the sale and to eliminate the provision for
income taxes as it is a nonrecurring charge directly attributable to
the sale.
(3) Pro Forma Adjustments for the Merger
Adjustments to Sheffield's Financial Statements
Pro forma adjustments have been made to the historical balance sheet of
Sheffield at December 31, 1995 and the historical statements of operations
for the nine months ended December 31, 1995 and the year ended
June 30, 1995:
(d) To record the exercise of the warrants to purchase 81,450 shares of
common stock of Sheffield for $162,900 in cash subsequent to
December 31, 1995 and prior to the effective date of the merger.
(e) To record the acquisition of Sheffield by TransMontaigne, including
(1) adjustments to record the shares of New Common Stock to be issued
to the Sheffield shareholders, (2) adjustments to the historical cost
of Sheffield's property, plant and equipment, and (3) an adjustment
to record goodwill.
(f) To adjust depreciation expense as a result of the purchase accounting
adjustments to the cost of the property, plant and equipment of
Sheffield and to amortize goodwill over 20 years.
(g) To eliminate the impairments of oil and gas properties recorded by
Sheffield since the assets to which they relate are being revalued to
fair value as part of the purchase adjustments.
(h) On a pro forma basis, no income tax benefit was recorded for the year
ended April 30, 1995 since the pro forma income tax benefit
attributable to the pro forma operating loss would have been offset by
an increase in the valuation allowance for net deferred tax assets. On
a pro forma basis, no income tax expense was reflected for the nine
months ended January 31, 1996 since the pro forma provision for income
taxes would have been offset by a decrease in the valuation allowance
for net deferred tax assets.
Adjustments to TransMontaigne's Financial Statements
A pro forma adjustment has been made to the historical balance sheet of
TransMontaigne at January 31, 1996:
(i) To record the issuance of 4,545,456 shares of TransMontaigne common
stock at $5.50 per share for total proceeds of $24,975,008, net of
offering costs of approximately $25,000, in the private placement
which was completed on April 17, 1996.
(j) To adjust the par value of the shares of common stock of
TransMontaigne to be converted into shares of New Common Stock with a
par value $.01 per share.
(4) Earnings (Loss) Per Share
Pro forma earnings per share have been computed based on the pro forma net
earnings (loss) and the pro forma weighted average common shares
outstanding for the periods presented. The pro forma weighted average
common shares outstanding have been computed by adjusting TransMontaigne's
historical weighted average common shares outstanding by the New Common
Shares to be issued to the shareholders of Sheffield. The dilutive effect
of options outstanding on the calculation of pro forma earnings per share
is not material.
F-9
<PAGE>
TRANSMONTAIGNE OIL COMPANY
AND SUBSIDIARIES
Consolidated Balance Sheets
January 31, 1996 and April 30, 1995 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets January 31, April 30,
- ------ 1996 1995
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $10,729,401 1,801,828
Trade accounts receivable 15,441,798 17,608,564
Amounts receivable under stock purchase
agreements - 30,000,002
Inventories 25,001,116 21,361,341
Prepaid expenses and other 958,281 905,794
----------- -----------
52,130,596 71,677,529
----------- -----------
Property, plant and equipment:
Land 1,072,798 1,047,324
Plant and equipment 23,745,515 20,915,921
Accumulated depreciation (6,170,639) (5,360,082)
----------- -----------
18,647,674 16,603,163
----------- -----------
Investments and other assets:
Investments 14,828,706 14,798,228
Other assets 921,152 994,598
Deferred debt issuance costs 411,267 146,828
----------- -----------
16,161,125 15,939,654
----------- -----------
$86,939,395 104,220,346
=========== ===========
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Current portion of long-term debt $ - 1,103,826
Trade accounts payable 9,395,047 22,365,444
Inventory due under exchange agreements 3,659,572 3,895,830
Accrued liabilities 6,435,066 6,323,224
----------- -----------
19,489,685 33,688,324
----------- -----------
Long-term debt, less current portion 32,402,267 36,945,610
Minority interests 5,224,555 5,115,710
Stockholders' equity:
Common stock issued and outstanding
14,785,715 shares at January 31, 1996
and 14,780,715 at April 30, 1995 1,478,572 1,478,071
Capital in excess of par value 36,661,550 36,912,002
Accumulated deficit (8,317,234) (9,919,371)
----------- -----------
29,822,888 28,470,702
----------- -----------
$86,939,395 104,220,346
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-10
<PAGE>
TRANSMONTAIGNE OIL COMPANY
AND SUBSIDIARIES
Consolidated Statements of Operations
Nine Months Ended January 31, 1996 and 1995 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Revenue:
Product sales, pipeline tariffs and
terminaling fees $ 347,974,850 236,169,346
Costs and expenses:
Product costs and direct operating
expenses 340,346,282 229,816,440
General and administrative 3,507,967 2,611,665
Depreciation and amortization 853,315 873,878
------------- ------------
344,707,564 233,301,983
------------- ------------
Operating income 3,267,286 2,867,363
Other income (expenses):
Equity in earnings of affiliates 316,241 514,637
Minority interests (108,845) (144,425)
Interest expense (1,916,297) (2,217,834)
Interest income 380,544 -
Other financing costs (232,290) (307,573)
------------- ------------
(1,560,647) (2,155,195)
------------- ------------
Earnings before income taxes 1,706,639 712,168
State income taxes (104,502) (88,158)
------------- ------------
Net earnings $ 1,602,137 624,010
============= ============
Weighted average common shares outstanding 14,713,980 2,694,830
============= ============
Earnings per common share $0.11 0.23
===== ====
</TABLE>
See accompanying notes to consolidated financial statements.
F-11
<PAGE>
TRANSMONTAIGNE OIL COMPANY
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Year Ended April 30, 1995 and Nine Months Ended January 31, 1996 (Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Redeemable Capital in
preferred Common excess of Accumulated
stock stock par value deficit Total
------------ --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Balance at April 30, 1994 $ 7,426,692 269,483 941,095 (6,156,435) 2,480,835
Preferred stock dividends (78,515 shares) 545,195 - - (545,301) (106)
Common stock issued in connection with
conversion of preferred stock (7,971,887) 295,255 7,676,632 - -
Common stock issued in connection with stock
purchase agreements - 833,333 29,166,669 - 30,000,002
Common stock issued in connection with a
merger - 80,000 120,000 - 200,000
Costs related to conversion of preferred stock and
issuance of common stock - - (992,394) - (992,394)
Net earnings - - - (3,217,635) (3,217,635)
----------- --------- ---------- ---------- ----------
Balance at April 30, 1995 - 1,478,071 36,912,002 (9,919,371) 28,470,702
Costs related to conversion of preferred
stock and issuance of common stock - - (263,452) - (263,452)
Common stock issued - 501 13,000 - 13,501
Net earnings - - - 1,602,137 1,602,137
----------- --------- ---------- ---------- ----------
Balance January 31, 1996 $ - 1,478,572 36,661,550 (8,317,234) 29,822,888
=========== ========= ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-12
<PAGE>
TRANSMONTAIGNE OIL COMPANY
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Nine Months Ended January 31, 1996 and 1995 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 1,602,137 624,010
Adjustments to reconcile net earnings to net
cash provided (used) by operating activities:
Equity in earnings of affiliates (207,396) (514,637)
Other noncash items (4,403) 144,425
Dividends received from affiliates - 50,000
Depreciation and amortization 853,315 873,878
Loss on cancellation of aircraft lease and
disposition of assets - (40,644)
Changes in operating assets and liabilities,
net of noncash activities:
Trade accounts receivable 2,166,766 9,302,354
Inventories (3,639,775) (4,134,707)
Prepaid expenses and other (52,487) 191,519
Trade accounts payable (12,793,266) (9,114,628)
Inventory due under exchange agreements (236,258) 4,344,958
Accrued liabilities (65,289) (1,332,848)
------------- ------------
Net cash provided (used) by operating
activities (12,376,656) 393,680
------------- ------------
Cash flows from investing activities:
Purchases of property, plant and equipment (2,895,371) (593,899)
Proceeds from sale of assets 295,387 260,000
Decrease in other assets 65,770 39,242
------------- ------------
Net cash used by investing activities (2,534,214) (294,657)
------------- ------------
Cash flows from financing activities:
Borrowings 144,328,899 127,465,433
Repayments of borrowings (149,976,068) (129,040,442)
Stock subscription receivable 30,000,002 -
Costs paid relating to conversion of
preferred stock, issuance of common stock
and debt issuance of debt (514,390) (76)
------------- ------------
Net cash provided (used) by investing
activities 23,838,443 (1,575,085)
------------- ------------
Increase (decrease) in cash and cash
equivalents 8,927,573 (1,476,062)
Cash and cash equivalents at beginning of period 1,801,828 2,210,427
------------- ------------
Cash and cash equivalents at end of period $ 10,729,401 734,365
============= ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-13
<PAGE>
TRANSMONTAIGNE OIL COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 31, 1996
- --------------------------------------------------------------------------------
(1) Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial reporting and the regulations of the Securities and
Exchange Commission for quarterly reporting. Accordingly, the consolidated
financial statements do not include all the information and notes required
by generally accepted accounting principles for complete financial
statements. As a result, these unaudited consolidated financial statements
should be read in conjunction with the Company's audited consolidated
financial statements and notes thereto included herein. In the opinion of
management, all adjustments, consisting only of normal recurring accruals,
have been made which are necessary for a fair presentation of the financial
position of the Company and the results of its operations. Operating
results for interim periods are not necessarily indicative of the results
that may be expected for the complete fiscal year.
(2) Long-term Debt
Long-term debt at January 31, 1996 and April 30, 1995, is as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
12 3/4% senior subordinated debentures net of
discount (face amount $4,000,000) $ 3,946,267 3,938,468
Line of credit with a bank 28,456,000 33,000,000
Note payable to a bank, repaid in May 1995 - 1,100,000
Other - 10,968
------------ ----------
32,402,267 38,049,436
Less current portion - (1,103,826)
------------ ----------
$ 32,402,267 36,945,610
============ ==========
</TABLE>
In March 1991, the Company issued 12 3/4% senior subordinated debentures
which are guaranteed by certain subsidiaries and are due December 15, 2000,
with interest payable semi-annually on June 15 and December 15. The
debentures are subject to a required prepayment amount of $2,000,000,
without premium, on December 15, 1999. The debentures may be prepaid prior
to December 15, 2000, at premium, under certain circumstances. In
conjunction with the issuance of these debentures, the Company issued
warrants to purchase 248,686 shares of the Company's common stock. The
warrant exercise price was reduced effective April 26, 1995 from $6.10 per
share to $3.60 per share, through December 15, 2000.
F-14
<PAGE>
TRANSMONTAIGNE OIL COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(3) Common Stock
Effective as of April 26, 1995, the Company entered into a series of Stock
Purchase Agreements and other related transactions, with certain
institutional and individual investors pursuant to which it issued
8,333,334 shares of common stock for $30,000,002. The proceeds from the
shares of common stock issued were received in May 1995.
(4) Stock Options
The Company has adopted two stock option plans, (the "1991 Plan" and the
"1995 Plan"), under which stock options may be granted to key employees of
the Company. Under the 1991 Plan, the Company may grant options for up to
300,000 shares of common stock at prices and for terms as determined by the
Administrative Committee of the 1991 Plan. The Company may grant options
for up to 1,000,000 shares of common stock under the 1995 Plan. Options
granted under the 1995 Plan are exercisable at a price determined by the
Incentive Plan Committee, however, in no event shall the price be less than
the fair market value of the stock on the date of grant. Options under the
1995 Plan expire at such time as the Incentive Plan Committee determines,
but no later than seven years from the date of grant. During the nine
months ended January 31, 1996, the Company granted options to purchase
68,000 shares of common stock at $3.60 per share. The options expire seven
years from the date of grant.
(5) Investment in Lion
The Company owns a 65% interest in COH, which owns a 28% interest in Lion.
As a result, the Company effectively owns 18% of common stock of Lion. At
January 31, 1996 and April 30, 1995, the Company's investment in Lion was
approximately $14,829,000 and $14,497,000, respectively, and the minority
interests were approximately $5,225,000 and $5,116,000, respectively.
Summarized balance sheet information for Lion as of January 31, 1996 and
April 30, 1995 is as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
(in thousands)
<S> <C> <C>
Assets:
Current assets $ 65,393 95,610
Property, plant and equipment, net 68,258 71,186
Other assets 1,127 1,926
-------- --------
$ 134,778 168,722
======== ========
Liabilities and stockholders' equity:
Current liabilities $ 35,131 37,273
Long-term debt 38,325 71,239
Deferred income taxes 7,879 7,962
Stockholders' equity 53,443 52,248
-------- --------
$ 134,778 168,722
======== ========
</TABLE>
Summarized statement of operations information for Lion for the nine months
ended January 31, 1996, and 1995 is as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
(in thousands)
<S> <C> <C>
Net sales $ 430,856 393,731
Cost of sales 421,259 383,051
-------- --------
Gross profit 9,597 10,680
Selling, general and administrative
expenses 3,982 4,203
Management fees 498 651
-------- --------
Operating income 5,117 5,826
Interest expense and other
(income), net 3,089 3,168
-------- --------
Earnings before income tax 2,028 2,658
Income tax expense 834 1,097
-------- --------
Net earnings $ 1,194 1,561
======== ========
</TABLE>
F-15
<PAGE>
Independent Auditors' Report
----------------------------
The Board of Directors and Stockholders
TransMontaigne Oil Company:
We have audited the accompanying consolidated balance sheets of TransMontaigne
Oil Company and subsidiaries as of April 30, 1995 and 1994, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year ended April 30, 1995, the seven months ended April 30, 1994 and the
years ended September 30, 1993 and 1992. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of TransMontaigne Oil
Company and subsidiaries as of April 30, 1995 and 1994, and the results of their
operations and their cash flows for the year ended April 30, 1995, the seven
months ended April 30, 1994 and the years ended September 30, 1993 and 1992, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Denver, Colorado
June 16, 1995, except for
the third paragraph of
note 6, as to which the date
is July 19, 1995
F-16
<PAGE>
TRANSMONTAIGNE OIL COMPANY
AND SUBSIDIARIES
Consolidated Balance Sheets
April 30, 1995 and 1994
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
Assets 1995 1994
- ------ ---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,801,828 2,210,427
Trade accounts receivable 17,608,564 18,891,986
Amounts receivable under stock 30,000,002 -
purchase agreements
Inventories 21,361,341 19,769,435
Prepaid expenses and other 905,794 997,814
------------ ----------
71,677,529 41,869,662
------------ ----------
Property, plant and equipment:
Land 1,047,324 1,045,824
Plant and equipment 20,915,921 21,248,750
Accumulated depreciation (5,360,082) (4,882,458)
------------ ----------
16,603,163 17,412,116
------------ ----------
Investments and other assets:
Investments 14,798,228 14,516,020
Other assets 994,598 1,500,824
Deferred debt issuance costs 146,828 171,644
------------ ----------
15,939,654 16,188,488
------------ ----------
$104,220,346 75,470,266
============ ==========
Liabilities and Stockholders' Equity
- ----------------------------------------
Current liabilities:
Current portion of long-term debt $ 1,103,826 211,710
Trade accounts payable 22,365,444 22,319,198
Inventory due under exchange agreements 3,895,830 1,168,835
Accrued liabilities 6,323,224 6,615,204
------------ ----------
33,688,324 30,314,947
------------ ----------
Long-term debt, less current portion 36,945,610 37,671,329
Minority interests 5,115,710 5,003,155
Stockholders' equity:
Redeemable Series A, voting,
cumulative, convertible
preferred stock, par value
$.10; authorized 3,000,000
shares, issued and outstanding
none at April 30, 1995
and 1,060,956 shares at
April 30, 1994 - 7,426,692
Common stock, par value $.10
per share; authorized
27,000,000 shares, issued and
outstanding 14,780,715 shares
at April 30, 1995 and
2,694,830 shares at April 30,
1994 1,478,071 269,483
Capital in excess of par value 36,912,002 941,095
Accumulated deficit (9,919,371) (6,156,435)
------------ ----------
28,470,702 2,480,835
------------ ----------
$104,220,346 75,470,266
============ ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-17
<PAGE>
TRANSMONTAIGNE OIL COMPANY
AND SUBSIDIARIES
Consolidated Statements of Operations
Year Ended April 30, 1995, Seven Months Ended April 30, 1994
and Years Ended September 30, 1993 and 1992
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
1995 1994 1993 1992
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Product sales, pipeline tariffs
and terminaling fees $324,591,409 296,086,981 507,936,810 515,547,695
Costs and expenses:
Product costs and direct
operating expenses 318,811,953 294,773,790 505,348,576 513,875,940
General and administrative 4,226,123 2,156,817 3,199,223 2,787,591
Depreciation and amortization 1,147,291 665,955 1,099,253 814,778
------------ ----------- ----------- -----------
324,185,367 297,596,562 509,647,052 517,478,309
------------ ----------- ----------- -----------
Operating income (loss) 406,042 (1,509,581) (1,710,242) (1,930,614)
Other income (expenses):
Equity in earnings (losses)
of affiliates 407,208 710,626 (136,511) 181,818
Minority interests (112,555) (231,156) 77,802 (25,259)
Interest expense (3,119,019) (1,524,473) (2,319,180) (2,032,951)
Other financing costs (393,031) (228,468) (354,195) (317,789)
Cancellation of aircraft lease (286,735) - - -
------------ ----------- ----------- -----------
(3,504,132) (1,273,471) (2,732,084) (2,194,181)
------------ ----------- ----------- -----------
Loss before income
taxes (3,098,090) (2,783,052) (4,442,326) (4,124,795)
State income taxes (119,545) (70,557) (48,142) (76,127)
------------ ----------- ----------- -----------
Net loss $ (3,217,635) (2,853,609) (4,490,468) (4,200,922)
============ =========== =========== ===========
Weighted average common shares
outstanding 2,860,390 2,694,830 2,694,830 2,694,830
============ =========== =========== ===========
Loss per common share $(1.32) (1.15) (1.85) (1.73)
====== ===== ===== =====
</TABLE>
See accompanying notes to consolidated financial statements.
F-18
<PAGE>
TRANSMONTAIGNE OIL COMPANY
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Year Ended April 30, 1995 and Seven Months Ended April 30, 1994 and Years Ended
September 30, 1993 and 1992
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Redeemable Capital in
preferred Common excess of Accumulated
stock stock par value deficit Total
------------ --------- ---------- ------------ -----------
<C> <C> <C> <C> <C> <C>
Balance at September 30, 1991 $ 6,221,292 269,483 941,095 6,594,193 14,026,063
Preferred stock dividends (65,245 shares) 456,715 - - (456,796) (81)
Net earnings - - - (4,200,922) (4,200,922)
----------- --------- ---------- ----------- ----------
Balance at September 30, 1992 6,678,007 269,483 941,095 1,936,475 9,825,060
Preferred stock dividends (70,034 shares) 490,238 - - (490,330) (92)
Net earnings - - - (4,490,468) (4,490,468)
----------- --------- ---------- ----------- ----------
Balance at September 30, 1993 7,168,245 269,483 941,095 (3,044,323) 5,334,500
Preferred stock dividends (36,921 shares) 258,447 - - (258,503) (56)
Net earnings - - - (2,853,609) (2,853,609)
----------- --------- ---------- ----------- ----------
Balance at April 30, 1994 7,426,692 269,483 941,095 (6,156,435) 2,480,835
Preferred stock dividends (78,515 shares) 545,195 - - (545,301) (106)
Common stock issued in connection with
conversion of preferred stock (7,971,887) 295,255 7,676,632 - -
Common stock issued in connection
with stock purchase agreements - 833,333 29,166,669 - 30,000,002
Common stock issued in connection with a merger - 80,000 120,000 - 200,000
Costs related to conversion of preferred stock and
issuance of common stock - - (992,394) - (992,394)
Net earnings - - - (3,217,635) (3,217,635)
----------- --------- ---------- ----------- ----------
Balance at April 30, 1995 $ - 1,478,071 36,912,002 (9,919,371) 28,470,702
=========== ========= ========== =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-19
<PAGE>
TRANSMONTAIGNE OIL COMPANY
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended April 30, 1995, Seven Months Ended April 30, 1994
and Years Ended September 30, 1993 and 1992
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ (3,217,635) (2,853,609) (4,490,468) (4,200,922)
Adjustments to reconcile net earnings to net cash
provided (used) by operating activities:
Equity in (earnings) losses of affiliates (407,208) (710,626) 136,511 (181,818)
Minority interests 112,555 231,156 (77,802) 25,259
Dividends received from affiliates 125,000 75,000 40,000 360,000
Depreciation and amortization 1,147,291 665,955 1,099,253 814,778
Deferred tax benefit - - - (50,000)
Loss on cancellation of aircraft lease and
disposition of assets 159,090 - (4,623) -
Dividends paid to minority shareholders - - - (126,000)
Changes in operating assets and liabilities,
net of noncash activities:
Trade accounts receivable 1,283,422 (10,201,357) 1,239,836 (1,219,993)
Inventories (1,591,906) 23,107,751 (8,756,709) (5,506,744)
Prepaid expenses and other 169,196 (567,652) (63,513) 76,535
Trade accounts payable (641,400) (12,845,989) 11,540,616 4,980,486
Inventory due under exchange agreements 2,726,995 (1,801,431) 2,038,399 (3,521,743)
Accrued liabilities (291,980) 2,713,551 2,302,687 271,108
------------- ------------ ------------ ------------
Net cash provided (used)
by operating activities (426,580) (2,187,251) 5,004,187 (8,279,054)
------------- ------------ ------------ ------------
Cash flows from investing activities:
Purchases of property, plant and equipment (747,774) (461,888) (4,730,726) (2,247,052)
Proceeds from sale of assets 260,585 - 8,245 51,430
Decrease (increase) in other assets 443,627 (579,181) 107,589 (131,569)
------------- ------------ ------------ ------------
Net cash used by investing activities (43,562) (1,041,069) (4,614,892) (2,327,191)
------------- ------------ ------------ ------------
Cash flows from financing activities:
Borrowings 161,521,745 104,155,965 171,977,400 152,282,000
Repayments of borrowings (161,355,348) (100,464,024) (173,293,008) (142,574,050)
Cash dividends paid on preferred stock (106) (56) (92) (81)
Cash received in connection with merger 200,000 - - -
Costs paid relating to conversion of preferred stock
and issuance of common stock (304,748) - - -
------------- ------------ ------------ ------------
Net cash provided (used) by
investing activities 61,543 3,691,885 (1,315,700) 9,707,869
------------- ------------ ------------ ------------
Increase (decrease) in cash and cash
equivalents (408,599) 463,565 (926,405) (898,376)
Cash and cash equivalents at beginning of period 2,210,427 1,746,862 2,673,267 3,571,643
------------- ------------ ------------ ------------
Cash and cash equivalents at end of period $ 1,801,828 2,210,427 1,746,862 2,673,267
============= ============ ============ ============
Supplemental disclosure of cash flow information -
Noncash investing and financing activities:
Costs accrued relating to conversion of preferred
stock and issuance of common stock $ 687,646 - - -
============= ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-20
<PAGE>
TRANSMONTAIGNE OIL COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
April 30, 1995 and 1994
- --------------------------------------------------------------------------------
(1) Merger and Issuance of Common Stock
Effective as of April 26, 1995, the Continental Ozark Corporation (the
"Company") and TransMontaigne Oil Company, ("TransMontaigne") entered into
a Merger Agreement pursuant to which all of the outstanding shares of
common stock of TransMontaigne were converted into 800,000 shares of common
stock of the Company. Upon consummation of the merger, the Company received
$200,000 in cash and changed its name to TransMontaigne Oil Company.
Effective as of April 26, 1995, the Company entered into a series of Stock
Purchase Agreements and other related transactions, with certain
institutional and individual investors pursuant to which the Company issued
8,333,334 shares of the Company's common stock for $30,000,002.
Effective as of April 26, 1995, the Company and the holders of its
redeemable convertible preferred stock entered into a Conversion Agreement
pursuant to which all of the outstanding shares of preferred stock of the
Company were converted into 2,952,551 shares of common stock of the
Company.
(2) Summary of Significant Accounting Policies
(a) Principles of Consolidation
The accompanying consolidated financial statements include,
collectively, the Company and its wholly owned subsidiary, Continental
Ozark, Inc. (COZ), and COZ's wholly owned subsidiaries (Spruce Oil
Corporation, Continental Ozark Trading Co., COZ Pipeline, Inc. and its
60% proportionate share of Razorback Pipeline Company, Norco Pipeline,
Inc. and COZ Terminaling, Inc.) and COZ's 65% owned subsidiary,
Continental Ozark Holding, Inc. (COH). All significant intercompany
accounts and transactions have been eliminated in consolidation.
(b) Description of the Business
The Company is an independent company in the business of pipelining,
terminaling, storing and selling refined petroleum products
principally in the Mid-Continent region of the United States. The
Company provides short-term credit to its customers which, with the
exception of related parties, are generally all wholesale distributors
of these products. The Company requires collateral, such as letters of
credit, liens on products, and guarantees on a customer by customer
basis. The Company maintains allowances for potential uncollectible
accounts receivable, which historically have been minimal.
(c) Cash and Cash Equivalents
The Company considers all short-term investments with a maturity of
three months or less when acquired to be cash equivalents.
F-21
<PAGE>
TRANSMONTAIGNE OIL COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies (Continued)
(d) Inventories
Inventories of refined products are stated at the lower of last-in,
first-out (LIFO) cost or market. Refined products due from third
parties under exchange agreements are included in inventory and
recorded at current replacement cost. Refined products due to third
parties under exchange agreements are recorded at current replacement
cost. Adjustments resulting from changes in current replacement cost
for refined products due to or from third parties under exchange
agreements are reflected in cost of products sold. The exchange
agreements are generally for a term of 30 days and are generally
settled by delivering product to or receiving product from the party
to exchange.
(e) Property, Plant and Equipment
Depreciation of equipment is provided by the straight-line and double-
declining balance methods. Depreciation of all other assets is
provided by the straight-line method. Estimated useful lives are 25
years for plant, which includes buildings, storage tanks and pipelines
and 3 to 20 years for equipment. All items of property, plant and
equipment are carried at cost.
(f) Investment in Lion Oil Company
The Company's investment in Lion Oil Company ("Lion") is accounted for
using the equity method. Under this method, the investment, originally
recorded at cost, is adjusted to recognize the Company's share of the
net earnings or losses of Lion as incurred rather than as dividends or
other distributions are received.
(g) Recognition of Revenue
Revenue from the sale of refined petroleum products are recorded at
the time title and risk of ownership pass. Transfers of products to or
from third parties under exchange agreements do not culminate the
earnings process and are recorded as inventory and liability
transactions with no effect on income.
(h) Deferred Debt Issuance Costs
Deferred debt issuance costs related to senior subordinated debentures
are amortized on the interest method over the term of the debentures
(approximately 10 years). Accumulated amortization was $101,332 and
$76,516 at April, 30, 1995 and 1994, respectively.
F-22
<PAGE>
TRANSMONTAIGNE OIL COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies (Continued)
(i) Income Taxes
The Company utilizes the asset and liability method of accounting for
income taxes, as prescribed by Statement of Financial Accounting
Standards No. 109 (Statement 109). Under this method, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply in the years in which these temporary
differences are expected to be recovered or settled. Changes in tax
rates are recognized in income in the period that includes the
enactment date.
(j) Minority Interests
Minority interests consist of ownership interests in COH attributable
to shareholders other than the Company.
(k) Hedging Arrangements
The Company manages the risk associated with fluctuations in the price
of refined petroleum products primarily through future contracts which
are entered into as designated hedges against the products purchased.
Gains and losses from these transactions are recorded as an adjustment
to the cost of the product purchased.
The Company's Risk Management Committee reviews the total inventory
position on a weekly basis in order to ensure compliance with the
Company's hedging policies, including the maximum amount of risk to be
assumed in connection with such hedging activity. During the year
ended April 30, 1995, the Company followed a hedging policy whereby
its net inventory position subject to price risk may not exceed
400,000 barrels of petroleum products, without the prior approval of
the Risk Management Committee.
At April 30, 1995, the Company had 736 petroleum product futures
contracts outstanding (each contract is for 1,000 barrels). When these
contracts were offset against net long-term purchase commitments and
physical inventory, the Company's exposure to the risk of price
fluctuations was reduced to approximately 95,000 barrels. In addition,
the Company is exposed to credit risk in the event the counterparties
in third party agreements were not able to perform their contractual
obligations.
(l) Earnings (Loss) Per Common Share
Earnings (loss) per common share has been calculated based on the
weighted average number of common shares outstanding during the period
after giving effect to preferred stock dividends. The assumed
conversion of the outstanding shares of convertible preferred stock
was anti-dilutive for all periods presented.
(m) Reclassifications
Certain amounts in the accompanying consolidated financial statements
for prior periods have been reclassified to conform to the
classifications used in 1995.
F-23
<PAGE>
TRANSMONTAIGNE OIL COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(3) Inventories
1995 1994
---- ----
<S> <C> <C>
Refined petroleum products $12,929,837 13,241,642
Refined petroleum products
due from third parties
under exchange agreements 8,421,611 6,513,745
Other 9,893 14,048
----------- ----------
$21,361,341 19,769,435
=========== ==========
</TABLE>
If the lower of average or replacement cost method of accounting had been
used instead of the LIFO method for valuing refined petroleum products,
inventories would have been $5,995,825 and $3,385,738 greater than reported
at April 30, 1995 and 1994, respectively.
If the lower of average or replacement cost method of accounting had been
used, the net earnings (loss) would have $260,126 for the year ended April
30, 1995, $635,516 for the seven months ended April 30, 1994 and
$(4,289,666) and $(3,809,917), respectively, for the years ended September
30, 1993 and 1992.
During the seven months ended April 30, 1994 and the year ended April 30,
1995, inventory quantities were reduced, which resulted in a liquidation of
LIFO inventory layers carried at costs which prevailed in prior years. The
effect of the liquidations was to increase product costs and the net loss
for the seven month ended April 30, 1994 by approximately $904,000 and to
decrease product costs and decease the net loss for the year ended April
30, 1995 by approximately $863,000.
The Company's refined petroleum products inventory consists primarily of
gasoline and distillates. A significant portion of this inventory
represents line fill and tank bottoms. This portion of the inventory is
required for operating balances in the conduct of the Company's daily
distribution transactions and is maintained both in tanks and pipelines
owned by the Company and pipelines owned by third parties.
(4) Property, Plant and Equipment
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Land $ 1,047,324 1,045,824
Terminals and equipment 5,764,874 5,704,955
Pipelines, rights of way and equipment 13,960,421 13,396,349
Other plant and equipment 1,190,626 2,147,446
----------- ----------
21,963,245 22,294,574
Less accumulated depreciation 5,360,082 4,882,458
----------- ----------
$16,603,163 17,412,116
=========== ==========
</TABLE>
F-24
<PAGE>
TRANSMONTAIGNE OIL COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(5) Investment in Lion
The Company owns a 65% interest in COH, which owns a 28% interest in Lion.
As a result, the Company effectively owns 18% of the common stock of Lion.
At April 30, 1995 and 1994, the Company's investment in Lion was
approximately $14,497,000 and $14,149,000, respectively, and the minority
interests were approximately $5,116,000 and $5,003,000, respectively.
Condensed financial information for Lion as of and for the year ended April
30, 1995, the seven months ended April 30, 1994 and the years ended
September 30, 1993 and 1992:
Summarized balance sheet information for Lion as of April 30, 1995 and 1994
is as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
(in thousands)
<S> <C> <C>
Assets:
Current assets $ 95,610 78,758
Property, plant and equipment, net 71,186 71,519
Other assets 1,926 3,502
------- -------
$ 168,722 153,779
======= =======
Liabilities and stockholders' equity:
Current liabilities $ 37,273 30,245
Long-term debt 71,239 64,429
Deferred income taxes 7,962 8,113
Stockholders' equity 52,248 50,992
------- -------
$ 168,722 153,779
======= =======
</TABLE>
Summarized statement of operations information for Lion for the years ended
April 30, 1995, 1994 and 1993 is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Net sales $ 525,037 477,573 493,244
Cost of sales 511,655 462,491 484,020
------- ------- -------
Gross profit 13,382 15,082 9,224
Selling, general and administrative
expenses 5,763 5,224 4,968
Management fees 532 1,166 55
------- ------- -------
Operating income 7,087 8,692 4,201
Interest expense and other
(income), net 4,939 4,002 3,944
------- ------- -------
Earnings before income tax 2,148 4,690 257
Income tax expense 892 1,831 129
------- ------- -------
Net earnings $ 1,256 2,859 128
======= ======= =======
</TABLE>
The Company has $2,600,000 of letters of credit outstanding to a bank to
assist Lion in obtaining financing. No outstanding obligations exist under
these letters of credit as of April 30, 1995.
(6) Long-term Debt
Long-term debt at April 30, 1995 and 1994, before giving effect to the
repayments in May 1995 described below, is as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
12 3/4% senior subordinated debentures net
of discount (face amount $4,000,000) $ 3,938,468 3,928,067
Line of credit with a bank 33,000,000 32,607,500
Note payable to a
bank at its prime rate plus
0.50%; repaid in May 1995; secured 1,100,000 1,250,000
by certain terminal facilities
Note payable to a bank at prime rate
plus 1.25%, repaid in 1995 - 83,260
Other 10,968 14,212
----------- ----------
38,049,436 37,883,039
Less current portion (1,103,826) (211,710)
----------- ----------
$36,945,610 37,671,329
=========== ==========
</TABLE>
F-25
<PAGE>
TRANSMONTAIGNE OIL COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(6) Long-term Debt
In March 1991, the Company issued 12 3/4% senior subordinated debentures
which are guaranteed by certain subsidiaries and are due December 15, 2000,
with interest payable semi-annually on June 15 and December 15. The
debentures are subject to a required prepayment amount of $2,000,000,
without premium, on December 15, 1999. The debentures may be prepaid prior
to December 15, 2000, at premium, under certain circumstances. In
conjunction with the issuance of these debentures, the Company issued
warrants to purchase 248,686 shares of the Company's common stock. The
warrant exercise price was reduced effective April 26, 1995 from $6.10 per
share to $3.60 per share, through December 15, 2000.
COZ has a line of credit with a major bank which provides available credit
up to $55,000,000 through October 31, 1996 and, through March 27, 1994, was
secured by accounts receivable and inventories. On March 28, 1994, COZ also
granted to the lender first security interests in the common stock of its
wholly owned subsidiaries and in certain pipeline assets with a depreciated
cost of approximately $2,270,000 at April 30, 1995, and provided upstream
guarantees of the debt by the wholly owned subsidiaries. The interest rate
on the line of credit is based on the bank's prime rate and was 9.0% at
April 30, 1995. Effective July 19, 1995, the lender released its first
security interests in all collateral other than accounts receivables and
inventory, and also released the upstream guarantees from the wholly owned
subsidiaries.
The line of credit arrangement contains covenants which require, among
other things, maintaining a minimum level of working capital and a minimum
level of tangible net worth. As of April 30, 1995, COZ was in compliance
with the covenants.
On May 9, 1995, COZ reduced the line of credit indebtedness by $18,900,000.
Also, on May 9, 1995 COZ repaid the $1,100,000 outstanding balance on the
note payable to another bank. After giving effect to these repayments,
maturities of long-term debt for fiscal years subsequent to 1995 are as
follows:
<TABLE>
<CAPTION>
<S> <C>
1996 $ 3,826
1997 14,104,164
1998 2,978
1999 -
2000 3,938,468
-----------
$18,049,436
===========
</TABLE>
COZ has outstanding standby letters of credit to product suppliers and a
bank (see note 5) totaling approximately $16,900,000 at April 30, 1995.
Actual obligations to such suppliers at April 30, 1995 are included in
trade accounts payable.
Cash payments for interest were approximately $2,478,000, $1,741,000,
$2,230,000 and $1,985,000 for the year ended April 30, 1995, the seven
months ended April 30, 1994 and the years ended September 30, 1993 and
1992, respectively.
F-26
<PAGE>
TRANSMONTAIGNE OIL COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(7) Redeemable Convertible Preferred Stock
In March 1991, the Company issued 857,143 shares of voting redeemable
Series A cumulative convertible preferred stock at $7.00 per share which
had a liquidation and mandatory redemption price of the same amount. This
preferred stock had one vote per share. Dividends on the preferred stock
were payable quarterly, at 7.15% per annum of the liquidation value
outstanding, in additional shares of preferred stock or, at the Company's
option, in cash.
Effective as of April 26, 1995 all outstanding shares of preferred stock
were converted into common stock.
(8) Stock Options
The Company has adopted two stock option plans, (the "1991 Plan" and the
"1995 Plan"), under which stock options may be granted to key employees of
the Company. Under the 1991 Plan, the Company may grant options for up to
300,000 shares of common stock at prices and for terms as determined by the
Administrative Committee of the 1991 Plan. The Company may grant options
for up to 1,000,000 shares of common stock under the 1995 Plan. Options
granted under the 1995 Plan are exercisable at a price determined by the
Incentive Plan Committee, however, in no event shall the price be less than
the fair market value of the stock on the date of grant. Options under the
1995 Plan expire at such time as the Incentive Plan Committee determines,
but no later than seven years from the date of grant.
Changes in stock options outstanding for the year ended April 30, 1995, the
seven months ended April 30, 1994 and the years ended September 30, 1993
and 1992 are as follows:
<TABLE>
<CAPTION>
1991 Plan 1995 Plan
------------------------ ------------------
Option Option
price per price per
Shares share Shares share
--------- ------------- ------- ---------
<S> <C> <C> <C> <C>
Outstanding at September 30,
1991, 1992 and 1993 220,254 $3.50 - 6.10 - -
Forfeited (124,500) 6.10 - -
Granted - - 124,500 2.70
-------- ------------ ------- ----
Outstanding at
April 30, 1994 95,754 3.50 - 6.10 124,500 2.70
Granted - - 350,000 2.70
-------- ------------ ------- ----
Outstanding at
April 30, 1995 95,754 3.50 - 6.10 474,500 2.70
======== ============ ======= ====
Exercisable at
April 30, 1995 95,754 $3.50 - 6.10 474,500 2.70
======== ============ ======= ====
</TABLE>
F-27
<PAGE>
TRANSMONTAIGNE OIL COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(9) Income Taxes
Income tax expense, consisting solely of state income taxes, was $119,545,
$70,557, $48,142 and $76,127 for the year ended April 30, 1995, the seven
months ended April 30, 1994 and the years ended September 30, 1993 and
1992, respectively. Income tax expense differs from the amount computed by
applying the U.S. federal corporate income tax rate of 34% to pretax loss
as a result of the following:
<TABLE>
<CAPTION>
1995 1994 1993 1992
---- ---- ---- ----
<S> <C> <C> <C> <C>
Computed "expected" tax $(1,015,000) (868,000) (1,537,000) (1,394,000)
expense
Increase (reduction) in
income taxes resulting from:
Increase in the valuation
allowance for deferred
tax assets allocated to
income tax expense 1,174,000 1,032,000 1,617,000 1,616,000
State income taxes, net of
federal income tax benefit 79,000 47,000 40,571 60,226
Other, net (118,455) (140,443) (72,429) (206,099)
----------- --------- ---------- ----------
Income tax expense $ 119,545 70,557 48,142 76,127
=========== ========= ========== ==========
</TABLE>
The tax effects of temporary differences which give rise to significant
portions of the deferred tax assets and deferred tax liabilities at April
30, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Deferred tax assets:
Inventories, principally due to differences in
method used for tax purposes $
Future deductible amounts for income tax
purposes resulting from a change in the
method of accounting for inventories 1,038,000 1,773,000
Net operating loss carryforwards 3,783,000 3,029,000
Alternative minimum tax credit carryforwards 24,000 24,000
----------- ----------
Total gross deferred tax assets 7,549,000 6,209,000
Less valuation allowance (4,717,000) (3,543,000)
----------- ----------
Net deferred tax assets 2,832,000 2,666,000
Deferred tax liabilities:
Plant and equipment, principally due to
differences in depreciation methods (2,796,000) (2,652,000)
Investments in affiliated company,
principally (36,000) (14,000)
due to undistributed earnings ----------- ----------
Net deferred taxes $ - -
=========== ==========
</TABLE>
F-28
<PAGE>
TRANSMONTAIGNE OIL COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
The Company intends to change its year-end for income tax purposes from
December 31 to April 30, effective in 1995. The Company also changed its
method of accounting for inventories for income tax purposes effective
January 1, 1994. The effect of this change was approximately $8,200,000 at
January 1, 1994, and, under the provisions of the Internal Revenue Code,
this amount is deductible over a 3-year period.
At April 30, 1995, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $9,956,000 which are available
to offset future federal taxable income, if any, through 2008. In addition,
the Company has alternative minimum tax credit carryforwards of
approximately $24,000 available to reduce future federal regular income
taxes, if any, which can be carried forward indefinitely.
Under Statement 109, the Company provides for deferred income taxes on the
undistributed net earnings of Lion. Under the transition rules in Statement
109, the Company is not required to recognize a deferred tax liability of
approximately $6,100,000 for the undistributed net earnings of Lion which
arose prior to the adoption of Statement 109 because the Company currently
does not expect those undistributed earnings to become taxable to the
Company in the foreseeable future. A deferred tax liability will be
recognized on these undistributed earnings when the Company expects that it
will recover those undistributed earnings in a taxable manner, such as
through the receipt of dividends or the sale of the investment.
The Company paid state income taxes of $138,000, $45,000, $-0- and $165,000
for the year ended April 30, 1995, the seven months ended April 30, 1994
and the years ended September 30, 1993 and 1992, respectively.
(10) Related Party Transactions
The Company had sales of $884,000, $6,698,000, $7,691,000 and $15,139,000
and purchases of $28,997,000, $15,710,000, $52,050,000 and $41,972,000 for
the year ended April 30, 1995, the seven months ended 1994 and the years
ended September 30, 1993 and 1992, respectively, with companies affiliated
by common ownership.
Related party balances at April 30, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Accounts receivable $ 45,549 16,633
Accounts payable 1,270,335 530,250
</TABLE>
F-29
<PAGE>
Independent Auditors' Report
----------------------------
The Board of Directors and Stockholders
Lion Oil Company and Subsidiary:
We have audited the accompanying consolidated balance sheets of Lion Oil Company
and subsidiary as of April 30, 1995 and 1994, and the related consolidated
statements of earnings, stockholders' equity and cash flows for each of the
years in the three-year period ended April 30, 1995. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Lion Oil Company and
subsidiary as of April 30, 1995 and 1994, and the results of their operations
and their cash flows for each of the years in the three-year period ended April
30, 1995, in conformity with generally accepted accounting principles.
As discussed in notes 1 and 5 to the consolidated financial statements, the
Company adopted the provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes, as of May 1, 1993.
KPMG Peat Marwick LLP
Jackson, Mississippi
July 11, 1995
F-30
<PAGE>
LION OIL COMPANY
AND SUBSIDIARY
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
April 30
January 31 ------------------------
Assets 1996 1995 1994
- ------ ---- ---- ----
(unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ - 11,909,536 17,191,910
Trade accounts receivable,
less allowance For doubtful accounts 23,144,274 26,812,439 19,646,891
Inventories 38,776,266 51,921,402 38,960,436
Refundable income taxes - 1,564,965 3,005
Current portion of deferred
income taxes - 82,822 104,723
Prepaid expenses and other
current assets 3,472,581 3,319,025 2,851,297
------------ ----------- -----------
Total current assets 65,393,121 95,610,189 78,758,262
------------ ----------- -----------
Property, plant and equipment 107,861,229 105,757,497 99,618,657
Less accumulated depreciation 39,602,988 34,571,855 28,099,810
------------ ----------- -----------
Net property, plant and equipment 68,258,241 71,185,642 71,518,847
------------ ----------- -----------
Deferred turnaround costs, less
accumulated amortization 502,449 1,405,162 2,938,067
Other assets 624,308 520,911 563,495
------------ ----------- -----------
$134,778,119 168,721,904 153,778,671
============ =========== ===========
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Cash overdraft $ 844,106 - -
Trade accounts payable 16,223,114 19,888,675 17,519,787
Current installments of long-term debt 2,939,875 3,142,857 476,196
Accrued expenses and other
current liabilities 5,849,287 10,040,495 9,732,824
Inventory due under finished
product exchange agreements 8,442,347 4,181,611 1,259,508
Income taxes currently 833,213 19,187 1,256,477
payable ------------ ----------- -----------
Total current liabilities 35,131,942 37,272,825 30,244,792
------------ ----------- -----------
Long-term liabilities:
Long-term debt, excluding
current installments 38,324,536 71,238,909 64,428,883
Deferred income taxes 7,879,086 7,961,907 8,113,010
------------ ----------- -----------
Total long-term liabilities 46,203,622 79,200,816 72,541,893
------------ ----------- -----------
Stockholders' equity:
Common stock of $.10 par value.
