<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION,
Washington, D.C. 20549
RULE 13E-3 TRANSACTION STATEMENT
(Pursuant to Section 13(e) of the Securities Exchange Act of 1934)
(Amendment No. 2)
SEABOARD OIL CO.
(Name of the Issuer)
SEABOARD OIL CO.,
SEABOARD ACQUISITION PARTNERS, INC., AND SEABOARD MIDLAND, INC.
(Name of Person(s) Filing Statement)
COMMON STOCK $.01 PAR VALUE
(Title of Class of Securities)
811603109
(CUSIP Number of Class of Securities)
GARY B. GILLIAM
3100 N. "A", BLDG. B, SUITE 200, MIDLAND, TEXAS 79705, (915) 684-7005
(Name, address and telephone number of person authorized to receive notices and
communications on behalf of person(s) filing statement)
This statement is filed in connection with (check the appropriate box):
a. [x] The filing of solicitation materials or an information
statement subject to Regulation 14A [17 CFR 240.14a-1 to 240.14b-1], Regulation
14C [17 CFR 240.14c-1 to 240.14c-101] or Rule 13e-3(c) [Section 240.13e-3(c)]
under the Securities Exchange Act of 1934.
b. [ ] The filing of a registration statement under the Securities Act
of 1933.
c. [ ] A tender offer.
d. [ ] None of the above.
Check the following box if the soliciting materials or information
statement referred to in check box (a) are preliminary copies: [ ]
CALCULATION OF FILING FEE
- --------------------------------------------------------------------------------
Transaction valuation (1) Amount of filing fee
- --------------------------------------------------------------------------------
$4,698,375 $3,132
================================================================================
(1) Based upon the acquisition of 415,686 shares of Common Stock of Issuer, and
the cancellation of options and other plan benefits, for a purchase price of
$9.75 per share (less the exercise price for option shares).
[x] Check box if any part of the fee is offset as provided by Rule
0-11(a)(2) and identify the filing with which the offsetting fee was
previously paid. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
Amount Previously Paid: $3,132
---------------------------------------------------------
Form or Registration No.: Rule 13e-3 Transaction Statement
-------------------------------------------------------
Filing Party: Seaboard Oil Co.
-------------------------------------------------------------------
Date Filed: July 12, 1996
---------------------------------------------------------------------
<PAGE> 2
GENERAL
The information required in answer to many of the items of this Rule
13e-3 Transaction Statement (this "Statement") is incorporated by reference to
the Proxy Statement of Seaboard Oil Co. (the "Company") with respect to its
1996 Annual Meeting of Stockholders and filed with the Securities and Exchange
Commission concurrently with the filing of this Statement (the "Proxy
Statement"). Pursuant to Instruction F to this Statement, the location of the
information in the Proxy Statement provided in answer to each item of this
Statement is set forth below in response to each item. The Proxy Statement is
attached as an exhibit to this Statement. This Statement is being filed on
behalf of Company, Seaboard Acquisition Partners, Inc. ("SAP"), an affiliate of
the Company, and Seaboard Midland, Inc..
ITEM RESPONSES
ITEM 1. ISSUER AND CLASS OF SECURITIES SUBJECT TO THE TRANSACTION.
The information set forth under "Introduction," "Stock Prices and Dividends,"
and "Principal Holders of Securities" in the Proxy Statement is incorporated by
reference in response to this Item.
ITEM 2. IDENTITY AND BACKGROUND.
(i) SUBPARTS 2(a)-2(d) AND 2(g). The information set forth
under "Principal Holders of Securities" and "Election of Directors" in the
Proxy Statement is incorporated by reference in response to these subparts of
this Item. In addition, the following information is also provided in response
to these subparts with respect to certain persons who are principal
stockholders of SAP for whom all or a part of the information required by Item
2 is not contained in the Proxy Statement:
(1) (a) L. Austin Weeks
(b) 7350 Southwest 162nd, Miami, Florida 33157
(c) Investor
(d) Principal Stockholder
(g) U.S.
(2) (a) Marta S. Weeks
(b) 7350 Southwest 162nd, Miami, Florida 33157
(c) Investor
(d) Principal Stockholder
(g) U.S.
(ii) SUBPARTS 2(e)-2(f). Not applicable.
ITEM 3. PAST CONTRACTS, TRANSACTIONS OR NEGOTIATIONS. The
information set forth under "Summary," "Special Factors," and "Certain
Relationships and Transactions" in the Proxy Statement is incorporated by
reference in response to this Item.
ITEM 4. TERMS OF THE TRANSACTION. The information set forth under
"Summary," and "The Merger Agreement" in the Proxy Statement is incorporated by
reference in response to this Item.
ITEM 5. PLANS OR PROPOSALS OF THE ISSUER OR AFFILIATE. The
information set forth under "Summary," and "Special Factors" in the Proxy
Statement is incorporated by reference in response to this Item.
ITEM 6. SOURCES AND AMOUNTS OF FUNDS OR OTHER CONSIDERATION. The
information set forth under "Summary," and "Financing of the Merger" in the
Proxy Statement is incorporated by reference in response to this Item.
ITEM 7. PURPOSE(S), ALTERNATIVES, REASONS AND EFFECTS. The
information set forth under "Summary," and "Special Factors" in the Proxy
Statement is incorporated by reference in response to this Item.
2
<PAGE> 3
ITEM 8. FAIRNESS OF THE TRANSACTION. The information set forth under
"Summary," and "Special Factors" in the Proxy Statement is incorporated by
reference in response to this Item.
ITEM 9. REPORTS, OPINIONS, APPRAISALS AND CERTAIN NEGOTIATIONS. The
information set forth under "Summary," and "Special Factors" in the Proxy
Statement is incorporated by reference in response to this Item.
ITEM 10. INTEREST IN SECURITIES OF THE ISSUER. The information set
forth under "Introduction," "Principal Holders of Securities," and "Election of
Directors" in the Proxy Statement is incorporated by reference in response to
this Item.
ITEM 11. CONTRACTS, ARRANGEMENTS OR UNDERSTANDINGS WITH RESPECT TO
ISSUER'S SECURITIES. Not applicable.
ITEM 12. PRESENT INTENTION AND RECOMMENDATION OF CERTAIN PERSONS WITH
REGARDS TO THE TRANSACTION. The information set forth under "Introduction,"
"Summary," and "Special Factors" in the Proxy Statement is incorporated by
reference in response to this Item.
ITEM 13. OTHER PROVISIONS OF THE TRANSACTION. The information set
forth under "Summary," and "Dissenters' Rights" in the Proxy Statement is
incorporated by reference in response to this Item.
ITEM 14. FINANCIAL INFORMATION. The information set forth under
"Summary," "Selected Financial Data," "Management's Discussion and Analysis of
Financial Conditions and Results of Operations," and "Consolidated Financial
Statements" in the Proxy Statement is incorporated by reference in response to
this Item.
ITEM 15. PERSONS AND ASSETS EMPLOYED, RETAINED OR UTILIZED. The
information set forth under "Introduction" in the Proxy Statement is
incorporated by reference in response to this Item.
ITEM 16. ADDITIONAL INFORMATION. The information set forth under
"Business of the Company," "Certain Information Concerning Seaboard Acquisition
Partners and Seaboard Midland, Inc.," and "Remuneration of Management" in the
Proxy Statement is incorporated by reference in response to this Item.
ITEM 17. MATERIAL TO BE FILED AS EXHIBITS.
99.(b)(1) Report of Joe C. Neal & Associates dated August 21,
1996 (with consent attached).
99.(b)(2) Report of Principal Financial Services, Inc. dated
June 7, 1996.
99.(b)(3) Opinion of Principal Financial Securities, Inc. dated
as of June 5, 1996 (attached as Appendix II to Proxy
Statement attached hereto as Exhibit (d)).
99.(d) Proxy Statement of Seaboard Oil Co. with respect to
1996 Annual Meeting of Stockholders.
99.(e) Section 262 of Delaware General Corporation Law
(attached as Appendix IV to Proxy Statement attached
hereto as Exhibit (d)).
3
<PAGE> 4
SIGNATURE
After due inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this Statement is true, complete and
correct.
(Date) September 27, 1996
SEABOARD OIL CO.
By: /s/ Gary B. Gilliam
---------------------------------
Gary B. Gilliam, President
SEABOARD ACQUISITION PARTNERS, INC.
By: /s/ E.E. Runyan
---------------------------------
E.E. Runyan, President
SEABOARD MIDLAND, INC.
By: /s/ E.E. Runyan
---------------------------------
E.E. Runyan, President
4
<PAGE> 5
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
- ------------ -----------
<S> <C>
99.(b)(1) Report of Joe C. Neal & Associates dated August 21, 1996 (with consent attached).
99.(b)(2) Report of Principal Financial Services, Inc. dated June 7, 1996.
99.(b)(3) Opinion of Principal Financial Securities, Inc. dated as of June 5, 1996 (attached as Appendix
II to Proxy Statement attached hereto as Exhibit (d)).
99.(d) Proxy Statement of Seaboard Oil Co. with respect to 1996 Annual Meeting of Stockholders.
99.(e) Section 262 of Delaware General Corporation Law (attached as Appendix IV to Proxy Statement
attached hereto as Exhibit (d)).
</TABLE>
5
<PAGE> 1
EXHIBIT 99.(b)(1)
August 21, 1996
Seaboard Oil Company
3100 North "A" Street
Building "B", Suite 200
Midland, Texas 79705
Gentlemen:
In accordance with your request, we have estimated the extent and value of
certain domestic proved crude oil, condensate, and gas reserves owned by
Seaboard Oil Company (the "Company") as of March 31, 1996. The properties to
which proved reserves are attributable are located in the states of Arkansas,
Colorado, Louisiana, North Dakota, New Mexico, Oklahoma, Texas and Wyoming.
The estimated reserves are based on a detailed study of certain properties
owned by the "Company". During this study, we consulted freely with the
officers and employees of the "Company" and were given access to such records,
geological and engineering reports, and other data as were desired for
examination. In preparation of this report, we have relied without independent
verification upon information furnished by the "Company" with respect to
property interests owned by it, production from such properties, current costs
of operation, current prices for production, agreements relating to current and
future operations and various other information and data which were accepted as
represented. It was not considered necessary to make a field examination of
the physical condition and operation of the properties in which the "Company"
owns an interest.
We estimate the net proved reserves, future net revenue, and the present value
of future net revenue from the properties of the "Company" as of March 31, 1996
to be as follows:
<TABLE>
<CAPTION>
Present Value
Classification Oil and Future Net Discounted
of Reserves Condensate Gas Revenue at 10 Percent
-------------- ---------- ------- ---------- -------------
(MBBL) (MMCF) (M$) (M$)
<S> <C> <C> <C> <C>
Proved Developed
Producing 1,947 1,904 25,105 17,020
</TABLE>
<PAGE> 2
The following table sets forth the changes in total proved reserves owned by
the "Company" as of March 31, 1996:
<TABLE>
<CAPTION>
Net Liquid Net Gas
(BBL) (MCF)
---------- -------
<S> <C> <C>
Total Proved Reserves:
Developed and Undeveloped
Beginning of Period, March 31, 1995 2,316,240 2,181,778
Revisions of Previous Estimates (86,329) (13,427)
--------- ---------
Beginning of Year, as Revised 2,229,911 2,168,351
Improved Recovery
Purchases of Minerals-in-Place
and Extensions 28,148 53,065
Production (311,004) (330,951)
Sales of Minerals-in-Place 251 14,154
--------- ---------
End of Period, March 31, 1996 1,947,306 1,904,619
========= =========
Proved Developed Reserves:
Beginning of Period, March 31, 1995 2,003,768 2,181,778
End of Period, March 31, 1996 1,947,306 1,904,619
</TABLE>
<PAGE> 3
Seaboard Oil Company
August 21, 1996
Page 3
Using a ten percent discount rate, the present value of the estimated future
net revenue from proved oil and gas reserves owned by the "Company" as of March
31, 1996 is shown as follows:
<TABLE>
<CAPTION>
Net Value, $
Discounted at 10%
-----------------
<S> <C>
Proved Developed and Undeveloped Reserves:
Added in Previous Years 16,980,657
New Discoveries and
Purchases of Minerals-in-Place 39,413
----------
Total as of March 31, 1996 17,020,070
==========
Proved Developed Reserves: 17,020,070
==========
</TABLE>
The reserves evaluated in this report are classified as proved. Reserves for
the producing properties were determined by extrapolation of the production
decline trends, where applicable, analogy with similar offset wells, by
volumetric calculations using basic reservoir parameters such as porosity,
water saturation, net pay thickness, and estimated areal extent of the
reservoir, or by material balance calculations.
This study was performed using industry-accepted principles of engineering
evaluation that are predicated on established scientific concepts. The
application of such principles involves extensive judgments and is subject to
changes in existing technical knowledge, economic conditions and statutory or
regulatory provisions. Reserve evaluations are imprecise due to inherent
uncertainties and limitations in the data base. Joe C. Neal & Associates
reserves the right to alter the calculation of reserves discussed in this
report if corrections to these data are subsequently required.
The value estimated in this report is based on the assumptions that the
properties are not negatively affected by the existence of hazardous substances
or detrimental environmental conditions. We are experts in the identification
of hazardous substances but were not asked to make that determination. It is
possible that tests and inspections conducted by a qualified hazardous
substance and environmental expert could reveal the existence of hazardous
material and environmental conditions on or around the properties that would
negatively affect the properties' value.
<PAGE> 4
Seaboard Oil Company
August 21, 1996
Page 4
Property identification, expense and revenue interests, actual product prices,
and operating expenses were provided by the "Company". These data were not
verified by inspection of internal records and files, nor was a physical
inspection made of the properties. Information regarding prices and the
particular pricing categories under current governmental regulations was
supplied by the "Company".
Net oil and gas reserves are estimated quantities of crude oil, natural gas,
and natural gas liquids attributed to the revenue interests of the "Company"
after deduction of royalty and/or overriding royalty interests. Net income to
the revenue interests of the "Company" is the future net revenue after
deduction of state and county taxes, operating expenses, and investments, if
applicable. The resulting net income is before federal income tax and does not
consider any encumbrances against the properties, if such exist. Minor
variations in composite column totals result from computer rounding.
Values of the estimated net proved reserves are expressed in terms of future
net revenue and present value of future net revenue. Future net revenue are
calculated by deducting estimated operating expenses, capital costs, and
severance and ad valorem taxes from the future gross revenue.
Present value of future net revenue is calculated by discounting the future net
revenue at the rate of ten percent per annum compounded monthly over the
expected period of realization. The present value set forth in this report
does not necessarily represent the fair market value of the evaluated
interests.
A summary projection of the estimated future net revenue and present value of
future net revenue as of March 31, 1996 is as follows:
<TABLE>
<CAPTION>
Proved Developed
----------------
Future Net Discounted
Year Revenue at 10%
---- ---------- ----------
($) ($)
<S> <C> <C>
1996 4,586,330 4,364,509
1997 3,770,459 3,246,713
1998 3,114,526 2,426,698
Remaining 13,633,915 6,982,150
---------- ----------
Total 25,105,230 17,020,070
========== ==========
</TABLE>
Current oil and gas prices were employed, with prices changed only to the
extent that
<PAGE> 5
Seaboard Oil Company
August 21, 1996
Page 5
the price changes are considered, under the Securities and Exchange
Commission's rules, to be fixed and determinable. Oil volumes shown herein are
expressed in barrels which are equivalent to 42 United States gallons. Gas
volumes are expressed at standard conditions of 60 degrees Fahrenheit and at
the standard pressure base of the respective area in which the reserves are
located.
Operating expenses were held constant for the life of the properties, except
for the Robertson North Clearfork and Quito West Units. The operating costs
were de-escalated for the loss of downdip wells as the units mature and "water
out"these wells. Severance and ad valorem taxes were deducted in the lease
reserves and economics projections at the standard state rates.
This report is solely for the information of and assistance to the "Company"
for their use in Securities and Exchange Commission filings. It is not to be
used, circulated, quoted or otherwise referred to for any other purpose without
the express written consent of the undersigned except as required by law. Data
utilized in this report will be maintained in our files and are available for
your use. It has been our privilege to serve you by preparing this evaluation.
Yours very truly,
/s/ JOE C. NEAL & ASSOCIATES
JCN:bm
Reference: 96004
<PAGE> 6
CONSENT OF INDEPENDENT ENGINEERS
As independent engineer consultants, we hereby consent to the use of our
summary report and data extracted therefrom (and all references to our Firm)
included in or made a part of this Rule 13E-3 Transaction Statement and Proxy
Statement for the Company's 1996 Annual Meeting.
/s/ Joe C. Neal & Associates
----------------------------
JOE C. NEAL & ASSOCIATES
Dated: August 21, 1996
<PAGE> 1
EXHIBIT 99.(b)(2)
- --------------------------------------------------------------------------------
[LOGO]
PRINCIPAL FINANCIAL SECURITIES, INC.
- --------------------------------------------------------------------------------
SEABOARD OIL COMPANY
MATERIALS PREPARED FOR THE
SPECIAL COMMITTEE OF THE
BOARD OF DIRECTORS
JUNE 7, 1996
PRINCIPAL FINANCIAL SECURITIES, INC.
909 FANNIN, SUITE 1900
HOUSTON, TEXAS 77010
TELEPHONE: (713) 651-1661
TELECOPIER: (713) 651-7444
<PAGE> 2
-----------------
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Section
-------
<S> <C>
SUMMARY OF THE TRANSACTION ........................................... 1
- Transaction Summary
- Summary Market Data
- Summary Operating Data
HISTORICAL AND PROJECTED FINANCIAL STATEMENTS ........................ 2
PRELIMINARY SUMMARY REFERENCE VALUE ANALYSIS ......................... 3
DISCOUNTED CASH FLOW ANALYSIS ........................................ 4
COMPARABLE RESERVES ACQUISITIONS ANALYSIS ............................ 5
COMPARABLE COMPANIES TRADING ANALYSIS ................................ 6
PREMIUMS PAID FOR RESIDUAL INTEREST ANALYSIS ......................... 7
BOOK VALUE PER SHARE ................................................. 8
</TABLE>
PRINCIPAL FINANCIAL SECURITIES
<PAGE> 3
SECTION 1
SUMMARY OF THE ACQUISITION
PRINCIPAL FINANCIAL SECURITIES
<PAGE> 4
-------------------
TRANSACTION SUMMARY
-------------------
<TABLE>
<S> <C>
Price to be paid per one share of Seaboard Oil Company Common Stock ....... $9.75
Seaboard Oil Company fully diluted shares outstanding ..................... 1,557,369 shares
Total shares owned by Seaboard Acquisition Partners ("SAP") ............... 1,055,683 shares
Total shares to be acquired by SAP ........................................ 501,686 shares
Total consideration to be paid (excluding transaction expenses) ........... $4,891,438
Estimated Effective Date .................................................. September 15, 1996
</TABLE>
PRINCIPAL FINANCIAL SECURITIES
<PAGE> 5
SEABOARD OIL COMPANY
-------------------
SUMMARY MARKET DATA
-------------------
<TABLE>
<S> <C>
Recent stock price(1) $8.00
Common shares outstanding (fully diluted) 1,557,369
Market value of common equity $12,458,952
Long-term debt (as of March 31, 1996) --
Long-term debt / total capital 0.0%
Net income (FY End 3/31/96) $1,809,000
EPS (FY End 3/31/96) $1.16
P/E Ratio 6.9x
After-Tax cash flow (FY End 3/31/96) $3,596,000
A-T cash flow per shr. (FY End 3/31/96) $2.30
Stock price / A-T cash flow per shr 3.5x
</TABLE>
- ---------
(1) Mid-point of bid/ask on June 3, 1996.
PRINCIPAL FINANCIAL SECURITIES
<PAGE> 6
SEABOARD OIL COMPANY
----------------------
SUMMARY OPERATING DATA
----------------------
(Amounts in thousands except per share data and where noted)
<TABLE>
<S> <C>
TOTAL REVENUE (FY END 3/31/96): $6,084
Oil & gas revenue $6,048
Other revenue $36
Other assets $868
% Reserves as oil (oil conv. @ 6:1) 86.0%
Proved developed reserves:
Oil (MBbls) 1,947
Gas (MMcf) 1,905
Proved developed & undeveloped reserves:
Oil (MBbls) 1,947
Gas (MMcf) 1,905
FYE 1996 production:
Oil (MBbls) 311
Gas (MMcf) 331
Oil Equivalent (MBbls) 366
Reserve Life Index - total proved:
Oil 6.26
Gas 5.75
SEC PV 10 $17,020
EQUIVALENT BBLS ANALYSIS 6 MCF TO 1 BBL
Equivalent MBbls - proved developed 2,265
Equivalent MBbls - total proved 2,265
Equivalent Bbls per share - proved developed 1.45
Equivalent Bbls per share - total proved 1.45
Market's value per equiv. Bbl $5.12
Equivalent reserve life (years) 6.19
</TABLE>
PRINCIPAL FINANCIAL SECURITIES
<PAGE> 7
SECTION 2
HISTORICAL AND PROJECTED FINANCIAL STATEMENTS
PRINCIPAL FINANCIAL SECURITIES
<PAGE> 8
SEABOARD OIL COMPANY
----------------
INCOME STATEMENT
----------------
($ in thousands)
<TABLE>
<CAPTION>
For the Years Ended March 31,
-----------------------------
1995 1996 1997E(a)
------ ------ --------
<S> <C> <C> <C>
Revenues:
Oil and gas sales $4,366 $6,048 $6,535
Interest and other income 176 203 159
------ ------ ------
Total revenues 4,542 6,251 6,694
Expenses:
Lease operating costs 1,410 1,653 1,801
Production taxes 219 242 278
D, D & A 1,100 1,766 1,906
G & A 746 786 866
Dry hole and abandonment 283 21 --
Compression & gathering 28 28 --
Geological & geophysical -- 17 --
Total expenses 3,786 4,513 4,851
Operating income 756 1,738 1,843
Other income (expenses) 68 71 --
Net income $824 $1,809 $1,843
Net income per share (b) $0.53 $1.16 $1.18
After-Tax Cash flow $1,924 $3,575 $3,749
A-T Cash flow per share (b) $1.24 $2.30 $2.41
</TABLE>
- ---------
(a) Based upon estimates provided by Seaboard management.
(b) Based on fully diluted shares of 1,557,369.
PRINCIPAL FINANCIAL SECURITIES
<PAGE> 9
SEABOARD OIL COMPANY
-------------
BALANCE SHEET
-------------
($ in thousands)
<TABLE>
<CAPTION>
For the Years Ended March 31,
-----------------------------
ASSETS 1995 1996 1997E(a)
-------- -------- --------
<S> <C> <C> <C>
Current assets:
Cash and equivalents $3,769 $3,827 $4,083
Accts. receivable 543 706 708
Other current assets 149 59 57
Total current assets 4,461 4,592 4,848
Property, plant & equip.:
Oil & gas properties 14,348 16,715 19,934
Other equipment 460 868 932
Less accumulated D, D & A (5,519) (7,251) (8,954)
Net P, P & E 9,289 10,332 11,912
Total assets $13,750 $14,924 $16,760
</TABLE>
- ---------
(a) Based upon estimates provided by Seaboard management.
PRINCIPAL FINANCIAL SECURITIES
<PAGE> 10
SEABOARD OIL COMPANY
-------------
BALANCE SHEET
-------------
($ in thousands)
<TABLE>
<CAPTION>
For the Years Ended March 31,
LIABILITIES AND -----------------------------
STOCKHOLDERS' EQUITY 1995 1996 1997E(a)
-------- -------- --------
<S> <C> <C> <C>
Current liabilities:
Accounts payable $783 $293 $517
Accrued liabilities and other 247 215 --
-------- -------- --------
Total current liabilities 1,030 508 517
Stockholders equity:
Common stock 16 16 16
Additional paid-in capital 9,517 9,517 9,517
Retained earnings 3,622 5,431 7,249
Less treasury stock (435) (548) (539)
Total stockholders' equity 12,720 14,416 16,243
Total liabilities and
shareholders' equity $13,750 $14,924 $16,760
</TABLE>
- ---------
(a) Based upon estimates provided by Seaboard management.
PRINCIPAL FINANCIAL SECURITIES
<PAGE> 11
SECTION 3
PRELIMINARY SUMMARY REFERENCE VALUE ANALYSIS
PRINCIPAL FINANCIAL SECURITIES
<PAGE> 12
--------------------
SEABOARD OIL COMPANY
--------------------
PRELIMINARY SUMMARY REFERENCE VALUE ANALYSIS
<TABLE>
<CAPTION>
Dollars Per Share (1) Weighting Weighted Value
--------------------- --------- --------------
<S> <C> <C> <C>
Discounted Cash Flow Analysis $8.29 - $9.99 30.0% $2.49 $3.00
Comparable Reserves Acquisitions Analysis $8.44 - $9.89 25.0% $2.11 $2.47
Comparable Companies Trading Analysis $11.79 - $13.79 25.0% $2.95 $3.45
Book Value per Share $9.06 10.0% $0.91 $0.91
Premiums Paid for Residual Interest Analysis $7.80 10.0% $0.78 $0.78
Weighted Average Total $9.23 $10.60
----- ------
Trading History (3-year Minimum, Maximum) $4.50 - $8.00
</TABLE>
- ---------
(1) 1,557,369 Shares Outstanding as of May 6, 1996.
PRINCIPAL FINANCIAL SECURITIES
<PAGE> 13
SECTION 4
DISCOUNTED CASH FLOW ANALYSIS
PRINCIPAL FINANCIAL SECURITIES
<PAGE> 14
--------------------
SEABOARD OIL COMPANY
--------------------
DISCOUNTED CASH FLOW ANALYSIS
KEY ASSUMPTIONS
Production: Based on independent reserve report prepared for Seaboard Oil
Company by Joe C. Neal & Associates ("J. C. Neal") pursuant to
the requirements of The Securities and Exchange Commission.
Effective Date: March 31, 1996.
Prices: Pricing was established using the average closing strip prices
as quoted in the May 31, 1996 Wall Street Journal for Light
Sweet Crude Oil and Natural Gas. For the Downside Case, prices
were held constant. For the Base Case, beginning in 1998, crude
oil prices were escalated at 2.5% per year and gas prices were
escalated at 3.0% per year. For the High Case, beginning in
1998, crude oil prices were escalated at 3.5% per year and gas
prices were escalated at 5.0% per year.
Costs: Lease Operating Costs were based on the J.C. Neal reserve report
and escalated at 2.5% per year beginning in 1997. General &
Administrative expenses were assumed to be 12.5% of revenues per
year.
Tax Rate: Assumed Tax Rate was 34%.
NOLs, AMT: Net Operating Loss Carryforwards of approximately $9 million
were utilized to decrease the tax liability of the Company. In
addition to the NOLs, the Company has available Alternative
Minimum Tax Carryforwards which were utilized in conjunction
with the NOLs to further reduce the tax liability of the
Company.
PRINCIPAL FINANCIAL SECURITIES
<PAGE> 15
--------------------
SEABOARD OIL COMPANY
--------------------
DISCOUNTED CASH FLOW ANALYSIS SUMMARY
PRESENT VALUE
($ in thousands, except per share)
<TABLE>
<CAPTION>
Discount Rate
-----------------------------------------------------------------------
Case 10.0% 12.0% 14.0% 16.0% 18.0%
---- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Downside $ 9,809.9 $ 9,288.3 $ 8,815.9 $ 8,386.3 $ 7,994.3
Base $ 11,476.2 $ 10,750.3 $ 10,106.6 $ 9,532.4 $ 9,017.5
High $ 12,295.7 $ 11,453.4 $ 10,715.6 $ 10,064.7 $ 9,486.5
</TABLE>
<TABLE>
<CAPTION>
Per Share Value(1)
Discount Rate
-----------------------------------------------------------------------
Case 10.0% 12.0% 14.0% 16.0% 18.0%
---- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Downside $ 8.93 $ 8.60 $ 8.29 $ 8.02 $ 7.77
Base $ 10.00 $ 9.54 $ 9.12 $ 8.75 $ 8.42
High $ 10.53 $ 9.99 $ 9.51 $ 9.10 $ 8.72
</TABLE>
- --------------
(1) Includes $4.1 million of excess cash. 1,557,369 shares outstanding as of
May 6,
PRINCIPAL FINANCIAL SECURITIES
<PAGE> 16
SECTION 5
COMPARABLE RESERVES ACQUISITIONS ANALYSIS
PRINCIPAL FINANCIAL SECURITIES
<PAGE> 17
--------------------
SEABOARD OIL COMPANY
--------------------
COMPARABLE RESERVES ACQUISITION ANALYSIS
<TABLE>
<CAPTION>
Comparable Implied Corporate Implied Current
Multiple of: Seaboard Transaction Multiples Multiple Range Asset Value Adjustments Market Value ($MM)
-------- --------------------- -------------- ----------- ----------- ------------------
<S> <C> <C> <C> <C> <C> <C>
FYE '96 Proved Reserves
($/BOE, MMBOE) 2.26 $2.25 - $8.57 $4.00 - $5.00 $9.0 - $11.3 $4.1 $13.1 - $15.4
Per Share (1) $8.44 - $9.89
----- -----
</TABLE>
- ---------
(1) 1,557,369 shares outstanding as of May 6, 1996
PRINCIPAL FINANCIAL SECURITIES
<PAGE> 18
--------------------
SEABOARD OIL COMPANY
--------------------
1994 & 1995 TRANSACTIONS (SORTED BY QUARTER)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Total PROVED RESERVES ANNUAL PRODUCTION
Q Trans. ---------------------- ---------------------
t Value OIL GAS MMBO % OIL GAS MMBO
r BUYER SELLER US$MM MMbls BCF (@6:1) Gas MMbls BCF (@6:1)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 Devon Energy Alta Energy $64.6 24.3 26.6 28.7 15% 0.5 1.2 0.7
- --------------------------------------------------------------------------------------------------------------------------
1 Questar Corp. (Universal) Union Pacific Resources $94.5 1.7 81.9 15.3 89% 0.3 11.0 2.1
- --------------------------------------------------------------------------------------------------------------------------
1 Alexander Energy American Natural Energy $42.5 0.9 60.2 10.9 92% 0.1 2.6 0.5
- --------------------------------------------------------------------------------------------------------------------------
1 Arch Petroleum Inc. Chevron USA, Inc. $17.9 2.3 18.1 5.3 57%
- --------------------------------------------------------------------------------------------------------------------------
1 Questar Corp. (Universal) Petroleum Inc. $22.6 1.4 14.5 3.8 64%
- --------------------------------------------------------------------------------------------------------------------------
1 Brooklyn Union Gas Anadarko $22.8 0.1 21.6 3.7 98% 0.0 5.5 0.9
- --------------------------------------------------------------------------------------------------------------------------
2 MCN Investment Undisclosed $100.0 1.5 61.0 11.7 87% 0.2 10.0 1.9
- --------------------------------------------------------------------------------------------------------------------------
2 Coda Energy Diamond Energy/Diamond A $53.5 5.7 3.2 6.2 9% 1.0 1.1 1.2
- --------------------------------------------------------------------------------------------------------------------------
3 Lomak Petroleum Red Eagle Resources $34.6 0.9 50.5 9.4 90% 0.1 1.9 0.4
- --------------------------------------------------------------------------------------------------------------------------
3 Abraxas Petroleum Enertex et al. $28.0 0.5 48.2 8.6 94% 0.0 2.6 0.5
- --------------------------------------------------------------------------------------------------------------------------
3 Alexander Energy Undisclosed $18.5 0.0 23.0 3.8 100% 0.0 1.5 0.3
- --------------------------------------------------------------------------------------------------------------------------
3 Tide West Oil Undisclosed $14.0 0.2 19.0 3.3 95%
- --------------------------------------------------------------------------------------------------------------------------
4 Coda Energy Texaco/Undisclosed $25.3 7.3 5.4 8.2 11% 0.5 0.5 0.5
- --------------------------------------------------------------------------------------------------------------------------
4 Southwestern Energy Natural Gas Clearinghouse $12.7 0.7 20.8 4.2 83% 0.1 2.1 0.4
- --------------------------------------------------------------------------------------------------------------------------
4 Alexander Energy JMC Exploration $18.2 0.0 23.0 3.8 100%
- --------------------------------------------------------------------------------------------------------------------------
1 Sonat Inc. Horizon Oil & Gas et al. $22.6 1.2 26.0 5.5 78%
- --------------------------------------------------------------------------------------------------------------------------
1 Cross Timbers Oil Apache $20.0 1.1 24.6 5.2 79% 0.1 2.1 0.5
- --------------------------------------------------------------------------------------------------------------------------
1 Gothic Energy Corp. Buttonwood Energy $21.0 0.5 24.6 4.6 90%
- --------------------------------------------------------------------------------------------------------------------------
Ener Vest Mgmt./EnCap
1 Energy Cap. Fund Union Pacific $11.0 2.5 9.3 4.1 38%
- --------------------------------------------------------------------------------------------------------------------------
2 Cross Timbers Oil Santa Fe Minerals $121.0 0.0 132.0 22.0 100% 0.0 11.0 1.8
- --------------------------------------------------------------------------------------------------------------------------
2 Louis Dreyfus Natural Gas American Exploration et al. $93.0 0.0 115.0 19.2 100% 0.0 13.1 2.2
- --------------------------------------------------------------------------------------------------------------------------
2 Pennzoil Oryx Energy $15.4 6.0 0% 0.7
- --------------------------------------------------------------------------------------------------------------------------
2 Hugoton Energy Mobil $13.0 0.1 16.5 2.8 97% 0.0 4.2 0.7
- --------------------------------------------------------------------------------------------------------------------------
Enron Capital & Trade
3 Resources Coda Energy $303.6 39.2 39.8 45.8 14% 3.1 4.8 3.9
- --------------------------------------------------------------------------------------------------------------------------
4 Texas Pacific Group Newscope Resources Ltd. $50.2 2.0 29.3 6.9 71% 0.3 2.0 0.6
- --------------------------------------------------------------------------------------------------------------------------
4 National Energy Group Alexander Energy $129.0 3.9 145.2 28.1 86% 0.2 8.9 1.7
- --------------------------------------------------------------------------------------------------------------------------
4 Vastar Resources H & H Star Energy $19.5 0.0 26.0 4.3 100% 0.0 2.2 0.4
- --------------------------------------------------------------------------------------------------------------------------
4 Key Production Co. Brock Exploration $20.3 2.4 11.6 4.3 45% 0.4 2.4 0.7
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
0 & G Implied Implied
Q Reserve Other Reserve Reserve
t Value Assets Value Value
r BUYER SELLER US$MM US$MM ($/BOE) $/MCFE
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1 Devon Energy Alta Energy $64.6 $0.0 $2.25 $0.37
- --------------------------------------------------------------------------------------------------------
1 Questar Corp. (Universal) Union Pacific Resources $80.0 $14.5 $5.22 $0.87
- --------------------------------------------------------------------------------------------------------
1 Alexander Energy American Natural Energy $42.5 $0.0 $3.89 $0.65
- --------------------------------------------------------------------------------------------------------
1 Arch Petroleum Inc. Chevron USA, Inc. $17.9 $0.0 $3.36 $0.56
- --------------------------------------------------------------------------------------------------------
1 Questar Corp. (Universal) Petroleum Inc. $22.6 $0.0 $5.99 $1.00
- --------------------------------------------------------------------------------------------------------
1 Brooklyn Union Gas Anadarko $18.7 $4.1 $5.08 $0.85
- --------------------------------------------------------------------------------------------------------
2 MCN Investment Undisclosed $100.0 $0.0 $8.57 $1.43
- --------------------------------------------------------------------------------------------------------
2 Coda Energy Diamond Energy/Diamond A $53.5 $0.0 $8.57 $1.43
- --------------------------------------------------------------------------------------------------------
3 Lomak Petroleum Red Eagle Resources $29.7 $4.9 $3.18 $0.53
- --------------------------------------------------------------------------------------------------------
3 Abraxas Petroleum Enertex et al. $27.9 $0.1 $3.26 $0.54
- --------------------------------------------------------------------------------------------------------
3 Alexander Energy Undisclosed $18.5 $0.0 $4.83 $0.80
- --------------------------------------------------------------------------------------------------------
3 Tide West Oil Undisclosed $14.0 $0.0 $4.20 $0.70
- --------------------------------------------------------------------------------------------------------
4 Coda Energy Texaco/Undisclosed $25.3 $0.0 $3.09 $0.51
- --------------------------------------------------------------------------------------------------------
4 Southwestern Energy Natural Gas Clearinghouse $12.7 $0.0 $3.05 $0.51
- --------------------------------------------------------------------------------------------------------
4 Alexander Energy JMC Exploration $18.2 $0.0 $4.75 $0.79
- --------------------------------------------------------------------------------------------------------
1 Sonat Inc. Horizon Oil & Gas et al. $22.6 $0.0 $4.08 $0.68
- --------------------------------------------------------------------------------------------------------
1 Cross Timbers Oil Apache $20.0 $0.0 $3.85 $0.64
- --------------------------------------------------------------------------------------------------------
1 Gothic Energy Corp. Buttonwood Energy $20.5 $0.5 $4.51 $0.75
- --------------------------------------------------------------------------------------------------------
Ener Vest Mgmt./EnCap
1 Energy Cap. Fund Union Pacific $11.0 $0.0 $2.72 $0.45
- --------------------------------------------------------------------------------------------------------
2 Cross Timbers Oil Santa Fe Minerals $91.0 $30.0 $4.14 $0.69
- --------------------------------------------------------------------------------------------------------
2 Louis Dreyfus Natural Gas American Exploration et al. $91.9 $1.1 $4.79 $0.80
- --------------------------------------------------------------------------------------------------------
2 Pennzoil Oryx Energy $15.4 $0.0 $2.55 $0.42
- --------------------------------------------------------------------------------------------------------
2 Hugoton Energy Mobil $13.0 $0.0 $4.59 $0.77
- --------------------------------------------------------------------------------------------------------
Enron Capital & Trade
3 Resources Coda Energy $272.8 $30.8 $5.95 $0.99
- --------------------------------------------------------------------------------------------------------
4 Texas Pacific Group Newscope Resources Ltd. $40.3 $9.8 $5.88 $0.98
- --------------------------------------------------------------------------------------------------------
4 National Energy Group Alexander Energy $126.3 $2.7 $4.49 $0.75
- --------------------------------------------------------------------------------------------------------
4 Vastar Resources H & H Star Energy $19.5 $0.0 $4.50 $0.75
- --------------------------------------------------------------------------------------------------------
4 Key Production Co. Brock Exploration $18.8 $1.5 $4.37 $0.73
- --------------------------------------------------------------------------------------------------------
</TABLE>
Minimum $2.25
Maximum $8.57
Average $4.49
PRINCIPAL FINANCIAL SECURITIES
<PAGE> 19
SECTION 6
COMPARABLE COMPANIES TRADING ANALYSIS
PRINCIPAL FINANCIAL SECURITIES
<PAGE> 20
--------------------
SEABOARD OIL COMPANY
--------------------
COMPARABLE COMPANIES TRADING ANALYSIS
<TABLE>
<CAPTION>
Implied
Comparable Company Total Current Corporate Implied Current
Seaboard Multiples Multiple Range Market Capitalization Adjustments Market Value ($MM)
-------- ------------------ -------------- --------------------- ----------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Market Capitalization To:
FYE '96 Proved Reserves 2.26 $2.73 - $9.96 $4.75 - $5.25 $10.7 - $11.9 $4.1 $14.8 - $16.0
($/BOE, MMBOE)
FYE '96 Pretax SEC PV 10% $17.0 0.7x - 2.0x 0.9x - 1.0x $14.5 - $17.0 $4.1 $18.6 - $21.1
FY 1996 Operating
Cash Flows $3.3 3.9x - 34.3x 5.0x - 6.0x $16.5 - $19.8 $4.1 $20.6 - $23.9
FY 1997 Operating
Cash Flows $3.7 4.3x - 5.1x $15.7 - $18.9 $4.1 $19.8 - $23.0
Market Value To:
FY 1996 After-Tax
Cash Flow $3.6 3.4x - 41.6x 5.0x - 6.5x $18.0 - $23.4
----- ----- ----- -----
Average $13.9 $16.2 $18.4 $21.5
----- ----- ----- -----
Value Per Share
------ ------
Per Share (1,557,369 shares outstanding) $11.79 $13.79
------ ------
</TABLE>
PRINCIPAL FINANCIAL SECURITIES
<PAGE> 21
--------------------
SEABOARD OIL COMPANY
--------------------
SELECTED COMPARABLE COMPANIES
Abraxas Petroleum
Primary areas of operations are in the Permian Basin in west Texas, onshore in
the South Texas Gulf Coast Region, and recently expanded to include western
Canada. As of Fiscal Year Ended December 31, 1995, approximately 98% of the
company's revenues were generated by oil & gas sales. Proved developed reserves
accounted for approximately 77% of total reserves.
