SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
(Amendment No. )
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 ^240.14a-11(c) or ^240.14a-12
THE MERIDIAN RESOURCE CORPORATION
(Name of Registrants as Specified In Their Charters)
N/A
(Name of Person(s) Filing Proxy Statement,
if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[x] 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: COMMON
STOCK, $.01 PAR VALUE, OF THE MERIDIAN RESOURCE CORPORATION.
2) Aggregate number of securities to which transaction applies:
___________25,000,000__________________________________________________
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): THE PROPOSED
PER UNIT PRICE IS BASED ON THE AVERAGE OF THE HIGH AND LOW SALE PRICES
OF THE COMMON STOCK, $.01 PAR VALUE, OF THE MERIDIAN RESOURCE
CORPORATION AS REPORTED ON THE NEW YORK STOCK EXCHANGE, INC. ON MAY 18,
1998.
4) Proposed maximum aggregate value of the transaction:
___________$199,218,750________________________________________________
5) Total fee paid:
___________$39,844_____________________________________________________
[ ] Fee previously paid with preliminary materials.
[ ] 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:
____________________________________N/A____________________________________
2) Form, Schedule or Registration Statement No.:
____________________________________N/A____________________________________
3) Filing Party:
____________________________________N/A____________________________________
4) Date Filed:
____________________________________N/A____________________________________
<PAGE>
THE MERIDIAN RESOURCE CORPORATION
15995 N. BARKERS LANDING, SUITE 300
HOUSTON, TEXAS 77079 ____________, 1998
Dear Shareholder:
You are cordially invited to attend a special meeting of shareholders (the
"Special Meeting") of The Meridian Resource Corporation (the "Company") to
be held at 9:00 a.m. on , , 1998, at the offices
of Fulbright & Jaworski L.L.P., 1301 McKinney, Suite 5100, Houston, Texas.
At the Special Meeting, you will be asked to consider and vote upon a
proposal pursuant to which the Company will acquire (the "LOPI Transaction")
Louisiana Onshore Properties Inc. ("LOPI"), an indirect subsidiary of Shell
Oil Company ("Shell"), pursuant to a merger of a wholly-owned subsidiary of
the Company with LOPI. The consideration that will be paid in the LOPI
Transaction will consist of 12,082,030 shares of the Company's common stock,
$.01 par value ("Common Stock"), and a new issue of convertible preferred
stock of the Company (the "Preferred Stock") that will be convertible into a
number of shares of Common Stock (estimated at 12,827,000 shares) that would
provide Shell Louisiana Onshore Properties Inc., an indirect subsidiary of Shell
and parent of LOPI ("SLOPI"), with a number of shares of Common Stock that,
when added to the shares of Common Stock to be issued at closing, would
represent 39.9% of the outstanding shares of Common Stock as of the closing of
the LOPI Transaction, assuming exercise of all outstanding options and warrants
and the conversion of the Preferred Stock. LOPI's assets consist of interests in
various producing and nonproducing properties located in south Louisiana. At
closing, LOPI is required to have no liabilities other than those relating to
the ownership and operation of its properties.
In a transaction separate from the LOPI Transaction, the Company also is
proposing to acquire from Shell Western E&P Inc., an indirect subsidiary of
Shell ("SWEPI"), various other oil and gas property interests located in south
Louisiana for a total cash consideration of $42.5 million, subject to adjustment
for production, expenses and other items since October 1, 1997 (the "SWEPI
Acquisition"). The LOPI Transaction and the SWEPI Acquisition (together, the
"Shell Transactions") are being effected to increase the Company's property
and exploration prospect positions and reserves in Louisiana and are expected to
substantially increase the Company's reserves, production and cash flow. The
property interests held by LOPI and the property interests to be acquired from
SWEPI (collectively, the "Shell Properties") represent substantially all of
Shell's and its direct and indirect subsidiaries' onshore oil and gas property
interests in south Louisiana (which excludes interests in Louisiana state
waters). The Shell Properties include interests in approximately 210,000 gross
(98,000 net) acres either held by production or under lease or option for
exploration, access to approximately 1,400 square miles of 3-D seismic data
covering onshore south Louisiana either currently held or now being acquired by
Shell and its direct and indirect subsidiaries, and access to all of Shell's and
its direct and indirect subsidiaries' existing 2-D seismic grid covering onshore
south Louisiana. On a pro forma basis, the Shell Properties would represent more
than 40% of the Company's proved reserves as of December 31, 1997, and would
have represented more than 60% of both the Company's total production on a
natural gas equivalent basis and operating cash flow for 1997.
In light of the large ownership position to be issued to SLOPI in the LOPI
Transaction and in recognition of both the Company's and SLOPI's desire that the
Company function as an independent oil and gas company, SLOPI has agreed to
enter into two separate agreements that define and limit SLOPI's and the
Company's respective rights and obligations. These agreements will limit SLOPI's
and its affiliates' control of the Company while protecting their interests in
the context of certain extraordinary transactions by (i) allowing SLOPI to
maintain representation on the Company's Board of Directors, (ii) restricting
SLOPI's and its affiliates' ability to effect certain business combinations with
the Company or to propose certain business combinations with the Company, (iii)
restricting the ability of SLOPI and its affiliates to sell all or a portion of
their shares of Common Stock and Preferred Stock, subject to certain exceptions
<PAGE>
designed to permit them to sell such shares over time and to sell such shares in
the event of certain business combinations involving the Company, (iv) limiting
SLOPI's and its affiliates' discretionary voting rights to 23% of the total
voting shares, except with respect to certain extraordinary events and in
situations in which the price of the Common Stock is less than $5.50 per share
or the Company is in material breach of its obligations under the agreements
governing the LOPI Transaction, (v) permitting SLOPI and its affiliates to
purchase additional securities of the Company in order to maintain a 21%
beneficial ownership interest of the Common Stock if the Company proposes to
issue additional shares of Common Stock or securities convertible into shares of
Common Stock and (vi) extending certain statutory and corporate restrictions on
business combinations applicable to SLOPI and its affiliates.
Please note that you will only be asked to consider and vote on the LOPI
Transaction. No approval by shareholders of the Company of the SWEPI Acquisition
is required; however, the closing of the SWEPI Acquisition is conditioned on the
approval of the Company's shareholders of the LOPI Transaction. Approval of the
LOPI Transaction also will constitute approval for purposes of the New York
Stock Exchange listing requirements of (i) the potential issuance of a currently
indeterminable number of additional shares of Common Stock pursuant to a
contingent adjustment feature contained in the merger agreement governing the
LOPI Transaction, (ii) the potential issuance of a currently indeterminable
number of shares of Common Stock and securities convertible into Common Stock
that the Company may be required to issue pursuant to a Stock Rights and
Restrictions Agreement to be entered into between the Company and SLOPI (the
"Stock Rights and Restrictions Agreement") in order to allow SLOPI and its
affiliates to purchase additional shares to allow them to maintain their
beneficial ownership at least at 21% of the outstanding shares of Common Stock
in the event the Company issues additional shares of Common Stock or securities
convertible into shares of Common Stock and (iii) the potential issuance of a
currently indeterminable number of shares of Common Stock that may be issued in
the future by the Company in satisfaction of a make-whole provision contained in
the Stock Rights and Restrictions Agreement in the event SLOPI receives less
than approximately $10.52 per share on the sale of the Common Stock that is
issuable upon conversion of the Preferred Stock (collectively, (i), (ii) and
(iii) the "Required Future Share Issuances").
You also will be asked at the Special Meeting to vote on a proposal to
amend the Company's Second Amended and Restated Articles of Incorporation to
increase the authorized Common Stock from 100,000,000 to 200,000,000 shares.
This proposed amendment is intended to allow the Company to have sufficient
shares for future acquisitions and financings after the LOPI Transaction and to
allow the Company to have sufficient shares to satisfy its obligations in
respect of the Required Future Share Issuances.
A summary of the basic terms and conditions of the Shell Transactions, and
certain financial and other information relating to the Company and the Shell
Properties, are set forth in the enclosed Proxy Statement. Please review and
consider the enclosed materials carefully. In connection with its approval of
the Shell Transactions on March 27, 1998, the Board of Directors received and
took into account the opinion of Chase Securities Inc. ("Chase"), an
investment banking firm retained by the Company, to the effect that, as of that
date, and based upon and subject to certain matters stated in the opinion, the
Common Stock and Preferred Stock to be issued and the payment of cash by the
Company pursuant to the Shell Transactions, taken as a whole, are fair to the
Company from a financial point of view. A copy of the Chase opinion is included
in the accompanying Proxy Statement as Appendix B.
The Board of Directors has unanimously approved the LOPI Transaction and
the related Required Future Share Issuances and the amendment to the Articles of
Incorporation. THE BOARD OF DIRECTORS AND MANAGEMENT BELIEVE THAT THE LOPI
TRANSACTION AND RELATED REQUIRED FUTURE SHARE ISSUANCES AND THE AMENDMENT TO THE
ARTICLES OF INCORPORATION ARE IN THE BEST INTERESTS OF THE COMPANY AND THE
SHAREHOLDERS OF THE COMPANY AND UNANIMOUSLY RECOMMEND THAT YOU VOTE FOR APPROVAL
OF THESE MATTERS. THE BOARD OF DIRECTORS ALSO HAS UNANIMOUSLY APPROVED THE SWEPI
ACQUISITION.
<PAGE>
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, IT IS IMPORTANT THAT
YOUR SHARES BE REPRESENTED AND VOTED. ACCORDINGLY, WE ASK THAT YOU MARK, DATE,
SIGN AND RETURN YOUR PROXY AT YOUR EARLIEST CONVENIENCE IN THE ENVELOPE
PROVIDED, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. If you have
multiple stockholder accounts and receive more than one set of these materials,
please be sure to vote each proxy and return it in the separate postage-paid
envelope provided.
Thank you for your continued interest and cooperation.
Very truly yours,
Joseph A. Reeves, Jr.
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
<PAGE>
THE MERIDIAN RESOURCE CORPORATION
15995 N. BARKERS LANDING, SUITE 300
HOUSTON, TEXAS 77079
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD _______________, 1998
Notice is hereby given that a Special Meeting of Shareholders of The
Meridian Resource Corporation (the "Company") will be held at 9:00 a.m. on
, , 1998, at the offices of Fulbright & Jaworski L.L.P., 1301
McKinney, Suite 5100, Houston, Texas. The purpose of the Special Meeting is:
1. To consider and vote upon a proposal to approve the merger (the
"LOPI Transaction") of Louisiana Onshore Properties Inc. ("LOPI"), a
wholly-owned subsidiary of Shell Louisiana Onshore Properties Inc.
("SLOPI"), with a wholly-owned subsidiary of the Company pursuant to an
Agreement and Plan Merger dated March 27, 1998, as amended (the "LOPI
Agreement"), by and among the Company, LOPI Acquisition Corp., a wholly
owned subsidiary of the Company, SLOPI and LOPI. Under the terms of the
LOPI Agreement, the Company will be required to issue to SLOPI (i)
12,082,030 shares of Common Stock and (ii) shares of a new issue of
preferred stock (the "Preferred Stock") of the Company having a stated
value of $135 million, an annual cash dividend of 4% of the stated value
(with dividends ceasing to accrue incrementally on one third of the shares
of Preferred Stock on the third, fourth and fifth anniversaries of the LOPI
Transaction so that no dividends will accrue on any shares of Preferred
Stock after the fifth anniversary of the closing of the LOPI Transaction)
and convertible into a number of shares of Common Stock that, when added to
the shares of Common Stock to be issued at closing, would provide SLOPI
with a 39.9% beneficial ownership of the Common Stock, assuming exercise of
all outstanding options and warrants and conversion of the Preferred Stock.
The Preferred Stock also will be entitled to a number of votes on matters
submitted to the Company's shareholders representing 8% of the total
outstanding voting shares as of the closing date.
Approval of the LOPI Transaction also will constitute approval under
the requirements of the New York Stock Exchange for (i) the potential
issuance of a currently indeterminable number of additional shares of
Common Stock pursuant to a contingent adjustment feature contained in the
LOPI Agreement in the event of adjustment to the tax basis of the assets of
LOPI, and (ii) the potential issuance of a currently indeterminable number
of additional shares of Common Stock or securities convertible into Common
Stock that the Company may be required to issue pursuant to a Stock Rights
and Restriction Agreement to be entered into between the Company and SLOPI
(the "Stock Rights and Restrictions Agreement") that will provide SLOPI
and its affiliates with the right to purchase additional shares of Common
Stock and securities convertible into Common Stock in order to maintain
their beneficial ownership of at least 21% of the outstanding Common Stock
in the event the Company issues additional shares of Common Stock or
securities convertible into shares of Common Stock and (iii) the potential
issuance of a currently indeterminable number of shares of Common Stock
that may be issued in the future by the Company in satisfaction at a
make-whole provision contained in the Stock Rights and Restrictions
Agreement in the event SLOPI receives less than approximately $10.52 per
share on the sale of the Common Stock that is issuable upon conversion of
the Preferred Stock.
2. To consider and vote upon a proposal to approve an amendment to
the Company's Second Amended and Restated Certificate of Incorporation, as
amended, to increase the authorized Common Stock from 100,000,000 to
200,000,000 shares.
3. To consider and take action upon any other business that may
properly come before the Special Meeting, or any adjournment or
postponement thereof.
<PAGE>
The Board of Directors has fixed the close of business on , 1998,
as the record date for the determination of shareholders entitled to notice of,
and to vote at, the Special Meeting or any adjournment or postponement thereof.
Only shareholders of record at the close of business on the record date are
entitled to notice of and to vote at such meeting. A complete list of such
shareholders will be available for examination at the Special Meeting and at the
Company's offices at 15995 N. Barkers Landing, Suite 300, Houston, Texas 77079,
during ordinary business hours, after , 1998, for the examination of
any such stockholder for any purpose germane to the Special Meeting.
By order of the Board of Directors,
JOSEPH A. REEVES, JR.
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
, 1998
------------------------
IMPORTANT
YOU ARE CORDIALLY INVITED TO ATTEND THE SPECIAL MEETING IN PERSON. EVEN IF
YOU PLAN TO BE PRESENT, YOU ARE URGED TO MARK, DATE, SIGN AND RETURN THE
ENCLOSED PROXY AT YOUR EARLIEST CONVENIENCE IN THE ENVELOPE PROVIDED, WHICH
REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. IF YOU ATTEND THE SPECIAL
MEETING, YOU MAY VOTE EITHER IN PERSON OR BY YOUR PROXY.
<PAGE>
THE MERIDIAN RESOURCE CORPORATION
PROXY STATEMENT
SPECIAL MEETING OF SHAREHOLDERS TO BE HELD __________________, 1998
------------------------
This Proxy Statement is being furnished to shareholders of The Meridian
Resource Corporation, a Texas corporation (the "Company"), in connection with
the solicitation of proxies by its Board of Directors for use at the Special
Meeting of Shareholders of the Company (the "Special Meeting") scheduled to be
held on , , 1998, at 9:00 a.m., at the
offices of Fulbright & Jaworski L.L.P., 1301 McKinney, Suite 5100, Houston,
Texas, and any adjournment or postponement thereof.
This Proxy Statement relates to a proposal pursuant to which a wholly-owned
subsidiary of the Company will merge (the "LOPI Transaction") with Louisiana
Onshore Properties Inc. ("LOPI"), an indirect subsidiary of Shell Oil Company
("Shell"). The consideration that will be paid in the LOPI Transaction will
consist of 12,082,030 shares of the Company's common stock, $.01 par value
("Common Stock"), and a new issue of convertible preferred stock of the
Company (the "Preferred Stock") that will be convertible into a number of
shares of Common Stock (estimated at 12,827,000 shares) that would provide Shell
Louisiana Onshore Properties Inc., an indirect subsidiary of Shell and parent of
LOPI ("SLOPI"), with a number of shares of Common Stock that, when added to
the shares of Common Stock to be issued at closing, would represent 39.9% of the
Fully-Diluted shares of Common Stock as of the closing of the LOPI Transaction.
LOPI's assets consist of interests in various producing and nonproducing
properties located in south Louisiana. At closing, LOPI is required to have no
liabilities other than those relating to the ownership and operation of its
properties.
In a transaction separate from the LOPI Transaction, the Company also is
proposing to acquire from Shell Western E&P Inc., an indirect subsidiary of
Shell ("SWEPI"), various other oil and gas property interests located in south
Louisiana for a total cash consideration of $42.5 million, subject to adjustment
for production, expenses and other items since October 1, 1997 (the "SWEPI
Acquisition"). The LOPI Transaction and the SWEPI Acquisition (together, the
"Shell Transactions") are being effected to increase the Company's property
and exploration prospect positions and reserves in Louisiana and are expected to
substantially increase the Company's reserves, production and cash flow. The
property interests held by LOPI and the property interests to be acquired from
SWEPI (collectively, the "Shell Properties") represent substantially all of
Shell's and its direct and indirect subsidiaries' onshore property interests in
south Louisiana (which excludes interests in Lousiana state waters). The Shell
Properties include interests in approximately 210,000 gross (98,000 net) acres
either held by production or under lease or option for exploration, access to
approximately 1,400 square miles of 3-D seismic data covering onshore south
Louisiana either currently held or now being acquired by Shell and its direct
and indirect subsidiaries and access to all of Shell's and its direct and
indirect subsidiaries' existing 2-D seismic grid covering onshore south
Louisiana.
Following the Shell Transactions, the Company is expected to have interests
in over 329,000 gross onshore acres in Louisiana and Texas and have access to
approximately 2,800 square miles of onshore 3-D seismic data. The Company
estimates that its current production base following the Shell Transactions will
be approximately 132 MMCFE of natural gas per day and that proved reserves will
total over 306 BCFE of natural gas having an estimated reserve life of
approximately six years. On a pro forma basis, the Shell Properties would
represent more than 40% of the Company's proved reserves as of December 31,
1997, and would have represented more than 60% of both the Company's total
production on a natural gas equivalent basis and Operating Cash Flow (as defined
herein) for 1997.
In light of the large ownership position to be issued to SLOPI in the LOPI
Transaction and in recognition of both the Company's and SLOPI's desire that the
Company function as an independent oil and gas company, SLOPI has agreed to
enter into two separate agreements that define and limit SLOPI's and the
Company's respective rights and obligations. These agreements will limit SLOPI's
and its affiliates' control of the Company while protecting their interests in
the context of certain extraordinary transactions
1
<PAGE>
by (i) allowing SLOPI to maintain representation on the Company's Board of
Directors, (ii) restricting SLOPI's and its affiliates' ability to effect
certain business combinations with the Company or to propose certain business
combinations with the Company, (iii) restricting the ability of SLOPI and its
affiliates to sell all or a portion of their shares of Common Stock and
Preferred Stock, subject to certain exceptions designed to permit them to sell
such shares over time and to sell such shares in the event of certain business
combinations involving the Company, (iv) limiting SLOPI's and its affiliates'
discretionary voting rights to 23% of the total voting shares, except with
respect to certain extraordinary events and in situations in which the price of
the Common Stock is less than $5.50 per share or the Company is in material
breach of its obligations under the agreements governing the LOPI Transaction,
(v) permitting SLOPI and its affiliates to purchase additional securities of the
Company in order to maintain a 21% beneficial ownership interest of the Common
Stock if the Company proposes to issue additional shares of Common Stock or
securities convertible into Common Stock and (vi) extending certain statutory
and corporate restrictions on business combinations applicable to SLOPI and its
affiliates.
Please note that you will only be asked to consider and vote on the LOPI
Transaction. No approval by shareholders of the Company of the SWEPI Acquisition
is required; however, the closing of the SWEPI Acquisition is conditioned on the
approval of the Company's shareholders of the LOPI Transaction. Approval of the
LOPI Transaction also will constitute approval for purposes of the New York
Stock Exchange (the "NYSE") listing requirements of (i) the potential issuance
of a currently indeterminable number of additional shares of Common Stock
pursuant to a contingent adjustment feature contained in the merger agreement
governing the LOPI Transaction (see "The LOPI Transaction -- Description of
LOPI Agreement -- Taxes and Additional Merger Consideration"), (ii) the
potential issuance of a currently indeterminable number of shares of Common
Stock and securities convertible into Common Stock that the Company may be
required to issue pursuant to a Stock Rights and Restrictions Agreement to be
entered into between the Company and SLOPI (the "Stock Rights and Restrictions
Agreement") that will provide SLOPI and its affiliates with the right to
purchase additional securities of the Company in order to maintain their
beneficial ownership at least at 21% of the outstanding shares of Common Stock
in the event the Company issues additional shares of Common Stock or securities
convertible into shares of Common Stock (see "The LOPI Transaction -- Stock
Rights and Restrictions Agreement -- Right to Participate in Certain Sales of
Common Stock") and (iii) the potential issuance of a currently indeterminable
number of shares of Common Stock that may be issued in the future by the Company
in satisfaction of a make-whole provision contained in the Stock Rights and
Restrictions Agreement in the event SLOPI receives less than approximately
$10.52 per share on the sale of the Common Stock that is issuable upon
conversion of the Preferred Stock (see "The LOPI Transaction -- Stock Rights
and Restrictions Agreement -- Company Support of Certain Stock Sales")
(collectively, (i), (ii) and (iii) the "Required Future Share Issuances").
You also will be asked at the Special Meeting to vote on a proposal to
amend the Company's Second Amended and Restated Articles of Incorporation to
increase the authorized Common Stock from 100,000,000 to 200,000,000 shares.
This proposed amendment is intended to allow the Company to have sufficient
shares for future acquisitions and financings after the Shell Transactions and
to allow the Company to have sufficient shares to satisfy its obligations in
respect of the Required Future Share Issuances.
The Common Stock is traded on the NYSE under the symbol "TMR". The NYSE
requires shareholder approval of the LOPI Transaction because the issuance of
the shares of Common Stock in the LOPI Transaction and the conversion of the
Preferred Stock issued in the LOPI Transaction will increase the Company's
currently outstanding Common Stock by more than 20%. The satisfaction of certain
other conditions also will be required to consummate the LOPI Transaction. See
"Description of the LOPI Transaction -- Conditions to the Transaction".
This Proxy Statement is first being mailed to shareholders of the Company
on or about , 1998.
------------------------
THE DATE OF THIS PROXY STATEMENT IS __________________, 1998.
2
<PAGE>
TABLE OF CONTENTS
PAGE
----
AVAILABLE INFORMATION................ 4
INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE.......................... 4
FORWARD-LOOKING STATEMENTS........... 4
SUMMARY.............................. 6
SPECIAL CONSIDERATIONS IN CONNECTION
WITH THE SHELL TRANSACTIONS........ 15
GENERAL INFORMATION ABOUT THE
MEETING............................ 19
Date, Time and Place of Special
Meeting........................ 19
Record Date and Outstanding
Shares......................... 19
Purposes of the Special
Meeting........................ 19
Vote Required.................... 19
Voting and Revocation of
Proxies........................ 19
Solicitation of Proxies.......... 20
Other Matters.................... 20
THE LOPI TRANSACTION................. 20
Background of the LOPI
Transaction.................... 20
The Company's Reasons for the
LOPI Transaction............... 21
Recommendation of the Company's
Board of Directors............. 22
Opinion of Financial Advisor..... 23
Description of LOPI Agreement.... 28
Stock Rights and Restrictions
Agreement...................... 31
Terms of the Preferred Stock..... 37
Registration Rights Agreement.... 38
Terms of the SWEPI Agreement..... 40
Accounting Treatment............. 40
Fees and Expenses................ 40
Interests of Certain Persons in
the LOPI Transaction........... 40
Appraisal Rights................. 41
Regulatory Approval.............. 41
ARTICLES OF INCORPORATION
AMENDMENT.......................... 42
<PAGE>
PAGE
----
TMRC SELECTED FINANCIAL
INFORMATION........................ 43
SHELL PROPERTIES SELECTED FINANCIAL
DATA............................... 44
UNAUDITED PRO FORMA FINANCIAL
STATEMENTS......................... 45
NOTES TO UNAUDITED PRO FORMA
FINANCIAL STATEMENTS............... 49
MARKET PRICE OF COMMON STOCK AND
DIVIDEND INFORMATION............... 53
STOCK OWNERSHIP OF PRINCIPAL
STOCKHOLDERS AND MANAGEMENT OF THE
COMPANY............................ 54
RELATIONSHIPS WITH INDEPENDENT PUBLIC
ACCOUNTANTS........................ 55
STOCKHOLDERS' PROPOSALS.............. 55
GLOSSARY OF DEFINED TERMS............ 56
Index of Financial Statements........ F-1
Consolidated Financial Statements of
The Meridian Resource
Corporation........................ F-2
Statements of Revenues and Direct
Operating Expenses for the LOPI
Properties......................... F-28
Statements of Revenues and Direct
Operating Expenses for the SWEPI
Properties......................... F-34
Appendix A -- Agreement and Plan of
Merger............................. A-1
Exhibit C -- Basis of Conversion
and Conversion Rights.......... A-C-1
Exhibit E -- Form of Certificate
of Designation for Preferred
Stock.......................... A-E-1
Exhibit F -- Form of Stock Rights
and Restrictions Agreement..... A-F-1
Exhibit G -- Form of Registration
Rights Agreement............... A-G-1
Exhibit H -- Contingent
Consideration.................. A-H-1
Schedule III -- True-Up
Accounting Procedures and
Principles..................... A-III-1
Appendix B -- Opinion of Chase
Securities Corporation............. B-1
3
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company with the Commission can be
inspected at the Public Reference Section of the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and the
Regional Offices of the Commission at Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60621-2511, and Seven World Trade Center, 13th
Floor, New York, New York 10048. Copies of such material of the Company may be
obtained from the Public Reference Section of the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Commission maintains an Internet Website at http://www.sec.gov that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. Such
reports, proxy and information statements and other information filed by the
Company also may be inspected at the offices of the New York Stock Exchange,
Incorporated, 20 Broad Street, New York, New York 10005, on which the Common
Stock is listed.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed by the Company with the Commission
(File No. 1-10671) are incorporated by reference herein:
(a) Annual Report on Form 10-K for the fiscal year ended December 31,
1997, as amended by Form 10-K/A;
(b) Quarterly Report on Form 10-Q for the three months ended March 31,
1998;
(c) Current Reports on Form 8-K dated April 7, 1998 and April 21, 1998;
and
(d) The description of Common Stock contained in the Company's
Registration Statement on Form 8-A, as filed with the Commission on
March 19, 1997, including any amendment or report filed for the
purpose of updating such description.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Proxy Statement and prior to
the date of the Special Meeting shall be deemed to be incorporated by reference
in this Proxy Statement and to be a part hereof from the date of filing of such
documents. Any statement contained in this Proxy Statement or in a document
incorporated or deemed to be incorporated by reference in this Proxy Statement
shall be deemed to be modified or superseded for purposes of this Proxy
Statement to the extent that a statement contained in this Proxy Statement or in
any other subsequently filed document that also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Proxy Statement.
The Company undertakes to provide without charge to each person to whom a
copy of this Proxy Statement has been delivered, upon request, a copy of any or
all of the documents incorporated by reference herein, other than the exhibits
to such documents, unless such exhibits are specifically incorporated by
reference into the information that this Proxy Statement incorporates. Requests
for copies should be directed to The Meridian Resource Corporation, 15995 N.
Barkers Landing, Suite 300, Houston, Texas 77079, Attention: Corporate Secretary
(Telephone number (281) 558-8080).
FORWARD-LOOKING STATEMENTS
This Proxy Statement includes and incorporates by reference forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 relating to, among other matters, analyses, including opinions from
independent financial advisors to the Company's Board of Directors, as to the
fairness from a financial point of view of the Common Stock and Preferred Stock
to be issued and cash to be paid in the Shell Transactions based on forecasts of
future results that are not yet determinable. Such forward-looking statements
also relate to the Company's future prospects, developments, oil and gas
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<PAGE>
reserves and properties and business strategies for their operations and
synergies that are possible from the Shell Transactions and the Company's recent
merger with Cairn Energy USA, Inc. These forward-looking statements are
identified by their use of terms and phrases such as "anticipate", "expect",
"estimate", "intend", "project", "believe" and similar terms and phrases
and are contained in sections entitled "Summary", "The LOPI Transaction",
"Unaudited Pro Forma Financial Statements", "Notes to Unaudited Pro Forma
Financial Statements" and other sections of this Proxy Statement and in the
documents incorporated herein by reference. Although the Company believes that
the expectations described in such forward-looking statements are reasonable,
these statements involve risks and uncertainties that may cause actual future
activities and results of operations to be materially different from that
suggested or described in this Proxy Statement. These risks include changes in
market conditions in the oil and gas industry and demand and prices for oil and
gas, the ability of the Company to integrate and realize anticipated synergies
related to the Company and the properties acquired in the Shell Transactions and
in the Company's recent merger with Cairn Energy USA, Inc., dependence on
current management, the ability of the Company to achieve and execute internal
business plans, the impact of any economic downturns and inflation and other
market factors affecting the demand and supply of oil and gas, the timing of
drilling new prospects, the ability of the Company to successfully identify and
complete its current prospects and the prospects acquired in the Shell
Transactions and in the Company's recent merger with Cairn Energy USA, Inc.,
variation in actual production results from that estimated in existing reserve
data, regulatory changes affecting exploration activities and higher costs
associated with drilling. Many of these risks are more specifically described in
the Company's Annual Report on Form 10-K, which are incorporated herein by
reference. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may vary
materially from those expected, estimated or projected.
5
<PAGE>
SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN
THIS PROXY STATEMENT. THIS SUMMARY DOES NOT CONTAIN A COMPLETE STATEMENT OF ALL
MATERIAL INFORMATION RELATING TO THE LOPI TRANSACTION AND THE PROPOSED
AMENDMENTS TO THE COMPANY'S SECOND AMENDED AND RESTATED ARTICLES OF
INCORPORATION, AS AMENDED (THE "ARTICLES OF INCORPORATION"), AND IS SUBJECT
AND QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE DETAILED INFORMATION AND
FINANCIAL STATEMENTS CONTAINED ELSEWHERE OR INCORPORATED BY REFERENCE IN THIS
PROXY STATEMENT, THE AGREEMENTS GOVERNING THE LOPI TRANSACTION, WHICH ARE
ATTACHED AS EXHIBITS HERETO AND INCORPORATED HEREIN BY REFERENCE, AND THE OTHER
APPENDICES ATTACHED HERETO. AS USED IN THIS PROXY STATEMENT, UNLESS THE CONTEXT
OTHERWISE REQUIRES, THE TERMS "TMRC" AND THE "COMPANY" MEAN THE MERIDIAN
RESOURCE CORPORATION AND ITS CONSOLIDATED SUBSIDIARIES AND THE TERM "SHELL"
MEANS SHELL OIL COMPANY. CERTAIN CAPITALIZED TERMS USED IN THIS SUMMARY ARE
DEFINED ELSEWHERE IN THIS PROXY STATEMENT. FOR CONVENIENCE OF THE READER, A
GLOSSARY OF CERTAIN DEFINED TERMS USED HEREIN APPEARS ON PAGE .
INTRODUCTION
The Meridian Resource Corporation is an independent oil and natural gas
company engaged in the exploration for and development of oil and natural gas
properties utilizing 3-D seismic technology. TMRC was one of the first
independent oil and natural gas companies in the industry to incorporate 3-D
seismic technology as an integral component of its exploration strategy and
considers itself to be among the leaders in the use of this technology by
independent oil and natural gas companies. TMRC believes that its expertise with
and disciplined application of 3-D seismic technology provides it with a
competitive advantage in the areas in which it operates.
In recent years, TMRC has focused its exploratory efforts in the onshore
and coastal areas of Louisiana and the Texas Gulf Coast. With TMRC's merger with
Cairn Energy USA, Inc. ("Cairn") in November 1997, TMRC expanded its
operations to the offshore waters in the Gulf of Mexico and, as of December 31,
1997, had 96 gross wells (20.7 net) and more than 50 3-D seismic-based prospect
opportunities offshore in the Gulf of Mexico. TMRC's estimated proved reserves
as of December 31, 1997 were approximately 9,731 MBbls of oil and 110.8 Bcf of
natural gas having an estimated Present Value of Proved Reserves of
approximately $213.9 million.
In March 1998, the Company entered into an Agreement and Plan of Merger, as
amended (the "LOPI Agreement") with LOPI Acquisition Corp., a wholly-owned
subsidiary of the Company ("Sub"), LOPI and SLOPI pursuant to which Sub would
merge with LOPI. The consideration to be paid by the Company in the LOPI
Transaction will consist of 12,082,030 shares of Common Stock and shares of
Preferred Stock that will be convertible into a number of shares of Common Stock
(estimated at 12,827,000 shares) that, when added to the shares of Common Stock
to be issued at closing, will provide SLOPI with a number of shares of Common
Stock that will represent 39.9% of the Fully-Diluted shares of Common Stock as
of the closing of the LOPI Transaction. LOPI's assets consist of interests in
various producing and nonproducing properties located in south Louisiana. At
closing, LOPI is required to have no liabilities other than those relating to
the ownership and operation of its properties.
In a transaction separate from the LOPI Transaction, the Company also is
proposing to acquire from SWEPI various other oil and gas property interests
located in south Louisiana for a total cash consideration of $42.5 million,
subject to adjustment for production, expenses and other items since October 1,
1997. The Shell Properties represent substantially all of Shell's and its direct
and indirect subsidiaries' onshore property interests in south Louisiana (which
excludes interests in Louisiana state waters). These property interests include
interests in approximately 210,000 gross (98,000 net) acres either held by
production or under lease or option for exploration, access to approximately
1,400 square miles of 3-D seismic data covering onshore south Louisiana either
currently held or now being acquired by Shell and its direct and
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<PAGE>
indirect subsidiaries and access to all of Shell's and its direct and indirect
subsidiaries' existing 2-D seismic grid covering onshore south Louisiana.
Following the Shell Transactions, the Company is expected to have interests
in over 329,000 gross onshore acres in Louisiana and Texas and to have access to
approximately 2,800 square miles of onshore 3-D seismic data, which the Company
believes to be one of the largest positions held by a company with TMRC's market
capitalization. On a pro forma basis, the Shell Properties would represent more
than 40% of the Company's proved reserves as of December 31, 1997, and would
have represented more than 60% of both the Company's total production on a
natural gas equivalent basis and Operating Cash Flow for 1997. The Company
estimates that its current production base following the Shell Transactions will
be approximately 132 MMCFE of natural gas per day and that proved reserves will
total over 306 BCFE of natural gas having an estimated reserve life of
approximately six years.
THE LOPI TRANSACTION
The terms of the LOPI Agreement call for SLOPI to receive a fixed 39.9% of
the Fully-Diluted Common Stock as of the closing date. The shares to be issued
to SLOPI pursuant to the LOPI Agreement will consist of 12,082,030 shares of
Common Stock and shares of Preferred Stock convertible into approximately
12,827,000 shares of Common Stock. The Preferred Stock will have a stated value
of $135 million, a 4% annual dividend for a period of six years (with dividends
ceasing to accrue incrementally on one third of the shares of Preferred Stock on
the third, fourth and fifth anniversaries of the Shell Transaction so that no
dividends will accrue on any shares of Preferred Stock after the fifth
anniversary of the Shell Transactions) and a conversion price of approximately
$10.52 per share. Substantially all of the Preferred Stock will convert
automatically into Common Stock after three years if the market price of the
Common Stock is greater than or equal to 150% of the conversion price for 75
consecutive trading days. In addition, the Preferred Stock will be entitled to a
number of votes on matters submitted to the Company's shareholders representing
8% of the total outstanding voting shares as of the closing date. The number of
shares of Common Stock and Preferred Stock to be issued in the LOPI Transaction,
as well as the number of shares of Common Stock into which the Preferred Stock
is convertible, are not subject to changes in the market price of the Common
Stock.
In light of the large ownership position to be issued to SLOPI in the LOPI
Transaction and in recognition of both the Company's and SLOPI's desire to allow
the Company to function as an independent oil and gas company, SLOPI has agreed
to enter into two separate agreements that define and limit SLOPI's and the
Company's respective rights and obligations. These agreements will limit SLOPI's
and its affiliates' control of the Company while protecting their interests in
the context of certain extraordinary transactions by (i) allowing SLOPI to
maintain representation on the Company's Board of Directors, (ii) restricting
SLOPI's and its affiliates' ability to effect certain business combinations with
the Company or to propose certain business combinations with the Company, (iii)
restricting the ability of SLOPI and its affiliates to sell all or a portion of
their shares of Common Stock and Preferred Stock, subject to certain exceptions
designed to permit it to sell such shares over time and to sell such shares in
the event of certain business combinations involving the Company, (iv) limiting
SLOPI's and its affiliates' discretionary voting rights to 23% of the total
voting shares, except with respect to certain extraordinary events and in
situations in which the price of the Common Stock is less than $5.50 per share
or the Company is in material breach of its obligations under the agreements
governing the LOPI Transaction, (v) permitting SLOPI and its affiliates to
purchase additional securities of the Company in order to maintain a 21%
beneficial ownership interest in the Common Stock if the Company proposes to
issue additional shares of Common Stock or securities convertible into Common
Stock and (vi) extending certain statutory and corporate restrictions on
business combinations applicable to SLOPI and its affiliates.
The above arrangements between the parties are defined in the Certificate
of Designation for the Preferred Stock (the "Certificate of Designation"), the
Registration Rights Agreement (the "Registration
7
<PAGE>
Rights Agreement") and the Stock Rights and Restrictions Agreement (the "Stock
Rights and Restrictions Agreement"), which are Exhibits E, F and G,
respectively, to the LOPI Agreement, which is included as Annex A to this Proxy
Statement. See "The LOPI Transaction -- Stock Rights and Restrictions
Agreement", "The LOPI Transaction -- Terms of the Preferred Stock" and "The
LOPI Transaction -- Registration Rights Agreement".
THE SWEPI ACQUISITION
Under the terms of the acquisition agreement providing for the SWEPI
Acquisition, the Company will pay to SWEPI $42.5 million in cash for various oil
and gas property interests, subject to adjustment for production, expenses and
other items from October 1, 1997. Consummation of the SWEPI Acquisition is
subject to approval of the shareholders of the Company of the LOPI Transaction.
The LOPI Transaction, however, is not conditioned upon a closing of the SWEPI
Acquisition. See "The LOPI Transaction -- Terms of the SWEPI Acquisition".
AMENDMENT TO THE ARTICLES OF INCORPORATION
The Company is seeking the approval of the Company's shareholders of a
proposal to amend (the "Articles of Incorporation Amendment") the Articles of
Incorporation to increase the authorized Common Stock from 100,000,000 to
200,000,000 shares. This proposed amendment is intended to allow the Company to
have sufficient shares for future acquisitions and financings after the Shell
Transactions and to allow the Company to have sufficient shares to satisfy its
obligations in respect of the Required Future Share Issuances. Approval of the
LOPI Transaction, however, is not contingent upon approval of the Articles of
Incorporation Amendment. See "Articles of Incorporation Amendment".
THE SPECIAL MEETING
TIME, DATE, PLACE AND PURPOSE. The Special Meeting will be held at 9:00
a.m., on , , 1998, at the offices of Fulbright &
Jaworski L.L.P., 1301 McKinney, Suite 5100, Houston, Texas, for the purpose of
approving the LOPI Transaction and the Articles of Incorporation Amendment.
Approval of the LOPI Transaction also will constitute approval for purposes of
the NYSE listing requirements of any Required Future Share Issuances.
RECORD DATE AND VOTE REQUIRED. The Board of Directors of the Company has
fixed the close of business on , 1998, as the record date
("Record Date") for the determination of shareholders entitled to notice of,
and to vote at, the Special Meeting and any adjournments thereof. Only holders
of record of Common Stock at the close of business on the Record Date are
entitled to notice of, and to vote at, the Special Meeting. See "General
Information about the Meeting".
Under the Company's listing agreement with the NYSE, approval of the LOPI
Transaction and the related Required Future Share Issuances requires the
affirmative vote of the holders of a majority of the shares of Common Stock
represented in person or by proxy and entitled to vote at the Special Meeting.
Pursuant to the Company's by-laws and Articles of Incorporation, approval of the
Articles of Incorporation Amendment requires approval of a majority of the
shares of Common Stock outstanding on the Record Date. See "General Information
about the Meeting -- Vote Required".
At the close of business on the Record Date, there were shares
of Common Stock outstanding and entitled to vote at the Special Meeting.
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<PAGE>
REASONS FOR THE LOPI TRANSACTION
The Shell Transactions are intended to expand significantly TMRC's position
as a leader among independent oil and natural gas companies in the exploration
and development of oil and natural gas in south Louisiana by adding to TMRC's
existing operations interests in approximately 210,000 gross (98,000 net) acres
either held by production or under lease or option for exploration and access to
approximately 1,400 square miles of 3-D seismic data.
The Shell Transactions are expected to provide the Company with the
following strategic benefits:
o Provide the Company with interests in approximately 210,000 gross (98,000
net) acres either held by production or under lease or option for
exploration. Individuals on the Company's exploration staff have between
eight and 35 years of experience in generating onshore and offshore
prospects in Louisiana and the Texas Gulf Coast and in the Gulf of Mexico.
The Company believes that its post-transaction acreage position in
Louisiana will represent one of the largest ownership positions of an
independent oil and natural gas company with the Company's market
capitalization. This acreage position also is expected to provide the
Company with substantial exploration prospects for the future.
o Increase the Company's proved natural gas equivalent reserves as of
December 31, 1997, by an estimated 42% or 137 BCFE.
o Increase the Company's access to 3-D seismic data to over 2,800 square
miles. A large portion of the 3-D seismic data to which the Company will be
provided access will be either proprietary to the Company and Shell (and
its existing partners and their permitted transferees) for a reasonable
period of time or cover areas where the Company has a secure land position
so as to allow the Company to receive competitive advantages in its
exploration program. In addition to access to Shell's and its direct and
indirect subsidiaries' 3-D seismic data covering onshore south Louisiana,
the Company also will be provided with access to a substantial inventory of
2-D seismic data covering onshore south Louisiana. Access to Shell's and
its direct and indirect subsidiaries' 3-D and 2-D seismic data is expected
to provide the Company with an advantage over many of its competitors who
do not have access to such substantial data on the same cost basis.
o Provide the Company with eight already identifiable 3-D exploration
prospects where the Company will have a secure acreage position. The
Company expects to drill over all of these prospects during the next twelve
months.
o Increase the Company's cash flows and earnings per share during 1998 and
1999 after excluding anticipated one-time charges and writedowns. In this
regard, the Company currently expects that the addition of the Shell
Properties will be immediately accretive to both its cash flow and earnings
per share for 1998 after excluding anticipated one-time charges and
writedowns, notwithstanding the issuance of the Common Stock and Preferred
Stock to SLOPI.
o Leverage the Company's existing organizational, management and operational
structure to permit the ownership and exploitation of the Shell Properties
at a cost that the Company believes will be substantially less than the
cost currently associated with the ownership and operation of such
properties. The Company believes that the only material additions to its
staff that will be necessary for future ownership of the Shell Properties
will be the addition of various field and operational personnel in fields
in which the Company currently does not operate plus a group of geological
and geophysical personnel for handling additional seismic data.
o Shell's 3-D seismic data and acreage positions do not substantially overlap
the Company's 3-D seismic and acreage positions. As a result, the Shell
Transactions will allow the Company to have access to 3-D seismic data and
acreage positions over a large portion of the highly prolific oil and
natural gas regions in south Louisiana.
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o The availability of Shell's 2-D and 3-D seismic data is expected to assist
the Company in further refining and improving its development of
exploration prospects in its areas of focus.
The consummation of the LOPI Transaction also will increase the Company's
equity and provide the Company with a greater base to finance its growth and
exploration and development strategy. The anticipated cash flow from production
associated with the Shell Properties also will provide the Company with a source
for funding its exploration and development program and future acquisitions.
CERTAIN CONSIDERATIONS; ANTICIPATED WRITEDOWN
In considering and approving the Shell Transactions, the Board of Directors
considered the fact that consummation of the LOPI Transaction pursuant to a
tax-free merger would result in the Company recording a deferred tax liability
in excess of $66 million, representing the excess of the purchase price for LOPI
over the tax basis of the LOPI Properties to be inherited by the Company. This
deferred tax liability will require the Company to increase the amount allocated
to oil and natural gas properties by the amount of the deferred tax liability so
that the total allocated to oil and natural gas properties as a result of the
Shell Transactions will be approximately $343 million for financial accounting
purposes.
The Board of Directors also took into account the fact that the estimated
$343 million to be allocated to oil and natural gas properties for financial
accounting purposes exceeded the SEC PV-10 reserves, net of estimated future
income taxes, of the Shell Properties as of December 31, 1997, utilizing reserve
estimates prepared by T. J. Smith & Company, Inc., the Company's outside
engineers for the Shell Properties ("T. J. Smith"). Based upon preliminary
analysis, the Company currently estimates that approximately $35 million of the
amount allocated to oil and natural gas properties for financial accounting
purposes will be classified as unevaluated properties, which will not be subject
to the Company's evaluated property full-cost ceiling limitation. Assuming no
changes in prices since March 31, 1998 or any net changes in proved reserves
since December 31, 1997, the Company expects that it would take an impairment
charge (beyond impairment on its existing oil and gas properties) of up to $125
million ($93 million net of tax benefits) within the quarter of the closing of
the Shell Transactions to reflect the impairment for accounting purposes of the
Shell Properties.
The Board of Directors considered the likelihood and magnitude of such an
impairment charge with respect to the Shell Properties when approving the Shell
Transactions and believes that the benefits and reserve potential of the Shell
Properties to the Company outweighed this expected one-time charge. In this
regard, the Board of Directors noted that, in addition to the numerous benefits
outlined above, on a pro forma basis, the Shell Properties would represent more
than 40% of the Company's proved reserves as of December 31, 1997, and would
have represented more than 60% of both the Company's total production on a
natural gas equivalent basis and Operating Cash Flow for 1997, and that after
considering such historical facts and the identified exploration opportunities,
as well as the geological and geophysical data it will have access to following
the Shell Transactions to evaluate additional opportunities, the inherent value
of the Shell Properties justifies the proposed aggregate purchase price for the
Shell Properties. See "Unaudited Pro Forma Financial Statements" and "Notes
to Unaudited Pro Forma Financial Statements".
REASONS FOR THE ARTICLES OF INCORPORATION AMENDMENT
If the LOPI Transaction is consummated, the Company estimates that it will
have issued or reserved for future issuance pursuant to outstanding options and
warrants and conversion of the Preferred Stock approximately 62.4 million shares
of Common Stock. In addition, the Stock Rights and Restrictions Agreement, which
will be entered into if the LOPI Transaction is consummated, will require the
Company to issue additional shares of Common Stock in connection with the
Required Future Share Issuances. Due to the increased number of shares that will
be issued and outstanding or reserved for issuance and that may be issued in
connection with the Required Future Share Issuances, the Company believes the
Articles of Incorporation Amendment is necessary so that the Company will have
sufficient authorized shares of
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<PAGE>
Common Stock to effect future stock splits or dividends, if any, and to
consummate future acquisitions and raise equity capital. See "Articles of
Incorporation Amendment".
BOARD RECOMMENDATION
THE COMPANY'S BOARD OF DIRECTORS BELIEVES THAT THE TERMS OF THE LOPI
TRANSACTION ARE FAIR TO, AND IN THE BEST INTERESTS OF, THE COMPANY AND THE
HOLDERS OF COMMON STOCK AND UNANIMOUSLY RECOMMENDS THAT THE HOLDERS OF COMMON
STOCK APPROVE THE LOPI TRANSACTION AND THE FUTURE ISSUANCE OF SHARES OF COMMON
STOCK PURSUANT TO THE REQUIRED FUTURE SHARE ISSUANCES. SEE "THE LOPI
TRANSACTION -- BACKGROUND OF THE LOPI TRANSACTION", " -- THE COMPANY'S REASONS
FOR THE LOPI TRANSACTION" AND " -- RECOMMENDATION OF THE COMPANY'S BOARD OF
DIRECTORS".
THE COMPANY'S BOARD OF DIRECTORS ALSO BELIEVES THAT THE ARTICLES OF
INCORPORATION AMENDMENT IS IN THE BEST INTERESTS OF THE COMPANY AND UNANIMOUSLY
RECOMMENDS THAT THE HOLDERS OF COMMON STOCK APPROVE AND ADOPT THE ARTICLES OF
INCORPORATION AMENDMENT. SEE "ARTICLES OF INCORPORATION AMENDMENT".
OPINIONS OF FINANCIAL ADVISOR
Chase Securities Inc. ("Chase"), financial advisor to the Company, has
rendered to the Company's Board of Directors a written opinion, dated March 27,
1998 (the "Chase Opinion"), to the effect that, as of such date and based upon
and subject to certain matters stated in such opinion, the Total Consideration
(as defined below) to be paid by the Company pursuant to the Shell Transactions
is, taken as a whole, fair to the Company from a financial point of view. A copy
of the opinion of Chase dated March 27, 1998 is attached hereto as Appendix B
and should be read carefully in its entirety with respect to the procedures
followed, assumptions made, matters considered and limitations on the review
undertaken in connection with such opinion. The opinion of Chase is directed to
the Company's Board of Directors and relates only to the fairness of the Total
Consideration from a financial point of view to the Company, does not address
any other aspect of the Shell Transactions or any related transaction and does
not constitute a recommendation to any shareholder as to how such shareholder
should vote at the Special Meeting. See "The LOPI Transaction -- Opinion of
Financial Advisor".
EFFECTIVE DATE; CONDUCT OF PARTIES; CONDITIONS; TERMINATION
The Company expects that the LOPI Transaction will be consummated promptly
following the shareholder approval thereof (the "Effective Date" or the
"Closing Date"). The SWEPI Acquisition is expected to close following the LOPI
Transaction. Pending consummation, the Company has agreed to give SLOPI
reasonable access to all information necessary to evaluate TMRC's business. In
addition, SLOPI has agreed to provide TMRC with reasonable access to all
information necessary to evaluate LOPI and to conduct operations of the LOPI
Properties only in the ordinary course. The LOPI Transaction is subject to a few
conditions, primarily its approval by the shareholders of the Company and the
listing with the NYSE of the shares of Common Stock to be issued at the closing
and upon conversion of the Preferred Stock. If these conditions are not met, the
LOPI Agreement may be terminated. In addition, the LOPI Agreement may be
terminated by mutual consent of SLOPI and LOPI and the Board of Directors of the
Company at any time prior to consummation of the LOPI Transaction. The Company
has agreed to pay SLOPI a break-up fee of $4 million in the event the Company's
Board of Directors withdraws its recommendation of the LOPI Transaction under
certain circumstances. See "The LOPI Transaction -- Description of the LOPI
Agreement".
ACCOUNTING TREATMENT
The Company will account for the Shell Transactions in accordance with the
purchase method of accounting. Accordingly, results of operations from the Shell
Properties will be included in the Company's
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consolidated financial statements beginning upon consummation of the Shell
Transactions (the "Closing Date"). As described above under "Reasons for the
LOPI Transaction -- Certain Considerations; Anticipated Writedown", due to the
acquisition of the Shell Properties in accordance with the purchase method of
accounting combined with current pricing conditions, the Company currently
expects, assuming no changes in prices since March 31, 1998 and no net changes
in reserves since December 31, 1997, to record an additional impairment charge,
(beyond its expected impairment on its existing oil and gas properties), of up
to $125 million ($93 million net of tax benefits) upon the closing of the Shell
Transactions to reflect the impairment of the Shell Properties for financial
accounting purposes.
SUMMARY INCOME TAX CONSEQUENCES
The parties intend that the LOPI Transaction will not be a taxable
transaction in the United States for either the Company, LOPI or their
respective shareholders. The Company may be required to issue to SLOPI
additional shares of Common Stock pursuant to a contingent adjustment feature
contained in the LOPI Agreement in the event of adjustment to the tax basis of
the assets of LOPI. See "The LOPI Transaction -- Description of LOPI
Agreement -- Taxes and Additional Merger Consideration".
APPRAISAL RIGHTS
The holders of Common Stock are not entitled to dissenters' or appraisal
rights in connection with the LOPI Transaction.
MARKET PRICES OF SECURITIES
The closing sales price of the Common Stock on the NYSE on March 27, 1998,
the day preceding the public announcement of the signing of the LOPI Agreement,
was $8.00. The closing price of the Common Stock on the NYSE on May 18, 1998,
was $7 15/16 per share. See "Market Price of Common Stock and Dividends
Information".
REGULATORY APPROVAL
Other than the filing of the certificate of merger relating to the LOPI
Transaction in Delaware on the Effective Date and complying with federal and
state securities laws, the Company is not aware of any material federal or state
regulatory requirements which must be complied with or the approval of which
must be obtained in connection with the LOPI Transaction.
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SUMMARY OPERATING AND RESERVE DATA
The following table sets forth certain summary operating and reserve data
on a historical basis for the Company. Such historical data has been restated to
reflect the Company's recent merger with Cairn, which was accounted for as a
pooling of interests for financial statement purposes. The following table also
sets forth pro forma summary operating and reserve data for the Company. The pro
forma operating data for the year ended December 31, 1997 and the three months
ended March 31, 1998 assumes that the Shell Transactions were consummated on
January 1, 1997 and January 1, 1998, respectively, while the pro forma reserve
data as of December 31, 1997 and March 31, 1998 assumes that the Shell
Transactions were consummated on December 31, 1997 and March 31, 1998,
respectively. The pro forma summary operating and reserve data does not purport
to represent what such operating and reserve data actually would have been had
the Shell Transactions occurred on such dates or to project what the Company's
operations and reserves will be for or at any future period or date. See
"Unaudited Pro Forma Financial Statements", "Notes to Unaudited Pro Forma
Financial Statements" and "Financial Statements".
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
-------------------------------- -------------------------------------------
PROFORMA PROFORMA
1998 1998 1997 1997 1997 1996 1995
--------- --------- --------- --------- --------- --------- ---------
PRODUCTION DATA (NET)
<S> <C> <C> <C> <C> <C> <C> <C>
Natural gas (MMcf)............... 8,025 3,858 3,669 33,255 14,603 15,783 14,598
Oil (MBbls)...................... 745 210 223 3,426 914 751 650
Natural gas equivalent (MMcf).... 12,495 5,118 5,007 53,811 20,087 20,289 18,498
AVERAGE SALE PRICE PER UNIT
Natural gas (Mcf)................ $ 2.27 $ 2.29 $ 3.10 $ 2.69 $ 2.70 $ 2.44 $ 1.71
Oil (Bbl)........................ $ 14.30 $ 13.65 $ 22.44 $ 20.22 $ 19.72 $ 21.92 $ 18.04
Natural gas equivalent (MCFE).... $ 2.31 $ 2.29 $ 3.27 $ 2.95 $ 2.86 $ 2.71 $ 1.99
LIFTING COSTS (PER MCFE)(1).......... $ .55 $ .39 $ .36 $ .62 $ .39 $ .31 $ .25
YEAR ENDED DECEMBER 31,
-------------------------------------------
PROFORMA
1997 1997 1996 1995
--------- --------- --------- ---------
ESTIMATED NET PROVED RESERVES DATA
Natural gas (MMcf)............... 194,334 110,785 107,406 90,993
Oil (MMBbls)..................... 18,562 9,731 9,416 3,563
Natural gas equivalent (MMCFE)... 305,706 169,171 163,902 112,371
- ------------
</TABLE>
(1) Lifting costs consist of oil and natural gas operating expenses and
severance and ad valorem taxes.
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SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The summary financial information of the Company set forth below has been
derived from and should be read in conjunction with the audited financial
statements and other financial information of the Company included in this Proxy
Statement. Such historical data has been restated to reflect the Company's
recent merger with Cairn. The unaudited pro forma financial information of the
Company has been derived from the financial statements of the Company and the
statements of revenues and direct operating expenses for the LOPI Properties and
the SWEPI Properties, which are included in this Proxy Statement. The unaudited
pro forma statements of operations information for the year ended December 31,
1997 and the three months ended March 31, 1998 give effect to the Shell
Transactions as if they had occurred on January 1, 1997 and January 1, 1998,
respectively, and the unaudited pro forma balance sheet information gives effect
to the Shell Transactions as if they had occurred on March 31, 1998. See "TMRC
Selected Financial Information", "Unaudited Pro Forma Financial Statements",
"Notes to Unaudited Pro Forma Financial Statements" and "Financial
Statements".
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, YEARS ENDED DECEMBER 31,
------------------------------------------ ---------------------------------------------
PROFORMA PROFORMA
1998 1998 1997 1997
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) 1997 1996 1995
----------- ----------- ----------- ----------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS INFORMATION:
Total revenues................... $ 29,036 $ 11,897 $16,660 $ 159,361 $ 58,333 $ 56,733 $ 38,230
Depletion and depreciation....... $ 24,317 $ 6,259 $ 6,231 $ 85,891 $ 26,337 $ 25,342 $ 18,491
Impairment of oil and gas
properties..................... $ 147,269(1) $ 40,278 -- $ 86,450(1) $ 24,141 -- --
Net income (loss) applicable to
common shareholders............ $ 123,486 $ (40,927) $ 5,644 $ (56,018) $ (28,541) $ 16,692 $ 7,458
Net income (loss) per share:
Basic....................... $ (2.71) $ (1.22) $ 0.17 $ (1.23) $ (.85) $ .50 $ .25
Diluted..................... $ (2.71) $ (1.22) $ 0.16 $ (1.23) $ (.85) $ .47 $ .23
Weighted average common shares
outstanding.................... 45,533 33,341 33,363 45,465 33,383 33,399 30,207
Cash dividends declared per
share.......................... -- -- -- -- -- -- --
AS OF MARCH 31,
---------------------
PROFORMA
1998(1) 1998
--------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
BALANCE SHEET INFORMATION:
Total assets..................... $ 487,702 $ 269,661
Long-term debt, inclusive of
current maturities.............. 167,573 125,073
Stockholders' equity............. 243,334 104,846
Book value per share(2).......... 4.17 3.13
- ------------
</TABLE>
(1) Gives effect to an anticipated writedown of the Shell Properties following
the closing of the Shell Transactions. See "Reasons for the LOPI
Transaction -- Certain Considerations; Anticipated Writedowns."
(2) Pro forma book value per share assumes conversion of the Preferred Stock
into Common Stock.
14
<PAGE>
SPECIAL CONSIDERATIONS IN CONNECTION WITH THE SHELL TRANSACTIONS
LARGE SHAREHOLDER
Immediately following the LOPI Transaction, SLOPI will beneficially own
39.9% of the Fully-Diluted Common Stock as of the closing date, and will have
one seat on the Company's Board of Directors. In addition, the LOPI Agreement
and Stock Rights and Restrictions Agreement will provide SLOPI with the
opportunity to acquire additional shares of Common Stock pursuant to the
Required Future Share Issuances. The existence of a shareholder with such a
significant ownership position could have several important consequences,
including (i) although not possessing a controlling vote, SLOPI's ownership
position will allow it to substantially influence the outcome on matters
submitted to the Company's shareholders for their approval; (ii) the sale by
SLOPI of a substantial block of Common Stock could have a materially adverse
effect on the prevailing market prices for the Common Stock; and (iii) SLOPI's
ownership position will allow it to more easily attempt to obtain control of the
Company through a tender offer or otherwise following the termination of certain
restrictions on such transactions.
The Stock Rights and Restrictions Agreement will contain provisions
designed to minimize these consequences, including (i) limiting SLOPI's and its
affiliates' discretionary voting ability on non-extraordinary corporate matters
presented to the Company's shareholders to 23% of the voting shares, (ii)
limiting SLOPI's and its affiliates' ability to sell certain portions of the
Common Stock and Preferred Stock acquired in the LOPI Transaction for a period
of five years, (iii) limiting SLOPI's and its affiliates' ability to acquire
additional shares of Common Stock and (iv) limiting SLOPI's and its affiliates'
ability to propose or enter into a Business Combination Transaction with the
Company. Such provisions, however, are subject to certain exceptions described
under "The LOPI Transaction -- Stock Rights and Restrictions Agreement". In
particular, such provisions will not totally eliminate SLOPI's ability to
substantially influence the outcome on shareholder votes and, subject to a right
of first refusal that has been granted to the Company, sell shares or transfer
control of the Company in the event of a tender or exchange offer for the
Company, which could have materially adverse consequences on the Company and its
shareholders. In addition, such provisions will limit SLOPI's ability to dispose
of the Common Stock acquired in the LOPI Transaction and upon conversion of the
Preferred Stock to a single purchaser, which could have a negative influence on
a party attempting to gain control of the Company. See "The LOPI
Transaction -- Stock Rights and Restrictions Agreement".
MAKE-WHOLE PAYMENTS
The Stock Rights and Restrictions Agreement provides that when SLOPI and
its affiliates, as permitted by the Stock Rights and Restrictions Agreement,
sell any shares of Common Stock issued to it upon conversion of the Preferred
Stock and the net proceeds (after reasonable and customary commissions,
underwriters discounts, placement fees and expenses of sale, but excluding legal
expenses of SLOPI) received by SLOPI and its affiliates are less than the
conversion price of the Preferred Stock (as adjusted from time to time in
accordance with the terms of the Certificate of Designation), the Company will
be obligated to pay SLOPI the amount of such difference in cash or to issue
shares of Common Stock based upon the average per share market value for the
previous 30 trading days immediately preceding the relevant date. Although
SLOPI's and its affiliates' ability to sell certain portions of shares of Common
Stock issued upon conversion of the Preferred Stock is limited for a period of
five years following the Closing Date, if SLOPI and its affiliates were to sell
all shares of Common Stock that could be issued upon conversion of the Preferred
Stock at a net price of $7 15/16 per share (the closing price of the Common
Stock as reported on the NYSE on May 18, 1998, the Company would be obligated to
pay SLOPI an amount in cash or Common Stock equal to $33.1 million, which could
have a adverse effect on the Company's financial condition or result in dilution
to the Company's shareholders other than SLOPI. See "The LOPI
Transaction -- Stock Rights and Restrictions Agreement -- Company Support of
Certain Stock Sales".
SHELL PURCHASE RIGHTS
The Company has agreed that if, when, and for so long as the Stock Rights
and Restrictions Agreement is in effect and SLOPI and its affiliates
beneficially own shares that would constitute (after giving effect to
15
<PAGE>
the proposed transaction) less than 21% of the then outstanding shares of Common
Stock, if the Company issues any shares of Common Stock (or any securities
exchangeable into shares of Common Stock), it will provide SLOPI and its
affiliates the opportunity to purchase a number of shares of Common Stock (or
securities exchangeable into Common Stock) so that after giving effect to such
purchase and the proposed other issuance by the Company, SLOPI and its
affiliates will beneficially own 21% of the outstanding Common Stock. Such
rights will have certain consequences on the Company, including requiring the
Company to issue additional shares of Common Stock in connection with an
acquisition or other business opportunity at a time the Company's Board of
Directors may deem such issuance as not in the best interests of the Company,
which could limit the Company's ability to consummate acquisitions and other
business transactions utilizing Common Stock (or securities convertible into
Common Stock). Any future issuance of Common Stock could result in additional
dilution to the Company's shareholders. See "The LOPI Transaction -- Stock
Rights and Restrictions Agreement -- Right to Participate in Certain Sales of
Common Stock".
PRIOR APPROVAL OF REQUIRED FUTURE SHARE ISSUANCES
Under the listing requirements of the NYSE, the Company is required to
obtain shareholder approval of various issuances of stock of the Company that
would represent more than 20% of the outstanding shares of the Company. In
addition, under such rules, the Company is required to obtain shareholder
approval with respect to various issuances of stock to affiliates of the
Company. Following the consummation of the LOPI Transaction, Shell and its
affiliates, including SLOPI, will become affiliates of the Company for purposes
of such NYSE listing requirements. Under the terms of the LOPI Agreement, the
Company is required to obtain shareholder approval for all future issuances of
stock by the Company that are required to be made by the Company either under
the LOPI Agreement or the Stock Rights and Restriction Agreement.