Authorized 12,000,000 shares; issued
and outstanding 8,649,600 shares 864,960 864,960 864,960
Additional paid-in capital 8,572,140 8,572,140 8,572,140
Retained earnings 44,005,455 42,811,163 41,554,886
------------ ----------- -----------
Total stockholders' equity 53,442,555 52,248,263 50,991,986
------------ ----------- -----------
$134,778,119 168,721,904 153,778,671
============ =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-31
<PAGE>
LION OIL COMPANY
AND SUBSIDIARY
Consolidated Statements of Earnings
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine months ended
January 31 Year ended April 30
----------------------- --------------------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(unaudited)
Net sales $430,855,988 393,731,304 525,036,778 477,573,034 493,244,228
Cost of sales 421,259,309 383,051,449 511,654,771 462,491,358 484,020,067
------------ ----------- ----------- ----------- -----------
Gross profit 9,596,679 10,679,855 13,382,007 15,081,676 9,224,161
Selling, general and administrative expenses 3,982,360 4,202,874 5,763,021 5,223,310 4,968,187
Management fees 497,621 650,493 531,946 1,166,099 54,579
------------ ----------- ----------- ----------- -----------
Operating income 5,116,698 5,826,488 7,087,040 8,692,267 4,201,395
------------ ----------- ----------- ----------- -----------
Other income (expense):
Interest expense (3,479,066) (3,361,147) (5,214,396) (4,187,176) (4,245,858)
Interest income 43,826 32,399 42,009 41,127 71,099
Miscellaneous, net 346,047 159,905 233,124 143,347 230,495
------------ ----------- ----------- ----------- -----------
(3,089,193) (3,168,843) (4,939,263) (4,002,702) (3,944,264)
------------ ----------- ----------- ----------- -----------
Earnings before income taxes 2,027,505 2,657,645 2,147,777 4,689,565 257,131
Income tax expense 833,213 1,096,462 891,500 1,830,887 128,858
------------ ----------- ----------- ----------- -----------
Net earnings $ 1,194,292 1,561,183 1,256,277 2,858,678 128,273
============ =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-32
<PAGE>
LION OIL COMPANY
AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common stock Additional Total
-------------------- paid-in Retained stockholders'
Shares Amount capital earnings equity
--------- --------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Balance at 8,649,600 $864,960 8,572,140 38,567,935 48,005,035
April 30, 1992
Net earnings for 1993 - - - 128,273 128,273
--------- -------- --------- ---------- ----------
Balance at
April 30, 1993 8,649,600 864,960 8,572,140 38,696,208 48,133,308
Net earnings for 1994 - - - 2,858,678 2,858,678
--------- -------- --------- ---------- ----------
Balance at
April 30, 1994 8,649,600 864,960 8,572,140 41,554,886 50,991,986
Net earnings for 1995 - - - 1,256,277 1,256,277
--------- -------- --------- ---------- ----------
Balance at
April 30, 1995 8,649,600 864,960 8,572,140 42,811,163 52,248,263
Net earnings for nine
months ended
January 31, 199
(unaudited) - - - 1,194,292 1,194,292
--------- -------- --------- ---------- ----------
Balance at
January 31,
1996 (unaudited) 8,649,600 $864,960 8,572,140 44,005,455 53,442,555
========= ======== ========= ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-33
<PAGE>
LION OIL COMPANY
AND SUBSIDIARY
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine months ended
January 31 Year ended April 30
----------------------------- ------------------------------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Increase in cash and cash equivalents:
Cash flows from operating activities:
Cash received from customers $ 436,639,348 394,677,295 520,302,240 490,889,065 490,427,017
Cash paid to suppliers and employees (409,548,348) (381,387,215) (521,484,138) (448,637,782) (498,672,340)
Interest and dividends received 43,871 32,399 42,009 41,127 71,099
Other operating income received 329,480 146,910 203,285 170,529 245,956
Interest paid (net of amount capitalized) (3,901,396) (3,287,399) (5,034,862) (4,108,359) (3,668,587)
Income taxes refunded (paid) 362,267 (3,824,425) (1,992,419) 2,375,937 57,251
------------- ------------ ------------ ------------ ------------
Net cash provided (used) by operating activities 23,925,222 6,357,565 (7,963,885) 40,730,517 (11,539,604)
------------- ------------ ------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures (3,425,059) (5,247,151) (6,510,499) (12,458,711) (6,316,706)
Deferred turnaround costs - - - - (4,598,597)
Proceeds from sale of equipment 25,676 70,480 211,233 33,097 91,712
Notes and other accounts receivable (63,583) 193,385 - - -
------------- ------------ ------------ ------------ ------------
Net cash used by investing activities (3,462,966) (4,983,286) (6,299,266) (12,425,614) (10,823,591)
------------- ------------ ------------ ------------ ------------
Cash flows from financing activities:
Proceeds from lines of credit 539,889,267 502,934,091 699,044,595 609,001,450 604,126,473
Principal payments on lines of credit (573,006,622) (540,128,869) (716,299,571) (617,412,186) (571,130,023)
Proceeds from long-term debt and note payable - 24,557,591 42,199,862 232,287 319,895
Principal payments on long-term debt and note payable - (9,010,116) (15,468,199) (9,284,526) (8,258,575)
Additions to debt issue costs (98,543) (246,593) (495,910) (458,813) (599,903)
Increase in cash overdraft 844,106 - - - -
------------- ------------ ------------ ------------ ------------
Net cash provided (used) by financing activities (32,371,792) (21,893,896) 8,980,777 (17,921,788) 24,457,867
------------- ------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (11,909,536) (20,519,617) (5,282,374) 10,383,115 2,094,672
Cash and cash equivalents at beginning of period 11,909,536 17,191,910 17,191,910 6,808,795 4,714,123
------------- ------------ ------------ ------------ ------------
Cash and cash equivalents at end of period $ - 3,327,707 11,909,536 17,191,910 6,808,795
============= ============ ============ ============ ============
</TABLE>
(Continued)
F-34
<PAGE>
LION OIL COMPANY
AND SUBSIDIARY
Consolidated Statements of Cash Flows, Continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine months ended
January 31 Year ended April 30
--------------------------- ----------------------------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Reconciliation of net earnings to net cash provided (used) by
operating activities:
Net earnings $ 1,194,292 1,561,183 1,256,277 2,858,678 128,273
Adjustments:
Depreciation and amortization 7,410,486 7,321,797 8,791,454 7,719,264 7,509,136
Deferred income taxes - - (129,202) 464,852 1,200,725
Gain from sale of equipment (18,862) (12,638) (62,584) (10,406) (39,106)
Changes in operating assets and liabilities:
(Increase) decrease in trade accounts receivable 3,668,165 (1,057,136) (7,165,548) 7,925,333 (7,611,384)
(Increase) decrease in inventories 13,145,136 (999,061) (12,960,966) 21,251,812 (6,724,358)
(Increase) decrease in refundable income taxes 1,564,965 3,005 (1,561,960) 2,456,487 (1,010,647)
Increase in prepaid expenses and other current assets (153,556) (1,700,693) (467,728) (50,615) (525,933)
(Increase) decrease in other assets (103,397) 208,558 (25,000) - -
Increase (decrease) in trade accounts payable (3,665,561) (1,603,081) 2,368,888 (3,802,728) (6,623,043)
Increase (decrease) in accrued expenses and other
current liabilities (4,191,208) (4,406,232) 307,671 2,183,208 (257,352)
Increase (decrease) in inventory due under finished
product exchange agreements 4,260,736 7,201,877 2,922,103 (1,521,845) 2,414,085
Increase (decrease) in income taxes currently payable 814,026 (160,014) (1,237,290) 1,256,477 -
----------- ---------- ----------- ---------- -----------
Net cash provided (used) by operating activities $23,925,222 6,357,565 (7,963,885) 40,730,517 (11,539,604)
=========== ========== =========== ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-35
<PAGE>
LION OIL COMPANY
AND SUBSIDIARY
Notes to Consolidated Financial Statements
For Each of the Years in the Three-Year Period Ended
April 30, 1995 and for the Nine Months Ended
January 31, 1996 and 1995
(Information with Respect to the Nine-Month Periods is Unaudited)
- --------------------------------------------------------------------------------
(1) Nature of Business and Summary of Significant Accounting Policies
Lion Oil Company (the Company) is engaged in petroleum refining and related
lines of business. It owns and operates a petroleum refinery, crude oil
gathering pipelines, product terminals and related equipment.
(a) Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, J. Christy Construction Co.,
Inc. (J. Christy), a maintenance and construction business. All
significant intercompany balances and transactions have been
eliminated in consolidation.
(b) Interim Financial Statements
The interim consolidated financial statements as of January 31, 1996
and for the nine months ended January 31, 1996 and 1995 are unaudited.
In the opinion of management, all adjustments, consisting only of
normal recurring accruals, have been made which are necessary for a
fair presentation of the financial position of the Company and the
results of its operations. Operating results for interim periods are
not necessarily indicative of the results that may be expected for the
complete fiscal year.
(c) Inventories
Inventories in the amount of $51,260,579 and $38,450,969 at April 30,
1995 and 1994, respectively, are stated at lower of approximate cost
(first-in, first-out) or market (net realizable value). Inventories in
the amount of $660,823 and $509,467, respectively, are stated at lower
of approximate cost (last-in, first-out) or market (replacement cost).
Had cost been determined using the first-in, first-out method for all
categories, inventories would have been greater by approximately
$284,000 and $300,000 at April 30, 1995 and 1994, respectively.
Finished petroleum products due from third parties under exchange
agreements are included in inventory and recorded at current
replacement cost. Finished petroleum products are due to third parties
under exchange agreements are recorded at current replacement cost.
Adjustments resulting from changes in current replacement cost for
refined products due to or from third parties under exchange
agreements are reflected in cost of products sold. The exchange
agreements are generally for a term of 30 days and are generally
settled by delivering product to or receiving product from the party
to the exchange.
(d) Property, Plant and Equipment
Depreciation of plant and equipment is provided over the estimated
useful lives of the respective assets using the straight-line method.
All property, plant and equipment is carried at cost.
(e) Recognition of Revenue
Revenues from the sale of finished products are recorded at the time
title and risk of ownership pass.
Transfers of products to or from third parties under exchange
agreements do not culminate the earnings process and are recorded as
inventory and liability transactions with no effect on income.
Inventory under product exchange agreements consisted primarily of
finished petroleum products at April 30, 1995 and 1994.
(f) Deferred Turnaround Costs
Turnaround costs for major production units of the refinery are
deferred and amortized over the three-year period benefited. All other
turnaround costs are charged to expense as incurred.
F-36
<PAGE>
LION OIL COMPANY
AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(g) Income Taxes
Effective May 1, 1993, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 109, Accounting for Income Taxes
(Statement 109). The cumulative effect of this change of accounting
for income taxes was not significant and was included in income tax
expense in the 1994 consolidated statement of earnings. Under the
asset and liability method of Statement 109, deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under Statement
109, the effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the
enactment date.
(h) Cash Equivalents
The Company considers interest bearing accounts with an original
maturity of three months or less to be cash equivalents.
(i) Tax Credits
The Company uses the flow through method to account for tax credits.
(j) Debt Issue Costs
Debt issue costs are amortized using the straight line method over the
term of the related debt agreements.
(2) Inventories
A summary of inventories follows:
<TABLE>
<CAPTION>
April 30
------------------------
1995 1994
------------ ----------
<S> <C> <C>
Finished petroleum products $19,798,790 16,546,031
Finished petroleum products due
from third parties under
exchange agreements 5,140,396 2,659,040
Crude oil 20,308,300 15,139,571
Intermediates 5,571,607 3,801,775
Raw materials and supplies 1,102,309 814,019
----------- ----------
$51,921,402 38,960,436
=========== ==========
</TABLE>
F-37
<PAGE>
LION OIL COMPANY
AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(3) Property, Plant and Equipment
A summary of property, plant and equipment follows:
<TABLE>
<CAPTION>
April 30
-------------------------
1995 1994
------------- ----------
<S> <C> <C>
Land $ 1,682,378 1,554,743
Buildings and improvements 824,005 824,005
Refinery and equipment 75,885,365 69,564,733
Pipelines and equipment 17,327,827 17,122,550
Terminals and equipment 2,353,110 2,335,763
Tractors, trailers and automobiles 3,097,647 3,123,772
Other plant and equipment 1,814,208 1,627,678
Construction in progress 2,772,957 3,465,413
------------ ----------
105,757,497 99,618,657
Less accumulated depreciation 34,571,855 28,099,810
------------ ----------
$ 71,185,642 71,518,847
============ ==========
</TABLE>
Approximately $223,000 of interest incurred during the year ended April 30,
1994 was capitalized as part of the cost of self-constructed assets.
Construction in progress consists primarily of costs incurred for refinery
improvements. The Company estimates that it will cost approximately
$2,254,000 to complete projects in progress at April 30, 1995.
(4) Leased Assets and Lease Commitments
As of April 30, 1995, minimum lease payments due under noncancelable
operating leases are as follows:
<TABLE>
<CAPTION>
Year ending April 30:
<S> <C>
1996 $2,148,119
1997 1,813,881
1998 1,327,568
1999 997,728
2000 944,623
Thereafter 1,889,246
----------
Total minimum lease payments $9,121,165
==========
</TABLE>
Most of the Company's leases require the Company to pay taxes, maintenance
and insurance applicable to the leased property.
Rental expense under operating leases was approximately $1,339,000,
$1,744,000 and $1,217,000 in 1995, 1994 and 1993, respectively.
F-38
<PAGE>
LION OIL COMPANY
AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(5) Income Taxes
As discussed in note 1, the Company adopted Statement 109 as of May 1,
1993. The cumulative effect of this change in accounting for income taxes
was determined as of May 1, 1993. This amount was not material, and
therefore is not shown separately in the 1994 consolidated statement of
earnings.
Components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
Federal State Total
------------ ------- -----------
<S> <C> <C> <C>
1995:
Current $ 999,088 21,614 1,020,702
Deferred (263,455) 134,253 (129,202)
----------- ------- ----------
$ 735,633 155,867 891,500
=========== ======= ==========
1994:
Current $ 1,343,560 22,475 1,366,035
Deferred 206,610 258,242 464,852
----------- ------- ----------
$ 1,550,170 280,717 1,830,887
=========== ======= ==========
1993:
Current $(1,087,903) 16,036 (1,071,867)
Deferred 1,163,341 37,384 1,200,725
----------- ------- ----------
$ 75,438 53,420 128,858
=========== ======= ==========
</TABLE>
Income tax expense of $891,500 for 1995 (effective rate of 41.5%),
$1,830,887 for 1994 (effective rate of 39.0%) and $128,858 for 1993
(effective rate of 50.1%) differs from the expected amounts (computed by
applying the U. S. Federal corporate rate of 34% to pretax earnings) as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- -------
<S> <C> <C> <C>
Computed expected tax expense $730,244 1,594,452 87,425
Increases resulting from:
State income taxes (net of federal
income tax benefit) 102,872 185,273 35,258
Other 58,384 51,162 6,175
-------- --------- -------
Actual tax expense $891,500 1,830,887 128,858
======== ========= =======
</TABLE>
F-39
<PAGE>
LION OIL COMPANY
AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(5) Income Taxes (continued)
The tax effects of temporary differences that give rise to the deferred tax
assets and deferred tax liabilities are presented below:
<TABLE>
<CAPTION>
April 30
-------------------------
1995 1994
------------ -----------
<S> <C> <C>
Deferred tax assets:
Accounts receivable, due to allowance for doubtful
accounts $ 18,980 18,980
Inventories, principally due to additional costs
inventoried for tax purposes pursuant to the Tax
Reform Act of 1986 60,674 46,047
State net operating loss carryforward 3,167 39,696
Alternative minimum tax credit carryforward 1,193,762 556,539
----------- ----------
Total gross deferred tax assets 1,276,583 661,262
----------- ----------
Deferred tax liabilities:
Plant and equipment, principally due to differences
in depreciation (8,622,268) (7,554,259)
Deferred turnaround costs (533,400) (1,115,290)
----------- ----------
Total gross deferred tax liabilities (9,155,668) (8,669,549)
----------- ----------
Net deferred tax liabilities $(7,879,085) (8,008,287)
</TABLE>
The Company has determined, based on its history of profitable operations
and expectations for the future, that the deferred tax assets will more
likely than not be fully realized and that no valuation allowance is
necessary at April 30, 1995.
At April 30, 1995 the Company had State net operating loss carryforwards
for income tax purposes of approximately $80,000. These operating loss
carryforwards will expire April 30, 1998.
F-40
<PAGE>
LION OIL COMPANY
AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(6) Note Payable and Long-term Debt
A summary of long-term debt follows:
<TABLE>
<CAPTION>
April 30
---------------------------
1995 1994
------------ -------------
<S> <C> <C>
Line of credit with NBD Bank (NBD) $52,672,688 -
Term note payable to The CIT Group/Equipment
Financing, Inc. (CIT) 21,214,285 -
Line of credit with Sunburst Bank (Sunburst),
due May 31, 1995 with interest at a stipulated
percentage above the prime rate, collateralized
by certain equipment 494,793 596,463
Line of credit with The First National Bank of
Boston (First Boston) - 49,927,664
Term note payable to First Boston, collateralized
by a first lien on the refinery, due in
quarterly installments of $750,000 beginning
July 31, 1995, plus interest at a stipulated
percentage above the prime rate. This note was
repaid in the year ended April 30, 1995. - 12,000,000
Term note payable to Deposit Guaranty National
Bank (DGNB), collateralized by a lien on a
pipeline and related equipment, due in monthly
installments of $39,683, plus interest at a
stipulated percentage above the prime rate.
This note was repaid in the year ended April 30,
1995. - 2,380,952
---------- ----------
74,381,766 64,905,079
Less current installments of long-term debt 3,142,857 476,196
----------- ------------
Long-term debt, excluding current installments $71,238,909 64,428,8 83
=========== ============
</TABLE>
A summary of balances outstanding at April 30, 1995 under the Company's
line of credit follows:
<TABLE>
<CAPTION>
<S> <C>
Line of credit available $ 75,000,000
Letters of credit outstanding (13,310,930)
Loan outstanding (52,672,688)
------------
Unused portion of line of credit $ 9,016,382
============
</TABLE>
F-41
<PAGE>
LION OIL COMPANY
AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(6) Note Payable and Long-term Debt (continued)
A summary follows of scheduled maturities of long-term debt at April 30,
1995:
<TABLE>
<CAPTION>
Fiscal year Amount
----------- ------
<S> <C>
1996 $ 3,142,857
1997 3,637,650
1998 55,815,545
1999 3,142,857
2000 3,142,857
Thereafter 5,500,000
-----------
$74,381,766
===========
</TABLE>
The line of credit with NBD provides for borrowings up to $75,000,000 with
interest payable on outstanding amounts at LIBOR plus 2.75% or the greater
of the prime rate or federal funds rate plus 1% (floating rate). The line
is secured by cash, accounts receivable and inventories, and by letters of
credit in the amount of $13,542,000 obtained in favor of the Company by its
stockholders. The effective rate is set at the Company's discretion and may
be changed periodically. Each time the Company requests an advance under
the line, it must specify whether interest is to be calculated using LIBOR
plus 2.75%, or the floating rate. At April 30, 1995 advances totaling
$20,000,000 were at LIBOR, at an effective rate of 8.875%, and advances
totaling $32,672,688 were under the floating rate, which was at the prime
rate of 9.0%. The Company is required to pay a commitment fee at an annual
percentage rate of 1/2% on the average daily unused amount of the line of
credit. These fees totaled approximately $240,000 for the year ended April
30, 1995. Amounts due under the line of credit are not due until August 30,
1997, the termination date of the related credit agreement and, therefore,
amounts outstanding at April 30, 1995 are classified as long-term debt in
the accompanying consolidated balance sheet.
The term note payable to CIT is due in eighty-four monthly principal
installments of $261,905 through January 2002 and is secured by a first
lien on the refinery, equipment, certain inventories and various pipelines
and bears interest at either LIBOR plus 3% or the prime rate plus 1%. The
effective rate is set at the Company's discretion and may be changed
periodically. At April 30, 1995 the interest rate on the note was 9.125%.
The Company also had a $600,000 revolving line of credit with Sunburst at
April 30, 1995. This line, which was due on demand, was collateralized by
certain equipment and had an interest rate which floated at a stipulated
percentage above the prime rate. This line matured on May 31, 1995, and was
subsequently renewed and extended with similar terms and conditions until
May 15, 1996. At April 30, 1995 the Company had $494,793 outstanding under
this line of credit.
F-42
<PAGE>
LION OIL COMPANY
AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
At April 30, 1994 the Company had a line of credit with First Boston which
provided for borrowings up to $75,000,000, with the interest rate floating
at a stipulated percentage above the prime rate. The line was secured by
all personal property of the Company, including accounts receivable and
inventories, and by letters of credit in the amount of $13,542,000 obtained
in favor of the Company by its stockholders. All amounts due under the line
were repaid and the line was canceled during the year ended April 30, 1995.
The line of credit with NBD and note payable to CIT contain restrictive
covenants which, among other things, require the Company to maintain stated
levels of tangible net worth and working capital, stated ratios of current
assets to current liabilities and limit capital expenditures and
indebtedness (other than that under this agreement) to certain levels.
(7) Management Contract and Related Party Transactions
The Company is managed by Ergon, Inc., its largest stockholder, under a
management contract whereby Ergon is paid a management fee by the Company.
The fee is based on a percentage of earnings before income taxes.
In the event of termination of the management contract by the Company
without cause or by mutual agreement of the Company and Ergon, Ergon has
the right, at its option, to purchase common stock of the Company equal to
20% of the total issued and outstanding capital stock as of the date of
such termination. The purchase price of such stock would be the same as
that of the original shares issued.
In the ordinary course of business the Company makes purchases from and
sales to Ergon and its subsidiaries as well as other stockholders of the
Company. Such transactions are at prevailing market prices.
A summary follows of material related party balances and transactions as of
and for the years ended April 30, 1995 and 1994 (approximate amounts):
<TABLE>
<CAPTION>
1995 1994
------------ ----------
<S> <C> <C>
Ergon and its subsidiaries:
Asphalt sales $2,878,000 2,190,000
========== =========
Other sales $1,235,000 1,676,000
========== =========
Net purchases $3,350,000 1,481,000
========== =========
Transportation expenses $1,152,000 1,724,000
========== =========
Management fees $ 532,000 1,166,000
========== =========
Data processing fees $ 304,000 290,000
========== =========
Net amounts due from (to) Ergon at April 30 $ 256,000 (461,000)
========== =========
</TABLE>
(continued)
F-43
<PAGE>
LION OIL COMPANY
AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994
------------ ----------
<S> <C> <C>
Continental Ozark Inc.:
Sales, net of trades $27,974,000 26,895,000
=========== ==========
Purchases, net of trades $ 917,000 4,310,000
=========== ==========
Net amounts due from Continental Ozark Inc.
at April 30 $ 652,000 688,000
=========== ==========
Wilson Sewell and Shuler Drilling Company -
purchases $ 786,000 824,000
=========== ==========
Long Brothers Oil Company:
Sales $ 18,000 19,000
=========== ==========
Purchases $ 960,000 1,188,000
=========== ==========
M. S. Delone - purchases $ 148,000 173,000
=========== ==========
Ned Price - purchases $ 1,344,000 1,370,000
=========== ==========
E. G. Bradberry - purchases $ 37,000 41,000
=========== ==========
</TABLE>
(8) Profit Sharing Plan
The Company has a defined contribution profit sharing plan covering
substantially all permanent full-time employees. The Company makes annual
contributions to the plan in amounts determined by the Board of Directors.
As of April 30, 1995 and 1994, contributions of $792,000 and $696,000,
respectively, had been authorized and accrued.
(9) Litigation and Contingencies
The Company has pending legal claims incurred in the normal course of
business which, in the opinion of management, can be disposed of without
material effect on the Company.
The Company is in the final stages of a required assessment of inactive
surface impound-ments for compliance with environmental laws and
regulations. When the assessment is completed, the Company, its consulting
engineers and regulatory authorities will determine the extent of any
required remedial action. In the opinion of management, the net cost of any
remedial action will not have a material adverse effect on the Company.
(10) Concentration of Credit
The Company sells a majority of its finished products to customers in the
oil and gas industry. The Company performs on-going credit evaluations of
its customers and generally does not require collateral on accounts
receivable. The Company believes it maintains adequate allowances for any
uncollectible accounts receivable, which historically have been minimal.
F-44
<PAGE>
LION OIL COMPANY
AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(11) Fair Value of Financial Instruments
The following table presents the carrying amounts and estimated fair values
of the Company's financial instruments at April 30, 1995. FASB Statement
No. 107, "Disclosures about Fair Value of Financial Instruments," defines
the fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing
parties.
<TABLE>
<CAPTION>
Carrying Fair
amount value
------------ ----------
<S> <C> <C>
Cash and cash equivalents $11,909,536 11,909,536
Long-term debt, including current installments 74,381,766 74,381,766
</TABLE>
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
(a) Cash and cash equivalents - the carrying amount approximates fair
-------------------------
value because of the short maturity of these instruments.
(b) Long-term debt, including current installments - the carrying amount
----------------------------------------------
approximates fair value based on the use of floating interest rates
which approximate market rates.
F-45
<PAGE>
Appendix I
RESTATED AGREEMENT AND PLAN OF MERGER
THIS RESTATED AGREEMENT AND PLAN OF MERGER, dated as of February 6, 1996
(this "Agreement"), is by and between TransMontaigne Oil Company, a Delaware
corporation ("TransMontaigne"), and Sheffield Exploration Company, Inc., a
Delaware corporation ("Sheffield").
RECITALS
A. TransMontaigne wishes to merge with and into Sheffield (the "Merger"),
and pursuant thereto, (i) each share of common stock, $.10 per share par value,
of TransMontaigne ("TransMontaigne Common Stock") will be converted into the
right to receive one share of common stock of Sheffield ("New Sheffield Common
Stock"), (ii) each 2.432599 shares of Sheffield common stock issued and
outstanding as of the Effective Time ("Old Sheffield Common Stock") will be
converted into the right to receive one share of New Sheffield Common Stock,
(iii) the name of Sheffield will be changed to "TransMontaigne Oil Company" and
(iv) the number of authorized shares of New Sheffield Common Stock will be
increased to 40,000,000.
B. The Board of Directors of Sheffield has determined that the Merger is
consistent with and in furtherance of the long-term business strategy of
Sheffield and is fair to, and in the best interests of, Sheffield and its
stockholders and has approved and adopted this Agreement and the issuance of New
Sheffield Common Stock in connection therewith and the other transactions
contemplated hereby, and recommended approval by the stockholders of Sheffield
of this Agreement.
D. The Board of Directors of TransMontaigne has determined that the Merger
is consistent with and in furtherance of the long-term business strategy of
TransMontaigne and is fair to, and in the best interests of, TransMontaigne and
its stockholders and has approved and adopted this Agreement and the
transactions contemplated hereby, and recommended approval of this Agreement by
the stockholders of TransMontaigne.
D. For federal income tax purposes, it is intended that the Merger qualify
as a reorganization under the provisions of section 368(a) of the United States
Internal Revenue Code of 1986, as amended (the "Code") and that this Agreement
constitute a plan of reorganization.
AGREEMENT
ACCORDINGLY, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth in this
Agreement, the parties hereto agree as follows:
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ARTICLE I
THE MERGER
Section 1.01. The Merger. Upon the terms and subject to the
----------
conditions set forth in this Agreement, and in accordance with the General
Corporation Law of the State of Delaware ("Delaware Law"), at the Effective
Time, TransMontaigne shall be merged with and into Sheffield. As a result of
the Merger, the separate corporate existence of TransMontaigne shall cease and
Sheffield shall continue as the surviving corporation of the Merger (the
"Surviving Corporation") and its name shall be changed to "TransMontaigne Oil
Company." Certain terms used in this Agreement are defined in Section 9.03
hereof.
SECTION 1.02. Closing; Closing Date; Effective Time. Unless this
-------------------------------------
Agreement shall have been terminated pursuant to Section 8.01, and subject to
the satisfaction or, if permissible, waiver of the conditions set forth in
Article VII, the consummation of the Merger and the closing of the transactions
contemplated by this Agreement (the "Closing") shall take place at the offices
of TransMontaigne as soon as practicable (but in any event within two business
days) after the satisfaction or, if permissible, waiver of the conditions set
forth in Article VII, or at such other date, time and place as TransMontaigne
and Sheffield may agree; provided, that the conditions set forth in Article VII
shall have been satisfied or waived at or prior to such time. The date on which
the Closing takes place is referred to herein as the "Closing Date". As
promptly as practicable on the Closing Date, the parties hereto shall cause the
Merger to be consummated by filing a Certificate of Merger with the Secretary of
State of the State of Delaware, in the form of Exhibit A attached hereto (the
date and time of such filing, or such later date or time agreed upon by
TransMontaigne and Sheffield and set forth therein, being the "Effective Time").
For all tax purposes, the Closing shall be effective at the end of the day on
the Closing Date.
SECTION 1.03. Effect of the Merger. At the Effective Time, the
--------------------
effect of the Merger shall be as provided in the applicable provisions of
Delaware Law.
SECTION 1.04. Certificate of Incorporation; Bylaws. At the Effective
------------------------------------
Time, the certificate of incorporation of Sheffield, as amended as provided in
the Certificate of Merger attached hereto as Exhibit A to change the name of
Sheffield to "TransMontaigne Oil Company" and to increase the authorized number
of shares of New Sheffield Common Stock to 40,000,000, shall be the certificate
of incorporation of the Surviving Corporation and thereafter shall continue to
be its certificate of incorporation until amended as provided therein and
pursuant to Delaware Law. The bylaws of Sheffield, as in effect immediately
prior to the Effective Time, shall be the bylaws of the Surviving Corporation
and thereafter shall continue to be its bylaws until amended as provided therein
and pursuant to Delaware Law.
SECTION 1.05. Directors and Officers. The directors of the Surviving
----------------------
Corporation immediately after the Effective Time shall be Edwin H. Morgens and
the directors of TransMontaigne immediately prior to the Effective Time, each to
hold office in accordance with the charter and bylaws of the Surviving
Corporation, and the officers of the Surviving Corporation immediately after the
Effective Time shall be the officers of TransMontaigne
I-2
<PAGE>
immediately prior to the Effective Time, each to hold office in accordance with
the bylaws of the Surviving Corporation, in each case until their respective
successors are duly elected or appointed and qualified.
ARTICLE II
CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES
SECTION 2.01. Merger Consideration; Conversion and Cancellation of
----------------------------------------------------
Securities. At the Effective Time, by virtue of the Merger and without any
- ----------
action on the part of TransMontaigne, Sheffield or their respective
stockholders:
(a) Subject to the other provisions of this Article II, each share of
TransMontaigne Common Stock issued and outstanding immediately prior to the
Effective Time (excluding any TransMontaigne Common Stock described in Section
2.01(b) of this Agreement and shares held by Dissenting TransMontaigne
Stockholders (as defined in Section 2.01(e)) shall be converted into the right
to receive one share of New Sheffield Common Stock and each 2.432599 shares of
Old Sheffield Common Stock (excluding any Old Sheffield Common Stock described
in Section 2.01(b) of this Agreement) shall be converted into the right to
receive one share of New Sheffield Common Stock (the "Exchange Ratios").
Notwithstanding the foregoing, if between the date of this Agreement and the
Effective Time the outstanding shares of TransMontaigne Common Stock or Old
Sheffield Common Stock shall have been changed into a different number of shares
or a different class, by reason of any stock dividend, subdivision,
reclassification, recapitalization, split, combination or exchange of shares,
the Exchange Ratios shall be correspondingly adjusted to reflect such stock
dividend, subdivision, reclassification, recapitalization, split, combination or
exchange of shares.
(b) Notwithstanding any provision of this Agreement to the contrary,
each share of TransMontaigne Common Stock held in the treasury of
TransMontaigne, and each share of TransMontaigne Common Stock or Old Sheffield
Common Stock owned by TransMontaigne or Sheffield or any direct or indirect
wholly owned subsidiary of TransMontaigne or of Sheffield immediately prior to
the Effective Time shall be canceled and extinguished without any conversion
thereof and no payment shall be made with respect thereto.
(c) All shares of TransMontaigne Common Stock and Old Sheffield Common
Stock shall cease to be outstanding and shall automatically be canceled and
retired, and each certificate previously evidencing TransMontaigne Common Stock
and Old Sheffield Common Stock immediately prior to the Effective Time (other
than TransMontaigne Common Stock and Old Sheffield Common Stock described in
Section 2.01(b) of this Agreement) ("Converted Shares" or "Converted Share
Certificates," as the case may be) shall thereafter represent the right to
receive, subject to Section 2.02(e) of this Agreement, that number of shares of
New Sheffield Common Stock determined pursuant to Section 2.01(a) hereof and, if
applicable, cash pursuant to Section 2.02(f) of this Agreement (the "Merger
Consideration"). The holders of Converted Share Certificates shall cease to
have any rights with respect to such Converted Shares except as
I-3
<PAGE>
otherwise provided herein or by law. Such Converted Share Certificates shall be
exchanged for certificates evidencing whole shares of New Sheffield Common Stock
upon the surrender of such Converted Share Certificates in accordance with the
provisions of Section 2.02 of this Agreement, without interest. No fractional
shares of New Sheffield Common Stock shall be issued in connection with the
Merger and, in lieu thereof, a cash payment shall be made pursuant to Section
2.02(f) of this Agreement.
(d) All shares of New Sheffield Common Stock issued to holders of
TransMontaigne Common Stock in the Merger shall be registered under the
Securities Act of 1933, as amended (the "Securities Act").
(e) Notwithstanding anything in this Agreement to the contrary, any
issued and outstanding shares of capital stock of TransMontaigne held by a
TransMontaigne stockholder who has not voted in favor of nor consented to the
Merger and who complies with all the provisions of Delaware Law concerning the
right of holders of such stock to dissent from the Merger and require appraisal
of their shares (a "Dissenting TransMontaigne Stockholder"), shall not be
converted as described in Section 2.01(a) but shall become, at the Effective
Date, by virtue of the Merger and without any further action, the right to
receive such consideration as may be determined to be due to such Dissenting
TransMontaigne Stockholder pursuant to Delaware Law; provided, however, that
-------- -------
shares of TransMontaigne Common Stock outstanding immediately prior to the
Effective Date and held by a Dissenting TransMontaigne Stockholder who shall,
after the Effective Date, withdraw his demand for appraisal or lose his right of
appraisal, in either case pursuant to Delaware Law, shall be deemed to be
converted as of the Effective Date, into the right to receive New Sheffield
Common Stock.
SECTION 2.02. Exchange and Surrender of Certificates.
--------------------------------------
(a) As of the Effective Time, Sheffield shall deposit, or shall cause
to be deposited with American Securities Transfer, Inc. (the "Exchange Agent"),
for the benefit of the holders of Converted Share Certificates, for exchange in
accordance with this Article II, the Merger Consideration, together with any
dividends or distributions with respect thereto, being hereinafter referred to
as the "Exchange Fund."
(b) As soon as reasonably practicable after the Effective Time, the
Exchange Agent shall mail to each holder of record of shares of TransMontaigne
Common Stock and Old Sheffield Common Stock immediately prior to the Effective
Time (i) a letter of transmittal (which shall specify that delivery shall be
effected, and risk of loss and title to the Converted Share Certificates shall
pass, only upon delivery of the Converted Share Certificates to the Exchange
Agent, and which shall be in such form and have such other provisions as
TransMontaigne and Sheffield may reasonably specify) and (ii) instructions for
use in effecting the surrender of the Converted Share Certificates in exchange
for certificates representing shares of New Sheffield Common Stock issuable
pursuant to Section 2.01 in exchange for such Converted Share Certificates.
Upon surrender of a Converted Share Certificate for cancellation to the Exchange
Agent together with such letter of transmittal, duly executed, the holder of
such Converted Share Certificate shall be entitled to receive in exchange
therefor a certificate
I-4
<PAGE>
representing that number of whole shares of New Sheffield Common Stock which
such holder has the right to receive in exchange for the Converted Share
Certificate surrendered pursuant to the provisions of this Article II (after
taking into account all Converted Shares then held by such holder), and the
Converted Share Certificates so surrendered shall forthwith be canceled. In the
event of a transfer of ownership of TransMontaigne Common Stock or Old Sheffield
Common Stock which is not registered in the transfer records of TransMontaigne,
a certificate representing the proper number of shares of New Sheffield Common
Stock may be issued to a transferee if the Converted Share Certificate
representing such TransMontaigne Common Stock or Old Sheffield Common Stock is
presented to the Exchange Agent, accompanied by all documents required to
evidence and effect such transfer and by evidence that any applicable stock
transfer taxes have been paid. Until surrendered as contemplated by this
Section 2.02, each Converted Share Certificate shall be deemed at any time after
the Effective Time to represent only the New Sheffield Common Stock into which
the Converted Shares represented by such Converted Share Certificate have been
converted as provided in this Article II and the right to receive upon such
surrender cash in lieu of any fractional shares of New Sheffield Common Stock as
contemplated by Section 2.02(f).
(c) After the Effective Time, there shall be no further registration
of transfers of TransMontaigne Common Stock certificates or Old Sheffield Common
Stock certificates. If, after the Effective Time, certificates representing
shares of TransMontaigne Common Stock or Old Sheffield Common Stock are
presented to the Surviving Corporation or the Exchange Agent, they shall be
canceled and exchanged for the Merger Consideration provided for, and in
accordance with the procedures set forth, in this Agreement.
(d) Any portion of the Merger Consideration or the Exchange Fund made
available to the Exchange Agent pursuant to Section 2.02(a) that remains
unclaimed by the holders of shares of TransMontaigne Common Stock one year after
the Effective Time shall be returned to the Surviving Corporation, upon demand,
and any such holder who has not exchanged its shares of TransMontaigne Common
Stock in accordance with this Section 2.02 prior to that time shall thereafter
look only to the Surviving Corporation for payment of the Merger Consideration
in respect of its shares of TransMontaigne Common Stock. Notwithstanding the
foregoing, the Surviving Corporation shall not be liable to any holder of
Converted Shares for any amount paid to a public official pursuant to applicable
abandoned property escheat or similar laws.
(e) No dividends, interest or other distributions with respect to
shares of New Sheffield Common Stock shall be paid to the holder of any
unsurrendered Converted Share Certificates until such Converted Share
Certificates are surrendered as provided in this Section 2.02. Upon such
surrender, the Surviving Corporation shall pay, without interest, all dividends
and other distributions payable in respect of such shares of New Sheffield
Common Stock on a date subsequent to, and in respect of a record date after, the
Effective Time.
(f) No certificates or scrip evidencing fractional shares of New
Sheffield Common Stock shall be issued upon the surrender for exchange of
certificates, and such fractional share interests shall not entitle the owner
thereof to any rights as a stockholder of the
I-5
<PAGE>
Surviving Corporation. In lieu of any such fractional shares, each holder of a
Converted Share Certificate shall, upon surrender of such certificate for
exchange pursuant to this Article II, be paid an amount in cash (without
interest), rounded to the nearest cent, determined by multiplying the last sale
price of the Old Sheffield Common Stock on the American Stock Exchange (Emerging
Company Marketplace) prior to the Closing Date by the fractional share of New
Sheffield Common Stock to which such holder would otherwise be entitled (after
taking into account all Converted Shares held of record by such holder at the
Effective Time).
(g) The Surviving Corporation shall be entitled to deduct and withhold
from the consideration otherwise payable pursuant to this Agreement to any
former holder of TransMontaigne Common Stock such amounts as the Surviving
Corporation (or any affiliate thereof) is required to deduct and withhold with
respect to the making of such payment under the Code, or any provision of state,
local or foreign tax law. To the extent that amounts are so withheld by the
Surviving Corporation, such withheld amounts shall be treated for all purposes
of this Agreement as having been paid to the former holder of the TransMontaigne
Common Stock in respect of which such deduction and withholding was made.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SHEFFIELD
Sheffield hereby represents and warrants to TransMontaigne that:
SECTION 3.01. Organization and Qualification; Subsidiaries. Each of
--------------------------------------------
Sheffield and its subsidiaries is a corporation duly organized, validly existing
and in good standing under the laws of the jurisdiction of its incorporation or
organization, has all requisite power and authority to own, lease and operate
its properties and to carry on its business as it is now being conducted and is
duly qualified and in good standing to do business in each jurisdiction in which
the nature of the business conducted by it or the ownership or leasing of its
properties makes such qualification necessary, other than where the failure to
be so duly qualified and in good standing would not have a Sheffield Material
Adverse Effect. The term "Sheffield Material Adverse Effect" as used in this
Agreement shall mean any change or effect that, individually or when taken
together with all other such changes or effects, would be reasonably likely to
be materially adverse to the assets, liabilities, financial condition, results
of operations or current or future business of Sheffield and its subsidiaries,
taken as a whole. Schedule 3.01 of the disclosure schedule to be delivered to
TransMontaigne by Sheffield as set forth in Section 7.02 hereof (the "Sheffield
Disclosure Schedule") will set forth, as of the date thereof, a true and
complete list of all Sheffield's directly or indirectly owned subsidiaries,
together with (A) the jurisdiction of incorporation or organization of each
subsidiary and the percentage of each subsidiary's outstanding capital stock or
other equity interests owned by Sheffield or another subsidiary of Sheffield,
and (B) an indication of whether each such subsidiary is a "Significant
Subsidiary" as defined in Section 9.03(g) of this Agreement. Except as set
forth in Schedule 3.01 to the Sheffield Disclosure Schedule, neither Sheffield
nor any of its subsidiaries owns an equity interest in any other partnership or
joint venture arrangement or other business entity that is
I-6
<PAGE>
material to the assets, liabilities, financial condition, results of operations
or current or future business of Sheffield and its subsidiaries, taken as a
whole.
SECTION 3.02. Charter and Bylaws. Sheffield has heretofore furnished
------------------
to TransMontaigne complete and correct copies of the charter and the bylaws or
the equivalent organizational documents as presently in effect of Sheffield and
each of its subsidiaries. Neither Sheffield nor any of its subsidiaries is in
violation of any of the provisions of its charter or any material provision of
its bylaws (or equivalent organizational documents).
SECTION 3.03. Capitalization.
--------------
(a) The authorized capital stock of Sheffield consists of (i)
10,000,000 shares of Old Sheffield Common Stock, of which 3,447,979 shares are
issued and outstanding, no shares are held in treasury by Sheffield and 240,000
shares are reserved for future issuance pursuant to outstanding stock options
and 81,450 shares are reserved for future issuance pursuant to outstanding
warrants; and (ii) 2,000,000 shares of preferred stock, par value $.01 per
share, of which no shares are issued and outstanding. Except as described in
this Section 3.03 or in Schedule 3.03(a) to the Sheffield Disclosure Schedule,
no shares of capital stock of Sheffield are reserved for any purpose. Each of
the outstanding shares of capital stock of, or other equity interests in, each
of Sheffield and its subsidiaries is duly authorized, validly issued, and, in
the case of shares of capital stock, fully paid and nonassessable, and has not
been issued in violation of (nor are any of the authorized shares of capital
stock of, or other equity interests in, such entities subject to) any preemptive
or similar rights created by statute, the charter or bylaws (or the equivalent
organizational documents) of Sheffield or any of its subsidiaries, or any
agreement to which Sheffield or any of its subsidiaries is a party or bound, and
such outstanding shares or other equity interests owned by Sheffield or a
subsidiary of Sheffield are owned free and clear of all security interests,
liens, claims, pledges, agreements, limitations on Sheffield's or such
subsidiaries' voting rights, charges or other encumbrances of any nature
whatsoever.
(b) Except as set forth in Section 3.03(a) above or in Schedule
3.03(b)(i) to the Sheffield Disclosure Schedule, there are no options, warrants
or other rights (including registration rights), agreements, arrangements or
commitments of any character to which Sheffield or any of its subsidiaries is a
party relating to the issued or unissued capital stock of Sheffield or any of
its subsidiaries or obligating Sheffield or any of its subsidiaries to grant,
issue or sell any shares of the capital stock of Sheffield or any of its
subsidiaries, by sale, lease, license or otherwise. Except as set forth in
Schedule 3.03(b)(ii) to the Sheffield Disclosure Schedule, there are no
obligations, contingent or otherwise, of Sheffield or any of its subsidiaries to
(i) repurchase, redeem or otherwise acquire any shares of Old Sheffield Common
Stock or other capital stock of Sheffield, or the capital stock or other equity
interests of any subsidiary of Sheffield; or (ii) provide material funds to, or
make any material investment in (in the form of a loan, capital contribution or
otherwise), or provide any guarantee with respect to the obligations of, any
subsidiary of Sheffield or any other person. Except as described in Schedule
3.03(b)(iii) to the Sheffield Disclosure Schedule, neither Sheffield nor any of
its subsidiaries (x) directly or indirectly owns, (y) has agreed to purchase or
otherwise acquire or (z) holds any interest convertible into or exchangeable or
exercisable for, 5% or more of the capital stock of any
I-7
<PAGE>
corporation, partnership, joint venture or other business association or entity
(other than the subsidiaries of Sheffield set forth in Schedule 3.01 to the
Sheffield Disclosure Schedule). Except as set forth in Schedule 3.03(b)(iv) to
the Sheffield Disclosure Schedule, there are no agreements, arrangements or
commitments of any character (contingent or otherwise) pursuant to which any
person is or may be entitled to receive any payment based on the revenues or
earnings, or calculated in accordance therewith, of Sheffield or any of its
subsidiaries. There are no voting trusts, proxies or other agreements or
understandings to which Sheffield or any of its subsidiaries is a party or by
which Sheffield or any of its subsidiaries is bound with respect to the voting
of any shares of capital stock of Sheffield or any of its subsidiaries.
(c) Sheffield has made available to TransMontaigne complete and
correct copies of (i) its Amended and Restated 1990 Stock Option Plan (the
"Sheffield Option Plan") and the forms of options issued pursuant to the
Sheffield Option Plan, including all amendments thereto and (ii) all options and
warrants that are not in the form thereof provided under clause (i) above.
Schedule 3.03(c) to the Sheffield Disclosure Schedule will set forth a complete
and correct list of all outstanding warrants and options, restricted stock or
any other stock awards (the "Sheffield Stock Awards") granted under the
Sheffield Option Plan or otherwise, setting forth as of the date hereof (i) the
number and type of Sheffield Stock Awards, (ii) the exercise price of each
outstanding stock option or warrants, and (iii) the number of stock options and
warrants presently exercisable.
(d) The shares of New Sheffield Common Stock to be issued pursuant to
the Merger (i) will be duly authorized, validly issued, fully paid and
nonassessable and not subject to preemptive rights created by statute,
Sheffield's charter or bylaws or any agreement to which Sheffield is a party or
is bound, (ii) will be registered under the Securities Act and the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and (iii) will be
registered or exempt from registration under applicable state securities or blue
sky laws ("Blue Sky Laws").
SECTION 3.04. Authority. Sheffield has all requisite corporate power
---------
and authority to execute and deliver this Agreement, to perform its obligations
hereunder and to consummate the transactions contemplated hereby (subject to,
with respect to the Merger and the issuance of the New Sheffield Common Stock in
the Merger, the approval thereof by the stockholders of Sheffield as described
in Section 3.15 hereof). The execution and delivery of this Agreement by
Sheffield and the consummation by Sheffield of the transactions contemplated
hereby have been duly authorized by all necessary corporate action and no other
corporate proceedings on the part of Sheffield are necessary to authorize this
Agreement or to consummate the transactions contemplated hereby (subject to,
with respect to the Merger, the adoption of this Agreement by the stockholders
of Sheffield as described in Section 3.15 hereof). This Agreement has been duly
executed and delivered by Sheffield and, assuming the due authorization,
execution and delivery thereof by TransMontaigne, constitutes the legal, valid
and binding obligation of Sheffield enforceable against Sheffield in accordance
with its terms, except that (i) such enforcement may be subject to applicable
bankruptcy, insolvency or other similar laws, now or hereafter in effect,
affecting creditors' rights generally, and (ii) the remedy of specific
performance and injunctive and other forms of equitable relief may be subject to
equitable defenses and to the discretion of the court before which any
proceeding therefor may be brought.
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<PAGE>
SECTION 3.05. No Conflict; Required Filings and Consents.
------------------------------------------
(a) The execution and delivery of this Agreement by Sheffield does
not, and the consummation of the transactions contemplated hereby in accordance
with its terms will not (i) conflict with or violate the charter or bylaws, or
the equivalent organizational documents, in each case as amended or restated, of
Sheffield or any of its subsidiaries, (ii) conflict with or violate any federal,
state, foreign or local law, statute, ordinance, rule, regulation, order,
judgment or decree (collectively, "Laws") applicable to Sheffield or any of its
subsidiaries or by which any of their respective properties is bound or subject
or (iii) except as described in Schedule 3.05 to the Sheffield Disclosure
Schedule, result in any breach of or constitute a default (or an event that with
notice or lapse of time or both would become a default) under, or give to others
any rights of termination, amendment, acceleration or cancellation of, or
require payment under, or result in the creation of a lien or encumbrance on any
of the properties or assets of Sheffield or any of its subsidiaries pursuant to,
any note, bond, mortgage, indenture, contract, agreement, lease, license,
permit, franchise or other instrument or obligation to which Sheffield or any of
its subsidiaries is a party or by or to which Sheffield or any of its
subsidiaries or any of their respective properties is bound or subject, except
for any such conflicts or violations described in clause (ii) or breaches,
defaults, events, rights of termination, amendment, acceleration or
cancellation, payment obligations or liens or encumbrances described in clause
(iii) that would not have a Sheffield Material Adverse Effect. The Board of
Directors of Sheffield has taken all actions necessary under Delaware Law,
including approving the transactions contemplated by this Agreement and taking
appropriate actions under Section 203 of Delaware Law, to ensure that the
restrictions on business combinations set forth in Section 203 of Delaware Law
do not, and will not, apply with respect to or as a result of the transactions
contemplated by this Agreement.