Alamco Inc.
Primary areas of operations are in the Appalachian Basin in West Virginia,
Tennessee and Kentucky. As of Fiscal Year Ended December 31, 1995,
approximately 88% of the company's revenues were generated by oil & gas sales
(excluding settlement of gas contract litigation). Proved developed reserves
accounted for approximately 77% of total reserves.
Bellwether Exploration Company
Primary areas of operations are in Texas, Louisiana and the Gulf of Mexico. As
of Fiscal Year Ended December 31, 1995, approximately 56% of the company's
revenues were generated by oil & gas sales. Proved developed reserves accounted
for approximately 76% of total reserves.
Coho Energy
Primary areas of operations are in Louisiana and Mississippi. As of Fiscal Year
Ended December 31, 1995, approximately 100% of the company's revenues were
generated by oil & gas sales. Proved developed reserves accounted for
approximately 81% of total reserves.
PRINCIPAL FINANCIAL SECURITIES
<PAGE> 22
--------------------
SEABOARD OIL COMPANY
--------------------
SELECTED COMPARABLE COMPANIES
Columbus Energy
Primary areas of operations are in Texas, North Dakota, Oklahoma and Montana.
As of Fiscal Year Ended December 31, 1995, approximately 84% of the company's
revenues were generated by oil & gas sales. Proved developed reserves accounted
for approximately 72% of total reserves. As of February 29, 1996, approximately
58% of the common shares outstanding were held by two individuals and two
institutions.
Mallon Resources
Primary areas of operations are in the San Juan Basin in New Mexico. As of
Fiscal Year Ended December 31, 1995, approximately 93% of the company's
revenues were generated by oil & gas sales (excluding deferred revenues).
Proved developed reserves accounted for approximately 72% of total reserves.
Maynard Oil
Primary areas of operations are in Texas and Oklahoma. As of Fiscal Year Ended
December 31, 1995, approximately 93% of the company's revenues were generated
by oil & gas sales. Proved developed reserves accounted for approximately 98%
of total reserves. As of May 21, 1996, approximately 63% of the common shares
outstanding were held by one individual and one institution.
Unit Corporation
Primary areas of operations are in Oklahoma, Texas, Kansas and Arkansas. As of
Fiscal Year Ended December 31, 1995, approximately 59% of the company's
revenues were generated by oil & gas sales. Proved developed reserves accounted
for approximately 87% of total reserves.
Wiser Oil
Primary areas of operations are in Texas, Louisiana, New Mexico and western
Canada. As of Fiscal Year Ended December 31, 1995, approximately 76% of the
company's revenues were generated by oil & gas sales. Proved developed reserves
accounted for approximately 76% of total reserves.
PRINCIPAL FINANCIAL SECURITIES
<PAGE> 23
SECTION 7
PREMIUMS PAID FOR RESIDUAL INTEREST ANALYSIS
PRINCIPAL FINANCIAL SECURITIES
<PAGE> 24
--------------------
SEABOARD OIL COMPANY
--------------------
PREMIUMS PAID FOR RESIDUAL INTEREST ANALYSIS
<TABLE>
<CAPTION>
Seaboard Average Implied
Trading Price Premium Transaction Price
------------- ------- -----------------
<S> <C> <C> <C>
Premium to Price
(four weeks prior to announcement) $6.00(1) 30% $7.80
</TABLE>
- ---------
(1) Mid-Point of Bid/Ask.
PRINCIPAL FINANCIAL SECURITIES
<PAGE> 25
--------------------
SEABOARD OIL COMPANY
--------------------
PREMIUMS PAID FOR RESIDUAL INTEREST ACQUISITION
<TABLE>
<CAPTION>
PRICE
DATE % HELD AT % PER
ANNOUNCED TARGET NAME ACQUIROR NAME DATE ANN SOUGHT SHARE
- --------- ----------- ------------- --------- ------ ------
<S> <C> <C> <C> <C> <C>
03/26/87 Standard Oil Co(British Petroleum Co PLC) BP America Inc(British
Petroleum Co PLC) 54.8 45.2 $73.50
12/06/88 Sage Energy Co Investor 69.0 31.0 $6.50
01/27/89 Ensource Inc(United Meridian Corp) United Meridian Corp 60.2 39.8 $10.50
02/15/89 Enserch Exploration Partners Ltd
(ENSERCH Corp) ENSERCH Corp 87.4 12.6 $13.53
01/06/89 Ocean Drilling & Exploration Co
(Odeco)(Murphy Oil Corp) Murphy Oil Corp 61.2 38.8 $18.00
07/31/90 Freeport-McMoRan Oil and Gas Co
(Freeport-McMoRan Inc) Freeport-McMoRan Inc 81.5 18.5 $10.88
01/03/91 Ocean Drilling & Exploration Co
(Odeco)(Murphy Oil Corp) Murphy Oil Corp 61.1 38.9 $19.39
02/06/91 Hamilton Oil Corp(BHP Holdings(USA)
Inc/Broken Hill Proprietary) BHP Holdings(USA)Inc(Broken Hill
Proprietary Co) 51.7 48.3 $10.00
09/18/91 Arkla Exploration Co(Arkla Inc) Arkla Inc 82.0 18.0 $15.44
02/24/92 Unocal Exploration Corp(Unocal Corp) Unocal Corp 96.0 4.0 $11.68
03/02/92 Grace Energy Corp(WR Grace & Co) WR Grace & Co 83.4 16.6 $19.00
10/09/92 Avalon Corp(Corona Corp) Dundee Bancorp International Inc
(Dundee Bancorp Inc) 83.5 16.5 $3.75
06/17/93 Hodson Energy Resources Corp(Apache Corp) Apache Corp 61.8 38.2 $15.00
04/26/94 Diamond Shamrock Offshore Partners LP
(Maxus Energy) Burlington Resources Inc 87.1 12.9 $1.48
</TABLE>
<TABLE>
<CAPTION>
PREMIUM OVER
PRICE
PRIOR TO
ANNOUNCEMENT
VALUE OF -----------------
DATE TRANSACTION ONE ONE FOUR
ANNOUNCED TARGET NAME ACQUIROR NAME ($ MIL) DAY WEEK WEEKS ATTITUDE STATUS
- --------- ----------- ------------- -------- ---- ---- ----- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
03/26/87 Standard Oil Co(British Petroleum Co PLC) BP America Inc(British
Petroleum Co PLC) $7,857.7 13.3 14.4 33.3 Friendly Completed
12/06/88 Sage Energy Co Investor $22.2 2.0 6.1 4.0 Friendly Completed
01/27/89 Ensource Inc(United Meridian Corp) United Meridian Corp $28.0 71.4 78.7 82.6 Friendly Completed
02/15/89 Enserch Exploration Partners Ltd
(ENSERCH Corp) ENSERCH Corp $162.3 20.2 21.6 40.5 NtAppl Completed
01/06/89 Ocean Drilling & Exploration Co
(Odeco)(Murphy Oil Corp) Murphy Oil Corp $300.0 8.3 2.9 Unlic Withdrawn
07/31/90 Freeport-McMoRan Oil and Gas Co
(Freeport-McMoRan Inc) Freeport-McMoRan Inc $16.2 36.0 42.7 47.5 Friendly Completed
01/03/91 Ocean Drilling & Exploration Co
(Odeco)(Murphy Oil Corp) Murphy Oil Corp $391.8 14.0 24.1 9.2 Hostile Completed
02/06/91 Hamilton Oil Corp(BHP Holdings(USA)
Inc/Broken Hill Proprietary) BHP Holdings(USA)Inc
(Broken Hill Proprietary Co) $524.3 18.5 21.2 31.1 Friendly Completed
09/18/91 Arkla Exploration Co(Arkla Inc) Arkla Inc $92.6 8.3 28.6 30.0 Friendly Completed
02/24/92 Unocal Exploration Corp(Unocal Corp) Unocal Corp $117.5 18.3 18.3 22.9 Friendly Completed
03/02/92 Grace Energy Corp(WR Grace & Co) WR Grace & Co $77.3 24.6 21.6 7.8 Friendly Completed
10/09/92 Avalon Corp(Corona Corp) Dundee Bancorp International Inc
(Dundee Bancorp Inc) $7.8 42.9 42.9 50.0 Friendly Completed
06/17/93 Hodson Energy Resources Corp(Apache Corp) Apache Corp $39.3 26.3 27.7 25.0 Friendly Completed
04/26/94 Diamond Shamrock Offshore Partners LP
(Maxus Energy) Burlington Resources Inc $42.6 -3.1 -0.4 5.4 Friendly Completed
Source: Securities Data Company, Inc. (201) 622-3100 Average [30%]
</TABLE>
Principal Financial Securities
<PAGE> 26
SECTION 8
BOOK VALUE PER SHARE
PRINCIPAL FINANCIAL SECURITIES
<PAGE> 27
--------------------
SEABOARD OIL COMPANY
--------------------
BOOK VALUE ANALYSIS
<TABLE>
<CAPTION>
$MM Per Share(1)
--- ------------
<S> <C> <C>
FYE '96 Book Value $14.4 $9.25
FYE '97 Book Value Estimate(2) $13.8 $8.87
Average $9.06
-----
</TABLE>
- ---------
(1) 1,557,369 shares outstanding as of May 6, 1996.
(2) Company Prepared Forecast - Discounted at 15%.
PRINCIPAL FINANCIAL SECURITIES
<PAGE> 1
PROXY STATEMENT
SEABOARD OIL CO.
ANNUAL MEETING OF STOCKHOLDERS TO BE HELD OCTOBER 24, 1996
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THE
INFORMATION CONTAINED IN THIS DOCUMENT. ANY
REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
<PAGE> 2
INTRODUCTION
TIME, DATE AND PLACE OF ANNUAL MEETING
This Proxy Statement is furnished in connection with the solicitation
of proxies by the Board of Directors of Seaboard Oil Co., a Delaware
corporation (the "Company"), for use at the annual meeting (the "Meeting") of
the Company's stockholders (the "Stockholders") to be held on Thursday, October
24, 1996, at 9:00 a.m., local time, at the Company offices, 3100 North "A"
Street, Building B, Midland, Texas 79705 and at any adjournments thereof.
ELECTION OF DIRECTORS; PROPOSED MERGER
In addition to the election of Directors, Stockholders will consider
and vote upon a proposal to adopt an Agreement and Plan of Merger dated June
28, 1996 (the "Merger Agreement") among the Company, Seaboard Acquisition
Partners, Inc. ("SAP") and Seaboard Midland, Inc. ("SMI") .
The Merger Agreement provides, subject to the approval of Stockholders
at the Meeting, for the merger of SMI with and into the Company, with the
Company being the surviving corporation (the "Merger"). Since SAP owns
approximately 72% of the shares of common stock, $.01 par value (the "Common
Stock"), of the Company (the "Shares") and has indicated its intention to vote
in favor of the Merger, adoption of the Merger Agreement is assured if SAP
votes in its favor. Pursuant to the Merger each outstanding Share (other than
Shares held by the Company as treasury stock, Shares held by SAP or Shares held
by Stockholders who do not vote in favor of the Merger Agreement and who
perfect their appraisal rights under Section 262 of the General Corporation
Laws of Delaware (the "DGCL"), will be converted into the right to receive
$9.75 per share in cash (the "Merger Consideration"). A copy of the Merger
Agreement is attached hereto as Appendix I.
RECORD DATE; VOTING
The Board of Directors of the Company has fixed the close of business
on August 30, 1996, as the Record Date (herein so called) for determining
Stockholders who will be entitled to notice of and to vote at the Meeting. On
the Record Date, there were 1,475,369 Shares outstanding and entitled to vote,
held by approximately 2,118 holders of record.
Holders of record of Shares are entitled to cast one vote per Share,
either in person or by proxy, on each matter presented to the Stockholders at
the Meeting. Approval and adoption of the Merger Agreement will require the
affirmative vote of the holders of a majority of the outstanding Shares.
Assuming SAP votes its Shares in favor of the Merger Agreement, adoption of the
Merger is assured. Approval of at least a majority of the Stockholders
unaffiliated with SAP is not required for approval of the Merger.
If a quorum is present, the affirmative vote of the holders of the
plurality of the Shares entitled to vote is required to elect Directors. The
Company's Certificate of Incorporation does not authorize cumulative voting for
Directors. All other matters properly coming before the Meeting will be
decided by the affirmative vote of a majority of the Shares represented at the
Meeting, except as otherwise required by law or by the Company's Certificate of
Incorporation or bylaws.
PROXIES
Shares represented by properly executed proxies, unless previously
revoked, will be voted at the Meeting in accordance with the instructions
thereon. A Stockholder may revoke his proxy at any time before such proxy is
voted by giving a later proxy or by giving written notice of such revocation to
the Secretary of the Company at or prior to the Meeting. Attendance at the
Meeting will not of itself constitute the revocation of a proxy.
1
<PAGE> 3
If any proxies are received without any direction as to how Shares are
to be voted, the Shares represented by such proxies will be voted for approval
and adoption of the Merger Agreement, in favor of the nominees for Directors
named herein and in the discretion of the persons named as proxies upon any
other business that may properly come before the meeting or any adjournments
thereof; provided, however, that such discretionary authority may not be used
to vote for an adjournment if the proxy contains a vote against the Merger.
The votes will be counted by one or more inspectors appointed by the
Board of Directors, who will determine, among other things, the number of votes
necessary for the Stockholders to take action in accordance with the foregoing
requirements and the votes cast for and against, and votes withheld, with
respect to each matter. With respect to such determinations, abstentions and
broker non-votes will not be considered affirmative votes on a matter.
However, failure to indicate a vote or abstention on a properly executed proxy
will be counted as an affirmative vote for the Merger and for the nominees
named herein.
The Company will bear the costs of solicitation of proxies for the
Meeting. In addition to solicitation by mail, officers and regular employees
of the Company may solicit proxies from Stockholders by telephone, telegram,
or personal interview. Such persons will receive no additional compensation
for such services.
OTHER MATTERS
The executive offices of the Company are located at 3100 North "A"
Street, Building B, Midland, Texas 79705, and its telephone number is (915)
684-7005.
The information contained in this Proxy Statement with respect to SAP
and SMI has been supplied by SAP. All other information, except as otherwise
specified, has been supplied by the Company.
This Proxy Statement and the enclosed proxy are first being mailed to
Stockholders on or about September 27, 1996.
------------------------
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROXY STATEMENT, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED.
2
<PAGE> 4
SUMMARY
The following is a summary of certain information contained elsewhere
in this Proxy Statement. The following summary is not intended to be a
complete description of the matters covered in this Proxy Statement and is
subject to and qualified in its entirety by reference to the more detailed
information contained elsewhere in this Proxy Statement including the
Appendices hereto. Stockholders are urged to read carefully the entire Proxy
Statement, including the Appendices.
GENERAL
Time, Place and Date of the The Meeting of Stockholders of the Company
Meeting . . . . . . . . . . will be held at the executive offices of the
Company at 3100 North "A" Street, Building B,
Midland, Texas, on Thursday, October 24, 1996
at 9:00 a.m., local time.
Record Date . . . . . . . . Holders of record of Shares at the close of
business on August 30, 1996 are entitled to
notice of and to vote at the Meeting. On that
date, there were 1,475,369 Shares outstanding,
including 369,794 shares held by 2,111
unaffiliated Stockholders. Each Share is
entitled to cast one vote with respect to the
Merger at the Meeting. See "INTRODUCTION -
RECORD DATE; VOTING."
Purpose of the Meeting;
Quorum; At the Meeting, Stockholders will: (1) vote on
Vote Required . . . . . . . the election of six Directors; and (2)
consider and vote upon a proposal to adopt the
Merger Agreement, a copy of which is attached
as Appendix I to this Proxy Statement. See
"INTRODUCTION - ELECTION OF DIRECTORS;
PROPOSED MERGER." The presence at the
Meeting, in person or by proxy, of a majority
of the outstanding Shares is necessary to
constitute a quorum at the Meeting. Directors
will be elected by a plurality of votes of
Shares represented in person or by proxy. The
adoption of the Merger Agreement requires the
affirmative vote of the holders of a majority
of the outstanding Shares. SAP, which owns
1,055,683 Shares constituting approximately
72% of the outstanding Shares as of the Record
Date, has indicated that it intends to vote
its Shares in favor of adoption of the Merger.
In addition, insiders and other affiliates of
the Company own an additional 49,892 Shares
constituting approximately 3.4% of the
outstanding Shares (for a total of 1,105,575
Shares, or approximately 75%, held by SAP and
the insiders and other affiliates), and such
persons have expressed an intention to vote
for the Merger. See "PRINCIPAL HOLDERS OF
SECURITIES" and "ELECTION OF DIRECTORS."
Unless SAP should change its intention,
consummation of the Merger will be assured.
Adoption of the Merger Agreement does not
require the approval of a majority of the
Shares held by Stockholders not affiliated
with SAP, primarily because the unaffiliated
stockholders holding a majority of such Shares
have not attended or voted at, in person or by
proxy, any of the Company's annual meetings
since 1991 and the Company has no reason to
believe holders of a majority of such shares
will attend or vote at the meeting. See
"INTRODUCTION - RECORD DATE; VOTING."
3
<PAGE> 5
Structure of the Merger . . Pursuant to the Merger Agreement, SMI, a
wholly owned subsidiary of SAP, will merge
with and into the Company with the Company
being the surviving corporation as a
wholly-owned subsidiary of SAP. Each
outstanding Share (except those Shares held
by the Company as treasury Shares or owned by
SAP or by Stockholders who perfect their
dissenters' rights under the DGCL), will be
converted into the right to receive $9.75 in
cash (the "Merger Consideration"). Each
outstanding Share owned by SAP or held by the
Company as treasury stock will be canceled
without consideration. See "THE MERGER
AGREEMENT - CONSIDERATION TO BE RECEIVED BY
STOCKHOLDERS OF THE COMPANY."
Plans for the Company After Upon consummation of the Merger, SAP intends
the Merger . . . . . . . . to continue the Company's existence and
business as an independent oil and gas
company. See "SPECIAL FACTORS - CERTAIN
RESULTS OF MERGER."
Certain Effects of the As a result of the Merger, the entire equity
Merger . . . . . . . . . . interest in the Company will be owned by SAP.
According to the terms of the Merger
Agreement, each Share (except treasury shares,
Shares owned by SAP, and Shares with respect
to which dissenters' rights have been
perfected) will be converted into the right to
receive the Merger Consideration. As a
result, the Shares will no longer represent an
equity interest in the Company and will no
longer share in future earnings or losses of
the Company, the risks associated with such
earnings and losses, or the potential to
realize greater value in the event that
strategic acquisitions, divestitures or other
extraordinary corporate transactions are
pursued by the Company in the future. Neither
the Company nor SAP have any ongoing
negotiations or intentions to acquire any
other companies, divest any significant assets
of the Company or engage in any other
extraordinary corporate transactions in the
foreseeable future. Following the Merger, the
Company intends to continue its current
business strategy, including without
limitation, exploratory and development
drilling and pursuing acquisitions of oil and
gas properties in the ordinary course of
business. Following the Merger, the Common
Stock will be eligible for termination of
registration under the Securities Exchange Act
of 1934 (the "Exchange Act"), and the Company
will no longer be obligated to file reports
under the Exchange Act. See "SPECIAL
FACTORS - CERTAIN RESULTS OF MERGER."
4
<PAGE> 6
Recommendation of the
Special Committee and the The Special Committee (herein so called),
Board of Directors . . . . consisting of three Directors of the Company
(Edward E. Runyan, Robert L. Hollis and Gary
B. Gilliam) who are not officers, directors or
equity owners of SAP, has unanimously
concluded that the Merger, including the price
of $9.75 in cash for each Share, is fair to
and in the best interests of the Stockholders
other than SAP (the "Minority Stockholders"),
and recommended approval of the Merger to the
Board. The Special Committee's recommendation
is based upon the following factors, among
others: (i) the opinion of Principal Financial
Securities, Inc., dated June 5, 1996; (ii) the
Committee's determination that the Merger
Consideration represents a fair price given
the Company's recent results and future
prospects; (iii) the illiquidity of the
Shares; and (iv) the fact that the Merger
Consideration represents a significant premium
in relation to the historic price of the
Common Stock. After considering the
recommendation of the Special Committee, the
Board of Directors unanimously approved the
Merger Agreement and recommends that
Stockholders vote FOR the proposal to adopt
the Merger Agreement. Although no member of
the Special Committee owns any interest in, or
has any affiliation with, SAP, Edward E.
Runyan and Robert L. Hollis are the son and
brother-in-law, respectively, of E.E. Runyan,
the president and a stockholder of SAP, and
Gary B. Gilliam, the President of the Company,
is expected to continue his employment with
the Company following the Merger. See
"SPECIAL FACTORS - BACKGROUND OF THE MERGER,"
"SPECIAL FACTORS - FAIRNESS ANALYSIS AND
RECOMMENDATIONS OF THE SPECIAL COMMITTEE AND
THE BOARD," "SPECIAL FACTORS - CONFLICTS OF
INTEREST," and "SPECIAL FACTORS - PROCEDURAL
FAIRNESS."
Opinion of Financial Principal Financial Securities, Inc. ("PFS"),
Advisor. . . . . . . . . . . . an independent investment banking firm, has
delivered its opinion to the Special Committee
dated June 5, 1996 that the Merger is fair to
the Minority Stockholders from a financial
point of view. A copy of such opinion is
attached hereto as Appendix II. See
"SPECIAL FACTORS - OPINION OF FINANCIAL
ADVISOR."
5
<PAGE> 7
Interests of Certain Persons Mr. E.E. Runyan (Chairman of the Board, Chief
in the Merger . . . . . . . Executive Officer and a Director of the
Company) is a stockholder, officer and
director of SAP, and Messrs. Robert L. Marolda
and Edward P. Bliss (Directors of the Company)
are officers and directors of SAP. It should
also be noted that while the Company's
remaining Directors are not affiliated with
and own no interest in SAP, Edward E. Runyan
and Robert L. Hollis are the son and
brother-in-law, respectively, of E.E. Runyan
and Gary B. Gilliam is employed by the Company
and is expected to be employed by the Company
following the Merger. See "SPECIAL FACTORS -
CONFLICTS OF INTEREST." In addition, all of
the current executive officers and directors
of the Company (6 persons) will receive as a
result of the Merger an aggregate of
$1,114,297 (those greater than $100,000 being
E.E. Runyan, $300,710; Robert L. Marolda,
$198,132; Robert L. Hollis, $188,382: Edward
P. Bliss, $176,438; and Gary B. Gilliam,
$157,162). $486,447 of such amount will be
Merger Consideration paid for Shares owned by
such persons and $627,850 will be paid in
exchange for the cancellation of stock options
and other rights to receive shares of Common
Stock under the Company's employee benefit
plans. See "THE MERGER AGREEMENT -
CONSIDERATION TO BE RECEIVED BY STOCKHOLDERS
OF THE COMPANY" and "REMUNERATION OF
MANAGEMENT - EMPLOYEE BENEFIT PLANS." Such
persons will also continue in their current
positions as officers and directors of the
Company following the Merger on the same terms
as are currently in place. There are no
employment agreements between the Company and
its executive officers. Other than as
specified herein, such persons do not receive
any other benefits as a result of the Merger.
The benefits to be received by such persons
were not considered by the Board of Directors
to be a material factor in the approval of the
Merger.
Federal Income Tax The receipt of cash for Shares in the Merger
Consequences . . . . . . . (or pursuant to the exercise of dissenters'
rights) will be a taxable transaction for
federal income tax purposes under the Internal
Revenue Code of 1986, as amended (the "Code"),
and also may be a taxable transaction under
applicable state, local and other tax laws.
See "SPECIAL FACTORS - CERTAIN FEDERAL INCOME
TAX CONSEQUENCES OF THE MERGER."
Financing of the Merger . . The total amount of funds required to pay the
Merger Consideration to the Minority
Stockholders and the consideration for
cancellation of options and other employee
benefit plan rights, as well as to pay related
Company fees and expenses in connection with
the Merger, is expected to be approximately
$5.1 million. These funds will be provided
from a credit arrangement with Texas Commerce
Bank pursuant to the Commitment attached
hereto as Appendix III, and from the Company's
general working capital. See "FINANCING OF
THE MERGER."
THE MERGER AGREEMENT
Effective Time of the The Merger will become effective upon the
Merger . . . . . . . . . . filing of a Certificate of Merger with the
Secretary of State of Delaware or at such time
as is specified in such Certificate of Merger
(the "Effective Time"). The filing will occur
after all conditions to the Merger contained
in the Merger Agreement have been satisfied or
waived. The Company, SAP and SMI anticipate
that the Merger will be consummated as
promptly as practicable following the Meeting.
See "THE MERGER AGREEMENT - EFFECTIVE TIME OF
THE MERGER."
6
<PAGE> 8
Conditions to Consummation The respective obligations of the Company, on
of the Merger . . . . . . . the one hand, and SAP and SMI, on the other
hand, to consummate the Merger are subject to
the satisfaction or waiver at or prior to the
Effective Time of certain conditions,
including the following material conditions
(i) adoption of the Merger Agreement by the
holders of a majority of the outstanding
Shares at the Meeting, (ii) the absence of any
injunction or other order that would prevent
consummation of the Merger, (iii) the receipt
of all other required authorizations, consents
and approvals of governmental authorities and
third parties, (iv) the performance of and
compliance with all agreements and obligations
of the parties under the Merger Agreement and
(v) the material truth and correctness of all
representations and warranties of the parties
to the Merger Agreement.
The obligations of SAP and SMI to consummate
the Merger are further subject to certain
additional conditions, including the following
material conditions (i) SAP having entered
into a credit arrangement with the Company and
Texas Commerce Bank for a sum sufficient to
pay the Merger Consideration and other payment
obligations in accordance with the commitment
attached hereto as Appendix III; (ii) the
number of Shares with respect to which the
holders thereof have exercised their
dissenters' rights not exceeding 10% of the
total number of Shares outstanding; and (iii)
no occurrence of a material adverse change in
the business, financial condition, operations
or results of operations of the Company.
The Company's obligation to consummate the
Merger is further subject to the receipt by
the Special Committee, on the closing date for
the Merger (if requested by the Special
Committee in its sole discretion), of an
opinion (or a confirmation of such an opinion
delivered at an earlier date) of PFS, dated as
of such closing date, to the effect that the
Merger Consideration is fair, from a financial
point of view, to the Minority Stockholders.
Because PFS was engaged by the Special
Committee, only the Special Committee may make
such a request. In determining whether to
request such an opinion or confirmation, the
Special Committee will consider many factors,
including the number of Shares held by
Minority Stockholders voted for and against
the Merger, the of Shares with respect to
which dissenters' rights have been exercised,
changes in the business, properties or results
of operations of the Company, and the cost to
the Company of obtaining such an opinion or
confirmation. Stockholders should be aware
that the Committee may determine not to
request an opinion or confirmation from PFS at
closing even though events may occur between
the date of the initial PFS opinion and
closing which could result in a material
change in the financial condition of the
Company. Because the value of the Company is
substantially dependent upon the quantity of
its oil and gas reserves and production, the
Special Committee intends to request an
opinion or confirmation from PFS at closing of
the Merger only in the event of a material
change, known by the Committee, in the
quantity of the Company's oil and gas reserves
or production.
7
<PAGE> 9
The conditions identified above include all of
the material conditions of the Merger. All
such conditions are waivable. The Company,
SAP and SMI anticipate that all the conditions
will be satisfied, or if not satisfied, waived
by the appropriate party except that in the
event PFS advises the Special Committee that
PFS is unable to deliver an opinion or
confirmation at closing because PFS does not
feel that the Merger is fair, the Company does
not intend to waive that condition to closing.
Therefore, if the Company does not waive that
condition for whatever reason, the Merger
Agreement will be terminated and no Merger
Consideration will be paid to the
Stockholders. The Board will consider the
best interests of Minority Stockholders in
making a determination with respect to that
condition. However, because that condition
can be waived by the Company, it may not
provide substantive protection to the
interests of the Minority Stockholders. See
"-TERMINATION OF THE MERGER AGREEMENT" and
"THE MERGER AGREEMENT - CONDITIONS TO
CONSUMMATION OF THE MERGER."
In the event the condition of receiving an
opinion or confirmation is waived, but
circumstances change or events occur
subsequent to the date of this Proxy Statement
which cause the Board of Directors or the
Special Committee to determine that they no
longer believe that the Merger is fair to the
Minority Stockholders from a financial point
of view, the Company will re-solicit the votes
of the stockholders, disclosing the change in
position and the reasons for the change.
Termination of the Merger The Merger Agreement may be terminated and the
Agreement . . . . . . . . . Merger may be abandoned at any time before the
Effective Time (notwithstanding approval of
the Merger Agreement by the Stockholders of
the Company, including approval of the
Minority Stockholders owning a majority of the
Shares held by Minority Stockholders) by
mutual written consent of the Company, SAP and
SMI, and by either the Company or SAP upon the
occurrence of certain events described under
"THE MERGER AGREEMENT - TERMINATION." If the
Merger is terminated, the stockholders will
likely be subject to a continuation of the
limited, but volatile, market for the Shares.
See "SPECIAL FACTORS - BACKGROUND OF THE
MERGER" and "STOCK PRICES AND DIVIDENDS".
Amendments to the Merger The Merger Agreement may not be amended before
Agreement . . . . . . . . . the Effective Time except by action of the
Company, SAP and SMI set forth in a written
instrument signed on behalf of each of the
parties. The Board of Directors may not
authorize an amendment on behalf of the
Company unless it receives the recommendation
of the Special Committee to do so. After
adoption of the Merger Agreement by the
Stockholders of the Company at the Meeting and
without the further approval of the
Stockholders, no amendment to the Merger
Agreement may be made that will change (i) the
Merger Consideration, or (ii) any other terms
and conditions of the Merger Agreement if any
of such changes would adversely affect the
Stockholders of the Company. See "THE MERGER
AGREEMENT - AMENDMENTS."
8
<PAGE> 10
Dissenters' Rights . . . . Holders of Shares who follow the procedures
set forth in Section 262 of the DGCL will be
entitled to have their Shares appraised by the
Delaware Chancery Court and to receive payment
in cash of the "fair value" of such Shares. A
holder of Shares wishing to exercise such
holders' appraisal rights must strictly comply
with the provisions of Section 262 of the
DGCL, including, but not limited to, (i)
voting against, abstaining or not voting with
respect to the adoption of the Merger
Agreement, and (ii) delivering to the Company,
before the vote on the Merger Agreement at the
Meeting, a written demand for appraisal of
such holder's Shares. Any Stockholder
contemplating the exercise of dissenters'
rights should carefully review Section 262 of
the DGCL, particularly the procedural steps
required to perfect dissenters' rights. See
"DISSENTERS' RIGHTS" and Appendix IV, which
contains the text of Section 262 of the DGCL.
Exchange of Certificates . If the Merger is consummated, the Company will
send instructions to Stockholders regarding
the surrender of stock certificates.
Stockholders should NOT submit any stock
certificates at the present time. See "THE
MERGER AGREEMENT - EXCHANGE OF STOCK
CERTIFICATES."
