<PAGE>
HAWKINS ENERGY CORPORATION
TWENTY EAST FIFTH STREET, SUITE 1500
TULSA, OKLAHOMA 74103
PROXY STATEMENT
SPECIAL MEETING OF STOCKHOLDERS
DECEMBER 19, 1996
-------------------------
GENERAL INFORMATION
This Proxy Statement is furnished in connection with the solicitation of
proxies by the management and Board of Directors of Hawkins Energy Corporation
(the "Company") to be used at the Special Meeting of Stockholders to be held
Thursday, December 19, 1996, at 10:00 a.m., local time, in the executive offices
of the Company at Twenty East Fifth Street, Suite 1500, 15th Floor, Tulsa,
Oklahoma 72103 and all adjournment(s) thereof, for the purposes set forth in the
attached Notice of Special Meeting. The approximate date upon which this Proxy
Statement and the form of proxy are being mailed to stockholders is December 5,
1996.
EXPENSES OF SOLICITATION
The expenses in connection with the solicitation of proxies, including the
cost of preparing, handling, printing and mailing the Notice of Special Meeting,
Proxy Statement and form of proxy, have been or will be borne by the Company.
The Company may reimburse banks, brokerage houses and other custodians, nominees
and fiduciaries for reasonable expenses incurred in sending proxy material to
their principals to obtain authorization for the execution of proxies.
Directors, officers and other employees of the Company may solicit proxies
personally, by telephone or telegram, from some stockholders if proxies are not
received promptly.
QUORUM AND VOTE REQUIRED
The presence, in person or by proxy, of a majority of the outstanding
shares of Common Stock of the Company is necessary to constitute a quorum at the
Special Meeting. The affirmative vote of the holders of a majority of the
outstanding shares of Common Stock is required to approve the amendments to the
Company's Certificate of Incorporation. Abstentions from voting and broker non-
votes will be treated as shares that are present for purposes of determining a
quorum and will have the same effect as a vote against the proposed amendments
to the Company's Certificate of Incorporation.
HACL, Ltd., a Texas limited partnership ("HACL"), has obtained proxies to
vote the shares represented thereby in favor of the proposals at the Special
Meeting from the following stockholders with respect to the number of shares of
the Company's Common Stock set forth below:
<PAGE>
<TABLE>
<CAPTION>
PERCENT
NAME NUMBER OF SHARES OF OUTSTANDING SHARES
- ---- ---------------- ---------------------
<S> <C> <C>
R.P. Gregory, Jr. 3,037,251 23.3%
Hawkins Oil & Gas, Inc. 1,229,667 9.4%
Don E. Smith 899,393 6.9%
Tandy Polk 405,315 3.1%
Shelton Smith 364,902 2.8%
James F. Hawkins 301,093 2.3%
Roger Broome 269,914 2.1%
Troy Jones 246,206 1.9%
Carroll Broome 205,019 1.6%
Bobby Wiggins 166,000 1.3%
--------- ----
7,124,760 54.7%
========= ====
</TABLE>
Accordingly, HACL has obtained proxies for a majority of the outstanding shares
of Common Stock, thereby assuring the approval of the amendments to the
Company's Certificate of Incorporation. See "Proposal to Increase the Number of
Authorized Shares of Common Stock--Background and Reasons for Proposed
Amendment." Stockholders of the Company will not be entitled to dissenters'
appraisal rights with respect to the amendments to the Certificate of
Incorporation.
REVOCABILITY OF PROXIES
The form of proxy enclosed is for use at the Special Meeting if a
stockholder is unable to attend or does not desire to vote in person. At any
time before the shares represented by the proxy are voted at the Special
Meeting, the stockholder may revoke the proxy by delivering to the Secretary of
the Company a written revocation of the proxy, by delivering a later dated
proxy, or by voting in person while in attendance at the Special Meeting.
MANNER OF VOTING PROXIES
All shares represented by valid proxies received prior to the meeting, and
not revoked, will be voted in accordance with the instructions on the proxy. If
the proxy is signed and returned to the Company, but no instructions are given,
it is intended that the proxy will be voted FOR the approval of the amendments
to the Company's Certificate of Incorporation. As to any other business that
may properly come before the meeting, including all matters incident to the
conduct of the meeting, it is intended that the proxy will be voted in respect
thereof in accordance with the judgment of the person voting the proxies.
2
<PAGE>
STOCKHOLDER PROPOSALS FOR 1997 MEETING
Under the rules of the Securities and Exchange Commission, in order to be
considered for inclusion in the Company's proxy statement relating to the 1997
Annual Meeting of Stockholders, a stockholder proposal must be received by the
Company at its principal offices, Twenty East Fifth Street, Suite 1500, Tulsa,
Oklahoma 74103, addressed to the Secretary of the Company, on or before December
27, 1996.
PROPOSAL TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK
The Board of Directors has approved and recommends that the stockholders
approve and adopt a proposal to amend the Certificate of Incorporation of the
Company (the "Proposed Amendment") to increase the number of authorized shares
of the Company's common stock, par value $.01 per share (the "Common Stock"),
from 20,000,000 shares to 40,000,000 shares (the number of authorized shares of
the Company's preferred stock, par value $1.00 per share, will remain unchanged
at 1,000,000 shares). The Proposed Amendment will amend the first sentence of
Article Fourth of the Company's Certificate of Incorporation to read as
follows:
"The aggregate number of shares of all classes of stock which the
Corporation shall have authority to issue is 41,000,000, 40,000,000 of
which shall be Common Stock of the par value of $.01 per share (hereinafter
called "Common Stock") and 1,000,000 of which shall be Preferred Stock of
the par value of $1.00 per share (hereinafter called "Preferred Stock")."
BACKGROUND AND REASONS FOR PROPOSED AMENDMENT
During the early part of 1996, the Company's Board of Directors began
considering alternative business plans and corporate developments for the
Company. Various alternatives considered were for the Company (i) to focus on
only one of its two primary business segments, either oil and gas exploration,
development and production or natural gas compressor sales and leasing, by
selling or otherwise disposing of one of such segments and focusing on expanding
operations in the other; (ii) to seek some form of business combination with
another company; and (iii) to simply continue to operate the two separate
business segments as the Company has since its formation in 1989.
The Company became acquainted with certain of the principals of HACL (the
"HACL Group") through its banking relationships and began preliminary
discussions with that group in late May, 1996. Members of the group had
recently liquidated their interests in a company named Cornerstone Natural Gas,
Inc. (which was acquired by El Paso Natural Gas Company) in which they had
acquired a controlling interest during 1993 and were considering a significant
investment in another company which might present them with a similar growth
opportunity. The market capitalization of Cornerstone grew from $8,200,000
($.66 per share) in November of 1993 to $98,000,000 ($6.00 per share) at the
time of its acquisition by El Paso.
On July 1, 1996, the Company received an informal proposal from the HACL
Group. A special committee of the Company's Board of Directors was formed to
(i) consider the advisability and desirability of an investment by the HACL
Group in the Company; (ii) consider alternative proposals or courses of action
for the Company; (iii) review the terms of any such transaction or transactions
on behalf of the Company; and (iv) recommend to the Board of Directors as a
whole whether the Company should engage in such a transaction. The Special
Committee consisted of Charles M. Butler, III, Clifford S. Lewis, Thomas F.
Ostrye and Don E. Smith. Thomas F. Ostrye, Chairman, President and Treasurer of
the Company, was principally responsible for the negotiations with the HACL
Group and the Special Committee met a total of four times, including two
meetings at which representatives of the HACL Group were present.
On August 13, 1996, Simmons & Company International ("Simmons") was engaged
to advise the Board of Directors on the fairness of the proposed transaction to
the Company from a financial point of view. See "Opinion of Financial Advisor"
below.
3
<PAGE>
Negotiations continued with the HACL Group and led to a proposed letter of
intent in September 1996. At its special meeting held on September 23, 1996,
the Board of Directors considered the proposed letter of intent and also
considered an informal proposal received by another company (the "Proposing
Company") pursuant to which the Company would merge with the Proposing Company,
the assets of the Company would be sold and the proceeds of the sale would be
used to fund the business of the merged company which would have been involved
primarily in natural gas marketing, processing and gathering. Simmons reviewed
both proposals and advised that the proposal from the HACL Group was fair to the
Company from a financial point of view and that the offer from the Proposing
Company did not appear to be as favorable to the Company as the proposal from
the HACL Group.
The letter of intent with the HACL Group was signed by the Company on
September 21, 1996, and was approved by the Board of Directors on September 23,
1996. The parties then began negotiating the terms of a definitive Stock
Purchase Agreement. Simmons participated to a limited extent in the
negotiations, particularly in the discussions regarding the amount and type of
the consideration that should be paid for the securities.
On October 16, 1996, the Board of Directors approved the Stock Purchase
Agreement with HACL and it was executed by the Company. At that meeting,
Simmons confirmed verbally its opinion as to the fairness of the consideration
to be received by the Company and delivered a final draft of its fairness letter
to the Board on that same date. See "Opinion of Financial Advisor" below.