(b) The execution and delivery of this Agreement by Sheffield does
not, and consummation of the transactions contemplated hereby will not, require
Sheffield to obtain any consent, license, permit, approval, waiver,
authorization or order of, or to make any filing with or notification to, any
governmental or regulatory authority, domestic or foreign (collectively,
"Governmental Entities"), except (i) for filing (A) a registration statement on
Form S-4 (the "Registration Statement") under the Securities Act, (B)
preliminary and definitive proxy materials under the Exchange Act, (C)
registration, qualifications and claims for exemptions under Blue Sky Laws, and
(D) appropriate merger documents as required by Delaware Law; and (ii) where the
failure to obtain such consents, licenses, permits, approvals, waivers,
authorizations or orders, or to make such filings or notifications, would not,
either individually or in the aggregate, materially interfere with Sheffield's
performance of its obligations under this Agreement and would not have a
Sheffield Material Adverse Effect.
SECTION 3.06. Permits; Compliance. Each of Sheffield and its
-------------------
subsidiaries and to Sheffield's knowledge each third party operator of any of
Sheffield's properties, is in possession of all franchises, grants,
authorizations, licenses, permits, easements, variances, exemptions, consents,
certificates, approvals and orders necessary to own, lease and operate its
properties and to carry on its business as it is now being conducted
(collectively, the "Sheffield Permits"), and there is no action, proceeding or
investigation pending or, to the knowledge of Sheffield,
I-9
<PAGE>
threatened regarding suspension or cancellation of any of the Sheffield Permits,
except where the failure to possess, or the suspension or cancellation of, such
Sheffield Permits would not have a Sheffield Material Adverse Effect. Neither
Sheffield nor any of its subsidiaries is in conflict with, or in default or
violation of (a) any Law applicable to Sheffield or any of its subsidiaries or
by or to which any of their respective properties is bound or subject or (b) any
of the Sheffield Permits, except for any such conflicts, defaults or violations
that would not have a Sheffield Material Adverse Effect. During the period
commencing on October 1, 1995 and ending on the date hereof, neither Sheffield
nor any of its subsidiaries has received from any Governmental Entity any
written notification with respect to possible conflicts, defaults or violations
of Laws, except as set forth in Schedule 3.06 of the Sheffield Disclosure
Schedule and except for written notices relating to possible conflicts, defaults
or violations that would not have a Sheffield Material Adverse Effect.
SECTION 3.07. Reports; Financial Statements; Reserve Reports.
----------------------------------------------
(a) Except as disclosed on Schedule 3.07(a) of the Sheffield
Disclosure Schedule, since December 31, 1992, Sheffield and its subsidiaries
have timely filed (i) all forms, reports, statements and other documents
required to be filed with (A) the Securities and Exchange Commission (the "SEC")
including, without limitation, (1) all Annual Reports on Form 10-K, (2) all
Quarterly Reports on Form 10-Q, (3) all proxy statements relating to meetings of
stockholders (whether annual or special), (4) all Current Reports on Form 8-K
and (5) all other reports, schedules, registration statements or other documents
(collectively referred to as the "Sheffield SEC Reports") and (B) any applicable
state securities authorities and (ii) all forms, reports, statements and other
documents required to be filed with any other applicable federal or state
regulatory authorities, except where the failure to file any such forms,
reports, statements or other documents would not have a Sheffield Material
Adverse Effect (all such forms, reports, statements and other documents in
clauses (i) and (ii) of this Section 3.07(a) being referred to herein,
collectively, as the "Sheffield Reports"). The Sheffield Reports, including all
Sheffield Reports filed after the date of this Agreement and prior to the
Effective Time, (x) were or will be prepared in accordance with the requirements
of applicable Law (including, with respect to Sheffield SEC Reports, the
Securities Act and the Exchange Act, as the case may be, and the rules and
regulations of the SEC thereunder applicable to such Sheffield SEC Reports) and
(y) did not at the time they were filed, or will not at the time they are filed,
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.
(b) Each of the consolidated financial statements (including, in each
case, any related notes thereto) contained in Sheffield SEC Reports filed prior
to the Effective Time (i) have been or will be prepared in accordance with the
published rules and regulations of the SEC and generally accepted accounting
principles applied on a consistent basis throughout the periods involved (except
(A) to the extent required by changes in generally accepted accounting
principles and (B) with respect to Sheffield SEC Reports filed prior to the date
of this Agreement, as may be indicated in the notes thereto) and (ii) fairly
present or will fairly present the consolidated financial position of Sheffield
and its subsidiaries as of the respective dates
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thereof and the consolidated results of operations and cash flows for the
periods indicated (including reasonable estimates of normal and recurring year-
end adjustments), except that (x) any unaudited interim financial statements
were or will be subject to normal and recurring year-end adjustments and (y) any
pro forma financial statements contained in such consolidated financial
statements are not necessarily indicative of the consolidated financial position
of Sheffield and its subsidiaries as of the respective dates thereof and the
consolidated results of operations and cash flows for the periods indicated.
(c) Except when a failure of any representation made in this Section
3.07(c) to be true and correct would not result in a liability to Sheffield in
excess of $10,000, Sheffield's internal oil and gas reserve report as to all of
Sheffield's oil and gas reserves except those covered by the Ryder Scott Report
described below (the "Internal Reserve Report") was prepared in accordance with
guidelines of the Society of Petroleum Engineers and the SEC and customary oil
and gas engineering practices and is based on historical information which is
accurate and complete in all material respects, and there is no fact or
circumstance that would materially affect the findings, conclusions, assumptions
or projections contained in the Internal Reserve Report.
(d) Except when a failure of any representation made in this Section
3.07(d) to be true and correct would not result in a liability to Sheffield in
excess of $10,000, in connection with preparation of the Ryder Scott Petroleum
Engineers ("Ryder Scott") report as to oil and gas reserves of wells connected
to the Lignite gas processing plant gathering system (the "Ryder Scott Report"),
nothing has come to Sheffield's attention nor is there any fact or circumstance
known to Sheffield that would affect any of the findings, conclusions,
assumptions or projections contained in the Ryder Scott Report.
SECTION 3.08. Absence of Certain Changes or Events. Except as disclosed
------------------------------------
in Sheffield SEC Reports filed prior to the date of this Agreement or as
contemplated by this Agreement or as set forth in Schedule 3.08 to the Sheffield
Disclosure Schedule, since September 30, 1995 Sheffield and its subsidiaries
have conducted their respective businesses only in the ordinary course and in a
manner consistent with past practice and there has not been: (i) any material
damage, destruction or loss (whether or not covered by insurance) with respect
to any material assets of Sheffield or any of its subsidiaries; (ii) any
material change by Sheffield or its subsidiaries in their accounting methods,
principles or practices; (iii) any declaration, setting aside or payment of any
dividends or distributions in respect of shares of Old Sheffield Common Stock or
the shares of stock of, or other equity interests in, any subsidiary of
Sheffield, or any redemption, purchase or other acquisition by Sheffield or any
of its subsidiaries of any of Sheffield's securities or any of the securities of
any subsidiary of Sheffield; (iv) any increase in the benefits under, or the
establishment or amendment 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 increase in the compensation payable or to become
payable to directors, officers or employees of Sheffield or its subsidiaries;
(v) any revaluation by Sheffield or any of its subsidiaries of any of their
assets, including the writing down of the value of inventory or the writing down
or off of notes or accounts receivable, other than in the ordinary course of
business and consistent with past
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practices; (vi) any entry by Sheffield or any of its subsidiaries into any
commitment or transaction material to Sheffield and its subsidiaries, taken as a
whole (other than this Agreement and the transactions contemplated hereby);
(vii) any material increase in indebtedness for borrowed money; or (viii) a
Sheffield Material Adverse Effect.
SECTION 3.09. Absence of Litigation. Except as disclosed in the Sheffield
---------------------
SEC Reports filed prior to the date of this Agreement or as set forth in
Schedule 3.09 to the Sheffield Disclosure Schedule, there is no claim, action,
suit, litigation, proceeding, arbitration or, to the knowledge of Sheffield,
investigation of any kind, at law or in equity (including actions or proceedings
seeking injunctive relief), pending or, to the knowledge of Sheffield,
threatened against Sheffield or any of its subsidiaries or any properties or
rights of Sheffield or any of its subsidiaries (except for claims, actions,
suits, litigation, proceedings, arbitrations or investigations which would not
have a Sheffield Material Adverse Effect), and neither Sheffield nor any of its
subsidiaries is subject to any continuing order of, consent decree, settlement
agreement or other similar written agreement with, or, to the knowledge of
Sheffield, continuing investigation by, any Governmental Entity, or any
judgment, order, writ, injunction, decree or award of any Government Entity or
arbitrator, including, without limitation, cease-and-desist or other orders,
except for matters that would not have a Sheffield Material Adverse Effect.
SECTION 3.10. Employee Benefit Plans; Labor Matters.
-------------------------------------
(a) Schedule 3.10(a) to the Sheffield Disclosure Schedule will set
forth each employee benefit plan (as such term is defined in ERISA section 3(3))
maintained or contributed to during the past five years by Sheffield or any
member of its ERISA Group or with respect to which Sheffield or any member of
its ERISA Group could incur liability under Section 4063, 4069, 4212(c) or 4204
of ERISA, and any other retirement, pension, stock option, stock appreciation
right, profit sharing, incentive compensation, deferred compensation, savings,
thrift, vacation pay, severance pay, or other employee compensation or benefit
plan, agreement, practice, or arrangement, whether written or unwritten, whether
or not legally binding (collectively, the "Sheffield Benefit Plans"). For
purposes of this Agreement, "ERISA Group" means a controlled or affiliated group
within the meaning of Code section 414(b), (c), (m), or (o) of which Sheffield
is a member. Sheffield has made available to TransMontaigne correct and
complete copies of all Sheffield Benefit Plans (including a detailed written
description of any Sheffield Benefit Plan that is unwritten, including a
description of eligibility criteria, participation, vesting, benefits, funding
arrangements and assets and any other provisions relating to Sheffield) and,
with respect to each Sheffield Benefit Plan, a copy of each of the following, to
the extent each is applicable to each Sheffield Benefit Plan: (i) the most
recent favorable determination letter, (ii) materials submitted to the Internal
Revenue Service in support of a pending determination letter request, (iii) the
most recent letter issued by the Internal Revenue Service recognizing tax
exemption, (iv) each insurance contract, trust agreement, or other funding
vehicle, (v) the three most recently filed Forms 5500 plus all schedules and
attachments, (vi) the three most recent actuarial valuations, and (vii) each
summary plan description or other general explanation or communication
distributed or otherwise provided to employees with respect to each Sheffield
Benefit Plan that describes the terms of the Sheffield Benefit Plan.
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(b) With respect to the Sheffield Benefit Plans, no event has occurred
and, to the knowledge of Sheffield, there exists no condition or set of
circumstances, in connection with which Sheffield or any member of its ERISA
Group could be subject to any liability under the terms of such Sheffield
Benefit Plans, ERISA, the Code or any other applicable Law which would have a
Sheffield Material Adverse Effect. Except as otherwise set forth on Schedule
3.10(b) to the Sheffield Disclosure Schedule,
(i) As to any Sheffield Benefit Plan intended to be qualified
under Section 401 of the Code, such Sheffield Benefit Plan satisfies the
requirements of such Section and there has been no termination or partial
termination of such Sheffield Benefit Plan within the meaning of Section
411(d)(3) of the Code;
(ii) There are no actions, suits or claims pending (other than
routine claims for benefits) or, to the knowledge of Sheffield, threatened
against, or with respect to, any of the Sheffield Benefit Plans or their assets,
any plan sponsor, or any fiduciary (as such term is defined in Section 3(21) of
ERISA), and Sheffield has no knowledge of any facts that could give rise to any
actions, suits or claims;
(iii) All contributions required to be made to the Sheffield
Benefit Plans pursuant to their terms and provisions have been made timely;
(iv) As to any Sheffield Benefit Plan subject to Title IV of
ERISA, there has been no event or condition which presents the material risk of
plan termination, no accumulated funding deficiency, whether or not waived,
within the meaning of Section 302 of ERISA or Section 412 of the Code has been
incurred, no reportable event within the meaning of Section 4043 of ERISA has
occurred, no notice of intent to terminate the Sheffield Benefit Plan has been
given under Section 4041 of ERISA, no proceeding has been instituted under
Section 4042 of ERISA to terminate the Sheffield Benefit Plan, and no liability
to the Pension Benefit Guaranty Corporation or to the Plan has been incurred;
(v) Neither Sheffield nor any party in interest (as such term is
defined in ERISA section 3(14)) nor any disqualified person has engaged in any
prohibited transaction within the meaning of ERISA section 406 or Code section
4975 that would subject Sheffield to any liability;
(vi) The consummation of the transactions contemplated by this
Agreement will not give rise to any acceleration of vesting of payments or
options, the acceleration of the time of making any payments, or the making of
any payments, which in the aggregate would result in an "excess parachute
payment" within the meaning of Section 280G of the Code and the imposition of
the excise under Section 4999 of the Code; and
(c) Neither Sheffield nor any member of its ERISA Group is or has ever
been a party to any collective bargaining or other labor union contracts. No
collective bargaining agreement is being negotiated by Sheffield or any of its
subsidiaries. There is no pending or threatened labor dispute, strike or work
stoppage against Sheffield or any of its subsidiaries
I-13
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which may interfere with the respective business activities of Sheffield or any
of its subsidiaries. None of Sheffield, any of its subsidiaries or any of their
respective representatives or employees has committed any unfair labor practices
in connection with the operation of the respective businesses of Sheffield or
its subsidiaries, and there is no pending or threatened charge or complaint
against Sheffield or any of its subsidiaries by the National Labor Relations
Board or any comparable state agency.
(d) Except as disclosed in Schedule 3.10(d) to the Sheffield
Disclosure Schedule, neither Sheffield nor any of its subsidiaries is a party to
or is bound by any severance agreements, programs or policies. Schedule 3.10(d)
to the Sheffield Disclosure Schedule will set forth, and Sheffield has made
available to TransMontaigne true and correct copies of, (i) all employment
agreements with officers of Sheffield or its subsidiaries; (ii) all agreements
with consultants of Sheffield or its subsidiaries obligating Sheffield or any
subsidiary to make annual cash payments in an amount exceeding $25,000; (iii)
all non-competition agreements with Sheffield or a subsidiary executed by
officers of Sheffield; and (iv) all plans, programs, agreements and other
arrangements of Sheffield or its subsidiaries with or relating to its directors.
(e) Except as provided in Schedule 3.10(e) to the Sheffield Disclosure
Schedule, (x) no Sheffield Benefit Plan provides retiree medical or retiree life
insurance benefits to any person and (y) neither Sheffield nor any of its
subsidiaries is contractually or otherwise obligated (whether or not in writing)
to provide any person with life insurance or medical benefits upon retirement or
termination of employment, other than as required by the provisions of Sections
601 through 608 of ERISA and Section 4980B of the Code and each such Sheffield
Benefit Plan or arrangement may be amended or terminated by Sheffield or its
subsidiaries at any time without liability.
(f) Neither Sheffield nor any member of its ERISA Group contributes to
or has an obligation to contribute to, and has not within six years prior to the
date of this Agreement contributed to or had an obligation to contribute to or
has any secondary liability under ERISA section 4204 to, a multiemployer plan
within the meaning of Section 3(37) of ERISA.
(g) Except as contemplated by this Agreement or as set forth in
Schedule 3.10(g), Sheffield has not amended, or taken any other actions with
respect to any of the Sheffield Benefit Plans or any of the plans, programs,
agreements, policies or other arrangements described in Section 3.10(d) of this
Agreement since December 31, 1995.
(h) With respect to each Sheffield Benefit Plan that is a "group
health plan" within the meaning of Section 5000(b) of the Code, each such
Sheffield Benefit Plan complies and has complied with the requirements of Part 6
of Title I of ERISA and Sections 4980B and 5000 of the Code, except where the
failure to so comply would not have a Sheffield Material Adverse Effect.
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SECTION 3.11. Taxes. Except when a failure of any representation made in
-----
this Section 3.11 to be true and correct would not result in a liability to
Sheffield in excess of $10,000:
(a) (1) Except to the extent that the applicable statute of
limitations has expired, all Returns required to be filed by or on behalf of
Sheffield have been duly filed on a timely basis and such Returns (including all
attached statements and schedules) are true, complete and correct. Except to
the extent that the applicable statute of limitations has expired, all Taxes
shown to be payable on the Returns or on subsequent assessments with respect
thereto have been paid in full on a timely basis, and no other Taxes are payable
by Sheffield with respect to items or periods covered by such Returns (whether
or not shown on or reportable on such Returns) or with respect to any period
prior to the Effective Time.
(2) Sheffield has withheld and paid over all Taxes required to
have been withheld and paid over (including any estimated taxes), and has
complied in all material respects with all information reporting and backup
withholding requirements, including maintenance of required records with respect
thereto, in connection with amounts paid or owing to any employee, creditor,
independent contractor, or other third party.
(3) Sheffield has disclosed on its income tax returns all
positions taken therein that could give rise to a substantial understatement
penalty within the meaning of Code Section 6662.
(4) There are no liens on any of the assets of Sheffield with
respect to Taxes, other than liens for Taxes not yet due and payable or as set
forth in Section 3.11 of the Sheffield Disclosure Schedule for Taxes that are
being contested in good faith through appropriate proceedings and for which
appropriate reserves have been established.
(5) Sheffield does not have any liability under Treasury
Regulation (S) 1.1502-6 or any analogous state, local or foreign law by reason
of having been a member of any consolidated, combined or unitary group, other
than in the current affiliated group of which Sheffield is the common parent
corporation.
(6) Except to the extent that the applicable statute of
limitations has expired, Sheffield has made available to TransMontaigne complete
copies of: (i) all federal and state income tax, sales and use tax, employment
tax and franchise tax returns of Sheffield for all periods since the formation
of Sheffield, and (ii) all tax audit reports, work papers statements of
deficiencies, closing or other agreements received by Sheffield or on its behalf
relating to Taxes, and
(7) Sheffield does not do business in or derive income from any
state, local, territorial or foreign taxing jurisdiction so as to be subject to
Return filing requirements of such jurisdiction, other than those for which
Returns have been furnished to TransMontaigne.
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(b) Except as disclosed on Schedule 3.11(b) of the Sheffield
Disclosure Schedule:
(1) There is no audit of any Returns of Sheffield by a governmental or
taxing authority in process, pending or, to the knowledge of Sheffield,
threatened (formally or informally).
(2) Except to the extent that the applicable statute of limitations
has expired and except as to matters that have been resolved, no deficiencies
exist or have been asserted (either formally or informally) or are expected to
be asserted with respect to Taxes of Sheffield, and no notice (either formally
or informally) has been received by Sheffield that it has not filed a Return or
paid Taxes required to be filed or paid by it.
(3) Sheffield is not a party to any pending action or proceeding for
assessment or collection of Taxes, nor has such action or proceeding been
asserted or threatened (either formally or informally) against it or any of its
assets, except to the extent that the applicable statute of limitations has
expired and except as to matters that have been resolved.
(4) No waiver or extension of any statute of limitations is in
effect with respect to Taxes or Returns of Sheffield.
(5) The deferred asset accounts as reflected on the Sheffield
financial statements are accurate.
(6) There are no requests for rulings, subpoenas or requests for
information pending with respect to Sheffield.
(7) No power of attorney has been granted by Sheffield, with
respect to any matter relating to Taxes.
(8) Sheffield has never been included in an affiliated group of
corporations, within the meaning of section 1504 of the Code, other than in the
current affiliated group of which Sheffield is the common parent corporation.
(9) Sheffield is not (nor has it ever been) a party to any tax
sharing agreement between affiliated corporations.
(10) The amount of liability for unpaid Taxes of Sheffield for all
periods ending on or before the Effective Time will not, in the aggregate,
materially exceed the amount of the liability accruals for Taxes reflected on
the balance sheet of Sheffield as of the Closing Date.
(c) Except as disclosed on Schedule 3.11(c) of the Sheffield Disclosure
Schedule:
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(1) Sheffield is not required to treat any of its assets as owned by
another person for federal income tax purposes or as tax-exempt bond financed
property or tax-exempt use property within the meaning of section 168 of the
Code.
(2) Sheffield has not issued or assumed any indebtedness that is
subject to section 279(b) of the Code.
(3) Sheffield has not entered into any compensatory agreements with
respect to the performance of services under which payment would result in a
nondeductible expense pursuant to Section 280G of the Code or an excise tax to
the recipient of such payment pursuant to Section 4999 of the Code.
(4) No election has been made under Section 338 of the Code with
respect to Sheffield and no action has been taken that would result in any
income tax liability to Sheffield as a result of a deemed election within the
meaning of Section 338 of the Code.
(5) No consent under Section 341(f) of the Code has been filed
with respect to Sheffield.
(6) Sheffield has not agreed, nor is it required to make, any
adjustment under Code Section 481(a) by reason of a change in accounting method
or otherwise.
(7) Sheffield has not disposed of any property that is presently
being accounted for under the installment method.
(8) Sheffield is not a party to any interest rate swap or
currency swap.
(9) Sheffield has not participated in any international boycott
as defined in Code Section 999.
(10) There are no outstanding balances of deferred gain or loss
accounts related to deferred intercompany transactions with respect to Sheffield
under Treasury Regulations (S)(S) 1.1502-13 or 1.1502-13T.
(11) Sheffield has not made and will not make any election under
Treasury Regulation (S) 1.1502-20(g)(1) (or any similar provision) with respect
to the reattribution of net operating losses of Sheffield.
(12) There is no excess loss account under Treasury Regulation
(S)1.1502-19 with respect to the stock of Sheffield or any subsidiary.
(13) Sheffield is not subject to any joint venture, partnership or
other arrangement or contract that is treated as a partnership for federal
income tax purposes.
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(14) With respect to any provisions of state or local income tax laws
that are comparable to the provisions of federal income tax laws described in
paragraph (1) through (13) above, Sheffield hereby makes representations for
state and local income tax purposes corresponding to the representations made by
Sheffield in paragraph (1) through (13) above with respect to federal income tax
matters.
(15) Sheffield does not have and has never had a permanent
establishment in any foreign country, as defined in any applicable tax treaty or
convention between the United States and such foreign country.
(16) Except as required with respect to cash paid for fractional
shares and to dissenting stockholders, Sheffield does not intend to withhold any
amount from the Merger Consideration pursuant to the tax withholding provisions
of section 3406 of the Code, or of Subchapter A of Chapter 3 of the Code, or of
any other provision of law.
(d) The books and records of Sheffield, including the tax returns of
Sheffield made available to TransMontaigne, contain accurate and complete
information with respect to:
(1) All material tax elections in effect with respect to
Sheffield;
(2) The current tax basis of the assets of Sheffield;
(3) The current and accumulated earnings and profits of
Sheffield;
(4) The net operating losses of Sheffield by taxable year;
(5) The net capital losses of Sheffield;
(6) The tax credit carry overs of Sheffield;
(7) The overall foreign losses of Sheffield under section
904(f) of the Code that are subject to recapture.
(e) The tax returns provided by Sheffield to TransMontaigne contain
accurate and complete information with respect to the net operating losses, net
operating loss carry forwards and other tax attributes of Sheffield, and the
extent to which they are subject to any limitation under Code sections 381, 382,
383, or 384, or any other provision of the Code or the federal consolidated
return regulations (or any predecessor provision of any Code section or the
regulations) and, apart from any such limitations and apart from any limitation
that would be imposed as a result of the Merger, there is nothing that would
prevent Sheffield from utilizing these net operating losses, net operating loss
carry forwards or other tax attributes as so limited if it had sufficient
income.
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(f) (1) For purposes of this Agreement the term "Taxes" shall mean
all taxes, however, denominated, including any interest, penalties or other
additions to tax that may become payable in respect thereof, imposed by any
federal, territorial, state, local or foreign government or any agency or
political subdivision of any such government, which taxes shall include, without
limiting the generality of the foregoing, all income or profits taxes, payroll
and employee withholding taxes, unemployment insurance, social security taxes,
sales and use taxes, ad valorem taxes, excise taxes, franchise taxes, gross
receipts taxes, business license taxes, occupation taxes, real and personal
property taxes, stamp taxes, environmental taxes, transfer taxes, workers'
compensation, Pension Benefit Guaranty Corporation premiums and other
governmental charges, and other obligations of the same or of a similar nature
to any of the foregoing, required to be paid, withheld or collected.
(2) For the purposes of this agreement, the term "Returns" shall
mean all reports, estimates, declarations of estimated tax, information
statements and returns relating to, or required to be filed in connection with,
any Taxes, including information returns or reports with respect to backup
withholding and other payments to third parties.
(3) All references to "Sheffield" in this section 3.11 shall
include all subsidiaries of Sheffield and where appropriate in this section
3.11, the singular shall include the plural.
SECTION 3.12. Tax Matters.
-----------
(a) Neither Sheffield nor, to the knowledge of Sheffield, any of its
affiliates has taken or agreed to take any action that would prevent the Merger
from constituting a reorganization qualifying under the provisions of section
368(a) of the Code.
(b) Sheffield has no plan or intention to reacquire the New Sheffield
Common Stock issued in the Merger.
(c) Sheffield and the holders of Old Sheffield Common Stock will each
pay their respective expenses, if any, incurred in connection with the Merger.
(d) There is no intercorporate indebtedness existing between Sheffield
and TransMontaigne that was issued, acquired or will be settled at a discount.
(e) Sheffield is not an investment company as defined in section
368(a)(2)(F)(iii) and (iv) of the Code.
SECTION 3.13. Certain Business Practices. None of Sheffield, any of its
--------------------------
subsidiaries or any directors, officers, agents or employees of Sheffield or any
of its subsidiaries has (i) used any funds for unlawful contributions, gifts,
entertainment or other unlawful expenses relating to political activity, (ii)
made any unlawful payment to foreign or domestic government officials or
employees or to foreign or domestic political parties or campaigns or violated
any
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provision of the Foreign Corrupt Practices Act of 1977, as amended, or (iii)
made any other unlawful payment.
SECTION 3.14. Environmental Matters.
---------------------
(a) Except for matters disclosed in Schedule 3.14 to the Sheffield
Disclosure Schedule and except for matters that would not result individually in
liability to Sheffield or any of its subsidiaries in excess of $25,000 or in the
aggregate with all other such matters, in liability to Sheffield or any of its
subsidiaries in excess of $50,000,
(i) the properties, operations and activities of Sheffield and its
subsidiaries are in compliance with all applicable Environmental Laws and there
are no circumstances which could reasonably be expected to prevent or interfere
with their continued compliance with applicable Environmental Laws.
(ii) Sheffield and its subsidiaries and the properties and operations
of Sheffield and its subsidiaries are not subject to any existing, pending, or,
to Sheffield's knowledge, threatened civil, criminal or administrative action,
suit, claim, notice of violation, investigation, notice of potential liability,
request for information, inquiry, demand or proceeding under applicable
Environmental Laws.
(iii) Sheffield and its subsidiaries have not agreed, whether
by contract or by consent agreement with governmental authorities or private
persons, to undertake investigation, clean up, or remedial activities.
(iv) All notices, permits, licenses, or similar authorizations
required to be obtained or filed by Sheffield or any of its subsidiaries under
any Environmental Law in connection with any aspect of the business of Sheffield
or its subsidiaries, including without limitation those relating to the
treatment, storage, disposal or discharge of Hazardous Materials, have been duly
obtained or filed and will remain valid and in effect after the Merger, and
Sheffield and its subsidiaries are in compliance with the terms and conditions
of all such notices, permits, licenses and similar authorizations.
(v) Sheffield and its subsidiaries have satisfied and are currently
in compliance with all financial responsibility requirements applicable to their
operations and imposed by any governmental authority under Environmental Laws,
and Sheffield and its subsidiaries have not received any notice of noncompliance
with respect to any such financial responsibility requirements.
(vi) There are no physical or environmental conditions existing on
any property of Sheffield or its subsidiaries or resulting from Sheffield's or
such subsidiaries' operations or activities, past or present, at any location,
including without limitation, releases and disposal of Hazardous Materials, that
would give rise to any on-site or off-site investigation, reporting, or remedial
obligations or other Environmental Liability.
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(vii) To the extent required by applicable Environmental Laws, all
Hazardous Materials generated by Sheffield and its subsidiaries have been
transported only by persons authorized under applicable Environmental Laws to
transport such materials, and disposed of only at treatment, storage and
disposal facilities authorized under applicable Environmental Laws to treat,
store or dispose of such Hazardous Materials.
(viii) There has been no exposure of any person or property to
Hazardous Materials or any release of Hazardous Materials into the environment
by Sheffield or its present or prior subsidiaries or in connection with their
present or prior properties or operations that could reasonably be expected to
give rise to any Environmental Liability.
(ix) No release or clean up of Hazardous Materials has occurred at
Sheffield and its subsidiaries' properties which could reasonably be expected to
result in the assertion or creation of any lien on the properties by any
governmental body or agency with respect thereto, nor has any such lien been
asserted or made by any governmental body or agency with respect thereto.
(x) To Sheffield's knowledge, the operations of each third party
operator of any of Sheffield or its subsidiaries' properties are in compliance
with the terms of this Section 3.14.
(b) Sheffield and its subsidiaries have made available to TransMontaigne
all internal and external environmental audits, studies, documents and
correspondence on environmental matters in the possession of Sheffield or its
subsidiaries relating to any of the present or prior properties or operations of
Sheffield and its subsidiaries.
(c) For purposes of this Agreement, the following terms shall be
defined as follows:
(i) "Environmental Laws" shall mean any and all laws, statutes,
ordinances, rules, regulations or orders of any governmental entity pertaining
to pollution, health, safety, or the environment, including without limitation,
the Clean Air Act, the Comprehensive Environmental, Response, Compensation, and
Liability Act ("CERCLA"), the Clean Water Act, the Occupational Safety and
Health Act, the Resource Conservation and Recovery Act, the Solid Waste Disposal
Act, the Emergency Planning and Community Right-To-Know Act, the Safe Drinking
Water Act, the Toxic Substances Control Act, the Hazardous Materials
Transportation Act, the Oil Pollution Act, all as amended, any state laws
implementing the foregoing federal laws, any state laws pertaining to waste
management including, without limitation, the handling of oil and gas
exploration and production or processing wastes or the use, maintenance and
closure of pits and impoundments, all other federal, state or local
environmental conservation or protection laws, and any common law creating
liability for environmental conditions. Environmental Laws shall include without
limitation, all restrictions, conditions, standards, limitations, prohibitions,
requirements, obligations, schedules and timetables contained in Environmental
Laws or contained in any regulation, plan, code, order, decree, judgment,
injunction, notice or demand letter issued, entered, promulgated or approved
thereunder.
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(ii) "Hazardous Materials" shall mean any materials that are
regulated by or form the basis of liability under Environmental Laws, and
includes without limitation, wastes, hazardous substances, pollutants or
contaminants, hazardous or solid wastes, hazardous constituents, hazardous
materials, toxic substances, petroleum, including crude oil or any fraction
thereof, natural gas, natural gas liquids, liquefied natural gas, or synthetic
gas usable for fuel (or mixtures of natural gas and such synthetic gas).
(iii) "Environmental Liability" shall mean liabilities, fines,
penalties, obligations, consequential damages, responsibilities, response costs,
natural resource damages, corrective action costs, reclamation costs, and costs
and expenses, known or unknown, absolute or contingent, past, present or future,
resulting from any requirement, claim or demand under Environmental Laws or
contract.
SECTION 3.15. Vote Required. The only vote of the holders of any class or
-------------
series of Sheffield capital stock necessary to approve the Merger and adopt this
Agreement is the affirmative vote of the holders of at least a majority of the
outstanding shares of Old Sheffield Common Stock.
SECTION 3.16. Brokers. Except as set forth in Schedule 3.16 to the
-------
Sheffield Disclosure Schedule, no broker, finder or investment banker is
entitled to any brokerage, finder's or other fee or commission in connection
with the transactions contemplated by this Agreement based upon arrangements
made by or on behalf of Sheffield. Prior to the date of this Agreement,
Sheffield has made available to TransMontaigne a complete and correct copy of
all agreements referenced in Schedule 3.16 to the Sheffield Disclosure Schedule
pursuant to which such firm will be entitled to any payment relating to the
transactions contemplated by this Agreement.
SECTION 3.17. Insurance. Sheffield and each of its subsidiaries are
---------
currently insured, and during each of the past five calendar years have been
insured, for reasonable amounts against such risks as companies engaged in a
similar business would, in accordance with good business practice, customarily
be insured.
SECTION 3.18. Properties.
----------
(a) With respect to Sheffield and its subsidiaries' non-oil and gas
properties (including without limitation the natural gas processing plant in
Lignite, North Dakota), except for liens arising in the ordinary course of
business after the date hereof and properties and assets disposed of in the
ordinary course of business after the date of the most recent balance sheet
contained in the Form 10-Q referred to below, Sheffield and its subsidiaries
have good and marketable title free and clear of all liens, except for
easements, rights-of-way, servitudes and permits on, over or in respect of any
of such properties that are not such as to materially interfere with the
operation, value or use thereof, to all their material properties and assets,
whether tangible or intangible, real, personal or mixed, reflected in
Sheffield's most recent consolidated balance sheet contained in Sheffield's most
recent Sheffield SEC Report on Form 10-Q filed prior to the date hereof as being
owned by Sheffield and its subsidiaries as of the date thereof. All buildings,
and all fixtures, equipment and other property and assets which are
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material to its business on a consolidated basis, held under leases by any of
Sheffield or its subsidiaries are held under valid instruments enforceable by
Sheffield or its subsidiaries in accordance with their respective terms.
Substantially all of Sheffield's and its subsidiaries' equipment in regular use
has been well maintained and is in good and serviceable condition, reasonable
wear and tear excepted.
(b) With respect to Sheffield and its subsidiaries' oil and gas
properties, Schedule 3.18(b) to the Sheffield Disclosure Schedule will list, as
of the date thereof, all of the producing oil and gas properties owned by
Sheffield and its subsidiaries (the "Sheffield Oil and Gas Properties") and
certain information with respect thereto; and:
(i) Except as set forth in Schedule 3.18(b) to the Sheffield
Disclosure Schedule, Sheffield and its subsidiaries have Defensible Title to all
of the Sheffield Oil and Gas Properties, subject to and except for the Permitted
Encumbrances and such other encumbrances as would be acceptable to a reasonably
prudent operator of oil and gas properties.
(A) As used herein, the term "Defensible Title" shall mean as
to the wells and properties described in the column "Lease Name" in Schedule
3.18(b) to the Sheffield Disclosure Schedule (individually called a "Property"),
such title as will enable Sheffield and its subsidiaries to receive not less
than the net revenue interests that will be set forth on Schedule 3.18(b) to the
Sheffield Disclosure Schedule of all hydrocarbons and other minerals produced
from each Property, and which will obligate Sheffield and its subsidiaries to
bear costs and expenses relating to the maintenance, development, and operations
of each Property not greater than the working interests that will be set forth
on Schedule 3.18(b) to the Sheffield Disclosure Schedule.
(B) As used herein, the term "Permitted Encumbrances" shall
mean:
(1) lessors' royalties, overriding royalties, division
orders, reversionary interests and net profits interests and similar burdens
which do not operate to reduce the net revenue interests in any Property below
those that will be set forth on Schedule 3.18(b) to the Sheffield Disclosure
Schedule;
(2) the terms and conditions of the oil, gas and mineral
leases (the "Sheffield Leases") related to the Sheffield Oil and Gas Properties
and all agreements, orders, instruments and declarations to which the Sheffield
Leases are subject and that are customary and acceptable in the oil and gas
industry in the area of the particular property;
(3) liens arising under operating agreements, pooling,
unitization or communitization agreements, and similar agreements of a type and
nature customary in the oil and gas industry and securing payment of amounts not
yet delinquent;
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<PAGE>
(4) liens securing payments to mechanics and materialmen,
and liens securing payment of taxes or assessments, which liens are not yet
delinquent or, if delinquent, are being contested in good faith in the normal
course of business;
(5) conventional rights of reassignment obligating
Sheffield and its subsidiaries to reassign their interests in a portion of the
Sheffield Oil and Gas Properties to a third party in the event Sheffield and its
subsidiaries intend to release or abandon such interest;
(6) calls on or preferential rights to purchase
production at not less than prevailing prices;
(7) rights reserved to or vested in any Governmental Entity
to control or regulate any of the Sheffield Oil and Gas Properties in any
manner, and all applicable laws, rules, regulations and orders of any such
Governmental Entity; and
(8) easements, rights-of-way, servitudes, permits, surface
leases, and other surface uses on, over or in respect of any of the Sheffield
Oil and Gas Properties that are not such as to materially interfere with the
operation, value or use thereof.
(ii) Except as described in Schedule 3.18(b)(ii) to the Sheffield
Disclosure Schedule, the Sheffield Leases are in full force and effect, are
valid and subsisting, cover the entire estates they purport to cover and contain
no express provisions that require the drilling of additional wells or other
material development operations in order to earn or to continue to hold all or
any portion of the Sheffield Oil and Gas Properties, and Sheffield has never
been advised directly or indirectly by any lessor under any Sheffield Lease or
by any other party of a default under any such Lease or of any requirements or
demands to drill additional wells on any of the lands included within any of the
Sheffield Oil and Gas Properties.
(iii) Neither Sheffield nor any of its subsidiaries is in
default under any contract or agreement pertaining to the Sheffield Oil and Gas
Properties. Except as specifically indicated on Schedule 3.18(b)(iii) to the
Sheffield Disclosure Schedule and except for hydrocarbon sales contracts with a
term not greater than three months, no hydrocarbons produced from the Sheffield
Oil and Gas Properties are subject to a sales contract or other agreement
relating to the marketing of hydrocarbons, and no person has any call upon,
option to purchase or similar rights with respect to the Sheffield Oil and Gas
Properties or the rights therefrom.
(iv) All royalties, rentals and other payments due under the
Sheffield Leases have been properly and timely paid, and all conditions
necessary to keep the Sheffield Leases in force have been fully performed.
(v) Except for gas balancing agreements containing customary
provisions, neither Sheffield nor any of its subsidiaries is obligated, by
virtue of a prepayment
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<PAGE>
arrangement, a "take or pay" arrangement, a production payment or any other
arrangement, to deliver hydrocarbons produced from the Sheffield Oil and Gas
Properties at some future time without then or thereafter receiving full payment
therefor.
(vi) Except as set forth on Schedule 3.18(b)(vi) to the Sheffield
Disclosure Schedule, with respect to Authorizations for Expenditure executed on
or after December 31, 1995, and covering expenditures exceeding $10,000
attributable to Sheffield or its subsidiaries' interest,
(1) there are no outstanding calls under Authorizations for
Expenditures for payments which are due or which Sheffield has committed to make
which have not been made;
(2) there are no material operations with respect to which
Sheffield has become a non-consenting party where the effect of such non-consent
will not be disclosed on Schedule 3.18(b) to the Sheffield Disclosure Schedule,
and
(3) there are no commitments for the expenditure of funds for
drilling or other capital projects other than projects with respect to which the
operator is not required under the applicable operating agreement to seek
consent.
(vii) Except as set forth on Schedule 3.18(b)(vii) to the
Sheffield Disclosure Schedule and except when a failure of any representation
made in this Section 3.18 to be true and correct would not result in a liability
to Sheffield in excess of $10,000, there are no Sheffield Oil and Gas Properties
to which Sheffield or any of its subsidiaries is either "over-produced" or
"under-produced" which singly or in the aggregate would have a Sheffield
Material Adverse Effect.
SECTION 3.19. Certain Contracts and Restrictions. Other than agreements,
----------------------------------
contracts or commitments listed elsewhere in the Sheffield Disclosure Schedule,
Schedule 3.19 to the Sheffield Disclosure Schedule will list, as of the date
thereof, each agreement, contract or commitment (including any amendments
thereto) to which Sheffield or any of its subsidiaries is a party or by which
Sheffield or any of its subsidiaries is bound (i) involving consideration during
the next twelve months in excess of $10,000 or (ii) which is otherwise material
to the assets, liabilities, financial condition, results of operations or
current or future business of Sheffield and its subsidiaries, taken as a whole.
As of the date of this Agreement and except as indicated on the Sheffield
Disclosure Schedule, (i) Sheffield has fully complied with all material terms
and conditions of all agreements, contracts and commitments listed in the
Sheffield Disclosure Schedule and all such agreements, contracts and commitments
are in full force and effect, (ii) Sheffield has no knowledge of any defaults
thereunder or any cancellations or modifications thereof, and (iii) such
agreements, contracts and commitments are not subject to any memorandum or other
written document or understanding permitting cancellation.
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<PAGE>
SECTION 3.20. Easements. Except when a failure of any representation made
---------
in this Section 3.20 to be true and correct would not result in a liability to
Sheffield in excess of $10,000, the business of Sheffield and its subsidiaries
has been operated in a manner that does not violate the material terms of any
easements, rights of way, permits, servitudes, licenses and similar rights
relating to real property used by Sheffield and its subsidiaries in its business
(collectively, "Sheffield Easements"), and all material Sheffield Easements are
valid and enforceable and grant the rights purported to be granted thereby and
all rights necessary thereunder for the current operation of such business.
SECTION 3.21. Futures Trading and Fixed Price Exposure. None of Sheffield
----------------------------------------
or any of its subsidiaries is presently engaged in any natural gas or other
futures or options trading or is a party to any price swaps, hedges, futures or
similar instruments.
SECTION 3.22. Information Supplied. Without limiting any of the
--------------------
representations and warranties contained herein, no representation or warranty
of Sheffield and no statement by Sheffield or other information contained in or
documents referred to in the Sheffield Disclosure Schedule, as of the date of
such representation, warranty, statement or document, contains or contained any
untrue statement of material fact, or, at the date thereof, omits or omitted to
state a material fact necessary in order to make the statements contained
therein, in light of the circumstances under which such statements are or were
made, not misleading.
SECTION 3.23. Opinion of Financial Advisor. Sheffield has received the
----------------------------
opinion of Rauscher Pierce Refsnes Inc. to the effect that, as of the date of
delivery of such opinion, the terms of the Merger Agreement are fair, from a
financial point of view, to the holders of Old Sheffield Common Stock.
Sheffield will promptly deliver to TransMontaigne a complete copy of such
opinion.
SECTION 3.24. AMEX Listing. The Old Sheffield Common Stock is listed on
------------
the American Stock Exchange (Emerging Company Marketplace), and Sheffield has
not received any current notice from the American Stock Exchange that it intends
to delist the Old Sheffield Common Stock from the American Stock Exchange
(Emerging Company Marketplace) and is not in default of its listing agreement
with the American Stock Exchange (Emerging Company Marketplace). Sheffield
continues to qualify in all respects for such listing. No representation is
made as to whether Sheffield will continue to meet the listing requirements
following the Closing.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF TRANSMONTAIGNE
TransMontaigne hereby represents and warrants to Sheffield that:
SECTION 4.01. Organization and Qualification; Subsidiaries. Each of
--------------------------------------------
TransMontaigne and its subsidiaries is a corporation duly organized, validly
existing and in good standing under the laws of its state of incorporation and
has all requisite corporate power and
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<PAGE>
authority to own, lease and operate its properties and to carry on its business
as it is now being conducted and is duly qualified and in good standing to do
business in each jurisdiction in which the nature of the business conducted by
it or the ownership or leasing of its properties makes such qualification
necessary, other than where the failure to be so duly qualified and in good
standing would not have a TransMontaigne Material Adverse Effect. The term
"TransMontaigne Material Adverse Effect" as used in this Agreement shall mean
any change or effect that, individually or when taken together with all such
other changes or effects, would be reasonably likely to be materially adverse to
the assets, liabilities, financial condition, results of operations or current
or future business of TransMontaigne and it subsidiaries, taken as a whole.
Schedule 4.01 of the disclosure schedule that will be delivered to Sheffield by
TransMontaigne pursuant to Section 7.03 hereof (the "TransMontaigne Disclosure
Schedule") will set forth, as of the date thereof, a true and complete list of
all TransMontaigne's directly or indirectly owned subsidiaries, together with
(A) the jurisdiction of incorporation or organization of each subsidiary and the
percentage of each subsidiary's outstanding capital stock or other equity
interests owned by TransMontaigne or another subsidiary of TransMontaigne, and
(B) an indication of whether each such subsidiary is a "Significant Subsidiary"
as defined in Section 9.03(g) of this Agreement. Except as set forth on in
Schedule 4.01 to the TransMontaigne Disclosure Schedule, neither TransMontaigne
nor any of its subsidiaries owns an equity interest in any other partnership or
joint venture arrangement or other business entity that is material to the
assets, liabilities, financial condition, results of operations or current or
future business of TransMontaigne and its subsidiaries, taken as a whole.
SECTION 4.02. Charter and Bylaws. TransMontaigne has heretofore furnished
------------------
to Sheffield a complete and correct copy of the charter and bylaws or the
equivalent organizational documents as presently in effect of TransMontaigne and
each of its subsidiaries. Neither TransMontaigne nor any of its subsidiaries is
in violation of any of the provisions of its charter or any material provision
of its bylaws.
SECTION 4.03. Capitalization.
--------------
(a) The authorized capital stock of TransMontaigne consists of (i)
30,000,000 shares of TransMontaigne Common Stock, of which 14,785,715 shares are
issued and outstanding, no shares are held in treasury by TransMontaigne and
881,940 shares are reserved for future issuance pursuant to outstanding stock
options and warrants; and (ii) 3,000,000 shares of preferred stock, par value
$.10 per share, of which no shares are issued and outstanding.. Except as
described in this Section 4.03 or in Schedule 4.03(a) of the TransMontaigne
Disclosure Schedule, no shares of capital stock of TransMontaigne are reserved
for any purpose. Each of the outstanding shares of capital stock of, or other
equity interests in, each of TransMontaigne and its subsidiaries is duly
authorized, validly issued, and, in the case of shares of capital stock, fully
paid and nonassessable, and has not been issued in violation of (nor are any of
the authorized shares of capital stock of, or other equity interests in, such
entities subject to) any preemptive or similar rights created by statute, the
charter or bylaws (or the equivalent organizational documents) of TransMontaigne
or any of its subsidiaries, or any agreement to which TransMontaigne or any of
its subsidiaries is a party or bound, and such outstanding shares or other
equity interests owned by TransMontaigne or a subsidiary of
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<PAGE>
TransMontaigne are owned free and clear of all security interests, liens,
claims, pledges, agreements, limitations on TransMontaigne's or such
subsidiaries' voting rights, charges or other encumbrances of any nature
whatsoever..
