<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. 1)
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/X/ Preliminary Proxy Statement / / Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or
Section 240.14a-12
SEABOARD OIL CO.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in its Charter)
SEABOARD OIL CO.
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(2)
or Item 22(a)(2) of Schedule 14A.
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/X/ Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
$3,132
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(2) Form, Schedule or Registration Statement No.:
Rule 13e-3 Transaction Statement
- --------------------------------------------------------------------------------
(3) Filing Party:
Seaboard Oil Co.
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(4) Date Filed:
July 12, 1996
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AMENDED PRELIMINARY COPIES
SEABOARD OIL CO.
3100 NORTH "A" STREET
BUILDING B
MIDLAND, TEXAS 79705
_______________, 1996
Dear Stockholder:
The Annual Meeting of Stockholders (the "Meeting") of Seaboard Oil Co.
(the "Company") will be held at the offices of the Company, 3100 North "A"
Street, Building B, Midland, Texas on September ____, 1996, commencing at 9:00
a.m., local time.
In addition to the election of Directors, stockholders will be
asked to vote upon an Agreement and Plan of Merger dated as of June 28, 1996
(the "Merger Agreement") which provides for the acquisition of the Company by
Seaboard Acquisition Partners, Inc. ("SAP") through a merger of a wholly owned
subsidiary of SAP with and into the Company (the "Merger"). In the Merger,
each outstanding share (the "Shares") of the Company's Common Stock, par value
$.01 per share (other than Shares held by SAP, held by the Company as treasury
stock or held by persons who choose to exercise their dissenters' rights
described in the accompanying Proxy Statement) will be converted into the right
to receive $9.75 in cash (the "Merger Consideration"). It is anticipated that
the Merger will be effective as soon as possible after the Meeting, and that
payment for Shares will be available immediately thereafter.
SAP owns approximately 72% of the Company's issued and
outstanding Shares and presently intends to vote all such Shares in favor of
the Merger. The Directors and officers of the Company have also advised the
Company that they intend to vote the Shares owned by them (approximately 3.4 %
of the outstanding Shares) in favor of the Merger. Since approval of the
Merger requires only the approval of a majority of the Company's outstanding
Shares, approval of the Merger is assured if SAP votes in its favor. Following
the Merger, all of the capital stock of the Company will be held by SAP, and
the present holders of the Shares will no longer have any equity interest in
the Company. A special committee of the Board of Directors has received the
opinion of Principal Financial Securities, Inc. ("PFS"), an investment banking
firm, stating that the Merger Consideration is fair from a financial point of
view to the stockholders of the Company other than SAP or its affiliates
(collectively, the "Minority Stockholders"). A copy of the opinion is attached
to the Proxy Statement as Appendix II. Stockholders are urged to read the
Proxy Statement and such opinion in its entirety for a description of the
procedures followed, the factors considered, the assumptions made, and the
scope and limits of PFS's review in rendering the opinion.
Your Board of Directors has approved the Merger described in
the attached material and has determined that it is fair to and in the best
interests of the Company and the Minority Stockholders. After careful
consideration, your Board of Directors recommends a vote in favor of the
Merger. The Directors and Officers of the Company have certain conflicts of
interest with respect to the Merger. See "SPECIAL FACTORS - CONFLICTS OF
INTEREST" in the Proxy Statement accompanying this letter.
Accompanying this letter, you will find a Notice of Annual
Meeting of Stockholders, a Proxy Statement relating to the actions to be taken
by the Company's Stockholders at the Meeting, a Proxy Card, and the Company's
Annual Report. The Proxy Statement more fully describes the Merger and
includes additional information about the Company.
All Stockholders are cordially invited to attend the Meeting
in person. However, whether or not you plan to attend the Meeting, please
complete, sign, date and return your Proxy Card in the enclosed envelope. If
you attend the Meeting, you may vote in person if you wish, even though you
have previously returned your Proxy Card.
Sincerely,
Gary B. Gilliam
President, Chief Financial Officer
and Secretary
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AMENDED PRELIMINARY COPIES
SEABOARD OIL CO.