9
<PAGE> 11
SUMMARY SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
SEABOARD ACQUISITION
THREE MONTHS PARTNERS, INC.(1)
ENDED JUNE 30, YEARS ENDED MARCH 31, PRO FORMA
---------------------- ---------------------------- -------------------------------
1996 1995 1996 1995 1994 THREE MONTHS YEAR ENDED
---- ---- ---- ---- ---- ENDED MARCH 31,
JUNE 30, 1996 1996
------------- -------------
(unaudited) (unaudited)
(in thousands, except ratios and per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenues $ 1,723 $ 1,518 $ 6,048 $ 4,366 $ 3,750 $ 1,723 $ 6,048
Operating income 402 520 1,571 613 161 402 1,657
Net income 480 612 1,801 824 207 482 1,888
Net income available
to common shareholders 480 612 1,801 824 207 482 1,888
Preferred stock dividends -- -- -- -- -- -- --
Common stock dividends -- -- -- -- -- -- --
Earnings per common share
Primary $ 0.33 $ 0.41 $ 1.22 $ 0.68 $ 0.27 $48.20(2) $188.80(2)
Fully diluted N/A N/A N/A N/A N/A N/A N/A
Ratio of earnings to fixed 192.93:1 98.03:1 91.05:1 31.52:1 8.39:1 161.67:1 83.09:1
charges
BALANCE SHEET DATA (AT PERIOD
END):
Current assets $ 5,130 $ 3,133 $ 4,587 $ 4,461 $ 1,579 $ 714
Total assets 15,572 13,804 14,919 13,750 8,860 9,450
Current liabilities 663 472 511 1,030 274 663
Long-term obligations -- -- -- -- -- 193
Total stockholders' equity 14,909 13,332 14,408 12,720 8,586 8,594
Book value per common share $10.13 $ 8.96 $ 9.82 $ 8.55 $11.45 $859.40(2)
</TABLE>
- --------------------------------------
(1) The pro forma selected financial data of SAP has been prepared as if
the Merger had been completed on June 30, 1996 for purposes of pro
forma balance sheet data, and on April 1, 1995 for purposes of pro
forma statement of operations data and reflects pro forma adjustments
to the historical combined amounts for the following items:
. Borrowings of $5.0 million under a credit agreement with Texas
Commerce Bank, proceeds of which will be used for Merger
Consideration to the Minority Stockholders who currently hold
365,794 shares of the Company's common stock for $3.6 million,
purchase of 49,892 shares of the Company's common stock held
by insiders and other affiliates for $0.5 million, the
cancellation of employee stock options and benefit plan rights
totalling $0.6 million.
10
<PAGE> 12
. SAP intends to use estimated consolidated cash of $4.5 as of
the Merger date plus excess proceeds from the credit agreement
of $0.3 million (as described above) to repay $4.8 million in
borrowings under the credit agreement with Texas Commerce
Bank. Consolidated cash consists of $4.4 million from the
Company and $0.1 million from SAP. SAP will own 100% of the
Common Stock of the Company after the Merger, and, there being
no restrictions on the dividend or use of the Company's cash
for payment of debt, substantially all of consolidated cash
will be available for and will be used to repay consolidated
debt.
. Elimination of interest income during the pro forma periods.
. Interest expense on debt not repaid from consolidated cash.
. Adjust depreciation, depletion, and amortization ("DD&A") to
reflect the consolidated basis in amortizable assets in the
pro forma financial statements of SAP.
The pro forma information presented above assumes that no additional
consideration will be paid to dissenting shareholders, if any.
Additional Merger Consideration will be paid only upon perfection of
dissenter's rights. The Company believes the Merger Consideration is
fair and that no dissenter's rights will be perfected. However, if
the Minority Stockholders (assuming the maximum of 365,794 shares)
received an additional $1.00 per share in Merger Consideration,
interest expense and DD&A expenses would be increased $25,606 ($2.56
per share) and $65,843 ($6.58 per share) during the year ended March
31, 1996. Interest expense and DD&A expense would be increased $6,402
($6.40 per share) and $16,461 ($1.65 per share) during the three
months ended June 30, 1996. Both long-term obligations and oil and
gas properties would increase $365,794 for each incremental $1.00 per
share in Merger Consideration reflecting the increased consideration
for the purchase of minority interest.
(2) Pro forma earnings per share is calculated based on the 10,000 common
shares of SAP outstanding during the pro forma periods. The same
number of shares will be outstanding upon consummation of the Merger.
If earnings per share were based on the historical weighted average
outstanding shares of the Company during the pro forma periods ended
March 31, 1996 and June 30, 1996, earnings per share would have been
$1.29 and $0.33 per share, respectively.
SPECIAL FACTORS
BACKGROUND OF THE MERGER
The Company was organized in 1988 (under the name Mid-America
Resources, Inc.) for the purpose of acquiring and consolidating the assets of
Mid-America Petroleum, Inc. and certain of its subsidiaries (collectively
"MAP"), as well as 20 oil and gas partnerships of which MAP served as general
partner (collectively, the "Partnerships"). MAP and the Partnerships were the
subject of a consolidated bankruptcy proceeding in the United States Bankruptcy
Court for the Northern District of Texas. A Reorganization Plan was confirmed
in February 1989. The Company received the Final Decrees closing the
bankruptcy proceeding for MAP and the Partnerships during September 1991 and
April 1992, respectively.
In connection with the Reorganization Plan, Richland Resources
Corporation ("RRC"), the Plan proponent, was issued 100,000 shares of the 8%
cumulative convertible preferred stock (the "Preferred Stock") of the Company.
Although prior to its bankruptcy MAP was a privately held entity, the majority
of the Partnerships were publicly held pursuant to registration statements
which had been filed with the Securities and Exchange Commission in connection
with the sale of limited partnership interests therein. The unsecured
creditors of MAP and the Partnerships and the limited partners of the
Partnerships were issued Common Stock of the Company to complete the Plan,
which resulted in the creation of thousands of "involuntary" stockholders of
the Company. The Common Stock was registered, and the Company became a public
company, under the Exchange Act pursuant to a Form 10 filed in July 1990.
In January 1991, SAP acquired from RRC all of the Preferred Stock
which automatically converted into Common Stock in March 1992. Giving effect
to the conversion, the purchase price per share for the 228,391 shares of
Common Stock acquired by SAP from RRC was $9.48, for an aggregate purchase
price of $2,164,000. Subsequently, SAP made a tender offer for shares of
Common Stock at an offering price of $5.50 per share, and acquired 125,843
shares as a result of that tender offer. Following the conversion and the
tender offer, SAP owned approximately 45% of the Common Stock then outstanding.
Effective September 15, 1992, the Company's name was changed to its present
name. SAP also acquired an additional 701,449 shares of Common Stock at $4.61
per share pursuant to a rights offering by the Company in 1994, increasing its
ownership percentage to in excess of 70% of the outstanding Common Stock.
11
<PAGE> 13
Since the Company became a public company, the Shares have failed to
attract any active trading market. The Shares have been quoted on the Nasdaq
"small cap" market, and have consistently failed to meet the criteria for
listing on any more recognized exchange. Trading activity in the Shares has
been extremely light, as shown in the following table.
FISCAL YEAR ENDED NUMBER OF SHARES TRADED
----------------- -----------------------
March 31, 1996 62,580
March 31, 1995 154,554
March 31, 1994 131,213
March 31, 1993 84,041
In addition to the absence of any active trading market, the Shares
have traded in a relatively narrow range of $3.50 to $6.50 over this four year
period. Because of the "involuntary" nature of many of the original
stockholders, several stockholders have been permanently "lost" since mailings
by the Company to such persons have been returned to the Company by the postal
service for several years, and their Shares have already been abandoned to
various state officials pursuant to applicable abandoned property laws. As of
June 1, 1996, the Company's transfer agent indicated that, of approximately
2,137 Stockholders of record, an additional 46 (holding about 4,964 Shares) are
also lost. If the Merger is approved, the Merger Consideration to be paid with
respect to shares held by the "lost" stockholders will be paid to appropriate
public officials pursuant to applicable abandoned property laws. See "THE
MERGER AGREEMENT - EXCHANGE OF STOCK CERTIFICATES." An additional 1,262
Stockholders, representing 3.3% of the outstanding Shares, were, as of June 1,
holders of "odd lots" (ownership of less than 100 shares). In 1991, the
Company conducted an odd-lot tender offer at an offering price of $5.50 per
share to provide an opportunity for the stockholders holding fewer than 100
Shares to dispose of such Shares when very little public market existed for the
Shares and to reduce the Company's costs associated with stockholder
communication. The Company acquired a total of 31,125 shares of Common Stock
pursuant to the odd-lot tender offer. Given the Company's historic stock
trading volume, the Shares owned by the odd lot holders are effectively
illiquid.
The combination of low trading volume and the limited number of market
makers (2) for the Common Stock result in precipitous changes in the price of
the Common Stock. For example, the Wall Street Journal reported that on March
26, 1996 a total of 100 Shares were traded. The 100 Shares traded resulted in
a decrease of the Common Stock's closing price from $6.25 to $5.00, or a
decrease of 20%. Similarly, in May 1996, approximately 2,400 Shares were
traded in three transactions, over a 5 day period, resulting in an aggregate
increase in the closing price for the Common Stock from $5.25 to $8.00, a 52%
increase based upon transactions involving only approximately 0.2% of the
outstanding Shares. The Company believes such extreme percentage fluctuations
on insignificant volume simply provides further evidence that effectively there
exists no meaningful market for the Common Stock which is reflective of the
Company's underlying value.
The Company estimates that it spends approximately $100,000 on an
annual basis on costs solely related to complying with requirements of being a
publicly held entity, including legal, accounting, outside engineering,
printing and mailing costs, without regard to the Company's internal general
and administrative expenditures. Given: (1) SAP's approximate 72% ownership of
the Shares; (2) the limited trading activity in the Shares; (3) the lack of any
foreseeable event that would change the trading pattern for the Shares; and (4)
the cost associated with remaining a publicly held entity, the Board of
Directors authorized the creation of the Special Committee in February 1996 to
explore a "cash merger" pursuant to which: (a) the Minority Stockholders could
receive cash which was more representative of the value of their Shares than
the values consistently reflected by the securities market; and (b) the cost
and expense of being a publicly held entity would be eliminated. For
additional information concerning the organization of the Special Committee,
please see "-PROCEDURAL FAIRNESS."
12
<PAGE> 14
Both the Company and SAP believe that the value of the Company, based
on the book value, per Share has consistently been greater than the price
established by the limited market activity of the Common Stock. See "STOCK
PRICES AND DIVIDENDS." When SAP acquired the Preferred Stock from RRC, SAP
paid an effective purchase price, giving effect to the conversion of the
Preferred Stock to Common Stock, of $9.48 per share of Common Stock which was
the approximate book value per share of Common Stock at that time. The book
value, ranging from $8.55 to $11.45 per share over the past five years, has
consistently been higher than the market price, resulting in a belief that the
market price did not reflect the underlying value of the Company. In addition,
the market price for the Common Stock has not changed materially in response to
changes in the Company's business and operations or general conditions in the
oil and gas industry, indicating that the market price has not reflected
changes in the underlying value. For example, the Company's oil and gas
reserves have been increased without the Company incurring any long-term debt,
earnings per share have generally increased over the period, and the price for
oil and gas has fluctuated significantly, both up and down, all with little or
no change reflected in the market price of the Common Stock. The Merger
Consideration represents a significant premium over the historic market price,
which is approximately $5.25 per share, see "STOCK PRICES AND DIVIDENDS," and
is higher than the average equity book value per share for fiscal years ended
1996 and (estimated) 1997 of $9.20 as determined by PFS (calculated as if the
shares of Common Stock subject to outstanding options and other employee
benefit plan rights were outstanding). The Company's financial statements show
a book value, calculated without taking into account benefit plan shares, at
March 31, 1996 of $9.82 per share and at June 30, 1996 of $10.13 per share.
PFS calculated the value of the Company utilizing a variety of methods of
valuation, and determined that $9.75 per share was a fair value. See "-OPINION
OF FINANCIAL ADVISOR." The Company and SAP have no reason to believe that such
value does not represent a fair value. See "-FAIRNESS ANALYSIS AND
RECOMMENDATIONS OF THE SPECIAL COMMITTEE AND THE BOARD" and "FAIRNESS ANALYSIS
OF SAP AND SMI."
The Special Committee considered the factors discussed above and the
potential terms of the Merger. As part of its analysis, the Special Committee
sought the assistance of an investment banking firm in determining the fair
value of the Shares. The Special Committee met with four investment banking
firms from March 14, 1996 to March 21, 1996. All of the firms interviewed were
unaffiliated and had no prior relationship with the Company or SAP. Some of
the criteria used by the Special Committee in selecting an investment banker
included the proposed valuation method(s) utilized by each firm, the
assumptions made, the firm's qualifications and the costs and fees charged by
the firm. No written materials relating to the value of the Company were
delivered by any of the investment banking firms to the Special Committee
during the interview process. During the selection process, each of the firms
orally advised the Special Committee of a preliminary range of prices for the
Common Stock, which ranges were from a low of $6.00 to $10.00 to a high of
$10.50 to $12.00. The preliminary range provided by PFS was between those high
and low ranges. The firms did not advise the Committee of the basis for or
analysis resulting in such preliminary information. Each firm made it clear
that such preliminary information was provided only for the Committee's
consideration in the selection process, that it may not accurately reflect the
value of the Common Stock and that any valuation would require in-depth
analysis of the Company following engagement of that firm by the Committee.
Because of its preliminary nature, this information was not considered by
either the Special Committee or the Board in connection with its analysis or
recommendations. As a result of this process, the Special Committee selected
PFS to provide an opinion as to the fairness of the Merger, from a financial
point of view, to the Minority Stockholders and entered into an engagement
letter with PFS. None of the Committee, the Company or SAP entered into any
contractual arrangement with, or received any analysis of the Company from, any
other financial advisors. The Special Committee selected PFS on the basis of
many factors, including: the other public oil and gas companies PFS used in
its comparative market analysis; the initial price range preliminarily provided
by PFS the willingness of PFS to analyze the transaction as proposed; and the
relatively low costs and fees charged by PFS when compared to other firms. The
Special Committee entered into an engagement letter with PFS on May 2, 1996,
and PFS delivered an oral report to the Special Committee on June 5, 1996, and
a written opinion dated June 5, 1996. A copy of that opinion is attached
hereto as Appendix II.
The Company considered a possible reverse stock split, a tender offer
or a merger as alternates to remedy the market liquidity problems outlined
above. A "cash merger" was selected because it was the only method which
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<PAGE> 15
would, by its terms, result in the Company becoming private and eliminate the
costs of being public and the illiquidity of the Shares. The other
alternatives might or might not have had the desired results . The Company
received an oral inquiry from another oil and gas company in January 1996
expressing interest in reviewing certain of the Company's properties. The
Company allowed the inquiring company to review the Company's records in this
regard, but never received any further interest by that company. No written
offers or materials were exchanged and there was no discussion concerning the
value of the Company. Otherwise, there have been no contacts with unaffiliated
parties over the past couple of years concerning a possible acquisition of the
Company, primarily because of SAP's desire to retain at least a majority
ownership interest in the Company. Generally, such unaffiliated parties are
not interested in acquiring a non-majority interest in the Company, which is
all that is available given SAP's desire to retain at least a majority
interest. Pursuant to the Merger Agreement, the Company generally cannot
actively solicit other possible bidders, which may also have the effect of
discouraging unaffiliated parties from pursuing an acquisition of the Company.
However, the Company has the right to terminate the Merger Agreement and enter
into a Competing Transaction (as hereinafter defined) in the event the Special
Committee determines in good faith that the Competing Transaction is more
favorable than the Merger to the Stockholders of the Company. See "THE MERGER
AGREEMENT - OTHER POTENTIAL BIDDERS" and "THE MERGER AGREEMENT - TERMINATION."
This provision is included in the Merger Agreement in part to protect the
Minority Stockholders if a more favorable transaction becomes available. As a
result of the foregoing, there were few, if any, alternatives for the Company
to consider in determining a course of action beneficial for the Company and
its Stockholders.
14
<PAGE> 16
CERTAIN FINANCIAL PROJECTIONS
The Company does not, as a matter of course, publicly disclose
projections as to future revenues, earnings or other financial information.
Certain projections (the "Projections") were prepared by management of the
Company and furnished to its directors, the Special Committee and PFS in the
course of the Special Committee's and the Board's consideration of the Merger.
The Projections were used by PFS in connection with its evaluation of the
Merger, and are included herein only to provide Stockholders with information
used by the Board, the Special Committee and PFS in evaluating the Merger. The
Projections are not included in this Proxy Statement to induce any Stockholder
to vote for the authorization and adoption of the Merger Agreement. None of
the Company, or any of its financial advisors or any of their respective
directors or officers, makes any representation with respect to the accuracy
of the Projections when compared to actual performance and results and is not
responsible for the difference between the Projections and actual performance
or results.. The Projections were based upon a variety of assumptions,
including those set forth below. Such assumptions involve judgments with
respect to, among other things, future economic, competitive and regulatory
conditions, financial market conditions and future business decisions, all of
which are difficult or impossible to predict accurately and many of which are
beyond the control of the Company. While the Company believes that the
assumptions underlying the Projections were reasonable when made, the
Projections include fiscal 1997 results that are not reasonably achievable if
certain drilling prospects are uneconomical or result in dry holes. The oil
and gas industry is volatile and risky in nature and the Company's operating
income and cash flow can be impacted significantly by changes in oil and gas
prices having a material effect on profitability; any projections must
accordingly be deemed inherently unreliable. Therefore, it is expected that
there will be differences between actual and projected results, and actual
results may be materially higher or lower than projected results.
The Projections below were not prepared with a view to public
disclosure or compliance with published guidelines of the Securities and
Exchange Commission (the "Commission"), nor were they prepared in accordance
with the guidelines established by the American Institute of Certified Public
Accountants for preparation and presentation of financial projections. The
Projections do not purport to present operations in accordance with generally
accepted accounting principles and have not been audited, compiled or otherwise
examined by KPMG Peat Marwick LLP ("Peat Marwick"), the Company's independent
accountants, or by any other independent accountants. Accordingly, neither
Peat Marwick nor any other independent accountants assume responsibility for
the Projections presented below.
Set forth below is certain projected consolidated income statement
information for the year ending March 31, 1997 and certain projected
consolidated balance sheet information as of March 31, for the year ending
March 31, 1997, under three different scenarios with different oil prices being
assumed. Oil and gas prices have historically been subject to significant
fluctuation, and the prices assumed for purposes of the following information
may be significantly higher or lower than the actual prices received by the
Company for its production. The significant assumptions underlying the
Projections are described in the notes following the Projections. The
Projections were prepared several months ago and must be reviewed in light of
the Company's more recent financial performance. The Projections do not take
into account the consummation of the Merger.
AS A GENERAL MATTER, THE PROJECTIONS ARE FORWARD LOOKING STATEMENTS
AND ACTUAL RESULTS COULD DIFFER MATERIALLY AS A RESULT OF ANY OR ALL OF THE
FACTORS AFFECTING THE COMPANY'S BUSINESS THAT HAVE BEEN IDENTIFIED ELSEWHERE IN
THIS PROXY STATEMENT OR IN OTHER INFORMATION CONCERNING THE COMPANY WHICH IS
PUBLICLY AVAILABLE.
THE PROJECTIONS SET FORTH BELOW ARE INCLUDED SOLELY BECAUSE SUCH
PROJECTIONS WERE CONSIDERED BY THE SPECIAL COMMITTEE AND THE BOARD IN THE
COURSE OF THEIR EVALUATION OF THE MERGER, AND BY PFS IN ITS EVALUATION OF THE
COMPANY AND THE MERGER. READERS ARE STRONGLY CAUTIONED THAT THE PROJECTIONS
SHOULD NOT BE RELIED UPON AS A CURRENT ESTIMATE BY MANAGEMENT OF PROJECTED
OPERATING RESULTS.
15
<PAGE> 17
<TABLE>
<CAPTION>
Projections for the year ending March 31, 1997
----------------------------------------------
Oil Pricing Scenarios
-------------------------------------------
Posted Price Posted Price Posted Price
$15.00/bbl $16.50/bbl $18.00/bbl
------------ ------------ ------------
<S> <C> <C> <C>
Revenues $ 6,016,000 $ 6,694,000 $ 7,069,000
Expenses 4,682,000 4,854,000 4,945,000
----------- ----------- -----------
Net Income 1,334,000 1,840,000 2,124,000
Depreciation, depletion and
amortization 1,906,000 1,906,000 1,906,000
----------- ----------- -----------
Total Cash Flow 3,240,000 3,746,000 4,030,000
Less: Capital Expenditures 3,370,000 3,370,000 3,370,000
----------- ----------- -----------
New Cash Flow $ (130,000) $ 376,000 $ 660,000
=========== =========== ===========
Working Capital $ 3,654,000 $ 4,331,000 $ 4,687,000
Total Assets $16,083,000 $16,760,000 $17,116,000
Stockholder's equity $15,566,000 $16,243,000 $16,599,000
Oil and Gas Production (BOE) 404,000 404,000 404,000
</TABLE>
NOTES TO CERTAIN FINANCIAL PROJECTIONS
Assumptions used in formulating the Projections included the following (certain
oil and gas terms are defined under "Business of the Company"):
(1) Oil pricing based on $15.00, $16.50 and $18.00 West Texas Intermediate
Sweet plus applicable bonus or deduction per producing field at
December 31, 1995.
(2) Gas pricing based on $1.60 per mcf.
(3) Expenses were projected based on a percentage of revenues basis from
the nine month average ended December 31, 1995.
(4) The projections assume that no dry holes are drilled and that no
leasehold costs are impaired.
(5) Production volumes based on current volume at December 31, 1995 less
applicable decline ratios per field plus expected drilling results,
resulting in an assumed increased of approximately 9.5%. Actual
production may be higher or lower than the projection.
OPINION OF FINANCIAL ADVISOR
PFS is a national investment banking firm providing a wide range of
financial and brokerage services. PFS regularly issues fairness opinions and
is continually engaged in the valuation of companies and their securities in
connection with business reorganizations, private placements, negotiated
underwritings, mergers and acquisitions
16
<PAGE> 18
and for other purposes. There is, and has been for in excess of two years, no
material relationship between PFS and the Company or its affiliates other than
with respect to the engagement described herein.
In connection with its opinion, PFS did not independently verify the
accuracy or completeness of publicly available information and information
provided by the Company. PFS did not obtain independent appraisals nor did it
conduct physical inspection of the properties, assets or liabilities of the
Company. No limitations were imposed by the Company on PFS with respect to the
investigations made or procedures followed by PFS in rendering its opinion. In
connection with rendering its opinion, PFS reviewed certain information
provided to it by the Company, including the Projections, met with the
Company's management to discuss the businesses and prospects of the Company,
and was provided an initial estimated price per share by SAP. The Special
Committee and the Board of Directors reviewed, for accuracy and completeness,
the information provided by the Company to PFS and found that PFS's reliance on
that information, within the full scope of PFS's analysis, was reasonable. In
addition, PFS considered certain publicly available business and financial
information related to the Company and certain financial and stock market data
of the Company, and compared that data with similar data for other publicly
held companies in businesses similar to those of the Company, and considered
the financial terms of certain other business transactions which have recently
been effected. PFS also considered such other information, financial studies,
analyses and investigations and financial, economic and market criteria which
it deem relevant. Based upon its analysis of the Company and the Shares, PFS
has delivered its opinion that the Merger is fair, from a financial point of
view, to the Minority Stockholders. A copy of the opinion is attached hereto
as Appendix II.
In arriving at its opinion, PFS used five separate analyses including
discounted cash flow analysis, comparable reserve acquisitions analysis,
comparable companies trading analysis, book value per share, and premiums that
were paid to acquire residual interest by a majority shareholder. The
following summary describes all material analysis undertaken by PFS and the
terms and features of each material valuation method. PFS made an oral report
of the following analyses to the Special Committee on June 5, 1996, and
provided copies of a written report to the Committee members for their review
during the oral presentation. The Committee reviewed the methodologies and
assumptions used by PFS by reviewing the written report and discussing such
matters with the PFS representative during the June 5 meeting and found the
same to be reasonable. Following that meeting, all copies of written reports
were returned to the PFS representative. PFS subsequently provided a copy of
the written report to the Company, which is attached as an exhibit to the
Company's Rule 13e-3 Transaction Statement filed with the Securities and
Exchange Commission in connection with the Merger.
Discounted Cash Flow ("DCF") Analysis. PFS performed a DCF analysis
pursuant to the present value of the future after-tax cash flows of the
Company's proved reserves for the period from fiscal 1997 to 2019. In its
analysis PFS used discount rates of 10%, 12%, 14%, 16% and 18%. PFS then
adjusted the equity value ranges to account for certain assets and liabilities
of the Company that were not included as part of such analysis. PFS performed
three cases using different pricing forecasts based on the average closing
strip prices as quoted in the May 31, 1996 Wall Street Journal for Light Sweet
Crude Oil and Natural Gas for the Company's fiscal year end March 31, 1997. In
the downside case, prices were held constant. For the base case, beginning in
1998, crude oil prices were escalated at 2.5% per year and gas prices at 3.0%
per year. For the high case, beginning in 1998, crude oil prices were
escalated at 3.5% per year and gas prices at 5.0% per year. Production data
was provided to PFS by the Company in an independent reserve report prepared
for the Company by Joe C. Neal & Associates as of March 31, 1996. Lease
operating costs were based on the Joe C. Neal & Associates reserve report and
escalated at 2.5% per year beginning in 1997. General and administrative
expenses were assumed to be 12.5% of revenues per year. The assumed tax rate
was 34% and taxes were calculated giving effect for net operating loss
carryforwards of approximately $9 million and alternative minimum tax carry
forwards available to the Company. Based on these assumptions PFS calculated
an approximate imputed equity value range for the Company of $7.77 to $10.53
per share.
Comparable Reserve Acquisitions Analysis. In calculating the relative
value of the Company's oil and gas reserves, PFS examined comparable oil and
gas reserve acquisition transactions that occurred during 1994 and 1995
17
<PAGE> 19
in the Mid-Continent region of the United States as reported by John S. Herold,
Inc., an independent petroleum research company that tracks such data. There
were 28 such transactions that occurred during the aforementioned period with a
mean purchase price of $4.49 per oil barrel of equivalent reserves. PFS
applied a multiple range of $4 to $5 per oil barrel of equivalent
(approximately $.50 above and below the average) to the Company's proved
reserves as provided to PFS by the Company. PFS then adjusted the equity value
ranges to account for certain assets and liabilities of the Company that were
not included as part of such analysis. Based on this analysis, PFS calculated
an approximate imputed equity value range for the Company of $8.44 to $9.89 per
share.
Comparable Companies Trading Analysis. Under this method, PFS
examined nine companies PFS believed to be comparable to the Company on various
financial and operational parameters. The comparable companies included were
Abraxas Petroleum, Alamco, Inc., Bellwether Exploration Company, Coho Energy,
Columbus Energy, Mallon Resources, Maynard Oil, Unit Corporation, and Wiser Oil
(the "Comparable Companies"). With respect to the Comparable Companies, PFS
analyzed, among other things, current market value multiples relative to proved
reserves, operating cash flows, after-tax cash flows, and pre-tax cash flows
under the standard established by the Commission for discounted present value
of proved reserves. PFS then established a trading range for each data point
based on its analysis of the Comparable Companies and multiplied the Company's
relative data provided to PFS by the Company to establish a relative value.
PFS then averaged these implied relative market values. Based on this
analysis, PFS calculated an approximate imputed equity value range for the
Company of $11.79 to $13.79 per share.
Book Value per Share. PFS examined the book value per share as it
related to a premium or discount to the value per share of the transaction.
This analysis utilized an average of the actual book value per share as of
March 31, 1996 and projected book value as of March 31, 1997 based upon the
Projections and other data supplied by the Company (calculated as if the shares
of Common Stock subject to outstanding options and other employee benefit plans
were outstanding). A 15% discount rate was applied to the March 31, 1997
estimated book value as a conservative estimate of the market's discount of
future value to the present. No consideration was given to historical book
values prior to March 31, 1996 or those as of any date after its opinion.
Under this analysis, the average equity book value for fiscal year end 1996 and
estimated fiscal year end 1997 is $9.20 per share.
Premiums Paid for Residual Interest Analysis. Under this method, PFS
examined transactions whereby a majority shareholder acquired the residual
interest it did not own in the company. According to Securities Data Company,
Inc., an independent research company, from 1987 to May 1996 thirteen such
transactions occurred in the oil and gas industry with an average 30% premium
paid over the trading price four weeks prior to announcement. PFS applied the
30% premium to the Company's average Bid / Ask trading price four weeks prior
to the merger offer by SAP to the Company, June 5, 1996. Based on this
analysis, PFS calculated an approximate imputed equity value for the Company of
$7.80 per share.
In reaching a conclusion as to value, PFS assigned different weights
to the results of each of the foregoing analyses, as follows: Discounted Cash
Flow Analysis, 30%; Comparable Reserve Acquisitions Analysis, 25%; Comparable
Companies Trading Analysis, 25%; Premiums Paid for Residual Interest Analysis,
10%; and Book Value per Share, 10%. In general, the analyses weighted most
heavily are those that best reflect valuation criteria emphasized in the
private acquisition market and the public trading market. The valuation
analyses that are not direct indicators of market value were accorded less
weight.
PFS has indicated in its opinion, based upon a provision in its
engagement letter with the Company which provides that PFS will not be liable
except for gross negligence or willful misconduct, that Stockholders cannot
rely upon the opinion to support claims against PFS arising under state law.
The availability of such a defense asserted by PFS will be resolved by a court
of competent jurisdiction, and will have no effect on the rights or
responsibilities of the Board of Directors of the Company under state law or of
either PFS or the Board under federal securities laws.
18
<PAGE> 20
FAIRNESS ANALYSIS AND RECOMMENDATIONS OF THE SPECIAL COMMITTEE AND THE BOARD
At a meeting on June 5, 1996, the Special Committee unanimously
concluded that the Merger, including the price of $9.75 in cash for each Share,
is fair to and in the best interests of the Minority Stockholders, and
recommended to the Board of Directors that it approve the Merger Agreement.
The Special Committee based its recommendations upon certain factors, including
the following material factors:
(i) The opinion of PFS to the effect that the Merger is
fair, from a financial point of view, to the Minority
Stockholders;
(ii) The fact that the Merger Consideration was based, at
least in part, on the report given to the Special Committee of
PFS;
(iii) The terms and conditions of the proposed Merger and
the Special Committee's judgment that the transaction is
likely to be consummated.
(iv) The fact that the Merger Consideration represents a
significant premium over the Company's historic stock trading
range and is an all-cash transaction which will provide the
Minority Stockholders with immediate liquidity;
(v) The relative illiquidity of the Shares in the public
market and the costs to the Company of being a public company;
(vi) No material factors were identified which were
considered against adoption of the Merger; and
(vii) The favorable comparison of the Merger Consideration,
$9.75 per share, to the average equity book value per share of
$9.20 as determined by PFS for the fiscal year end 1996 and
estimated fiscal year end 1997, and to the middle of the range
of the book value per share over the past five years from
$8.55 to $11.45 ($9.82 at March 31, 1996).
The Special Committee did not analyze the Merger Consideration in
relation to various valuation methods separately from the analysis performed by
PFS, but the Committee did examine and review the methodologies and assumptions
used by PFS in its analysis. Based on its review and examination, the Special
Committee believes that those methods of valuation of the Company performed by
PFS and considered by the Committee were adequately addressed by PFS in its
report to the Special Committee, which provided the basis for the Committee's
valuation analysis. See "OPINION OF FINANCIAL ADVISOR." The Merger
Consideration, $9.75 per share, is greater than or within the range of values
per share determined by PFS except the range resulting from the comparable
companies trade analysis, which focuses on the trading of securities of other
companies. A number of factors and variables related to each of those other
companies are not present with respect to the Company, particularly the
stockholders of the other companies most likely do not include a number of
"involuntary" stockholders, see "SPECIAL FACTORS - BACKGROUND OF MERGER," the
securities of the other companies are more widely and actively traded, most of
the other companies are larger in size and resources, and the regions in which
many of the other companies operate are different from the Company. A separate
analysis of liquidation value was not considered since liquidation would
require the consent of SAP and SAP has advised the Company that it does not
intend to liquidate the Company or any significant portion thereof. Since the
liquidation value of the Company would be almost entirely based upon the sale
of its oil and gas reserves, such liquidation value would likely be similar to
the comparable reserve acquisitions analysis performed by PFS which resulted in
a range of per share values of $8.44 to $9.89. The Merger Consideration falls
within the higher portion of that range, and is considered by the Special
Committee to be fair under that analysis. Notwithstanding the foregoing, the
value of the Company per share upon liquidation may be higher than the Merger
Consideration. The Special Committee believes that the Merger
19
<PAGE> 21
Consideration is fair to the Minority Stockholders in comparison to the per
share values determined by the various valuation methods reported by PFS to the
Committee.
Most methods of valuation of the Company are based, at least in part,
on the value assigned to the Company's oil and gas reserves. The estimated
reserve data used in the valuation analysis of PFS and the Special Committee
was based upon a report prepared by an independent petroleum reservoir
engineering firm. See "BUSINESS OF THE COMPANY." Such reserve data reflected,
as of the time it was prepared, all of the known reserves of the Company based
upon criteria set by the Commission. However, such estimates, and the
expectations of the Company, may change as to a particular property, field,
prospect or strategy upon further information becoming available, such as from
the drilling of wells. New prospects or strategies are constantly being added
to replace depleted reserves or disappointing prospects. As a result, the
Company has and will likely have in the future a variety of strategies or
prospects which are and will be in various stages of consideration and
analysis, development, depletion or, perhaps, abandonment. The Company is
currently expanding its drilling activities outside its core areas of
operations due to a reduction of development drilling opportunities. This
shift in the Company's strategy will subject the Company to the higher risks
associated with such exploratory drilling, while providing the Company with
potentially greater opportunities. See "BUSINESS OF THE COMPANY - BUSINESS
OPERATIONS."
Because an estimate of the value of the Company is dependent upon a
valuation of its oil and gas reserves, it is important to note that reserve
data present estimates only. In general, estimates of economically recoverable
oil and gas reserves and of the future net revenues therefrom are based upon
any number of variable factors and assumptions, such as historical production
from the subject properties, the assumed effects of regulation by governmental
agencies and assumptions concerning future oil and gas prices and future
operating costs, all of which may vary considerably from actual results. All
such estimates are to some degree speculative, and classifications of reserves
are only attempts to define the degree of speculation involved. For these
reasons, estimates of the economically recoverable oil and gas reserves
attributable to any particular revenues expected therefrom, prepared by
different engineers or by the same engineers at different times, may vary
substantially. The Company therefore emphasizes that the actual production,
revenues, severance and excise taxes, development and operating expenditures
with respect to its reserves will likely vary from such estimates, and such
variances could be material. Estimates with respect to proved reserves that
may be developed and produced in the future are often based upon volumetric
calculations and upon analogy to similar types of reserves rather than actual
production history. Subsequent evaluation of the same reserves based upon
production history will result in variations, which may be substantial, in the
estimated reserves.
Based on the recommendation of the Special Committee and on the
material factors and analysis outlined above, which were considered and adopted
by the Board, the Board of Directors unanimously concluded that the Merger,
including the price of $9.75 in cash for each Share, is fair and in the best
interests of the Minority Stockholders. Accordingly, the Board of Directors
recommends that Stockholders vote FOR the adoption of the Merger Agreement.
The members of the Board have advised the Company that they intend to vote
their shares in favor of adoption of the Merger Agreement.
FAIRNESS ANALYSIS OF SAP AND SMI
Each of SAP and SMI adopt the analysis of the Special Committee and
the Board of Directors of the Company, and the analysis of PFS as independent
financial advisor to the Special Committee, as its own analysis of the Merger
and its fairness. See "-BACKGROUND OF MERGER" and "-FAIRNESS ANALYSIS AND
RECOMMENDATIONS OF THE SPECIAL COMMITTEE AND THE BOARD."
CONFLICTS OF INTEREST
Mr. E.E. Runyan (Chairman of the Board, Chief Executive Officer and a
Director of the Company) is a stockholder, officer and director of SAP, and
Messrs. Robert L. Marolda and Edward P. Bliss (Directors of the
20
<PAGE> 22
Company) are officers and directors of SAP. As the parent of the Company
following the Merger, SAP will benefit from the cost savings associated with
the Company no longer being publicly held, and will benefit from any future
growth in the profits and properties of the Company. Accordingly, these
persons may be deemed to have a direct conflict of interest with respect to the
Merger. In addition, all of the current executive officers and directors of
the Company (6 persons) will receive as a result of the Merger an aggregate of
$1,114,297 (those greater than $100,000 being E.E. Runyan, $300,710; Robert L.
Marolda, $198,132; Robert L. Hollis, $188,382; Edward P. Bliss, $176,438; and
Gary B. Gilliam, $157,162). $486,447 of such amount will be Merger
Consideration paid for Shares owned by such persons and $627,850 will be paid
in exchange for the cancellation of stock options and other rights to receive
shares of Common Stock under the Company's employee benefit plans. See
"REMUNERATION OF MANAGEMENT - EMPLOYEE BENEFIT PLANS." Such persons will also
continue in their current positions as officers and directors of the Company
following the Merger on the same terms as are currently in place. There are no
employment agreements between the Company and its executive officers. Other
than as specified herein, such persons do not receive any other benefits as a
result of the Merger. The benefits to be received by such persons were not
considered by the Board of Directors to be a material factor in the approval of
the Merger.