Under the terms of the Stock Purchase Agreement, the Company has agreed to sell
to HACL 8,000,000 shares of Common Stock and warrants which, upon satisfying
certain vesting requirements, will entitle HACL to purchase an additional
8,000,000 shares of Common Stock at a price of $0.91 per share (the "Warrants"),
for an aggregate consideration of $4,400,000 in cash and HACL's covenant to
utilize its reasonable efforts to provide the Company with certain business
transactions. See "Terms of the Stock Purchase Agreement" below.
In considering the amount and type of the consideration for the securities,
the parties took into account the then market value of the Company's Common
Stock (during the two months prior to the execution of the letter of intent,
the closing sales prices of the Company's Common Stock as reported by the NASDAQ
Small Cap Market ranged from $.5625 to $.8125 per share and was $.7813 per share
on September 18, 1996, the last day the Common Stock traded prior to entering
into the letter of intent), the fact that the shares and warrants to be issued
to the purchaser would be restricted securities, the value to the Company of the
business opportunities and prospects that the parties anticipate that the
purchaser will be able to bring to the Company and other related considerations.
The parties also considered the impact on the Company's performance that might
be expected in the event that the business opportunities and prospects were
effected.
In considering the various alternative courses of action available to the
Company and the fairness of the consideration to be received from HACL under its
proposal, the Board took into account the fact that the Company is facing a very
competitive natural gas compressor market which is negatively impacting the
rental rates, sales prices and utilization rates of its natural gas compressor
fleet. It also believes that the Company's growth potential is being restrained
by the lack of available capital and that the current asset base of the Company
lacks the "critical mass" necessary to realize the profitability and growth
potential that are inherent in the businesses in which the Company is engaged.
The Board believes that the proposal from HACL presents potential value to the
Company and its stockholders beyond the needed capital that is being contributed
in that HACL is expected to also provide (i) new business opportunities which
could enable it to expand and/or more efficiently utilize its rental natural gas
compressor fleet, (ii) contacts and experience which could be valuable in
expanding and improving its oil and gas exploration, development and production
operations, and (iii) financing expertise and resources which may give the
Company greater access to additional capital. See "Terms of the Stock Purchase
Agreement--Expiration and Vesting of Warrants" below. The Board considered that
the per share amount to be received in cash at closing for the Common Stock and
Warrants is below the then current market price for the Common Stock and below
the range of values as estimated by the Company's financial advisor (see
"Opinion of Financial Advisor" below), but the Board determined that the
consideration is fair because the Common Stock and the Warrants to be issued to
HACL will be restricted securities and not freely tradeable in the open market
and because of the anticipated value to be added by the Board leadership,
experience and expertise that HACL representatives are expected to provide and
the business opportunities that are expected to be presented to the Company by
virtue of the HACL investment.
4
<PAGE>
In analyzing the proposal presented to it by the Proposing Company, the
Board relied heavily on the analysis of the Company's financial advisor which
indicated that if that transaction were consummated, the shares of Common Stock
held by the current stockholders of the Company could have a value less than the
then market value of those shares and less than the per share value offered by
HACL. Although this offer contemplated an offer to the Company's stockholders
to purchase their shares at $.77 per share, the Board believed that stockholders
of the Company who did not sell their shares pursuant to this offer could hold
shares valued at below the range of the estimated values of the Company's Common
Stock and would be minority security holders in a company engaged in businesses
substantially different than those in which the Company is currently engaged.
Under the Proposing Company's proposal, the Company would merge with the
Proposing Company and the Company's current stockholders would own only between
15% to 20% of the outstanding shares of the surviving corporation. The assets
of the Company would then be sold, its current indebtedness would be paid and
the balance of the sales proceeds would be used by the surviving corporation to
expand its businesses. There was doubt expressed by the Board about whether the
estimates expressed on behalf of the offeror of the amounts that could be
realized from a sale of the Company's assets were realistic or achievable and
whether the planned operations of the of the combined company could produce the
results that would provide the Company's stockholders with the same potential
return that the Board believes is possible under the HACL proposal.
Consequently, the Board believes that the HACL proposal provides the Company's
stockholders with a greater potential for realizing an increase in the value of
their investment in the Company than the other proposal.
The purpose of the Proposed Amendment and the reason it is being
recommended to stockholders is that the increase in the authorized shares of
Common Stock is necessary for the Company to effect the transactions
contemplated pursuant to the Stock Purchase Agreement. At November 4, 1996, the
Company had 13,040,168 shares of Common Stock outstanding (exclusive of 9,067
shares of treasury stock) and 20,000,000 authorized shares of Common Stock.
Accordingly, without the increase in the authorized capital proposed hereby,
there would not be sufficient authorized and unissued shares of Common Stock
available to meet the Company's obligations to issue up to 16,000,000 shares of
Common Stock under the terms of the Stock Purchase Agreement in the event all of
the Warrants are exercised. The Board believes that increasing the number of
authorized shares of Common Stock to 40,000,000 is appropriate so the Company
will have authorized capital available in the event that it encounters
acquisition or capitalization opportunities in the future.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE AMENDMENT TO INCREASE THE
COMPANY'S AUTHORIZED COMMON STOCK.
TERMS OF THE STOCK PURCHASE AGREEMENT
Pursuant to the Stock Purchase Agreement, the Company will issue to HACL or
its designee 8,000,000 shares of Common Stock and Warrants which, upon
satisfying certain vesting requirements discussed below, will entitle the holder
to purchase an additional 8,000,000 shares of Common Stock at a price of $0.91
per share. The Common Stock and Warrants are being issued to HACL for aggregate
consideration of $4,400,000 in cash and HACL's covenant to utilize its
reasonable efforts to provide the Company with certain business transactions
which satisfy the vesting requirements of the Warrants (see "--Expiration and
Vesting of Warrants" below). In addition, the Company has agreed to elect up to
eight persons designated by HACL to the Company's Board of Directors following
the closing of the sale of the Common Stock and Warrants pursuant to the Stock
Purchase Agreement and, thereafter, to include among its nominees for the Board
of Directors a sufficient number of persons designated by HACL such that the
percentage of directors proposed to be composed of HACL's designees is
approximately proportionately equal to HACL's percentage ownership of the
Company's total outstanding shares of Common Stock. It is anticipated that the
sale of Common Stock and Warrants pursuant to the Stock Purchase Agreement will
be consummated as soon as practicable after the Special Meeting and all of the
conditions precedent to such sale contained in the Stock Purchase Agreement have
been satisfied. See "--Conditions to Stock Purchase Agreement" below.
Upon consummation of the sale of the Common Stock and Warrants pursuant to
the Stock Purchase Agreement, HACL, or its designee, will own approximately 38%
of the Company's outstanding shares of Common Stock based on the number of
shares outstanding as of November 4, 1996. Should the Warrants vest and be
exercised in full, HACL or its designee may own in the aggregate up to 55.1% of
the Company's outstanding shares of Common Stock based on the number of shares
outstanding as of November 4, 1996.
5
<PAGE>
Expiration and Vesting of Warrants. All of the Warrants to be issued to
HACL will expire four years from the date of issuance (the "Expiration Date").
The Warrants will not become exercisable until the satisfaction of the following
vesting requirements:
Providing New Business. The Warrants will vest based upon HACL, directly
----------------------
or indirectly, providing to the Company contracts or agreements to lease natural
gas compressors from the Company having an aggregate horsepower as follows:
<TABLE>
<CAPTION>
AGGREGATE HORSEPOWER PERCENT OF WARRANTS VESTED
---------------------- ---------------------------
<S> <C>
15,000 or greater 100%
11,250 to 14,999 75%
7,500 to 11,249 50%
3,750 to 7,499 25%
</TABLE>
For purposes of satisfying the above vesting requirements, the following
transactions will be considered the equivalent to providing contracts or
agreements for the lease of natural gas compressors:
. Any sale and lease back transaction originated by HACL, provided that
the purchase price of the compressors to the Company does not exceed
their fair market value, the lease rentals are at not less than market
rates and the transaction is approved by directors of the Company not
affiliated with or designated by HACL.
. Any compressors provided by the Company to any oil and gas properties
acquired by the Company which were identified by HACL and which
properties satisfy any of the vesting requirements discussed below.
There is no specified length or other required terms of the compressor
leases to be provided by HACL for these purposes. However, only the leases
provided by HACL which are in effect at the time that any vesting determination
is made will be taken into account for vesting purposes. The properties on
which the compressors may be located may be owned by affiliates of HACL or by
third parties.