3100 North "A" Street
Building B
Midland, Texas 79705
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To Be Held September ___, 1996
To the Stockholders:
The 1996 Annual Meeting of Stockholders (the "Meeting") of Seaboard
Oil Co. (the "Company") will be held on _________, September ___, 1996, at 9:00
a.m., local time, at the Company's offices, 3100 North "A" Street, Building B,
Midland, Texas 79705, for the purpose of considering and taking action upon the
following matters:
1. The Agreement and Plan of Merger (the "Merger Agreement") among
Seaboard Acquisition Partners, Inc. ("SAP"), Seaboard Midland,
Inc. and the Company dated June 28, 1996, pursuant to which a
wholly owned subsidiary of SAP will merge with and into the
Company (the "Merger"), and stockholders of the Company (other
than SAP or persons who perfect their dissenters' rights under
Delaware law) will receive $9.75 in cash for each share of Common
Stock of the Company (the "Shares") all as more fully described
in the accompanying Proxy Statement and in the Merger Agreement,
a copy of which is attached to the Proxy Statement.
2. Election of six (6) Directors to serve until the earlier of:
(a) the consummation of the Merger, or
(b) if the Merger is not consummated, until the next Annual
Meeting or until their successors are elected and have
qualified.
3. Transaction of such other business that may properly come before
the meeting or any adjournment thereof.
The Board of Directors has fixed the close of business on August 9,
1996 as the record date for the determination of stockholders entitled to vote
at the meeting and any adjournment thereof.
A copy of the Merger Agreement is included as Appendix I to the
accompanying Proxy Statement. If the Merger is consummated, holders of Shares
who do not vote, vote against or abstain from voting on the adoption of the
Merger Agreement and who perfect their statutory appraisal rights under Section
262 of the Delaware General Corporation Law (the "DGCL") will have the right to
seek appraisal of their Shares. See "DISSENTERS' RIGHTS" in the accompanying
Proxy Statement for a statement of the rights of such stockholders and a
description of the procedures required to be followed by stockholders to obtain
appraisal of their Shares. The text of Section 262 of the DGCL is attached as
Appendix IV to the accompanying Proxy Statement.
By Order of the Board of Directors,
Gary B. Gilliam
President, Chief Financial Officer and Secretary
Midland, Texas
__________, 1996
PLEASE RETURN YOUR SIGNED AND DATED PROXY PROMPTLY.
WE REQUEST THAT YOU SIGN AND MAIL THE ENCLOSED PROXY AS SOON AS
POSSIBLE REGARDLESS OF WHETHER YOU INTEND TO BE PRESENT AT THE MEETING. YOU
ARE CORDIALLY INVITED TO ATTEND AND YOUR PROXY WILL NOT BE USED IF YOU ARE
PRESENT AND PREFER TO VOTE IN PERSON.
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AMENDED PRELIMINARY COPIES
PROXY STATEMENT
SEABOARD OIL CO.
ANNUAL MEETING OF STOCKHOLDERS TO BE HELD SEPTEMBER ____, 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.
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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 ______, September _____, 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 9, 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 1,471,369 Shares outstanding and entitled to vote,
held by approximately 2,122 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.
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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 _____________, 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.
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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
Meeting . . . . . . . . . . Company will be held at the executive
offices of the Company at 3100 North "A"
Street, Building B, Midland, Texas, on
_____, September ____, 1996 at 9:00
a.m., local time.
Record Date . . . . . . . . Holders of record of Shares at the close
of business on August 9, 1996 are
entitled to notice of and to vote at the
Meeting. On that date, there were
1,471,369 Shares outstanding, including
365,794 shares held by 2,115
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; At the Meeting, Stockholders will: (1)
Quorum; vote on the election of six Directors;
Vote Required . . . . . . . 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."
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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
the Merger . . . . . . . . intends 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
Merger . . . . . . . . . . equity 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."
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Recommendation of the The Special Committee (herein so called),
Special Committee and the consisting of three Directors of the
Board of Directors . . . . 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 - RECOMMENDATIONS OF THE
SPECIAL COMMITTEE AND THE BOARD,"
"SPECIAL FACTORS - CONFLICTS OF
INTEREST," AND "SPECIAL FACTORS -
PROCEDURAL FAIRNESS."
Opinion of Financial Advisor Principal Financial Securities, Inc.
("PFS"), 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."
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Interests of Certain Persons Mr. E.E. Runyan (Chairman of the Board,
in the Merger . . . . . . . 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. 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
Consequences . . . . . . . Merger (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 Merger The Merger will become effective upon the
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."