In addition, although no member of the Special Committee is an
officer, director or equity owner of SAP, Edward E. Runyan and Robert L. Hollis
are the son and brother-in-law, respectively, of E.E. Runyan. Gary B. Gilliam,
the final member of the Special Committee, is the President of the Company and
is expected to continue his employment with the Company following the Merger.
Accordingly, each member of the Special Committee may be deemed to have at
least an indirect conflict of interest with respect to the Merger. See
"-PROCEDURAL FAIRNESS."
PROCEDURAL FAIRNESS
The Merger is a transaction between the Company and an affiliate and
is not an arms-length transaction. As a result, certain procedures which might
be used in a similar transaction to assist in attempting to ensure equitable
treatment to the Minority Stockholders were either unavailable or not
undertaken with respect to the Merger.
Given the composition of the Board of Directors and the interests in
and relationships of the directors of the Company with SAP, it was not possible
to form a committee of independent directors with no interest in the outcome of
the transaction to represent and protect the Minority Stockholders. The
Special Committee was organized to interview, engage and receive a report from
an independent financial advisor concerning the value of the Company and to
make a recommendation to the Board of Directors with respect to the Merger. As
a part of these functions, the Committee made a determination, with the
assistance of PFS, as to whether the Merger was fair to and in the best
interests of the Company and the Minority Stockholders. However, the Special
Committee was not formed to negotiate for or to indirectly represent the
Minority Stockholders. Also, none of the members of the Special Committee
should be viewed as "independent" due to interests or relationships which they
have in the Merger or with the Company or SAP. See "- CONFLICTS OF INTEREST."
Furthermore, the Special Committee did not retain separate legal counsel, but
consulted with the same legal counsel utilized by the Company and SAP in
connection with the Merger. This was done to reduce costs associated with the
Merger which may have effected the Merger Consideration, and was not a decision
based upon a consideration of procedural fairness to the Minority Stockholders.
Thus, no legal counsel has been retained specifically for protection of the
interests of the Minority Stockholders.
The approval of the holders of a majority of the Shares held by the
Minority Stockholders is not required for approval of the Merger, even though
such approval by the Minority Stockholders may enhance procedural fairness.
The primary reason such approval of the Minority Stockholders is not required
for approval of the Merger is that holders of a majority of the Shares owned by
the Minority Stockholders have not been present, nor voted, at any of the
Company's annual meetings since 1991 and the Company has no reason to believe
that such a majority
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<PAGE> 23
of the Minority Stockholders will attend or vote at the Meeting. Because of
such lack of participation by the Minority Stockholders, it is not feasible to
require separate approval of the Merger by the Minority Stockholders.
CERTAIN RESULTS OF MERGER
As a result of the Merger, SAP will own all of the outstanding equity
interests of the Company, so that SAP's interest in the Company, including its
future net earnings, will increase from approximately 72% to 100%. According
to the terms of the Merger Agreement, each Share (except treasury shares,
Shares owned by SAP, and Shares for which dissenters' rights have been
perfected) will be converted into the right to receive the Merger
Consideration. As a result, the Shares will no longer represent an equity
interest in the Company and will no longer share in future earnings or losses
of the Company, the risks associated with such earnings and losses, or the
potential to realize greater value in the event that strategic acquisitions,
divestitures or other extraordinary corporate transactions are pursued by the
Company in the future. Following the Merger, the Company intends to continue
its current business strategy, including exploratory and developmental drilling
and the pursuit of possible acquisitions of oil and gas properties. Neither
the Company nor SAP have any ongoing negotiations or intentions to acquire any
other companies, sell any significant assets of the Company or engage in any
other extraordinary corporate transactions in the foreseeable future.
Following the Merger, it is anticipated that the registration of the Common
Stock under the Exchange Act will be terminated and that the Company will no
longer file reports under the Exchange Act. SAP intends to continue the
Company's existence and its business as an independent oil and gas company
after the Merger. SAP also intends to retain the current management of the
Company following the Merger.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The receipt of cash for Shares pursuant to the Merger (or pursuant to
the perfected exercise of dissenters' rights) will be a taxable transaction for
federal income tax purposes under the Code, and also may be a taxable
transaction under applicable state, local and other tax laws.
In general, a stockholder will recognize gain or loss equal to the
difference between the tax basis for the Shares held by such stockholder and
the amount of cash received in exchange therefor. Such gain or loss will be
capital gain or loss if the Shares are capital assets in the hands of the
stockholder and will be long term gain or loss if the holding period for the
Shares is more than one year prior to the Effective Date. If the holding
period is less than one year then the gain or loss will be short term gain or
loss.
Long-term capital gains recognized in 1996 by stockholders who are
individuals are taxable at a maximum rate of 28% (as compared with a maximum
rate of 39.6% on ordinary income). Corporations generally are subject to tax
at a maximum rate of 35% on both capital gains and ordinary income. The
distinction between capital gain and ordinary income may be relevant for
certain other purposes, including the taxpayer's ability to utilize capital
loss carryovers to offset any gain recognized.
However, any capital gain or loss resulting from the receipt of cash
pursuant to the Merger will be combined with all other capital gains and losses
recognized by the stockholder during the taxable year. If a stockholder has
both long-term and short-term capital transactions during the year, a two-step
netting process occurs. First, gains and losses from each type of transaction
are netted separately. The long-term capital gains, if any, are offset by net
short-term capital losses, if any, and short-term capital gains, if any, are
offset by long-term capital losses, if any.
If the result of combining all of the stockholder's capital gains and
losses during the taxable year is a net capital gain, the full amount of such
gain will be included in the stockholder's gross income. In general, if the
result of combining all such capital gains and losses recognized during the
taxable year is a net capital loss, a stockholder that is a corporation may not
deduct any portion of such loss, and a stockholder that is not a corporation
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(such as an individual) may deduct such loss only to the extent that it does
not exceed $3,000 ($1,500 in the case of a married individual filing a separate
return), with the remainder available for carryover into future taxable years.
The foregoing discussion may not be applicable to stockholders who
acquired their Shares pursuant to the exercise of options or other compensation
arrangements or who are not citizens or residents of the United States or who
are otherwise subject to special tax treatment under the Code.
ACCOUNTING TREATMENT OF THE MERGER
The Merger will be accounted for as a purchase of a minority interest.
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THE MERGER AGREEMENT
The following discussion of the material aspects of the Merger
Agreement is qualified in its entirety by reference to the complete text of the
Merger Agreement, which is included in this Proxy Statement as Appendix I and
is incorporated herein by reference.
GENERAL
The Merger Agreement provides for the merger of SMI with and into the
Company. The Company will be the surviving corporation in the Merger and, as a
result of the Merger, SAP will own all of the Company's Common Stock. In the
Merger, the Stockholders of the Company, other than SAP and Stockholders who
exercise their dissenters' rights under Delaware law, will receive the Merger
Consideration described below. See "-CONSIDERATION TO BE RECEIVED BY
STOCKHOLDERS OF THE COMPANY."
EFFECTIVE TIME OF THE MERGER
The Effective Time of the Merger will occur upon the filing of a
Certificate of Merger with the Secretary of State of the State of Delaware as
required by the DGCL or at such later time as is specified in such Certificate
of Merger. It is anticipated that the Certificate of Merger will be filed as
promptly as practicable after adoption of the Merger Agreement by the
Stockholders of the Company at the Meeting. Such filing will be made, however,
only upon satisfaction or waiver of all conditions to the Merger contained in
the Merger Agreement.
CONSIDERATION TO BE RECEIVED BY STOCKHOLDERS OF THE COMPANY
As a result of the Merger, each outstanding Share (except Shares held
by the Company as treasury stock, Shares owned by SAP, and by Stockholders who
perfect their dissenters' rights under the DGCL), will be converted into the
right to receive the Merger Consideration of $9.75 per share in cash. Each
Share owned by SAP, or held by the Company as treasury stock, will be canceled
without consideration.
All rights or options to acquire or receive grants of Common Stock
under the Employee Benefit Plans (as defined herein under "REMUNERATION OF
MANAGEMENT - EMPLOYEE BENEFIT PLANS") will be canceled at the Effective Time,
and each holder of such right or option will receive, in cancellation and
settlement of such right or option, a cash amount for each Share to which the
right or option applies equal to the Merger Consideration less the exercise
price, if any. The aggregate amount of such consideration to be paid in
cancellation and settlement of such rights and options is $627,850. As of the
Effective Time, holders of such rights or options will not be entitled to any
shares of Common Stock, but will only be entitled to the cash consideration in
cancellation and settlement thereof. The Merger Agreement prohibits the
Company from amending the Employee Benefit Plans or granting any options
thereunder.
EXCHANGE OF STOCK CERTIFICATES
Upon consummation of the Merger, subject to the provisions described
below, each Share outstanding at the Effective Time (except treasury shares,
Shares owned by SAP and Shares with respect to which dissenters' rights have
been exercised) will be converted into the right to receive the Merger
Consideration. If the Merger is consummated, instructions with regard to the
surrender of stock certificates formerly representing Shares together with a
letter of transmittal to be used for that purpose, will be mailed to
Stockholders as soon as practicable after the Effective Time. The Company, as
soon as practicable following receipt from a Stockholder of a duly executed
letter of transmittal, together with stock certificates formerly representing
Shares and any other items required by the letter of transmittal, shall pay the
Merger Consideration to such Stockholder. If payment is to be made to a person
other than the person in whose name the certificate so surrendered is
registered, it will be a condition of payment that the certificate so
surrendered to be properly endorsed or otherwise in proper form for transfer
and that
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the person requesting such payment pay to the Company any transfer or other
taxes required by reason of such payment or establish to the satisfaction of
the Company that such taxes have been paid or are not applicable.
Stockholders should NOT submit any stock certificates at the present
time.
After the Effective Time, a holder of a certificate formerly
representing Shares shall cease to have any rights as a stockholder of the
Company, and such holder's sole right will be to receive the Merger
Consideration to which such holder is entitled. Stockholders will not be
entitled to receive any interest on the Merger Consideration to be distributed
to them in connection with the Merger. Neither SAP nor the Company shall be
liable to any holder of Shares for any amount paid to a public official
pursuant to applicable abandoned property laws. After the Effective Time, the
stock ledger of the Company will be closed and any transfer of Shares not
registered on such ledger prior to the Effective Time will not be made on the
stock transfer books of the Company after the Effective Time.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties
of the Company, SAP and SMI relating to, among other things, the following
matters (which representations and warranties are subject in certain cases, to
specified exceptions): (i) due incorporation, corporate existence, good
standing and power of, and similar corporate matters with respect to, each of
the Company, SAP and SMI; (ii) corporate power and authority to enter into, and
the valid and binding execution and delivery of, the Merger Agreement by each
such party; (iii) the absence of any governmental authorization, consent, or
approval required to consummate the Merger, except as disclosed; (iv) that the
Merger Agreement and the Merger do not conflict with the certificate of
incorporation or bylaws or violate any law, rule, regulation, judgment, order
or decree relating to the Company and its subsidiaries, SAP or SMI; and (v) the
absence of any investment banking, brokerage, finder's or other similar fee or
commission due in connection with the Merger (except for fees payable to PFS,
as described under "SPECIAL FACTORS - OPINION OF FINANCIAL ADVISOR").
In the Merger Agreement, the Company has made certain additional
representations and warranties to SAP and SMI relating to the following matters
(which representations and warranties are subject, in certain cases, to
specified exceptions): (i) the capital structure of the Company; (ii) the
absence of any undisclosed litigation or investigations that could have a
material adverse effect on the Company; and (iii) other matters relating to the
Company's business, including liabilities and environmental issues.
SAP and SMI have made certain additional representations and
warranties to the Company relating to the financing for payment of the Merger
Consideration and other payment obligations of Parent and SMI under the Merger
Agreement.
COVENANTS
The Company has agreed in the Merger Agreement that until consummation
of the Merger, the Company will conduct its business in the ordinary course
consistent with past practice. Without limiting the foregoing, the Company
will not: (i) adopt any change in its certificate of incorporation or bylaws;
(ii) grant any options, warrants or other rights to purchase or obtain any of
its capital stock, or issue, sell, or otherwise dispose of any of its capital
stock (except upon the exercise of options outstanding on the date of the
Merger Agreement); (iii) declare, set aside, or pay any dividend or
distribution with respect to its capital stock, or redeem, repurchase, or
otherwise acquire any of its capital stock; (iv) issue any note, bond or other
debt security, or create, incur, assume, or guarantee any indebtedness for
borrowed money or capitalized lease obligation outside the ordinary course of
business; (v) grant any security interest on any of its assets outside the
ordinary course of business, or transfer, lease, license, sell, mortgage,
pledge, or otherwise dispose of or encumber any assets or incur or modify any
indebtedness or other liability other than in the ordinary course of business;
(vi) make any capital investment in, make any loan to,
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acquire the securities or assets of, or merge or consolidate with, any other
person outside the ordinary course of business; (vii) make any acquisition of a
material amount of assets or securities or enter into any material contract or
any release or relinquishment of any material contract rights not in the
ordinary course of business; (viii) make any change in employment terms for any
of its directors, officers, or employees outside the ordinary course of
business; (ix) grant any severance or termination pay to, or enter into any
employment or severance agreement with, any director, officer or other employee
except pursuant to benefit plants in existence on the date of the Merger
Agreement and in the ordinary course of business; (x) establish, adopt, enter
into, or (except as required by law) amend any benefit plans or make any new
grants or awards under any benefit plants other than in the ordinary course of
business; or (xi) commit to do any of the foregoing.
The Company has agreed to give SAP and its authorized representatives
full access to the offices, properties, books and records of the Company and
its subsidiaries and will furnish to SAP and its authorized representatives
such financial and operating data and other information as SAP and its
authorized representatives may reasonably request. SAP and the Company have
each agreed to use its best efforts to take all actions and to do all things
necessary, proper or advisable to consummate and make effective the
transactions contemplated by the Merger Agreement. The Company has agreed not
to solicit or initiate (other than by means of a press release announcing the
proposed Merger) discussions with any third parties that might be interested in
acquiring the Company, nor to respond to or negotiate with such parties unless
the Special Committee has been advised that the failure to do so would subject
the Directors to a substantial risk of a breach of their fiduciary duties to
the Stockholders.
SAP and the Company have agreed to use reasonable best efforts to take
such action as necessary or appropriate with respect to any action by or filing
with any governmental authority as may be required, or any actions, consents,
approvals, or waivers which are required to be obtained from parties to any
material contracts in connection with the Merger and the transactions
contemplated by the Merger Agreement.
Except for a press release announcing the proposed Merger, neither the
Company, SAP nor SMI may issue any press release or make any public
announcement relating to the Merger without the prior approval of the other
parties. However, any of such parties may make any public disclosure it
believes in good faith is required by applicable law, in which case the
disclosing party must use all commercial and reasonable efforts to advise the
other parties prior to making any such disclosure.
OTHER POTENTIAL BIDDERS
The Merger Agreement generally provides that the Company shall not,
and shall not authorize or permit any of its subsidiaries, officers, directors,
employees, or advisors to, (i) solicit, initiate, or encourage any merger, sale
of assets (except in the ordinary course of business), offers to purchase
shares of capital stock or similar transaction involving the Company and any
third party not affiliated with SAP (any such transaction being referred to
herein as a "Competing Transaction"), (ii) negotiate with any third party with
respect to any Competing Transaction, (iii) endorse or recommend any Competing
Transaction, or (iv) enter into any contract with any third party with the
intent to effect any Competing Transaction. However, the Merger Agreement
provides that the Company may furnish information and access to any third
party, in response to credible requests therefor received before or after the
date of the Merger Agreement, and may participate in discussions and negotiate
with any such third party concerning a Competing Transaction if the Special
Committee determines in good faith that the failure to provide such information
or to participate in such discussions or negotiations would cause the directors
of the Company to be subject to a substantial risk of a breach of their
fiduciary duties under applicable law. The Company may also enter into a
contract for Competing Transaction if the Special Committee determines in good
faith that the Competing Transaction is more favorable to the Stockholders of
the Company than the Merger. See "-TERMINATION."
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The Merger Agreement requires the Company to reimburse SAP for its
expenses under certain circumstances if the Merger is not consummated. See
"-EXPENSE REIMBURSEMENT." Such a provision generally may have the effect of
discouraging other potential bidders from making an offer to acquire the
Company, but the Company does not believe that the reimbursable expenses of SAP
relating to the Merger will be large enough to have such an effect.
CONDITIONS TO CONSUMMATION OF THE MERGER
The respective obligations of the Company, on the one hand, and SAP
and SMI, on the other hand, to consummate the Merger are subject to the
satisfaction or waiver, at or prior to the Effective Time, of certain
conditions, including the following material conditions: (i) adoption of the
Merger Agreement by the holders of a majority of the outstanding Shares at the
Meeting; (ii) the absence of any injunction or other order (whether preliminary
or permanent) that would prevent the consummation of the Merger; (iii) the
receipt of all other required authorizations, consents, and approvals of
governmental authorities; (iv) the performance of and compliance with, in all
material respects, all agreements and obligations contained in the Merger
Agreement and required to be performed or complied with at or prior to the
Effective Time by the respective parties to the Merger Agreement; and (v) the
material truth and correctness of all representations and warranties of the
parties to the Merger Agreement.
The obligation of the Company to consummate the Merger may be further
subject to the receipt by the Special Committee (if requested by the Special
Committee in its sole discretion), on the closing date for the Merger, of an
opinion (or a confirmation of such an opinion delivered at an earlier date) of
PFS, dated as of such closing date in form and substance reasonably
satisfactory to the Special Committee, to the effect that the Merger
Consideration is fair, from a financial point of view, to the Minority
Stockholders. Because PFS was engaged by the Special Committee, only the
Special Committee may make such a request. In determining whether to request
such an opinion or confirmation, the Special Committee will consider many
factors, including the number of Shares held by Minority Stockholders voted for
and against the Merger , the number of Shares with respect to which dissenters'
rights have been exercised, changes in the business, properties or results of
operations of the Company, and the cost to the Company of obtaining such an
opinion or confirmation. Stockholders should be aware that the Committee may
determine not to request an opinion or confirmation from PFS at closing even
though events may occur between the date of the initial PFS opinion and closing
which could result in a material change in the financial condition of the
Company. Because the value of the Company is substantially dependent upon the
quantity of its oil and gas reserves and production, the Special Committee
intends to request an opinion or confirmation from PFS at closing of the Merger
only in the event of a material change, known by the Committee, in the quantity
of the Company's oil and gas reserves or production.
The obligations of SAP and SMI to consummate the Merger are further
subject to the satisfaction or waiver of certain additional conditions,
including the following material conditions: (i) SAP and the Company having
entered into a credit arrangement with Texas Commerce Bank (see "FINANCING OF
THE MERGER"), which will provide available funds for the transactions
contemplated by the Merger Agreement; (ii) the number of Shares with respect to
which the holders thereof shall have exercised their dissenters' rights shall
not exceed 10% of the total number of Shares outstanding; and (iii) there shall
not have occurred any material adverse change in the business, financial
condition, operations, or results of operations of the Company except changes
contemplated by the Merger Agreement.
The conditions identified above include all of the material conditions
to the Merger. All such conditions are waivable. The Company, SAP and SMI
anticipate that all the conditions will be satisfied, or if not satisfied,
waived by the appropriate party except that in the event PFS advises the
Special Committee that PFS is unable to deliver an opinion or confirmation at
closing because PFS does not feel that the Merger is fair, the Company does not
intend to waive that condition to closing. Therefore, if the Company does not
waive that condition for whatever reason, the Merger Agreement will be
terminated and no Merger Consideration will be paid to the Stockholders.
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The Board will consider the best interests of Minority Stockholders in making a
determination with respect to that condition. However, because that condition
can be waived by the Company, it may not provide substantive protection to the
interests of protection to the interests of the Minority Stockholders. See
"-TERMINATION OF THE MERGER AGREEMENT" and "THE MERGER AGREEMENT - CONDITIONS
TO CONSUMMATION OF THE MERGER." In the event the condition of receiving an
opinion or confirmation is waived, but circumstances change or events occur
subsequent to the date of this Proxy Statement which cause the Board of
Directors or the Special Committee to determine that they no longer believe
that the Merger is fair to the Minority Stockholders from a financial point of
view, the Company will re-solicit the votes of the stockholders, disclosing the
change in position and the reasons for the change.
TERMINATION
The Merger Agreement may be terminated and the Merger abandoned at any
time prior to the Effective Time, notwithstanding adoption of the Merger
Agreement by the Stockholders of the Company, including the Minority
Stockholders: (i) by mutual written consent of the Company, SAP and SMI; (ii)
by SAP and SMI if the Merger has not been consummated by December 31, 1996, due
to the failure of any condition precedent to the obligations of SAP or SMI
(unless the failure results primarily from either of SAP or SMI breaching any
material representation, warranty or covenant); (iii) by the Company if the
Merger has not been consummated on or before December 31, 1996 due to the
failure of any condition precedent to the Company's obligations (unless the
failure results primarily from the Company breaching any representation,
warrant or covenant); (iv) by the Company at any time prior to the Effective
Time if Stockholder approval is not obtained at the Meeting, other than by
reason of the occurrence of a Triggering Event (as defined below); (v) by the
Company if SAP or SMI has breached the Merger Agreement in any material respect
and the Company is not then in breach, provided that the Company has notified
the breaching party of the breach, and the breach has continued without cure
for a period of ten days after the notice of breach; (vi) by SAP or SMI if the
Company has breached the Merger Agreement in any material respect and SAP and
SMI are not then in breach, provided that SAP or SMI has notified the Company
of the breach, and the breach has continued without cure for a period of ten
days after the notice of breach; (vii) by the Company if it receives a bona
fide offer to effect a Competing Transaction that the Special Committee
determines in good faith is more favorable to the Company's Stockholders than
the Merger, provided that the Special Committee shall have recommended to the
Board of Directors approval of such Competing Transaction and the Board of
Directors shall have approved such Competing Transaction; or (viii) by SAP or
SMI at any time prior to the Effective Time if any of the following events (a
"Triggering Event") shall have occurred; (a) the Company's Board of Directors
shall have failed to recommend, or shall have withdrawn or have modified, in a
manner adverse to either SAP or SMI, its recommendation of adoption of the
Merger Agreement, (b) the Company's Board of Directors shall have approved,
endorsed or recommended any Competing Transaction, (c) the Company shall have
entered into any contract to consummate any Competing Transaction, or (d) any
person or group other than SAP shall have become the beneficial owner of 10% or
more of the outstanding shares of any class of capital stock of the Company.
If the Merger is terminated, the stockholders will likely be subject
to a continuation of the limited, but volatile, market for the Shares. See
"SPECIAL FACTORS - BACKGROUND OF THE MERGER" and "STOCK PRICES AND DIVIDENDS."
EXPENSE REIMBURSEMENT
The Merger Agreement provides that all costs and expenses incurred in
connection with the Merger Agreement and the transactions contemplated thereby
shall be paid by the party incurring such cost or expense, except that SAP is
entitled to reimbursement from the Company for all of its actual, documented,
customary and reasonable fees and expenses incurred in connection with the
Merger if the Merger Agreement is terminated by SAP or SMI as a result of the
occurrence of a Triggering Event.
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AMENDMENT
The parties may amend the Merger Agreement prior to the Effective Time
with the prior authorization of the boards of directors of SAP and SMI, and the
Board of Directors of the Company; provided, however, that the Board of
Directors of the Company may not authorize an amendment until it receives the
recommendation of the Special Committee to do so. After approval of the Merger
Agreement by the Stockholders of the Company and without the further approval
of such Stockholders, no amendment to the Merger Agreement may be made that
will change the Merger Consideration or any of the other terms if such change
would adversely affect the Stockholders of the Company.
DISSENTERS' RIGHTS
Holders of record of Shares who comply with the applicable procedures
summarized herein will be entitled to appraisal rights under Section 262 of the
DGCL. A person having a beneficial interest in Shares 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 appraisal rights.
THE FOLLOWING DISCUSSION IS NOT A COMPLETE STATEMENT OF THE LAW
PERTAINING TO APPRAISAL RIGHTS UNDER THE DGCL AND IS QUALIFIED IN ITS ENTIRETY
BY THE FULL TEXT OF SECTION 262, WHICH IS REPRINTED IN ITS ENTIRETY AS APPENDIX
IV TO THIS PROXY STATEMENT. ALL REFERENCES IN SECTION 262 AND IN THIS SUMMARY
TO A "STOCKHOLDER" ARE TO THE RECORD HOLDER OF SHARES AS TO WHICH APPRAISAL
RIGHTS ARE ASSERTED. VOTING AGAINST, ABSTAINING FROM VOTING, OR FAILING TO
VOTE ON APPROVAL AND ADOPTION OF THE MERGER AGREEMENT WILL NOT CONSTITUTE A
DEMAND FOR APPRAISAL WITHIN THE MEANING OF SECTION 262 OF THE DGCL.
Under the DGCL, holders of Shares who follow the procedures set forth
in Section 262 will be entitled to have their Shares appraised by the Delaware
Chancery Court and to receive payment in cash of the "fair value" of Shares,
exclusive of any element of value arising from the accomplishment or
expectation of the Merger, together with a fair rate of interest, if any, as
determined by such court.
Under Section 262, where a proposed merger is to be submitted for
approval at a meeting of stockholders, the corporation, not less than 20 days
prior to the meeting, must notify each of its stockholders who was a
stockholder on the record date for such meeting with respect to shares for
which appraisal rights are available, that appraisal rights are so available,
and must include in such notice a copy of Section 262.
The Proxy Statement constitutes such notice to the holders of Shares
and the applicable statutory provisions of the DGCL are attached to this Proxy
Statement as Appendix IV. Any Stockholder who wishes to exercise such
appraisal rights or who wishes to preserve his right to do so should review the
following discussion and Appendix IV carefully, because failure to timely and
properly comply with the procedures specified will result in the loss of
appraisal rights under the DGCL.
A holder of Shares wishing to exercise such holder's appraisal rights
(i) must vote against, abstain or not vote with respect to the adoption of the
Merger Agreement, and (ii) must deliver to the Company prior to the vote on the
Merger Agreement at the Meeting to be held on October 24, 1996, a written
demand for appraisal of such holder's Shares. A holder of shares wishing to
exercise such holder's appraisal rights must be the record holder of such
Shares on the date the written demand for appraisal is made and must continue
to hold such Shares of record until the Effective Time of the Merger.
Accordingly, a holder of shares who is the record holder of Shares on the date
the written demand for appraisal is made, but who thereafter transfers such
Shares prior to the Effective Time of the Merger will lose any right to
appraisal in respect of such Shares.
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Only a holder of record of Shares is entitled to assert appraisal
rights for the Shares registered in that holder's name. A demand for appraisal
should be executed by or on behalf of the holder of record fully and correctly,
as such holder's name appears on such holder's stock certificate. If the
Shares are owned of record in a fiduciary capacity, such as by a trustee,
guardian or custodian, execution of the demand should be made in that capacity,
and if the Shares are owned of record by more than one person as in a joint
tenancy or tenancy in common, the demand should be executed by or on behalf of
all joint owners. An authorized agent, including an agent for two or more
joint owners, may executed a demand for appraisal on behalf of a holder of
records; however, the agent must identify the record owner or owners and
expressly disclose the fact that, in executing the demand, the agent is agent
for such owner or owners. A record holder such as a broker who holds Shares as
nominee for several beneficial owners may exercise appraisal rights with
respect to Shares held for one or more beneficial owners while not exercising
such rights with respect to the Shares held for other beneficial owners; in
such case, the written demand should set forth the identity of the Stockholder,
the Stockholder's intention to demand an appraisal of his or her Shares, and
the number of Shares as to which appraisal is sought. Where no number of
Shares is expressly mentioned, the demand will be presumed to cover all Shares
held in the name of the record owner. Stockholders who hold their Shares in
brokerage accounts or other nominee forms and who wish to exercise appraisal
rights are urged to consult with their brokers to determine the appropriate
procedures for the making of a demand for appraisal by such nominee.
All written demands for appraisal should be sent or delivered to the
Company at 3100 North "A" Street, Building B, Midland, Texas 79705, Attention:
Gary B. Gilliam.
The Company shall, within 10 days after the Effective Time of the
Merger, notify each Stockholder who has complied with the statutory
requirements summarized above and fully set forth in Section 262 that the
Merger has become effective and the date that it became effective. Within 120
days after the Effective Time of the Merger, but not thereafter, the Company or
any Stockholder who has complied with the statutory requirements summarized
above may file a petition in the Chancery Court demanding a determination of
the value of the Shares. The Company is under no obligation to and has no
present intention to file a petition with respect to the appraisal of the fair
value of the Shares. Accordingly, it will be the obligation of the individual
Stockholders to initiate all necessary action to perfect their appraisal rights
and initiate any such action within the time prescribed in Section 262.
Within 120 days of the Effective Time of the Merger, any Stockholder
who has complied with the requirements for exercise of appraisal rights will be
entitled, upon written request, to receive from the Company a statement setting
forth the aggregate number of Shares not voted in favor of adoption of the
Merger Agreement and with respect to which demands for appraisal have been
received and the aggregate number of holders of such Shares. Such statements
must be mailed within 10 days after a written request therefor has been
received by the Company or within 10 days after the expiration of the period
for appraisal demands, whichever is later.
If a petition for an appraisal is timely filed, after a hearing on
such petition, the Chancery Court will determine the Stockholders entitled to
appraisal rights and will appraise the "fair value" of their Shares, exclusive
of any element of value arising from the accomplishment or expectation of the
Merger, together with a fair rate of interest, if any, to be paid upon the
amount determined to be the fair value. Stockholders considering seeking
appraisal should be aware that the fair value of their Shares as determined
under Section 262 could be more than, the same as, or less than the
consideration they would receive pursuant to the Merger Agreement if they did
not seek appraisal of their Shares, and that investment banking opinion(s) as
to fairness from a financial point of view referred to herein are not
necessarily opinions as to fair value under Section 262. Generally, value may
be proven by any techniques or methods that are generally considered acceptable
in the financial community.
The Chancery Court will determine the amount of interest, if any, to
be paid upon the amounts to be received by persons whose Shares have been
appraised. The costs of the action may be determined by the Chancery Court
and taxed upon the parties as the Chancery Court deems equitable. Upon
application of a Stockholder, the Chancery Court may also order that all or a
portion of the expenses incurred by any Stockholder in connection with
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an appraisal, including, without limitation, reasonable attorneys' fees and the
fees and expenses of experts utilized in the appraisal proceeding, be charged
pro rata against the value of all of the Shares entitled to appraisal.
Any holder of Shares who has duly demanded an appraisal in compliance
with Section 262 will not, after the Effective Time of the Merger, be entitled
to vote the Shares subject to such demand for any purpose or be entitled to the
payment of dividends or other distributions on those Shares (except dividends
or other distributions payable to holders of record of Shares as of a record
date prior to the Effective Time of the Merger).
If any Stockholder who properly demands appraisal of such
Stockholder's Shares under Section 262 fails to perfect, or effectively
withdraws or loses, such Stockholder's rights to appraisal as provided in the
DGCL, the Shares of such Stockholder will be converted in the right to receive
the Merger Consideration. A Stockholder will fail to perfect, or effectively
lose or withdraw, a right to appraisal if, among other things, no petition for
appraisal is filed within 120 days after the Effective Time of the Merger, or
if the Stockholder delivers to the Company a written withdrawal of such
Stockholder's demand for appraisal and acceptance of the Merger. Any such
attempt to withdraw an appraisal demand more than 60 days after the Effective
Time of the Merger will require the written approval of the Company.
Failure to follow the steps required by Section 262 of the DGCL for
perfecting appraisal rights may result in the loss of such rights (in which
event a Stockholder will be entitled to receiver the Merger Consideration with
respect to such Shares in accordance with the Merger Agreement).
FINANCING OF THE MERGER
The funds to finance the Merger and pay the Merger Consideration and
other consideration to be paid in connection with the Merger, including
$3,605,492 to purchase the outstanding Shares held by Minority Stockholders,
will be made available pursuant to a credit arrangement among SAP, the Company
and Texas Commerce Bank. Such credit arrangement will close simultaneously
with the closing of the Merger and will be on the following terms, which are
more fully set forth in the commitment attached hereto as Appendix III: (1) the
Company and SAP will be co-borrowers under a revolving line of credit for up to
five million dollars, (2) the interest rate will be the prime rate of Texas
Commerce Bank, (3) the loan will mature on September 30, 1997, (4) the loan
will be secured by the "major properties" of the Company and by the shares of
stock of the Company owned by SAP, and (5) customary covenants and fees common
in oil and gas lending. Such pledge of assets of the Company will occur only
upon consummation of the Merger and the Company becoming a wholly-owned
subsidiary of SAP. The funds to be made available under the credit arrangement
will be sufficient to make the payments required by the Merger Agreement. The
loan will be repaid from the Company's cash on hand and revenues after the
Merger.
The costs of the Merger to the Company, such as legal fees, printing
costs, mailing and other costs and fees, are not expected to exceed $125,132
and will be paid from the Company's general working capital. Such costs and
fees are generally estimated and summarized as follows:
<TABLE>
<S> <C>
Filing Fees $ 3,132
Legal Fees 35,000
Accounting Fees 10,000
Fairness Opinion 50,000
Printing Costs 20,000
Miscellaneous Expenses 7,000
--------
TOTAL: $125,132
=======
</TABLE>
31
<PAGE> 33
STOCK PRICES AND DIVIDENDS
As discussed under "SPECIAL FACTORS - BACKGROUND OF THE MERGER", the
Common Stock trades infrequently and within a relatively narrow price range,
but with dramatic changes in price due to small and infrequent trades.
The Company's Common Stock trades on the over-the-counter market
through listing on the Nasdaq Small-Cap Market under the symbol SBRD. Market
price ranges for the Common Stock during the fiscal years ended March 31, 1995
and 1996 as reported by Nasdaq were:
<TABLE>
<CAPTION>
1997 1996 1995
----
Bid Bid Bid
---
-------------------------------------------------------------------------------
High Low High Low High Low
---- ---
<S> <C> <C> <C> <C> <C> <C>
1st Quarter $9.75(1) $5.00 $4.75 $4.50 5.50 5.00
2nd Quarter -- -- $5.25 $4.75 6.00 4.75
3rd Quarter -- -- $5.00 $5.00 6.50 4.50
4th Quarter -- -- $6.25 $5.00 5.50 4.50
</TABLE>
- ------------------------------------
(1) Following the announcement of the Merger.
On August 30, 1996, the closing bid price of the Common Stock was
$8.25 and the Company had approximately 2,118 Stockholders of record. On June
20, 1996, the day prior to the Company's announcement of the Merger, the
closing bid price of the Common Stock was $7.25. From April 26, 1996 to May
23, 1996, the closing price was $5.25 per share, the median price over the last
two years as reflected in the table above. In late May 1996, a series of
trades involving only 2,400 Shares (approximately 0.2% of the outstanding
Shares) resulted in an increase in the closing price to $8.00. See "SPECIAL
FACTORS - BACKGROUND OF THE MERGER." All prices set forth above represent
inter-dealer prices, without retail mark-up, mark-down or commission, and may
not represent actual transactions in the Common Stock.
The Company has not declared any cash dividends with respect to the
Common Stock since becoming publicly held in 1989. The Company's Board of
Directors presently intends to retain funds for financing the oil and gas
development and acquisition activities, as opposing to using such funds to
declare and pay cash dividends.
BUSINESS OF THE COMPANY
GENERAL
The Company and its subsidiaries are primarily engaged in the business
of domestic oil and gas exploration, development and production. The Company
was organized in June 1988 as a Delaware corporation and began operations in
March 1989. The Company has concentrated its efforts in the Permian Basin area
of Texas with minor operations in New Mexico, Louisiana, Oklahoma, Arkansas,
North Dakota, Colorado and Wyoming. The Company's principal operations have
been in the enhancement and further development of its operated oil and gas
properties, purchases of additional working interests in producing properties,
and the installation and monitoring of a secondary recovery waterflood project.
Certain terms related to the oil and gas business as defined under "-DEFINITION
OF CERTAIN OIL AND GAS TERMS."
At March 31, 1996, the Company had total proved reserves of
approximately 1,947,000 Bbls of oil and approximately 1,905,000 Mcf of natural
gas, representing $17,020,000 at an SEC 10 value. On a BOE basis, oil
constitutes 86% of total proved reserves and natural gas constitutes 14%.