The Warrants will vest in the percentages reflected in column (4) below
upon HACL providing compressor leases aggregating the aggregate minimum
horsepower reflected in column (1) below if, in addition, the Company also
acquires either (i) oil and gas properties identified by HACL which have an
aggregate purchase price indicated in column (2) below or (ii) other compressor
leasing companies identified by HACL which have under lease compressors which
have an aggregate horsepower equal to at least the amounts reflected in column
(3) below:
6
<PAGE>
<TABLE>
<CAPTION>
(1) (2) (3) (4)
AGGREGATE HORSEPOWER
MINIMUM AGGREGATE PURCHASE UNDER LEASE BY PERCENT OF
AGGREGATE PRICE OF OIL ACQUIRED COMPANY WARRANTS
HORSEPOWER AND GAS PROPERTIES AT TIME OF ACQUISITION VESTED
- ---------- --------------------- ---------------------- ----------
<S> <C> <C> <C>
7,500 at least $4,000,000 7,500 or greater 100%
6,000 at least $3,000,000 at least 5,625 75%
4,250 at least $2,000,000 at least 3,750 50%
2,500 at least $1,000,000 at least 1,875 25%
</TABLE>
In addition, the Warrants may vest through a combination of the methods set
forth above, provided that there must be compressor leases for the minimum
aggregate horsepower reflected in Column (1) for the percentage of Warrants
indicated in Column (4) to vest. If any portion of the Warrants vest pursuant
to the immediately preceding table above, then for any contracts or agreements,
or set of contracts or agreements, provided by HACL for the lease of natural gas
compressors from the Company having an additional aggregate of 3,750 horsepower
or more, then an additional 25% of the Warrants shall vest with respect to each
incremental addition of an aggregate of 3,750 horsepower. In addition, the
acquisition by the Company of producing oil and gas properties identified by
HACL in a transaction reflected in Column (2) will be considered in determining
the vesting of the Warrants in combination with any acquisition by the Company
of a company in the business of owning and leasing natural gas compressors by
treating each $1,000,000 of the purchase price of such producing oil and gas
properties to be the equivalent of an aggregate horsepower of 1,875 under lease
by an acquired company.
Change of Control. Upon the occurrence of certain events which result in a
-----------------
"change of control" of the Company, then all unvested Warrants will become
vested. A change in control will be deemed to have taken place upon the
occurrence of the following events: (i) as a result of a proxy solicitation by a
party other than the Company, the directors serving on the Company's Board
immediately prior to such action no longer constitute a majority of the total
number of directors of the Company following such action; (ii) any person or
group other than HACL or its affiliates acquires more than 50% of the Company's
outstanding voting securities; (iii) the Company's stockholders approve the
merger or consolidation of the Company with another corporation or business
organization, the sale of substantially all of the Company's assets or the
liquidation or dissolution of the Company, unless, in the case of a merger or
consolidation, the directors in office immediately prior to such transaction
constitute a majority of the directors of the surviving entity or a majority of
the disinterested directors of the Company approve such transaction; or (iv) a
majority of the disinterested directors of the Company determine that any other
proposed action would constitute a change in control and such action is taken.
Conditions to Closing. The Stock Purchase Agreement provided that HACL
would have until October 30, 1996, to perform a due diligence review and could,
on or before such date, notify the Company that it was electing to cancel its
obligations under the contract. No such notice was received. The Stock
Purchase Agreement also provided that a condition to HACL's obligations was its
obtaining proxies from ten or fewer stockholders of the Company holding a
majority of the outstanding shares of Common Stock which would allow it to vote
those shares in favor of the proposed amendments to the Company's Certificate of
Incorporation. HACL has received such proxies and, as a result, approval of the
amendments is assured.
The obligations of each party to consummate the transactions contemplated
by the Stock Purchase Agreement are subject to a number of conditions, including
the following: (i) each of the representations, warranties and covenants of the
other party set forth in the Stock Purchase Agreement shall, in all material
respects, be true on, or complied with by, the closing date as if made on such
date and each party shall have received a certificate of an officer of the other
party to such effect; (ii) no preliminary or permanent injunction or other final
order by any federal or state court shall have been issued which prevents the
proposed transactions pursuant the Stock Purchase Agreement; (iii) each party
shall
7
<PAGE>
have received a legal opinion, dated the date of closing, from counsel to the
other party as to certain matters; and (iv) stockholders of the Company shall
have approved an amendment to the Company's Certificate of Incorporation to
increase the number of authorized shares of Common Stock to 40,000,000.
Conduct of Business Pending Closing. The Stock Purchase Agreement contains
certain restrictions on the conduct of the Company's business pending closing of
the transactions under the agreement. The Company may not, among other things,
amend its Certificate of Incorporation or bylaws, declare or pay any dividend
with respect to its Common Stock, authorize capital expenditures in excess of
$100,000 in the aggregate other than in the ordinary course of business, or
enter into any new employment or severance agreement with any director, officer
or employee of the Company. In addition, the Company has agreed to conduct
business in the usual and ordinary course and use its best efforts to preserve
its business organization and maintain its existing relations with customers,
suppliers, employees and business associates in all material respects.
Registration Rights. That Stock Purchase Agreement provides that after two
years from the date of the consummation of the sale of the Common Stock and
Warrants to HACL, upon the request of HACL, the Company will register under the
Securities Act of 1933, as amended, any of the shares of Common Stock issued
pursuant to the Stock Purchase Agreement or upon exercise of Warrants, for sale
in accordance with HACL's intended method of disposition thereof (a "Demand
Registration"). HACL will have the right to request up to two Demand
Registrations. The Company will have the right under certain circumstances to
delay the filing of a Demand Registration. HACL will also have "piggy-back"
registration rights to include the shares of Common Stock then held by it in
certain other registrations by the Company of its Common Stock. The Company
will be required to pay all costs and expenses in connection with each
registration except HACL's attorney's fees and any underwriting fees or
commission's applicable to the shares of Common Stock sold by HACL.
OPINION OF FINANCIAL ADVISOR
The Board of Directors of the Company retained Simmons to act as its
financial advisor and to render a fairness opinion in connection with the HACL
proposal. Simmons rendered its oral opinion to the Company's Board of Directors
at a meeting on October 16, 1996 that, as of such date, the consideration to be
paid to the Company by HACL in the HACL proposal was fair from a financial point
of view. Simmons confirmed this opinion in writing by delivering to the Company
a final draft of its fairness letter to the Board on that same date.
The full text of Simmons' fairness opinion, dated October 16, 1996, which
sets forth the assumptions made, general procedures followed, matters considered
and limits on the review undertaken, is attached as Appendix A to this Proxy
Statement. Simmons' opinion is directed only to the fairness, from a financial
point of view, to the holders of Common Stock of the consideration to be paid to
the Company by HACL in the HACL proposal and does not constitute a
recommendation to any holder of Common Stock as to how such stockholder should
vote on the Proposed Amendment. The summary of Simmons' opinion set forth below
is qualified in its entirety by reference to the full text of such opinion
attached as Appendix A. STOCKHOLDERS ARE URGED TO READ THE OPINION IN ITS
ENTIRETY.
In connection with rendering its opinion, Simmons reviewed, analyzed and
relied upon, among other things, the following: (i) the letter of intent between
the Company and HACL dated September 21, 1996; (ii) the Stock Purchase
Agreement; (iii) the financial statements and other information concerning the
Company, including the Annual Reports on Form 10-KSB of the Company for each of
the years in the four-year period ended December 31, 1995, the Quarterly Reports
on Form 10-QSB of the Company for the quarters ended March 31, 1996 and June 30,
1996, the Current Report on Form 8-K dated June 30, 1995 and the Registration
Statement on Form S-3 of the Company related to a shelf registration of Company
Common Stock dated July 21, 1994, as amended; (iv) certain other internal
information, primarily financial in nature, concerning the business and
operations of the Company furnished by the Company for the purposes of Simmons'
analysis; (v) certain publicly available information concerning the trading of,
and the trading market for, Company Common Stock; (vi) certain publicly
available information with respect to certain other companies that Simmons
believes to be comparable to the Company (the "Comparable Companies") and the
trading markets for such Comparable Companies' securities; (vii) certain
publicly available information concerning estimates of the future operating and
financial performance of the Comparable Companies prepared by industry experts
unaffiliated with the Company;
8
<PAGE>
and (viii) certain publicly available information concerning the nature and
terms of certain other transactions considered relevant to the inquiry. Simmons
also met with certain officers and employees of the Company and HACL to discuss
the foregoing as well as other matters believed relevant to the inquiry.
In arriving at its opinion, Simmons assumed and relied upon the accuracy
and completeness of all of the financial and other information provided by the
Company or publicly available, and did not attempt independently to verify any
of such information. With respect to financial projections provided by the
Company and estimates of potential rental rates, profitability and capital costs
of additional compressors, Simmons assumed, with the consent of the Board of
Directors, that such projections and other data were reasonably prepared on
bases reflecting the best currently available estimates and judgments of the
Company's management. Simmons did not conduct a physical inspection of any of
the properties or facilities of the Company, nor did Simmons make or obtain any
independent evaluations or appraisals of any of such properties or facilities.
In conducting its analysis and arriving at its opinion, Simmons considered
such financial and other factors as it deemed appropriate under the
circumstances including, among others, the following: (i) the historical and
current financial position and results of operations of the Company; (ii) the
business prospects of the Company; (iii) the historical and current market for
the Common Stock and equity securities of the Comparable Companies; and (iv) the
nature and terms of certain other acquisition transactions that Simmons believed
to be relevant. Simmons also took into account its assessment of general
economic, market and financial conditions and its experience in connection with
similar transactions and securities' valuation generally. Simmons' opinion
necessarily was based upon conditions as they existed and could be evaluated on,
and on the information made available at, the date of such opinion.