(b) Except as set forth in Section 4.03(a) above or in Schedule
4.03(b)(i) to the TransMontaigne Disclosure Schedule, there are no options,
warrants or other rights (including registration rights), agreements,
arrangements or commitments of any character to which TransMontaigne is a party
relating to the issued or unissued capital stock of TransMontaigne or any of its
subsidiaries or obligating TransMontaigne or any of its subsidiaries to grant,
issue or sell any shares of the capital stock of TransMontaigne or any of its
subsidiaries, by sale, lease, license or otherwise. Except as set forth in
Schedule 4.03(b)(ii) to the TransMontaigne Disclosure Schedule, there are no
obligations, contingent or otherwise, of TransMontaigne or any of its
subsidiaries to (i) repurchase, redeem or otherwise acquire any shares of
TransMontaigne Common Stock or other capital stock of TransMontaigne, or the
capital stock or other equity interests of any subsidiary of TransMontaigne; or
(ii) provide material funds to, or make any material investment in (in the form
of a loan, capital contribution or otherwise), or provide any guarantee with
respect to the obligations of, any subsidiary of TransMontaigne or any other
person. Except as described in Schedule 4.03(b)(iii) to the TransMontaigne
Disclosure Schedule, neither TransMontaigne nor any of its subsidiaries(x)
directly or indirectly owns, (y) has agreed to purchase or otherwise acquire or
(z) holds any interest convertible into or exchangeable or exercisable for, 5%
or more of the capital stock of any corporation, partnership, joint venture or
other business association or entity (other than the subsidiaries of
TransMontaigne that will be set forth in Schedule 4.01 to the TransMontaigne
Disclosure Schedule). Except as set forth in Schedule 4.03(b)(iv) to the
TransMontaigne Disclosure Schedule and except for any agreements, arrangements
or commitments between TransMontaigne and its subsidiaries or between such
subsidiaries, there are no agreements, arrangements or commitments of any
character (contingent or otherwise) pursuant to which any person is or may be
entitled to receive any payment based on the revenues or earnings, or calculated
in accordance therewith, of TransMontaigne or any of its subsidiaries. Except
as set forth in Schedule 4.03(b)(v), there are no voting trusts, proxies or
other agreements or understandings to which TransMontaigne or any of its
subsidiaries is a party or by which TransMontaigne or any of its subsidiaries is
bound with respect to the voting of any shares of capital stock of
TransMontaigne or any of its subsidiaries.
(c) TransMontaigne has made available to Sheffield complete and correct
copies of (i) its Amended and Restated Employee Nonqualified Stock Option Plan
and Employees' Stock Option Plan (the "TransMontaigne Option Plan") and the
forms of options issued pursuant to the TransMontaigne Option Plan, including
all amendments thereto and (ii) all options and warrants that are not in the
form thereof provided under clause (i) above. Schedule 4.03(c) to the
TransMontaigne Disclosure Schedule will set forth a complete and correct list of
all outstanding warrants and options, restricted stock or any other stock awards
(the "TransMontaigne Stock Awards") granted under the TransMontaigne Option Plan
or otherwise, setting forth as of the date hereof (i) the number and type of
TransMontaigne Stock Awards, (ii) the exercise price of each outstanding stock
option or warrants, and (iii) the number of stock options and warrants presently
exercisable.
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SECTION 4.04. Authority. TransMontaigne has all requisite corporate power
---------
and authority to execute and deliver this Agreement, to perform its obligations
hereunder and to consummate the transactions contemplated hereby (subject to,
with respect to the Merger, the adoption of this Agreement by the stockholders
of TransMontaigne as described in Section 4.12 hereof). The execution and
delivery of this Agreement by TransMontaigne and the consummation by
TransMontaigne of the transactions contemplated hereby have been duly authorized
by all necessary corporate action and no other corporate proceedings on the part
of TransMontaigne are necessary to authorize this Agreement or to consummate the
transactions contemplated hereby (subject to, with respect to the approval and
adoption of this Agreement and the Merger, the approval thereof by the holders
of the TransMontaigne Common Stock as described in Section 4.12). This
Agreement has been duly executed and delivered by TransMontaigne and, assuming
the due authorization, execution and delivery thereof by Sheffield, constitutes
the legal, valid and binding obligation of TransMontaigne enforceable against
TransMontaigne in accordance with its terms, except that (i) such enforcement
may be subject to applicable bankruptcy, insolvency or other similar laws, now
or hereafter in effect, affecting creditors' rights generally, and (ii) the
remedy of specific performance and injunctive and other forms of equitable
relief may be subject to equitable defenses and to the discretion of the court
before which any proceeding therefor may be brought.
SECTION 4.05. No Conflict; Required Filings and Consents.
------------------------------------------
(a) The execution and delivery of this Agreement by TransMontaigne does
not, and the consummation of the transactions contemplated hereby will not (i)
conflict with or violate the charter or bylaws, or the equivalent organizational
documents, in each case as amended or restated, of TransMontaigne or any of its
subsidiaries, (ii) conflict with or violate any Laws applicable to
TransMontaigne or any of its subsidiaries or by which any of their respective
properties is bound or subject, or (iii) result in any breach of or constitute a
default (or an event that with notice or lapse of time or both would become a
default) under, or give to others any rights of termination, amendment,
acceleration or cancellation of, or result in the creation of a lien or
encumbrance on any of the properties or assets of TransMontaigne or any of its
subsidiaries pursuant to, any note, bond, mortgage, indenture, contract,
agreement, lease, license, permit, franchise or other instrument or obligation
to which TransMontaigne or any of its subsidiaries is a party or by or to which
TransMontaigne or any of its subsidiaries or any of their respective properties
is bound or subject, except for any such conflicts or violations described in
clause (ii) or breaches, defaults, events, rights of termination, amendment,
acceleration or cancellation, payment obligations or liens or encumbrances
described in clause (iii) that would not have a TransMontaigne Material Adverse
Effect.
(b) The execution and delivery of this Agreement by TransMontaigne does
not, and the consummation of the transactions contemplated hereby will not,
require TransMontaigne to obtain any consent, license, permit, approval, waiver,
authorization or order of, or to make any filing with or notification to, any
Governmental Entities, except (i) for applicable requirements, if any, of the
Securities Act, the Exchange Act and Blue Sky Laws and the filing and
recordation of appropriate merger documents as required by Delaware Law, and
(ii) where the failure to obtain such consents, licenses, permits, approvals,
waivers,
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authorizations or orders, or to make such filings or notifications, would not,
either individually or in the aggregate, materially interfere with
TransMontaigne's performance of its obligations under this Agreement and would
not have a TransMontaigne Material Adverse Effect.
SECTION 4.06. Permits; Compliance. Each of TransMontaigne and its
-------------------
subsidiaries and to TransMontaigne's knowledge each third party operator of any
of TransMontaigne's properties, is in possession of all franchises, grants,
authorizations, licenses, permits, easements, variances, exemptions, consents,
certificates, approvals and orders necessary to own, lease and operate its
properties and to carry on its business as it is now being conducted
(collectively, the "TransMontaigne Permits"), and there is no action, proceeding
or investigation pending or, to the knowledge of TransMontaigne, threatened
regarding suspension or cancellation of any of the TransMontaigne Permits,
except where the failure to possess, or the suspension or cancellation of, such
TransMontaigne Permits would not have a TransMontaigne Material Adverse Effect.
Neither TransMontaigne nor any of its subsidiaries is in conflict with, or in
default or violation of (a) any Law applicable to TransMontaigne or any of its
subsidiaries or by or to which any of their respective properties is bound or
subject or (b) any of the TransMontaigne Permits, except for any such conflicts,
defaults or violations described in the TransMontaigne Disclosure Schedule or
which would not have a TransMontaigne Material Adverse Effect. During the period
commencing on January 1, 1995 and ending on the date hereof, neither
TransMontaigne nor any of its subsidiaries has received from any Governmental
Entity any written notification with respect to possible conflicts, defaults or
violations of Laws, except for written notices relating to possible conflicts,
defaults or violations described in the TransMontaigne Disclosure Schedule or
that would not have a TransMontaigne Material Adverse Effect.
SECTION 4.07. Financial Statements. TransMontaigne's consolidated
---------------------
financial statements (including the related notes thereto) for the year ended
April 30, 1995 and for the quarter ended October 31, 1995 (i) have been prepared
in accordance with generally accepted accounting principles applied on a
consistent basis throughout the periods involved (except (A) to the extent
required by changes in generally accepted accounting principles and (B) as may
be indicated in the notes thereto) and (ii) fairly present the financial
position of TransMontaigne and its subsidiaries as of the respective dates
thereof and the results of operations and cash flows for the periods indicated
(including reasonable estimates of normal and recurring year-end adjustments),
except that (x) any unaudited interim financial statements were or will be
subject to normal and recurring year-end adjustments and (y) any pro forma
financial information contained in such financial statements is not necessarily
indicative of the financial position of TransMontaigne and its subsidiaries as
of the respective dates thereof and the results of operations and cash flows for
the periods indicated.
SECTION 4.08. Absence of Certain Changes or Events. Except as disclosed in
------------------------------------
the TransMontaigne Disclosure Schedule or as contemplated by this Agreement or
as set forth in Schedule 4.08 to the TransMontaigne Disclosure Schedule, since
October 31, 1995, TransMontaigne and its subsidiaries have conducted their
respective businesses in the ordinary course of business consistent with past
practice. Since October 31, 1995, there has not occurred (i) any events,
changes, or effects (including the incurrence of any liabilities of any nature,
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whether or not accrued, contingent or otherwise) having or, which would be
reasonably likely to have, individually or in the aggregate, a TransMontaigne
Material Adverse Effect; (ii) any declaration, setting aside or payment of any
dividend or other distribution (whether in cash, stock or property) with respect
to the equity interests of TransMontaigne or of any of its subsidiaries other
than dividends paid by wholly owned subsidiaries, or any redemption, purchase or
other acquisition by TransMontaigne or any of its subsidiaries of any of
TransMontaigne's securities or any of the securities of any subsidiary of
TransMontaigne; (iii) any revaluation by TransMontaigne or any of its
subsidiaries of any of their assets, including the writing down of the value of
inventory or the writing down or off of notes or accounts receivable, other than
in the ordinary course of business and consistent with past practices; (iv) any
change by TransMontaigne or any of its subsidiaries in accounting principles or
methods, except insofar as may be required by a change in generally accepted
accounting principles; (v) a fundamental change in the nature of
TransMontaigne's business; or (vi) a TransMontaigne Material Adverse Effect.
SECTION 4.09. Absence of Litigation. Except as set forth in Schedule 4.09
---------------------
to the TransMontaigne Disclosure Schedule, there is no claim, action, suit,
litigation, proceeding, arbitration or, to the knowledge of TransMontaigne,
investigation of any kind, at law or in equity (including actions or proceedings
seeking injunctive relief), pending or, to the knowledge of TransMontaigne,
threatened against TransMontaigne or any of its subsidiaries or any properties
or rights of TransMontaigne or any of its subsidiaries (except for claims,
actions, suits, litigation, proceedings, arbitrations or investigations which
would not have a TransMontaigne Material Adverse Effect), and neither
TransMontaigne nor any of its subsidiaries is subject to any continuing order
of, consent decree, settlement agreement or other similar written agreement
with, or, to the knowledge of TransMontaigne, continuing investigation by, any
Governmental Entity, or any judgment, order, writ, injunction, decree or award
of any Government Entity or arbitrator, including, without limitation, cease-
and-desist or other orders, except for matters that would not have a
TransMontaigne Material Adverse Effect.
SECTION 4.10. Tax Matters. Neither TransMontaigne nor, to the knowledge of
-----------
TransMontaigne, any of its affiliates has taken or agreed to take any action
that would prevent the Merger from constituting a reorganization qualifying
under the provisions of section 368(a) of the Code.
SECTION 4.11. Taxes. Except as set forth in Schedule 4.11 of the
-----
TransMontaigne Disclosure Schedule and except as such failure of any
representation or warranty made in this Section 4.11 to be true and correct
which would not have a TransMontaigne Material Adverse Effect:
(a) TransMontaigne and its subsidiaries have (i) duly filed (or there have
been filed on their behalf) with the appropriate governmental authorities all
Returns required to be filed by them and such Returns are true, correct and
complete, and (ii) duly paid in full or made provision in accordance with
generally accepted accounting principles (or there has been paid or provision
has been made on their behalf) for the payment of all Taxes for all periods
ending through the date hereof;
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(b) TransMontaigne and its subsidiaries have complied in all respects with
all applicable laws, rules and regulations relating to the payment and
withholding of Taxes (including withholding of Taxes pursuant to Sections 1441
and 1442 of the Code or similar provisions under any foreign laws) and have,
within the time and the manner prescribed by law, withheld from employee wages
and paid over to the proper governmental authorities all amounts required to be
so withheld and paid over under applicable laws;
(c) There is no plan or intention by any stockholder of TransMontaigne who
owns one percent or more of TransMontaigne Common Stock, and to the knowledge of
TransMontaigne there is no plan or intention on the part of any of the remaining
stockholders of TransMontaigne, to sell, exchange or otherwise dispose of a
number of shares of New Sheffield Common Stock to be received in the Merger that
would reduce the TransMontaigne stockholders' ownership of New Sheffield Common
Stock to a number of shares having a value, as of the Effective Time, of less
than 50 percent of the value of all of the TransMontaigne Common Stock
(including shares of TransMontaigne Common Stock exchanged for cash in lieu of
fractional shares of New Sheffield Common Stock) outstanding immediately prior
to the Effective Time;
(d) TransMontaigne and each of its subsidiaries (A) has not been a member of
an affiliated group filing a consolidated federal income tax return other than a
group the common parent of which was TransMontaigne, (B) does not have any
liability under Treas. Reg. (S) 1.1502-6 or any analogous state, local or
foreign law by reason of having been a member of any consolidated, combined or
unitary group, other than in the current affiliated group of which
TransMontaigne is the common parent corporation, and (C) is not a party to any
tax sharing agreement with any persons other than current members of the
consolidated group of which TransMontaigne is the common parent corporation;
(e) There is no material dispute or claim concerning any liabilities for
Taxes of TransMontaigne or its subsidiaries either raised or expected to be
raised by any taxing authority;
(f) TransMontaigne has made available to Sheffield complete copies of (i)
all federal income tax returns of TransMontaigne for all periods since the
formation of TransMontaigne and all federal income tax returns of its
subsidiaries for all periods open under the statute of limitations for
assessments and (ii) examination reports, and statements of deficiencies
assessed or agreed by TransMontaigne or its subsidiaries;
(g) No consent under Section 341(f) of the Code has been filed with respect
to TransMontaigne or any of its subsidiaries;
(h) TransMontaigne has not entered into any compensatory agreements with
respect to the performance of services under which payment would result in a
nondeductible expense pursuant to Section 280G of the Code;
(i) TransMontaigne and each of its subsidiaries has not agreed, nor is it
required to make, any adjustment under Code Section 481(a) by reason of a change
in accounting
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method or otherwise, and TransMontaigne and no such adjustment with respect to
tax items that would, but for the Merger, be realized by TransMontaigne and its
subsidiaries will be required as a result of the Merger;
(j) TransMontaigne and its subsidiaries have not issued or assumed any
indebtedness that is subject to Section 279(b) of the Code;
(k) The amount of liability for unpaid Taxes of TransMontaigne and its
subsidiaries for all periods ending on or before the Effective Time will not, in
the aggregate, materially exceed the amount of the liability accruals for Taxes
reflected on the balance sheet of TransMontaigne as of the Closing Date;
(l) The tax returns provided by TransMontaigne to Sheffield contain accurate
and complete information with respect to the net operating losses, net operating
loss carryforwards and other tax attributes of TransMontaigne and its
subsidiaries, and the extent to which they are subject to any limitation under
Code Sections 381, 382, 383 or 384, or any other provision of the Code or the
federal consolidated return regulations (or any predecessor provision of any
Code section or the regulations) and, apart from any such limitations and apart
from any limitation that would be imposed as a result of the Merger, there is
nothing that would prevent Sheffield from utilizing these net operating losses,
net operating loss carryforwards or other tax attributes as so limited if
sufficient income were realized;
(m) TransMontaigne and its subsidiaries have not disposed of any property in
a transaction that is presently accounted for under the installment method; and
(n) TransMontaigne and its subsidiaries are not required to treat any of
their assets as owned by another person for federal income tax purposes or as
tax exempt bond property or as tax exempt use property within the meaning of
Section 118 of the Code.
SECTION 4.12. Vote Required. The only vote of the holders of any class or
-------------
series of TransMontaigne capital stock necessary to approve the Merger is the
affirmative vote of the holders of two-thirds of the shares of TransMontaigne
Common Stock outstanding.
SECTION 4.13. Brokers. No broker, finder or investment banker is entitled
-------
to any brokerage, finder's or other fee or commission in connection with the
transactions contemplated by this Agreement based upon arrangements made by or
on behalf of TransMontaigne .
SECTION 4.14. Information Supplied. Without limiting any of the
--------------------
representations and warranties contained herein, no representation or warranty
of TransMontaigne and no statement by TransMontaigne or other information
contained in or documents referred to in the TransMontaigne Disclosure Schedule,
as of the date of such representation, warranty, statement or document, contains
or contained any untrue statement of material fact, or, at the date thereof,
omits or omitted to state a material fact necessary in order to make the
statements contained therein, in light of the circumstances under which such
statements are or were made, not misleading.
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SECTION 4.15. Employee Benefit Plans; Labor Matters. (a) As of the date of
-------------------------------------
this Agreement, except as would not have a TransMontaigne Material Adverse
Effect, the material employee benefit plans, arrangements, practices, contracts
and agreements (including, without limitation, employment agreements, change of
control employment agreements and severance agreements, incentive compensation,
bonus, stock option, stock appreciation rights and stock purchase plans, and
including, but not limited to, plans described in section 3(3) of ERISA),
maintained by TransMontaigne, any of its subsidiaries or any trade or business,
whether or not incorporated, that together with TransMontaigne would be deemed a
"controlled group" within the meaning of section 4001(a)(14) of ERISA, or with
respect to which TransMontaigne or any of its subsidiaries has or may have a
liability (the "TransMontaigne Plans") are in substantial compliance with
applicable laws, including ERISA and the Code.
(b) With respect to the TransMontaigne Plans, no event has occurred
and, to the knowledge of TransMontaigne, there exists no condition or set of
circumstances, in connection with which TransMontaigne or any member of its
ERISA Group could be subject to any liability under the terms of such
TransMontaigne Plans, ERISA, the Code or any other applicable Law which would
have a TransMontaigne Material Adverse Effect.
(c) Except as otherwise set forth on Schedule 4.10(c) to the
TransMontaigne Disclosure Schedule, neither TransMontaigne nor any member of its
ERISA Group contributes to or has an obligation to contribute to, and has not
within six years prior to the date of this Agreement contributed to or had an
obligation to contribute to or has any secondary liability under ERISA section
4204 to, a multiemployer plan within the meaning of Section 3(37) of ERISA.
SECTION 4.16. Certain Business Practices. None of TransMontaigne, any of
--------------------------
its subsidiaries or any directors, officers, agents or employees of
TransMontaigne or any of its subsidiaries has (i) used any funds for unlawful
contributions, gifts, entertainment or other unlawful expenses relating to
political activity, (ii) made any unlawful payment to foreign or domestic
government officials or employees or to foreign or domestic political parties or
campaigns or violated any provision of the Foreign Corrupt Practices Act of
1977, as amended, or (iii) made any other unlawful payment.
SECTION 4.17. Environmental Matters. (a) Except as disclosed in Schedule
---------------------
4.17 to the TransMontaigne Disclosure Schedule and except for matters that would
not have or are reasonably not likely to have a TransMontaigne Material Adverse
Effect, to the best knowledge of TransMontaigne:
(i) the properties, operations and activities of TransMontaigne and
its subsidiaries are in compliance with all applicable Environmental Laws and
there are no circumstances which could reasonably be expected to prevent or
interfere with their continued compliance with applicable Environmental Laws.
(ii) TransMontaigne and its subsidiaries and the properties and
operations of TransMontaigne and its subsidiaries are not subject to any
existing, pending, or, to
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TransMontaigne's knowledge, threatened civil, criminal or administrative action,
suit, claim, notice of violation, investigation, notice of potential liability,
request for information, inquiry, demand or proceeding under applicable
Environmental Laws.
(iii) TransMontaigne and its subsidiaries have not agreed,
whether by contract or by consent agreement with governmental authorities or
private persons, to undertake investigation, clean up, or remedial activities.
(iv) All notices, permits, licenses, or similar authorizations
required to be obtained or filed by TransMontaigne or any of its subsidiaries
under any Environmental Law in connection with any aspect of the business of
TransMontaigne or its subsidiaries, including without limitation those relating
to the treatment, storage, disposal or discharge of Hazardous Materials, have
been duly obtained or filed and will remain valid and in effect after the
Merger, and TransMontaigne and its subsidiaries are in compliance with the terms
and conditions of all such notices, permits, licenses and similar
authorizations.
(v) TransMontaigne and its subsidiaries have satisfied and are
currently in compliance with all financial responsibility requirements
applicable to their operations and imposed by any governmental authority under
Environmental Laws, and TransMontaigne and its subsidiaries have not received
any notice of noncompliance with respect to any such financial responsibility
requirements.
(vi) There are no physical or environmental conditions existing on
any property of TransMontaigne or its subsidiaries or resulting from
TransMontaigne's or such subsidiaries' operations or activities, past or
present, at any location, including without limitation, releases and disposal of
Hazardous Materials, that would give rise to any on-site or off-site
investigation, reporting, or remedial obligations or other Environmental
Liability.
(vii) To the extent required by applicable Environmental Laws,
all Hazardous Materials generated by TransMontaigne and its subsidiaries have
been transported only by persons authorized under applicable Environmental Laws
to transport such materials, and disposed of only at treatment, storage and
disposal facilities authorized under applicable Environmental Laws to treat,
store or dispose of such Hazardous Materials.
(viii) There has been no exposure of any person or property to
Hazardous Materials or any release of Hazardous Materials into the environment
by TransMontaigne or its present or prior subsidiaries or in connection with
their present or prior properties or operations that could reasonably be
expected to give rise to any Environmental Liability.
(ix) No release or clean up of Hazardous Materials has occurred at
TransMontaigne and its subsidiaries' properties which could reasonably be
expected to result in the assertion or creation of any lien on the properties by
any governmental body or agency with respect thereto, nor has any such lien been
asserted or made by any governmental body or agency with respect thereto.
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(x) The operations of each third party operator of any of
TransMontaigne or its subsidiaries' properties are in compliance with the terms
of this Section 4.17.
(b) TransMontaigne and its subsidiaries have made available to
Sheffield all material internal and external environmental audits, studies,
documents and correspondence on environmental matters in the possession of
TransMontaigne or its subsidiaries relating to any of the present or prior
properties or operations of TransMontaigne and its subsidiaries and Lion Oil
Company.
SECTION 4.18. Insurance. TransMontaigne and each of its subsidiaries are
---------
currently insured, and during each of the past five calendar years have been
insured, for reasonable amounts against such risks as companies engaged in a
similar business would, in accordance with good business practice, customarily
be insured.
SECTION 4.19. Certain Contracts and Restrictions. Other than agreements,
----------------------------------
contracts or commitments listed elsewhere in the TransMontaigne Disclosure
Schedule, Schedule 4.19 to the TransMontaigne Disclosure Schedule will list, as
of the date thereof, (i) the ten largest (in terms of consideration) agreements,
contracts or commitments (including any amendments thereto) to which
TransMontaigne or any of its subsidiaries is a party or by which TransMontaigne
or any of its subsidiaries is bound and (ii) each agreement, contract or
commitment (including any amendments thereto) which is otherwise material to the
assets, liabilities, financial condition, results of operations or current or
future business of TransMontaigne and its subsidiaries, taken as a whole. As of
the date of this Agreement and except as indicated on the TransMontaigne
Disclosure Schedule, (i) TransMontaigne has fully complied with all material
terms and conditions of all agreements, contracts and commitments that will be
listed in the TransMontaigne Disclosure Schedule and all such agreements,
contracts and commitments are in full force and effect, (ii) TransMontaigne has
no knowledge of any defaults thereunder or any cancellations or modifications
thereof, and (iii) such agreements, contracts and commitments are not subject to
any memorandum or other written document or understanding permitting
cancellation.
SECTION 4.20. Properties. Except for liens arising in the ordinary course
----------
of business after the date hereof and properties and assets disposed of in the
ordinary course of business after the date of TransMontaigne's most recent
balance sheet, TransMontaigne and its subsidiaries have good and marketable
title free and clear of all liens, the existence of which would have a
TransMontaigne Material Adverse Effect, to all their material properties and
assets, whether tangible or intangible, real, personal or mixed, reflected in
TransMontaigne's most recent consolidated balance sheet as being owned by
TransMontaigne and its subsidiaries as of the date thereof or purported to be
owned on the date hereof. All buildings, and all fixtures, equipment and other
property and assets which are material to its business on a consolidated basis,
held under leases by any of TransMontaigne or its subsidiaries are held under
valid instruments enforceable by TransMontaigne or its subsidiaries in
accordance with their respective terms. Substantially all of TransMontaigne's
and its subsidiaries' equipment in regular
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use has been well maintained and is in good and serviceable condition,
reasonable wear and tear excepted.
SECTION 4.21. Easements. The business of TransMontaigne and its
---------
subsidiaries has been operated in a manner that does not violate the material
terms of any easements, rights of way, permits, servitudes, licenses and similar
rights relating to real property used by TransMontaigne and its subsidiaries in
its business (collectively, "TransMontaigne Easements") except for violations
that have not resulted and will not result in a TransMontaigne Material Adverse
Effect. All material TransMontaigne Easements are valid and enforceable and
grant the rights purported to be granted thereby and all rights necessary
thereunder for the current operation of such business.
ARTICLE V
COVENANTS
SECTION 5.01. Affirmative Covenants of Sheffield. Sheffield hereby
----------------------------------
covenants and agrees that, prior to the Effective Time, unless otherwise
expressly contemplated by this Agreement or consented to in writing by
TransMontaigne, Sheffield will and will cause its subsidiaries to:
(a) operate its business in all material respects in the usual and
ordinary course consistent with past practices;
(b) 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 employees and maintain its relationships
with its material customers and suppliers;
(c) maintain and keep its material properties and assets in as good
repair and condition as at present, ordinary wear and tear excepted, and
maintain supplies and inventories in quantities consistent with its customary
business practice;
(d) use all reasonable efforts to keep in full force and effect
insurance and bonds comparable in amount and scope of coverage to that currently
maintained.
SECTION 5.02. Negative Covenants of Sheffield. Except as expressly
-------------------------------
contemplated by this Agreement or otherwise consented to in writing by
TransMontaigne, from the date of this Agreement until the Effective Time,
Sheffield will not do, and will not permit any of its subsidiaries to do, any of
the foregoing:
(a) (i) except as set forth on in Schedule 5.02 to the Sheffield
Disclosure Schedule, increase the compensation payable to or to become payable
to any director or executive officer; (ii) grant any severance or termination
pay to, or enter into or amend any employment or severance agreement with, any
director, officer or employee; (iii) establish, adopt
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<PAGE>
or enter into any employee benefit plan or arrangement; or (iv) except as may be
required by applicable law, amend, or take any other actions with respect to,
any of the Benefit Plans or any of the plans, programs, agreements, policies or
other arrangements described in Section 3.10(d) of this Agreement;
(b) declare or pay any dividend on, or make any other distribution in
respect of, outstanding shares of capital stock, except for dividends by a
wholly owned subsidiary of Sheffield to Sheffield or another wholly owned
subsidiary of Sheffield;
(c) (i) except as described in Schedule 3.03(b)(ii) to the Sheffield
Disclosure Schedule, redeem, purchase or otherwise acquire any shares of its or
any of its subsidiaries' capital stock or any securities or obligations
convertible into or exchangeable for any shares of its or its subsidiaries'
capital stock (other than any such acquisition directly from any wholly owned
subsidiary of Sheffield in exchange for capital contributions or loans to such
subsidiary), or any options, warrants or conversion or other rights to acquire
any shares of its or its subsidiaries' capital stock or any such securities or
obligations (except in connection with the exercise of outstanding stock options
in accordance with their terms); (ii) effect any reorganization or
recapitalization; or (iii) split, combine or reclassify any of its or its
subsidiaries' capital stock or issue or authorize or propose the issuance of any
other securities in respect of, in lieu of or in substitution for, shares of its
or its subsidiaries' capital stock;
(d) (i) except as described in Schedule 3.03(b)(i) to the Sheffield
Disclosure Schedule, issue, deliver, award, grant or sell, or authorize or
propose the issuance, delivery, award, grant or sale (including the grant of any
security interests, liens, claims, pledges, limitations in voting rights,
charges or other encumbrances) of, any shares of any class of its or its
subsidiaries' capital stock (including shares held in treasury), any securities
convertible into or exercisable or exchangeable for any such shares, or any
rights, warrants or options to acquire any such shares (except for the issuance
of shares upon the exercise of outstanding stock options or the vesting of
restricted stock in accordance with the terms of outstanding Sheffield Stock
Awards); (ii) amend or otherwise modify the terms of any such rights, warrants
or options the effect of which shall be to make such terms more favorable to the
holders thereof; or (iii) take any action to optionally accelerate the
exercisability of stock options;
(e) acquire or agree to acquire, by merging or consolidating with, by
purchasing an equity interest in or a portion of the assets of, or by any other
manner, any business or any corporation, partnership, association or other
business organization or division thereof, or otherwise acquire or agree to
acquire any assets of any other person (other than the purchase of assets from
suppliers or vendors in the ordinary course of business and consistent with past
practice);
(f) sell, lease, exchange, mortgage, pledge, transfer or otherwise
dispose of, or agree to sell, lease, exchange, mortgage, pledge, transfer or
otherwise dispose of, any of its material assets or any material assets of any
of its subsidiaries, except for dispositions of oil and gas production in the
ordinary course of business and consistent with past practice;
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(g) initiate, solicit or encourage (including by way of furnishing
information or assistance), or take any other action to facilitate, any
inquiries or the making of any proposal relating to, or that may reasonably be
expected to lead to, any Competing Transaction (as defined below), or enter into
discussions or negotiate with any person or entity in furtherance of such
inquiries or to obtain a Competing Transaction, or agree to or endorse any
Competing Transaction, or authorize or permit any of the officers, directors or
employees of Sheffield or any of its subsidiaries or any investment banker,
financial advisor, attorney, accountant or other representative retained by
Sheffield or any of Sheffield's subsidiaries to take any such action, and
Sheffield shall promptly notify TransMontaigne of all relevant terms of any such
inquiries and proposals received by Sheffield or any of its subsidiaries or by
any such officer, director, investment banker, financial advisor, attorney,
accountant or other representative relating to any of such matters and if such
inquiry or proposal is in writing, Sheffield shall promptly deliver or cause to
be delivered to TransMontaigne a copy of such inquiry or proposal; provided,
however, that nothing contained in this subsection (g) shall prohibit the Board
of Directors of Sheffield from (i) furnishing information to, or entering into
discussions or negotiations with, any person or entity in connection with an
unsolicited bona fide proposal in writing by such person or entity to acquire
Sheffield pursuant to a merger, consolidation, share exchange, business
combination or other similar transaction or to acquire a substantial portion of
the assets of Sheffield or any of its Significant Subsidiaries, if, and only to
the extent that (A) the Board of Directors of Sheffield, after consultation with
and based upon the written opinion of independent legal counsel (who may be
Sheffield's regularly engaged independent legal counsel), determines in good
faith that such action is necessary for such Board of Directors to comply with
its fiduciary duties to stockholders under applicable law and (B) prior to
furnishing such information to, or entering into discussions or negotiations
with, such person or entity Sheffield (x) provides written notice to
TransMontaigne to the effect that it is furnishing information to, or entering
into discussions or negotiations with, such person or entity and (y) enters into
with such person or entity a confidentiality agreement in reasonably customary
form on terms not more favorable to such person or entity than the terms
contained in that certain Confidentiality Agreement dated as of January 9, 1996
between TransMontaigne and Sheffield (the "Confidentiality Agreement"); (ii)
complying with Rule 14e-2 promulgated under the Exchange Act with regard to a
Competing Transaction; or (iii) failing to make or withdrawing or modifying its
recommendation referred to in Section 6.02(a) if there exists a Competing
Transaction and the Board of Directors of Sheffield, after consultation with and
based upon the written opinion of independent legal counsel (who may be
Sheffield's regularly engaged independent legal counsel), determines in good
faith that such action is necessary for such Board of Directors to comply with
its fiduciary duties to stockholders under applicable law. For purposes of this
Agreement, "Competing Transaction" shall mean any of the following (other than
the transactions contemplated by this Agreement) involving Sheffield or any of
its subsidiaries: (I) any merger, consolidation, share exchange, business
combination or similar transaction; (II) any sale, lease, exchange, mortgage,
pledge, transfer or other disposition of 20% or more of the assets of Sheffield
and its subsidiaries, taken as a whole, (III) any tender offer or exchange offer
for 20% or more of the outstanding shares of capital stock of Sheffield or the
filing of a registration statement under the Securities Act in connection
therewith; (IV) any person (other than stockholders as of the date of this
Agreement) having acquired beneficial ownership of, or any group (as such term
is defined under Section 13(d) of the Exchange Act and
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<PAGE>
the rules and regulations promulgated thereunder) having been formed which
beneficially owns or has the right to acquire beneficial ownership of, 20% or
more of the outstanding shares of capital stock of Sheffield; or (V) any public
announcement of a proposal, plan or intention to do any of the foregoing or any
agreement to engage in any of the foregoing;
(h) release any third party from its obligations, or grant any consent,
under any existing standstill provision relating to a Competing Transaction or
otherwise under any confidentiality or other agreement, or fail to fully enforce
any such agreement;
(i) adopt or propose to adopt any amendments to its charter or bylaws,
which would alter the terms of its capital stock or would have an adverse impact
on the consummation of the transactions contemplated by this Agreement;
(j) (A) change any of its methods of accounting in effect at June 30,
1995, or (B) make or rescind any express or deemed election relating to Taxes,
settle or compromise any claim, action, suit, litigation, proceeding,
arbitration, investigation, audit or controversy relating to Taxes (except where
the amount of such settlements or controversies, individually or in the
aggregate, does not exceed $25,000), or change any of its methods of reporting
income or deductions for federal income tax purposes from those employed in the
preparation of the federal income tax returns for the taxable year ended June
30, 1995, except, in each case, as may be required by Law or generally accepted
accounting principles;
(k) incur any obligation for borrowed money or purchase money
indebtedness or guarantee, whether or not evidenced by a note, bond, debenture
or similar instrument, except in the ordinary course of business consistent with
past practice and in no event in excess of $100,000 in the aggregate;
(l) enter into any material arrangement, agreement or contract with any
third party which provides for an exclusive arrangement with that third party or
is substantially more restrictive on Sheffield or substantially less
advantageous to Sheffield than arrangements, agreements or contracts existing on
the date hereof;
(m) take any action other than actions required by this Agreement,
which would result in a failure to maintain the listing of the Old Sheffield
Common Stock on the American Stock Exchange (Emerging Company Marketplace);
(n) adopt a plan of complete or partial liquidation, dissolution,
merger, consolidation, restructuring, recapitalization or other material
reorganization of Sheffield or any of its subsidiaries;
(o) pay, discharge or satisfy any claims, liabilities or obligations
(absolute, accrued, asserted or unasserted, contingent or otherwise), other than
the payment, discharge or satisfaction of any such claims, liabilities or
obligations, (x) reflected or reserved against in, or contemplated by, the
financial statements (or the notes thereto) of Sheffield and its
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<PAGE>
subsidiaries, (y) incurred in the ordinary course of business consistent with
past practice or (z) which are legally required to be paid, discharged or
satisfied;
(p) knowingly take, or agree to commit to take, any action that would
make any representation or warranty of Sheffield contained herein inaccurate in
any respect at, or as of any time prior to, the Effective Time;
(q) other than between or among wholly-owned subsidiaries of Sheffield
which remain wholly-owned or between Sheffield and its wholly-owned subsidiaries
which remain wholly-owned, neither Sheffield nor any of its subsidiaries will
engage in any transaction with, or enter into any agreement, arrangement, or
understanding with, directly or indirectly, any of Sheffield's affiliates,
including, without limitation, any transactions, agreements, arrangements or
understandings with any affiliate or other person covered under Item 404 of
Regulation S-K under the Securities Act that would be required to be disclosed
under such Item 404, other than pursuant to such agreements, arrangements, or
understandings existing on the date of this Agreement (which are set forth on
Section 5.01 of the Sheffield Disclosure Schedule) or as disclosed in writing to
TransMontaigne on the date hereof; provided, however, that any such agreement,
arrangement or understanding disclosed in such writing shall be approved by at
least two independent directors of Sheffield, after having received an appraisal
or valuation from an independent appraiser or expert (reasonably acceptable to
TransMontaigne) that the terms are fair to Sheffield and are no less favorable
to Sheffield than could be obtained in an arms-length transaction with an
unaffiliated party, and, provided, further, that Sheffield provides
TransMontaigne with all information concerning any such agreement, arrangement
or understanding that TransMontaigne may reasonably request;
(r) agree to or approve any commitment, including any authorization for
expenditure or agreement to acquire property, obligating Sheffield for an amount
in excess of $10,000;
(s) engage in any natural gas or other futures or options trading or be
a party to any price swaps, hedges, futures or similar instruments, except for
hedging purposes in accordance with past practices; or
(t) agree in writing or otherwise to do any of the foregoing.
SECTION 5.03. Affirmative and Negative Covenants of TransMontaigne.
----------------------------------------------------
(a) TransMontaigne hereby covenants and agrees that, prior to the
Effective Time, unless otherwise expressly contemplated by this Agreement or
consented to in writing by Sheffield, TransMontaigne will and will cause its
subsidiaries to:
(i) 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 TransMontaigne employees and
maintain its relationships with its material customers and suppliers;
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(ii) maintain and keep its material properties and assets in as
good repair and condition as at present, ordinary wear and tear excepted, and
maintain supplies and inventories in quantities consistent with its customary
business practice; and
(iii) use all reasonable efforts to keep in full force and
effect insurance and bonds comparable in amount and scope of coverage to that
currently maintained.
(b) Except as expressly contemplated by this Agreement or otherwise
consented to in writing by Sheffield, from the date of this Agreement until the
Effective Time, TransMontaigne will not do, and will not permit any of its
subsidiaries to, (i) adopt or propose to adopt any amendments to its charter or
bylaws, which would have an adverse impact on the consummation of the
transactions contemplated by this Agreement; or (ii) knowingly take, or agree to
commit to take, any action that would make any representation or warranty of
TransMontaigne contained herein inaccurate in any respect at, or as of any time
prior to, the Effective Time.
(c) TransMontaigne will not cause the Sheffield Exploration Company,
Inc. 401(k) Plan to be terminated or merged with any other plan until after the
close of the 1996 Plan Year.
SECTION 5.04. Access and Information.
----------------------
(a) Sheffield shall, and shall cause its subsidiaries to (i) afford to
TransMontaigne and its officers, directors, employees, accountants, consultants,
legal counsel, agents and other representatives (collectively, the
"TransMontaigne Representatives") reasonable access at reasonable times, upon
reasonable prior notice, to the officers, employees, agents, properties, offices
and other facilities of Sheffield and its subsidiaries and to the books and
records thereof and (ii) furnish promptly to TransMontaigne and the
TransMontaigne Representatives such information concerning the business,
properties, contracts, records and personnel of Sheffield and its subsidiaries
(including, without limitation, financial, operating and other data and
information) as may be reasonably requested, from time to time, by
TransMontaigne.
(b) TransMontaigne shall, and shall cause its subsidiaries to (i)
afford to Sheffield and its officers, directors, employees, accountants,
consultants, legal counsel, agents and other representatives (collectively, the
"Sheffield Representatives") reasonable access at reasonable times, upon
reasonable prior notice, to the officers, employees, accountants, agents,
properties, offices and other facilities of TransMontaigne and its subsidiaries
and to the books and records thereof and (ii) furnish promptly to Sheffield and
the Sheffield Representatives such information concerning the business,
properties, contracts, records and personnel of TransMontaigne and its
subsidiaries (including, without limitation, financial, operating and other data
and information) as may be reasonably requested, from time to time, by
Sheffield.
(c) Notwithstanding the foregoing provisions of this Section 5.04,
neither party shall be required to grant access or furnish information to the
other party to the
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extent that such access or the furnishing of such information is prohibited by
law. No investigation by the parties hereto made heretofore or hereafter shall
affect the representations and warranties of the parties which are herein
contained and each such representation and warranty shall survive such
investigation.
(d) The information received pursuant to Section 5.04 (a) and (b) shall
be deemed to be "Confidential Information" for purposes of the Confidentiality
Agreement.
ARTICLE VI
ADDITIONAL AGREEMENTS
SECTION 6.01. Meetings of Stockholders.
------------------------
(a) Sheffield shall, promptly after the date of this Agreement, take
all actions necessary in accordance with Delaware Law and its charter and bylaws
to convene a special meeting of Sheffield's stockholders to act on this
Agreement (the "Sheffield Stockholders Meeting"), and Sheffield shall consult
with TransMontaigne in connection therewith. Sheffield shall use its best
efforts to solicit from stockholders of Sheffield proxies in favor of the
approval and adoption of this Agreement and to secure the vote of stockholders
required by Delaware Law and its charter and bylaws to approve and adopt this
Agreement and the Merger, unless otherwise necessary due to the applicable
fiduciary duties of the directors of Sheffield, as determined by such directors
in good faith after consultation with and based upon the written opinion of
independent legal counsel (who may be Sheffield's regularly engaged independent
legal counsel).
(b) TransMontaigne shall, promptly after the date of this Agreement,
take all actions necessary in accordance with Delaware Law and its charter and
bylaws to act on this Agreement (the "TransMontaigne Stockholders Meeting").
TransMontaigne shall use its best efforts to solicit from stockholders of
TransMontaigne proxies in favor of the approval and adoption of this Agreement
and to secure the vote of stockholders required by Delaware Law and its charter
and bylaws to approve and adopt this Agreement and the Merger.
SECTION 6.02. Registration Statement.
----------------------
(a) As promptly as practicable after the execution of this Agreement,
TransMontaigne and Sheffield shall prepare and file with the SEC the
Registration Statement, including a proxy statement for stockholders of
Sheffield and TransMontaigne in connection with the transactions contemplated by
this Agreement and a prospectus for the issuance by Sheffield of the New
Sheffield Common Stock to former holders of TransMontaigne Common Stock (the
"Proxy Statement/Prospectus"). Each of TransMontaigne and Sheffield will use
its best efforts to cause the Registration Statement to be declared effective by
the SEC as promptly as practicable, and shall take any action required to be
taken under any applicable federal or state securities laws in connection with
the issuance of shares of New Sheffield Common Stock to former holders of
TransMontaigne Common Stock in the Merger. Each of TransMontaigne and Sheffield
shall furnish to the other all information concerning it and the holders of its
capital
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stock as the other may reasonably request in connection with such actions. As
promptly as practicable after the Registration Statement shall have been
declared effective by the SEC, Sheffield shall mail the Proxy
Statement/Prospectus to its stockholders entitled to notice of and to vote at
the Sheffield Stockholders Meeting and to the stockholders of TransMontaigne
entitled to notice of and to vote at the TransMontaigne Stockholders Meeting.
The Proxy Statement/Prospectus shall include the recommendation of Sheffield's
Board of Directors in favor of the Merger and adoption of this Agreement, unless
otherwise necessary due to the applicable fiduciary duties of the directors of
Sheffield, as determined by such directors in good faith after consultation with
and based upon the written opinion of independent legal counsel (who may be
Sheffield's regularly engaged independent legal counsel). The Proxy
Statement/Prospectus shall include the recommendation of TransMontaigne's Board
of Directors in favor of approval of the Merger and adoption of this Agreement.
(b) The information supplied by Sheffield for inclusion in the
Registration Statement shall not, at the time the Proxy Statement/Prospectus is
mailed to the stockholders of Sheffield and TransMontaigne, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein not
misleading. If at any time prior to the Effective Time any event or
circumstance relating to Sheffield or any of its affiliates, or its or their
respective officers or directors, should be discovered by Sheffield that should
be set forth in a supplement to the Proxy Statement/Prospectus, Sheffield shall
promptly inform TransMontaigne thereof in writing. All documents that Sheffield
is responsible for filing with the SEC in connection with the transactions
contemplated herein will comply as to form in all material respects with the
applicable requirements of the Securities Act and the rules and regulations
thereunder and the Exchange Act and the rules and regulations thereunder.
(c) The information supplied by TransMontaigne for inclusion in the
Registration Statement shall not, at the time the Proxy Statement/Prospectus is
mailed to the stockholders of Sheffield and TransMontaigne, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein not
misleading. If at any time prior to the Effective Time any event or
circumstance relating to TransMontaigne or any of its affiliates, or to their
respective officers or directors, should be discovered by TransMontaigne that
should be set forth in a supplement to the Proxy Statement/Prospectus,
TransMontaigne shall promptly inform Sheffield thereof in writing.
SECTION 6.03. Appropriate Action; Consents; Filings.
-------------------------------------
(a) Sheffield and TransMontaigne shall each use, and shall cause each
of their respective subsidiaries to use, all reasonable efforts to (i) take, or
cause to be taken, all appropriate action, and do, or cause to be done, all
things necessary, proper or advisable under applicable Law or otherwise to
consummate and make effective the transactions contemplated by this Agreement,
(ii) obtain from any Governmental Entities any consents, licenses, permits,
waivers, approvals, authorizations or orders required to be obtained or made by
TransMontaigne or Sheffield or any of their subsidiaries in connection with the
authorization, execution and
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delivery of this Agreement and the consummation of the transactions contemplated
hereby, including, without limitation, the Merger, (iii) make all necessary
filings, and thereafter make any other required submissions, with respect to
this Agreement and the Merger required under (A) the Securities Act and the
Exchange Act and the rules and regulations thereunder, and any other applicable
federal or state securities laws, and (B) any other applicable Law; provided
that TransMontaigne and Sheffield shall cooperate with each other in connection
with the making of all such filings, including providing copies of all such
documents to the nonfiling party and its advisors prior to filings and, if
requested, shall accept all reasonable additions, deletions or changes suggested
in connection therewith. Sheffield and TransMontaigne shall furnish all
information required for any application or other filing to be made pursuant to
the rules and regulations of any applicable Law (including all information
required to be included in the Registration Statement) in connection with the
transactions contemplated by this Agreement.
(b) TransMontaigne and Sheffield agree to cooperate with respect to,
and shall cause each of their respective subsidiaries to cooperate with respect
to, and agree to use all reasonable efforts vigorously to contest and resist,
any action, including legislative, administrative or judicial action, and to
have vacated, lifted, reversed or overturned any decree, judgment, injunction or
other order (whether temporary, preliminary or permanent) (an "Order") of any
Governmental Entity that is in effect and that restricts, prevents or prohibits
the consummation of the Merger or any other transactions contemplated by this
Agreement, including, without limitation, by vigorously pursuing all available
avenues of administrative and judicial appeal and all available legislative
action. Each of TransMontaigne and Sheffield also agree to take any and all
actions, including, without limitation, the disposition of assets or the
withdrawal from doing business in particular jurisdictions, required by
regulatory authorities as a condition to the granting of any approvals required
in order to permit the consummation of the Merger or as may be required to
avoid, lift, vacate or reverse any legislative or judicial action which would
otherwise cause any condition to Closing not to be satisfied; provided, however,
that in no event shall either party take, or be required to take, any action
that would or could reasonably be expected to have a TransMontaigne Material
Adverse Effect, and Sheffield shall not be required to take any action which
would be consummated prior to the Effective Time and which would or could
reasonably be expected to have a Sheffield Material Adverse Effect .
(c) (i) Each of Sheffield and TransMontaigne shall give (or shall
cause their respective subsidiaries to give) any notices to third parties, and
use, and cause their respective subsidiaries to use, all reasonable efforts to
obtain any third party consents, including without limitation the consent of
TransMontaigne's lenders described in Section 7.01(d) (A) necessary, proper or
advisable to consummate the transactions contemplated by this Agreement, (B)
otherwise required under any contracts, licenses, leases or other agreements in
connection with the consummation of the transactions contemplated hereby or (C)
required to prevent a Sheffield Material Adverse Effect from occurring prior to
the Effective Time or a TransMontaigne Material Adverse Effect from occurring
after the Effective Time.
