<PAGE>
As filed with the Securities and Exchange Commission on November 12, 1999
Registration No. 333-85537
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 2 to
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
ST. MARY LAND & EXPLORATION COMPANY
(Exact name of registrant as specified in its charter)
Delaware 1311 41-0518430
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification No.)
organization)
1776 Lincoln Street, Suite 1100
Denver, Colorado 80203
(303) 861-8140
(Address, including Zip Code, and telephone number, including area code,
of registrant's principal executive offices)
Mark A. Hellerstein
President and Chief Executive Officer
St. Mary Land & Exploration Company
1776 Lincoln Street, Suite 1100
Denver, Colorado 80203
(303) 861-8140
(Name, address, including Zip Code, and telephone number,
including area code, of agent for service)
copies to:
Roger C. Cohen Gregory C. Hill
Ballard Spahr Andrews & Ingersoll, LLP Locke Liddell & Sapp LLP
1225 17/th/ Street, Suite 2300 3400 Chase Tower
Denver, Colorado 80202-5596 600 Travis
(303) 299-7304 Houston, Texas 77002-3095
(713) 226-1187
<PAGE>
Approximate date of commencement of proposed sale of securities to the
public: As soon as practicable after this registration statement becomes
effective and the effective time of the merger of a wholly owned subsidiary of
the registrant with and into King Ranch Energy, Inc. as described in the
Agreement and Plan of Merger dated July 27, 1999.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] _____
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ] _____
Calculation of Registration Fee
<TABLE>
<CAPTION>
Proposed Proposed
Title of each maximum maximum
class of offering aggregate Amount of
securities to Amount to be price per offering registration
be registered registered unit price (2) fee (3)
- ------------------- -------------------------- ----------------- ------------------------------ ---------------
<S> <C> <C> <C> <C>
Common stock,
$.01 par value 2,666,252 shares(1) N/A $46,782,000 $13,006(4)
</TABLE>
(1) The maximum number of shares of St. Mary Land & Exploration Company common
stock issuable in connection with the merger in exchange for shares of King
Ranch Energy, Inc. common stock.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(f)(2) under the Securities Act, based on the book value as
of June 30, 1999 of the shares of King Ranch Energy, Inc. common stock to be
received by St. Mary Land & Exploration Company in the merger.
(3) Calculated pursuant to Section 6(b) of the Securities Act as .000278 of
$46,782,000.
(4) Previously paid with original filing.
The registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
St. Mary Land & Exploration Company/King Ranch, Inc. Joint Proxy/Consent
Statement
------------------------------
St. Mary Land & Exploration Company Prospectus
The boards of directors of St. Mary Land & Exploration Company and
King Ranch, Inc. have approved a merger agreement by which St. Mary will acquire
King Ranch Energy, Inc., which is King Ranch's oil and gas business subsidiary.
In the merger St. Mary will issue to King Ranch stockholders a total of
2,666,252 shares of St. Mary common stock, representing 6.4988 shares of St.
Mary common stock for each share of King Ranch Energy common stock, plus cash in
lieu of fractional shares. St. Mary common stock is listed for trading on the
Nasdaq National Market under the symbol "MARY."
We cannot complete the merger unless St. Mary's stockholders vote to
approve the issuance of common stock in the merger and King Ranch Energy's
stockholders consent to the merger agreement. The meeting for the vote and the
forum for consent will be held as follows:
For St. Mary stockholders: For King Ranch Energy stockholders:
Thursday, December 16, 1999 Thursday, December 16, 1999
10:00 a.m., local time 1:00 p.m., local time
1776 Lincoln Strret Offices of Locke Liddell & Sapp LLP
Suite 1100 2500 Chase Tower
Denver, Colorado 600 Travis
Houston, Texas
To vote at the St. Mary meeting please either attend the meeting or
complete and sign the enclosed proxy card and return it promptly in the
accompanying envelope. The St. Mary board of directors recommends voting "For"
approval of the St. Mary common stock issuance. To consent at the King Ranch
forum please sign and deliver the enclosed consent form at the forum. The King
Ranch board of directors recommends consenting to the merger agreement.
Thomas E. Congdon Abraham Zaleznik
Chairman of the Board Chairman of the Board
St. Mary Land & Exploration Company King Ranch, Inc.
See "Risk Factors" beginning on page 9.
Neither the SEC nor any state securities regulators have approved the
merger or the St. Mary common stock to be issued as discussed in this document
or determined if this document is accurate or adequate. Any representation to
the contrary is a criminal offense.
This document is dated November 10, 1999 and is first being mailed
with accompanying forms of proxy and consent to stockholders on November 16,
1999.
<PAGE>
[For St. Mary booklet only]
[St. Mary logo]
St. Mary Land & Exploration Company
Notice of Special Meeting of Stockholders
Date:
Thursday, December 16, 1999
Time:
10:00 a.m., local time
Place:
1776 Lincoln Street
Suite 1100
Denver, Colorado
Purpose:
To vote on a proposal to issue a total of 2,666,252 shares of St. Mary
common stock under the merger agreement by which St. Mary is to acquire King
Ranch Energy, Inc.
Only stockholders of record on November 5, 1999 may vote at the
meeting.
Your vote is important. Please either attend the meeting or promptly
complete, sign, date and return your proxy card in the enclosed envelope. Any
stockholder who returns their proxy can revoke it at any time before the vote is
taken at the meeting.
By Order of the Board of Directors
__________________________________
Richard C. Norris
Secretary
Denver, Colorado
November 10, 1999
<PAGE>
[For King Ranch booklet only]
[King Ranch, Inc. Letterhead]
NOTICE OF DISTRIBUTION
AND STOCKHOLDER FORUM
As you know, on July 27, 1999 King Ranch entered into a merger
agreement with St. Mary Land & Exploration Company. Under that agreement St.
Mary has agreed to acquire King Ranch Energy. As contemplated by that agreement,
shares of King Ranch Energy common stock will be distributed on a pro rata basis
to King Ranch stockholders of record as of September 30, 1999. The distribution
will take place on December 16, 1999, if all other conditions to the merger have
been satisfied. Before the distribution, shares of King Ranch Energy common
stock will be divided into two classes, which will have corresponding rights and
preferences with the two existing classes of King Ranch common stock. In the
distribution, holders of voting common stock of King Ranch will receive shares
of voting common stock of King Ranch Energy, and holders of non-voting common
stock of King Ranch will receive shares of non-voting common stock of King Ranch
Energy. Physical stock certificates will not be delivered to King Ranch
stockholders, but will be held in escrow by King Ranch pending the closing of
the merger.
On December 16, 1999 at 1:00 p.m., immediately following the
distribution, we will hold a stockholders forum at the offices of Locke Liddell
& Sapp LLP, 2500 Chase Tower, 600 Travis, Houston, Texas, for the following
purposes:
. Answer any questions that you or your advisors may have about the
distribution of King Ranch Energy common stock and the
acquisition of King Ranch Energy by St. Mary.
. Obtain the written consent of the holders of a majority of the
King Ranch Energy voting common stock to the merger of King Ranch
Energy and St. Mary.
For purposes of convenience, you may submit your written consent to
King Ranch before the stockholder forum by completing, signing and returning the
written consent in the enclosed envelope. Voting instructions are included on
the written consent. If you submit a written consent before the King Ranch
Energy stockholder forum, the written consent will not be effective until
immediately after the stockholder forum. Any consent may be withdrawn at any
time before its effectiveness by providing written notice of withdrawal.
By order of the Board of Directors,
Jack Hunt
Chief Executive Officer
November 10, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Summary................................................................................. 1
Risk Factors............................................................................ 9
The St. Mary Stockholders Meeting....................................................... 12
Date, Time and Place .......................................................... 12
Purpose ....................................................................... 12
Record Date and Shares Entitled to Vote ....................................... 12
Vote Necessary to Approve the St. Mary Stock Issuance.......................... 13
Proxies........................................................................ 13
Proxy Solicitation............................................................. 13
Appraisal Rights............................................................... 14
Stock Ownership of Principal Stockholders and Management....................... 14
The Distribution and the King Ranch Energy Stockholders Forum........................... 14
Date, Time and Place of Stockholders Forum..................................... 14
Purposes of Stockholders Forum................................................. 15
Record Date and Shares Entitled to Consent .................................... 15
Consent Necessary for the Merger Agreement..................................... 15
Written Consents............................................................... 15
Consent Solicitation........................................................... 16
Appraisal Rights............................................................... 16
Interests of King Ranch Insiders in the Merger................................. 18
Stock Ownership of Principal Stockholders and Management....................... 19
The Merger Transaction.................................................................. 20
Background of the Merger....................................................... 20
Our Reasons for the Merger..................................................... 27
Factors Considered by, and Recommendation of,
the St. Mary Board of Directors....................................... 28
Factors Considered by, and Recommendation of,
the King Ranch Board of Directors..................................... 31
Opinions of Financial Advisors................................................. 34
Comparison of King Ranch and St. Mary
Stockholder Rights.................................................... 55
Accounting Treatment........................................................... 62
Material Federal Income Tax Consequences of the Merger......................... 62
Regulatory Matters............................................................. 66
Termination of King Ranch Energy Employees..................................... 67
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
The Merger Agreement....................................................................... 67
Structure of the Merger........................................................... 67
Timing of Closing................................................................. 67
Merger Consideration.............................................................. 67
Restrictions on the Transfer of St. Mary Common Stock
to be Issued in the Merger............................................... 68
St. Mary Board of Directors after the Merger...................................... 69
Representations and Warranties.................................................... 69
Covenants......................................................................... 71
Other Agreements.................................................................. 72
Indemnification................................................................... 74
Conditions to Closing............................................................. 74
Termination of the Merger Agreement............................................... 76
Other Expenses.................................................................... 77
Amendments and Waivers............................................................ 78
The Companies.............................................................................. 78
Business of St. Mary.............................................................. 78
Selected Historical Consolidated Financial Data of St. Mary....................... 79
King Ranch........................................................................ 80
Business of King Ranch Energy..................................................... 80
Selected Historical Consolidated Financial Data of King Ranch Energy.............. 87
King Ranch Energy Management's Discussion and Analysis
of Financial Condition and Results of Operations......................... 88
King Ranch Energy Changes in and Disagreements With
Accountants on Accounting and Financial Disclosure....................... 97
Legal Matters.............................................................................. 97
Experts.................................................................................... 97
Where You Can Find More Information........................................................ 98
Future St. Mary Stockholder Proposals...................................................... 100
Cautionary Information About Forward-Looking Statements.................................... 100
SEC Position on Indemnification for Securities Act Liabilities............................. 103
Unaudited Pro Forma Condensed Combined Financial Statements................................ 103
Index to King Ranch Energy Consolidated Financial Statements............................... F-1
Annexes
Annex A - Agreement and Plan of Merger............................................ A-1
Annex B - Opinion of Deutsche Bank Securities Inc................................. B-1
Annex C - Opinion of Nesbitt Burns Securities Inc.............................. C-1
Annex D - Section 262 of the Delaware General Corporation Law..................... D-1
</TABLE>
ii
<PAGE>
SUMMARY
This summary highlights selected information from this document and may not
contain all of the information that is important to you. To understand the
merger fully and for a more complete description of the legal terms of the
merger, you should carefully read this document and the documents we refer you
to. See "Where You Can Find More Information" on page 98.
The Companies
St. Mary Land & Exploration Company
1776 Lincoln Street, Suite 1100
Denver, Colorado 80203
(303) 861-8140
St. Mary is a publicly-held independent energy company engaged in the
exploration, development, acquisition and production of natural gas and crude
oil. St. Mary's operations are focused in the following five core U.S. operating
areas:
. the Mid-Continent region in western Oklahoma and northern Texas,
. the ArkLaTex region that spans northern Louisiana and portions of
eastern Texas, Arkansas and Mississippi,
. southern Louisiana,
. the Williston Basin in eastern Montana and western North Dakota,
and
. the Permian Basin in eastern New Mexico and western Texas.
King Ranch Energy, Inc.
1415 Louisiana, Suite 2300
Houston, Texas 77002
(713) 752-0101
King Ranch Energy is the oil and gas exploration and production business
subsidiary of King Ranch, with operations located primarily in the following
areas:
. onshore in:
. Texas,
. Oklahoma,
. Louisiana,
1
<PAGE>
. North Dakota, and
. Utah, and
. in the Gulf of Mexico, offshore Texas and Louisiana.
King Ranch is a privately-held company engaged primarily in ranching,
agricultural and energy development businesses. It owns the historic 825,000
acre "King Ranch" in South Texas.
The Merger Transaction (see page 20)
Before the merger the outstanding shares of King Ranch Energy common stock
will be split to equal the number and class of outstanding shares of King Ranch
common stock and then distributed on a pro rata basis to King Ranch stockholders
if all other conditions to the merger have been satisfied. In the distribution,
each King Ranch stockholder will receive the same number of shares of voting
and/or non-voting King Ranch Energy common stock as that stockholder currently
holds in King Ranch. In the merger, St. Mary will acquire King Ranch Energy and
St. Mary will issue shares of St. Mary common stock in exchange for King Ranch
Energy common stock. The merger agreement is attached to this document as Annex
A. We encourage you to read the merger agreement since it is the legal document
that governs the merger.
What King Ranch Stockholders Will Receive in the Merger
St. Mary will issue 2,266,252 shares of common stock for all of the
outstanding stock of King Ranch Energy. There are currently 1,000 shares of King
Ranch Energy common stock outstanding. King Ranch has a total of 410,266 shares
of common stock outstanding, comprised of 42,938 shares of voting common stock
and 367,328 shares of non-voting common stock. Before the merger King Ranch
Energy will split its common stock into 410,266 shares and distribute these
shares to shareholders of King Ranch on a pro rata basis. As a result of the
merger, King Ranch stockholders will receive 6.4988 shares of St. Mary common
stock for each share of post-split King Ranch Energy common stock that they own,
plus cash in lieu of any fractional shares. The total of 2,666,252 shares of St.
Mary common stock to be issued will represent approximately 19.4% of the
outstanding shares of St. Mary common stock after the merger.
St. Mary Stock Transfer Restrictions Under the Merger Agreement (see page
68)
The merger agreement provides that King Ranch stockholders will generally
not be able to transfer any of the shares of St. Mary common stock issued to
them in the merger until March 31, 2001, except in connection with an
acquisition of St. Mary or for estate planning purposes.
Material Federal Income Tax Consequences of the Merger (see page 62)
For St. Mary to proceed with the merger, all shares of King Ranch Energy
common stock will be distributed to the King Ranch stockholders before the
exchange of King Ranch Energy common stock for St. Mary common stock at the
merger closing. King Ranch stockholders should not recognize any gain or loss
for Federal income tax purposes upon receipt of King Ranch Energy common stock
in the distribution. This distribution, however, may result in a taxable gain
to a subsidiary of King Ranch. King Ranch does not expect that gain to be
material to King Ranch on a consolidated basis.
The merger has been structured as a "tax-free reorganization" for Federal
income tax purposes. Assuming that the stock distribution is tax-free to the
King Ranch stockholders, after receipt of King Ranch Energy common stock, King
Ranch stockholders will not recognize any gain or loss for Federal income tax
purposes on the receipt of St. Mary common stock in exchange for their pro rata
interests in King Ranch Energy under
2
<PAGE>
the merger agreement. In addition, King Ranch Energy and St. Mary, as well as
the St. Mary stockholders, will not recognize gain or loss as a result of the
merger.
Opinions from King Ranch's outside counsel and the independent accounting
firm of Ernst & Young LLP concerning the Federal income tax consequences of the
stock distribution and the merger have been filed with the SEC as exhibits to
the registration statement relating to this document.
Appraisal Rights (see page 14)
Under Delaware law St. Mary stockholders do not have dissenters' appraisal
rights in connection with the merger. Under Delaware law King Ranch Energy
stockholders who do not consent to the merger have a right to obtain in cash the
appraised fair value of their pro rata interest in King Ranch Energy in lieu of
the shares of St. Mary common stock to be issued to them under the merger
agreement.
Under the merger agreement, if dissenters' appraisal rights are exercised
as to more than 5% of the shares of King Ranch Energy common stock, St. Mary
will not have to complete the merger. However, if appraisal rights are exercised
as to more than 5% but less than 10% of the shares, King Ranch has the option of
causing the merger to be completed by paying the appraised fair value of each
King Ranch Energy share to the extent that the value exceeds $19.76 per share of
St. Mary common stock which would otherwise have been received by each
dissenter.
St. Mary Stockholders Meeting (see page 12)
The St. Mary stockholders meeting to vote on the issuance of St. Mary
common stock in the merger will take place on December 16, 1999 in Denver,
Colorado. The time and address of the meeting is on page 12.
Voting Recommendation to St. Mary Stockholders
The St. Mary board of directors believes that the merger is advisable and
in the best interests of St. Mary and its stockholders and recommends that St.
Mary stockholders vote "For" approval of the issuance of St. Mary common stock
in the merger.
St. Mary Stockholder Vote Required to Approve the Stock Issuance
Approval of the issuance of St. Mary common stock in the merger requires
the affirmative vote of the holders of a majority of the shares of St. Mary
common stock represented in person or by proxy at the St. Mary stockholders
meeting. St. Mary directors, executive
3
<PAGE>
officers and their affiliates have the power to vote a total of approximately
2.1% of the shares of St. Mary common stock entitled to vote at the meeting.
Thomas E. Congdon, St. Mary's Chairman of the Board, and members of his
immediate family currently own approximately 12% of the shares entitled to vote
at the meeting. Mr. Congdon and members of his extended family currently own
approximately 29% of the shares entitled to vote at the meeting. While no formal
arrangements exist, the extended family members may be inclined to act in
concert with Mr. Congdon in matters related to control of St. Mary or the
approval of a significant transaction such as the issuance of St. Mary common
stock in the merger. That inclination may be stronger among the immediate family
members.
The following table shows the approximate pre-merger and post-merger
percentage ownership of St. Mary common stock by Mr. Congdon and members of his
immediate and extended family.
<TABLE>
<CAPTION>
Pre-merger Post-merger
---------- -----------
<S> <C> <C>
Mr. Congdon and:
Immediate family 12% 10%
Extended family 29% 23%
</TABLE>
King Ranch Stockholders Forum (see page 14)
The King Ranch stockholders forum to discuss the merger and obtain consents
to the merger will take place on December 16, 1999 in Houston, Texas. The time
and address of the forum is on page 14.
Consent Recommendation to King Ranch Energy Stockholders
The King Ranch board of directors believes that the merger agreement is
advisable and in the best interests of King Ranch and King Ranch Energy and
recommends that King Ranch Energy stockholders consent to the merger agreement.