As part of the approval by the shareholders of the Company of the LOPI
Transaction, the shareholders will be authorizing for purposes of the NYSE
listing requirements all Required Future Share Issuances. The Required Future
Share Issuances consist of the following: (i) the potential issuance of a
currently indeterminable number of additional shares of Common Stock pursuant to
a contingent adjustment feature contained in the LOPI Agreement in the event of
adjustment to the tax basis of the assets of LOPI (see "The LOPI
Transaction -- Description of LOPI Agreement -- Taxes and Additional Merger
Consideration"), (ii) the potential issuance of a currently indeterminable
number of shares of Common Stock and securities convertible into Common Stock
that the Company may be required to issue pursuant to the Stock Rights and
Restrictions Agreement in order to allow SLOPI and its affiliates to purchase
additional securities of the Company in order to maintain at least a 21%
beneficial ownership interest in the outstanding shares of Common Stock in the
event the Company issues additional shares of Common Stock or securites
convertible into shares of Common Stock (see "The LOPI Transaction -- Stock
Rights and Restrictions Agreement -- Right to Participate in Certain Sales of
Common Stock") and (iii) the potential issuance of a currently indeterminable
number of shares of Common Stock that may be issued in the future by the Company
in satisfaction of a make-whole provision contained in the Stock Rights and
Restrictions Agreement in the event SLOPI receives less than approximately
$10.52 per share on the sale of the Common Stock that is issuable upon
conversion of the Preferred Stock (see "The LOPI Transaction -- Stock Rights
and Restrictions Agreement -- Company Support of Certain Stock Sales".)
As a result of the preapproval of the Required Future Share Issuances, the
Company will not be required to seek further shareholder approval of any
Required Future Share Issuances under the listing requirements of the NYSE and
does not intend to seek further shareholder approval of any Required Future
Share Issuances unless such approvals are required to be received under
applicable law. Any Required Future Share Issuances could have the impact of
diluting the voting or percentage ownership interest of the holders of the
Common Stock as well as a dilution on the book value per share earnings of the
Common Stock depending upon the circumstances of issuance.
16
<PAGE>
TAX STRUCTURE OF TRANSACTION
Because of the tax structure of the LOPI Transaction, it is intended that
the Company inherit SLOPI's tax basis in the properties owned by LOPI (the
"LOPI Properties"). This tax basis is estimated to be approximately $196.0
million less than the value of the Common Stock and Preferred Stock issued in
the LOPI Transaction to be recorded by the Company for financial reporting
purposes. Assuming the Company would have the ability to fully utilize the tax
deductions relating to the LOPI Properties, the acquisition of LOPI pursuant to
a tax-free reorganization in which the Company will inherit the tax basis of the
LOPI Properties held by LOPI will cause the Company to report $196.0 million
more of taxable income over the life of the LOPI Properties than if the LOPI
Properties had been purchased directly in a taxable transaction.
ANTICIPATED WRITEDOWN
The consummation of the LOPI Transaction is expected to result in the
Company recording a deferred tax liability in excess of $66 million,
representing the excess of the purchase price for LOPI over the tax basis of the
LOPI Properties to be inherited by the Company. This deferred tax liability will
require the Company to increase the amount allocated to oil and natural gas
properties as a result of the Shell Transactions for financial accounting
purposes by an amount equal to the deferred tax liability so that the total
allocated to oil and natural gas properties as a result of the Shell
Transactions will be approximately $343 million for financial accounting
purposes. This $343 million to be allocated to oil and natural gas properties
exceeds the SEC PV-10 reserves, net of estimated future income taxes, of the
Shell Properties as of December 31, 1997, utilizing reserve estimates prepared
by T.J. Smith. Based upon preliminary estimates, the Company currently estimates
that approximately $35 million of the amount allocated to oil and natural gas
properties for financial accounting purposes will be classified as unevaluated
properties, which will not be subject to the Company's evaluated property
full-cost ceiling limitation. Assuming no changes in prices since March 31,
1998, or any net changes in proved reserves since December 31, 1997, the Company
expects it will take an impairment charge (beyond impairment on its existing oil
and gas properties) of up to $125 million ($93 million net of tax benefits)
within the quarter of the closing of the Shell Transactions to reflect the
impairment for accounting purposes of the Shell Properties.
INTERESTS OF CERTAIN PERSONS IN THE LOPI TRANSACTION
In considering the recommendation of the Board of Directors of the Company
with respect to the LOPI Transaction, the Company's shareholders should be aware
that the terms of certain warrants held by Joseph A. Reeves, Jr. and Michael J.
Mayell provide for adjustments to those warrants in the event of the additional
issuance of shares of Common Stock. Pursuant to the adjustment provisions and as
a result of the LOPI Transaction and assuming conversion of all of the Preferred
Stock, each of them will be entitled to receive approximately 252,253 additional
shares of Common Stock upon the exercise of their warrants without the payment
of any additional consideration. The value of these additional shares of the
Common Stock, based on the closing sale price of the Common Stock on May 18,
1998, is approximately $2.0 million for each of them. In addition, Chase, the
financial advisor of the Company, will receive additional compensation if the
LOPI Transaction is effected. Affiliates of Chase also provide financial
services on behalf of the Company and Shell and its affiliates. See "The LOPI
Transaction -- Opinion of Financial Advisor" and "The LOPI
Transaction -- Interest of Certain Persons in the LOPI Transaction".
TRANSITION OF OPERATIONS
Discussions concerning the transition of operations of the Shell Properties
from LOPI and SWEPI to the Company have begun. Such transition will require the
dedication of management resources that may temporarily detract from attention
to the day-to-day business of the Company, which may have the effect of delaying
planned exploration and development activities.
CONFLICTS OF INTEREST
Neither the LOPI Agreement nor any of the agreements to be executed in
connection therewith contain any provisions that contractually prohibit either
Shell or its affiliates or the Company and its affiliates from
17
<PAGE>
competing against each other. At present, the Company and Shell and its
affiliates compete offshore in the Gulf of Mexico for offshore prospects and it
is expected that such competition will continue following consummation of the
Shell Transactions. Shell and its affiliates also retain and may obtain in the
future interests in producing properties and exploration prospects in Louisiana
state waters where they are in competition with the Company. In addition,
although Shell currently does not have any working interests in producing
properties or exploration prospects onshore in south Louisiana, other than the
Shell Properties or those in Louisiana state waters, and has indicated to the
Company that it has no current intention to obtain any such interests, it may do
so in the future. Any future competition between the Company and Shell and its
affiliates could result in a conflict of interest between the Company and Shell
and its affiliates and the Shell Designees (as defined below) serving on the
Company's Board of Directors at such time.
18
<PAGE>
GENERAL INFORMATION ABOUT THE MEETING
DATE, TIME AND PLACE OF SPECIAL MEETING
The Special Meeting will be held at 9:00 a.m. on , ,
1998, at the offices of Fulbright & Jaworski L.L.P., 1301 McKinney, Suite 5100,
Houston, Texas.
RECORD DATE AND OUTSTANDING SHARES
Only holders of record of Common Stock at the close of business on
, 1998, are entitled to notice of, and to vote at, the Special Meeting.
At the close of business on the Record Date, there were holders of
record of Common Stock with shares issued and outstanding. Each share of
Common Stock entitles the holder thereof to one vote on each matter submitted
for shareholder approval.
PURPOSES OF THE SPECIAL MEETING
The purpose of the Special Meeting is to consider and vote upon (a) a
proposal to approve the LOPI Transaction and the related Required Future Share
Issuances, (b) a proposal to approve the Articles of Incorporation Amendment and
(c) such other matters as may properly be brought before the Special Meeting.
VOTE REQUIRED
The Company's Bylaws provide that the presence at the Special Meeting, in
person or by proxy, of the holders of a majority of the outstanding shares of
Common Stock entitled to vote at the meeting will constitute a quorum for the
transaction of business. Under the Company's listing agreement with the NYSE,
which requires shareholder approval for the issuance of more than 20% of the
outstanding Common Stock in connection with any acquisition by the Company,
approval of the LOPI Transaction and the related Required Future Share Issuances
requires the affirmative vote of the holders of a majority of the shares of
Common Stock present, in person or by proxy, and entitled to vote at the Special
Meeting. Pursuant to the Company's Bylaws and Articles of Incorporation,
approval of the Articles of Incorporation Amendment requires approval of a
majority of the shares of Common Stock outstanding on the Record Date.
VOTING AND REVOCATION OF PROXIES
All properly executed proxies that are not revoked will be voted at the
Special Meeting in accordance with the instructions contained therein. If a
holder of Common Stock executes and returns a proxy and does not specify
otherwise, the shares represented by such proxy will be voted (i) "FOR"
approval and adoption of the LOPI Transaction and the related Required Future
Share Issuances and (ii) "FOR" approval and adoption of the Articles of
Incorporation Amendment in accordance with the recommendation of the Company's
Board of Directors. The failure to return a proxy card will not be considered a
vote for or against approval of the LOPI Transaction and the Required Future
Share Issuances but will have the effect of voting against the Articles of
Incorporation Amendment. Checking the abstention box on the proxy card will have
the same effect of voting against the LOPI Transaction and the related Required
Future Share Issuances and against the Articles of Incorporation Amendment. A
shareholder of the Company who has executed and returned a proxy may revoke it
at any time before it is voted at the Special Meeting by executing and returning
a proxy bearing a later date, by filing written notice of such revocation with
the Secretary of the Company, or by attending the Special Meeting and voting in
person.
Under applicable stock exchange rules, brokers will not be permitted to
submit proxies authorizing a vote on the LOPI Transaction and the related
Required Future Share Issuances or on the Articles of Incorporation Amendment in
the absence of specific instructions from beneficial owners. Broker non-votes
will have the effect of voting against the Articles of Incorporation Amendment.
Under Texas law, broker non-votes contained in a returned proxy card will not be
considered a vote for or against the LOPI Transaction and the related Required
Future Share Issuances.
19
<PAGE>
SOLICITATION OF PROXIES
In addition to solicitation by mail, the directors, officers and employees
of the Company may solicit proxies from the Company's shareholders by personal
interview, telephone, facsimile or otherwise. The Company will bear the costs of
the solicitation of proxies from its stockholders. Arrangements also will be
made with brokerage firms and other custodians, nominees and fiduciaries who
hold the voting securities of record for the forwarding of solicitation
materials to the beneficial owners thereof. The Company will reimburse such
brokers, custodians, nominees and fiduciaries for the reasonable out-of-pocket
expenses incurred by them in connection therewith. The Company also has engaged
the services of , a proxy solicitation firm, to distribute proxy
solicitation materials to brokers, banks and other nominees and to assist in the
solicitation of proxies from their respective stockholders for an anticipated
fee of $ from the Company, plus mailing expenses.
OTHER MATTERS
As of the date of this Proxy Statement, the Company's Board of Directors
does not know of any business to be presented at the Special Meeting other than
as set forth in the notice accompanying this Proxy Statement. If any other
matters should properly come before the Special Meeting, it is intended that the
shares represented by proxies will be voted with respect to such matters in
accordance with the judgment of the persons voting such proxies. Proxies voted
"against" the approval and adoption of the LOPI Transaction and the related
Required Future Share Issuances or against the Articles of Incorporation
Amendment will not be used to vote for any adjournment pursuant to this
authority.
THE LOPI TRANSACTION
BACKGROUND OF THE LOPI TRANSACTION
The Company's business strategy has been focused since 1991 on finding and
developing oil and natural gas reserves through the use of 3-D seismic data and
computer-aided exploration techniques. Since that time, the Company (including
Cairn) has successfully discovered eight new fields utilizing 3-D seismic
technology. Pursuant to the merger with Cairn in November 1997, the Company
expanded its operations, which historically were focused onshore in Louisiana
and Texas, offshore into the Gulf of Mexico, and significantly expanded its
proved reserve base and exploration opportunities.
In the fall of 1997, Shell solicited bids for a merger with LOPI. The
Company considered an acquisition of LOPI to be beneficial to the Company
because the LOPI Properties are strategically located within the Company's
historical base of operations in south Louisiana, and believed that its
extensive knowledge and operating history in the producing areas where the LOPI
Properties were located created an excellent strategic fit for the Company and
its exploration staff. Based on these perceived benefits, the Company entered
into a confidentiality agreement with Shell and submitted bids for LOPI.
On December 18, 1997, the Company and SLOPI entered into a non-binding
letter of intent relating to the LOPI Transaction and issued a joint press
release. Following execution of the letter of intent, the Company continued its
due diligence review of the Shell Properties and SLOPI began its due diligence
review of the Company. The Company and SLOPI and SWEPI also began negotiating
the terms and conditions of definitive acquisition agreements, including the
terms and conditions of the Stock Rights and Restrictions Agreement, the
Certificate of Designation and the Regtistration Rights Agreement, relating to
the LOPI Transaction.
On March 13, 1998, the Company's Board of Directors met to discuss the
status of the negotiations between SLOPI and the Company as well as the status
of discussions relating to the separate SWEPI Acquisition and to consider a
preliminary report from Chase on the fairness of the Shell Transactions to the
Company from a financial point of view. On March 27, 1998, the Board of
Directors held a meeting to discuss the final terms of the LOPI Transaction and
the SWEPI Acquisition and the strategic benefits that could be expected to be
derived from the Shell Properties versus the consideration to be paid by the
Company in the LOPI Transaction and the SWEPI Acquisition. At this meeting,
Chase also rendered its oral
20
<PAGE>
opinion to the Company's Board of Directors as to the fairness of the Common
Stock and Preferred Stock to be issued in the LOPI Transaction and the cash to
be paid in the SWEPI Acquisition. Thereafter the Board unanimously approved the
LOPI Transaction and the SWEPI Acquisition. On March 27, 1998, following such
meeting and the receipt of the fairness opinion, the Company and Shell executed
definitive agreements governing the LOPI Transaction.
THE COMPANY'S REASONS FOR THE LOPI TRANSACTION
The Shell Transactions are intended to expand significantly TMRC's position
as a leader among independent oil and natural gas companies in the exploration
and development of oil and natural gas in south Louisiana by adding to TMRC's
existing operations interests in approximately 210,000 gross (98,000 net) acres
either held by production or under lease or option for exploration and access to
approximately 1,400 square miles of 3-D seismic data.
The Shell Transactions are expected to provide the Company with the
following strategic benefits:
o Provide the Company with interests in approximately 210,000 gross (98,000
net) acres either held by production or under lease or option for
exploration. Individuals on the Company's exploration staff have between
eight and 35 years of experience in generating onshore and offshore
prospects in Louisiana and the Texas Gulf Coast and in the Gulf of Mexico.
The Company believes that its post-transaction acreage position in
Louisiana will represent one of the largest ownership positions of an
independent oil and natural gas company of the size of the Company. This
acreage position also is expected to provide the Company with substantial
exploration prospects for the future.
o Increase the Company's proved natural gas equivalent reserves as of
December 31, 1997, by an estimated 42% or 137 BCFE.
o Increase the Company's access to 3-D seismic data to over 2,800 square
miles. A large portion of the 3-D seismic data to which the Company will be
provided access will be either proprietary to the Company and Shell (and
its existing partners and their permitted transferees) for a reasonable
period of time or over areas where the Company has a secure land position
so as to allow the Company to receive competitive advantages in its
exploration program. In addition to the access to Shell's and its direct
and indirect subsidiaries' 3-D seismic data covering onshore south
Louisiana, the Company also will be provided with access to a substantial
inventory of 2-D seismic data covering onshore south Louisiana. Access to
Shell's and its direct and indirect subsidiaries' 3-D and 2-D seismic data
is expected to provide the Company with an advantage over many of its
competitors who do not have access to such substantial data on the same
cost basis.
o Provide the Company with eight already identifiable 3-D exploration
prospects where the Company will have a secure acreage position. The
Company expects to drill over all of these prospects during the next twelve
months.
o Increase the Company's cash flows and earnings per share during 1998 and
1999 after excluding anticipated one-time charges and writedowns. In this
regard, the Company currently expects that the addition of the Shell
Properties will be immediately accretive to both its cash flow and earnings
per share for 1998 after excluding anticipated one-time charges and
writedowns, notwithstanding the issuance of the Common Stock and Preferred
Stock to SLOPI.
o Leverage the Company's existing organizational, management and operational
structure to permit the ownership and exploitation of the Shell Properties
at a cost that the Company believes will be substantially less than the
cost currently associated with the ownership and operation of such
properties. The Company believes that the only material additions to its
staff that will be necessary for future ownership of the Shell Properties
will be the addition of various field and operational personnel in fields
in which the Company currently does not operate plus a group of geological
and geophysical personnel for handling additional seismic data.
o Shell's 3-D seismic data and acreage positions do not substantially overlap
the Company's 3-D seismic and acreage positions. As a result, the Shell
Transactions will allow the Company to have access to 3-D
21
<PAGE>
seismic data and acreage positions over a large portion of the highly
prolific oil and natural gas regions in south Louisiana.
o The availability of Shell's 2-D and 3-D seismic data is expected to assist
the Company in further refining and improving its development of
exploration prospects in its areas of focus.
The consummation of the LOPI Transaction also will increase the Company's
equity and provide the Company with a greater base to finance its growth and
exploration and development strategy. The anticipated cash flow from production
associated with the Shell Properties also will provide the Company with a source
for funding its exploration and development program and future acquisitions.
CERTAIN CONSIDERATIONS; ANTICIPATED WRITEDOWN
In considering and approving the Shell Transactions, the Board of Directors
considered the fact that consummation of the LOPI Transaction pursuant to a
tax-free merger would result in the Company recording a deferred tax liability
in excess of $66 million, representing the excess of the purchase price for LOPI
over the tax basis of the LOPI Properties to be inherited by the Company. This
deferred tax liability will require the Company to increase the amount allocated
to by the amount of the deferred tax liability so that the total allocated to
oil and natural gas properties as a result of the Shell Transactions will be
approximately $343 million for financial accounting purposes.
The Board of Directors also took into account the fact that the estimated
$343 million to be allocated to oil and natural gas properties for financial
accounting purposes exceeded the SEC PV-10 reserves, net of estimated future
income taxes, of the Shell Properties as of December 31, 1997, utilizing reserve
estimates prepared by T. J. Smith. Based upon preliminary analysis, the Company
currently estimates that approximately $35 million of the amount allocated to
oil and natural gas properties for financial accounting purposes will be
classified as unevaluated properties, which will not be subject to the Company's
evaluated property full-cost ceiling limitation. Assuming no changes in prices
since March 31, 1998 or any net changes in proved reserves since December 31,
1997, the Company expects that it would take an impairment charge beyond its
expected impairment on its existing oil and gas properties of up to $125 million
($93 million net of tax benefits) within the quarter of the closing of the Shell
Transactions to reflect the impairment for accounting purposes of the Shell
Properties.
The Board of Directors considered the likelihood and magnitude of an
impairment charge with respect to the Shell Properties when approving the Shell
Transactions and believes that the benefits and reserve potential of the Shell
Properties to the Company outweighed this expected one-time charge caused by
current pricing conditions. In this regard, the Board of Directors noted that,
in addition to the numerous benefits outlined above, on a pro forma basis, the
Shell Properties would represent more than 40% of the Company's proved reserves
as of December 31, 1997, and would have represented more than 60% of both the
Company's total production on a natural gas equivalent basis and Operating Cash
Flow for 1997, and that after considering such historical facts and the
identified exploration opportunities, as well as the geological and geophysical
data it will be have access to following the Shell Transactions to evaluate
additional opportunities, the inherent value of the Shell Properties justifies
the proposed aggregate purchase price for the Shell Properties. See "Unaudited
Pro Forma Financial Information" and "Notes to Unaudited Pro Forma Financial
Statements".
RECOMMENDATION OF THE COMPANY'S BOARD OF DIRECTORS
For the reasons set forth under "Background of the LOPI Transaction" and
"The Company's Reasons for the LOPI Transaction" above, the Company's Board of
Directors believes that the terms of the LOPI Transaction are fair to, and in
the best interests of, the Company and the holders of Common Stock. THE
COMPANY'S BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE LOPI TRANSACTION AND
RELATED REQUIRED FUTURE SHARE ISSUANCES AND RECOMMENDS THAT THE HOLDERS OF
COMMON STOCK VOTE "FOR" ADOPTION AND APPROVAL OF THE LOPI TRANSACTION AND THE
RELATED REQUIRED FUTURE SHARE ISSUANCES.
In analyzing the LOPI Transaction and the Required Share Issuances, the
Company's Board of Directors was assisted and advised by Chase, and, at the
March 27, 1998 special meeting, Chase delivered
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to the Company's Board of Directors its oral opinion to the effect that, as of
the date of the Chase Opinion, the Total Consideration to be paid by the Company
pursuant to the Shell Transactions is, taken as a whole fair to the Company from
a financial point of view. See " -- Opinion of Financial Advisor".
OPINION OF FINANCIAL ADVISOR
On March 13, 1998, the Company retained Chase Securities Inc. to act as its
financial advisor in connection with the Shell Transactions. At the March 27,
1998 special meeting of the Company's Board of Directors, Chase rendered to the
Company's Board of Directors an oral opinion to the effect that, as of such date
and based upon and subject to certain matters stated in such opinion, the Total
Consideration to be paid by the Company pursuant to the Shell Transactions is,
taken as a whole, fair to the Company from a financial point of view. Chase
subsequently confirmed its oral opinion by delivering to the Board the Chase
Opinion.
The full text of the Chase Opinion, which sets forth the assumptions made,
matters considered, and qualifications and limitations on the review undertaken
by Chase, is attached as Appendix B to this Proxy Statement and is incorporated
herein by reference. The summary of the Chase Opinion set forth in this Proxy
Statement is qualified in its entirety by reference to the full text of such
opinion. Shareholders of the Company are urged to read such opinion in its
entirety. The Chase Opinion was provided to the Board of Directors of the
Company for its information and is directed only to the fairness to the Company
from a financial point of view of the Total Consideration to be paid by the
Company pursuant to the Shell Transactions, taken as a whole, does not address
the merits of the underlying decision by the Company to engage in the Shell
Transactions and does not constitute a recommendation to any Company shareholder
as to how such shareholder should vote at the Special Meeting. In addition, the
Chase Opinion assumes that the SWEPI Acquisition is completed and does not
address the fairness of the consideration to be paid in the LOPI Transaction on
a stand-alone basis or any other aspect of the LOPI Transaction on a stand-alone
basis. As used in this Proxy Statement, the term "Total Consideration" refers
collectively to the 12,082,030 shares of Common Stock and the shares of
Preferred Stock to be issued or paid pursuant to the LOPI Agreement and the
$42.5 million in cash to be paid to SWEPI pursuant to the SWEPI Acquisition.
The summary set forth below does not purport to be a complete description
of the analyses underlying the Chase Opinion or the presentation made by Chase
to the Board of Directors of the Company. The preparation of a fairness opinion
is a complex analytic process involving various determinations as to the most
appropriate and relevant methods of financial analysis and the application of
those methods to the particular circumstances and, therefore, such an opinion is
not readily susceptible to partial analysis or summary description. In arriving
at its opinion, Chase did not attribute any particular weight to any analysis or
factor considered by it, but rather made qualitative judgments as to the
significance and relevance of each analysis and factor. Accordingly, Chase
believes that its analyses must be considered as a whole and that selecting
portions of its analyses, without considering all analyses, would create an
incomplete view of the process underlying its opinion.
In performing its analyses, numerous assumptions were made with respect to
industry performance, general business, economic, market and financial
conditions and other matters, many of which are beyond the control of Chase and
the Company. Any estimates contained in the analyses performed by Chase are not
necessarily indicative of actual values or future results, which may be
significantly more or less favorable than suggested by such analyses.
Additionally, estimates of the value of businesses or securities do not purport
to be appraisals or to reflect the prices at which such businesses or securities
might actually be sold. Accordingly, such analyses and estimates are inherently
subject to substantial uncertainty. In addition, as described above, the Chase
Opinion was among several factors taken into consideration by the Board of
Directors of the Company in making its determination to approve the Shell
Transactions. Consequently, the Chase analyses described below should not be
viewed as determinative of the decision of the Board of Directors of the Company
with respect to the fairness of the Total Consideration to be paid by the
Company pursuant to the Shell Transactions.
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In arriving at its opinion, Chase, among other things, (i) reviewed drafts
of the LOPI Agreement, the Letter Agreement, dated as of March 27, 1998 among
SLOPI, SWEPI and the Company (the "Letter Agreement") the Letter of Intent,
dated as December 18, 1997, between SWEPI and the Company (the "Letter of
Intent"), the draft of the Purchase and Sale Agreement between the Company and
SWEPI (the"SWEPI Agreement"), drafts of the Stock Rights and Restriction
Agreement and drafts of the Registration Rights Agreement, all in the forms
provided to Chase, and Chase assumed that the final forms of such agreements
would not vary in any regard that was material to its analysis, (ii) reviewed
certain publicly available business and financial information that Chase deemed
relevant relating to the industries which LOPI, the Company and the Shell
Properties operate; (iii) reviewed certain publicly available business and
financial information that Chase deemed relevant to LOPI; (iv) reviewed internal
non-public financial analyses, forecasts, projections and operating data
received from the Company for LOPI, the Shell Properties and the Company,
without and giving effect to the Shell Transactions (collectively, the
"Financial Forecasts") as well as analyses and forecasts of certain cost
savings, operating efficiencies and revenue effects resulting from the Shell
Transactions (collectively, the "Expected Synergies"); (v) discussed, with
members of the Company's senior management the Company's and the Shell
Properties' historical operations, financial statements and future prospects,
before and after giving effect to the Shell Transactions, as well as their views
of the business, operational and strategic benefits and other implications of
the Shell Transactions; (vi) compared the financial and operating performance of
the Shell Properties and the Company with publicly available information
concerning certain other companies and businesses that Chase deemed comparable
and reviewed the relevant stock market information for such other companies;
(vii) reviewed the financial terms of certain recent business combinations and
acquisition transactions that Chase deemed reasonably comparable to the Shell
Transactions and otherwise relevant to its inquiry; and (viii) made such other
analyses and examinations as Chase deemed necessary.
In preparing its opinion, Chase assumed and relied on the accuracy and
completeness of all information supplied or otherwise made available to Chase,
discussed with or reviewed by or for Chase, or publicly available and Chase did
not assume any responsibility for independently verifying such information and
Chase has not undertaken an independent evaluation or appraisal of any of the
assets or liabilities of LOPI, the Shell Properties or the Company. Chase has
further assumed that the Financial Forecasts provided to Chase by the Company
have been reasonably determined on the bases reflecting the best currently
available estimates and judgments of the management of the Company as to the
future financial performance of the Company and the Shell Properties and that
the Expected Synergies will be realized in the amounts and at the times
indicated thereby. Chase expressed no view as to such forecast or projection
information or the assumptions on which they were based. Chase also assumed that
the Shell Transactions would not result in a change in control of the Company.
Chase further assumed that no facts or circumstances existed that if discovered
by the Company could result in an adjustment to the Total Consideration or the
Shell Properties or the termination of the SWEPI Agreement. Chase also assumed
that the final form of the SWEPI Agreement would not vary in any way from the
purchase and sale agreement attached to the Letter of Intent. Chase further
assumed that the closing of the SWEPI Acquisition will occur immediately
following or contemporaneously with, the closing of the LOPI Transaction. Chase
also assumed that there will be no increase in the number of Fully Diluted
Shares (as defined in the LOPI Agreement) between the date hereof and the
Closing Date.
For purposes of rendering the Chase Opinion, Chase assumed, in all respects
material to its analysis, that the representations and warranties of each party
contained in the LOPI Agreement and the SWEPI Agreement (together, the "Shell
Agreements") are true and correct, that each party will perform all of the
covenants and agreements required to be performed by it under such agreements
and that all conditions to the consummation of the Shell Transactions will be
satisfied without waiver thereof. Chase also assumed that at the closing of the
Shell Transactions there would be no liabilities of LOPI or the Shell Properties
(except as and in the amounts specifically set forth in the Financial
Forecasts), and that no increase in the amount of the Total Consideration or
other payments or incurrence of liabilities by the Company will be required
under the Shell Agreements, that in the aggregate would be material to its
analysis. Chase further assumed that all governmental, regulatory or other
consents and approvals will be obtained and that in the
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course of obtaining any necessary governmental, regulatory or other consents and
approvals, or any amendments, modifications or waivers to any documents to which
any of the Company, SLOPI, LOPI and SWEPI is a party, no restrictions will be
imposed or amendments, modifications or waivers made that would have any
material adverse effect on the contemplated benefits to the Company of the Shell
Transactions. Chase further assumed that the LOPI Transaction will qualify as a
tax-free reorganization for United States federal income tax purposes. No
limitations were imposed by the Company or the Board of Directors of the Company
with respect to the investigations made or procedures followed by Chase in
rendering the Chase Opinion.
The Chase Opinion is necessarily based on market, economic and other
conditions as they existed and could be evaluated on March 27, 1998. The Chase
Opinion is limited to the fairness to the Company from a financial point of view
of the Total Consideration to be paid by the Company pursuant to the Shell
Agreements, and Chase expressed no opinion as to the merits of the underlying
decision by the Company to engage in the Shell Transactions. Chase also
expressed no opinion as to the future trading or acquisition value of the Common
Stock. All of the projections and financial forecasts for the Company and the
Shell Properties used by Chase in rendering the Chase Opinion were based on
Company management forecasts.
The following is a summary of the material analyses presented by Chase to
the Board of Directors of the Company in connection with the rendering of the
Chase Opinion.
VALUATION OF THE SHELL PROPERTIES
COMPARABLE PUBLIC COMPANY ANALYSIS
Chase compared certain financial and operating information and multiples
for the Shell Properties with corresponding financial and operating information
and multiples for ten independent oil exploration and production companies with
properties onshore and offshore in the Gulf of Mexico. These companies included
Swift Energy Company, Stone Energy Corp., Chieftain International, Belwether
Exploration Company, Lomak Petroleum Inc., Callon Petroleum Company, Forest Oil
Corp., Newfield Exploration Company and Noble Affiliates, Inc. (collectively,
the "Selected Public Companies"). All financial projections for the Selected
Public Companies were based on equity analysts reports. Such analysis indicated
that for the Selected Public Companies (i) Total Enterprise Value (defined as
total market value of common equity plus the liquidation value of outstanding
preferred equity plus net outstanding indebtedness) as a multiple of 1997
estimated earnings before interest, taxes, depreciation, amortization and
exploration ("EBITDAX") ranged from 4.3x to 15.0x, (ii) Total Enterprise Value
as a multiple of 1998 estimated EBITDAX ranged from 3.7x to 6.8x, (iii) total
common equity market value as a multiple of 1997 estimated discretionary cash
flow ("DCF") (defined as net income plus depletion, amortization,
depreciation, exploration, deferred taxes and impairments or unusual charges)
ranged from 3.6x to 11.6x, (iv) total common equity market value as a multiple
of 1998 estimated DCF ranged from 2.7x to 6.6x and (v) Total Enterprise Value
per 1997 proved billion of cubic feet equivalent ("Proved Bcfe") ranged from
$.98 to $2.93.
Based on its review and comparison of such multiples and financial
information for the Selected Public Companies and utilizing the Financial
Forecasts, Chase calculated a summary reference range for the Shell Properties
of (i) $434.1 million to $506.5 million based on 1997 estimated EBITDAX, (ii)
$345.5 million to $414.6 million based on 1998 estimated EBITDAX, (iii) $336.5
million to $403.8 million based on 1997 estimated DCF, (iv) $285.2 million to
$356.5 million based on 1998 estimated DCF and (v) $187.4 million to $249.9
million based on 1997 Proved Bcfe.
None of the Selected Public Companies are, of course, identical to the
Shell Properties. Accordingly, a complete analysis of the results of the
foregoing calculations cannot be limited to a quantitative review of such
results and involves complex considerations and judgments concerning differences
in characteristics of the Selected Public Companies, and other factors that
could affect EBITDAX, DCF and Proved Bcfe of the Selected Public Companies as
well as that of the Shell Properties.
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COMPARABLE ACQUISITION TRANSACTION ANALYSIS. Chase reviewed certain
publicly available information regarding 19 selected acquisitions of oil
exploration and production companies for which information was publicly
available (the "Transaction Comparables") and calculated Total Enterprise
Value (based on the acquisition price) (i) as a multiple of EBITDAX for the last
twelve month period ("LTM") preceding the transaction for which financial
statements were publicly available, (ii) per Proved Bcfe and (iii) as a multiple
of SEC PV-10. Chase also reviewed certain publicly available information
regarding 33 selected sales of oil and gas properties (the "Asset Sale
Comparables") and calculated Total Enterprise Value (based on the acquisition
price) per Proved Bcfe for such sales. For the Transaction Comparables, the
analysis indicated Total Enterprise Value (i) as a multiple of LTM EBITDAX
ranging from 2.4x to 10.6x, (ii) per Proved Bcfe ranging from $0.67 to $2.53 and
(iii) as a multiple of SEC PV-10 ranging from 0.70x to 1.8x. For the Asset Sale
Comparables, the analysis indicated Total Enterprise Value per Proved Bcfe
ranging from $0.61 to $1.55.
Based on its review and comparison of such multiples and financial
information for the Transaction Comparables and utilizing the Financial
Forecasts, Chase calculated a summary reference range for the Shell Properties
of (i) $470.2 million to $542.6 million based on LTM EBITDAX, (ii) $218.6
million to $249.9 million based on Total Enterprise Value per Proved Bcfe and
(iii) $280.4 million to $327.1 million based on SEC PV-10. Based on its review
and comparison of Proved Bcfe, Chase calculated a summary reference range for
the Shell Properties of $156.2 million to $187.4 million.
No transaction utilized in the comparable transaction analysis was
identical to the Shell Transactions. Accordingly, an analysis of the results of
this comparison is not purely mathematical; rather, it involves complex
considerations and judgments primarily concerning differences in historical and
projected financial, operating, trading and other characteristics of the
companies and assets involved in such other transactions and the circumstances
surrounding such transactions.
NET ASSET VALUE ANALYSIS. Based on reserve reports prepared by T. J. Smith
as of December 31, 1997 and the Financial Forecasts, Chase calculated a net
asset value for the Shell Properties based on SEC PV-10. This analysis yielded a
range of Total Enterprise Value for the Shell Properties from $252.6 million to
$332 million.
VALUATION OF THE COMPANY
COMPARABLE PUBLIC COMPANY ANALYSIS
Chase compared certain financial and operating information and multiples
for the Company with corresponding financial and operating information and
multiples for the Selected Public Companies. Such analysis indicated that for
the Selected Public Companies (i) Total Enterprise Value as a multiple of 1997
estimated EBITDAX ranged from 4.3x to 15.0x, (ii) Total Enterprise Value as a
multiple of 1998 estimated EBITDAX ranged from 3.7x to 6.8x, (iii) total common
equity market value as a multiple of 1997 estimated DCF per share ("DCFPS")
ranged from 3.6x to 11.6x, (iv) total common equity market value as a multiple
of 1998 estimated DCFPS ranged from 2.7x to 6.6x, (v) Total Enterprise Value per
1997 Proved Bcfe ranged from $0.98 to $2.93, and (vi) Total Enterprise Value as
a multiple of 1996 SEC PV-10 ranged from 1.08x to 2.32x.
Based on its review and comparison of such multiples and financial
information for the Selected Public Companies and utilizing the Financial
Forecasts, Chase calculated a summary reference range of implied per share
values for the Common Stock of (i) $6.06 to $7.36 based on 1997 estimated
EBITDAX, (ii) $7.57 to $9.43 based on 1998 estimated EBITDAX, (iii) $6.20 to
$7.44 based on 1997 estimated DCFPS, (iv) $7.06 to $8.83 based on 1998 estimated
DCFPS, (v) $5.63 to $8.09 based on Total Enterprise Value per 1996 Proved Bcfe
and (vi) $10.01 to $12.36 based on 1996 SEC PV-10.
None of the Selected Public Companies are, of course, identical to the
Company. Accordingly, a complete analysis of the results of the foregoing
calculations cannot be limited to a quantitative review of such results and
involves complex considerations and judgments concerning differences in
characteristics of
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the Selected Public Companies, and other factors that could affect EBITDAX,
DCFPS, Proved Bcfe and SEC PV-10 for the Selected Public Companies as well as
that of the Company.
COMPARABLE ACQUISITION TRANSACTION ANALYSIS. Chase reviewed certain
publicly available information regarding the Transaction Comparables and
calculated LTM EBITDAX multiples, LTM DCF multiples, Proved Bcfe and SEC PV-10
multiples for such transactions. The analysis indicated (i) Total Enterprise
Value (based on the acquisition price) as a multiple of LTM EBITDAX for the
Transaction Comparables ranging from 2.4x to 10.6x, (ii) total common equity
market value (based on the acquisition price) as a multiple of LTM DCF for the
Transaction Comparables ranging from 5.3x to 27.5x, (iii) Total Enterprise Value
(based on the acquisition price) per Proved Bcfe for the Transaction Comparables
ranging from $0.67 to $2.53 and (iv) Total Enterprise Value (based on the
acquisition price) as a multiple of SEC PV-10 for the Transaction Comparables
ranging from 0.70x to 1.8x.
Based on its comparison of such multiples and financial information for the
Transaction Comparables and utilizing the Financial Forecasts, Chase calculated
a summary reference range of implied per share values for the Common Stock of
(i) $6.90 to $8.23 based on LTM EBITDAX, (ii) $9.53 to $10.65 based on LTM DCF,
(iii) $7.14 to $8.40 based on Proved Bcfe and (iv) $7.88 to $9.48 based on SEC
PV-10.
No company utilized in the comparable transaction analysis was identical to
the Company. Accordingly, an analysis of the results of this comparison is not
purely mathematical; rather, it involves complex considerations and judgments
primarily concerning differences in historical and projected financial,
operating, trading and other characteristics of the companies and assets
involved in such other transactions and the circumstances surrounding such
transactions.
NET ASSET VALUE ANALYSIS. Based on reserve reports prepared by T. J. Smith
as of December 31, 1997 and the Financial Forecasts, Chase calculated a range of
implied value per share of the Common Stock of $6.87 to $8.86. This implied
value was made solely for purposes of comparison, does not give effect to the
inherent value of the Company's future prospects or undrilled acreage on a going
concern basis and does not reflect Chase's or the Company's view as to the
inherent value of the Company as a whole.
CONTRIBUTION ANALYSIS
Based on the Financial Forecasts, Chase calculated the relative
contribution of the Shell Properties to the Company on a pro forma basis after
giving effect to the Shell Transactions. This analysis indicated that the Shell
Properties would contribute the following to the Company on a pro forma basis:
(i) 54% of the 1998 estimated revenue and 51% of 1999 estimated revenue, (ii)
53% of 1998 estimated EBITDAX and 49% of 1999 estimated EBITDAX, (iii) 42% of
1997 oil and natural gas reserves, (iv) 47% of 1997 SEC Pre-Tax PV-10, (v) 53%
of 1998 estimated oil and natural gas production and 55% of 1999 estimated oil
and natural gas production and (vi) between 49% and 52% of 1998 estimated oil
and gas production.
PRO FORMA ACCRETION/DILUTION ANALYSIS
Based on the Financial Forecasts, Chase calculated the forecasted impact on
the Shell Transactions on certain projected financial and operating results of
the Company for 1998. This analysis indicated that the Shell Transactions would
increase the Company's (i) 1998 estimated millions of cubic feet equivalent
production per day by 23.5% in 1998, (ii) 1998 forecasted EBITDAX per share by
78.2%, (iii) 1998 forecasted DCF per outstanding share by 62.4%, (iv) 1998
forecasted DCF per share on a fully diluted basis by 35.7%, (v) 1998 forecasted
net income per outstanding share by 73.2% and (vi) 1998 forecasted net income
per share on a fully diluted basis by 31.4%.
Pursuant to a letter agreement between the Company and Chase, the Company
agreed to pay Chase a fee of $2,500,000 payable upon the closing of the LOPI
Transaction. Pursuant to such letter agreement, the Company also agreed to
reimburse Chase for its reasonable out-of-pocket expenses, including certain
reasonable fees and disbursements of its legal counsel; provided that Chase
would not be entitled to reimbursement of expenses in excess of $50,000 without
the prior approval of the Company. Additionally, the Company agreed to indemnify
Chase and certain related persons for certain liabilities related to or arising
out of its engagement, including liabilities under the federal securities laws.
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The Company retained Chase based upon Chase's experience and expertise.
Chase is an internationally recognized investment banking and advisory firm.
Chase, as part of its investment banking business, is continuously engaged in
the valuation of businesses and securities in connection with mergers and
acquisitions, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes.
The Chase Manhattan Corporation and its affiliates, including Chase, in the
ordinary course of business, have from time to time provided, and in the future
may continue to provide, commercial and investment banking services to the
Company and to Shell and their respective affiliates. In the ordinary course of
business, Chase or its affiliates may trade in the debt and equity securities of
the Company and Shell and their respective affiliates for its own accounts and
for the accounts of its customers and, accordingly, may at any time hold a long
or short position in such securities.
DESCRIPTION OF LOPI AGREEMENT
CONSIDERATION.
Under the terms of the LOPI Agreement, at the closing of the LOPI
Transaction, Sub will merge with and into LOPI and SLOPI will receive 12,082,030
shares of Common Stock and shares of Preferred Stock that will be convertible
into a number of shares of Common Stock (estimated at 12,827,000 shares) that
will provide SLOPI with a number of shares of Common Stock that, when added to
the shares of Common Stock to be issued at closing, will represent 39.9% of the
Fully-Diluted Shares of Common Stock as of the Closing Date. The LOPI Agreement
requires that as of the Closing LOPI have no liabilities other than those
relating to the ownership and operations of its properties.
ADJUSTMENTS.
No adjustments will be made to the number of shares of Common Stock to be
received by SLOPI under the LOPI Agreement. The number of shares of Common Stock
to be issued upon conversion of the Preferred Stock is subject to adjustment
based upon changes between March 27, 1998 and the closing Date of the number of
shares of Common Stock issued and outstanding or reserved for issuance pursuant
to outstanding options and warrants. In addition, the voting rights of the
Preferred Stock will be adjusted in the event the market price of the Common
Stock is less than $6.00 or more than $12.00 per share on the Closing Date;
however, such adjustment will have no effect on the conversion price for the
Preferred Stock or increase SLOPI's and its affiliates' total discretionary
voting rights.
REPRESENTATIONS AND WARRANTIES.
The LOPI Agreement contains various customary representations and
warranties by the Company and SLOPI with respect to their respective businesses
and operations, including due authorization, compliance with laws and absence of
certain governmental approvals and consents.
CONDUCT OF PARTIES PRIOR TO TRANSACTION.
LOPI and the Company have agreed that prior to the Closing Date each will
take or refrain from taking certain actions, including without limitation, (i)
each party will conduct its business in the ordinary course; (ii) each party
will not pay dividends, except that LOPI may pay a dividend in an amount equal
to the excess of LOPI's current assets over total liabilities, excluding
deferred taxes and gas imbalances, as of December 31, 1997, (iii) the Company
will not acquire or publicly propose to acquire any businesses or assets in
excess of $50,000,000 without LOPI's prior written consent, which shall not be
unreasonably withheld; (iv) neither party shall dispose of any assets exceeding
$50,000,000 in the aggregate except in the normal course of business; (v)
neither party will incur any additional indebtedness except short-term debt in
the ordinary course and borrowings by the Company under new or existing credit
facilities not to exceed $202.5 million; (vi) except in the ordinary course of
business, neither party will adopt any employee benefit plans, increase any
compensation or benefit arrangements or enter into or amend any employment or
severance arrangement with respect to termination of employment; (vii) each
party shall confer with the other party on a regular and frequent basis
regarding its operations; (viii) each party will use commercially
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reasonable efforts to obtain any required consents to the LOPI Transaction and
maintain all material permits; and (ix) each party will provide the other party
access to all information reasonably requested.
CONDITIONS TO THE TRANSACTION.
In addition to the approval of the Company's shareholders of the LOPI
Transaction at the Special Meeting, consummation of the LOPI Transaction is
subject to several other conditions, including (i) there being no proceeding
from or orders issued by any governmental authority attempting to restrain or
prohibit consummation of the LOPI Transaction; (ii) the Common Stock to be
issued in the LOPI Transaction and upon conversion of the Preferred Stock shall
be listed on the NYSE; (iii) all required statutory approvals for the LOPI
Transaction shall have been obtained; (iv) there shall not have been a material
adverse effect with respect to the Company or LOPI; and (v) the fairness opinion
of Chase shall not have been withdrawn.
AMENDMENT.
The LOPI Agreement may be amended by the parties thereto pursuant to action
of their respective Boards of Directors, at any time before or after approval
thereof by the shareholders of the Company and prior to the Effective Time, but
after such approval, no amendment shall: (i) alter or change the amount or kind
of shares to be received or exchanged for or on conversion of any class or
series of capital stock of either corporation as provided under the LOPI
Agreement, or (ii) alter or change any of the terms and conditions of the LOPI
Agreement if any of the alterations or changes, alone or in the aggregate, would
materially and adversely affect the rights of holders of Common Stock or
Preferred Stock.
The LOPI Agreement may not be amended except by an instrument in writing
signed on behalf of each of the parties hereto.
TERMINATION.
The LOPI Agreement may be terminated at any time prior to the Closing Date,
whether before or after approval by the shareholders of the Company, (a) by
mutual written consent of the Boards of Directors of LOPI and the Company; (b)
by either of SLOPI and LOPI or the Company, by written notice to the other
party, if the Effective Time shall not have occurred on or before September 30,
1998 (the "Termination Date"), provided that the right to terminate for such
reason shall not be available to any party whose failure to fulfill any
obligation under the LOPI Agreement is the cause of, or resulted in, the failure
of the Effective Time to occur on or before the Termination Date; (c) by either
of SLOPI and LOPI or the Company, by written notice to the other party, if the
approval of the Company's shareholders shall not have been obtained at the
Special Meeting, including any adjournments thereof; (d) by either of SLOPI and
LOPI or the Company, if any state or federal law, order, rule or regulation is
adopted or issued that has the effect, as supported by the written opinion of
outside counsel for such party, of prohibiting the LOPI Transaction, or by
either of SLOPI and LOPI or the Company, if any court of competent jurisdiction
in the United States or any State shall have issued an order, judgment or decree
permanently restraining, enjoining or otherwise prohibiting the LOPI
Transaction, and such order, judgment or decree shall have become final and
nonappealable; (e) by the Company, by written notice to SLOPI and LOPI, if there
shall have been any material breach of any representation or warranty, or any
material breach of any covenant or agreement, of SLOPI or LOPI under the LOPI
Agreement, and such breach shall not have been remedied within ten business days
after receipt by SLOPI and LOPI of notice in writing from the Company,
specifying the nature of such breach and requesting that it be remedied; (f) by
SLOPI and LOPI, by written notice to the Company, if there shall have been any
material breach of any representation or warranty, or any material breach of any
covenant or agreement, of the Company under the LOPI Agreement, and such breach
shall not have been remedied within ten business days after receipt by the
Company of notice in writing from SLOPI and LOPI, specifying the nature of such
breach and requesting that it be remedied; or (g) if the Board of Directors of
the Company or any committee thereof shall, under any circumstances, withdraw or
modify in a manner adverse to SLOPI and LOPI its recommendation that the
Company's shareholders approve the LOPI Transaction, then by SLOPI and LOPI, by
written notice to the Company, within a period of ten days after the date of
announcement of such withdrawal or modification.
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BREAK-UP FEE.
Promptly upon termination of the LOPI Agreement by SLOPI and LOPI pursuant
to item (g) above, the Company shall pay to SLOPI in cash a fee of $4,000,000
(the "Fee") if: (i) the Company's Board of Directors or any committee thereof
shall have withdrawn or modified its recommendation that its shareholders
approve the LOPI Transaction, (ii) no material adverse effect as to LOPI shall
have occurred, (iii) SLOPI and LOPI shall have performed in all material
respects their covenants and agreements required by the LOPI Agreement and (iv)
the representations and warranties of SLOPI and LOPI set forth in the LOPI
Agreement shall have been true and correct in all material respects.
INDEMNIFICATION.
From and after the Effective Time, SLOPI has agreed to defend, indemnify
and hold harmless the Company against and in respect of those certain claims,
costs, expenses, liabilities, damages and judgments (collectively, "Claims")
relating to certain litigation and claims disclosed to the Company in the LOPI
Agreement; provided, that to the extent that the Company realizes a benefit
after the Effective Time from such matters, such benefit shall offset the amount
and indemnification to which the Company shall be entitled; and, provided
further, that no such indemnification shall be provided as to that portion of
matters within the control of the Company after the Effective Time or with
respect to that portion of matters attributable to the continuation of policies,
calculations or procedures by the Company after the Effective Time
(collectively, the "Current Litigation Claims").
In addition, from and after the Effective Time, SLOPI has agreed to
indemnify, defend and hold the Company harmless against and in respect of all
Claims (other than the Current Litigation Claims) that are (w) expressly and
definitively made or claimed by bona fide third parties against the Company
prior to the date which is one year after the Effective Time, but not if made
thereafter, (x) exceed, in the aggregate, a threshold basket of $7,500,000 and
then only to the extent, if any, of such excess, and (y) arise out of events
occurring in the conduct of the Company's business, assets and operations or
circumstances existing with respect to the Company's business, assets and
operations, in each case accrued and attributable up to and including, but not
after, the Effective Time; provided, however, that no indemnification shall be
provided with respect to that portion of matters that are attributable to the
policies, calculations or procedures that are continued by the Company after the
Effective Time.
SLOPI's indemnification obligations have been guaranteed by SWEPI.
The Company has agreed that it will indemnify, defend and hold harmless
SLOPI against and in respect of all Claims made by bona fide third parties
against SLOPI relating to the Company and its business, assets and operations
(y) that arise on or after, or are accrued or attributable to any time on or
after, the Effective Time or (z) are asserted against the Company or the
Surviving Corporation on or after the date which is one year after the Effective
Time, irrespective of when the underlying events or circumstances occurred.
EFFECTIVE DATE.
The closing of the LOPI Transaction is expected to occur shortly after
approval of the transaction by the Company's shareholders, subject to the
satisfaction or waiver of the conditions set forth under "-- Conditions to the
Transaction".
TAXES AND ADDITIONAL MERGER CONSIDERATION.
The LOPI Transaction has been structured with the intention of it
qualifying as a tax-free reorganization pursuant to Section 368 of the Code. As
a result, the Company will assume LOPI's tax basis in the LOPI Properties. In
this regard, the Company has agreed in the LOPI Agreement to not knowingly take
any action which would cause the LOPI Transaction to fail to qualify as a
reorganization within the meaning of Section 368 of the Code (and any comparable
provisions of applicable state law). Without limiting the foregoing, in the LOPI
Agreement the Company has agreed (i) to characterize the LOPI Transaction as a
reorganization for purposes of any income tax returns and other filings and (ii)
not to liquidate, merge, transfer or reorganize LOPI or permit LOPI to transfer,
sell or otherwise dispose of its assets, if such action
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would cause the LOPI Transaction to fail to qualify as a reorganization within
the meaning of Section 368 of the Code. If the Company's actions, other than the
Company's actions in the consummation of the LOPI Transaction and the issuance
of Common Stock and Preferred Stock, cause the LOPI Transaction to fail to
qualify as a reorganization within the meaning of Section 368 of the Code, then
the Company will assume and accept the tax liability associated with such
non-qualification and indemnify SLOPI, on an after-tax basis, for such tax
liability. If both the Company's and SLOPI's actions, other than the Company's
actions in the consummation of the LOPI Transaction and the issuance of Common
Stock and Preferred Stock, cause the LOPI Transaction to fail to qualify as a
reorganization within the meaning of Section 368 of the Code, then each party
shall bear and accept the responsibility and tax liability associated with their
respective actions, and the Company shall indemnify SLOPI for its portion of
such tax liability.
In addition, in the event that (i) LOPI is entitled to increase the tax
basis of its assets held at the Effective Time for periods during either 1997 or
1998 through the Effective Time, which adjustment has the effect of increasing
LOPI's tax basis (as agreed to by SLOPI and the Company) in its assets by more
than 100 percent (the "Threshold Amount"), and (ii) such increased tax basis
is available to LOPI after the Closing, the parties have agreed that to the
extent the Company's consolidated federal income tax group actually realizes a
cash benefit as a result of such increase in basis in LOPI's assets in excess of
the Threshold Amount with respect to any consolidated federal income tax return
which includes LOPI for any period ending before the tenth anniversary of the
Closing Date, the Company will be required to issue and deliver to SLOPI an
additional number of shares of Common Stock equal in value to 60% of such cash
benefit. Such additional shares of Common Stock will be required to be delivered
within 30 days after the date of filing of the Company's federal income tax
return for each year in which the Company realizes such cash benefit. In
determining whether a reduction in the Company's federal income tax has actually
been realized, the Company will be entitled to utilize all other deductions,
expenses and credits of all members of its affiliated group before utilizing any
tax benefits arising from such increase in tax basis of LOPI's assets. For
purposes of issuing additional shares of Common Stock, all such shares shall be
valued at an average per share market value with respect to the date of
issuance.
STOCK RIGHTS AND RESTRICTIONS AGREEMENT
On the Closing Date, the Company and SLOPI will execute the Stock Rights
and Restrictions Agreement, in the form of Exhibit F to the LOPI Agreement. The
Stock Rights and Restrictions Agreement generally (i) limits SLOPI's and its
affiliates' right to enter into mergers and other Business Combination
Transactions with the Company; (ii) exempts the LOPI Transaction from the
application of Article Eight of the Articles of Incorporation and Part Thirteen
of the TBCA; (iii) provides that SLOPI may nominate at least one member of the
Company's Board of Directors; (iv) limits SLOPI's and its affiliates' ability to
acquire additional shares of Common Stock; (v) limits SLOPI's and its
affiliates' ability to transfer the shares of Common Stock acquired in the LOPI
Transaction and upon conversion of the Preferred Stock; and (vi) limits SLOPI's
and its affiliates' discretionary voting authority.
LIMITATIONS ON CERTAIN TRANSACTIONS.
The Stock Rights and Restrictions Agreement provides that SLOPI and its
affiliates shall not, during the period from the Closing Date until termination
of the Stock Rights and Restrictions Agreement, (i) engage, or propose to
engage, in any Business Combination Transaction with the Company or (ii) make
any proposal to the Company, the Board of Directors of the Company or the
shareholders of the Company with respect to a tender offer or exchange offer for
shares of Common Stock or a liquidation of the Company, unless either (A) such
transaction shall have been approved by a majority of the Continuing Directors
or (B) (x) the third anniversary of the Closing Date shall have occurred and (y)
on the date when such transaction is proposed, either no Shell Designee (as
defined below) shall be serving on the Board of Directors of the Company or
SLOPI and its affiliates collectively shall beneficially own less than 21% of
the then outstanding Common Stock. In addition, the Stock Rights and
Restrictions Agreement provides that SLOPI and its affiliates shall not, during
the period from the Closing Date until termination of the Stock Rights and
Restrictions Agreement, request or solicit any party to make a tender or
exchange offer for
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shares of Common Stock or make a proposal for a Business Combination
Transaction, unless either (A) a majority of the Continuing Directors shall have
approved of SLOPI taking such action or (B) (x) the third anniversary of the
Closing Date shall have occurred on the date when such action is first requested
or solicited by SLOPI and (y) either no Shell Designees shall be serving on the
Board of Directors of the Company or SLOPI and its affiliates shall collectively
beneficially own less than 21% of the then outstanding Common Stock.
ANTI-TAKEOVER STATUTES AND SIMILAR PROVISIONS.
Article Eight of the Articles of Incorporation contains provisions designed
to prevent related parties and affiliated shareholders beneficially owning 10%
or more of the Common Stock from entering into certain business combinations and
other transactions with the Company for a period of two years following the date
of becoming such a related party or affiliated shareholder unless such
transactions are approved by a majority of the disinterested directors. Part
Thirteen of the TBCA contains similar provisions limiting transactions by
parties beneficially owning 20% or more of the Common Stock for a period of
three years.
In connection with the LOPI Transaction, the Company's Board of Directors
has taken all action to assure that Article Eight of the Articles of
Incorporation and Part Thirteen of the TBCA will not apply to the LOPI
Transaction or any of the transactions contemplated in the LOPI Agreement or in
the documents attached thereto, including the Required Future Share Issuances.
The Company also has agreed that it will not implement any poison pill or
takeover defense mechanism, unless, in each and every such case, provision shall
be made to exclude SLOPI and its affiliates from all effects thereof.
In addition, the Company and SLOPI have agreed that the operative
provisions, as presently in effect, of Article Eight of the Articles of
Incorporation and Part Thirteen of the TBCA will apply to any business
combination transaction covered by Article Eight or Part Thirteen between SLOPI
and its affiliates and the Company for the term of the Stock Rights and
Restrictions Agreement, notwithstanding that the operative provisions of said
Article Eight and Part Thirteen might otherwise be applicable for a shorter
period of time.
BOARD MEMBER.
The Stock Rights and Restrictions Agreement and the Certificate of
Designation together provide SLOPI with the ability to elect at least one member
to the Company's Board of Directors and additional members in the event the
number of Board seats is increased to ten or more so that SLOPI is able to
nominate 20% of the Company's Board members (rounded downward in the event of a
fractional number) until the earlier of (i) the termination of the Stock Rights
and Restrictions Agreement and (ii) SLOPI and its affiliates shall beneficially
own less than 21% of the then outstanding Common Stock. Such directors are
hereinafter referred to as the "Shell Designees". Initially, and until all of
the Preferred Stock is converted into Common Stock, the holders of the Preferred
Stock will be entitled to elect such directors. Upon conversion of all Preferred
Stock, then, in connection with each election of directors of the Company,
whether at an annual or special meeting, the Company will nominate, and, subject
to the fiduciary obligations of the Company's directors, solicit proxies for a
number of persons designated by SLOPI to fill such director positions. No Shell
Designee may be a person who previously has been a director of the Company and
was properly removed for cause from the Board of Directors of the Company or a
person who has been convicted of a felony or a crime involving moral turpitude.
At all times when there is a Shell Designee on the Company's Board of Directors,
at least one Shell Designee shall be a member of the audit committee of the
Board of Directors.
LIMITATIONS ON ACQUISITION OF COMMON STOCK.
The Stock Rights and Restrictions Agreement provides that after the Closing
Date SLOPI and its affiliates shall not acquire any shares of Common Stock,
other than the Common Stock issued in the LOPI Transaction and Common Stock
issued upon conversion of the Preferred Stock (i) without the prior written
consent of a majority of the Continuing Directors or (ii) unless (A) the third
anniversary of the Closing Date shall have occurred and (B) at the time of such
acquisition, either no Shell Designee shall be serving on the Board of Directors
of the Company or SLOPI and its affiliates shall collectively beneficially own
less than
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21% of the then outstanding Common Stock; provided, that such restrictions do
not prevent SLOPI from acquiring shares of Common Stock pursuant to the Required
Future Share Issuances, as described under " -- Description of LOPI
Agreement -- Taxes and Additional Merger Consideration", " -- Right to
Participate in Certain Sales of Common Stock" and " -- Company Support of
Certain Stock Sales".
RESTRICTIONS ON SHELL'S ABILITY TO TRANSFER SHARES.
SLOPI has agreed that from and after the Closing Date until the termination
of the Stock Rights and Restrictions Agreement, it will not sell, transfer or
otherwise convey beneficial ownership of any of the Common Stock or Preferred
Stock acquired in the LOPI Transaction or shares of Common Stock issued upon
conversion of the Preferred Stock without the prior written consent of a
majority of the Continuing Directors, which consent shall not be unreasonably
withheld, except that, in any event, any and all of the following transfers
shall be permitted:
(i) one or more transfers to a direct or indirect affiliate; provided
that SLOPI and each such affiliate agree in writing with the Company to be
bound by the same restrictions as are applicable to SLOPI under the Stock
Rights and Restrictions Agreement;
(ii) one or more transfers to the Company or a subsidiary of the
Company;
(iii) one or more transfers pursuant to a merger, consolidation or
compulsory share exchange in which the Company is a constituent
corporation; and
(iv) one or more transfers made as a pro rata dividend or
distribution to the holders of the common stock of SLOPI and its
affiliates, provided, unless such dividend or distribution is to the public
shareholders of any of the Royal Dutch/Shell Group of Companies, such
holders agree in writing with the Company to be bound by the same
restrictions as SLOPI under the Stock Rights and Restrictions Agreement.
The limitations on SLOPI's and its affiliates' ability to transfer shares are
subject to the following additional exceptions:
Acceptance of Tender Offers. Notwithstanding the aforementioned
restrictions, SLOPI may make one or more transfers to any party (other than
SLOPI or any affiliate of Shell) who shall have commenced a tender or
exchange offer for shares of Common Stock if, at the time of public
announcement of the tender or exchange offer SLOPI and its affiliates
beneficially own less than 21% of the then outstanding shares of Common
Stock and no Shell Designee is serving on the Company's Board of Directors.
In addition, if SLOPI or its affiliates beneficially owns more than 21% of
the then outstanding shares of Common Stock or any Shell Designee is
serving on the Company's Board of Directors, SLOPI and its affiliates may
sell its shares in a tender or exchange offer if they first provide to the
Company a preferential right to purchase, for cash, all such shares which
SLOPI and its affiliates would be willing to tender or exchange at a price
of 105% of the tender or exchange offer price which SLOPI and its
affiliates would be willing to accept. Once the Company has given notice to
SLOPI that the Company will exercise such preferential right, then, on the
then stated expiration date of the tender or exchange offer, the Company
will be obligated to close the purchase and pay in full in cash, and SLOPI
and its affiliates will be obligated to sell, at the applicable 105% price
notwithstanding anything that may otherwise occur with respect to the
tender or exchange offer, including, without limitation, withdrawal,
extension, modification, or increase or decrease in the tender or exchange
price or other consideration. Once the Company has not exercised a
preferential right to purchase with respect to a particular tender or
exchange offer made by a particular party, then SLOPI and its affiliates
shall not thereafter be required to make any additional preferential
purchase rights available to the Company with respect to such particular
tender or exchange offer, even if in such tender or exchange offer there is
an extension or modification of or an increase or decrease in price or
other consideration in any tender or exchange offer made by such particular
party; provided, however, that SLOPI and its affiliates will be required to
provide to the Company a preferential purchase right with respect to any
tender or exchange offer made by each other party or with respect to any
new tender or exchange offer by such particular party which SLOPI would be
willing to accept.
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Phase Out on Sale Limitations. Beginning on the second anniversary of
the Closing Date, SLOPI and its affiliates may sell an incremental 25% of
the shares of Common Stock issued in the LOPI Transaction or issued upon
conversion of the Preferred Stock until following the fifth anniversary of
the Closing Date, SLOPI and its affiliates may sell 100% of the Common
Stock issued in the LOPI Transaction or upon conversion of the Preferred
Stock, in each case in one or more Public Offerings, Private Placements
and/or transactions in accordance with Rule 144 or 145 (as defined under
the Exchange Act). Notwithstanding the foregoing, if, at any time or from
time to time, SLOPI receives shares of Common Stock pursuant to an
anti-deficiency payment described in " -- Company Support of Certain Stock
Sales", then immediately the same number of shares of Common Stock will be
available for transfer.
In addition, beginning on the third anniversary of the Closing Date,
SLOPI and its affiliates may sell an incremental one-third of the shares of
Preferred Stock issued in the LOPI Transaction in one or more Private
Placements, until following the fifth anniversary of the Closing Date,
SLOPI and its affiliates may sell up to 100% of the shares of Preferred
Stock issued in the LOPI Transaction in one or more Private Placements.
The parties also have agreed that if (i) the Company shall ever, in
connection with a merger, consolidation, share exchange, or acquisition of
a business or properties or similar transaction, sell or issue or commit to
sell or issue 5,000,000 or more shares of Common Stock or exchangeable
securities that, at the time of issuance, sale or commitment and assuming
full conversion, exchange or exercise thereof, represent 5,000,000 or more
of the shares of Common Stock and (ii) at or prior to the meeting of the
Board of Directors approving any such transactions the Board of Directors
shall not have received an opinion letter from an investment banking firm
of national recognition to the effect that the contemplated transaction is
fair, from a financial point of view, to the Company, then SLOPI's and its
affiliates' right to transfer shares shall be accelerated.
Limitations on Public Offerings. SLOPI and the Company have agreed
that SLOPI's and its affiliates' ability to sell shares of Common Stock in
a Public Offering or other public offering (both a "Registered
Transaction") is subject to both SLOPI and its affiliates and the Company
obtaining from the managing underwriter of such Public Offering or from
each broker through which such Registered Transaction is made, as the case
may be, a commitment to use its reasonable best efforts to make a broad
public distribution of the Common Stock (including an indirect distribution
of Common Stock as a result of a distribution of exchangeable securities)
to be transferred in such Registered Transaction. For this purpose, a
"broad public distribution" means a distribution such that no party is
allocated for purchase in such Registered Transaction a number of shares of
Common Stock in excess of (A) 5% of the then outstanding shares of Common
Stock (after giving effect to the offering of the Common Stock and any
other securities being offered by the Company concurrently therewith in
such Registered Offering) or (B) in the case of a Public Offering, 20% of
the number of shares of Common Stock being offered in such Public Offering,
provided that, in the case of this clause (B), there shall be disregarded
Common Stock allocated for purchase by a mutual fund, a pension fund, an
investment adviser (which investment adviser shall be registered under the
Investment Advisers Act of 1940, as amended) for any mutual fund or pension
fund, or any party who is entitled to report such party's holdings of
Common Stock on Schedule 13G promulgated under the Exchange Act in light of
that party's investment intent.