Approximately 96% of the Company's
32
<PAGE> 34
proved reserves are concentrated in the Permian Basin of West Texas. The
Company had interests in 177 gross (87 net) productive oil and gas wells at
March 31, 1996 and operated 101 of such wells. Average daily net production
during fiscal 1996 was approximately 852 Bbls of oil and 907 Mcf of natural
gas.
For the past several years, the Company has been operating under a
business plan to increase reserves, production and cash flow by adhering to a
focused strategy that concentrates on (a) developing and increasing production
from existing properties through low risk development drilling primarily in the
North Robertson Unit and on surrounding leases in Gaines County, Texas (b)
monitoring the waterflood project in the Quito West Unit in Ward County, Texas
to determine if additional expansion is warranted (c) acquiring leasehold
acreage for limited and controlled exploration activities and (d) maintaining
financial flexibility to take advantage of additional development and
acquisition opportunities. The Company is committed to continuing to enhance
stockholder value through adherence to this strategy, but there is significant
risk associated with such strategy and with the oil and gas business in general
and such strategy may or may not result in any enhancement of value. See
"SPECIAL FACTORS -- FAIRNESS ANALYSIS AND RECOMMENDATIONS OF THE SPECIAL
COMMITTEE AND THE BOARD."
During fiscal 1996, the Company drilled six development locations
which were classified as proved undeveloped reserves at March 31, 1995. All
six of these wells were productive. Since the Company has drilled seventeen
development wells over the past two years, its inventory of development drill
sites has been significantly reduced. As a result, the Company has begun to
focus on developing additional drilling opportunities outside its core areas of
operations. The majority of drilling activity during fiscal 1997 is forecast
to be on new prospects developed by the Company.
BUSINESS OPERATIONS
The Company and its subsidiaries are primarily engaged in the business
of domestic oil and gas exploration, development and production. The Company
has concentrated its efforts in the Permian Basin area of Texas with minor
operations in New Mexico, Louisiana, Oklahoma, Arkansas, North Dakota, Colorado
and Wyoming. The Company's principal operations have been the enhancement and
further development of oil and gas properties it operates, acquisition of
additional working interests in producing properties, production from a
combination of operated and non-operated wells, and the installation and
monitoring of a secondary recovery waterflood project. During 1996, the
Company began to develop drilling opportunities outside its core areas of
operations.
As operator of numerous properties, the Company is responsible for the
identification and evaluation of opportunities for additional development,
including the drilling of offset wells, conducting well workovers and
initiating secondary recovery techniques such as waterflood projects. Other
activities associated with operating these properties include the marketing of
crude oil and natural gas, the operation of salt water disposal facilities, the
repair and maintenance of lease and well equipment and the use of secondary
recovery methods of production where appropriate. The Company monitors
production, expense and revenue data received on its non-operated properties to
determine the economic viability of those operations.
In order to avoid the risks inherent in the drilling of exploratory
wells, the Company has concentrated its activities on the development of its
existing producing fields primarily in the Quito West Unit and North Robertson
Unit in Ward and Gaines Counties, Texas, respectively. Through the drilling of
additional wells within a producing field or recompletions of existing wells in
other zones, the Company believes it can provide additions to its reserves
without bearing a great degree of risk. However, the Company expanded its
activities into Southeast New Mexico by acquiring undeveloped leasehold acreage
and drilling two exploratory wells in fiscal 1995. One of these wells was a dry
hole and resulted in a charge to dryhole and abandonment costs of approximately
$275,000. In the future, the Company believes that the risks associated with
the drilling of exploratory wells will become a much more significant factor in
its drilling program due to a significant reduction in development drilling
opportunities.
33
<PAGE> 35
PRINCIPAL PRODUCTS, SERVICES AND MARKETS
The Company's only products are oil and natural gas. The Company
markets its oil and gas by the sale of such products at the wellhead to
gathering and transportation companies operating in the geographic area of the
Company's production. The ability of the Company to market the oil and gas that
it finds or produces, if any, depends on numerous factors beyond the control of
the Company. The effect of such factors cannot be accurately predicted or
anticipated. These factors include the availability of other domestic and
foreign production, the marketing of competitive fuels, the proximity and
capacity of pipelines, fluctuations in supply and demand, the effect of federal
and state regulation of production, refining, transportation and general
prevailing national and worldwide economic conditions. At the present time,
worldwide oil production capacity and gas production in certain areas of the
United States exceed demand. The Company cannot predict the duration of the
surplus of crude oil and natural gas or the extent to which prices might be
affected.
The Company sold 77% and 83% of its products in 1996 and 1995,
respectively to two non-affiliated customers (See Note 8 to the Consolidated
Financial Statements). The Company has several short-term contracts (many are
month-to-month) for the sale of its oil production which generally provide for
a purchase price equal to the price for West Texas Intermediate Crude plus a
bonus ranging from $0.90 per bbl to $1.55 per bbl. The Company also has gas
purchase contracts with terms from month-to-month to seven years, which
generally provide for a price equal to a percentage of purchaser's proceeds
upon resale. Currently, the market for oil and natural gas in the areas in
which the Company is active is strong and competitive and the loss of one of
these customers would not have a material effect on the Company.
COMPETITION
The oil and gas industry is highly competitive. Competition is
particularly intense in the acquisition of desirable undeveloped oil and gas
leases and in the acquisition of producing oil and gas properties. Major and
independent oil and gas companies and oil and gas syndicates actively bid for
desirable oil and gas properties, as well as for the equipment and labor
required to operate and develop such properties.
There is also competition with other industries supplying the energy
and fuel needs of consumers. Although a number of the Company's competitors
have financial resources, facilities, and technical staffs much larger than
those of the Company, the Company believes that the locations of its leasehold
acreage, its exploration, drilling and production capabilities and the
experience of its management generally enable the Company to compete
effectively in its principal producing areas.
OPERATING HAZARDS
The oil and gas business involves a variety of operating risks,
including the risks of fire, explosions, blowouts, pipe failure, casing
collapse and abnormally pressured formations, the occurrence of any of which
could result in substantial losses to the Company due to injury and loss of
life, severe damage to or destruction of property and equipment, and suspension
of operations. The business is also subject to environmental hazards such as
oil spills, gas leaks, ruptures and discharges of toxic gases, which could
expose the Company to substantial liability due to pollution and other
environmental damage. The Company maintains insurance against some, but not
all, potential risks; however, there can be no assurance that such insurance
will be adequate to cover any loss or exposure for liability, or that such
insurance will continue to be available. 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 assurances can be given that the Company will be
able to maintain adequate insurance in the future at rates it considers
reasonable.
34
<PAGE> 36
GOVERNMENTAL REGULATION
The various governmental jurisdictions in which the Company holds oil
and gas properties and conducts exploration, production and related operations
have statutory and administrative provisions regulating the exploration for and
the production, transportation and sale of oil and gas. The regulations
specify, among other things, permits necessary for drilling of wells, spacing
of wells, measures required for preventing waste of oil and gas resources,
measures required for environmental protection, rates of production and sales
prices to be charged to purchasers. Failure to comply with such rules and
regulations can result in substantial penalties. The regulatory burden on the
oil and gas industry increases the Company's cost of doing business and affects
its profitability. Because such rules and regulations are frequently amended or
reinterpreted, the Company is unable to predict the future cost or impact of
complying with such laws. Although no prediction can be made concerning future
regulation or legislation which may affect the competitive status of the
Company, or affect the prices at which it may sell its oil and gas, any
regulation or legislation that lowers, directly or indirectly, price levels for
oil and gas sold could have an adverse effect on the Company's operations.
TAXATION
The Company's operations, and the petroleum industry in general, are
significantly affected by certain provisions of the Internal Revenue Code of
1986. These provisions permit, among other things, the owner of an economic
interest in an oil and gas property to deduct, subject to certain limitations,
the greater of cost depletion or percentage depletion. The Code also permits a
holder of a working interest in an oil or gas property to deduct intangible
drilling costs (IDC) when incurred. As a result, a large portion of the
exploratory and other costs incurred in discovering and developing a productive
oil or gas property can be deducted when incurred rather than recovered over a
number of years through deductions for depletion.
The Company is subject to an alternative minimum tax on an income base
which includes certain tax preference items and other adjustments to regular
taxable income.
The Revenue Reconciliation Act of 1990 provided the oil and gas
industry with various tax benefits. Due to the Company's large net operating
loss carryforward, no immediate benefits can be realized by the Company. For
further discussion of the Company's net operating loss carryforwards, see Note
4 on pages F-11 through F-12.
Oil and gas activities are also subject to state and local income,
severance, property and other taxes. It is also possible that subsequent
legislation, court decisions and governmental agency actions could further
limit tax benefits and impose additional tax burdens on the Company's oil and
gas activities.
ENVIRONMENTAL MATTERS
In general, the exploration and production activities of the Company
are subject to certain laws and regulations relating to environmental quality
and pollution control. Such laws and regulations may substantially increase the
costs of equipping for and carrying on these activities and may prevent or
delay the commencement or continuance of a given operation. The existence of
such regulations has had no material effect on the Company's methods of
development of its properties and the cost of such compliance has not been
material to date. The Company is not aware of any material cost to which it is
subject at this time, or to which it may become subject, with respect to
compliance with environmental laws and regulations, but the cost of compliance
in the future cannot be predicted.
EMPLOYEES
At June 1, 1996, the Company employed a total of 10 persons, of which
4 were engaged in exploration and development and 6 were engaged in
administrative, financial and management activities. In addition, the Company
contracts for field labor in certain areas of its operations.
35
<PAGE> 37
OIL AND GAS RESERVE INFORMATION
Estimates of the Company's proved oil and gas reserves as of March 31,
1996 were prepared by Joe C. Neal & Associates, Inc., independent petroleum
reservoir engineers. Proved oil and gas reserve estimates as of March 31, 1995
and 1994 were prepared by T. Scott Hickman & Associates, Inc., independent
petroleum reservoir engineers. Numerous uncertainties exist in estimating
quantities of proved reserves and in projecting future rates of production and
timing of development expenditures, including many factors beyond the Company's
control. This Proxy Statement contains estimates of the Company's proved oil
and gas reserves and the related future net revenues therefrom. Such estimates
were made by the Company's independent petroleum reserve engineers in
accordance with applicable guidelines prescribed by the Commission and based
upon a number of factors and assumptions common in the industry, the material
of which are that prices for oil and gas will remain constant, that a decline
curve or trend on the rate of production can be established, that there are no
significant changes in operating costs, that there is no significant change in
the rate of mechanical failures or catastrophic events, that similar wells will
have similar characteristics, that there is no significant change in
governmental regulation, and that the oil and gas contracts of the Company will
not be canceled All such factors and assumptions may vary considerably from
actual results. Actual future production, oil and gas prices, revenues,
production taxes, capital expenditures, operating expenses, geological success
and quantities of recoverable oil and gas reserves may vary substantially from
those assumed in the estimates and could materially affect the estimated
quantities and related SEC 10 value of proved reserves set forth in this Proxy
Statement. In addition, the Company's reserves may be subject to downward or
upward revisions based on production performance, purchases or sales of
properties, results of future development, prevailing oil and gas prices and
other factors. Therefore, estimates of the SEC 10 value of proved reserves
contained in this Proxy Statement should not be construed as estimates of the
current market value of the Company's proved reserves.
SEC 10 value is a reporting convention that provides a common basis
for comparing oil and gas companies subject to the rules and regulations of the
Commission. It requires the use of oil and gas prices prevailing as of the date
of computation. Consequently, it may not reflect the prices ordinarily received
or that will be received for oil and gas because of seasonal price fluctuations
or other varying market conditions. SEC 10 values as of any date are not
necessarily indicative of future results of operations. Accordingly, estimates
of future net revenues in this Proxy Statement may be materially different from
the net revenues that are ultimately received.
The Company did not provide estimates of total proved oil and gas
reserves during 1996 to any federal authority or agency, other than the
Commission.
PROVED RESERVES
At March 31, 1996, the Company had total proved reserves of
approximately 1,947,000 Bbls of oil and approximately 1,905,000 Mcf of natural
gas, representing $17,020,000 of SEC 10 value. On a BOE basis, oil constitutes
86% of total proved reserves and natural gas contributes 14%. Based on reserve
information as of March 31, 1996, and using the Company's reserve report
production information for fiscal 1997, the reserve-to-production ratio
associated with the Company's proved reserves is 6.8 years on a BOE basis.
36
<PAGE> 38
The following table summarizes the Company's proved oil and gas
reserves for the periods indicated.
<TABLE>
<CAPTION>
March 31,
-------------------------------------------------------
1996 1995 1994
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Proved developed reserves
Oil (Bbl) 1,947 2,004 1,331
Natural Gas (Mcf) 1,905 2,182 1,887
Proved undeveloped reserves
Oil (Bbl) - 312 268
Natural Gas (Mcf) - - -
</TABLE>
Additional information concerning the Company's estimated proved oil
and gas reserves is included in Item 7 - Financial Statements and Supplementary
Data.
No major discovery or other favorable or adverse event has occurred
since April 1, 1996 which is believed to have caused a significant change in
the estimated proved oil and gas reserves of the Company.
PRODUCTION
The following table summarizes the net oil and gas production,
average sales prices, and average production (lifting) costs per BOE for the
periods indicated.
<TABLE>
<CAPTION>
Years ended
March 31,
-------------------------------------------------------
1996 1995 1994
---- ---- ----
(In thousands, except average price and cost data)
<S> <C> <C> <C>
Oil
Production (Bbls) 311 226 191
Average sales price
per Bbl $17.53 $16.73 $15.46
Natural Gas
Production (Mcf) 331 332 426
Average sales price
per Mcf $ 1.81 $ 1.78 $ 1.88
Production Costs
Production (lifting)
costs per BOE $ 5.16 $ 5.78 $ 6.60
</TABLE>
DESCRIPTION OF MAJOR PROPERTIES
Quito West Unit. On November 30, 1990, the Company completed the
installation of the pilot waterflood project in the Quito West Unit in Ward
County, Texas, and water injection began into the reservoir. Oil production
materially increased from the pilot project and a $1,300,000 expansion of the
waterflood was begun in May 1993 and completed in September 1993. Oil
production has increased from a daily average of 65 barrels per
37
<PAGE> 39
day in November 1990 to an average of 542 barrels per day in March 1996. The
Company drilled three producing wells in the Quito West Unit during fiscal 1996
and converted one producer to an injector. One producing well was drilled in
the waterflood project last year.
Currently, the waterflood is being closely monitored and studied in
order to determine the reason the western one-third of the project has seen no
response to five years of water injection. No further development will be done
on this side of the field, which includes the drilling of three additional
wells, until response is seen.
At March 31, 1996, proved developed reserves related to the
waterflood project totalled approximately 962,000 Bbls of oil and 425,000 Mcf
of gas which represents 49.4% and 22.3% of the Company's total proved oil and
gas reserves, respectively.
North Robertson Unit. In the fiscal year ended March 31, 1996, the
Company drilled three productive wells in the North Robertson Unit (the
"Unit"). Additionally, the Company drilled and completed two other producing
wells on adjoining leases to the Unit in fiscal 1996. The Company has
identified additional drilling locations in the Unit and on surrounding acreage
to be drilled depending on regulatory approval and certain economic conditions.
In mid-1996, a well was drilled and completed as a producing well in the Unit.
Oil production in the Unit has increased from a daily average of 176 barrels of
oil per day in March 1992 to a daily average of 346 barrels of oil per day in
March 1996. Once the Unit has been drilled on twenty acre spacing, the Company
intends to study the feasibility of initiating a secondary recovery waterflood
project. The Company explored the idea of shooting a 3-D seismic survey of the
Unit and on adjacent leases, but determined that the project was not
economically viable.
At March 31, 1996, proved developed reserves related to the North
Robertson Unit totalled approximately 595,000 Bbls of oil and 361,000 Mcf of
gas which represents 30.6% and 19.0% of the Company's total proved oil and gas
reserves, respectively.
Southeast New Mexico. During 1995 and 1994 the Company acquired a
total of 1,413 net undeveloped acres in Eddy and Lea Counties, New Mexico.
During fiscal 1995, the Company drilled an exploratory well on a 160 acre tract
in Eddy County. This exploratory well was a dry hole and resulted in a charge
to dryhole and abandonment costs of approximately $275,000, which includes
$32,000 related to leasehold impairment.
The Company plans to continue to acquire additional acreage in
Southeast New Mexico based on specific geological prospects. No drilling is
planned in Southeast New Mexico for fiscal 1997.
Weeks Clearfork Prospect. In February 1996, the Company entered
into a drilling arrangement with an affiliated company to drill two Clearfork
tests on leases covering 640 acres in Hockley County, Texas. Two wells have
been drilled on this prospect, one a dry hole and one producing well. The
Company is currently evaluating any further development of this prospect.]
38
<PAGE> 40
PRODUCING WELLS AND ACREAGE
All wells owned and/or operated by the Company are located in the
continental onshore United States. The following table sets forth the Company's
total gross and net producing oil and gas wells and its total gross and net
developed and undeveloped acreage as of March 31, 1996 by state.
<TABLE>
<CAPTION>
Producing Wells
-----------------------------------------
Developed
State Oil Gas Acreage Undeveloped
----- --- --- --------------- -----------------
Gross Net Gross Net Gross Net Gross Net
----- --- ----- --- ----- --- ----- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Arkansas 0 0 3 .07 1,597 49 0 0
Colorado 0 0 2 .53 640 306 0 0
Louisiana 10 .94 0 0 948 110 0 0
New Mexico 2 .25 0 0 2,280 167 2,040 1,413
North Dakota 2 .24 0 0 960 99 0 0
Oklahoma 5 .43 0 0 1,452 104 0 0
Texas 145 84.17 6 .25 18,328 8,082 1,920 862
Wyoming 2 .09 0 0 720 61 0 0
--- ----- -- --- ------ ----- ----- -----
Total 166 86.12 11 .85 26,925 8,978 3,960 2,275
=== ===== == === ====== ===== ===== =====
</TABLE>
Additionally, the Company serves as operator of 20 injection wells
and 3 disposal wells. As operator, the Company receives fees from other
working interest owners as reimbursement for the general and administrative
expenses attendant to the operation of the wells.
The Company's oil and gas properties are subject to royalty,
overriding royalty and other outstanding interests customary in the industry.
The properties are also subject to burdens such as liens incident to operating
agreements, current taxes, development obligations under oil and gas leases and
other encumbrances, easements and restrictions. Specifically, certain of the
Company's properties are subject to liens securing the Company's line of credit
more fully described on page F-12. The Company believes that the existence of
any such burdens does not materially detract from the value of its leasehold
interests.
39
<PAGE> 41
EXPLORATION AND DEVELOPMENT ACTIVITIES
The following table shows gross and net wells drilled in which the
Company had a working interest during fiscal years 1996, 1995 and 1994.
<TABLE>
<CAPTION>
1996 1995 1994
--------------------- --------------------- -----------------------
Gross Net Gross Net Gross Net
----- --- ----- --- ----- ---
<S> <C> <C> <C> <C> <C> <C>
Exploratory
Productive 0.00 0.00 1.00 0.13 0.00 0.00
Dry 0.00 0.00 1.00 0.50 0.00 0.00
Development
Productive 11.00 9.33 6.00 5.51 2.00 1.58
Dry 0.00 0.00 0.00 0.00 0.00 0.00
Total
Productive 11.00 9.33 7.00 5.64 2.00 1.58
Dry 0.00 0.00 1.00 0.50 0.00 0.00
</TABLE>
Ten of the eleven wells drilled during fiscal 1996 were on Company
operated properties. All of the development wells drilled during both fiscal
1995 and 1994 were operated by the Company while the two exploratory wells
drilled in 1995 were on properties operated by others. During fiscal year
1997, the Company expects to drill approximately eight to ten gross wells on
its operated properties.
OFFICE FACILITIES
In May, 1995, the Company purchased an office building located at
3100 North "A" Street, Building B, Midland, Texas, 79705 for approximately
$339,000. The Company relocated its corporate offices to this address in
November 1995. The Company's telephone number at such office is (915)
684-7005.
DEFINITION OF CERTAIN OIL AND GAS TERMS
When used in this Proxy Statement, the following terms have the
meanings indicated below.
"Bbl" means a standard barrel of 42 U.S. gallons and represents the
basic unit for measuring the production of crude oil and condensate.
"BOE" means a barrel-of-oil-equivalent and is a customary conversion
used in the United States to express oil and gas volumes on a comparable basis.
It is determined on the basis of the estimated relative energy content of
natural gas to oil, being approximately 6 Mcf of natural gas per Bbl of oil.
"gross" acre or well means an acre or well in which a working
interest is owned.
"Mcf" means one thousand cubic feet under prescribed conditions of
pressure and temperature and represents the basic unit for measuring the
production of natural gas.
"net" acres or wells is determined by multiplying the gross acres or
wells, as the case may be, by the applicable working interest in those gross
acres or well.
40
<PAGE> 42
"proved reserves" means those estimated quantities of crude oil and
natural gas that geological and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known oil and gas reservoirs
under existing economic and operating conditions. Proved reserves are limited
to those quantities of oil and gas that can be expected to be recoverable
commercially at current prices and costs, under existing regulatory practices
and with existing conventional equipment and operating methods.
"proved developed oil and gas reserves" are proved reserves that can
be expected to be recovered through existing wells and existing equipment and
operating methods.
"proved undeveloped oil and gas reserves" are proved reserves that
are expected to be recovered from new wells on undrilled acreage or from
existing wells where a relatively major expenditure is required for
recompletion or secondary or tertiary recovery. Reserves assigned to undrilled
acreage are limited to those drilling units that offset productive units
reasonably certain of production when drilled.
"SEC 10 value" means the present value of estimated future net
revenues, before income taxes, of proved reserves, determined in all material
respects in accordance with the rules and regulations of the Securities and
Exchange Commission (generally using prices and costs in effect at the
specified date and a 10% discount rate). The prices in effect at March 31, 1996
used in calculating SEC 10 value as of such date for purposes of this Proxy
Statement were (a) in the case of oil, an average of $20.70 per Bbl and (b) in
the case of gas, an average of $2.03 per Mcf.
ADDITIONAL INFORMATION
Additional information regarding the Company is set forth in the
Company's Annual Report on Form 10-KSB for the fiscal year ended March 31,
1996, a copy of which accompanies this Proxy Statement.
CERTAIN INFORMATION CONCERNING SEABOARD
ACQUISITION PARTNERS, INC. AND SMI
SAP is a Delaware corporation whose principal asset is its ownership
of 1,055,683 Shares. SAP conducts no business other than owning Shares. SMI,
a Delaware corporation, is a wholly owned subsidiary of SAP and was formed for
the purpose of the Merger. SMI has not conducted any business except in
connection with the Merger, and has no material assets other than its rights
under the Merger Agreement. SMI will cease to exist following the Merger.
The current officers and directors of SAP are Messrs. E.E. Runyan,
Robert L. Marolda and Edward P. Bliss, all of whom are Directors of the
Company. Mr. E.E. Runyan is an officer and the sole director of SMI. See
"ELECTION OF DIRECTORS" for additional information regarding these individuals.
41
<PAGE> 43
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
THREE MONTHS
ENDED JUNE 30, YEARS ENDED MARCH 31,
-------------------- ---------------------------------------------------------------
1996 1995 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
(unaudited)
(in thousands, except ratios and per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenues $ 1,723 $ 1,518 $ 6,048 $ 4,366 $ 3,750 $ 3,890 $ 3,062
Operating income (loss) 402 520 1,571 613 161 201 (209)
Net income 480 612 1,801 824 207 565 20
Net income (loss) available
to common shareholders 480 612 1,801 824 207 565 (55)
Preferred stock dividends -- -- -- -- -- -- 75
Common stock dividends -- -- -- -- -- -- --
Earnings (loss) per common share
Primary 0.33 $ 0.41 $1.22 $0.68 $0.27 $0.73 $(0.10)
Fully diluted N/A N/A N/A N/A N/A N/A N/A
Ratio of earnings to fixed charges 192.93:1 98.03:1 91.05:1 31.52:1 8.39:1 19.83:1 1.80:1
BALANCE SHEET DATA (AT PERIOD END):
Current assets $ 5,130 $ 3,133 $ 4,587 $ 4,461 $ 1,579 $ 3,075 $ 3,385
Total assets 15,572 13,804 14,919 13,750 8,860 8,890 8,552
Current liabilities 663 472 511 1,030 274 473 546
Long-term obligations -- -- -- -- -- -- --
Total stockholders' equity 14,909 13,332 14,408 12,720 8,586 8,417 8,006
Book value per common share $ 10.13 $ 8.96 $ 9.82 $ 8.55 $ 11.45 $ 11.13 $ 10.20
</TABLE>
42
<PAGE> 44
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
At the end of the fiscal year ended March 31, 1996, the Company had
working capital of $4,076,000 and a current ratio of 9.0 to 1.0. The primary
investing activity during the 1996 fiscal year was approximately $3,466,000 in
capital expenditures which includes the cash outlay to drill six development
oil wells in the North Robertson Unit and adjacent acreage, four development
oil wells in the Quito West Unit and nearby acreage, and one development oil
well in Louisiana. Expenditures were also made for undeveloped acreage and an
office building.
During fiscal years ended March 31, 1996 and March 31, 1995, the
Company generated cash from operations of $3,554,000 and $2,152,000,
respectively. Such cash provided from operations plus the Company's cash
balances, has been and is expected to be sufficient to satisfy all of the
Company's working capital requirements. In addition to its working capital
requirements, the Company expects that its capital expenditure requirements for
fiscal year 1997 could total approximately $3,200,000 depending on drilling
results of new prospects generated by the Company.
Approximately 50% of the Company's capital expenditure budget for
fiscal 1997 is projected to be on new prospects not associated with the
Company's North Robertson and Quito West Units. Development drilling will
continue in the Quito West Unit if warranted by waterflood response and in the
North Robertson Unit depending on regulatory approval and certain economic
conditions.
To fund such capital expenditures, the Company expects that its cash
provided by operations and cash balances plus borrowing under its line of
credit described below will be adequate not only to fund fiscal 1997 capital
expenditures but provide the Company the financial flexibility needed to
respond to investment opportunities for the acquisition of oil and gas
properties.
On August 17, 1994, the Company established a two year revolving
line of credit of up to $5,000,000 with a bank. The current borrowing base on
the line of credit is $1,800,000 and is determined by the lender's valuation of
certain of the Company's proved developed producing oil and gas properties.
The interest rate is the bank's prime rate and a commitment fee of 1/2 of 1%
per annum is payable on the unused portion of the credit line. The line of
credit is secured by a significant portion of the Company's oil and gas
properties and is subject to the terms of an agreement which restricts the
incurrence of additional indebtedness and limits the amount of lease payments.
At March 31, 1996 the Company had not utilized any portion of its credit line.
At March 31, 1996, stockholders' equity represented 96.6% of total
assets. The Company purchased 20,081 shares of Common Stock during the year
ended March 31, 1996 for an aggregate purchase price of $113,000 (an average
price per share of $5.63), and 12,638 shares during the year ended March 31,
1995 for an aggregate purchase price of $70,000 (an average price per share of
$5.54), all of which shares are being held by the Company as treasury stock.
RESULTS OF OPERATIONS
The Company's results of operations have been prepared on a BOE
(equivalent barrels of oil, using a ratio of six Mcf of gas to one barrel of
crude oil) basis for the two years ended March 31, 1996 and 1995.
43
<PAGE> 45
<TABLE>
<CAPTION>
Three Months Ended Years ended
June 30, March 31,
------------------------ ------------------------------
1996 1995 1996 1995
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Production and prices (unaudited)
Oil (Bbls) 75,000 77,000 311,000 226,000
Natural gas (Mcf) 79,000 78,000 331,000 332,000
Average oil price (per Bbl) $20.70 $17.92 $17.53 $16.73
Average gas price (per Mcf) $ 2.26 $ 1.78 $ 1.81 $ 1.78
Ratio of average oil to
average gas price 9.16/1 10.07/1 9.69/1 9.40/1
Equivalent barrels
of oil (BOE) 88,000 90,000 366,000 281,000
--------- --------- --------- ---------
Increase in production
volumes over prior year (2.22)% 40.63% 30.25% 7.25%
Results of operations per BOE
Oil and gas sales $ 19.58 $ 16.87 $ 16.52 $ 15.54
--------- --------- --------- ---------
Costs and expenses
Lease operating expenses 5.23 4.62 5.16 5.78
Dryhole and abandonment 2.45 .23 .05 1.01
Depreciation and depletion 5.27 4.31 4.83 3.91
General and administrative 2.06 1.92 2.15 2.66
Geological and geophysical -- -- .05 --
--------- --------- --------- ---------
15.01 11.08 12.24 13.36
--------- --------- --------- ---------
Operating income 4.57 5.79 4.28 2.18
--------- --------- --------- ---------
Other income
Interest income .64 .47 .46 .51
Gains on sales of property
and equipment .24 .55 .19 --
Other income .01 -- .01 .24
--------- --------- --------- ---------
.89 1.02 .66 .75
--------- --------- --------- ---------
Net income per BOE $ 5.46 $ 6.81 $ 4.94 $ 2.93
========= ========= ========= =========
</TABLE>
44
<PAGE> 46
THREE MONTHS ENDED JUNE 30, 1996 VS. THREE MONTHS ENDED JUNE 30, 1995
Revenue from oil and gas production for the three months ended June
30, 1996 was $1,723,000 compared to $1,518,000 for the same period last year.
The majority of this increase can be attributed to higher oil prices. The
Company received an average of $20.70 per barrel during the current quarter
compared to $17.92 per barrel for the same quarter last year. Gas prices also
increased from an average of $1.78 last year to $2.26 for the current period.
Other income reported by the Company for the quarter ended June 30,
1996 was $78,000, a decrease of $14,000 from the same period last year. A gain
of $50,000 from the sale of a certain royalty interest recorded last year
offset by higher interest income in the current quarter accounts for the
decrease.
Lease operating expenses were $460,000 during the quarter ended June
30, 1996 compared to $416,000 for the same period last year. This increase in
lease operating expenses is due primarily to a production tax refund received
during the first quarter of last year. General and administrative expenses
held steady at 11% of revenue for the three months ended June 30, 1996 and
1995.
YEAR ENDED MARCH 31, 1996 VS. YEAR ENDED MARCH 31, 1995
Revenues for the fiscal year ended March 31, 1996 increased 39% in
total or 6% on an equivalent barrel basis when compared to the fiscal year
ended March 31, 1995, primarily due to the combination of a 5% increase in the
average oil price received and a 38% increase in oil production. Such increase
in oil production resulted from the drilling and other production activities
described elsewhere herein.
Lease operating expenses decreased 11% per equivalent barrel
reflecting management's efforts to control operating expenses. General and
administrative expense increased slightly by 5% in total, but decreased by 19%
on an equivalent barrel basis. Depreciation and depletion increased in total
by $666,000 or on an equivalent barrel basis it increased 24%. This increase
is the direct result of the 30% increase in production.
The Company's total other income increased $26,000 due primarily to
an increase in interest income.
The Company's gross deferred tax assets consist primarily of the tax
effect of net operating loss carryforwards for Federal income tax purposes
totalling $9,070,000. Management believes that it is more likely than not that
the Company will be unable to utilize the entirety of the net operating loss
carryforwards during the application carryforward period. Management
considered the following factors in reaching this conclusion and in estimating
the appropriate amount of valuation allowance needed to offset the gross
deferred tax assets:
1. The Company has not generated significant taxable
income in prior years and is unable to determine when
taxable income of a magnitude sufficient to utilize net
operating loss carryforwards will be generated.
2. The effects of alternative minimum tax limit the
usefulness of net operating loss carryforwards.
3. The expectation that reversal of existing temporary
difference in book and tax basis will result in the
realization of existing net operating loss
carryforwards to the extent necessary to offset the
regular tax impact of such reversals.
4. If the Merger is consummated, the resulting ownership
change may limit the use of all or a portion of the net
operating loss carry forwards.
45
<PAGE> 47
NEW ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121 - Accounting for Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of ("FAS 121").
FAS 121 is effective for financial statements for fiscal years beginning after
December 15, 1995, although earlier adoption is encouraged. The application of
FAS 121 to oil and gas companies utilizing the successful efforts method (such
as the Company) requires periodic determination of whether the book value of
long-lived assets exceeds the future cash flows expected to result from the use
of such assets and, if so, requires a reduction of the carrying amount of the
"impaired" assets to their estimated fair values.
At March 31, 1996, the Company elected early adoption of FAS 121 for
which it was determined that no impairment exists for the year.
46
<PAGE> 48
PRINCIPAL HOLDERS OF SECURITIES
The following table sets forth certain information as of August 30,
1996 with respect to (i) each person who owns beneficially more than five
percent of the outstanding shares of Common Stock; and (ii) the beneficial
ownership of Common Stock by all Officers, Directors and Nominees as a group.
<TABLE>
<CAPTION>
Number of Shares
Relationship of Common Stock Percent
Name and Address to Company Beneficially Owned of Class
---------------- ----------- ------------------ --------
<S> <C> <C> <C> <C>
Seaboard Acquisition Partners, Inc.(1) Principal Stockholder 1,055,683(2) 71.55%
3100 North "A" Street -----
Bldg. B, Suite 201
Midland, Texas 79705
All Officers, Directors and Nominees
as a Group (see "ELECTION OF DIRECTORS" for 81,892(3) 5.43%(4)
individual ownership information) ----
</TABLE>
- ----------------------
(1) Mr. E.E. Runyan (Chairman of the Board, Chief Executive Officer and a
Director of the Company) is a stockholder, officer and director of SAP;
and Messrs. Robert L. Marolda and Edward P. Bliss (Directors of the
Company) are officers and directors of SAP.
(2) Includes 701,449 Shares acquired by SAP in the Company's rights offering
in 1994 for a purchase price of $4.61 per share.
(3) Does not include any portion of the 1,055,683 shares owned by SAP.
Includes shares which such persons have the right to acquire within 60
days through presently exercisable options granted to such persons under
the Employer Benefits Plans (as defined herein). See the stock ownership
table on the next page and "REMUNERATION OF MANAGEMENT - EMPLOYEE BENEFIT
PLANS".
(4) For the sole purpose of calculating this percentage, the shares
underlying the options described in (3) above are treated as outstanding
shares.
ELECTION OF DIRECTORS
At the Meeting of Stockholders, six (6) Directors are to be elected. The
present Board of Directors has fixed the number of Directors for the upcoming
fiscal year at six (6). Information with respect to the nominees for Directors
is set forth below. Each Director so elected will hold office until the
earlier of (a) completion of the Merger or (b) the next Meeting of Stockholders
or until his successor is elected and has qualified. The persons named as
proxies in the enclosed proxy have been designated by the Board of Directors
and intend to vote for the nominees named herein in the election of Directors.
If the contingency should occur that any such nominee is unable to serve as a
Director, it is intended that the Shares represented by the proxies will be
voted in the absence of contrary indication for any substitute nominee that the
Board of Directors may designate. Each of the nominees listed has advised the
Company that he is willing to serve as a Director if elected.
The following table sets forth certain information as of August 30, 1996
with respect to each nominee to the Board of Directors, all of whom currently
serve in the capacities indicated below:
47
<PAGE> 49
<TABLE>
<CAPTION>
Name, (age), Position with Company Served as a Shares of Common Stock Percent
and address Director Since(1) Beneficially Owned of Class(2)
- ---------------------------------- -------------- ---------------------- --------
<S> <C> <C> <C> <C>
E.E. Runyan (62) January 1991 19,960 (3)(4) 1.35%
Chairman of the Board, Chief
Executive Officer and Director
5114 Polo Club Drive
Midland, TX 79705
Edward E. Runyan (37) January 1991 5,491 (5) *
Director
1708 Coventry
Midland, TX 79705
Robert L. Marolda (45) January 1991 16,225 (4)(5) 1.10%
Director
518 17th Street, Ste. 1010
Denver, CO 80202-4111
Robert L. Hollis (69) January 1991 15,225 (5) 1.03%
Director
2011 Parkview Drive
Okmulgee, OK 74447
Gary B. Gilliam (46) August 1992 10,991 (6) *
President, Chief Financial
Officer, Secretary and Director
4608 Island Drive
Midland, TX 79707
Edward P. Bliss (63) August 1993 14,000 (4)(5) *
Director
38 Bullard St.
Sherborn, MA 01770
</TABLE>
- --------------------
* Less than one percent of the shares outstanding.
(1) The term of office of each of the present Directors is until the 1996
Meeting of Stockholders or until a successor is elected and has
qualified.