In connection with a presentation to the Company's Board on September 23,
1996, Simmons advised the Company's Board that, in evaluating the consideration
to be received by the Company in the HACL proposal, Simmons had performed a
variety of financial analyses with respect to the Company. A description of all
material financial analyses performrd by Simmons is included below:
Analysis of Selected Publicly Traded Comparable Companies. Simmons
reviewed certain financial information for the 12 months ended June 30, 1996 and
recent stock market information for the Company, and certain publicly available
financial information as of the most recently reported period and recent stock
market information for nine publicly traded oil field service and equipment
companies deemed comparable to the Company. For the Company and each comparable
company, Simmons calculated multiples of "Adjusted Market Value" (defined as the
market value of the common equity plus the book value of total debt, less
"excess cash and cash equivalents" (defined as cash in excess of five percent of
revenues)) to trailing 12 month period ("TTM") revenues, earnings before
depreciation, interest and taxes ("EBDIT") and "Adjusted Book Value" (defined as
the book value of stockholders' equity, plus the book value of total debt, less
excess cash and cash equivalents). Simmons also calculated multiples of market
value of common equity to TTM earnings and cash flow (defined as earnings plus
depreciation and amortization), and estimated earnings and cash flow for 1996
and 1997 (derived from estimates prepared by industry experts unaffiliated with
the Company or HACL, except for the Company's projections, which were provided
by Company management).
An analysis of the multiples of market value of common equity to TTM cash
flow, to estimated 1996 cash flow and to estimated 1997 cash flow yielded for
the Company 4.5x, 4.1x and 3.3x, respectively, and ranges of 7.5x to 12.4x, 5.7x
to 10.5x, and 4.9x to 9.2x, respectively, for the comparable oil field service
and equipment companies. An analysis of the multiples of market value of common
equity to TTM earnings, to estimated 1996 earnings and to estimated 1997
earnings yielded for the Company's multiples which were not meaningful because
the Company recorded a TTM net loss of $0.2 million, and is projecting a net
loss of $0.1 million for 1996 and net income of $0.4 million in 1997. An
analysis of the multiples of market value of common equity to TTM earnings, to
estimated 1996 earnings and to estimated 1997 earnings yielded ranges of 19.0x
to 40.5x, 11.4x to 25.5x, and 8.4x to 19.1x, respectively, for the comparable
oil field service and equipment companies. An analysis of the Adjusted Market
Value to TTM revenues, EBDIT and Adjusted Book Value yielded 1.9x, 6.3x and
1.0x, respectively for the Company, with ranges of 0.6x to 4.0x, 6.5x to 11.7x,
and 0.9x to 2.8x, respectively, for the comparable oil field service and
equipment companies.
9
<PAGE>
Analysis of Selected Comparable Acquisition Transactions. Simmons reviewed
transactions involving the acquisition of all or part of certain compressor
companies and certain oil field service companies. With respect to the
compressor company acquisitions, Simmons calculated the multiples of transaction
value to TTM revenues, EBDIT, net income and horsepower (defined as the total
company fleet horsepower). With respect to the oil field service company
acquisitions, Simmons calculated the multiples of transaction value to TTM
revenues, EBDIT and Book Value, and multiples of equity purchase price (excludes
debt assumed by acquiring company) to TTM net income.
For the compressor companies, these calculations yielded a range of
transaction value to TTM revenues of 1.4x to 3.9x, a range of transaction value
to TTM EBDIT of 5.3x to 11.1x, a range of transaction value to TTM net income of
19.9x to 21.6x, and a range of transaction value to horsepower of $550x to
$1,160x.
For the oil field service companies, these calculations yielded a range of
transaction value to TTM revenues of 0.1x to 2.7x, a range of transaction value
to TTM EBDIT of 3.8x to 9.3x, a range of transaction value to Book Value of 1.0x
to 12.3x, and a range of equity purchase price to TTM net income of 2.9x to
48.6x.
Valuation Multiple Analysis. For a range of total market values (including
debt and equity) for the Company of $16.0 million to $26.0 million, Simmons
calculated multiples of the Company's share prices ($0.52 per share to $1.29 per
share) to the Company's TTM estimated 1996 and estimated 1997 earnings per share
and cash flow per share. For the same range of total market values, Simmons
also calculated multiples of the Company's Adjusted Market Values to the
Company's TTM, estimated 1996 and estimated 1997 revenues and EBDIT.
These calculations resulted in multiples of the range of the Company's
share prices ($0.52 per share to $1.29 per share) to TTM earnings per share
which were not meaningful, to estimated 1996 earnings per share which were not
meaningful, and to estimated 1997 earnings per share of 16.0x to 39.5x. The
calculations resulted in multiples of the range of Company share prices ($0.52
per share to $1.29 per share) to TTM cash flow per share of 3.5x to 8.6x, to
estimated 1996 cash flow per share of 3.1x to 7.8x, and to estimated 1997 cash
flow per share of 2.5x to 6.2x. The calculations resulted in multiples of the
range of the Company's Adjusted Market Values ($16.0 million to $26.0 million)
to TTM revenues of 1.7x to 2.8x, to estimated 1996 revenues of 1.7x to 2.7x, and
to estimated 1997 revenues of 1.6x to 2.5x. The calculations resulted in
multiples of the range of the Company's Adjusted Market Values ($16.0 million to
$26.0 million) to TTM EBDIT of 5.5x to 9.0x, to estimated 1996 EBDIT of 5.2x to
8.5x, and to estimated 1997 EBDIT of 4.2x to 6.8x.
Simmons also adjusted the Company's TTM and projected 1996 and 1997 results
to reflect potential benefits which may be achieved by a potential acquiror of
the Company, including increased utilization of the Company's compressor fleet
and consolidation cost savings. For a range of total market values (including
debt and equity) for the Company of $16.0 million to $26.0 million, Simmons
calculated multiples of the Company's share prices ($0.52 per share to $1.29 per
share) to the Company's TTM, estimated 1996 and estimated 1997 adjusted earnings
per share and adjusted cash flow per share. For the same range of total market
values, Simmons also calculated multiples of the Company's Adjusted Market
Values to the Company's TTM, estimated 1996 and estimated 1997 adjusted EBDIT.
These calculations resulted in multiples of the range of the Company's
share prices ($0.52 per share to $1.29 per share) to TTM adjusted earnings per
share of 5.8x to 14.3x, to estimated 1996 adjusted earnings per share of 5.2x to
12.9x, and to estimated 1997 adjusted earnings per share of 3.8x to 9.3x. The
calculations resulted in multiples of the range of the Company's share prices
($0.52 per share to $1.29 per share) to TTM adjusted cash flow per share of 2.0x
to 5.0x, to estimated 1996 adjusted cash flow per share of 1.9x to 4.7x, and to
estimated 1997 adjusted cash flow per share of 1.7x to 4.2x. The calculations
resulted in multiples of the range of assumed the Company's Adjusted Market
Values ($16.0 million to $26.0 million) to TTM adjusted EBDIT of 3.2x to 5.2x,
to estimated 1996 adjusted EBDIT of 3.1x to 5.0x, and to estimated 1997 adjusted
EBDIT of 2.7x to 4.4x.
Based upon the results of the Valuation Multiple Analysis, the Analysis of
Selected Publicly Traded Comparable Companies indicated the value of the
Company's Common Stock to be in the range of $0.67 to $0.98 per share. Based
upon the results of the Valuation Multiple Analysis, the Analysis of Selected
Comparable Acquisition Transactions indicated the value of the Company's Common
Stock to be in the range of $0.60 to $0.90 per share.
10
<PAGE>
Discounted Cash Flow Analysis. Simmons used the Company's management's
projections and Lee Keeling & Associates, Inc.'s December 31, 1995 reserve
report on the Company's oil and gas reserves to calculate projected future cash
flows for the Company through 2015. Simmons then performed discounted cash flow
analysis ("DCF") based on the projected free cash flows.
Simmons also evaluated potential enhancements which could potentially be
made to the Company's financial performance by a potential acquiror including
increased utilization of the Company's compressor fleet, reduced Company capital
expenditures and consolidation cost savings.
The DCF analysis of the Company as a single entity indicated the total
value of the Company was less than its debt, suggesting zero value for the
Company's equity, without any potential benefits achievable by an acquiror; and
a share price in the range of $0.52 to $0.75 per share, with potential benefits
achievable by an acquiror.
Analysis of Value of Separate Business Segments. Simmons performed an
analysis of the values of each business segment of the Company. Simmons
performed a DCF analysis on the projected future cash flows of the Company's
compression segment and calculated its value to be in the $6.0 to $8.0 million
range, without any benefits potentially achievable by an acquiror of the
compression segment, and in the $13.0 to $17.0 million range, including benefits
potentially achievable by an acquiror of the compression segment.
For a range of total market values for the compression segment of $12.0 to
$22.0 million, Simmons calculated multiples of such market value to the
compression segment's TTM, estimated 1996 and estimated 1997 revenues and EBDIT.