VOTING RIGHTS.
The Certificate of Designation provides that each share of Preferred Stock
will be entitled to one vote on matters submitted to the Company's shareholders
for their approval. It is anticipated that the Preferred Stock will be divided
into a number of shares such that the voting power of all Preferred Stock
immediately following the Closing Date shall represent 8% of all of the shares
of capital stock entitled to vote. During the term of the Stock Rights and
Restrictions Agreement and (i) prior to the conversion of all of the Preferred
Stock, SLOPI and its affiliates shall be entitled to vote, in their complete
discretion and on all matters, such number of its shares of Common Stock that,
when added to the votes represented by the Preferred Stock, constitute an
aggregate of up to 23% of the then outstanding votes eligible to be cast for
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such matter; (ii) after the conversion of all the Preferred Stock, SLOPI and its
affiliates will be entitled to vote, in its complete discretion and on all
matters, such number of its shares of Common Stock that constitute up to 23% of
the then outstanding votes eligible to be cast for such matter; (iii) if only a
portion of the Preferred Stock has been converted, the voting shall be prorated
between the Common Stock and Preferred Stock for a total of up to 23% of the
then outstanding votes eligible to be cast for such matter. With respect to
those shares of Common Stock, if any, that are in excess of the above amounts of
the then outstanding votes eligible to be cast for such matter (the "Excess
Shares"), SLOPI and its affiliates will be required to vote the Excess Shares
pro rata with the votes of all shares, other than the Excess Shares, that are
actually voted for, against or abstain from voting on each matter.
Notwithstanding the foregoing, SLOPI and its affiliates will have complete
discretion in voting all of their Common Stock and Preferred Stock on any matter
(i) that constitutes a Business Combination Transaction, (ii) that would involve
a change of control of the Company (for purposes of this provision a change in
control shall mean the acquisition by a party other than SLOPI and its
affiliates of beneficial ownership of more than 40% of the then outstanding
shares of Common Stock), or (iii) with respect to which a vote is taken when any
of the following shall have occurred or shall exist: (w) the average per share
market value for the Common Stock with respect to the day on which the matter is
voted upon has been less than $5.50 per share for 30 days, (x) there are any
accrued but unpaid dividends on any Preferred Stock, (y) the Company shall have
failed to issue the additional shares of Common Stock required to be issued
pursuant to the LOPI Agreement or (z) there shall be a continuing and uncured
default by the Company of any of its material obligations under the Stock Rights
and Restrictions Agreement, the Certificate of Designation, the Registration
Rights Agreement or the LOPI Agreement.
RIGHT TO PARTICIPATE IN CERTAIN SALES OF COMMON STOCK.
If, when and for so long as SLOPI and its affiliates beneficially own
shares of Common Stock that would constitute, after giving effect to the
proposed transaction (but not prior to the proposed transaction), less than 21%
of all of the then outstanding shares of Common Stock, the Company shall not
issue any shares of Common Stock or any exchangeable securities, for any
consideration or in any type of transaction, unless the Company shall have first
provided SLOPI the opportunity to purchase shares of Common Stock (or
exchangeable securities) such that, following SLOPI's purchase and the
contemplated transaction, SLOPI and its affiliates would beneficially own 21% of
the outstanding Common Stock.
If the Company determines to issue any shares of Common Stock or any
exchangeable security, other than in a Public Offering, then SLOPI shall
purchase such securities at the same price and on the same terms as the Company
proposes to issue such shares of Common Stock or exchangeable security to others
(or, if the Company proposes to issue such shares of Common Stock or any
exchangeable security other than for cash, at a cash price equal to the current
market price of the Common Stock, or if an exchangeable security, such value to
be determined by agreement between the Company or SLOPI, or if the parties are
unable to agree, by an investment banking firm or other asset valuation firm of
national reputation selected by SLOPI and agreed to by a majority of the
Continuing Directors).
If at any time and from time to time the Company determines to issue any
shares of Common Stock or any exchangeable security in a Public Offering, SLOPI
shall purchase such shares from the Company directly or from the underwriters or
placement agent(s), at the applicable offering price.
COMPANY SUPPORT OF CERTAIN STOCK SALES.
In the event that, from time to time, SLOPI and its affiliates shall sell
any shares of Common Stock to be issued upon conversion of Preferred Stock and
the net proceeds (after reasonable and customary commissions, underwriters
discounts, placement fees and expenses of sale, excluding expenses of legal
counsel for the selling shareholder(s)) received by SLOPI and its affiliates for
such Common Stock results in a Deficiency Amount (as defined below), then the
Company shall, at its option, (i) pay to SLOPI an amount of cash equal to the
Deficiency Amount or (ii) issue to SLOPI additional shares of Common Stock equal
in value to the Deficiency Amount. All shares of Common Stock issued by the
Company in respect of a Deficiency Amount shall be issued as of the closing of
such sale. If the Company issues shares of
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Common Stock in respect of a Deficiency Amount, then the Company will cause such
shares to be listed for trading on the principal stock exchange for the Common
Stock. The term "Deficiency Amount" means with respect to any sale by SLOPI or
its affiliates of shares of Common Stock which were issued upon the conversion
of Preferred Stock, (i) the product of (x) the number of shares of Common Stock
sold by SLOPI or its affiliates in such sale at a per share price that is less
than the conversion price, times (y) the amount by which the per share sales
price is less than the conversion price. If shares of Common Stock are sold in a
Public Offering, then the net proceeds to selling shareholder (after reasonable
and customary underwriting discounts, commissions, placement fees and expenses
of sale, excluding expenses for SLOPI's and its affiliates' legal counsel) will
be deemed to be the sales price. If shares of Common Stock are sold in a Private
Placement or any transaction other than a Public Offering, then the sales price
shall be deemed to be the greater of (i) the actual sales price and (ii) the
average of the per share market value of such shares for the 30 trading days
immediately preceding (and excluding) the relevant date.
NO ADOPTION OF RIGHTS PLAN.
The Company has agreed that during the term of the Stock Rights and
Restrictions Agreement, the Company's Board of Directors shall not adopt any
shareholder rights plan or amend any rights plan without the approval of a
majority of the Shell Designee(s) then on the Board of Directors of the Company
unless such plan exempts SLOPI from all effects thereof. This provision will not
prohibit the Company from adopting any rights plan that might be applicable to
any other person nor will it exempt SLOPI or any of its affiliates from the
restrictions contained in the Articles of Incorporation or under Part Thirteen
of the TBCA with respect of certain takeover proposals. See " -- Anti-Takeover
Statutes and Similar Provisions".
TERMINATION.
The Stock Rights and Restrictions Agreement may be terminated: (i) by the
mutual written consent of the parties thereto; (ii) by SLOPI or the Company if
SLOPI and its affiliates shall have become the beneficial owner of less than 10%
of the Fully-Diluted Common Stock; (iii) by SLOPI if any party (other than SLOPI
and its affiliates) shall have proposed to the Company a Business Combination
Transaction and a majority of the Continuing Directors shall have approved such
proposal or shall have retained (or authorized the Company to retain) the
services of an investment banking firm and shall have instructed such investment
banking firm to solicit indications of interest with respect to a Business
Combination Transaction; provided that, if a proposal with respect to a Business
Combination Transaction referred to in this clause (iii) shall have been
terminated or withdrawn by the party who made such proposal and SLOPI shall have
withdrawn, terminated or permitted to expire any tender or exchange offer or
proposal with respect to a Business Combination Transaction made by SLOPI, then
the provisions of the Stock Rights and Restrictions Agreement shall thereafter
be reinstated and the Stock Rights and Restrictions Agreement shall thereafter
continue in full force and effect in accordance with its terms; (iv) by SLOPI if
(A) any party other than SLOPI and its affiliates shall have acquired beneficial
ownership of 20% (or, if lower, the percentage specified in the definition of
"Affiliated Shareholder" in Part Thirteen of the TBCA, as amended from time to
time) or more of the voting shares of the Company and such person shall not have
entered into an agreement with the Company containing restrictions and other
provisions at least as favorable to the Company as those contained in the Stock
Rights and Restrictions Agreement; (v) by SLOPI if the Continuing Directors
shall not constitute a majority of the Board of Directors of the Company; (vi)
by SLOPI if the Company shall have breached any material provision of the Stock
Rights and Restrictions Agreement, the LOPI Agreement, or the Certificate of
Designation or the Registration Rights Agreement and SLOPI shall have delivered
a written notice of such breach to the Company; provided that, if such breach is
reasonably susceptible of cure and the Company shall proceed diligently to cure
such breach, then the Stock Rights and Restrictions Agreement shall not be
terminated unless such breach shall not have been cured on or prior to the fifth
day after the delivery of written notice by SLOPI to the Company that the
Company has breached a material provision of any such instrument; or (vii) by
SLOPI if (x) the Company shall seek relief under any bankruptcy, insolvency,
receivership, custodianship, trusteeship, liquidation, reorganization,
composition, readjustment, moratorium or similar law (an "Insolvency Law"); or
(y) a proceeding or case shall be commenced under an Insolvency Law by a third
party against the Company and
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such proceeding or case shall continue undismissed or unstayed for 60 days; or
(z) an order for relief under an Insolvency Law shall be entered against the
Company.
Unless the Stock Rights and Restrictions Agreement has been earlier
terminated as provided above, the Stock Rights and Restrictions Agreement shall
terminate on the 10th anniversary of the Closing Date.
TERMS OF THE PREFERRED STOCK
The terms of the Preferred Stock will be set forth in the Certificate of
Designation, the form of which is included in this Proxy Statement as Annex E to
the LOPI Agreement. The following is a summary of the material terms and
conditions of the Preferred Stock.
DESIGNATION AND RANK.
The Preferred Stock will have an aggregate stated value of $135 million and
will rank prior to the Common Stock as to distribution of assets and payment of
dividends.
DIVIDENDS.
The Preferred Stock will be entitled to receive, when and as declared by
the Board of Directors, a cash dividend at the rate of 4% per annum on the
stated value per share; provided, however, dividends shall cease to accrue on an
incremental one third of the shares of Preferred Stock beginning after the third
anniversary of the Closing Date until the sixth anniversary of the Closing Date,
at which time dividends will no longer accrue on any shares of Preferred Stock.
Until paid in full, any dividend arrearages also shall accrue dividends at the
rate of 4% per annum. No dividends may be declared or paid on the Common Stock
until full cumulative dividends on the Preferred Stock have been
contemporaneously declared and paid or a sum sufficient for such payment is set
apart for payment to holders of the Preferred Stock.
VOTING.
Each share of Preferred Stock will be entitled to one vote per share on all
matters submitted to the shareholders of the Company for their approval. The
LOPI Agreement provides that the Preferred Stock issued in the LOPI Transaction
will be divided into a number of shares sufficient to allow the votes of all
shares of Preferred Stock to constitute 8% of the outstanding voting power
immediately following the LOPI Transaction. In addition, the affirmative vote or
consent of the holders of a majority of the shares of Preferred Stock is
required in order for the Company to effect any of the following: (i) the
authorization, creation or issuance, or any increase in the authorized or issued
amount, of any class of senior stock or parity stock or (ii) the amendment,
restatement, modification, alteration or repeal of any of the provisions of the
Certificate of Designation.
ELECTION OF DIRECTORS.
Until the earlier of (i) the termination of the Stock Rights and
Restrictions Agreement and (ii) SLOPI and its affiliates beneficially own less
than 21% of the outstanding Common Stock, the holders of the Preferred Stock
shall be entitled to elect a number of directors, such that after giving effect
to election of such persons, the number of directors elected by the holders of
Preferred Stock shall equal the product (rounded downward in the event of a
fractional number but in no event less than one) of (x) the total number of
directors constituting the entire Board of Directors multiplied by (y) 20%. So
long as there is a director elected by the holders of Preferred Stock on the
Company's Board of Directors, at least one director elected by the holders of
Preferred Stock is required to be a member of the Company's audit committee. See
"-- Stock Rights and Restrictions Agreement -- Board Member".
CONVERSION.
The Preferred Stock may be converted into Common Stock at any time by the
holder thereof. In addition, on or after the third anniversary of the Closing
Date, the Preferred Stock will automatically convert into Common Stock if the
mean per share market value of the Common Stock exceeds 150% of the conversion
price for 75 consecutive trading days; provided that SLOPI has the right to
withhold conversion on one share of Preferred Stock. The number of shares of
Common Stock to be issued upon conversion shall be calculated by dividing the
stated value of the shares of Preferred Stock by the conversion price. The
conversion price will be approximately $10.52 per share of Preferred Stock,
subject to adjustments based
37
<PAGE>
upon the number of shares of Common Stock that are issued and outstanding or
that underlie issued options and warrants immediately prior to the Closing Date.
The conversion price also is subject to change based upon certain anti-dilution
provisions.
REGISTRATION RIGHTS AGREEMENT
On the Closing Date, the Company and SLOPI are required to enter into the
Registration Rights Agreement, the form of which is included in this Proxy
Statement as Exhibit G to the LOPI Agreement. The Registration Rights Agreement
will facilitate the sale or transfer of the shares of Common Stock owned by
SLOPI. The material terms of the Registration Rights Agreement are summarized
below.
The shares of Common Stock to be issued upon consummation of the LOPI
Transaction and the shares of Common Stock that will be issued upon conversion
of the Preferred Stock will be restricted stock and will not be freely
transferable and tradable. These restrictions exist for three reasons. First,
such shares will not have been registered under the Securities Act of 1933, as
amended (the "Securities Act"). As a result, SLOPI must hold the stock for one
year after issuance before it is publicly transferable. Second, since SLOPI will
beneficially own a significant portion of the total outstanding Common Stock and
will be represented on the Company's Board of Directors, SLOPI may be deemed to
be an "affiliate" of the Company within the meaning of the Securities Act. As
a result of these two restrictions, after the first year following the issuance
of such shares and so long as SLOPI is an affiliate of the Company, SLOPI can
publicly sell during any three month period only a number of shares equal to the
greater of (a) the average of the preceding four weeks' trading volume and (b)
1% of the Company's total shares of outstanding Common Stock. These restrictions
can only be removed if there is an effective registration statement on file with
the Commission registering such shares for sale. Third, on the Effective Date of
the LOPI Transaction the Company and SLOPI will execute the Stock Rights and
Restrictions Agreement which, among other things, imposes contractual
limitations on the disposition of the shares beneficially owned by SLOPI.
ELIGIBLE SHARES.
The shares of Common Stock owned by SLOPI that will be subject to the
Registration Rights Agreement (collectively, the "Eligible Stock") are shares
of Common Stock (i) that have been issued pursuant to the LOPI Agreement; (ii)
that are issued upon conversion of the Preferred Stock issued pursuant to the
LOPI Agreement; (iii) that have been purchased by SLOPI upon the exercise of its
rights pursuant to the Stock Rights and Restrictions Agreement as described
above under " -- Stock Rights and Restrictions Agreement -- Right to
Participate in Certain Sales of Common Stock"; and (iv) that may be issued
pursuant to the anti-deficiency provisions described under " -- Stock Rights
and Restrictions Agreement -- Company Support of Certain Stock Sales".
DEMAND REGISTRATIONS.
SLOPI and its affiliates will have the right, subject to the limitations
set forth below, to require the Company to file a registration statement with
the Commission on ten separate occasions for the resale of all or a portion of
the Eligible Stock owned by it. The registration statement must contain
information about the number of shares SLOPI and its affiliates are selling, the
method of distribution of such shares and all current material information about
the Company.
The Company will not be obligated to file a requested registration in the
event that the aggregate number of shares of Eligible Stock to be included in
such requested registration is less than 2 1/2% of the issued and outstanding
Common Stock, or to prepare or file such registration statement or an amendment
or supplement thereto, and may suspend sales, at any time when the Company
reasonably determines (by action of the Company's Board of Directors or an
officer duly authorized by the Board of Directors to make such decision) that
the filing thereof at the time requested, or the offering of the Eligible Stock
pursuant thereto, would materially and adversely affect a pending or proposed
offering of securities of the Company, an acquisition, merger, recapitalization,
consolidation, reorganization or similar transaction relating to the Company or
negotiations, discussions or pending proposals with respect thereto or require
premature disclosure of information not otherwise required to be disclosed to
the potential detriment of the Company; provided, however, that such period of
sale or distribution shall resume after any such suspension for a
38
<PAGE>
number of days necessary to keep such registration effective for permitted sales
thereunder for a term of 90 days.
The filing of a registration statement, or any amendment or supplement
thereto, by the Company may not be deferred, and the sale and distribution of
shares may not be suspended, in each case pursuant to the foregoing provisions,
for more than 60 days after the abandonment or consummation (or the completion
of the distribution of securities in the case of a public offering) of any of
the proposals or transactions described therein or, in any event, for more than
120 days during any one year.
If a requested registration statement is filed and the Company otherwise
complies with its obligations hereunder, but the registration statement is
withdrawn by SLOPI due to a delay in the offering requested by the Company for a
period of more than 15 business days for the aforementioned reasons, then no
requested registration statement shall be deemed to have been filed for the
purpose of determining the number of demand registrations to which SLOPI is
entitled. In addition, after SLOPI and its affiliates have utilized five demand
registrations, the Company will not be required to register any Eligible Stock
unless at the time of the first filing with the Commission of such registration
statement, SLOPI and its affiliates and its underwriter(s) have reasonably
estimated that the price to the public of the Eligible Stock to be sold (before
discounts, commissions and expenses) will be equal to or greater than
$50,000,000.
A registration statement filed pursuant to a request by SLOPI and its
affiliates shall first include all Eligible Stock requested to be included by
SLOPI and its affiliates and, only after such inclusion, may include securities
of the Company being sold for the account of the Company, subject to customary
underwriter cutback provisions. In addition, no other holder of Common Stock
will be entitled to include shares in a registration requested by SLOPI and its
affiliates.
PIGGYBACK REGISTRATIONS.
If the Company at any time proposes to file a registration statement (other
than a registration statement filed pursuant to a request by SLOPI and its
affiliates discussed above) under the Securities Act relating to a Public
Offering of Common Stock to be sold for cash that would permit the registration
of Eligible Stock owned by SLOPI and its affiliates, SLOPI and its affiliates
will be entitled to include all or a portion of the Eligible Stock owned by them
in such registration statement and offering. However, if the managing
underwriter of the proposed Public Offering by the Company shall advise the
Company in writing that, in the reasonable opinion of the managing underwriter,
the distribution of the Eligible Stock requested by SLOPI and its affiliates to
be included in the registration statement concurrently with securities being
registered for sale by the Company would materially adversely affect the
distribution of such securities by the Company and SLOPI and its affiliates,
then the number of securities that are entitled to be included in the
registration and underwriting shall be allocated as follows: (i) in the event a
registration statement is being filed in connection with the exercise of
registration rights by a security holder other than SLOPI and its affiliates (an
"Other Holder"), all of any Other Holder's shares of Common Stock shall be
included in the registration and the remaining number of securities that are
entitled to be included in the registration shall be allocated (A) 80% to the
Company and any other shareholders (not including the Other Holder or SLOPI and
its affiliates) whose shares are to be included in such registration statement
and (B) 20% to SLOPI and its affiliates, and (ii) in the event the registration
is not being filed in connection with the exercise of registration rights of any
Other Holder, (a) 80% to the Company and any other shareholders (not including
SLOPI and its affiliates) whose shares are to be included in such registration
statement and (b) 20% to SLOPI and its affiliates.
FEES AND EXPENSES.
Underwriting discounts and commissions attributable to shares of Common
Stock offered on behalf of SLOPI and its affiliates plus the fees and expenses
of separate counsel for SLOPI and its affiliates incurred in connection with
effecting a registration statement including shares owned by SLOPI and its
affiliates pursuant to the Registration Rights Agreement shall be borne by SLOPI
and its affiliates. However, in the event SLOPI and its affiliates shall propose
to transfer shares to a person who has committed to purchase such shares
pursuant to a transaction not involving a Public Offering at a time when SLOPI
and its affiliates are authorized to sell such shares, and under the terms of
the Stock Rights and Restrictions Agreement such person would be required to
enter into an agreement containing transfer restrictions substantially similar
to
39
<PAGE>
those contained in the Stock Rights and Restrictions Agreement with the Company
but such person and the Company are unable to effect such agreement, and SLOPI
and its affiliates shall subsequently sell such shares pursuant to a Public
Offering, the Company shall pay the reasonable and customary commissions,
underwriters discounts and expenses of sale payable by SLOPI and its affiliates
in such sale, excluding expenses of legal counsel for SLOPI and its affiliates.
ASSIGNMENT.
The Registration Rights Agreement may be assigned by SLOPI, in whole or in
part, in connection with any transfer (one or more) of Eligible Stock that is
permitted under the Stock Rights and Restrictions Agreement except for transfers
(i) in a Public Offering or (ii) pursuant to Rule 144 or Rule 145; provided,
however, that any such transferee who is not an affiliate of SLOPI must acquire
from SLOPI a number of shares of Eligible Stock equal to at least 25% of the
Eligible Stock then held by SLOPI. In addition, in the event that any such
transferee is an E&P Company (as defined below), then any underwriter for such
E&P Company shall have customary access to perform its due diligence obligations
with respect to any registration statement subject to confidentiality
obligations that prohibit the sharing or disclosure of information with such E&P
Company, and no such E&P Company shall, by virtue of the Registration Rights
Agreement, have access to non-public information of the Company. In addition, no
transfer or assignment of the Registration Rights Agreement shall increase the
number of registrations which the Company is obligated to make under such
Agreement. An "E&P Company" is defined as to any person or entity who,
directly or indirectly, has as one of its material businesses the expoloration,
development or production of crude oil or natural gas.
TERMS OF THE SWEPI AGREEMENT
The asset purchase agreement governing the SWEPI Acquisition provides that
the Company will purchase the SWEPI Properties from SWEPI for $42.5 million in
cash, subject to adjustment for production, expenses and other items from
October 1, 1997. The asset purchase agreement contains representations,
warranties and covenants that are customary in oil and gas property
acquisitions, the material terms of which do not survive the closing of the
acquisition.
ACCOUNTING TREATMENT
The Company will account for the Shell Transactions in accordance with the
purchase method of accounting. Accordingly, results of operations from the Shell
Properties will be included in the Company's consolidated financial statements
beginning upon consummation of the Shell Transactions. As described under " The
LOPI Transactions -- The Company's Reasons for the LOPI Transaction -- Certain
Considerations; Anticipated Writedown", due to the acquisition of the Shell
Properties in accordance with the purchase method of accounting combined with
current pricing conditions the Company currently expects, assuming no changes in
prices since March 31, 1998 and no net changes in reserves since December 31,
1997, to record an additional impairment charge, beyond its expected impairment
on its existing oil and gas properties, of up to $125 million ($93 million net
of tax benefits) upon the closing of the Shell Transactions to reflect the
impairment of the Shell Properties for financial accounting purposes.
FEES AND EXPENSES
The Company and SLOPI will each bear its own expenses incurred in
connection with the Shell Transactions.
INTERESTS OF CERTAIN PERSONS IN THE LOPI TRANSACTION
In considering the recommendation of the Board of Directors of the Company
with respect to the LOPI Transaction, the Company's shareholders should be aware
that certain members of the Board of Directors and officers of the Company have
certain interests with respect the LOPI Transaction separate from their
interests as holders of Common Stock, including those referred to below. In
addition, Chase, the Company's financial advisor, will receive additional
compensation if the LOPI Transaction is effected. Affiliates of Chase also
provide financial services on behalf of the Company and Shell and its
affiliates. See "-- Opinion of Financial Advisors".
40
<PAGE>
GENERAL PARTNER WARRANTS.
In considering the recommendation of the Board of Directors of the Company
with respect to the LOPI Transaction, the Company's shareholders should be aware
that the terms of the General Partner Warrants held by Joseph A. Reeves, Jr.,
the Chief Executive Officer of the Company, and Michael Mayell, the President of
The Company, provide for adjustments to those warrants in the event of the
additional issuance of shares of Common Stock. Under the terms of the General
Partner Warrants held by them, following the issuance of the Common Stock in the
LOPI Transaction and the issuance of Common Stock upon conversion of all of the
Preferred Stock, each of them will be entitled to receive approximately 252,253
additional shares of Common Stock upon the exercise of their warrants without
the payment of any additional consideration. The value of these additional
shares of Common Stock, based on the closing sale price of the Common Stock on
May 18, 1998, is approximately $2.0 million for each of them.
The General Partner Warrants were issued to Messrs. Reeves and Mayell in
conjunction with certain transactions with Messrs. Reeves and Mayell that took
place in anticipation of the Company's consolidation in December 1990 and were
in partial consideration of various interests that Messrs. Reeves and Mayell had
as general partners in TMR Ltd., a predecessor entity of the Company. The
General Partner Warrants currently entitle Messrs. Reeves and Mayell to each
purchase 1% of the outstanding shares of Common Stock for $94,444, through
December 31, 2015. The number of shares of Common Stock purchasable upon the
exercise of each General Partner Warrant and its corresponding exercise price
are subject to customary anti-dilution adjustments. In addition to such
customary adjustments, the number of shares of Common Stock purchasable upon the
exercise of each General Partner Warrant and its corresponding exercise price
are subject to adjustment for any issuance of Common Stock by the Company such
that each warrant will permit the holder to purchase at the same aggregate
exercise price a number of shares of Common Stock equal to the percentage of
outstanding shares of the Common Stock that the holder could purchase before the
issuance. This adjustment will be triggered by the LOPI Transaction and the
conversion of the Preferred Stock. In connection with the LOPI Transaction, the
Company has agreed that its Board of Directors will consider proposals relating
to the payment of consideration to Messrs. Reeves and Mayell in exchange for
those warrants or the elimination of the aforementioned anti-dilution
provisions.
EMPLOYEE BENEFIT PLANS.
Consummation of the LOPI Transaction will constitute a "change in
control" for purposes of the Company's 1995 Long-Term Incentive Plan and 1997
Long-Term Incentive Plan. As a result, unvested options to purchase
approximately 232,000 shares of Common Stock will become immediately
exercisable, of which the Company's executive officers and directors own options
to purchase 78,000 shares. Consummation of the LOPI Transaction also will
increase the number of shares available for grant by the Board of Directors
pursuant to the 1997 Long-Term Incentive Plan by 2,500,000 shares pursuant to
the anti-dilution provisions of such plan.
APPRAISAL RIGHTS
The holders of the Common Stock are not entitled to dissenters' or
appraisal rights in connection with the LOPI Transaction.
REGULATORY APPROVAL
Other than the filing of the certificate of merger relating to the LOPI
Transaction with the Secretary of State of the State of Delaware on the
Effective Date and complying with federal and state securities laws, the Company
is not aware of any material federal or state regulatory requirements that must
be complied with or the approval of which must be obtained in connection with
the LOPI Transaction.
41
<PAGE>
ARTICLES OF INCORPORATION AMENDMENT
The Company's Board of Directors has unanimously approved the Articles of
Incorporation Amendment, which will increase the authorized Common Stock from
100,000,000 shares to 200,000,000 shares. Following the Closing Date, the
Company will have approximately million shares outstanding and million
shares reserved for issuance pursuant to outstanding options and warrants and
upon conversion of the Preferred Stock. In addition, the Required Future Share
Issuances may require the Company to issue additional shares of Common Stock to
SLOPI in the future. Although the Board of Directors does not have any current
plans or intention to issue any of the additional shares of Common Stock that
would be authorized pursuant to the Articles of Incorporation Amendment, it
believes that the increase in the number of authorized shares of Common Stock
will insure that the Company has sufficient authorized shares of Common Stock to
allow the Company to consummate future acquisitions and public offerings
utilizing Common Stock and for the Board of Directors to declare future stock
dividends and effectuate stock splits. Unless required by law, regulatory
authorities or applicable rules of the NYSE, it is not anticipated that the
Company will seek any future authorization by a vote of shareholders for the
issuance of any shares of Common Stock. In this regard, it should be noted that
approval of the LOPI Transaction also will constitute approval of any Required
Future Share Issuances for purposes of the rules of the NYSE. Shareholders of
the Company do not have any statutory preemptive rights to purchase additional
shares of Common Stock, whether now or hereafter authorized.
The increase in the authorized number of shares of Common Stock will be
effected through an amendment to the introductory paragraph of Article Four of
the Articles of Incorporation. As amended, such paragraph would read as follows:
"The Corporation shall have the authority to issue two (2)
classes of stock, and the total number authorized shall be Two
Hundred Million (200,000,000) shares of Common Stock, par value of
One Cent ($0.01) per share ("Common Stock"), and Twenty-five
Million (25,000,000) shares of Preferred Stock, par value of One
Dollar ($1.00) per share ("Preferred Stock"). A description of
the different classes of stock of the Corporation and a statement
of the designations and the powers, preferences and rights, and the
qualifications, limitations or restrictions thereof, in respect to
each class of such stock are as follows:"
The Company intends to restate its entire Articles of Incorporation
following approval of the Articles of Incorporation Amendment so that the
Articles of Incorporation, including all amendments thereto, are reflected in a
single document filed with the Secretary of State of Texas.
The affirmative vote of the holders of a majority of the outstanding shares
of Common Stock is required for approval of the Articles of Incorporation
Amendment. Abstentions and broker non-votes will not be treated as either a vote
for or against the proposal. However, because the proposal requires the
affirmative vote of a majority of the outstanding shares, abstentions and broker
non-votes will have the same effect as a vote against the proposal.
THE COMPANY'S BOARD OF DIRECTORS BELIEVES THAT THE ARTICLES OF
INCORPORATION AMENDMENT IS IN THE BEST INTERESTS OF THE COMPANY AND THE
COMPANY'S SHAREHOLDERS AND RECOMMENDS THAT THE HOLDERS OF COMMON STOCK VOTE
"FOR" THE ARTICLES OF INCORPORATION AMENDMENT.
42
<PAGE>
TMRC SELECTED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following selected financial information of the Company has been
derived from the financial statements of the Company included elsewhere in this
Proxy Statement and is qualified by reference thereto and should be read in
conjunction therewith. See "Financial Statements".
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
---------------------- ----------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS INFORMATION:
Total revenues..................... $ 11,897 $ 16,660 $ 58,333 $ 56,733 $ 38,230 $ 17,752 $ 18,549
Depletion and depreciation......... 6,259 6,231 26,337 25,342 18,491 7,788 7,494
Net income (loss) applicable to
common shareholders............. (40,927) 5,644 (28,541) 16,692 7,458 1,661 (1,980)
Net income (loss) per share:
Basic........................... $ (1.22) $ 0.17 $ (.85) $ .50 $ .25 $ .07 $ (.11)
Diluted......................... $ (1.22) $ 0.16 $ (.85) $ .47 $ .23 $ .06 $ (.11)
Weighted average common shares
outstanding..................... 33,451 33,363 33,383 33,399 30,207 24,485 18,815
Cash dividends declared per share.. -- -- -- -- -- -- --
AS OF DECEMBER 31,
AS OF ----------------------------------------------------------
MARCH 31, 1998 1997 1996 1995 1994 1993
---------------------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED)
BALANCE SHEET INFORMATION:
Total assets....................... $ 269,661 $ 292,558 $ 245,757 $ 193,134 $ 126,124 $ 82,067
Long-term debt, inclusive of
current maturities.............. 125,073 107,195 42,000 15,500 23,500 9,600
Stockholders' equity............... 104,846 145,102 171,432 154,924 93,685 66,899
Impairment of oil and gas
properties...................... $ 40,278 -- $ 24,141 -- -- --
43
</TABLE>
<PAGE>
SHELL PROPERTIES SELECTED FINANCIAL DATA
(IN THOUSANDS)
The following selected financial information of the LOPI Properties and the
SWEPI Properties has been derived from the statements of revenues and direct
operating expenses of the LOPI Properties and the SWEPI Properties included
elsewhere in this Proxy Statement. This selected financial information is
qualified by reference to such statements and the notes thereto and should be
read in conjunction therewith. See "Financial Statements".
LOPI PROPERTIES
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
-------------------- -------------------------------
1998 1997 1997 1996 1995
--------- --------- --------- --------- ---------
UNAUDITED
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS INFORMATION:
Revenues........................ $ 14,335 $ 23,835 $ 85,334 $ 92,917 $ 92,201
Direct operating expenses....... 4,638 5,884 23,309 28,724 22,219
--------- --------- --------- --------- ---------
Revenues in excess of direct
operating expenses............ $ 9,697 $ 17,951 $ 62,025 $ 64,193 $ 69,982
========= ========= ========= ========= =========
SWEPI PROPERTIES
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
-------------------- -------------------------------
1998 1997 1997 1996 1995
--------- --------- --------- --------- ---------
UNAUDITED
STATEMENT OF OPERATIONS INFORMATION:
Revenues........................ $ 2,804 $ 4,719 $ 15,694 $ 18,640 $ 14,193
Direct operating expenses....... 291 391 1,979 4,456 3,364
--------- --------- --------- --------- ---------
Revenues in excess of direct
operating expenses............ $ 2,513 $ 4,328 $ 13,715 $ 14,184 $ 10,829
========= ========= ========= ========= =========
</TABLE>
44
<PAGE>
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The LOPI Transaction will be consummated following approval thereof by the
shareholders of the Company at the Special Meeting. The SWEPI Acquisition is
expected to be consummated immediately after the consummation of the LOPI
Transaction. The Unaudited Pro Forma Statements of Operations for the year ended
December 31, 1997 and the three months ended March 31, 1998 give effect to the
LOPI Transaction and the SWEPI Acquisition as if each had occurred on January 1,
1997 and January 1, 1998, respectively, and the Unaudited Pro Forma Balance
Sheet gives effect to the LOPI Transaction and SWEPI Acquisition as if each had
occurred on March 31, 1998.
The Unaudited Pro Forma Statements of Operations and Unaudited Pro Forma
Balance Sheet should be read in conjunction with the notes thereto and the
historical financial statements of the Company and the statements of revenues
and direct operating expenses of the Shell Properties and the notes thereto
included elsewhere in this Proxy Statement.
The pro forma adjustments to give effect to the various events described
above are based upon currently available information and upon certain
assumptions that management of the Company believes are reasonable. The LOPI
Transaction and the SWEPI Acquisition will be accounted for by the Company under
the purchase method of accounting, and the assets and liabilities of LOPI and
the oil and gas property interests and other assets acquired in the SWEPI
Acquisition will be recorded at their estimated fair market values at the date
of their respective acquisitions. The adjustments included in the Unaudited Pro
Forma Statements of Operations and in the Unaudited Pro Forma Balance Sheet
reflect the Company's preliminary determination of these and other necessary
adjustments based upon available information. There can be no assurance that the
actual adjustments will not vary significantly from the estimated adjustments
reflected in the Unaudited Pro Forma Statements of Operations and Unaudited Pro
Forma Balance Sheet.
The unaudited pro forma combined financial information does not purport to
be indicative of the financial position or results of operations that would
actually have occurred if both the LOPI Transaction and the SWEPI Acquisition
had occurred as presented in such statements or that may be obtained in the
future. In addition, future results may vary significantly from the results
reflected in such statements due to general economic conditions, oil and gas
commodity prices, the Company's ability to successfully integrate the operations
acquired in the recent merger with Cairn and in the Shell Transactions and
several other factors beyond the Company's control. See "Forward-Looking
Statements".
45
<PAGE>
PRO FORMA BALANCE SHEET
UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
AS OF
MARCH 31, PRO FORMA
1998 AS OF
--------- PRO FORMA MARCH 31,
TMRC ADJUSTMENTS 1998
--------- ------------ ----------
ASSETS
CURRENT ASSETS: (42,500)(A)
Cash and cash equivalents..... $ 6,532 $ 42,500(B) $ 6,532
Accounts receivable........... 12,051 -- 12,051
Due from affiliates........... 3,256 -- 3,256
Prepaid expenses and other.... 791 -- 791
--------- ------------ ----------
Total current assets..... 22,630 -- 22,630
--------- ------------ ----------
PROPERTY AND EQUIPMENT:
Oil and natural gas properties... 433,103 343,090(A) 776,193
Land............................. 478 -- 478
Equipment........................ 4,864 -- 4,864
--------- ------------ ----------
438,445 343,090 781,535
Less accumulated depletion and
depreciation.................. (192,256) (125,049)(C) (317,305)
--------- ------------ ----------
246,189 218,041 464,230
OTHER ASSETS, net................ 842 -- 842
--------- ------------ ----------
$ 269,661 $ 218,041 $487,702
========= ============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.............. $ 7,845 $ -- $ 7,845
Revenue and royalties payable. 4,543 -- 4,543
Accrued liabilities........... 21,149 -- 21,149
Current maturities of long-term
debt........................ 122 -- 122
--------- ------------ ----------
Total current
liabilities.............. 33,659 -- 33,659
--------- ------------ ----------
LONG-TERM DEBT................... 124,951 42,500(B) 167,451
OTHER LIABILITIES................ -- 2,771(A) 2,771
COMMITMENTS AND CONTINGENCIES.... -- -- --
DEFERRED TAX LIABILITIES......... -- 66,702(A) 34,282
(32,420)(C)
LITIGATION LIABILITIES........... 6,205 -- 6,205
STOCKHOLDERS' EQUITY:
Preferred stock............... -- 135,000(A) 135,000
Common stock.................. 337 121(A) 458
Additional paid-in capital.... 172,164 95,996(A) 268,160
Accumulated earnings
(deficit)................... (67,033) (92,629) (159,662)
Unamortized deferred
compensation................ (321) -- (321)
--------- ------------ ----------
105,147 138,488 243,635
Treasury stock................ (301) -- (301)
--------- ------------ ----------
Total stockholders'
equity................... 104,846 138,488 243,334
--------- ------------ ----------
$ 269,661 $ 218,041 $487,702
========= ============ ==========
46
<PAGE>
PRO FORMA STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1998 PRO FORMA
THREE MONTHS
---------------------------------- PRO ENDED
LOPI SWEPI FORMA MARCH 31,
TMRC PROPERTIES PROPERTIES ADJUSTMENTS 1998
-------- ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
REVENUES
Oil and natural gas............. $ 11,766 $ 14,335 $ 2,804 $ -- $ 28,905
Interest and other.............. 131 -- -- -- 131
-------- ---------- ---------- ----------- ------------
11,897 14,335 2,804 -- 29,036
COSTS AND EXPENSES:
Oil and natural gas operating... 1,978 4,638 291 -- 6,907
Depletion and depreciation...... 6,259 -- -- 18,058(D) 24,317
General and administrative...... 1,977 -- -- -- (E) 1,977
Interest........................ 2,332 -- -- 790(F) 3,122
Impairment of long-lived
assets........................ 40,278 -- -- 106,991(C) 147,269
-------- ---------- ---------- ----------- ------------
52,824 4,638 291 125,839 183,592
-------- ---------- ---------- ----------- ------------
INCOME (LOSS) BEFORE INCOME TAXES.... $(40,927) 9,697 2,513 (125,839) (154,556)
NET TAX EXPENSE (BENEFIT)............ -- -- -- (32,420)(C) (32,420)
-------- ---------- ---------- ----------- ------------
NET INCOME (LOSS).................... $(40,927) 9,697 2,513 (93,419) (122,136)
DIVIDEND REQUIREMENT ON PREFERRED
STOCK.............................. -- -- -- (1,350)(G) (1,350)
-------- ---------- ---------- ----------- ------------
NET INCOME (LOSS) APPLICABLE TO
COMMON SHAREHOLDERS................ $(40,927) $ 9,697 $ 2,513 $ (94,769)(E) $ (123,936)
======== ========== ========== =========== ============
NET INCOME (LOSS) PER SHARE:
Basic........................... $ (1.22) (E) $ (2.71)
======== ============
Diluted......................... $ (1.22) (E) $ (2.71)
======== ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES:
Outstanding..................... 33,451 12,082(A) 45,533
======== =========== ============
Assuming dilution............... 33,451 12,082(H) 45,533
======== =========== ============
</TABLE>
47
<PAGE>
PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 PRO FORMA
------------------------------------- PRO YEAR ENDED
LOPI SWEPI FORMA DECEMBER 31,
TMRC PROPERTIES PROPERTIES ADJUSTMENTS 1997
---------- ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
REVENUES
Oil and natural gas............. $ 57,640 $ 85,334 $ 15,694 $ -- $ 158,668
Interest and other.............. 693 -- -- -- 693
---------- ---------- ---------- ----------- ------------
58,333 85,334 15,694 -- 159,361
---------- ---------- ---------- ----------- ------------
COSTS AND EXPENSES:
Oil and natural gas operating... 7,845 23,309 1,979 -- 33,133
Depletion and depreciation...... 26,337 -- -- 59,554(D) 85,891
General and administrative...... 7,192 -- -- -- (E) 7,192
Interest........................ 5,149 -- -- 3,161(F) 8,310
Impairment of long-lived
assets........................ 24,141 -- -- 62,309(C) 86,450
Merger expenses................. 9,998 -- -- -- 9,998
Litigation expenses and loss
provision..................... 6,205 --c -- -- 6,205
---------- ---------- ---------- ----------- ------------
86,867 23,309 1,979 125,024 237,179
---------- ---------- ---------- ----------- ------------
INCOME (LOSS) BEFORE INCOME TAXES.... (28,534) 62,025 13,715 (125,024) (77,818)
NET TAX EXPENSE (BENEFIT)............ 7 -- -- (27,209(C) (27,200)
---------- ---------- ---------- ----------- ------------
NET INCOME (LOSS).................... (28,541) 62,025 13,715 (97,817) (50,618)
DIVIDEND REQUIREMENT ON PREFERRED
STOCK.............................. -- -- -- (5,400)(G) (5,400)
---------- ---------- ---------- ----------- ------------
NET INCOME (LOSS) APPLICABLE TO
COMMON SHAREHOLDER................. $ (28,541) $ 62,025 $ 13,715 $ (103,217)(E) $ (56,018)
========== ========== ========== =========== ============
NET INCOME (LOSS) PER SHARE:
Basic........................... $ (0.85) (E) $ (1.23)
========== ============
Diluted......................... $ (0.85) (E) $ (1.23)
========== ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES:
Outstanding..................... 33,383 12,082(A) 45,465
========== =========== ============
Assuming dilution............... 33,383 12,082(H) 45,465
========== =========== ============
</TABLE>
48
<PAGE>
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
(A) To record the purchase price of $343 million to acquire the LOPI and
the SWEPI Properties, consisting of ($ in millions, except per share data):
$42.5 Cash
135.0 Issuance of Preferred Stock ($135 million stated value)
96.1 Issuance of 12,082,030 shares of Common Stock
2.7 Assumption of certain liabilities
66.7 Deferred income taxes related to acquired properties
- ---------
$343.0
=========
Note: The $7.96 per share value of Common Stock is based on the
average closing price of the Common Stock on the NYSE several
days before and after execution of the LOPI Agreement.
(B) To record $42.5 million of additional borrowings to finance the cash
consideration paid for the SWEPI Properties.
(C) To record adjustment relating to the impairment charge and deferred
income taxes related to the Shell Properties. See "The LOPI Transaction -- The
Company's Reasons for the LOPI Transaction -- Certain Considerations;
Anticipated Writedown".
(D) To adjust depreciation and depletion expense related to the
acquisition of the LOPI Properties and the SWEPI Properties.
(E) The unaudited pro forma statements of operations do not include any
adjustments relating to additional general and administrative expenses that
would have been incurred by the Company during the year ended December 31, 1997
and the three months ended March 31, 1998, had the Shell Transactions been
consummated on January 1, 1997. The Company currently estimates that general and
administrative expenses will increase annually by approximately $3.5 million to
$4.0 million following consummation of the Shell Transactions.
(F) To record interest on additional borrowings of $42.5 million to
finance the cash consideration paid for the SWEPI Properties.
(G) To accrue a 4% dividend on the $135 million stated value of the
Preferred Stock.
(H) Since the unaudited pro forma statements of operations indicate a net
loss, conversion of the Preferred Stock is deemed to be antidilutive and is not
considered in the earnings per share calculation. In the event the Company would
have had pro forma net income, the Common Stock to be issued upon conversion of
the Preferred Stock would have been included in the calculation of diluted
earnings per share and would have resulted in a significant reduction in pro
forma diluted earnings per share and pro forma basic earnings per share.
49
<PAGE>
PRO FORMA COMBINED SUPPLEMENTAL OIL AND GAS RESERVE AND STANDARDIZED MEASURE
INFORMATION
The following is a summary of pro forma quantities of proved reserves
prepared by adjusting historical quantities for the effects of the merger with
LOPI and the acquisition of the SWEPI Properties.
<TABLE>
<CAPTION>
PRO FORMA
YEAR ENDED DECEMBER 31, 1997 YEAR ENDED
------------------------------ PRO FORMA DECEMBER 31,
TMRC LOPI SWEPI ADJUSTMENTS(1) 1997
-------- -------- -------- -------------- ------------
<S> <C> <C> <C> <C>
Pro Forma Estimated Quantities of
Proved Reserves
Oil (MBbls)
BALANCE AT DECEMBER 31, 1996......... 9,416 17,317 860 -- 27,593
Production......................... (914) (2,443) (69) -- (4,417)
Revisions of previous estimates.... (761) (3,694) 38 -- (1,339)
Purchase of reserves............... -- 343 -- -- 343
Extensions, discoveries and
improved recovery............... 1,990 788 -- -- 2,778
Pro forma adjustment............... -- -- -- (4,309) (4,309)
-------- -------- -------- -------------- ------------
BALANCE AT DECEMBER 31, 1997......... 9,731 12,311 829 (4,309) 18,562
Natural Gas (MMcf)
BALANCE AT DECEMBER 31, 1996......... 107,406 103,872 57,543 -- 268,821
Production......................... (14,603) (14,032) (4,620) -- (33,255)
Revisions of previous estimates.... (13,862) (12,875) (31,665) -- (58,402)
Purchase of reserves............... -- 63 -- -- 63
Extensions, discoveries and
improved recovery............... 31,844 4,438 1,777 -- 38,059
Pro forma adjustment............... -- -- -- (20,952) (20,952)
-------- -------- -------- -------------- ------------
BALANCE AT DECEMBER 31, 1997......... 110,785 81,466 23,035 (20,952) 194,334
Pro Forma Estimated Quantities of
Proved Developed Reserves
Oil (MBbls)........................ 5,305 10,816 829 (4,506) 12,444
Natural Gas (MMcf)................. 81,500 76,776 23,035 (30,854) 150,456
- ------------
</TABLE>
(1) See footnote (1) on page 52.
50
<PAGE>
The following is a summary of pro forma standardized measure of discounted
future net cash flows related to the Company's pro forma proved oil, natural gas
and natural gas liquids reserves and includes the effects of the acquisition of
the LOPI Properties and the SWEPI Properties. The additions to proved reserves
from new discoveries and extension could vary significantly from year to year.
Additionally, the impact of changes to reflect current prices and costs of
reserves proved in prior years could be significant. Accordingly, the
information presented below should neither be viewed as an estimate of the fair
value of the Company's oil and natural gas properties following the Shell
Transactions nor should it be considered indicative of any trends.
<TABLE>
<CAPTION>
PRO FORMA
YEAR ENDED DECEMBER 31, 1997 YEAR ENDED
-------------------------------- PRO FORMA DECEMBER 31,
TMRC LOPI SWEPI ADJUSTMENTS(1) 1997
--------- --------- -------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Pro Forma Standardized Measure of
Discounted Future Net Cash Flows
Future cash flows.................... $ 451,157 $ 415,124 $ 73,736 $ (97,928) 842,089
Future production and development
costs.............................. (109,381) (180,980) (18,069) 85,501 (222,929)
--------- --------- -------- --------------- ------------
Future net cash flows................ 341,776 234,144 55,667 (12,427) 619,160
Discount to present value at 10%
percent annual rate................ (127,859) (67,806) (15,223) 10,397 (200,491)
--------- --------- -------- --------------- ------------
Standardized measure (before income
taxes) of future net cash flows.... $ 213,917 $ 166,338 $ 40,444 $ (2,030) $418,669
========= ========= ======== =============== ============
Pro Forma Changes in Standardized
Measure of Discounted Future Net
Cash Flows
BALANCE AT BEGINNING OF
PERIOD............................. $ 394,507 $ 437,018 $125,944 $ -- 957,469
Sale of oil and natural gas, net of
production costs................ (49,796) (62,025) (13,715) -- (125,536)
Changes in prices and production
costs........................... (165,406) (195,318) (52,021) -- (412,745)
Purchases of reserves in place..... -- 2,282 -- -- 2,282
Revisions of previous quantity
estimates....................... (28,574) (41,377) (41,245) -- (111,196)
Current year discoveries, extension
and improved recovery........... 50,274 11,222 2,294 -- 63,790
Changes in estimated future
development costs............... (3,564) -- -- -- (3,564)
Development cost incurred during
the period...................... 27,666 13,602 3,584 -- 44,852
Accretion of discount.............. 39,451 43,702 12,594 -- 95,747
Changes in production rates
(timing) and other.............. (50,641) (42,768) 3,009 -- (90,400)
Pro forma adjustment............... -- -- -- (2,030) (2,030)
--------- --------- -------- --------------- ------------
Net change......................... (180,590) (270,680) (85,500) (2,030) (538,800)
--------- --------- -------- --------------- ------------
BALANCE AT END OF PERIOD........... $ 213,917 $ 166,338 $ 40,444 $ (2,030) $418,669
========= ========= ======== =============== ============
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
51
<PAGE>
- ------------
(1) The differences in the estimated proved reserves of the Shell Properties, as
reflected in the Statements of Revenues and Direct Operating Expenses for
each of the LOPI Properties and the SWEPI Properties (the "Shell Financial
Statements"), and as estimated in the T. J. Smith report relate to, among
other factors, differences between Shell and the Company in depletion and
development strategies and related expenditures for proved developed
reserves. Other reserve differences relate to differing assumptions as to
decline curves, volumetric analysis and other engineering judgments inherent
in the reserve estimating process.
The reserve estimates reflected in the Shell Financial Statements assume
$199 million in future production and development costs for the Shell
Properties while T. J. Smith's estimates assume only $114 million of such
costs will be expended by the Company for such properties. Approximately
one-half of the difference in estimated future development and production
costs relates to (i) differences in the amount of expenditures for proved
developed non-producing reserves, which may be produced from existing wells
but require additional expenditures for recompletion efforts and related
operating expenses and (ii) differences in estimated production costs
related to reserves which T.J. Smith's estimates do not assume will be
produced. Shell's expenditure estimates include amounts that, absent the
Shell Transactions, it anticipated making for future production and
development of these reserves. Because of its higher cost of capital and
focus on larger exploration prospects, the Company does not currently plan
to make such expenditures and produce such reserves. Rather, the Company
currently intends to concentrate its expenditures with respect to the Shell
Properties on an accelerated exploration and development program that is
focused on the unproved properties that the Company believes provide higher
potential ultimate returns than the lower risk and lower volume proved
developed properties. The remaining difference in estimated expenditures
relates primarily to differences in estimated plugging and abandonment costs
that will be incurred at the conclusion of operation of these fields due to
differing assumptions between Shell and the Company on the plan of
abandonment or disposition of the properties prior to abandonment.
52
<PAGE>
MARKET PRICE OF COMMON STOCK AND DIVIDEND INFORMATION
The Common Stock is traded on the NYSE under the symbol "TMR". Prior to
April 3, 1997, the Common Stock was traded on the American Stock Exchange
("AMEX"). The following table sets forth the range of high and low sale prices
for the Common Stock for the periods indicated, as reported on the NYSE and
AMEX.
HIGH LOW
--------- ---------
TWELVE MONTHS ENDED DECEMBER 31, 1996
Quarter ended March 31, 1996.... 14 10 3/4
Quarter ended June 30, 1996..... 13 9
Quarter ended September 30,
1996............................ 15 1/8 9 5/16
Quarter ended December 31,
1996............................ 18 1/2 14 5/8
TWELVE MONTHS ENDED DECEMBER 31, 1997
Quarter ended March 31, 1997.... 16 7/8 12 1/2
Quarter ended June 30, 1997..... 13 3/8 11 1/8
Quarter ended September 30,
1997............................ 14 1/8 9 7/8
Quarter ended December 31,
1997............................ 14 1/8 8
TWELVE MONTHS ENDED DECEMBER 31, 1998
Quarter ended March 31, 1998.... 9 1/2 7 1/4
(Through May 18, 1998).......... 8 9/16 7 5/8
The closing sales price of the Common Stock on the NYSE on March 27, 1998,
the day preceding the public announcement of the signing of the LOPI Agreement,
was $8.00. The closing price of the Common Stock on the NYSE on May 18, 1998,
was $7 15/16 per share.
Following the Shell Transactions, the Common Stock will continue to be
traded on the NYSE under the symbol "TMR".
The Company has not declared or paid any dividends during the past three
fiscal years and does not intend to pay cash dividends on the Common Stock in
the foreseeable future. The Company currently intends to retain its cash for the
continued development of its business, including exploratory and development
drilling activities. The Company also is currently restricted under its credit
agreement from expending more than $500,000 in the aggregate for cash dividends
on Common Stock or for purchases of shares of Common Stock without the prior
consent of the lenders. The lenders have agreed to permit the payment of
dividends on the Preferred Stock, subject to such payment not otherwise creating
an event of default under the credit agreement.
NYSE LISTING
As a condition to the closing of the LOPI Transaction, the shares of Common
Stock to be issued upon consummation of the LOPI Transaction and the shares of
Common Stock to be issued upon conversion of the Preferred Stock issued in the
LOPI Transaction will be approved for listing on the NYSE, subject to official
notice of issuance.
53
<PAGE>
STOCK OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND
MANAGEMENT OF THE COMPANY
The following table sets forth information, as of the Record Date, with
respect to the beneficial ownership of Common Stock by (a) each director, (b)
each executive officer required to be named in the Summary Compensation Table
contained in the Company's Annual Report on Form 10-K, as amended, (c) each
shareholder known by the Company to be the beneficial owner of more than 5% of
the Common Stock and (d) all officers and directors of the Company as a group.
<TABLE>
<CAPTION>
NO. OF SHARES
TO BE
NO. OF ACQUIRED
SHARES IN THE PERCENT
BENEFICIALLY LOPI AFTER LOPI
NAME OWNED(1) PERCENT(1) TRANSACTION TRANSACTION
- ------------------------------------- ------------ ---------- ------------- -----------
<S> <C> <C> <C> <C>
Joseph A. Reeves, Jr.(2)............. 1,630,817 4.7% -- 3.5%
15995 N. Barkers Landing
Suite 300
Houston, Texas 77079
Michael J. Mayell(3)................. 1,534,689 4.4 -- 3.3
15995 N. Barkers Landing
Suite 300
Houston, Texas 77079
P. Richard Gessenger(4).............. 10,750 * -- *
Kevin McMichael(5)................... 6,250 * -- *
Lloyd V. DeLano(6)................... 46,543 * -- *
James T. Bond(7)..................... 18,500 * -- *
Joe E. Kares(8)...................... 51,250 * -- *
Gary A. Messersmith(9)............... 7,700 * -- *
Jack A. Prizzi(10)................... 61,500 * -- *
All executive officers and directors
as a group (9 persons) (2), (3),
(4), (5), (6), (7), (8), (9),
(10)............................... 3,367,999 9.3 7.0
SLOPI(11)............................ -- -- 24,909,030 42.7
Mellon Bank Corporation(12).......... 2,815,603 8.4 6.2
Phemus Corporation(13)............... 2,785,860 8.3 6.1
KAIM Non-Traditional, L.P.(14)....... 2,068,576 6.2 4.5
Warburg Pincus Counsellors,
Inc.(15)........................... 1,967,050 5.9 4.3
- ------------
</TABLE>
* Less than 1%
(1) Shares of Common Stock which are not outstanding but which can be acquired
by a person upon exercise of an option or warrant within 60 days are deemed
outstanding for the purpose of computing the number and percentage of
outstanding shares beneficially owned by such person.
(2) Includes 335,590 shares, 714,000 shares and 224,750 shares of Common Stock
that Mr. Reeves has the right to acquire upon the exercise of the General
Partner Warrant, executive officer warrants, and stock options under the
Company's stock option plans, respectively. Mr. Reeves' ownership following
the LOPI Transaction reflects the adjustment to the General Partner
Warrants currently held by him.
(3) Includes 335,590 shares, 714,000 shares and 224,750 shares of Common Stock
that Mr. Mayell has the right to acquire upon the exercise of the General
Partner Warrant, executive officer warrants and stock options under the
Company's stock option plans, respectively. Mr. Mayell's ownership
following the LOPI Transaction reflects the adjustment to the General
Partner Warrants currently held by him.
(4) Includes 6,250 shares of Common Stock that Mr. Gessenger has the right to
acquire upon the exercise of stock options under the Company's stock option
plans. Excludes 18,750 shares underlying options not exercisable within 60
days.
(5) Includes 6,250 shares of Common Stock that Mr. McMichael has the right to
acquire upon the exercise of stock options under the Company's stock option
plans. Excludes 18,750 shares underlying options not exercisable within 60
days.
(6) Includes 44,376 shares of Common Stock that Mr. DeLano has the right to
acquire upon the exercise of stock options under the Company's stock option
plans. Excludes 10,625 shares underlying options not exercisable within 60
days.
54
<PAGE>
(7) Includes 7,500 shares of Common Stock that Mr. Bond has the right to
acquire upon the exercise of stock options under the Company's stock option
plans. Excludes 22,500 shares underlying options not exercisable within 60
days.
(8) Includes 36,250 shares of Common Stock that Mr. Kares has the right to
acquire upon the exercise of stock options under the Company's stock option
plans. Excludes 3,750 shares underlying options not exercisable within 60
days.
(9) Includes 7,500 shares of Common Stock that Mr. Messersmith has the right to
acquire upon the exercise of stock options under the Company's stock option
plans. Excludes 22,500 shares underlying options not exercisable within 60
days.
(10) Includes 43,750 shares of Common Stock that Mr. Prizzi has the right to
acquire upon the exercise of stock options under the Company's stock option
plans. Excludes 11,250 shares underlying options not exercisable within 60
days.
(11) SLOPI's address is P.O. Box 7986, Newark, Delaware. Includes 12,082,030
shares of Common Stock issued at the closing as well as an estimated
12,827,000 shares of Common Stock issued upon conversion of the Preferred
Stock. The calculation of SLOPI's beneficial ownership following
consummation of the LOPI Transaction assumes that the Preferred Stock has
been converted to Common Stock but does not assume that any other
outstanding options or warrants have been exercised. On a Fully-Diluted
basis, which assumes that all outstanding options and warrants are
exercised, SLOPI's beneficial ownership would be 39.9%.
(12) The business address of Mellon Bank Corporation is One Mellon Bank Center,
Pittsburgh, Pennsylvania 15258.
(13) The business address of Phemus Corporation is 600 Atlantic Avenue, Boston,
Massachusetts 02210-2203. Includes 20,000 shares issued pursuant to the
exercise of stock options exercisable within 60 days.
(14) The business address of KAIM Non-Traditional, L.P. is 1800 Avenue of the
Stars, 2nd Floor, Los Angeles, California 90067.
(15) The business address of Warburg Pincus Counsellors, Inc. is 466 Lexington
Avenue, New York, New York 10017.
RELATIONSHIPS WITH INDEPENDENT PUBLIC ACCOUNTANTS
It is expected that representatives of Ernst & Young LLP will be present at
the Special Meeting to respond to appropriate questions of shareholders and to
make a statement if they so desire.
STOCKHOLDERS' PROPOSALS
Any proposals of shareholders of Common Stock intended to be presented at
the Annual Meeting of Shareholders of the Company to be held in 1998 must be
received by the Company, addressed at its principal executive offices, 15995 N.
Barkers Landing, Suite 300, Houston, Texas 77079, no later than , 1998,
to be considered for inclusion in the proxy statement and form of proxy relating
to that meeting.
55
<PAGE>
GLOSSARY OF DEFINED TERMS
The following capitalized terms used in this Proxy Statement shall have the
meanings assigned to them below. Certain of the definitions set forth below
apply to the indicated terms commonly used in the oil and natural gas industry
and in this Proxy Statement. Unless otherwise noted herein, MCFEs are determined
using the ratio of six Mcf of natural gas to one barrel of oil, condensate or
natural gas liquids, which approximates the relative energy content of crude
oil, condensate and natural gas liquids as compared to natural gas. Prices have
historically been substantially higher for crude oil than natural gas on an
energy equivalent basis. Gross acres shall mean those acres in which LOPI, SWEPI
or the Company, as the case may be, shall have any percentage of the working
interest. Net acres or wells shall be determined by multiplying gross acres or
wells by the relevant working percentage interest therein.
"Bbl" means barrel and "Bbls" means barrels.
"Bcf" means billion cubic feet.
"BCFE" means billion cubic feet of natural gas equivalent.
"Btu" means British Thermal Unit.
"Business Combination Transaction" means a merger, consolidation,
"business combination" as defined in Part Thirteen of the TBCA as in
effect on the date of the LOPI Agreement, compulsory share exchange,
recapitalization or other transaction in which TMRC is a constituent
corporation or to which TMRC is a party and pursuant to which the shares of
Common Stock are exchanged for cash, securities or other property, or a
sale of all or substantially all of the assets of TMRC and its
subsidiaries, taken as a whole; provided that none of the following shall
be deemed a Business Combination Transaction: (i) a merger, consolidation,
compulsory share exchange, recapitalization or other transaction in which
the beneficial ownership of the capital stock of TMRC or the surviving
corporation of the transaction (or of the ultimate parent of TMRC or of
such surviving corporation) immediately after the consummation of such
transaction is substantially the same as the ownership of the capital stock
of TMRC immediately prior to the consummation of the transaction or (ii) a
merger (A) in which TMRC is the surviving corporation, (B) in which all
shares of Common Stock immediately prior to the consummation of such merger
remain outstanding immediately after the consummation thereof, (C) as a
result of the consummation of which no person will own a majority of the
then outstanding shares of Common Stock and (D) following the consummation
of which the Continuing Directors will represent a majority of the Board of
Directors of TMRC.
"Continuing Directors" means (i) any member of the Board of
Directors of TMRC, while such person is a member of such Board of
Directors, who (A) was a member of the Board of Directors of TMRC prior to
the Effective Time or (B) is recommended or elected to the Board of
Directors by a majority of the Continuing Directors to fill a vacancy
arising as a result of an increase in the number of directors of TMRC
occurring after the date of the LOPI Agreement, and (ii) any successor of a
Continuing Director, while such successor is a member of the Board of
Directors of TMRC, who is recommended or elected to succeed the Continuing
Director by a majority of the Continuing Directors.
"Fully-Diluted" means, at any time, the sum of (i) the shares of
Common Stock then outstanding plus (ii) the number of shares of Common
Stock reserved for issuance or issuable in connection with the exercise,
exchange or conversion of options, warrants or securities of TMRC then
outstanding which are exercisable or exchangeable for shares of Common
Stock or are convertible into shares of Common Stock (including, without
limitation, the Preferred Stock).
"MBbls" means thousand barrels.
"Mcf" means thousand cubic feet of natural gas equivalent.
"MMBbls" means million barrels.
"MMBtu" means million Btus.
"MMcf" means million cubic feet.
56
<PAGE>
"MMCFE" means million cubic feet of natural gas equivalent.
"Operating Cash Flow" means oil and gas revenues less oil and gas
operating expenses.
"Present Value of Future Net Revenues" or "Present Value of Proved
Reserves" or "SEC PV-10" means the present value of estimated future
revenues to be generated from the production of proved reserves calculated
in accordance with Commission guidelines, net of estimated production and
future development costs, using prices and costs as of the date of
estimation without future escalation, without giving effect to non-property
related expenses such as general and administrative expenses, debt service,
future income tax expenses and depreciation, depletion and amortization,
and discounted using an annual discount rate of 10%.