(2) For the sole purpose of calculating these percentages, the shares which
the named person has the right to acquire within 60 days, by exercise of
the options described in these footnotes, are deemed outstanding shares
with respect to that person's percentage ownership.
(3) Includes 7,000 shares held in the name of Edward E. Runyan - Defined
Benefit Plan and 7,000 shares which Mr. Runyan has the right to acquire
within 60 days through a presently exercisable option granted to Mr.
Runyan pursuant to the 1994 Employee Incentive Stock Option Plan. See
"REMUNERATION OF MANAGEMENT -EMPLOYEE BENEFIT PLANS".
48
<PAGE> 50
(4) Does not include 1,055,683 shares owned by SAP, of which Messrs. Runyan,
Marolda and Bliss are officers and directors. See "PRINCIPAL HOLDERS OF
SECURITIES."
(5) Includes 4,000 shares which the named person has the right to acquire
within 60 days through a presently exercisable option granted to the
named person under the Outside Directors Stock Option Plan. See
"REMUNERATION OF MANAGEMENT - EMPLOYEE BENEFIT PLANS".
(6) Includes 9,000 shares which Mr. Gilliam has the right to acquire within 60
days through a presently exercisable option granted to Mr. Gilliam
pursuant to the 1994 Employee Incentive Stock Option Plan. See
"REMUNERATION OF MANAGEMENT - EMPLOYEE BENEFIT PLANS".
Presented below is certain biographical information with respect to each
Director and executive officer of the Company (all such persons are United
States citizens).
E.E. Runyan became Chairman of the Board and Chief Executive Officer of the
Company in January 1991. For in excess of the past five years, Mr. Runyan has
been an independent oil operator in Midland, Texas, operating through Runyan
Oil Co., Texon Oil Company and Honolulu Oil Co. He is the father of Edward E.
Runyan and the brother-in-law of Robert L. Hollis, both of whom are Directors.
Edward E. Runyan, a Director of the Company since January 1991, is currently
President and a Director of Texon Oil Company and a Director of Merlyn Energy.
Mr. Runyan was formerly employed as a production engineer by Conoco, Inc. from
June 1982 until joining Texon Oil Company in February 1991. He is the son of
E.E. Runyan, Chairman of the Board and Chief Executive Officer of the Company,
and the nephew of Robert L. Hollis, a Director of the Company.
Robert L. Marolda is currently President and a Director of Castlereagh
Investments, Inc., a privately held oil, gas and corporate investment company.
Mr. Marolda previously served as Chairman and President of BMR Corporation from
1986 through its sale in July 1993. He also served as President of Energy
Minerals Corporation, BMR's operating subsidiary, an independent oil and gas
company based in Denver, Colorado from 1984 to July 1993. Mr. Marolda also
serves as a Director of Honolulu Oil Co. He has been a Director of the Company
since 1991.
Robert L. Hollis became a Director of the Company in January 1991. For in
excess of the past five years, Mr. Hollis has served in a variety of positions
at First National Bank & Trust Co. of Okmulgee, Oklahoma, including Chairman of
the Board and Chief Executive Officer, and is currently chairman emeritus of
that institution. In addition, Mr. Hollis serves as President of First
Okmulgee Corporation, Okmulgee, Oklahoma. He is the uncle of Edward E. Runyan,
a Director of the Company, and the brother-in-law of E.E. Runyan, Chairman of
the Board and Chief Executive Officer of the Company.
Gary B. Gilliam became a Director of the Company in August 1992. He has
served as President, Chief Financial Officer and Secretary of the Company since
July 1991.
Edward P. Bliss is and has been, for in excess of five years, an Investment
Counselor for Loomis, Sayles & Company, Inc., and serves as a Managing Partner
and Vice President of Loomis, Sayles & Company. He also serves as a Director
of Sierra Pacific Resources, Inc., a public utility company. Mr. Bliss has
been a Director of the Company since August 1993.
49
<PAGE> 51
COMMITTEES AND MEETINGS OF THE BOARD
The Company currently has only three committees of the Board of Directors,
the Audit Committee, the Employee Plan Committee and the Special Committee
formed in connection with the Merger. The Audit Committee, composed of Messrs.
Edward E. Runyan, Hollis and Marolda, considers financial matters relating to
the Company's independent auditors and hears reports by the Company's
independent auditors with respect to management controls and other related
matters. The Audit Committee met one time during the fiscal year ended March
31, 1996. The Employee Plan Committee is composed of Messrs. Edward E. Runyan,
Marolda, Hollis and Bliss, and administers the Company's 1994 Employee
Incentive Stock Option Plan. The Employee Plan Committee met one time during
the Company's fiscal year ended March 31, 1996. The Special Committee,
composed of Messrs. Edward E. Runyan, Gilliam and Hollis, was formed to
consider issues related to the Merger. See "SPECIAL FACTORS - BACKGROUND OF
THE MERGER." The Special Committee met three times during the fiscal year
ended March 31, 1996.
During the year ended March 31, 1996, the Board of Directors held four
meetings. No Director proposed for election attended fewer than 75 percent of
the aggregate of the total number of Board and Committee (as applicable)
meetings held during the period that he served.
REMUNERATION OF MANAGEMENT
The following table sets forth information as to remuneration paid by the
Company to its chief executive officer and its only other executive officer
whose total cash compensation exceeded $100,000, for services rendered in all
capacities to the Company during each of the last three fiscal years ended
March 31, 1994, 1995 and 1996:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term All Other
Annual Compensation(1) Compensation Compensation(2)
---------------------- ------------ ---------------
Securities
Underlying
Name and Principal Position Year Salary Bonus Options/SARs
--------------------------- ---- ------ ----- ------------
<S> <C> <C> <C> <C> <C>
E.E. Runyan 1996 $70,000 $15,778 (3) 4,000 $6,000
Chairman of the Board, Chief 1995 $65,833 $ 5,000 (4) 3,000 $4,500
Executive Officer & a Director 1994 $60,000 $10,000 0 $6,000
Gary B. Gilliam 1996 $90,000 $15,778 (3) 4,000 $18,578 (5)
President, Chief Financial 1995 $89,917 $ 5,000 (4) 5,000 $16,667 (5)
Officer, Secretary & a Director 1994 $85,000 $10,000 0 $16,210 (5)
</TABLE>
- --------------------
(1) In addition to annual salary and bonuses, certain of the Company's
executive officers receive certain personal benefits as part of their
annual compensation. The aggregate amount of such personal benefits,
however, does not exceed the lesser of $50,000 or 10% of the total of
annual salary and bonus reported for any of the named executive officers.
50
<PAGE> 52
(2) Includes amounts paid to the named persons in their capacities as
Directors of the Company for attendance at meetings of the Board.
(3) Does not include a performance bonus of approximately $34,225 for services
rendered in the fiscal year ended March 31, 1996, but paid in the fiscal
year ended March 31, 1997.
(4) Does not include a performance bonus of approximately $15,778 for services
rendered in the fiscal year ended March 31, 1995, but paid in the fiscal
year ended March 31, 1996.
(5) Includes the dollar value of any insurance premiums paid by, or on behalf
of, the Company with respect to term life insurance for the benefit of the
named executive officer.
EMPLOYMENT ARRANGEMENTS
The Company has no employment agreements with any of its current officers or
employees, and has no compensatory plans or arrangements related to the
resignation, retirement or other termination of an executive officer's
employment or to a change in control of the Company other than benefits under
the Employee Benefit Plans. See "-EMPLOYEE BENEFIT PLANS."
DIRECTORS' FEES
The Company currently compensates its Directors for attendance at Board and
Committee meetings at the rate of $1500 for Board meetings and $500 for
Committee meetings held separately from Board meetings.
EMPLOYEE BENEFIT PLANS
The Company currently has three employee benefit plans, the Seaboard Oil Co.
1994 Employee Incentive Stock Option Plan, the Outside Directors Stock Option
Plan of Seaboard Oil Co. and the Directors Long-Term Incentive Plan of Seaboard
Oil Co. (collective, the "Employee Benefit Plans"). The following tables
reflect grants under the Employee Benefit Plans to the executive officers named
in the Summary Compensation Table. A description of each of the Employee
Benefit Plans follows the tables.
OPTIONS/SARS GRANTED IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Number of Shares % of Total Options/SARs Granted Exercise Expiration
Name Underlying Options/SARs Granted(1) to Employees in Fiscal Year (2) Price Date
---- ------------------------------- --------------------------- ----- ----
<S> <C> <C> <C> <C>
E.E. Runyan 4,000 33% $5.50 August 25,
2005
Gary B. Gilliam 4,000 33% $5.00 August 25,
2005
</TABLE>
- --------------------
(1) All shares listed relate to options granted under the 1994 Employee
Incentive Stock Option Plan on August 25, 1995, and are immediately and
fully exercisable.
(2) These percentages are based solely on the options granted under the 1994
Employee Incentive Stock Option Plan and do not include options granted to
non-employee directors under the Outside Directors Stock Option Plan.
51
<PAGE> 53
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Number of Securities Underlying Unexercised Value of Unexercised In-the-Money
Options/SARs at FY-End Options/SARs at FY-End
Name Exercisable/Unexercisable(1) Exercisable/Unexercisable(2)
---- ------------------------- -------------------------
<S> <C> <C>
E.E. Runyan 7,000/0 $1,850.00/0
Gary B. Gilliam 9,000/0 $6,500.00/0
</TABLE>
- --------------------
(1) All shares listed relate to options granted under the 1994 Employee
Incentive Stock Option Plan on August 26, 1994, and on August 25, 1995,
and are immediately and fully exercisable.
(2) The bid and ask prices for the Common Stock as reported on the Nasdaq
Small-cap Market on March 31, 1996 (fiscal year end) were $5.75 and $6.25,
respectively. Therefore, the "fair market value" used to calculate the
value in this column is $6.00.
Outside Directors Stock Option Plan. The Outside Directors Stock Option
Plan provides for the issuance of stock options to the outside directors of the
Company. A total of 40,000 shares of Common Stock has been authorized and
reserved for issuance under the plan, subject to adjustments to reflect changes
in the Company's capitalization resulting from stock splits, stock dividends
and similar events. Only outside directors are eligible to participate in the
plan. Outside directors are those directors of the Company who are not
executive officers or regular salaried employees of the Company as of the date
an option is granted. Under the plan, an option for 2,000 shares of Common
Stock will be granted to each person who qualifies as an outside director as of
the effective date of the plan and each year thereafter that such person is
elected as a director of the Company through and including 1998. The exercise
price of each option granted under the plan will be the fair market value (as
reported on the Nasdaq Small Cap Market) of the Common Stock at the time the
option is granted, and may be paid either in cash or shares of Common Stock.
Each option will be exercisable immediately, and will expire ten years from the
date of grant. An option granted under the plan is not transferrable other
than by will or the laws of descent and distribution. In the event a
participant in the plan ceases to be an outside director, other than by reason
of death or change of control of the Company, such participant may exercise an
outstanding option under the plan within ninety days after such termination, to
the extent the participant was entitled to exercise the option on the date of
termination. In the event of the death of a participant under the plan, such
participant's option(s) may be exercised by the executors or administrators of
the optionee's estate or by the legatees of such participant within one year
after his death, so long as the term of the option has not expired. In the
event of a change of control of the Company, each participant will be provided
with notice of the change of control and will have thirty days from the date of
such notice to exercise options granted under the plan, subject to certain
conditions. The Company does not receive any consideration upon the grant of
options under the plan. The options granted under the plan are intended to be
non-qualifying options for federal income tax purposes. Because options under
the plan are not generally transferrable, do not appear to be subject to a
substantial risk of forfeiture and the exercise price will be the fair market
value of the common stock on the date of grant, the options should not be
taxable to an optionee until the optionee exercises the option, at which time
the optionee would recognize income on the difference between the exercise
price and the fair market value of the shares on the date of exercise. The
grant of options under the plan should be treated as compensation paid by the
Company for purposes of the Company's federal income tax considerations. The
Board of Directors may amend the plan without the approval of the stockholders
of the Company in any respect other than the following, which require
stockholder approval: material increases in the number of shares which may be
awarded under the plan, material increases in the benefits accruing to
participants under the plan, material modifications of the requirements for
eligibility for participation in the plan, or any other amendment which
requires stockholder approval by law. The Company currently has four
directors, Messrs. Edward E. Runyan, Marolda, Hollis and Bliss, who are
eligible to participate in the plan. Pursuant to the terms of the plan, an
option for 2,000 shares of Common Stock was granted to each of the currently
eligible outside directors as of August 25, 1995, with an exercise price of
$5.00 per share.
1994 Employee Incentive Stock Option Plan. The 1994 Employee Incentive
Stock Option Plan provides for the grant of qualified stock options to the
employees of the Company and its subsidiaries, including officers and directors
who are salaried
52
<PAGE> 54
employees. A total of 60,000 shares of Common Stock has been authorized and
reserved for issuance under the plan, subject to adjustment to reflect changes
in the Company's capitalization resulting from stock splits, stock dividends
and similar events. The plan is administered by the Employee Plan Committee,
which consists of not less than three and not more than five directors who are
not eligible to participate in the plan. The Committee has the sole authority
to interpret the plan, to determine the persons to whom options will be
granted, to determine the basis upon which the options will be granted, and to
determine the exercise price, duration and other terms of the options to be
granted under the plan; provided that (a) the exercise price of each option
granted under the plan may not be less than the fair market value of the Common
Stock on the date the option is granted (110% of fair market value if the
employee is the beneficial owner of 10% or more of the Company's voting
securities), (b) the exercise price must be paid in cash or by surrendering
previously owned shares of Common Stock upon the exercise of the option, (c)
the term of the option may not exceed ten years, and (d) no option is
transferrable other than by will or the laws of descent and distribution. Upon
termination of an optionee's employment (other than by death or disability),
the option may be exercised prior to the expiration date of the option or
within three months after the date of such termination, whichever is earlier,
but only to the extent the optionee had the right to exercise the option upon
the date of such termination. In the event of the death or disability of an
optionee, the option may be exercised by such person, his guardian, legatee or
personal representative at any time prior to the expiration date of the option
or within one year after the date of the death or disability, whichever is
earlier, but only to the extent the optionee had the right to exercise the
option as of the date of his death or disability. Options may not be granted
under the plan to any individual if the effect of such grant would permit that
person to have the first opportunity to exercise such options, in any calendar
year, for the purchase of shares having a fair market value (at the time of
grant of the option) in excess of $100,000.00. Neither the Company nor any of
its subsidiaries will receive any consideration for the granting of options
under the plan. Options granted under the plan are intended to have the
federal income tax consequences of a qualified stock option. As a result, the
exercise of the option will not be a taxable event; the taxable event occurs at
the time the shares of Common Stock acquired upon exercise of the option are
sold. If the optionee holds such shares for the later of two years from the
date the option was granted or one year from the date of exercise of the
option, the difference between the price paid for the shares at exercise and
the price for which those shares are sold will be treated as capital gains
income. If the optionee does not hold the shares for the required holding
period, the income would be treated as ordinary income rather than capital
gains income. The grant of options under the plan will be treated as
compensation by the Company for federal income tax purposes. The Board of
Directors may amend the plan, without stockholder approval, in any respect
other than the following, which will require stockholder approval: increasing
the total number of shares for which options may be granted under the plan,
changing the minimum exercise price, affecting outstanding options or the
unexercised rights thereunder, extending the option period, or extending the
termination date of the plan. There are currently approximately ten persons
who are eligible to participate under the plan. On August 25, 1995, options
were granted under the plan to Mr. E.E. Runyan (4,000 shares), Mr. Gary Gilliam
(4,000 shares), and certain employees who are not executive officers (as a
group, 4,000 shares).
Directors Long-Term Incentive Plan. The Directors Long-Term Incentive Plan
provides for awards of shares of Common Stock to the current directors of the
Company based upon the Company achieving certain performance objectives
described in the plan over a five year period. A total of 50,000 shares of
Common Stock has been authorized and reserved for issuance pursuant to the
plan, subject to adjustments to reflect changes in the Company's capitalization
resulting from stock splits, stock dividends and similar events. Only the
current directors of the Company are eligible to participate under the plan.
The number of shares included in the awards to the directors, if any, will be
based upon the extent to which certain performance objectives are attained by
the Company. The performance objectives are based upon increases in the value
of the Company as determined in accordance with a formula set forth in the
plan. Upon the death of any of the participants, that participant's legatees
or personal representative will receive an award under the plan based upon the
number of years that participant served as a director under the plan. In the
event of a change of control of the company or in the event the performance
objectives are fully attained at any annual review prior to termination of the
plan, awards will be granted to the directors as if the performance objectives
had been fully attained. If not previously granted, awards will be granted
under the plan to the extent the performance objectives are attained at the
expiration of five years from the date of the plan. The plan will terminate
upon grants of awards to all eligible directors or upon the expiration of the
five year period. If an eligible director is terminated for any reason other
than death or change of control, the terminated director will not be entitled
to any award under the plan. The Board of Directors may amend the plan without
approval of the stockholders in any respect other than the following, which
require stockholder approval: material increases in the number of shares which
may be awarded under the plan, material increases in the benefits accruing to
participants in the plan, material modifications of the requirements for
eligibility for participation under the plan, and any other amendment requiring
stockholder approval by law. There are six persons eligible to participate
under the plan. No awards have been granted under the plan.
53
<PAGE> 55
CERTAIN RELATIONSHIPS AND TRANSACTIONS
In February 1996, the Company entered into two drilling arrangements with
Honolulu Oil Co. Mr. E.E. Runyan is a principal shareholder of Honolulu Oil
Co., and Mr. Marolda is a director of that corporation. Pursuant to the
arrangements, the Company acquired interests in oil and gas leases from
Honolulu Oil Co. in exchange for an agreement to pay $20,000 for each well
drilled on the subject leases, plus a cash payment at closing on one of the
leases. As of June 30, 1996, the Company had paid to Honolulu Oil Co.
approximately $60,000 pursuant to these arrangements. The Company believes the
terms of these transactions to be fair and in accordance with customary
practice in the industry.
COMPLIANCE WITH SECTION 16 OF THE SECURITIES EXCHANGE ACT OF 1934
Based solely upon a review of Forms 3, 4 and 5 and amendments thereto
furnished to the Company pursuant to the rules and regulations promulgated
under Section 16(a) of the Securities Exchange Act of 1934 during and with
respect to the Company's last fiscal year and upon certain written
representations received by the Company, the Company is not aware of any
failure by a reporting person of the Company under Section 16(a) to timely file
reports required by Section 16(a).
INDEPENDENT PUBLIC ACCOUNTANTS
The Company's independent public accountant for the most recently completed
fiscal year and for the current year is KPMG Peat Marwick LLP. A
representative of KPMG Peat Marwick LLP will be present at the Meeting. This
representative will have an opportunity to make a statement if he or she
desires to do so, and will be available to respond to Stockholder questions.
FORM 10-KSB
A copy of the Company's Annual Report on Form 10-KSB as filed with the
Securities and Exchange Commission, which contains financial statements as of,
and for the year ended, March 31, 1996 accompanies this Proxy Statement.
STOCKHOLDER PROPOSALS
In the event the Merger is not approved and consummated, Stockholders who
desire to present proposals to the Company for consideration for inclusion in
the Company's Proxy Statement and form of proxy for the 1997 Meeting of
Stockholders of the Company must submit such proposals to the Secretary of the
Company by May 25, 1997.
TRANSACTION OF OTHER BUSINESS
Management does not intend to present to the Meeting any business other than
as set forth in the Notice of Annual Meeting and knows of no other business to
be presented for action at the Meeting. If, however, any other business should
properly come before the Meeting or any adjournments thereof, it is intended
that all proxies will be voted with respect thereto in accordance with the best
judgment of the persons named in the proxies.
By Order of the Board of Directors
Gary B. Gilliam
President, Chief Financial Officer and Secretary
Midland, Texas
September 27, 1996
54
<PAGE> 56
SEABOARD OIL CO. CONSOLIDATED FINANCIAL STATEMENTS
Index to Consolidated Financial Statements and
Supplementary Financial Information
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report F-2
Financial Statements:
- ---------------------
Consolidated Balance Sheets as of June 30,
1996 (unaudited) and March 31, 1996 F-3
Consolidated Statements of Operations,
For the three months ended June 30, 1996 and
1995 (unaudited) and for the years ended
March 31, 1996 and 1995 F-4
Consolidated Statements of Stockholders' Equity,
For the three months ended June 30, 1996
(unaudited) and for the years ended
March 31, 1996 and 1995 F-5
Consolidated Statements of Cash Flows,
For the three months ended June 30, 1996 and
1995 (unaudited) and for the years ended
March 31, 1996 and 1995 F-6
Notes to Consolidated Financial Statements F-7
</TABLE>
F-1
<PAGE> 57
Independent Auditors' Report
The Board of Directors and Stockholders
Seaboard Oil Co.:
We have audited the accompanying consolidated balance sheet of Seaboard Oil Co.
and subsidiaries as of March 31, 1996 and the related consolidated statements
of operations, stockholders' equity, and cash flows for the years ended March
31, 1996 and 1995. These consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Seaboard Oil Co.
and subsidiaries as of March 31, 1996 and the results of their operations and
their cash flows for the years ended March 31, 1996 and 1995, in conformity
with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Midland, Texas
May 20, 1996
F-2
<PAGE> 58
SEABOARD OIL CO.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
------
JUNE 30, 1996 MARCH 31, 1996
------------- --------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,416,000 $ 3,827,000
Accounts receivable:
Trade 68,000 47,000
Oil and gas sales 580,000 650,000
Other 6,000 9,000
Other current assets 60,000 54,000
------------ ------------
Total current assets 5,130,000 4,587,000
------------ ------------
Property and equipment at cost:
Oil and gas properties, based on
successful efforts accounting method 17,289,000 16,715,000
Other equipment 851,000 868,000
------------ ------------
18,140,000 17,583,000
Less accumulated depreciation and depletion (7,698,000) (7,251,000)
------------ ------------
Net property and equipment 10,442,000 10,332,000
------------ ------------
$ 15,572,000 $ 14,919,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Trade accounts payable $ 376,000 $ 176,000
Accrued liabilities:
Oil and gas sales 128,000 117,000
Other 159,000 218,000
------------ ------------
Total current liabilities 663,000 511,000
------------ ------------
Stockholders' equity:
Preferred Stock, $.10 par value
Authorized 500,000 shares; no
shares issued or outstanding -- --
Common Stock, $.01 par value
Authorized 3,000,000 shares,
1,571,015 and 1,567,015 issued, respectively;
1,471,369 and 1,467,369 outstanding, respectively 16,000 16,000
Capital in excess of par value 9,538,000 9,517,000
Retained earnings 5,903,000 5,423,000
------------ ------------
15,457,000 14,956,000
Less: Treasury stock, at cost, 99,646 shares (548,000) (548,000)
------------ ------------
Total stockholders' equity 14,909,000 14,408,000
Commitments
------------ ------------
$ 15,572,000 $ 14,919,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 59
SEABOARD OIL CO.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30, YEARS ENDED MARCH 31,
----------------------- -----------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
(unaudited)
<S> <C> <C> <C> <C>
Operating revenues-oil and gas sales $1,723,000 $1,518,000 $6,048,000 $4,366,000
---------- ---------- ---------- ----------
Operating costs and expenses:
Lease operating expenses 460,000 416,000 1,887,000 1,624,000
Dryhole and abandonment 216,000 21,000 21,000 283,000
Depreciation and depletion 464,000 388,000 1,766,000 1,100,000
General and administrative 181,000 173,000 786,000 746,000
Geological and geophysical -- -- 17,000 --
---------- ---------- ---------- ----------
Total operating costs and expenses 1,321,000 998,000 4,477,000 3,753,000
---------- ---------- ---------- ----------
Operating income 402,000 520,000 1,571,000 613,000
---------- ---------- ---------- ----------
Other income:
Interest income 56,000 42,000 167,000 143,000
Gains on sales of property and equipment 21,000 50,000 69,000 --
Other income 1,000 -- 2,000 68,000
---------- ---------- ---------- ----------
Total other income 78,000 92,000 238,000 211,000
---------- ---------- ---------- ----------
Income before income taxes 480,000 612,000 1,809,000 824,000
Income tax expense-current -- -- 8,000 --
---------- ---------- ---------- ----------
Net income $ 480,000 $ 612,000 $1,801,000 $ 824,000
========== ========== ========== ==========
Earnings per share $ 0.33 $ 0.41 $ 1.22 $ 0.68
========== ========== ========== ==========
Weighted average shares outstanding 1,469,918 1,487,450 1,478,530 1,215,196
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 60
<TABLE>
<CAPTION>
Common Stock Treasury Stock
------------------- ------------------
Capital
Shares in excess of Retained
Issued Amount of par value earnings Shares Amount Total
--------- ------- ------------ ---------- ------ --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at March 31, 1994 817,089 $ 8,000 $6,145,000 $2,798,000 66,927 $(365,000) $ 8,586,000
Net Income -- -- -- 824,000 -- -- 824,000
Issuance of Common Stock 749,926 8,000 3,372,000 -- -- -- 3,380,000
Purchase of Common Stock -- -- -- -- 12,638 (70,000) (70,000)
--------- ------- ---------- ---------- ------ --------- ------------
Balances at March 31, 1995 1,567,015 16,000 9,517,000 3,622,000 79,565 (435,000) 12,720,000
Net Income -- -- -- 1,801,000 -- -- 1,801,000
Purchase of common stock -- -- -- -- 20,081 (113,000) (113,000)
--------- ------- ---------- ---------- ------ --------- ------------
Balances at March 31, 1996 1,567,015 16,000 9,517,000 5,423,000 99,646 (548,000) 14,408,000
Net income (unaudited) -- -- -- 480,000 -- -- 480,000
Exercise of stock option
(unaudited) 4,000 -- 21,000 -- -- -- 21,000
--------- ------- ---------- ---------- ------ --------- ------------
Balances at June 30, 1996
(unaudited) 1,571,015 $16,000 $9,538,000 $5,903,000 99,646 $(548,000) $ 14,909,000
========= ======= ========== ========== ====== ========= ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 61
SEABOARD OIL CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30, YEARS ENDED MARCH 31,
-------------------------- --------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 480,000 $ 612,000 $ 1,801,000 $ 824,000
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and depletion 464,000 388,000 1,766,000 1,100,000
Dryhole and abandonment 213,000 11,000 11,000 275,000
Gain on sale of assets (21,000) (50,000) (69,000) --
Income taxes -- -- 8,000 --
Change in operating assets and liabilities:
(Increase) decrease in accounts receivable 52,000 (139,000) (163,000) (125,000)
(Increase) decrease in other current assets (6,000) 106,000 90,000 (46,000)
Increase in accounts payable 200,000 69,000 25,000 75,000
Increase (decrease) in accrued liabilities (47,000) 5,000 85,000 49,000
----------- ----------- ----------- -----------
Net cash provided by operating activities 1,335,000 1,002,000 3,554,000 2,152,000
----------- ----------- ----------- -----------
Cash flows from investing activities:
Additions to oil and gas properties (795,000) (2,087,000) (3,025,000) (2,721,000)
Additions to other equipment -- (340,000) (442,000) (30,000)
Proceeds from sales of property and equipment 28,000 64,000 84,000 --
----------- ----------- ----------- -----------
Net cash used in investing activities (767,000) (2,363,000) (3,383,000) (2,751,000)
----------- ----------- ----------- -----------
Cash flows from financing activities:
Exercise of stock option 21,000 -- -- --
Purchase of Treasury stock -- -- (113,000) (70,000)
Proceeds from stock offering -- -- -- 3,380,000
----------- ----------- ----------- -----------
Net cash provided by (used in)
financing activities 21,000 -- (113,000) 3,310,000
----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 589,000 (1,361,000) 58,000 2,711,000
Cash and cash equivalents at beginning of year 3,827,000 3,769,000 3,769,000 1,058,000
----------- ----------- ----------- -----------
Cash and cash equivalents at end of year $ 4,416,000 $ 2,408,000 $ 3,827,000 $ 3,769,000
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 62
SEABOARD OIL CO.
Notes to Consolidated Financial Statements
(1) Organization and Summary of Significant Accounting
Policies
Organization
Seaboard Oil Co. (the "Company") was organized as a Delaware
corporation in June 1988 and began operations in March 1989. The
Company's business focus is in domestic oil and gas exploration,
development and production. The majority of the Company's business
is conducted in the Permian Basin area of Texas with minor operations
in New Mexico, Louisiana, Oklahoma, Arkansas, North Dakota, Colorado
and Wyoming.
Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All
significant accounts and transactions between the Company and its
subsidiaries have been eliminated.
Use of Estimates in the Preparation of Financial Statements
Preparation of the accompanying financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
Cash Equivalents
For purposes of the statements of cash flows, the Company considers
all money market accounts and highly liquid debt instruments
purchased with a maturity of three months or less to be cash
equivalents.
F-7
<PAGE> 63
SEABOARD OIL CO.
Notes to Consolidated Financial Statements (Continued)
Impairment of Long-Lived Asset
The Company follows the provisions of Statement of Financial
Accounting Standards No. 121 - Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of ("FAS
121"). Consequently, the Company reviews its long-lived assets to
be held and used, including oil and gas properties accounted for
under the successful efforts method of accounting, whenever events or
circumstances indicate that the carrying value of those assets may
not be recoverable. An impairment loss is indicated if the sum of
the expected future cash flows on a field by field basis, is less
than the carrying amount of the assets for the corresponding field.
No impairment was determined to exist during the year ended March 31,
1996.
Oil and Gas Properties
The Company utilizes the successful efforts method of accounting for
its oil and gas properties and equipment. Under this method, all
costs associated with productive wells and nonproductive development
wells are capitalized while nonproductive exploration costs are
expensed. The carrying amounts of properties sold or otherwise
disposed of and the related allowances for depletion are eliminated
from the accounts and any gain or loss is included in the results of
operations.
Capitalized costs relating to proved properties are depleted on net
equivalent barrels using the unit-of-production method applied to
groups of properties with common geological structures based on
estimated proved oil and gas reserves. Costs of significant
nonproducing properties and development projects are excluded from
depletion until such time as the related project is developed and
proved reserves are established or impairment is determined.
Prior to the adoption of FAS 121 on April 1, 1995, the Company's
aggregate oil and gas properties were carried at cost, not in excess
of total estimated future net revenues net of related income tax
effects calculated on a company-wide basis. The adoption of FAS 121
had no effect on the Company's consolidated financial statements.
F-8
<PAGE> 64
SEABOARD OIL CO.
Notes to Consolidated Financial Statements (Continued)
Other Equipment
Other equipment is recorded at cost. Maintenance and repairs are
charged to operations; renewals and betterments are charged to the
appropriate property and equipment accounts. Upon retirement or
disposition of assets other than oil and gas properties, the cost and
related accumulated depreciation are removed from the accounts with
the resulting gains or losses, if any, reflected in results of
operations. Depreciation of other property and equipment is computed
based on the straight-line method over the estimated useful lives of
the assets, which range from three to fifteen years.
Gas Balancing
The Company utilizes the sales method of accounting for natural gas
revenues whereby revenues are recognized based on the amount of gas
sold to purchasers. The amount of gas sold may differ from the amount
to which the Company is entitled based on its working interests in
the properties. At March 31, 1996, the Company considers the effect
of its overproduced position to be immaterial.
Income Taxes
The Company accounts for federal income taxes using the Statement of
Financial Accounting Standards No. 109, "Accounting for Income
Taxes." 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 basis. 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.
Earnings Per Share
Earnings per common share are based on the weighted average number of
common shares outstanding during each period. Stock options for the
years ended March 31, 1996 and 1995 were antidilutive.
F-9
<PAGE> 65
SEABOARD OIL CO.
Notes to Consolidated Financial Statements (Continued)
Environmental
The Company is subject to extensive Federal, state and local
environmental laws and regulations. These laws, which are constantly
changing, regulate the discharge of materials into the environment
and may require the Company to remove or mitigate the environmental
effects of the disposal or release of petroleum or chemical
substances at various sites. Environmental expenditures are expensed
or capitalized depending on their future economic benefit.
Expenditures that relate to an existing condition caused by past
operations and that have no future economic benefits are expensed.
Liabilities for expenditures of a noncapital nature are recorded when
environmental assessment and/or remediation is probable, and the
costs can be reasonably estimated.
Interim Financial Statements
The interim financial information for the three months ended June 30,
1996 and 1995 is unaudited. However, in the opinion of management,
these interim financial statements include all the necessary
adjustments to fairly present the results of the interim periods and
all such adjustments are of a normal recurring nature. The interim
financial statements should be read in conjunction with the audited
financial statements for the years ended March 31, 1996 and 1995.
Reclassifications
Certain reclassifications have been made to the June 30, 1995
financial statements to conform to the June 30, 1996 presentation.
(2) Disclosures About Fair Value of Financial Instruments
The carrying amount of cash, accounts receivable, accounts payable,
and accrued liabilities approximates fair value because of the short
maturity of these instruments.
(3) Common Stock Rights Offering
On August 8, 1994 the Company closed its common stock rights offering
dated July 8, 1994. The Company offered 749,926 shares of its common
stock at $4.61 per share to stockholders of record at June 24, 1994.
The net proceeds the Company received was approximately $3,380,000.
F-10
<PAGE> 66
SEABOARD OIL CO.
Notes to Consolidated Financial Statements (Continued)
(4) Income Taxes
Federal income tax expense differs for the years ended March 31, 1996
and 1995 from the amount computed at the Federal statutory income tax
rate as follows:
<TABLE>
<CAPTION>
Years ended
March 31,
-------------------------
1996 1995
--------- ---------
<S> <C> <C>
Income tax expense at
statutory rates $ 616,000 $ 283,000
Increase (reduction) in
income taxes resulting
from:
Change in beginning-of-the-
year balance of the valuation
allowance for deferred tax
assets in income tax expense (617,000) (284,000)
Other, net 9,000 1,000
--------- ---------
Income tax expense $ 8,000 $ --
========= =========
</TABLE>
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
March 31 are presented below:
<TABLE>
<CAPTION>
1996
-----------
<S> <C>
Deferred tax assets:
Net operating loss carryforwards $ 3,083,000
Accounts receivable, principally
due to allowance for doubtful accounts 23,000
Alternative minimum tax credit
carryforwards 6,000
Other 5,000
-----------
Total gross deferred tax assets 3,117,000
Less valuation allowance (1,862,000)
-----------
Net deferred tax
assets 1,255,000
-----------
Deferred tax liability:
Property and equipment, principally
due to differences in basis and
depletion and the deduction of
intangible drilling costs for
tax purposes (1,255,000)
-----------
Net deferred tax asset (liability) $ --
===========
</TABLE>
F-11
<PAGE> 67
SEABOARD OIL CO.
Notes to Consolidated Financial Statements (Continued)
A valuation allowance is provided when it is more likely than not that
some portion of the deferred tax assets will not be realized. Based
on recent operating results, the Company expects to generate
sufficient taxable income during the carryforward periods to realize
the net deferred tax assets remaining as of March 31, 1996. The
valuation allowance for deferred tax assets as of April 1, 1995 was
$2,479,000. The net change in the total valuation allowance for the
years ended March 31, 1996 and 1995 was a decrease of $617,000 and
$284,000, respectively.
At March 31, 1996, the Company has net operating loss carryforwards
and alternative minimum tax carryforwards which may be used in future
years to offset future regular and alternative minimum taxable
income. The schedule below summarizes the net operating loss
carryforwards and alternative minimum tax carryforwards and their
expiration dates. The carryforwards expire as of March 31, of the
year listed.
<TABLE>
<CAPTION>
Net Alternative
Date of Operating Loss Minimum Tax
expiration Carryforwards Carryforwards
---------- -------------- -------------
<S> <C> <C>
1998 $2,629,000 $2,141,000
1999 1,288,000 1,288,000
2001 2,268,000 2,268,000
2002 147,000 147,000
2003 41,000 41,000
2004 1,421,000 1,421,000
2005 1,114,000 1,026,000
2007 111,000 8,000
2009 48,000 --
2010 3,000 --
---------- ----------
$9,070,000 $8,340,000
========== ==========
</TABLE>
(5) Line of Credit
On August 17, 1994, the Company established a two year revolving line
of credit of up to $5,000,000 with a bank. The current borrowing base
on the line of credit is $1,800,000 and is determined by the lender's
valuation of certain of the Company's proved developed producing oil
and gas properties. The interest rate is the bank's prime rate and a
commitment fee of 1/2 of 1% per annum is payable on the unused
portion of the credit line. The line of credit is secured by a
significant portion of the Company's oil and gas properties and is
subject to the terms of an agreement which restricts the incurrence
of
F-12
<PAGE> 68
SEABOARD OIL CO.