The calculations resulted in multiples of the range of total market value to TTM
revenues of 1.5x to 2.8x, to estimated 1996 revenues of 1.5x to 2.8x, and to
estimated 1997 revenues of 1.5x to 2.8x. The calculations resulted in multiples
of the range of total market value to TTM EBDIT of 4.6x to 8.4x, to estimated
1996 EBDIT of 4.3x to 7.9x, and to estimated 1997 EBDIT of 4.3x to 7.9x.
Simmons performed the same analysis after adjusting the TTM and projected
financial results of the compression segment to reflect benefits which could
potentially be achievable by an acquiror. The calculations resulted in
multiples of the range of total market value to TTM adjusted revenues of 1.4x to
2.6x, to estimated 1996 adjusted revenues of 1.4x to 2.6x, and to estimated 1997
adjusted revenues of 1.4x to 2.6x. The calculations resulted in multiples of
the range of total market value to TTM adjusted EBDIT of 3.1x to 5.7x, to
estimated 1996 adjusted EBDIT of 3.0x to 5.5x, and to estimated 1997 adjusted
EBDIT of 3.0x to 5.5x. Based upon the results of this analysis, the Analysis of
Selected Publicly Traded Comparable Companies and the Analysis of Selected
Comparable Acquisition Transactions indicated the value of the compression
segment to be in the range of $14.0 to $17.0 million.
Simmons also performed a DCF analysis on the projected cash flows based on
Lee Keeling & Associates, Inc.'s December 31, 1995 reserve report on the
Company's oil and gas reserves. The calculations indicated the value of the
Company's oil and gas reserves to be in the range of $6.0 to $7.0 million.
Based upon these analyses of value of the Company's two business segments,
the range of values for the Company's shares was calculated to be $0.63 to $0.91
per share.
Valuation Summary. Based upon the foregoing analyses, the value of the
Company's shares was estimated to be in the $0.60 to $0.90 per share range.
Analysis of HACL's Proposed Investment in the Company. Simmons analyzed
the potential effect of the HACL proposal on the Company's share price and
ownership structure. As part of this analysis, Simmons evaluated the EBDIT
impact on the Company's EBDIT of additional compression demand brought to the
Company by HACL, using assumptions for compressor costs, monthly compressor
rental rates and EBDIT margins provided by the Company. Simmons also conducted
an analysis of the Company's Common Stock and Warrant values at various vesting
points under the HACL proposal. In addition, Simmons performed a sensitivity
analysis to calculate the impact on the Company's share price after the HACL
proposal of various changes in compressor costs, EBDIT margins and monthly
compressor rental rates.
11
<PAGE>
The analysis of the structure of the HACL proposal demonstrated that upon
consummation of the sale of the Company's Common Stock and Warrants to HACL
pursuant to the Stock Purchase Agreement, HACL would own 38.1% of the Company's
outstanding Common Stock, based on the number of the Company's shares
outstanding as of September 23, 1996. Upon full exercise of the Warrants, HACL
would own 55.2% of the Company's outstanding Common Stock, based on the number
of the Company's shares outstanding as of September 23, 1996.
The analysis of the impact of additional compression demand brought to the
Company by HACL indicated that, following the consummation of the HACL proposal,
with the Warrants fully vested and 15,000 horsepower of additional compressor
demand, with a new compressor cost of $400 per horsepower, a monthly rental rate
of $12.50 per horsepower and a 65% EBDIT margin, a 6.0x EBDIT multiple would
yield a the Company's share price of $0.66 per share. A 7.0x EBDIT multiple
would yield a price of $0.84 per share of the Company's Common Stock.
Accordingly, the foregoing analysis of the HACL proposal with the Warrants
fully vested and 15,000 horsepower of additional compressor demand yielded
estimated values within the range of values of the Company's shares indicated by
the analyses previously described above. Simmons then performed additional
analyses described below regarding the additional compressor demand necessary
under the HACL proposal to achieve an estimated price of $.60 per share, the
minimum of the range of the Company's per share value, assuming the Warrants are
not fully vested.
Simmons analyzed the additional compressor demand which would generate a
price after the consummation of the HACL proposal of $0.60 per share. Based on
the foregoing compressor assumptions and a 6.0x EBDIT multiple, Simmons
calculated the required additional horsepower at the 25 %, 50 %, 75 % and 100 %
vesting points would be 2,100, 3,800, 5,200, and 6,400 horsepower, respectively.
Simmons also performed a sensitivity analysis by varying certain
assumptions regarding the additional compressor demand. Simmons calculated that
a share price of $0.60 per share could be achieved under the following
scenarios: (a) a minimum incremental horsepower requirement of 6,400 (given
compressor cost per horsepower of $400, monthly rental rate per horsepower of
$12.50 and 65% EBDIT margin); (b) a maximum per horsepower new compressor cost
of $500 (given monthly rental rate per horsepower of $12.50, 65% EBDIT margin
and 15,000 incremental compressor horsepower); (c) a minimum EBDIT margin of 53%
(given compressor cost per horsepower of $400, monthly rental rate per
horsepower of $12.50 and 15,000 incremental compressor horsepower); or (d) a
minimum monthly rental rate per horsepower of $10.20 (given compressor cost per
horsepower of $400, 65% EBDIT margin and 15,000 incremental compressor
horsepower). Simmons also calculated the additional compressor demand which
would generate a share price after the consummation of the HACL proposal of
$0.60 per share if the Company's existing idle compressor capacity was used.
Based on a compressor cost per horsepower of $100, monthly rental rate per
horsepower of $12.50 and 55% EBDIT margin, Simmons calculated the required
additional demand would be 3,000 horsepower.
Simmons also analyzed a verbal indication from the Proposing Company that
it might be interested in pursuing a merger with the Company in which the
Company would be the surviving corporation and the Company's current
stockholders would receive 15% to 20 % of the combined company. Alternatively,
the Proposing Company may offer to cash out some of the Company's stockholders
at $0.77 per share. The Proposing Company would also consider grantimg a put
option at $1.00 per share exercisable by the Company's stockholders 24 to 28
months following the merger. The Proposing Company indicated that it would
intend to liquidate the Company's assets and operations following the merger.
In its analysis, Simmons utilized internal financial information provided
by the Proposing Company, including financial projections prepared by the
Proposing Company's financial advisor (the "Projections").
Simmons performed a DCF analysis on the future projected cash flows
generated by the Proposing Company based on the Projections. The Projections
consisted of (i) a Projected Volume Case, which was based on a report prepared
by an independent petroleum engineering firm of the natural gas reserves for
which the Proposing Company was the sole purchaser, and utilized historical
shares of gas the Proposing Company had purchased from other gas producers and
transporters to determine available gas volumes where the Proposing Company was
not the sole purchaser; and (ii) a Growth Case which assumed increased gas
availability. For the Projected Volume Case, the DCF analysis
12
<PAGE>
resulted in a total value of the Proposing Company (including debt of $31.2
million) in the $49.0 to $54.0 million range. Simmons repeated this analysis
for the combined company after a merger with the Company which resulted in a
total value in the $59.0 to $64.0 million range and yielded a post-merger price
for the Common Stock in the range of $0.30 to $0.50 per share. For the Growth
Case, the DCF analysis for the combined company after a merger with the Company
resulted in a total value in the $70.0 to $77.0 million range and yielded a
price for the Common Stock in the range of $0.45 to $0.71 per share.
Based upon the foregoing analysis, Simmons advised the Board of Directors
that the indication from the Proposing Company did not appear to be as favorable
to the Company as the HACL proposal.
The foregoing summary does not purport to be a complete description of the
analyses performed by Simmons or of its presentations to the Company's Board of
Directors. The preparation of financial analyses and fairness opinions is a
complex process and is not necessarily susceptible to partial analysis or
summary description. Simmons believes that its analyses (and the summary set
forth above) must be considered as a whole, and that selecting portions of such
analyses and of the factors considered by Simmons, without considering all of
such analyses and factors, could create an incomplete view of the processes
underlying the analyses conducted by Simmons and its opinion. Simmons made no
attempt to assign specific weights to particular analyses. Any estimates
contained in Simmons' analyses are not necessarily indicative of actual values,
which may be significantly more or less favorable than as set forth herein.
The Company's Board of Directors selected Simmons as its financial advisor
because Simmons is a nationally recognized investment banking firm specializing
in service to the energy services industry with substantial experience in
transactions similar to the HACL proposal and is familiar with the Company and
its business. As part of its investment banking business, Simmons is
continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities, private
placements and valuations for estate, corporate and other purposes. In the
ordinary course of business, Simmons may actively trade the Company's Common
Stock for its own account and for the accounts of customers and, accordingly,
may at any time hold a long or short position in such security.
Pursuant to its engagement letter with Simmons, the Company has agreed to
pay Simmons a non-contingent fee of $125,000. The Company has also agreed to
reimburse Simmons for its reasonable out-of-pocket expenses and to indemnify
Simmons and certain related persons against certain liabilities and expenses
relating to or arising out of its engagement, including certain liabilities
under the federal securities laws.