"Private Placement" mean a transfer of shares of Common Stock or
Preferred Stock pursuant to a transaction not involving a Pubic Offering;
provided, however, that (A) the sale of shares of Common Stock or Preferred
Stock pursuant to a tender or exchange offer is not a Private Placement;
(B) a Private Placement shall not include a transfer to any person or
entity who, directly or indirectly, has as one of its material businesses
the exploration, development or production of crude oil or natural gas (an
"E&P Company") if, as a result of such Private Placement, such E&P
Company would beneficially own and/or have the right to acquire upon
conversion of shares of Preferred Stock, such number of shares of Common
Stock as would constitute 10% or more of the then outstanding shares of
Common Stock, (x) unless any such E&P Company acquiring such amount of
securities enters into an agreement with TMRC limiting the transfer of such
shares on substantially the same terms as the Stock Rights and Restrictions
Agreement except that the term of such agreement shall be 10 years from the
date of such agreement and (y) if any such E&P Company is acquiring
registration rights under the Registration Rights Agreement, it must agree
that, although any underwriter for such E&P Company shall have customary
access to TMRC to perform its due diligence obligations, such underwriter
will be subject to confidentiality obligations that prohibit the sharing or
disclosure of non-public information with such E&P Company; and (C) a
private placement shall not include a transfer of shares of Common Stock or
Preferred Stock to any party in which following such transfer such party
beneficially owns or has the right to acquire upon conversion of the
Preferred Stock more than 10% of the Common Stock of TMRC unless such party
enters into an agreement with TMRC with terms and conditions restricting
the transfer of such shares substantially similar to those contained herein
except that the term of such agreement shall be for 10 years from the date
of such agreement. For purposes of the foregoing, in determining whether
any person beneficially owns shares of Common Stock or shares of Preferred
Stock, SLOPI and its affiliates shall be entitled to rely exclusively on
the existence or non-existence of any reports on Schedule 13D that may have
been filed by such person with the Commission, without having to make any
inquiry of such person or otherwise.
"Public Offering"shall mean a firm commitment underwritten public
offering pursuant to a registration statement under the Securities Act.
57
<PAGE>
INDEX OF FINANCIAL STATEMENTS
PAGE
----
CONSOLIDATED FINANCIAL STATEMENTS OF
THE MERIDIAN RESOURCE CORPORATION:
Report of Independent
Auditors........................ F-2
Consolidated Statements of
Operations for the years ended
December 31, 1997, 1996 and
1995........................... F-3
Consolidated Balance Sheets as
of December 31, 1997 and
1996........................... F-4
Consolidated Statements of Cash
Flows for the year ended
December 31, 1997, 1996 and
1995........................... F-5
Consolidated Statements of
Changes in Stockholders' Equity
for the years ended December
31, 1997, 1996 and 1995........ F-6
Notes to Consolidated Financial
Statements...................... F-7
Consolidated Statements of
Operations for the three months
ended March 31, 1998 and 1997
(Unaudited).................... F-23
Consolidated Balance Sheets of
March 31, 1998 (Unaudited) and
December 31, 1997.............. F-24
Consolidated Statements of Cash
Flows for the three months
ended March 31, 1998 and 1997
(Unaudited).................... F-25
Notes to Consolidated Financial
Statements..................... F-26
STATEMENTS OF REVENUES AND DIRECT
OPERATING EXPENSES
FOR THE LOPI PROPERTIES:
Report of Independent
Accountants.................... F-28
Statements of Revenues and
Direct Operating Expenses for
the years ended
December 31, 1997, 1996 and
1995 and the three months ended
March 31, 1998 and 1997........ F-29
Notes to Statements of Revenues
and Direct Operating
Expenses....................... F-30
STATEMENTS OF REVENUES AND DIRECT
OPERATING EXPENSES
FOR THE SWEPI PROPERTIES:
Report of Independent
Accountants.................... F-34
Statements of Revenues and
Direct Operating Expenses for
the years ended
December 31, 1997, 1996 and
1995 and the three months ended
March 31, 1998 and 1997........ F-35
Notes to Statements of Revenues
and Direct Operating
Expenses....................... F-36
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
The Meridian Resource Corporation
We have audited the accompanying consolidated balance sheets of The
Meridian Resource Corporation and subsidiaries as of December 31, 1997 and 1996,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
The Meridian Resource Corporation and subsidiaries at December 31, 1997 and
1996, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
March 10, 1998,
except for Note 7,
as to which the date
is March 27, 1998
Houston, Texas
F-2
<PAGE>
THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
---------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
REVENUES:
Oil and natural gas............. $ 57,640 $ 55,123 $ 36,966
Interest and other.............. 693 1,610 1,264
---------- --------- ---------
58,333 56,733 38,230
---------- --------- ---------
COSTS AND EXPENSES:
Oil and natural gas operating... 5,680 4,696 3,735
Severance and ad valorem
taxes........................... 2,165 1,677 966
Depletion and depreciation...... 26,337 25,342 18,491
General and administrative...... 7,192 5,770 4,661
Interest........................ 5,149 2,582 2,589
Impairment of long-lived
assets.......................... 24,141 -- 300
Merger expenses................. 9,998 -- --
Litigation expenses and loss
provision....................... 6,205 -- --
---------- --------- ---------
86,867 40,067 30,742
---------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES.... (28,534) 16,666 7,488
INCOME TAX EXPENSE (BENEFIT)......... 7 (26) 30
---------- --------- ---------
NET INCOME (LOSS).................... $ (28,541) $ 16,692 $ 7,458
========== ========= =========
NET INCOME (LOSS) PER SHARE:
Basic........................... $ (0.85) $ 0.50 $ 0.25
========== ========= =========
Diluted......................... $ (0.85) $ 0.47 $ 0.23
========== ========= =========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES:
Outstanding..................... 33,383 33,399 30,207
========== ========= =========
Assuming dilution............... 33,383 35,484 31,984
========== ========= =========
See notes to consolidated financial statements.
F-3
<PAGE>
THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
----------------------
1997 1996
---------- ----------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............... $ 8,083 $ 23,705
Accounts receivable..................... 10,920 12,020
Due from affiliates..................... 3,038 857
Prepaid expenses and other.............. 1,130 587
---------- ----------
Total current assets............... 23,171 37,169
---------- ----------
PROPERTY AND EQUIPMENT:
Oil and natural gas properties, full
cost method (including $51,883,000
[1997] and $54,454,000 [1996] not
subject to depletion)................. 409,310 298,446
Land.................................... 478 478
Equipment............................... 4,618 3,586
---------- ----------
414,406 302,510
Less accumulated depletion and
depreciation.......................... (145,719) (95,246)
---------- ----------
268,687 207,264
---------- ----------
OTHER ASSETS, NET....................... 700 1,324
---------- ----------
$ 292,558 $ 245,757
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable..................... $ 7,735 $ 10,528
Revenues and royalties payable....... 5,991 5,530
Accrued liabilities.................. 20,330 16,267
Current maturities of long-term
debt................................. 110 --
---------- -----------
Total current
liabilities.................. 34,166 32,325
---------- -----------
LONG-TERM DEBT....................... 107,085 42,000
---------- -----------
COMMITMENTS AND CONTINGENCIES........ -- --
LITIGATION LIABILITIES............... 6,205 --
---------- -----------
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value
(25,000,000 shares authorized, none
issued and outstanding)............ -- --
Common stock, $0.01 par value
(100,000,000 shares authorized,
33,481,261 [1997] and 33,422,556
[1996] issued)....................... 336 334
Additional paid-in capital........... 172,023 170,086
Accumulated earnings (deficit)....... (26,106) 2,435
Unamortized deferred compensation.... (309) (343)
---------- -----------
145,944 172,512
Treasury stock, at cost (46,792
[1997] and 60,000 [1996] shares)... (842) (1,080)
---------- -----------
Total stockholders'
equity....................... 145,102 171,432
---------- -----------
$ 292,558 $ 245,757
========== ===========
See notes to consolidated financial statements.
F-4
<PAGE>
THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................. $ (28,541) $ 16,692 $ 7,458
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depletion and depreciation...... 26,337 25,342 18,491
Amortization of other assets.... 671 519 410
Non-cash compensation........... 1,815 719 63
Impairment of long-lived
assets........................ 24,141 -- 300
Litigation expenses and loss
provision..................... 6,205 -- --
Changes in assets and liabilities:
Accounts receivable............. 1,100 (6,605) (2,215)
Due from affiliates............. (2,181) 314 (487)
Accounts payable................ (2,793) 2,515 3,933
Revenues and royalties
payable....................... 461 2,164 2,667
Accrued liabilities and other... 5,930 (228) (255)
---------- ---------- ----------
Net cash provided by operating
activities......................... 33,145 41,432 30,365
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions,
net............................. (114,311) (83,350) (44,809)
Proceeds from sale of oil and
natural gas properties.......... -- 502 1,920
---------- ---------- ----------
Net cash used in investing
activities......................... (114,311) (82,848) (42,889)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt....... 156,234 26,500 13,800
Reductions in long-term debt....... (91,039) -- (21,800)
Common stock offering, net of
issuance costs.................. -- -- 53,464
Exercise of stock options.......... 396 177 254
Payment of deferred loan costs and
other financing costs........... (47) (767) (276)
---------- ---------- ----------
Net cash provided by financing
activities......................... 65,544 25,910 45,442
---------- ---------- ----------
NET CHANGE IN CASH AND CASH
EQUIVALENTS........................ (15,622) (15,506) 32,918
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR.................. 23,705 39,211 6,293
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF
YEAR............................... $ 8,083 $ 23,705 $ 39,211
========== ========== ==========
See notes to consolidated financial statements.
F-5
<PAGE>
THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL ACCUMULATED UNAMORTIZED TREASURY STOCK
-------------------- PAID-IN EARNINGS DEFERRED ----------------
SHARES PAR VALUE CAPITAL (DEFICIT) COMPENSATION SHARES COST
------ --------- ---------- ----------- ------------ ------ -----
<S> <C> <C> <C> <C>
Balance, December 31, 1994, as
previously reported................. 10,593 $ 106 $ 37,151 $ (4,899) -- -- --
Adjustment for pooling-of-interests... 17,240 173 77,970 (16,816) -- -- --
------ --------- ---------- ----------- ------------ ------ -----
Balance, December 31, 1994, as
restated............................ 27,833 279 115,121 (21,715) -- -- --
Common stock offering, net of
issuance costs.................. 5,482 55 53,409 -- -- -- --
Exercise of stock options......... 64 -- 254 -- -- -- --
Company's 401(k) plan
contribution.................... 5 -- 63 -- -- -- --
Net income........................ -- -- -- 7,458 -- -- --
------ --------- ---------- ----------- ------------ ------ -----
Balance, December 31, 1995............ 33,384 334 168,847 (14,257) -- -- --
Exercise of stock options......... 25 -- 177 -- -- -- --
Issuance of rights to common
stock........................... -- -- 910 -- (910) -- --
Compensation expense.............. -- -- -- -- 567 -- --
Treasury shares acquired.......... -- -- -- -- -- (60) (1,080)
Company's 401(k) plan
contribution.................... 13 -- 152 -- -- -- --
Net income........................ -- -- -- 16,692 -- -- --
------ --------- ---------- ----------- ------------ ------ -----
Balance, December 31, 1996............ 33,422 334 170,086 2,435 (343) (60) (1,080)
Exercise of stock options......... 55 1 395 -- -- -- --
Company's 401(k) plan
contribution.................... 4 -- (57) -- -- 13 238
Issuance of rights to common
stock........................... -- 1 1,599 -- (1,600) -- --
Compensation expense.............. -- -- -- -- 1,634 -- --
Net loss.......................... -- -- -- (28,541) -- -- --
------ --------- ---------- ----------- ------------ ------ -----
Balance, December 31, 1997............ 33,481 $ 336 $172,023 $ (26,106) $ (309) (47) $(842)
====== ========= ========== =========== ============ ====== =====
</TABLE>
TOTAL
--------
Balance, December 31, 1994, as
previously reported................... $ 32,358
Adjustment for pooling-of-interests..... 61,327
--------
Balance, December 31, 1994, as
restated.............................. 93,685
Common stock offering, net of
issuance costs.................... 53,464
Exercise of stock options........... 254
Company's 401(k) plan
contribution...................... 63
Net income.......................... 7,458
--------
Balance, December 31, 1995.............. 154,924
Exercise of stock options........... 177
Issuance of rights to common
stock............................. --
Compensation expense................ 567
Treasury shares acquired............ (1,080)
Company's 401(k) plan
contribution...................... 152
Net income.......................... 16,692
--------
Balance, December 31, 1996.............. 171,432
Exercise of stock options........... 396
Company's 401(k) plan
contribution...................... 181
Issuance of rights to common
stock............................. --
Compensation expense................ 1,634
Net loss............................ (28,541)
--------
Balance, December 31, 1997.............. $145,102
========
See notes to consolidated financial statements.
F-6
<PAGE>
THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
The Meridian Resource Corporation together with its subsidiaries, (the
"Company" or "TMRC") explores for, develops and produces oil and natural gas
reserves, principally located onshore and offshore Louisiana and southeast
Texas. The Company was initially organized in 1985 as a master limited
partnership and operated as such until 1990 when it converted into a corporation
through a merger with a limited partnership of which the Company was the sole
limited and general partner. On November 5, 1997, Cairn Energy USA, Inc.
("Cairn") merged with a subsidiary of the Company (see note 6). The merger was
accounted for as a pooling of interests and, accordingly, the accompanying
financial statements have been restated to include the financial position and
results of operations of Cairn for all periods presented.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
These consolidated financial statements reflect the accounts of TMRC and
its subsidiaries after elimination of all significant intercompany transactions
and balances.
PROPERTY AND EQUIPMENT
The Company follows the full cost method of accounting for its investments
in oil and natural gas properties. The Company capitalizes all direct and
certain indirect costs associated with the acquisition, exploration and
development costs of oil and natural gas reserves. Included in capitalized costs
are general and administrative costs that are directly identified with
acquisition, exploration and development activities. Proceeds from sale of oil
and natural gas properties are credited to the full cost pool, unless the sale
involves a significant quantity of reserves, in which case a gain or loss is
recognized. Under the rules of the Securities and Exchange Commission ("SEC")
for the full cost method of accounting, the net carrying value of oil and
natural gas properties is limited to the sum of the present value (10% discount
rate) of the estimated future net cash flows from proved reserves, based on the
current prices and costs, plus the lower of cost or estimated fair market value
of unproved properties.
Capitalized costs of proved oil and natural gas properties are depleted on
a unit of production method using proved oil and natural gas reserves as
reviewed by independent petroleum engineers. Costs depleted include all
capitalized cost (less accumulated depletion); the estimated dismantlement,
restoration, and abandonment costs. Estimated future abandonment, dismantlement
and site restoration costs include costs to dismantle, relocate and dispose of
the Company's offshore production platforms, gathering systems, wells and
related structures. Such costs related to onshore properties, net of estimated
salvage values, are not expected to be significant. Equipment is recorded at
cost, and depreciation is determined using an accelerated depreciation method
basis over the estimated useful lives of the assets.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, cash equivalents include time
deposits, certificates of deposit and all highly liquid instruments with
original maturities of three months or less.
CONCENTRATION OF CREDIT RISK
Substantially all of the Company's receivables are due from oil and natural
gas producing companies located in the United States.
REVENUE RECOGNITION
TMRC recognizes oil and natural gas revenue from its interests in producing
wells as oil and natural gas is produced and sold from those wells. Oil and
natural gas sold is not significantly different from TMRC's share of production.
F-7
<PAGE>
THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement No. 128, ("SFAS 128") "Earnings per Share," which
simplifies the computation of earnings per share ("EPS"). SFAS 128 is
effective for financial statements issued for periods ending after December 15,
1997, and requires restatement for all prior periods earnings per share data
presentation. Under SFAS 128, the Company computes two earnings per share
amounts -- basic EPS and EPS assuming dilution. Basic EPS (which replaces the
current "primary earnings per share") is calculated based on the weighted
average number of shares of common stock outstanding for the periods. EPS
assuming dilution is based on the weighted average number of shares of common
stock outstanding for the periods, including the dilutive effects of stock
options and warrants granted through December 31, 1997. Dilutive options and
warrants that are issued during a period or that expire or are canceled during a
period are reflected in the EPS assuming dilution computations for the time they
were outstanding during the periods being reported. Options where the exercise
price of the options exceeds the average price for the period are considered
antidilutive, and therefore are not included in the calculation of dilutive
shares.
STOCK OPTIONS
As permitted by SFAS No. 123, "Accounting for Stock Based Compensation,"
the Company will continue to follow the existing accounting requirements for
stock options and stock-based awards contained in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations and consensus of the Emerging Issues Task Force in terms of
measuring compensation expense.
COMPREHENSIVE INCOME
In June 1997, the FASB issued Statement No. 130 ("SFAS 130"), "Reporting
Comprehensive Income," which establishes standards for reporting and displaying
of comprehensive income in the financial statements. Comprehensive income is the
total of net income and all other non-owner changes in equity. Adoption of this
standard is not expected to have a material effect on the Company's financial
statements.
ESTIMATES IN FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CHANGES IN PRESENTATION
Certain items in 1995 and 1996 have been reclassed to conform to 1997
presentation.
3. IMPAIRMENT OF LONG-LIVED ASSETS
The Company recognized a $24.1 million non-cash write-down of its oil and
natural gas properties, under the full cost method of accounting, primarily as a
result of declines in both oil and natural gas prices which significantly
lowered the present value of proved oil and natural gas reserves at December 31,
1997. Prices for these commodities since have declined further and, based on
prices in effect at March 1, 1998, an estimated additional write-down of $40 to
$45 million would have been required had such prices been in effect on December
31, 1997. If oil and natural gas prices do not improve or if there are no other
factors that offset the effect of lower prices, such as significant net
additions to proved oil and gas reserves during the first quarter of 1998, the
Company will recognize an additional property write-down at March 31, 1998.
F-8
<PAGE>
THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Because the carrying value of oil and natural gas properties has been
reduced due to the full cost ceiling limitation such that the present value of
the Company's proved oil and gas reserves do not exceed the Company's net oil
and gas properties recorded on its balance sheet, there is an increased risk of
future property write-downs due to factors that negatively affect the present
value of proved oil and gas reserves, including volatile oil and natural gas
prices and downward revisions in estimated proved oil and gas quantities and
unsuccessful exploratory drilling operations.
4. LONG-TERM DEBT
In November 1997, the Company obtained a $125 million line of credit with
The Chase Manhattan Bank ("Chase"). The Company's obligations under this
facility are secured by the stock of The Meridian Resource & Exploration Company
("TMRX"), the Company's operating subsidiary, and certain other subsidiaries
of the Company and Cairn's oil and gas properties. Under the terms of this
facility, the Company may borrow, on a revolving basis, up to $125 million,
subject to a borrowing base as determined from time to time by Chase. The Credit
Agreement contains various restrictive covenants including, among other things,
certain minimum financial ratios and restrictions on cash dividends. Borrowings
under the Credit Agreement mature on November 5, 2002.
Under the Credit Agreement, the Company may secure either an alternate base
rate loan, which bears interest at a rate per annum equal to the greatest of (i)
Chase's prime rate, (ii) a CD-based rate or Federal Funds-based rate, or a
Eurodollar base rate loan, which bears interest, generally, at a rate per annum
equal to the rate at which Chase is offered U. S. dollar deposits in the
interbank Eurodollar market plus 1.0% to 1.75% depending on the Company's ratio
of the aggregate outstanding loans and Letters of Credit to the borrowing base.
The Credit Agreement also provides for commitment fees ranging from 0.3% to 0.5%
per annum. The book value of the Company's floating-rate debt is considered
representative of its fair value.
5. COMMITMENTS AND CONTINGENCIES
LITIGATION
In June 1996, Amoco Production Company ("Amoco") filed suit against the
Company in Louisiana State Court in Calcasieu Parish with respect to a dispute
involving the drilling by the Company of the Company's Ben Todd No. 1 (TMRC)
well in the Southwest Holmwood Field in which the Company ET AL and Amoco each
hold a 50% leasehold interest. The case was removed to the United States
District Court for the Western District of Louisiana in July 1996. The Ben Todd
No. 1 (TMRC) well was drilled by the Company under a participation agreement
between the Company and Amoco in which Amoco had a right to participate in the
well. The well was drilled by the Company after providing notice to Amoco
pursuant to the participation agreement of the Company's intent to drill the
well and Amoco's failure to take action to elect to participate in the well.
Prior to the drilling of the well, the Company had been advised by its advisors
that the drilling of the well by the Company was permitted under the
participation agreement by virtue of Amoco's refusal to reasonably consent to
the well following TMRC's request to do so. Amoco also did not seek to enjoin
the drilling of the well and accepted the benefits of the well following the
drilling thereof as well as other benefits under the participation agreement and
lease. Amoco alleged in its suit that the well was not permitted to be drilled
under the agreement and sought to recover all the revenues from the well or have
the production from the well stopped. Amoco requested that the trial court
cancel the participation agreement and the Company's leasehold interest in the
prospect, which includes the Company's 50% interest in the Ben Todd No. 2
(Amoco) well that was drilled prior to the Ben Todd No. 1 (TMRC) well on an
agreed basis. The Company filed a counterclaim for breach of contract, unfair
practices and other claims.
On December 22, 1997, the Federal District Court entered a judgment against
the Company in this matter and ordered that the Company was not permitted under
the participation agreement to drill the Ben
F-9
<PAGE>
THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Todd No. 1 (TMRC) well and that the participation agreement and related lease
had been terminated by virtue of the Company's drilling of the well. The trial
court also dismissed the Company's counterclaims against Amoco. The trial court
further ordered a reversion of the Company's rights with respect to the Ben Todd
No. 1 (TMRC) and the Ben Todd No. 2 (Amoco) and directed TMRC to account for all
production and monies received by it from the date of the cancellation of the
lease. The Company has calculated the production and revenues received by it as
operator from these properties to which the trial court has ordered to be
returned to Amoco to be approximately 4.0 Bcfe and $10.2 million. The Company
recorded a charge of $6.2 million in the fourth quarter of 1997, representing
its estimated portion of the potential loss, which is net of approximately $4.0
million of amounts that would be recoverable from third parties with respect to
the Amoco lawsuit. Management does not expect any material additional charges to
be made with respect to this matter. The Company has reported no reserves
related to these properties as of December 31, 1997.
GECO-PRAKLA
In December 1996, the Company entered into an agreement with GECO-Prakla
("GECO"), a division of Schlumberger Technology Corporation. Under this
agreement, GECO intends to acquire between 1,000 and 2,000 square miles of 3-D
seismic data per year through the year 2000, including surveys which will be
performed at the Company's request and direction. This agreement obligated the
Company to acquire 1,100 square miles of 3-D seismic over a three year period.
During 1997, TMRC purchased 605 square miles of seismic data, leaving an
obligation of 495 square miles to be acquired from GECO over the remaining two
years.
6. MERGER
On November 5, 1997, a wholly-owned subsidiary of the Company combined with
Cairn pursuant to a merger agreement in which approximately 19.0 million shares
of the Company's common stock were issued in exchange for all of the outstanding
common stock of Cairn. The Company also reserved approximately 0.8 million
shares for issuance in connection with Cairn's outstanding employee stock
options plans. The transaction has been accounted for as a pooling of interests.
Revenues and net income for the separate companies and the combined amounts
presented in the consolidated financial statements follow.
NINE MONTHS
ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1997 1996 1995
------------- ------------ ------------
(IN THOUSANDS)
Revenues:
The Meridian Resource
Corporation............... $21,159 $ 26,387 $ 12,267
Cairn Energy USA, Inc. ... 21,103 30,346 25,963
------------- ------------ ------------
Combined.................. $42,262 $ 56,733 $ 38,230
============= ============ ============
Net income:
The Meridian Resource
Corporation............... $ 3,747 $ 7,134 $ 2,153
Cairn Energy USA, Inc. ... 3,203 6,638 5,235
Merger adjustments........ 1,586 2,920 70
------------- ------------ ------------
Combined.................. $ 8,536 $ 16,692 $ 7,458
============= ============ ============
Merger adjustments primarily relate to the recognition of deferred tax
benefits in 1996. Certain amounts from Cairn's prior financial statements have
been reclassified to conform to the Company's presentation.
F-10
<PAGE>
THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the merger, the Company incurred significant financial
advisor, legal, accounting, printing, severance and other costs. Under pooling
of interests accounting, these costs, totaling approximately $10.0 million, were
expensed in the fourth quarter of 1997. Accrued merger costs of approximately
$5.9 million are included in accrued liabilities as of December 31, 1997.
7. PROPOSED MERGER AND ACQUISITION OF OIL AND GAS INTERESTS
On March 27, 1998, the Company and affiliates of Shell Oil Company
(collectively, "Shell") executed a definitive merger agreement which, together
with a separate purchase and sale agreement (collectively referred to as the
"Shell Agreements" and the transactions contemplated by the Shell Agreements
are referred to herein as the "Shell Transactions"), will result in the
Company acquiring all of Shell's producing and exploration properties in South
Louisiana in exchange for shares of common and preferred stock to be issued
pursuant to the merger agreement representing 39.9% of the common stock of the
Company as of the closing, assuming exercise of all stock options, warrants and
conversion of the preferred stock, and $42.5 million in cash to be paid pursuant
to the separate purchase and sale agreement.
The terms of the Shell Agreements call for Shell to receive a fixed 39.9%
of the post-transaction common stock of the Company, assuming exercise of all
stock options, warrants and conversion of the preferred stock, comprised of
12.082 million shares of common stock and shares of a new series of preferred
stock (the "Preferred Stock") convertible into approximately 12.827 million
shares of common stock. The Preferred Stock will have a stated value of $135
million, a 4% annual dividend for a period of five years (with the dividend
reducing in amount by one-third in each year starting at the end of two years so
that no dividends will be payable after five years) and a conversion price of
approximately $10.52 per share. The Preferred Stock will convert automatically
into common stock if the market price of the common stock is greater than or
equal to 150% of the conversion price for 75 consecutive trading days. Terms of
the Shell Transactions are not subject to changes in the market price of the
common stock.
To insure the Company's ability to function as an independent oil and gas
company, Shell has agreed to restrict its discretionary voting rights on
non-extraordinary corporate issues requiring a shareholder vote to 23% of the
outstanding voting shares, with the remainder of its holdings to be voted in the
same ratio as the shares voted by other shareholders and Shell's unrestricted
shares. Shell also has agreed to restrictions on its ability to sell shares and
will be provided with certain rights to purchase additional shares to the extent
necessary to maintain at least a 21% beneficial ownership interest in the
Company. Shell will be entitled to one seat on the Company's board of directors.
The consummation of the Shell Transactions is subject to approval of the
shareholders of the Company and certain other customary conditions. The Company
currently anticipates that a closing of the Shell Transactions will occur either
late in the second quarter or early in the third quarter of 1998.
8. INCOME TAXES
Components of the provision (benefit) for federal and state income taxes
are as follows:
1997 1996 1995
----- ----- -----
(IN THOUSANDS)
Current.............................. $ 7 $ (26) $ 30
Deferred............................. -- -- --
----- ----- -----
$ 7 $ (26) $ 30
===== ===== =====
F-11
<PAGE>
THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income tax expense as reported is reconciled to the federal statutory rate
(35%) as follows:
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
Income tax provision (benefit)
computed at statutory rate........... $ (9,987) $ 5,833 $ 2,621
Nondeductible merger costs........... 2,355 -- --
Nondeductible items -- other......... 111 95 35
Non-statutory options................ -- -- (51)
Decrease (increase) in percentage
depletion carryover.................. 18 (263) (302)
Change in valuation allowance........ 7,597 (5,658) (2,283)
Other................................ (87) (33) 10
--------- --------- ---------
$ 7 $ (26) $ 30
========= ========= =========
Deferred income taxes reflect the net tax effects of net operating losses,
depletion carryovers, and temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for
income tax purposes. Significant components of the Company's deferred tax assets
and liabilities are as follows:
1997 1996
--------- ---------
(IN THOUSANDS)
Deferred tax assets:
Net operating tax loss
carryforward..................... $ 39,933 $ 22,731
Statutory depletion carryforward... 950 968
Basis differential in equipment.... 108 108
Other.............................. 3,094 --
Less valuation allowance........... (8,754) (1,157)
--------- ---------
Total deferred tax assets............... 35,331 22,650
--------- ---------
Deferred tax liabilities:
Exploration and development
expenditures expensed for tax and
capitalized for books............ 35,261 22,580
Basis differential in long-term
investments...................... 70 70
--------- ---------
Total deferred tax liabilities.......... $ 35,331 $ 22,650
========= =========
Net deferred tax asset (liability)...... -- --
========= =========
As of December 31, 1997, the Company has approximately $114 million of net
operating loss carryforwards which begin to expire in 2005. Some of the net
operating loss carryforwards are subject to change in ownership and separate
return limitations. The net operating loss carryforwards assume that certain
items, primarily intangible drilling costs have been written off in the current
year. However, the Company has not made a final determination if an election
will be made to capitalize all or part of these items for tax purposes.
9. STOCKHOLDERS' EQUITY
COMMON STOCK
In July 1995, the Company completed a public offering of 3,795,000 shares
of common stock at a price of $10.50 per share. The total proceeds of the
offering, net of issuance costs, received by the Company were approximately
$36.9 million. The Company used a portion of these funds to retire $2.8 million
in long-term
F-12
<PAGE>
THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
debt and the remainder of the proceeds is being used for additional drilling and
other exploration and development activities and for other general corporate
purposes.
A public offering of 1,687,500 shares of Cairn's common stock at an
offering price of $10.42 per share was closed on September 18, 1995. The total
net proceeds of the offering totaling approximately $16.6 million, after
issuance costs, were used to reduce Cairn's borrowings.
TREASURY STOCK
On December 9, 1996, the Board of Directors authorized the acceptance of
60,000 shares of the Company's common stock, based on the closing price of
$18.00 per share, in satisfaction of certain obligations owed by affiliates of
Messrs. Reeves and Mayell (See Note 13). The acquired stock will be used to fund
the Company's future contributions to the employees' 401(k) plan. During 1997,
the Company issued 13,208 shares of the Company's treasury stock to the
employees' 401(k) plan.
WARRANTS
The Company had the following warrants to purchase TMRC common stock
outstanding at December 31, 1997:
NUMBER OF
SHARES UNDER EXERCISE
WARRANTS WARRANT PRICE EXPIRATION DATE
- -------------------------------- ------------ -------- ------------------
Executive Officer Warrants...... 1,428,000 $ 5.85 *
General Partner Warrants........ 677,180 $ 0.28 December 31, 2015
- ------------
* A date one year following the date on which the respective warrant holder
ceases to be an employee of the Company.
On June 7, 1994, the shareholders of the Company approved a conversion of
Class "B" Warrants held by Joseph A. Reeves, Jr. and Michael J. Mayell, which
entitled each of them to purchase an aggregate of 714,000 shares of common
stock, to Executive Officer Warrants. The Warrants expire one year following the
date on which the respective officer ceases to be an employee of the Company.
The Warrants further provide that in the event the officer's employment with the
Company is terminated by the Company without "cause" or by the officer for
"good reason," the officer will have the option to require the Company to
purchase some or all of the Warrants held by the officer for an amount per
Warrant equal to the difference between the exercise price, $5.85 per share, and
the then prevailing market price of the common stock. The Company may satisfy
this obligation with shares of its common stock.
F-13
<PAGE>
THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK OPTIONS
Options to purchase the Company's common stock have been granted to
officers, employees, nonemployee directors and certain key individuals, under
various stock option plans. Options generally become exercisable in 25%
cumulative annual increments beginning with the date of grant and expire at the
end of ten years. At December 31, 1997, 1996 and 1995, 851,024, 913,221 and
808,491 shares, respectively, were available for grant under the plans. A
summary of option transactions follows:
WEIGHTED
NUMBER AVERAGE
OF SHARES EXERCISE PRICE
--------- --------------
Outstanding at December 31, 1994..... 1,085,050 $ 6.24
Granted......................... 522,950 11.01
Exercised....................... (63,539) 4.02
Canceled........................ (14,311) 8.05
--------- --------------
Outstanding at December 31, 1995..... 1,530,150 7.94
Granted......................... 480,550 9.64
Exercised....................... (24,710) 7.15
Canceled........................ (34,110) 10.40
--------- --------------
Outstanding at December 31, 1996..... 1,951,880 8.30
Granted......................... 332,926 11.79
Exercised....................... (55,327) 7.17
Canceled........................ (157,292) 9.26
--------- --------------
Outstanding at December 31, 1997..... 2,072,187 $ 8.81
========= ==============
Shares exercisable:
December 31, 1997............... 1,621,025 $ 8.95
December 31, 1996............... 1,233,380 $ 7.45
December 31, 1995............... 751,899 $ 6.56
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------- -----------------------------------
WEIGHTED WEIGHTED
RANGE OF OUTSTANDING AT AVERAGE EXERCISABLE AT AVERAGE
EXERCISABLE PRICES DECEMBER 31, 1997 EXERCISE PRICE DECEMBER 31, 1997 EXERCISE PRICE
------------------ ----------------- -------------- ----------------- --------------
<S> <C> <C> <C> <C> <C>
$1.13-$4.98.......................... 388,500 $ 4.72 388,500 $ 4.87
$5.56-$10.00......................... 915,132 $ 8.44 806,757 $ 8.52
$10.38-$16.38........................ 768,555 $11.33 425,768 $11.19
----------------- -------------- ----------------- --------------
2,072,187 $ 8.81 1,621,025 $ 8.95
================= ============== ================= ==============
</TABLE>
The weighted average remaining contractual life of options outstanding at
December 31, 1997 was approximately seven years.
Pro forma information is required by SFAS No. 123 to reflect the estimated
effect on net income and net income per share as if the Company had accounted
for the stock options and other awards granted using the fair value method
described in that Statement. The fair value was estimated at the date of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions: risk-free interest rate of 5.6% and 6.2%; dividend yield of 0%;
volatility factors of the expected market price of the Company's common stock of
0.31 and 0.35 for 1997 and 1996, respectively; and a weighted-average expected
life of five years. These assumptions resulted in a weighted average grant date
fair value of $3.90 and $2.61 for options granted in 1997 and 1996,
respectively. For purposes of the pro forma disclosures, the estimated fair
value is amortized to expense over the awards' vesting period. Reflecting the
amortization of this hypothetical expense for 1997 and 1996 results in pro forma
net income (loss) of $(29.6) million and
F-14
<PAGE>
THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$15.7 million, respectively, and pro forma basic net income (loss) per share of
$(0.89) and $0.47, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options. In addition,
because SFAS 123 is applicable only to options granted subsequent to December
31, 1994, the pro forma information does not reflect the pro forma effect of all
previous stock option grants of the Company, and thus the pro forma information
is not necessarily indicative of future amounts until SFAS 123 is applied to all
outstanding stock options.
DEFERRED COMPENSATION
In July 1996, the Company through the Compensation Committee of the Board
of Directors granted to Messrs. Reeves and Mayell (the Company's Chief Executive
Officer and President, respectively) rights to the Company's common stock in
lieu of cash compensation pursuant to the Company's Long-Term Incentive Plan.
Under such grants, Messrs. Reeves and Mayell each elected to defer $180,000 and
$400,000 of their compensation for 1996 and 1997, respectively. The Company also
granted to each officer a 100% matching deferral, which is subject to a one-year
vesting. Under the terms of the grants, the employee and matching deferrals are
allocated to a common stock account in which units are credited to the accounts
of the officer based on the number of shares that could be purchased at the
market price of the common stock at June 28, 1996, for deferrals in 1996 and at
December 31, 1996, for deferrals in 1997. At December 31, 1997, the plan had
reserved 250,000 shares of common stock for future issuance and 173,435 rights
have been granted. No actual shares of common stock are issued and the officer
has no rights with respect to any shares unless and until there is a
distribution. Distributions are to be made upon the death, retirement or
termination of employment of the officer.
The obligations of the Company with respect to the deferrals are unsecured
obligations. The shares of common stock that may be issuable upon distribution
of deferrals have been treated as a common stock equivalent in the financial
statements of the Company. The compensation expense of $1,634,000 and $567,000
for 1997 and 1996, respectively, relating to these grants is reflected in
general and administrative expense for the years ended December 31, 1997 and
1996, respectively.
10. PROFIT SHARING AND SAVINGS PLAN
The Company has a 401(k) profit sharing and savings plan (the "Plan")
that covers substantially all employees and entitles them to contribute up to
15% of their annual compensation, subject to maximum limitations imposed by the
Internal Revenue Code. TMRC matches 25% of each employee's contribution up to
10% of annual compensation subject to certain limitations as outlined in the
Plan. In addition, TMRC may make discretionary contributions which are allocable
to participants in accordance with the Plan.
11. OIL AND GAS HEDGING ACTIVITIES
During the years ended December 31, 1995 and 1996, Cairn's oil and gas
revenues were increased by $323,000 and reduced by $2,449,000 respectively, as a
result of hedging transactions. As of December 31,1997 the Company has no open
hedging agreements.
F-15
<PAGE>
THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. MAJOR CUSTOMERS
Major customers for TMRC for the years ended December 31, 1997, 1996 and
1995 were as follows (based on purchases of oil and natural gas as a percent of
total oil and natural gas sales):
YEAR ENDED DECEMBER 31,
-------------------------
CUSTOMER 1997 1996 1995
- ------------------------------------- ----- ----- -----
Phillips Petroleum Company........... 20% 22% 19%
Coastal Corporation.................. 15% 21% 15%
Koch Oil Company..................... 15% 12% 7%
Phillips Petroleum Company ("Phillips") is the sole purchaser of TMRC's
natural gas production from the Chocolate Bayou Field under a natural gas
contract entered into pursuant to a farmout agreement with Phillips.
13. RELATED PARTY TRANSACTIONS
Texas Oil Distribution and Development, Inc. ("TODD") and Sydson Energy,
Inc. ("Sydson"), entities controlled by Joseph A. Reeves, Jr. and Michael J.
Mayell, respectively, collectively invested approximately $2,315,000,
$1,660,000, and $625,000 for the years ended December 31, 1997, 1996 and 1995,
respectively, in oil and natural gas drilling activities for which the Company
was the operator. Collective amounts due from such entities for such activities
were approximately $2,500,000 and $83,000 as of December 31, 1997 and 1996,
respectively, which have been netted by amounts owed to them from the Company
(See Note 9 regarding stock purchase from Messrs. Reeves and Mayell). The
Company has executed note agreements with TODD and Sydson dated December 31,
1997 for $1,510,699 each related to certain amounts due, which mature on
December 30, 1998 and accrue interest at variable market rates. TODD and Sydson
participated under the same terms negotiated with unaffiliated working interest
owners.
Mr. Joe Kares, a Director of TMRC, is a partner in the public accounting
firm of Kares & Cihlar, which provided TMRC and its affiliates with accounting
services for the years ended December 31, 1997, 1996 and 1995 and received fees
of approximately $27,000, $56,000 and $68,000, respectively. Such fees exceeded
5% of the gross revenues of Kares & Cihlar for those respective years.
Management believes that such fees were equivalent to fees that would have been
paid to similar firms providing such services in arm's length transactions.
Mr. Gary A. Messersmith, a director of TMRC, is a partner in the law firm
of Fouts & Moore, L.L.P. in Houston, Texas, which periodically provides legal
services for the Company. In addition, the Company has Mr. Messersmith on
personal retainer of $8,333.33 per month relating to services provided to the
Company personally by Mr. Messersmith.
In the interest of retaining talented technical personnel, the Company has
adopted an incentive compensation system for its senior geologist, geophysicists
and executives that relates each individual's compensation to the success of the
Company's exploration activities by providing compensation based on results of
the prospects.
F-16
<PAGE>
THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
---------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE)
Numerator:
Net income (loss)............... $ (28,541) $ 16,692 $ 7,458
Denominator:
Denominator for basic earnings
per share -- weighted-average
shares outstanding............ 33,383 33,399 30,207
Effect of potentially dilutive common
shares:
Employee and director stock
options....................... N/A 650 442
Warrants........................ N/A 1,435 1,335
--------- ---------
Denominator for diluted earnings
per share -- weighted-average
shares outstanding and assumed
conversions................... 33,383 35,484 31,984
========== ========= =========
Basic (loss) earnings per share...... $ (0.85) $ 0.50 $ 0.25
========== ========= =========
Diluted (loss) earnings per share.... $ (0.85) $ 0.47 $ 0.23
========== ========= =========
15. SUPPLEMENTAL CASH FLOWS INFORMATION
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
Cash Payments:
Interest........................ $ 3,866 $ 2,166 $ 2,239
Income taxes.................... $ 7 $ (26) $ 37
Non-Cash Operating and Financing
Activities:
Accounts receivable............. -- $ (1,080) --
Treasury stock (See Note 9)..... $ 1,080 --
F-17
<PAGE>
THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. RESTATED QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations
for the years ended December 31, 1997 and 1996.
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31(2) TOTAL
-------- ------- ------------ -------------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1997
<S> <C> <C> <C> <C> <C>
Revenues............................. $16,660 $13,239 $ 12,363 $ 16,071 $ 58,333
======== ======= ============ ============== ==========
Results of operations from
exploration and production
activities(1)...................... $ 8,563 $ 4,606 $ 3,986 $(16,924) $ 81
======== ======= ============ ============== ==========
Net income(loss)..................... $ 5,644 $ 2,016 $ 876 $(37,077) $ (28,541)
======== ======= ============ ============== ==========
Net income (loss) per common share:
Basic........................... $ 0.17 $ 0.06 $ 0.03 $ (1.11) $ (0.85)
======== ======= ============ ============== ==========
Diluted......................... $ 0.16 $ 0.06 $ 0.02 $ (1.11) $ (0.85)
======== ======= ============ ============== ==========
1996
Revenues............................. $12,366 $13,144 $ 14,410 $ 16,813 $ 56,733
======== ======= ============ ============== ==========
Results of operations from
exploration and production
activities(1)...................... $ 5,563 $ 4,861 $ 5,314 $ 8,253 $ 23,991
======== ======= ============ ============== ==========
Net income........................... $ 4,207 $ 3,223 $ 3,471 $ 5,791 $ 16,692
======== ======= ============ ============== ==========
Net income (loss) per common share:
Basic........................... $ 0.13 $ 0.10 $ 0.10 $ 0.17 $ 0.50
======== ======= ============ ============== ==========
Diluted......................... $ 0.12 $ 0.09 $ 0.10 $ 0.16 $ 0.47
======== ======= ============ ============== ==========
- ------------
</TABLE>
(1) Results of operations from exploration and production activities, which
approximate gross profit, are computed as operating revenues less lease
operating expenses, severance and ad valorem taxes, depletion and impairment
of oil and natural gas properties.
(2) Fourth quarter 1997 results include impairment of $24.1 million related to
oil and natural gas properties, merger expenses of $10.0 million and a
provision of $6.2 million related to litigation.
F-18
<PAGE>
THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED SUPPLEMENTAL OIL AND NATURAL GAS INFORMATION
(UNAUDITED)
The following information is being provided as supplemental information in
accordance with certain provisions of SFAS No. 69, "Disclosures about Oil and
Gas Producing Activities." Expenditures for oil and natural gas properties
attributable to TMRC for the years ended December 31, 1997, 1996 and 1995 were
primarily to acquire, explore and develop oil and natural gas properties.
COSTS INCURRED IN OIL AND NATURAL GAS PROPERTY ACQUISITION, EXPLORATION AND
DEVELOPMENT
ACTIVITIES ARE SUMMARIZED BELOW:
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
---------- --------- ---------
(IN THOUSANDS)
Costs incurred during the year:(1)
Property acquisition costs(2)... $ 11,610 $ 10,923 $ 329(3)
Exploration..................... 73,441 67,093 35,752
Development..................... 25,813 9,184 16,062
---------- --------- ---------
$ 110,864 $ 87,200 $ 52,143
========== ========= =========
- ------------
(1) Costs incurred during the years ended December 31, 1997, 1996 and 1995
include general and administrative costs related to acquisition, exploration
and development of oil and natural gas properties, net of third party
reimbursements, of $3,958,000, $3,102,000 and, $2,697,000, respectively.
(2) All property acquisition costs are related to unproved property.
(3) Includes a $3.9 million favorable purchase price adjustment in connection
with an acquisition of properties in 1994.
CAPITALIZED COSTS RELATING TO OIL AND NATURAL GAS PRODUCING ACTIVITIES:
DECEMBER 31,
-----------------------
1997 1996
----------- ----------
(IN THOUSANDS)
Capitalized costs.................... $ 409,310 $ 298,446
Accumulated depletion(1)............. (143,510) (93,796)
----------- ----------
Net capitalized costs................ $ 265,800 $ 204,650
=========== ==========
- ------------
(1) Accumulated depletion includes a $24.1 million oil and natural gas property
impairment taken in 1997.
The leasehold costs which are excluded from the depletion base consist
primarily of acreage acquisition costs and related geological and geophysical
costs. For the years ended December 31, 1997 and 1996, costs of $51,883,000 and
$54,454,000, respectively, were excluded from the depletion base. These costs
are expected to be evaluated within the next three years.
F-19
<PAGE>
RESULTS OF OPERATIONS FROM OIL AND NATURAL GAS PRODUCING ACTIVITIES:
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
Oil and natural gas revenues......... $ 57,640 $ 55,123 $ 36,966
Less:
Oil and natural gas operating
costs......................... 5,680 4,696 3,735
Production and ad valorem
taxes......................... 2,165 1,677 966
Depletion....................... 25,573 24,759 18,143
Impairment of oil and natural gas
properties......................... 24,141 -- --
--------- --------- ---------
57,559 31,132 22,844
--------- --------- ---------
Results of operations from oil and
natural gas producing activities... $ 81 $ 23,991 $ 14,122
========= ========= =========
Depletion expense per MCFE........... $ 1.27 $ 1.22 $ 0.98
========= ========= =========
PROVED RESERVES
The following table sets forth the net proved reserves of TMRC as of
December 31, 1997, 1996 and 1995, and the changes therein during the years then
ended. The reserve information was reviewed by Ryder Scott Company Petroleum
Engineers. All of TMRC's oil and natural gas producing activities are located in
the United States.
OIL GAS
(MBBLS) (MMCF)
-------- ---------
PROVED RESERVES:
BALANCE AT DECEMBER 31, 1994......... 2,907 77,218
Production...................... (650) (14,598)
Sale of reserves in place....... (111) (2,060)
Revisions....................... (125) 5,742
Discoveries and extensions...... 1,542 24,691
-------- ---------
BALANCE AT DECEMBER 31, 1995......... 3,563 90,993
Production...................... (751) (15,783)
Revisions....................... 648 (4,418)
Discoveries and extensions...... 5,956 36,614
-------- ---------
BALANCE AT DECEMBER 31, 1996......... 9,416 107,406
Production...................... (914) (14,603)
Revisions....................... (761) (13,862)
Discoveries and extensions...... 1,990 31,844
-------- ---------
BALANCE AT DECEMBER 31, 1997......... 9,731 110,785
======== =========
OIL GAS
(MBBLS) (MMCF)
-------- -------
PROVED DEVELOPED RESERVES:
Balance at December 31, 1997.... 5,305 81,500
Balance at December 31, 1996.... 4,361 81,192
Balance at December 31, 1995.... 2,569 76,944
Balance at December 31, 1994.... 2,396 60,573
F-20
<PAGE>
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH
FLOWS RELATING TO PROVED OIL AND GAS RESERVES
The information that follows has been developed pursuant to procedures
prescribed by SFAS No. 69 and utilizes reserve and production data reviewed by
independent petroleum consultants. Reserve estimates are inherently imprecise
and estimates of new discoveries are more imprecise than those of producing oil
and natural gas properties. Accordingly, these estimates are expected to change
as future information becomes available.
The estimated discounted future net cash flows from estimated proved
reserves are based on prices and costs as of the date of the estimate unless
such prices or costs are contractually determined at such date. Actual future
prices and costs may be materially higher or lower. Actual future net revenues
also will be affected by factors such as actual production, supply and demand
for oil and natural gas, curtailments or increases in consumption by natural gas
purchasers, changes in governmental regulations or taxation and the impact of
inflation on costs. At December 31, 1997, the Company has no future income taxes
as the deductible tax basis and available net operating loss carryforwards
exceeds future net cash flows. Future income tax expense has been reduced for
the effect of available net operating loss carryforwards.
AT DECEMBER 31
------------------------
1997 1996
----------- -----------
(IN THOUSANDS)
Future cash flows.................... $ 451,157 $ 671,123
Future production costs.............. (76,635) (69,332)
Future development costs............. (32,746) (41,827)
Future income tax expense............ -- (121,347)
----------- -----------
Future net cash flows................ 341,776 438,617
Discount to present value at 10
percent annual rate................ (127,859) (124,994)
----------- -----------
Standardized measure of discounted
future net cash flows.............. $ 213,917 $ 313,623
=========== ===========
The average price for natural gas in the above computations was $2.53 and
$4.10 at December 31, 1997 and 1996, respectively. The average price used for
crude oil in the above computations was $17.31 and $24.36 at December 31, 1997
and 1996, respectively.
F-21
<PAGE>
CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
The following table sets forth the changes in standardized measure of
discounted future net cash flows for the years ended December 31, 1997, 1996 and
1995.
YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
(IN THOUSANDS)
BALANCE AT BEGINNING OF PERIOD....... $ 313,623 $ 149,863 $ 100,782
Sale of oil and gas, net of
production costs................... (49,796) (48,750) (32,265)
Changes in prices, and production
costs.............................. (165,406) 104,249 20,316
Revisions of previous quantity
estimates.......................... (28,574) (756) 9,839
Sales of reserves in place........... -- -- (3,262)
Current year discoveries, extensions
and improved recovery.............. 50,274 167,080 56,603
Changes in estimated future
development costs.................. (3,564) (7,597) (20,751)
Development cost incurred during the
period............................. 27,666 11,723 19,242
Accretion of discount................ 39,451 16,182 10,485
Net change in income taxes........... 80,884 (63,476) (13,199)
Change in production rates (timing)
and other(1)....................... (50,641) (14,895) 2,073
----------- ----------- -----------
Net change........................... (99,706) 163,760 49,081
----------- ----------- -----------
BALANCE AT END OF PERIOD............. $ 213,917 $ 313,623 $ 149,863
=========== =========== ===========
- ------------
(1) Approximately $29 million of this change in 1997 relates to production rates
(timing).
F-22
<PAGE>
THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
---------------------
1998 1997
---------- ---------
(IN THOUSANDS, EXCEPT
FOR PER SHARE DATA)
REVENUES:
Oil and nutural gas............. $ 11,766 $ 16,421
Interest and other.............. 131 239
---------- ---------
11,897 16,660
---------- ---------
COSTS AND EXPENSES:
Oil and natural gas operating... 1,518 1,133
Severance and ad valorem
taxes.......................... 460 662
Depletion and depreciation...... 6,259 6,231
General and administrative...... 1,977 2,114
Interest........................ 2,332 876
Impairment of long-lived
assets......................... 40,278 --
---------- ---------
52,824 11,016
---------- ---------
NET INCOME (LOSS).................... $ (40,927) $ 5,644
========== =========
NET INCOME (LOSS) PER SHARE:
Basic........................... $ (1.22) $ 0.17
========== =========
Diluted......................... $ (1.22) $ 0.16
========== =========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES:
Outstanding..................... 33,451 33,363
========== =========
Assuming dilution............... 33,451 35,832
========== =========
See notes to consolidated financial statements.
F-23
<PAGE>
THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......... $ 6,532 $ 8,083
Accounts receivable................ 12,051 10,920
Due from affiliates................ 3,256 3,038
Prepaid expenses and other......... 791 1,130
----------- ------------
Total current assets.......... 22,630 23,171
----------- ------------
PROPERTY AND EQUIPMENT:
Oil and natural gas properties,
full cost method (including
$55,745,000 [1998] and $51,883,000
[1997] not subject to
depletion)........................ 433,103 409,310
Land............................... 478 478
Equipment.......................... 4,864 4,618
----------- ------------
438,445 414,406
Less accumulated depletion and
depreciation...................... (192,256) (145,719)
----------- ------------
246,189 268,687
----------- ------------
OTHER ASSETS............................ 842 700
----------- ------------
$ 269,661 $ 292,558
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................... $ 7,845 $ 7,735
Revenues and royalties payable..... 4,543 5,991
Accrued liabilities................ 21,149 20,330
Current maturities of long-term
debt............................... 122 110
----------- ------------
Total current liabilities..... 33,659 34,166
----------- ------------
LONG TERM DEBT.......................... 124,951 107,085
----------- ------------
LITIGATION LIABILITIES.................. 6,205 6,205
----------- ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value
(25,000,000 shares authorized,
none issued and outstanding)...... -- --
Common stock, $0.01 par value
(100,000,000 shares authorized,
33,496,217 [1998] and 33,481,261
[1997] issued..................... 337 336
Additional paid-in capital......... 172,164 172,023
Accumulated deficit................ (67,033) (26,106)
Unamortized deferred
compensation...................... (321) (309)
----------- ------------
105,147 145,944
Treasury stock, at cost (16,703
[1998] and 46,792 [1997]
shares)........................... (301) (842)
----------- ------------
Total stockholders' equity......... 104,846 145,102
----------- ------------
$ 269,661 $ 292,558
=========== ============
See notes to consolidated financial statements.
F-24
<PAGE>
THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
---------------------
1998 1997
---------- ---------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............... $ (40,927) $ 5,644
Adjustments to reconcile net
income (loss) to net cash
provided by (used in) operating
activities:....................
Depletion and
depreciation................. 6,259 6,231
Amortization of other
assets....................... 23 143
Non-cash compensation...... 599 454
Impairment of long-lived
assets....................... 40,278 --
Changes in operating assets and
liabilities:
Accounts receivable........ (1,131) 1,427
Due from affiliates........ (218) (219)
Accounts payable........... 110 2,917
Revenues and royalties
payable...................... (1,448) (468)
Accrued liabilities and
other........................ (4,475) (603)
---------- ---------
Net cash (used in) provided by
operating activities........... (930) 15,526
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and
equipment, net................. (18,406) (31,908)
Other........................... (165) --
---------- ---------
Net cash (used in) investing
activities...................... (18,571) (31,908)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt.... 17,897 1,000
Reductions in long-term debt.... (19) --
Exercise of stock options....... 72 --
Deferred loan costs and other... -- (122)
---------- ---------
Net cash provided by financing
activities..................... 17,950 878
---------- ---------
NET CHANGE IN CASH AND CASH
EQUIVALENTS........................ (1,551) (15,504)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD................ 8,083 23,705
---------- ---------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD............................. $ 6,532 $ 8,201
========== =========
See notes to consolidated financial statements.
F-25
<PAGE>
THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated financial statements reflect the accounts of The Meridian
Resource Corporation and its subsidiaries (the "Company" or "TMRC") after
elimination of all significant intercompany transactions and balances. On
November 5, 1997, Cairn Energy USA, Inc. ("Cairn") merged with a subsidiary of
the Company. The merger was accounted for as a pooling of interests and
accordingly, the accompanying March 31, 1997 financial statements have been
restated to include the financial position and results of operations of Cairn.
The financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended December 31, 1997, as filed with the Securities
and Exchange Commission.
Certain items in the first quarter of 1997 have been reclassed to conform
to the first quarter of 1998 persentation.
The financial statements included herein as of March 31, 1998, and for the
three months ended March 31, 1998 and 1997 are unaudited, and, in the opinion of
management, the information furnished reflects all material adjustments,
consisting of normal recurring adjustments, necessary for a fair statement of
the results for the interim periods presented.
2. IMPAIRMENT OF LONG-LIVED ASSETS
The Company recognized a $40.3 million non-cash write down of its oil and
natural gas properties under the full cost method of accounting, primarily as a
result of declines in both oil and natural gas prices which significantly
lowered the present value of proved oil an natural gas reseves as of March 31,
1998 and nonproductive investments in oil and gas properties.
Because the carrying value of oil and natural gas properties have been
reduced due to the full cost ceiling limitation such that the present value of
the Company's proved oil and natural gas reserves do not exceed the Company's
net oil and natural gas properties recorded on its balance sheet, there is an
increased risk of future write-downs due to factors which may negatively affect
the present value of proved oil and natural gas reserves and the carrying value
of oil and natural gas properties, including volatile oil and natural gas
prices, downward revisions in estimated proved oil and natural gas reserve
quantities and unsuccessful drilling activities.
F-26
<PAGE>
THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net
income (loss) per share:
THREE MONTHS ENDED
MARCH 31,
---------------------
1998 1997
---------- ---------
(IN THOUSANDS,
EXCEPT PER SHARE
DATA)
Numerator:
Net income (loss)............... $ (40,927) $ 5,644
Denominator:
Denominator for basic net income
(loss) per share -- weighted-
average shares outstanding.... 33,451 33,363
Effect of potentially dilutive common
shares:
Employee and director stock
options......................... N/A 943
Warrants........................ N/A 1,526
---------- ---------
Denominator for diluted net
income (loss) per
share -- weighted average
shares outstanding and assumed
conversions................... 33,451 35,832
========== =========
Basic net income (loss) per share.... $ (1.22) $ 0.17
========== =========
Diluted net income (loss) per
share................................ $ (1.22) $ 0.16
========== =========
F-27
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of
Louisiana Onshore Properties Inc.
We have audited the accompanying Historical Statement of Revenues and Direct
Operating Expenses of the oil and gas properties (the "Acquisition
Properties") of Louisiana Onshore Properties Inc. for the years ended December
31, 1997, 1996 and 1995. This historical statement is the responsibility of
Louisiana Onshore Properties Inc. Our responsibility is to express an opinion on
this historical statement 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 historical statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
amounts and disclosures in the historical statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the historical
statement. We believe that our audits provide a reasonable basis for our
opinion.
The accompanying statement was prepared as described in Note 1 for the purpose
of complying with certain rules and regulations of the Securities and Exchange
Commission (SEC) for inclusion in certain SEC regulatory reports and filings of
The Meridian Resource Corporation and are not intended to be a complete
presentation of the revenues and direct operating expenses of the Acquisition
Properties.
In our opinion, the historical statement referred to in the first paragraph of
this report presents fairly, in all material respects, the revenues and direct
operating expenses of the Acquisition Properties described in Note 1 for the
years ended December 31, 1997, 1996 and 1995, in conformity with generally
accepted accounting principles.
PRICE WATERHOUSE LLP
Houston, Texas
May 12, 1998
F-28
<PAGE>
THE LOPI PROPERTIES
HISTORICAL STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED FOR THE YEAR ENDED
MARCH 31, DECEMBER 31,
-------------------- -------------------------------
1998 1997 1997 1996 1995
--------- --------- --------- --------- ---------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues:
Oil and condensate.............. $ 7,676 $ 14,238 $ 47,670 $ 63,953 $ 53,580
Gas............................. 6,659 9,597 37,664 28,964 38,621
--------- --------- --------- --------- ---------
Total...................... 14,335 23,835 85,334 92,917 92,201
Direct operating expenses............ 4,638 5,884 23,309 28,724 22,219
--------- --------- --------- --------- ---------
Revenues in excess of direct
operating expenses................. $ 9,697 $ 17,951 $ 62,025 $ 64,193 $ 69,982
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-29
<PAGE>
THE LOPI PROPERTIES
NOTES TO HISTORICAL STATEMENT OF REVENUES AND
DIRECT OPERATING EXPENSES
1. BASIS OF PRESENTATION
In October 1997, Louisiana Onshore Properties Inc. ("LOPI") was formed
and interests in certain oil and gas properties owned by one or more
consolidated subsidiaries of Shell Oil Company were conveyed to LOPI (the "LOPI
Properties"). In December 1997, LOPI signed a Letter of Intent to enter into a
merger agreement with The Meridian Resources Corporation ("TMRC") whereby, if
the transaction closes, LOPI, inclusive of the LOPI Properties, will be acquired
by TMRC in exchange for stock of TMRC. As used herein, "Shell" shall refer to
Shell Oil Company or one or more of its consolidated subsidiaries or a
combination of Shell Oil Company and one or more of its consolidated
subsidiaries, as the context requires.
No segregated accounting records for LOPI existed prior to its formation
and, due to its fully consolidated status with Shell and its pending sale, no
attempt has been made to prepare a balance sheet and income statement for LOPI
as a stand alone entity.
The revenues and direct operating expenses associated with the LOPI
Properties can be derived from the Shell accounting records. Revenues and direct
operating expenses, as set forth in this financial statement, include oil and
gas revenues and associated direct operating expenses related to the net revenue
interest and net working interest, respectively, in the LOPI Properties. Each
owner recognizes revenue and expenses based on its proportionate share of the
related production and costs. The statement includes oil and gas revenues, net
of royalties. Expenses include labor, repairs and maintenance, fuel consumed and
supplies utilized to operate and maintain the wells and related equipment and
facilities, production taxes and ad valorem taxes.
This statement varies from an income statement in that it does not show
certain expenses which were incurred in connection with ownership of the LOPI
Properties -- including general and administrative expenses and income taxes.
These costs were not separately allocated to the LOPI Properties in the Shell
accounting records and any pro forma allocation would be both time consuming and
expensive and would not be a reliable estimate of what these costs would
actually have been had LOPI been operated historically as a stand alone entity.
In addition, these allocations, if made using historical Shell general and
administrative structures and tax burdens, would not produce allocations that
would be indicative of the historical performance of the LOPI Properties had
they been assets of TMRC, due to the greatly varying size, structure, operations
and accounting of the two companies. This statement also does not include
provisions for depreciation, depletion and amortization as such amounts would
not be indiciative of those costs which would be incurred by TMRC upon
allocation of the purchase price.
For the same reason, primarily the lack of segregated or easily obtainable
reliable data on asset values and related liabilities, a balance sheet is not
presented for LOPI.
Pursuant to the terms of the Agreement and Plan of Merger by and among The
Meridian Resource Corporation, LOPI Acqusition Corporation, Shell Louisiana
Onshore Properties Inc. and Louisiana Onshore Properties Inc. dated March 27,
1998, as amended, Shell has agreed to assume all identified and scheduled
existing liabilities related to LOPI.
At the end of the economic life of these fields, certain restoration and
abandonment costs will be incurred by the respective owners of these fields. No
accrual for these costs is included in the direct operating expenses.
The interim financial data for the three months ended March 31, 1998 and
March 31, 1997 is unaudited; however, in the opinion of LOPI, the interim data
includes all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the results for the interim periods.
F-30
<PAGE>
THE LOPI PROPERTIES
NOTES TO HISTORICAL STATEMENT OF REVENUES AND
DIRECT OPERATING EXPENSES -- (CONTINUED)
2. GAS BALANCING
With respect to gas sales, the entitlement method is used for recording
revenues. Under this approach, revenues are based on the LOPI Properties'
proportionate share of the related production. When sales volumes of the LOPI
Properties exceed the LOPI Properties' entitled share of production, an
over-produced imbalance occurs and a liability is recorded. At December 31,
1997, the LOPI Properties were in a net overproduced position of 390,300 mcf
which is valued at $1,031,559.
3. RELATED PARTY TRANSACTIONS
Affiliates of Shell acquired substantially all of the crude oil and natural
gas production from the LOPI Properties for each of the years in the three year
period ended December 31, 1997. Such sales, which include the net revenue
interest of the LOPI Properties as well as associated royalties, amounted to
$92,587,354, $100,188,481 and $101,744,473 for the years ended December 31,
1997, 1996 and 1995, respectively.
SUPPLEMENTARY OIL AND GAS INFORMATION (UNAUDITED)
PROVED RESERVE ESTIMATES
Oil and gas proved reserves cannot be measured exactly. Reserve estimates
are based on many factors related to reservoir performance which require
evaluations by the engineers interpreting the available data, as well as price
and other economic factors. The reliability of these estimates at any point in
time depends on both the quality and quantity of the technical and economic
data, the production performance of the reservoirs, as well as extensive
engineering judgment. Consequently, reserve estimates are subject to revision as
additional data becomes available during the producing life of a reservoir. When
a commercial reservoir is discovered, proved reserves are initially determined
based on limited data from the first well or wells. Subsequent data may better
define the extent of the reservoir and additional production performance, well
tests and engineering studies will likely improve the reliability of the reserve
estimate. The evolution of technology may also result in the application of
improved recovery techniques such as supplemental or enhanced recovery projects,
or both, which have the potential to increase reserves beyond those envisioned
during the early years of a resevoir's producing life. Revisions to reserves are
based on engineering analysis of individual reservoirs at the field level.
Proved reserves are those quantities which, upon analysis of geological and
engineering data, appear with reasonable certainty to be recoverable in the
future from known oil and gas reservoirs under current prices and costs as of
the date the estimate is made. For major revisions, extensions and discoveries,
proved reserves must also be recoverable under future prices and costs
forecasted by Shell. Proved developed reserves are those reserves which can be
expected to be recovered through existing wells with existing equipment and
operating methods. Proved undeveloped reserves are those reserves which are
expected to be recovered from new wells on undrilled acreage or from existing
wells where a relatively major expenditure is required. Net proved reserves
represent the estimated recoverable volumes after deducting from gross reserves
the portion due land owners or others as royalty or operating interests.