Notes to Consolidated Financial Statements (Continued)
additional indebtedness and limits the amount of lease payments. At
March 31, 1996 the Company had not utilized any portion of its credit
line. Commitment fee expense was $9,000 for each of the years ended
March 31, 1996 and 1995.
(6) Stock Option and Stock Award Plans
Employee Incentive Stock Option Plan.
During the 1995 fiscal year, the Company authorized and adopted the
1994 Employee Incentive Stock Option Plan (the "1994 Plan") which was
approved by the Company's stockholders. A total of 60,000 shares of
common stock were authorized and reserved for issuance under the 1994
Plan. Options are issued with an exercise price equal to the fair
market value of the common stock at the date of grant. Each option is
exercisable immediately and will expire ten years from the date of
grant. No options were exercised in the fiscal years ended March 31,
1996 and 1995. Shares to be issued under the 1994 Employee Incentive
Stock Option Plan were registered under the Securities Act of 1933 on
November 22, 1994.
A summary of stock option activity for the 1994 Plan for the past two
years is as follows:
<TABLE>
<CAPTION>
Number of Option Price
Shares per Share
--------- ------------
<S> <C> <C>
Outstanding at
March 31, 1994 -- --
Granted 12,000 $5.50-$6.05
Exercised -- --
Outstanding at
March 31, 1995 12,000 $5.50-$6.05
Granted 12,000 $5.00-$5.50
Exercised -- --
Outstanding at
March 31, 1996 24,000 $5.00-$6.05
</TABLE>
Outside Directors' Stock Option Plan.
During the 1995 fiscal year, the Company authorized and adopted the
Outside Director Stock Option Plan ("Outside Directors' Plan") which
was approved by the Company's stockholders. The Outside Directors'
Plan
F-13
<PAGE> 69
SEABOARD OIL CO.
Notes to Consolidated Financial Statements (Continued)
provides for the issuance of stock options to the outside directors
of the Company. Outside directors are those directors of the Company
who are not executive officers or regular salaried employees of the
Company. A total of 40,000 shares of common stock were authorized and
reserved for issuance under the Outside Directors' Plan. Under the
Outside Directors' plan, an option for 2,000 shares of common stock
was granted to each person who qualified as an outside director as of
the effective date of the Outside Directors' Plan which was August
26, 1994. Each year thereafter that an outside director is elected as
a director of the Company, an option for 2,000 shares of common stock
will be granted to that outside director through and including 1998.
The exercise price of each option granted under the Outside
Directors' Plan will be issued at the fair market value of the common
stock at the date of grant. Each option is exercisable immediately
and will expire ten years from the date of grant. No options were
exercised in the fiscal years ended March 31, 1996 and 1995. Shares
to be issued under the Outside Directors' Stock Option Plan were
registered under the Securities Act of 1933 on November 23, 1994.
A summary of stock option activity for the Outside Directors' Plan for
the past two years is as follows:
<TABLE>
<CAPTION>
Number of Option Price
Shares per Share
--------- ------------
<S> <C> <C>
Outstanding at
March 31, 1994 -- --
Granted 8,000 $5.50
Exercised -- --
Outstanding at
March 31, 1995 8,000 $5.50
Granted 8,000 $5.00
Exercised -- --
Outstanding at
March 31, 1996 16,000 $5.00-$5.50
</TABLE>
Directors' Long-Term Incentive Plan.
During the 1995 fiscal year, the Company authorized and adopted the
Directors' Long-Term Incentive Plan ("Long-Term Plan") which was
approved by the Company's stockholders. The Long-Term Plan provides
for awards of common stock to the current directors of the Company
F-14
<PAGE> 70
SEABOARD OIL CO.
Notes to Consolidated Financial Statements (Continued)
based upon the Company achieving certain performance objectives over
a five year period. A total of 50,000 shares of common stock were
authorized and reserved for issuance pursuant to the Long-Term Plan.
Only the current directors of the Company are eligible to participate
under the Long-Term Plan. The number of shares included in the awards
to the directors, if any, will be based upon the extent to which
certain performance objectives are attained by the Company. The
performance objectives are based upon increases in the value of the
Company as determined in accordance with the Long-Term Plan. The
Long-Term Plan will terminate upon grants of awards to all eligible
directors or upon the expiration of a five year period ending March
31, 1999. There are six persons eligible to participate under the
Long-Term Plan and no awards have been granted or earned under the
Long-Term Plan as of March 31, 1996 or 1995. Shares to be issued
under the Directors' Long-Term Incentive Plan were registered under
the Securities Act of 1933 on November 22, 1994.
(7) Related Party Transactions
Certain officers and directors of the Company concurrently hold
comparable positions with Seaboard Acquisition Partners, Inc.
("SAP"). As a result of the Company's Common Stock Rights Offering
described in Note 3, SAP acquired 701,448 shares of common stock for
approximately $3,234,000, increasing its ownership to approximately
71% at March 31, 1995 and 1996.
(8) Significant Customers
Sales to the Company's significant customers in 1996 and 1995, as a
percentage of oil and gas production revenue, were as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Customer A 44% 45%
Customer B 33% 38%
</TABLE>
F-15
<PAGE> 71
SEABOARD OIL CO.
Notes to Consolidated Financial Statements (Continued)
(9) Statement of Cash Flows
There were $632,000 in non-cash additions to oil and gas properties
for the year ended March 31, 1995.
No Federal income taxes were paid in the years ended March 31, 1996
and 1995, as a result of loss carryforwards. No interest expense was
paid in the years ended March 31, 1996 or 1995.
(10) Oil and Gas Expenditures
The following tables set forth certain historical costs and operating
information related to the Company's oil and gas producing
activities:
<TABLE>
<CAPTION>
March 31
--------------------------------
1996 1995
------------ ------------
<S> <C> <C>
Capitalized Costs:
Proved properties $ 16,387,000 $ 14,133,000
Unproved properties 328,000 215,000
Less accumulated
depletion (6,983,000) (5,277,000)
------------ ------------
Net capitalized
costs $ 9,732,000 $ 9,071,000
============ ============
</TABLE>
<TABLE>
<CAPTION>
Years ended
March 31,
----------------------------
1996 1995
---------- ----------
<S> <C> <C>
Costs incurred:
Proved property
acquisition costs $ 9,000 $ 86,000
========== ==========
Unproved property
acquisition costs $ 122,000 $ 84,000
========== ==========
Exploration costs $ 200,000 $ 360,000
========== ==========
Development costs $2,073,000 $2,823,000
========== ==========
</TABLE>
F-16
<PAGE> 72
SEABOARD OIL CO.
Notes to Consolidated Financial Statements (Continued)
Results of Operations
The following table reflects the results of operations for the
Company's oil and gas producing activities:
<TABLE>
<CAPTION>
Years ended
March 31,
-----------------------------
1996 1995
----------- -----------
<S> <C> <C>
Revenues $ 6,048,000 $ 4,366,000
Production costs
including pro-
duction taxes (1,887,000) (1,624,000)
Dryhole and aban-
donment (21,000) (283,000)
Depletion (1,706,000) (1,053,000)
----------- -----------
Results of operations
for oil and gas
producing activities
(excluding corporate
overhead costs) $ 2,434,000 $ 1,406,000
=========== ===========
</TABLE>
F-17
<PAGE> 73
SEABOARD OIL CO.
Unaudited Supplementary Information
(11) Supplemental Oil and Gas Reserve Data (Unaudited)
The following table presents estimates of the Company's proved oil and
gas reserves, which are all located in the United States and are
prepared by independent petroleum engineers. Reserves were estimated
in accordance with guidelines established by the Securities and
Exchange Commission and the Financial Accounting Standards Board,
which require that reserve estimates be prepared under existing
economic and operating conditions with no provision for price and
cost escalations except by contractual arrangements. Information for
oil is presented in barrels (Bbl) and for gas in thousands of cubic
feet (Mcf).
<TABLE>
<CAPTION>
Reserves Quantities
-------------------
Oil Gas
(Bbls) (Mcf)
------ -----
<S> <C> <C>
Total proved reserves:
Reserves as of
March 31, 1994 1,598,882 1,887,433
Revisions of previous
estimates 911,082 610,118
Purchase of minerals in
place 31,879 15,762
Production (225,603) (331,535)
---------- ----------
Reserves as of
March 31, 1995 2,316,240 2,181,778
New discoveries & extensions 26,196 40,663
Revisions of previous
estimates (84,339) 13,965
Purchase of minerals in
place 462 13,318
Sales of reserves in place (249) (14,154)
Production (311,004) (330,951)
---------- ----------
Reserves as of
March 31, 1996 1,947,306 1,904,619
========== ==========
Proved developed reserves as of
March 31, 1995 2,003,769 2,181,778
========== ==========
March 31, 1996 1,947,306 1,904,619
========== ==========
</TABLE>
F-18
<PAGE> 74
SEABOARD OIL CO.
Unaudited Supplementary Information (Continued)
The standardized measure of discounted future net cash flows, in
management's opinion, should be examined with caution. The basis for
this table is the reserve studies prepared by independent petroleum
consultants, which contain imprecise estimates of quantities and
rates of production of reserves. Revisions of previous year estimates
can have a significant impact on these results. Also, exploration
costs in one year may lead to significant discoveries in later years
and may significantly change previous estimates of proved reserves
and their valuation. Therefore, the standardized measure of
discounted future net cash flow is not necessarily a "best estimate"
of the fair value of the Company's proved oil and gas properties.
Standardized measure of oil and gas reserves
The following tabulation reflects the Company's estimated discounted
future cash flows from oil and gas production:
<TABLE>
<CAPTION>
Years ended
March 31,
--------------------------------
1996 1995
------------ ------------
<S> <C> <C>
Future cash flows $ 44,178,000 $ 44,590,000
Future production
and development
costs (19,073,000) (20,982,000)
------------ ------------
Future cash flows
before income taxes 25,105,000 23,608,000
Future income taxes (3,398,000) (2,491,000)
------------ ------------
Future net cash flows 21,707,000 21,117,000
Annual discount
at 10% (5,336,000) (5,692,000)
------------ ------------
Standardized
measure of oil and
gas reserves $ 16,371,000 $ 15,425,000
============ ============
</TABLE>
The future cash flows reflected above are based on estimated oil and
gas reserves utilizing prices and costs in effect at the end of each
period.
F-19
<PAGE> 75
SEABOARD OIL CO.
Unaudited Supplementary Information (Continued)
The following are the significant sources of changes in discounted
future net cash flows:
<TABLE>
<CAPTION>
Years ended
March 31,
----------------------------
1996 1995
----------- -----------
<S> <C> <C>
Oil and gas sales,
net of production
costs $(4,162,000) $(2,742,000)
New discoveries and extensions 234,000 --
Net changes in prices
and production costs 2,753,000 2,738,000
Purchases of minerals
in place 8,000 255,000
Sales of minerals in place (10,000) --
Changes in future
development costs 581,000 (1,217,000)
Accretion of
discount 1,543,000 918,000
Revision of quantity
estimates (595,000) 6,721,000
Net change in income taxes (649,000) --
Changes in production
rates and other 1,243,000 (427,000)
----------- -----------
$ 946,000 $ 6,246,000
=========== ===========
</TABLE>
F-20
<PAGE> 76
APPENDIX I
AGREEMENT AND PLAN OF MERGER
<PAGE> 77
AGREEMENT AND PLAN OF MERGER
AMONG
SEABOARD ACQUISITION PARTNERS, INC.,
SEABOARD MIDLAND, INC. AND
SEABOARD OIL CO.
DATED AS OF JUNE 28, 1996
<PAGE> 78
AGREEMENT AND PLAN OF MERGER, dated as of June 28, 1996 (this "Agreement"),
among SEABOARD ACQUISITION PARTNERS, INC., a Delaware corporation ("Parent"),
SEABOARD MIDLAND, INC., a Delaware corporation and a wholly owned subsidiary of
Parent ("MergerCo."), and SEABOARD OIL CO., a Delaware corporation (the
"Company").
WHEREAS, the Boards of Directors of Parent, MergerCo. and the Company have
each determined that it is in the best interests of their respective
stockholders for Parent to acquire the Company upon the terms and subject to
the conditions set forth herein; and
WHEREAS, in furtherance of such acquisition, the Boards of Directors of
Parent, MergerCo. and the Company have each approved the merger (the "Merger")
of MergerCo. with and into the Company in accordance with the General
Corporation Law of the State of Delaware ("Delaware Law"), upon the terms and
subject to the conditions set forth herein;
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements herein contained, and intending to be legally bound hereby,
Parent, MergerCo. and the Company hereby agree as follows:
ARTICLE I
THE MERGER
SECTION 1.01. The Merger. Upon the terms and subject to the conditions set
forth in Article VI, and in accordance with Delaware Law, at the Effective Time
(as hereinafter defined) MergerCo. shall be merged with and into the Company.
As a result of the Merger, the separate corporate existence of MergerCo. shall
cease and the Company shall continue as the surviving corporation of the Merger
(the "Surviving Corporation"). Notwithstanding anything to the contrary
contained in this Section 1.01, Parent may elect (with the Company's consent,
which consent shall not be unreasonably withheld) instead, at any time prior to
the fifth business day immediately preceding the date on which the Proxy
Statement (as hereinafter defined) is mailed initially to the Company's
stockholders, to merge the Company into MergerCo. or another direct or indirect
wholly owned subsidiary of Parent. In such event, the parties agree to execute
an appropriate amendment to this Agreement in order to reflect the foregoing
and to provide, as the case may be, that MergerCo. or such other wholly owned
subsidiary of Parent shall be the Surviving Corporation.
SECTION 1.02. Effective Time; Closing. As promptly as practicable after
the satisfaction or waiver of the conditions set forth in Article VI hereof,
the parties hereto shall cause the Merger to be consummated by filing the
Certificate of Merger in the form attached hereto as Exhibit 1.02 (the "Merger
Certificate"), together with required officers' certificates, with the
Secretary of State of the State of Delaware, in such form as is required by,
and executed in accordance with the relevant provisions of Delaware Law (the
date and time of such filing or the effective time set forth in the Merger
Certificate being the "Effective Time"). The closing of the Merger (the
"Closing") will take place as soon as practicable on the later of (i) the date
of the Stockholder's Meeting referred to in Section 5.01 and (ii) the fifth
business day after satisfaction or waiver of the latest to occur of the
conditions set forth in Article VI (the "Closing Date"), at the offices of
Cotton, Bledsoe, Tighe & Dawson, 500 West Illinois, Suite 300, Midland, Texas
79701, unless a different date or place is agreed to in writing by the parties
hereto.
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 this Agreement
and Delaware Law. Without limiting the generality of the foregoing, and subject
thereto, at the Effective Time all the rights and property of the Company and
MergerCo. shall vest in the Surviving Corporation, and all debts and
liabilities of the Company and MergerCo. shall become the debts and liabilities
of the Surviving Corporation.
SECTION 1.04. Certificate of Incorporation; Bylaws. (a) Unless otherwise
determined by Parent prior to the Effective Time, at the Effective Time the
Certificate of Incorporation of the Company, as in effect immediately prior to
the Effective Time, shall be the Certificate of Incorporation of the Surviving
Corporation until thereafter amended as provided by law and such Certificate of
Incorporation.
(b) Unless otherwise determined by Parent prior to the Effective Time, the
Bylaws of the Company, as in effect immediately prior to the Effective Time,
shall be the Bylaws of the Surviving Corporation until thereafter amended as
provided by law, the Certificate of Incorporation of the Surviving Corporation
or such Bylaws.
2
<PAGE> 79
SECTION 1.05. Directors and Officers. The directors of the Company
immediately prior to the Effective Time shall be the initial directors of the
Surviving Corporation, each to hold office in accordance with the Certificate
of Incorporation and Bylaws of the Surviving Corporation, and the officers of
the Company immediately prior to the Effective Time shall be the initial
officers of the Surviving Corporation, in each case until their respective
successors are duly elected or appointed and qualified.
SECTION 1.06. Conversion of Securities. At the Effective Time, by virtue
of the Merger and without any action on the part of MergerCo., the Company or
the holders of any of the following securities:
(a) Each share of Common Stock, par value $.01 per share, of the Company
("Company Common Stock") (shares of Company Common Stock being hereinafter
collectively referred to as "Shares") issued and outstanding immediately
prior to the Effective Time (other than any Shares to be canceled pursuant
to Section 1.06(b) and any Dissenting Shares (as hereinafter defined)) shall
be converted automatically into the right to receive an amount equal to
$9.75 in cash (the "Merger Consideration") payable, without interest, to the
holder of such Share, upon surrender, in the manner provided in Section
1.09, of the certificate that formerly evidenced such Share;
(b) Each share of Company Common Stock owned by Parent or held by the
Company as treasury stock immediately prior to the Effective Time shall be
canceled without any conversion thereof and no payment or distribution shall
be made with respect thereto; and
(c) Each share of Common Stock, par value $.10 per share, of MergerCo.
issued and outstanding immediately prior to the Effective Time shall be
converted into and exchanged for one validly issued, fully paid and
nonassessable share of Common Stock, par value $.01 per share, of the
Surviving Corporation.
SECTION 1.07. Employee Stock Options. (a) At the Effective Time, each
outstanding option to purchase Company Common Stock ("Employee Options"),
granted under the Company's 1994 Employee Incentive Stock Option Plan or the
Outside Directors Stock Option Plan (the "Stock Option Plans"), whether or not
then exercisable, shall be canceled by the Company and each holder of a
canceled Employee Option shall receive from Parent, in cancellation and
settlement of the Employee Option, a cash amount (the "Option Consideration")
equal to the product of (i) the number of shares of Company Common Stock
previously subject to the Employee Option as of such time, multiplied by (ii)
the excess, if any, of the Merger Consideration over the exercise price per
share of Company Common Stock previously subject to the Employee Option. Prior
to the Closing, the Company shall provide Parent with a listing of Employee
Options held by each optionee (including the date of grant, the number of
Shares issuable upon exercise of the Employee Option, and the Option
Consideration to which the optionee is entitled) certified by an executive
officer of the Company. As of the Effective Time, each holder of an Employee
Option will be entitled to receive only an amount equal to the Option
Consideration. All amounts payable under this Section 1.07(a) shall be paid at
the Effective Time and shall be subject to any minimum required withholding of
taxes and shall be paid without interest. The Company shall not grant or amend
any Employee Options and shall not amend or modify the Stock Option Plans after
the date hereof.
(b) At the Effective Time, any and all rights held by any of the directors
eligible to receive an award (the "Incentive Plan Awards") of Company Common
Stock under the Directors Long-Term Incentive Plan (the "Long-Term Plan") shall
be canceled by the Company and each holder of an Incentive Plan Award shall
receive from the Parent, in cancellation and settlement of the Incentive Plan
Award, a cash amount (the "Award Consideration") equal to the product of (i)
the number of shares of Company Common Stock previously subject to the
Incentive Plan Award as determined under the Long-Term Plan based upon a change
of control of the Company, multiplied by (ii) the Merger Consideration. As of
the Effective Time, each holder of an Incentive Plan Award will be entitled
only to the Award Consideration and is not entitled to any shares of Company
Common Stock. All amounts payable under this Section 1.07(b) shall be paid at
the Effective Time and shall be subject to any minimum required withholding of
taxes and shall be paid without interest. The Company shall not amend or
modify the Long-Term Plan after the date hereof.
SECTION 1.08. Procedure for Payment; Stock Transfer Books. (a)
Immediately after the Effective Time, Parent shall deposit or cause to be
deposited into a segregated bank account (the "Account") cash in an aggregate
amount necessary to make the payments required pursuant to Section 1.06 and
Section 1.07 hereof. The Account shall be at a financial institution whose
deposits are insured by the United States government. All interest, if any,
earned on the Account shall be paid to the Surviving Corporation. The funds
deposited in the Account shall be used and withdrawn only as providing in this
Agreement.
3
<PAGE> 80
(b) As soon as possible after the Effective Time, the Surviving Corporation
shall cause to be mailed to each person who was, at the Effective Time, a
holder of record of Shares entitled to receive the Merger Consideration
pursuant to Section 1.06(a) a form of letter of transmittal (which shall
specify that delivery shall be effected, and risk of loss and title to the
certificates evidencing such Shares (the "Certificates") shall pass, only upon
proper delivery of the Certificates to the Surviving Corporation) and
instructions for use in effecting the surrender of the Certificates pursuant to
such letter of transmittal. Upon surrender to the Surviving Corporation of a
Certificate, together with such letter of transmittal duly completed and
validly executed in accordance with the instructions thereto, and such other
documents as may be required pursuant to such instructions, the holder of such
Certificate shall be entitled to receive in exchange therefor the Merger
Consideration for each Share formerly evidenced by such Certificate, and such
Certificate shall then be canceled. No interest shall accrue or be paid on the
Merger Consideration payable upon the surrender of any Certificate for the
benefit of the holder of such Certificate. If payment of the Merger
Consideration is to be made to a person other than the person in whose name the
surrendered Certificate is registered on the stock transfer books of the
Company, it shall be a condition of payment that the Certificate so surrendered
shall be endorsed properly or otherwise be in proper form for transfer and that
the person requesting such payment shall have paid all transfer and other taxes
required by reason of the payment of the Merger Consideration to a person other
than the registered holder of the Certificate surrendered or shall have
established to the satisfaction of the Surviving Corporation that such taxes
either have been paid or are not applicable. After the Effective Time, until
surrendered in accordance with the provisions of Section 1.08(b), each
Certificate (other than Certificates representing shares owned by the Parent
and Dissenting Shares) shall represent for all purposes solely the right to
receive the Merger Consideration for each Share evidenced by such Certificate,
without any interest thereon.
(c) Any portion of the funds in the Account (including any interest earned
thereon) that remains unclaimed by the stockholders of the Company more than
180 days after the Effective Time shall be paid to the Surviving Corporation.
Holders of Certificates shall thereafter look only to the Surviving Corporation
as general creditors thereof for payment of any Merger Consideration that may
be payable upon due surrender of their Certificates. Notwithstanding the
foregoing, neither the Parent nor the Surviving Corporation shall be liable to
a holder of a Certificate for amounts delivered to a public official pursuant
to any applicable abandoned property, escheat or similar laws.
(d) Closing of Transfer Records. After the Effective Time, the stock
transfer ledger of the Company shall be closed and any transfers of Company
Common Stock not registered on such ledger prior to the Effective Time shall
not be made on the stock transfer books of the Surviving Corporation. If,
after the Effective Time, Certificates are presented to the Surviving
Corporation, they shall be canceled and exchanged for cash as provided in this
Section 1.08.
SECTION 1.09 Dissenting Shares. Notwithstanding anything in this Agreement
to the contrary, in the event that dissenters' rights are available in
connection with the Merger pursuant to Section 262 of the Delaware General
Corporation Law, Shares that are issued and outstanding immediately prior to
the Effective Time and that are held by stockholders who did not vote in favor
of the Merger and comply with all of the relevant provisions of Section 262 of
the Delaware General Corporation Law (the "Dissenting Shares") shall not be
converted into or be exchangeable for the right to receive the Merger
Consideration. If such holders fail to perfect or effectively withdraw or lose
such right, such holder's Shares shall thereupon be deemed to have been
converted into and to have become exchangeable for the right to receive, as of
the Effective Time, the Merger Consideration without any interest thereon. The
Company shall give the Parent (i) prompt notice of any written demands for
appraisal of Shares received by the Company and (ii) the opportunity to direct
all negotiations and proceedings with respect to any such demands. The Company
shall not, without the prior consent of the Parent, voluntarily make any
payment with respect to, or settle or offer to settle, any such demands.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Parent and MergerCo. as follows.
With respect to any representations or warranties in this Article II indicated
to be limited to the knowledge of the Company (or words to like effect), such
knowledge will be deemed to include the knowledge of officers of the Company
who are also affiliated with Parent or MergerCo.
SECTION 2.01. Organization, Qualification, and Corporate Power. Each of
the Company and its subsidiaries is a corporation duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation. Each of the Company and its subsidiaries is duly authorized to
conduct business and is in good standing under the laws of each jurisdiction
where such qualification is required, except for failures to so qualify would
not have a material adverse
4
<PAGE> 81
effect on the Company and its subsidiaries taken as a whole. The Company's
subsidiaries and the state of incorporation of each are identified on Schedule
2.01.
SECTION 2.02. Certificate of Incorporation and Bylaws. The Company has
heretofore furnished to Parent a complete and correct copy of the Certificate
of Incorporation and the Bylaws, each as amended to date, of the Company. The
Company is not in violation of any provision of its Certificate of
Incorporation or Bylaws.
SECTION 2.03. Capitalization. (a) The authorized capital stock of the
Company consists of 3,000,000 Shares and 500,000 shares of Preferred Stock $.10
par value ("Company Preferred Stock"). As of March 31, 1996, (i) 1,467,369
Shares are issued and outstanding, all of which are validly issued, fully paid
and nonassessable, (ii) 99,646 Shares are held in the treasury of the Company,
and (iii) 150,000 Shares are reserved for issuance pursuant to the Stock Option
Plans and the Directors Long-Term Incentive Plans. Since March 31, 1996, the
Company has not granted any employee stock options or stock incentive rights.
As of the date hereof, no shares of Company Preferred Stock are issued and
outstanding.
(b) Except for the options granted and rights under the Stock Option Plans
and the Long-Term Plan as described in this Agreement, there are no options,
warrants or other rights, agreements, arrangements or commitments of any
character relating to the issued or unissued capital stock of the Company or
obligating the Company to issue or sell any shares of capital stock of, or
other equity interests in, the Company. There are no outstanding contractual
obligations of the Company to repurchase, redeem or otherwise acquire any
Shares or to provide funds to, or make any investment (in the form of a loan,
capital contribution or otherwise) in, any person.
(c) All of the outstanding shares of capital stock and other equity
interests of each subsidiary of the Company are owned of record and
beneficially by the Company.
SECTION 2.04. Authority Relative to this Agreement. (a) The Company has
all necessary power and authority to execute and deliver this Agreement, to
perform its obligations hereunder and to consummate the transactions
contemplated hereby (the "Transactions"). The execution and delivery of this
Agreement by the Company and the consummation by the Company of the
Transactions have been duly and validly authorized by all necessary corporate
action and no other corporate proceedings on the part of the Company are
necessary to authorize this Agreement or to consummate the Transactions (other
than, with respect to the Merger, the approval and adoption of this Agreement
and the Merger by the holders of a majority of the then outstanding Shares, and
the filing of the Merger Certificate, as required by Delaware Law.) This
Agreement has been duly and validly executed and delivered by the Company and,
assuming the due authorization, execution and delivery by Parent and MergerCo.,
constitutes a legal, valid and binding obligation of the Company, enforceable
in accordance with its terms.
(b) The Board, at a meeting duly called and held on June 5, 1996, has
unanimously (i) determined that this Agreement and the Transactions, including
the Merger, are fair to and in the best interests of the holders of Shares,
Employee Options, and the Incentive Awards, (ii) approved and adopted this
Agreement and the Transactions and (iii) recommended that the shareholders of
the Company approve and adopt this Agreement and the Transactions.
(c) Principal Financial Securities, Inc. has delivered to the Special
Committee formed by the Board to review and consider the possibility of a
merger (the "Special Committee") a written opinion that the consideration to be
received by the holders of Shares pursuant to the Merger is fair to the holders
of Shares (other than Parent) from a financial point of view.
(d) The Company has been advised by each of its directors and executive
officers that they intend to vote all Shares beneficially owned by them in
favor of the approval and adoption by the shareholders of the Company of this
Agreement and the Transactions; provided, that no provision of this Agreement
shall be interpreted to preclude directors or executive officers of the Company
from transferring or distributing Shares beneficially owned by them prior to
the Effective Time.
SECTION 2.05. No Conflict; Required Filings and Consents. (a) The
execution and delivery of this Agreement by the Company do not, and the
performance of this Agreement by the Company will not, (i) conflict with or
violate the Certificate of Incorporation or Bylaws of the Company, (ii)
conflict with or violate any law, rule, regulation, order, judgment or decree
applicable to the Company or by which any property or asset of the Company is
bound or affected, or (iii) result in any breach of or constitute a default (or
an event which with notice or lapse of time or both would become a default)
under, or give to others any right of termination, amendment, acceleration or
cancellation of, or result in the creation of a lien or other encumbrance on
any property or asset of the Company pursuant to, any note, bond, mortgage,
indenture, contract, agreement, lease, license, permit, franchise or other
instrument or obligation except (in the case of
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clauses (ii) and (iii)) for such conflicts, violations, breaches, defaults,
rights or liens or other encumbrances that would not, individually or in the
aggregate, have a material adverse effect to the Company.
(b) The execution and delivery of this Agreement by the Company do
not, and the performance of this Agreement by the Company will not, require any
consent, approval, authorization or permit of, or filing with or notification
to, any governmental or regulatory authority, domestic or foreign, except (i)
for applicable requirements, if any, of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), state securities or "blue sky" laws ("Blue Sky
Laws") and Delaware Law and (ii) where failure to obtain such consents,
approvals, authorizations or permits, or to make such filings or notifications,
would not prevent or delay consummation of the Merger, or otherwise prevent the
Company from performing its obligations under this Agreement, and would not,
individually or in the aggregate, have a material adverse effect on the
Company.
SECTION 2.06. Compliance. The Company is not in conflict with, or in
default or violation of, (i) any law, rule, regulation, order, judgment or
decree applicable to the Company or by which any property or asset of the
Company is bound or affected, or (ii) any note, bond, mortgage, indenture,
contract, agreement, lease, license, permit, franchise or other instrument or
obligation to which the Company is a party or by which the Company or any
property or asset of the Company is bound or affected, except for any such
conflicts, defaults or violations that would not, individually or in the
aggregate, have a material adverse effect on the Company.
SECTION 2.07. SEC Filings; Financial Statements. (a) The Company
has filed all forms, reports and documents required to be filed by it with the
Securities and Exchange Commission (the "SEC") since December 31, 1994 (the
"SEC Reports"), including without limitation (i) its Annual Reports on Form
10-KSB for the fiscal years ended March 31, 1995 and March 31, 1996,
respectively, and (ii) all proxy statements relating to the Company's meetings
of shareholders (whether annual or special) held since December 31, 1994. The
SEC Reports (i) were prepared in accordance with the requirements of the
Securities Act of 1993, as amended (the "Securities Act"), and the Exchange
Act, as the case may be, and the rules and regulations thereunder and (ii) did
not at the time they were 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 made therein, in the light of the circumstances
under which they were made, not misleading.
(b) Each of the financial statements (including, in each case, any
notes thereto) contained in the SEC Reports was prepared in accordance with
generally accepted accounting principles applied on a consistent basis
throughout the periods indicated (except as may be indicated in the notes
thereto or, in the case of unaudited statements, as permitted by Form 10-Q) and
each fairly presented the financial position, results of operations and changes
in financial position of the Company as at the respective dates thereof and for
the respective periods indicated therein (subject, in the case of unaudited
statements, to such normal recurring audit adjustments as are necessary, in the
opinion of the Company, to present fairly such data.)
(c) Except as and to the extent set forth on the balance sheet of the
Company at March 31, 1996, including the notes thereto (the "1996 Balance
Sheet"), the Company has no liability or obligation of any nature (whether
accrued, absolute, contingent or otherwise) which would be required to be
reflected on a balance sheet, or in the notes thereto, prepared in accordance
with generally accepted accounting principles, except (i) as disclosed in any
SEC Report filed prior to the date of this Agreement and (ii) for liabilities
and obligations incurred in the ordinary course of business consistent with
past practice which would not, individually or in the aggregate, have a
material adverse effect on the Company.
(d) The Company has heretofore furnished to Parent complete and
correct copies of all amendments and modifications that have not been filed by
the Company with the SEC to all agreements, documents and other instruments
that previously had been filed by the Company with the SEC and are currently in
effect except for such amendments or modifications which are not material,
either individually or in the aggregate.
SECTION 2.08. Absence of Certain Changes or Events. Since March 31,
1996, except as contemplated by this Agreement or disclosed in any SEC Report
filed since March 31, 1996, and prior to the date of this Agreement, the
Company has conducted its business only in the ordinary course and in a manner
consistent with past practice and, since March 31, 1996, there has not been (i)
any change in the business, operations, properties, condition (financial or
otherwise), assets or liabilities (including, without limitation, contingent
liabilities) of the Company having, individually or in the aggregate, a
material adverse effect on the Company, (ii) any damage, destruction or loss
(whether or not covered by insurance) with respect to any property or asset of
the Company having, individually or in the aggregate, a material adverse effect
on the Company, (iii) any change by the Company in its accounting methods,
principles or practices, (iv) any revaluation by the Company of any asset,
other than in the ordinary course of business consistent with past practice,
(v) any
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entry by the Company into any commitment or transaction material to the
Company, (vi) any declaration, setting aside or payment of any dividend or
distribution in respect of any capital stock of the Company or any redemption,
purchase or other acquisition of any of its securities, or (vii) any increase
in or establishment of any bonus, insurance, severance, deferred compensation,
pension, retirement, profit sharing, stock option (including, without
limitation, the granting of stock options, stock appreciation rights,
performance awards, or restricted stock awards), stock purchase or other
employee benefit plan, or any other increase in the compensation payable or to
become payable to any officers, directors, or key employees of the Company,
except in the ordinary course of business consistent with past practice.
SECTION 2.09. Absence of Litigation. Except as disclosed in the SEC
Reports filed prior to the date of this Agreement, there is no claim, action,
proceeding or investigation pending or, to the Company's knowledge, threatened
against the Company, or any property or asset of the Company, before any court,
arbitrator or administrative, governmental or regulatory authority or body,
domestic or foreign, which (i) individually or in the aggregate, is reasonably
likely to have a material adverse effect on the Company or (ii) seeks to delay
or prevent the consummation of any Transaction. As of the date hereof, neither
the Company nor any property or asset of the Company is subject to any order,
writ, judgment, injunction, decree, determination or award having, individually
or in the aggregate, a material adverse effect on the Company.
SECTION 2.10. Employee Benefit Plans. The employee benefit plans,
programs and arrangements maintained for the benefit of any current or former
employee, officer or director of the Company are described in Section 1.07
hereof (the "Plans") and Parent has been furnished with a copy of each Plan and
each material document prepared in connection with each Plan. Except as
disclosed by the Company to the Parent: (i) none of the Plans is a
multiemployer plan within the meaning of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"); (ii) none of the Plans promises or
provides retiree medical or life insurance benefits to any person; (iii) each
Plan intended to be qualified under Section 401(a) of the Internal Revenue Code
of 1986, as amended (the "Code"), has received a favorable determination letter
from the Internal Revenue Service (the "IRS") that it is so qualified and
nothing has occurred since the date of such letter to affect the qualified
status of such Plan; and (iv) each Plan has been operated in all material
respects in accordance with its terms and the requirements of applicable law.
SECTION 2.11. Proxy Statement. The proxy statement to be sent to the
stockholders of the Company in connection with the Stockholders' Meeting (as
hereinafter defined) (such proxy statement, as amended or supplemented, being
referred to herein as the "Proxy Statement"), shall not, at the date the Proxy
Statement (or any amendment or supplement thereto) is first mailed to
stockholders of the Company, at the time of the Stockholders' Meeting and at
the Effective Time, be false or misleading with respect to any material fact,
or omit to state any material fact required to be stated therein or necessary
in order to make the statements made therein, in the light of the circumstances
under which they are made, not misleading or necessary to correct any statement
in any earlier communication with respect to the solicitation of proxies for
the Stockholders' Meeting which shall have become false or misleading. The
Proxy Statement shall comply in all material respects as to form with the
requirements of the Exchange Act and the rules and regulations thereunder.
SECTION 2.12. Real Property and Leases. The Company has sufficient
title to all its properties and assets to conduct its business as currently
conducted or as contemplated to be conducted, with only such exceptions as,
individually or in the aggregate, would not have a material adverse effect to
the Company.
SECTION 2.13. Taxes. The Company has filed all federal, state, local
and foreign tax returns and reports required to be filed by it and has paid and
discharged all taxes shown as due thereon and has paid all applicable ad
valorem taxes as are due, other than (i) such payments as are being contested
in good faith by appropriate proceedings and (ii) such filings, payments or
other occurrences that, individually or in the aggregate, would not have a
material adverse effect. No taxing authority or agency, domestic or foreign,
is now asserting or, to the best knowledge of the Company, threatening to
assert against the Company any deficiency or claim for additional taxes or
interest thereon or penalties in connection therewith. The Company has not
granted any waiver of any statute of limitations with respect to, or any
extension of a period for the assessment of, any federal, state, county,
municipal or foreign income tax. The accruals and reserves for taxes reflected
in the 1996 Balance Sheet are adequate to cover all taxes accruable through
such date (including interest and penalties, if any, thereon) in accordance
with generally accepted accounting principles.