King Ranch Energy Stockholder Consent Required for the Merger Agreement
Following the distribution, and once all other conditions to the merger
have been satisfied, the holders of King Ranch Energy voting common stock will
be asked to consent to the merger. The holders of a majority of the shares of
King Ranch Energy voting common stock must consent to the merger. King Ranch
directors, executive officers and their affiliates will have the power to vote a
total of approximately 13.8% of the shares of King Ranch Energy voting common
stock. King Ranch has obtained from Stephen J. Kleberg, John D. Alexander, Jr.,
and James H. Clement, Jr., members of the King Ranch board of directors, who
will have the right to vote a total of 13.8% of the shares of King Ranch Energy
voting common stock, commitments to:
. consent to the merger agreement, and
4
<PAGE>
. recommend, subject to their fiduciary obligations, to the members of
their immediate families who will hold King Ranch Energy voting common
stock that they consent to the merger agreement.
Opinions of Financial Advisors (see page 34)
In deciding to approve the merger, each board of directors considered the
opinion of its financial advisor. St. Mary received an opinion from Deutsche
Bank Securities Inc. that the share exchange ratio by which the shares of King
Ranch Energy common stock will be converted into the right to receive 2,666,252
shares of St. Mary common stock is fair to St. Mary from a financial point of
view. King Ranch received an opinion from Nesbitt Burns Securities Inc. that the
consideration to be received in the merger by the King Ranch stockholders is
fair to the King Ranch stockholders from a financial point of view. These
opinions are attached to this document as Annex B and Annex C. We encourage you
to read these opinions.
St. Mary Market Price Information
St. Mary common stock is publicly traded and quoted on the Nasdaq National
Market System under the symbol "MARY." On July 27, 1999, the last full trading
day before the public announcement of the merger agreement, the closing price
per share of St. Mary common stock as reported on the Nasdaq National Market
system was $22.625. On November 9, 1999, the most recent practicable trading day
before the printing of this document, the closing price per share of St. Mary
common stock as reported on the Nasdaq National Market system was $26.75. We
encourage you to check publicly available sources for the current market price
of St. Mary common stock. Shares of King Ranch Energy common stock are not
publicly traded and there are not public sources of the market value of King
Ranch Energy common stock.
5
<PAGE>
Selected Unaudited Pro Forma Combined Financial Data
We have derived the following selected unaudited pro forma combined
financial data from the Unaudited Pro Forma Condensed Combined Financial
Statements and related notes beginning on page 103, which you should read. This
information is based on the historical financial statements of St. Mary and King
Ranch Energy. It gives effect to the merger using the purchase method of
accounting for business combinations as if the merger had been completed at the
beginning of the periods presented and as of June 30, 1999.
This information is for illustrative purposes only. The companies may have
performed differently had they merged as of the assumed dates. Therefore, you
should not rely on this information as being indicative of the historical
results that would have been achieved had the companies merged as of the assumed
dates or the future results that the combined company will experience after the
merger.
<TABLE>
<CAPTION>
Six Months Year
Ended Ended
June 30, December 31,
1999 1998
------------ --------------
(thousands of dollars,
except per share amounts)
<S> <C> <C>
Total operating revenues........................................... $ 50,944 $ 118,151
Total operating expenses........................................... $ 45,070 $ 129,353
Net income (loss) from continuing operations....................... $ 3,870 $ (7,523)
Basic net income (loss) per share from continuing
operations............................................... $ 0.29 $ (0.55)
Diluted net income (loss) per share from continuing
operations................................................ $ 0.29 $ (0.55)
Cash dividends per share........................................... $ 0.10 $ 0.20
</TABLE>
<TABLE>
<CAPTION>
June 30,
1999
-----------
(thousands of dollars
<S> <C>
Total assets....................................................... $ 251,045
Long-term debt..................................................... $ 20,087
Total stockholders' equity......................................... $ 191,797
</TABLE>
6
<PAGE>
Comparative Per Share Data
The following table presents comparative per common share data for St. Mary
and King Ranch Energy on an historical basis, and on a pro forma combined basis
to reflect the merger under the purchase method of accounting as if the merger
had been completed at the beginning of the periods presented and as of June 30,
1999.
There are currently 1,000 shares of King Ranch Energy common stock
outstanding. All of these shares are owned by King Ranch. Before the merger the
shares of King Ranch Energy common stock will be split to equal the number and
class of outstanding shares of King Ranch common stock and then distributed on a
pro rata basis to the King Ranch stockholders if all other conditions to the
merger have been satisfied. There are currently 410,266 shares of King Ranch
common stock outstanding, comprised of 42,938 share of voting common stock and
367,328 shares of non-voting common stock. For comparative per share data
purposes King Ranch Energy pro forma equivalent information is presented using a
pre-split exchange ratio of 2,666.252 and a post-split exchange ratio of 6.4988
for the total of 2,666,252 shares of St. Mary common stock to be issued in the
merger in exchange for all shares of King Ranch Energy common stock.
<TABLE>
<CAPTION>
Six Months Year
Ended Ended
June 30, December 31,
1999 1998
---------- ------------
<S> <C> <C>
Net income (loss) per common share
St. Mary historical
Basic................................................. $ 0.21 $ (0.81)
Diluted............................................... $ 0.21 $ (0.81)
King Ranch Energy historical................................. $ (1,568) $ (7,119)
St. Mary/King Ranch Energy pro forma combined
Basic................................................ $ 0.29 $ (0.55)
Diluted.............................................. $ 0.29 $ (0.55)
King Ranch Energy pro forma equivalent/(1)/
Basic, pre-split..................................... $ 773 $ (1,466)
Diluted, pre-split................................... $ 773 $ (1,466)
Basic, post-split.................................... $ 1.88 $ (3.57)
Diluted, post-split.................................. $ 1.88 $ (3.57)
Cash dividends per common share
St. Mary historical.......................................... $ 0.10 $ 0.20
King Ranch Energy historical................................. $ - $ 4,655
St. Mary/King Ranch Energy pro forma combined................ $ 0.10 $ 0.20
King Ranch Energy pro forma equivalent, pre-split/(1)/....... $ 266.63 $ 533.25
King Ranch Energy pro forma equivalent, post-split/(1)/...... $ 0.65 $ 1.30
June 30,
1999
--------
Book value per common share
St. Mary historical.......................................... $ 12.31
King Ranch Energy historical................................. $ 46,782
St. Mary/King Ranch Energy pro forma combined................ $ 13.76
King Ranch Energy pro forma equivalent, pre-split/(1)/....... $ 36,688
King Ranch Energy pro forma equivalent, post-split/(1)/...... $ 89.42
</TABLE>
7
<PAGE>
__________
/(1)/ The King Ranch Energy pro forma equivalent represents the St.
Mary/King Ranch pro forma combined book value, cash dividends or net
income (loss) per common share multiplied by an exchange ratio of
2,666.252 on a pre-split basis and multiplied by an exchange ratio of
6.4988 on a post-split basis.
/(2)/ The cash dividends per common share for St. Mary/King Ranch Energy pro
forma combined were determined to be $.10 per common share for the six
month period ended June 30, 1999 and $.20 per common share for the
year ended December 31, 1998, which are the same as St. Mary's
historical dividend rate. This determination was based on the
historical facts that St. Mary has declared and paid cash dividends to
shareholders every year since 1940 and in January 1997 increased the
dividend to $.05 per common share per quarter. While King Ranch Energy
did pay a dividend in 1998, it does not have a consistent history of
paying dividends to shareholders. Consequently, the dividend paid by
King Ranch Energy in 1998 was not considered in determining the pro
forma dividend per share. These amounts are projections and are
separate from the pro forma calculations required by Article 11 of
Regulation S-X. See Unaudited Pro Forma Condensed Combined Financial
Statements.
Regulatory Requirements (see page 66)
The merger is exempt from the pre-merger reporting and waiting period
requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976.
8
<PAGE>
RISK FACTORS
In addition to the other information contained in this document, the
following matters should be considered carefully.
St. Mary May Not Be Able to Successfully Integrate King Ranch Energy's Business
Operations
The integration and consolidation of the assets and operations of St. Mary
and King Ranch Energy after the merger will present significant management
challenges for St. Mary. These challenges include managing:
. the additional demands imposed on St. Mary employees to integrate King
Ranch Energy's operations into St. Mary, and
. the conversion of King Ranch Energy's dissimilar computerized oil and
gas recordkeeping systems.
St. Mary cannot assure you that it will be able to successfully integrate
the St. Mary and King Ranch Energy business operations or that the combined
company will realize any of the anticipated benefits of the merger.
The St. Mary Stock to be Issued Under the Merger Agreement Generally Cannot Be
Transferred until March 31, 2001
The merger agreement provides that the King Ranch stockholders will not be
able to transfer any of the shares of the St. Mary common stock issued to them
in the merger until March 31, 2001, except in connection with:
. any acquisition of St. Mary, or
. estate planning transfers.
We cannot assure the King Ranch stockholders that the public trading market
price of St. Mary common stock after the restriction period has elapsed will be
the same or greater than the current market price. See "The Merger Agreement -
Restrictions on the Transfer of St. Mary Common Stock to be Issued in the
Merger."
There is no guarantee that the Stock Distribution and the Merger will be
Tax-Free to the King Ranch Stockholders.
The tax opinions received by King Ranch from Locke Liddell & Sapp LLP and
Ernst & Young LLP are not binding on the Internal Revenue Service or any court.
Therefore, we cannot guarantee that the stock distribution to the King Ranch
stockholders will be tax-free to the King Ranch stockholders. For a more
detailed discussion of the tax risks associated with the stock distribution and
the merger, see the section entitled "The Merger Transaction - Material Federal
Income Tax Consequences of the Merger."
St. Mary May Inadvertently Acquire Properties With Environmental
Contamination
St. Mary intends to continue making acquisitions of oil and gas properties
such as those which are owned by King Ranch Energy. If acquired properties are
environmentally
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contaminated, under law St. Mary may become liable for the entire amount of the
cleanup costs without regard to fault. These cleanup costs may have a material
adverse effect on St. Mary's results of operations, cash flows and financial
condition. Although St. Mary performs a review of acquired properties that it
believes is consistent with industry practices, existing or potential
environmental problems with properties may not be discovered until after an
acquisition has been completed.
St. Mary May Not Be Able To Adequately Replace Its Oil and Gas Reserves
Except to the extent that St. Mary conducts successful exploration or
development activities or acquires properties containing proved oil and gas
reserves, the estimated net proved reserves of St. Mary will generally decline
as reserves are produced. We cannot assure you that St. Mary's planned
development and exploration projects and acquisition activities will result in
significant additional reserves or that St. Mary will have continuing success
drilling productive wells.
Many of St. Mary's oil and gas properties are operated by third parties and
as a result St. Mary has limited control over the nature and timing of
exploration and development of those properties or the manner in which
operations are conducted. A significant portion of St. Mary's cash flow is
attributable to royalty interests on its southern Louisiana fee properties. A
fee property means that St. Mary holds the most extensive interest that can be
owned in land, including surface and oil and gas rights. Without continued
exploration and development of the fee properties, which St. Mary has only a
limited ability to control, production and cash flow from these properties will
decline.
St. Mary's Technology Systems May Not Be Ready for the Year 2000
St. Mary has not completed a comprehensive analysis of the operational
problems and costs that would be reasonably likely to result from any failure of
the technology systems of St. Mary or of other parties with which St. Mary has
significant relationships to be Year 2000 compliant by January 1, 2000. These
operational problems could involve a system failure or miscalculations causing
disruptions of operations, including a temporary inability to process
transactions, operate equipment or engage in normal business activities. Failure
to correct a material Year 2000 compliance problem could result in an
interruption in, or inability to conduct normal business activities or
operations. Those failures could have a material adverse effect St. Mary's
results of operations, cash flow and financial condition.
St. Mary's Chairman of the Board and His Family May Continue to Control St. Mary
After the Merger
Thomas E. Congdon, St. Mary's Chairman of the Board, and members of his
extended family currently own approximately 29% of the outstanding shares of St.
Mary common stock. While no formal arrangements exist, these extended family
members may be inclined to act in concert with Mr. Congdon on matters related to
control of St. Mary, including for example the election of directors or response
to an unsolicited bid to acquire St. Mary. While the percentage ownership of Mr.
Congdon and his extended family will be reduced to approximately 23% after
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the merger, Mr. Congdon and his extended family may continue to be able to
control or influence matters presented to the St. Mary stockholders.
St. Mary's Shareholder Rights Plan May Make It More Difficult For A Third Party
To Acquire St. Mary
In July 1999 the St. Mary board of directors adopted a shareholder rights
plan. The plan makes it more difficult for a third party to acquire control of
St. Mary without approval of the board of directors, even if the acquisition
would be at a premium to the current market price of St. Mary common stock. For
example, if the St. Mary board of directors decides in accordance with its
fiduciary obligations that the terms of a potential acquisition do not reflect
the long-term value of St. Mary, under the plan the board of directors could
allow the holder of each outstanding share of St. Mary common stock other than
those held by the potential acquirer to purchase one additional share of St.
Mary common stock for one-half of its current market value. This prospective
dilution to a potential acquirer would make the acquisition impracticable unless
the terms were improved to the satisfaction of the board of directors.
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THE ST. MARY STOCKHOLDERS MEETING
The St. Mary board of directors is using this document as a proxy statement
to solicit proxies from the holders of St. Mary common stock for use at the St.
Mary stockholders meeting for the purpose of voting on the issuance of St. Mary
common stock in the merger. The St. Mary board of directors recommends that St.
Mary stockholders vote "For" approval of the stock issuance in the merger.
We are first mailing this document and accompanying form of proxy to the
St. Mary stockholders on or about November 16, 1999.
Date, Time and Place
Thursday, December 16, 1999
10:00 a.m., local time
1776 Lincoln Street
Suite 1100
Denver, Colorado
Purpose
The purpose of the St. Mary stockholders meeting is to vote on a proposal
to issue a total of 2,666,252 shares of St. Mary common stock under the merger
agreement.
St. Mary common stock trades on the Nasdaq National Market. Stockholder
approval of the St. Mary stock issuance is required by Nasdaq rules because the
number of shares of St. Mary common stock that are to be issued in the merger is
more than 20% of the number of shares of St. Mary common stock that will be
outstanding immediately before the completion of the merger.
Record Date and Shares Entitled to Vote
The record date for shares entitled to vote is November 5, 1999.
Stockholders entitled to vote are St. Mary stockholders at the close of business
on the record date. As of the record date there were 11,097,968 shares of St.
Mary common stock entitled to vote.
A quorum of stockholders is necessary to hold a valid meeting. The presence
in person or by proxy at the meeting of the holders of one-third of the shares
of St. Mary common stock entitled to vote at the meeting is a quorum.
Abstentions and broker "non-votes" count as present for establishing a quorum. A
broker non-vote occurs on a matter when a broker is not permitted to vote on
that matter without instruction from the beneficial owner of the shares and no
instruction is given. Shares held by St. Mary in its treasury are not entitled
to vote and do not count toward a quorum.
A total of approximately 2.1% of the shares of St. Mary common stock
entitled to consent to the merger will be beneficially owned by St. Mary
directors, executive officers and their
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affiliates. These individuals have indicated that they will vote in favor of the
issuance of St. Mary common stock in the merger as recommended by the St. Mary
board of directors.
Vote Necessary to Approve the St. Mary Stock Issuance
Approval of the St. Mary stock issuance in the merger requires the
affirmative vote by the holders of a majority of shares of stock represented in
person or proxy at the meeting. Abstentions and broker non-votes will have the
same effect as a vote against the stock issuance.
Proxies
You may vote in person at the meeting or by proxy. We recommend that you
vote by proxy even if you plan to attend the meeting. You can always change your
vote at the meeting.
Voting instructions are included on your proxy card. If you properly give
your proxy and submit it to us in time to vote, one of the individuals named as
your proxy will vote your shares as you have directed. You may also abstain from
voting.
To vote by proxy, complete, sign, date and return your proxy card in the
enclosed envelope. If you submit your proxy but do not make a specific choice,
your proxy will follow the recommendations of the St. Mary board of directors
and vote your shares "For" approval of the issuance of St. Mary common stock in
the merger, and in its discretion as to any other business that may properly
come before the meeting.
You may revoke your proxy before it is voted by:
. submitting a new proxy with a later date,
. notifying St. Mary's Secretary in writing before the meeting that
you have revoked your proxy, or
. voting in person at the meeting.
If you plan to attend a meeting and wish to vote in person, we will give
you a ballot at the meeting.
Proxy Solicitation
St. Mary will pay its own costs of soliciting proxies. In addition to this
mailing, St. Mary employees may solicit the proxies personally, electronically
or by telephone.
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Appraisal Rights
St. Mary is a Delaware corporation. Under Delaware law, St. Mary
stockholders do not have dissenters' appraisal rights in connection with the
merger since the merger involves a wholly owned subsidiary of St. Mary.
Stock Ownership of Principal Stockholders and Management
For information about St. Mary stock ownership of principal stockholders
and management, you should read St. Mary's 1998 Annual Report on Form 10-K
incorporated by reference into this document. See "Where You Can Find More
Information" on page 98.
THE DISTRIBUTION AND
THE KING RANCH ENERGY STOCKHOLDERS FORUM
As contemplated by the merger agreement, shares of King Ranch Energy common
stock will be distributed on a pro rata basis to King Ranch stockholders before
the merger. Before the distribution, shares of King Ranch Energy common stock
will be divided into two classes, which will have corresponding rights and
preferences with the two existing classes of King Ranch common stock. In the
distribution, each King Ranch stockholder will receive the same number of shares
of voting and/or non-voting King Ranch Energy common stock as that stockholder
currently holds in King Ranch. Following the distribution, but immediately
before the merger, each King Ranch stockholder will hold the same number of
shares of stock of King Ranch and King Ranch Energy. Physical stock certificates
will not be delivered to King Ranch stockholders, but will be held in escrow by
King Ranch pending the closing of the merger.
The King Ranch board or directors is using this document as a consent
solicitation statement to solicit consents from persons who will hold shares of
King Ranch Energy voting common stock after the distribution. The King Ranch
board of directors recommends that the King Ranch Energy stockholders consent to
the merger agreement.
This document is also a prospectus for the St. Mary common stock to be
issued to the King Ranch Energy stockholders under the merger agreement. We are
first mailing this document and accompanying form of consent to the King Ranch
stockholders on or about November 16, 1999.