Estimates of proved reserves include and rely upon a production and
development plan and strategy. Shell premises certain expenditures will be made
to produce incremental barrels in the last years of mature fields such as the
LOPI Properties. This represents Shell's philosophy to generally produce all
incremental reserves which can be produced profitabily. If such expenditures are
not made, such volumes will not be produced. Thus, these reserves estimates are
valid only if Shell's operating plan is followed and planned expenditures are
made. In any case, many factors such as unanticipated technical problems or
changes in prices or costs or errors in sound technical judgment made on the
best information available may cause actual production to vary significantly
from estimated reserves.
Net proved reserves represent the estimated recoverable volumes after
deducting from gross proved reserves the portion due land owners or others as
royalty or operating interests.
F-31
<PAGE>
THE LOPI PROPERTIES
NOTES TO HISTORICAL STATEMENT OF REVENUES AND
DIRECT OPERATING EXPENSES -- (CONTINUED)
Estimated quantities of net proved oil and natural gas reserves and of
changes in net quantities of proved developed and undeveloped reserves for each
of the period indicated were as follows:
OIL GAS
(MBBLS) (MMCF)
-------- -------
Proved reserves at December 31,
1994............................... 17,496 52,298
Production...................... (3,218) (23,479)
Revision of previous
estimates..................... 2,065 16,069
Purchases of reserves........... 0 0
Extensions, discoveries and
improved recovery............. 274 11,210
-------- -------
Proved reserves at December 31,
1995............................... 16,617 56,098
Production...................... (2,987) (10,993)
Revision of previous
estimates..................... 2,210 (1,035)
Purchases of reserves........... 434 34,388
Extensions, discoveries and
improved recovery............. 1,043 25,414
-------- -------
Proved reserves at December 31,
1996............................... 17,317 103,872
Production...................... (2,443) (14,032)
Revision of previous
estimates..................... (3,694) (12,875)
Purchases of reserves........... 343 63
Extensions, discoveries and
improved recovery............. 788 4,438
-------- -------
Proved reserves at December 31,
1997............................... 12,311 81,466
Proved developed reserves at:
December 31, 1995............... 14,616 52,586
December 31, 1996............... 15,166 98,864
December 31, 1997............... 10,816 76,776
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL
AND GAS RESERVES
The following disclosures concerning the standardized measure of future
cash flows from proved oil and gas reserves are presented in accordance with the
Statement of Financial Accounting Standards No. 69. As prescribed by this
statement, the amounts shown are based on prices and costs at the end of each
period and a 10 percent annual discount factor. Since prices and costs do not
remain static, and no price or cost changes have been considered, the results
are not necessarily indicative of the fair market value of estimated proved
reserves, but they do provide a common benchmark which may enhance the users'
ability to project future cash flows.
Extensive judgments are involved in estimating the timing of production and
the costs that will be incurred throughout the remaining lives of these fields.
Therefore, the results may not be comparable to estimates disclosed by other oil
and gas producers.
The standardized measure of discounted future net cash flows related to
proved oil and gas reserves at December 31 (in thousands) was as follows:
F-32
<PAGE>
THE LOPI PROPERTIES
NOTES TO HISTORICAL STATEMENT OF REVENUES AND
DIRECT OPERATING EXPENSES -- (CONTINUED)
1997 1996 1995
---------- ---------- ----------
Future cash flows.................... $ 415,124 $ 822,690 $ 374,947
Future production and development
costs.............................. 180,980 204,916 175,064
---------- ---------- ----------
Future net cash inflows.............. 234,144 617,774 199,883
10% annual discount for estimated
timing of cash flows............... 67,806 180,756 58,778
---------- ---------- ----------
Standardized Measure (before income
taxes) of discounted future net
cash flows......................... $ 166,338 $ 437,018 $ 141,105
========== ========== ==========
The Standardized Measure of discounted future net cash flows is based on
the following oil and gas prices at December 31:
1997 1996 1995
--------- --------- ---------
Oil (per Bbl.)....................... $ 16.34 $ 24.25 $ 18.12
Gas (per Mcf)........................ $ 2.53 $ 3.92 $ 1.85
Crude oil and natural gas price realizations for the LOPI Properties at
March 31, 1998 were $13.34 per Bbl and $2.26 per Mcf, respectively.
The aggregate change in the Standardized Measure of discounted future net
cash flows was a decrease of $270,680,000 in 1997, an increase of $295,913,000
in 1996 and an increase of $49,160,000 in 1995. The principal sources of change
for the years ended December 31 were as follows (in thousands):
1997 1996 1995
---------- ---------- ----------
Sales and transfers of oil and gas
produced, net of production
costs.............................. (62,025) (64,193) (69,982)
Net change in prices and costs....... (195,318) 127,302 56,966
Extensions, discoveries and improved
recovery........................... 11,222 69,544 16,064
Purchases of reserves in place....... 2,282 81,923 0
Development costs incurred during the
period............................. 13,602 24,191 19,651
Revisions of previous reserve
estimates.......................... (41,377) 44,476 31,691
Accretion of discount................ 43,702 14,111 9,195
F-33
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of
Shell Western E&P Inc.
We have audited the accompanying Historical Statement of Revenues and Direct
Operating Expenses of the oil and gas properties (the "Acquisition
Properties") of Shell Western E&P Inc. for the years ended December 31, 1997,
1996 and 1995. This historical statement is the responsibility of Shell Western
E&P Inc. Our responsibility is to express an opinion on this historical
statement 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 historical statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
amounts and disclosures in the historical statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the historical
statement. We believe that our audits provide a reasonable basis for our
opinion.
The accompanying statement was prepared as described in Note 1 for the purpose
of complying with certain rules and regulations of the Securities and Exchange
Commission (SEC) for inclusion in certain SEC regulatory reports and filings of
The Meridian Resource Corporation and are not intended to be a complete
presentation of the revenues and direct operating expenses of the Acquisition
Properties.
In our opinion, the historical statement referred to in the first paragraph of
this report presents fairly, in all material respects, the revenues and direct
operating expenses of the Acquisition Properties described in Note 1 for the
years ended December 31, 1997, 1996 and 1995, in conformity with generally
accepted accounting principles.
PRICE WATERHOUSE LLP
Houston, Texas
May 12, 1998
F-34
<PAGE>
THE SWEPI PROPERTIES
HISTORICAL STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED FOR THE YEAR ENDED
MARCH 31, DECEMBER 31,
-------------------- -------------------------------
1998 1997 1997 1996 1995
--------- --------- --------- --------- ---------
(UNAUDITED) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues:
Oil and condensate.............. $ 112 $ 457 $ 3,573 $ 4,614 $ 3,569
Gas............................. 2,692 4,262 12,121 14,026 10,624
--------- --------- --------- --------- ---------
Total...................... 2,804 4,719 15,694 18,640 14,193
Direct operating expenses............ 291 391 1,979 4,456 3,364
--------- --------- --------- --------- ---------
Revenues in excess of direct
operating expenses................. $ 2,513 $ 4,328 $ 13,715 $ 14,184 $ 10,829
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-35
<PAGE>
THE SWEPI PROPERTIES
NOTES TO HISTORICAL STATEMENT OF REVENUES AND
DIRECT OPERATING EXPENSES
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. BASIS OF PRESENTATION
In December 1997, Shell Western E&P, Inc. (the "Company") signed a letter
of intent to sell the Company's interest in Gibson-Humphreys and Turtle Bayou
(the "SWEPI Properties") to The Meridian Resources Corporation ("TMRC") for
$42.5 million.
No segregated accounting records for the SWEPI properties exist as the
SWEPI Properties are fully consolidated with Shell Oil Company and no attempt
has been made to prepare a balance sheet and income statement for the SWEPI
Properties similar to a stand alone entity. As used herein, "Shell" shall
refer to Shell Oil Company or one or more of its consolidated subsidiaries or a
combination of Shell Oil Company and one or more of its consolidated
subsidiaries, as the context requires.
The revenues and direct operating expenses associated with the SWEPI
Properties can be derived from the Shell accounting records. Revenues and direct
operating expenses, as set forth in this financial statement, include oil and
gas revenues and associated direct operating expenses related to the net revenue
interest and net working interest, respectively, in the SWEPI Properties. Each
owner recognizes revenue and expenses based on its proportionate share of the
related production and costs. The statement includes oil and gas revenues, net
of royalties. Expenses include labor, repairs and maintenance, fuel consumed and
supplies utilized to operate and maintain the wells and related equipment and
facilities, production taxes and ad valorem taxes.
This statement varies from an income statement in that it does not show
certain expenses which are incurred in connection with ownership of the SWEPI
Properties -- most notably general and administrative expenses and income taxes.
These costs were not separately allocated to the SWEPI Properties in the Shell
accounting records and any pro forma allocation would be both time consuming and
expensive and would not be a reliable estimate of what these costs would
actually have been had the SWEPI Properties been operated historically as a
stand alone entity. In addition, these allocations, if made using historical
Shell general and administrative structures and tax burdens, would not produce
allocations that would be indicative of the historical performance of the SWEPI
Properties had they been assets of TMRC, due to the greatly varying size,
structure, operations and accounting of the two companies. This statement also
does not include provisions for depreciation, depletion and amortization as such
amounts would not be indicative of those costs which would be incurred by TMRC
upon allocation of the purchase price.
For the same reason, primarily the lack of segregated or easily obtainable
reliable data on asset values and related liabilities, a balance sheet is not
presented for the SWEPI Properties.
At the end of the economic life of these fields, certain restoration and
abandonment costs will be incurred by the respective owners of these fields. No
accrual for these costs is included in the direct operating expenses.
The interim financial data for the three months ended March 31, 1998 and
March 31, 1997 is unaudited; however, in the opinion of the Company, the interim
data includes all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the results for the interim periods.
2. GAS BALANCING
With respect to gas sales, the entitlement method is used for recording
revenues. Under this approach, revenues are based on the SWEPI Properties'
proportionate share of the related production. When sales volumes of the SWEPI
Properties exceed the Company's entitled share of production, an over-produced
F-36
<PAGE>
THE SWEPI PROPERTIES
NOTES TO HISTORICAL STATEMENT OF REVENUES AND
DIRECT OPERATING EXPENSES -- (CONTINUED)
imbalance occurs and a liability is recorded. At December 31, 1997, the SWEPI
Properties were in a net overproduced position of 695,526 mcf which is valued at
$1,739,837.
3. RELATED PARTY TRANSACTIONS
Affiliates of Shell acquired substantially all of the crude oil and natural
gas production from the SWEPI Properties for each of the years in the three year
period ended December 31, 1997. Such sales, which include the net revenue
interest of the SWEPI Properties as well as associated royalties, amounted to
$12,660,277, $18,752,521 and $12,927,216 for the years ended December 31, 1997,
1996 and 1995, respectively.
SUPPLEMENTARY OIL AND GAS INFORMATION (UNAUDITED)
PROVED RESERVE ESTIMATES
Oil and gas proved reserves cannot be measured exactly. Reserve estimates
are based on many factors related to reservoir performance which require
evaluations by the engineers interpreting the available data, as well as price
and other economic factors. The reliability of these estimates at any point in
time depends on both the quality and quantity of the technical and economic
data, the production performance of the reservoirs, as well as extensive
engineering judgment. Consequently, reserve estimates are subject to revision as
additional data becomes available during the producing life of a reservoir. When
a commercial reservoir is discovered, proved reserves are initially determined
based on limited data from the first well or wells. Subsequent data may better
define the extent of the reservoir and additional production performance, well
tests and engineering studies will likely improve the reliability of the reserve
estimate. The evolution of technology may also result in the application of
improved recovery techniques such as supplemental or enhanced recovery projects,
or both, which have the potential to increase reserves beyond those envisioned
during the early years of a reservoir's producing life. Revisions to reserves
are based on engineering analysis of individual reservoirs at the field level.
Proved reserves are those quantities which, upon analysis of geological and
engineering data, appear with reasonable certainty to be recoverable in the
future from known oil and gas reservoirs under current prices and costs as of
the date the estimate is made. For major revisions, extensions and discoveries,
proved reserves must also be recoverable under future prices and costs
forecasted by Shell. Proved developed reserves are those reserves which can be
expected to be recovered through existing wells with existing equipment and
operating methods. Proved undeveloped reserves are those reserves which are
expected to be recovered from new wells on undrilled acreage or from existing
wells where a relatively major expenditure is required. Net proved reserves
represent the estimated recoverable volumes after deducting from gross proved
reserves the portion due land owners or others as royalty or operating
interests.
Estimates of proved reserves include and rely upon a production and
development plan and strategy. Shell premises certain expenditures will be made
to produce incremental barrels in the last years of mature fields such as the
SWEPI Properties. This represents Shell's philosophy to generally produce all
incremental reserves which can be produced profitably. If such expenditures are
not made, such volumes will not be produced. Thus, these reserve estimates are
valid only if Shell's operating plan is followed and planned expenditures are
made. In any case, many factors such as unanticipated technical problems or
changes in prices or costs or errors in sound technical judgement made on the
best information available may cause actual production to vary significantly
from estimated reserves.
F-37
<PAGE>
THE SWEPI PROPERTIES
NOTES TO HISTORICAL STATEMENT OF REVENUES AND
DIRECT OPERATING EXPENSES -- (CONTINUED)
Estimated quantities of net proved oil and natural gas reserves and of
changes in net quantities of proved developed and undeveloped reserves for each
of the periods indicated were as follows:
OIL GAS
(MBBLS) (MMCF)
------- ---------
Proved reserves at December 31,
1994............................... 953 69,684
Production...................... (101) (7,633)
Revision of previous
estimates..................... 101 1,856
Extensions, discoveries and
improved recovery............. 0 0
------- ---------
Proved reserves at December 31,
1995............................... 953 63,907
Production...................... (111) (6,677)
Revision of previous
estimates..................... (15) (2,490)
Extensions, discoveries and
improved recovery............. 33 2,803
------- ---------
Proved reserves at December 31,
1996............................... 860 57,543
Production...................... (69) (4,620)
Revision of previous
estimates..................... 38 (31,665)
Extensions, discoveries and
improved recovery............. 0 1,777
------- ---------
Proved reserves at December 31,
1997............................... 829 23,035
Proved developed reserves at:
December 31, 1995............... 953 63,907
December 31, 1996............... 860 57,542
December 31, 1997............... 829 23,035
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED
OIL AND GAS RESERVES
The following disclosures concerning the standardized measure of future
cash flows from proved oil and gas reserves are presented in accordance with the
Statement of Financial Accounting Standards No. 69. As prescribed by this
statement, the amounts shown are based on prices and costs at the end of each
period and a 10 percent annual discount factor. Since prices and costs do not
remain static, and no price or cost changes have been considered, the results
are not necessarily indicative of the fair market value of estimated proved
reserves, but they do provide a common benchmark which may enhance the users'
ability to project future cash flows.
Extensive judgments are involved in estimating the timing of production and
the costs that will be incurred throughout the remaining lives of these fields.
Therefore, the results may not be comparable to estimates disclosed by other oil
and gas producers.
1997 1996 1995
--------- ---------- ----------
Future cash inflows.................. $ 73,736 $ 238,447 $ 136,939
Future production and development
costs.............................. 18,069 30,223 28,648
--------- ---------- ----------
Future net cash inflows.............. 55,667 208,224 108,291
10% annual discount for estimated
timing of cash flows............... 15,223 82,280 36,592
--------- ---------- ----------
Standardized measure (before income
taxes) of discounted future net
cash flows......................... $ 40,444 $ 125,944 $ 71,699
========= ========== ==========
F-38
<PAGE>
THE SWEPI PROPERTIES
NOTES TO HISTORICAL STATEMENT OF REVENUES AND
DIRECT OPERATING EXPENSES -- (CONTINUED)
The Standardized Measure of discounted future net cash flows is based on
the following oil and gas prices at December 31:
1997 1996 1995
--------- --------- ---------
Oil (per Bbl)........................ $ 16.61 $ 23.65 $ 18.27
Gas (per Mcf)........................ $ 2.62 $ 4.05 $ 1.85
Crude oil and natural gas price realizations for the SWEPI Properties at
March 31, 1998 were $12.59 per Bbl and $2.31 per Mcf, respectively.
The aggregate change in the Standardized Measure of discounted future net
cash flows was a decrease of $85,500,000 in 1997, an increase of $52,245,000 in
1996 and an increase of $10,561,000 in 1995. The principal sources of change for
the years ended December 31 were as follows (in thousands):
1997 1996 1995
---------- ---------- ----------
Sales and transfers of oil and gas
produced, net of production
costs.............................. (13,715) (14,184) (10,829)
Net change in prices and costs....... (52,021) 80,031 454
Extensions, discoveries and improved
recovery........................... 2,294 7,041 0
Purchases of reserves in place....... 0 0 0
Development costs incurred during the
period............................. 3,584 5,510 11,094
Revisions of previous reserve
estimates.......................... (41,245) (15,588) 4,337
Accretion of discount................ 12,594 7,170 6,414
F-39
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
THE MERIDIAN RESOURCE CORPORATION
LOPI ACQUISITION CORP.
SHELL LOUISIANA ONSHORE PROPERTIES INC.
AND LOUISIANA ONSHORE PROPERTIES INC.
DATED MARCH 27, 1998
THIS AGREEMENT IS
SUBJECT TO BINDING ARBITRATION
<PAGE>
TABLE OF CONTENTS
PAGE
------
ARTICLE I -- CERTAIN DEFINITIONS................................. A-1
ARTICLE II -- THE MERGER
SECTION 2.1 THE MERGER........................... A-4
SECTION 2.2 EFFECTIVE TIME OF THE MERGER......... A-4
SECTION 2.3 CERTIFICATE OF INCORPORATION......... A-4
SECTION 2.4 BYLAWS............................... A-4
SECTION 2.5 DIRECTORS OF THE SURVIVING
CORPORATION.......................... A-5
SECTION 2.6 OFFICERS OF THE SURVIVING
CORPORATION.......................... A-5
SECTION 2.7 EFFECTS OF MERGER.................... A-5
ARTICLE III -- CONVERSION OF SHARES
SECTION 3.1 EFFECT OF MERGER ON CAPITAL STOCK.... A-5
SECTION 3.2 EXCHANGE OF CERTIFICATES............. A-5
SECTION 3.3 ADJUSTMENTS TO PREVENT DILUTION...... A-5
SECTION 3.4 FURTHER ASSURANCES................... A-5
ARTICLE IV -- THE CLOSING
SECTION 4.1 CLOSING.............................. A-6
ARTICLE V -- REPRESENTATIONS AND WARRANTIES OF TMR
SECTION 5.1 ORGANIZATION AND QUALIFICATION....... A-6
SECTION 5.2 SUBSIDIARIES......................... A-6
SECTION 5.3 CAPITALIZATION....................... A-6
SECTION 5.4 AUTHORITY; NON-CONTRAVENTION;
STATUTORY APPROVALS;
COMPLIANCE........................... A-7
SECTION 5.5 REPORTS AND FINANCIAL STATEMENTS..... A-8
SECTION 5.6 ABSENCE OF CERTAIN CHANGES OR EVENTS;
ABSENCE OF UNDISCLOSED LIABILITIES... A-9
SECTION 5.7 LITIGATION........................... A-9
SECTION 5.8 PROXY STATEMENT...................... A-9
SECTION 5.9 TAX MATTERS.......................... A-10
SECTION 5.10 VOTE REQUIRED........................ A-10
SECTION 5.11 STATE TAKEOVER STATUTES; ABSENCE OF
SUPERMAJORITY PROVISION.............. A-10
SECTION 5.12 HSR EXEMPTION........................ A-10
SECTION 5.13 ERISA................................ A-10
ARTICLE VI -- REPRESENTATIONS AND WARRANTIES OF SLOPI AND THE
COMPANY
SECTION 6.1 ORGANIZATION AND QUALIFICATION....... A-11
SECTION 6.2 SUBSIDIARIES......................... A-11
SECTION 6.3 CAPITALIZATION....................... A-11
SECTION 6.4 AUTHORITY; NON-CONTRAVENTION;
STATUTORY APPROVALS;
COMPLIANCE........................... A-11
SECTION 6.5 FINANCIAL STATEMENTS................. A-13
SECTION 6.6 ABSENCE OF CERTAIN CHANGES OR EVENTS;
ABSENCE OF UNDISCLOSED LIABILITIES... A-13
SECTION 6.7 LITIGATION........................... A-13
SECTION 6.8 INFORMATION IN PROXY STATEMENT....... A-13
SECTION 6.9 TAX MATTERS.......................... A-13
A-i
<PAGE>
PAGE
------
SECTION 6.10 VOTE REQUIRED........................ A-14
SECTION 6.11 EMPLOYEE MATTERS..................... A-14
SECTION 6.12 MATERIAL CONTRACTS AND AGREEMENTS.... A-14
SECTION 6.13 INVESTMENT INTENT.................... A-14
SECTION 6.14 HSR EXEMPTION........................ A-14
ARTICLE VII -- REPRESENTATIONS AND WARRANTIES REGARDING TMR SUB
SECTION 7.1 ORGANIZATION AND STANDING............ A-14
SECTION 7.2 CAPITAL STRUCTURE.................... A-14
SECTION 7.3 AUTHORITY; NON-CONTRAVENTION......... A-15
ARTICLE VIII -- CONDUCT OF BUSINESS PENDING THE MERGER
SECTION 8.1 ORDINARY COURSE OF BUSINESS.......... A-15
SECTION 8.2 DIVIDENDS AND OTHER PAYMENTS......... A-15
SECTION 8.3 ISSUANCE OF SECURITIES............... A-16
SECTION 8.4 CHARTER DOCUMENTS.................... A-16
SECTION 8.5 NO ACQUISITIONS...................... A-16
SECTION 8.6 NO DISPOSITIONS...................... A-16
SECTION 8.7 INDEBTEDNESS......................... A-16
SECTION 8.8 COMPENSATION, BENEFITS............... A-17
SECTION 8.9 TAX-FREE STATUS...................... A-17
SECTION 8.10 INSURANCE............................ A-17
SECTION 8.11 COOPERATION, NOTIFICATION............ A-17
SECTION 8.12 THIRD-PARTY CONSENTS................. A-17
SECTION 8.13 PERMITS.............................. A-17
SECTION 8.14 AFFILIATE LIABILITIES................ A-18
ARTICLE IX -- ADDITIONAL AGREEMENTS
SECTION 9.1 ACCESS TO INFORMATION................ A-18
SECTION 9.2 TMR PROXY STATEMENT.................. A-18
SECTION 9.3 REGULATORY MATTERS................... A-19
SECTION 9.4 APPROVAL OF TMR STOCKHOLDERS......... A-19
SECTION 9.5 DISCLOSURE SCHEDULES; PROPRIETARY
DATA................................. A-19
SECTION 9.6 PUBLIC ANNOUNCEMENTS................. A-20
SECTION 9.7 NO WITHDRAWAL OF RECOMMENDATION...... A-20
SECTION 9.8 EXPENSES............................. A-20
SECTION 9.9 COVENANT TO SATISFY CONDITIONS....... A-20
SECTION 9.10 TAX MATTERS.......................... A-20
SECTION 9.11 WITHDRAWAL FEE....................... A-23
SECTION 9.12 TRANSFER OF RECORD TITLE TO
PROPERTIES........................... A-23
ARTICLE X -- CONDITIONS
SECTION 10.1 CONDITIONS TO EACH PARTY'S OBLIGATION
TO EFFECT THE MERGER................. A-24
SECTION 10.2 CONDITIONS TO OBLIGATION OF TMR TO
EFFECT MERGER........................ A-24
SECTION 10.3 CONDITIONS TO OBLIGATION OF SLOPI AND
THE COMPANY TO EFFECT THE MERGER..... A-25
ARTICLE XI -- TERMINATION, AMENDMENT AND WAIVER
SECTION 11.1 TERMINATION.......................... A-25
SECTION 11.2 EFFECT OF TERMINATION................ A-26
SECTION 11.3 AMENDMENT............................ A-26
SECTION 11.4 WAIVER............................... A-27
A-ii
<PAGE>
PAGE
------
ARTICLE XII -- GENERAL PROVISIONS
SECTION 12.1 NON-SURVIVAL; INDEMNITIES............ A-27
SECTION 12.2 NO BROKERS........................... A-28
SECTION 12.3 NOTICES.............................. A-28
SECTION 12.4 NO PUNITIVE DAMAGES.................. A-29
SECTION 12.5 BINDING ARBITRATION.................. A-30
SECTION 12.6 DTPA WAIVER.......................... A-30
SECTION 12.7 MISCELLANEOUS........................ A-30
SECTION 12.8 INTERPRETATION....................... A-31
SECTION 12.9 COUNTERPARTS; EFFECT................. A-31
SECTION 12.10 PARTIES IN INTEREST.................. A-31
SECTION 12.11 SPECIFIC PERFORMANCE................. A-31
SECTION 12.12 FURTHER ASSURANCES................... A-31
SECTION 12.13 CONTINGENT CONSIDERATION............. A-31
SECTION 12.14 GAS IMBALANCES....................... A-31
EXHIBITS:
A -- Directors of Surviving Corporation*
B -- Officers of Surviving Corporation*
Basis of Conversion and Conversion
C -- Rights............................... A-C-1
D -- Company Financial Statements*
Form of Certificate of Designation
E -- for Preferred Stock.................. A-E-1
Form of Stock Rights and Restriction
F -- Agreement............................ A-F-1
Form of Registration Rights
G -- Agreement............................ A-G-1
H -- Contingent Consideration............. A-H-1
I -- Preliminary TMR Financial Statements*
SCHEDULES:
I -- TMR Disclosure Schedule*
II -- Company Disclosure Schedule*
True-Up Accounting Procedures and
III -- Principles........................... A-III-1
* Intentionally omitted from this Proxy Statement.
A-iii
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of March 27, 1998 (this
"Agreement"), by and among The Meridian Resource Corporation, a corporation
formed under the laws of the State of Texas ("TMR"), LOPI Acquisition Corp, a
corporation formed under the laws of the State of Delaware and a wholly-owned
subsidiary of TMR ("TMR Sub"), Shell Louisiana Onshore Properties Inc., a
corporation formed under the laws of the State of Delaware ("SLOPI"), and
Louisiana Onshore Properties Inc. (the "Company"), a corporation formed under
the laws of the State of Delaware and a wholly-owned subsidiary of SLOPI.
WHEREAS, the respective Boards of Directors of TMR, TMR Sub, SLOPI and the
Company have approved, and TMR and the Company have declared advisable and in
the best interests of their stockholders, the merger of TMR Sub with and into
the Company (the "Merger"), pursuant to the terms and conditions set forth in
this Agreement.
WHEREAS, pursuant to the Merger, each issued and outstanding share of
common stock, par value $1.00 per share, of the Company ("Company Common
Stock") not owned directly or indirectly by TMR or the Company, will be
converted into the right to receive, on the basis herein stated (i) shares of
common stock, par value $0.01 per share, of TMR ("TMR Common Stock") and (ii)
shares of the Series A Cumulative Convertible Preferred Stock, par value $1.00
per share, of TMR (the "TMR Series A Preferred");
WHEREAS, for federal income or tax purposes it is intended that the Merger
shall qualify as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code"); and
WHEREAS, TMR, TMR Sub, SLOPI and the Company desire to make certain
representations, warranties, covenants and agreements in connection with the
Merger and also to prescribe various conditions to the Merger.
NOW, THEREFORE, in consideration of the premises and the representations,
warranties, covenants and agreements contained in this Agreement, the parties
hereto, intending to be legally bound, hereby agree as follows:
ARTICLE I
CERTAIN DEFINITIONS
As used in this Agreement, the following terms shall have the following
meanings:
"Affiliate" shall have the meaning set forth in the Stock Rights and
Restriction Agreement.
"Asset Conveyance Agreements" shall have the meaning set forth in Section
9.12.
"Cairn" shall have the meaning set forth in Section 5.5(a).
"Certificate of Designation" shall mean the Statement of Designation for
the TMR Series A Preferred which is set forth as Exhibit E.
"Certificate of Merger" shall have the meaning set forth in Section 2.2.
"Chase" shall mean Chase Securities Corporation, which is acting as
financial advisor to TMR.
"Choctaw" shall mean Choctaw Pipeline Company, a Delaware corporation,
which is an Affiliate of the Company and SLOPI.
"Chase Opinion" shall mean the opinion letter dated March 27, 1998 from
Chase to TMR's Board of Directors with respect to the fairness, from a financial
point of view, of the Merger and the related transactions to TMR.
"Closing" and "Closing Date" shall have the meaning set forth in
Section 4.1.
"Code" shall have the meaning set forth in the third Whereas clause of
this Agreement.
A-1
<PAGE>
"Company Common Stock" shall mean the common stock, par value $1.00 per
share, of the Company.
"Company Disclosure Schedule" shall have the meaning set forth in the
introductory sentence of Article VI.
"Company Financial Statements" shall have the meaning set forth in
Section 6.5(a).
"Company Material Adverse Change" or "Company Material Adverse Effect"
shall mean the cumulative effect of all changes or effects that are, or, so far
as can reasonably be determined, are likely to be materially adverse to the
business, operations, properties, assets, condition (financial or otherwise), or
results of operations of the Company (with cumulative changes or effects greater
than $25,000,000 being material) or on the consummation of the transactions
contemplated by this Agreement; provided, however, that the terms "Company
Material Adverse Change" and "Company Material Adverse Effect" shall not
include normal production decline of oil and gas properties, economic, political
or legal changes affecting the oil and gas industry as a whole, general changes
in oil or gas prices or results of drilling of any undeveloped or unevaluated
leaseholds or horizons now owned or hereafter acquired.
"Company Required Consents" shall mean all required third-party consents
or other approvals not yet obtained as set forth in the Company Disclosure
Schedule.
"Company Required Statutory Approvals" shall have the meaning set forth
in Section 6.4(c).
"Confidentiality Agreement" shall have the meaning set forth in Section
9.1(b).
"Conversion Rights" shall have the meaning set forth in Section 3.1(b)
and in Exhibit C.
"Current Litigation Claims" shall have the meaning set forth in Section
12.1(c)(i).
"DGCL" shall mean the General Corporation Law of the State of Delaware.
"Disclosure Schedules" shall mean the TMR Disclosure Schedule and the
Company Disclosure Schedule, collectively.
"Effective Time" shall have the meaning set forth in Section 2.2. The
Effective Time will be on, or as soon as practicable after, the Closing Date.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Fee" shall have the meaning set forth in Section 9.11.
"Fully Diluted Shares" shall mean, at any time, the sum of (i) the shares
of TMR Common Stock then outstanding plus (ii) the number of shares of TMR
Common Stock reserved for issuance or issuable in connection with the exercise,
exchange or conversion of options, warrants or securities of TMR then
outstanding which are exercisable or exchangeable for shares of TMR Common Stock
or are convertible into shares of TMR Common Stock (including, without
limitation, the TMR Series A Preferred).
"GAAP" shall mean generally accepted accounting principles.
"Governmental Authority" shall mean any court, governmental or regulatory
body (including a stock exchange or other self-regulatory body) or authority,
domestic or foreign.
"HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended.
"Indemnification Agreement" shall have the meaning set forth in Section
9.1(c).
"Joint Venture" shall mean, with respect to any person, any corporation
or other entity (including partnerships and other business associations and
joint ventures) in which such person or one or more of its Subsidiaries owns an
equity interest that is less than a majority of any class of the outstanding
voting securities or equity, other than equity interests held for passive
investment purposes that are less than 5% of any class of the outstanding voting
securities or equity; provided, however, that the term "Joint Venture" shall
not include operating agreements, exploration alliances or other similar
arrangements relating to or associated with exploration and development of Oil
and Gas Interests not involving the sharing of equity in a legal entity.
A-2
<PAGE>
"LOPI Properties" shall mean the properties and assets described in the
Asset Conveyance Agreements.
"Proxy Statement" shall have the meaning set forth in Section 5.8.
"Registration Rights Agreement" shall mean the form of agreement set
forth in Exhibit G.
"Representatives" shall have the meaning set forth in Section 9.1.
"SEC" shall mean the Securities and Exchange Commission.
"Secretary of State" shall have the meaning set forth in Section 2.2.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Share Issuance" shall have the meaning set forth in Section 5.4(a).
"Shell" shall mean Shell Oil Company, a Delaware corporation which is an
Affiliate of the Company and SLOPI.
"Shell Group" shall have the meaning set forth in Section 9.10(a)(3).
"SOVI" shall mean Shell Onshore Ventures Inc., a Delaware corporation,
which is an Affiliate of the Company and SLOPI.
"Stock Rights and Restriction Agreement" shall mean the form of agreement
set forth in Exhibit F.
"Subsidiary" shall mean, with respect to any person, any corporation or
other entity (including partnerships and other business associations) in which a
person directly or indirectly owns at least a majority of the outstanding voting
securities or other equity interests having the power, under ordinary
circumstances, to elect a majority of the directors, or otherwise to direct the
management and policies, of such corporation or other entity. Without limiting
the foregoing, references to a Subsidiary or Subsidiaries shall include, without
limitation, Cairn as a subsidiary of TMR.
"Surviving Corporation" shall have the meaning set forth in Section 2.1.
"SWEPI" shall mean Shell Western E&P Inc., a Delaware corporation which
is an Affiliate of the Company and SLOPI.
"Tax Return" shall mean any report, return or other information required
to be supplied to a governmental entity with respect to Taxes.
"Taxes" shall mean any federal, state, county, local or foreign taxes,
charges, fees, levies or other assessments, including, without limitation, all
net income, gross income sales and use, ad valorem, transfer, gains, profits,
excise, franchise, real and personal property, gross receipts, capital stock,
production, business and occupation disability, employment, payroll, license,
estimated, stamp, custom duties, severance or withholding taxes or charges
imposed by any governmental entity, and includes any interest and penalties
(civil or criminal) on or additions to any such taxes, charges, fees, levies or
other assessments, and any expenses incurred in connection with the
determination, settlement or litigation of any liability for any of the
foregoing.
"Tax Accrual" shall have the meaning set forth in Section 9.10(a)(3).
"Tax Indemnified Party" shall have the meaning set forth in Section
9.10(f).
"Tax Indemnifying Party" shall have the meaning set forth in Section
9.10(f).
"Tax Items" shall have the meaning set forth in Section 9.10(a)(1).
"Tax Losses" shall have the meaning set forth in Section 9.10(d).
"TBCA" shall mean the Texas Business Corporation Act, as amended from
time to time.
"Termination Date" shall have the meaning set forth in Section 11.1(b).
"TMR Common Stock" shall mean the common stock, par value $0.01 per
share, of TMR.
A-3
<PAGE>
"TMR Disclosure Schedule" shall have the meaning set forth in the
introductory sentence of Article V.
"TMR Financial Statements" shall have the meaning set forth in Section
5.5(d).
"TMR Material Adverse Change" or "TMR Material Adverse Effect" shall
mean the cumulative effect of all changes or effects that are or, so far as can
reasonably be determined, are likely to be materially adverse to the business,
operations, properties, assets, condition (financial or otherwise), or results
of operations of TMR and its Subsidiaries taken as a whole (with cumulative
changes or effects greater than $25,000,000 being material) or on the
consummation of the transactions contemplated by this Agreement; provided,
however, that the terms "TMR Material Adverse Change" and "TMR Material
Adverse Effect" shall not include normal production decline of oil and gas
properties, economic, political or legal changes affecting the oil and gas
industry as a whole, general changes in oil or gas prices or results of drilling
of any undeveloped or unevaluated leaseholds or horizons now owned or hereafter
acquired.
"TMR Preferred Stock" shall have the meaning set forth in Section 5.3(a).
"TMR Required Consents" shall mean all required third-party consents or
other approvals set forth in the TMR Disclosure Schedule.
"TMR SEC Reports" shall have the meaning set forth in Section 5.5(b).
"TMR Series A Preferred" shall have the meaning set forth in the second
Whereas clause of this Agreement.
"TMR Special Meeting" shall have the meaning set forth in Section 9.4(a).
"TMR Stockholders' Approval" shall have the meaning set forth in Section
5.10.
"Violation" shall have the meaning set forth in Section 5.4(b).
ARTICLE II
THE MERGER
SECTION 2.1 THE MERGER. Upon the terms and subject to the conditions set
forth in this Agreement, and in accordance with the DGCL, TMR Sub shall be
merged with and into the Company at the Effective Time (as hereinafter defined).
Following the Merger, the separate corporate existence of TMR Sub shall
thereupon cease, and the Company shall continue as the surviving corporation
(the "Surviving Corporation") and shall succeed to and assume all the rights
and obligations of TMR Sub in accordance with the DGCL.
SECTION 2.2 EFFECTIVE TIME OF THE MERGER. The parties acknowledge that it
is their mutual desire and intent to consummate the Merger as soon as
practicable after the date hereof. Accordingly, the parties shall use all
reasonable efforts to bring about the satisfaction as soon as practicable of all
the conditions specified in Article X and otherwise to effect the consummation
of the Merger as soon as practicable. Subject to the terms hereof, as soon as
practicable after all of the conditions set forth in Article X shall have been
satisfied or waived, the parties hereto will (i) file a certificate of merger
(the "Certificate of Merger") executed in accordance with the relevant
provisions of the DGCL and (ii) make all other filings or recordings required
under the DGCL. The Merger shall become effective at such time, on, or as soon
as practicable after, the Closing Date, as the Certificate of Merger is duly
filed with the Secretary of State of Delaware ("Secretary of State") or at
such other time, on, or as soon as practicable after, the Closing Date, as TMR
and the Company shall agree shall be specified in the Certificate of Merger (the
"Effective Time").
SECTION 2.3 CERTIFICATE OF INCORPORATION. 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
following the Effective Time, until duly amended.
SECTION 2.4 BYLAWS. The Bylaws of TMR Sub as in effect immediately prior
to the Effective Time shall be the Bylaws of the Surviving Corporation following
the Effective Time, until duly amended.
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SECTION 2.5 DIRECTORS OF THE SURVIVING CORPORATION. Effective as of the
Effective Time, (i) the then serving directors of the Company shall resign and
(ii) the individuals listed as such in Exhibit A attached hereto shall be the
directors of the Surviving Corporation until the earlier of their resignation or
removal or until their respective successors are duly elected and qualified, as
the case may be.
SECTION 2.6 OFFICERS OF THE SURVIVING CORPORATION. Effective as of the
Effective Time, (i) the then serving officers of the Company shall resign and
(ii) the individuals listed as such in Exhibit B shall be the officers of the
Surviving Corporation until the earlier of their resignation or removal or until
their respective successors are duly elected and qualified, as the case may be.
SECTION 2.7 EFFECTS OF MERGER. The Merger shall have the effects set
forth in the DGCL, including Section 259 thereof.
ARTICLE III
CONVERSION OF SHARES
SECTION 3.1 EFFECT OF MERGER ON CAPITAL STOCK. At the Effective Time, by
virtue of the Merger and without any action on the part of any holder of any
capital stock of the Company, TMR or TMR Sub:
(a) CANCELLATION OF CERTAIN COMPANY COMMON STOCK. Each share of
Company Common Stock, if any, that is held in the treasury of the Company
shall be canceled and cease to exist and no capital stock of TMR or other
consideration shall be delivered in exchange therefor.
(b) CONVERSION OF COMPANY COMMON STOCK. Each issued and outstanding
share of Company Common Stock (other than shares of Company Common Stock
canceled pursuant to Section 3.1(a)) shall be converted into duly
authorized, validly issued, fully paid and nonassessable shares of (i) TMR
Common Stock and (ii) TMR Series A Preferred, on the bases and in the
manner specified in Exhibit C (collectively, the "Conversion Rights").
Upon such conversion, all such shares of Company Common Stock shall be
canceled and cease to exist, and the holder of a certificate representing
such shares shall cease to have any rights with respect thereto, except the
right to receive the number of whole shares of TMR Common Stock and TMR
Series A Preferred to be issued in consideration therefor upon the
surrender of such certificate in accordance with Section 3.2 and Exhibit C.
(c) CONVERSION OF COMMON STOCK OF TMR SUB. Each issued and
outstanding share of common stock, par value $0.01 per share, of TMR Sub
shall be converted into one fully paid and nonassessable share of common
stock, par value $1.00 per share, of the Surviving Corporation.
SECTION 3.2 EXCHANGE OF CERTIFICATES.
(a) EXCHANGE. At the Effective Time, TMR and SLOPI shall exchange and
deliver to each other certificates for all shares of Company Common Stock, TMR
Common Stock and TMR Series A Preferred.
(b) NO FRACTIONAL SECURITIES. No fractional share interests will be
created because the formula for the Conversion Rights specifies that all share
calculations shall be rounded up to the nearest whole share of TMR Common Stock
or TMR Series A Preferred.
(c) CLOSING OF TRANSFER BOOKS. From and after the Effective Time, the
stock transfer books of the Company shall be closed and no transfer of any
Company Common Stock shall thereafter be made.
SECTION 3.3 ADJUSTMENTS TO PREVENT DILUTION. Subject to the requirements
of Article VIII hereof, in the event that prior to the Effective Time there is a
change in the number of issued and outstanding shares of TMR Common Stock or
Company Common Stock, as the case may be, as a result of a reclassification,
subdivision, recapitalization, combination, exchange, stock split (including
reverse stock split), stock dividend or distribution or other similar
transaction, the Conversion Rights shall be equitably adjusted to eliminate the
effects of such event, and all references to the Conversion Rights in this
Agreement shall be deemed to be to the Conversion Rights as so adjusted.
SECTION 3.4 FURTHER ASSURANCES. At and after the Effective Time, the
officers and directors of the Surviving Corporation will be authorized to
execute and deliver, in the name and on behalf of the
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Company or TMR Sub, any deeds, bills of sale, assignments or assurances and to
take and do, in the name and on behalf of the Company or TMR Sub, any other
actions and things to vest, perfect or conform of record or otherwise in the
Surviving Corporation any and all right, title and interest in, to and under any
of the rights, properties or assets acquired or to be acquired by the Surviving
Corporation as a result of, or in connection with, the Merger.
ARTICLE IV
THE CLOSING
SECTION 4.1 CLOSING. The closing of the Merger (the "Closing") shall
take place at the offices of Bracewell & Patterson, L.L.P., 711 Louisiana
Street, Houston, Texas 77002 at 10:00 a.m., local time, on the second business
day immediately following the date on which the last of the conditions set forth
in Article X is fulfilled or waived, or at such other time and date and place as
TMR and the Company shall mutually agree (the "Closing Date").
At the Closing, TMR and SLOPI shall execute and deliver to each other: (a)
the Stock Rights and Restriction Agreement, (b) the Registration Rights
Agreement and (c) the other closing documents referred to in Sections 10.1, 10.2
and 10.3.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF TMR
Except as set forth in the TMR Disclosure Schedule attached hereto as
Exhibit D (the "TMR Disclosure Schedule"), TMR represents and warrants to
SLOPI and the Company as follows:
SECTION 5.1 ORGANIZATION AND QUALIFICATION. TMR is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Texas, and each of TMR's Subsidiaries is a corporation duly organized, validly
existing and in good standing under the laws of its jurisdiction of
incorporation. Each of TMR and its Subsidiaries has all requisite corporate
power and authority, and is duly authorized by all necessary regulatory
approvals and orders, to own, lease and operate its assets and properties and to
carry on its business as it is now being conducted, and is duly qualified and in
good standing to do business in each jurisdiction in which the nature of its
business or the ownership or leasing of its assets and properties makes such
qualification necessary, other than such failures which, individually or in the
aggregate, will not have a TMR Material Adverse Effect.
SECTION 5.2 SUBSIDIARIES.
(a) Section 5.2 of the TMR Disclosure Schedule sets forth a list as of the
date hereof of all Subsidiaries and Joint Ventures of TMR, including the name of
each such entity and the state or jurisdiction of its formation.
(b) All of the issued and outstanding shares of capital stock of each
Subsidiary of TMR are validly issued, fully paid, nonassessable and free of
preemptive rights and are owned directly or indirectly by TMR free and clear of
any liens, claims, encumbrances, security interests, equities, charges and
options of any nature whatsoever, and there are no outstanding subscriptions,
options, calls, contracts, voting trusts, proxies or other commitments,
understandings, restrictions, arrangements, rights or warrants, including any
right of conversion or exchange under any outstanding security, instrument or
other agreement, obligating any such Subsidiary to issue, deliver or sell, or
cause to be issued, delivered or sold, additional shares of its capital stock or
obligating it to grant, extend or enter into any such agreement or commitment.
SECTION 5.3 CAPITALIZATION.
(a) As of the date hereof, the authorized capital stock of TMR consists of
100,000,000 shares of TMR Common Stock and 25,000,000 shares of preferred stock,
par value $1.00 per share ("TMR Preferred Stock").
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(b) As of the close of business on January 30, 1998, 33,449,469 shares of
TMR Common Stock and no shares of TMR Preferred Stock were issued and
outstanding. As of the close of business on January 30, 1998, 46,792 shares of
TMR Common Stock were held by TMR in its treasury.
(c) All of the issued and outstanding shares of the capital stock of TMR
are validly issued, fully paid, nonassessable and free of preemptive rights.
(d) At the close of business on January 30, 1998, (i) 1,964,687 shares of
TMR Common Stock were reserved for issuance pursuant to outstanding options and
awards under TMR's employee and director stock plans as described in the TMR
Disclosure Schedule, (ii) 2,105,484 shares of TMR Common Stock were reserved for
issuance upon exercise of TMR's outstanding warrants as described in the TMR
Disclosure Schedule, and (iii) 3,099,612 shares of TMR Common Stock were
reserved for future awards under TMR's 1995 Long Term Incentive Plan and 1997
Long Term Incentive Plan. A detailed schedule of all such options, warrants and
awards is included in the TMR Disclosure Schedule, showing all dates of grant,
dates of expiration, and exercise terms, conditions and prices.
(e) The form of Certificate of Designation for the TMR Series A Preferred
has been approved by TMR's Board of Directors.
(f) There are no outstanding subscriptions, options, calls, contracts,
voting trusts, proxies or other commitments, understandings, restrictions,
arrangements, rights or warrants, including any right of conversion or exchange
under any outstanding security, instrument or other agreement, to which TMR or
any of its Subsidiaries is a party or by which any of them is bound obligating
TMR or any of its Subsidiaries to issue, deliver or sell, or cause to be issued,
delivered or sold, additional shares of the capital stock of TMR or other voting
securities of TMR obligating TMR to grant, extend or enter into any such
agreement or commitment.
SECTION 5.4 AUTHORITY; NON-CONTRAVENTION; STATUTORY APPROVALS; COMPLIANCE.
(a) AUTHORITY.
(i) The Board of Directors of TMR has approved this Agreement, TMR
has all requisite power and authority to enter into this Agreement and,
subject to the approval of the issuance of shares of TMR Common Stock
pursuant to the Merger and pursuant to the terms of the TMR Series A
Preferred and the Stock Rights and Restriction Agreement (collectively, the
"Share Issuance") by the stockholders of TMR, the filing of the
Certificate of Designations with the Secretary of State of Texas pursuant
to the TBCA and TMR Required Statutory Approvals, to consummate the Merger
and the other transactions contemplated hereby.
(ii) The execution and delivery of this Agreement and the
consummation by TMR of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of TMR, subject to
approval of the Share Issuance by the stockholders of TMR.
(iii) This Agreement has been duly and validly executed and delivered
by TMR and, assuming the due authorization, execution and delivery hereof
by SLOPI and the Company, constitutes a valid and binding obligation of
TMR, enforceable against TMR in accordance with its terms, except as may be
limited by applicable bankruptcy, insolvency, reorganization, fraudulent
conveyance or other similar laws affecting the enforcement of creditors'
rights generally, and except that the availability of equitable remedies,
including specific performance, may be subject to the discretion of any
court before which any proceedings may be brought.
(iv) All directors of TMR have advised the Company and SLOPI that
they intend to vote all their shares of TMR Common Stock in favor of the
Share Issuance.
(b) NON-CONTRAVENTION. The execution and delivery of this Agreement by
TMR do not, and the consummation of the transactions contemplated hereby and
thereby will not, violate, conflict with or result in a breach of any provision
of, or constitute a default (with or without notice or lapse of time or both)
under, or result in the termination of, or accelerate the performance required
by, or result in a right of termination, cancellation or acceleration of any
obligation or the loss of a material benefit under, or result in
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the creation of any lien, security interest, charge or encumbrance upon any of
the properties or assets (any such violation, conflict, breach, default, right
of termination, cancellation or acceleration, loss or creation, a "Violation")
of, TMR or any of its Subsidiaries or, to the knowledge of TMR, its Joint
Ventures, under any provisions of:
(i) the articles or certificates of incorporation, bylaws or similar
governing documents of TMR or any of its Subsidiaries or Joint Ventures;
(ii) subject to obtaining the TMR Required Statutory Approvals, any
statute, law, ordinance, rule, regulation judgment, decree, order or
injunction of any Governmental Authority applicable to TMR or any of its
Subsidiaries or Joint Ventures or any of their respective properties or
assets or business as presently conducted; or
(iii) subject to obtaining the TMR Required Consents, any note, bond,
mortgage, indenture, deed of trust, license, franchise, permit, concession,
contract, lease or other instrument, obligation or agreement of any kind to
which TMR or any of its Subsidiaries or Joint Ventures is now a party or by
which it or any of its properties or assets may be bound or affected;
excluding from the foregoing such Violations as would not, in the aggregate,
have a TMR Material Adverse Effect.
(c) STATUTORY APPROVALS. Except for (i) the filing with the SEC of (A)
the Proxy Statement and (B) such reports under Section 13(a) of the Exchange Act
as may be required in connection with this Agreement and the transactions
contemplated hereby, (ii) the filing of the Certificate of Merger with the
Delaware Secretary of State with respect to the Merger as provided in the DGCL
(iii) the filing of the Certificate of Designation with the Texas Secretary of
State as provided under the TBCA, and (iv) the filing of appropriate documents
with the relevant authorities in other states in which TMR is qualified to do
business, no declaration, filing, or registration with, or notice to or
authorization, consent or approval of, any Governmental Authority is necessary
for the execution and delivery of this Agreement by TMR or the consummation by
TMR of the transactions contemplated hereby, the failure to obtain, make or give
which would have a TMR Material Adverse Effect (the "TMR Required Statutory
Approvals"), it being understood that references in this Agreement to
"obtaining" such TMR Required Statutory Approvals shall mean making such
declarations, filings or registrations; giving such notice, obtaining such
consents and approvals; and having such waiting periods expire, as are necessary
to avoid a violation of law.
(d) COMPLIANCE.
(i) To the knowledge of TMR's executive officers, neither TMR nor any
of its Subsidiaries nor, to the knowledge of TMR, any of its Joint Ventures
is in violation of or under investigation with respect to, or has been
given notice or been charged with any violation of any law, statute, order,
rule, regulation, ordinance or judgment (including without limitation, any
applicable environmental law, ordinance or regulation) of any Governmental
Authority, except for violations that do not have, and would not have, a
TMR Material Adverse Effect.
(ii) TMR, its Subsidiaries and, to the knowledge of TMR, its Joint
Ventures have all permits, licenses, franchises and other governmental
authorizations, consents and approvals necessary to conduct their
respective business as currently conducted, except those the failure to
obtain which would not have a TMR Material Adverse Effect.
SECTION 5.5 REPORTS AND FINANCIAL STATEMENTS.
(a) Since December 31, 1993, the filings required to be made by TMR and
Cairn Energy USA, Inc. ("Cairn") under the Securities Act or the Exchange Act
have been filed with the SEC as required by each such law or regulation
including all forms, statements, reports, agreements and all documents,
exhibits, amendments and supplements appertaining thereto, and TMR have complied
in all material respects with all applicable requirements of the appropriate act
and the rules and regulations thereunder.
(b) TMR has made available to SLOPI and the Company a true and complete
copy of each report, schedule, registration statement and definitive proxy
statement filed by TMR and/or Cairn with the SEC
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since December 31, 1993 (such documents of TMR and Cairn as filed, and any and
all amendments thereto being collectively referred to as the "TMR SEC
Reports").
(c) The TMR SEC Reports, including without limitation any financial
statements or schedules included therein, at the time filed, and all forms,
reports or other documents filed by TMR with the SEC after the date hereof, did
not and will not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were or will
be made, not misleading.
(d) The audited consolidated financial statements and unaudited interim
financial statements of TMR included in the TMR SEC Reports have been prepared,
and the audited consolidated financial statements and unaudited interim
financial statements of TMR included in all forms, reports, or other documents
filed by TMR with the SEC after the date hereof will be prepared, (collectively,
the "TMR Financial Statements") in accordance with GAAP applied on a
consistent basis (except as may be indicated therein or in the notes thereto and
except with respect to unaudited statements as permitted by Form 10-Q) and
fairly present, or will fairly present, in all material respects the financial
position of TMR as of the respective dates thereof or the results of operations
and cash flows for the respective periods then ended, as the case may be,
subject, in the case of the unaudited interim financial statements, to normal,
recurring audit adjustments.
(e) True, accurate and complete copies of the Articles of Incorporation
and Bylaws of TMR, as in effect on the date hereof, have been delivered to the
Company.
SECTION 5.6 ABSENCE OF CERTAIN CHANGES OR EVENTS; ABSENCE OF UNDISCLOSED
LIABILITIES.
(a) Except as set forth in the TMR SEC Reports or as otherwise expressly
permitted by this Agreement, from December 31, 1996 through the date hereof TMR
and each of its Subsidiaries has conducted its business only in the ordinary
course of business consistent with past practice and there has not been (i) any
declaration, setting aside or payment of any dividend (whether in cash, stock or
property) with respect to any of TMR's capital stock, (ii) (A) any granting by
TMR or any of its Subsidiaries to any executive officer of TMR or any of its
Subsidiaries of any increase in compensation, except in the ordinary course of
business consistent with prior practice or as was required under employment
agreements in effect as of December 31, 1996, (B) any granting by TMR or any of
its Subsidiaries to any such executive officer of any increase in severance or
termination pay, except as was required under employment, severance or
termination agreements in effect as of December 31, 1996, or (C) any entry by
TMR or any of its Subsidiaries into any employment, severance or termination
agreement with any such executive officer, (iii) any damage, destruction or
loss, whether or not covered by insurance, that would have a TMR Material
Adverse Effect or (iv) the occurrence or existence of any other fact or
condition that would have a TMR Material Adverse Effect.
(b) Neither TMR nor any of its Subsidiaries has any liabilities or
obligations (whether absolute, accrued, contingent or otherwise) of a nature
required by GAAP to be reflected in a consolidated corporate balance sheet,
except liabilities, obligations or contingencies (i) that are accrued or
reserved against in the preliminary consolidated financial statements of TMR or
reflected in the notes thereto as of and for the year ended December 31, 1997,
copies of which are attached as Exhibit I, (ii) that were incurred after
December 31, 1997 in the ordinary course of business and would not have a TMR
Material Adverse Effect, or (iii) that are described in Section 5.6 of the TMR
Disclosure Schedule.
SECTION 5.7 LITIGATION. There are no claims, suits, actions or
proceedings, pending or, to the knowledge of the executive officers of TMR,
threatened, nor are there, to the knowledge of the executive officers of TMR,
any investigations or reviews pending or threatened against, relating to or
affecting TMR or any of its Subsidiaries or Joint Ventures, or judgments,
decrees, injunctions, rules or orders of any court, governmental department,
commission, agency, instrumentality or authority or any arbitrator applicable to
TMR or any of its Subsidiaries or Joint Ventures, that would have a TMR Material
Adverse Effect.
SECTION 5.8 PROXY STATEMENT. None of the information supplied or to be
supplied by or on behalf of TMR for inclusion or incorporation by reference in
the proxy statement, at the date mailed to such
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TMR's stockholders and, as the same may be amended or supplemented, at the time
of the meeting, in definitive form relating to the meeting of the stockholders
of TMR to be held in connection with the Share Issuance (the "Proxy
Statement"), will contain any untrue statement of a material fact or omit to
state any material fact with respect to TMR or its Subsidiaries necessary in
order to make the statements therein, in light of the circumstances under which
they are made, not misleading.
SECTION 5.9 TAX MATTERS.
(a) TMR and each of its Subsidiaries have filed (i) within the time and in
the manner prescribed by law, all required Tax Returns calculated on or with
reference to income, profits, earnings or gross receipts and all other Tax
Returns required to be filed that would report a material amount of Tax, and
(ii) paid all Taxes due and payable within the time and in the manner prescribed
by law except for those being contested in good faith and for which adequate
reserves have been established.
(b) As of the date hereof there are no claims, assessments, audits or
administrative or court proceedings pending against TMR or any of its
Subsidiaries for any alleged deficiency in Tax, and none of TMR or any of its
Subsidiaries has executed any outstanding waivers or comparable consents
regarding the application of the statute of limitations with respect to any
Taxes or Tax Returns.
(c) TMR has established adequate accruals for Taxes and for any liability
for deferred Taxes in the TMR Financial Statements in accordance with GAAP.
SECTION 5.10 VOTE REQUIRED. The approval of the Share Issuance by the
affirmative vote of holders of a majority of the shares of TMR Common Stock
entitled to vote on such matter at the TMR Special Meeting (the "TMR
Stockholders' Approval") is the only vote of the holders of any class or series
of the capital stock of TMR required to approve this Agreement, the Merger and
the other transactions contemplated hereby.
SECTION 5.11 STATE TAKEOVER STATUTES; ABSENCE OF SUPERMAJORITY
PROVISION. TMR has taken all action to assure that no state takeover statute or
similar statute or regulation, shall apply to the Merger or any of the other
transactions contemplated hereby. Except for TMR Stockholders' Approval, no
other stockholder action on the part of TMR is required for approval of the
Merger, this Agreement and the transactions contemplated hereby. No provisions
of TMR's Articles of Incorporation or By-laws or other governing instruments of
its Subsidiaries or the terms of any rights plan or other takeover defense
mechanism of TMR would, directly or indirectly, restrict or impair the ability
of the TMR or the Company to consummate the Merger or the ability of any party
to consummate any of the other transactions contemplated herein or in any of the
documents attached hereto; nor will any such provisions restrict or impair the
ability of SLOPI or any Affiliate of Shell to exercise any rights to vote or
otherwise exercise any other rights of a stockholder generally, in all cases as
to any and all securities acquired pursuant to this Agreement or any of the
other transactions contemplated herein or in any of the documents attached
hereto. The Company has taken action to assure that the provisions of Article
13.03 of the TBCA will not apply to the acquisition of securities acquired
pursuant to this Agreement or any of the other transactions contemplated herein
or in any of the documents attached hereto. In addition, the provisions of
Article 8 of the Articles of Incorporation of TMR will not apply to securities
acquired pursuant to this Agreement or any of the other transactions
contemplated herein or in any of the documents attached hereto.
SECTION 5.12 HSR EXEMPTION. The assets of TMR that do not fall under the
exemption from the requirements of the HSR Act specified in 16 CFR Ch. 1 ^802.3
(Acquisitions of carbon-based mineral reserves) are less than $15 million.
SECTION 5.13 ERISA.
(a) With respect to all employee benefit, welfare, retirement, pension and
other similar plans, TMR and its Subsidiaries have complied with all
requirements of the Employee Retirement Income Security Act and of the Code, and
all rules and regulations thereunder, except to the extent that any and all such
noncompliance would not result in any liability or liabilities to TMR or its
Subsidiaries aggregating more than $1,000,000.
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(b) Except as disclosed on Section 5.13(b) of the TMR Disclosure Schedule,
TMR and its Subsidiaries have not established, and do not maintain, any
post-retirement benefits for their employees, including but not limited to
post-retirement life insurance or post-retirement medical.
(c) The agreements listed in Section 5.13(c) of the TMR Disclosure Schedule
constitute all agreements or arrangements of TMR or its Subsidiaries in effect
on the date hereof that provide for the payment of income or the provisions of
benefits (including vesting, entitlement, receipt, creation or transfer of any
rights, privileges, income or title to property or beneficial ownership) to any
employees of TMR as a result of a change of control. Except as set forth in
Section 5.13(c) of the TMR Disclosure Schedule, there is no acceleration of
payments or vesting nor any increase in benefits that would result from the
Merger, nor is there any forfeiture provision thereof that will be altered by
the Merger.
(d) Prior to the date of this Agreement, neither TMR nor any of its
Subsidiaries has made any representation to its employees as to employment
opportunities with SLOPI or benefits available to them under SLOPI employee
benefit plans.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF SLOPI AND THE COMPANY
Except as set forth in the Company Disclosure Schedule attached hereto as
Schedule II (the "Company Disclosure Schedule"), SLOPI and the Company jointly
and severally represent and warrant to TMR as follows:
SECTION 6.1 ORGANIZATION AND QUALIFICATION. Each of SLOPI and the Company
is a corporation duly organized, validly existing and in good standing, under
the laws of the State of Delaware. The Company has all requisite corporate power
and authority, and is duly authorized by all necessary regulators approvals and
orders, to own, lease and operate its assets and properties and to carry on its
business as it is now being conduced, and is duly qualified and in good standing
to do business in each jurisdiction in which the nature of its business or the
ownership or leasing of its assets and properties makes such qualification
necessary, other than such failure which, individually or in the aggregate, will
not have a Company Material Adverse Effect.
SECTION 6.2 SUBSIDIARIES. The Company has no Subsidiaries or Joint
Ventures.
SECTION 6.3 CAPITALIZATION.
(a) As of the date hereof, the authorized capital stock of the Company
consists of 3,000 shares of Company Common Stock and no shares of preferred
stock.
(b) As of the close of business on February 28, 1998, 1,000 shares of
Company Common Stock were issued and outstanding. As of the close of business on
February 28, 1998, no shares of Company Common Stock were held by the Company in
its treasury.
(c) All of the issued and outstanding shares of the capital stock of the
Company are validly issued, fully paid, nonassessable and free of preemptive
rights.
(d) There are no outstanding subscriptions, options, calls, contracts,
voting trusts, proxies or other understandings, restrictions, arrangements,
rights or warrants, including any right of conversion or exchange under any
outstanding security, instrument or other agreement, obligating the Company to
issue, deliver or sell, or cause to be issued, delivered or sold, additional
shares of capital stock of the Company or obligating the Company to grant,
extend or enter into any such agreement or commitment.
SECTION 6.4 AUTHORITY; NON-CONTRAVENTION; STATUTORY APPROVALS; COMPLIANCE.
(a) AUTHORITY.
(i) The Board of Directors of the Company has declared the Merger fair
to and advisable and in the best interests of SLOPI, as the sole
stockholder of the Company. The Company and SLOPI have all requisite power
and authority to enter into this Agreement and, subject to the Company
Required Statutory Approvals, to consummate the transactions contemplated
hereby.
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(ii) The execution and delivery of this Agreement and the consummation
by SLOPI and the Company of the transactions contemplated hereby have been
duly authorized by all necessary corporate action on the part of SLOPI and
the Company.
(iii) This Agreement has been duly and validly executed and delivered
by SLOPI and the Company and, assuming the due authorization execution and
delivery hereof by TMR and TMR Sub, constitutes the valid and binding
obligation of SLOPI and the Company, enforceable against SLOPI and the
Company in accordance with its terms, except as would be limited by
applicable bankruptcy, insolvency, reorganization, fraudulent conveyance or
other similar laws affecting the enforcement of creditors' rights generally
and except that the availability of equitable remedies, including specific
performance, may be subject to the discretion of any court before which any
proceeding therefor may be brought.
(b) NON-CONTRAVENTION. The execution and delivery of this Agreement by
SLOPI and the Company do not, and the consummation of the transactions
contemplated hereby and thereby will not, result in any Violation by SLOPI or
the Company under any provisions of:
(i) the certificate of incorporation, bylaws or similar governing
documents of SLOPI or the Company;
(ii) subject to obtaining the Company Required Statutory Approvals,
any statute, law, ordinance, rule, regulation judgment, decree, order or
injunction of any Governmental Authority applicable to the Company or any
of its properties or assets or business as previously conducted; or
(iii) subject to obtaining the Company Required Consents, any note,
bond, mortgage, indenture, deed of trust, license, franchise, permit,
concession, contract, lease or other instrument, obligation or agreement of
any kind to which the Company is now a party or by which it or any of its
properties or assets may be bound or affected;
excluding from the forgoing clauses such Violations as would not, in the
aggregate, reasonably likely have a Company Material Adverse Effect.