In connection with the engagement of Simmons, the Company presented Simmons
with certain estimates, projections and other data regarding future revenues,
earnings, cash flows, operations and related information. This information was
presented solely for the purpose of Simmons' evaluation of the proposals before
the Board and are based upon assumptions and estimates made by management of the
Company in good faith on the basis of the Company's experience and historical
performance. These estimates and projections are forward-looking statements
whose accuracy depends upon a number of circumstances and variable, many of
which are beyond the control of the Company or its management. These include
market conditions and demand, the effects of competition, weather factors, the
cost and availability of foreign imports and alternative energy sources, labor
costs and availability, currently unforeseeable changes in corporate strategy or
focus, governmental regulation and restrictions and related factors. There can
be no assurance that the actual results experienced by the Company and its
successors will not vary materially from the estimates and projections of the
Company used for these purposes.
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTION
The Company entered into a "Change of Control" Agreement dated March 27,
1996, and amended as of October 16, 1996 (the "Change Agreement"), with Thomas
F. Ostrye, Chairman of the Board and President of the Company. Under the Change
Agreement, if there is a "change of control" and Mr. Ostrye is involuntarily
terminated other than for "cause" or other than by reason of death or disability
or if he voluntarily terminates after a reduction in his compensation or
responsibilities or a requested relocation, he will be entitled to receive a
final payment after his termination of employment in an amount equal to his
compensation, including bonuses, for the twelve months immediately preceding
13
<PAGE>
his termination plus the value of employee benefits received for that twelve
month period. The consummation of the transactions pursuant to the Stock
Purchase Agreement will result in a "change in control" under the Change
Agreement. "Cause" includes theft or conviction of a felony or any crime
involving dishonesty or moral turpitude, or gross neglect and inattention to
duties.
USE OF PROCEEDS
The Company intends to use the cash consideration of $4.4 million to be
received from the sale of the Common Stock and Warrants pursuant to the Stock
Purchase Agreement to repay a portion of its outstanding indebtedness under a
revolving line of credit. In September 1995, the Company entered into a
Revolving Credit and Term Loan Agreement to refinance its existing indebtedness
and to provide additional borrowing amounts under an 18 month revolving line of
credit having a $12 million cap (the "Revolving Credit Facility"). At September
30, 1996, the Revolving Credit Facility had a borrowing base of $8.8 million and
the Company had borrowed $7.82 million of the available credit line. The
Revolving Credit Facility bears interest at the prime rate plus 2% (9.75% at
September 30, 1996), payable monthly, and the outstanding balance thereunder at
March 31, 1997 converts into term note payable over 36 months.
Reducing the outstanding balance of the Revolving Credit Facility will
result in additional amounts being available for borrowing thereunder. The
Company expects that it will incur additional borrowings under the Revolving
Credit Facility as needed to acquire additional natural gas compressors or oil
and gas properties or for other business or investment opportunities it may
develop.
INFORMATION CONCERNING DIRECTORS TO BE DESIGNATED BY HACL
The Stock Purchase Agreement provides that after the closing of the
transactions pursuant thereto, that HACL may designate up to eight directors,
which will constitute a majority of the members of the Company's Board of
Directors, who shall be immediately appointed to the Board of Directors of the
Company by the current members of the Board. It is currently anticipated that
Donald C. Nejedly and probably two additional current directors of the Company
will resign shortly after consummation of the sale of the Common Stock and
Warrants to HACL and that the five persons named below will be appointed to the
Board. If fewer than three of the current directors resign, it is anticipated
that additional designees of HACL will be appointed to the Board after the
closing as necessary for the designees of HACL to represent a majority of the
members of the Board of Directors. The identity of such additional designees,
if any, has not yet been determined.
The Company's Board of Directors is divided into three classes--Class I,
Class II and Class III--with each class being as equal in size as possible and
with the terms of each class ending in successive years. Each designated
director appointed to the Board, however, will not be classified and will serve
until the next annual meeting of stockholders at which time all unclassified
directors shall be nominated for election and designated in one of the three
classes. Set forth below is certain information with respect to each HACL
designee to the Company's Board of Directors. Each designee is an investor in
HACL.
Mr. Ray C. Davis, 53. Mr. Davis is a founding principal of Energy Transfer
Company, an energy investment firm. Mr. Davis founded Capstone Partners in
1988, a buy out firm formed to acquire under performing companies. He served as
Chairman and CEO of several companies acquired by Capstone Partners, including
Healthco International Inc., a $500 million a year dental supply company, HPSC,
an equipment leasing company quoted on the Nasdaq system, and Cornerstone
Natural Gas, Inc., a natural gas pipeline and processing company listed on the
American Stock Exchange. Mr. Davis served as Director and General Partner of
Hydro Environmental Services, Inc. from 1989 to 1992, and as Chief Executive
Officer of Healthco International, Inc. from June 1991 to August 1992. He was
also Chairman of the Board of HPSC, Inc. from 1991 to 1992. On June 9, 1993,
Healthco International, Inc. filed for protection under Chapter 11 in the U.S.
Bankruptcy Court in the Western District of Massachusetts, Western Division,
Case No. 93-41604-JFQ. In connection with Mr. Davis' and a group of investors'
initial acquisition of an interest in Cornerstone Natural Gas, Inc. and as part
of a pre-packaged plan, Cornerstone's predecessor and certain of its
subsidiaries filed voluntary petitions under Chapter 11 of the Bankruptcy Code
with the U.S. Bankruptcy Court for the Eastern District of Texas, Sherman
Division. On November 2, 1993, Cornerstone emerged from such pre-packaged plan
and Mr. Davis
14
<PAGE>
and the investor group acquired their interest in Cornerstone. From 1983 to
1988, he shared the operating duties of Colt Industries, a Fortune 200
diversified manufacturer. Mr. Davis was last responsible for two groups of
companies with operations in 15 countries and sales in excess of $1 billion.
Mr. Davis held several executive positions in Colt Industries and, prior to
that, held several management positions at Mobil Chemical, a division of Mobil
Oil.
Mr. Kelcy L. Warren, 41. Kelcy L. Warren is a founding principal of Energy
Transfer Company, an energy investment firm. Prior to forming Energy Transfer
Company, he was employed by Endevco, Inc., a natural gas pipeline and processing
company and predecessor of Cornerstone Natural Gas, Inc., from 1981 to 1992. At
Endevco, Mr. Warren served in many capacities, including President, Chief
Operating Officer and Director. He and a group of investors acquired
controlling interest of Cornerstone Natural Gas, Inc. in 1993 as part of a pre-
packaged plan, whereby Endevco and certain of its subsidiaries filed voluntary
petitions under Chapter 11 of the Bankruptcy Code with the U.S. Bankruptcy Court
for the Eastern District of Texas, Sherman Division. On November 2, 1993,
Cornerstone Natural Gas, Inc. emerged from such pre-packaged plan and Mr. Warren
and the investor group acquired their interest in Cornerstone. Mr. Warren
served as President, Chief Operating Officer and a director of Cornerstone until
its sale to El Paso Natural Gas Company in 1996. Prior to joining Endevco, Mr.
Warren was employed by Lone Star Gas Company.
Mr. Matthew S. Ramsey, 41. Mr. Ramsey is a private investor and attorney.
Mr. Ramsey served as Vice President of Nuevo Energy Company, an independent
energy company, from 1990 to 1996. From 1990 to 1996, he was employed by Torch
Energy Advisors Incorporated, a company providing management and operations
services to energy companies including Nuevo Energy Company, last serving as a
director and Executive Vice President. Mr. Ramsey joined Torch Energy as Vice
President of Land and was named Senior Vice President of Land in 1992. Prior to
joining Torch Energy, Mr. Ramsey was self-employed for eleven years. Mr. Ramsey
holds a B.B.A. in Marketing from the University of Texas at Austin and a J.D.
from South Texas College of Law. Mr. Ramsey is a graduate of Harvard Business
School's Advanced Management Program. He is licensed to practice law in the
State of Texas.
Mr. Richard D. Brannon, 37. Mr. Brannon is President of Brannon Oil & Gas,
Inc., an independent energy investment company. Mr. Brannon is also an active
investor in oil and gas production, natural gas pipelines, real estate and
equity investments. He has a broad range of experience in the natural gas
industry from drilling and well completion to managing acquisitions, finance and
contract negotiations. Mr. Brannon served as director of Cornerstone Natural
Gas, Inc., a natural gas pipeline and processing company, until its sale to El
Paso Natural Gas Company in 1996. Mr. Brannon also previously served as an
Advisory Board member to First Interstate Bank, Ft. Worth. Mr. Brannon began
his career in 1981 with TXO Production Corp. as a completion and reservoir
engineer. Mr. Brannon has a B.S. degree in Petroleum Engineering from the
University of Texas and is a Certified Professional Engineer.
Mr. Jon P. Stevenson, 51. Mr. Stevenson is President and owner of
Sandollar Oil & Gas, Inc., an independent exploration and production company
located in Longview, Texas. Prior to forming Sandollar in 1981, Mr. Stevenson
was employed from 1971 to 1980 by Enserch Exploration, Inc. in Dallas, Texas, in
various engineering capacities, with his last assignment being Vice President of
Production. He began his career in 1968 as an engineer with Shell Oil Company
in New Orleans, Louisiana. Mr. Stevenson received his B.S. degree in Petroleum
Engineering from Louisiana Tech University in 1968. He is a Certified
Professional Engineer in the State of Texas.