Date, Time and Place of Stockholders Forum
Thursday December 16, 1999
1:00 p.m., local time
Offices of Locke Liddell & Sapp LLP
2500 Chase Tower
600 Travis
Houston, Texas
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Purposes of Stockholders Forum
The purposes of the King Ranch Energy stockholders forum are to:
. Answer any questions that King Ranch stockholders or their
advisors may have about the distribution of King Ranch Energy
common stock and the acquisition of King Ranch Energy by St.
Mary, and
. Obtain the written consent of the holders of a majority of the
King Ranch Energy voting common stock to the merger of King Ranch
Energy and St. Mary.
Record Date and Shares Entitled to Consent
The record date for the distribution of shares of King Ranch Energy to King
Ranch stockholders is September 30, 1999. Following the distribution, 42,938
shares of voting common stock and 367,328 shares of non-voting common stock of
King Ranch Energy will be outstanding. Record holders of King Ranch Energy
voting common stock on the date of the stockholders forum will be entitled to
consent to the merger agreement.
A total of approximately 13.8% of the shares of King Ranch Energy voting
common stock will be beneficially owned by King Ranch directors, executive
officers and their affiliates. King Ranch has obtained from Stephen J. Kleberg,
John D. Alexander, Jr., and James H. Clement, Jr., members of the King Ranch
board of directors who will have the right to vote a total of 13.8% of the
shares of King Ranch Energy voting common stock, commitments to:
. consent to the merger agreement, and
. recommend, subject to their fiduciary obligations, to the members
of their immediate families who will hold King Ranch Energy
voting common stock that they consent to the merger agreement.
Consent Necessary for the Merger Agreement
Approval of the merger agreement requires the written consent of the
holders of a majority of the shares of King Ranch Energy voting common stock.
Abstentions will have the same effect as a vote against the merger agreement.
Written Consents
You will be asked to submit a written consent at the King Ranch Energy
stockholders forum. For purposes of convenience, you may submit your written
consent to King Ranch before the stockholders forum by completing, signing and
returning the written consent in the enclosed envelope. Instructions are
included on the written consent.
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If you submit a written consent before the King Ranch Energy stockholder
forum, the written consent will not be effective until immediately after the
forum. Any consent may be withdrawn at any time before its effectiveness by
providing written notice of withdrawal to Stephen Pettit at 1415 Louisiana,
Suite 2300, Houston, Texas 77002. Notices of withdrawal may be faxed to the
attention of Mr. Pettit at (713) 752-0101. To be effective, a notice of
withdrawal of consent must:
. state your name,
. state that your earlier written consent to the St. Mary/King Ranch
Energy merger agreement is withdrawn, and
. be dated.
Consent Solicitation
King Ranch will pay the costs of soliciting consents. In addition to this
mailing, King Ranch employees may solicit the consents personally,
electronically or by telephone.
Appraisal Rights
King Ranch Energy is a Delaware corporation. Under Delaware law, King Ranch
Energy stockholders who do not consent to the merger will be entitled to
dissenters' appraisal rights. Unless waived, these rights give them the right to
obtain in cash the appraised fair value of their shares of King Ranch Energy
common stock instead of the shares of St. Mary common stock to be issued under
the merger agreement.
Under the merger agreement, St. Mary will not have to complete the merger
if:
. dissenters' appraisal rights are exercised with respect to 10% or
more of the shares of King Ranch Energy common stock, or
. dissenters' appraisal rights are exercised with respect to less
than 10% but more than 5% of the shares of King Ranch Energy
common stock and King Ranch does not elect to pay for the shares
in that percentage range the amount of their appraised fair value
of each King Ranch Energy share to the extent that the value
exceeds $19.76 per share of St. Mary common stock which would
otherwise have been received by such dissenter. The amount of
$19.76 per share of St. Mary common stock was negotiated by St.
Mary and King Ranch.
The following is a brief summary of the statutory procedures under Section
262 of the Delaware General Corporation Law which must be strictly followed by a
stockholder who wishes to perfect appraisal rights in connection with the
merger. This summary is qualified in its entirety by reference to Section 262 of
the Delaware General Corporation Law which is attached to this document as Annex
D. If a stockholder fails to comply with the procedural requirements of the
Delaware General Corporation Law, appraisal rights will be forfeited.
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If a King Ranch Energy stockholder asserts appraisal rights, then within
120 days after the completion of the merger St. Mary or the King Ranch Energy
stockholder will be entitled to file a petition in the Delaware Chancery Court.
This petition will be to demand a determination of the fair value of the King
Ranch Energy shares for which a timely demand for appraisal had been made. St.
Mary does not have to and does not currently intend to file a petition for the
appraisal of the fair value of any shares. Accordingly, a dissenting King Ranch
Energy stockholder will have to initiate all necessary action to perfect any
appraisal rights within the time limits of Section 262. King Ranch Energy
stockholders who elect to exercise appraisal rights should mail or deliver their
written demands to:
Richard C. Norris, Secretary
St. Mary Land & Exploration Company
1776 Lincoln Street, Suite 1100
Denver, Colorado 80203
Within 10 days after the completion of the merger, St. Mary must notify
each King Ranch Energy stockholder entitled to appraisal rights that the merger
has been completed. This notice must include the effective date of the merger
and a copy of the applicable provisions of the Delaware General Corporation Law.
Within 20 days after the date of mailing of that notice, King Ranch Energy
stockholders who are eligible to exercise their appraisal rights and desire to
do so must deliver a written demand for appraisal to St. Mary at the address
indicated in the immediately preceding paragraph. Although appraisal rights will
only be available to King Ranch Energy stockholders who do not consent to the
merger, the failure to consent to the merger will not constitute that demand.
The written demand for appraisal should specify the holder's name and
mailing address, the number of shares covered by the demand, and that the holder
is thereby demanding appraisal of those shares.
If a petition for an appraisal is timely filed, after a hearing on that
petition the Delaware Chancery Court will appraise the "fair value" of the
appraisal shares. This appraisal will exclude any element of value arising from
the completion or expectation of the merger, but will include a fair rate of
interest, if any, to be paid upon the amount determined to be the fair value.
The fair value of the appraisal shares as determined under Section 262 could be
more than, the same as, or less than the value of the shares of St. Mary common
stock that holders would receive under the merger agreement if they did not seek
appraisal of the appraisal shares. The Delaware Supreme Court has stated that
"proof of value by any techniques or methods which are generally considered
acceptable in the financial community and otherwise admissible in court" should
be considered in the appraisal proceedings. The Delaware Chancery Court would
determine the amount of interest, if any, to be paid upon the amounts to be
received in respect of the appraisal shares. The costs of the action may be
determined by the Delaware Chancery Court and charged to the parties as the
Delaware Chancery Court deems equitable.
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Any King Ranch Energy stockholders who seek appraisal would not, after the
completion of the merger, be entitled to vote the appraisal shares for any
purpose or be entitled to the payment of dividends or other distributions on the
appraisal shares.
If the King Ranch Energy stockholders who seek appraisal properly demanded
appraisal of their shares but effectively withdrew or lost their right to
appraisal, the shares would be converted into the right to receive the shares of
St. Mary common stock under the merger agreement. A stockholder will effectively
lose or withdraw his or her right to appraisal if among other things no petition
for appraisal is filed within 120 days after the completion of the merger, or if
the stockholder withdraws his or her demand for appraisal. No appraisal
proceeding pending in the Delaware Court of Chancery will be dismissed without
the approval of the court, and any dismissal would be conditioned upon terms as
the court deems just.
Interests of King Ranch Insiders in the Merger
In considering the recommendation of the King Ranch board of directors for
the consent to the merger agreement, King Ranch stockholders should be aware
that the members of King Ranch and King Ranch Energy management and the King
Ranch board of directors discussed below have interests in the merger that may
be different from, or in addition to, the interests of the stockholders of King
Ranch and King Ranch Energy generally.
Representation on the St. Mary Board of Directors
St. Mary has agreed that upon the completion of the merger it will cause
Jack Hunt and William Gardiner to become members of the St. Mary board of
directors for a period of two years. Mr. Hunt is President and Chief Executive
Officer and a director of King Ranch. Mr. Gardiner is Chief Financial Officer of
King Ranch. Should Mr. Hunt or Mr. Gardiner become unavailable to act as a St.
Mary director, John Alexander and James Clement will take their place.
Severance Arrangements; Termination of King Ranch Energy Employees
King Ranch Energy has existing severance agreements with six senior
management employees, including Thomas F. Fiorito, President, and William Silk,
Jr., Senior Vice President of Exploration and Production. These agreements
provide for lump sum payments of varying amounts upon the termination of their
employment which will occur upon completion of the merger.
St. Mary intends to utilize current St. Mary employees or new employees to
manage the business and properties of King Ranch Energy. Following the execution
of the merger agreement, the employment of 14 King Ranch Energy employees was
terminated, including four of its senior management employees. All of the 14
terminated King Ranch Energy employees received a severance package. St. Mary
intends to terminate the employment of all but 3 of the 12 remaining King Ranch
Energy employees following the merger. The remaining King Ranch Energy employees
have been told that they will not be retained by St. Mary following the merger
or only for a short transition period.
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See "The Merger Transaction -- Termination of King Ranch Energy Employees,"
"The Merger Agreement -- Other Agreements -King Ranch Energy Employee Severance
Payments" and "The Companies B Business of King Ranch Energy B Employees."
Indemnification of Officers and Directors
Under the merger agreement, the provisions in the King Ranch Energy
certificate of incorporation and bylaws for the indemnification of King Ranch
Energy officers and directors, including Jack Hunt and Abraham Zaleznik, who are
also directors of King Ranch, will survive the merger for a period of two years.
Stock Ownership of Principal Stockholders and Management
The following table contains information about the ownership of King Ranch
voting common stock as of the record date by:
. each person who is the beneficial owner of more than 5% of the
outstanding shares of King Ranch common stock,
. each King Ranch director,
. each King Ranch executive officer, and
. all King Ranch directors and executive officers as a group.
Shares Percentage
Stockholder Beneficially Owned of Total
- ----------- ------------------ ----------
John D. Alexander, Jr. 4,501/(1)/ 10.5%
1415 Louisiana, Suite 2300
Houston, TX 77002
James H. Clement, Jr. 498/(2)/ 1.2%
Stephen J. Kleberg 927 2.2%
Ogden M. Phipps 1,501/(3)/ 3.5%
Yarborough KRI L.P 3,049/(4)/ 7.1%
200 North Loraine, Suite 1400
Midland, Texas 79701
Richard Greer Sugden 2,809 6.5%
P.O. Box 70
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Wilson, Wyoming 83014
The Helen K. Groves Revocable Trust 2,164 5.0%
700 N. St. Mary's, Suite 1200
San Antonio, Texas 78205
Directors and Executive Officers as a Group 5,926 13.8%
__________________________________
/(1)/ Includes 2,357 shares of King Ranch voting common stock held by
private trusts or custodianships for minors which Mr. Alexander serves as a
trustee or custodian, and beneficial ownership of those shares is not
acknowledged.
/(2)/ Includes 249 shares of King Ranch voting common stock held by a
family limited partnership of which Mr. Clement serves as a manager.
/(3)/ All 1,501 shares of King Ranch voting common stock are held by
private trusts or custodianships for minors which Mr. Phipps serves as a
trustee or custodian, and beneficial ownership of those shares is not
acknowledged. Mr. Alexander also serves as a trustee or custodian of these
private trusts or custodianships for minors, and the 1,501 shares of King
Ranch voting common stock are included in the 2,357 shares referenced in
footnote 1 above.
/(4)/ Yarborough KRI L.P. is a family limited partnership. The general
partner of Yarborough KRI L.P. is Yarborough Management L.L.C., which is
managed by a professional administrator. The membership interests of
Yarborough Management L.L.C. are held by several persons, none of whom
exercises control over that entity. Therefore, for purposes of Section
13(d) of the Securities Exchange Act of 1934, all 3,049 shares of King
Ranch voting common stock are deemed to be beneficially owned by Yarborough
Management L.L.C.
As of the record date there were approximately 110 holders of record of
King Ranch voting common stock and King Ranch common stock.
THE MERGER TRANSACTION
Background of the Merger
The managements of each of St. Mary and King Ranch Energy continually
review their company's positions in light of the changing competitive
environment of the oil and gas industry with the objective of determining what
alternatives are available to further enhance shareholder value. In recent years
the managements of both St. Mary and King Ranch Energy have had conversations
with a number of other companies regarding a range of options to improve their
competitive positions, including acquisitions or dispositions of assets,
possible partnerships, alliances or other significant transactions.
In December 1997, at the initiation of Deutsche Bank, Deutsche Bank met
with Jack Hunt, King Ranch's Chief Executive Officer, and was informed that King
Ranch Energy was
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internally considering various strategic alternatives to maximize shareholder
value. These alternatives included:
. going public through a public offering process,
. seeking capital from private sources for growth and future
expenditures, or
. locating a company with oil and gas reserves and exploration and
production capabilities comparable to King Ranch Energy's
capabilities for a synergistic alliance on a tax efficient basis.
On January 9, 1998, at the initiation of Deutsche Bank, Mark A.
Hellerstein, St. Mary's President and Chief Executive Officer, met with
representatives of Deutsche Bank. At the meeting, Deutsche Bank indicated that
they were aware of a sizeable Houston-based oil and gas exploration and
production company that was interested in a possible stock-for-stock business
combination transaction.
On January 28, 1998, St. Mary entered into an oral agreement to retain
Deutsche Bank as financial advisor to St. Mary in a possible business
combination transaction with the company previously referred to by Deutsche
Bank. Deutsche Bank indicated that the company was King Ranch Energy, and
arranged a dinner meeting between St. Mary and King Ranch Energy senior
executives on February 4, 1998.
On February 4, 1998, Mr. Hellerstein, Ronald D. Boone, St. Mary's Executive
Vice President and Chief Operating Officer, David L. Henry, then St. Mary's
Chief Financial Officer, and Douglas W. York, St. Mary's Vice President of
Acquisitions and Reservoir Engineering, had a dinner meeting at the South Texas
location of the King Ranch with Jack Hunt, and William Gardiner, King Ranch's
Vice President and Chief Financial Officer. This meeting served primarily as an
initial orientation in which the representatives of both St. Mary and King Ranch
Energy presented an overview of their companies and what each company could
contribute to a combination. Mr. Hunt and Mr. Gardiner discussed various
structural and other issues that would be important to King Ranch Energy in a
business combination transaction.
On March 12, 1998, St. Mary formalized its retention of Deutsche Bank as
financial advisor for a possible transaction with King Ranch Energy. At that
time Deutsche Bank provided St. Mary with preliminary information regarding King
Ranch Energy based on their meetings with King Ranch Energy management personnel
and Mr. Gardiner.
On March 25, 1998, St. Mary senior executives met with representatives of
King Ranch Energy in Houston. Representing King Ranch Energy were Thomas F.
Fiorito, then President of King Ranch Energy, William Silk, Jr., then Senior
Vice President of Exploration and Production of King Ranch Energy, Brian P.
Romere, then Vice President of Finance and Controller of King Ranch Energy,
Larry L. Worden, then Vice President and General Counsel of King Ranch Energy,
and Mr. Gardiner. Representing St. Mary were Mark A. Hellerstein, Ronald D.
Boone, David L. Henry and Douglas W. York. At the meeting the King Ranch Energy
executives presented a detailed overview of King Ranch Energy, including its
history, pending oil and gas acquisitions, core areas, prospects, current
drilling activity and its current business plan. After the King Ranch Energy
presentation, St. Mary representatives indicated that for discussions to
progress, they would need to conduct a detailed review of King Ranch Energy's
oil and gas properties. The King Ranch Energy executives responded that before
involving other King Ranch Energy employees in the negotiation process, a
mutually acceptable range for the possible company valuations and for the
relative ownerships by the King Ranch Energy and St. Mary shareholders of a
combined company would need to be established.
On April 14, 1998, Mr. Hellerstein and Mr. Boone met with Mr. Hunt and Mr.
Gardiner in Houston. At that meeting Mr. Hellerstein and Mr. Boone presented a
written proposal
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outlining a framework for a merger transaction between St. Mary and King Ranch
Energy. The St. Mary proposal outlined among other things a stock-for-stock
merger based on the net asset value of King Ranch Energy as determined by the
independent petroleum engineering firm of Ryder Scott Company, L.P., and the
additional issuance of warrants to acquire St. Mary common stock.
On April 17, 1998, Deutsche Bank made a presentation on the St. Mary merger
proposal to Mr. Gardiner before a King Ranch Energy board of directors meeting.
On May 28, 1998, Deutsche Bank contacted Mr. Hunt. Mr. Hunt indicated that
he was not comfortable with the warrant component of St. Mary's April 14
proposal and that he was also concerned that King Ranch Energy would have to
establish retention bonuses for employees if St. Mary were allowed a full
technical review of King Ranch Energy's oil and gas properties. Mr. Hunt
concluded that in view of the lack of an acceptable valuation range for a merger
with St. Mary, further pursuit of a possible merger was a relatively low
priority for King Ranch Energy.
On July 16, 1998, at a regular meeting of the St. Mary board of directors
Mr. Hellerstein reported that St. Mary management had decided that the warrant
value component of its proposed acquisition of King Ranch Energy should not be
replaced with stock value and that therefore they would discontinue an active
pursuit of a merger transaction with King Ranch Energy.
In September 1998, King Ranch retained Nesbitt Burns Securities Inc. to
explore possible strategic alternatives with respect to King Ranch Energy. At
that time King Ranch had established certain fundamental objectives
including:
. Increasing shareholder value,
. Diversifying the reserve base,
. Increasing the reserve life profile,
. Expanding the exploration and development team, and
. Gaining access to an experienced acquisition staff.
In conjunction with those objectives, King Ranch instructed Nesbitt Burns
to consider various strategic alternatives including:
. going public through a public offering process,
. seeking capital from private sources for growth and future
expenditures, or
. structuring a merger or sale of King Ranch Energy.
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On October 23, 1998, based on a conversation with Nesbitt Burns, Deutsche
Bank informed Mr. Hellerstein that King Ranch Energy had retained Nesbitt Burns
to identify suitable merger candidates and also had retained Ryder Scott
Company, L.P. to analyze King Ranch Energy's oil and gas reserves.
On November 11, 1998, Mr. Hellerstein met with representatives of Nesbitt
Burns. Nesbitt Burns indicated that they were planning to hold discussions with
a group of companies on a possible transaction with King Ranch Energy, but were
waiting on King Ranch Energy's oil and gas reserve engineering analysis before
formally beginning that process. In addition, Nesbitt Burns explained that King
Ranch Energy was interested in a stock-for-stock transaction and that King Ranch
Energy expected the relative ownership by King Ranch Energy shareholders of the
combined entity to be based on the net relative asset values of King Ranch
Energy and the acquiring company.