(c) STATUTORY APPROVALS. Except for (i) the filing by SLOPI with the SEC
of such reports under the Exchange Act as may be required in connection with
this Agreement and the transactions contemplated hereby and (ii) the filing of
the Certificate of Merger with the Delaware Secretary of State with respect to
the Merger as provided in the DGCL and appropriate documents with the relevant
authorities in other states in which the Company is qualified to do business, no
declaration, filing or registration with, or notice to or authorization, consent
or approval of, any Governmental Authority is necessary for the execution and
delivery of this Agreement by the Company or the consummation by the Company of
the transactions contemplated hereby, the failure to obtain, make or give which
would reasonably likely have a Company Material Adverse Effect (the "Company
Required Statutory Approvals"), it being understood that references in this
Agreement to "obtaining" such Company Required Statutory Approvals shall mean
making such declarations, filings or registrations; giving such notice;
obtaining such consents or approvals; and having such waiting periods expires as
are necessary to avoid a violation of law.
(d) COMPLIANCE.
(i) To the knowledge of the Company's executive officers, the Company
is not in violation of or under investigation with respect to, or has been
given notice or been charged with any violation of, any law, statute,
order, rule, regulation, ordinance or judgment (including, without
limitation, any applicable environmental law, ordinance or regulation) of
any Governmental Authority, except for violations that do not have, and,
would not reasonably likely have, a Company Material Adverse Effect.
(ii) The Company and/or its Affiliates have all permits, licenses,
franchises and other governmental authorizations, consents and approvals
necessary, to conduct the business of the Company as currently conducted,
except those the failure to obtain which would not reasonably likely have a
Company Material Adverse Effect.
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SECTION 6.5 FINANCIAL STATEMENTS.
(a) The Company's unaudited statement of revenue and direct operating
expenses is attached as Exhibit D (the "Company Financial Statements"). The
Company Financial Statements will be audited before the preliminary Proxy
Statement is filed with the SEC. The Company Financial Statements fairly present
the revenues and direct lease operating expenses of the oil and gas properties
now owned by the Company for the years ended December 31, 1997, 1996 and 1995.
The Company Financial Statements do not include any balance sheets, income
statements, or statements of cash flows.
(b) True, accurate and complete copies of the Certificate of Incorporation
and By-Laws of the Company, as in effect on the date hereof, have been delivered
to TMR.
(c) As of the Closing, the Company shall have no debts or obligations other
than (i) accrued Taxes, which shall be provided for as set forth in Section
9.10, and (ii) accounts payable and other expenditures relating to the
properties of the Company which shall be accrued and reflected in the final
closing settlement prepared in accordance with the true-up accounting procedures
in Schedule III and Sections 8.2 and 12.14.
SECTION 6.6 ABSENCE OF CERTAIN CHANGES OR EVENTS; ABSENCE OF UNDISCLOSED
LIABILITIES.
Except as otherwise expressly permitted by this Agreement, from December
31, 1997 through the date hereof the Company has conducted its business only in
the ordinary course of business consistent with past practice and there has not
been (i) any declaration, setting aside or payment of any dividend (whether in
cash, stock or property) with respect to any of the Company's capital stock,
(ii) (A) any granting by the Company to any executive officer of the Company of
any increase in compensation, except in the ordinary course of business
consistent with prior practice or as was required under employment agreements in
effect as of December 31, 1997, (B) any granting by the Company to any such
executive officer or any increase in severance or termination pay, except as was
required under employment, severance or termination agreements in effect as of
December 31, 1997, or (C) any entry by the Company into any employment,
severance or termination agreement with any such executive officer, (iii) any
damage, destruction or loss, whether or not covered by insurance, that would
have a Company Material Adverse Effect or (iv) any other fact or condition
exists that would reasonably likely have a Company Material Adverse Effect.
SECTION 6.7 LITIGATION. There are no claims, suits, actions or
proceedings, pending or, to the knowledge of the executive officers of the
Company, threatened, nor are there, to the knowledge of the executive officers
of the Company, any investigations or reviews pending or threatened against,
relating to or affecting the Company or judgments, decrees, injunctions, rules
or orders of any court, governmental department, commission, agency,
instrumentality or authority or any arbitrator applicable to the Company that
would have, or would reasonable likely have, a Company Material Adverse Effect.
SECTION 6.8 INFORMATION IN PROXY STATEMENT.
None of the information supplied or to be supplied by or on behalf of SLOPI
or the Company for inclusion or incorporation by reference in the Proxy
Statement will, at the date the Proxy Statement is mailed to the stockholders of
TMR and, as the same may be amended or supplemented, at the time of the meetings
of TMR's stockholders to be held in connection with the Share Issuance, contain
any untrue statement of a material fact or omit to state any material fact with
respect to SLOPI or the Company necessary in order to make the statements
therein with respect to SLOPI or the Company, in light of the circumstances
under which they are made, not misleading.
SECTION 6.9 TAX MATTERS.
(a) The Company has filed (i) within the time and in the manner prescribed
by law all required Tax Returns calculated on or with reference to income,
profits, earnings or gross receipts and all other Tax Returns required to be
filed that would report a material amount of Tax, and (ii) paid all Taxes due
and payable within the time and in the manner prescribed by law except for those
being contested in good faith and for which adequate reserves have been
established by the Company.
(b) As of the date hereof there are no claims, assessments, audits or
administrative or court proceedings pending against the Company for any alleged
deficiency in Tax, and none of the Company has
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executed any outstanding waivers or comparable consents regarding the
application of the statute of limitations with respect to any Taxes or Tax
Returns.
(c) All tax allocation or tax sharing agreements shall be terminated prior
to the Closing Date and, except as provided in Section 9.10, no payments are due
or will become due by the Company on or after the Closing Date pursuant to any
such agreement or arrangement.
(d) There is no claim against the Company for any Taxes, and no assessment,
deficiency or adjustment has been asserted or proposed with respect to any Tax
Return of or with respect to the Company; the Company will not be required to
include any amount in income for any taxable period beginning after the
Effective Time as a result of a change in accounting method for any taxable
period ending on or before the Effective Time or pursuant to any agreement with
any Tax authority with respect to any such taxable period.
SECTION 6.10 VOTE REQUIRED. The approval of this Agreement by SLOPI is
the only vote of holders of any class or series of the capital stock of the
Company required to approve this Agreement, the Merger and the other
transactions by the Company and SLOPI contemplated hereby.
SECTION 6.11 EMPLOYEE MATTERS. The Company has no employees and does not
maintain any employee benefit plans. Effective as of the Closing, the Company
will have no obligations with respect to any employee benefit plans or similar
arrangements.
SECTION 6.12 MATERIAL CONTRACTS AND AGREEMENTS. Section 6.12 of the
Company Disclosure Schedule sets forth a list of all contracts, agreements or
arrangements to which the Company is a party or by which the Company or its
assets are bound which (i) would be required to be filed as exhibits to an
Annual Report on Form 10-K for the year ended December 31, 1997 if the Company
were required to file as a registrant under the Exchange Act or (ii) are with an
Affiliate of the Company. The Company has provided TMR with a copy of all
documents transferring beneficial ownership or record title to the Company of
all oil and gas properties and other assets as of the date hereof, as
contemplated in the Asset Conveyance Agreements.
SECTION 6.13 INVESTMENT INTENT. SLOPI will acquire the TMR Common Stock
and the TMR Series A Preferred for investment purposes and not with a view to or
in connection with a distribution within the meaning of the Securities Act.
SLOPI understands and agrees that the certificates representing the TMR Common
Stock and TMR Series A Preferred will have a legend imprinted thereon to the
effect set forth in Section 3 of the Stock Rights and Restrictions Agreement
attached as Exhibit F. The provisions of this Section shall survive Closing.
SECTION 6.14 HSR EXEMPTION. The assets of the Company that do not fall
under the exemption from the requirements of the HSR Act specified in 16 CFR Ch.
1 ^ 802.3 (Acquisitions of carbon-based mineral reserves) are less than $15
million.
ARTICLE VII
REPRESENTATIONS AND WARRANTIES REGARDING TMR SUB
TMR and TMR Sub jointly and severally represent and warrant to SLOPI and
the Company as follows:
SECTION 7.1 ORGANIZATION AND STANDING. TMR Sub is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware. TMR Sub was organized solely for the purpose of acquiring the Company
and engaging in the transactions contemplated by this Agreement and has not
engaged in any business since it was incorporated which is not in connection
with the Merger and this Agreement.
SECTION 7.2 CAPITAL STRUCTURE. The authorized capital stock of TMR Sub
consists of 1,000 shares of common stock, par value $0.01 per share, all of
which are validly issued and outstanding, fully paid and nonassessable, free of
preemptive rights and are owned directly by TMR free and clear of all liens,
claims and encumbrances.
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SECTION 7.3 AUTHORITY; NON-CONTRAVENTION. TMR Sub has all requisite power
and authority to enter into this Agreement and to consummate the Merger and the
other transactions contemplated hereby. The execution and delivery of this
Agreement by TMR Sub, the performance by TMR Sub and its obligations hereunder
and the consummation of the transactions contemplated hereby have been duly
authorized by its Board of Directors and by TMR as its sole stockholder, and,
except for the corporate filings required by state law, no other corporate
proceedings on the part of TMR Sub are necessary to authorize this Agreement and
the Merger and the other transactions contemplated hereby. This Agreement has
been duly and validly executed and delivered by TMR Sub and, assuming the due
authorization, execution and delivery hereof by the Company and SLOPI,
constitutes a valid and binding obligation of TMR Sub enforceable against TMR
Sub in accordance with its terms, except to the extent enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, fraudulent
conveyance or other similar laws affecting the enforcement of creditors' rights
generally, and except that the availability of equitable remedies, including
specific performance, may be subject to the discretion of any court before which
any proceedings may be brought. The execution and delivery of this Agreement do
not, and the consummation of the transactions contemplated hereby and compliance
with the provisions hereof will not, violate, conflict with or result in a
breach of any provision of, or constitute a default (with or without notice or
lapse of time, or both) under, or result in the termination of, or accelerate
the performance required by, or result in a right of termination, cancellation
or acceleration of any obligation or the loss of a material benefit under, or
result in the creation of any lien, security interest, charge or encumbrance
upon any of the properties or assets of TMR Sub under, any provisions of (i) the
Certificate of Incorporation or Bylaws (true and complete copies of which as of
the date hereof have been delivered to the Company) of TMR Sub, (ii) any loan or
credit agreement, note, bond, mortgage, indenture, lease or other agreement,
instrument, permit, concession, franchise or license applicable to TMR Sub or
(iii) any judgment, order, decree, statute, law, ordinance, rule or regulation
applicable to TMR Sub or any of its properties or assets, other than, in the
case of clauses (ii) or (iii), any such conflicts, violations, defaults, rights,
losses, liens, security interests, charges or encumbrance that, individually or
in the aggregate, would not materially impair the ability of TMR Sub to perform
its obligations hereunder or prevent the consummation of any of the transactions
contemplated hereby.
ARTICLE VIII
CONDUCT OF BUSINESS PENDING THE MERGER
After the date hereof and prior to the Effective Time or earlier
termination of this Agreement, TMR shall, and shall cause its Subsidiaries to,
and the Company shall, and shall cause its Subsidiaries to, comply with the
provisions of this Article VIII.
SECTION 8.1 ORDINARY COURSE OF BUSINESS. TMR, TMR's Subsidiaries and the
Company shall conduct their respective businesses in the usual, regular and
ordinary course in substantially the same manner as heretofore conducted. TMR,
TMR's Subsidiaries and the Company shall not take or commit to any material
actions or transactions that are not in the usual, regular and ordinary course
of business, except with the prior written consent of the other parties. The
Company shall consult with TMR prior to electing to participate or not to
participate in any well, lease, or properties; and prior to electing not to
participate in any well, lease or properties shall give TMR reasonable
opportunity to advise the Company that TMR wants the Company to elect to
participate on behalf of TMR on the same terms as the Company would have
participated. If the Merger is not consummated, (i) the Company shall assign its
working interests in any such well, lease or properties to TMR, (ii) TMR shall
reimburse the Company for any costs associated with the participation by the
Company, and (iii) TMR shall receive all the benefits and bear all the
detriments of any such participation, less any benefits that otherwise would be
earned by a non-consenting party in the form of an overriding royalty or similar
interest.
SECTION 8.2 DIVIDENDS AND OTHER PAYMENTS. TMR, the Company and SLOPI
shall follow the true-up accounting procedures specified in Schedule III. TMR
shall not, nor shall it permit any of its Subsidiaries to, and the Company shall
not:
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(a) declare or pay any dividends or make other distributions in
respect of any of their capital stock other than to TMR or to its
Subsidiaries or to the Company, as the case may be, except that, prior to
the Closing Date and subsequent to the Company's payment of its estimated
federal and state income taxes (but excluding any deferred tax liabilities)
for the taxable period beginning October 1, 1997, and ending December 31,
1997, the Company shall be entitled to pay to SLOPI a cash dividend equal
to the excess, if any, of its current assets over its total liabilities
(excluding any liabilities associated with deferred Taxes and gas
imbalances) as of December 31, 1997; or
(b) split, combine or reclassify any of their capital stock or issue
or authorize or propose the issuance of any other securities in respect of,
in lieu of, or in substitution for, shares of their capital stock; or
(c) redeem, repurchase or otherwise acquire any shares of their
capital stock, other than
(i) intercompany acquisitions of capital stock, or
(ii) in connection with the administration of employee benefit and
dividend reinvestment plans as in effect on the date hereof in the
ordinary course of the operation of such plans.
SECTION 8.3 ISSUANCE OF SECURITIES. TMR shall not, and shall not permit
any of its Subsidiaries to, and the Company shall not issue, agree to issue,
deliver or sell, or authorize or propose the issuance, delivery or sale of, any
shares of their capital stock or any class or any securities convertible into or
exchangeable for, or any rights, warrants or options to acquire, any such shares
or convertible or exchangeable securities except for:
(a) the issuance of common stock or other securities by TMR pursuant
to the plans and arrangements listed in the TMR Disclosure Schedules in the
ordinary course of the operation of such plans and arrangements in
accordance with their current terms.
(b) existing outstanding securities and rights to acquire securities
of TMR, or
(c) issuance by a wholly-owned Subsidiary of its capital stock to TMR.
SECTION 8.4 CHARTER DOCUMENTS. TMR and the Company shall not amend or
propose to amend their respective articles or certificate of incorporation or
bylaws in any way adverse to the other; provided that TMR may increase the
number of authorized shares of TMR Common Stock to 200,000,000 in connection
with the TMR Special Meeting; provided, further, that prior to consummation of
the Merger all such shares shall remain subject to Section 8.3.
SECTION 8.5 NO ACQUISITIONS. TMR shall not, nor shall it permit any of
its Subsidiaries to, and the Company shall not, acquire, or publicly propose to
acquire, or agree to acquire, by merger or consolidation, by purchase or
otherwise, any assets of any business or any corporation, partnership,
association or other business organization or division thereof or otherwise
acquire or agree to acquire any assets, in any case or in the aggregate that
involve a transaction or transactions exceeding $50,000,000, except with the
prior written consent of the other parties, which consent shall not be
unreasonably withheld.
SECTION 8.6 NO DISPOSITIONS. TMR shall not, nor shall it permit any of
its Subsidiaries to, and the Company shall not, sell, lease, license, encumber
or otherwise dispose of any assets in any case or in the aggregate that involve
a transaction or transactions exceeding $50,000,000, except (i) for normal
extensions to or replacements of properties in the ordinary course of business
consistent with prior practice; provided, however, this Section shall not
prohibit ordinary course of business transfers of properties in connection with
the establishment of exploration arrangements, including farmout and similar
arrangements or (ii) except with the prior written consent of the other parties.
SECTION 8.7 INDEBTEDNESS. TMR shall not, nor shall it permit any of its
Subsidiaries to, and the Company shall not incur or guarantee any indebtedness
(including any debt borrowed or guaranteed or otherwise assumed, including,
without limitation, the issuance of debt securities), except for:
(a) short-term indebtedness in the ordinary course of business
consistent with past practice,
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(b) long-term indebtedness in connection with the refinancing of
existing indebtedness either at its stated maturity or at a lower cost of
funds, or
(c) borrowings under new or existing credit facilities, except that
the aggregate principal amount of such borrowings may not exceed
$202,500,000.
SECTION 8.8 COMPENSATION, BENEFITS. Except as may be required by
applicable law or by the express terms of this Agreement, TMR shall not, nor
shall it permit any of its Subsidiaries to, and the Company shall not: (a) enter
into, adopt or amend any employee benefit plan or any other contract, agreement,
commitment, arrangement, plan or policy maintained by, contributed to or entered
into by TMR or its Subsidiaries or the Company, as the case may be, or increase
the amount of or accelerate the payment or vesting of any benefit or amount
payable thereunder other than pursuant to the terms thereof or (b) increase, or
enter into any contract, agreement, commitment or arrangement to increase in any
manner, the compensation or fringe benefits, or otherwise to extend, expand or
enhance the engagement, employment or any related rights of any director,
officer or other employee of TMR, its Subsidiaries or the Company, as the case
may be, except for normal increases in the ordinary course of business
consistent with past practice that, in the aggregate in the case of TMR and its
Subsidiaries or in the case of the Company, do not result in a material increase
in benefits or compensation expense to TMR, its Subsidiaries or the Company, as
the case may be, or (c) enter into or amend any employment, severance, or
special pay arrangement with respect to the termination of employment or other
similar contract, agreement or arrangement with any director or officer or other
employee other than in the ordinary course of business consistent with past
practice.
SECTION 8.9 TAX-FREE STATUS. Each party shall report, on all applicable
federal and state Tax returns, the Merger as a reorganization under Section 368
of the Code. No party shall knowingly take any action which would cause the
Merger not to qualify as a reorganization within the meaning of Section 368 of
the Code; provided, however, that the consummation of the Merger and the
issuance of TMR Common Stock and TMR Series A Preferred shall not be a violation
of this provision.
SECTION 8.10 INSURANCE. TMR shall, and shall cause its Subsidiaries to,
and the Company shall, maintain with financially responsible insurance companies
(or through self-insurance not inconsistent with such party's past practice)
insurance in such amounts and against such risks and losses as are consistent
with each respective party's usual, regular and ordinary course of business.
SECTION 8.11 COOPERATION, NOTIFICATION. TMR and the Company shall:
(a) confer on a regular and frequent basis with one or more
representatives of the other party to discuss material operational matters
and the general status of its ongoing operations,
(b) promptly notify the other party of any significant changes in its
business, properties, assets, condition (financial or otherwise), prospects
or results of operations,
(c) advise the other party of any change or event that has had or, to
the knowledge of such party, would reasonably likely have a TMR Material
Adverse Effect or a Company Material Adverse Effect, and
(d) consult with each other prior to making any filings with any state
or federal court, administrative agency, commission or other Governmental
Authority in connection with this Agreement and the transactions
contemplated hereby, and promptly after each such filing provide the other
with a copy thereof.
SECTION 8.12 THIRD-PARTY CONSENTS. Each of TMR and the Company shall use
all commercially reasonable efforts to obtain all TMR Required Consents or
Company Required Consents, as the case may be. Each party shall promptly notify
the other party of any failure or prospective failure to obtain any such
consents and, if requested by the other party, shall provide to the other party
copies of all TMR Required Consents or Company Required Consents, as the case
may be, obtained by such party.
SECTION 8.13 PERMITS. Each of TMR and the Company shall use commercially
reasonable efforts to maintain in effect all existing material permits pursuant
to which such party operates.
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SECTION 8.14 AFFILIATE LIABILITIES. As of the Effective Time, the Company
shall have no liability to any Affiliate of the Company other than those that
are related to the operation of the Company in the ordinary course of business
and are considered in the True-Up Accounting Procedures specified in Schedule
III.
ARTICLE IX
ADDITIONAL AGREEMENTS
SECTION 9.1 ACCESS TO INFORMATION.
(a) Upon reasonable notice, each of TMR and the Company shall, and TMR
shall cause its Subsidiaries to, afford to the officers, directors, employees,
accountants, counsel, investment bankers, financial advisors, consultants and
other representatives of the other (collectively, "Representatives")
reasonable access, during normal business hours throughout the period prior to
the Effective Time, to all of its properties, books, contracts, commitments and
records, including, but not limited to, Tax Returns, but excluding (i) that
information that is restricted by applicable confidentiality and secrecy
agreements, (ii) that information that a party may be restricted from disclosing
under applicable law, and (iii) the corporate proceedings of TMR or the Company
(as the case may be) in considering the Merger, and, during such period, each
shall, and shall cause its Subsidiaries to, furnish promptly to the other:
(i) a copy of each report, schedule and other document filed by it or
any of its Subsidiaries with any Governmental Authority and any other
document pertaining to the transactions contemplated hereby filed with any
Governmental Authority that is not filed as an exhibit to an SEC filing or
described in an SEC filing, and
(ii) all information concerning itself, its Subsidiaries, directors,
officers and stockholders and such matters as may be reasonably requested
by the other party in connection with any filings, applications or
approvals required or contemplated by this Agreement.
(b) Without limiting the application of the Confidentiality Agreement dated
August 21, 1997 between TMR and SWEPI (the "Confidentiality Agreement"), all
documents and information furnished pursuant to Section 9.1(a)(ii) shall be
subject to the Confidentiality Agreement.
(c) TMR and the Company have also signed an Agreement for Indemnification
and Responsibility for Damages to the Subject Properties in connection with Site
Visits dated January 19, 1998 (the "Indemnification Agreement") in order for
TMR to make certain site visits and physical investigations in connection with
its due diligence investigations.
SECTION 9.2 TMR PROXY STATEMENT.
(a) As soon as practicable following the date of this Agreement, TMR shall
prepare and file with the SEC preliminary proxy materials and shall use all
reasonable efforts to have the Proxy Statement cleared by the SEC as promptly as
practicable. SLOPI and the Company shall cooperate with TMR in the preparation
of the Proxy Statement and shall furnish to TMR such data and information
relating to SLOPI and the Company as TMR may reasonably request in order for TMR
to comply with the Exchange Act and for the purpose of including such data and
information in the Proxy Statement. TMR shall give SLOPI and the Company and
their counsel the opportunity to review any preliminary proxy materials and the
Proxy Statement prior to their being filed with the SEC and shall give SLOPI and
the Company and their counsel the opportunity to review all amendments and
supplements thereto and all responses to requests for additional information and
replies to comments prior to their being filed with, or sent to, the SEC. TMR
will provide promptly to SLOPI and the Company copies of all correspondence
between TMR or any of its representatives and the SEC. TMR will advise SLOPI and
the Company promptly when any supplement to or amendment of the Proxy Statement
has been filed, or the issuance of any stop order, or of any request by the SEC
or the New York Stock Exchange for amendment of the Proxy Statement.
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(b) TMR shall also take such action as may be required to cause the shares
of TMR Common Stock and TMR Series A Preferred issuable in connection with the
Merger to be exempt from registration under applicable federal and state
securities laws.
(c) Each of the parties shall furnish all information concerning itself
that is required or customary for inclusion in the Proxy Statement and SLOPI
shall confirm in writing that information which is provided by it, including
without limitation, the Company Financial Statements, as audited, and if the
Proxy Statement is mailed to shareholders on or after May 14, 1998, unaudited
financial statements as of and for the three months ended March 31, 1997 and
1998, conforming the presentation of the Company Financial Statements.
(d) No representation, warranty, covenant or agreement contained in this
Agreement is made by any party hereto with respect to information supplied by
any other party hereto for inclusion in the Proxy Statement.
(e) TMR shall cause the Proxy Statement to comply as to form in all
material respects with the Exchange Act and the rules and regulations
thereunder.
(f) The parties shall take such action as may be reasonably required to
cause the shares of TMR Common Stock issuable in the Merger or upon conversion
of TMR Series A Preferred to be approved for listing on the New York Stock
Exchange.
SECTION 9.3 REGULATORY MATTERS.
(a) Each party hereto shall cooperate and use its reasonable best efforts
promptly to prepare and file all necessary permits, consents, approvals and
authorizations of all Governmental Authorities and all other persons necessary
or advisable to consummate the transactions contemplated by this Agreement,
including, without limitation, the Company Required Statutory Approvals and the
TMR Required Statutory Approvals.
(b) TMR shall have the right to review and approve in advance all
characterizations of the information relating to TMR, on the one hand, and the
Company and SLOPI shall have the right to review and approve in advance all
characterizations of the information relating to the Company or SLOPI, on the
other hand, in either case, which appear in any filing made in connection with
the transactions contemplated by this Agreement or the Merger.
(c) The parties shall consult each other with respect to the obtaining of
all such necessary or advisable permits, consents, approvals and authorizations
of Governmental Authorities.
SECTION 9.4 APPROVAL OF TMR STOCKHOLDERS. TMR shall, as promptly as
reasonably practicable after the date hereof:
(a) take all steps reasonably necessary to duly call, give notice of,
convene and hold a special meeting of its stockholders (the "TMR Special
Meeting") for the purpose of securing the TMR Stockholders' Approval,
(b) distribute to its stockholders the Proxy Statement in accordance
with applicable law, and its Articles of Incorporation and Bylaws,
(c) recommend to its stockholders the approval of the Share Issuance;
provided that the Board of Directors of TMR may withdraw or modify its
recommendation that its shareholders approve the Share Issuance if such
Board determines in good faith, after consultation with and based on the
advice of outside counsel, the failure to withdraw or modify such
recommendation could reasonably be expected to result in a breach of its
fiduciary duties under applicable law, and
(d) cooperate and consult with SLOPI and the Company with respect to
each of the foregoing matters.
SECTION 9.5 DISCLOSURE SCHEDULES; PROPRIETARY DATA. Without limiting the
application of the Confidentiality Agreement, the parties shall use their best
efforts to keep the Disclosure Schedules confidential. Further, TMR agrees (and
shall cause any third party who merges with TMR, is a joint venturer with TMR,
is a successor in interest to TMR or its property or acquires the assets of TMR)
to
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maintain and safeguard any proprietary data obtained through or in connection
with the Merger in a manner at least as stringent as the industry practices for
information and data of similar type and quality.
SECTION 9.6 PUBLIC ANNOUNCEMENTS. SLOPI and the Company, on the one hand,
and TMR and TMR Sub, on the other hand, shall cooperate with each other in the
development and distribution of all news releases and other public information
disclosures with respect to this Agreement or any of the transactions
contemplated hereby and shall not issue any public announcement or statement
prior to consultation with the other party, except that each party may respond
to questions from stockholders and may respond to inquiries from financial
analysts and media representatives in a manner consistent with its past practice
and each party may make such disclosure as may be required by applicable law or
by obligations pursuant to any listing agreement with any national securities
exchange without prior consultation to the extent such consultation is not
reasonably practicable. The parties agree that the initial press release or
releases to be issued in connection with the execution of this Agreement shall
be mutually agreed upon prior to the issuance thereof.
SECTION 9.7 NO WITHDRAWAL OF RECOMMENDATION. Neither the Board of
Directors of TMR nor any committee thereof shall, except in connection with the
termination of this Agreement pursuant to Sections 11.1(a), (b), (c) or (d),
withdraw or modify, or propose to withdraw or modify, in a manner adverse to
SLOPI or the Company the approval or recommendation by the Board of Directors of
TMR or any such committee of this Agreement or the Merger or take any action
having such effect. Notwithstanding the foregoing, in the event the Board of
Directors of TMR determines that, in the exercise of its fiduciary obligations
(as determined in good faith after consultation with and based on the advice of
outside counsel), that the recommendation of the approval of the Share Issuance
is not in the interest of TMR and its shareholders and then the Board of
Directors of TMR may withdraw its approval or recommendation of this Agreement
and the Share Issuance.
SECTION 9.8 EXPENSES. All costs and expenses incurred in connection with
this Agreement and the transactions contemplated hereby shall be paid by the
party incurring such expenses.
SECTION 9.9 COVENANT TO SATISFY CONDITIONS.
(a) Each of TMR, TMR Sub, SLOPI and the Company shall take all reasonable
actions necessary, to comply promptly with all legal requirements that may be
imposed on it with respect to this Agreement.
(b) Subject to the terms and conditions hereof, and taking into account
the circumstances and giving due weight to the materiality of the matter
involved or the action required, TMR, TMR Sub, SLOPI and the Company shall each
use their reasonable best efforts to take or cause to be taken all actions, 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 Merger and
the other transactions contemplated hereby (subject to TMR Stockholders'
Approval), including fully cooperating with the other in obtaining the TMR
Required Statutory Approvals, the Company Required Statutory Approvals and all
other approvals and authorizations of any Governmental Authorities necessary or
advisable to consummate the transactions contemplated hereby.
SECTION 9.10 TAX MATTERS
(a) (1) With respect to each Tax Return covering a taxable period
beginning on or after January 1, 1998 by or with respect to the Company (other
than the consolidated, combined, or unitary Tax Returns described in Section
9.10(a)(3)), TMR shall cause such Tax Return to be accurately prepared and
completed, shall cause to be included in such Tax Return all items of income,
gain, loss, deduction and credit or other items (collectively "Tax Items")
required to be included therein, and shall timely file such Tax Returns and pay
all taxes with respect to such period.
(2) SLOPI shall cause the Company to cause all Tax Returns with respect to
or which include the Company for all periods ending on or before December 31,
1997, to be accurately completed and timely filed and SLOPI shall pay or cause
to be paid all taxes with respect to such period.
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(3)(A) SLOPI shall cause to be included in the consolidated federal income
Tax Returns (and the state income Tax Returns of any state that permits
consolidated, combined or unitary income Tax Returns, if any) of any affiliated
group of corporations that includes the Company (the "Shell Group") for all
periods or portions thereof relating to the Company which end on or before or
which include the Effective Time, all Tax Items of the Company which are
required to be included therein, shall file timely all such Tax Returns with the
appropriate taxing authorities and shall pay timely all Taxes due with respect
to the periods covered by such Tax Returns.
(B) In accordance with the true-up accounting procedures set forth in
Schedule III, within sixty (60) days of the Effective Time, TMR shall cause the
Company to pay to SLOPI (i) the amount of federal and state income taxes accrued
or paid (but excluding any deferred taxes) through the Effective Time for the
Company (as a separate company) with respect to the Company's taxable income
from January 1, 1998 through the Effective Time to the extent and only to the
extent such federal and state taxable income is required to be included in a
consolidated federal Tax Return or a combined state Tax Return for the Shell
Group, plus the amount of any separate company state taxes paid by SLOPI or an
affiliate or SLOPI (but excluding deferred taxes) through the Effective Time for
the Company (as a separate company) with respect to the Company's taxable income
from January 1, 1998 through the Effective Time, plus (ii) the amount of any
1998 Louisiana state taxes that have been paid or will be paid by any member of
the Shell Group (other than the Company) for or on behalf of the Company
(collectively the "Tax Accrual"). At the Effective Time, the Company shall
provide TMR with a schedule of its calculation of the amount of such Tax
Accrual, accompanied by all accounting work papers reasonably necessary to
review the Tax Accrual calculation for material error. TMR shall have 30
business days from the Effective Time to review and approve the Company's Tax
Accrual calculation. If TMR finds no material error with respect to the Tax
Accrual calculation, then TMR shall cause the Company to pay to SLOPI the Tax
Accrual amount calculated by the Company. In the event that TMR finds a material
error, TMR shall submit the Tax Accrual calculation along with all accounting
workpapers reasonably necessary to review such Tax Accrual calculation to Price
Waterhouse within 30 business days from the Effective Time so that Price
Waterhouse may independently verify the Tax Accrual calculation and review such
calculation for material error. In the event that Price Waterhouse finds
material error with respect to the Tax Accrual calculation, then TMR shall cause
the Company within 60 business days from the Effective Time, to pay to SLOPI the
Tax Accrual amount calculated by Price Waterhouse. If Price Waterhouse finds no
material error with respect to the Company's Tax Accrual calculation, then TMR
shall cause the Company to pay to SLOPI the Tax Accrual amount calculated by the
Company.
(4) The income of the Company will be apportioned to the period up to and
including the Effective Time and the period after the Effective Time by closing
the books of the Company as of the end of the day of the Effective Time
provided, that, TMR, SLOPI and the Company agree to report all transactions of
the Company not in the ordinary course of business occurring on the day of the
Effective Time but after the Effective Time on TMR's consolidated federal income
tax return to the extent permitted by Treasury Regulation Section
1.1502-76(b)(1)(B).
(b) Any Tax Return to be prepared pursuant to the provisions of this
Section 9.10 shall be prepared in a manner consistent with practices followed in
prior years with respect to similar Tax Returns, except for changes required by
law or regulations.
(c)(1) SLOPI and each member of the Shell Group shall grant to TMR (or its
designees) access at all reasonable times to all of the information, books and
records relating to the Company within the possession of SLOPI or any member of
the Shell Group (including work papers and correspondence with taxing
authorities), and shall afford TMR (or its designees) the right (at TMR's
expense) to take extracts therefrom and to make copies thereof, to the extent
reasonably necessary to permit TMR (or its designees) to prepare Tax Returns, to
conduct negotiations with Tax authorities, and to implement the provisions of,
or to investigate or defend any claims between the parties arising under, this
Agreement.
(2) TMR shall grant or cause the Company to grant to SLOPI (or its
designees) access at all reasonable times to all of the information, books and
records relating to the Company within the possession
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of TMR or the Company (including work papers and correspondence with taxing
authorities), and shall afford SLOPI (or its designees) the right (at SLOPI's
expense) to take extracts therefrom and to make copies thereof, to the extent
reasonably necessary to permit SLOPI (or its designees) to prepare Tax Returns,
to conduct negotiations with Tax authorities, and to implement the provisions
of, or to investigate or defend any claims between the parties arising under,
this Agreement.
At SLOPI's request, TMR shall cause the Company to make or join with the
Shell Group in making any tax election after the Effective Time.
Each of the parties hereto will preserve and retain all schedules,
workpapers and other documents relating to any Tax Returns of or with respect to
the Company or to any claims, audits or other proceedings affecting the Company
until the expiration of the statute of limitations (including extensions)
applicable to the taxable period to which such documents relate or until the
final determination of any controversy with respect to such taxable period, and
until the final determination of any payments that may be required with respect
to such taxable period under this Agreement.
(d) SLOPI hereby agrees to defend, indemnify and hold harmless TMR and the
Company on an after tax basis from and against, and agrees to pay, all Taxes
imposed and all costs and expenses (including, without limitation, litigation
costs and reasonable attorneys' and accountants' fees and disbursements)
incurred (all herein referred to as "Tax Losses"), as a result of a claim,
notice of deficiency, or assessment by, or any obligation owing to, any taxing
authority for:
(1) any Taxes of the Company attributable to any period ending on or
before December 31, 1997; and
(2) any Taxes of any corporation (including the Company) that is or
was included in a consolidated, combined, unitary or similar Tax Return of
SLOPI or any affiliate of SLOPI: and
(3) any Taxes of SLOPI, the Company or their subsidiaries attributable
to or arising from (i) the transactions contemplated by this Agreement
excluding any Taxes resulting from TMR's actions which would cause the
merger to fail to qualify as a reorganization within the meaning of section
368 of the Code or (ii) any transactions occurring before the Effective
Time which are outside the ordinary course of business of the Company but
only if such transactions are entered into without the written consent of
TMR.
(e) TMR agrees to defend, indemnify and hold harmless SLOPI and the
members of the Shell Group on an after tax basis from and against, and agrees to
pay, all Tax Losses incurred as a result of a claim, notice of deficiency, or
assessment by, or any obligation owing to, any taxing authority for:
(1) any Taxes of the Company with respect to any Tax Return described
in Section 9.10(a)(1); and
(2) any Taxes owed by the Shell Group resulting from the transaction
of the Company not in the ordinary course of business occurring on the date
of the Effective Time but after the Effective Time.
(f) (1) If a claim shall be made by any taxing authority that, if
successful, would result in the indemnification of a party under this Agreement
(referred to herein as the "Tax Indemnified Party"), the Tax Indemnified Party
shall promptly notify the party obligated under this Agreement to so indemnify
(referred to herein as the "Tax Indemnifying Party") in writing; provided,
however, that no delay on the part of the Tax Indemnified Party in notifying the
Tax Indemnifying Party shall relieve the Tax Indemnifying Party from any
obligation hereunder unless (and then solely to the extent) the Tax Indemnifying
Party is prejudiced thereby.
(2) The Tax Indemnified Party shall take such action in connection with
contesting such claim as the Tax Indemnifying Party shall reasonably request in
writing from time to time, including the selection of counsel and experts and
the execution of powers of attorney, provided that (A) within 30 days after the
notice described in Section 9.10(f)(1) has been delivered (or such earlier date
that any payment of Taxes is due by the Tax Indemnified Party but in no event
sooner than 5 days after the Tax Indemnifying Party's receipt of such notice),
the Tax Indemnifying Party requests that such claim be contested, (B) the Tax
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Indemnifying Party shall have agreed to pay the Tax Indemnified Party all costs
and expenses that the Tax Indemnified Party incurs in connection with and
contesting such claim, including, without limitation, reasonable attorneys' fees
and disbursements, and (C) if the Tax Indemnified Party is requested by the Tax
Indemnifying Party to pay the Tax claimed and sue for a refund, the Tax
Indemnifying Party shall have advanced to the Tax Indemnified Party, on an
interest-free basis, the amount of such claim. The Tax Indemnified Party shall
not make any payment of such claim for at least 30 days (or such shorter period
as may be required by applicable law) after the giving of the notice required by
Section 9.10(f)(1), shall give to the Tax Indemnifying Party any information
reasonably requested relating to such claim, and otherwise shall cooperate with
the Tax Indemnifying Party in good faith in order to contest effectively any
such claim.
(3) Subject to the provisions of Section 9.10(f)(2), the Tax Indemnified
Party shall enter into a settlement of such contest with the applicable taxing
authority or prosecute such contest to a determination in a court or other
tribunal of initial or appellate jurisdiction, all as the Tax Indemnifying Party
may request.
(4) If, after actual receipt by the Tax Indemnified Party of an amount
advanced by the Tax Indemnifying Party pursuant to Section 9.10(f)(2)(C), the
extent of the liability of the Tax Indemnified Party with respect to the claim
shall be established by the final judgment or decree of a court or other
tribunal or final and binding settlement with an administrative agency having
jurisdiction thereof, the Tax Indemnified Party shall promptly repay to the Tax
Indemnifying Party the amount advanced to the extent of any refund received by
the Tax Indemnified Party with respect to the claim together with any interest
received thereon from the applicable taxing authority and any recovery of legal
fees from such taxing authority, net of any Taxes as required to be paid by the
Tax Indemnified Party with respect to such refund, interest or legal fees
(calculated at the maximum applicable statutory rate of Tax without regard to
any other Tax Items). Notwithstanding the foregoing, the Tax Indemnified Party
shall not be required to make any payment hereunder before such time as the Tax
Indemnifying Party shall have made all payments or indemnities then due with
respect to the Tax Indemnified Party pursuant to this Agreement.
(5) Promptly after a final determination of the Tax Indemnifying Party
shall pay to the Tax Indemnified Party the amount of any Tax Losses to which the
Tax Indemnified Party may become entitled by reason of the provisions of this
Section 9.10(f).
(g) Any refund of Taxes of or relating to the Company shall be paid to the
party who is responsible for indemnification with respect to such Taxes as
described in Sections 9.10(d) and (e).
(h) The representations, warranties and agreements contained in this
Section 9.10 shall survive the consummation of the transactions contemplated
herein for the applicable period of the statute of limitations with respect to
such Taxes.
SECTION 9.11 WITHDRAWAL FEE. Promptly upon termination of this Agreement
by the Company pursuant to Section 11.1(g), TMR shall pay to SLOPI in cash a fee
of $4,000,000 (the "Fee") if: (i) TMR's Board of Directors or any committee
thereof shall have withdrawn or modified its recommendation that its
shareholders approve the Share Issuance, (ii) no Company Material Adverse Effect
shall have occurred, (iii) SLOPI and the Company shall have performed in all
material respects their covenants and agreements required by this Agreement, and
(iv) the representations and warranties of SLOPI and the Company set forth in
this Agreement shall have been true and correct in all material respects.
SECTION 9.12 TRANSFER OF RECORD TITLE TO PROPERTIES. All properties
listed in the Asset Conveyance Agreements, dated October 1, 1997, between SWEPI
and the Company, SOVI and the Company and Choctaw and the Company, as amended
and previously provided to TMR (collectively, the "Asset Conveyance
Agreements") have been or will be conveyed of record to the Company in
accordance with the terms of those Asset Conveyance Agreements.
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ARTICLE X
CONDITIONS
SECTION 10.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE
MERGER. The respective obligations of each party to effect the Merger or cause
the Merger to be effected shall be subject to the satisfaction on or prior to
the Closing Date of the following conditions, except, to the extent permitted by
applicable law, that such conditions may be waived in writing pursuant to
Section 11.5:
(a) STOCKHOLDER APPROVAL. The TMR Stockholders' Approval shall have
been obtained.
(b) NO INJUNCTION OR DAMAGES. No suit, action or other proceeding
shall be pending by any Governmental Authority in which it is sought to
restrain or prohibit the performance of or to obtain damages or other
relief in connection with this Agreement or the transactions contemplated
hereby, and no temporary restraining order or preliminary or permanent
injunction or other order by any federal or state court preventing
consummation of the Merger or ordering damages in connection therewith
shall have been issued and continue in effect, and the Merger and the other
transactions contemplated hereby shall not have been prohibited under any
applicable federal or state law or regulation.
(c) LISTING OF SHARES. The shares of TMR Common Stock issuable in
the Merger pursuant to Article III or upon conversion of TMR Series A
Preferred shall have been approved for listing on the New York Stock
Exchange, upon official notice of issuance.
(d) STATUTORY APPROVALS. The Company Required Statutory Approvals,
the TMR Required Statutory Approvals or matters related thereto shall have
been obtained at or prior to the Effective Time, any such approvals shall
have become or resulted in final orders at or prior to the Effective Time,
and no such final order shall impose terms or conditions that would have,
or would be reasonably likely to have, a TMR Material Adverse Effect or a
Company Material Adverse Effect.
(e) Contemporaneously with the Closing under this Agreement, those
certain Service Agreements dated September 24, 1997 between (i) the Company
and Shell Oil Company and (ii) the Company and SWEPI shall be terminated
and all accounts receivable and payable thereunder through the Closing Date
shall be settled in cash in accordance with Schedule III, True-Up
Accounting Procedures.
SECTION 10.2 CONDITIONS TO OBLIGATION OF TMR TO EFFECT MERGER. The
obligation of TMR to effect the Merger or cause the Merger to be effected shall
be further subject to the satisfaction, on or prior to the Closing Date, of the
following conditions, except as may be waived by TMR in writing pursuant to
Section 11.4:
(a) PERFORMANCE OF OBLIGATIONS OF THE COMPANY. SLOPI and the Company
shall have performed in all material respects their agreements and
covenants contained in or contemplated by this Agreement required to be
performed by them at or prior to the Effective Time.
(b) REPRESENTATIONS AND WARRANTIES. The representations and
warranties of SLOPI and the Company set forth in this Agreement shall be
true and correct in all material respects as of the date hereof and as of
the Closing Date as if made on and as of the Closing Date, except as
otherwise contemplated by this Agreement.
(c) CLOSING CERTIFICATES. TMR shall have received a certificate
signed by the President and Treasurer of each of SLOPI and the Company,
dated the Closing Date and given in their corporate capacities and not
individually, to the effect that, to each such officer's knowledge, the
conditions set forth in Section 10.2(a), (b) and (d) have been satisfied.
(d) COMPANY MATERIAL ADVERSE EFFECT. No Company Material Adverse
Effect shall have occurred and there shall exist no fact or circumstance
that would have, or would be reasonably likely to have, a Company Material
Adverse Effect.
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(e) OPINION OF DANNA M. WALTON. TMR shall have received opinions of
Danna M. Walton, counsel for the Company, SLOPI and SWEPI, in form and
substance satisfactory to TMR, addressed to TMR and dated the Closing Date,
which opinion may be based on appropriate representations of the Company,
SLOPI and SWEPI.
(f) COMPANY REQUIRED CONSENTS. The Company Required Consents shall
have been obtained except those that in the aggregate would not result in
and would not reasonably be likely to result in a Company Material Adverse
Effect.
(g) FAIRNESS OPINION. The Chase Opinion shall not have been
withdrawn.
(h) TITLE CONVEYANCES. The provisions of the Asset Conveyance
Agreements shall have been complied with.
SECTION 10.3 CONDITIONS TO OBLIGATION OF SLOPI AND THE COMPANY TO EFFECT
THE MERGER. The obligation of SLOPI and the Company to effect the Merger or
cause the Merger to be effected shall be further subject to the satisfaction, on
or prior to the Closing Date, of the following conditions, except as may be
waived by the Company in writing pursuant to Section 11.4.
(a) PERFORMANCE OF OBLIGATIONS OF TMR. TMR shall have performed in all
material respects its agreements and covenants contained in or contemplated by
this Agreement required to be performed by it at or prior to the Effective Time.
(b) REPRESENTATIONS AND WARRANTIES. The representations and warranties of
TMR set forth in this Agreement shall be true and correct in all material
respects as of the date hereof and as of the Closing Date as if made on and as
of the Closing Date, except as otherwise contemplated by this Agreement.
(c) CLOSING CERTIFICATES. The Company shall have received a certificate
signed by the Chief Executive Officer and Chief Financial Officer of TMR, dated
the Closing Date and given in their corporate capacities and not individually,
to the effect that, to each such officer's knowledge, the conditions set forth
in Sections 10.3(a), (b) and (d) have been satisfied.
(d) TMR MATERIAL ADVERSE EFFECT. No TMR Material Adverse Effect shall
have occurred and there shall exist no fact or circumstance that would have, or
would be reasonably like to have, a TMR Material Adverse Effect.
(e) OPINION OF FULBRIGHT & JAWORSKI, L.L.P. The Company and SLOPI shall
have received an opinion of Fulbright & Jaworski, L.L.P., in form and substance
satisfactory to the Company and SLOPI, addressed to the Company and SLOPI and
dated the Closing Date, which opinion may be based on appropriate
representations of TMR.
(f) TMR REQUIRED CONSENTS. The TMR Required Consents shall have been
obtained except those that in the aggregate would not result in and would not
reasonably be likely to result in a TMR Material Adverse Effect.
(g) CERTIFICATE OF DESIGNATIONS. The Certificate of Designations for the
TMR Series A Preferred shall have been filed with and accepted by the Texas
Secretary of State.
(h) CHASE WAIVER. TMR shall have obtained from The Chase Manhattan Bank
its consent for the Merger and the issuance of TMR Common Stock and TMR Series A
Preferred thereunder, as contemplated by this Agreement.
ARTICLE XI
TERMINATION, AMENDMENT AND WAIVER
SECTION 11.1 TERMINATION. This Agreement may be terminated and the Merger
abandoned at any time prior to the Closing Date, whether before or after
approval by the stockholders of TMR or the Company:
(a) by mutual written consent of the Boards of Directors of the
Company and TMR;
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(b) by either of the Company or TMR, by written notice to the other,
if the Effective Time shall not have occurred on or before August 1, 1998
("Termination Date") provided that the right to terminate this Agreement
under this Section 11.1(b) shall not be available to any party whose
failure to fulfill any obligation under this Agreement has been the cause
of, or resulted in, the failure of the Effective Time to occur on or before
the Termination Date; or
(c) by either of the Company or TMR, by written notice to the other
party, if the TMR Stockholders' Approval shall not have been obtained at a
duly held TMR Special Meeting, including any adjournments thereof; or
(d) by either of the Company or TMR, if any state or federal law,
order, rule or regulation is adopted or issued, that has the effect, as
supported by the written opinion of outside counsel for such party, of
prohibiting the Merger, or by either of the Company or TMR, if any court of
competent jurisdiction in the United States or any State shall have issued
an order, judgment or decree permanently restraining, enjoining or
otherwise prohibiting the Merger, and such order, judgment or decree shall
have become final and nonappealable; or
(e) by TMR, by written notice to the Company, if there shall have been
any material breach of any representation or warranty, or any material
breach of any covenant or agreement, of SLOPI or the Company hereunder, and
such breach shall not have been remedied within ten (10) business days
after receipt by SLOPI and the Company of notice in writing from TMR,
specifying the nature of such breach and requesting that it be remedied; or
(f) by the Company, by written notice to TMR, if there shall have been
any material breach of any representation or warranty, or any material
breach of any covenant or agreement, of TMR hereunder, and such breach
shall not have been remedied within ten (10) business days after receipt by
TMR of notice in writing from the Company, specifying the nature of such
breach and requesting that it be remedied; or
(g) if the Board of Directors of TMR or any committee thereof shall,
under any circumstances, withdraw or modify in a manner adverse to the
Company or SLOPI its recommendation that TMR's shareholders approve the
Share Issuance, then by the Company, by written notice to TMR, within a
period of ten (10) days after the date of announcement of such withdrawal
or modification.
SECTION 11.2 EFFECT OF TERMINATION. In the event of termination of this
Agreement by either the Company or TMR pursuant to Section 11.1, there shall be
no liability on the part of the Company, SLOPI or TMR or their respective
officers or directors hereunder, except that
(a) Section 9.1(b) (Confidentiality Agreement), Section 9.1(c)
(Indemnification Agreement), Section 9.5 (Disclosure Schedules; Proprietary
Data), Section 9.8 (Expenses), Section 9.11 (Withdrawal Fee) and Article
XII (General Provisions) shall survive, and
(b) no such termination shall relieve any party from liability by
reason of any willful breach of any agreement, representation, warranty or
covenant contained in this Agreement.
SECTION 11.3 AMENDMENT.
(a) This Agreement may be amended by the parties hereto pursuant to action
of their respective Boards of Directors, at any time before or after approval
hereof by the stockholders of TMR or the Company and prior to the Effective
Time, but after such approvals, no amendment shall:
(i) alter or change the amount or kind of shares to be received or
exchanged for or on conversion of any class or series of capital stock of
either corporation as provided under Article II, or
(ii) alter or change any of the terms and conditions of this Agreement
if any of the alterations or changes, alone or in the aggregate, would
materially and adversely affect the rights of holders of Company Common
Stock, TMR Common Stock or TMR Series A Preferred.
(b) This Agreement may not be amended except by an instrument in writing
signed on behalf of each of the parties hereto.
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SECTION 11.4 WAIVER. At any time prior to the Effective Time, to the
extent permitted by applicable law, the parties hereto may (i) extend the time
for the performance of any of the obligations or other acts of the other parties
hereto, (ii) waive any inaccuracies in the representations and warranties
contained herein or in any document delivered pursuant hereto and (iii) waive
compliance with any of the agreements or conditions contained herein. Any
agreement on the part of a party hereto to any such extension or waiver shall be
valid only if set forth in an instrument in writing signed by a duly authorized
officer of such party.
ARTICLE XII
GENERAL PROVISIONS
SECTION 12.1 NON-SURVIVAL; INDEMNITIES.
(a) SURVIVAL OR NON-SURVIVAL OF REPRESENTATIONS, WARRANTIES, COVENANTS AND
AGREEMENTS. The representations, warranties, covenants and agreements in this
Agreement and in the Disclosure Schedules, and all liability with respect
thereto, shall not survive the Merger and shall terminate as of the Merger,
except the covenants and agreements contained in Article III (Conversion of
Shares), Article XII (General Provisions), Section 5.3 (Capitalization), Section
6.3 (Capitalization), the last two sentences of Section 8.1 (Ordinary Course of
Business), Section 8.9 (Tax-Free Status), Section 8.14 (Affiliate Liabilities),
Section 9.1(b) (Confidentiality Agreement), Section 9.1(c) (Indemnification
Agreement), Section 9.5(c) (Disclosure Schedules; Proprietary Data), Section 9.8
(Expenses), Section 9.10 (Tax Matters), Section 9.11 (Withdrawal Fee), Section
9.12 (Transfer of Record Title to Properties), Section 11.2 (Effect of
Termination) and Schedule III (True-Up Procedures), each of which shall survive
in accordance with its terms.
(b) TAX REORGANIZATION INDEMNIFICATION. TMR has no plan or intention and
shall not knowingly take any action which would cause the Merger to fail to
qualify as a reorganization within the meaning of Section 368 of the Code (and
any comparable provisions of applicable state law). Without limiting the
foregoing, (i) TMR will characterize the Merger as such a reorganization for
purposes of any income tax returns and other filings, and (ii) TMR has no plan
or intention to and will not liquidate, merge, transfer or reorganize the
Company or permit the Company to transfer, sell, or otherwise dispose of any of
the Company's assets, if such action would cause the Merger to fail to qualify
as a reorganization within the meaning of Section 368 of the Code. If TMR's
actions, other than TMR's actions in the consummation of the Merger and the
issuance of TMR Common Stock and TMR Series A Preferred, shall cause the Merger
to fail to qualify as a reorganization within the meaning of Section 368 of the
Code, then TMR shall assume and accept the tax liability associated with such
non-qualification and indemnify SLOPI and the Shell Group, on an after-tax
basis, for such tax liability. If both TMR's and SLOPI's actions, other than
TMR's actions in the consummation of the Merger and the issuance of TMR Common
Stock and TMR Series A Preferred, cause the Merger to fail to qualify as a
reorganization within the meaning of Section 368 of the Code, then each party
shall bear and accept the responsibility and Tax liability associated with their
respective actions, and TMR shall indemnify SLOPI for its portion of such Tax
liability.
(c) POST CLOSING INDEMNIFICATION.
(i) BY SLOPI -- LITIGATION. From and after the Effective Time, SLOPI
shall defend, indemnify and hold harmless the Company and the Surviving
Corporation against and in respect of those certain claims, costs, expenses,
liabilities, damages and judgments (collectively, "Claims") relating to the
litigation and claims described in Section 6.7 of the Company Disclosure
Schedule; provided, that to the extent that TMR, the Company or the Surviving
Corporation realizes a benefit after the Effective Time from the matters
identified in Section 6.7 of the Company Disclosure Schedule such benefit shall
offset the amount and indemnification to which the Company or Surviving
Corporation shall be entitled; and, provided further that no such
indemnification shall be provided as to that portion of matters within the
control of the Company, TMR or the Surviving Corporation after the Effective
Time or with respect to that portion of matters attributable to the continuation
of policies, calculations or procedures by TMR or the Surviving Corporation
after the Effective Time (collectively, the "Current Litigation Claims").
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(ii) BY SLOPI -- UNKNOWN CLAIMS. From and after the Effective Time, SLOPI
shall indemnify, defend and hold the Company and the Surviving Corporation
against and in respect of all Claims (other than the Current Litigation Claims)
that are (w) expressly and definitively made or claimed by bona fide third
parties against the Company or the Surviving Corporation prior to the date which
is one (1) year after the Effective Time, but not if made thereafter, and (x)
exceed, in the aggregate, a threshold basket of $7,500,000 and then only to the
extent, if any, of such excess, and (y) arise out of events occurring in the
conduct of the Company's business, assets and operations or circumstances
existing with respect to the Company's business, assets and operations, in each
case accrued and attributable up to and including, but not after, the Effective
Time; provided, however, that no indemnification shall be provided with respect
to that portion of matters that are attributable to the policies, calculations
or procedures that are continued by TMR or the Surviving Corporation after the
Effective Time.
(iii) BY TMR. From and after the Effective Time, TMR will indemnify,
defend and hold harmless SLOPI and any of SLOPI's Affiliates (other than the
Company and TMR) against and in respect of all Claims made by bona fide third
parties against SLOPI or any of SLOPI's Affiliates (other than the Company or
TMR) relating to the Company and its business, assets and operations (y) that
arise on or after, or are accrued or attributable to any time on or after
Effective Time or (z) are asserted against the Company or the Surviving
Corporation on or after the date which is one (1) year after the Effective Time,
irrespective of when the underlying events or circumstances occurred; provided,
however, that Section 9.10 (Tax Matters) shall be given full effect
notwithstanding the foregoing.
(iv) The indemnifying party shall, at its expense, control the defense
and settlement of all Claims as to which indemnification is being provided. An
indemnified party, at its expense, shall have the right to participate in the
defense, but shall have no control over the defense or settlement.
(D) THE FOREGOING INDEMNIFICATION IN THIS SECTION 12.1 IS TO BE GIVEN
EXPRESS AND FULL EFFECT EVEN IF, AS A RESULT THEREOF, AN INDEMNIFIED PARTY WOULD
BE INDEMNIFIED AGAINST ITS OWN NEGLIGENCE (WHETHER SOLE, CONCURRENT OR
CONTRIBUTORY) OR ITS STRICT (STATUTORY) LIABILITY. NOTHING IN THIS SECTION
12.1(D) SHALL EXPAND OR CONTRACT THE EXPRESS LANGUAGE OF THE FOREGOING
PROVISIONS OF SECTION 12.1.
SECTION 12.2 NO BROKERS.
(a) SLOPI and the Company represents and warrants that no broker, finder
or investment bank is entitled to any brokerage, finder's or other fee or
commission in connection with the transactions contemplated by this Agreement
based upon arrangements made by or on behalf of SLOPI or the Company.
(b) TMR represents and warrants that, except for Chase, no broker, finder
or investment bank is entitled to any brokerage, finder's or other fee or
commission in connection with the transaction contemplated by this Agreement
based upon arrangements made by or on behalf of TMR.
SECTION 12.3 NOTICES. All notices and other communications hereunder
shall be in writing and shall be deemed given (a) if delivered personally, or
(b) if sent by overnight courier service (receipt confirmed in writing), or (c)
if delivered by facsimile transmission (with receipt confirmed), or (d) five (5)
days after being mailed by registered or certified mail (return receipt
requested) to the parties, in each case to the following addresses (or at such
other address for a party as shall be specified by like notice);
(i) if to SLOPI:
Shell Louisiana Onshore Properties Inc.
P.O. Box 7986
Newark, Delaware 19714
Attention: Corporate Secretary
with a copy to:
Shell Oil Company Legal Firm
P.O. Box 2463
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Houston, Texas 77252
Attention: Danna M. Walton
Fax: (713) 241-5056
(ii) if to the Company:
Louisiana Onshore Properties Inc.:
200 North Dairy Ashford
P.O. Box 576
Houston, Texas 77002
Attention: J.M. Funk
Fax: (281) 544-2204
with a copy to:
Shell Oil Company Legal Firm
One Shell Plaza
P.O. Box 2463
Houston, Texas 77252-2463
Attention: Danna M. Walton
Fax: 713-241-5362
(iii) if to TMR or TMR Sub:
The Meridian Resource Corporation
15995 N. Barkers Landing, Suite 300
Houston, Texas 77079
Attention: Joseph A. Reeves, Jr., Chairman and
Chief Executive Officer
Fax: (281) 558-5595
with a copies to:
Fouts & Moore, L.L.P.
1300 Post Oak Blvd., 25th Floor
Houston, Texas 77056
Attention: Gary A. Messersmith
Fax: (713) 986-7299
Fulbright & Jaworski L.L.P.
1301 McKinney Street, Suite 5100
Houston, Texas 77010
Attention: John R. Allender
Fax: (713) 651-5246
SECTION 12.4 NO PUNITIVE DAMAGES. NOTWITHSTANDING ANYTHING TO THE
CONTRARY, NO PARTY SHALL BE ENTITLED TO RECOVER FROM ANY OTHER PARTY ANY LOSSES,
COSTS, EXPENSES, OR DAMAGES ARISING UNDER THIS AGREEMENT OR IN CONNECTION WITH
OR WITH RESPECT TO THE TRANSACTIONS CONTEMPLATED IN THIS AGREEMENT IN ANY AMOUNT
IN EXCESS OF THE ACTUAL COMPENSATORY DAMAGES, ARBITRATION COSTS AND REASONABLE
ATTORNEY FEES AND EXPENSES TO ENFORCE THIS AGREEMENT, SUFFERED BY SUCH PARTY.
ALL PARTIES WAIVE ANY RIGHT TO RECOVER PUNITIVE, SPECIAL, EXEMPLARY AND
CONSEQUENTIAL DAMAGES ARISING UNDER THIS AGREEMENT OR IN CONNECTION WITH OR WITH
RESPECT TO THE TRANSACTIONS CONTEMPLATED IN THIS AGREEMENT. HOWEVER, THE
FOREGOING SHALL NOT LIMIT ANY INDEMNIFICATION OBLIGATIONS HEREUNDER OR PRECLUDE
ONE PARTY FROM BEING INDEMNIFIED BY ANOTHER PARTY AGAINST SUCH OBLIGATIONS.
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SECTION 12.5 BINDING ARBITRATION. Any controversy or claim, whether based
on contract, tort, statute or other legal or equitable theory (including but not
limited to any claim of fraud, misrepresentation or fraudulent inducement or any
question of validity or effect of this Agreement, including this clause) arising
out of or related to this Agreement (including any amendments or extensions and
any agreements attached as Exhibits hereto), or the breach or termination
thereof shall be settled by arbitration in accordance with the then current CPR
Institute for Dispute Resolution Rules for Non-administered Arbitration of
Business Disputes, and this provision. The arbitration shall be governed by the
United States Arbitration Act, 9 U.S.C. 1-16 to the exclusion of any provision
of state law inconsistent therewith or which would produce a different result,
and judgment upon the award rendered by the arbitrators may be entered by any
court having jurisdiction.
The arbitration shall be held in Houston, Texas, or at some other location
as mutually agreed upon by the parties. There shall be three arbitrators. TMR
and SLOPI shall each select an arbitrator, and those arbitrators shall select
the third arbitrator. To the extent the parties' dispute(s) concern matters of
(i) oil and gas law, geology and/or petroleum engineering and/or (ii)
environmental law and/or environmental science, then each arbitrator must be
trained and knowledgeable in such matters.
The arbitrators shall determine the claims of the parties and render a
final award. The arbitrators shall set forth the reasons for the award in
writing.
All statutes of limitations and defenses based upon passage of time
applicable to any claim of a defending party (including any counterclaim or
set-off) shall be tolled while the arbitration is pending.
The obligation to arbitrate all controversial claims shall extend to the
successors, assigns and third party beneficiaries of the parties.
The arbitrators shall order the parties to promptly exchange copies of all
documents regarding the materials in dispute, potential facts, witness lists and
expert witness lists, and, if requested by a party, to produce other relevant
documents, to answer up to ten (10) interrogatories (including subparts), to
respond to up to ten (10) requests for admissions (which shall be deemed
admitted if not denied) and to produce for deposition and, if requested, at the
hearing any or all listed witnesses, both fact and expert, within such party's
control. Any additional discovery shall only occur by agreement of the parties
or as ordered by the arbitrators upon a finding of good cause.
Each party shall bear its own costs, expenses and attorney's fees; provided
that if court proceedings to stay litigation or compel arbitration are
necessary, any party who, in such court proceedings, unsuccessfully opposes
implementation of any part of these arbitration requirements shall pay all
reasonable associated costs, expenses, and attorney's fees in connection with
such court proceeding.
In order to prevent irreparable harm, the arbitrators shall have the power
to grant temporary or permanent injunctive or other equitable relief. Prior to
the appointment of an arbitrator a party may, notwithstanding any other
provision of this Agreement, seek temporary injunctive relief from any court of
competent jurisdiction; provided that the party seeking such relief shall (if
arbitration has not already been commenced) simultaneously commence arbitration.
Such court ordered relief shall not continue more than ten (10) days after the
appointment of the arbitrators (or in any event for longer than sixty (60)
days). Except as required by law (and then only after prior notice to the other
party), no party shall disclose the facts of the underlying dispute or the
contents or result of the arbitration without the prior consent of all parties.
If any part of this arbitration provision is held to be unenforceable, it
shall be severed and shall not affect either the duty to arbitrate or any other
part of this provision.
SECTION 12.6 DTPA WAIVER. ALL PARTIES HEREBY WAIVE, TO THE EXTENT (IF
ANY) APPLICABLE, THE PROVISIONS OF THE TEXAS DECEPTIVE TRADE PRACTICES-CONSUMER
PROTECTION ACT (OTHER THAN THE PROVISIONS OF SECTION 17.555 THEREOF, WHICH ARE
NOT WAIVED).
SECTION 12.7 MISCELLANEOUS
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(a) This Agreement, including the documents and instruments referred to
herein, (i) constitutes the entire agreement and supersedes all other prior
agreements and understandings, both written and oral, among the parties, or any
of them, with respect to the subject matter hereof other than the
Indemnification Agreement and the Confidentiality Agreement, (ii) shall not be
assigned by operation of law or otherwise, and (iii) shall be governed by and
construed in accordance with the laws of the State of Delaware applicable to
contracts executed in and to be fully performed in such State, without giving
effect to its conflicts of laws statutes, rules or principles.
(b) The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provision of this
Agreement, which shall remain in full force and effect. The parties hereto shall
negotiate in good faith to replace any provision of this Agreement so held
invalid or unenforceable with a valid provision that is as similar as possible
in substance to the invalid or unenforceable provision.