Following the closing of the transactions under the Stock Purchase
Agreement, it is currently anticipated that each of HACL's designees to the
Company's Board of Directors will beneficially own, directly or indirectly, the
number of shares of the Company's Common Stock set forth below:
15
<PAGE>
<TABLE>
<CAPTION>
PERCENT TO BE
NAME NUMBER OF SHARES BENEFICIALLY OWNED
----- ---------------- ------------------
<S> <C> <C>
Ray C. Davis 575,758 2.74%
Kelcy L. Warren 575,758 2.74%
Matthew S. Ramsey 181,818 *
Richard D. Brannon 1,046,364(1) 4.93%
Jon P. Stevenson 345,455 1.64%
</TABLE>
- ------------------
* Less than 1%
(1) Includes 10,000 shares beneficially owned by Mr. Brannon prior to the
consummation of the proposed transaction.
PROPOSAL TO CHANGE THE NAME OF THE COMPANY
The Board of Directors has approved and recommends that the stockholders
approve and adopt a proposal to amend the Certificate of Incorporation of the
Company to change the corporate name of the Company to "Equity Compression
Services Corporation." The Company was formed in 1989 to consolidate the
businesses and assets of Equity Compressors, Inc. and ten oil and gas limited
partnerships sponsored by Hawkins Oil & Gas, Inc. ("Hawkins Oil & Gas"). As a
result of the consolidation, Hawkins Oil & Gas originally became the Company's
largest stockholder, and the Company subleased office space from and shared
certain administrative services with Hawkins Oil & Gas through the end of 1995.
Since its formation, the Company has grown through 1993 acquisitions of Mid-
South Compressors, Inc. and Owens Compression Services, Inc. which substantially
diluted Hawkins Oil & Gas' ownership in the Company. Accordingly, the Board of
Directors of the Company believes that the continued use of "Hawkins" in the
Company's name causes some confusion because it suggests that the Company is
still affiliated with Hawkins Oil & Gas. In addition, the investment by HACL in
the Company will result in a change in control of the Company as HACL will
immediately have the right to designate a majority of the Company's Board of
Directors. The Board of Directors believes the change in the corporate name to
"Equity Compression Services Corporation" will reflect the change in control of
the Company and provide the Company with increased independent name recognition.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE CHANGE IN CORPORATE NAME.
VOTING SECURITIES AND PRINCIPAL STOCKHOLDERS THEREOF
At the close of business on November 4, 1996, there were 13,040,168 issued
and outstanding shares of the Common Stock (exclusive of 9,067 shares held in
treasury) of the Company. Each holder of Common Stock is entitled to one vote
per share on all matters. There is no other class of securities of the Company
entitled to vote at the meeting. Only stockholders of record at the close of
business on November 15, 1996, will be entitled to vote at the Special Meeting.
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of November 4, 1996, and as adjusted
to reflect the sale of the Common Stock pursuant to the Stock Purchase
Agreement, by (i) all persons who were known by the Company to be beneficial
owners of more than five percent of the outstanding shares of Common Stock, (ii)
each director, (iii) each executive officer named in the Summary
16
<PAGE>
Compensation Table included in the Company's Proxy Statement for its Annual
Meeting held May 14, 1996, individually, and (iv) all the directors and
executive officers of the Company as a group. Unless otherwise noted, the
persons named below have sole voting and investment power with respect to such
shares.
<TABLE>
<CAPTION>
PERCENT BENEFICIALLY OWNED
--------------------------
NAME AND ADDRESS BEFORE AFTER
OF BENEFICIAL OWNER NUMBER OF SHARES TRANSACTION TRANSACTION(11)
------------------- ---------------- ----------- ---------------
<S> <C> <C> <C>
PRINCIPAL STOCKHOLDERS:
R.P. Gregory, Jr. 3,037,251(2) 23.29% 14.44%
7575 San Felipe, Suite 350
Houston, TX 77063
Hawkins Oil & Gas, Inc. 1,296,582(1) 9.94% 6.16%
400 S. Boston, Suite 800
Tulsa, OK 74103
DIRECTORS AND EXECUTIVE OFFICERS:
Charles M. Butler, III 152,500(3) 1.17% *
John B. Hawkins 1,414,534(4) 10.76% 6.69%
Clifford S. Lewis 84,935(5) * *
Donald C. Nejedly 22,500(6) * *
Thomas F. Ostrye 214,847(7) 1.62% 1.01%
Don E. Smith 972,183(8) 7.42% 4.61%
David J. Parsons 56,703(9) * *
All Directors and Executive Officer
as a Group (9 Persons) 2,930,563(10) 21.61% 13.89%
</TABLE>
- --------------
* Less than 1%
(1) Includes 40,319 shares attributable to Hawkins Oil & Gas, Inc.'s general
partner interest in HX 1986, 19,522 shares attributable to its general
partner interest in Hawkins Exploration and 47,393 shares attributable to
the Hawkins Oil & Gas, Inc. Profit Sharing Plan.
(2) Includes 3,037,251 shares which are held of record by Gregory & Cook, Inc.,
but of which Mr. Gregory, as the majority owner of Gregory & Cook, Inc. has
the power to direct the voting and disposition of such shares.
(3) Includes 27,500 shares which may be acquired upon the exercise of presently
exercisable options.
(4) Includes 105,000 shares which may be acquired upon the exercise of
presently exercisable options, 1,296,582 shares owned directly and
indirectly by Hawkins Oil & Gas, Inc., but which may also be attributable
to John B. Hawkins based on his individual ownership of the common stock of
Hawkins Oil & Gas, Inc., and 11,634
17
<PAGE>
shares held by the Hawkins Energy Corporation 401(k) Plan (the "401(k)
Plan") and allocated to the account of John B. Hawkins.
(5) Includes 55,000 shares which may be acquired upon the exercise of presently
exercisable options, and 29,935 shares held by the 401(k) Plan and
allocated to the account of Mr. Lewis.
(6) Includes 22,500 shares which may be acquired upon the exercise of presently
exercisable options.
(7) Includes 200,000 shares which may be acquired upon the exercise of
presently exercisable options, and 14,545 shares held by the 401(k) Plan
and allocated to the account of Mr. Ostrye.
(8) Includes 60,000 shares which may be acquired upon the exercise of presently
exercisable options, and 12,790 shares held by the 401(k) Plan and
allocated to the account of Mr. Smith.
(9) Includes 52,500 shares which may be acquired upon the exercise of presently
exercisable options, and 4,203 shares held by the 401(k) Plan and allocated
to the account of Mr. Parsons
(10) Includes 522,500 shares which may be acquired upon the exercise of
presently exercisable options and 73,107 shares held by the 401(k) Plan and
allocated to the accounts of such individuals.
(11) As adjusted to reflect sale of 8,000,000 shares of Common Stock pursuant to
the Stock Purchase Agreement. Excludes 8,000,000 shares of Common Stock
reserved for issuance upon exercise of the Warrants to be issued pursuant
to the Stock Purchase Agreement.
OTHER MATTERS
MATTERS WHICH MAY COME BEFORE THE SPECIAL MEETING
The Board of Directors does not intend to bring any other matters before
the meeting, nor does the Board of Directors know of any matters which other
persons intend to bring before the meeting. If, however, other matters not
mentioned in this Proxy Statement properly come before the meeting, the persons
named in the accompanying Proxy Card will vote thereon in accordance with the
recommendation of the Board of Directors.
REMINDER: PLEASE SIGN, DATE AND RETURN YOUR PROXY CARD TO ASSURE THAT ALL
OF YOUR SHARES WILL BE VOTED.
18
<PAGE>
APPENDIX A
SIMMONS & COMPANY
INTERNATIONAL
________________________________________________________________________________
October 16, 1996
Board of Directors
Hawkins Energy Corporation
Twenty East Fifth Street
Suite 1500
Tulsa, Oklahoma 74103
Members of the Board:
You have requested the opinion of Simmons & Company International ("Simmons") as
investment bankers as to the fairness, from a financial point of view, to
Hawkins Energy Corporation (the "Company") of the proposed sale of shares of
common stock, par value $0.01 per share of the Company (the "Company Common
Stock"), and warrants to purchase Company Common Stock (the "Proposed
Transaction") pursuant to the Stock Purchase Agreement (the "Agreement") between
the Company and HACL, Ltd. (the "Purchaser"), a limited partnership to be formed
under the laws of Texas to consummate the Proposed Transaction.