(ii) In the event that any party shall fail to obtain any third
party consent described in subsection (c)(i) above, such party shall use all
reasonable efforts, and shall take any such actions reasonably requested by the
other parties, to limit the adverse effect upon
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Sheffield and TransMontaigne, their respective subsidiaries, and their
respective businesses resulting, or which could reasonably be expected to result
after the Effective Time, from the failure to obtain such consent.
(d) Each of TransMontaigne and Sheffield shall promptly notify the
other of (w) any material change in its current or future business, assets,
liabilities, financial condition or results of operations, (x) any complaints,
investigations or hearings (or communications indicating that the same may be
contemplated) of any Governmental Entities with respect to its business or the
transactions contemplated hereby, (y) the institution or the threat of material
litigation involving it or any of its subsidiaries or (z) any event or condition
that might reasonably be expected to cause any of its representations,
warranties, covenants or agreements set forth herein not to be true and correct
at the Effective Time. As used in the preceding sentence, "material litigation"
means any case, arbitration or adversary proceeding or other matter which would
have been required to be disclosed on the Sheffield Disclosure Schedule pursuant
to Section 3.09 or the TransMontaigne Disclosure Schedule pursuant to Section
4.09, as the case may be, if in existence on the date hereof, or in respect of
which the legal fees and other costs (i) to Sheffield (or its subsidiaries)
might reasonably be expected to exceed $20,000 over the life of the matter or
(ii) to TransMontaigne (or its subsidiaries) might reasonably be expected to
exceed $200,000 over the life of the matter.
SECTION 6.04. Tax Treatment. Each party hereto shall use all reasonable
-------------
efforts to cause the Merger to qualify, and shall not take, and shall use all
reasonable efforts to prevent any affiliate of such party from taking, any
actions that could prevent the Merger from qualifying, as a reorganization under
the provisions of section 368(a) of the Code.
SECTION 6.05. Public Announcements. Neither party shall issue any press
--------------------
release or otherwise make any public statements with respect to the Merger
without the approval of the other. The press release announcing the execution
and delivery of this Agreement shall be a joint press release of TransMontaigne
and Sheffield.
SECTION 6.06. Stock Exchange Listing. Sheffield shall use all reasonable
----------------------
efforts to cause the shares of New Sheffield Common Stock to be issued in the
Merger to former holders of TransMontaigne Common Stock to be approved for
listing (subject to official notice of issuance) on the American Stock Exchange
(Emerging Company Marketplace) prior to the Effective Time.
SECTION 6.07. Indemnification. For a period of five years after the
---------------
Effective Time, the Surviving Corporation shall not amend or otherwise modify
Article VIII or IX of the charter of Sheffield or Article 6 of the bylaws of
Sheffield (as in effect on the date hereof) in a manner that would adversely
affect the rights thereunder of any individuals who at any time prior to the
Effective Time were directors or officers of Sheffield in respect of acts or
omissions occurring at or prior to the Effective Time (including, without
limitation, the transactions contemplated by this Agreement), unless such
amendment or modification is required by law. This Section 6.07 is intended to
be for the benefit of, and shall be enforceable by, the persons
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referred to in the foregoing sentence, their heirs and personal representatives,
and shall be binding on the Surviving Corporation and its successors and
assigns.
ARTICLE VII
CLOSING CONDITIONS
SECTION 7.01. Conditions to Obligations of Each Party Under This Agreement.
------------------------------------------------------------
The respective obligations of each party to effect the Merger and the other
transactions contemplated hereby shall be subject to the satisfaction at or
prior to the Closing Date of the following conditions, any or all of which may
be waived in writing by the parties hereto, in whole or in part, to the extent
permitted by applicable law:
(a) Securities Laws. The Registration Statement shall have been
---------------
declared effective by the SEC and Sheffield shall have received all Blue Sky
permits and other authorizations necessary to consummate the transactions
contemplated by this Agreement.
(b) Stockholder Approval. This Agreement and the Merger shall have
--------------------
been approved and adopted by the requisite vote of the stockholders of
Sheffield, and this Agreement and the Merger shall have been approved by the
requisite vote of the stockholders of TransMontaigne.
(c) No Order. No Governmental Entity or federal or state court of
--------
competent jurisdiction shall have enacted, issued, promulgated, enforced or
entered any statute, rule, regulation, executive order, decree, injunction or
other order (whether temporary, preliminary or permanent) which is in effect and
which has the effect of making the Merger illegal or otherwise prohibiting
consummation of the Merger.
(d) TransMontaigne Lender Consents. First National Bank of Boston N.A.
------------------------------
and Massachusetts Mutual Life Insurance Company shall have given their consents
to the consummation of the transactions contemplated hereby.
(e) Opinion of Financial Advisor. Sheffield must have received the
----------------------------
opinion of Rauscher Pierce Refsnes Inc. to the effect that, as of the date of
delivery of the Proxy Statement/Prospectus to the stockholders of Sheffield, the
terms of the Merger Agreement are fair, from a financial point of view, to such
stockholders.
SECTION 7.02. Additional Conditions to Obligations of TransMontaigne . The
-------------------------------------------------------
obligations of TransMontaigne to effect the Merger and the other transactions
contemplated hereby are also subject to the satisfaction at or prior to the
Closing Date of the following conditions, any or all of which may be waived in
writing by TransMontaigne, in whole or in part, to the extent permitted by
applicable law:
(a) Representations and Warranties. Except when the failure of
------------------------------
representations made by Sheffield in this Agreement to be true and correct
(without regard to any
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exception in any representation for matters that would not constitute a
Sheffield Material Adverse Effect) would not result in an aggregate liability to
Sheffield or reduction in value of Sheffield in excess of $350,000, each of the
representations and warranties of Sheffield contained in this Agreement shall be
true and correct as of the Closing Date as though made on and as of the Closing
Date (except to the extent such representations and warranties specifically
relate to an earlier date, in which case such representations and warranties
shall be true and correct as of such earlier date). If a representation is
given to the knowledge of Sheffield, the existence of such knowledge shall be
determined as of the Closing Date. TransMontaigne shall have received a
certificate of the President and the Chief Financial Officer of Sheffield, dated
the Closing Date, to such effect.
(b) Agreements and Covenants. Sheffield shall have performed or
------------------------
complied with all agreements and covenants required by this Agreement to be
performed or complied with by it on or prior to the Closing Date. TransMontaigne
shall have received a certificate of the President and the Chief Financial
Officer of Sheffield, dated the Closing Date, to that effect.
(c) Material Adverse Change. Since the date of this Agreement, there
-----------------------
shall have been no change, occurrence or circumstance in the current or future
business, assets, liabilities, financial condition or results of operations of
Sheffield or any of its subsidiaries having or reasonably likely to have,
individually or in the aggregate, a Sheffield Material Adverse Effect.
TransMontaigne shall have received a certificate of the President and the Chief
Financial Officer of Sheffield, dated the Closing Date, to such effect.
(d) Absence of Regulatory Conditions. There shall not be any action
--------------------------------
taken, or any statute, rule, regulation or order enacted, entered, enforced or
deemed applicable to the Merger, by any Governmental Entity in connection with
the grant of a regulatory approval necessary, in the reasonable business
judgment of TransMontaigne, to the continuing operation of the current or future
business of Sheffield, which imposes any condition or restriction upon
TransMontaigne or the business or operations of Sheffield which, in the
reasonable business judgment of TransMontaigne, would be materially burdensome
in the context of the transactions contemplated by this Agreement.
(e) Tax Opinion. Prior to the date the Registration Statement is
-----------
mailed to the stockholders of TransMontaigne, Holme Roberts & Owen LLC shall
have delivered its written opinion to TransMontaigne, in form and substance
reasonably satisfactory to TransMontaigne, to the effect that: (i) the Merger
will constitute a reorganization within the meaning of section 368(a) of the
Code; (ii) TransMontaigne and Sheffield will each be a party to that
reorganization within the meaning of section 368(b) of the Code; (iii)
TransMontaigne will not recognize any gain or loss for federal income tax
purposes as a result of the Merger; and (iv) for federal income tax purposes no
gain or loss will be recognized by the holders of TransMontaigne stock upon
receipt of shares of New Sheffield Common Stock in the Merger, except with
respect to any cash received in lieu of a fractional share interest in the New
Sheffield Common Stock; and such tax opinion shall not have been withdrawn or
modified in any material
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respect prior to the Closing Date. Counsel may rely on representations from the
parties and the TransMontaigne stockholders in rendering its opinion.
(f) DGS Opinion. Prior to the date the Proxy Statement/Prospectus is
-----------
mailed to the stockholders of TransMontaigne, Davis Graham & Stubbs shall have
delivered its written opinion to TransMontaigne, in form and substance
reasonably satisfactory to TransMontaigne, to the effect that the New Sheffield
Common Stock, when issued as contemplated by this Agreement to former holders of
TransMontaigne Common Stock, will be duly authorized, fully paid and validly
issued. Counsel may rely on representations from the parties in rendering its
opinion.
(g) Withholding. Sheffield must not have determined to withhold any
-----------
amount from the Merger Consideration pursuant to the tax withholding provisions
of section 3406 of the Code, or of Subchapter A of Chapter 3 of the Code, or of
any other provision of law, except with respect to cash paid for fractional
shares and to dissenting stockholders.
(h) Due Diligence. Sheffield shall have provided to TransMontaigne the
-------------
detailed Sheffield Disclosure Schedule and other information required by this
Agreement by February 13, 1996 and TransMontaigne shall not have advised
Sheffield in writing on or before February 16, 1996 that it has concluded that,
as a result of its due diligence with respect to Sheffield, there exists
information that TransMontaigne believes is likely to have a material adverse
effect on the future operating prospects of Sheffield that, if known by
TransMontaigne as of the date of this Agreement, would have caused
TransMontaigne to refuse to enter into this Agreement.
(i) Warrants. Sheffield's warrants to purchase 81,450 shares of Old
--------
Sheffield Common Stock must have been exercised.
SECTION 7.03. Additional Conditions to Obligations of Sheffield. The
-------------------------------------------------
obligations of Sheffield to effect the Merger and the other transactions
contemplated hereby are also subject to the satisfaction at or prior to the
Closing Date of the following conditions, any or all of which may be waived in
writing by Sheffield, in whole or in part, to the extent permitted by applicable
law:
(a) Representations and Warranties. Except when the failure of
------------------------------
representations made by TransMontaigne in this Agreement to be true and correct
(without regard to any exception in any representation for matters that would
not constitute a TransMontaigne Material Adverse Effect) would not result in an
aggregate liability to TransMontaigne or reduction in value of TransMontaigne in
excess of $3,500,000, each of the representations and warranties of
TransMontaigne contained in this Agreement shall be true and correct as of the
Closing Date as though made on and as of the Closing Date (except to the extent
such representations and warranties specifically relate to an earlier date, in
which case such representations and warranties shall be true and correct as of
such earlier date). If a representation is given to the knowledge of
TransMontaigne, the existence of such knowledge shall be determined as of the
Closing Date. Sheffield shall have received a certificate of the
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President and the Chief Financial Officer of TransMontaigne, dated the Closing
Date, to such effect.
(b) Agreements and Covenants. TransMontaigne shall have performed or
------------------------
complied with all agreements and covenants required by this Agreement to be
performed or complied with by it on or prior to the Closing Date. Sheffield
shall have received a certificate of the President and the Chief Financial
Officer of TransMontaigne, dated the Closing Date, to that effect.
(c) Due Diligence. TransMontaigne shall have provided to Sheffield the
-------------
detailed TransMontaigne Disclosure Schedule and other information required by
this Agreement by February 13, 1996 and Sheffield shall not have advised
TransMontaigne in writing on or before February 16, 1996 that it has concluded
that, as a result of its due diligence with respect to TransMontaigne, there
exists information that Sheffield believes is likely to have a material adverse
effect on the future operating prospects of TransMontaigne that, if known by
Sheffield as of the date of this Agreement, would have caused Sheffield to
refuse to enter into this Agreement.
(d) Tax Opinion. Holme Roberts & Owen LLC shall have delivered its
-----------
written opinion to Sheffield, in form and substance reasonably satisfactory to
Sheffield, to the effect that: (i) the Merger will constitute a reorganization
within the meaning of section 368(a) of the Code; (ii) TransMontaigne and
Sheffield will each be a party to that reorganization within the meaning of
section 368(b) of the Code; (iii) TransMontaigne will not recognize any gain or
loss for federal income tax purposes as a result of the Merger; and (iv) for
federal income tax purposes no gain or loss will be recognized by the holders of
TransMontaigne stock upon receipt of shares of New Sheffield Common Stock in the
Merger, except with respect to any cash received in lieu of a fractional share
interest in the New Sheffield Common Stock; and such tax opinion shall not have
been withdrawn or modified in any material respect prior to the Closing Date.
Counsel may rely on representations from the parties and the TransMontaigne
stockholders in rendering its opinion.
(e) Nonforeign Certificates. Each stockholder of TransMontaigne shall
-----------------------
have provided to Sheffield a certificate of nonforeign status pursuant to
Treasury Regulations under Section 1445 of the Code.
(f) Material Adverse Change. Since the date of this Agreement, there
-----------------------
shall have been no change, occurrence or circumstance in the current or future
business, assets, liabilities, financial condition or results of operations of
TransMontaigne or any of its subsidiaries having or reasonably likely to have,
individually or in the aggregate, a TransMontaigne Material Adverse Effect.
Sheffield shall have received a certificate of the President and the Chief
Financial Officer of TransMontaigne, dated the Closing Date, to such effect.
ARTICLE VIII
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TERMINATION, AMENDMENT AND WAIVER
SECTION 8.01. Termination. This Agreement may be terminated at any time
-----------
prior to the Effective Time, whether before or after approval of this Agreement
and the Merger by the stockholders of Sheffield:
(a) by mutual consent of TransMontaigne and Sheffield;
(b) by TransMontaigne, upon a material breach of any representation,
warranty, covenant or agreement on the part of Sheffield set forth in this
Agreement, or if any representation or warranty of Sheffield shall have become
untrue, in either case such that the conditions set forth in Section 7.02(a) or
Section 7.02(b) of this Agreement, as the case may be, would be incapable of
being satisfied by July 31, 1996 (or as otherwise extended as described in
Section 8.01(e)); provided, that in any case, a wilful breach shall be deemed to
cause such conditions to be incapable of being satisfied for purposes of this
Section 8.01(b);
(c) by Sheffield, upon a material breach of any representation,
warranty, covenant or agreement on the part of TransMontaigne set forth in this
Agreement, or if any representation or warranty of TransMontaigne shall have
become untrue, in either case such that the conditions set forth in Section
7.03(a) or Section 7.03(b) of this Agreement, as the case may be, would be
incapable of being satisfied by July 31, 1996 (or as otherwise extended as
described in Section 8.01(e)); provided, that in any case, a wilful breach shall
be deemed to cause such conditions to be incapable of being satisfied for
purposes of this Section 8.01(c);
(d) by either TransMontaigne or Sheffield, if there shall be any Order
which is final and nonappealable preventing the consummation of the Merger,
except if the party relying on such Order to terminate this Agreement has not
complied with its obligations under Section 6.03(b) of this Agreement;
(e) by either TransMontaigne or Sheffield, if the Merger shall not have
been consummated before July 31, 1996; provided, however, that this Agreement
may be extended by written notice of either TransMontaigne or Sheffield to a
date not later than October 30, 1996, if the Merger shall not have been
consummated as a direct result of Sheffield or TransMontaigne having failed by
July 31, 1996 to receive all required regulatory approvals or consents with
respect to the Merger;
(f) by either TransMontaigne or Sheffield, if this Agreement and the
Merger shall fail to receive the requisite vote for approval and adoption by the
stockholders of Sheffield at the Sheffield Stockholders Meeting;
(g) by TransMontaigne, if (i) the Board of Directors of Sheffield
withdraws, modifies or changes its recommendation of this Agreement or the
Merger in a manner adverse to TransMontaigne or shall have resolved to do any of
the foregoing; (ii) the Board of Directors of Sheffield shall have recommended
to the stockholders of Sheffield any Competing Transaction or shall have
resolved to do so; (iii) a tender offer or exchange offer for
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20% or more of the outstanding shares of capital stock of Sheffield is
commenced, and the Board of Directors of Sheffield does not recommend that
stockholders not tender their shares into such tender or exchange offer or; (iv)
any person (other than TransMontaigne or an affiliate thereof, or any
stockholder of Sheffield as of the date of this Agreement) shall have acquired
beneficial ownership or the right to acquire beneficial ownership of, or any
"group" (as such term is defined under Section 13(d) of the Exchange Act and the
rules and regulations promulgated thereunder), shall have been formed which
beneficially owns, or has the right to acquire beneficial ownership of, 20% or
more of the then outstanding shares of capital stock of Sheffield; or
(h) by Sheffield, if the Board of Directors of Sheffield (x) fails to
make or withdraws its recommendation referred to in Section 6.02(a) if there
exists at such time a Competing Transaction (as defined in Section 5.02(g)), or
(y) recommends to Sheffield's stockholders approval or acceptance of a Competing
Transaction, in each case only if the Board of Directors of Sheffield, after
consultation with and based upon the written opinion of independent legal
counsel (who may be Sheffield's regularly engaged independent legal counsel),
determines in good faith that such action is necessary for such Board of
Directors to comply with its fiduciary duties to stockholders under applicable
law.
The right of any party hereto to terminate this Agreement pursuant to this
Section 8.01 shall remain operative and in full force and effect regardless of
any investigation made by or on behalf of any party hereto, any person
controlling any such party or any of their respective officers, directors,
representatives or agents, whether prior to or after the execution of this
Agreement.
SECTION 8.02. Effect of Termination. Except as provided in Section 8.05 or
---------------------
Section 9.01 of this Agreement, in the event of the termination of this
Agreement pursuant to Section 8.01, this Agreement shall forthwith become void,
there shall be no liability on the part of TransMontaigne or Sheffield to the
other and all rights and obligations of any party hereto shall cease, except
that nothing herein shall relieve any party of any liability for (i) any breach
of such party's covenants or agreements contained in this Agreement, or (ii) any
willful breach of such party's representations or warranties contained in this
Agreement.
SECTION 8.03. Amendment. This Agreement may be amended by the parties
---------
hereto by action taken by or on behalf of their respective Boards of Directors
at any time prior to the Effective Time; provided, however, that, after approval
of the Merger by the stockholders of Sheffield, (i) no amendment, which under
applicable law may not be made without the approval of the stockholders of
Sheffield or TransMontaigne, may be made without such approval, and (ii) no
amendment, which under the applicable rules of the American Stock Exchange
(Emerging Company Marketplace), may not be made without the approval of the
stockholders of Sheffield, may be made without such approval. This Agreement may
not be amended except by an instrument in writing signed by the parties hereto.
SECTION 8.04. Waiver. At any time prior to the Effective Time, any party
------
hereto may (a) extend the time for the performance of any of the obligations or
other acts of the other party hereto, (b) waive any inaccuracies in the
representations and warranties of the other party
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contained herein or in any document delivered pursuant hereto and (c) waive
compliance by the other party with any of the agreements or conditions contained
herein. Any such extension or waiver shall be valid only if set forth in an
instrument in writing signed by the party or parties to be bound thereby.
SECTION 8.05. Fees, Expenses and Other Payments.
---------------------------------
(a) Except as provided in Section 8.05(c) of this Agreement, all
Expenses (as defined in paragraph (b) of this Section 8.05) incurred by the
parties hereto shall be borne solely and entirely by the party that has incurred
such Expenses.
(b) "Expenses" as used in this Agreement shall include all out-of-
pocket expenses (including, without limitation, all fees and expenses of
counsel, accountants, investment bankers, experts and consultants to a party
hereto and its affiliates) incurred by a party or on its behalf in connection
with or related to the authorization, preparation, negotiation, execution and
performance of this Agreement, the preparation, printing, filing and mailing of
the Registration Statement and the Proxy Statement/Prospectus, the solicitation
of stockholder approvals and all other matters related to the consummation of
the transactions contemplated hereby.
(c) Sheffield agrees that if this Agreement is terminated pursuant to:
(i) Section 8.01(b) and (x) such termination is the result of a
wilful breach of any representation, warranty, covenant or agreement of
Sheffield contained herein, (y) Sheffield shall have had contacts or entered
into negotiations relating to a Competing Transaction, in any such case at any
time within the period commencing on the date of this Agreement through the date
of termination of this Agreement, and (z) within twelve months after the date of
termination of this Agreement, and with respect to any person or group with whom
the contacts or negotiations referred to in clause (y) have occurred, a Business
Combination (as defined in Section 8.05(e)) shall have occurred or Sheffield
shall have entered into a definitive agreement providing for a Business
Combination; or
(ii) Section 8.01(f) because this Agreement and the Merger shall
fail to receive the requisite vote for approval and adoption by the stockholders
of Sheffield at the Sheffield Stockholders Meeting and at the time of such
meeting there shall exist a Competing Transaction; or
(iii) Section 8.01(g)(i) and at the time of the withdrawal,
modification or change (or resolution to do so) of its recommendation by the
Board of Directors of Sheffield, there shall exist a Competing Transaction; or
(iv) Sections 8.01(g)(ii) or (iii); or
(v) Section 8.01(h);
I-53
<PAGE>
then Sheffield shall pay to TransMontaigne an amount equal to $410,000, which
amount is inclusive of all of TransMontaigne's Expenses.
(d) Any payment required to be made pursuant to Section 8.05(c) of this
Agreement shall be made as promptly as practicable but not later than three
business days after termination of this Agreement, and shall be made by wire
transfer of immediately available funds to an account designated by
TransMontaigne, except that any payment to be made as the result of an event
described in Section 8.05(c)(i) shall be made as promptly as practicable but not
later than three business days after the occurrence of the Business Combination
or the execution of the definitive agreement providing for a Business
Combination.
(e) For purposes of this Section 8.05, the term "Business Combination"
means (i) a merger (other than pursuant to this Agreement), consolidation, share
exchange, business combination or similar transaction involving Sheffield, (ii)
a sale, lease, exchange, transfer or other disposition of 20% or more of the
assets of Sheffield and its subsidiaries, taken as a whole, in a single
transaction or a series of transactions, or (iii) the acquisition, by a person
(other than TransMontaigne or any affiliate thereof) or group (as such term is
defined under Section 13(d) of the Exchange Act and the rules and regulations
thereunder) of beneficial ownership (as defined in Rule 13d-3 under the Exchange
Act) of 20% or more of the Old Sheffield Common Stock whether by tender or
exchange offer or otherwise.
ARTICLE IX
GENERAL PROVISIONS
SECTION 9.01. Effectiveness of Representations, Warranties and Agreements.
-----------------------------------------------------------
(a) Except as set forth in Section 9.01(b) of this Agreement, the
representations, warranties and agreements of each party hereto shall remain
operative and in full force and effect regardless of any investigation made by
or on behalf of any other party hereto, any person controlling any such party or
any of their officers, directors, representatives or agents, whether prior to or
after the execution of this Agreement.
(b) The representations, warranties and agreements in this Agreement
shall terminate at the Effective Time or upon the termination of this Agreement
pursuant to Article VIII, except that the agreements set forth in Articles I and
II and IX and Sections 6.04 and 6.07 shall survive the Effective Time and those
set forth in Sections 5.04(d), 8.02 and 8.05 and Article IX hereof shall survive
termination. Nothing herein shall be construed to cause the Confidentiality
Agreement to terminate upon the termination of this Agreement pursuant to
Article VIII.
SECTION 9.02. Notices. All notices and other communications given or made
-------
pursuant hereto shall be in writing and shall be deemed to have been duly given
upon receipt, if delivered personally, mailed by registered or certified mail
(postage prepaid, return receipt requested) to the parties at the following
addresses (or at such other address for a party as shall
I-54
<PAGE>
be specified by like changes of address) or sent by electronic transmission to
the telecopier number specified below:
(a) If to TransMontaigne, to:
TransMontaigne Oil Company, Inc.
370 17th Street
Republic Plaza, Suite 900
Denver, CO 80208
Attention: Harold R. Logan Jr.
Telecopier No.: (303) 605-1671
with a copy to:
Holme Roberts & Owen LLC
1700 Lincoln Street, Suite 4100
Denver, Colorado 80203
Attention: Joseph W. Morrisey, Jr.
Telecopier No.: (303) 866-0200
(b) If to Sheffield, to:
Sheffield Exploration Company Inc.
1801 Broadway, Suite 600
Denver, Colorado 80202
Attention: President
Telecopier No.: (303) 296-0329
with a copy to:
Davis Graham & Stubbs
370 Seventeenth Street
Denver, Colorado 80202
Attention: Lester L. Woodward, Jr.
Telecopier No.: (303) 893-1379
SECTION 9.03. Certain Definitions. For the purposes of this Agreement, the
-------------------
term:
(a) "affiliate" means a person that directly or indirectly, through one
or more intermediaries, controls, is controlled by, or is under common control
with, the first mentioned person;
(b) a person shall be deemed a "beneficial owner" of or to have
"beneficial ownership" of Old or New Sheffield Common Stock or TransMontaigne
Common Stock, as the case may be, in accordance with the interpretation of the
term "beneficial
I-55
<PAGE>
ownership" as defined in Rule 13d-3 under the Exchange Act, as in effect on the
date hereof; provided that a person shall be deemed to be the beneficial owner
of, and to have beneficial ownership of, Old or New Sheffield Common Stock or
TransMontaigne Common Stock, as the case may be, that such person or any
affiliate of such person has the right to acquire (whether such right is
exercisable immediately or only after the passage of time) pursuant to any
agreement, arrangement or understanding or upon the exercise of conversion
rights, exchange rights, warrants or options, or otherwise.
(c) "business day" means any day other than a day on which banks in the
State of New York are authorized or obligated to be closed;
(d) "control" (including the terms "controlled," "controlled by" and
"under common control with") means the possession, directly or indirectly or as
trustee or executor, of the power to direct or cause the direction of the
management or policies of a person, whether through the ownership of stock or as
trustee or executor, by contract or credit arrangement or otherwise;
(e) "knowledge" or "known" shall mean, with respect to any matter in
question, if an executive officer of Sheffield or TransMontaigne, as the case
may be, has actual knowledge of such matter;
(f) "person" means an individual, corporation, partnership,
association, trust, unincorporated organization, other entity or group (as
defined in Section 13(d) of the Exchange Act);
(g) "Significant Subsidiary" means any subsidiary of Sheffield or
TransMontaigne, as the case may be, that would constitute a Significant
Subsidiary of such party within the meaning of Rule 1-02 of Regulation S-X of
the SEC; and
(h) "subsidiary" or "subsidiaries" of Sheffield, TransMontaigne, the
Surviving Corporation or any other person, means any corporation, partnership,
joint venture or other legal entity of which Sheffield, TransMontaigne, the
Surviving Corporation or any such other person, as the case may be (either alone
or through or together with any other subsidiary), owns, directly or indirectly,
50% or more of the stock or other equity interests the holders of which are
generally entitled to vote for the election of the board of directors or other
governing body of such corporation or other legal entity.
SECTION 9.04. Headings. The headings contained in this Agreement are for
--------
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Section references herein are, unless the
context otherwise requires, references to sections of this Agreement.
SECTION 9.05. Severability. If any term or other provision of this
------------
Agreement is invalid, illegal or incapable of being enforced by any rule of law
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so
I-56
<PAGE>
long as the economic or legal substance of the transactions contemplated hereby
is not affected in any manner materially adverse to any party. Upon such
determination that any term or other provision is invalid, illegal or incapable
of being enforced, the parties hereto shall negotiate in good faith to modify
this Agreement so as to effect the original intent of the parties as closely as
possible in an acceptable manner to the end that transactions contemplated
hereby are fulfilled to the extent possible.
SECTION 9.06. Entire Agreement. This Agreement (together with the
----------------
Exhibits, the Sheffield Disclosure Schedule and the TransMontaigne Disclosure
Schedule) and the Confidentiality Agreement constitute the entire agreement of
the parties, and supersede all prior agreements and undertakings, both written
and oral, among the parties or between any of them, with respect to the subject
matter hereof. Sheffield agrees that nothing contained in this Agreement, the
proxies granted by certain officers and directors of Sheffield to TransMontaigne
on or about the date hereof or the transactions contemplated hereby or thereby
shall be deemed to violate the Confidentiality Agreement, and that such
agreements and proxies have been entered into or granted with the prior written
consent of Sheffield.
SECTION 9.07. Assignment. This Agreement shall not be assigned by
----------
operation of law or otherwise.
SECTION 9.08. Parties in Interest. This Agreement shall be binding upon
-------------------
and inure solely to the benefit of each party hereto, and nothing in this
Agreement, express or implied (other than as contemplated by Section 6.07), is
intended to or shall confer upon any other person any right, benefit or remedy
of any nature whatsoever under or by reason of this Agreement.
SECTION 9.09. Specific Performance. The parties hereby acknowledge and
--------------------
agree that the failure of any party to perform its agreements and covenants
hereunder, including its failure to take all actions as are necessary on its
part to the consummation of the Merger, will cause irreparable injury to the
other parties for which damages, even if available, will not be an adequate
remedy. Accordingly, each party hereby consents to the issuance of injunctive
relief by any court of competent jurisdiction to compel performance of such
party's obligations and to the granting by any court of the remedy of specific
performance of its obligations hereunder.
SECTION 9.10. Failure or Indulgence Not Waiver; Remedies Cumulative. No
-----------------------------------------------------
failure or delay on the part of any party hereto in the exercise of any right
hereunder shall impair such right or be construed to be a waiver of, or
acquiescence in, any breach of any representation, warranty or agreement herein,
nor shall any single or partial exercise of any such right preclude other or
further exercise thereof or of any other right. All rights and remedies existing
under this Agreement are cumulative to, and not exclusive to, and not exclusive
of, any rights or remedies otherwise available.
SECTION 9.11. Governing Law. This Agreement shall be governed by, and
-------------
construed in accordance with, the laws of the State of Delaware, regardless of
the laws that might otherwise govern under applicable principles of conflicts of
law.
I-57
<PAGE>
SECTION 9.12. Counterparts. This Agreement may be executed in multiple
------------
counterparts, and by the different parties hereto in separate counterparts, each
of which when executed shall be deemed to be an original but all of which taken
together shall constitute one and the same agreement.
I-58
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed as of the date first written above by their respective officers
thereunto duly authorized.
TRANSMONTAIGNE OIL COMPANY
By: /s/ Cortlandt S. Dietler
------------------------
Cortlandt S. Dietler
President and Chief Executive Officer
SHEFFIELD EXPLORATION COMPANY, INC.
By: /s/ J. Samuel Butler
--------------------
J. Samuel Butler
President and Chief Executive Officer
I-59
<PAGE>
[LETTERHEAD OF RAUSCHER PIERCE REFSNES, INC. APPEARS HERE]
May 10, 1996
Board of Directors
Sheffield Exploration Company, Inc.
1801 Broadway, Suite 600
Denver, Colorado 80202
Gentlemen:
You have requested our opinion as to the fairness from a financial
point of view to the stockholders of Sheffield Exploration Company, Inc., a
Delaware corporation ("Sheffield"), of the terms of the proposed merger
("Merger") as set forth in the Restated Agreement and Plan of Merger, dated
February 6, 1996 (the "Agreement"), by and between Sheffield and TransMontaigne
Oil Company, a Delaware corporation ("TransMontaigne"). Pursuant to the
Agreement, TransMontaigne will be merged with and into Sheffield, and (i) each
share of common stock, $.10 par value, of TransMontaigne ("TransMontaigne Common
Stock") will be converted into the right to receive one share of common stock,
$.01 par value, of Sheffield ("New Sheffield Common Stock"); (ii) each 2.432599
shares of Sheffield common stock, $.01 par value, issued and outstanding as of
the effective time of the merger ("Old Sheffield Common Stock") will be
converted into the right to receive one share of New Sheffield Common Stock;
(iii) the name of Sheffield will be changed to "TransMontaigne Oil Company"; and
(iv) the number of authorized shares of New Sheffield Common Stock will be
increased to 40,000,000.
In arriving at our opinion, we have reviewed the Agreement and certain
publicly available business and financial information concerning Sheffield and
TransMontaigne. We have also reviewed certain other information, including
financial forecasts, provided to us by Sheffield and TransMontaigne, and have
met with the managements of Sheffield and TransMontaigne to discuss the business
and prospects of Sheffield and TransMontaigne, both individually and as a
combined entity. Also, we have reviewed certain internally-prepared reserve
reports relating to Sheffield's oil and gas properties (the "Reserve
Reports").
<PAGE>
Board of Directors
Sheffield Exploration Company, Inc.
May 10, 1996
Page 2
We have reviewed the terms of the Merger in relation to, among
other things: current and historical market prices and trading volume of the
Old Sheffield Common Stock; the respective companies' cash flow, net income and
book value per share; the capitalization and financial condition of Sheffield
and TransMontaigne; the pro forma financial impact of the Merger on Sheffield
and TransMontaigne, including the potential relative ownership of the New
Sheffield Common Stock after the Merger by the current shareholders of Sheffield
and TransMontaigne; and, to the extent publicly available, the terms of recent
merger and acquisition transactions involving reference companies. In addition,
we have reviewed the merger premiums paid in recent stock-for-stock acquisitions
of energy industry companies. We have also analyzed certain financial, stock
market and other publicly available information relating to the business of
other reference companies. In addition to the foregoing, we have considered such
other information, financial studies, analyses and investigations and financial,
economic and market criteria as we deemed relevant in arriving at our opinion.
In connection with our review, we have not independently verified any of
the foregoing information, and we have relied upon such information being
complete and accurate in all material respects. With respect to the financial
forecasts, we have assumed that they have been reasonably prepared on bases
reflecting the best currently available estimates and judgments of the
managements of Sheffield and TransMontaigne as to the future financial
performance of Sheffield and TransMontaigne, respectively. In addition, we have
not made an independent evaluation or appraisal of the assets or liabilities
(contingent or otherwise) of Sheffield and TransMontaigne, nor (except for the
Reserve Reports) have we been furnished with any such evaluations or
appraisals. In rendering our opinion, we have assumed that in the course of
obtaining the necessary regulatory and governmental approvals for the proposed
Merger, no restriction will be imposed that will have a material adverse effect
on the contemplated benefits of the proposed Merger. Our opinion is based
necessarily upon financial, economic, market and other conditions as they exist
and can be evaluated on the date hereof.
Rauscher Pierce Refsnes, Inc. as part of its investment banking
business, is continually engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, secondary distributions of listed and unlisted securities,
private placements and valuations for estate, corporate and other purposes. We
will receive a fee for rendering this opinion. In the ordinary course of our
business, we may actively trade the securities of Sheffield for our own account
and for the accounts of customers and, accordingly, may at any time hold a long
or short position in such securities.
<PAGE>
The Board of Directors
Sheffield Exploration Company, Inc.
May 10, 1996
Page 3
It is understood that this letter is for the information of the Board of
Directors of Sheffield in connection with its consideration of the Merger and is
not to be quoted or referred to, in whole or in part, in any registration
statement, prospectus or proxy statement, or in any other document used in
connection with the offering or sale of securities, nor shall this letter be
used for any other purposes, without Rauscher Pierce Refsnes, Inc.'s prior
written consent, which will not be unreasonably withheld. We understand that
this letter will be reprinted in its entirety in the proxy statement sent to the
stockholders of Sheffield in connection with the Merger.
Based upon and subject to the foregoing, our experience as investment
bankers, our work described above and other factors we deemed relevant, we are
of the opinion that the terms of the proposed Merger are fair to stockholders of
Sheffield from a financial point of view.
Very truly yours,
RAUSCHER PIERCE REFSNES, INC.
<PAGE>
Appendix III
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
December 31, 1995 Commission File Number 0-13201
SHEFFIELD EXPLORATION COMPANY, INC.
1801 Broadway, Suite 600
Denver, Colorado 80202
Incorporated in Delaware IRS ID #06-1052062
Telephone: (303) 296-1908
Sheffield Exploration Company, Inc. ("the Company") (1) has filed all
reports required to be filed by Section 13 of the Securities Exchange
Act of 1934 during the preceding 12 months and (2) has been subject to
such filing requirements for the past 90 days.
3,447,979 shares of common stock, $.01 par value,
outstanding at February 7, 1996
<PAGE>
INDEX
-----
Page
----
Part One - Financial Information
Consolidated Balance Sheets - December 31, 1995
and June 30, 1995 1
Consolidated Statements of Operations - Six months
and three months ended December 31, 1995 and 1994 3
Consolidated Statements of Cash Flows - Six months
ended December 31, 1995 and 1994 4
Notes to Consolidated Financial Statements 5
Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
Part Two - Other Information
Submission of Matters to a Vote of Security Holders 10
Exhibits and Reports on Form 8-K 11
Signatures 11
Exhibit Index 12
<PAGE>
PART ONE - FINANCIAL INFORMATION
SHEFFIELD EXPLORATION COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
December 31, June 30,
1995 1995
------------- -------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 2,885,261 $ 43,594
Receivables, net 1,116,607 1,156,837
Gas in storage -- 237,810
Assets held for sale 87,450 4,144,040
Deferred income taxes, net -- 670,000
Other 70,531 78,809
------------- -------------
4,159,849 6,331,090
PROPERTY AND EQUIPMENT
(Using the successful efforts method)
Unproved oil and gas properties 668,218 624,980
Proved properties 4,381,685 4,258,381
Gas plant and related equipment 2,201,782 2,071,328
Other property and equipment 149,312 123,402
------------- -------------
7,400,997 7,078,091
Accumulated depreciation, depletion and
amortization and impairment (4,101,723) (3,800,247)
------------- -------------
3,299,274 3,277,844
Deferred income taxes, net 321,000 321,000
Other assets 38,743 105,832
------------- -------------
$ 7,818,866 $ 10,035,766
============= =============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
-1-
<PAGE>
SHEFFIELD EXPLORATION COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31, June 30,
1995 1995
------------- -------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 836,103 $ 849,349
Deposits -- 12,783
Current portion of long-term debt -- 1,175,250
Production and ad valorem taxes payable 113,153 147,781
------------- -------------
949,256 2,185,163
LONG-TERM DEBT, net of current portion 100,050 1,374,050
STOCKHOLDERS' EQUITY
Preferred stock $.01 par value; 2,000,000 shares
authorized; none issued -- --
Common stock, $.01 par value; 10,000,000 shares
authorized; 3,423,598 and 3,389,261 shares
issued and outstanding at December 31, 1995
and June 30, 1995, respectively 34,236 33,893
Additional paid-in capital 6,856,217 6,805,550
Accumulated deficit (120,893) (362,890)
------------- -------------
6,769,560 6,476,553
------------- -------------
$ 7,818,866 $ 10,035,766
============= =============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
-2-
<PAGE>
SHEFFIELD EXPLORATION COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
----------------------------- -----------------------------
1995 1994 1995 1994
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues
Gas processing, gathering and storage $ 445,702 $ 1,588,169 $ 2,590,323 $ 3,584,912
Oil and gas sales 264,736 309,154 506,416 617,933
------------- ------------- ------------- -------------
Total revenues 710,438 1,897,323 3,096,739 4,202,845
Expenses
Gas processing, gathering and storage 298,195 1,368,581 1,929,257 3,087,216
Operation of producing properties 117,181 95,172 214,734 189,286
Production taxes 28,465 30,346 55,473 58,448
Exploration 13,413 6,919 43,677 21,107
Depreciation, depletion and amortization:
Gas processing, gathering and storage assets 49,671 98,499 171,503 211,633
Oil and gas properties 108,536 110,965 202,134 199,523
Other 2,811 12,635 16,348 22,195
Impairments:
Unproved properties -- 100,951 -- 100,951
Proved properties -- 511,347 -- 511,347
General and administrative, net 345,759 111,151 581,736 238,254
------------- ------------- ------------- -------------
Total expenses 964,031 2,446,566 3,214,862 4,639,960
------------- ------------- ------------- -------------
Operating loss (253,593) (549,243) (118,123) (437,115)
Other income (expense)
Interest income and other 43,551 11,289 49,492 13,089
Gain on sale of fixed assets 1,037,517 10,411 1,050,954 17,552
Interest expense, net of capitalized interest (6,450) (42,651) (70,326) (87,704)
------------- ------------- ------------- -------------
1,074,618 (20,951) 1,030,120 (57,063)
------------- ------------- ------------- -------------
Income (loss) before income taxes 821,025 (570,194) 911,997 (494,178)
Provision (benefit) for income taxes 636,000 (28,000) 670,000 --
------------- ------------- ------------- -------------
Net income (loss) $ 185,025 $ (542,194) $ 241,997 $ (494,178)
============= ============= ============= =============
Net income (loss) per share $ 0.05 $ (0.17) $ 0.07 $ (0.15)
============= ============= ============= =============
Weighted average common shares outstanding 3,402,157 3,266,565 3,396,035 3,266,565
============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
-3-
<PAGE>
SHEFFIELD EXPLORATION COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
September 30,
------------------------------
1995 1995
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 241,997 $ (494,178)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depletion, depreciation and amortization 389,985 433,351
Deferred income taxes 670,000 --
Impairment expense -- 612,298
(Gain) on asset sales (1,050,954) (5,628)
Cost of storage gas sales (purchases) 238,624 (110,600)
Stock as compensation 50,000 --
Other 12,330 8,631
Changes in current assets and liabilities:
Receivables 23,230 316,559
Payables (13,246) (73,649)
Taxes payable (34,628) 24,911
Other current assets 8,278 68,611
Other assets (3,972) 45,227
------------- -------------
Net cash provided by operating activities 531,644 825,533
Cash flows from investing activities:
Proceeds from asset sales 5,271,896 8,500
Additions to properties:
Producing properties (123,304) (190,637)
Gas plant, gathering and storage systems (130,836) (372,668)
Unproved properties (54,694) (97,406)
Other (25,910) (132,998)
Additions to assets held for sale (166,104) --
Gas in storage -- (266,000)
Deposits (12,783) 217,000
------------- -------------
Net cash provided by (used in) investing activities 4,758,265 (834,209)
Cash flows from financing activities:
Loan proceeds -- 173,715
Payment of loan principal (2,449,250) --
Proceeds from stock issuance 3,000 --
Purchase of common stock (1,992) --
------------- -------------
Net cash (used in) provided by financing activities (2,448,242) 173,715
------------- -------------
Net increase in cash and equivalents 2,841,667 165,039
Cash and equivalents at beginning of period 43,594 360,124
------------- -------------
Cash and equivalents at end of period $ 2,885,261 $ 525,163
============= =============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
-4-
<PAGE>
SHEFFIELD EXPLORATION COMPANY AND SUBSIDIARIES
("Sheffield" or "the Company")
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) FINANCIAL STATEMENT ADJUSTMENTS AND FOOTNOTE DISCLOSURES:
The accompanying consolidated financial statements are unaudited.
However, in the opinion of management, the accompanying financial
statements reflect all adjustments, which are normal and recurring in
nature, necessary for a fair presentation.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the
Securities and Exchange Commission's rules and regulations.
Management believes the disclosures made are adequate to make the
information not misleading and suggests that these financial
statements be read in conjunction with the Company's June 30, 1995
Form 10-K.
Certain reclassifications have been made to the prior year financial
statements to conform to the current year presentation.
(2) INCOME TAXES:
As a result of the Company's January 1, 1991 quasi-reorganization,
income tax benefits resulting from utilization in subsequent years of
net operating loss carryforwards existing at January 1, 1991 are
excluded from results of operations and, since the Company's adoption
of Statement of Financial Accounting Standard No. 109 in fiscal 1993,
credited to the deferred tax asset. From the date of quasi-
reorganization through June 30, 1992, benefits were credited to
additional paid-in capital.
The $670,000 tax provision for the six months ended December 31, 1995
consists of taxes at the federal statutory rate of 34 percent
($328,000), a 3 percent state provision ($27,000) and an increase in
the tax asset valuation allowance of $315,000.
As discussed in Note 5, the Company has executed a merger agreement.
Assuming the merger is consummated, it is anticipated that future use
of the Company's tax loss carryforward will be restricted.
5
<PAGE>
(3) NET INCOME (LOSS) PER SHARE:
Warrants and options have been excluded from the income (loss) per
share calculation as they have no material dilutive effect.
(4) RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARD:
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standard No. 123 "Accounting for Stock-Based Compensation"
in October 1995. This statement, which is required to be adopted in
fiscal year 1997, introduces a fair-value based method of accounting
for stock-based compensation. The Company has not yet adopted the
statement and has not yet determined the impact it may have on the
Company's financial statements or on the financial statement
disclosure.
(5) PROPOSED MERGER WITH TRANSMONTAIGNE OIL COMPANY:
On February 6, 1996, the Company executed an agreement with
TransMontaigne Oil Company ("TransMontaigne"), a privately-held,
Denver-based holding company, to merge TransMontaigne into Sheffield.
Sheffield will be the surviving corporation and its name will be
changed to TransMontaigne Oil Company. The current stockholders of
TransMontaigne will own 91% of the surviving corporation. The board
of directors of the surviving entity will consist of the members of
the current TransMontaigne board, as well as Edwin H. Morgens,
chairman of Sheffield. It is expected that the current officers of
TransMontaigne will serve as officers after the merger.
The merger is subject to approval by the stockholders of
TransMontaigne and Sheffield. The Company expects to file with the
Securities and Exchange Commission a registration statement which
includes proxy material for a stockholders' meeting, presently
expected to be held in late April 1996.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
GENERAL. On October 2, the Company sold all of its gas gathering and
processing assets in Kansas and Oklahoma for a pre-adjustment price of
$5.5 million (the "Asset Sale"). The purchase and sale agreement
provided for an effective date of July 1, 1995. However, the purchase
and sale agreement specified that Sheffield was entitled to all
proceeds from the sale of natural gas from storage inventory provided
that at closing there be a minimum of 150,000 mmbtu in inventory.
Additionally, Sheffield continued to operate the assets until
January 31, 1996. The Company recorded a gain of approximately $1
million during the quarter ended December 31, 1995 as a result of the
Asset Sale. A portion of the proceeds have been used to substantially
reduce bank debt, leaving the Company with a cash balance of
approximately $3 million. This cash balance is significantly greater
than that needed for the capital projects Sheffield currently plans to
undertake in fiscal 1996.
As disclosed in Item 6, during February 1996, Sheffield issued a press
release to announce that it had signed an agreement to merge with a
company considerably larger than itself. Accordingly, Sheffield does
not presently intend to undertake any significant capital expenditures
outside its current areas of interest prior to the merger, which is
anticipated to consummate prior to Sheffield's June 30, 1996 fiscal
year end.
OPERATIONS. The primary difference in operating cash flows from 1994
to 1995 relates to the $317,000 increase in cash generated from
changes in receivable balances during the six months ended
December 31, 1994. Although the sale of the Kansas and Oklahoma
assets will ultimately have a negative effect on cash flows from
operating activities, that effect was not manifested during the six
months ended December 31, 1995. During the six months ended
December 31, 1994 additions were made to storage field gas inventory
balances, thereby decreasing cash flows; during the quarter ended
September 30, 1995 (the quarter prior to the Asset Sale), sales from
storage inventory were made, thereby increasing operating cash flows.
Other changes in the components of net income are discussed in RESULTS
OF OPERATIONS, below.