On November 18, 1998, at a regular meeting of the St. Mary board of
directors, Mr. Hellerstein reported that it was St. Mary management's impression
that the likelihood of completing an acquisition of King Ranch Energy on terms
acceptable to St. Mary was diminished in view of King Ranch Energy's retention
of Nesbitt Burns to contact a number of companies.
On January 11, 1999, after a discussion with Nesbitt Burns, Deutsche Bank
informed Mr. Hellerstein that Nesbitt Burns did not include St. Mary on the list
of companies identified by Nesbitt Burns as possible suitable candidates for a
transaction with King Ranch Energy.
From January, 1999 through May 7, 1999, King Ranch held preliminary
discussions with several other companies. With the exception of St. Mary, only
two companies submitted formal offers to enter into a transaction with King
Ranch Energy. Both of these offers were from public companies offering stock as
consideration for King Ranch Energy. Following a thorough examination, King
Ranch rejected both offers based on its conclusion that neither of the two other
companies would be a strong strategic fit with King Ranch Energy and that
neither offer provided sufficient consideration. In reaching this conclusion,
King Ranch was concerned over the relatively high level of debt at both of the
offering companies, which in both cases was significantly higher than the level
of debt at St. Mary. King Ranch was also concerned with the size of the two
offering companies, and the fact that the shares issued under each offer as
consideration for King Ranch Energy would represent a controlling or dominant
interest in the surviving company.
On February 23, 1999, Deutsche Bank informed Mr. Hellerstein that Nesbitt
Burns had contacted Deutsche Bank and indicated that King Ranch Energy was not
satisfied with the other companies with which preliminary discussions had been
held and that St. Mary's prior interest compared favorably to the interests of
those other companies. After reviewing preliminary levels of interest from other
oil and gas companies, including the two offers discussed above, King Ranch
determined that the discussions with St. Mary would likely result in a more
favorable outcome. Specifically, the following aspects of a combination with St.
Mary were more attractive relative to the other companies:
. the location of the core properties within each company,
. the level of management talent and technical expertise, and
. the overall financial profile of the combined companies.
During the discussions with St. Mary, King Ranch did continue to have
discussions with other parties, including the companies that made the offers
discussed above. However, once King Ranch rejected the offers from the other
companies, King Ranch did not make any counter-offers or propose to renegotiate
terms of the proposed offers, but merely kept in contact with these other
companies to keep them appraised of their ability to submit another proposal.
On March 3, 1999, Mr. Hellerstein, Milam Randolph Pharo, St. Mary's Vice
President-Land and Legal, and Richard C. Norris, St. Mary's Vice
President-Finance, met with Nesbitt Burns. Nesbitt Burns indicated that King
Ranch Energy was holding discussions with a small number of companies concerning
an acquisition and that if St. Mary remained interested in
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acquiring King Ranch Energy, time was of the essence. Nesbitt Burns also
explained that King Ranch Energy remained interested in a relative net asset
value transaction and that the King Ranch Energy needed an estimated valuation
from St. Mary before proceeding further. Mr. Hellerstein responded that St. Mary
remained willing to enter into a relative net asset value stock-for-stock
transaction, but that a specific quantitative analysis could not be given until
St. Mary had additional technical information concerning King Ranch Energy's oil
and gas reserves. Nesbitt Burns then indicated that St. Mary representatives
would be allowed to visit King Ranch Energy's data room in Houston for two days.
On March 8-10, 1999, St. Mary exchanged data with Nesbitt Burns concerning
oil and gas reserves and net asset book values. As a result, St. Mary became
concerned about the valuation of the reserves of the significant Flour Bluff
field acquired by King Ranch Energy in February 1999.
On March 16 and 17, 1999, Mr. Boone and St. Mary technical personnel
visited King Ranch Energy's offices in Houston to review King Ranch Energy
geologic prospects. In addition, Mr. York further reviewed the reserve
engineering. St. Mary's preliminary analysis raised some concerns about King
Ranch Energy's geologic prospects, but in general St. Mary was of the initial
impression that the properties involved opportunities for St. Mary to enhance
production and reserves.
On March 25, 1999, at a regular St. Mary board of directors meeting Mr.
Hellerstein updated the directors as to the status of discussions between St.
Mary and King Ranch Energy and discussed the anticipated strategic benefits from
the potential acquisition. Mr. Hunt and Mr. Gardiner then met with the St. Mary
directors at a luncheon meeting. Mr. Hellerstein advised Mr. Hunt that St. Mary
planned in approximately two weeks to deliver a written proposal outlining the
terms of a merger.
On April 12, 1999, Mr. Hellerstein met with Nesbitt Burns to discuss a King
Ranch Energy transaction and St. Mary's net asset value calculations. For
expediency in preparing the proposal letter outlining the terms of a merger, St.
Mary had decided to use the Flour Bluff reserve amounts it had estimated in
February 1999 in connection with a possible acquisition of King Ranch Energy but
it agreed with Nesbitt Burns that the Flour Bluff reserves would be re-estimated
by Ryder Scott before the determination of final net asset values for purposes
of a final merger agreement.
On April 14, 1999, Mr. Hellerstein sent the proposal letter to Mr. Hunt
which outlined terms for a merger transaction. The letter contemplated that the
merger would be a stock-for-stock transaction based on the relative net asset
valuations of St. Mary and King Ranch Energy which in turn would be based on the
valuation of their proved and probable oil and gas reserves as of December 31,
1998.
On April 21, 1999, Mr. Hunt called Mr. Hellerstein and indicated that King
Ranch Energy was generally comfortable with the basic merger framework set forth
in the April 14 proposal letter, but that some changes would be necessary which
Nesbitt Burns would discuss with St. Mary. Mr. Hunt asked for two additional
weeks to consider a formal letter of intent and
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to arrange for a meeting of the King Ranch, Inc. board of directors. Reciprocal
confidentiality agreements with respect to the exchange of information between
the parties were entered into in February 1999 and April 1999.
On April 30, 1999, Mr. Hunt sent a letter to Mr. Hellerstein which
included a draft letter of intent setting forth general terms of the proposed
merger which generally followed St. Mary's proposal letter of April 14. In the
following week, St. Mary and King Ranch Energy and their counsel negotiated the
provisions of the letter of intent.
On May 3, 1999, Thomas E. Congdon, St. Mary's Chairman of the Board,
Mr. Hellerstein and Mr. Boone attended a meeting of the King Ranch, Inc. board
of directors. At that meeting the St. Mary senior executives presented an
overview of St. Mary and answered questions. Mr. Congdon and Mr. Hellerstein met
that afternoon with Mr. Hunt and Mr. Gardiner to further negotiate the
provisions of the letter of intent.
On May 7, 1999, St. Mary and King Ranch finalized and executed the
letter of intent, which was non-binding and subject to the negotiation and
execution of a final merger agreement. The letter of intent contemplated that
the shares of King Ranch Energy would be distributed to King Ranch stockholders
immediately before the merger, in part to address St. Mary's significant
concerns over having a single holder of the shares to be issued as consideration
for King Ranch Energy.
On May 10, 1999 officers of St. Mary and King Ranch, and their
financial and legal advisors, met by telephone to establish procedures for each
company to carry out a due diligence investigation of the other. During the
succeeding thirty days senior management of St. Mary spent extensive time at the
offices and on the properties of King Ranch Energy reviewing the geologic,
engineering, environmental, land, financial and legal aspects of King Ranch
Energy's business and assets. During this period St. Mary also met with Ryder
Scott Company, King Ranch Energy's independent petroleum engineers, to review
reserve valuations. Management of King Ranch during this period also visited the
offices of St. Mary and met with its independent engineers for due diligence
purposes.
On May 21, 1999, at a regular meeting of the St. Mary board of
directors, Mr. Hellerstein informed the directors that the non-binding letter of
intent had been executed and discussed the terms of the merger contemplated by
the letter of intent.
On June 3, 1999, Ballard Spahr Andrews & Ingersoll, LLP, counsel to
St. Mary, delivered a draft of the merger agreement to Locke Liddell & Sapp LLP,
counsel to King Ranch. On June 11, 1999, Locke Liddell & Sapp provided written
comments on this draft to Ballard Spahr and in the following weeks St. Mary and
King Ranch Energy and their counsel continued to resolve the legal provisions of
the merger agreement.
On June 17, 1999 Mr. Hellerstein, Mr. Boone and a representative of
Deutsche Bank met in Houston with Mr. Hunt, Mr. Gardiner and a representative of
Nesbitt Burns to discuss St. Mary's due diligence findings on King Ranch Energy.
At that meeting St. Mary proposed a material reduction in the number of St. Mary
shares to be issued for King Ranch Energy based
25
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principally on St. Mary's evaluation of King Ranch Energy's oil and gas
reserves, including the Flour Bluff field reserves, and 1999 capital
expenditures. No agreement was reached on any adjustment. It was agreed that
King Ranch would consider St. Mary's proposal, and the extensive materials it
had presented in support of that proposal, and respond subsequently.
On June 23, 1999 Nesbitt Burns delivered to Deutsche Bank a response
to the June 17 St. Mary purchase price adjustment proposal along with extensive
materials in support of that response. The response involved a substantial
increase in the purchase price for King Ranch Energy from that proposed by St.
Mary on June 17.
On July 2, 1999 St. Mary senior engineering personnel and a
representative of Deutsche Bank met with senior King Ranch Energy personnel to
discuss technical differences in the evaluations by the parties of King Ranch
Energy's oil and gas reserves. This meeting resulted in agreement on a number of
matters relating to the reserves.
On July 12, 1999 Mr. Hunt and Mr. Gardiner met in Denver with Mr.
Hellerstein, Mr. Boone and a representative of Deutsche Bank to discuss the
remaining purchase price and related issues. Agreement was reached that day on
those issues, subject to the approval of the boards of directors of both
companies. The agreement resolved St. Mary's concerns about the Flour Bluff
field through a reduction in the purchase price due to St. Mary's evaluation of
Flour Bluff reserves. That agreement is reflected in the merger agreement.
On July 14, 1999 St. Mary's legal counsel met with King Ranch's legal
counsel to work on completing the merger agreement to reflect the agreements
reached by the parties on July 12 and also to complete the agreements previously
reached on other matters. Revision of the merger agreement to reflect these
matters identified various other less substantive issues.
On July 23, 1999, Mr. Hellerstein sent a letter to Mr. Hunt, which
reaffirmed St. Mary's concerns over having a single holder of the shares to be
issued as consideration for King Ranch Energy. These concerns related primarily
to the decreased public float of St. Mary common stock, as well as control
issues, that would occur if a large block of stock were held by a single holder.
In the letter, Mr. Hellerstein indicated that these concerns were relevant in
evaluating whether St. Mary would proceed with the transaction, and Mr.
Hellerstein expressed appreciation that King Ranch had agreed to distribute the
shares of King Ranch Energy common stock to its stockholders to facilitate the
transaction. The letter confirmed to the King Ranch board of directors that the
distribution of King Ranch Energy common stock to the King Ranch stockholders
was a material consideration for St. Mary to proceed with the merger.
On July 23, 1999 there was a telephone conference among Mr.
Hellerstein, Mr. Boone, Mr. Hunt and Mr. Gardiner, along with the legal and
financial advisors of both companies, during which final agreement was reached
on all remaining open matters. A merger agreement reflecting that final
agreement was circulated by the parties on July 25, 1999.
At a special meeting of the St. Mary board of directors on July 23,
1999, Mr. Hellerstein and Mr. Boone reviewed the strategic benefits of a merger
with King Ranch Energy and the status of the transaction, Deutsche Bank reviewed
its fairness opinion with the St. Mary board,
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<PAGE>
and Ballard Spahr made a presentation on the terms and conditions of the merger
agreement. After due consideration, the St. Mary board of directors unanimously
approved the merger agreement and the related merger matters described in this
document, subject to receipt of the final Deutsche Bank fairness opinion. On
July 27, 1999 Deutsche Bank delivered its final fairness opinion to the St. Mary
board of directors and the board adopted a resolution giving final approval to
the merger.
At a special meeting of the King Ranch board of directors on July 27,
1999, Mr. Hunt and Mr. Gardiner reviewed the strategic benefits of a merger of
King Ranch Energy with St. Mary and the status of the transaction, Nesbitt Burns
delivered its fairness opinion to the King Ranch board, and Locke Liddell & Sapp
made a presentation on the terms and conditions of the merger agreement. After
due consideration, the King Ranch board of directors approved the merger
agreement, subject to stockholder approval, and determined to recommend that the
King Ranch stockholders vote to approve the merger agreement.
Following the approval of their boards of directors, St. Mary and King
Ranch executed the merger agreement and St. Mary issued a press release after
the close of markets on July 27, 1999.
On November 8, 1999, St. Mary and King Ranch amended the merger
agreement to:
. change the date by which if the merger is not completed the
merger agreement may be terminated by St. Mary or King Ranch from
November 30, 1999 to December 31, 1999, and
. change the provisions for the restrictions on transfer of St.
Mary common stock to be issued in the merger to:
. eliminate an exception to the restrictions which would have
applied in the event of sales of St. Mary common stock by Mr.
Congdon or his immediate family or entities controlled by
them, and
. change the termination date for those restrictions from the
expiration of two years after the completion of the merger to
March 31, 2001. By March 31, 2001 St. Mary will have had the
opportunity to report publicly its consolidated financial
statements for the year ending December 31, 2000 which St.
Mary anticipates will reflect the benefits of the merger for
a period of at least one year following the merger, before
the shares of St. Mary common stock to be issued in the
merger can be
transferred.
Our Reasons for the Merger
We believe that by combining the two companies we can create
substantially more stockholder value than could be achieved by the companies on
their own. This is the fundamental reason for the merger.
Simply having a bigger company is not a reason for us to merge. To
create stockholder value, the combined company must be better. As we explain
below, we believe that by combining the assets and businesses of St. Mary and
King Ranch Energy we can increase profits and returns.
The expected benefits of the merger fall broadly into three categories:
. exploration and production enhancements,
. savings through the reduction of personnel and other operating
synergies, and
. capital productivity improvements.
We believe these benefits depend on the merger and are not available to the
companies on their own.
Exploration and Production Enhancements
St. Mary continually seeks acquisitions of oil and gas properties or
companies that would afford opportunities to expand St. Mary's existing core
areas where it has proprietary geologic
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knowledge or to gain a significant acreage and production foothold in a new U.S.
basin which is suitable for enhanced exploration and production using St. Mary's
technical expertise.
For St. Mary, the acquisition of King Ranch Energy represents an
opportunity to obtain complementary properties to its existing core areas,
expansion of its Gulf Coast properties and a foothold in the offshore Gulf of
Mexico. Specifically, St. Mary management believes that with King Ranch Energy's
inventory of leaseholds and seismic surveys there are significant opportunities
for St. Mary to increase production and reserves from King Ranch Energy using
St. Mary exploration and reservoir expertise.
Operating Synergies
We believe we can run the combined company efficiently. By operating
synergies we mean increases in production and revenues, decreases in unit costs
and overall overhead expense, and other benefits made possible by combining
operations.
These benefits should come from streamlining the combined
organization, which we can run with less management, administrative and overhead
cost than two separate organizations. Specifically, although King Ranch Energy's
offshore and Gulf Coast properties may require additional technical personnel to
operate, most of King Ranch Energy's other onshore properties can be managed by
St. Mary through its existing offices and existing personnel. Thus, it is
practicable for St. Mary to plan not to continue over the long term the
employment of most of King Ranch Energy's management and administrative
employees. Although St. Mary plans to add approximately 15 people on a permanent
basis, it expects to reduce the overhead associated with the King Ranch
properties by half. Additional synergy benefits should come from exploring for
oil and gas more efficiently in regions where the companies operate separately
today.
Capital Productivity Improvements
We also believe the combined company can use its capital more
profitably than either company on its own. St. Mary expects that by combining
the assets of King Ranch Energy with those of St. Mary it will have a stronger
presence in those U.S. basins with optimal potential for future oil and gas
discoveries and production. As a result, we believe the combined company will be
able to maintain or improve earnings while spending less on capital projects
overall.
Factors Considered by, and Recommendation of, the St. Mary Board of Directors
At a meeting of the St. Mary board of directors held on July 23, 1999,
after due consideration, the St. Mary board unanimously:
. determined that the merger agreement and the issuance of St. Mary
common stock in the merger are advisable and in the best
interests of St. Mary and its stockholders,
. approved the merger agreement and the related transactions, and
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<PAGE>
. determined to recommend that the St. Mary stockholders approve
the issuance of St. Mary common stock in the merger.
Therefore, the St. Mary board recommends that the St. Mary
stockholders vote "For" the approval of the issuance of St. Mary common stock in
the merger.
In approving the transaction and making this recommendation, the St.
Mary board consulted with St. Mary's management as well as St. Mary's outside
legal counsel and financial advisor, and considered the following material
factors:
. All the reasons described above under "Our Reasons for the
Merger," including the:
. exploration and production enhancements,
. relative net asset valuations, and
. cash flow,
. operating synergies, and
. capital productivity improvements
expected to be available to the combined company,
. Alternatives to the merger by pursuing a comparable transaction
with an entity other than King Ranch Energy, and the St. Mary
board's conclusion that a transaction with King Ranch Energy is
more feasible and is expected to yield greater benefits than the
currently available alternatives. The St. Mary board reached this
conclusion for reasons including:
. King Ranch Energy's interest in pursuing a transaction with
St. Mary,
. St. Mary's view that the transaction could be completed from
an acceptable timing standpoint, and
. St. Mary management's assessment of the alternatives and the
expected benefits of the merger and compatibility of the
companies as described under "Our Reasons for the Merger"
above,
. The fact that those persons who are St. Mary stockholders before
the merger would hold 80.6% of the outstanding stock of the
combined company after the merger,
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. Comparisons of historical and projected financial measures for
St. Mary and King Ranch Energy, including:
. earnings,
. return on capital employed, and
. cash flow,
. Comparisons of historical operational measures for St. Mary and
King Ranch Energy, including:
. oil and gas reserve replacement, and
. oil and gas production,
. Current industry, economic and market conditions, including
current prices for crude oil. The St. Mary board considered that
oil and gas prices generally fluctuate and that when prices fall,
companies must improve the performance of their internal
operations to maintain profitability. The St. Mary board
considered it likely that a recurrence of low prices would lead
to further consolidation in the oil and gas industry. This is
because combining operations can help companies save money,
strengthen the combined balance sheet and operate more
efficiently,
. The ability to complete the merger as a tax-free reorganization
for U.S. federal income tax purposes,
. The terms and conditions of the merger agreement, including the
conditions to closing and the termination fees discussed under
"The Merger Agreement -- Conditions to Closing" and "The Merger
Agreement -- Termination of the Merger Agreement",
. The analyses and presentations of Deutsche Bank, and Deutsche
Bank's written opinion to the effect that, as of July 23, 1999
and subject to the various matters set forth in its opinion, the
share exchange ratio by which the shares of King Ranch Energy
common stock will be converted into the right to receive
2,666,252 shares of St. Mary common stock is fair to St. Mary
from a financial point of view,
. The addition of two new members to the St. Mary board of
directors from King Ranch's management team to reflect the
percentage of shares of St. Mary common stock outstanding after
the merger held by the King Ranch stockholders, and
. The challenges of combining the businesses of two major
corporations of this size and the accompanying risk of not
achieving the expected cost savings and other benefits, as
discussed under "Cautionary Information About Forward-Looking
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<PAGE>
Statements", and of diverting management focus and resources from
other strategic opportunities and operational matters for an
extended period of time.