As more specifically set forth in the Agreement, in the Proposed Transaction the
Purchaser will agree to purchase from the Company, and the Company will agree to
sell to the Purchaser, a total of 8,000,000 shares of Company Common Stock, and
8,000,000 warrants (the "Warrants"). The total consideration to be paid by the
Purchaser to the Company at closing for the issuance of such securities shall be
$4,400,000. Each Warrant will entitle the Purchaser to the right to purchase one
share of Company Common Stock upon exercise of the Warrant at an exercise price
of $0.91 per share. The Warrants will expire at the end of four years from the
date of initial issuance. The Warrants will become exercisable only when vested
based on the following schedule: (i) the Warrants will become fully vested upon
the Purchaser providing to the Company contracts committing to lease from the
Company natural gas compressors having an aggregate of 15,000 horsepower; with
25 percent of the Warrants becoming vested when such contracts commit to leasing
natural gas compressors having an aggregate of 3,750 horsepower, 50 percent of
the Warrants becoming vested when such contracts commit to leasing natural gas
compressors having an aggregate of 7,500 horsepower, and 75 percent of the
Warrants becoming vested when such contracts commit to leasing natural gas
compressors having an aggregate of 11,250 horsepower; or (ii) the Warrants will
become fully vested upon the Purchaser providing to the Company contracts
committing to lease from the Company natural gas compressors having an aggregate
of 7,500 horsepower and the Purchaser identifying oil and gas properties which
are acquired by the Company in one or more transactions approved by a majority
of the members of the Board of Directors of the Company not affiliated with or
designated by the Purchaser (an "Approved Transaction") with an aggregate
purchase price of at least $4,000,000; with 25 percent of the Warrants becoming
vested upon the Purchaser providing to the Company contracts committing to lease
from the Company natural gas compressors having an aggregate of 2,500 horsepower
and the Purchaser identifying oil and gas properties which are acquired by the
Company in one or more Approved Transactions with an aggregate purchase price of
$1,000,000, 50 percent of the Warrants becoming vested upon the Purchaser
providing to the Company contracts committing to lease from the Company natural
gas compressors having an aggregate of 4,250 horsepower and the Purchaser
identifying oil and gas properties which are acquired by the Company in one or
more Approved Transactions with an aggregate purchase price of $2,000,000, and
75 percent of the Warrants becoming vested upon the Purchaser providing to the
Company contracts committing to lease from the Company natural gas compressors
having an aggregate of 6,000 horsepower and the Purchaser identifying oil and
gas properties which are acquired by the Company in one or more Approved
Transactions with an aggregate purchase price of $3,000,000, or (iii) the
Warrants will become fully vested upon the Purchaser providing to the Company
contracts committing to lease from the Company natural gas compressors having
A-1
<PAGE>
an aggregate of 7,500 horsepower and the Purchaser identifying a company or
companies which are acquired by the Company which have compressor leases in
effect covering an aggregate of at least 7,500 horsepower; with 25 percent of
the Warrants becoming vested upon the Purchaser providing to the Company
contracts committing to lease from the Company natural gas compressors having an
aggregate of 2,500 horsepower and the Purchaser identifying a company or
companies which are acquired by the Company which have compressor leases in
effect covering an aggregate of at least 1,875 horsepower, 50 percent of the
Warrants becoming vested upon the Purchaser providing to the Company contracts
committing to lease from the Company natural gas compressors having an aggregate
of 4,250 horsepower and the Purchaser identifying a company or companies which
are acquired by the Company which have compressor leases in effect covering an
aggregate of at least 3,750 horsepower, and 75 percent of the Warrants becoming
vested upon the Purchaser providing to the Company contracts committing to lease
from the Company natural gas compressors having an aggregate of 6,000 horsepower
and the Purchaser identifying a company or companies which are acquired by the
Company which have compressor leases in effect covering an aggregate of at least
5,625 horsepower; or (iv) if the Company has acquired producing oil and gas
properties identified by the Purchaser and has acquired companies identified by
the Purchaser which are in the business of owning and leasing natural gas
compressors to third parties, both types of acquisitions shall be considered in
determining the vesting of the Warrants, with each $1,000,000 of purchase price
of such producing oil and gas properties purchased in one or more Approved
Transactions being considered to be the equivalent of compressor leases of such
acquired companies with an aggregate horsepower of 1,875 and vice versa,
providing in no event shall any Warrants vest unless the compressor leases
provided by the Purchaser or its Affiliates pursuant to (i) above cover
compressors which have an aggregate of at least 2,500 horsepower; in no event
shall the percentage of Warrants that vests exceed 25 percent unless the
compressor leases provided by the Purchaser pursuant to (i) above cover
compressors which have an aggregate of at least 4,250 horsepower; in no event
shall the percentage of Warrants that vests exceed 50 percent unless the
compressor leases provided by the Purchaser pursuant to (i) above cover
compressors which have an aggregate of at least 6,000 horsepower, and in no
event shall the percentage of Warrants that vests exceed 75 percent unless the
compressor leases provided by the Purchaser pursuant to (i) above cover
compressors which have an aggregate of at least 7,500 horsepower; or (v) the
Warrants will become fully vested if the Company consummates a merger in which
the Company is not the surviving company or which involves a change of control
of the Company, and such change of control is approved by a majority vote of the
shareholders of the Company.
Simmons, as a specialized energy-related investment banking firm, is engaged in
the valuation of businesses and their securities in connection with mergers and
acquisitions, the management and underwriting of sales of equity and debt to the
public, and private placements of equity and debt. In the ordinary course of
business, Simmons may actively trade Company Common Stock for its own account
and for the accounts of customers and, accordingly, may at any time hold a long
or short position in such security.
In connection with rendering its opinion, Simmons has reviewed and analyzed,
among other things, the following: (i) the Letter of Intent between the Company
and Purchaser dated September 21, 1996; (ii) the Agreement; (iii) the financial
statements and other information concerning the Company, including the Annual
Reports on Form 10-KSB of the Company for each of the years in the four-year
period ended December 31, 1995, the Quarterly Reports on Form 10-QSB of the
Company for the quarters ended March 31, 1996 and June 30, 1996, the Current
Report on Form 8-K dated June 30, 1995 and the Registration Statement on Form S-
3 of the Company related to a shelf registration of Company Common Stock dated
July 21, 1994, as amended; (iv) certain other internal information, primarily
financial in nature, concerning the business and operations of the Company
furnished by the Company for the purposes of Simmons' analysis; (v) certain
publicly available information concerning the trading of, and the trading market
for, Company Common Stock; (vi) certain publicly available information with
respect to certain other companies that Simmons believes to be comparable to the
Company (the "Comparable Companies") and the trading markets for such Comparable
Companies' securities; (vii) certain publicly available information concerning
estimates of the future operating and financial performance of the Comparable
Companies prepared by industry experts unaffiliated with the Company; and (viii)
certain publicly available information concerning the nature and terms of
certain other transactions considered relevant to the inquiry. Simmons has also
met with certain officers and employees of the Company and Purchaser to discuss
the foregoing as well as other matters believed relevant to the inquiry.
In arriving at its opinion, Simmons has assumed and relied upon the accuracy and
completeness of all of the financial and other information provided by the
Company or publicly available, and has not attempted independently to verify any
A-2
<PAGE>
of such information. With respect to financial projections provided by the
Company and estimates of potential rental rates, profitability and capital costs
of additional compressors, Simmons has assumed, with your consent, that they
were reasonably prepared on bases reflecting the best currently available
estimates and judgments of the Company's management. Simmons has not conducted
a physical inspection of any of the properties or facilities of the Company, nor
has Simmons made or obtained any independent evaluations or appraisals of any of
such properties or facilities.
In conducting its analysis and arriving at its opinion as expressed herein,
Simmons has considered such financial and other factors as it deemed appropriate
under the circumstances including, among others, the following: (i) the
historical and current financial position and results of operations of the
Company; (ii) the business prospects of the Company; (iii) the historical and
current market for Company Common Stock and equity securities of the Comparable
Companies; and (iv) the nature and terms of certain other acquisition
transactions that Simmons believes to be relevant. Simmons has also taken into
account its assessment of general economic, market and financial conditions and
its experience in connection with similar transactions and securities' valuation
generally. Simmons' opinion necessarily is based upon conditions as they exist
and can be evaluated on, and on the information made available at, the date
hereof.
Simmons is acting as financial advisor to the Company in this transaction and
will receive a customary fee for its services. Simmons' opinion expressed
herein is provided for the information and assistance of the Board of Directors
of the Company in connection with its consideration of the transaction
contemplated hereby and is not to be construed as a recommendation to the
holders of the Company Common Stock with respect to the Proposed Transaction.
Simmons was not authorized to solicit, nor did Simmons solicit from others,
indications of interest with respect to purchasing any securities of the Company
or with respect to acquiring the Company. Simmons' opinion does not address the
relative merits of the Proposed Transaction as compared to other alternative
transactions which might be available to the Company. Simmons is not expressing
any opinion regarding the value that would be realized upon the sale of any
securities of the Company or upon the liquidation or sale of the Company.
Furthermore, Simmons is not expressing any opinion regarding the trading market
for, or the market price of, the Company Common Stock, or the effect of the
ownership interest, represented by shares of Company Common Stock and the
Warrants, to be held by the Purchaser on the trading market for, or the market
price of, the Company Common Stock following the Proposed Transaction.
Based upon and subject to the foregoing, Simmons is of the opinion, as
investment bankers, that the consideration to be paid to the Company by the
Purchaser in the Proposed Transaction is fair to the Company from a financial
point of view.
Sincerely,
SIMMONS & COMPANY INTERNATIONAL
/s/ Frederick W. Charlton
- -----------------------------------------
Frederick W. Charlton
Vice President
A-3