INVESTING. Proceeds from the Asset Sale during the six months ended
December 31, 1995 accounted for the significant change from the
comparable period in 1994. Expenditures during each of the periods
presented were for additions to projects in which the Company had
previously made investments.
Sheffield (through its joint venture partner) is in the final stages
of negotiating an agreement with a Canadian gas producer which,
assuming successful completion of the contract negotiations, will
result in the extension of the Company's Lignite, North Dakota
gathering system into Saskatchewan. Due to recent successful Canadian
drilling, the gas
7
<PAGE>
processing facility serving the area north of Lignite is approaching
its processing capacity. As a prerequisite to finalizing the
agreement, the Company intends to obtain a commitment from a purchaser
for gas volumes sufficient to achieve an adequate return on the
capital expended for the extension.
FINANCING. Proceeds from the Asset Sale were used to pay down
substantially all the Company's bank debt. After reducing the
borrowing base to reflect the Asset Sale, the Company has
approximately $1.4 million of unused bank borrowing capacity.
RESULTS OF OPERATIONS
GAS GATHERING, PROCESSING AND STORAGE. The change in components of
gas processing and gathering revenue from 1994 to 1995 is comprised of
the following:
PRICE QUANTITY REVENUE
CHANGE CHANGE CHANGE
------ -------- -------
For the quarters:
Residue gas sales (28)% (82)% (87)%
Natural gas liquid sales 10% (25)% (18)%
For the six-month periods:
Residue gas sales (16)% (38)% (48)%
Natural gas liquid sales 7% (15)% (7)%
The quantity and revenue decreases from 1994 to 1995 are a result of
the October 1995 Asset Sale. However, the positive impact of storage
field sales during the quarter ended September 30, 1995 resulted in
higher operating income from gathering, processing and storage during
the six months ended December 31, 1995 versus the same six month
period of 1994.
With regard to the Lignite, North Dakota system (the only system the
Company owns after the Asset Sale), gas and liquids volumes have
declined together with gas prices from 1995 to 1994. These declines
have been offset somewhat by an increase in the price received for the
liquids.
Lower 1995 depreciation, depletion and amortization reflects the Asset
Sale.
8
<PAGE>
OIL AND GAS EXPLORATION AND PRODUCTION. The change in components of
oil and gas revenue from 1994 to 1995 is comprised of the following:
PRICE QUANTITY REVENUE
CHANGE CHANGE CHANGE
------ -------- -------
For the quarters:
Oil 1% (9)% (8)%
Gas (3)% (24)% (26)%
For the six-month periods:
Oil (2)% (4)% (7)%
Gas (20)% (24)% (40)%
Gas volume declines result from normal well depletion combined with
the fact that no successful wells have been completed during the
current fiscal year. However, two wells in the Pinedale, Wyoming
field, which had been shut-in during April 1995 due to gas price
considerations, were put back on production during December 1995.
Production from those wells, together with production from another
Pinedale well, is now being sold pursuant to a ten-year contract at a
price of $1.85 per mmbtu (or $1.67 per mcf at the wellhead). The
contract contains an annual escalation factor of 4 percent.
Certain Williston Basin oil wells require repairs and reworking on a
recurring but irregular basis. Immediately prior to being reworked,
the wells typically experience a decrease in production. Such was the
case during the quarter ended December 31, 1995, when oil volume
declined and operating costs went up. Both volumes and costs are
expected to return to more normal levels during the remainder of the
fiscal year.
During 1994, impairment expense was recognized on the south Texas
properties.
INTEREST/GENERAL AND ADMINISTRATIVE EXPENSE. Proceeds from the Asset
Sale were used to pay down bank debt (resulting in lower 1995 interest
expense) and invested in short-term money market instruments
(resulting in higher 1995 interest income).
In December 1994, Trinity Petroleum Management, Inc. ("Trinity")
became a wholly-owned subsidiary of Sheffield. Trinity previously
provided management and administrative services to Sheffield and
another company; now the former Trinity employees provide these
services exclusively to Sheffield. Accordingly, certain personnel and
overhead costs formerly shared by Sheffield and a third party company
are now borne entirely by Sheffield. The increase in general and
administrative expense from 1994 to 1995 is attributable primarily to
the foregoing.
PROVISION FOR TAXES. As discussed in Note 2 to the Consolidated
Financial Statements, the tax provision for the six months ended
December 31, 1995 consists of taxes provided at the federal and state
statutory rates as well as an amount representing a change in the
deferred tax asset valuation allowance.
9
<PAGE>
PART TWO
OTHER INFORMATION
Item 4. Submission of matters to a vote of security holders.
a. The Company's Annual Meeting of Shareholders was held
at the Norwest Bank Building, Forum Room, 1740
Broadway, Denver, Colorado at 10:30 a.m. on December 5,
1995.
b. Matters voted upon at the meeting and the results of
the vote are as follows:
PROPOSAL 1:
Election of Directors
FOR WITHHELD
--- --------
Edwin H. Morgens 2,426,886 277
J. Samuel Butler 2,426,886 277
David A. Melman 2,426,886 277
McLain J. Forman 2,426,886 277
Randall E. King 2,426,886 277
PROPOSAL 2:
Approval of the appointment of Coopers & Lybrand to serve as the
Company's independent auditors for the fiscal year ending June 30,
1996.
FOR AGAINST ABSTAIN
--- ------- -------
2,427,069 87 7
10
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits required by Item 601 of S-K
10.17 Key Employee Retention Plan dated January 19,
1996.
27 Financial Data Schedule
b. On February 7, 1996, the Company filed a Form 8-K
disclosing that it had issued a press release on
February 6, 1996 reporting the execution of a merger
agreement with privately-held TransMontaigne Oil
Company.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
SHEFFIELD EXPLORATION COMPANY, INC.
Date: February 13, 1996 By: David L. Milanesi
------------------------------------
David L. Milanesi
On behalf of registrant as Treasurer;
Principal Financial Officer
11
<PAGE>
Appendix IV
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13
of the Securities Exchange Act of 1934
For the fiscal year ended June 30, 1995 File No. 0-13201
SHEFFIELD EXPLORATION COMPANY, INC.
1801 Broadway, Suite 600
Denver, Colorado 80202
Incorporated in Delaware IRS ID #06-1052062
Telephone (303) 296-1908
No securities are registered pursuant to Section 12(b) of the Act. Securities
registered pursuant to Section 12(g) of the Act:
COMMON STOCK; $.01 PAR VALUE
The Company (1) has filed all reports required to be filed by Section 13 of the
Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been
subject to such filing requirement for the past 90 days.
The Company had no delinquent filers pursuant to Item 405 of Regulation S-K.
As of September 18, 1995, the aggregate market value of the shares of Common
Stock held by nonaffiliates of the Company was $4,393,000, based upon the
closing sale price of the Common Stock on the American Stock Exchange on
September 18, 1995 of $1.63 per share.
Shares of Common Stock outstanding on September 18, 1995: 3,391,261
IV-1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item Page No.
<C> <S> <C>
Part I 1. Business.......................................... 1
2. Properties........................................ 8
3. Legal Proceedings................................. 11
4. Vote of Security Holders.......................... 11
Part II 5. Market for Common Stock........................... 12
6. Selected Financial Data........................... 13
7. Management's Discussion and Analysis of
Financial Condition and Results of Operations... 13
8. Financial Statements and Supplementary Data....... 18
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosures......... 31
Part III 10. Directors and Executive Officers.................. 32
11. Executive Compensation............................ 33
12. Security Ownership of Certain Beneficial
Owners and Management........................... 34
13. Certain Relationships and Related Transactions.... 35
Part IV 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K............................. 36
</TABLE>
IV-2
<PAGE>
i
PART I
ITEM 1. BUSINESS
INTRODUCTION
Sheffield Exploration Company, Inc. ("Sheffield" or "the Company") engages in
the acquisition, exploration, development, production and sale of crude oil and
natural gas and in the gathering and processing of "wet" natural gas into
residue ("dry") natural gas and natural gas liquids. Through the fiscal year
ended June 30, 1995, natural gas gathering, storing and processing activities
were located in North Dakota, Kansas and Oklahoma, but the Company recently sold
its holdings in Kansas and Oklahoma, leaving North Dakota as the sole site for
the Company's current natural gas processing and gathering activities. See
"Sale of Gas Gathering, Processing and Related Assets." The Company's
development drilling activities have been conducted in the Berry Cox Field and
the Laredo Field in south Texas and more recently in the Pinedale Field in
Wyoming. The Company also engages in well recompletion work in the Williston
Basin (Montana and North Dakota).
The Company was organized under the laws of the State of Delaware in March 1991,
at which time it acquired (through merger) the stock of its predecessor,
originally incorporated in July 1981. See "Notes to Consolidated Financial
Statements - Note 1." As used herein, references to Sheffield or the Company
also include the Company's wholly-owned subsidiaries and its predecessors,
unless otherwise indicated.
BUSINESS STRATEGY
Sheffield was incorporated in 1981 as a small oil company focused on exploration
and production activities. Since its recapitalization and $2.7 million private
placement of stock in 1991, it has implemented a strategy to expand its asset
base and improve its cash flow through investment in gas processing and
gathering assets as well as the drilling of natural gas wells.
Sheffield has taken an opportunistic approach to its investment strategy by
identifying investments in which the Company can achieve a competitive edge over
other potential investors through its ability to evaluate and finance projects
more quickly than its competitors. Since 1990, this approach has allowed the
Company to acquire an interest in a gas gathering system and natural gas
processing plant in Lignite, North Dakota, gathering systems in Kansas and
Oklahoma (together with a small processing plant), a gas storage field in Kansas
and an interest in the development of two gas fields in south Texas and one in
Pinedale, Wyoming.
The Company has financed its investments through use of its own cash coupled
with bank debt. Since Sheffield generally attempts to liquidate the debt
expeditiously, its borrowing capacity is quickly made available for future
projects. This approach has allowed the Company to quickly close acquisitions,
resulting in a competitive advantage for Sheffield in its purchase negotiations.
See Item 7, Management's Discussion and Analysis, Liquidity and Capital
Resources.
In recent years, the Company's investment in gas processing and gathering assets
has provided relatively stable cash flows, thus facilitating the Company's
prudent but aggressive investments in exploration/exploitation projects. While
gas gathering and processing have provided consistent returns on investment,
management believes that most investors in smaller oil and gas companies
typically seek a potential investment return that can best be achieved through
successful exploration/exploitation activities. Since the Company's May 1993
acquisition of its Kansas and Oklahoma gathering operations, competition for the
purchase of such assets has increased significantly. Regulatory change (see
"Federal Regulation of Sales and Transportation of Natural Gas") has led to
consolidation within the gas transportation business and has resulted in
companies attempting to acquire systems in order to better compete in the
rapidly changing transportation sector. Additionally, primarily as a result of
the completion of its Konold (Kansas) gas storage facility, the Company feels it
has enhanced the value of the operations since it purchased them two years ago.
Given the
IV-1
<PAGE>
foregoing, and the Company's strategy of having financing capacity available
prior to bidding on properties, the Company decided to sell a significant
portion of its natural gas processing and gathering assets for a cash price of
$5.5 million (subject to certain post-closing adjustments). See "Sale of Gas
Gathering, Processing and Related Assets."
As it has done in the past, the Company will continue to seek investment
opportunities in producing properties. However, competition to purchase
producing properties remains strong, which is reflected in the offering prices.
As a result of the intense competition for the acquisition of producing
properties and other capital commitments, the Company did not acquire any
additional producing properties during fiscal 1993 or 1994. In fiscal 1995,
however, the Company acquired a 25 percent interest in the Pinedale Field,
Sublette County, Wyoming, pursuant to its joint venture agreement with III
Exploration Company, a wholly-owned subsidiary of Boise-based Intermountain
Industries, Inc. (See "Intermountain Industries Joint Venture").
SALE OF GAS GATHERING, PROCESSING AND RELATED ASSETS
In May 1993, Sheffield purchased eleven natural gas gathering systems in south-
central Kansas and southern Oklahoma, a processing facility in Oklahoma and a
partially completed gas storage field in Kansas, by acquiring 100 percent of the
stock of Republic Natural Gas Company ("Republic") and Prairie Gas
Transportation Company ("Prairie") from a subsidiary of Dallas-based Sunrise
Energy Services, Inc. The acquisition price consisted of a $3.7 million cash
payment plus a share of future revenue generated by the assets if such revenue
exceeded certain levels defined in the acquisition agreement. The Company
financed the acquisition using existing working capital and a $2 million loan
from Norwest Bank Denver.
The systems include approximately 380 miles of gathering lines (95 percent of
which are located in Kansas), with combined gross throughput of approximately
9.5 million cubic feet of gas per day from approximately 310 wells. The gas
processing facility provides extraction capacity for approximately 4.5 million
cubic feet per day. The systems have interconnects with three intrastate and
two interstate pipelines in Kansas and one intrastate pipeline in Oklahoma,
while servicing approximately 125 on-systems customers. As part of the
acquisition agreement, Sheffield agreed to complete the Konold gas storage
project, located south of Pratt, Kansas, an undertaking which was substantially
completed during fiscal 1994 and became fully operational during the first
quarter of fiscal 1995 at a cost of approximately $530,000. The Konold facility
is capable of cycling up to one billion cubic feet per year, and has allowed the
Company to better match gas supply with demand, thereby allowing the Company to
maximize the margins on gas it sells by increasing that proportion of gas sold
to end-users. In order to simplify administration of the Kansas operation, a
merger of Prairie and Republic (both wholly-owned subsidiaries of Sheffield) was
consummated in December 1993.
The ability of the Company to acquire its gas gathering, processing and storage
assets in Kansas and Oklahoma in 1993 was facilitated by the Company's financial
position at that time and its ability to move quickly to consummate the
acquisition. As discussed previously, in July 1995, the Company was of the
opinion that market conditions were such that it could maximize its financial
returns by sellings its Kansas and Oklahoma assets. Therefore, the Company
began soliciting bids from potential purchasers for all of its gas gathering and
related assets, including its Lignite, North Dakota gathering system and
processing plant. See "Gas Gathering and Processing Activities."
On September 25, 1995, the Company entered into an agreement (the "Agreement")
to sell the Oklahoma and Kansas gas gathering, processing and storage assets to
NGC Energy Resources, Limited Partnership, a Delaware limited partnership
("NGC"), for a cash price of $5.5 million. The Agreement provides for the
Company to operate the assets until a date agreed upon by the Company and the
buyer. In return, the Company will be reimbursed for its operating expenses,
receive a management fee and retain all proceeds from the sale of gas from the
Konold gas storage facility through September 30, 1995 to the extent such sales
did not reduce the amount of gas in storage below 150,000 mmbtu. The Company
closed the transaction on October 2, 1995, and will participate in a post-
closing adjustment within 180 days thereafter in order to reconcile the
expenses, fees, taxes and receivables paid by or owed to either the Company or
NGC. The Company did not receive an adequate bid for its Lignite plant and as a
result has decided to retain the plant.
EXPLORATION AND PRODUCTION ACTIVITIES
IV-2
<PAGE>
The Company has historically acquired various producing oil and gas properties,
as well as leaseholds and other interests in oil and gas properties for
exploratory and developmental drilling. Although the Company modified its
business strategy to take advantage of attractive investment opportunities in
the gas gathering and processing arenas, the Company remains committed to the
acquisition and development of future oil and gas reserves. Given the
competition for gas processing/gathering assets described previously, the
Company does not anticipate making new investments in this sector during the
foreseeable future.
In October 1994, the Company closed the acquisition of the Pinedale Field,
Sublette County, Wyoming, in conjunction with its joint venture partner, III
Exploration, Inc.. The Company acquired a 25 percent interest in two producing
wells (shut-in at the time of purchase) and 1,410 gross acres for future drill
sites; the remaining 75 percent is owned by III Exploration, Inc. In November
1994, the Company's first well to be drilled at Pinedale, the Vible No. 1, was
spudded, and the two shut-in wells were put on production at a combined rate of
1,800 mcf of gas per day. Beginning in October 1995, the Company will sell
existing Pinedale production pursuant to a ten-year contract at $1.85 per mmbtu,
or $1.67 per mcf at the wellhead. The contract contains an annual escalation
factor of 4 percent. Based upon the performance of all three wells to date, the
Company is evaluating future drilling sites in the Pinedale Field. Due to the
low current level of natural gas prices, the Company has deferred additional
drilling at Pinedale until calendar 1996.
In south Texas, the Company has experienced disappointing results in its two
wells in the Berry Cox Field, Jim Hogg County - the Rufino & Josefa Lopez No. 3
("Lopez No. 3") and the Armstrong Ranch No. 2. Although the Lopez No. 3,
completed as a producer in the spring of 1994, began production on April 1,
1994, pressure declined rapidly in the initially perforated zone as well as the
Hinnant Sand zone, causing the Company to adjust estimates of expected reserves
downward significantly.
After experiencing numerous delays caused by a myriad of mechanical problems,
the Armstrong Ranch No. 2 was completed during the third quarter of fiscal 1995.
The Armstrong Ranch No. 2 production profile was similar to that of the Lopez
No. 3 and projected future reserves associated with the well are insignficant.
The Company owns a 12.5 percent working interest in the south Texas wells and
currently has no plans to drill additional wells at that location.
During fiscal 1992 and 1993, Sheffield conducted all of its drilling activity in
Webb County (south Texas), completing three wells as gas producers and drilling
one development dry hole. Plans are underway to drill four additional wells in
Webb County and to recomplete an existing well in the field during fiscal 1996.
Although the Company has focused its exploration and production activity on
drilling gas wells in south Texas since fiscal 1990, it has participated in the
recompletion of several Williston Basin (Montana) oil wells during the past four
years. That pattern continued during fiscal 1995 with the successful
recompletion of the Bob Crusch 2-10 well. Based on the well's performance to
date, it is expected that an offset will be drilled during fiscal 1996. The
Company owns a 1.6 percent interest in the Crusch and adjacent acreage.
GAS GATHERING AND PROCESSING ACTIVITIES
Since its recapitalization in 1991, Sheffield has been financially positioned to
implement a strategy of opportunistic investing designed to build the Company's
asset base and improve its cash flow. Sheffield Gas Processors, Inc. ("SGP"), a
wholly-owned subsidiary of Sheffield, was created to facilitate the Company's
acquisitions of natural gas gathering and processing businesses.
In addition to the Republic acquisition described in "Sale of Gas Gathering,
Processing and Related Assets," in September 1991, the Company, through SGP,
signed an agreement with Interenergy Corporation ("Interenergy") to participate
in a partnership (the "Partnership") formed for the purpose of purchasing a gas
processing plant, a gathering system and a 24-mile pipeline (the "Asset
Purchase") near the town of Lignite, North Dakota. Sheffield contributed
capital of $1.5 million in return for a 90 percent interest in the net income
generated by the Asset Purchase until recoupment of Sheffield's $1.5 million
capital contribution, and a 70 percent interest in net income after recoupment.
Day-to-day management of the Partnership is provided by Interenergy while major
decisions are made by a management committee consisting of two members each from
Sheffield and Interenergy.
IV-3
<PAGE>
In conjunction with the Asset Purchase, the Partnership obtained a bank loan
(subsequently repaid) in the amount of $1.75 million, collateralized by all of
the Partnership assets and guaranteed by the Company. Simultaneous with the
closing of the Asset Purchase (net price of $3 million), the pipeline was sold
to a third party for $450,000, $300,000 of which was applied to the debt. The
Company achieved payout of its investment in November 1993, only two years after
the Asset Purchase. Thereafter, on May 1, 1994, the Company sold an additional
20 percent interest to its partner, Interenergy, for $700,000.
During the past year, the Company has been negotiating with the owner of a
Canadian gas processing facility regarding the extension of the Company's North
Dakota gathering system into Canada. Due to increased gas production resulting
from horizontal drilling north of the North Dakota border, the Canadian
processing facility has reached the limits of its processing capacity. The
Company has been discussing a possible agreement with the Canadian entity to
divert gas to the Company's Lignite facility, and anticipates finalizing an
agreement in the near future, subject to obtaining any necessary regulatory
approvals from Canadian and U.S. authorities. See "Regulation."
During fiscal 1995 after completion of the Konold gas storage facility and prior
to its sale, the Company was able to purchase natural gas at relatively low
prices and inject approximately 400 million cubic feet of gas into the storage
reservoir, thereby positioning itself to serve its end-users with lower cost gas
from storage rather than with gas purchased at a higher cost on the spot market.
Gas was sold from storage both during the heating season as well as during the
summer to meet increased electric demand related to air conditioning use and to
area farmers who use the gas to pump water for irrigation purposes. In
accordance with the terms of the Agreement to sell the facility, the Company
retained all the proceeds from sales of gas from the facility until the date of
closing. See "Sale of Gas Gathering, Processing and Related Assets."
INTERMOUNTAIN INDUSTRIES JOINT VENTURE
The Company has the ability to participate in larger acquisitions than would be
possible on its own due to its joint venture agreement with III Exploration
Company, a wholly-owned subsidiary of Boise, Idaho-based Intermountain
Industries, Inc. ("Intermountain"), whose principal business is the distribution
of natural gas for southern Idaho (the "Intermountain Joint Venture"). The
Company entered into the Intermountain Joint Venture Agreement on September 1,
1993 for an initial term of two years. The agreement, which required an initial
capital contribution of up to $2 million from Sheffield and up to $6 million
from Intermountain, was formed for the purpose of acquiring proved oil and gas
properties as well as gas processing and gathering assets, throughout North
America. The agreement provides that Sheffield will own 25 percent of the
venture and, as managing partner, bring investment opportunities to the venture.
As compensation for serving as managing partner, Sheffield's 25 percent interest
in properties acquired pursuant to the Intermountain Joint Venture will increase
to 35 percent after Intermountain recoups its investment cost.
The Company has renewed the Intermountain Joint Venture agreement for one year,
effective September 1, 1995, under the same terms as the initial agreement.
Pursuant to the agreement, Intermountain and Sheffield paid annual management
fees of $75,000 and $25,000, respectively, to Trinity Petroleum Management, Inc.
("Trinity") through December 1994, at which time Sheffield acquired Trinity.
See "Acquisition of Trinity Petroleum Management, Inc." Beginning in January
1995, Intermountain remits its $75,000 annual management fee directly to the
Company.
During the first two years of its existence, the Intermountain Joint Venture
evaluated properties having an estimated value of approximately $237 million.
Bids totalling $23 million were extended and, in October 1994, the Intermountain
Joint Venture was successful in acquiring the Pinedale Field in Wyoming. See
"Exploration and Production Activities." On behalf of the joint venture, the
Company currently is evaluating several additional properties for potential
acquisition.
ACQUISITION OF TRINITY PETROLEUM MANAGEMENT, INC.
On December 31, 1994, Sheffield exchanged 60,000 shares of its common stock at
market value and approximately $10,000 cash for all of the shares of Trinity
Petroleum Management Company, Inc. ("Trinity"), resulting in Trinity becoming a
wholly-owned subsidiary of the Company. From September 1990 through December
1994, Trinity
IV-4
<PAGE>
provided management and administrative services to Sheffield and another
company. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Interest/General and Administrative Expense." In
conjunction with the acquisition, all of the former Trinity employees became
employees of Sheffield (21 individuals at June 30, 1995). Prior to the
acquisition Sheffield had no employees since all of the Company's management
and administrative services were provided by Trinity. The Board of Directors
determined the fair market value of the transaction to be approximately $96,000.
COMPETITION AND MARKETS
In both south Texas and North Dakota, Sheffield's natural gas is sold on the
open market. The parties operating the properties which produce the gas
actively seek the highest price available on a short-term basis. Likewise, the
Company's oil and natural gas liquids are not sold pursuant to any long-term
fixed price contracts. The price received for oil correlates with the price
established on the world market while the liquids price, though somewhat related
to the price of oil, is also affected by seasonal and local market conditions.
The oil and gas industry is highly competitive. The Company competes for
acquisition of oil and gas properties with numerous other entities, including
major oil companies, other independent oil and gas concerns and individual
producers and operators. Many of these competitors have financial and other
resources substantially greater than those of the Company. A variety of
factors affect the market for oil and gas, including the extent of domestic
production and imports of oil and gas, the proximity and capacity of natural gas
pipelines and other transportation facilities, demand for oil and gas, the
marketing of competitive fuels, political instability throughout the world and
the effects of state and federal regulation of oil and gas production and sales.
The oil and gas industry also competes with other industries in supplying the
energy and fuel requirements of industrial, commercial and individual customers.
Alternative customers exist for both the Company's oil and gas production and
its liquid hydrocarbons. As such, the loss of any customer would not adversely
affect the Company. As a result of many uncontrollable factors, including
international political events and economic conditions, prices for petroleum
products have fluctuated greatly from time to time, however, there can be no
assurance that the prices received by the Company's products will not be
affected adversely by such fluctuations.
In view of the uncertainty of prices, Sheffield enters into price hedging
agreements from time to time as conditions warrant. These hedges typically
assure (assuming no breach or failure by the counterparty) that a minimum price
is received for a portion of Sheffield's production which would otherwise be
sold into local spot markets. Although a minimum price is assured on the
volumes hedged, the benefits of upward movements in local spot prices may not be
fully realized by Sheffield. Sheffield will continue to evaluate opportunities
for hedging its oil and gas production as conditions warrant. The Company
presently has no hedge contracts in effect. However, starting in October 1995,
the Company will sell its 25 percent share of a gross 1,000 mcf per day from the
Pinedale Field at a year-round price of $1.85 per mmbtu, or $1.67 per mcf at the
wellhead. The ten-year contract contains an annual escalation factor of 4
percent.
REGULATION
The availability of a ready market for oil and natural gas production depends
upon numerous factors beyond the Company's control. These factors include
regulation of natural gas and oil transportation, federal and state regulations
governing environmental quality and pollution control, state limits on allowable
rates of production by well or proration unit, the amount of natural gas and oil
available for sale, the availability of adequate pipeline and other
transportation and processing facilities and the marketing of competitive fuels.
For example, a productive natural gas well may be "shut-in" because of an
oversupply of natural gas or lack of a natural gas pipeline in the areas in
which the Company conducts operations. State and federal regulations generally
are intended to prevent waste of natural gas and oil, protect rights to produce
natural gas and oil between owners in a common reservoir, control the amount of
natural gas and oil produced by assigning allowable rates of production and
control contamination of the environment. Pipelines are subject to the
jurisdiction of various federal, state and local agencies.
IV-5
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FEDERAL REGULATION OF SALES AND TRANSPORTATION OF NATURAL GAS. Historically,
the transportation and sale for resale of natural gas in interstate commerce
have been regulated pursuant to the Natural Gas Act of 1938 (the "NGA"), the
Natural Gas Policy Act of 1978 (the "NGPA") and the regulations promulgated
thereunder by the Federal Energy Regulatory Commission (the "FERC"). Maximum
selling prices of certain categories of natural gas sold in "first sales,"
whether sold in interstate or intrastate commerce, were regulated pursuant to
the NGPA. On July 26, 1989, the Natural Gas Wellhead Decontrol Act (the
"Decontrol Act") was enacted, which removed, as of January 1, 1993, all
remaining federal price controls from natural gas sold in "first sales." The
FERC's jurisdiction over natural gas transportation was unaffected by the
Decontrol Act.
The transportation and resale of natural gas transported and resold within the
state of its production is usually regulated by the state involved. (In Kansas,
such regulation is by the Kansas Corporation Commission). Although federal and
state regulation of the transportation and resale of natural gas produced by the
Company currently does not have any material direct impact on the Company, such
regulation does have a material impact on the market for the Company's natural
gas production and the price the Company receives for its natural gas
production, as discussed below. Adverse changes in the regulation affecting the
Company's gas markets could have a material impact on the Company.
Commencing in the mid-1980s and continuing until the present, the FERC
promulgated several orders designed to correct market distortions and to make
gas markets more competitive by, among other things, removing the transportation
barriers to market access. The orders have had a profound influence on natural
gas markets in the United States and have, among other things, fostered the
development of a large spot market for gas. The following is a brief
description of the most significant of those orders and is not intended to
constitute a complete description of those orders or their impact.
In April 1992, the FERC issued Order No. 636, a rule designed to restructure the
interstate natural gas transportation and marketing system and remove various
barriers and practices that have historically limited non-pipeline natural gas
sellers, including producers, from effectively competing with interstate
pipelines. The most significant provisions of Order No. 636 require (a) that
interstate pipelines provide both firm and interruptible transportation solely
on an "unbundled" basis, separate from their sales service; (b) provide for the
issuance of blanket certificates to pipelines to provide unbundled sales
service, giving all customers the opportunity to purchase supplies from non-
pipeline merchants (see the discussion of Order No. 547 below); (c) require that
pipelines provide firm and interruptible transportation service on a basis that
is equal in quality for all natural gas supplies, whether purchased from the
pipeline or elsewhere; (d) require that pipelines provide new, non-
discriminatory "no-notice" transportation for certain of their traditional sales
customers that largely replicates the "bundled" sales service previously
provided by pipelines; (e) establish programs for the reallocation of firm
pipeline capacity; (f) require that all pipelines offer access to their storage
facilities on a firm and interruptible basis; (g) provide for pregranted
abandonment of pipeline sales agreements, interruptible and short-term (defined
as one year or less) transportation agreements and conditional pregranted
abandonment of long-term transportation service; (h) modify transportation rate
design by requiring that all fixed costs related to transportation be recovered
through the reservation charge and (i) provide mechanisms for the recovery by
pipelines of certain types of costs likely to occur from implementation of Order
No. 636. The restructuring process has been implemented on a pipeline-by-
pipeline basis through negotiations in individual pipeline proceedings before
the FERC.
Since the issuance of Order No. 636, the FERC has issued two orders making
relatively minor modifications to Order No. 636. Certain parties filed for
judicial review of Order No. 636 as well as for judicial review of the FERC's
orders approving restructuring plans for various individual pipelines, but such
efforts to alter the general restructuring contemplated under Order No. 636 have
experienced limited success. Because implementation of the restructuring may
vary by pipeline, it is not possible to predict what effect, if any, the
ultimate restructuring resulting from Order No. 636 will have on the Company;
however, the intended result is to cause the sale of natural gas to be market
sensitive.
In December 1992, the FERC issued Order No. 547, governing the issuance of
blanket marketer sales certificates to all natural gas sellers other than
interstate pipelines. The order applies to non-first sales that remain subject
to the FERC's NGA jurisdiction. Among other things, the order eliminates the
need for natural gas producers and marketers to seek specific authorization
under Section 7 of the NGA from the FERC to make sales of natural gas for
resale. Instead, effective January 7, 1993, these natural gas sellers, by
operation of the order, were issued blanket certificates of public convenience
and necessity allowing them to make jurisdictional natural gas sales for resale
at negotiated rates without seeking specific FERC authorization, thus allowing
such sellers to compete with sellers making deregulated first sales.
IV-6
<PAGE>
The FERC intends Order No. 547, in tandem with Order No. 636, to foster a
competitive market for natural gas by giving natural gas purchasers access to
multiple supply sources at market-driven prices. Order No. 547 may increase
competition in markets in which the Company's natural gas is sold.
In October 1992, the Energy Policy Act of 1992 was enacted. This Act
streamlined the permitting process necessary to import Canadian natural gas and
altered the treatment of such gas under the NGPA, eliminating the FERC's
jurisdiction over the price of non-pipeline sales of natural gas imported from
Canada. Canadian natural gas imports still require import authorizations from
the Department of Energy's Office of Fossil Energy under Section 3 of the NGA
and construction and siting authorizations, where applicable, from the FERC.
These changes could enhance the ability of Canadian producers to export natural
gas to the United States and increase competition in the domestic natural gas
market.
Additional proposals and proceedings that might affect the natural gas industry
are pending before Congress, the FERC and the courts. The natural gas industry
historically has been very heavily regulated; therefore, there is no assurance
that the less stringent regulatory approach recently pursued by the FERC and
Congress will continue, or ultimately result in any benefit to the Company.
OIL PRICE CONTROLS AND TRANSPORTATION RATES. Sales of crude oil, condensate
and gas liquids by the Company are currently not subject to federal regulation
and are made at market prices. The FERC has issued an order establishing an
indexing system for transportation rates for oil that could increase the cost of
transporting oil to the purchaser. Because this order is subject to
administrative and judicial review, the Company is not able to predict what
effect, if any, this order will have on it.
STATE REGULATION OF OIL AND GAS PRODUCTION. States in which the Company
conducts its natural gas and oil activities regulate the production and sale of
natural gas and oil, including requirements for obtaining drilling permits, the
method of developing new fields, the spacing and operation of wells and the
prevention of waste of natural gas and other resources. In addition, many
states regulate the rate of production and may establish maximum daily
production allowables for wells on a market demand or conservation basis.
Such provisions may limit the rate at which oil and gas could be produced from
the Company's properties and may restrict the number of wells that may be
drilled on a particular lease or in a particular field. Recent trends indicate
increased state and local regulation of oil and gas activities and pipeline
operations which will impact the Company's operations; however, these impacts
are not expected to be significant.
ENVIRONMENTAL REGULATION. The Company's operations are subject to numerous laws
and regulations governing the discharge of materials into the environment or
otherwise relating to environmental protection. These laws and regulations may
require the acquisition of a permit before drilling commences, restrict the
types, quantities and concentration of various substances that can be released
into the environment in connection with drilling and production activities,
limit or prohibit drilling activities on certain lands lying within wilderness,
wetlands and other protected areas, and impose substantial liabilities for
pollution resulting from the Company's operations. Moreover, the recent trend
toward stricter standards in environmental legislation and regulations is likely
to continue. For instance, legislation has been proposed in Congress from time
to time that would reclassify certain oil and gas exploration and production
wastes as "hazardous wastes" which would make the reclassified wastes subject to
much more stringent handling, disposal and clean-up requirements. If such
legislation were to be enacted, it could have a significant impact on the
operating costs of the Company, as well as the oil and gas industry in general.
Initiatives to further regulate the disposal of oil and gas wastes are pending
or have recently been passed in certain states, and these various initiatives
could have a similar impact on the Company. Management believes that the
Company is in substantial compliance with current applicable environmental laws
and regulations and that continued compliance with existing requirements will
not have a material adverse impact on the Company.
TITLE TO PROPERTIES
Substantially all of the Company's oil and gas property interests are held
pursuant to leases from third parties. As is customary in the industry, the
Company performs only a minimal title investigation before acquiring undeveloped
properties and updates existing title opinions for its acquisitions of producing
properties. A title opinion is obtained
IV-7
<PAGE>
prior to the commencement of drilling operations on properties. The Company has
obtained title opinions on substan tially all of its producing properties and
believes that it has satisfactory title to such properties in accordance with
standards generally accepted in the oil and gas industry. The Company's
properties are subject to customary royalty interests, liens for current taxes
and other burdens which the Company believes do not materially interfere with
the use of or affect the value of such properties. Historically, substantially
all of the Company's oil and gas properties have been mortgaged to secure
borrowings under the Company's credit facilities.
The Company also holds real property title to rights-of-way and easements
associated with its gas gathering pipeline systems. These rights-of-way and
easements establish the right of the Company to own and operate pipelines across
the lands of various landowners and generally allow the Company to conduct such
repairs, maintenance and replacements as are reasonably necessary to continue
the operation of the systems.
OPERATIONAL HAZARDS AND INSURANCE
The Company's operations are subject to the usual hazards incident to the
drilling and production of oil and gas, such as blow-outs, cratering,
explosions, uncontrollable flows of oil, gas or well fluids, fires, pollution,
release of toxic gas and other environmental hazards and risks. These hazards
can cause personal injury and loss of life, severe damage to and destruction of
property and equipment, pollution or environmental damage and suspension of
operations.
The Company maintains insurance of various types to cover its operations. The
Company has one million dollars of general liability insurance and an additional
four million dollars of excess liability insurance. In addition, the Company
reviews the need for Operator's Extra Expense (control of well) Insurance on a
case-by-case basis. The Company's insurance does not cover every potential risk
associated with the drilling and production of oil and gas. In particular,
coverage is not available for certain types of environmental hazards. The
occurrence of a significant adverse event, the risks of which are not fully
covered by insurance, could have a material adverse effect on the Company's
financial condition and results of operations. Moreover, no assurance can be
given that the Company will be able to maintain adequate insurance in the future
at rates it considers reasonable.
ITEM 2. PROPERTIES
RESERVE INFORMATION
Reserve information presented herein is based on reports prepared by the
Company.
There are numerous uncertainties inherent in estimating quantities of proved
reserves and in projecting the future rates of production and timing of
development expenditures. The reserve data presented herein represent
estimates only and should not be construed as being exact or a guarantee of
future production by the Company.
Moreover, the standardized measure of discounted future net cash flows should
not be construed as the fair market value of the Company's future cash flows. A
market value determination would include many additional factors including (i)
anticipated future increases or decreases in oil and gas prices and production
and development costs; (ii) an allowance for return on investment; (iii) the
value of additional reserves, not considered proved at present, which may be
recovered as a result of further exploration and development activities and (iv)
other business risks.
Proved oil and gas reserves are the estimated quantities of crude oil and
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. Proved
developed oil and gas reserves are those expected to be recovered through
existing wells with existing equipment and operating methods.
Future net cash flows were computed using year-end prices and costs. Future
income tax expense was not recognized due to the availability of net operating
loss carryforwards.
IV-8
<PAGE>
All reserves are located within the United States. The Company's net interest
in estimated quantities of proved developed and undeveloped reserves at June 30,
1993, 1994 and 1995, and changes in such quantities during those years are as
follows:
<TABLE>
<CAPTION>
Oil Natural Gas
----------- -----------
(Bbls) (Mcf)
<S> <C> <C>
PROVED DEVELOPED AND UNDEVELOPED RESERVES:
June 30, 1992 417,741 633,787
Revisions of previous estimates 165,723 135,748
Extensions and discoveries 6,799 388,499
Production (70,485) (131,299)
Reserve sales (34,839) ---
----------- ----------
June 30, 1993 484,939 1,026,735
Revisions of previous estimates 28,848 23,541
Extensions and discoveries 13,708 342,583
Production (55,879) (233,803)
Reserve sales (25,352) (17,867)
----------- ----------
June 30, 1994 446,264 1,141,189
Revisions of previous estimates 42,249 (553,889)
Extensions and discoveries 2,305 433,912
Production (49,446) (214,166)
Reserve purchases 4,162 401,010
----------- ----------
June 30, 1995 445,534 1,208,056
PROVED DEVELOPED RESERVES:
June 30, 1993 463,637 987,974
June 30, 1994 417,683 1,097,698
June 30, 1995 415,455 1,167,429
</TABLE>
Standardized Measure of Discounted Future Net Cash Flows and Changes therein
Relating to Proved Oil and Gas Reserves:
<TABLE>
<CAPTION>
Years Ended June 30,
-----------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Future cash inflows $ 9,029,000 $ 9,873,000 $ 9,785,000
Future production costs (4,243,000) (4,682,000) (4,943,000)
Future development costs (121,000) (138,000) (49,000)
----------- ----------- -----------
Future net cash flows 4,665,000 5,053,000 4,793,000
Annual discount of 10%
for estimated timing of
cash flows (2,092,000) (2,136,000) (1,763,000)
----------- ----------- -----------
Standardized measure of
discounted future net
cash flows $ 2,573,000 $ 2,917,000 $ 3,030,000
=========== =========== ===========
</TABLE>
IV-9
<PAGE>
The principal sources of changes in the standardized measure of discounted
future net cash flows are as follows:
<TABLE>
<CAPTION>
Years Ended June 30,
------------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Exploration and Production
Balance, beginning of year $2,917,000 $3,030,000 $3,107,000
Sales of oil and gas
produced, net of (657,000) (662,000) (811,000)
production costs
Net changes in prices and (374,000) 252,000 (494,000)
production costs
Extensions and discoveries 378,000 402,000 571,000
Revisions of estimates (273,000) (215,000) 434,000
Change in future
development costs (35,000) (56,000) 34,000
Reserve purchases 325,000 --- ---
Reserve sales --- (137,000) (122,000)
Accretion of discount 292,000 303,000 311,000
---------- ---------- ----------
$2,573,000 $2,917,000 $3,030,000
========== ========== ==========
</TABLE>
The Company's properties are located only within the United States.
The Company is not presently a party to any contracts or agreements requiring it
to provide fixed quantities of oil or gas to specified purchasers. However,
starting in October 1995, the Company will sell its 25 percent share of a gross
1,000 mcf per day from the Pinedale Field at a year-round price of $1.85 per
mmbtu, or $1.67 per mcf at the wellhead after adjustments. The ten-year contract
contains an annual escalation factor of 4 percent.
The Company's leasehold interests in its producing properties are in effect as
long as production on the respective lease is maintained. Leasehold interests in
undeveloped (nonproducing) properties have varying expiration dates and often
require the payment of annual "delay rentals" to the lessors.
<TABLE>
<CAPTION>
Productive Wells and Acreage
June 30, 1995
- --------------------------------------------------------------------------------------------------------------------------------
Wells
------------------------------------------------------------------------------
Acreage Gross Net
--------------------------- -------------------------------- -------------------------------
Gross Net Oil Gas Oil Gas
----------- ------------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
N. Dakota 2,402 668 16 - 4.1392 -
Wyoming 564 137 1 3 0.2500 0.7000
Texas 1,526 224 - 6 - 0.7394
Montana 5,890 864 19 1 3.2502 0.5000
----------- ------------- ----------- ----------- ---------- ----------
Total 10,382 1,893 36 10 7.6394 1.9394
=========== ============= =========== =========== ========== ==========
<CAPTION>
Undeveloped Acreage
June 30, 1995
----------------------------------------------------------------------
Gross Net
----------- ----------
<S> <C> <C>
Montana 9,416 1,142
N. Dakota 2,922 557
Texas 682 330
Wyoming 1,726 418
----------- ----------
14,746 2,447
=========== ==========
</TABLE>
IV-10
<PAGE>
<TABLE>
<CAPTION>
Average Sales Price and Production Cost
----------------------------------------------------------------------------------
1995 1994 1993
------ ------- -------
Exploration and Production
--------------------------
<S> <C> <C> <C>
Sales Price:
Oil (per bbl.) $16.38 $14.43 $18.59
Gas (per mcf) $ 1.62 $1.95 $1.68
Production cost per equivalent Bbl. (a) $ 5.88 $6.42 $7.80
</TABLE>
(a) Gas volumes converted to barrel volumes at 6 MCF of gas to one barrel of
oil. Production cost includes production tax expense and repairs to the
Company-owned salt water disposal well in fiscal 1993.
<TABLE>
<CAPTION>
Drilling Activity
- ----------------------------------------------------------------------------------------------------------------------------
Gross Productive Wells Gross Net Productive Wells Net
------------------------------ Dry ------------------------------------- Dry
Gas Oil Total Wells Gas Oil Total Wells
------- -------------------- ------- ------- ------------------------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1993
Development 2 --- 2 1 0.3113 --- 0.3113 0.2222
1994
Development 2 --- 2 --- 0.2141 --- 0.2141 ---
1995
Development 2 --- 2 --- 0.3750 --- 0.3750 ---
</TABLE>
An exploratory well is a well drilled to find oil and gas in an unproved area,
to find a new reservoir in a field previously found to be productive of oil and
gas in another reservoir or to extend a known reservoir. A development well is a
well drilled within a proved area of an oil and gas reservoir to the depth of a
stratigraphic horizon known to be productive in other locations.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter ended
June 30, 1995.
IV-11
<PAGE>
PART II
ITEM 5. MARKET PRICE OF THE REGISTRANT'S COMMON STOCK AND RELATED
SECURITY HOLDER MATTERS
Sheffield's Common Stock has been regularly traded on the Emerging Company
Marketplace of the American Stock Exchange, Inc. (the "Exchange") since December
14, 1993, under the symbol "SHE." As listed by the Exchange, the high and low
closing sales prices for the Company's Common Stock for each quarter during the
last two fiscal years were as follows:
<TABLE>
<CAPTION>
For the Quarter Ended Low High
------------------------------------------------ ------- --------
<S> <C> <C>
Fiscal 1994
December 31, 1993 $2.87 $3.25
(beginning December 14, 1993)
March 31, 1994 $2.87 $3.62
June 30, 1994 $1.87 $2.87
Fiscal 1995
September 30, 1994 $1.88 $2.25
December 31, 1994 $1.38 $1.94
March 31, 1995 $1.19 $1.44
June 30, 1995 $1.25 $1.63
</TABLE>
On September 18, 1995, the closing sale price was $1.63.
As of September 18, 1995, there were 446 stockholders of record of the Company's
Common Stock.
Prior to December 14, 1993, quotations for the Company's Common Stock were
available only in the "pink sheets." There was virtually no trading in Sheffield
stock from 1987 through the date of the Company's listing on the Exchange and no
reliable price quotes are available for that period.
The Company has not paid cash dividends on its Common Stock since its
incorporation and does not anticipate paying cash dividends in the foreseeable
future. Sheffield instead intends to retain its earnings to support the growth
of its business. Any future cash dividends would depend on future earnings,
capital requirements, Sheffield's financial condition and other factors deemed
relevant by the Board of Directors. The Company's credit agreement with Norwest
Bank of Denver currently prohibits the payment of dividends.
IV-12
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data is for the fiscal years ended June 30,
1995, 1994, 1993, 1992 and 1991. Reference is made to the consolidated financial
statements included in Item 8, "Financial Statements and Supplementary Data,"
for additional information.
<TABLE>
<CAPTION>
Years Ended June 30,
----------------------------------------------------------------------------------
1995 1994 1993 1992 1991
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUES
Gas gathering/processing $ 6,972,380 $10,277,680 $ 4,384,747 $2,743,868 $ ---
Oil and gas 1,156,745 1,264,568 1,530,940 1,382,315 1,124,454
----------- ----------- ----------- ---------- ----------
8,129,125 11,542,248 5,915,687 4,126,183 1,124,454
NET INCOME (LOSS) $(1,275,953) $ 75,658 $ 743,269 $ 204,344 $ (40,759)
NET INCOME (LOSS) PER
COMMON SHARE $ (0.38) $ 0.02 $ 0.23 $ 0.06 $ (0.02)
TOTAL ASSETS $10,035,766 $10,789,503 $10,961,038 $6,298,459 $4,927,655
WORKING CAPITAL $ 4,145,927 $ 880,184 $ 1,061,206 $1,824,032 $3,433,292
LONG-TERM DEBT, excluding $ 1,374,050 $ 2,111,333 $ 2,141,414 $ 602,248 $ ---
current maturities
</TABLE>
No dividends were declared or paid during the five years presented.
The Company adopted Statement of Financial Auditing Standard No. 109, Accounting
for Income Taxes, during fiscal 1993 resulting in a net deferred tax asset at
June 30, 1995 and June 30, 1994 of $991,000, for each period, and $1.5 million
at June 30, 1993. During the quarter ended March 31, 1995, the Company adopted
Statement of Financial Accounting Standard No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
Revenue increases from fiscal 1991 to 1992 and from fiscal 1993 to 1994 are
attributable to gas processing/gathering acquisitions.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
GENERAL. On September 25, 1995, the Company signed an agreement ("the Purchase
and Sale Agreement") providing for the sale of all of its gas gathering and
processing assets in Kansas and Oklahoma for a pre-adjustment price of $5.5
million (the "Asset Sale"). The Purchase and Sale Agreement provides for an
effective date of July 1, 1995. However, the Purchase and Sale Agreement
specifies that Sheffield is entitled to all proceeds from the sale of natural
gas from storage inventory providing that at closing (October 2, 1995) there be
a minimum of 150,000 mmbtu in inventory. The Company anticipates recording a
gain of approximately $1.1 million as a result of the Asset Sale. A portion of
the proceeds will be used to substantially reduce bank debt, leaving the Company
with approximately $3.4 million in cash. This cash balance is significantly
greater than that needed for the capital projects Sheffield currently plans to
undertake in fiscal 1996 (see below), leaving the Company with cash for projects
yet to be identified.