In view of the wide variety of factors considered in connection with
its evaluation of the merger and the complexity of these matters, the St. Mary
board of directors did not find it useful to and did not attempt to quantify,
rank or otherwise assign relative weights to these factors. The St. Mary board
relied on the experience and expertise of Deutsche Bank, its financial advisor,
for quantitative analysis of the financial terms of the merger. See "Opinion of
Financial Advisor--Opinion of St. Mary Financial Advisor." In addition, the St.
Mary board did not try to make any specific determination as to whether any
particular factor, or any aspect of any particular factor, was favorable or
unfavorable to the St. Mary board's ultimate determination, but rather the St.
Mary board conducted an overall analysis of the factors described above,
including thorough discussions with and questioning of St. Mary's management and
legal, financial and accounting advisors. In considering the factors described
above, individual members of the St. Mary board may have given different weight
to different factors.
The St. Mary board considered all these factors as a whole, and
overall considered the factors to be favorable to and to support its
determination. However, the general view of the St. Mary board was that the last
factor constituted an uncertainty or risk relating to the transaction, and that
the other reasons and factors described above were generally favorable.
Factors Considered by, and Recommendation of, the King Ranch Board of Directors
At a meeting of the King Ranch board of directors held on July 27,
1999, after due consideration, the King Ranch board:
. determined that the merger agreement and the consideration of St.
Mary common stock to be received in the merger are advisable and
in the best interests of King Ranch and the King Ranch
stockholders,
. approved the merger agreement and the related transactions, and
. determined to recommend that the King Ranch stockholders, who
will hold shares of King Ranch Energy voting common stock
following the distribution, consent to the merger agreement.
Therefore, the King Ranch board recommends that the holders of King
Ranch Energy voting common stock consent to the merger agreement.
In approving the transaction and making this recommendation, the King
Ranch board consulted with King Ranch Energy's management as well as King
Ranch's outside legal counsel and financial advisor, and considered the
following material factors:
. All the reasons described above under "Our Reasons for the
Merger," including the
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<PAGE>
. exploration and production enhancements,
. relative net asset valuations, and
. cash flow,
. operating synergies, and
. capital productivity improvements
expected to be available to the combined company,
. Alternatives to the merger by presently pursuing a comparable
acquisition of or a business combination or joint venture with an
entity other than St. Mary, and the King Ranch board's conclusion that
a transaction with St. Mary is more feasible and is expected to yield
greater benefits than the currently available alternatives. The King
Ranch board reached this conclusion for reasons including:
. St. Mary's interest in pursuing a transaction with King Ranch
Energy,
. King Ranch's view that the transaction could be completed from an
acceptable timing standpoint, and
. King Ranch Energy management's assessment of the alternatives and
the expected benefits of the merger and compatibility of the
companies as described under "Our Reasons for the Merger"
above,
. The fact that 19.4% of the outstanding stock of the combined
company would be the consideration for King Ranch Energy,
. Comparisons of historical and projected financial measures for St.
Mary and King Ranch Energy, including:
. earnings,
. return on capital employed, and
. cash flow,
. Comparisons of historical operational measures for St. Mary and King
Ranch Energy, including:
. oil and gas reserve replacement, and
. oil and gas production,
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<PAGE>
. Current industry, economic and market conditions, including
current prices for crude oil. The King Ranch board considered
that oil and gas prices generally fluctuate and that when prices
fall, companies must improve the performance of their internal
operations to maintain profitability. The King Ranch board
considered it likely that a recurrence of low prices would lead
to further consolidation in the oil and gas industry because, as
explained under "Our Reasons for the Merger," combining
operations can help companies save money, strengthen the combined
balance sheet and operate more efficiently,
. The ability to complete the merger as a tax-free reorganization
for U.S. federal income tax purposes,
. The fact that the distribution of King Ranch Energy common stock
to the King Ranch stockholders will result in a taxable gain to a
subsidiary of King Ranch which should not be material to King
Ranch on a consolidated basis,
. The terms and conditions of the merger agreement, including the
conditions to closing and the termination fees discussed under
"The Merger Agreement--Conditions to the Completion of the
Merger" and "The Merger Agreement-Termination of the Merger
Agreement",
. The analyses and presentations of Nesbitt Burns, and Nesbitt
Burn's written opinion to the effect that, as of July 27, 1999,
and based upon and subject to the various matters set forth in
its opinion, the number of shares of St. Mary common stock to be
received in the merger by the King Ranch stockholders is fair to
the King Ranch stockholders from a financial point of view,
. The composition of the combined company's board of directors, the
two new members of which from King Ranch's management team will
reflect the percentage of shares of St. Mary common stock
outstanding after the merger held by the King Ranch
stockholders,
. The risks of the July 27, 1999 termination of a number of King
Ranch Energy employees before stockholder approval of the merger
agreement, and
. The challenges of combining the businesses of two major
corporations of this size and the attendant risk of not achieving
the expected cost savings and other benefits, as discussed under
"Cautionary Information About Forward-Looking Statements", and of
diverting management focus and resources from other strategic
opportunities and operational matters for an extended period of
time.
In view of the wide variety of factors considered in connection with
its evaluation of the merger and the complexity of these matters, the King Ranch
board of directors did not find it useful to and did not attempt to quantify,
rank or otherwise assign relative weights to these factors. The King Ranch board
relied on the experience and expertise of Nesbitt Burns, its financial advisor,
for quantitative analysis of the financial terms of the merger. See "Opinion of
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<PAGE>
Financial Advisor--Opinion of King Ranch Financial Advisor." In addition, the
King Ranch board did not undertake to make any specific determination as to
whether any particular factor, or any aspect of any particular factor, was
favorable or unfavorable to the King Ranch board's ultimate determination, but
rather the King Ranch board conducted an overall analysis of the factors
described above, including thorough discussions with and questioning of King
Ranch Energy's management and legal, financial and accounting advisors. In
considering the factors described above, individual members of the King Ranch
board may have given different weight to different factors.
The King Ranch board considered all these factors as a whole, and
overall considered the factors to be favorable to and to support its
determination. However, the general view of the King Ranch board was that the
last two factors constituted uncertainties or risks relating to the transaction,
and that the other reasons and factors described above were generally favorable.
Opinions of Financial Advisors
Opinion of St. Mary's Financial Advisor
Deutsche Bank has acted as financial advisor to St. Mary in connection
with the merger. At the July 23, 1999 meeting of the St. Mary board of
directors, Deutsche Bank delivered its oral opinion, subsequently confirmed in
writing as of the July 27, 1999, to the St. Mary board of directors to the
effect that, as of the date of that opinion, based upon and subject to the
assumptions made, matters considered and limits of the review undertaken by
Deutsche Bank, the share exchange ratio between St. Mary and the King Ranch
Energy stockholders was fair, from a financial point of view, to St. Mary
stockholders.
The full text of Deutsche Bank's written opinion, dated July 27, 1999,
which includes the assumptions made, matters considered and limits on the review
undertaken by Deutsche Bank in connection with the opinion, is attached as
Appendix B to this document and is incorporated herein by reference. St. Mary
stockholders are urged to read Deutsche Bank's opinion in its entirety. The
summary of Deutsche Bank's opinion set forth in this document is qualified in
its entirety by reference to the full text of Deutsche Bank's opinion.
In connection with Deutsche Bank's role as financial advisor to St.
Mary, and in arriving at its opinion, Deutsche Bank has, among other things:
. reviewed publicly available financial information and other
information concerning King Ranch Energy and St. Mary as it
deemed appropriate,
. reviewed internal analyses and other information furnished to it
by King Ranch Energy and St. Mary,
. held discussions with the members of the senior managements of
St. Mary and King Ranch Energy regarding the businesses and
prospects of their respective companies and the joint prospects
of a combined company,
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. reviewed the reported prices and trading activity for the common stock
of St. Mary,
. compared financial data for King Ranch Energy and St. Mary, and stock
market information for St. Mary, with similar information for selected
companies whose securities are publicly traded,
. reviewed the financial terms of selected recent business combinations
which it deemed comparable in whole or in part,
. reviewed the terms of the merger agreement and related documents,
and
. performed other studies and analyses and considered other factors as
it deemed appropriate.
In preparing its opinion, Deutsche Bank did not independently verify any
information concerning King Ranch Energy or St. Mary, including any:
. financial information,
. forecasts, or
. projections
considered in connection with the rendering of its opinion. Accordingly, for
purposes of its opinion Deutsche Bank relied upon the accuracy and completeness
of all of that information. Deutsche Bank did not conduct a physical inspection
of any of the properties or assets, and did not prepare or obtain any
independent evaluation or appraisal of any of the assets or liabilities, of King
Ranch Energy or St. Mary. With respect to the financial forecasts and
projections, including analyses and forecasts of the:
. cost savings,
. operating efficiencies,
. revenue effects, and
. financial synergies
expected by St. Mary to be achieved as a result of the merger, made available to
Deutsche Bank and used in its analyses, Deutsche Bank has assumed that they have
been reasonably prepared on bases reflecting the best currently available
estimates and judgments of the management of St. Mary. In rendering its opinion,
Deutsche Bank expressed no view as to the:
. reasonableness of those forecasts and projections, including those
synergies, or
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<PAGE>
. the assumptions on which they are based.
Deutsche Bank's opinion was necessarily based upon economic, market and other
conditions as in effect on, and the information made available to Deutsche Bank
as of, the date of its opinion.
For purposes of rendering its opinion, Deutsche Bank has assumed that in
all respects material to its analysis:
. the representations and warranties of each party in the merger
agreement are true and correct,
. each party to the merger agreement will perform all of the covenants
and agreements to be performed by it under the merger agreement,
. all conditions to the obligations of each party to the merger
agreement to consummate the merger will be satisfied without any
waiver thereof, and
. all approvals and consents required in connection with the
consummation of the transactions contemplated by the merger agreement
will be obtained.
In addition, Deutsche Bank has been advised by St. Mary, and accordingly
has assumed for purposes of its opinion, that the merger will be tax-free to
each St. Mary and King Ranch.
Set forth below is a brief summary of financial analyses performed by
Deutsche Bank in connection with its opinion and reviewed with the St. Mary
board of directors at its meeting on July 23, 1999.
Analysis of Selected Publicly Traded Companies. Deutsche Bank compared
financial information and commonly used valuation measurements for King Ranch
Energy to corresponding information and measurements for a group of four
publicly traded exploration and production companies. These companies are:
. Bellwether Exploration Company,
. Callon Petroleum Company,
. PANACO, Inc., and
. Remington Oil & Gas Corporation
These companies are also collectively referred to below as the Selected KRE
Comparable Companies. The Selected KRE Comparable Companies are comprised of
companies with a market capitalization of less than $150 million, operations in
geographically similar locations to those of King Ranch Energy and a similar
reserve and production profile to that of King Ranch Energy. Deutsche Bank also
compared financial information and commonly used valuation
36
<PAGE>
measurements for St. Mary to corresponding information and measurements for a
group of six publicly traded exploration and production companies. These
companies are:
. Key Production Company, Inc.,
. Belco Oil & Gas Corp.,
. HS Resources, Inc.,
. Patina Oil & Gas Corporation,
. Tom Brown, Inc., and
. Titan Exploration, Inc.
These companies are collectively referred to below as the Selected St. Mary
Comparable Companies. The Selected St. Mary Comparable Companies are comprised
of companies with a market capitalization of less than $450 million, operations
in geographically similar locations to those of St. Mary and a similar reserve
and production profile to that of St. Mary.
The financial information and valuation measurements included:
. common equity market valuation,
. capitalization ratios,
. operating performance,
. ratios of common equity market value as adjusted for debt and cash
("Total Enterprise Value") to earnings before interest expense, income
taxes, depreciation, amortization and exploration ("EBITDAX") and to
SEC pre-tax PV-10 which is the value of future net cash flows from
proved reserves before taxes discounted at 10% at December 31, 1998,
and year end proved reserves, and
. ratios of common equity market prices per share ("Equity Value") to
operating cash flow per share.
To calculate the trading multiples for King Ranch Energy and the Selected
KRE Comparable Companies and for St. Mary and the Selected St. Mary Comparable
Companies, Deutsche Bank used publicly available information concerning
historical and projected financial performance, including published historical
financial information and operating cash flow estimates reported by the
Institutional Brokers Estimate System ("IBES"). IBES is a data service that
monitors and publishes compilations of earnings and cash flow estimates by
selected research analysts regarding companies of interest to institutional
investors.
37
<PAGE>
Deutsche Bank compared the King Ranch Energy multiples of Total Enterprise
Value implied by the share exchange ratio with the following calculated
multiples for Selected KRE Comparable Companies:
<TABLE>
<CAPTION>
Selected KRE Comparable Companies
King Ranch Low Median High
---------- --- ------ ----
Energy Implied
--------------
<S> <C> <C> <C> <C>
12/31/98-Latest Twelve 2.01x 5.09x 6.99x 8.96x
Month EBITDAX
1998 Year End SEC 1.06x 1.50x 1.73x 2.00x
Pre-Tax PV-10
1998 Year End Proved
Reserves $0.94 $1.10 $1.30 $1.54
</TABLE>
Deutsche Bank further calculated that the multiple of Equity Value to 1999
estimated operating cash flow per share was 2.35x for King Ranch Energy compared
to a range of 1.02x to 6.43x, with a median of 3.91x, for the Selected KRE
Comparable Companies.
Deutsche Bank compared St. Mary actual multiples of Total Enterprise Value
with the following calculated multiples for Selected St. Mary Comparable
Companies:
<TABLE>
<CAPTION>
Selected St. Mary Comparable Companies
St. Mary Low Median High
-------- --- ------ ----
Actual
------
<S> <C> <C> <C> <C>
12/31/98-Latest Twelve 5.22x 5.65x 7.094x 11.02x
Month EBITDAX
1998 Year End SEC 2.13x 0.87x 1.40x 2.09x
Pre-Tax PV-10
1998 Year End Proved
Reserves $1.44 $0.60 $0.97 $1.45
</TABLE>
Deutsche Bank further calculated that the multiple of Equity Value to 1999
estimated operating cash flow per share was 2.35x for St. Mary compared to a
range of 1.00x to 10.39x, with a median of 5.78x, for the Selected St. Mary
Comparable Companies.
None of the companies utilized as a comparison is identical to King Ranch
Energy or St. Mary. Accordingly, the analysis of the publicly traded comparable
companies is not simply mathematical. Rather, it involves complex considerations
and qualitative judgments concerning differences in financial and operating
characteristics of the comparable companies and other factors that could effect
the public trading value of the comparable companies.
Analysis of Selected Precedent Transactions. Deutsche Bank reviewed the
financial terms, to the extent publicly available, of 9 proposed, pending or
completed mergers and acquisition transactions of greater than $10 million since
January 1, 1996 involving exploration and production companies with a similar
asset mix to King Ranch Energy (the "Selected KRE
38
<PAGE>
Corporate Transactions"). Deutsche Bank utilized estimated reserve value and
proved reserves to determine reserve value to proved reserves in order to
estimate a total enterprise value for King Ranch Energy and compared them to
corresponding reserve value to proved reserves for the merger, based on the
share exchange ratio. Deutsche Bank calculated that total enterprise value
divided by estimated proved reserves was $.84 for the merger compared to a range
of $0.80 to $1.66, with a median of $1.02, for the Selected KRE Corporate
Transactions.
Deutsche Bank reviewed the financial terms, to the extent publicly
available, of 55 proposed pending or completed asset sale transactions of
greater than $10 million since January 1, 1996 involving producing properties
within the three operating regions of King Ranch Energy (the "Selected KRE Asset
Transactions"). Deutsche Bank utilized estimated reserve value and proved
reserves in order to determine a multiple of reserve value to proved reserves to
estimate a total enterprise value for King Ranch Energy and compared them to
corresponding reserve value to proved reserves for the merger, based on the
share exchange ratio. Deutsche Bank calculated that the total enterprise value
to estimated proved reserves was $.84 for the merger compared to the following
multiples for the Selected KRE Asset Transactions:
<TABLE>
<CAPTION>
Operating Region 25/th/ Percentile Median 75/th/ Percentile
---------------- ----------------- ------ -----------------
<S> <C> <C> <C>
Gulf of Mexico - Offshore $0.86 $0.99 $1.24
Texas - Onshore $0.58 $0.75 $0.80
Oklahoma / Rocky Mountains $0.51 $0.71 $0.83
- Utah/North Dakota
</TABLE>
Deutsche Bank reviewed the financial terms, to the extent publicly
available, of 8 proposed, pending or completed mergers and acquisition
transactions of greater than $10 million since January 1, 1996 involving
exploration and production companies with a similar asset mix to St. Mary (the
"Selected St. Mary Corporate Transactions"). Deutsche Bank utilized estimated
reserve value and proved reserves to determine a total enterprise value multiple
of proved reserves and compared them to the corresponding multiple for St. Mary.
Deutsche Bank calculated that the multiple of total enterprise value to year end
proved reserves was 1.44 for St. Mary compared to a range of 0.61 to 1.36, with
a median of 1.00, for Selected St. Mary Corporate Transactions.