SECTION 2.14. Environmental Matters. (a) As used in this Agreement
"Environmental Laws" shall mean: any federal, state or local law, rule, or
regulation or common law, relating to public health or safety, worker health or
safety, or pollution, damage to or protection of the environment including,
without limitation, laws relating to emissions, discharges, releases or
threatened release of Hazardous Materials (as defined by such laws) into the
environment (including, without
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limitation, ambient air, surface water, groundwater, land surface or
subsurface), or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, generation, disposal, transport or
handling of any Hazardous Material.
(b) There are no specific facts or circumstances known to the Company
that would indicate that the Company or any of its subsidiaries will likely be
subject to liability in respect of a violation or alleged violation of any
Environmental Laws, which would be material to the Company and its
subsidiaries, taken as a whole.
SECTION 2.15. Brokers' Fees. The Company does not have any liability
or obligation to pay any fees or commissions to any broker, finder, or similar
agent with respect to the transactions contemplated by this Agreement, except
for the fees payable to Principal Financial Securities, Inc. under its
engagement letter with the Company, dated May 2, 1996.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGERCO.
Parent and MergerCo. hereby, jointly and severally, represent and
warrant to the Company that:
SECTION 3.01. Corporate Organization. Each of Parent and MergerCo.
is a corporation duly organized, validly existing and in good standing under
the laws of Delaware and has the requisite power and authority and all
necessary governmental approvals to own, lease and operate its properties and
to carry on its business as it is now being conducted, except where the failure
to be so organized, existing or in good standing or to have such power,
authority and governmental approvals would not, individually or in the
aggregate, have a material adverse effect on the business or operations of
Parent and MergerCo.
SECTION 3.02. Authority Relative to this Agreement. Each of Parent
and MergerCo. has all necessary corporate power and authority to execute and
deliver this Agreement, to perform its obligations hereunder and to consummate
the Transactions. The execution and delivery by Parent and MergerCo. of this
Agreement, and the consummation by Parent and MergerCo. of the Transactions
have been duly and validly authorized by all necessary corporate action and no
other corporate proceedings on the part of Parent or MergerCo. are necessary to
authorize this Agreement or to consummate the Transactions (other than, with
respect to the Merger, the filing and recordation of the Merger Certificate as
required by Delaware Law). This Agreement has been duly and validly executed
and delivered by Parent and MergerCo. and, assuming the due authorization,
execution and delivery by the Company, constitutes a legal, valid and binding
obligation of each of Parent and MergerCo. enforceable against each of Parent
and MergerCo. in accordance with its terms.
SECTION 3.03. No Conflict; Required Filings and Consents. (a) The
execution and delivery of this Agreement by Parent and MergerCo. do not, and
the performance of this Agreement by Parent and MergerCo. will not, (i)
conflict with or violate the Certificate of Incorporation or Bylaws of either
Parent or MergerCo., (ii) conflict with or violate any law, rule, regulation,
order, judgment or decree applicable to Parent or MergerCo. or by which any
property or asset of either of them is bound or affected, or (iii) result in
any breach of or constitute a default (or an event which 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 other encumbrance on any property or asset of Parent or
MergerCo. pursuant to, any note, bond, mortgage, indenture, contract,
agreement, lease, license, permit, franchise or other instrument or obligation
to which Parent or MergerCo. is a party or by which Parent or MergerCo. or any
property or asset of either of them is bound or affected, except (in the case
of clauses (ii) and (iii)) for any such conflicts, violations, breaches or
other occurrences which would not, individually or in the aggregate, have a
material adverse effect on the business or operations of Parent or MergerCo.
(b) The execution and delivery of this Agreement by Parent and
MergerCo. do not, and the performance of this Agreement by Parent and MergerCo.
will not, require any consent, approval, authorization or permit of, or filing
with or notification to, any governmental or regulatory authority, domestic or
foreign, except (i) for applicable requirements, if any, of the Exchange Act,
Blue Sky Laws and Delaware Law and (ii) where failure to obtain such consents,
approvals, authorizations or permits, or to make such filings or notifications,
would not prevent or delay consummation of the Merger, or otherwise prevent
Parent or MergerCo. from performing its respective obligations under this
Agreement.
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SECTION 3.04. Financing. At the Effective Time, Parent will have
sufficient funds to pay the Merger Consideration, Option Consideration and
Award Consideration. Parent shall deliver to Company a commitment for the
lending of such funds from Texas Commerce Bank prior to the filing of the Proxy
Statement with the SEC.
SECTION 3.05. Absence of Litigation. There is no claim, action,
proceeding or investigation pending or, to Parent's or MergerCo.'s knowledge,
threatened, against Parent or MergerCo., or any property or asset of Parent or
MergerCo., before any court, arbitrator or administrative, governmental or
regulatory authority or body, domestic or foreign, which seeks to delay or
prevent the consummation of any Transaction.
SECTION 3.06. Proxy Statement. The information supplied by Parent
for inclusion in the Proxy Statement will not, on the date the Proxy Statement
(or any amendment or supplement thereto) is first mailed to stockholders of the
Company, at the time of the Stockholders' Meeting and at the Effective Time,
contain any statement which, at such time and in light of the circumstances
under which it is made, is false or misleading with respect to any material
fact, or omits to state any material fact required to be stated therein or
necessary in order to make the statements therein not false or misleading or
necessary to correct any statement in any earlier communication with respect to
the solicitation of proxies for Stockholders' Meeting which shall have become
false or misleading. Notwithstanding the foregoing, Parent and MergerCo. make
no representation or warranty with respect to any information supplied by the
Company or any of its representatives which is contained in any of the
foregoing documents.
SECTION 3.07. Brokers' Fees. No broker, finder or investment banker
is entitled to any brokerage, finder's or other fee or commission in connection
with the Transactions based upon arrangements made by or on behalf of Parent or
MergerCo.
ARTICLE IV
CONDUCT OF BUSINESS PENDING THE MERGER
SECTION 4.01. Conduct of Business by the Company Pending the Merger.
The Company covenants and agrees that, between the date of this Agreement and
the Effective Time, unless Parent shall otherwise agree in writing, the
business of the Company shall be conducted only in, and the Company shall not
take any action except in, the ordinary course of business and in a manner
consistent with past practice; and the Company shall use its reasonable best
efforts to preserve substantially intact the business organization of the
Company, to keep available the services of the current officers and employees
of the Company and to preserve the current relationships of the company with
customers, suppliers, licensees, licensors and other persons with which the
Company has significant business relations. By way of amplification and not
limitation, except as contemplated by this Agreement, the Company shall not,
between the date of this Agreement and the Effective Time, directly or
indirectly do, or propose to do, any of the following without the prior written
consent of Parent.
(a) amend or otherwise change its Certificate of Incorporation or
Bylaws;
(b) issue, sell, pledge, dispose of, grant, encumber, or authorize
the issuance, sale, pledge, disposition, grant or encumbrance of, (i) any
shares of capital stock of any class of the Company, or any options, warrants,
convertible securities or other rights of any kind to acquire any shares of
such capital stock, or any other ownership interest (including, without
limitation, any phantom interest) of the Company (except for the issuance of a
maximum of 40,000 Shares issuable upon the exercise of employee stock options
outstanding on the date hereof, if such are exercised prior to the Effective
Time);
(c) declare, set aside, or pay any dividend or distribution with
respect to its capital stock (whether in cash or in kind), or redeem,
repurchase, or otherwise acquire any of its capital stock;
(d) issue any note, bond, or other debt security or create, incur,
assume, or guarantee any indebtedness for borrowed money or capitalized lease
obligation outside the ordinary course of business;
(e) grant any security interest on any of its assets outside the
ordinary course of business; or transfer, lease, license, sell, mortgage,
pledge, dispose of or encumber any assets or incur or modify any indebtedness
or other liability other than in the ordinary course of business;
(f) make any capital investment in, make any loan to, acquire the
securities or assets of, or merge or consolidate with, any other person outside
the ordinary course of business;
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(g) make any acquisition of a material amount of assets or securities
or enter into any material contract or any release or relinquishment of any
material contract rights, not in the ordinary course of business;
(h) make any change in employment terms for any of its directors,
officers, and employees outside the ordinary course of business; grant any
severance or termination pay to, or enter into any employment or severance
agreement with any director, officer or other employee of the Company or any of
its subsidiaries, other than pursuant to benefit plans in existence as of the
date of this Agreement and in the ordinary course of business; establish,
adopt, enter into, or, except as required by law, amend any benefit plans, or
make any new grants or awards under any benefit plans other than in the
ordinary course of business; and
(i) commit to do any of the foregoing.
ARTICLE V
ADDITIONAL AGREEMENTS
SECTION 5.01. Stockholders' Meeting. The Company, acting through the
Board, shall, in accordance with applicable law and the Company's Certificate
of Incorporation and Bylaws, (i) duly call, give notice of, convene and hold an
annual or special meeting of its stockholders as soon as reasonably practicable
for the purpose of considering and taking action on this Agreement and the
Transactions (the "Stockholders' Meeting") and (ii) subject to its fiduciary
duties under applicable law, (A) include in the Proxy Statement the unanimous
recommendation of the Board to the stockholders of the Company to approve and
adopt this Agreement and the Transactions and (B) use its reasonable best
efforts to obtain such approval and adoption.
SECTION 5.02. Proxy Statement. The Company shall file the Proxy
Statement with the SEC under the Exchange Act, and shall use its reasonable
best efforts to have the Proxy Statement cleared by the SEC. Parent, MergerCo.
and the Company shall cooperate with each other in the preparation of the Proxy
Statement, and the Company shall notify Parent of the receipt of any comments
of the SEC with respect to the Proxy Statement and of any requests by the SEC
for any amendment or supplement thereto or for additional information and shall
provide to Parent promptly copies of all correspondence between the Company or
any representative of the Company and the SEC. The Company shall give Parent
and its counsel the opportunity to review the Proxy Statement prior to its
being filed with the SEC and shall give Parent and its counsel the opportunity
to review all amendments and supplements to the Proxy Statement and all
responses to requests for additional information and replies to comments prior
to their being filed with, or sent to, the SEC. Each of the Company, Parent
and MergerCo. agrees to use its reasonable best efforts, after consultation
with the other parties hereto, to respond promptly to all such comments of and
requests by the SEC and to cause the Proxy Statement and all required
amendments and supplements thereto to be mailed to the holders of Shares
entitled to vote at the Stockholders' Meeting at the earliest practicable time.
SECTION 5.03. Access to Information; Confidentiality. From the date
hereof to the Effective Time, the Company shall, and shall cause the officers,
directors, employees, auditors and agents of the Company to, afford the
officers, employees and agents of Parent and MergerCo. and persons providing or
committing to provide Parent or MergerCo. with financing for the Transactions
complete access at all reasonable times to the officers, employees, agents,
properties, offices, properties, books and records of the Company, and shall
furnish Parent and MergerCo. and persons providing or committing to provide
Parent or MergerCo. with financing for the Transactions with all financial,
operating and other data and information as Parent or MergerCo., through its
officers, employees or agents, may reasonably request. All information
obtained by the Company, Parent or MergerCo. or other persons pursuant to this
Section 5.03 shall be kept confidential.
SECTION 5.04. No Solicitation of Transactions. The Company shall
not, and it shall not authorize or permit any of its subsidiaries, officers,
directors or employees or any advisors or agents retained by the Company or its
subsidiaries, directly or indirectly, to (i) solicit, initiate or knowingly
encourage or induce the making of any proposal (other than by Parent or
MergerCo.) regarding any merger, business combination or similar transaction
involving the Company, any sale or other disposition of assets of the Company
(other than in the ordinary course of business) or any offer to purchase,
tender offer or similar transaction involving the Common Stock (a "Company
Acquisition Proposal"), (ii) negotiate with any third party with respect to any
Company Acquisition Proposal, (iii) endorse or recommend the Company
Acquisition Proposal of any third party, or (iv) enter into any contract with
any third party with the intent to effect any Company Acquisition Proposal.
Notwithstanding the foregoing, nothing in this Section 5.04 shall limit or
prohibit the Company from issuing a press release relating to the Merger or
(ii) shall limit or prohibit the Company or any officer, director or employee
of the
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company or any advisor or agent retained by the Company (in each case, as
authorized by the Special Committee) from (A) furnishing or causing to be
furnished information concerning the Company, (B) participating in discussions
and negotiations through its authorized representatives with persons who have
sought such information if the Special Committee, upon the advice of its legal
counsel, determines in good faith that the failure to provide such information
or to participate in such discussions or negotiations would cause the members
of the Board of Directors to be subject to a risk of a breach of their
fiduciary duties under applicable law, and (C) entering into a contract to
effect a Company Acquisition Proposal that the Special Committee, with the
advise of its legal and financial advisors, determines in good faith is more
favorable to the stockholders than the Merger contemplated hereby. (The
foregoing sentence shall not relieve any person from the responsibility of
protecting confidential information of the Company when it is furnished to a
third party.)
SECTION 5.05. Directors' and Officers' Indemnification and Insurance.
The Certificate of Incorporation and Bylaws of the Surviving Corporation shall
contain provisions no less favorable with respect to indemnification than are
set forth in Certificate of Incorporation and Bylaws of the Company, which
provisions shall not be amended, repealed or otherwise modified for a period of
five years from the Effective Time in any manner that would affect adversely
the rights thereunder of individuals who at the Effective Time were directors,
officers or agents of the Company, unless such modification shall be required
by law.
SECTION 5.06. Notification of Certain Matters. The Company shall
give prompt notice to Parent, and Parent shall give prompt notice to the
Company, of (i) the occurrence, or non-occurrence, or any event the occurrence,
or non- occurrence, of which would be likely to cause any representation or
warranty contained in this Agreement to be untrue or inaccurate and (ii) any
failure of the Company, Parent or MergerCo., as the case may be, to comply with
or satisfy any covenant, condition or agreement to be complied with or
satisfied by it hereunder; provided, however, that the delivery of any notice
pursuant to this Section 5.06 shall not limit or otherwise affect the remedies
available hereunder to the party receiving such notice.
SECTION 5.07. Further Action; Reasonable Best Efforts. Upon the
terms and subject to the conditions hereof, each of the parties hereto shall
use its reasonable best efforts to take, or cause to be taken, all appropriate
action, and to do, or cause to be done, all things necessary, proper or
advisable under applicable laws and regulations to consummate and make
effective the Transactions, including, without limitation, using its reasonable
best efforts to obtain all consents, approvals, authorizations, waivers and
orders of governmental authorities and parties to any material contracts with
the Company as are necessary for the consummation of the Transactions and to
fulfill the conditions to the Merger. In case at any time after the Effective
Time any further action is necessary or desirable to carry out the purposes of
this Agreement, the proper officers and directors of each party to this
Agreement shall use their reasonable best efforts to take all such action.
SECTION 5.08. Public Announcements. Parent and the Company
acknowledge that they previously agreed to the issuance of a press release
disclosing the terms of the Transactions. Parent and the Company shall consult
with each other before issuing any subsequent press release or otherwise making
any public statements with respect to this Agreement, the Merger Agreement or
any Transaction and shall not issue any such press release or make any such
public announcement without the prior approval of Parent and the Company of
such press release or public statement, except as may be required by law, in
which case the disclosing party must use all commercial and reasonable efforts
to advise the other parties prior to making any such disclosure.
ARTICLE VI
CONDITIONS TO THE MERGER
SECTION 6.01. Conditions to the Merger. The respective obligations
of each party to effect the Merger shall be subject to the satisfaction at or
prior to the Effective Time of the following conditions:
(a) This Agreement and the Transactions shall have been approved and
adopted by the affirmative vote of the stockholders of the Company to the
extent and in the manner required by Delaware Law and the Certificate of
Incorporation of the Company;
(b) No governmental authority or other agency or commission or court
of competent jurisdiction shall have enacted, issued, promulgated, enforced or
entered any law, rule, regulation, executive order, decree, injunction or other
order (whether temporary, preliminary or permanent) which is then in effect and
has the effect of making the acquisition
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of Shares by Parent or MergerCo. or any affiliate of either of them illegal or
otherwise restricting, preventing or prohibiting consummation of the
Transactions;
(c) All other required authorizations, consents, and approvals of
governmental authorities and third parties shall have been obtained:
(d) The parties shall have performed and complied with, in all
material respects, all agreements and obligations contained in this Agreement
and required to be performed or complied with at or prior to the Effective
Time; and
(d) All representations and warranties of the parties shall be true
and correct in all material respects.
SECTION 6.02. Additional Conditions to Obligations of Parent and
MergerCo. The obligations of Parent and MergerCo. to effect the Merger are
also subject to the following conditions:
(a) Parent and, as necessary, the Company, shall have entered into a
credit arrangement with Texas Commerce Bank to provide available funds for the
Transactions of not less than $4.9 million;
(b) The number of Shares with respect to which the holders thereof
shall have exercised dissenters' rights shall not exceed ten percent (10%) of
the total number of Shares outstanding; and
(c) There shall not have occurred any material adverse change in the
business, financial condition, operations or results of operations of the
Company except such changes as are contemplated by this Agreement.
SECTION 6.03. Additional Conditions to Obligation of the Company.
The obligation of the Company to effect the Merger is also subject to the
Special Committee having received, if requested by the Special Committee in its
sole discretion, an opinion or confirmation of such opinion delivered at an
earlier date of Principal Financial Securities, Inc. dated as of the closing
date in form and substance acceptable to the Special Committee, to the effect
that the Merger Consideration is fair, from a financial point of view, to the
holders of Shares (other than Parent).
SECTION 6.04 Waiver of Conditions. Any party may waive any condition
set forth above if it executes a writing so stating at or prior to Closing.
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
SECTION 7.01. Termination. This Agreement may be determined and the
Merger and the other Transactions may be abandoned at any time prior to the
Effective Time, notwithstanding any requisite approval and adoption of this
Agreement and the Transactions by the stockholders of the Company:
(a) By mutual written consent duly authorized by the Board of
Directors of Parent, MergerCo. and the Company; or
(b) By either of Parent or MergerCo. upon giving written
notice to the Company at any time prior to the Effective Time, if the
Closing shall not have occurred on or before December 31, 1996 due to
the failure of any condition precedent to the obligations of Parent or
MergerCo. (unless the failure results primarily from either of Parent
or MergerCo. breaching any material representation, warranty, or
covenant contained in this Agreement).
(c) By the Company upon giving written notice to Parent and
MergerCo. at any time (i) prior to the Effective Time, if the Closing
shall not have occurred on or before December 31, 1996 due to the
failure of any condition precedent to the Company's obligations
(unless the failure results primarily from the Company breaching any
representation, warranty, or covenant contained in this Agreement),
(ii) prior to the Effective Time, at any time after the stockholders
if the stockholder approval is not obtained (unless such event
constitutes a Company Triggering Event (as defined below); or (iii)
prior to the Effective Time, if the Company receives a bona fide offer
to effect a Company Acquisition Proposal which the Special Committee,
upon advice of its legal and financial advisors, determines in good
faith is more favorable to the stockholders
12
<PAGE> 89
than the Merger contemplated hereby, provided that the Special
Committee shall have recommended to the Board of Directors approval of
such Company Acquisition Proposal and the Board of Directors shall
have approved such Company Acquisition Proposal.
(d) Any nonbreaching Party may terminate this Agreement by
giving written notice to the other parties at any time prior to the
Effective Time in the event a party has breached any material
representation, warranty or covenant for the benefit of such
non-breaching party contained in this Agreement in any material
respect, the terminating party has notified the breaching party of the
breach, and the breach has continued without cure for a period of 10
days after the notice of breach. Such termination by the Company
shall be by action of its Board of Directors after receipt of the
recommendation of the Special Committee.
(e) Either Parent or MergerCo. may terminate this Agreement
by giving written notice to the Company at any time prior to the
Effective Time upon the occurrence of any of the following events (a
"Company Triggering Event"): (i) the Company's Board of Directors
shall have failed to recommend, or shall have withdrawn or have
modified, in a manner adverse to either Parent and MergerCo., its
recommendation of adoption of this Agreement; (ii) the Company's Board
of Directors shall have approved, endorsed or recommended any Company
Acquisition Proposal; (iii) the Company enters into any contract to
consummate any Company Acquisition Proposal; or (iv) any person or
group other than Parent becomes the beneficial owner of 10% or more of
the outstanding shares of any class of capital stock of the Company.
SECTION 7.02. Effect of Termination. If this Agreement is terminated
pursuant to Section 7.01, this Agreement shall become void and of no effect,
without any liability on the part of any party hereto or its affiliates,
directors, officers, stockholders or partners other than as provided in this
Section 7.02, which section is intended to serve as liquidated damages. If
this Agreement is terminated pursuant to Section 7.01(d), all rights and
obligations of the parties hereunder shall terminate without any liability of
any party to any party, except for any liability of any party then in breach.
If this Agreement is terminated by the Company pursuant to Section
7.01(c)(iii) or is terminated by either Parent or Purchaser in the event of a
Company Triggering Event pursuant to Section 7.01(e), the Company shall
promptly reimburse Parent for all of Parent's and Purchaser's actual,
documented, customary and reasonable fees and expenses (including the fees and
expenses of its counsel, bank and accountants) incurred in connection with the
transactions contemplated by this Agreement (the "Expense Reimbursement
Amount").
SECTION 7.03. 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 such
approval by the Company's Board of Directors may not authorize an amendment
unless and until it receives the recommendation of the Special Committee to do
so; provided, further, that after the approval and adoption of this Agreement,
the Merger Agreement and the Transactions by the stockholders of the Company,
no amendment may be made without the further approval of the stockholders which
would reduce the amount or change the type of consideration into which each
Share shall be converted upon consummation of the Merger or any other term if
such change would adversely effect the stockholders. This Agreement may not be
amended except by an instrument in writing signed by the parties hereto.
SECTION 7.04. Waiver. At any time prior to the Effective Time, any
party hereto may (i) extend the time for the performance of any obligation or
other act of any other party hereto, (ii) waive any inaccuracy in the
representations and warranties contained herein or in any document delivered
pursuant hereto and (iii) waive compliance with any agreement or condition
contained herein. Any such extension or waiver shall be valid if set forth in
an instrument in writing signed by the party or parties to be bound thereby.
ARTICLE VIII
GENERAL PROVISIONS
SECTION 8.01. Non-Survival of Representations, Warranties and
Agreements. The representations, warranties and agreements in this Agreement
shall terminate at the Effective Time or upon the termination of this Agreement
pursuant to Section 7.01, as the case may be, except that the agreements set
forth in Article I and Section 5.05 shall survive the Effective Time
indefinitely and those set forth in Sections 5.03 and 7.02 shall survive
termination indefinitely.
13
<PAGE> 90
SECTION 8.02. Notices. All notices, requests, claims, demands and
other communications hereunder shall be in writing and shall be given (and
shall be deemed to have been duly given upon receipt) by delivery in person, by
cable, telecopy, telegram or telex or by registered or certified mail (postage
prepaid, return receipt requested) to the respective parties at the following
addresses (or at such other address for a party as shall be specified in a
notice given in accordance with this Section 8.02):
if the Parent or MergerCo.:
Seaboard Acquisition Partners, Inc.
3100 N. "A," Building B, Suite 201
Midland TX 79705.
if to the Company:
Seaboard Oil Co.
3100 N. "A," Building B, Suite 200
Midland TX 79705.
SECTION 8.03. Certain Definitions. For purposes of this Agreement,
the term:
(a) "affiliate" of a specified person means a person who directly or
indirectly through one or more intermediaries controls, is controlled by, or is
under common control with, such specified person;
(b) "beneficial owner" with respect to any Shares means a person who
shall be deemed to be the beneficial owner of such Shares under the Exchange
Act and the rules and regulations promulgated thereunder;
(c) "business day" means any day on which the principal offices of
the SEC in Washington, D.C. are open to accept filings, or, in the case of
determining a date when any payment is due, any day on which banks are not
required or authorized to close in Midland, Texas;
(d) "control" (including the terms "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 and
policies of a person, whether through the ownership of voting securities, as
trustee or executor, by contract or credit arrangement or otherwise;
(e) "person" means an individual, corporation, partnership, limited
partnership, syndicate, person (including, without limitation, a "person" as
defined in Section 13(d)(3) of the Exchange Act), trust, association or entity
or government, political subdivision, agency or instrumentality of a
government; and
(f) "subsidiary" or "subsidiaries" of the Company, the Surviving
Corporation, Parent or any other person means an affiliate controlled by such
person, directly or indirectly, through one or more intermediaries.
SECTION 8.04. 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 long as the economic or legal
substance of the Transactions 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 mutually acceptable manner in
order that the Transactions be consummated as originally contemplated to the
fullest extent possible.
SECTION 8.05. Entire Agreement; Assignment. This Agreement
constitutes the entire agreement among the parties with respect to the subject
matter hereof and supersedes all prior agreements and undertakings, both
written and oral, among the parties, or any of them, with respect to the
subject matter hereof. This Agreement shall not be assigned by operation of
law or otherwise, except that Parent and MergerCo. may assign all or any of
their rights and obligations hereunder to any affiliate of Parent provided that
no such assignment shall relieve the assigning party of its obligations
hereunder if such assignee does not perform such obligations.
14
<PAGE> 91
SECTION 8.06. 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, 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, other than Section 5.05 (which is intended to be for the
benefit of the persons covered thereby and may be enforced by such persons).
SECTION 8.07. Specific Performance. The parties hereto agree that
irreparable damage would occur in the event any provision of this Agreement was
not performed in accordance with the terms hereof and that the party shall be
entitled to specific performance of the terms hereof, in addition to any remedy
at law or equity.
SECTION 8.08. Governing Law. This Agreement shall be governed by,
and construed in accordance with, the laws of the State of Texas applicable to
contracts executed in and to be performed in that State except to the extent
Delaware Law shall be applicable. All actions and proceedings arising out of
or relating to this Agreement shall be heard and determined in any court
sitting in Midland, Texas.
SECTION 8.09 Headings. The descriptive headings contained in this
Agreement are included for convenience of reference only and shall not affect
in any way the meaning or interpretation of this Agreement.
15
<PAGE> 92
IN WITNESS WHEREOF, Parent, MergerCo. and the Company have caused this
Agreement to be executed as of the date first written above by their respective
officers thereunto duly authorized.
SEABOARD ACQUISITION PARTNERS, INC.
By: /s/ E.E. Runyan
--------------------------------------
E.E. Runyan, President
SEABOARD MIDLAND, INC.
By: /s/ E.E. Runyan
--------------------------------------
E.E. Runyan, President
SEABOARD OIL CO.
By: /s/ Gary B. Gilliam
--------------------------------------
Gary B. Gilliam, President
16
<PAGE> 93
EXHIBIT 1.02
CERTIFICATE OF MERGER
OF
SEABOARD MIDLAND, INC.
INTO
SEABOARD OIL CO.
The undersigned corporation organized and existing under and by virtue
of the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
FIRST: That the name and state of incorporation of each of the
constituent corporations of the merger is as follows:
NAME STATE OF INCORPORATION
Seaboard Midland, Inc. Delaware
Seaboard Oil Co. Delaware
SECOND: That an agreement and plan of merger between the parties to
the merger has been approved, adopted, certified, executed and acknowledged by
each of the constituent corporations in accordance with the requirements of
Section 251 of the General Corporation Law of the State of Delaware.
THIRD: That the name of the surviving corporation of the merger is
Seaboard Oil Co.
FOURTH: That the certificate of incorporation of Seaboard Oil Co., a
Delaware corporation, the surviving corporation, shall be the certificate of
incorporation of the surviving corporation.
FIFTH: That the executed agreement and plan of merger is on file at
the principal place of business of the surviving corporation. The address of
the principal place of business of the surviving corporation is 3100 North "A",
Building B, Suite 200, Midland, Texas 79705.
SIXTH: That a copy of the agreement and plan of merger will be
furnished by the surviving corporation, on request and without cost to any
stockholder of any constituent corporation.
SEABOARD OIL CO.
By:
----------------------------------
Gary B. Gilliam, President
ATTEST:
By:
---------------------------------------------
E.E. Runyan, Chairman of the Board
and Chief Executive Officer
<PAGE> 94
SCHEDULE 2.01
LIST OF SUBSIDIARIES OF THE COMPANY
Name of Subsidiary State of Incorporation
------------------ ----------------------
Probe, Inc. Texas
Mid-America Well Service, Inc. Texas
Mid-America Drilling Fluids, Inc. Texas
Mid-America Pipe & Supply Company Texas
<PAGE> 95
APPENDIX II
OPINION OF PRINCIPAL FINANCIAL SECURITIES, INC.
<PAGE> 96
JUNE 5, 1996
The Special Committee of the
Board of Directors
SEABOARD OIL CO.
3100 North A Street
Building B, Suite 200
Midland, TX 79705
Gentlemen:
Principal Financial Securities, Inc. ("PFS") understands that pursuant to
an Agreement and Plan of Merger between Seaboard Oil Company (the "Company")
and Seaboard Acquisition Partners ("SAP"), dated June 28, 1996 (the
"Agreement") and as reflected in an offer letter from SAP dated June 5, 1996,
SAP will acquire each outstanding share of Seaboard's common stock not already
held by SAP in a going-private transaction. You have asked us to advise you as
to the fairness of the terms of the Agreement, from a financial point of view,
to the current stockholders of the Company (other than SAP).
In arriving at our opinion we have:
1. Reviewed the Agreement;
2. Reviewed Seaboard's financial statements for the fiscal year ended
March 31, 1996 and certain other publicly available financial
statements and reports regarding the Company;
3. Reviewed certain reserve information provided by the Company
relating to the producing properties of the Company, including
certain reserve reports prepared by independent petroleum
engineers for the Company;
4. Reviewed certain financial and stock market data of the Company
and compared that data with similar data for other publicly-held
companies that have operations similar in some respect to the
operations of the Company;
5. Reviewed the financial terms, to the extent publicly available, of
certain comparable transactions;
6. Discussed with management of the Company the operations of and
business prospects for the Company and the anticipated financial
consequences of the proposed transaction to the Company; and
7. Performed other analyses as are customary in our industry.
<PAGE> 97
Seaboard Oil Co.
June 5, 1996
Page 2
As part of our investment banking business, we regularly issue fairness
opinions and are continually engaged in the valuation of companies and their
securities in connection with business reorganizations, private placements,
negotiated underwritings, mergers and acquisitions and valuations for estate,
corporate and other purposes. In the ordinary course of business, Principal
Financial Securities, Inc. and its affiliates at any time may hold long or
short positions, and may trade or otherwise effect transactions as principal or
for the accounts of customers, in debt or equity securities or options on
securities of the Company.
In connection with our review, we have not independently verified any of
the information concerning the Company and have relied on its being complete
and accurate in all material respects. In addition, we have not made an
independent evaluation or appraisal of the assets of the Company , nor have we
been furnished with any such independent evaluations or appraisals (other than
certain reserve reports prepared by independent petroleum engineers for the
Company).
Our opinion is based solely upon the information set forth herein as
reviewed by us and circumstances existing as of the date hereof. Events
occurring after the date hereof could materially affect the assumptions used
both in preparing this opinion and in the documents reviewed by us. We have
not undertaken to reaffirm or revise this opinion or otherwise comment upon any
events occurring after the date hereof.
We are not opining, and were not requested by you to opine, as to the
fairness of any aspect of the transaction other than the financial terms of the
Agreement. We have assumed that the Agreement and all other aspects of the
proposed transaction will be, in all respects, in compliance with all laws and
regulations that are applicable to Seaboard, SAP or the proposed transaction
(and we have relied as to all legal matters relating thereto on counsel to
Seaboard).
We have acted as financial advisor to the Board of Directors in
connection with this transaction and will receive a fee for our services. It is
understood that this letter is for the information of the Board of Directors
only and, without our prior written consent, other than as required by law or
judicial process, 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
written document used in connection with the offering or sale of securities,
nor shall this letter be used for any other purposes, except that this letter
may be filed with the Securities and Exchange Commission as an exhibit to a
proxy statement to be prepared in connection with the proposed transaction.
Based upon and subject to the foregoing, including the various
assumptions and limitations set forth herein, it is our opinion that on the
date hereof the terms of the Agreement are fair, from a financial point of
view, to the current stockholders of the Company (other than SAP).
Very truly yours,
PRINCIPAL FINANCIAL SECURITIES, INC.
<PAGE> 98
APPENDIX III
LOAN COMMITMENT
<PAGE> 99
July 3, 1996
Seaboard Acquisition Partners, Inc.
3100 North "A", Suite 200
Midland, Texas 79705
ATTN: E. E. Runyan, President
RE: Proposed $5.0MM Revolving Credit Facility To Seaboard Acquisition
Partners, Inc. ("SAP") with regard to the Agreement and Plan of
Merger among Seaboard Oil Co., SAP, and Seaboard Midland, Inc.
("SMI"), the "Merger"
Dear Mr. Runyan:
Pursuant to our discussions with you, regarding the above referenced Credit
Facility, Texas Commerce Bank is pleased to submit our approved commitment to
you for a $5.0MM Revolving Credit Facility to be used to finance the Merger, as
outlined in the Agreement and Plan of Merger among "SAP", Seaboard Oil Co., and
"SMI" dated June 28, 1996. The terms and conditions of this Commitment are set
forth in the attached Term Sheet. Funding on the loan will be made
simultaneously with the closing of the Merger as outlined above. If these
terms are satisfactory, please execute in the space provided below and return
an executed copy to my attention.
Very Truly Yours,
/s/ Sidney K. Smith
--------------------
Sidney K. Smith
Senior Vice President
Accepted this 3rd day of July, 1996
Seaboard Acquisition Partners, Inc.
By: /s/ E. E. Runyan
------------------------------------
E. E. Runyan, President
<PAGE> 100
TERM SHEET
SEABOARD ACQUISITION PARTNERS, INC.
BORROWERS: Seaboard Acquisition Partners, Inc.
Seaboard Oil Co.
FACILITY: Revolving Line Of Credit
AMOUNT: $5,000,000.00 with an initial Borrowing Base of $5,000,000.00
PURPOSE: Finance Merger costs associated with Plan of Merger among
Seaboard Oil Co., Seaboard Acquisition Partners, Inc.,
("SAP"), and Seaboard Midland, Inc. ("SMI"). Acquisition of
producing oil and gas properties.
INTEREST RATE: TCB Prime, as it changes, payable monthly
MATURITY: September 30, 1997
FEES: Commitment Fee: 1/2 of 1% (0.00500) per annum on the "Unused"
Portion of the Borrowing Base, Payable Semi-Annually, in
arrears concurrent with Borrowing Base Reviews.
COLLATERAL: A) First Lien Deed of Trust, Mortgage, Security Agreement,
and Assignment of Production on the "major properties" of
Borrower, as requested by Bank.
B) All Common Stock of Seaboard Oil Co., owned or purchased
by SAP (1,055,683 shares currently owned)
<PAGE> 101
Page 2
Seaboard Acquisition Partners, Inc.
Term Sheet
AGREEMENTS: "Letter Agreement" between Bank and Borrower providing for the
following:
1. Semi-Annual Borrowing Base Re-determinations, @ sole
discretion of Bank, etc..
2. Annual Audited Financial Statements, within 120 days of
Borrower's Fiscal year-end, in a form satisfactory to Bank,
provided the approved Borrowing Base exceeds $2,000,000.00
as of Borrower's fiscal year-end beginning March 31, 1997.
3. Quarterly Financial Statements, within 45 days, in a
form satisfactory to Bank.
4. Engineering Data, to include Monthly Production Reports,
Reserve Reports, etc., as "reasonably requested" by Bank.
CONDITIONS
PRECEDENT: Satisfactory review and approval of Title Documents, etc.
relating to the Ownership of the Mortgaged Properties, and
receipt of all shares of Seaboard Oil Co., Common Stock
currently held by SAP.
LEGAL
COSTS: Borrower to pay all costs incurred by Bank in connection with
the preparation of Loan Documents, including Recording fees,
and any "out-of-pocket" expenses of Bank's Counsel required to
consummate this transaction.
<PAGE> 102
APPENDIX IV
SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW
<PAGE> 103
Section 262. 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 Sections 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 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:
<PAGE> 104
(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 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 of 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 offices 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 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
<PAGE> 105
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 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.