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Conditions to Consummation The respective obligations of the
of the Merger . . . . . . . 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 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. 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 and the number of
Shares with respect to which dissenters'
rights have been exercised.
The conditions identified above include
all of the material conditions of the
Merger. All such conditions are
waivable, and the Company, SAP and
Seaboard Midland anticipate that all
the conditions will be satisfied, or if
not satisfied, waived by the appropriate
party. If PFS is unable, upon request
of the Special Committee, to deliver an
opinion or confirmation at closing, and
that condition is not waived by the
Company, the Merger Agreement will be
terminated and no Merger Consideration
will be paid to the Stockholders. In
determining whether to waive that
condition, the Board of Directors will
consider many factors, including the
best interests of the Company and the
Minority Stockholders. See
"-TERMINATION OF THE MERGER AGREEMENT"
AND "THE MERGER AGREEMENT - CONDITIONS
TO CONSUMMATION OF THE MERGER."
Termination of the Merger The Merger Agreement may be terminated
Agreement . . . . . . . . . and the 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".
7
<PAGE> 12
Amendments to the Merger The Merger Agreement may not be amended
Agreement . . . . . . . . . before 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."
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."
8
<PAGE> 13
SUMMARY SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
PRO FORMA
SEABOARD ACQUISITION
PARTNERS, INC. (1)
THREE MONTHS --------------------------
ENDED JUNE 30, YEARS ENDED MARCH 31, THREE MONTHS YEAR ENDED
----------------- ------------------------------ ENDED JUNE 30, MARCH 31,
1996 1995 1996 1995 1994 1996 1996
---- ---- ---- ---- ---- -------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
(unaudited) (Unaudited)
STATEMENT OF OPERATIONS DATA: (in thousands, except ratios and per share data)
Operating revenues $ 1,723 $ 1,518 $ 6,048 $ 4,366 $ 3,750 $ 1,725 $ 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) Pro Forma financial information for SAP is provided as if the Merger had
been completed as of June 30, 1996 and at the beginning of fiscal 1996.
(2) Based on 10,000 shares of common stock of SAP outstanding as of June 30,
1996 and the periods ended June 30, 1996 and March 31, 1996.
9
<PAGE> 14
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.
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.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NUMBER OF SHARES TRADED
----------------- -----------------------
<S> <C>
March 31, 1996 62,580
March 31, 1995 154,554
March 31, 1994 131,213
March 31, 1993 84,041
</TABLE>
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.
Currently, the Company's transfer agent indicates that, of approximately 2,137
stockholders of record, an additional 46 (holding about 4,964
10
<PAGE> 15
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, are 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.
Both the Company and SAP believe that the value of the Company, on a per
Share basis, is greater than the price established by the limited market
activity of the Common Stock. See "STOCK PRICES AND DIVIDENDS." For the past
several years, the market price has not changed materially in response to
changes in the Company's business and operations or general conditions in the
oil and gas industry. 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. In addition, the book value
per share has historically been higher than the market price. 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 $9.06 as determined by PFS. 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 "-RECOMMENDATIONS OF THE SPECIAL COMMITTEE AND
THE BOARD" AND "-ANALYSIS OF SAP AND SEABOARD MIDLAND."
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. Some of the criteria used by the
Special Committee in selecting an investment banker included the valuation
method(s) utilized by each firm, the assumptions made, the firm's
qualifications and the costs and fees charged by the firm. As a result of this
process, the Special Committee selected PFS to provide an opinion as to
11
<PAGE> 16
the fairness of the Merger, from a financial point of view, to the Minority
Stockholders. The Special Committee selected PFS on the basis of many factors,
including: the other small public oil and gas companies PFS used in its
comparative market analysis; the initial price range preliminarily provided by
PFS was similar to such range provided by a majority of the other firms; 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 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, depending upon various factors. The
Company has had few contacts with unaffiliated parties 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.
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, assumes any responsibility, as a result of the inclusion
of the Projections in this Proxy Statement, for the accuracy of the
Projections. 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
12
<PAGE> 17
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.
13
<PAGE> 18
<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
14
<PAGE> 19
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. 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 describes each method in summary. PFS made an oral report of the
following analyses to the Special Committee and the Committee conducted a brief
independent review of the methodologies and assumptions used by PFS.
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 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.
15
<PAGE> 20
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. The average
equity book value for fiscal year end 1996 and estimated fiscal year end 1997
is $9.06 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.