SECTION 12.8 INTERPRETATION. When reference is made in this Agreement to
Articles, Sections or Exhibits, such reference shall be to an Article, Section
or Exhibit of this Agreement, as the case may be, unless otherwise indicated.
The table of contents and headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement. Whenever the words "include", "includes" or "including"
are used in this Agreement, they shall be deemed to be followed by the words
"without limitation." Whenever "or" is used in this Agreement it shall be
construed in the nonexclusive sense.
SECTION 12.9 COUNTERPARTS; EFFECT. The Agreement may be executed in one
or more counterparts each of which shall be deemed to be an original, but of
which shall constitute one and the same agreement.
SECTION 12.10 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 confer upon any person any rights
or remedies of any nature whatsoever under or by reason of this Agreement.
SECTION 12.11 SPECIFIC PERFORMANCE. The parties hereto agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with its specific terms or were
otherwise breached. It is accordingly agreed that the parties hereto shall be
entitled to an injunction or injunctions to prevent breaches of this Agreement
and to enforce specifically the terms and provisions hereof, this being in
addition to any other remedy to which they are entitled at law or in equity.
SECTION 12.12 FURTHER ASSURANCES. Each party hereto shall execute such
further documents and instruments and take such further actions as may
reasonably be requested by other party hereto in order to consummate the Merger
in accordance with the terms hereof.
SECTION 12.13 CONTINGENT CONSIDERATION. Pursuant to the terms of Exhibit
H, and upon the occurrence of the events specified therein, TMR shall, to the
extent required thereby, issue and deliver to SLOPI additional fully paid and
non-assessable shares of TMR Common Stock.
SECTION 12.14 GAS IMBALANCES. TMR acknowledges that the Surviving
Corporation will assume all liabilities with respect to the gas imbalances shown
on Section 6.5 of the Company Disclosure Schedule.
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IN WITNESS WHEREOF, TMR, TMR Sub, SLOPI and the Company have caused this
Agreement to be signed by their respective officers thereunto duly authorized as
of the date first written above.
"SLOPI" "TMR"
SHELL LOUISIANA ONSHORE THE MERIDIAN RESOURCE
PROPERTIES INC. CORPORATION
By: /s/S. P. METHVIN By: /s/JOSEPH A. REEVES
Name: S. P. Methvin Name: Joseph A. Reeves, Jr.
Title: President Title: Chief Executive Officer
"Company" "TMR Sub"
LOUISIANA ONSHORE PROPERTIES INC. LOPI ACQUISITION CORP.
By: /s/S. P. METHVIN By: /s/JOSEPH A. REEVES
Name: S. P. Methvin Name: Joseph A. Reeves, Jr.
Title: President Title: Chief Executive Officer
Limited Joinder and Guaranty by Shell Western E&P Inc.:
In order to induce TMR and TMR Sub to execute and deliver this Merger
Agreement, and in consideration thereof, and for other good and valuable
consideration, the receipt of which is hereby acknowledged, Shell Western E&P,
Inc., a Delaware corporation ("SWEPI"), hereby absolutely and unconditionally
guarantees to the Company and the Surviving Corporation (as their respective
interests may appear), as primary obligor and not merely as surety, the full and
prompt payment and performance when due and compliance by SLOPI with all of
SLOPI's obligations under Sections 9.10 (Tax Matters), 9.12 (Transfer of Record
Title of Properties), 12.1(c) (Post Closing Indemnification) and Schedule III
(True-Up Accounting Procedures) of the Merger Agreement (collectively, the
"Guaranteed Obligations"). The obligations of SWEPI hereunder are absolute,
present and continuing obligations which are not conditional upon the exercise
of any remedies against SLOPI or the making of a demand against SLOPI or the
filing of a suit to obtain or assert a claim for personal judgment against SLOPI
for the Guaranteed Obligations or the making of an effort at collecting the
Guaranteed Obligations from SLOPI, or the taking of any other action with
respect to SLOPI, it being expressly acknowledged and agreed that SWEPI shall be
directly obligated hereunder for all amounts payable by SLOPI pursuant to the
Guaranteed Obligations.
SWEPI has all requisite power and authority to enter into this Guaranty.
The execution and delivery of this Guaranty by SWEPI have been duly authorized
by all necessary corporate action on the part of SWEPI. This Guaranty has been
duly and validly executed and delivered by SWEPI and constitutes the valid and
binding obligation of SWEPI, enforceable against SWEPI in accordance with its
terms, except as would be limited by applicable bankruptcy, insolvency,
reorganization, fraudulent conveyance or other similar laws affecting the
enforcement of creditors' rights generally and except that the availability of
equitable remedies, including specific performance, may be subject to the
discretion of any court before which any proceeding therefor may be brought. The
execution and delivery of this Guaranty by SWEPI do not result in any violation
by SWEPI under any provisions of: the certificate of incorporation, bylaws or
similar governing documents of SWEPI; any judgment, decree, order or injunction
of any Governmental Authority applicable to SWEPI or any of its properties or
assets or any note, bond, mortgage, indenture, deed of trust, license,
franchise, permit, concession, contract, lease or other instrument, obligation
or agreement of any kind to which SWEPI is now a party or by which it or any of
its properties or assets may be bound or affected; excluding from the foregoing
clauses such violations as would not, in the aggregate, be reasonably likely to
have a material adverse effect on SWEPI.
SHELL WESTERN E&P INC.
By: /s/Y. N. YOUSSEF
Name: Y. N. Youssef
Title: Attorney-in-fact
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EXHIBIT C
BASIS OF CONVERSION AND CONVERSION RIGHTS
Upon consummation of the Merger, SLOPI shall receive a total 12,082,030
shares of Common Stock and a number of shares of Preferred Stock calculated as
provided below:
The Preferred Stock to be issued to SLOPI upon consummation of the Merger
shall be convertible into a number of shares of Common Stock calculated by the
following formula:
Fully-Diluted Shares of Common Stock on the Effective Date
DIVIDED BY .601 = "Total Post Closing Diluted Common Stock."
"Total Post Closing Diluted Common Stock" MULTIPLIED BY .399 =
"Total SLOPI Beneficial Ownership."
"Total SLOPI Beneficial Ownership" LESS 12,082,030 = The
number of shares of Common Stock into which the Preferred Stock
issued to SLOPI upon consummation of the Merger is convertible.
The Conversion Price per share of Preferred Stock issued on the Effective
Date shall be calculated utilizing the following formula:
$135,000,000 DIVIDED BY the number of shares of Common Stock
into which the Preferred Stock issued to SLOPI upon consummation
of the Merger is convertible (calculated above).
The number of shares of Preferred Stock to be issued on the Effective Date
shall be calculated as follows:
The total votes outstanding immediately following the Effective
Time are equal to the sum of the number of shares of Common
Stock immediately prior to the Effective Time PLUS 12,082,030
(Common Stock to be issued at the Effective Time), the total of
which is DIVIDED BY .92.
Total Votes Outstanding Immediately following the Effective Time
MULTIPLIED BY .08 = number of shares of Preferred Stock.
However, in the event that the closing price of the Common Stock at the
Effective Time is equal to or less than $6.00 or equal to or greater than $12.00
per share, the calculation of the number of shares of Preferred Stock issued in
the Merger shall be adjusted so that the ratio of votes represented by the
Preferred and the Common Stock does not jeopardize the qualification of the
Merger as a tax-free reorganization under Section 368 of the Code; provided,
however, the calculation of the number of shares of Common Stock into which the
Preferred Stock is convertible, and the related conversion price, shall not
change.
Stated Value per share of Preferred Stock shall be calculated as follows:
$135,000,000 DIVIDED BY Number of Shares of Preferred Stock.
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EXHIBIT E
FORM OF CERTIFICATE OF DESIGNATION
FOR
PREFERRED STOCK
THE MERIDIAN RESOURCE CORPORATION
- ---------------------------------------------------------
CERTIFICATE OF DESIGNATION,
PREFERENCES AND RIGHTS OF A SERIES OF
PREFERRED STOCK BY RESOLUTION OF THE
BOARD OF DIRECTORS PROVIDING FOR AN
ISSUE OF SHARES OF PREFERRED
STOCK DESIGNATED SERIES A CUMULATIVE
CONVERTIBLE PREFERRED STOCK.
- ---------------------------------------------------------
The Meridian Resource Corporation, a Texas Corporation (the "Company"),
pursuant to the provisions of Article 2.12 of the Texas Business Corporation Act
("TBCA"), does hereby state and certify that, pursuant to the authority
expressly vested in the Board of Directors of the Company by the Second Amended
and Restated Articles of Incorporation of the Company, as amended, that the
Board of Directors, at a meeting thereof duly called and held on March , 1998,
at which meeting a quorum was present and acting throughout, duly adopted the
following resolutions providing for the issue of shares of Preferred Stock
hereinafter referred to, and further providing with respect to such issue of
shares of Preferred Stock for such powers, designations, preferences and
relative, participating, optional and other special rights, and the
qualifications, limitations or restrictions thereof, as are hereinafter set
forth, in addition to those set forth in said Articles of Incorporation;
RESOLVED, that pursuant to Article Four of the Second Amended and Restated
Articles of Incorporation of the Company, as amended (which authorizes the
Company to issue up to 25,000,000 shares of Preferred Stock, par value $1.00 per
share), the Board of Directors hereby provides for the issue of a series of up
to shares of Preferred Stock designated "Series A Cumulative
Convertible Preferred Stock"; and
RESOLVED, that the powers, designations, preferences and relative,
participating, optional and other special rights, and the qualifications,
limitations or restrictions thereof, of the shares of the Series A Cumulative
Convertible Preferred Stock shall be as follows:
SECTION 1 DESIGNATION AND RANK. The designation of the series of
Preferred Stock created by this resolution shall be "Series A Cumulative
Convertible Preferred Stock", and the number of shares constituting this Series
shall have a stated value of [$135 million divided by the number of shares
issued] per share (the "Stated Value"). The shares of this Series shall rank
prior to the Junior Stock (as defined in Section 8) as to distribution of assets
and payments of dividends.
SECTION 2 DIVIDENDS.
(a) Shares of this Series shall be entitled to receive, when and as
declared by the Board of Directors, a cash dividend at the dividend rate of four
percent (4%) per annum (the "Dividend Rate") on the Stated Value per share of
this Series, and no more; provided, however, that dividends shall cease to
accrue on shares of the Series on the following schedule: shares
[1/3] on the third anniversary of the date of original issuance (the
"Sub-Series A-I"); shares [1/3] on the fourth anniversary of the
date of original issuance (the "Sub-Series A-II"); and shares
[1/3] on the fifth anniversary of the date of original issuance (the
"Sub-Series A-III") (collectively, the "Sub-Series"). The certificates
evidencing shares of the Series will specify whether the shares represented
thereby are designated Sub-Series A-I, Sub-Series A-I or Sub-Series A-III.
Dividends shall be cumulative, shall accrue (whether or not declared and whether
or not there shall be funds legally available for the payment of dividends) from
the data of original issuance and shall be payable in arrears, out of assets
legally available therefor, when and as declared by the Board of Directors of
the Company, on January 1, April 1, July 1, and October 1 of each year in which
dividends are payable, commencing , 1998, (except that if any
such date is a
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Saturday, Sunday or a Business Day then such dividend shall be payable without
interest on the next day that is not a Saturday, Sunday or Business Day) (each
three-month period expiring on a dividend payment date being referred to herein
as a "Dividend Period"). Dividends shall be paid to the holders of record of
shares of each Sub-Series entitled thereto as they appear on the stock register
of the Company on such record dates, not exceeding 30 days preceding the payment
dates thereof, as shall be fixed by the Board of Directors. Dividends on account
of arrears for any past Dividend Periods (an "Arrearage") may be declared and
paid at any time, without reference to any regular dividend payment date, to
holders of record on such date, not exceeding 45 days preceding the payment date
thereof, as may be fixed by the Board of Directors. Until paid in full, each
Arrearage shall also accrue dividends at the rate of 4% per annum. All dividends
and Arrearages respectively, shall be declared and paid pro rata on all
Sub-Series, based on the aggregate of the accrued dividends, Arrearages and
dividends on Arrearages, respectively, for the various Sub-Series.
(b) No dividends (other than a dividend in Junior Stock or other than as
provided in Section 2(b)) shall be declared or paid or set apart for payment on
Junior Stock for any period unless (i) full cumulative dividends have been or
contemporaneously are declared and paid or declared and a sum sufficient for the
payment thereof set apart for such payment on this Series for all Dividend
Periods terminating on or prior to the date of payment of such full cumulative
dividends Holders of shares of this Series shall not be entitled to any
dividend, whether payable in cash, property or stock, in excess of full
cumulative dividends.
(c) So long as any shares of this Series are outstanding, no dividend
(other than a dividend in Junior Stock or other than as provided in Section
2(b)) shall be declared or paid or set aside for payment or other distribution
declared or made upon the Junior Stock, nor shall any Junior Stock be redeemed,
purchased or otherwise acquired for any consideration (or any moneys be paid to
or made available for a sinking fund for the redemption of any shares of Junior
Stock) by the Company (except by conversion into or in exchange for Junior
Stock) unless, in each case, full cumulative dividends on all outstanding shares
of this Series then payable shall have been paid.
(d) Dividends payable on this Series for a period less than a full
Dividend Period shall be computed on the basis of the ratio of the number of
days in such partial period to the actual number of days in such full Dividend
Period.
SECTION 3 VOTING AND ELECTION OF DIRECTORS.
(a) The holders of outstanding shares of this Series shall be entitled to
vote, with the Common Stock and any other capital stock voting with the Common
Stock, with respect to all matters for which a vote of the holders of Common
Stock is taken. Each holder of outstanding shares of this Series shall be
entitled to that number of votes as are equal to the number of shares of this
Series held by such holder. The record date for holders of shares of the Series
entitled to vote on any matters submitted to the holders of Common Stock for
their vote, whether at an annual or special meeting of shareholders or by
unanimous written consent, shall be the same date as the record date established
for the Common Stock.
(b) So long as any shares of this Series remain outstanding, the
affirmative vote or consent of the holders of a majority of the shares of this
Series outstanding at the time, voting as a single class, given in person or by
proxy, either in writing or at a meeting, shall be necessary to permit, effect
or validate any of the following: (i) the authorization, creation or issuance,
or any increase in the authorized or issued amount, of any class of series of
Senior Stock or Parity Stock (both as defined in Section 8) or (ii) the
amendment, restatement, modification, alteration or repeal of any of the
provisions of this Certificate of Designation.
(c) Until the earlier of (i) the termination of the Stock Rights and
Restrictions Agreement to be entered into on or about , 1998,
as it may be amended from time to time (the "SLOPI Agreement"), between the
Company and Shell Louisiana Onshore Properties, Inc., a Delaware Corporation
("SLOPI") or (ii) SLOPI and its Affiliates shall Beneficially Own shares of
Common Stock constituting less than 21% of the then outstanding shares of Common
Stock, then, in connection with each election of directors of the Company,
whether at an annual or special meeting, the holders of this Series shall be
entitled to elect at such meeting a number of directors (the "Preferred
Directors") such that, after giving effect to the election of such persons to
the Board of Directors of the Company, the number of Preferred
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Directors then serving on the Board of Directors of the Company shall equal the
product (rounded downward to the nearest whole number, but, in any event, not
less than one) of (i) the total number of directors constituting the entire
Board of Directors multiplied by (ii) 20% (the "Director Percentage").
(d) If at any time the number of directors constituting the Board of
Directors of the Company shall decrease so that the holders of the Series would
be entitled to designate fewer directors than are then serving as Preferred
Directors, the holders of the Series, one or more of the Preferred Directors
shall resign so that the percentage of the Board of Directors consisting of
Preferred Directors does not exceed the Director Percentage (rounded downward to
the nearest whole number but in no event less than one); provided, that, if a
Preferred Director does not resign, the members of the Board of Directors who
are not Preferred Directors shall be entitled to remove such Preferred Director.
Further, (i) upon termination of the SLOPI Agreement in accordance with its
terms or (ii) the conversion of all outstanding shares of this Series into
Common Stock, all Preferred Directors then serving as directors of the Company
shall immediately cease to be members of the Company's Board of Directors and
shall be deemed to have resigned on the date of such termination.
(e) (i) In the event that any Preferred Director shall cease to serve as
a director for any reason (other than as set forth in Section (d) immediately
above), the vacancy resulting thereby shall be filled by appointment by any
Preferred Director remaining, and in the absence of action by the remaining
Preferred Directors, by the holders of the Series, and such Preferred Director
shall thereafter serve until the expiration of the term of the Preferred
Director replaced by such new Preferred Director.
(ii) Subject to the provisions of Section 3(f) below, if there shall exist
at any time any vacancy or vacancies on the Board of Directors of the Company as
a result of any increase in the number of directors that constitutes the entire
Board of Directors of the Company, which the directors of the Company then in
office intend to fill in accordance with the Company's then existing Articles of
Incorporation, by-laws and applicable law, the holders of the Series shall be
entitled to designate one or more persons to fill such vacancy or vacancies if
and to the extent necessary so that, after giving effect to the filling of such
vacancy or vacancies, the number of Preferred Directors then serving on the
Board of Directors of the Company shall equal the Director Percentage (rounded
downward to the nearest whole number but in no event less than one).
(f) Notwithstanding anything to the contrary contained herein, no
Preferred Director may be a person who previously has been a director of the
Company and was properly removed for cause from the Board of Directors of the
Company or a person who has been convicted of a felony or a crime involving
moral turpitude.
(g) At all times when there is a Preferred Director on the Company's Board
of Directors, at least one shall be a member of each Audit Committee of the
Board of Directors. All members of the Audit Committee shall have access to the
Company's independent accountants and all audit and tax work papers to the same
extent as any other member of the Audit Committee.
(h) The Preferred Directors will be furnished with all information that is
provided to all other directors of the Company (in their capacities as such) at
the same time as such information is furnished to such other directors (in their
capacities as such).
(i) All Preferred Directors shall comply with the retirement policies of
the Company as in effect on the date hereof or as hereafter amended or modified
from time to time by the Board of Directors of the Company or its stockholders;
provided that no such amendment or modification to such policies shall be
binding upon a Preferred Director unless at least one Preferred Director shall
have voted in favor of such amendment or modification at the meeting, or in the
action in lieu of a meeting, of the Board of Directors of the Company at or in
which it is considered.
(j) The election of Preferred Directors or approval under paragraph (b)
above shall be by holders of a majority of the issued and outstanding Series as
reflected on the stock books of the Company on the applicable record date, or if
by written consent, on the date of such consent. The record date for holders of
shares of the Series entitled to vote on matters pursuant to this Section 3 at a
meeting of the holders of the
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Series shall be established by the Board of Directors of the Company and shall
not precede 60 days before such meeting. Special meetings of the holders of the
Series may be called by any holder of more than 25% of the outstanding shares of
the Series, except that the Company may call a special meeting of the holders of
the Series in connection with any action to be voted on pursuant to paragraph
(b) above. Any action taken by written consent of the holders of the Series need
not be unanimous and such action will be effective upon delivery of such written
consent to the Secretary of the Company.
SECTION 4 LIQUIDATION. In the event of any complete liquidation,
dissolution or winding-up of the Company, whether voluntary or involuntary the
holders of shares of this Series shall each be entitled to receive out of assets
of the Company, whether such assets are capital or surplus, for each share of
this Series a sum equal to the Stated Value plus the amount of any accrued and
unpaid dividends on such share plus interest accrued but unpaid on any
Arrearage, before any distribution shall be made to the holders of Junior Stock
of the Company, and if the assets of the Company shall be insufficient to pay in
full such amounts, then such assets shall be distributed among the holders of
this Series ratably in accordance with the respective amounts that would be
payable on such shares if all amounts payable thereon were paid in full.
SECTION 5 CONVERSION.
(a) Each share of this Series shall be convertible at the option of the
record holder thereof at any time by presentation of the certificate
representing such share by the record holder in person or by registered mail,
return receipt requested with postage prepaid thereof, at the principal office
of the Company, and at such other offices, if any, as the Board of Directors may
determine, into the number of fully paid and nonassessable shares of Common
Stock determined by dividing the Stated Value by the Conversion Price in effect
on the Conversion Date.
(b) The conversion price initially shall be $ (the "Conversion
Price") and shall be subject to adjustment from time to time as follows:
(i) If the Company, at any time while any shares of this Series are
outstanding, shall (A) pay a stock dividend or stock dividends or otherwise
make a distribution or distributions on shares of its capital stock payable
in shares of Common Stock (or in securities convertible into shares of
Common Stock), (B) except as set forth in clause (A) above, pay a stock
dividend or make a distribution on shares of its capital stock payable in
shares of its capital stock of any class other than Common Stock or a class
convertible into Common Stock, (C) subdivide outstanding shares of Common
Stock into a larger number of shares, (D) combine outstanding shares of
Common Stock into a smaller number of shares, or (E) issue by
reclassification of shares of Common Stock any shares of capital stock of
the Company of any class or classes, the Conversion Price in effect
immediately prior to such action shall be adjusted so that the holder of
any shares of this Series thereafter surrendered for conversion shall be
entitled to receive the number and class or classes of shares of the
capital stock of the Company which he would have owned or have been
entitled to receive immediately after the happening of any of the events
described above, had such shares of this Series been converted on or
immediately prior to the record date for such dividend or distribution or
the effective date of such subdivision, combination or reclassification, as
the case may be. An adjustment made pursuant to this subsection 5(b)(i)
shall become effective immediately after the record date in the case of a
dividend or distribution and shall become effective immediately after the
effective date in the case of a subdivision, combination or
reclassification.
(ii) If the Company, at any time while any shares of this Series are
outstanding, shall issue rights or warrants to all holders of Common Stock
entitling them (for a period expiring within 45 days after the record date
mentioned below) to subscribe for or purchase shares of Common Stock at a
price per share less than the Per Share Market Value of Common Stock at the
record date mentioned below, the Conversion Price at which each share of
this Series shall thereafter be convertible shall be reduced by multiplying
the Conversion Price in effect immediately prior to such record date by a
fraction, of which the denominator shall be the number of shares of Common
Stock (excluding treasury shares, if any) outstanding on the date of
issuance of such rights or warrants plus the number of additional shares of
Common Stock offered for subscription or purchase, and of which the
numerator shall be the
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number of shares of Common Stock (excluding treasury shares, if any)
outstanding on the date of issuance of such rights or warrants plus the
number of shares which the aggregate offering price of the total number of
shares so offered would purchase at such Per Share Market Value. Such
adjustment shall be made whenever such rights or warrants are issued, and
shall become effective immediately after the record date for the
determination of stockholders entitled to receive such rights or warrants.
However, upon the expiration of any right or warrant to purchase Common
Stock the issuance of which resulted in an adjustment in the Conversion
Price of the shares of this Series pursuant to this Subsection 5(b)(ii), if
any such right or warrant shall expire and shall not have been fully
exercised, the Conversion Price per share of Common Stock at which each
share of this Series shall thereafter be convertible shall immediately upon
such expiration be recomputed and effective immediately upon such
expiration be increased to the price which it would have been (but
reflecting any other adjustments in the Conversion Price made pursuant to
the provisions of this Section 6 after the issuance of such rights or
warrants) had the adjustment of the Conversion Price made upon the issuance
of such rights or warrants been made on the basis of offering for
subscription or purchase only that number of shares of Common Stock
actually purchased upon the exercise of such rights or warrants which were
actually exercised. No adjustment shall be made pursuant to this Section
5(b)(ii) if rights and warrants are also distributed to the holders of this
Series on the basis of the number of shares of Common Stock then issuable
on conversion of the shares of this Series.
(iii) If the Company, at any time while shares of this Series are
outstanding, shall distribute to all holders of Common Stock evidences of
its indebtedness or assets (excluding cash dividends or cash distributions
paid out of earned surplus) or rights or warrants to subscribe for or
purchase any security (excluding those referred to in Subsection 5(b)(ii)
above) then in each such case the Conversion Price per share of Common
Stock at which each share of this Series shall thereafter be convertible
shall be determined by multiplying the Conversion Price in effect
immediately prior to the record date fixed for determination of
stockholders entitled to receive such distribution by a fraction, of which
the denominator shall be the Per Share Market Value of Common Stock
determined as of the record date mentioned above, and of which the
numerator shall be such Per Share Market Value of the Common Stock, less
the then fair market value (as determined by the Board of Directors of the
Company (the "Board") in good faith, whose determination shall be
conclusive if made in good faith; provided, however, that in the event of a
distribution or series of related distributions exceeding 10% of the net
assets of the Company, then such fair market value shall be determined by a
nationally recognized or major regional investment banking firm or firm of
independent certified public accountants of recognized standing (which may
be the firm that regularly examines the financial statements of the
Company) selected in good faith by the Board, and in either case shall be
described in a statement provided to all registered holders of this Series)
of the portion of assets or evidences of indebtedness so distributed or
such subscription rights applicable to one share of Common Stock. Such
adjustment shall be made whenever any such distribution is made and shall
become effective immediately after the record date mentioned above. No
adjustment shall be made pursuant to this subsection 5(b)(iii) if such
evidence of indebtedness or assets are also distributed to the holders of
this Series on the basis of the number of shares of Common Stock then
issuable on the conversion of the shares of this Series.
(iv) No notification to the holders of any adjustment in the
Conversion Price otherwise required by this Section 5 shall be required
unless such adjustment would require an increase or decrease of at least 1%
in such price; provided, however, that any adjustment which by reason of
this subsection 5(b)(iv) is not required to be made shall be carried
forward and taken into account in any subsequent adjustments, and that upon
presentment of shares of this Series for conversion, all adjustment shall
be made calculating the conversion rights of such holder. All calculations
under this Section 5 shall be made to the nearest cent or the nearest
1/100th of a share, as the case may be.
(v) Subject to (iv) above, whenever the Conversion Price is adjusted,
as herein provided, the Company shall promptly mail to each registered
holder of shares of this Series a notice setting forth the Conversion Price
after such adjustment and setting forth a brief statement of the facts
requiring such
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adjustment. Such notice prepared in good faith shall be conclusive evidence
of the correctness of such adjustment absent manifest error.
(vi) In case:
(A) the Company shall declare a dividend (or any other
distribution) on the Common Stock payable otherwise than in cash out of
its earned surplus; or
(B) the Company shall declare a special nonrecurring cash dividend
on or a redemption of its Common Stock; or
(C) the Company shall authorize the granting to the holders of the
Common Stock of rights or warrants to subscribe for or purchase any
shares of capital stock of any class or of any other rights; or
(D) the approval of any stockholders of the Company shall be
required in connection with any reclassification of the Common Stock of
the Company (other than a subdivision or combination of the outstanding
shares of Common Stock), any consolidation or merger to which the
Company is a party, any sale or transfer of all or substantially all of
the assets of the Company, or any compulsory share exchange whereby the
Common Stock is converted into other securities, cash or property; or
(E) of the voluntary or involuntary dissolution, liquidation or
winding up of the affairs of the Company,
then the Company shall cause to be filed at each office or agency maintained for
the purpose of conversion of the shares of this series, and shall cause to be
mailed to the holders of record of the shares of this Series at their last
addresses as they shall appear upon the stock books of the Company, at least 10
days prior to the applicable record date hereinafter specified, a notice stating
(x) the date on which a record is to be taken for the purpose of such dividend,
distribution, redemption, rights or warrants, or, if a record is not to be
taken, the date as of which the holders of Common Stock of record to be entitled
to such dividend, distribution, redemption, rights or warrants are to be
determined, or (y) the date on which such reclassification, consolidation,
merger, sale, transfer, share exchange, dissolution, liquidation or winding up
is expected to become effective, and the date as of which it is expected that
holders of Common Stock of record shall be entitled to exchange their shares of
Common Stock for securities or other property deliverable upon such
reclassification, consolidation, merger, sale, transfer, share exchange,
dissolution, liquidation or winding up (but no failure to mail such notice or
any defect therein or in the mailing thereof shall affect the validity of the
corporate action required to be specified in such notice).
(c) In case of any reclassification of the Common Stock, then the holders
of the shares of this Series then outstanding shall have the right thereafter to
convert such shares only into the kind and amount of shares of stock and other
securities and property receivable upon or deemed to be held following such
reclassification by a holder of a number of shares of the Common Stock of the
Company into which such shares of this Series could have been converted
immediately prior to such reclassification. This provision shall similarly apply
to successive reclassifications.
(d) In case of any consolidation or merger of the Company with or into
another Person in which the Company is not the surviving entity or any
compulsory share exchange pursuant to any of which the Common Stock is converted
into other securities, cash or property (any such event being hereinafter
referred to as "Reorganization"), then the terms of such Reorganization shall
provide that each holder of share of this Series then outstanding shall have the
right to receive in exchange therefor the kind and amount of shares of stock and
other securities and property receivable upon such Reorganization
("Reorganization Consideration") by a holder of the number of shares of the
Common Stock of the Company into which (x) a share of this Series (or
Sub-Series) could have been converted as of the effective date of the
Reorganization, plus (y) the Arrearage (if any) on a share of this Series could
have been exchanged as of the effective date of the Reorganization.
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(e) In case at any time conditions shall arise by reason of action taken
by the Company, which, in the opinion of the Board of Directors of the Company,
are not adequately covered by the other provisions hereof and which might
materially and adversely affect the rights of the holders of shares of this
Series, the Board of Directors of the Company shall appoint a firm of
independent certified public accountants of recognized standing (which may be
the firm that regularly examines the financial statements of the Company), who
shall give their opinion as to the adjustment, if any (not inconsistent with the
standards established in this Section 5, of the Conversion Price (including, if
necessary, any adjustment as to the securities into which shares of this Series
may thereafter be convertible) which is or would be required to preserve the
rights of the holders of shares of this Series. The Board of Directors of the
Company shall make the adjustment recommended forthwith upon the receipt of such
opinion or the taking of any such action contemplated, as the case may be;
provided, however, that no such adjustment of the Conversion Price shall be made
which in the opinion of the investment banking firm or firm of accountants
giving the aforesaid opinion would result in an increase of the Conversion Price
to more than the Conversion Price then in effect.
SECTION 6 MATTERS RELATING TO ISSUANCE OF COMMON STOCK. The following
provisions shall be applicable to issuances of Common Stock upon conversion of
shares of this Series.
(a) The Company covenants that it will at all times reserve and keep
available, out of its authorized and unissued Common Stock solely for the
purpose of issuance upon conversion of this Series as herein provided, free from
preemptive rights or any other actual or contingent purchase rights of Persons
other than the holders of shares of this Series, such number of shares of Common
Stock as shall then be issuable upon the conversion of all outstanding shares of
this Series. The Company covenants that all shares of Common Stock that shall be
so issuable shall upon issue be duly and validly issued and fully paid and
nonassessable.
(b) The Company shall not be required to issue stock certificates
representing fractions of shares of Common Stock, but may, if otherwise
permitted, make a cash payment in respect of any final fraction of a share based
on the Per Share Market Value at such time. If the Company elects not, or is
unable, to make such a cash payment, the holder of a share of this Series shall
be entitled to receive, in lieu of the final fraction of a share, one whole
share of Common Stock.
(c) The issuance of certificates for shares of Common Stock on conversion
of this Series shall be made without charge to the holders thereof for any
documentary stamp or similar taxes that may be payable in respect of the issue
or delivery of such certificate, provided, that the Company shall not be
required to pay any tax that may be payable in respect of any transfer involved
in the issuance and delivery of any such certificate in a name other than that
of the holder of the shares of this Series converted was made and the Company
shall not be required to issue or deliver such certificates unless or until the
Person or Persons requesting the issuance thereof shall have paid to the Company
the amount of such tax or shall have established to the satisfaction of the
Company that such tax has been paid.
(d) The exercise by a holder of shares of this Series of the conversion
rights granted herein is subject in all respects to and conditioned upon
compliance by the parties with the HSR Act, and rules and regulations
promulgated pursuant thereto, to the extent that said act, rules and regulations
are applicable to such exercise. The Company and such holder agree to make such
filings with and provide such information to the Federal Trade Commission and
the Department of Justice with respect to such exercise as are required in
connection with the HSR Act in a timely manner and to join each others request
for early termination. The Company and such holder will use such reasonable
efforts to obtain all governmental approval required to permit such exercise and
to cause early termination of the waiting period under the HSR Act.
SECTION 7 AUTOMATIC CONVERSION. If on or after ,
2001 [third anniversary of issuance], (a) any shares of this Series have not
been converted into shares of Common Stock and (b) the mean average Per Share
Market Value exceeds 150% of the Conversion Price for 75 consecutive Trading
Days, then all such shares of this Series shall automatically be converted into
the number of shares of Common Stock determined by dividing the Stated Value by
the Conversion Price in effect at the time of
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conversion; provided that SLOPI and its Affiliates may elect to retain an
aggregate of one share of Preferred Stock that will not be automatically
converted pursuant to this Section 7.
SECTION 8 DEFINITIONS. For the purposes hereof, the following terms shall
have the following respective meanings:
"Affiliate" shall mean, with respect to any specified Person, any other
Person, directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified Person. For the purposes of this
definition, "control" (including, with correlative meanings, "controlling,"
"controlled by," and "under common control with") means the power to direct
or cause the direction of the management and policies of such Person, directly
or indirectly, whether through the ownership of voting securities, by contract,
or otherwise and, and with respect to a corporation or partnership, control
shall mean direct or indirect ownership of more than fifty percent (50%) of the
voting stock or general partnership interest or voting interest in any such
corporation or partnership.
"Arrearage" has the meaning specified in Section 2(a).
"Beneficially Own" shall have the meaning assigned to such term in Rule
13d-3 under the Exchange Act in effect on the date hereof. "Beneficial Owner"
and "Beneficial Ownership" shall have correlative meanings.
"Business Day" shall mean any day that commercial banks located in
Houston, Texas are legally open for business.
"Change of Control" shall mean the acquisition by a Person other than
SLOPI or its Affiliates of Beneficial Ownership of more than 50% of the then
outstanding shares of Common Stock.
"Common Stock" means shares now or hereafter authorized of the class of
Common Stock, $0.01 par value, of the Company presently authorized and stock of
any other class into which such shares may hereafter have been reclassified or
changed.
"Conversion Date" means the date the stock certificate is received by the
Company for conversion in accordance with Section 5(a).
"Conversion Price" has the meaning specified in Section 5(b).
"Dividend Period" has the meaning specified in Section 2(a).
"Dividend Rate" has the meaning specified in Section 2(a).
"Fully Diluted Shares" means, at any time, the sum of (i) the shares of
Common Stock then outstanding plus (ii) the number of shares of Common Stock
reserved for issuance or issuable in connection with the exercise, exchange or
conversion of options, warrants or securities of the Company then outstanding
which are exercisable or exchangeable for shares of Common Stock or are
convertible into shares of Common Stock (including, without limitation, this
Series).
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended.
"Junior Stock" means the Common Stock of the Company and any other stock
of the Company over which shares of this Series has a preference as to
distribution of assets and payment of dividends.
"Parity Stock" means any stock of the Company ranking as to distribution
of assets and payment of dividends on a parity with this Series.
"Per Share Market Value" means on any particular date (a) the last sale
price per share of the Common Stock on such date on the principal stock exchange
on which the Common Stock has been listed or, if there is no such price on such
date, then the last sale price on such exchange on the date nearest preceding
such date, or (b) if the Common Stock is not listed on any stock exchange, the
final bid price for a share of Common Stock in the over-the-counter market, as
reported by The Nasdaq Stock Market at the close of business on such date, or
the last sales price if such price is reported and final ibid prices are not
available, or (c) if the Common Stock is not quoted on The Nasdaq Stock Market,
the bid price for a share of Common Stock in the over-the-counter market as
reported by the National Quotation Bureau
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Incorporated (or any similar organization or agency succeeding to its functions
of reporting prices), or (d) if the Common Stock is no longer publicly traded,
as determined by one of the investment banking firms listed on Schedule I to the
SLOPI Agreement selected in good faith by the Board of Directors of the Company,
provided, that none of the transactions related to the foregoing shall include
purchases by any "affiliate" (as such term is defined in the General Rules and
Regulations under the Securities Act of 1933) of the Company.
"Person" means any individual, firm, partnership, association, group (as
such term is defined in Section 13(d)(3) of the Exchange Act, as in effect on
the date hereof), corporation, trust, business trust or other entity, and
includes any successor (by merger or otherwise) of any such entity.
"Preferred Stock" means the Company's Preferred Stock, par value $0.01
per share.
"Reorganization" has the meaning specified in Section 5(d).
"Reorganization Consideration" has the meaning specified in Section 5(d).
"Senior Stock" means any stock of the Company which has a priority over
shares of this Series as to payment of dividends or distribution of assets of
the Company.
"SLOPI" means Shell Louisiana Onshore Properties, Inc., a Delaware
corporation.
"SLOPI Agreement" has the meaning assigned thereto in Section 3.C.
"Stated Value" has the meaning specified in Section 1.
"Trading Day" means (a) a day on which the Common Stock is traded on the
principal stock exchange on which the Common Stock has been listed, or (b) if
the Common Stock is not listed on any stock exchange, a day on which the Common
Stock is quoted in the over-the-counter market, as reported by National
Association of Securities Dealers Automated Quotation System ("NASDAQ"), or
(c) if the Common Stock is not quoted by NASDAQ, a day on which the Common Stock
is quoted in the over-the-counter market as reported by the National Quotation
Bureau Incorporated (or any similar organization or agency succeeding to its
functions of reporting prices).
IN WITNESS WHEREOF, The Meridian Resource Corporation has caused this
Certificate to be signed by a duly authorized officer, this day
of , 1998.
THE MERIDIAN RESOURCE CORPORATION
By:___________________________________
JOSEPH A. REEVES, JR.
CHIEF EXECUTIVE OFFICER AND
CHAIRMAN OF THE BOARD
ATTEST:
By:_____________________________________________________________________________
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EXHIBIT F
FORM OF STOCK RIGHTS AND RESTRICTION AGREEMENT
STOCK RIGHTS AND RESTRICTIONS AGREEMENT
STOCK RIGHTS AND RESTRICTIONS AGREEMENT, dated as of
, 1998, between The Meridian Resource Corporation, a
Texas corporation ("TMR"), and Shell Louisiana Onshore Properties Inc., a
Delaware corporation ("SLOPI").
RECITALS:
(A) After giving effect to the Closing (as defined below), SLOPI owns
shares of Common Stock (the "Common Shares") and shares of
Preferred Stock (the "Preferred Shares") (together with any additional Common
Shares or Preferred Shares which SLOPI or any Affiliate of Shell (as defined
below) may from time to time own (collectively, the "Shares")).
(B) After giving effect to the Closing, the number of directors
constituting the whole Board of Directors of TMR is seven (7) and the following
person is the initial Preferred Director (as defined below): J.M. Funk.
(C) The Boards of Directors of TMR and SLOPI deem it advisable to
establish certain rights and restrictions with respect to the Shares.
ACCORDINGLY, premises considered, the parties have entered into this
Agreement.
1. DEFINITIONS. For purposes of this Agreement, the following terms have
the meanings indicated:
(a) "Affiliate" shall mean, with respect to any specified Person, any
other Person, directly or indirectly controlling or controlled by or under
direct or indirect common control with such specified Person. For the purposes
of this definition, "control" (including, with correlative meanings,
"controlling," "controlled by," and "under common control with") means the
power to direct or cause the direction of the management and policies of such
Person, directly or indirectly, whether through the ownership of voting
securities, by contract, or otherwise and, with respect to a corporation or
partnership, control shall mean direct or indirect ownership of more than fifty
(50%) of the voting stock or general partnership interest or voting interest in
any such corporation or partnership.
(b) "Allocated Price Per Share" shall mean the then existing conversion
price of the Preferred Shares (or if all of the Preferred Shares shall have been
converted, the conversion price that would have then been in existence had the
Preferred Shares not been so converted) as the same may be adjusted from time to
time in accordance with the terms thereof.
(c) "Applicable Percentage" shall mean 21%.
(d) "Average Per Share Market Value" of shares of Common Stock shall
mean the average of the Per Share Market Value of such shares for the 30 Trading
Days immediately preceding (and excluding) the relevant date.
(e) "Beneficially Own" shall have the meaning assigned to such term in
Rule 13d-3 under the Exchange Act in effect on the date hereof. "Beneficial
Owner" and "Beneficial Ownership" shall have correlative meanings.
(f) "Business Combination Transaction" shall mean a merger,
consolidation, "business combination" as defined in Part Thirteen of the TBCA
as in effect on the date hereof, compulsory share exchange, recapitalization or
other transaction in which TMR is a constituent corporation or to which TMR is a
party and pursuant to which the shares of Common Stock are exchanged for cash,
securities or other property or a sale of all or substantially all of the assets
of TMR and its Subsidiaries, taken as a whole; provided that none of the
following shall be deemed a Business Combination Transaction for purposes of
this Agreement: (i) a merger, consolidation, compulsory share exchange,
recapitalization or other transaction in which the
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Beneficial Ownership of the capital stock of TMR or the surviving corporation of
the transaction (or of the ultimate parent of TMR or of such surviving
corporation) immediately after the consummation of such transaction is
substantially the same as the ownership of the capital stock of TMR immediately
prior to the consummation of the transaction or (ii) a merger (A) in which TMR
is the surviving corporation, (B) in which all shares of Common Stock
immediately prior to the consummation of such merger remain outstanding
immediately after the consummation thereof, (C) as a result of the consummation
of which no Person will own a majority of the then outstanding shares of Common
Stock and (D) following the consummation of which the Continuing Directors will
represent a majority of the Board of Directors of TMR.
(g) "Certificate of Designation" for the Preferred Shares shall have the
meaning assigned to such term in the Merger Agreement.
(h) "Closing" shall have the meaning assigned to such term in the Merger
Agreement.
(i) "Common Shares" shall have the meaning set forth in Recital A.
(j) "Common Stock" shall mean TMR's common stock, par value $0.01 per
share, and any shares of common stock or similar securities into which the
common stock of TMR are hereafter reclassified into or exchanged for.
(k) "Continuing Director" shall mean (i) any member of the Board of
Directors of TMR, while such person is a member of such Board of Directors, who
(1) was a member of the Board of Directors of TMR prior to the Effective Time or
(2) is recommended or elected to the Board of Directors by a majority of the
Continuing Directors to fill a vacancy arising as a result of an increase in the
number of directors of TMR occurring after the date hereof, and (ii) any
successor of a Continuing Director, while such successor is a member of the
Board of Directors of TMR, who is recommended or elected to succeed the
Continuing Director by a majority of the Continuing Directors. Notwithstanding
anything to the contrary in this definition, for purposes of this Agreement, the
SLOPI Designee(s) or Preferred Director(s) shall not be considered Continuing
Directors.
(l) "Deficiency Amount" shall mean with respect to any sale by SLOPI or
its Affiliates of Common Shares which were issued upon the conversion of
Preferred Shares, (i) the product of (x) the number of Common Shares sold by
SLOPI or its Affiliates in such sale at a per share price that is less than the
Allocated Price Per Share, times (y) the amount by which the per share sales
price is less than the Allocated Price Per Share. If Common Shares are sold in a
Public Offering, then the net proceeds to selling shareholder (after reasonable
and customary underwriting discounts, commissions, placement fees and expenses
of sale, excluding expenses for Security Holder's legal counsel) shall be deemed
to be the sales price. If Common Shares are sold in a Private Placement or any
transaction other than Public Offering, then the sales price shall be deemed to
be the greater of (i) the actual sales price or (ii) the Average Per Share
Market Value of the Common Stock relating to the date of such sale.
(m) "Director Election Date" shall have the meaning set forth in Section
2.2(b).
(n) "Director Percentage" shall have the meaning set forth in Section
2.2(b).
(o) "Effective Time" shall have the meaning assigned to such term in the
Merger Agreement.
(p) "E&P Company" shall have the meaning set forth in the definition of
Private Placement.
(q) "Excess Shares" shall have the meaning set forth in Section 2.5.
(r) "Exchangeable Security" shall mean a security of any type, including
but not limited to debt, equity, warrants or other rights, issued by TMR or
representing the right to acquire Voting Shares from TMR upon exchange,
conversion or exercise thereof.
(s) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, or any successor federal statute as in effect from time to time.
(t) "Fully Diluted Shares" shall mean, at any time, the sum of (i) the
shares of Common Stock then outstanding plus (ii) the number of shares of Common
Stock reserved for issuance or issuable in connection
A-F-2
<PAGE>
with the exercise, exchange or conversion of options, warrants or securities of
TMR then outstanding which are exercisable or exchangeable for shares of Common
Stock or are convertible into shares of Common Stock (including, without
limitation, the Preferred Shares).
(u) "Merger Agreement" shall mean the Agreement and Plan of Merger dated
March 27, 1998 among TMR, LOPI Acquisition Corp., SLOPI, and Louisiana Onshore
Properties Inc.
(v) "Per Share Market Value" means on any particular date (a) the last
sale price per share of the Common Stock on such date on the principal stock
exchange on which the Common Stock has been listed or, if there is no such price
on such date, then the last price on such exchange on the date nearest preceding
such date, or (b) if the Common Stock is not listed on any stock exchange, the
final bid price for a share of Common Stock in the over-the-counter market, as
reported by The Nasdaq Stock Market at the close of business on such date, or
the last sales price if such price is reported and final bid prices are not
available, or (c) if the Common Stock is not quoted on The Nasdaq Stock Market,
the bid price for a share of Common Stock in the over-the-counter market as
reported by the National Quotation Bureau Incorporated (or any similar
organization or agency succeeding to its functions of reporting prices), or (d)
if the Common Stock is no longer publicly traded, as determined by one of the
investment banking firms listed on Schedule I, as selected by SLOPI.
(w) "Person" shall mean any individual, firm, partnership, association,
group (as such term is defined in Section 13(d)(3) of the Exchange Act, as in
effect on the date hereof), corporation, trust, business trust or other entity,
and includes any successor (by merger or otherwise) of any such entity.
(x) "Preferred Director" shall have the meaning assigned to such term in
the Certificate of Designation for the Preferred Stock.
(y) "Preferred Shares" shall have the meaning set forth in Recital A.
(z) "Preferred Stock" shall mean TMR's Series A Cumulative Convertible
Preferred Stock, par value $1.00 per share.
(aa) "Private Placement" shall mean a Transfer of Shares pursuant to a
transaction not involving a Pubic Offering; provided, however, that (A) the sale
of Shares pursuant to a tender or exchange offer is not a Private Placement; (B)
a Private Placement shall not include a Transfer to any Person who, directly or
indirectly, has as one of its material businesses the exploration, development
or production of crude oil or natural gas (an "E&P Company") if, as a result
of such Private Placement, such E&P Company would Beneficially Own and/or have
the right to acquire upon conversion of shares of Preferred Stock, such number
of shares of Common Stock as would constitute 10% or more of the then
outstanding shares of Common Stock, (x) unless any such E&P Company acquiring
such amount of securities enters into an agreement with TMR limiting the
Transfer of such shares on substantially the same terms as this Agreement except
that the term of such agreement shall be 10 years from the date of such
agreement and (y) if any such E&P Company is acquiring registration rights under
the Registration Rights Agreement (as defined in the Merger Agreement), it must
agree that, although any underwriter for such E&P Company shall have customary
access to TMR to perform its due diligence obligations, such underwriter will be
subject to confidentiality obligations that prohibit the sharing or disclosure
of non-public information with such E&P Company; and (C) a private placement
shall not include a Transfer of Shares to any Person in which following such
Transfer such Person Beneficially Owns or has the right to acquire upon
conversion of the Preferred Stock more than 10% of the Common Stock of TMR
unless such Person enters into an agreement with TMR with terms and conditions
restricting the Transfer of such Shares substantially similar to those contained
herein except that the term of such agreement shall be for 10 years from the
date of such agreement. For purposes of the foregoing, in determining whether
any Person Beneficially Owns shares of Common Stock or shares of Preferred
Stock, SLOPI and its Affiliates shall be entitled to rely exclusively on the
existence or non-existence of any reports on Schedule 13D that may have been
filed by such Person with the SEC, without having to make any inquiry of such
Person or otherwise.
(bb) "Public Offering" shall mean a firm commitment underwritten public
offering pursuant to a registration statement which has been declared effective
by the SEC under the Securities Act.
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<PAGE>
(cc) "Relevant Date" shall have the meaning set forth in Section 2.4(k).
(dd) "Rule 144" and "Rule 145" shall mean Rule 144 and Rule 145
adopted by the SEC under the Securities Act, or any successor rule.
(ee) "SEC" shall mean the Securities and Exchange Commission.
(ff) "Securities Act" shall mean the Securities Act of 1933, as amended,
or any successor federal statute as in effect from time to time.
(gg) "Shares" shall have the meaning set forth in Recital A.
(hh) "Shell" shall mean Shell Oil Company, a Delaware corporation, which
is an Affiliate of SLOPI.
(ii) "Subsidiary" shall mean, with respect to any Person, any other
Person of which at least a majority of the voting power of the voting equity
securities or voting equity interest is owned, directly or indirectly, by such
Person.
(jj) "SLOPI" shall have the meaning set forth in the first paragraph
hereof; and the term "SLOPI" shall include SLOPI and its Affiliates unless the
context otherwise requires.
(kk) "SLOPI Designee(s)" shall have the meaning set forth in Section
2.2(b) hereof.
(ll) "TBCA" shall have the meaning set forth in Section 2.1(c).
(mm) "TMR" shall have the meaning set forth in the first paragraph of
this Agreement.
(nn) "Trading Days" means (a) a day on which the Common Stock is traded
on the principal stock exchange on which the Common Stock has been listed, or
(b) if the Common Stock is not listed on any stock exchange, a day on which the
Common Stock is quoted in the over-the-counter market, as reported by The Nasdaq
Stock Market, or (c) if the Common Stock is not quoted on The Nasdaq Stock
Market, a day on which the Common Stock is quoted in the over-the-counter market
as reported by the National Quotation Bureau Incorporated (or any similar
organization or agency succeeding to its functions of reporting prices).
(oo) "Transfer" shall have the meaning set forth in Section 2.4 hereof.
(pp) "Voting Shares" shall mean the Common Stock and any other
securities of TMR having voting power under ordinary circumstances with respect
to the election of directors of TMR.
2. SHARE RIGHTS AND RESTRICTIONS.
2.1 LIMITATION ON CERTAIN TRANSACTIONS.
(a) Except as otherwise permitted by this Agreement, SLOPI agrees that
SLOPI shall not, during the period from the date of this Agreement until its
termination, (i) engage, or propose to engage, in any Business Combination
Transaction with TMR, or (ii) make any proposal to TMR, the Board of Directors
of TMR or the shareholders of TMR with respect to a tender offer or exchange
offer for shares of Common Stock or a liquidation of TMR, unless either (A) such
transaction shall have been approved by a majority of the Continuing Directors
or (B) (x) the third anniversary of the date of this Agreement shall have
occurred and (y) on the date when such transaction is proposed, either no
Preferred Director(s) or SLOPI Designee(s) shall be serving on the Board of
Directors of TMR or SLOPI and its Affiliates collectively shall Beneficially Own
less than 21% of the then outstanding Common Stock.
(b) Except as otherwise permitted by this Agreement, SLOPI agrees that
SLOPI shall not, during the period from the date of this Agreement until its
termination, (i) request or solicit any Person (A) to make a tender or exchange
offer for shares of Common Stock or (B) to make a proposal for a Business
Combination Transaction, unless either (A) a majority of the Continuing
Directors shall have approved of SLOPI taking such action or (B) (x) the third
anniversary of the date of this Agreement shall have occurred on the date when
such action is first requested or solicited by SLOPI and (y) either no SLOPI
Designee(s) or Preferred Director(s) shall be serving on the Board of Directors
of TMR or SLOPI and its Affiliates shall collectively Beneficially Own less than
21% of the then outstanding Common Stock.
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<PAGE>
(c) In connection with the Merger, TMR's Board of Directors has taken all
action to assure that (i) no state takeover statute or similar statute will
apply to the Merger or to any of the transactions contemplated in the Merger
Agreement or the items referenced to in Section 2.3(w), (x), (y) and (z), (ii)
Article Eight of TMR's Articles of Incorporation will not apply to the Merger or
any of the transactions contemplated in the Merger Agreement or in the documents
attached thereto, and (iii) Part Thirteen of the Texas Business Corporation Act
("TBCA") will not apply to the Merger or any of the transactions contemplated
in the Merger Agreement or the items referenced to in Section 2.3(w), (x), (y)
and (z). Further, TMR has no "poison pill" or takeover defense mechanism other
than Article Eight of TMR's Articles of Incorporation except those that exclude
SLOPI and its Affiliates from all effects thereof. TMR shall not amend or modify
any of the foregoing actions nor shall TMR implement any new, additional,
amended or modified poison pill or takeover defense mechanism, unless, in each
and every such case, provision shall be made to exclude SLOPI and its Affiliates
from all effects thereof. This Section 2.1(c) shall survive the termination of
this Agreement.
(d) TMR and SLOPI agree that the operative provisions, as presently in
effect, of Article Eight of TMR's Articles of Incorporation and Part Thirteen of
the TBCA will apply to any business combination transaction covered by said
Article Eight or Part Thirteen between SLOPI and its Affiliates and TMR for the
term of this Agreement, notwithstanding that the operative provisions of said
Article Eight and Part Thirteen might otherwise be applicable for a shorter
period of time.
2.2 TMR BOARD OF DIRECTORS.
(a) Subject to restrictions of applicable law and unless this Agreement
has been terminated, on the Director Election Date (defined below), TMR shall
appoint SLOPI Designee(s) (defined below) to fill the vacancies created by the
removal of the Preferred Director(s) in accordance with the Certificate of
Designation for the Preferred Stock, to serve until their successors are elected
or their earlier resignation or removal.
(b) From and after the date on which all the Preferred Shares shall have
been converted into Common Stock (the "Director Election Date") and until the
earlier of (i) termination of this Agreement or (ii) SLOPI and its Affiliates
shall Beneficially Own Shares constituting less than 21% of the then outstanding
shares of Common Stock, then, in connection with each election of directors of
TMR, whether at an annual or special meeting, TMR will nominate, and, subject to
the fiduciary obligations of the TMR directors, solicit proxies for, in
accordance with its procedures for the nomination of, and solicitation of
proxies for, management-slate directors, a number of persons designated by SLOPI
(all such persons who, at any time, are or were designated by SLOPI for purposes
of this Agreement are referred to herein as the "SLOPI Designee(s)") such
that, after giving effect to the election of such persons to the Board of
Directors of TMR, the number of SLOPI Designees then serving on the Board of
Directors of TMR shall equal the product (rounded downward to the nearest whole
number, but, in any event, not less than one) of (i) the total number of
directors constituting the entire Board of Directors of TMR multiplied by (ii)
20% (the "Director Percentage").
(c) If at any time the number of directors constituting the Board of
Directors of TMR shall decrease so that SLOPI would be entitled to designate
fewer directors than are then serving as SLOPI Designees, SLOPI shall cause one
or more of the SLOPI Designees serving as TMR directors to resign so that the
percentage of the Board of Directors consisting of SLOPI Designees does not
exceed the Director Percentage (rounded downward to the nearest whole number,
but, in any event, not less than one); provided, that in no event will there
ever be less than one SLOPI Designee. Further, upon termination of this
Agreement in accordance with its terms, SLOPI shall cause all SLOPI Designees
then serving as directors of TMR to resign immediately.
(d) (i) In the event that any SLOPI Designee shall cease to serve as a
director for any reason (other than as set forth in Section 2.2(c)), the vacancy
resulting thereby shall be filled by the remaining directors of the Company in
accordance with its Articles of Incorporation, by-laws and applicable law by a
new SLOPI Designee and such new SLOPI Designee shall thereafter serve until the
expiration of the term of the SLOPI Designee replaced by such new SLOPI
Designee.
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<PAGE>
(ii) Subject to the provisions of Section 2.2(e), if, after the Director
Election Date, there shall exist at any time any vacancy or vacancies on the
Board of Directors of TMR as a result of any increase in the number of directors
that constitutes the entire Board of Directors of TMR, which the directors of
TMR then in office intend to fill in accordance with TMR's Articles of
Incorporation, by-laws and applicable law, SLOPI shall be entitled to designate
one or more persons as SLOPI Designees to fill such vacancy or vacancies if and
to the extent necessary so that, after giving effect to the filling of such
vacancy or vacancies, the number of SLOPI Designees then serving on the Board of
Directors of TMR shall equal the Director Percentage (rounded downward to the
nearest whole number, but, in any event, not less than one). TMR agrees to take
all actions appropriate or necessary to ensure that any SLOPI Designees
designated pursuant to the preceding sentence are appointed to the Board of
Directors of TMR to fill any such vacancy or vacancies filled by the Board of
Directors of TMR as provided in the preceding sentence.
(e) Notwithstanding anything to the contrary contained herein, no SLOPI
Designee may be a person who previously has been a director of TMR and was
properly removed for cause from the Board of Directors of TMR or a person who
has been convicted of a felony or a crime involving moral turpitude.
(f) The SLOPI Designees will be furnished with all information that is
provided to all other directors of TMR (in their capacities as such) at the same
time as such information is furnished to such other directors (in their
capacities as such).
(g) SLOPI shall cause all SLOPI Designees serving as directors of TMR to
comply with the retirement policies of TMR as in effect on the date hereof or as
hereafter amended or modified from time to time by the Board of Directors of TMR
or its shareholders; provided that no such amendment or modification to such
policies shall be binding upon SLOPI or the SLOPI Designees unless at least one
SLOPI Designee shall have voted in favor of such amendment or modification at
the meeting, or in the action in lieu of a meeting, of the Board of Directors of
TMR at or in which it is considered.
(h) At all times when there is a SLOPI Designee on TMR's Board of
Directors, at least one SLOPI Designee shall be a member of each Audit Committee
of the Board of Directors. Each SLOPI Designee who is a member of the Audit
Committee shall have unrestricted access to TMR's independent accountants and
all audit and tax work papers to the same extent as any other member of the
Audit Committee.
2.3 LIMITATION ON ACQUISITION OF ADDITIONAL SHARES BY SLOPI. From and
after the date hereof, SLOPI shall not acquire any shares of Common Stock, other
than the Common Shares and the Preferred Shares owned by SLOPI as of the
Effective Time and after giving effect to the Closing, (i) without the prior
written consent of a majority of the Continuing Directors or (ii) unless (A) the
third anniversary of the date of this Agreement shall have occurred and (B) at
the time of such acquisition no SLOPI Designee(s) or Preferred Director(s) shall
be serving on the Board of Directors of TMR or SLOPI and its Affiliates would
collectively Beneficially Own less than 21% of the then outstanding Common
Stock; provided, however, that nothing in this Section 2.3 shall limit SLOPI's
power and right (w) to convert shares of Preferred Stock into shares of Common
Stock, or (x) to purchase or acquire shares as a result of any stock dividend or
stock split, reclassification of the Common Stock, or the exercise or conversion
of any security received by SLOPI from TMR in respect of its Shares, or (y) to
receive shares of Common Stock pursuant to Section 2.7 to make up a Deficiency
Amount or (z) to acquire shares of Common Stock or any TMR Exchangeable Security
pursuant to Section 2.6 or to convert, exchange or exercise any such TMR
Exchangeable Security.
2.4 RESTRICTIONS ON TRANSFER. From and after the date hereof until the
termination of this Agreement, SLOPI and its Affiliates shall not sell, transfer
or otherwise convey (when used as a verb, "Transfer" and, any sale, transfer
or other conveyance, a "Transfer") Beneficial Ownership of any Shares
(including Shares subject to Exchangeable Securities), without the prior written
consent of a majority of the Continuing Directors, which consent shall not be
unreasonably withheld, except that, in any event, any and all of the following
Transfers shall be permitted:
(a) One or more Transfers to Shell or a direct or indirect Affiliate of
Shell, provided that Shell and each such Affiliate of Shell agrees in writing
with TMR to be bound by the same restrictions as are applicable to SLOPI
hereunder.
A-F-6
<PAGE>
(b) One or more Transfers to TMR or a to a direct or indirect Subsidiary
of TMR (pursuant to a tender offer or otherwise).
(c) One or more Transfers pursuant to a merger, consolidation or
compulsory share exchange, in which TMR is a constituent corporation.
(d) One or more Transfers made as a pro rata dividend or distribution to
the holders of the common stock of SLOPI or its Affiliates, provided, unless
such dividend or distribution is to the public shareholders of any of the Royal
Dutch/Shell Group of Companies, such holders agree in writing with TMR to be
bound by the same restrictions as SLOPI hereunder.
(e) One or more Transfers to any Person (other than SLOPI or any Affiliate
of Shell) who shall have commenced a tender or exchange offer for shares of
Common Stock if, at the time of public announcement of the tender or exchange
offer: (i) SLOPI and its Affiliates collectively Beneficially Own less than 21%
of the then outstanding shares of Common Stock and no SLOPI Designee or
Preferred Director is serving on the TMR Board of Directors, or (ii) SLOPI and
its Affiliates collectively Beneficially Own more than 21% of the then
outstanding shares of Common Stock or any SLOPI Designee or Preferred Director
is serving on the TMR Board of Directors, unless SLOPI and any Affiliates first
provide to TMR a preferential right to purchase, for cash, all such shares which
SLOPI and any Affiliates would be willing to tender or exchange at a price of
105% of the tender offer price which SLOPI and any Affiliates would be willing
to accept (which shall be the market value of the security to be exchanged on
such date if publicly traded or the cash equivalent value as reasonably
determined in good faith by SLOPI and its Affiliates). With respect to clause
(ii) above, SLOPI and its Affiliates shall give TMR notice of its willingness to
accept the tender or exchange offer at least 10 calendar days prior to its then
stated expiration date and, if TMR desires to exercise its preferential purchase
right, it must so notify SLOPI and its Affiliates in writing within said 10
calendar day period. Once TMR has given notice to SLOPI and its Affiliates that
TMR will exercise such preferential right, then, on such then stated expiration
date of the tender or exchange offer, TMR will be obligated to close the
purchase and pay in full in cash, and SLOPI and its Affiliates will be obligated
to sell, at the applicable 105% price notwithstanding anything that may
otherwise occur with respect to the tender or exchange offer, including, without
limitation, withdrawal, extension, modification, or increase or decrease in the
tender or exchange price or other consideration. Once TMR has not exercised a
preferential right to purchase with respect to a particular tender or exchange
offer made by a particular Person, then SLOPI and its Affiliates shall not
thereafter be required to make any additional preferential purchase rights
available to TMR with respect to such particular tender or exchange offer, even
if in such tender or exchange offer there is an extension or modification of or
an increase or decrease in price or other consideration, in any tender or
exchange offer made by such particular Person; provided, however, that SLOPI
will be required to provide to TMR a preferential purchase right with respect to
any tender or exchange offer made by each other Person or with respect to any
new tender or exchange offer by such particular Person which SLOPI and its
Affiliates would be willing to accept.
(f) From and after the following anniversaries of the date of this
Agreement, SLOPI and its Affiliates may, collectively, sell the following
percentages of the number of their Common Shares in one or more Public
Offerings, Private Placements and/or transactions described below in paragraphs
(h), (i), or (j):
PERCENTAGE OF
COMMON SHARES
PERMITTED TO TRANSFER*
ANNIVERSARY OF -----------------------------
THIS AGREEMENT INCREMENTAL* AGGREGATE*
----------------- ------------- ------------
Second............................. 25% 25%
Third.............................. 25% 50%
Fourth............................. 25% 75%
Fifth.............................. 25% 100%
- ------------
* These time restrictions and percentages will also apply to any shares of
Common Stock acquired by SLOPI and its Affiliates upon conversion of any
Preferred Shares into Common Shares, which will result in additional Common
Shares that can be Transferred based on the percentage limitations being
applied to a greater number of Common Shares.
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<PAGE>
Notwithstanding the above, if, at any time or from time to time, SLOPI or any of
its Affiliates receive Common Shares pursuant to Section 2.7 to make up a
Deficiency Amount, then immediately the same number of Common Shares will be
available for Transfer. Such increased availability for Transfer and any actual
Transfer(s) will not reduce or delay other Transfers otherwise permitted to be
made in accordance with the foregoing.
(g) From and after the following anniversaries of the date of this
Agreement, SLOPI may sell the following percentages of the number of its
Preferred Shares in one or more Private Placements:
PERCENTAGE OF
COMMON SHARES
PERMITTED TO TRANSFER
ANNIVERSARY OF -----------------------------
THIS AGREEMENT INCREMENTAL AGGREGATE
----------------- ------------- ------------
Third.............................. 33 1/3% 33 1/3%
Fourth............................. 33 1/3% 66 2/3%
Fifth.............................. 33 1/3% 100%
(h) Subject to paragraphs (f) and (g), as such may be modified pursuant to
paragraph (k) below, one or more Transfers in accordance with Rule 144 or Rule
145.