Sheffield participates in a joint venture with a subsidiary of Intermountain
Industries, Inc. (For a more complete description of the joint venture, see Item
1 -Business). The Company is committed to identifying investment opportunities
for the joint venture and will pay 25 percent of the cost of such investments.
The Company anticipates concentrating much of its efforts throughout fiscal 1996
on identifying potential producing property acquisitions in which the joint
venture can invest. Assuming success, it is anticipated that proceeds from the
Asset Sale will be used for capital contributions by Sheffield to the joint
venture.
IV-13
<PAGE>
OPERATIONS. Operating cash flows before general and administrative expense,
interest expense and changes in working capital decreased by 7 percent, or
$130,000, from fiscal 1994 to fiscal 1995. Although Sheffield's interest in cash
flows generated by the Lignite, North Dakota gas processing facility ("Lignite")
decreased from an average of 75 percent in 1994 to 50 percent in 1995, and
although 10 percent of the Kansas gas gathering throughput volume was stored in
the Konold storage facility rather than sold, net positive changes in other
variables (see Results of Operations) led to the relatively modest decline in
operating cash flow from year to year. Higher interest and general and
administrative expenses (see below) as well as working capital changes made in
the ordinary course of business accounted for the remaining operating cash flow
decrease from 1994 to 1995.
INVESTING. Cash flows for investing activities reflect expenditures made for
well drilling and completion costs as well as costs attributable to the
Company's Kansas operations, primarily the Konold gas storage facility. That
facility became fully operational during the fiscal year and began generating
revenue during the quarter ended December 31, 1994.
Sheffield acquired a 25 percent interest in the Pinedale, Wyoming Field
("Pinedale") in October 1994 at a net cost to the Company of $174,000. At the
time of purchase, the Pinedale Field consisted of two producing gas wells and
1,806 undeveloped acres. The investment in Pinedale was made for both the
producing wells and for the purpose of conducting additional drilling on the
prospective acreage. In January 1995, the Vible No. 1 gas well was completed as
a producer at a cost of approximately $345,000 net to Sheffield's interest.
Additional drilling is planned for Pinedale during calendar 1996. It is
anticipated that the cost of future wells will be less than the cost of the
Vible No. 1 as the Vible No. 1 served as a test well and certain costs incurred
in its drilling and completion can be avoided in the future.
The Company incurred additional drilling and completion expenditures during
fiscal 1995 in the Berry R. Cox Field (gas), south Texas. Based on the
disappointing results to date, it is anticipated that any future expenditures in
the field will be limited to recompleting a single zone in a currently producing
well. However, Sheffield plans to exploit its past success in the Laredo Field
(also a south Texas gas field) by drilling up to four wells and recompleting
another during fiscal 1996.
Sheffield is in the final stages of negotiating an agreement with a Canadian gas
producer which, assuming successful completion of the contract negotiations,
will result in the extension of the Company's Lignite, North Dakota gathering
system into Saskatchewan. Due to recent successful Canadian drilling, the gas
processing facility serving the area north of Lignite is approaching its
processing capacity. As a prerequisite to finalizing the agreement, the Company
intends to obtain a commitment from a purchaser for gas volumes sufficient to
achieve an adequate return on the capital expended for the extension.
FINANCING. During both fiscal 1994 and 1995, the Company's primary financing
sources have been operational cash flows and bank debt. During the quarter ended
March 31, 1995, the Company reached the limit of its borrowing capacity under
the terms of the Norwest Bank ("Norwest") revolving credit agreement (the
"Credit Agreement"). As a result of the Asset Sale, the Company will be required
to reduce its loan principal by approximately $1.2 million. However, in order to
reduce interest expense, it is anticipated that the Company will use proceeds
from the Asset Sale to pay down the principal balance to no more than $100,000.
The existing Credit Agreement will be maintained so as to have bank financing
capacity available (approximately $1.4 million after the Asset Sale) for future
needs without having to incur the front-end costs associated with putting a
credit facility in place. The available credit will be redetermined semi-
annually in conjunction with a review of the Company's producing reserves and
reserves dedicated to Company processing and gathering facilities.
During the quarter ended December 31, 1994, Sheffield entered into a new credit
facility agreement with Norwest which provided for a working capital credit line
tied to the natural gas inventory at the Konold (Kansas) gas storage facility.
The new agreement provided the Company with up to $500,000 of borrowing capacity
over and above the credit line described in the previous paragraph. After the
Asset Sale, this line of credit will no longer be available to the Company.
IV-14
<PAGE>
RESULTS OF OPERATIONS - FISCAL 1995 COMPARED TO FISCAL 1994
GAS GATHERING AND PROCESSING. The change in components of gas processing and
gathering revenue from fiscal 1994 to fiscal 1995 is comprised of the following:
<TABLE>
<CAPTION>
Price Quantity Revenue
Change Change Change
------ -------- -------
<S> <C> <C> <C>
Residue gas sales (20%) (20%) (36%)
Natural gas liquid sales 4% (28%) (24%)
</TABLE>
The volume change results from both the lower fiscal 1995 interest in Lignite
described previously and from the injection of certain Kansas gas volumes into
storage during the fiscal year. The negative impact of lower natural gas prices
was offset somewhat by a hedging gain of $27,000. Total production (i.e., 100
percent wellhead volumes) was up in North Dakota and down marginally in Kansas
during fiscal 1995.
The fiscal 1995 decrease in gathering and processing costs is related to
decreased revenue since producer payments are generally based on a percentage of
sales proceeds. Also, there was a decrease in field operating expense during
fiscal 1995. These lower costs, in conjunction with sales of gas from storage
which have not been included in the above table, resulted in fiscal 1995 net
from gathering and processing declining by 11 percent from fiscal 1994 despite
the negative revenue factors disclosed in the table.
As a result of the Asset Sale, the Company will no longer have an interest in
its Kansas and Oklahoma assets. Accordingly, fiscal 1996 gathering and
processing income/cash flows will be down from fiscal 1995. This is expected
to be offset somewhat by the anticipated extension of the Lignite system into
Canada.
OIL AND GAS EXPLORATION AND PRODUCTION. The change in components of oil and gas
revenue from fiscal 1994 to fiscal 1995 is comprised of the following:
<TABLE>
<CAPTION>
Price Quantity Revenue
Change Change Change
------ -------- -------
<S> <C> <C> <C>
Oil 13% (12%) -nil-
Gas (17%) (8%) (24%)
</TABLE>
The decrease in oil volume results from normal depletion and the sale of certain
marginal oil properties. In recent years, the Company has committed its drilling
expenditures exclusively to gas wells, although some Williston Basin oil wells
have been successfully recompleted. Changes in gas production are also due to
normal depletion, offset by production from new wells. Overall, revenue from oil
and gas sales was down 9 percent from fiscal 1994 to 1995 but, as a result of
lower production taxes and the Company's continuing efforts to reduce operating
costs on its oil wells, net revenue from exploration and production was
virtually unchanged.
Gas revenue included $37,000 from hedging transactions during the nine months
ended March 31, 1995. The Company presently has no hedge contracts in place.
However, starting in October 1995, the Company will sell its 25 percent share of
a gross 1,000 mcf per day from the Pinedale Field at a year-round price of $1.85
per mmbtu, or $1.67 per mcf at the wellhead. The ten-year contract contains an
annual escalation factor of 4 percent.
Much of the decline in exploration cost during fiscal 1995 is attributable to
reduced activity in the Berry R. Cox Field. Depreciation, depletion and
amortization ("DD&A") expense of oil and gas producing properties was higher in
the current year due to the inclusion of new properties, particularly the Berry
R. Cox wells, in the property base. Limited reserves in the Cox Field also
caused the Company to recognize impairment expenses totaling approximately $1.1
million in fiscal 1995. As described in Note 1 to the financial statements,
during the quarter ended March 31, 1995, Sheffield adopted Statement of
Financial Accounting Standard No. 121, Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of ("SFAS 121"). Unlike
the accounting policy in effect through December 31, 1994 (which required a 10
percent discounted cash flow projection based on unescalated, current prices),
SFAS 121 requires an undiscounted, anticipated price, cash flow projection with
regard to asset impairment tests and, if impairment is indicated, measurement of
the impairment is based upon fair market value. SFAS 121 also precludes
IV-15
<PAGE>
the restatement of prior period financials. Accordingly, the proved property
impairment expense of $511,000 recognized at December 31, 1994 was not adjusted
to conform to the undiscounted cash flow approach mandated by SFAS 121 and the
impairment expense of $467,000 incurred during the quarter ended June 30, 1995
was computed pursuant to the terms of SFAS 121.
INTEREST/GENERAL AND ADMINISTRATIVE EXPENSE. Higher interest rates combined with
a greater average outstanding loan balance caused interest expense to increase
from fiscal 1994 to fiscal 1995.
As described in Note 3 to the financial statements, in December 1994, Trinity
Petroleum Management, Inc. ("Trinity") became a wholly-owned subsidiary of
Sheffield. Trinity previously provided management and administrative services
to Sheffield and another company; now the former Trinity employees provide these
services exclusively to Sheffield. Accordingly, certain personnel and overhead
costs formerly shared by Sheffield and a third party company are now borne
entirely by Sheffield and, as a consequence, general and administrative expense
has increased. Approximately $159,000 of the increase in general and
administrative expense is attributable to the foregoing. However, Sheffield
currently has an infrastructure adequate to manage and administer a considerably
larger asset base than it presently owns. As such, potential future Company
growth should be achieved with only marginal increases in general and
administrative expense.
Costs that would have been incurred whether or not Sheffield had acquired
Trinity accounted for $71,000 of the increased 1995 expense. Finally, the
Company incurred compensation expense of $94,000 in 1995 related to stock
issued as compensation and the granting of a one-time bonus for the purpose of a
stock warrant exercise.
Actual expenditures for overhead are projected to decrease in fiscal 1996.
However, as a result of the sale of the Kansas and Oklahoma operations,
general and administrative recoveries from field operations are projected to
decrease. The Company reports its general and administrative expense net of
recoveries, so reported general and administrative expense for fiscal 1996
could increase should the Kansas and Oklahoma operations not be replaced.
RESULTS OF OPERATIONS - FISCAL 1994 COMPARED TO FISCAL 1993
GAS GATHERING AND PROCESSING. Gas processing/gathering revenues and expenses all
increased markedly during fiscal 1994 as a result of the Republic Natural Gas
acquisition. With regard to assets owned during both 1994 and 1993, Lignite
(North Dakota) revenue less cost of sales and operating costs was down from 1993
for the following reasons: (i) a change in the physical characteristics in the
gas processed by the Lignite plant resulting in marginally higher residue gas
sales but lower liquids sales; (ii) a 14 percent decrease in liquids prices from
1993 to 1994 and (iii) a decrease in Sheffield's interest in the partnership
which owns Lignite (an average of 75 percent in 1994 versus 90 percent in 1993).
The recognition of a full year's expense associated with the cost of the
Republic Natural Gas acquisition accounts for the higher fiscal 1994 gas plant
depreciation.
OIL AND GAS EXPLORATION AND PRODUCTION. The change in components of oil and gas
revenue from fiscal 1993 to fiscal 1994 is comprised of the following:
<TABLE>
<CAPTION>
Price Quantity Revenue
Change Change Change
------ -------- ------
<S> <C> <C> <C>
Oil (22%) (21%) (38%)
Gas 16% 78% 107%
</TABLE>
The decrease in oil volume is attributable to two separate sales of relatively
high operating cost properties while the increased gas production reflects the
fiscal 1994 addition of wells in south Texas. The 13 percent decrease in
operating expense is attributable to the shift in emphasis from relatively high
cost oil wells to lower cost gas wells.
Depreciation, depletion and amortization of oil and gas properties was higher in
1994 due both to the inclusion of the south Texas gas well costs with common
geological structure and production/reserve quantities associated with the new
wells.
IV-16
<PAGE>
INTEREST/GENERAL AND ADMINISTRATIVE EXPENSE. Higher debt levels associated with
the acquisition of Republic Natural Gas and the south Texas drilling activity
caused interest expense to increase sharply in 1994. Higher travel, legal and
insurance cost in 1994 contributed to higher general and administrative expense.
Also, the Company incurred certain costs associated with the trading of its
stock on the American Stock Exchange Emerging Company Marketplace beginning in
fiscal 1994.
QUASI-REORGANIZATION AND INCOME TAXES
The Company eliminated its accumulated deficit through a quasi-reorganization
effective January 1, 1991. No revaluation of assets or liabilities was involved.
Any income tax benefits resulting from utilization in subsequent years of net
operating loss carryforwards existing at January 1, 1991, have been and will
continue to be excluded from results of operations and credited to additional
paid-in capital, resulting in lower earnings than would have been reported had
the Company not elected to adopt the quasi-reorganization. Total operating loss
carryforwards amounted to approximately $8.1 million at June 30, 1995.
Realization of future tax benefits is dependent on the Company's ability to
generate taxable income within the carryforward period. At June 30, 1995, the
Company had a net deferred tax asset of $991,000, consisting of gross deferred
tax assets of approximately $3.4 million, a valuation allowance of approximately
$1.9 million and a deferred tax liability of $501,000. Based on existing
operating conditions and certain tax planning strategies, it cannot be
demonstrated that realization of the entire tax loss carryforward is more likely
than not. Accordingly, the valuation allowance reflects the amount of loss
carryforward benefit not likely to be utilized.
The annual amount of net operating loss carryforwards by year of expiration are
summarized as follows:
<TABLE>
<CAPTION>
Amount
Year Expiring
------ ------------
<S> <C>
1998 $ 1,091,000
1999 510,000
2000 783,000
2001 2,758,000
2002 779,000
2004 765,000
2005 154,000
2006 41,000
2010 1,228,000
------------
$ 8,109,000
============
</TABLE>
Taxable income is subject to change resulting from the sale of assets,
fluctuations in oil and gas prices, the addition or deletion of wells from
gathering and processing systems and fluctuations in gas liquids prices. A total
of approximately $9.2 million minimum level of future taxable income is
necessary to enable the Company to realize the gross deferred tax asset of $3.4
million.
IV-17
<PAGE>
Historically, the income (loss) before income taxes for financial statements
differed from taxable income as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ---------- ----------
<S> <C> <C> <C>
Income (loss) before income taxes per
financial statements $(1,276,000) $ 585,000 $1,173,000
Differences between income before taxes
for financial statement purposes and
taxable income:
Intangible drilling costs
deductible for taxes (872,000) (815,000) (199,000)
Excess of tax over book
depletion, depreciation and
amortization (259,000) (80,000) (326,000)
Impairment of properties 1,069,000 --- 2,000
Gain (loss) on property dispositions
in excess of book value 110,000 (322,000) 59,000
Gain on debt forgiveness of a
subsidiary --- 1,418,000 ---
Other --- (110,000) 84,000
----------- ---------- ----------
Federal taxable income (loss) $(1,228,000) $ 676,000 $ 793,000
=========== ========== ==========
</TABLE>
IV-18
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Stockholders
Sheffield Exploration Company, Inc.:
We have audited the accompanying consolidated balance sheets of Sheffield
Exploration Company, Inc. and Subsidiaries as of June 30, 1995 and 1994, and the
related consolidated statements of operations, changes in stockholders' equity,
and cash flows for each of the three years in the period ended June 30, 1995.
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, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Sheffield
Exploration Company, Inc. and Subsidiaries as of June 30, 1995 and 1994, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended June 30, 1995 in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes," in fiscal 1993 and Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of" in fiscal 1995.
COOPERS & LYBRAND L.L.P.
Denver, Colorado
October 2, 1995
IV-19
<PAGE>
SHEFFIELD EXPLORATION COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
June 30,
-------------------------
1995 1994
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 43,594 $ 360,124
Receivables, net 1,156,837 1,405,895
Gas in storage 237,810 ---
Assets held for sale (Note 9) 4,144,040 ---
Deferred income taxes, net 670,000 ---
Other 78,809 218,755
----------- -----------
Total current assets 6,331,090 1,984,774
PROPERTY AND EQUIPMENT
(Using the successful efforts method)
Unproved oil and gas properties 624,980 1,036,429
Proved properties 4,258,381 2,965,808
Gas plant and related equipment 2,071,328 5,940,907
Other property and equipment 123,402 89,260
----------- -----------
7,078,091 10,032,404
Accumulated depreciation, depletion and
amortization and impairment (3,800,247) (2,450,046)
----------- -----------
3,277,844 7,582,358
OTHER ASSETS
Deferred income taxes, net 321,000 991,000
Other 105,832 231,371
----------- -----------
$10,035,766 $10,789,503
=========== ===========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 862,132 $ 970,794
Current portion of long-term debt 1,175,250 ---
Production and ad valorem taxes payable 147,781 133,796
----------- -----------
Total current liabilities 2,185,163 1,104,590
LONG-TERM DEBT, net of current portion 1,374,050 2,111,333
COMMITMENTS (Notes 2 and 8) --- ---
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 2,000,000
shares authorized; none issued --- ---
Common stock, $.01 par value; 10,000,000
shares authorized; 3,389,261
shares issued and outstanding at June 30,
1995; 3,266,565 issued and
outstanding at June 30, 1994 33,893 32,666
Additional paid-in-capital 6,805,550 6,627,851
Retained earnings (accumulated deficit)
(deficit of $8,584,236 eliminated at
January 1, 1991) (362,890) 913,063
----------- -----------
6,476,553 7,573,580
----------- -----------
$10,035,766 $10,789,503
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
IV-20
<PAGE>
SHEFFIELD EXPLORATION COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------------------------
1995 1994 1993
----------- ----------- ----------
<S> <C> <C> <C>
REVENUE:
Gas processing and gathering $ 6,972,380 $10,277,680 $4,384,747
Oil and gas sales 1,156,745 1,264,568 1,530,940
----------- ----------- ----------
Total Revenue 8,129,125 11,542,248 5,915,687
EXPENSES:
Gas processing and gathering 5,991,614 9,172,238 3,122,031
Operation of producing properties 385,526 470,754 542,020
Production taxes 114,685 131,630 178,155
Dry holes and abandonments 11,151 20,648 481
Exploration 43,640 104,202 100,444
Depreciation, depletion and
amortization:
Gas processing, gathering and
storage assets 480,369 513,796 303,792
Oil and gas properties 355,968 247,292 195,228
Other 46,865 28,177 21,165
Impairments:
Unproved properties 90,951 --- 19,000
Proved properties 978,097 --- 13,882
General and administrative 717,897 393,820 324,810
Other, net 12,704 --- 15,517
----------- ----------- ----------
Total Expenses 9,229,467 11,082,557 4,836,525
----------- ----------- ----------
Operating income (loss) (1,100,342) 459,691 1,079,162
Other expense (income)
Interest income (12,181) (30,628) (66,169)
Gain on asset sales (8,715) (222,218) (72,954)
Interest expense, net of $25,000
and $36,000 of capitalized
interest in 1995 and 1994,
respectively 196,507 127,879 45,016
----------- ----------- ----------
175,611 (124,967) (94,107)
----------- ----------- ----------
Income (loss) before income taxes (1,275,953) 584,658 1,173,269
----------- ----------- ----------
Provision for income taxes:
Current --- --- 18,000
Deferred --- 509,000 412,000
----------- ----------- ----------
--- 509,000 430,000
NET INCOME (LOSS) $(1,275,953) $ 75,658 $ 743,269
=========== =========== ==========
NET INCOME (LOSS) PER SHARE $(0.38) $0.02 $0.23
=========== =========== ==========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 3,327,672 3,261,003 3,254,565
=========== =========== ==========
</TABLE>
IV-21
<PAGE>
The accompanying notes are an integral part of these consolidated financial
statements.
IV-22
<PAGE>
SHEFFIELD EXPLORATION COMPANY, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Common
Common Treasury Share Par Treasury
Shares Stock Value Stock
--------- -------- ---------- ---------
<S> <C> <C> <C> <C>
BALANCE, JUNE 30, 1992 3,264,609 (10,044) $32,646 ($20,088)
Subscriptions receivable interest -- -- -- --
Subscriptions receivable elimination -- -- -- --
Use of tax net operating loss carryforward -- -- -- --
Net income for the year ended June 30, 1993 -- -- -- --
--------- -------- ---------- ---------
BALANCE, JUNE 30, 1993 3,264,609 (10,044) $32,646 (20,088)
Option exercise 12,000 -- 120 --
Retirement of treasury stock (10,044) 10,044 (100) 20,088
Net income for the year ended June 30, 1994 -- -- -- --
--------- -------- ---------- ---------
BALANCE, JUNE 30, 1994 3,266,565 -- 32,666 --
Warrant exercise 43,333 -- 433 --
Stock issued pursuant to purchase transaction 60,000 -- 600 --
Stock issued as compensation 20,000 -- 200 --
Purchase of common stock -- (637) -- (1,274)
Retirement of treasury stock (637) 637 (6) 1,274
Net loss for the year ended June 30, 1995 -- -- -- --
--------- -------- ---------- ---------
BALANCE, JUNE 30, 1995 3,389,261 -- $33,893 --
============================================================
Retained
Additional Earnings
Paid-In Subscriptions (Accumulated
Capital Receivable Deficit) Total
---------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
BALANCE, JUNE 30, 1992 $4,720,621 ($12,678) $94,136 $4,814,637
Subscriptions receivable interest 338 (338) -- --
Subscriptions receivable elimination -- 13,016 -- 13,016
Use of tax net operating loss carryforward 1,912,000 -- -- 1,912,000
Net income for the year ended June 30, 1993 -- -- 743,269 743,269
---------- ------- ------- ---------
BALANCE, JUNE 30, 1993 6,632,959 -- 837,405 7,482,922
Option exercise 14,880 -- -- 15,000
Retirement of treasury stock (19,988) -- -- --
Net income for the year ended June 30, 1994 -- -- 75,658 75,658
---------- ------- ------- ---------
BALANCE, JUNE 30, 1994 6,627,851 -- 913,063 7,573,580
Warrant exercise 64,567 -- -- 65,000
Stock issued pursuant to purchase transaction 85,800 -- -- 86,400
Stock issued as compensation 28,600 -- -- 28,800
Purchase of common stock -- -- -- (1,274)
Retirement of treasury stock (1,268) -- -- --
Net loss for the year ended June 30, 1995 -- -- (1,275,953) (1,275,953)
---------- ------- ---------- ----------
BALANCE, JUNE 30, 1995 $6,805,550 -- ($362,890) $6,476,553
==============================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
IV-23
<PAGE>
SHEFFIELD EXPLORATION COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Years Ended June 30,
---------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(1,275,953) $ 75,658 $ 743,269
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation, depletion and amortization 883,202 789,265 534,067
Deferred income tax provision --- 509,000 412,000
Impairment expense 1,069,048 --- 19,000
Dry holes and abandonments --- --- 481
Gain on asset sales (8,715) (222,218) (72,954)
Stock as compensation 28,800 --- ---
Other 12,330 3,238 21,346
Changes in operating assets and liabilities:
Receivables 249,058 313,540 (1,259,576)
Payables (36,812) (271,613) 677,209
Gas in storage (237,810) --- ---
Taxes payable/refundable 13,985 (18,000) 18,000
Other current assets 139,946 (74,078) (25,137)
Other assets (8,716) 32,676 8,625
----------- ----------- -----------
Net cash provided by operating activities: 828,363 1,137,468 1,076,330
Cash flows from investing activities:
Purchase of gas gathering facilities --- --- (3,704,573)
Proceeds from sale of properties:
Oil and gas --- 98,845 214,413
Pipeline 78,750 --- ---
Gas plant and related equipment --- 700,000 ---
Other 106,180 6,111 ---
Additions to properties:
Oil and gas (923,433) (855,184) (435,622)
Gas plant (709,545) (684,568) (28,331)
Unproved properties (33,687) (519,591) (3,900)
Other (177,634) --- ---
Other investments 12,783 (41,672) (9,813)
----------- ----------- -----------
Net cash (used in) investing activities: (1,646,586) (1,296,059) (3,967,826)
Cash flows from financing activities:
Loan proceeds 593,374 600,000 2,000,000
Payment of loan principal (155,407) (630,081) (700,915)
Treasury stock (1,274) --- ---
Proceeds from exercise of stock warrants 65,000 15,000 ---
----------- ----------- -----------
Net cash provided by (used in) financing activities: 501,693 (15,081) 1,299,085
----------- ----------- -----------
Net (decrease) in cash and cash equivalents (316,530) (173,672) (1,592,411)
Cash and cash equivalents at beginning of year 360,124 533,796 2,126,207
----------- ----------- -----------
Cash and cash equivalents at end of year $ 43,594 $ 360,124 $ 533,796
=========== =========== ===========
Supplemental disclosure of cash flows:
Interest paid $ 228,086 $ 163,879 $ 48,958
Income taxes paid $ --- $ 18,000 $ ---
</TABLE>
In conjunction with the 1993 purchase of the gas gathering facilities, the
Company acquired accounts receivable of approximately
IV-24
<PAGE>
$913,000 and assumed liabilities of approximately the same amount. In fiscal
1995, 60,000 shares were issued as part of a merger transaction.
The accompanying notes are an integral part of these consolidated financial
statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION:
Sheffield Exploration Company, Inc. ("Sheffield" or "the Company") was
incorporated in Delaware during 1981 for the purpose of acquiring various
producing oil and gas properties. On March 6, 1991, the shareholders of
Sheffield Exploration Company ("Old Sheffield") approved a merger into New
Sheffield Exploration Company ("Newco"), a newly-formed wholly-owned
subsidiary of Old Sheffield. Immediately following the merger, the Company
completed the private sale of 1,350,000 shares of its common stock at $2.00
per share. Net proceeds to the Company after offering costs were
$2,568,241. In connection with the merger, the Company's Board of Directors
approved a quasi-reorganization effective January 1, 1991, and transferred
$8,584,236 from additional paid-in capital to offset the existing
accumulated deficit. The quasi-reorganization did not involve a revaluation
of any assets or liabilities.
Newco, renamed Sheffield Exploration Company, Inc. holds and conducts all
business activities formerly owned and operated by Old Sheffield. For
financial reporting purposes, Sheffield is considered the continuing
accounting entity that is the successor to Old Sheffield. During fiscal
1992, the Company established a wholly-owned subsidiary, Sheffield Gas
Processors, for the purpose of making investments in the natural gas
gathering and processing business.
PRINCIPLES OF CONSOLIDATION:
The accompanying consolidated financial statements include the accounts of
Sheffield and its wholly-owned subsidiaries, Knight Royalty Corporation,
Republic Natural Gas Company ("Republic"), Sheffield Gas Processors
("SGP"), Sheffield Operating Company, Inc. ("SOC") and Trinity Petroleum
Management, Inc. ("TPM"). Additionally, the Company's partnership interests
in various gathering/processing assets are consolidated on a pro-rata
basis. All significant intercompany transactions and balances have been
eliminated.
CASH AND CASH EQUIVALENTS:
Cash and cash equivalents include currency on hand, demand deposits with
banks or other financial institutions and certificates of deposit purchased
with a maturity of three months or less.
CONCENTRATION OF CREDIT RISK:
The Company invests its excess cash in money market funds ("the Money
Market Funds") which invest exclusively in U.S. government securities. At
June 30, 1995 and 1994, substantially all of the Company's cash and cash
equivalents were invested in the Money Market Funds. The Company has not
incurred any losses related to these funds. The Company sells its oil and
gas production and most of the output from its gas processing facility and
gathering systems to relatively large companies. Allowances for potential
credit losses relating to product sales are not maintained and the Company
generally does not require collateral. The Company has not incurred any
credit losses relating to product sales.
GAS IN STORAGE PRICING:
Natural gas stored for future sale is recorded at the spot market price in
effect at the date the gas is stored (which approximates cost). Cost of
sales from inventory is based on the weighted average price of storage
inventory in the month preceding the sale.
IV-25
<PAGE>
PROPERTY AND EQUIPMENT:
The Company accounts for its oil and gas operations using the successful
efforts method of accounting. Under this method, all costs associated with
property acquisition, successful exploratory wells and all development
wells are capitalized. Items charged to expense include geological and
geophysical costs, costs of unsuccessful exploratory wells and oil and gas
production costs.
Unproved properties are assessed periodically to determine whether
impairment has occurred. Capitalized costs of proved properties are
amortized using the units-of-production method on the basis of estimated
proved oil and gas reserves. Estimated dismantlement and abandonment costs
and estimated residual salvage values are considered in the amortization
rate. For accounting periods prior to March 31, 1995, proved property costs
were evaluated using the same criteria as are used for amortization
purposes for net realizability and carried at the lower of cost less
accumulated depreciation, depletion and amortization or estimated future
pre-tax net revenue discounted at 10 percent, based on unescalated, current
prices. During the quarter ended March 31, 1995, Sheffield adopted
Statement of Financial Accounting Standard No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of
("SFAS 121). SFAS 121 calls for a review of assets for possible impairment
whenever events or changed circumstances indicate that the net book value
(carrying amount) of an asset may not be recoverable. If the carrying
amount of the asset is greater than the future undiscounted cash flow it is
projected to generate, the asset is written down to its estimated fair
market value. For purposes of the SFAS 121 impairment test, the Company
groups its producing oil and gas properties in the same manner used for the
depreciation, depletion and amortization calculation. Gains and losses are
recognized when a grouping as described above is sold. Proceeds from the
sale of individual properties are credited to accumulated depreciation,
depletion and amortization. All of the Company's oil and gas properties are
located within the continental United States.
Impairment expense of $511,000 related to proved property costs incurred
during the quarter ended December 31, 1994 is equal to the amount by which
the property unit carrying cost at December 31, 1994 exceeded projected
future net revenues, based on unescalated quarter-end prices, discounted at
10 percent. The impairment of unproved properties ($91,000), also incurred
during the quarter ended December 31, 1994, reflects the writedown of such
properties to estimated fair market value. Based on the provisions of SFAS
121, the proved property impairment expense of $467,000 recognized during
the quarter ended June 30, 1995 equaled the amount by which the impaired
property exceeded its estimated fair market value. The fourth quarter
impairment, all of which related to the Company's south Texas property,
resulted from downward revisions of gas reserves as well as relatively low
natural gas prices. Fair market value was estimated using a discounted cash
flow approach. After projecting cash flows using forecasted prices, varying
discount factors were applied to adjust the cash flows for perceived risk.
The discount factors were intended to approximate those used in the
marketplace for properties having characteristics similar to those being
written down.
The gas processing facility and the gathering system lines are depreciated
using the straight line method over their estimated useful lives of 15
years. Other equipment, having useful lives ranging from three to seven
years, is also depreciated on a straight line basis. Maintenance and
repairs which do not result in betterments or extend the useful life of an
asset are expensed. Gains and losses from retirement or replacement of
other property and equipment are included in operations.
Estimated dismantlement, restoration and abandonment costs associated with
the Company's producing properties and gas processing facilities are
approximately offset by estimated residual values of equipment.
Accordingly, no accrual for such costs has been recorded.
OIL AND GAS PRICING ARRANGEMENTS:
Sheffield periodically enters into various oil and gas pricing
arrangements, including oil price swaps, forward sales contracts accounted
for as hedges and the purchase/sale of puts and calls, referred herein
collectively as hedging transactions or contracts. Gains and losses
relating to these contracts are included in oil and gas revenues upon
delivery and related cash flows from such activities are included in
operating activities. In connection with these hedging transactions, the
Company may be exposed to nonperformance by other parties
IV-26
<PAGE>
to such agreements, thereby subjecting the Company to current oil prices
and, in certain cases, loss of any premiums paid in advance by the Company.
However, the Company only enters into hedging contracts with large
financial institutions and does not anticipate nonperformance. As of June
30, 1995, Sheffield was not party to any hedging transactions. However,
starting in October 1995, the Company will sell its 25 percent share of a
gross 1,000 mmbtu per day from the Pinedale Field at a year-round price of
$1.85 per mmbtu, or $1.67 per mcf at the wellhead. The ten-year contract
contains an annual escalation factor of 4 percent.
INCOME TAXES:
During fiscal 1993, the Company adopted Statement of Financial Accounting
Standard 109, Accounting for Income Taxes ("SFAS 109"). SFAS 109 requires
the recognition of deferred tax assets for deductible temporary differences
and operating loss carryforwards and of deferred tax liabilities for
taxable temporary differences. Measurement of current and deferred tax
liabilities and assets is based on provisions of enacted tax law; the
effects of future changes in tax laws or rates are not anticipated.
Deferred tax assets primarily result from net operating loss carryforwards
and deferred tax liabilities from the recognition of depreciation,
depletion and amortization in different periods for financial reporting and
tax purposes.
NET INCOME (LOSS) PER COMMON SHARE:
Net income (loss) per common share has been calculated based upon the
weighted average number of shares outstanding during each year presented.
The effect of options and warrants is not included in the computation as
such effect is either immaterial or antidilutive.
RECLASSIFICATIONS:
Certain amounts in prior year financial statements have been reclassified
to conform to the current year presentation.
2. LONG-TERM DEBT
The Company entered into a credit agreement ("the Agreement") in April 1993
(amended in September 1993, November 1994 and May 1995) with Norwest Bank
which expires in December 1997. Loans made pursuant to the Agreement are
collateralized by substantially all of the Company's interests in its oil
and gas properties, gas gathering assets and SGP's interest in the
partnership which owns the Lignite gas processing and gathering assets.
There are two components of the borrowing base: a reserve based portion
("the Reserve Based Component") related to estimates of future oil and gas
production ($2.3 million and $2.1 million outstanding principal at June 30,
1995 and 1994, respectively) and a gas storage inventory working capital
credit line ("the Storage Component") ($259,000 outstanding principal at
June 30, 1995). The Reserve Based Component balance is redetermined
semiannually while the Storage Component balance is revised monthly. If the
Reserve Based Component loan balance exceeds the redetermined borrowing
base, the Company has the option of paying the excess in total within 30
days of notification by the lender or in six equal monthly installments. At
June 30, 1994, the Reserve Based Component was classified as long-term
debt.
Interest on the unpaid principal balance is computed at an annual rate
which equals the sum of the defined prime rate plus one-half percent. The
rate in effect at June 30, 1995 was 9.5 percent. In addition, the Agreement
calls for the Company to pay a commitment fee of one-half percent per annum
on the difference between the borrowing base and the outstanding principal
balance.
Required principal payments at June 30, 1995 are as follows:
<TABLE>
<CAPTION>
Fiscal
Years Amount
-------- -----------
<S> <C>
1996 $ 1,175,000
1997 435,000
1998 939,000
-----------
</TABLE>
IV-27
<PAGE>
<TABLE>
<S> <C>
$ 2,549,000
===========
</TABLE>
The entire Storage Component balance and that portion of Reserve Based
Component related to the gas processing and gathering assets expected to be
sold during fiscal 1996 have been classified as current at June 30, 1995.
The Company has been informed by Norwest Bank that Norwest will release its
security interest in the Kansas and Oklahoma assets in order to facilitate
their sale.
The Agreement includes various covenants which prohibit or limit the
Company's capacity to incur additional indebtedness, sell properties,
change the nature of its business or enter into mergers. The covenants also
require the Company to maintain (1) a net worth of $4,600,000 plus 50
percent of cumulative net income after June 30, 1993, (2) a current ratio
of not less than 1 to 1, (3) a ratio of funded debt (all debt having a
maturity of more than one year) to net worth of not greater than 1 to 1 and
(4) precludes the Company from paying cash dividends.
In September 1991, the Interenergy-Sheffield Partnership ("the
Partnership") entered into a four-year loan agreement with Norwest Bank.
The $1.75 million loan proceeds were used to finance the acquisition of
various gas plant and gas processing assets in the vicinity of Lignite,
North Dakota. The loan was guaranteed by the Company and collateralized by
all the Partnership assets. Interest on the unpaid principal balance was
computed at an annual rate which equals the sum of the defined prime rate
plus three-fourths of one percent. There was no outstanding principal at
June 30, 1995.
3. RELATED PARTY TRANSACTIONS
On September 17, 1990, the Company entered into a management agreement
("the Trinity Agreement") with Trinity Petroleum Management ("Trinity").
The Trinity Agreement provided for the consolidation of the Company's
administrative staff with the staff of Trinity and that Trinity provide
management and administrative services for Sheffield for an annual fee of
$100,000. The Company continued to pay certain direct administrative
expenses which were not included under the Trinity Agreement. In
conjunction with the purchase of a gas processing plant ("the Plant"), the
Company executed a three-year agreement ("the Interenergy Agreement") with
Interenergy Corporation ("Interenergy") in September 1991. The Interenergy
Agreement called for Interenergy to manage the Plant for a monthly fee of
$20,000, $5,000 of which was remitted to Trinity. In conjunction with the
purchase of Republic, the Company agreed to pay Trinity an additional
management fee of $16,000 monthly during the July through December 1993
period, $6,000 per month from January through September 1994 and $16,000
per month thereafter ("the Republic Management Fee"). In September 1993,
Sheffield entered into a joint venture agreement ("the III Agreement") with
III Exploration Company, a wholly-owned subsidiary of Boise-based
Intermountain Industries, Inc. ("Intermountain"). The III Agreement
provided for Sheffield to remit a monthly management fee of $2,083 to
Trinity.
The Trinity Agreement also provided that Sheffield remit to Trinity all
overhead recoveries from producing properties operated by the Company and
overhead recoveries from the Company's managed limited partnerships.
Additionally, personnel costs associated with field operations were charged
to Company-operated properties and billed to third party joint owners or
recognized by the Company as operating expense.
The following table summarizes Trinity's charges to Sheffield during each
of the last three fiscal years.
<TABLE>
<CAPTION>
1995 1994 1993
--------- ---------- ----------
<S> <C> <C> <C>
Trinity Agreement management fees $ 62,498 $ 100,000 $ 100,000
Republic management fees 66,000 132,000 16,000
Interenergy Agreement management fees 30,000 60,000 60,000
III Agreement management fees 37,500 20,830 ---
Overhead recoveries (producing properties) 24,339 53,840 94,586
Field operations personnel costs 293,492 643,886 109,909
Direct administrative expenses 34,562 41,765 21,836
Other --- --- 35,000
--------- ---------- ----------
</TABLE>
IV-28
<PAGE>
<TABLE>
<S> <C> <C> <C>
$ 548,391 $ 1,052,321 $ 437,331
=========== ============ ==========
</TABLE>
On December 31, 1994, Sheffield exchanged 60,000 shares of its common stock
(at $1.44 per share based upon the then-current stock price) and
approximately $10,000 for all of the shares of Trinity, resulting in
Trinity becoming a wholly-owned subsidiary of the Company. Sheffield's
President and Chief Executive Officer, who owned a one-third interest in
Trinity from its inception through November 1994, was the sole shareholder
of Trinity at the time of the exchange.
Republic was purchased from Sunrise Energy Services, Inc. of which Mr.
David A. Melman, a director of Sheffield, was a director. In addition,
during fiscal 1994, the Company acquired a 13 percent working interest in a
drilling prospect from XCL, Inc., of which Mr. Melman is an officer and
director. Through June 30, 1995, Sheffield has expended approximately $1.6
million on this prospect.
The Company had sales to Interenergy of approximately $634,000, $699,000
and $1,022,000 in fiscal 1995, 1994 and 1993, respectively. Related
accounts receivable of approximately $48,000 and $49,000 existed at June
30, 1995 and 1994, respectively. Also, during fiscal 1994, the Company sold
a partial interest in the Lignite, North Dakota gas processing facility to
Interenergy for $700,000.
4. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------------------------------
1995 1994 1993
---------- ---------- ---------
<S> <C> <C> <C>
Current:
Federal $ --- $ --- $ 18,000
State --- --- ---
---------- ---------- ---------
$ --- $ --- $ 18,000
Deferred:
Federal $ (434,000) $ 198,000 $ 381,000
State (38,000) 18,000 31,000
Change in valuation allowance 472,000 293,000 ---
---------- ---------- ---------
--- 509,000 412,000
---------- ---------- ---------
$ --- $ 509,000 $ 430,000
========== ========== =========
</TABLE>
Tax provisions have resulted in effective tax rates differing from the
Federal income tax rate as shown in the following table.
<TABLE>
<CAPTION>
Percent of Pretax Earnings
----------------------------
1995 1994 1993
----------------------------
<S> <C> <C> <C>
Federal statutory rate (34)% 34% 34%
State income taxes (3)% 3% 3%
Change in valuation allowance 37% 50% -
----------------------------
Effective rate --- 87% 37%
============================
</TABLE>
IV-29
<PAGE>
The Company's deferred income tax asset is comprised of the tax benefit
(cost) associated with the following items (based on a 37 percent tax
rate). Valuation allowances reflect the amounts of operating loss
carryforwards and tax credits which are either not expected to be utilized
before expiration date or which benefits management currently cannot
predict will more likely than not be realized.
<TABLE>
<CAPTION>
June 30,
---------------------------
1995 1994
-------------- ------------
<S> <C> <C>
Deferred tax assets:
Tax loss carryforwards $ 3,000,000 $ 3,109,000
Percentage depletion carryforward 108,000 94,000
Undeveloped property tax basis 225,000 98,000
Investment tax credit 52,000 52,000
Other 10,000 ---
-------------- ------------
Gross deferred tax asset 3,395,000 3,353,000
Valuation allowance (1,903,000) (1,719,000)
-------------- ------------
1,492,000 1,634,000
Deferred tax liability:
Difference in book and tax bases,
property, plant and equipment (501,000) (643,000)
-------------- ------------
Net deferred tax asset $ 991,000 $ 991,000
============== ============
Current $ 670,000 $ ---
Noncurrent 321,000 991,000
-------------- ------------
$ 991,000 $ 991,000
============== ============
</TABLE>
A significant portion of the net deferred tax asset is expected to be
realized during fiscal 1996 as a result of the asset sale described in
Note 9.
As a result of the Company's fiscal 1991 quasi-reorganization (see Note 1)
and the fact that the tax losses giving rise to the asset were incurred
prior to that reorganization, the deferred tax asset recognized by the
Company during fiscal 1993 was credited directly to stockholders' equity.
As of June 30, 1995, the Company had the following tax loss carryforwards
available to offset future taxable income. The carryforwards expire in
varying amounts between 1997 and 2010.
<TABLE>
<CAPTION>
<S> <C>
Regular income tax $8,191,000
Alternative minimum tax $4,759,000
Investment tax credit $ 52,000
Percentage depletion
(no expiration date) $ 293,000
</TABLE>
Approximately $1,145,000 of regular tax loss and $120,000 of alternate
minimum tax loss can only be used to offset future income of a separate
subsidiary, and not income of the consolidated group. In addition,
approximately $8,000 of investment tax credit carryover is attributable to
the subsidiary, and can be used only to offset future tax liability of the
subsidiary.
5. OPTIONS, WARRANTS AND RESERVED SHARES
In November 1990, the Board of Directors adopted a new stock option plan
("the 1990 Plan"), which was approved by the shareholders of the Company on
March 6, 1991. The 1990 Plan superseded any stock option plans existing
prior to its adoption. All employees of the Company, its subsidiaries,
directors and consultants are eligible to participate in the 1990 Plan.
Options are of two types: incentive stock options (for employees) for terms
not to exceed 5 years, and non-qualified options (for nonemployee
participants) for terms not to exceed 10 years. When adopted, the maximum
number of shares of common stock which could be issued under the 1990 Plan
was 150,000, subject to adjustment for future stock dividends, stock splits
or other relevant capitalization changes. Options under the 1990 Plan are
granted at 100 percent of fair market value of the underlying common stock
as of the grant date.
IV-30
<PAGE>
In September 1993, the Board of Directors amended the Plan to both increase
the number of shares which may be issued pursuant to options granted under
the Plan to 350,000 shares and to clarify participation in the 1990 Plan.
In December 1993, stockholders ratified the September Board of Directors'
action.
The following table summarizes outstanding common shares subject to options
under the 1990 Plan and pre-existing plans as of June 30, 1995.
<TABLE>
<CAPTION>
Non-
Incentive Qualified
Option Price/Expiration Date Total Options Options
-------------------------------- ------------ ---------------------- -------------
<S> <C> <C> <C>
$1.50; September 1995 18,667 18,667 ---
$2.00; January 1998 90,000 90,000 ---
$3.00; December 1998 65,000 65,000 ---
$2.00; March 2001 2,000 --- 2,000
$2.00; July 2002 10,000 --- 10,000
$2.00; September 2003 45,000 --- 45,000
$3.00; December 2003 28,000 --- 28,000
-------------- ----------------------- ------------
258,667 173,667 85,000
============== ======================= =============
</TABLE>
Of the 258,667 shares shown in the table, 133,333 were exercisable at June
30, 1995.
The following table summarizes 1990 Plan (or pre-existing plan, where so
noted) activity during each of the last three fiscal years.
<TABLE>
<CAPTION>
Exercised Granted
----------------------- -------------------------------------------
Expired Currently Expiration
Fiscal Shares Shares Price Shares Exercisable Price Date
------------------ ------- ------ ----------------------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
1993 --- --- --- 10,000 6,667 $2.00 July 2002
90,000 60,000 $2.00 January 1998
1994 500 12,000 (a) $1.25 45,000 15,000 $2.00 September 2003
65,000 21,666 $3.00 December 1998
44,000 9,333 $3.00 December 2003
1995 16,000 --- --- --- --- --- ---
</TABLE>
(a) Options for these shares were granted pursuant to a superseded plan.
The option price equalled the market price of the stock at the date of
grant.
Not included in the above table are options for 20,667 shares issued prior
to fiscal 1993.
In addition to the options disclosed in the table, during September 1990,
the Company's president was issued a Special Purchase Warrant Certificate
which entitled him to purchase 43,333 shares of common stock at a price of
$1.50 per share. The warrant was exercised during fiscal 1995.
In connection with the private placement of common stock described in Note
1, the placement agent purchased for $2,500 a warrant to purchase 81,450
shares of common stock at $2.00 per share. The warrant expires in March
1996.
IV-31
<PAGE>
6. OIL AND GAS PRODUCING ACTIVITIES
The aggregate amount of capitalized costs of oil and gas properties and the
corresponding accumulated depreciation, depletion, amortization and
impairments are summarized as follows:
<TABLE>
<CAPTION>
June 30,
-----------------------------------------
1995 1994 1993
-------------- ------------ -----------
<S> <C> <C> <C>
Unproved oil and gas properties:
Cost $ 684,480 $ 1,036,429 $ 595,156
Impairment (607,789) (516,838) (590,838)
-------------- ------------ -----------
$ 76,691 $ 519,591 $ 4,318
============== ============ ===========
Proved properties:
Cost $ 4,258,381 $ 2,965,808 $ 2,190,304
Accumulated depreciation, depletion,
amortization and impairment (2,208,743) (1,289,297) (1,084,067)
-------------- ------------ -----------
$ 2,049,638 $ 1,676,511 $ 1,106,237
============== ============ ===========
</TABLE>
The aggregate amount of expenditures relating to oil and gas producing
activities are summarized as follows:
<TABLE>
<CAPTION>
June 30,
-------------------------------
1995 1994 1993
-------------------------------
<S> <C> <C> <C>
Property acquisition costs:
Proved $174,145 $ 94,576 $ 23,250
Unproved 33,687 59,500 3,900
Exploration costs 43,640 104,202 100,444
Development costs 749,288 754,690 412,372
Wells in progress --- 460,091 ---
</TABLE>
None of the Company's oil and gas sales were from foreign production or
from reserves applicable to long-term supply or similar agreements with
foreign governments.