Deutsche Bank reviewed the financial terms, to the extent publicly
available, of 40 proposed pending or completed asset sale transactions of
greater than $10 million since January 1, 1996 involving producing properties
within the five operating regions of St. Mary (the "Selected St. Mary Asset
Transactions"). Deutsche Bank utilized estimated reserve value and proved
reserves and compared them to corresponding multiples for St. Mary. Deutsche
Bank calculated that the multiple of total enterprise value to year end proved
reserves was 1.44 for St. Mary compared to the following multiples for the
Selected St. Mary asset Transactions:
39
<PAGE>
<TABLE>
<CAPTION>
Operating Region 25/th/ Percentile Median 75/th/ Percentile
---------------- ----------------- ------ -----------------
<S> <C> <C> <C>
Rockies - Williston Basin $0.42 $0.67 $0.78
Mid-Continent $0.69 $0.92 $1.03
Permian Basin $0.65 $0.75 $0.80
ArkLaTex Region $0.69 $0.72 $0.77
South Louisiana $0.85 $1.07 $1.28
</TABLE>
All multiples for each of the:
. Selected KRE Corporate Transactions,
. Selected KRE Asset Transactions,
. Selected St. Mary Corporate Transactions, and the
. Selected St. Mary Asset Transactions
were based on John S. Herold Inc. data and public information available at the
time of announcement of those transactions, without taking into account
differing market and other conditions during the three and one half-year period
during which these transactions occurred.
Because the reasons for and circumstances surrounding each of the precedent
transactions analyzed were so diverse, and due to the inherent differences
between the operations and financial conditions of King Ranch Energy and St.
Mary and the companies involved in each of the:
. Selected KRE Corporate Transactions,
. Selected KRE Asset Transactions,
. Selected St. Mary Corporate Transactions, and the
. Selected St. Mary Asset Transactions,
Deutsche Bank believes that a comparable transaction analysis is not simply
mathematical. Rather, it involves complex considerations and qualitative
judgments, reflected in Deutsche Bank's opinion, concerning differences between
the characteristics of these transactions and the merger that could affect the
value of the subject companies and businesses and King Ranch Energy and St.
Mary.
Contribution Analysis. Deutsche Bank analyzed the relative contributions of
St. Mary and King Ranch Energy, as compared to St. Mary and King Ranch Energy's
relative ownership
40
<PAGE>
after the merger of approximately 80.64% and 19.36% respectively of the
outstanding capital of the combined company, to the pro forma income statement
of the combined company, based on managements' projections for their respective
companies. The analysis showed that on a pro forma combined basis,
excluding:
. the effect of any synergies that may be realized as a result of the
merger, and
. non-recurring expenses relating to the merger,
based on 1999 and 2000 estimates for St. Mary and King Ranch Energy, St. Mary
and King Ranch Energy would account for approximately the following percentages
of the combined company for the following:
<TABLE>
<CAPTION>
St. Mary King Ranch
-------- ----------
<S> <C> <C>
1999E EBITDAX 62.00% 38.00%
2000E EBITDAX 70.30% 29.70%
2001E EBITDAX 75.50% 24.50%
1999E Operating Cash
Flow Per Share 58.90% 41.10%
2000E Operating Cash
Flow Per Share 65.00% 35.00%
2001E Operating Cash
Flow Per Share 74.10% 25.90%
1999E Production 63.10% 36.90%
2000E Production 71.40% 28.60%
2001E Production 74.70% 25.30%
</TABLE>
Discounted Cash Flow Analysis. Deutsche Bank performed a discounted cash
flow analysis for both King Ranch Energy and St. Mary. Deutsche Bank calculated
the discounted cash flow values for each of King Ranch Energy and St. Mary as
the sum of the net present values of:
. the estimated future cash flow that King Ranch or St. Mary will
generate for the period described below, plus
. the value of King Ranch Energy or St. Mary at the end of that
period.
The estimated future cash flows were based on the financial projections for King
Ranch Energy for the years 1999 through 2005 prepared by King Ranch Energy's
management and for St. Mary for the years 1999 through 2004 prepared by St.
Mary's management. The terminal value of
41
<PAGE>
King Ranch Energy was calculated based on projected EBITDAX for 2005 and a range
of multiples of 3.0x, 4.0x, and 5.0x. The terminal value of St. Mary was
calculated based on projected EBITDAX for 2004 and a range of multiples of 4.0x,
5.0x, and 6.0x. Deutsche Bank used discount rates ranging from 10.0% to 14.0%.
Deutsche Bank used discount rates based on its judgment of the estimated
weighted average cost of capital of Selected KRE Comparable Companies and
Selected St. Mary Comparable Companies, and used those multiples based on its
review of the trading characteristics of the common stock of Selected KRE
Comparable Companies and Selected St. Mary Comparable Companies. This analysis
indicated a range of values of $63.0 million to $77.6 million for the King Ranch
Energy depletion case and a range of values of $183.6 million to $371.9 million
for St. Mary.
The foregoing summary describes all analyses and factors that Deutsche Bank
deemed material in its presentation to St. Mary board of directors, but is not a
comprehensive description of all analyses performed and factors considered by
Deutsche Bank in connection with preparing its opinion. The preparation of a
fairness opinion is a complex process involving the application of subjective
business judgment in determining the most appropriate and relevant methods of
financial analysis and the application of those methods to the particular
circumstances and, therefore, is not readily susceptible to summary description.
Deutsche Bank=s analyses must be considered as a whole and considering any
portion of those analyses and of the factors considered without considering all
analyses and factors could create a misleading view of the process underlying
the opinion. In arriving at its fairness determination, Deutsche Bank did not
assign specific weights to any particular analyses.
In conducting its analyses and arriving at its opinions, Deutsche Bank
utilized a variety of generally accepted valuation methods. The analyses were
prepared solely for the purpose of enabling Deutsche Bank to provide its opinion
to the St. Mary board of directors as to the fairness to St. Mary of the share
exchange ratio and does not purport to be appraisals or necessarily reflect the
prices at which businesses or securities actually may be sold, which are
inherently subject to uncertainty. In connection with its analyses, Deutsche
Bank made, and was provided by St. Mary management with, numerous assumptions
with respect to industry performance, general business and economic conditions
and other matters, many of which are beyond St. Mary's or King Ranch Energy's
control. Analyses based on estimates or forecasts of future results are not
necessarily indicative of actual past or future values or results, which may be
significantly more or less favorable than suggested by those analyses. Because
those analyses are inherently subject to uncertainty, being based upon numerous
factors or events beyond the control of St. Mary, King Ranch Energy or their
respective advisors, neither St. Mary nor Deutsche Bank nor any other person
assumes responsibility if future results or actual values are materially
different from these forecasts or assumptions.
The terms of the merger were determined through negotiations between St.
Mary and King Ranch and were approved by the St. Mary board of directors.
Although Deutsche Bank provided advice to St. Mary during the course of these
negotiations, the decision to enter into the
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<PAGE>
merger was solely that of the St. Mary board of directors. As described above,
the opinion and presentation of Deutsche Bank to the St. Mary board of directors
were only one of a number of factors taken into consideration by the St. Mary
board of directors in making its determination to approve the merger. Deutsche
Bank's opinion was provided to the St. Mary board of directors to assist it in
connection with its consideration of the merger and does not constitute a
recommendation to any holder of St. Mary Common Stock as to how to vote with
respect to the merger.
St. Mary originally selected BT Alex. Brown as financial advisor in
connection with the merger based on BT Alex. Brown's qualifications, expertise,
reputation and experience in mergers and acquisitions. St. Mary retained BT
Alex. Brown Incorporated under an engagement letter agreement dated March 11,
1999. Deutsche Bank is the successor to the investment banking and client
advisory businesses of BT Alex. Brown and has assumed BT Alex. Brown's rights
and responsibilities under the engagement letter. As compensation for Deutsche
Bank's services in connection with the merger, St. Mary has paid Deutsche Bank a
cash fee of $175,000 and has agreed to pay an additional cash fee of $675,000 if
the merger is consummated. Regardless of whether the merger is consummated, St.
Mary has agreed to reimburse Deutsche Bank for reasonable fees and disbursements
of Deutsche Bank's counsel and all of Deutsche Bank's reasonable travel and
other out-of-pocket expenses incurred in connection with the merger or otherwise
arising out of the retention of Deutsche Bank under the engagement letter. St.
Mary has also agreed to indemnify Deutsche Bank to the full extent lawful
against liabilities under the federal securities laws arising out of its
engagement or the merger.
Deutsche Bank is an internationally recognized investment banking firm
experienced in providing advice in connection with mergers and acquisitions and
related transactions. Deutsche Bank has previously advised and executed natural
gas hedging transactions for St. Mary. Deutsche Bank and its affiliates may
actively trade securities of St. Mary for their own account or the account of
their customers and, accordingly, may from time to time hold a long or short
position in those securities.
Opinion of King Ranch's Financial Advisor
King Ranch retained Nesbitt Burns to act as its financial advisor with
respect to considering strategic alternatives for King Ranch Energy. On July 27,
1999, the King Ranch board held a meeting to evaluate the proposed merger. At
this meeting Nesbitt Burns rendered its opinion that, as of that date and based
upon and subject to the limitations and assumptions set forth in its opinion,
the consideration to be received by the shareholders of King Ranch in connection
with the merger was fair from a financial point of view to the shareholders of
King Ranch.
The full text of the opinion, which describes, among other things, the
assumptions made, matters considered and qualifications and limitations on the
review undertaken by Nesbitt Burns is attached as Appendix C to this document
and is incorporated in this document by reference. The summary of the fairness
opinion set forth in this document is qualified in its entirety by reference to
the full text of the opinion. The King Ranch
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<PAGE>
shareholders are urged to read Nesbitt Burns' opinion carefully and in its
entirety. The fairness opinion was provided to the King Ranch board and
addresses only the fairness from a financial point of view of the consideration
to be received by the King Ranch shareholders and does not address any other
aspect of the merger or any related transaction and does not constitute a
recommendation to any shareholder as to how to whether to consent to the merger.
In arriving at its opinion, Nesbitt Burns, among other things:
. reviewed publicly available business and financial information
relating to King Ranch, King Ranch Energy and St. Mary as it deemed
appropriate,
. reviewed internal financial and operating information, including
financial forecasts of the respective results of operations of King
Ranch Energy and St. Mary as well as estimates of the expected
operational and financial benefits expected to result from the merger,
prepared and provided by the managements of King Ranch, King Ranch
Energy and St. Mary,
. held discussions with senior officers, directors and other
representatives and advisors of King Ranch, King Ranch Energy and St.
Mary concerning their respective strategic objectives, businesses,
operations, assets, financial condition and prospects before and after
giving effect to the merger and the expected synergies described in
the bullet point set forth above,
. reviewed the reported prices and trading activity for St. Mary common
stock,
. considered, to the extent publicly available, the financial terms of
other similar transactions recently effected which Nesbitt Burns
considered relevant in evaluating the transaction contemplated by the
merger agreement,
. analyzed financial, stock market and other publicly available
information relating to the businesses of other companies whose
operations Nesbitt Burns considered relevant in evaluating those of
King Ranch Energy and St. Mary,
. participated in discussions and negotiations among representatives of
King Ranch, King Ranch Energy and St. Mary and their respective legal
and financial advisors,
. reviewed the draft merger agreement and related agreements, and
. conducted other analyses, inquiries and examinations and considered
other financial, engineering, economic and market criteria as Nesbitt
Burns deemed appropriate in arriving at its opinion.
In rendering its opinion, Nesbitt Burns assumed and relied upon, without
independent verification, the accuracy, fair representation and completeness of
all financial and other information, data, advice, opinions and representations
publicly available or furnished to or
44
<PAGE>
otherwise reviewed by or discussed with Nesbitt Burns and its opinion is
conditioned upon that accuracy, fairness and completeness. With respect to
financial forecasts, the expected synergies and other information provided to or
otherwise reviewed by or discussed with Nesbitt Burns by management of King
Ranch, King Ranch Energy or St. Mary, Nesbitt Burns assumed that they have been
reasonably prepared and reflect the best currently available estimates and
judgment of King Ranch's, King Ranch Energy's or St. Mary's management as to the
expected future financial performance of King Ranch Energy or St. Mary, as the
case may be. Subject to the exercise of professional judgment and except as
expressly described in the fairness opinion, Nesbitt Burns has not assumed any
responsibility or attempted to verify independently the accuracy or completeness
of any that information, data, advice, opinions and representations. Nesbitt
Burns has further assumed that the merger will be accounted for as a purchase
under generally accepted accounting principles and that it will qualify as a
tax-free reorganization for U.S. Federal income tax purposes.
Nesbitt Burns has not made or been provided with an independent
evaluation of the assets or liabilities of King Ranch, King Ranch Energy, or St.
Mary nor did it make any physical inspection of the properties or assets of King
Ranch, King Ranch Energy or St. Mary. The Nesbitt Burns opinion is based upon
the condition and prospects, financial and otherwise, of King Ranch Energy and
St. Mary as they were reflected in the information and documents reviewed by
Nesbitt Burns and as they were represented to Nesbitt Burns in discussions with
management of King Ranch, King Ranch Energy and St. Mary.
For the purpose of rendering the opinion, Nesbitt Burns assumed that
the final form of the transaction documents, including the merger agreement, is
substantially similar to the form in which they were reviewed by Nesbitt Burns
and that in the course of obtaining the necessary regulatory or other consents
or approvals for the merger, no restriction, including any divestiture
requirements or amendments or modifications, will be imposed that will have a
material adverse effect on the contemplated benefits of the merger.
The fairness opinion was necessarily rendered on the basis of
information available, including financial and securities markets, economic and
general business and financial conditions and other conditions and circumstances
existing and disclosed to Nesbitt Burns, as of the date of the opinion.
The fairness opinion does not address the merits of the underlying
decision by King Ranch to engage in the merger and is not intended to be and
does not constitute a recommendation to any stockholder of King Ranch Energy as
to whether that stockholder should consent to the proposed merger or any matter
related thereto. Nesbitt Burns is not expressing any opinion as to the prices at
which the St. Mary common stock will trade following the announcement or
consummation of the Merger.
Analyses of Nesbitt Burns
In performing its analyses, Nesbitt Burns made numerous assumptions
with respect to industry performance, general business, economic, market and
financial conditions and other matters, many of which are beyond the control of
any party involved. Any estimates contained
45
<PAGE>
in the analyses performed by Nesbitt Burns are not necessarily indicative of
actual values or future results, which may be significantly more or less
favorable than suggested by these analyses. Additionally, estimates of the value
of businesses or securities do not purport to be appraisals or to reflect the
prices at which those businesses or securities might actually be sold.
Accordingly, these analyses and estimates are inherently subject to substantial
uncertainty. In addition, the Nesbitt Burns opinion was among several factors
taken into consideration by the King Ranch board in making its determination to
approve the merger agreement and the merger. Consequently, the analyses
described below should not be viewed as determinative of the decision of the
King Ranch board or management of King Ranch with respect to the fairness of the
consideration.
The following is a summary of the material financial analyses presented
by Nesbitt Burns to the King Ranch board on July 27, 1999 in connection with the
rendering of its opinion on that date. The summary below is not a complete
description of the analyses underlying the Nesbitt Burns opinion or the
presentation made by Nesbitt Burns to the King Ranch board, but summarizes the
material analyses performed and presented in connection with its opinion. 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. Therefore, a fairness opinion is not readily susceptible to
partial analysis or summary description. In arriving at its opinion, Nesbitt
Burns did not attribute any particular weight to any analysis or factor that it
considered, but rather made qualitative judgments as to the significance and
relevance of each analysis and factor. Accordingly, Nesbitt Burns believes that
its analyses and the summary of its analyses must be considered as a whole and
that selecting portions of its analyses and factors focusing on the information
presented below in tabular format, without considering all analyses and factors
or the full narrative description of the financial analyses, including the
methodologies and assumptions underlying the analyses, could create a misleading
or incomplete view of the process underlying its analyses and opinion. The
tables alone do not constitute a complete description of the financial analyses.
Analysis of Selected Asset Acquisition Transactions. In order to
approximate the value of King Ranch Energy, Nesbitt Burns reviewed publicly
available information for eighteen asset acquisitions that had been announced
between April 1998 and July 1999. Each transaction involved primarily Gulf Coast
oil and gas properties and the value of each transaction was below $250 million.
The following transactions were reviewed:
. Mitchell Energy & Development Corp./Occidental Petroleum Corp.,
. Union Pacific Resources Group Inc./Occidental Petroleum Corp.,
. Swift Energy Company/Sonat Inc.,
. Enron Oil & Gas Co./Union Pacific Resources Group Inc.,
. Collins & Ware Inc./Union Pacific Resources Group Inc.,
46
<PAGE>
. Chancellor Group, Inc./Union Pacific Resources Group Inc.,
. Clayton Williams Energy, Inc./Sonat Inc.,
. Samson Investment Co./Nuevo Energy Company,
. The Houston Exploration Company/Chevron Corp.,
. EnerVest Management Co. L.C./Coho Energy, Inc.,
. Canadian Occidental Petroleum Ltd./Royal Dutch and Shell Group,
. Castle Energy Corp./United Energy plc,
. Coastal Corp./Titan Exploration, Inc.,
. Coastal Corp./undisclosed seller,
. Louis Dreyfus Natural Gas Corp./undisclosed seller,
. Phillips Petroleum Co./Kelley Oil & Gas Corp.,
. Prize Energy Corp./Pioneer Natural Resources Co., and
. undisclosed seller/MCN Energy Group Inc.
In each case above the first-named company is the acquiror and the second-named
company is the seller of the assets. Nesbitt Burns considered the assets
transferred in these transactions to be similar, but not identical, to the
assets of King Ranch Energy.
For each of these transactions Nesbitt Burns derived the implied value
per thousand cubic feet equivalent ("MCFE") of proved reserves, using a 6.0 MCF
of natural gas to 1.0 barrel of oil conversion ratio as of the completion date
of each transaction. The weighted average of the implied reserve values per MCFE
for the eighteen transactions was determined by dividing the sum of proved
reserves sold in each of these transactions by the sum of the values attributed
to the reserves in each transaction. Nesbitt Burns applied the multiples of
equivalent reserves to King Ranch Energy's proved reserves of 65 billion cubic
feet equivalent ("BCFE"), which reflect King Ranch Energy's proved reserves as
of December 31, 1998 of 52 BCFE plus the subsequent acquisition in February 1999
of proved reserves of 13 BCFE attributable to the Flour Bluff field. These
reserves were determined by third party engineers for purposes of the merger
analysis. Nesbitt Burns determined an asset reference value range implied by
these multiples. After deducting current obligations of King Ranch Energy and
due diligence value adjustments to King Ranch Energy of $11.8 million and $4.0
million, respectively, and adding current assets of King Ranch Energy of $10.9
million, the indicated equity reference value range of King Ranch Energy was
$23.8 million to $84.6 million. The following table shows the low, high and
weighted
47
<PAGE>
average implied reserve values per MCFE of these transactions and the
implied equity value of King Ranch Energy derived therefrom:
________________________________________________________________________________
Implied Value per MCFE Implied King Ranch Energy Equity
of Proved Reserves Value (in $ millions)
- --------------------------------------------------------------------------------
Low $0.44 23.8
- --------------------------------------------------------------------------------
Weighted Average $0.73 42.7
- --------------------------------------------------------------------------------
High $1.37 84.6
- --------------------------------------------------------------------------------
St. Mary Offer $0.89 61.2
- --------------------------------------------------------------------------------
Analysis of Selected Corporate Transactions. In order to approximate
the value of King Ranch Energy, Nesbitt Burns also reviewed publicly available
information for nine change of control transactions that had been announced
between April 1996 and July 1999. Each transaction involved oil and gas
companies with substantial interests in the Gulf Coast and the value of each
transaction was below $200 million. The following transactions were reviewed:
. Burlington Resources Inc./Gulfstream Resources,
. Forcenergy Inc./ Great Western Resources,
. Domain Energy Corp./ El Paso Natural Gas Co.,
. Alliance Resources plc/LaTex Resources Inc.,
. Forcenergy Inc./ Convest Energy Corp. and Edisto Resources Corp.,
. PANACO, Inc./ Goldking Companies, Inc.,
. Seagull Energy Corp./BRG Petroleum Inc.,
. Texoil, Inc./Cliffwood Oil & Gas Corp., and
. Energen Corporation and Westport Oil and Gas/ TOTAL S.A.