PFS has indicated in its opinion 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.
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;
16
<PAGE> 21
(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 $9.06 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 and involves a number of factors and variables related to each of
those companies that may or may not be present with respect to 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
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
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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.
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.
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 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.
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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 make a determination, with the assistance of
an independent financial advisor, as to whether the Merger was fair to and in
the best interests of the Company and the Minority Stockholders. However, 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. 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 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.
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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 (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. 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 and the number of Shares with respect to which
dissenters' rights have been exercised.
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, and the Company, SAP and Seaboard
Midland anticipate that all the conditions will be satisfied, or if not
satisfied, waived by the appropriate party. If PFS is unable, upon request of
the Special Committee, to deliver an opinion or confirmation at closing and
that condition is not waived by the Company, the Merger Agreement will be
terminated and no Merger Consideration will be paid to the Stockholders. In
determining whether to waive that condition, the Board of Directors will
consider many factors, including the best interests of the Company and the
Minority Stockholders. See "-TERMINATION OF THE MERGER AGREEMENT."
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
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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.
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.
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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 September ____, 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.
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.
26
<PAGE> 31
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 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.
27
<PAGE> 32
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 $3,566,492 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>
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.
28
<PAGE> 33
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>
1996 1995
Bid Bid
-----------------------------------------
High Low High Low
<S> <C> <C> <C> <C>
1st Quarter $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>
On August 9, 1996, the closing bid price of the Common Stock was $8.25 and
the Company had approximately 2,122 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 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
29
<PAGE> 34
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.
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.
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
30
<PAGE> 35
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.
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
31
<PAGE> 36
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.
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, which were made
in accordance with applicable guidelines prescribed by the Commission. 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
32
<PAGE> 37
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.
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.
33
<PAGE> 38
<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 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.
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<PAGE> 39
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.]
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.
35
<PAGE> 40
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.
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.
36
<PAGE> 41
"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.
"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 SEABOARD MIDLAND, INC.
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.
37
<PAGE> 42
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Three Months
Ended June 30, Years Ended March 31,
---------------- -------------------------------------------------------------
1996 1995 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
(unaudited)
STATEMENT OF OPERATIONS DATA: (in thousands, except ratios and per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
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 (AS 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>
38
<PAGE> 43
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.
39
<PAGE> 44
<TABLE>
<CAPTION>
Three Months Ended Years ended
June 30, March 31,
--------------------------- --------------------------------------
1996 1995 1996 1995
---- ---- -------- --------
(unaudited)
<S> <C> <C> <C> <C>
Production and prices
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>
40
<PAGE> 45
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.
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-
41
<PAGE> 46
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.
42
<PAGE> 47
PRINCIPAL HOLDERS OF SECURITIES
The following table sets forth certain information as of August 9,
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>
Seaboard Acquisition Partners, Inc.(1) Principal Stockholder 1,055,683(2) 71.75%
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) 5.45%(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 9, 1996 with
respect to each nominee to the Board of Directors, all of whom currently serve
in the capacit ies indicated below:
<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>
E.E. Runyan (62) January 1991 19,960 (3)(4) 1.35%
Chairman of the Board, Chief
</TABLE>
43
<PAGE> 48
<TABLE>
<S> <C> <C> <C>
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".
(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".
44
<PAGE> 49
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.
45
<PAGE> 50
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.
(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.
46
<PAGE> 51
(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.
47
<PAGE> 52
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 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
48
<PAGE> 53
(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.
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
49
<PAGE> 54
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 April 1, 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 ____, 1996
50
<PAGE> 55
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> 56
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> 57
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> 58
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> 59
<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> 60
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> 61
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> 62
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> 63
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> 64
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> 65
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> 66
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> 67
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> 68
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> 69
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> 70
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> 71
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> 72
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> 73
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> 74
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> 75
APPENDIX I
Agreement and Plan of Merger
<PAGE> 76
AGREEMENT AND PLAN OF MERGER
Among
SEABOARD ACQUISITION PARTNERS, INC.,
SEABOARD MIDLAND, INC. and
SEABOARD OIL CO.
Dated as of June 28, 1996
<PAGE> 77
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.
2
<PAGE> 78
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.
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.
3
<PAGE> 79
(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.
(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
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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 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.
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(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 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.