<TABLE>
<CAPTION>
7. MAJOR CUSTOMERS
1995 1994 1993
-------------- ------------ -----------
<S> <C> <C> <C>
Gas Processing and Gathering:
Rangeline * 11% *
Williston Basin * * 30%
City of Pratt 19% * *
Cenex * * 18%
Koch Canada * * 13%
-------------- ------------ -----------
19% 11% 61%
Oil and Gas Operations:
Permian * * 11%
</TABLE>
*Less than 10%
Figures are expressed as percentage of total revenue.
IV-32
<PAGE>
8. LEASING ARRANGEMENTS
The Company leases certain production and office facilities under non-
cancelable operating leases. Future minimum lease payments under non-
cancelable operating leases at June 30, 1995 are as follows:
<TABLE>
<CAPTION>
Year Ending June 30,
<S> <C>
1996 $ 83,650
1997 18,250
1998 18,250
1999 18,250
----------
Total minimum payments $138,400
==========
</TABLE>
Rent expense for fiscal 1995 and 1994 was approximately $58,000 and
$13,800, respectively. In connection with the sale of the Company's gas
gathering and processing assets (Note 9), the Buyer is assuming annual
lease payments of $18,250.
9. SUBSEQUENT EVENT
On September 25, 1995, the Company signed an agreement ("the Purchase and
Sale Agreement") providing for the sale of all of its gas gathering and
processing assets in Kansas and Oklahoma for a pre-adjustment price of $5.5
million. The Purchase and Sale Agreement provides for an effective date of
July 1, 1995. However, the Purchase and Sale Agreement specifies that
Sheffield is entitled to all proceeds from the sale of natural gas from
storage inventory providing that at closing (October 2, 1995) there be a
minimum of 150,000 mmbtu in inventory.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
IV-33
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names, ages and titles of the members of the
Board of Directors and the executive officers of Sheffield:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Edwin H. Morgens 54 Chairman of the Board
J. Samuel Butler 50 President, Chief Executive Officer and
Director
Randall E. King 41 Director
David A. Melman 52 Director
McLain J. Forman 66 Director
David L. Milanesi 48 Vice President, Secretary and Treasurer
Jerry D.Smothermon 58 Vice President
</TABLE>
EDWIN H. MORGENS has been a director since 1981 and served as President of
the Company from 1986 to September 1990. He has been Chairman of Morgens,
Waterfall, Vintiadis & Co., Inc., a financial services firm, since 1970.
Mr. Morgens is also a general partner of three New York investment limited
partnerships and chairman of the corporate general partner of a Delaware
investment partnership.
J. SAMUEL BUTLER has been a Director, President and Chief Executive Officer
of the Company since September 1990. He served as the Chief Executive
Officer of Trinity Petroleum Management, Inc. ("Trinity") and Sterling
Energy Corporation ("Sterling") from 1989 until December 1994, and was also
a principal in the investment banking firm of Petrie Parkman & Co. from
1989 until December 1994. From 1985 until his affiliation with Trinity and
Sterling, he was President and Chief Operating Officer of Columbus Energy
Corporation (Denver, Colorado). He is presently a director of Columbus
Energy Corporation. Mr. Butler joined the predecessor of Columbus Energy
Corporation in 1974.
RANDALL E. KING has been a principal with the investment banking firm of
Petrie Parkman & Co. since April 1989. Mr. King served as Vice President of
the Company from September 1990 until December 1994. Also, from 1989 until
November 1994, he served as Executive Vice President of Sterling Energy
Corporation. Mr. King served as a Vice President of Netherland, Sewell &
Associates, a petroleum engineering consulting concern, from 1981 through
1989.
DAVID A. MELMAN has been a Director of the Company since 1982. He has been
Executive Vice President since March 1989 and Vice President - General
Counsel for The Exploration Company of Louisiana since January 1984. He has
been a director of such company since September 1987.
McLAIN J. FORMAN has been a director of the Company since May 1988. Mr.
Forman has been President of Forman Petroleum Corporation, a private
company engaged in petroleum exploration and production, since 1982.
DAVID L. MILANESI has been Treasurer of the Company or its predecessor,
Knight Royalty Corporation, since December 1981. He was elected Vice
President in September 1990. He served as Controller from December 1981
until September 1988 and as Secretary from January 1983 to September 1988
and from March 1991 to the present. Mr. Milanesi is a Certified Public
Accountant and has a Masters Degree in Business Administration from
Northwestern University.
JERRY D. SMOTHERMON has been Vice President - Operations of the Company
since December 1994. From January 1991 until December 1994 he served in the
same capacity with Trinity. Prior thereto, from July 1989, he served as a
consultant to Trinity. Mr. Smothermon received a degree in Petroleum
Engineering from the University of Wyoming and is a registered Professional
Engineer.
IV-34
<PAGE>
The Bylaws of the Company provide that the number of directors shall be
fixed by the Board of Directors. The number of directors is presently fixed
at five and there are no vacancies.
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
During September 1990, the Company signed an agreement with Trinity Petroleum
Management, Inc. ("Trinity") providing for Trinity to furnish management
services to the Company. In conjunction with the agreement, some of the
Company's officers transferred to Trinity, maintaining their status as officers
of the Company but being compensated by Trinity. Accordingly, the Company paid
no compensation other than grants of stock options to any officer or employee
during the 1993 and 1994 fiscal years and through the second quarter of fiscal
1995. On December 31, 1994, however, the Company purchased all of the
outstanding stock of Trinity and, therefore, the management services agreement
with Trinity was discontinued and the Company's officer began receiving
compensation directly from the Company. See "Acquisition of Trinity Petroleum
Management, Inc." Compensation paid and stock options granted to Mr. Butler,
the Chief Executive Officer of the Company, is set forth in the following table:
<TABLE>
<CAPTION>
Summary Compensation Table
- ------------------------------------------------------------------------------------------------------------
Annual Compensation Long-Term Compensation
-------------------------------- ----------------------------
Name and Principal Position Year Salary ($) Bonus ($) Awards/Options/SARs
- ----------------------------- ---- ----------- ---------- ----------------------------
<S> <C> <C> <C> <C>
J. Samuel Butler
President & CEO 1995 $65,000 (1) $65,000 (2)
1994 N.A. N.A. 50,000 shares
1993 N.A. N.A. 50,000 shares
</TABLE>
(1) Compensation was paid by the Company for the quarters ended March 31,
1995 and June 30, 1995. Compensation for the quarters ended September 30,
1994 and December 31, 1994 was paid by Trinity.
(2) In January 1995, Mr. Butler was granted a cash bonus of $65,000 for the
purpose of exercising a Special Purchase Warrant, purchasing 43,333
shares of common stock at a price of $1.50 per share. The bonus was
granted in conjunction with the Company's acquisition of Trinity.
<TABLE>
<CAPTION>
Aggregated Option/SAR Exercises in Last Fiscal Year and Year End Option/SAR Values*
- ------------------------------------------------------------------------------------------------------------------------------------
Number of Value of
Unexercised Unexercised
Options/SARs for Options/SARs for
Year End Year End
Shares Acquired Value Realized Exercisable/ Exercisable/
Name on Exercise (# ) ($) Unexercisable Unexercisable
- --------------------------- ------------------ ----------------- ------------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
J. Samuel Butler 43,333 * -0- 50,000/50,000 $71,875 /$71,875
</TABLE>
* Special Purchase Warrant issued in September 1990 for 43,333 shares of
Common Stock at a purchase price of $1.50 per share. The warrant became
exercisable in three equal parts on September 13, 1991, 1992 and 1993 and
was due to expire on September 14, 1995.
COMPENSATION TO DIRECTORS
IV-35
<PAGE>
Directors of the Company are paid a director's fee of $250 for each meeting of
the Board of Directors that they attend.
IV-36
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of September 25, 1995, information regarding
the beneficial ownership of the Company's Common Stock (i) by each person known
by the Company to be the beneficial owner of more than 5 percent of the Common
Stock of the Company, (ii) by each of the Company's directors and (iii) by all
directors and officers of the Company as a group.
<TABLE>
<CAPTION>
Percent of
Name and Address Amount and Nature Outstanding
of Beneficial Owner Beneficial Owner (1) Shares (2)
- --------------------- -------------------- ------------
<S> <C> <C>
Edwin H. Morgens 486,050 (3) 14.3%
10 East 50th Street
New York, NY 10022
J. Samuel Butler 174,810 (4) 5.1%
1801 Broadway, Suite 600
Denver, CO 80202
Randall E. King 41,667 (5) 1.2%
1801 Broadway, Suite 600
Denver, CO 80202
David A. Melman 14,761 *
1801 Broadway, Suite 600
Denver, CO 80202
McLain J. Forman 6,667 *
1801 Broadway, Suite 600
Denver, CO 80202
All Officers and Directors as
a Group (6 persons) 805,621 (6) 23.0%
</TABLE>
* Indicates less than one percent.
(1) All shares are owned both of record and beneficially unless otherwise
specified by footnote to this table.
(2) Based on 3,391,261 shares of Common Stock outstanding.
(3) Shares are held by the Edwin H. Morgens and Linda H. Morgens 1993 Trust.
(4) Includes 50,000 shares issuable upon exercise of stock options granted
under the 1990 Stock Option Plan, and 7,000 shares held in trust for Mr.
Butler's grandchildren, of which Mr. Butler is Trustee. Mr. Butler
specifically disclaims beneficial ownership of such 7,000 shares.
(5) Includes 16,667 shares issuable upon exercise of stock options granted
under the 1990 Stock Option Plan.
(6) Includes 50,000 shares issuable upon exercise of stock options granted
under the 1990 Stock Option Plan and not included in prior footnotes.
IV-37
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On September 17, 1990, the Company entered into an agreement with Trinity which
provided for the payment by the Company to Trinity of an annual fee for
administration and management services. For fiscal 1995, the annual fee was set
at $172,000. On December 31, 1994, the Company purchased all of the outstanding
stock of Trinity from Mr. J. Samuel Butler. Mr. Butler is a director, officer
and stockholder of the Company, and was a director, officer and the sole
stockholder of Trinity at the time of the transaction. The Company's Board of
Directors, with Mr. Butler abstaining, approved consummation of the transaction
and determined that the value of the Trinity shares received by the Company in
exchange for the issuance by the Company to Mr. Butler of 60,000 shares of
Common Stock (valued at $1.44 per share based upon the then-current stock price)
and a cash payment of $9,756 represented a fair value to the Company.
IV-38
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
Page
<S> <C>
(a) Financial Statements and Financial Statement Schedules:
Report of Independent Accountants................................. 18
Consolidated Balance Sheets
as of June 30, 1995 and 1994..................................... 19
Consolidated Statements of Operations for the years
ended June 30, 1995, 1994 and 1993............................... 20
Consolidated Statements of Changes in Stockholders' Equity for
the years ended June 30, 1995, 1994 and 1993..................... 21
Consolidated Statements of Cash Flows for the years
ended June 30, 1995, 1994 and 1993.............................. 22
Notes to Consolidated Financial Statements........................ 23
Report of Independent Accountants on Financial
Statement Schedules.............................................. 36
Financial Statements Schedules:
Schedule II: Valuation and Qualifying Accounts.............. 39
(b) Exhibits............................................................... 41
</TABLE>
A list of the exhibits required by Item 601 of Regulation S-K to be filed
as part of this report is set forth in the Index to Exhibits, and is
incorporated herein by reference.
REPORTS ON FORM 8-K
No reports were filed on Form 8-K during the quarter ended June 30, 1995.
IV-39
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Our report on the consolidated financial statements of Sheffield Exploration
Company, Inc. and Subsidiaries is included on page 18 of this Form 10-K. In
connection with our audits of such financial statements, we have also audited
the related financial statement schedule listed in the index on page 38 of this
Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
Denver, Colorado
October 2, 1995
IV-40
<PAGE>
SHEFFIELD EXPLORATION COMPANY, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance, Balance,
Beginning End of
of Period Additions Deductions Period
-------------------------------------------------
<S> <C> <C> <C> <C>
Year ended June 30, 1993
Deferred tax asset valuation allowance $ --- $1,426,000 $ --- $1,426,000
Trade receivable allowance $ 6,900 $ --- $ --- $ 6,900
Year ended June 30, 1994
Deferred tax asset valuation allowance $1,426,000 $ 293,000 $ --- $1,719,000
Trade receivable allowance $ 6,900 $ --- $ (6,089) $ 811
Year ended June 30, 1995
Deferred tax asset valuation allowance $1,719,000 $ 472,000 $(288,000) $1,903,000
Trade receivable allowance $ 811 $ --- $ (373) $ 438
</TABLE>
IV-41
<PAGE>
SIGNATURE PAGE
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SHEFFIELD EXPLORATION COMPANY, INC.
October 2, 1995 /s/Edwin H. Morgens
-------------------------------------------
Edwin H. Morgens
Chairman
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report is signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/s/Edwin H. Morgens October 2, 1995
- -------------------------------------
Edwin H. Morgens, Chairman
/s/J. Samuel Butler October 2, 1995
- -------------------------------------
J. Samuel Butler, President and Chief
Executive Officer
/s/David L. Milanesi October 2, 1995
- -------------------------------------
David L. Milanesi, Treasurer
(Chief Financial Officer)
/s/David A. Melman October 2, 1995
- -------------------------------------
David A. Melman, Director
/s/McLain J. Forman October 2, 1995
- -------------------------------------
McLain J. Forman, Director
/s/Randall E. King October 2, 1995
- -------------------------------------
Randall E. King, Director
IV-42
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description
- ----------- -----------
3.1 Articles of Incorporation (a)
3.2 By-Laws (a)
10.1 1987 Employee Stock Option Plan. Incorporated by reference to
Sheffield Exploration Company, Inc. (reg No. 33-16265) Form S-1
Registration Statement dated October 9, 1987.
10.2 Limited Partnership Agreement dated July 19, 1988 between the Company
as general partner and TFP, Inc. as limited partner. Incorporated by
reference to Sheffield Exploration Company, Inc. (S.E.C. File No. 0-
13201) Form 8-K dated July 15, 1988.
10.3 Stock Purchase Agreement dated August 31, 1990 between Sterling Energy
Corporation and the Company. (b)
10.4 Joint Acquisition Agreement dated August 31, 1990 between Sterling
Energy Corporation and the Company. (b)
10.5 Management Agreement dated August 31, 1990 between Trinity Petroleum
Management, Inc. and the Company. (b)
10.6 Purchase Agreement dated December 27, 1990 between the Company and
Sterling Energy Corporation. (a)
10.7 Merger Agreement dated November 30, 1990 between the Company and New
Sheffield Exploration Company, Inc. (a)
10.8 The Company's 1990 Stock Option Plan. (a)
10.9 The Company's Amended and Restated 1990 Stock Option Plan. (d)
10.10 March 19, 1991 warrant issued to Petrie Parkman & Co. for the purchase
of 81,450 shares of Company common stock for $2.00 per share.
Incorporated by reference to Sheffield Exploration Company, Inc.
(S.E.C. File No. 0-13201) Form 10-K dated September 19, 1991.
10.11 Partnership agreement between the Company's wholly-owned subsidiary,
Sheffield Gas Processors, Inc., and Interenergy. Incorporated by
reference to Sheffield Exploration Company, Inc. (S.E.C. File No. 0-
13201) Form 8-K dated September 26, 1991.
10.12 Purchase and Sale Agreement between the Company's wholly-owned
subsidiary, Sheffield Gas Processors, Inc., and a subsidiary of
Sunrise Energy Services, Inc. for Republic Natural Gas Company.
Incorporated by reference to Sheffield Exploration Company, Inc.
(S.E.C. File No. 0-13201) Form 8-K dated June 7, 1993.
10.13 Joint Venture Agreement between the Company and III Exploration, Inc.,
a wholly-owned subsidiary of Intermountain Industries, Inc.
Incorporated by reference to Sheffield Exploration Company, Inc.
(S.E.C. File No. 0-13201) Form 8-K dated September 14, 1993.
IV-43
<PAGE>
INDEX TO EXHIBITS (continued)
Exhibit No. Description
- ----------- -----------
10.14 Credit Agreement between the Company and Norwest Bank Denver, National
Association dated April 9, 1993 (c).
10.15 Amended Credit Agreement between the Company and Norwest Bank Denver,
National Association dated September 16, 1993 (c).
10.16 Prairie Gas Transportation Company and Republic Natural Gas Company
Agreement and Plan of Merger dated December 1, 1993. (d)
10.17 Merger Agreement dated December 31, 1994 between the Company, Trinity
Petroleum Management, Inc. and SheffSub, Inc.*
10.18 Amended Credit Agreement between the Company and Norwest Bank Denver,
National Association dated May 10, 1995.*
10.19 Purchase and Sale Agreement dated September 25, 1995 between The
Company, Sheffield Gas Processors, Inc., Republic Natural Gas Company
and NGC Energy Resources, Limited Partnership.*
22 Subsidiaries:
Sheffield Operating Company, Inc.
Knight Royalty Corporation, Inc.
Sheffield Gas Processors, Inc.
Republic Natural Gas Company
Trinity Petroleum Management, Inc.
(a) Incorporated by reference to Sheffield Exploration Company, Inc.
(S.E.C. File No. 0-13201) Form S-4 dated January 22, 1991.
(b) Incorporated by reference to Sheffield Exploration Company, Inc.
(S.E.C. File No. 0-13201) Form 10-K dated September 19, 1990
(c) Incorporated by reference to Sheffield Exploration Company, Inc.
(S.E.C. File No. 0-13201) Form 10-K dated September 20, 1993.
(d) Incorporated by reference to Sheffield Exploration Company, Inc.
(S.E.C. File No. 0-13201) Form 10-K dated September 27, 1994.
* Agreement filed only with manually executed copies of Form 10-K.
IV-44
<PAGE>
Appendix V
Section 262, Delaware General Corporation Law, Appraisal rights
(a) Any stockholder of a corporation of this State who holds shares of stock
on the date of the making of a demand pursuant to subsection (d) of this section
with respect to such shares, who continuously holds such shares through the
effective date of the merger or consolidation, who has otherwise complied with
subsection (d) of this section and who has neither voted in favor of the merger
or consolidation nor consented thereto in writing pursuant to section 228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of his shares of stock under the circumstances described in
subsections (b) and (c) of this section. As used in this section, the word
"stockholder" means a holder of record of stock in a stock corporation and also
a member of record of a nonstock corporation; the words "stock" and "share" mean
and include what is ordinarily meant by those words and also membership or
membership interest of a member of a nonstock corporation; and the words
"depository receipt" mean a receipt or other instrument issued by a depository
representing an interest in one or more shares, or fractions thereof, solely of
stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or series
of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to section 251, section 252, section 254, section 257, section
258, section 263 or section 264 of this title:
(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock, which stock, or
depository receipts in respect thereof, at the record date fixed to determine
the stockholders entitled to receive notice of and to vote at the meeting of
stockholders to act upon the agreement of merger or consolidation, were either
(i) 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. or (ii) held of record by more than 2,000 holders;
and further provided that no appraisal rights shall be available for any shares
of stock of the constituent corporation surviving a merger if the merger did not
require for its approval the vote of the stockholders of the surviving
corporation as provided in subsections (f) or (g) of section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series of
stock of a constituent corporation if the holders thereof are required by the
terms of an agreement of merger or consolidation pursuant to section 251, 252,
254, 257, 258, 263 and 264 of this title to accept for such stock anything
except:
a. Shares of stock of the corporation surviving or resulting from such
merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts in
respect thereof, which shares of stock or depository receipts at the effective
date of the merger or consolidation will be
V-1
<PAGE>
either 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. or held of record by more than 2,000
holders;
c. Cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a. and b. of this paragraph; or
d. Any combination of the shares of stock, depository receipts and cash
in lieu of fractional shares or fractional depository receipts described in the
foregoing subparagraphs a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under section 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall be
available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting, shall
notify each of its stockholders who was such on the record date for such meeting
with respect to shares for which appraisal rights are available pursuant to
subsection (b) or (c) hereof that appraisal rights are available for any or all
of the shares of the constituent corporations, and shall include in such notice
a copy of this section. Each stockholder electing to demand the appraisal of his
shares shall deliver to the corporation, before the taking of the vote on the
merger or consolidation, a written demand for appraisal of his shares. Such
demand will be sufficient if it reasonably informs the corporation of the
identity of the stockholder and that the stockholder intends thereby to demand
the appraisal of his shares. A proxy or vote against the merger or consolidation
shall not constitute such a demand. A stockholder electing to take such action
must do so by a separate written demand as herein provided. Within 10 days after
the effective date of such merger or consolidation, the surviving or resulting
corporation shall notify each stockholder of each constituent corporation who
has complied with this subsection and has not voted in favor of or consented to
the merger or consolidation of the date that the merger or consolidation has
become effective; or
(2) If the merger or consolidation was approved pursuant to section 228 or
253 of this title, the surviving or resulting corporation, either before the
effective date of the merger or
V-2
<PAGE>
consolidation or within 10 days thereafter, shall notify each of the
stockholders entitled to appraisal rights of the effective date of the merger or
consolidation and that appraisal rights are available for any or all of the
shares of the constituent corporation, and shall include in such notice a copy
of this section. The notice shall be sent by certified or registered mail,
return receipt requested, addressed to the stockholder at his address as it
appears on the records of the corporation. Any stockholder entitled to appraisal
rights may, within 20 days after the date of mailing of the notice, demand in
writing from the surviving or resulting corporation the appraisal of his shares.
Such demand will be sufficient if it reasonably informs the corporation of the
identity of the stockholder and that the stockholder intends thereby to demand
the appraisal of his shares.
(e) Within 120 days after the effective date of the merger or consolidation,
the surviving or resulting corporation or any stockholder who has complied with
subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the value of the stock of all such stockholders. Notwithstanding the
foregoing, at any time within 60 days after the effective date of the merger or
consolidation, any stockholder shall have the right to withdraw his demand for
appraisal and to accept the terms offered upon the merger or consolidation.
Within 120 days after the effective date of the merger or consolidation, any
stockholder who has complied with the requirements of subsections (a) and (d)
hereof, upon written request, shall be entitled to receive from the corporation
surviving the merger or resulting from the consolidation a statement setting
forth the aggregate number of shares not voted in favor of the merger or
consolidation and with respect to which demands for appraisal have been received
and the aggregate number of holders of such shares. Such written statement shall
be mailed to the stockholder within 10 days after his written request for such a
statement is received by the surviving or resulting corporation or within 10
days after expiration of the period for delivery of demands for appraisal under
subsection (d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register in Chancery
in which the petition was filed a duly verified list containing the names and
addresses of all stockholders who have demanded payment for their shares and
with whom agreements as to the value of their shares have not been reached by
the surviving or resulting corporation. If the petition shall be filed by the
surviving or resulting corporation, the petition shall be accompanied by such a
duly verified list. The Register in Chancery, if so ordered by the Court, shall
give notice of the time and place fixed for the hearing of such petition by
registered or certified mail to the surviving or resulting corporation and to
the stockholders shown on the list at the addresses therein stated. Such notice
shall also be given by 1 or more publications at least 1 week before the day of
the hearing, in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publication as the Court deems advisable. The forms
of the notices by mail and by publication shall be approved by the Court, and
the costs thereof shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may
V-3
<PAGE>
require the stockholders who have demanded an appraisal for their shares and who
hold stock represented by certificates to submit their certificates of stock to
the Register in Chancery for notation thereon of the pendency of the appraisal
proceedings; and if any stockholder fails to comply with such direction, the
Court may dismiss the proceedings as to such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted his
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that he is
not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed upon
the parties as the Court deems equitable in the circumstances. Upon application
of a stockholder, the Court may order all or a portion of the expenses incurred
by any stockholder in connection with the appraisal proceeding, including,
without limitation, reasonable attorney's fees and the fees and expenses of
experts, to be charged pro rata against the value of all the shares entitled to
an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days
V-4
<PAGE>
after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the shares
of such objecting stockholders would have been converted had they assented to
the merger or consolidation shall have the status of authorized and unissued
shares of the surviving or resulting corporation.
V-5
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Section 145 of the General Corporation Law of the State of Delaware
(the "DGCL"), a Delaware corporation has the power, under specified
circumstances, to indemnify its directors, officers, employees and agents in
connection with threatened, pending or completed actions, suits or proceedings,
whether civil, criminal, administrative or investigative (other than an action
by or in right of the corporation), brought against them by reason of the fact
that they were or are such directors, officers, employees or agents, against
expenses, judgments, fines and amounts paid in settlement actually and
reasonably incurred in any such action, suit or proceeding. Article IX of
Sheffield's Charter and Article 6 of Sheffield's Bylaws provide for
indemnification of each person who is or was or is threatened to be made a party
to any threatened, pending or completed civil, administrative, criminal or
investigative action, suit or proceeding (other than an action by or in right of
the corporation) because such person is or was a director or officer of
Sheffield or, while a director or officer of Sheffield, is or was serving at the
request of Sheffield as a director, officer, partner, trustee, agent or employee
of another corporation or of a partnership, joint venture, trust association,
partnership or other enterprise, against expenses (including attorney's fees),
judgments, fines, and amounts paid in settlement, incurred by the person in
connection with such action, suit or proceeding, if the person acted in good
faith and in a manner that such person reasonably believed to be in or not
opposed to the best interest of Sheffield, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe that his conduct was
unlawful.
Sheffield also maintains policies of directors and officers liability
insurance.
Section 102(b)(7) of the DGCL provides that a certificate of incorporation
may contain a provision eliminating or limiting the personal liability of a
director to the corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director, provided that such provision does not eliminate
or limit the liability of a director (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 (relating to liability for
unauthorized acquisitions or redemptions of, or dividends on, capital stock) or
(iv) for any transaction from which the director derived an improper personal
benefit. Article VIII of Sheffield's Charter contains such a provision.
88
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
2.1 Restated Agreement and Plan of Merger dated as of February 6, 1996
between Sheffield Exploration Company, Inc. and TransMontaigne Oil
Company (included as Appendix I to the Joint Proxy
Statement/Prospectus)
3.1 Restated Certificate of Incorporation (d)
3.2 By-Laws (a)
5.1 Opinion of Davis Graham & Stubbs LLP regarding the legality of
the securities (f)
8.1 Opinion of Holme Roberts & Owen LLC regarding tax matters
10.1 Sheffield Exploration Company, Inc.'s Amended and Restated 1990
Stock Option Plan. (b)
10.2 March 19, 1991 warrant issued to Petrie Parkman & Co. for the
purchase of 81,450 shares of Sheffield Exploration Company, Inc.
common stock for $2.00 per share. Incorporated by reference to
Sheffield Exploration Company, Inc. (SEC File No. 0-13201) Form 10-
K dated September 19, 1991.
10.3 Partnership agreement between Sheffield Exploration Company, Inc.'s
wholly-owned subsidiary, Sheffield Gas Processors, Inc., and
Interenergy. Incorporated by reference to Sheffield Exploration
Company, Inc. (SEC File No. 0-13201) Form 8-K dated September 26,
1991.
10.4 Joint Venture Agreement between Sheffield Exploration Company, Inc.
and III Exploration, Inc., a wholly-owned subsidiary of
Intermountain Industries, Inc. Incorporated by reference to
Sheffield Exploration Company, Inc. (SEC File No. 0-13201) Form 8-K
dated September 14, 1993.
10.5 Merger Agreement dated December 31, 1994 between Sheffield
Exploration Company, Inc., Trinity Petroleum Management, Inc. and
SheffSub, Inc. (c)
10.6 Amended Credit Agreement between Sheffield Exploration Company,
Inc. and Norwest Bank Denver, National Association dated May 10,
1995. (c)
89
<PAGE>
INDEX TO EXHIBITS (CONTINUED)
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.7 Purchase and Sale Agreement dated September 25, 1995 between
Sheffield Exploration Company, Inc., Sheffield Gas Processors,
Inc., Republic Natural Gas Company and NGC Energy Resources,
Limited Partnership. (c)
10.8 Key Employee Retention Plan dated January 1, 1996. (e)
10.9 Bear Paw LLC Operating Agreement dated January 1, 1996 between
Sheffield Exploration Company, Inc., TransMontaigne Oil Company
and BP Energy Operating, LLC. (f)
10.10 Put agreement dated February 21, 1996 between Sheffield
Exploration Company, Inc. and TransMontaigne Oil Company relating
to Bear Paw Operating Company, LLC. (f)
10.11 Engagement letter agreement dated December 15, 1995 between
Sheffield Exploration Company, Inc. and Petrie Parkman & Co. as
amended by letter dated March 21, 1996. (f)
22 Subsidiaries:
Sheffield Operating Company, Inc.
Knight Royalty Corporation, Inc.
Sheffield Gas Processors, Inc.
Republic Natural Gas Company
Trinity Petroleum Management, Inc.
23.1 Consent of KPMG Peat Marwick LLP (TransMontaigne)
23.2 Consent of Coopers & Lybrand L.L.P. (Sheffield)
23.3 Consent of Rauscher Pierce Refsnes, Inc.
23.4 Consent of KPMG Peat Marwick LLP (Lion)
99.1 Form of Sheffield Proxy
_____________
(a) Incorporated by reference to Sheffield Exploration Company, Inc. (SEC File
No. 0-13201) Form S-4 dated January 22, 1991.
(b) Incorporated by reference to Sheffield Exploration Company, Inc. (SEC File
No. 0-13201) Form 10-K dated September 27, 1994.
(c) Incorporated by reference to Sheffield Exploration Company, Inc. (SEC File
No. 0-13201) Form 10-K dated October 2, 1995.
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<PAGE>
(d) Incorporated by reference to Sheffield Exploration Company, Inc. (SEC File
No. 0-13201) Form 10K/A dated December 11, 1995.
(e) Incorporated by reference to Sheffield Exploration Company, Inc. (SEC File
No. 0-13201) Form 10-Q dated February 14, 1996.
(f) Incorporated by reference to Sheffield Exploration, Inc. Registration
Statement on Form S-4 filed May 6, 1996 (SEC File No. 333-03195).
(B) FINANCIAL STATEMENT SCHEDULES:
Schedule II -- Valuation and Qualifying Accounts; Incorporated by reference to
Sheffield Exploration Company, Inc. (SEC File No. 0-13201) Form 10K/A dated
December 11, 1995.
ITEM 22. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any propectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) ((S) 230.424(b) of this chapter) if, in the
aggregate, the changes in volume and price represent no more than 20%
change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
(2) That, for the purpose 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; and
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
the offering.
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<PAGE>
(4) 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; and
(5) 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.
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 provisions described under Item 20 above, 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.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Denver, State of
Colorado, on May 10, 1996.
SHEFFIELD EXPLORATION COMPANY, INC.
/s/ J. Samuel Butler
-----------------------------------
J. Samuel Butler
President and Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below does hereby make, constitute and
appoint each of J. Samuel Butler and David L. Milanesi as such person's true and
lawful attorney-in-fact and agent, with full power of substitution,
resubstitution and revocation to execute, deliver and file with the Securities
and Exchange Commission, for and on such person's behalf, and in any and all
capacities, this Registration Statement on Form S-4, and any and all amendments
(including post-effective amendments) thereto, with all exhibits thereto and
other documents in connection therewith, granting unto said attorneys-in-fact
and agents full power and authority to do and perform each and every act and
thing requisite and necessary to be done as fully to all intents and purposes as
such person might or could do in person, hereby ratifying and confirming all
that said attorney-in-fact and agent or such persons's substitute or substitutes
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities indicated
on May 10, 1996.
/s/J. Samuel Butler, Attorney in Fact
- -------------------------------------
Edwin H. Morgens, Chairman
/s/J. Samuel Butler, Attorney in Fact
- -------------------------------------
J. Samuel Butler, President and Chief
Executive Officer
/s/David L. Milanesi
- -------------------------------------
David L. Milanesi, Treasurer
(Chief Financial and Accounting Officer)
/s/J. Samuel Butler, Attorney in Fact
- -------------------------------------
David A. Melman, Director
/s/J. Samuel Butler, Attorney in Fact
- -------------------------------------
McLain J. Forman, Director
/s/J. Samuel Butler, Attorney in Fact
- -------------------------------------
Randall E. King, Director
93
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
2.1 Restated Agreement and Plan of Merger dated as of February 6, 1996
between Sheffield Exploration Company, Inc. and TransMontaigne Oil
Company (included as Appendix I to the Joint Proxy
Statement/Prospectus)
3.1 Restated Certificate of Incorporation (d)
3.2 By-Laws (a)
5.1 Opinion of Davis Graham & Stubbs LLP regarding the legality of the
securities (f)
8.1 Opinion of Holme Roberts & Owen LLC regarding tax matters
10.1 Sheffield Exploration Company, Inc.'s Amended and Restated 1990
Stock Option Plan. (b)
10.2 March 19, 1991 warrant issued to Petrie Parkman & Co. for the
purchase of 81,450 shares of Sheffield Exploration Company, Inc.
common stock for $2.00 per share. Incorporated by reference to
Sheffield Exploration Company, Inc. (SEC File No. 0-13201) Form
10-K dated September 19, 1991.
10.3 Partnership agreement between Sheffield Exploration Company, Inc.'s
wholly-owned subsidiary, Sheffield Gas Processors, Inc., and
Interenergy. Incorporated by reference to Sheffield Exploration
Company, Inc. (SEC File No. 0-13201) Form 8-K dated September 26,
1991.
10.4 Joint Venture Agreement between Sheffield Exploration Company, Inc.
and III Exploration, Inc., a wholly-owned subsidiary of
Intermountain Industries, Inc. Incorporated by reference to
Sheffield Exploration Company, Inc. (SEC File No. 0-13201) Form 8-K
dated September 14, 1993.
10.5 Merger Agreement dated December 31, 1994 between Sheffield
Exploration Company, Inc., Trinity Petroleum Management, Inc. and
SheffSub, Inc. (c)
10.6 Amended Credit Agreement between Sheffield Exploration Company,
Inc. and Norwest Bank Denver, National Association dated May 10,
1995. (c)
<PAGE>
INDEX TO EXHIBITS (CONTINUED)
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.7 Purchase and Sale Agreement dated September 25, 1995 between
Sheffield Exploration Company, Inc., Sheffield Gas Processors,
Inc., Republic Natural Gas Company and NGC Energy Resources,
Limited Partnership. (c)
10.8 Key Employee Retention Plan dated January 1, 1996. (e)
10.9 Bear Paw LLC Operating Agreement dated January 1, 1996 between
Sheffield Exploration Company, Inc., TransMontaigne Oil Company and
BP Energy Operating, LLC. (f)
10.10 Put agreement dated February 21, 1996 between Sheffield Exploration
Company, Inc. and TransMontaigne Oil Company relating to Bear Paw
Operating Company, LLC. (f)
10.11 Engagement letter agreement dated December 15, 1995 between
Sheffield Exploration Company, Inc. and Petrie Parkman & Co. as
amended by letter dated March 21, 1996. (f)
22 Subsidiaries:
Sheffield Operating Company, Inc.
Knight Royalty Corporation, Inc.
Sheffield Gas Processors, Inc.
Republic Natural Gas Company
Trinity Petroleum Management, Inc.
23.1 Consent of KPMG Peat Marwick LLP (TransMontaigne)
23.2 Consent of Coopers & Lybrand L.L.P. (Sheffield)
23.3 Consent of Rauscher Pierce Refsnes, Inc.
23.4 Consent of KPMG Peat Marwick LLP (Lion)
99.1 Form of Sheffield Proxy
______________
(a) Incorporated by reference to Sheffield Exploration Company, Inc.
(SEC File No. 0-13201) Form S-4 dated January 22, 1991.
(b) Incorporated by reference to Sheffield Exploration Company, Inc.
(SEC File No. 0-13201) Form 10-K dated September 27, 1994.
(c) Incorporated by reference to Sheffield Exploration Company, Inc.
(SEC File No. 0-13201) Form 10-K dated October 2, 1995.
<PAGE>
(d) Incorporated by reference to Sheffield Exploration Company, Inc. (SEC
File No. 0-13201) Form 10K/A dated December 11, 1995.
(e) Incorporated by reference to Sheffield Exploration Company, Inc. (SEC
File No. 0-13201) Form 10-Q dated February 14, 1996.
(f) Incorporated by reference to Sheffield Exploration, Inc. Registration
Statement on Form S-4 filed May 6, 1996 (SEC File No. 333-03195).
<PAGE>
Exhibit 8.1
Form of Tax Opinion
May 3, 1996
TransMontaigne Oil Company
370 17th Street
Republic Plaza, Suite 900
Denver, Colorado 80208
Sheffield Exploration Company, Inc.
1801 Broadway, Suite 600
Denver, Colorado 80202
Re: TransMontaigne/Sheffield Merger Transaction
Gentlemen:
This tax opinion relates to the merger (the "Merger") of TransMontaigne
Oil Company ("TransMontaigne") with and into Sheffield Exploration Company, Inc.
("Sheffield"), with Sheffield surviving the Merger. Undefined capitalized terms
used herein have the same meaning as in the preliminary Proxy
Statement/Prospectus filed with the Securities and Exchange Commission on
May 3, 1996 (the "Proxy Statement").
This opinion is rendered in connection with the discussion included under
the caption "Certain Federal Income Tax Consequences" in the Proxy Statement.
Our opinion is limited in its scope. It only covers those federal income
tax consequences of the Merger expressly addressed herein. Among other items,
it does not cover the special tax consequences, if any, that might apply to
TransMontaigne or Sheffield stockholders who (i) may be entitled to special
treatment under the Code, such as dealers in securities, foreign persons, mutual
funds, insurance companies and tax-exempt entities, (ii) acquired their shares
as compensation, or (iii) do not hold their shares of TransMontaigne Stock or
Sheffield Stock as a capital asset. It does not cover state, local or foreign
tax consequences.
<PAGE>
TransMontaigne Oil Company
Sheffield Exploration Company, Inc.
May 3, 1996
Page 2
In rendering our opinion, we have examined the following documents: (i)
the Agreement and Plan of Merger, dated February 6, 1996, between TransMontaigne
and Sheffield (the "Plan"); (ii) the Proxy Statement; and (iii) such other
documents and instruments that are available at this time as we have deemed
necessary to provide a basis for our opinion.
Our opinion is based on a number of assumptions. If any of these
assumptions is not true or accurate, our opinion may be different. In rendering
our opinion, we have assumed the following:
(i) the Plan sets forth the complete agreement among the parties with
respect to the Merger;
(ii) all Merger documents have been or will be properly executed, and
when executed will be valid, binding and enforceable in accordance with their
terms, and all copies of such documents are accurate reproductions of the
original documents;
(iii) the Merger and related transactions will take place as described
in the Plan and in the Proxy Statement, the facts described in those documents
are accurate and complete, and will continue to be accurate and complete as of
the Effective Time, and the conduct of the parties is and will be materially
consistent with those facts;
(iv) the Merger will be a valid merger under applicable state law;
(v) appropriate representation letters with respect to certain factual
matters will be received from TransMontaigne and Sheffield and the
representations set forth in those letters will be true, correct and complete in
all material respects and will continue to be true, correct and complete in all
material respects at the Effective Time; and
(vi) appropriate representations will be received from the stockholders
of TransMontaigne as to their plans and intentions with respect to the sale or
other disposition of the Sheffield stock that they will receive in the Merger
and those representations will be true, correct and complete in all material
respects and will continue to be true, correct and complete in all material
respects at the Effective Time.
Our opinion is based on the existing provisions of the Internal Revenue
Code of 1986, as amended (the "Code"), the applicable Treasury Regulations
issued
<PAGE>
TransMontaigne Oil Company
Sheffield Exploration Company, Inc.
May 3, 1996
Page 3
thereunder and the official published interpretations of those provisions by the
Internal Revenue Service and the courts, all of which are subject to change,
which changes could be applied retroactively. If the applicable law changes, our
opinion may be different.
Subject to the assumptions, conditions and qualifications described
herein and in the section of the Proxy Statement captioned "Certain Federal
Income Tax Consequences," and based on existing federal income tax law, it is
our opinion that for federal income tax purposes:
(i) The Merger will constitute a reorganization within the meaning of
Section 368(a) of the Code, and TransMontaigne and Sheffield will each be a
party to the reorganization within the meaning of Section 368(b) of the Code;
(ii) TransMontaigne will not recognize any gain or loss for federal
income tax purposes as a result of the Merger;
(iii) No gain or loss will be recognized by the stockholders of
TransMontaigne upon their receipt of Sheffield Stock in exchange for their
TransMontaigne Stock;
(iv) The aggregate tax basis of the shares of Sheffield Stock received
in the Merger by a stockholder of TransMontaigne will be the same as the tax
basis of his TransMontaigne Stock exchanged therefor; and
(v) The holding period of Sheffield Stock in the hands of a
TransMontaigne stockholder will include the holding period of his TransMontaigne
Stock exchanged therefor, provided such TransMontaigne Stock is held as a
capital asset at the Effective Time of the Merger.
(vi) The section of the Proxy Statement captioned "Certain Federal
Income Tax Consequences" summarizes the material federal income tax consequences
expected to result to the stockholders of TransMontaigne from the Merger subject
to the conditions and limitations described therein.
It is also our opinion that: the holders of Old Sheffield Common Stock
will not recognize any gain or loss as a result of the reverse stock split of
their stock in the Merger except to the extent of cash received in lieu of
fractional shares of New Common Stock; the aggregate tax basis of the shares of
New Common Stock received in the exchange will be the same as the aggregate tax
basis of the shares of Old Sheffield Common Stock surrendered in exchange
therefor (adjusted to take into
<PAGE>
TransMontaigne Oil Company
Sheffield Exploration Company, Inc.
May 3, 1996
Page 4
account basis attributable to any fractional shares); and the holding period for
the shares of New Common Stock will include the holding period of the shares of
Old Sheffield Common Stock surrendered in exchange therefor (provided that such
shares of Old Sheffield Common Stock are held as a capital asset at the
Effective Time).
Our opinion may change if the applicable law changes, if any of the facts
of the Merger transactions as included in the Proxy Statement and the Merger
documents are inaccurate, incomplete or change, if any of the representations
made to us by TransMontaigne or by Sheffield in the representation letters (or
the TransMontaigne stockholders in their certificates) are not true, complete
and correct in all material respects, or if the conduct of the parties is
materially inconsistent with the facts reflected in the Proxy Statement or the
Merger documents.
The opinion represents our current legal judgment on the specific issues
addressed based on the assumptions, conditions, qualifications and applicable
law described above and it has no official legal status of any kind. The
Internal Revenue Service may take a position contrary to our opinion and, if the
matter is litigated, a court could reach a contrary decision.
The opinions expressed herein are solely for your benefit and the benefit
of the TransMontaigne and Sheffield stockholders at the Effective Time, and they
may not be relied upon in any manner or for any purpose by any other person.
We hereby consent to the filing of this opinion letter with the
Securities and Exchange Commission as an exhibit to the Registration Statement
and to the use of our name therein.
Very truly yours,
HOLME ROBERTS & OWEN LLC
Member
<PAGE>
Exhibit 23.1
------------
Accountants' Consent
--------------------
The Board of Directors
TransMontaigne Oil Company:
We consent to the use of our report relating to the consolidated balance sheets
of TransMontaigne Oil Company as of April 30, 1995 and 1994, and the related
consolidated statements of operations, stockholder's equity, and cash flows for
the year ended April 30, 1995, seven months ended April 30, 1994 and years ended
September 30, 1993 and 1992 included herein and to the reference to our firm
under the heading "Experts" in the prospectus.
KPMG Peat Marwick LLP
Denver, Colorado
May 9, 1996
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in this Registration Statement on
Form S-4 of our reports dated October 2, 1995, on our audits of the consolidated
financial statements and financial statement schedule of Sheffield Exploration
Company, Inc. and Subsidiaries as of June 30, 1995 and 1994 and for each of the
three years in the period then ended. We also consent to the reference to our
firm under the caption "Experts."
/s/ Coopers & Lybrand L.L.P.
Denver, Colorado
May 9, 1996.
<PAGE>
Exhibit 23.3
Rauscher Pierce Refsnes, Inc. Consent
The undersigned hereby consents to the inclusion of its opinion as an exhibit
to the Registration Statement on Form S-4 of Sheffield Exploration Company, Inc.
and to the references to the undersigned and the summarization of such opinion
in the Registration Statement.
May 10, 1996
Rauscher Pierce Refsnes, Inc.
By /s/ Joseph P. Cunningham
---------------------------
Joseph P. Cunningham,
Managing Director
<PAGE>
Exhibit 23.4
------------
Accountants' Consent
--------------------
The Board of Directors
Lion Oil Company:
We consent to the use of our report relating to the consolidated balance sheets
of Lion Oil Company as of April 30, 1995 and 1994, and the related consolidated
statements of earnings, stockholder's equity, and cash flows for each of the
years in the three-year period ended April 30, 1995 included herein and to the
reference to our firm under the heading "Experts" in the prospectus.
KPMG Peat Marwick LLP
Jackson, Mississippi
May 9, 1996
<PAGE>
SHEFFIELD EXPLORATION COMPANY, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE SPECIAL MEETING OF STOCKHOLDERS ON JUNE 3, 1996.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" ITEM 1 BELOW.
As evidenced by the signature(s) on the reverse side hereof, the undersigned
hereby appoints J. Samuel Butler and David L. Milanesi, and any one of them, as
Proxies, each with full power of substitution, to represent and vote all shares
of the Common Stock of Sheffield Exploration Company, Inc. ("Sheffield") which
the undersigned would be entitled to vote if personally present at the Special
Meeting of Stockholders of Sheffield to be held at the Forum Room, Norwest Bank
Building, 1740 Broadway, Denver, Colorado, on June 3, 1996, at 2:00 P.M., and
at any adjournments thereof, with all power the undersigned would possess if
personally present.
ITEM 1. APPROVAL OF THE RESTATED AGREEMENT AND PLAN OF MERGER BETWEEN
SHEFFIELD AND TRANSMONTAIGNE OIL COMPANY AS MORE FULLY SET FORTH IN THE
ACCOMPANYING JOINT PROXY STATEMENT/PROSPECTUS.
[_] FOR [_] AGAINST [_] ABSTAIN
ITEM 2. ON ANY OTHER MATTERS THAT MAY PROPERLY COME BEFORE THE MEETING.
(continued and to be signed on other side)
THIS PROXY WILL BE VOTED IN THE MANNER DIRECTED. IN THE ABSENCE OF DIRECTION,
THIS PROXY WILL BE VOTED "FOR" ITEM 1 AND IN THE DISCRETION OF THE WITHIN NAMED
PROXIES WITH RESPECT TO OTHER BUSINESS THAT MAY PROPERLY COME BEFORE THE
MEETING OR ANY ADJOURNMENT THEREOF.
When signing as attorney, executor, administrator, trustee, or guardian, or
in other representative capacities, please give your full title as such. A
Proxy for shares held in joint ownership should be signed by EACH owner. If
account is registered in the name of a corporation, partnership or other
entity, a duly authorized individual must sign on its behalf and give title.
Date___________________________
_______________________________
Signature(s) of Stockholder(s)
_______________________________
Signature(s) of Stockholder(s)
PLEASE SIGN EXACTLY AS YOUR NAME APPEARS ABOVE, MARK ANY ADDRESS CORRECTION,
DATE, AND RETURN THIS PROXY USING THE ENCLOSED ENVELOPE.