In each case above the first-named company is the acquiror and the second-named
company is the acquired company or parent of the acquired corporate entity.
Nesbitt Burns considered these transactions to be similar to the merger but none
of these transactions are identical to the merger.
For each of these transactions Nesbitt Burns derived the implied
reserve values per MCFE as of the completion date of each transaction. The
weighted average of the implied reserve values per MCFE for the nine
transactions was determined by dividing the sum of proved reserves of the target
by the sum of value attributed to the reserves in each transaction. Nesbitt
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<PAGE>
Burns applied the multiples of equivalent reserves to King Ranch Energy's proved
reserves of 65 BCFE, which reflect King Ranch Energy's proved reserves as of
December 31, 1998 of 52 BCFE plus the subsequent acquisition in February 1999 of
proved reserves of 13 BCFE attributable to the Flour Bluff field. These reserves
were determined by third party engineers for purposes of the merger analysis.
Nesbitt Burns determined an asset reference value range implied by these
multiples. After deducting current obligations of King Ranch Energy and due
diligence value adjustments to King Ranch Energy of $11.8 million and $4.0
million, respectively, and adding current assets of King Ranch Energy of $10.9
million, the indicated equity reference value range of King Ranch Energy was
$21.8 million to $83.3 million. The following table shows the low, high and
weighted average implied value per unit of proved reserves of these transactions
and the implied equity value of King Ranch Energy derived therefrom:
________________________________________________________________________________
Implied Value per MCFE Implied King Ranch Energy Equity
of Proved Reserves Value (in $ millions)
- --------------------------------------------------------------------------------
Low $0.41 21.8
- --------------------------------------------------------------------------------
Weighted Average $0.87 51.9
- --------------------------------------------------------------------------------
High $1.35 83.3
- --------------------------------------------------------------------------------
St. Mary Offer $0.89 61.2
- --------------------------------------------------------------------------------
Comparable Company Analysis - King Ranch Energy. Nesbitt Burns compared
selected operating results of King Ranch Energy to the publicly available
corresponding data for the following companies that Nesbitt Burns determined
were comparable to King Ranch Energy based on their size, location and nature of
operations:
. Bellwether Exploration Co. . Newfield Exploration Co.
. Callon Petroleum Corp. . PANACO Inc.
. Chieftan International . Stone Energy Corp.
. Meridian Resource Corp. . Swift Energy Co.
. Edge Petroleum Corp.
Nesbitt Burns calculated and analyzed ratios based on relevant
historical publicly available data and upon projected financial criteria as
published by independent third-party equity research analysts. The following
ratios were determined:
. Enterprise value/LTM EBITDAX,
. Enterprise value/1999 estimated EBITDAX,
. Enterprise value/MCFE (proved SEC reserves as of 12/31/98),
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. Enterprise value/SEC-10 (based on proved reserves as of 12/31/98),
. Price/1999 estimated cash flow, and
. Price/2000 estimated cash flow.
For purposes of this section, "LTM EBITDAX" means the latest twelve
months of earnings before deducting interest income and expense, income taxes,
depreciation, depletion, amortization, and exploration expenses; and ASEC-10"
means future after-tax cash flows of proved reserves determined by year-end
commodity prices, operating expenses and development costs discounted at 10%.
Some multiples were adjusted based on Nesbitt Burns' market research to account
for King Ranch Energy's industry-low reserve life index.
Nesbitt Burns applied appropriate benchmark multiples to King Ranch
Energy's LTM and 1999 estimated EBITDAX, year-end SEC proved reserves, SEC-10
value and 1999 and 2000 estimated cash flow. Nesbitt Burns determined an asset
reference value range for King Ranch Energy implied by these multiples. After
deducting current obligations of King Ranch Energy and due diligence value
adjustments to King Ranch Energy of $11.8 million and $4.0 million,
respectively, and adding current assets of King Ranch Energy of $10.9 million,
the indicated equity reference value range of King Ranch Energy was $10.0
million to $203.1 million. The St. Mary offer represented a value of $61.2
million. The following table shows the low, mean and high implied equity value
of King Ranch Energy for each of the above ratios based on the nine comparable
companies :
Implied King Ranch Energy Equity Value (in $ millions)
______________________________________________________________________________
EV/LTM EV/1999E
EBITDAX EBITDAX EV/MCFE EV/SEC-10 P/CF 1999E P/CF 2000E
- ------------------------------------------------------------------------------
Low 55.2 54.9 50.3 62.0 27.0 10.0
- ------------------------------------------------------------------------------
Mean 83.2 68.8 88.0 91.2 123.5 59.1
- ------------------------------------------------------------------------------
High 111.3 82.8 137.6 135.5 203.1 91.3
- ------------------------------------------------------------------------------
Comparable Company Analysis - St. Mary. Nesbitt Burns compared selected
operating results of St. Mary to the publicly available corresponding data for
the following companies that Nesbitt Burns determined were comparable to St.
Mary based on their size, location and nature of operations:
. Bellwether Exploration Co. . Titan Exploration Inc.
. Callon Petroleum Corp. . Tom Brown Inc.
. Basin Exploration Inc. . Stone Energy Corp.
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<PAGE>
. Comstock Resources Inc.
. Swift Energy Co.
. Key Production Company
Nesbitt Burns calculated and analyzed the same ratios for St. Mary and
these nine companies based on relevant historical publicly available data and
upon projected financial criteria as published by independent third-party equity
research analysts.
Nesbitt Burns applied these benchmark multiples to St. Mary's LTM and 1999
estimated EBITDAX, year-end SEC proved reserves, SEC-10 value and 1999 and 2000
estimated cash flow. Nesbitt Burns determined an asset reference value range
implied by these multiples. After deducting current and long-term obligations
$41.7 million and adding current and other assets of St. Mary and due diligence
adjustments to St. Mary of $42.4 million and $12.4 million, respectively, the
indicated equity reference value range of St. Mary was $8.28 to $44.00 per
share. The closing price for St. Mary common stock on July 26, 1999 was $22.94
per share. The following table shows the low, mean and high implied equity value
of St. Mary for each of the ratios based on the nine comparable companies on an
aggregate and per share basis:
Implied St. Mary Equity Value (in $ millions)
- --------------------------------------------------------------------------------
EV/LTM EV/1999E EV/SEC- P/CF P/CF
EBITDAX EBITDAX EV/MCFE 10 1999E 2000E
- --------------------------------------------------------------------------------
Low 197.5 196.4 92.0 103.0 107.0 116.4
- --------------------------------------------------------------------------------
Mean 343.2 301.7 235.9 177.7 234.8 266.1
- --------------------------------------------------------------------------------
High 488.6 413.6 432.9 313.3 400.4 481.1
- --------------------------------------------------------------------------------
Implied St. Mary Equity Value per Share
- --------------------------------------------------------------------------------
EV/LTM EV/1999E EV/SEC- P/CF P/CF
EBITDAX EBITDAX EV/MCFE 10 1999E 2000E
- --------------------------------------------------------------------------------
Low $17.78 $17.69 $ 8.28 $ 9.28 $ 9.64 $10.48
- --------------------------------------------------------------------------------
Mean $30.91 $27.17 $21.25 $16.00 $21.15 $23.97
- --------------------------------------------------------------------------------
High $44.00 $37.25 $38.99 $28.22 $36.06 $43.33
- --------------------------------------------------------------------------------
Comparable Company Analysis - King Ranch Energy Pro Forma. The above equity
values for each company indicated the following range of implied King Ranch
Energy pro forma ownership in St. Mary. The King Ranch Energy pro forma
ownership in St. Mary based on the St. Mary offer was 19.4%.
Pro Forma Ownership
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- --------------------------------------------------------------------------------
EV/LTM EV/1999E EV/SEC- P/CF P/CF
EBITDAX EBITDAX EV/MCFE 10 1999E 2000E
- --------------------------------------------------------------------------------
Low 18.6% 16.7% 24.1% 30.2% 20.1% 7.9%
- --------------------------------------------------------------------------------
Mean 19.5% 18.6% 27.2% 33.9% 34.5% 18.2%
- --------------------------------------------------------------------------------
High 21.8% 21.8% 35.3% 37.6% 33.6% 15.9%
- --------------------------------------------------------------------------------
Discounted Cash Flow Analysis - King Ranch Energy. Nesbitt Burns conducted
a discounted cash flow analysis for the purpose of determining the equity
reference value range of King Ranch Energy. Nesbitt Burns calculated the net
present value of estimates of future after-tax cash flows through 2014 for King
Ranch Energy's oil and gas reserve assets based on reserve estimates by
independent engineers.
Nesbitt Burns evaluated two scenarios in which the principal variables were
oil and gas prices. The two pricing scenarios were based on benchmarks for spot
sales of West Texas Intermediate crude oil and for spot price sales of Henry Hub
gas ("Pricing Case I" and "Pricing Case II"). Nesbitt Burns applied appropriate
quality and transportation adjustments to these benchmarks. Benchmark oil prices
for Pricing Cases I and II were projected to be $17.00 and $19.00 per barrel,
respectively, for 1999 and were escalated annually thereafter at the rate of
3.0%. Benchmark gas prices for Pricing Cases I and II were projected to be $2.20
and $2.40 per MCFE, respectively, for 1999 and were escalated annually
thereafter at the rate of 3.0%. Operating and capital costs were escalated at
3.0% per year after 1999. The discount rates ranged from 8 to 12 percent.
Assuming a carry-over of King Ranch Energy's existing tax positions, and
applying reserve and capital spending risk factors ranging from 100% to 35%,
depending on reserve category, the discounted cash flow analysis indicated a
range of asset reference values. After deducting current obligations of King
Ranch Energy and due diligence value adjustments to King Ranch Energy of $11.8
million and $4.0 million, respectively, and adding current assets of King Ranch
Energy of $10.9 million, the indicated equity reference value ranges of King
Ranch Energy were $48.5 million to $54.6 million for Pricing Case I and $55.6
million to $62.9 million for Pricing Case II. The St. Mary offer represented a
value of $61.2 million.
Implied King Ranch Energy Equity Value (in $ millions)
- -----------------------------------------------------------------------
Discount Rate 8% 9% 10% 11% 12%
- -----------------------------------------------------------------------
Pricing Case I 54.6 52.9 51.3 49.8 48.5
- -----------------------------------------------------------------------
Pricing Case II 62.9 60.9 59.0 57.2 55.6
- -----------------------------------------------------------------------
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<PAGE>
Discounted Cash Flow Analysis - St. Mary. Nesbitt Burns conducted a
discounted cash flow analysis for the purpose of determining the equity
reference value range of St. Mary. Nesbitt Burns calculated the net present
value of estimates of future after-tax cash flows for St. Mary's oil and gas
reserve assets based on reserve estimates by independent engineers as well as
the estimated after-tax cash flows derived from reserves added by St. Mary's
projected capital spending program.
Nesbitt Burns evaluated two scenarios using the same variables and
benchmarks as under the King Ranch Energy analysis. Assuming a carry-over of St.
Mary's existing tax positions, applying reserve and capital spending risk
factors ranging from 100% to 35%, depending on reserve category, and applying a
terminal value of 5 times 2004 discretionary cash flow, the discounted cash flow
analysis indicated a range of asset reference values. After deducting current
and long-term obligations $41.7 million and adding current and other assets of
St. Mary and due diligence adjustments to St. Mary of $42.4 million and $12.4
million, respectively, the indicated equity reference value ranges of St. Mary
were $245.8 million to $300.2 million for pricing case I, $314.6 million to
$379.8 million for Pricing Case II, $22.14 to $27.03 per share for Pricing Case
I and $28.33 to $34.20 per share for Pricing Case II. The closing price for St.
Mary common stock on July 26, 1999 was $22.94 per share.
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<PAGE>
Implied Equity Value of St. Mary (in $ millions)
- ------------------------------------------------------------------------
Discount Rate 8% 9% 10% 11% 12%
- ------------------------------------------------------------------------
Pricing Case I 300.2 285.4 271.5 258.3 245.8
- ------------------------------------------------------------------------
Pricing Case II 379.8 362.1 345.4 329.5 314.6
- ------------------------------------------------------------------------
Implied Equity Value of St. Mary per Share
- ------------------------------------------------------------------------
Discount Rate 8% 9% 10% 11% 12%
- ------------------------------------------------------------------------
Pricing Case I 27.03 25.70 24.45 23.26 22.14
- ------------------------------------------------------------------------
Pricing Case II 34.20 32.61 31.10 29.68 28.33
- ------------------------------------------------------------------------
Discounted Cash Flow Analysis - King Ranch Energy Pro Forma. The above
equity values for each company indicated the following range of implied King
Ranch Energy pro forma ownership in St. Mary. The King Ranch Energy pro forma
ownership in St. Mary based on the St. Mary offer was 19.4%.
Pro Forma Ownership
- ------------------------------------------------------------------------
Discount Rate 8% 9% 10% 11% 12%
- ------------------------------------------------------------------------
Pricing Case I 15.4% 15.6% 15.9% 16.2% 16.5%
- ------------------------------------------------------------------------
Pricing Case II 14.2% 14.4% 14.6% 14.8% 15.0%
- ------------------------------------------------------------------------
Pro Forma Accretion/Dilution Analysis. Nesbitt Burns analyzed some pro
forma effects which could result from the mergers based on discussions with the
management of King Ranch and St. Mary. This analysis indicated that the merger
is expected to be dilutive to the forecasted cash flow and earnings per share to
King Ranch Energy in 1999 and, to a lesser extent, 2000 but accretive to the
forecasted cash flow and earnings per share of St. Mary in the same period.
* * * * *
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<PAGE>
King Ranch retained Nesbitt Burns based upon its experience and expertise.
Nesbitt Burns is an internationally recognized investment banking and advisory
firm. As part of its investment banking business, Nesbitt Burns is regularly
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 estate, corporate and other purposes.
In the ordinary course of its business, Nesbitt Burns and some of its
affiliates may actively trade the securities of St. Mary for their account or
for the account of its customers and, accordingly, may at any time hold a long
or short position in those securities. Nesbitt Burns has in the past provided
financial advisory and investment banking services to King Ranch and may
continue to do so and have received, and may receive, compensation for the
rendering of those services.
Nesbitt Burns has been engaged to act as financial advisor to King Ranch in
connection with the merger and will receive a fee from King Ranch for their
services, a significant portion of which is contingent on the consummation of
the merger. King Ranch also agreed to indemnify Nesbitt Burns for some
liabilities in connection with its engagement.
Comparison of King Ranch and St. Mary Stockholder Rights
King Ranch is a Texas corporation and St. Mary and King Ranch Energy are
Delaware corporations. Because King Ranch Energy is a subsidiary of King Ranch,
at the present time the rights of King Ranch stockholders to their proportionate
interests in King Ranch Energy result from their rights as King Ranch
stockholders. The rights of King Ranch stockholders under the King Ranch
articles of incorporation and bylaws with respect to their proportionate
interests in King Ranch Energy before the merger and before the distribution to
them of the King Ranch Energy Shares are substantially similar to the rights
that they will have under the St. Mary certificate of incorporation and bylaws
and the Nasdaq Stock Market corporate governance rules with respect to the
shares of St. Mary common stock to be issued to them in the merger.
Material differences between King Ranch and St. Mary stockholder rights are
summarized in the following chart. Copies of the King Ranch articles of
incorporation and bylaws, King Ranch Energy certificate of incorporation and
bylaws, and the St. Mary certificate of incorporation and bylaws are filed with
the SEC as exhibits to the registration statement related to this document and
will be sent to King Ranch stockholders upon request. See "Where You Can Find
More Information" on page 98. The summary in the following chart is not intended
to be complete and is qualified by reference to Texas law, Delaware law, the
Nasdaq Stock Market corporate governance rules, the King Ranch articles of
incorporation and bylaws, the King Ranch Energy certificate of incorporation and
bylaws, and the St. Mary certificate of incorporation and bylaws.
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<PAGE>
King Ranch Stockholder Rights St. Mary Stockholder Rights
General Corporate Governance
The rights of King Ranch stockholders The rights of St. Mary stockholders
are governed by Texas law and the are currently governed by Delaware
King Ranch articles of incorporation law, the St. Mary certificate of
and bylaws. Upon completion of the incorporation and bylaws and the
merger, the rights of King Ranch Nasdaq Stock Market corporate
stockholders with respect to the governance rules.
shares of St. Mary common stock
issued to them in the merger after
the distribution to them of the King
Ranch Energy shares will be governed
by Delaware law, the St. Mary
certificate of incorporation and
bylaws and the Nasdaq Stock Market
corporate governance rules.
Authorized Capital Stock
The King Ranch articles of The St. Mary certificate of
incorporation authorize King Ranch incorporation authorizes St. Mary
to issue up to 228,075 shares of 5% to issue up to 50,000,000 shares
Cumulative Preferred Stock, 42,938 of common stock.
shares of Class A Common Stock, and
544,320 shares of Class B Common
Stock.
Number of Directors
The King Ranch bylaws provide that The St. Mary bylaws provide that
the number of directors may be the number of directors may be
designated by the King Ranch board determined by the St. Mary board of
of directors. King Ranch currently directors, but there must be at
has nine directors. least 3 directors. The St. Mary board
of directors currently consists of
nine directors. If the merger is
completed, Jack Hunt and William
Gardiner will be appointed to the
St. Mary board of directors for a
total of eleven directors. The Nasdaq
Stock Market requires that St. Mary
have at least two independent
directors. St. Mary currently has six
independent directors. If the merger
is completed and Mr. Hunt and Mr.