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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 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
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(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
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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 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
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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.
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,
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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;
(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.
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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 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
12
<PAGE> 88
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 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:
13
<PAGE> 89
(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
14
<PAGE> 90
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 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.
15
<PAGE> 91
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.
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;
16
<PAGE> 92
(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.
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.
17
<PAGE> 93
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
18
<PAGE> 94
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> 95
SCHEDULE 2.01
LIST OF SUBSIDIARIES OF THE COMPANY
<TABLE>
<CAPTION>
Name of Subsidiary State of Incorporation
------------------ ----------------------
<S> <C>
Probe, Inc. Texas
Mid-America Well Service, Inc. Texas
Mid-America Drilling Fluids, Inc. Texas
Mid-America Pipe & Supply Company Texas
</TABLE>
<PAGE> 96
APPENDIX II
OPINION OF PRINCIPAL FINANCIAL SECURITIES, INC.
<PAGE> 97
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> 98
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> 99
APPENDIX III
LOAN COMMITMENT
<PAGE> 100
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> 101
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> 102
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> 103
APPENDIX IV
SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW
<PAGE> 104
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> 105
(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> 106
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.
<PAGE> 107
AMENDED PRELIMINARY COPIES
PROXY
SEABOARD OIL CO.
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS AND MAY BE
REVOKED PRIOR TO ITS EXERCISE
The undersigned hereby appoints E. E. Runyan, Gary B. Gilliam and
Robert L. Marolda, and each of them, Proxies, with full power of substitution,
to vote all shares of the undersigned in Seaboard Oil Co. (the "Company") which
the undersigned would be entitled to vote if personally present at the Annual
Meeting of Stockholders to be held on September ___, 1996 at 9:00 a.m., local
time, and at any adjournments thereof, on the matters set forth in the Notice
of Annual Meeting of Stockholders and Proxy Statement dated _____________,
1996, a copy of which the undersigned hereby acknowledges having received, as
follows:
(1) The Agreement and Plan of Merger (the "Merger Agreement")
among Seaboard Acquisition Partners, Inc. ("SAP"), Seaboard
Midland, Inc. and the Company dated June 28, 1996 pursuant to
which a wholly owned subsidiary of SAP will merge with and
into the Company, and stockholders of the Company (other than
SAP or persons who perfect their dissenters' rights under
Delaware law) will receive $9.75 in cash for each share of
Common Stock of the Company all as more fully described in the
accompanying Proxy Statement and in the Merger Agreement, a
copy of which is attached to the Proxy Statement.
FOR AGAINST ABSTAIN
------------- ------------- -------------
------------- ------------- -------------
(2) ELECTION OF DIRECTORS
For all nominees listed below (except as indicated to the
contrary)
----------------
----------------
WITHHOLD AUTHORITY
to vote for all nominees listed below
----------------
----------------
E. E. Runyan, Edward E. Runyan, Robert L. Marolda, Robert L.
Hollis, Gary B. Gilliam, and Edward P. Bliss
(INSTRUCTION: To withhold authority to vote for any
individual nominee, write that nominee's name on the space
provided below)
---------------------------------------------------------
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<PAGE> 108
(3) In their discretion, upon any other matter which may properly
come before the meeting or any adjournment thereof.
This Proxy will be voted in accordance with authority granted or
withheld with respect to each item. IF NO DIRECTION IS INDICATED, THIS PROXY
WILL BE VOTED "FOR" ITEM (1). IF AUTHORITY TO VOTE IS NOT WITHHELD ON ITEM
(2), THIS PROXY WILL BE VOTED "FOR" EACH NOMINEE SHOWN IN ITEM (2).
This Proxy should be dated, signed by the Stockholder exactly as his
name appears on this Proxy, and returned promptly in the enclosed envelope.
PERSONS SIGNING IN A FIDUCIARY CAPACITY SHOULD SO INDICATE, AND JOINT OWNERS
SHOULD EACH SIGN.
Dated: 1996.
-----------------------------,
Signed:
-------------------------------------
-------------------------------------
PLEASE FURNISH RESIDENCE ADDRESS:
-------------------------------------
(number and street)
-------------------------------------
(city) (state) (zip)
To help us in our planning, please check here if you expect to attend the
meeting: . Number of people in your party: .
-------- --------
PROXIES MUST BE SIGNED AND DATED TO BE VALID
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