(i) Subject to paragraphs (f) and (g) as such may be modified pursuant to
paragraph (k) below, one or more Transfers of Shares in a Public Offering or in
a public offering (other than a Public Offering) made pursuant to a registration
statement which has been declared effective by the SEC under the Securities Act
(any such Public Offering or public offering, a "Registered Transaction");
provided, however, that, in connection with any such Registered Transaction,
SLOPI and the Company shall obtain from the managing underwriter of such Public
Offering or from each broker through which such public offering is made, as the
case may be, a commitment to use its reasonable best efforts to make a broad
public distribution of the Shares (including an indirect distribution of Shares
as a result of a distribution of Exchangeable Securities) to be Transferred in
such Registered Transaction. The managing underwriter or broker, as the case may
be, will be advised that, for purposes of this Agreement, a "broad public
distribution" means a distribution such that no Person is allocated for
purchase in such Registered Transaction a number of Shares in excess of (A) 5%
of the then outstanding shares of Common Stock (after giving effect to the
offering of the Common Shares and any other securities being offered by TMR
concurrently therewith in such Registered Offering) or (B) in the case of a
Public Offering, in excess of 20% of the number of shares of Common Shares being
offered in such Public Offering, provided that, in the case of this clause (B),
there shall be disregarded Common Shares allocated for purchase by a mutual
fund, a pension fund, an investment adviser (which investment adviser shall be
registered under the Investment Advisers Act of 1940, as amended) for any mutual
fund or pension fund, or any party who is entitled to report such party's
holdings of Common Stock on Schedule 13G promulgated under the Exchange Act in
light of that party's investment intent.
(j) Notwithstanding paragraphs (f) or (g), as such may be modified
pursuant to paragraph (k) below, such numbers of shares of Common Stock as are
equal to the numbers of shares that SLOPI and its Affiliates may from time to
time have received pursuant to Section 2.7 to make up a Deficiency Amount.
(k) Notwithstanding paragraphs (f) and (g) above, if (i) TMR shall ever,
in connection with a merger, consolidation, share exchange, or acquisition of a
business or properties or similar transaction, sell or issue or commit to sell
or issue 5,000,000 (as adjusted for stock splits, reverse splits,
reclassifications, and similar actions) or more shares of Common Stock or TMR
Exchangeable Securities that, at the time of issuance, sale or commitment and
assuming full conversion, exchange or exercise thereof, represent 5,000,000 (as
adjusted for stock splits, reverse splits, reclassifications, and similar
actions) or more of the Voting Shares and (ii) at or prior to the meeting of the
TMR Board of Directors approving any such transaction the TMR Board of Directors
shall not have received an opinion letter from an investment banking firm of
national recognition to the effect that the contemplated transaction is fair,
from a financial point of view, to TMR, then (x) SLOPI and its Affiliates will,
immediately or at any time thereafter, be permitted to Transfer an additional
number of Common Shares equal to the number of shares of Common Stock and/or the
Common Stock equivalent of the Voting Shares represented by the transaction as
to which the requisite fairness
A-F-8
<PAGE>
opinion was not obtained, and (y) if such would result in earlier or greater
Transfers by SLOPI and its Affiliates, the tables in paragraphs (f) and (g)
shall upon the date of issuance, sale or commitment (the "Relevant Date") be
revised to read, in their entirety:
For paragraph (f):
PERCENTAGE OF
COMMON SHARES
PERMITTED TO TRANSFER*
--------------------------
DATE INCREMENTAL* AGGREGATE*
- ------------------------------------- ------------ ----------
Immediately.......................... 25% 25%
1 year after Relevant Date........... 25% 50%
2 years after Relevant Date.......... 25% 75%
3 years after Relevant Date.......... 25% 100%
- ------------
* These time restrictions and percentages will also apply to any shares of
Common Stock acquired by SLOPI upon conversion of any Preferred Shares into
Common Shares, which will result in additional Common Shares that can be
Transferred based on the percentage limitations being applied to a greater
number of Common Shares.
For paragraph (g):
PERCENTAGE OF
PREFERRED SHARES
PERMITTED TO TRANSFER
--------------------------
DATE INCREMENTAL AGGREGATE
- ------------------------------------- ------------ ----------
Immediately.......................... 33 1/3% 33 1/3%
1 year after Relevant Date........... 33 1/3% 66 2/3%
2 years after Relevant Date.......... 33 1/3% 100%
2.5 VOTING OF COMMON SHARES. During the term of this Agreement and prior
to the conversion of all of the Preferred Shares, the following provisions will
apply: SLOPI and its Affiliates shall be entitled to vote, in its or their
complete discretion, and on all matters, such number of its Common Shares that,
when added to the votes represented by the Preferred Shares, constitute an
aggregate of up to 23% of the then outstanding votes eligible to be cast for
such matter. After the conversion of all the Preferred Shares, SLOPI and its
Affiliates shall be entitled to vote, in its or their complete discretion, and
on all matters, such number of its Common Shares that constitute up to 23% of
the then outstanding votes eligible to be cast for such matter. If only a
portion of the Preferred Shares has been converted, the voting shall be prorated
between the Common Stock and Preferred Stock for a total of up to 23% of the
then outstanding eligible votes to be cast for such matter. With respect to
those Common Shares, if any, that are in excess of the above amounts of the then
outstanding votes eligible to be cast for such matter (the "Excess Shares"),
SLOPI shall vote such Excess Shares pro rata with the votes of all shares, other
than the Excess Shares, that are actually voted for, against or abstain from
voting on each matter. Notwithstanding the previous sentence, SLOPI shall have
complete discretion in voting all of its Common Shares and Preferred Shares on
any matter (i) that constitutes a Business Combination Transaction, (ii) that
would involve a change of control of TMR (for purposes of this section a change
in control shall mean the acquisition by a Person other than SLOPI or its
Affiliates of Beneficial Ownership of more than 50% of the then outstanding
shares of Common Stock), or (iii) with respect to which a vote is taken when any
of the following shall have occurred or shall exist: (w) the Average Per Share
Market Value for TMR's Common Stock with respect to the day in which the matter
is voted upon has been less than $5.50 per share (such amount to be
appropriately adjusted to give effect to stock splits, reverse splits, stock
dividends, reclassifications, share exchanges, dividends and distributions for
which adjustments to the conversion price of the Preferred Shares may be made),
(x) there are any accrued but unpaid dividends on any Preferred Shares, (y) TMR
shall have failed to issue the additional shares of Common Stock required to be
issued pursuant to Section 2.7, or (z) there shall be a continuing and uncured
default by TMR of any of its material obligations under this Agreement, the
Certificate of Designation or Registration Rights Agreement (both as defined in
the Merger Agreement) or the Merger
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Agreement. The foregoing does not limit or restrict SLOPI's or its Affiliates'
complete discretion in voting its or their Preferred Shares.
2.6 RIGHT TO PARTICIPATE IN CERTAIN ISSUANCES BY TMR.
(a) If, when, and for so long as, SLOPI and its Affiliates Beneficially
Own shares of Common Stock that would constitute, after giving effect to the
proposed transaction (but not prior to the proposed transaction), less than the
Applicable Percentage of the then outstanding shares of Common Stock, TMR shall
not issue any shares of Common Stock or any Exchangeable Securities, for any
consideration or in any type of transaction, unless TMR shall have first
complied with, in the case of an issuance other than pursuant to Public
Offering, the provisions of Section 2.6(b) or, in the case of a Public Offering,
the provisions of Section 2.6(c).
(b) If TMR determines to issue any shares of Common Stock or any
Exchangeable Security, other than in a Public Offering, then TMR shall provide
written notice of such determination to SLOPI, which notice shall include all
the terms of such issuance and shall offer to SLOPI the right to purchase, at
the same price and on the same terms as TMR proposes to issue such shares of
Common Stock or Exchangeable Security to others (or, if TMR proposes to issue
such shares of Common Stock or any Exchangeable Security other than for cash, at
a cash price equal to the current market price of the Common Stock or if a
Exchangeable Security, such value to be determined by agreement between TMR or
SLOPI, or if the parties are unable to agree, by an investment banking firm or
other asset valuation firm of national reputation selected by SLOPI from
Schedule I attached hereto (as such Schedule I may be amended in writing from
time to time by both TMR and SLOPI) with the consent of a majority of the
Continuing Directors, which consent shall not be unreasonably withheld, the cost
of which shall be borne by TMR) a number or amount of the shares of Common Stock
or Exchangeable Securities proposed to be issued that represents the right to
acquire upon exercise, exchange or conversion of such Exchangeable Securities a
number of Voting Shares so that, upon closing of the transaction, SLOPI and its
Affiliates will Beneficially Own the Applicable Percentage of the then to be
outstanding Common Stock (the "Offer Notice"). If SLOPI determines to accept
the offer contained in the Offer Notice, SLOPI shall deliver a written notice to
TMR indicating its acceptance within 10 days after its receipt of the Offer
Notice, which notice shall indicate whether SLOPI has accepted such offer in
whole or in part, and, if accepted in part, the number or amount of shares of
Common Stock or Exchangeable Securities as to which such offer has been accepted
(an "Acceptance Notice"). Any acceptance of the offer contained in an Offer
Notice by delivery of an Acceptance Notice shall be irrevocable and shall
constitute a commitment by SLOPI to purchase from TMR, and by TMR to sell to
SLOPI, the number or amount of shares of Common Stock or Exchangeable Securities
covered by such Acceptance Notice upon the terms contained in the Offer Notice.
(c) If at any time and from time to time, (i) TMR determines to issue any
shares of Common Stock or any Exchangeable Security in a Public Offering, and
(ii) as a result thereof SLOPI and its Affiliates would Beneficially Own less
than the Applicable Percentage of the then to be outstanding shares of Common
Stock, then (y) TMR shall provide written notice of such determination to SLOPI,
which notice shall include the proposed size and other terms of such issuance,
to the extent then known, the name or names of any managing underwriter or
placement agent(s) and the date when it is proposed that any such issuance will
be made, and (z) TMR shall either sell directly or cause the underwriters or
placement agent(s) to offer to SLOPI the right to purchase from TMR directly or
from the underwriters or placement agent(s), at the applicable offering price, a
number or amount of the shares of Common Stock, Exchangeable Securities or other
securities proposed to be issued that, if purchased by SLOPI, would permit SLOPI
and its Affiliates to Beneficially Own a number of shares of Common Stock equal
to Applicable Percentage of the then to be outstanding Common Stock after
closing the proposed issuance.
2.7 TMR SUPPORT OF CERTAIN STOCK SALES.
(a) In the event that, from time to time, SLOPI and/or any Affiliate of
SLOPI or of Shell shall sell any of the Common Shares to be issued upon
conversion of Preferred Shares and the net proceeds (after reasonable and
customary commissions, underwriters discounts, placement fees and expenses of
sale, excluding expenses of legal counsel for the selling shareholder(s))
received by SLOPI or such Affiliate for
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such Common Shares shall result in a Deficiency Amount, then TMR shall, at its
option, (i) pay to SLOPI an amount of cash equal to the Deficiency Amount or
(ii) issue to SLOPI or such Affiliate additional fully paid and non-assessable
shares of Common Stock equal in value to the Deficiency Amount. All shares of
Common Stock issued by TMR in respect of a Deficiency Amount (i) shall be valued
in the manner set forth in the definition of Deficiency Amount and (ii) shall be
issued as of the closing of such sale. If TMR issues shares of Common Stock in
respect of a Deficiency Amount, then TMR will cause such shares to be listed for
trading on the principal stock exchange for the Common Stock.
(b) In the event, (i) SLOPI shall propose to Transfer Shares to a person
who has committed to purchase such Shares pursuant to a transaction not
involving a Public Offering at a time when SLOPI is authorized to sell such
Shares, (ii) under the terms of this Agreement, such person would be required to
enter into an agreement with TMR and such person and TMR are unable to effect
such agreement, and (iii) SLOPI shall subsequently sell such Shares pursuant to
a Public Offering, TMR shall pay the reasonable and customary commissions,
underwriters discounts and expenses of sale payable by SLOPI in such sale,
excluding expenses of legal counsel for SLOPI. If this Section 2.7(b) shall be
applicable in the circumstances, then this Section shall control over Section
2.C (11) g of the Registration Rights Agreement.
3 STOCK CERTIFICATES AND OTHER RESTRICTIONS.
3.1 ENDORSEMENT OF CERTIFICATES.
(a) All certificates representing Shares shall, subject to Section 3.1(c),
bear the following legend:
"THIS CERTIFICATE IS SUBJECT TO THE PROVISIONS OF A STOCK RIGHTS AND
RESTRICTIONS AGREEMENT BETWEEN THE MERIDIAN RESOURCE CORPORATION AND SHELL
LOUISIANA ONSHORE PROPERTIES, INC. DATED AS OF , 1998. A
COPY OF SUCH AGREEMENT IS ON FILE AT THE PRINCIPAL BUSINESS OFFICE OF THE
MERIDIAN RESOURCE CORPORATION."
(b) All certificates representing Shares shall, subject to Section 3.1(c),
bear the following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND
MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE CONVEYED EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR PURSUANT TO RULE 144
UNDER THE ACT, UNLESS THE COMPANY SHALL HAVE BEEN FURNISHED WITH AN OPINION
OF COUNSEL, WHICH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL FOR
TMR ENERGY CORPORATION, THAT REGISTRATION UNDER THE ACT IS NOT REQUIRED."
(c) After such time as either of the legends set forth in Sections 3.1(a)
and (b) is no longer required hereunder (including without limitation as a
result of the termination of this Agreement in accordance with its terms) or if
the securities represented by a certificate have been registered under the
Securities Act pursuant to an effective registration statement or are to be sold
pursuant to Rule 144, or if the Company shall have been furnished with an
opinion of counsel, which opinion shall be reasonably satisfactory to counsel
for TMR, that registration under the Securities Act is not required, as the case
may be, then, in any such event, upon the request of SLOPI, TMR shall cause such
certificate or certificates to be exchanged for a certificate or certificates
that do not bear any legend.
3.2 IMPROPER TRANSFER. Any attempt by SLOPI or its Affiliates to Transfer
any Shares other than in accordance with this Agreement shall be null and void
and neither TMR nor any transfer agent for such securities shall be required to
give any effect to such attempted Transfer in its stock records.
4 GENERAL PROVISIONS.
4.1 REPRESENTATIONS AND WARRANTIES.
(a) TMR represents and warrants to SLOPI that (i) TMR is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Texas and has the corporate power and authority to enter into this
Agreement and to carry out its obligations hereunder, (ii) the execution and
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delivery of this Agreement by TMR and the consummation by TMR of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of TMR and no other corporate proceedings on the
part of TMR are necessary to authorize this Agreement or any of the transactions
contemplated hereby, and (iii) this Agreement has been duly executed and
delivered by TMR and constitutes a valid and binding obligation of TMR, and,
assuming this Agreement constitutes a valid and binding obligation of SLOPI, is
enforceable against TMR in accordance with its terms, subject to applicable
bankruptcy, reorganization, insolvency, moratorium, fraudulent conveyance and
similar laws affecting creditors' rights generally from time to time and to
general principles of equity.
(b) SLOPI represents and warrants to TMR that (i) SLOPI is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware and has the corporate power and authority to enter into this
Agreement and to carry out its obligations hereunder, (ii) the execution and
delivery of this Agreement by SLOPI and the consummation by SLOPI of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of SLOPI and no other corporate proceedings on the
part of SLOPI are necessary to authorize this Agreement or any of the
transactions contemplated hereby, and (iii) this Agreement has been duly
executed and delivered by SLOPI and constitutes a valid and binding obligation
of SLOPI, and, assuming this Agreement constitutes a valid and binding
obligation of TMR, is enforceable against SLOPI in accordance with its terms,
subject to applicable bankruptcy, reorganization, insolvency, moratorium,
fraudulent conveyance and similar laws affecting creditors' rights generally
from time to time and to general principles of equity.
4.2 AMENDMENT AND MODIFICATION; WAIVER OF COMPLIANCE. This Agreement may
be amended or waived only by written instrument duly executed by the parties. In
the event of the amendment or modification of this Agreement in accordance with
its terms, the Board of Directors of TMR shall adopt any amendment to the
by-laws of TMR that may be required as a result of such amendment or
modification to this Agreement, and, if required, shall propose any amendment to
the Certificate of Incorporation that may be required as a result of such
amendment or modification to this Agreement to the TMR shareholders entitled to
vote thereon at a meeting duly called and held for such purpose, and shall
recommend that the TMR shareholders vote in favor of such amendment to the
Certificate of Incorporation.
4.3 INJUNCTIVE RELIEF. Each of the parties hereto hereby acknowledges
that in the event of a breach by any of them of any material provision of this
Agreement, the aggrieved party may be without an adequate remedy of law. Each of
the parties therefore agrees that in the event of a breach of any material
provision of this Agreement the aggrieved party may elect to institute and
prosecute proceedings in any court of competent jurisdiction to enforce specific
performance or to enjoin the continuing breach of such provision, as well as to
obtain damages for breach of this Agreement. By seeking or obtaining any such
relief, the aggrieved party will not be precluded from seeking or obtaining any
other relief to which it may be entitled in equity or at law.
4.4 BYLAWS. At all times while this Agreement shall be in effect, TMR
shall cause its Bylaws to conform to the provisions of this Agreement, including
by causing its Bylaws to be amended.
4.5 NO ADOPTION OR AMENDMENT OF RIGHTS PLAN. During the term of this
Agreement, TMR's Board of Directors shall not adopt any shareholder rights plan
or amend any rights plan without the approval of a majority of the SLOPI
Designee(s) or Preferred Director(s) then on the Board of Directors of TMR
unless such plan exempts SLOPI and its Affiliates from all effects thereof.
4.6 LIMITATION ON REDUCTIONS OF PUBLIC FLOAT BY TMR. TMR shall not take
any action, including without limitation an acquisition by TMR or any of its
Affiliates of shares of Common Stock then outstanding, or a recapitalization by
TMR, which would reduce the number of shares of Common Stock held by Persons
other than SLOPI, TMR or any Affiliate of either SLOPI or TMR to less than the
minimum number required to maintain TMR's listing on the New York Stock
Exchange, without the prior written consent of SLOPI.
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4.7 GOVERNING LAW. This Agreement and the legal relations between the
parties shall be governed by and construed in accordance with the laws of the
State of Texas, without regard to the principles of conflicts of law thereof.
4.8 TERMINATION.
(a) This Agreement may be terminated:
(i) by the mutual written consent of the parties hereto;
(ii) by SLOPI or TMR if SLOPI shall have become the Beneficial Owner
of less than 10% of the Fully Diluted Shares; or
(iii) by SLOPI if any Person (other than SLOPI or any Affiliate of
SLOPI) shall have proposed to TMR a Business Combination Transaction and a
majority of the Continuing Directors shall have approved such proposal or
shall have retained (or authorized TMR to retain) the services of an
investment banking firm and shall have instructed such investment banking
firm to solicit indications of interest with respect to a Business
Combination Transaction; provided that, if a proposal with respect to a
Business Combination Transaction referred to in this clause (iii) shall
have been terminated or withdrawn by the Person who made such proposal and
SLOPI shall have withdrawn, terminated or permitted to expire any tender or
exchange offer or proposal with respect to a Business Combination
Transaction made by SLOPI, then the provisions of this Agreement shall
thereafter be reinstated (without liability to any party for any failure to
have complied with the terms and provisions of this Agreement during the
period when it shall have been terminated in accordance with this Section
4.8(a)(iii)) and this Agreement shall thereafter continue in full force and
effect in accordance with its terms; or
(iv) by SLOPI if (A) any Person other than SLOPI or its Affiliates
shall have acquired Beneficial Ownership of 20% (or, if lower, the
percentage specified in the definition of "Affiliated Shareholder" in
Part Thirteen of the TBCA, as amended from time to time), or more of the
Voting Shares and such Person shall not have entered into an agreement with
TMR containing restrictions and other provisions at least as favorable to
TMR as those contained in this Agreement; or
(v) by SLOPI if the Continuing Directors shall not constitute a
majority of the Board of Directors of TMR; or
(vi) by SLOPI if TMR shall have breached any material provision of
this Agreement, the Merger Agreement, or the Certificate of Designation or
the Registration Rights Agreement (both as defined in the Merger Agreement)
and SLOPI shall have delivered a written notice of such breach to TMR;
provided that, if such breach is reasonably susceptible of cure and TMR
shall proceed diligently to cure such breach, then this Agreement shall not
be terminated unless such breach shall not have been cured on or prior to
the fifth day after the delivery of written notice by SLOPI to TMR that TMR
has breached a material provision of any such instrument; or
(vii) by SLOPI if (x) TMR shall seek relief under any bankruptcy,
insolvency, receivership, custodianship, trusteeship, liquidation,
reorganization, composition, readjustment, moratorium or similar law (an
"Insolvency Law"); or (y) a proceeding or case shall be commenced under
an Insolvency Law by a third party against TMR and such proceeding or case
shall continue undismissed or unstayed for 60 days; or (z) an order for
relief under an Insolvency Law shall be entered against TMR.
(b) Unless this Agreement shall have been earlier terminated as provided
in Section 4.8(a), this Agreement shall terminate on the 10th anniversary of the
date of this Agreement.
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<PAGE>
4.9 NOTICES. All notices, requests, demands or other communications
required or permitted by this Agreement shall be in writing and effective when
received, and delivery shall be made personally or by registered or certified
mail, return receipt requested, postage prepaid, or overnight courier or
confirmed facsimile transmission, addressed as follows:
(a) If to TMR:
The Meridian Resource Corporation
15995 N. Barkers Landing, Suite 300
Houston, Texas 77079
Attention: Joseph A. Reeves, Jr.,
Chairman and
Chief Executive Officer
Fax: (281) 558-5595
with a copy to:
Fulbright & Jaworksi L.L.P.
1301 McKinney Street, Suite 5100
Houston, Texas 77010
Attention: Curtis W. Huff
Fax: (713) 651-5246
(b) If to SLOPI:
Shell Louisiana Onshore Properties
Inc.
P.O. Box 7986
Newark, Delaware 19714
Attention: Corporate Secretary
with a copy to:
Shell Oil Company Legal Firm
P.O. Box 2463
Houston, Texas 77252
Attention: Danna M. Walton
Fax: 713-241-5056
4.10 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 contemplated hereby is not affected in any manner adverse to
any party. Upon such determination that any term or other provision is invalid,
illegal or incapable of being enforced, the parties hereto shall negotiate in
good faith to modify this Agreement so as to effect the original intent of the
parties as closely as possible in an acceptable manner to the end that the
transactions contemplated hereby are fulfilled to the fullest extent possible.
4.11 ENTIRE AGREEMENT. Except as otherwise expressly stated herein, 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. Except for the permitted Transfers to Shell and Affiliates of
Shell or SLOPI and except as otherwise expressly permitted or contemplated
herein, the rights and obligations under this Agreement shall not be assigned by
operation of law or otherwise. Nothing in this Agreement shall be construed as
prohibiting TMR from effecting a merger, consolidation or other similar
transaction with another entity, provided that (i) the operative terms of this
Agreement shall be applied in respect of any such transaction and (ii) under the
express terms of such transaction this Agreement will be continued in effect by
TMR or any successor thereto.
4.12 PARTIES IN INTEREST. This Agreement shall be binding upon and inure
solely to the benefit of each party hereto and to Shell and the Affiliates of
Shell and SLOPI if they receive Permitted Transfers in accordance with this
Agreement. Nothing in this Agreement, express or implied, is intended to or
shall
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confer upon any other person any rights, benefits or remedies of any nature
whatsoever under or by reason of this Agreement, except as expressly otherwise
contemplated herein.
4.13 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.
4.14 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, and by the different parties hereto in separate counterparts, each
of which when executed shall be deemed to be an original but all of which taken
together shall constitute one and the same agreement.
4.15 AUDIT RIGHTS. SLOPI shall have the right to perform, directly or
through its representatives, periodic audits of TMR and its subsidiaries. The
audits may cover financial transactions, operational matters, and other areas
deemed appropriate. The audit frequency will not be more than once a year. The
scope of the audits will be determined by SLOPI. SLOPI will utilize TMR's
independent auditor, Ernst & Young LLP or such other firm as may then be TMR's
outside auditors ("E&Y"), to conduct the audits as long as E&Y performs to
SLOPI's satisfaction. SLOPI reserves the right to use a different E&Y partner to
conduct any audit. SLOPI personnel or representatives may participate in the
audit and/or review all audit work papers. SLOPI will bear the cost of the
audits.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first written above by their respective officers
thereunto duly authorized.
THE MERIDIAN RESOURCE CORPORATION
By:
Name:
Title:
SHELL LOUISIANA ONSHORE PROPERTIES INC.
By:
Name:
Title:
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<PAGE>
EXHIBIT G
FORM OF REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT, dated , 1998 by and
between The Meridian Resource Corporation, a Texas corporation (the
"Company"), and Shell Louisiana Onshore Properties Inc., a Delaware
corporation ("Security Holder").
WITNESSETH:
WHEREAS, the Company and Security Holder have entered into an Agreement and
Plan of Merger dated as of March 27, 1998 (the "Merger Agreement") which
provides, among other things, for the execution of this Agreement;
NOW THEREFORE, in consideration of the mutual covenants and agreements set
forth herein and in the Merger Agreement the parties hereto agree as follows:
Section 1. DEFINITIONS. The terms defined in this Section, whenever used
in this Agreement, shall, unless the context otherwise requires, have the
respective meanings hereinafter specified. Terms not defined in this Agreement,
and defined in the Merger Agreement have the meanings assigned them in the
Merger Agreement.
"Agreement" shall mean this Registration Rights Agreement.
"Commission" shall mean the United States Securities and Exchange
Commission.
"Common Stock" shall mean the Company's authorized Common Stock, par
value $0.01 per share.
"Company" shall mean The Meridian Resource Corporation, a Texas
corporation, and any successor corporation by merger, consolidation or otherwise
and any parent corporation resulting from the merger or consolidation of the
Company with or into a subsidiary of another corporation.
"Eligible Stock" means the issued and outstanding shares of Common Stock
(i) that have been issued pursuant to the Agreement and Plan of Merger (the
"Merger Agreement") by and among the Company, the Security Holder, LOPI
Acquisition Corp. and Louisiana Onshore Properties, Inc., (ii) that have been
issued upon conversion of the Series A Convertible Preferred Stock issued
pursuant to the Merger Agreement; (iii) that have been purchased by the Security
Holder upon the exercise of its rights pursuant to the Stock Rights and
Restrictions Agreement; and (iv) that may be issued pursuant to Section 2.7 of
the Stock Rights and Restriction Agreement.
"Exchange Act" shall mean the Securities Exchange Act of 1934, and the
rules and regulations of the Commission thereunder, all as the same shall be in
effect at the time.
"Person" shall mean an individual, a corporation, a partnership, a trust,
an unincorporated organization or a government or any agency or political
subdivision thereof.
"Public Offering" shall mean a firm commitment underwritten public
offering pursuant to a registration statement under the Securities Act.
"Registrable Securities" shall mean that portion of the shares of
Eligible Stock that any Security Holder is permitted to sell under Section
2.4(f) of the Stock Rights and Restriction Agreement, as such Section may be
adjusted in accordance with terms of such Agreement.
"Registration" shall mean the registration under the Securities Act of
Registrable Securities pursuant to either Section 2.A hereof or 2.B hereof.
"Registration Statement" shall mean a registration statement filed under
the Securities Act or a similar document filed pursuant to any other statute
then in effect corresponding to the Securities Act.
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"Securities Act" shall mean the Securities Act of 1933, and the rules and
regulations of the Commission thereunder, all as the same shall be in effect at
the time.
"Security Holder" shall mean Shell Louisiana Onshore Properties Inc., a
Delaware corporation, its permitted assigns, or any affiliate thereof holding
Common Stock or any successor corporation to any of the foregoing by merger or
consolidation or otherwise.
"Stock Rights and Restrictions Agreement" means that certain Stock Rights
and Restrictions Agreement of even date herewith between the Company and the
Security Holder.
Section 2. REGISTRATION RIGHTS.
A. DEMAND REGISTRATIONS. Subject to the provisions of Section 5 in the
event of assignment of this Agreement, if the Company shall receive a written
request from Security Holder requesting that the Company file a Registration
Statement relating to Registrable Securities, the Company will as promptly as
practicable prepare and file a Registration Statement and use reasonable best
efforts to cause the Registration Statement to become effective; subject,
however, to the following provisions:
(1) the Company shall be required to file no more than an aggregate of 5
Registration Statements on behalf of Security Holder (or Security Holders in the
event of an assignment of this Agreement) pursuant to this Subsection 2.A, plus
any number of additional Registration Statements (not to exceed an aggregate of
an additional 5) as to which, at the time of the first filing with the SEC, the
Security Holder (or Security Holders in the event of an assignment of this
Agreement) and its underwriter(s) have reasonably estimated that the price to
the public of the Registrable Securities to be sold (before discounts,
commissions, and expenses) will be equal to or greater than $50,000,000;
(2) the Company shall not be obligated (i) to file a requested Registration
in the event that the aggregate number of Registrable Securities to be included
in such requested Registration is less than 2 1/2% of the issued and outstanding
Common Stock; or (ii) to prepare or file such Registration Statement or an
amendment or supplement thereto, and may suspend sales, at any time when the
Company reasonably determines (by action of the Company's Board of Directors or
an officer duly authorized by the Board of Directors to make such decision) that
the filing thereof at the time requested, or the offering of Registrable
Securities pursuant thereto, would materially and adversely affect a pending or
proposed offering of securities of the Company, an acquisition, merger,
recapitalization, consolidation, reorganization or similar transaction relating
to the Company or negotiations, discussions or pending proposals with respect
thereto or require premature disclosure of information not otherwise required to
be disclosed to the potential detriment of the Company; PROVIDED, HOWEVER, that
such period of sale or distribution shall resume after any such suspension for a
number of days necessary to keep such Registration effective for permitted sales
thereunder for a term of 90 days. The filing of a Registration Statement, or any
amendment or supplement thereto, by the Company may not be deferred, and the
sale and distribution of shares may not be suspended, in each case pursuant to
the foregoing provisions, for more than 60 days after the abandonment or
consummation (or the completion of the distribution of securities in the case of
a public offering) of any of the proposals or transactions described therein or,
in any event, for more than 120 days during any one year;
(3) a Registration Statement filed pursuant to a request of Security Holder
shall first include all Registrable Securities requested to be included by
Security Holder and, only after such inclusion, may, include securities of the
Company being sold for the account of the Company provided, however, that
securities to be offered on behalf of the Company will be included in such
Registration Statement only to the extent that, in the reasonable opinion of the
managing underwriter for the Public Offering of Registrable Securities on behalf
of Security Holder, such inclusion will not materially adversely affect the
distribution of Registrable Securities on behalf of Security Holder;
(4) the selection of an underwriter for a Public Offering of Registrable
Securities by Security Holder shall be subject to the approval of the Company,
which shall not be unreasonably withheld;
(5) for purposes of paragraph (1) of this Subsection A, if a requested
Registration Statement is filed and the Company otherwise complies with its
obligations hereunder, but the Registration Statement is withdrawn by Security
Holder due to a delay in the offering requested by the Company for a period of
more
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than 15 business days pursuant to Section 2, then no requested Registration
Statement shall be deemed to have been filed; and
(6) no Other Holder (as defined below) shall be entitled to include
securities or piggyback in any Registration demanded by Security Holder.
B. INCIDENTAL/"PIGGY-BACK" REGISTRATIONS. If the Company at any time
proposes to file a Registration Statement (other than a Registration Statement
filed pursuant to Subsection A of this Section) under the Securities Act
relating to a Public Offering of Common Stock to be sold for cash that would
permit the registration of Registrable Securities, it will give Security Holder
as much advance notice, in writing, as is reasonably practicable under the
circumstances, but in any event not less than 5 days, before the filing with the
Commission of such Registration Statement, which notice shall set forth the
securities proposed to be registered. The notice shall offer to include in such
filing such amount of Registrable Securities as Security Holder may request. If
Security Holder wishes to have Registrable Securities registered for sale in the
Public Offering pursuant to this Subsection B, it shall advise the Company in
writing within 20 days after the date of receipt of such offer from the Company
(or such shorter period, but in any event not less than 5 days, as the Company
shall specify in its notice to Security Holder), setting forth the amount of
Registrable Securities for which registration is requested. If the managing
underwriter of the proposed Public Offering of Common Stock by the Company shall
advise the Company in writing that, in the reasonable opinion of the managing
underwriter, the distribution of the Registrable Securities requested by
Security Holder to be included in the Registration Statement concurrently with
securities being registered for sale by the Company would materially adversely
affect the distribution of such securities by the Company and Security Holder,
then the Company shall so advise the Security Holder and the number of
securities that are entitled to be included in the registration and underwriting
shall be allocated as follows: (i) in the event a Registration Statement is
being filed in connection with the exercise of registration rights by a security
holder other than the Security Holder (an "Other Holder"), all of any Other
Holder's shares of Common Stock shall be included in the registration and the
remaining number of securities that are entitled to be included in the
registration shall be allocated (A) 80% to the Company and any other
shareholders (not including the Other Holder or the Security Holder) whose
shares are to be included in such Registration Statement and (B) 20% to the
Security Holder, and (ii) in the event the registration is not being filed in
connection with the exercise of registration rights of any Other Holder (a) 80%
to the Company and any other shareholders (not including Security Holder) whose
shares are to be included in such Registration Statement and (b) 20% to Security
Holder. If any Person does not agree to the terms of any such underwriting, such
Person shall be excluded therefrom by written notice from the Company or the
underwriter.
Nothing contained in this Subsection B shall, however, limit the Company's
right to cancel, postpone or withdraw any such registration proposed by the
Company for any reason.
Any obligation of the Company to effect a registration pursuant to this
Subsection B shall be conditioned upon Security Holder entering into an
underwriting agreement with the Company and the managing underwriters of the
registered offering of the type described in paragraph (10) of Subsection C.
C. REGISTRATION PROCEDURES. If the Company is required by the provisions
of Subsections A or B of this Section 2 to effect the Registration of any of the
Registrable Securities under the Securities Act, the Company will, as soon as is
reasonably practicable:
(1) Prepare and file with the Commission a Registration Statement with
respect to such securities and use its reasonable best efforts to cause such
Registration Statement to become and, subject to paragraph (2) of this
Subsection C, remain effective.
(2) Keep such Registration effective, and the prospectus used in
connection therewith, current for a period of ninety (90) days or until the
Security Holder has completed the distribution described in the Registration
Statement relating thereto, whichever first occurs (the "Selling Period");
provided, however, that (a) the Selling Period shall be extended for a period of
time equal to any period that Security Holder
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refrains from selling any securities included in such registration pursuant to a
suspension under Subsection A.
(3) Prepare and file with the Commission such amendments and supplements
to such Registration Statement and the prospectus used in connection therewith
as may be necessary to keep such Registration Statement effective and such
prospectus current in compliance with Section 10 of the Securities Act, and to
comply with the provisions of the Securities Act with respect to the sale or
other disposition of all Common Stock covered by such Registration Statement;
provided, however, that the Company shall have no obligation under this
paragraph (3) after the period required by paragraph (2) of this Subsection C
has lapsed.
(4) Furnish to Security Holder such number of copies of such Registration
Statement and of each amendment and supplement thereto (in each case including
all exhibits), such number of copies of the prospectus included in such
Registration Statement (including each preliminary prospectus, summary
prospectus and prospectus supplement), in conformity with the requirements of
the Securities Act, and such other documents, as Security Holder may reasonably
require in order to facilitate the public offering, sale or other disposition of
the Registrable Securities owned by Security Holder.
(5) Use reasonable best efforts to register or qualify the Common Stock
covered by such Registration Statement under such other securities or blue sky
laws of jurisdictions in the United States of America as Security Holder shall
reasonably request (excluding however any jurisdiction in which the filing would
subject the Company to additional tax liability, and any jurisdiction in which
the Company would be required to execute a general consent to service of process
in effecting such registration or qualification which consent would not be
required but for this paragraph (5)), and do such other acts and things as may
be required to enable Security Holder to consummate the public sale or other
disposition in such jurisdictions of the Registrable Securities owned by
Security Holder.
(6) Otherwise use reasonable best efforts to comply with all applicable
rules and regulations of the Commission, and make available to its security
holders, as soon as reasonably practicable, an earnings statement which
satisfies the provisions of Section 11(a) of the Securities Act.
(7) Immediately notify Security Holder at any time when a prospectus is
required to be delivered under the Securities Act within the Selling Period
referred to in paragraph (2) of this Subsection C, of the Company becoming aware
that the prospectus included in the Registration Statement, or as such
prospectus may be amended or supplemented, includes an untrue statement of a
material fact or omits to state any material fact required to be stated therein
or necessary in order to make the statements therein not misleading in light of
the circumstances then existing, and at the request of Security Holder to
promptly prepare and furnish to Security Holder a number of copies of an amended
or supplemental prospectus as may be necessary so that, as thereafter delivered
to the purchasers of such Registrable Securities, such prospectus shall not
include an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements
therein not misleading in the light of the circumstances then existing. In the
event the Company shall give any such notice, Security Holder shall immediately
suspend use of the prospectus and the Selling Period shall be extended by the
number of days during the period from and including the date of the giving of
such notice to and including the date when Security Holder shall have received
the copies of such supplemented or amended prospectus.
(8) In the event that the Company suspends use by Security Holder of a
prospectus relating to an offering of Registrable Securities pursuant to a
suspension under Subsection A, because the Company is conducting negotiations
for a material business combination or due to pending material developments or
events that have not yet been publicly disclosed and as to which the Company
believes public disclosure will be prejudicial to the Company, the Company shall
deliver notice in writing to the effect of the foregoing and, upon receipt of
such notice, the Security Holder shall not use the prospectus, and the Selling
Period shall cease to run or will not commence, until such Security Holder has
received copies of the supplemented or amended prospectus provided for in
paragraph 3 of this Subsection C, or until it is advised in writing by the
Company that the prospectus may be used, and has received copies of any
additional or supplemental filings that are incorporated or deemed incorporated
by reference in such prospectus. The
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Company will use reasonable best efforts to ensure that the use of the
prospectus may be resumed, and the Selling Period will commence, as promptly as
is practicable and, in any event, promptly after the earlier of (x) public
disclosure of such material business combination or pending material development
or event sufficient to permit an affiliate of the Company to sell Common Stock
or (y) in the judgment of the Company, public disclosure of such material
business combination or material development or event would not be prejudicial
to the Company.
(9) Use its reasonable best efforts to list such Registrable Securities on
the primary securities exchange or other trading market on which the Common
Stock is then listed, if such Registrable Securities are not already so listed
and if such listing is then permitted under the rules of such exchange or other
trading market, and to provide a transfer agent and registrar for such
Registrable Securities covered by such Registration Statement not later than the
effective date of such Registration Statement.
(10) Enter into such agreements (including an underwriting agreement in
customary form and containing customary provisions relating to legal opinions
and accountants' letters and customary representations and warranties and
customary provisions for mutual indemnification and contribution between the
Company and the underwriters for Security Holder) and take such other actions as
Security Holder may reasonably request in order to expedite or facilitate the
disposition of such Registrable Securities.
(11) Make available for inspection by Security Holder, by any underwriter
participating in any disposition to be effected pursuant to such Registration
Statement and by any attorney, accountant or other agent retained by Security
Holder or any such underwriter, all customary financial and other records,
customary corporate documents and properties of the Company, and cause all of
the Company's officers, directors and employees to supply all customary
information requested by Security Holder, such underwriter, attorney, accountant
or agent, as is reasonably needed in connection with such Registration
Statement; provided such parties execute confidentiality agreements reasonably
acceptable to the Company.
Except as otherwise provided in Section 2.7(b) of the Stock Rights and
Restriction Agreement, underwriting discounts and commissions attributable to
securities offered on behalf of Security Holder plus the fees and expenses of
separate counsel for Security Holder incurred in connection with effecting a
Registration pursuant to this Section 2 shall be borne by Security Holder. All
other expenses incurred in connection with the Registration Statement shall be
borne by the Company.
It shall be a condition precedent to the obligation of the Company to take
any action pursuant to this Section 2 in respect of the Registrable Securities
which are to be registered at the request of Security Holder that Security
Holder shall furnish to the Company such information regarding the securities
held by it and the intended method of disposition thereof as the Company shall
reasonably request and as shall be required in connection with the action taken
by the Company.
D. INDEMNIFICATION.
(1) In the event of any Registration of any Registrable Securities under
the Securities Act pursuant to this Section 2, the Company agrees to indemnify
and hold harmless Security Holder, its directors, officers and employees, and
each other Person, if any, who controls Security Holder within the meaning of
Section 15 of the Securities Act, against any losses, claims, damages or
liabilities, joint or several, to which Security Holder or any such director,
officer, employee or controlling Person may become subject under the Securities
Act or any other statute or at common law, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon (i) any alleged untrue statement of any material fact contained, on the
effective date thereof, in any Registration Statement under which such
securities were registered under the Securities Act, any preliminary prospectus
or final prospectus contained therein, or any amendment or supplement thereto,
or (ii) any alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, and
shall reimburse Security Holder or such director, officer, employee or
controlling Person for reasonable legal or any other expenses reasonably
incurred by Security Holder or such director, officer, employee or controlling
Person in connection with investigating or defending any such loss, claim,
damage, liability or action; provided,
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however, that the Company shall not be liable in any such case to the extent
that any such loss, claim, damage or liability arises out of or is based upon
any alleged untrue statement or alleged omission made in such Registration
Statement, preliminary prospectus, prospectus, or amendment or supplement in
reliance upon and in conformity with written information furnished to the
Company in writing for use therein; and provided, further, that the Company
shall not be liable in any such case to the extent that any such loss, claim,
damage, liability or expense arises out of or is based upon an untrue statement
or alleged untrue statement or omission or alleged omission in the prospectus if
such untrue statement or alleged untrue statement or omission or alleged
omission has been the subject of a notice given to Security Holder pursuant to
paragraph (7) of Subsection C if Security Holder after receipt of such notice
and prior to the receipt of a corrected prospectus sold a Registrable Security
to the Person asserting such loss, claim, damage, liability or expense who
purchased such Registrable Security which is the subject thereof from Security
Holder. Such indemnity shall remain in full force and effect regardless of any
investigation made by or on behalf of Security Holder or such director, officer,
employee or participating Person or controlling Person, and shall survive the
transfer of such securities by Security Holder.
(2) Security Holder agrees to indemnify and hold harmless the Company, its
directors, officers and employees and each other Person, if any, who controls
the Company against any losses, claims, damages or liabilities joint or several,
to which the Company or any such director, officer, or employee or any such
Person may become subject under the Securities Act or any other statute or at
common law, insofar as such losses, claims, damages or liabilities (or actions
in respect thereof) arise out of or are based upon (i) any alleged untrue
statement of any material fact contained, on the effective date thereof, in any
Registration Statement under which Registrable Securities were registered under
the Securities Act at the request of Security Holder, any preliminary prospectus
or final prospectus contained therein, or any amendment or supplement thereto,
or (ii) any alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, in
each case to the extent, but only to the extent, that such alleged untrue
statement or alleged omission was made in such Registration Statement,
preliminary prospectus, prospectus, amendment or supplement in reliance upon and
in conformity with written information furnished to the Company in writing by
Security Holder for use therein, and shall reimburse the Company or such
director, officer, employee or other Person for any reasonable legal or any
other expenses reasonably incurred in connection with investigating or defending
any such loss, claim, damage, liability or action.
(3) Promptly after receipt by an indemnified party hereunder of written
notice of the commencement of any action or proceeding involving a claim
referred to in the preceding paragraphs of this Subsection E, such indemnified
party will, if a claim in respect thereof is to be made against an indemnifying
party, give written notice to the latter of the commencement of such action;
provided, that the failure of any indemnified party to give notice as provided
herein shall not relieve the indemnifying party of its obligation under this
Subsection D to the extent the indemnifying party is not materially prejudiced
by such failure. In case any such action is brought against an indemnified
party, the indemnified party shall permit the indemnifying party to assume the
defense of such action or proceeding, provided that counsel for the indemnifying
party, who shall conduct the defense of such action or proceeding shall be
approved by the indemnified party (whose approval shall not be unreasonably
withheld) and the indemnified party may participate in such defense at such
indemnified party's expense unless in the opinion of counsel to such indemnified
party a conflict of interest between such indemnified and indemnifying parties
may exist in respect of such claim that would prevent the indemnified party's
counsel from adequately representing both parties, in which event the
indemnifying party shall pay the reasonable fees and expense of separate counsel
for the indemnified party. No indemnifying party will consent to entry of any
judgment or enter into any settlement which does not include as an unconditional
term thereof the giving by the claimant or plaintiff to such indemnified party
of a release from all liability in respect to such claim or litigation. The
indemnifying party shall not, in connection with any proceeding or related
proceedings in the same jurisdiction, be liable for the fees and expenses of
more than one separate firm for all indemnified parties. The indemnifying party
shall not be liable for any settlement of any proceeding effected without its
written consent.
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(4) Indemnification similar to that specified in the preceding paragraphs
of this Subsection E shall be given by the Company and Security Holder (with
such modifications as shall be appropriate) with respect to liability related to
any required registration or other qualification of Registrable Securities under
any Federal or state law or regulation of governmental authority other than the
Securities Act.
(5) If the indemnification provided for in this Subsection D is
unavailable or insufficient to hold harmless an indemnified party under
paragraphs (1) or (2) above, then the indemnifying party shall contribute to the
amount paid or payable by such indemnified party as a result of the losses,
claims, damages or liabilities referred to in paragraphs (1) or (2) above, in
such proportion as is appropriate to reflect the relative fault of the Company
on the one hand and Security Holder on the other in connection with the
statements or omissions which resulted in such losses, claims, damages or
liabilities, as well as any other relevant equity considerations. The relative
fault shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the Company
or Security Holder and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such untrue statement or
omission. The Company and Security Holder agree that it would not be just and
equitable if contributions pursuant to this paragraph (5) were to be determined
by pro rata allocation or by any other method of allocation which does not take
account of the equitable considerations referred to in the first sentence of
this paragraph (5). The amount paid by an indemnified party as a result of the
losses, claims, damages or liabilities referred to in the first sentence of this
paragraph (5) shall be deemed to include any legal or other expenses reasonably
incurred by such indemnified party in connection with investigating or defending
any action or claim (which shall be limited as provided in paragraph (3) above
if the indemnifying party has assumed the defense of any such action in
accordance with the provisions thereof) which is the subject of this paragraph
(5). Notwithstanding the provisions of this paragraph (5), in respect of any
loss, claim, damage or liability based upon any untrue or alleged untrue
statement of a material fact or omission or alleged omission to state a material
fact which relates to information other than information supplied by Security
Holder, Security Holder shall not be required to contribute any amount in excess
of the amount by which the total price at which the Registrable Securities
offered by it and distributed to the public were offered to the public exceeds
the amount of any damages which Security Holder has otherwise been required to
pay by reason of such untrue or alleged untrue statement or omission or alleged
omission. No Person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Act) shall be entitled to contribution from any Person
who was not guilty of such fraudulent misrepresentation. Promptly after receipt
by an indemnified party under this paragraph (5) of notice of the commencement
of any action against such party in respect of which a claim for contribution
may be made against an indemnifying party under this paragraph (5), such
indemnified party shall notify the indemnifying party in writing of the
commencement thereof if the notice specified in paragraph (3) above has not been
given with respect to such action; but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have to
any indemnified party under this paragraph (5) to the extent such omission is
not prejudicial.
E. PUBLIC AVAILABILITY OF INFORMATION. The Company shall comply with all
public information reporting requirements of the Commission, to the extent
required from time to time to enable Security Holder to sell Registrable
Securities without Registration under the Securities Act within the limitation
of the exemptions provided by (i) Rule 144 under the Securities Act, as such
Rule may be amended from time to time, or (ii) any similar rule or regulation
hereafter adopted by the Commission. Upon the request of Security Holder, the
Company will deliver to Security Holder a written statement as to whether it has
complied with such requirements.
F. SUPPLYING INFORMATION. The Company shall cooperate with Security
Holder in supplying such information as may be necessary for Security Holder to
complete and file any information reporting forms presently or hereafter
required by the Commission as a condition to the availability of an exemption
from the Securities Act for the sale of any Registrable Securities.
G. SPECIFIC PERFORMANCE. Each party hereto acknowledges and agrees that
each other party hereto would be irreparably harmed and would have no adequate
remedy of law if any of the provisions of this
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Agreement were not performed in accordance with their specific terms or were
otherwise breached. Accordingly, it is agreed that, in addition to any other
remedies by law or in equity which may be available, the parties hereto shall be
entitled to obtain temporary and permanent injunctive relief with respect to any
breach or threatened breach of, or otherwise obtain specific performance of the
covenants and other agreements contained in this Agreement.
SECTION 3 REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to Security Holder that (a) the Company is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Texas and has the corporate power and authority to enter into this
Agreement and to carry out its obligations hereunder, (b) the execution and
delivery of this Agreement by the Company and the consummation by the Company of
the transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of the Company and no other corporate proceedings
on the part of the Company are necessary to authorize this Agreement or any of
the transactions contemplated hereby, and (c) this Agreement has been duly
executed and delivered by the Company and constitutes a valid and binding
obligation of the Company, and, assuming this Agreement constitutes a valid and
binding obligation of Security Holder is enforceable against the Company in
accordance with its terms, subject to applicable bankruptcy, reorganization,
insolvency, moratorium, fraudulent conveyance and similar laws affecting
creditors, rights generally from time to time and to general principles of
equity, and except as the enforceability thereof may be limited by
considerations of public policy.
SECTION 4 REPRESENTATIONS AND WARRANTIES OF SECURITY HOLDER. Security
Holder represents and warrants to the Company that (a) it is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware and has the corporate power and authority to enter into this Agreement
and to carry out its obligations hereunder, (b) the execution and delivery of
this Agreement by Security Holder and the consummation by Security Holder of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of Security Holder and no other corporate
proceedings on the part of Security Holder are necessary to authorize this
Agreement or any of the transactions contemplated hereby, and (c) this Agreement
has been duly executed and delivered by Security Holder and constitutes a valid
and binding obligation of Security Holder, and, assuming this Agreement
constitutes a valid and binding obligation of the Company, is enforceable
against Security Holder in accordance with its terms subject to applicable
bankruptcy, reorganization, insolvency, moratorium, fraudulent conveyance and
similar laws affecting creditors' rights generally from time to time and to
general principles of equity, and except as the enforceability thereof may be
limited by considerations of public policy.
SECTION 5 STOCK RIGHTS AND RESTRICTIONS AGREEMENT. This Agreement shall
be in all respects subject to the terms and conditions of the Stock Rights and
Restrictions Agreement between the parties hereto and of even date herewith. As
provided in the next sentence, this Agreement may be assigned by Security
Holder, in whole or in part, in connection with any transfer (one or more) of
Registrable Securities that is permitted under the Stock Rights and Restrictions
Agreement except for transfers (i) in a Public Offering or (ii) pursuant to Rule
144 or Rule 145; provided, however, that any such transferee who is not an
Affiliate of Security Holder must acquire from the Security Holder a number of
Registrable Securities equal to at least 25% of the Eligible Stock then held by
Security Holder and its Affiliates. In order for any such transferee to be
entitled to the benefits of this Agreement and thereby become a "Security
Holder," such transferee must agree to be bound by this Agreement by executing
a counterpart of this Agreement. In the event of an assignment or partial
assignment of this Agreement pursuant to this Section 5, notices and requests to
and from the Company pursuant to this Agreement shall continue to be made only
to and from the Security Holder until such time as Security Holder shall
otherwise advise the Company in writing from time to time that a
transferee-Security Holder(s) will give and receive notices and requests.
In the event that any such transferee-Security Holder is an E&P Company (as
defined in the Stock Rights and Restriction Agreement), then any underwriter for
such E&P Company shall have customary access to perform its due diligence
obligations with respect to any Registration Statement subject to
confidentiality obligations that prohibit the sharing or disclosure of
information with such E&P Company,
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and no such E&P Company shall, by virtue of this Agreement, have access to
non-public information of the Company.
No transfer or assignment of this Agreement shall increase the number of
Registrations which the Company is obligated to make under this Agreement.
SECTION 6. NOTICES. All notices and other communications hereunder shall
be in writing and shall be deemed given if delivered personally or transmitted
by telex, telegram or facsimile transmission or mailed by registered or
certified mail (return receipt requested) to the parties at the following
addresses (or at such other address for a party as shall be specified by like
notice):
(a) if to Security Holder, to:
Shell Louisiana Onshore Properties Inc.
P.O. Box 7986
Newark, Delaware 19714
Attention: Corporate Secretary
with a copy to:
Shell Oil Company Legal Firm
P.O. Box 2463
Houston, Texas 77252
Attention: Danna M. Walton
Fax: 713-241-5056
(b) if to the Company, to:
The Meridian Resource Corporation
15995 N. Barkers Landing, Suite 300
Houston, Texas 77079
Attention: Joseph A. Reeves, Jr., Chairman and
Chief Executive Officer
Fax: (281) 558-5595
with a copy to:
Fulbright & Jaworksi L.L.P.
1301 McKinney Street, Suite 5100
Houston, Texas 77010
Attention: Curtis W. Huff
Fax: (713) 651-5246
SECTION 7. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Texas.
SECTION 8. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, which together shall constitute a single agreement.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their officers thereunto duly authorized.
THE MERIDIAN RESOURCE CORPORATION
By __________________________________
Name ___________________________
Title _________________________
SHELL LOUISIANA ONSHORE PROPERTIES
INC.
By __________________________________
Name ___________________________
Title _________________________
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EXHIBIT H
CONTINGENT CONSIDERATION
For purposes of this Agreement, the parties agree that the Company's
federal income tax basis in its assets as of the Effective Time is $36 million
(the "Agreed Tax Basis"). In the event that (i) the Company is entitled to
increase the tax basis of its assets held at the Effective Time for periods
during either 1997 or 1998 through the Effective Time, which adjustment has the
effect of increasing the Company's Agreed Tax Basis in its assets by more than
100 percent (the "Threshold Amount"), and (ii) such increased tax basis is
available to the Company after the Closing, the parties agree as follows:
Notwithstanding any provision in this Agreement or the Stock Rights and
Restrictions Agreement which might otherwise limit the acquisition by SLOPI or
any of it Affiliates of additional shares of TMR Common Stock, to the extent
that TMR's consolidated federal income tax group actually realizes a cash
benefit as a result of such increase in basis in the Company's assets in excess
of the Threshold Amount with respect to any consolidated federal income tax
return which includes the Company for any period ending before the tenth
anniversary of the Closing, TMR shall issue and deliver to SLOPI an additional
number of shares of TMR Common Stock equal in value to 60% of such cash benefit.
Such additional shares of TMR Common Stock shall be delivered within 30 days
after the date of filing of TMR's federal income tax return for each year in
which TMR or the Company realizes such cash benefit. For purposes of this
Agreement, in determining whether a reduction in TMR's federal income tax has
actually been realized, TMR shall be entitled to utilize all other deductions,
expenses, and credits of all members of its affiliated group before utilizing
any tax benefits arising from such increase in tax basis of the Company's
assets. For purposes of issuing additional shares of TMR Common Stock, all such
shares shall be valued at the "Average Per Share Market Value" with respect to
the date of issuance (as such term is defined in the Stock Rights and
Restriction Agreement).
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SCHEDULE III
TRUE-UP ACCOUNTING PROCEDURES AND PRINCIPLES
OPERATIONS AND PRODUCTION AFTER 12/31/97
SLOPI DIVIDEND AND OPERATIONS ON AND AFTER 1/1/98
Although Closing will occur after 1/1/98, the parties agree that, in
general, the economic benefits and burdens relating to the LOPI Properties prior
to 1/1/98 shall be for the benefit of SLOPI and that the benefits and burdens
relating to the LOPI Properties on and after 1/1/98 shall be for the benefit of
TMR. In order to divide the benefits and burdens relating to the LOPI Properties
in such a manner, the parties hereby agree to the following:
(1) SLOPI will have received a dividend (the "SLOPI Dividend") by
the Company in an amount in accordance with Section 8.2(a) relating to the
period beginning 10/1/97 and ending 12/31/97 such that the accounts and
records of the Company following payment of the SLOPI Dividend reflect or
include only the following: (i) the benefits from all Production and
Proceeds from the LOPI Properties in respect of operations on or after
January 1, 1998, including all Revenues, (ii) the burdens of all Production
and Proceeds from the LOPI Properties in respect of operations on or after
January 1, 1998, including all Expenditures on or after January 1, 1998,
(iii) all assets and liabilities relating to Suspense Funds for the LOPI
Properties (which assets and liabilities shall "net" to zero; (iv) all
property, plant and equipment that are LOPI Properties; and (v) all
liabilities associated with deferred taxes and gas imbalances.
(2) The Company shall accrue an amount for taxes described in Section
9.10(a)(3) of the Agreement relating to the taxable period beginning
January 1, 1998.
REVENUES
Oil, gas and natural gas liquids production revenues accounted for shall
include (i) the actual value received of production sold or transferred and
recorded in accordance with GAAP and the appropriate adjustments for royalties,
and other contractual provisions, Revenues will specifically exclude (a)
products purchases for resale, (b) production and severance taxes, and (c) any
marketing fees paid to affiliates. Other revenues will include miscellaneous
revenues and expenses associated with oil and gas operations.
PRODUCTION AND PROCEEDS
Production and Proceeds shall include, without limitation, proceeds from
any imbalance and oil in storage above the pipeline connection, and take-or-pay
collections/rights and accounts receivable attributable to production and all
other monetary payments (including, without limitation, proceeds from the sale
of mineral production, credits, tax refunds, insurance proceeds, salvage
payments and reimbursement of joint operating costs and expenses) attributable
to the ownership, use or production of the LOPI Properties.
EXPENDITURES
Expenditures shall include (i) all direct expenditures incurred to operate
and maintain wells and related equipment, including, such expenditures as
operating labor, repairs and maintenance, materials, supplies, and fuel consumed
in operations, reconditioning and recompletion activities, (ii) exploration
costs associated with geological and geophysical activity (including, but not
limited to seismic activity to the extent title is owned by LOPI), acquiring,
carrying and retaining undeveloped properties (other than the LOPI Properties),
and drilling exploratory wells determined to be productive or non-productive
(excluding non-producing amortization), (iii) severance and ad valorem taxes,
(iv) regulatory fees, (v) processing, compression, dehydration and separation
fees and transportation and gathering costs, (vi) all capital expenditures
associated with drilling, completing and equipping the operations, and (vii)
operating overhead charges of $1.64 per net barrel equivalent of production
calculated on the basis of 6mcf per barrel of oil equivalent.
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SUSPENSE FUNDS
Suspense Funds shall include the amount of money representing the aggregate
amount of all suspense accounts associated with the LOPI Properties, including
accounts receivable from interest owners relating to the LOPI Properties on
account of revenue settlement disbursements, whether incurred prior to, on or
after 1/1/98, provided that, the assets constituting Suspense Funds are at least
equal to the liabilities constituting Suspense Funds; and PROVIDED FURTHER, that
Suspense Funds shall not include any associated amounts for administrative and
legal expenses relating to periods prior to 1/1/98, it being understood that
such administrative and legal expenses associated with Suspense Funds prior to
1/1/98 shall be for the account of SLOPI and administrative and legal expenses
associated with Suspense Funds on or after 1/1/98 (other than internal and
affiliate charges, which shall be included in the operating overhead charges
provided above) shall be for the account of TMR.
INTERIM ACCOUNTING PAYMENT AND COLLECTION SERVICES
From 1/1/98 until Closing, SLOPI shall, for the account of and in
consideration of the overhead charges set forth in clause (vii) of the
definition of Expenditures, provide all necessary and appropriate financial
accounting services for the Properties and all related operations and
administration of the LOPI Properties in the same manner and to the same extent
provided by Shell prior to 1/1/98, taking into account and acting consistent
with the provisions in this agreement. Shell shall, for the account of and at
the sole cost to the Company, pay all expenditures which are the obligations of
the Company and collect all proceeds and other monetary payments which are
allocated to the Company.
POST CLOSING SETTLEMENT
Within sixty (60) business days after Closing, SLOPI and its Affiliates
shall make a final post-closing settlement to account for all revenues,
expenditures, accruals for taxes described in Section 9.10(a)(3) of the
Agreement and other obligations associated with the period starting with 1/1/98
and inclusive through the Effective Time to insure the division of economic
benefits and burdens as contemplated under these true-up accounting principles.
SLOPI and its Affiliates shall provide TMR with access to the post closing
settlement calculation and the work papers related thereto. If after such 60
business day period, TMR shall have an objection to the calculation of the post
closing settlement, then the parties shall attempt to resolve such dispute over
the 15 business day period following the delivery of the post closing statement.
If no objections are made during such 15 business day period, the applicable
party shall pay the other party in cash the net amount owed pursuant to the post
closing settlement, and if there is a dispute, the net amount of any undisputed
amounts. If disputes with respect to the final settlement cannot be resolved
within the 15 business day period, then either party with notice to the other
party may submit the matters in dispute to Arthur Andersen & Co. or such other
nationally recognized independent accounting firm as may be approved by the
parties, which firm shall render an opinion on such disputed matters. Within
five days of the delivery of such opinion, the amounts owed as determined by
such accounting firm shall be paid in cash by the owing party to the other
party.
ACCOUNTING INFORMATION TO BE PROVIDED TO SLOPI BY TMR
TMR shall provide SLOPI financial information necessary for SLOPI to
recognize and disclose its interest in TMR in accordance with SEC requirements.
This will include access to information necessary to convert TMR's financial
records to successful efforts accounting and the costs of conversion from full
cost to successful efforts shall be borne by SLOPI. For the 10-Q reporting
periods ending March 31, June 20 and September 30 of each year, TMR shall
provide such information on or about the 30th day following the end of the
applicable period, absent special circumstances in which case it will be
provided as soon as practicable, but in no event later than the 40th day
following the end of the applicable period. For calendar year periods, TMR shall
provide such information on or about the 60th day following the end of the
period, absent special circumstances in which case it will be provided as soon
as reasonably practicable, but in no event later than March 15 of the following
calendar year.
A-III-2
<PAGE>
APPENDIX B
[CHASE LETTERHEAD]
Intentionally Omitted From
this Preliminary Proxy Statement
[To be filed by Amendment]
B-1
<PAGE>
THE MERIDIAN RESOURCE CORPORATION
PROXY FOR
SPECIAL MEETING OF SHAREHOLDERS
, 1998
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS. The
undersigned shareholder of The Meridian Resource Corporation ("the
Company") hereby appoints Joseph A. Reeves, Jr. and Michael J. Mayell, or
either of them, as proxies, each with power to act without the other and with
full power of substitution, for the undersigned to vote the number of shares
of Common Stock of the Company that the undersigned would be entitled to vote
if personally present at the Special Meeting of Shareholders of the Company
to be held on , 1998, at :00 .m., Houston time, at the
offices of Fulbright & Jaworski L.L.P., 1301 McKinney, Suite 5100, Houston,
Texas, and at any adjournment or postponement thereof, on the following
matters that are more particularly described in the Proxy Statement dated
, 1998:
(1) Proposal to approve the LOPI Transaction and related Required Future
Share Issuances as more fully described in the enclosed Proxy
Statement.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
(2) Proposal to approve an amendment to the Company's Second Amended and
Restated Articles of Incorporation, as amended, to increase the
authorized shares of Common Stock from 100,000,000 to 200,000,000
shares.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
(3) To consider and take action upon any other business that may
properly come before the meeting or any adjournment or postponement
thereof.
(CONTINUED AND TO BE SIGNED ON OTHER SIDE)
(CONTINUED FROM OTHER SIDE)
This proxy, when properly executed, will be voted in the manner directed
herein by the undersigned stockholder. IF NO DIRECTION IS MADE, THIS PROXY
WILL BE VOTED "FOR" PROPOSALS 1 AND 2. Receipt of the Proxy Statement dated
, 1998, is hereby acknowledged.
_________________________________
_________________________________
Signature of Shareholder(s)
Please sign your name exactly as
it appears hereon. Joint owners
must each sign. When signing as
attorney, executor,
administrator, trustee or
guardian, please give your full
title as it appears thereon.
Date: ____________________, 1998.
PLEASE MARK, SIGN, DATE AND RETURN USING THE ENCLOSED ENVELOPE.