Gardiner are appointed to the St.
Mary board of directors, St. Mary
have eight independent directors.
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<PAGE>
King Ranch Stockholder Rights St. Mary Stockholder Rights
Quorum to Hold a Stockholder Meeting
The King Ranch bylaws provide that The St. Mary bylaws provide that the
the presence at a meeting in person presence at a meeting in person or by
or by proxy of the holders of a proxy of the holders of one-third of
majority of the shares of the King the shares of St. Mary common stock
Ranch common stock entitled to vote entitled to vote at the meeting is a
at the meeting is a quorum. quorum.
Stockholder Approval Without A Meeting
Under Texas law, stockholder approval Under Delaware law, stockholder
of a matter may be obtained without a approval of a matter may be obtained
meeting only by the unanimous written without a meeting by the written
consent of all stockholders, unless consent of the holders of outstanding
the articles of incorporation provide stock representing the number of shares
otherwise. The King Ranch articles of necessary to approve that matter if a
incorporation do not provide otherwise. meeting were held at which all shares
entitled to vote were present and
voted.
Special Meetings of Stockholders
Under Texas law and King Ranch's The St. Mary bylaws provide that
articles of incorporation, special special meetings of stockholders can
meetings of stockholders can be called be called on the request of:
on the request of:
. two directors, or
. the president of the
corporation, . the holders of a majority of
common stock.
. the board of directors,
. a person that is authorized in
the King Ranch articles of
incorporation or bylaws, or
. the holders of at least 20% of
the shares entitled to vote at
the proposed meeting.
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<PAGE>
King Ranch Stockholder Rights St. Mary Stockholder Rights
Amendments to Articles of
Certificate of Incorporation
Under the King Ranch articles of Under Delaware law, an amendment to
incorporation, an amendment to the the certificate of incorporation
articles of incorporation requires requires the approval of the holders
the approval of the holders of at of at least a majority of the
least two-thirds of the outstanding outstanding shares entitled to vote.
Class A Common Stock.
Limitation of Director Liability
The King Ranch articles of The St. Mary certificate of
incorporation provide that a director incorporation provides that no
of King Ranch will not be personally director of St. Mary will be liable
liable to King Ranch or its to St. Mary or its stockholders for
stockholders for monetary damages for breach of fiduciary duty as a
any act or omission in his capacity director except for:
as a director, except to the extent
otherwise expressly provided by . a breach of the duty of loyalty
Texas statute. to St. Mary or its stockholders,
. acts in bad faith or which
involve intentional misconduct
or a knowing violation of law,
. authorizing unlawful dividend
payments, or
. any transaction where the
director derived an improper
personal benefit.
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<PAGE>
King Ranch Stockholder Rights St. Mary Stockholder Rights
Removal of Directors
Under the King Ranch articles of Under Delaware law, any St. Mary
incorporation, any director(s) or director or the entire board of
the entire board of directors may directors may be removed, with or
be removed, with or without cause, without cause, by the holders of a
at any shareholder meeting called majority of the shares entitled to
expressly for that purpose. vote at an election of directors.
Stockholder Approval of Mergers and
Similar Transactions
Under Texas law, the merger of a Under Delaware law, the merger of a
corporation or a similar transaction corporation or similar transaction
must generally be approved by the must generally be approved by the
holders of at least two-thirds of the holders of at least a majority of all
outstanding shares or class or series outstanding shares entitled to vote.
of shares entitled to vote, unless
the corporation's articles of
incorporation provide otherwise.
Appraisal Rights
Under Texas law, stockholders which Under Delaware law, appraisal rights
dissent to a merger of their in connection with a merger are not
corporation have the right to obtain available for holders of qualifying
in cash the appraised fair value of national market system securities,
their shares in lieu of the subject to exceptions. Since St. Mary
consideration be received in the common stock is quoted on the Nasdaq
merger, subject to exceptions. National Market System, appraisal
rights are generally not available
to St. Mary stockholders.
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<PAGE>
King Ranch Stockholder Rights St. Mary Stockholder Rights
Nasdaq Stockholder Approval Rules
King Ranch is not subject to the The Nasdaq Stock Market requires
Nasdaq stockholder approval rules St. Mary to obtain stockholder
applicable to St. Mary as discussed approval for the following items:
in the right column.
. a stock option or purchase
plan under which stock may
be acquired by officers or
directors,
. the issuance of stock which
will result in a change in
control of St. Mary,
. the issuance of stock for
the acquisition of stock or
assets of another company
where either:
. a director, officer or
substantial stockholder has
a 5% or more interest in the
company or assets to be
acquired and the issuance of
stock could increase the
outstanding common shares or
voting power of St. Mary by
5% or more, or
. the issuance of stock could
increase the outstanding
common shares or voting
power of St. Mary by 20%
or more.
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<PAGE>
King Ranch Stockholder Rights St. Mary Stockholder Rights
Anti-Takeover Statutes
Texas has not enacted any specific Under the Delaware anti-takeover
anti-takeover statutes, which statute, a person becomes an
typically apply to publicly traded "interested stockholder" subject to
companies. a three-year takeover moratorium
once that person acquires 15% or
Since King Ranch Energy is a privately more of a Delaware corporation. A
held company it does not qualify for qualifying publicly held corporation
the three-year moratorium on takeover cannot enter into a merger or similar
transactions under the Delaware transaction with an interested
anti-takeover statute applicable to stockholder for a period of three
St. Mary as discussed in the right years after that person became an
column. interested stockholder unless:
. the board of directors
approved the acquisition of
stock or the merger
transaction before the
person became an interested
stockholder,
. the person owned at least
85% of the stock of the
corporation at the time the
person became an interested
stockholder, or
. the merger transaction is
approved by the board of
directors and the holders
of two-thirds of the stock
which is not owned by the
interested stockholder.
These provisions have the effect of
discouraging hostile takeovers of
publicly held Delaware corporations
such as St. Mary, even if the
acquisition would be at a premium to
the current market price.
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<PAGE>
King Ranch Stockholder Rights St. Mary Stockholder Rights
Shareholder Rights Plan
King Ranch Energy does not have a St. Mary adopted a shareholder rights
shareholder rights plan. plan in July 1999, under which St.
Mary has issued to its stockholders
rights to purchase from St. Mary
shares of common stock if there is a
potential takeover transaction not
approved by the St. Mary board of
directors. The merger and the related
agreements and transactions with
King Ranch Energy do not trigger the
St. Mary shareholder rights plan since
the St. Mary board of directors has
approved the merger.
The shareholder rights plan makes it
more difficult for a third party to
acquire St. Mary without approval of
the board of directors, even if the
acquisition would be at a premium to
the current market price.
Accounting Treatment
St. Mary and King Ranch Energy expect that the merger will be accounted
for using the purchase method of accounting for business combinations. Under the
purchase accounting method, the merger will be treated as an acquisition of King
Ranch Energy by St. Mary, and St. Mary will allocate the total acquisition cost
among the acquired assets and liabilities based on their fair values as of the
date the merger is completed. St. Mary's total acquisition cost will reflect a
discount to the publicly traded market price of the St. Mary common stock to be
issued in the merger, as determined at the time of the announcement of the
merger. The discount is attributable to the number of shares to be issued in
comparison to the historical trading volumes of St. Mary stock and the fact that
resale of that stock will generally not be permitted until March 31, 2001. The
reported income of St. Mary will include the operations of King Ranch Energy
after the merger, based on the cost of the acquisition to St. Mary. See
"Unaudited Pro Forma Condensed Combined Financial Statements".
Material Federal Income Tax Consequences
The following is a summary based on the opinions of Locke Liddell &
Sapp LLP and Ernst & Young LLP as to the material U.S. Federal income tax
consequences of the distribution of the stock of King Ranch Energy and the
merger of St. Mary Energy Company into King Ranch Energy to the King Ranch
stockholders, who hold the shares of King Ranch Energy common stock as a capital
asset. This summary is also based on the Internal Revenue Code of
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<PAGE>
1986, as amended, the corresponding Treasury Regulations, administrative
rulings, and court decisions, all as in effect as of the date hereof and all of
which are subject to change at any time, possibly with retroactive effect. This
summary is not a complete description of all the tax consequences of the
distribution of the stock of King Ranch Energy to the King Ranch stockholders
and the subsequent merger and, in particular, does not address U.S. Federal
income tax considerations applicable to stockholders subject to special
treatment under U.S. Federal income tax law, which would include, for example,
non-U.S. persons, financial institutions, dealers in securities, insurance
companies, tax-exempt entities, and stockholders who are subject to the
alternative minimum tax provisions of the Internal Revenue Code of 1986, as
amended. In addition, no information is provided with respect to the tax
consequences of the distribution of the stock of King Ranch Energy or the
subsequent merger under applicable foreign, state or local laws.
Holders of King Ranch stock are urged to consult with their own tax
advisors regarding the Federal income and other tax consequences of the
distribution of the King Ranch Energy stock to the King Ranch stockholders and
the subsequent merger to them, including the effects of state, local and foreign
tax laws.
Opinion of Counsel
Although King Ranch and King Ranch Energy have received opinions from
Locke Liddell & Sapp LLP and Ernst & Young LLP regarding the tax consequences of
the stock distribution, the obligation of King Ranch, King Ranch Energy, St.
Mary and St. Mary Energy Company to effect the merger is conditioned upon, among
other things, the confirmation of the opinions of Locke Liddell & Sapp LLP and
Ernst & Young LLP, each dated as of the date of the distribution of the stock of
King Ranch Energy and the subsequent merger. Based on the facts, representations
and assumptions set forth in their respective written opinions, both Locke
Liddell & Sapp LLP and Ernst & Young LLP have stated their opinion that the
stock distribution should not be taxable to the stockholders of King Ranch.
Furthermore, based on the facts, representations and assumptions set forth in
its written opinion, including the assumption that the stock distribution is not
taxable to King Ranch stockholders, Locke Liddell & Sapp LLP has stated its
opinion that the merger will qualify as a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code of 1986, as amended.
An opinion of counsel is not binding on the Internal Revenue Service or
the courts, and no assurance can be given that the Internal Revenue Service will
not challenge the tax treatment of the distribution of the stock of King Ranch
Energy to the stockholders of King Ranch or the subsequent merger. Further, the
opinions of Locke Liddell & Sapp LLP and Ernst & Young LLP are dependent upon
future events, such as St. Mary and St. Mary Energy Company continuing to own
and conduct the historic business of King Ranch Energy after the merger, the
result of which will not be reviewed by counsel. King Ranch, King Ranch Energy,
St. Mary and St. Mary Energy Company have represented to Locke Liddell & Sapp
LLP that they are not currently aware of any facts or circumstances that will
cause the representations that they have made to counsel to be untrue or
incorrect in any material respect.
The Federal Tax Consequences of the King Ranch Energy Stock Distribution
Neither King Ranch nor King Ranch Energy has received a ruling from the
Internal Revenue Service that the distribution of the stock of King Ranch Energy
to the King Ranch stockholders will qualify as a tax-free distribution to the
stockholders of King Ranch under
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<PAGE>
Section 355(a) of the Code nor will a ruling be requested. There are several
factors which are material to the determination regarding the tax consequences
of the stock distribution. These factors include:
. King Ranch must control King Ranch Energy before the stock
distribution;
. King Ranch must distribute an amount of stock in King Ranch
Energy which constitutes control;
. King Ranch and King Ranch Energy must both be engaged in the
active conduct of a trade or business immediately after the
stock distribution and such trade or business must have been
actively conducted throughout the five year period ending on
the date of the stock distribution;
. The stock distribution must not have been used principally as
a device for the distribution of the earnings and profits of
King Ranch or King Ranch Energy;
. The King Ranch stockholders must retain a continuity of
interest in the stock of King Ranch Energy;
. There must be a continuity of business enterprise of King
Ranch Energy after the stock distribution; and
. The stock distribution must have a bona fide corporate
business purpose for such stock distribution.
In order for the stock distribution to be non-taxable to the King Ranch
stockholders, all of the factors must be satisfied. If any one of these factors
is not satisfied, the stock distribution will be taxable.
Each of the above stated factors was reviewed by Locke Liddell & Sapp
LLP and Ernst & Young LLP, and was analyzed based on facts related to the stock
distribution. To support this analysis, King Ranch, King Ranch Energy, St. Mary
and St. Mary Energy Company made specific representations to Locke Liddell &
Sapp LLP and Ernst & Young LLP with respect to factual matters as well as
customary statements relating to technical requirements under the Internal
Revenue Code of 1986, as amended. While these factual representations were
relied upon by Locke Liddell & Sapp LLP and Ernst & Young LLP in applying the
factors regarding the tax consequences of the stock distribution, this analysis
involves a determination of the effects of the represented facts and
circumstances. Neither the factual representations made by King Ranch, King
Ranch Energy, St. Mary and St. Mary Energy Company nor the analysis used in
applying the factors is binding on the Internal Revenue Service or any court.
Moreover, there can be no assurance that this analysis or the determination of
the effects of the represented facts and circumstances made by Locke Liddell &
Sapp LLP and Ernst & Young LLP will be accepted by the Internal Revenue Service
or by any court. For example, the Internal Revenue Service has not published any
guidance as to whether the specific facts surrounding the stock distribution
would constitute a "bona fide corporate business purpose," or a device for the
distribution of the earnings and profits of King Ranch Energy, which makes it
difficult to predict with certainty how the Internal Revenue Service or any
court will interpret these factors.
It is also important to note that at least three of the above listed
factors relate to future actions of the parties. These three factors are that
King Ranch and King Ranch Energy must be both be engaged in the active conduct
of a trade or business immediately after the stock distribution, that the King
Ranch stockholders must retain a continuity of interest in the stock of King
Ranch Energy, and that there must be a continuity of business enterprise of King
Ranch Energy after the stock distribution. While Locke Liddell & Sapp LLP and
Ernst & Young LLP have relied on the factual representations regarding such
future actions, there is always a risk that subsequent actions by the parties
will deviate from such representations.
For the reasons stated above, Locke Liddell & Sapp LLP and Ernst &
Young LLP have opined that the stock distribution "should" not be taxable to the
stockholders of King Ranch. It should be noted that a "should" opinion does not
carry the same weight as an opinion which states that the stock distribution
"will" not be taxable to the stockholders of King Ranch.
Based upon the opinions of Locke Liddell & Sapp LLP and Ernst & Young
LLP, King Ranch believes that the distribution of the stock of King Ranch Energy
to the King Ranch stockholders will have the following effects:
. The King Ranch stockholders should recognize no gain, loss or
income as a result of the receipt of the King Ranch Energy
stock;
. The aggregate adjusted tax basis of the King Ranch Energy
stock and King Ranch stock in the hands of each King Ranch
stockholder will be the same as the adjusted tax basis of the
King Ranch stock held by that King Ranch stockholder
immediately before the distribution of the King Ranch Energy
stock and will be allocated in proportion to the respective
fair market values of the King Ranch Energy stock and King
Ranch stock owned by that King Ranch stockholder calculated on
a separate basis for blocks of King Ranch stock that were
purchased at different times or for different prices, and
. The holding period of the King Ranch Energy stock received
from King Ranch by a King Ranch stockholder will include the
holding period of the King Ranch stock held by that King Ranch
stockholder immediately before the King Ranch Energy stock, if
that King Ranch stockholder held the King Ranch stock as a
capital asset on the date of the distribution of the King
Ranch Energy stock.
As a result of the distribution of the stock of King Ranch Energy to
the King Ranch stockholders and the subsequent merger, King Ranch will be
required under Section 355(e) of the Internal Revenue Code of 1986, as amended,
to recognize taxable gain in an amount equal to the excess, if any, of the fair
market value of the King Ranch Energy stock distributed to the King Ranch
stockholders over King Ranch's adjusted tax basis in that King Ranch Energy
stock immediately before the stock distribution. There can be no assurance that
the Internal Revenue Service will agree with King Ranch's determination of the
fair market value of the King Ranch Energy stock distributed to King Ranch's
stockholders or King Ranch's resulting tax liability from the stock
distribution.
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Allocation of Tax Basis to King Ranch Energy Stock. As stated above,
the aggregate adjusted tax basis of the King Ranch Energy stock and the King
Ranch stock in the hands of each King Ranch stockholder will be the same as the
adjusted tax basis of the King Ranch stock held by that King Ranch stockholder
immediately before the distribution of the King Ranch Energy stock and will be
allocated in proportion to the respective fair market values of the King Ranch
Energy stock and the King Ranch stock owned by that King Ranch stockholder. If
the King Ranch stockholder holds blocks of King Ranch stock that were purchased
at different times or for different prices, those allocation must be separately
calculated for each block of King Ranch stock.
Federal Income Tax Risks of King Ranch Energy Stock Distribution. As
stated above, an opinion of counsel is not binding upon the Internal Revenue
Service or the courts and there can be no assurance that the Internal Revenue
Service or the courts will agree with King Ranch's determination that the
distribution of the King Ranch Energy stock will be tax-free to the stockholders
of King Ranch. If the stock distribution does not qualify as a tax-free
distribution to the King Ranch stockholders under Section 355(a) of the Internal
Revenue Code of 1986, as amended, each King Ranch stockholder would be treated
as having received a taxable dividend in an amount equal to the fair market
value of the King Ranch Energy stock received to the extent of that
stockholder's pro rata share of King Ranch's current and accumulated earnings
and profits. This includes any earnings and profits attributable to any gain
that King Ranch recognizes for Federal income tax purposes in connection with
the stock distribution. In addition, the adjusted tax basis of the King Ranch
stock held by that King Ranch stockholder would be reduced to the extent that
the amount received by that King Ranch stockholder exceeded his or her pro rata
share of King Ranch current and accumulated earnings and profits. In the event
the adjusted tax basis of the King Ranch stockholder was reduced to zero, that
King Ranch stockholder would be required to recognize taxable gain to the extent
that the amount received by that King Ranch stockholder exceeded the adjusted
tax basis of the King Ranch stock held by that King Ranch stockholder.
The Merger
Locke Liddell & Sapp LLP, counsel for King Ranch Energy, has delivered
an opinion of the description of the Federal income tax consequences of the
merger to King Ranch Energy and the King Ranch Energy stockholders which
indicates the material Federal income tax consequences of the merger to King
Ranch Energy and the King Ranch Energy stockholders. This opinion is based upon,
among other things, representation letters provided by King Ranch, King Ranch
Energy, St. Mary and St. Mary Energy Company containing customary statements
relating to technical requirements under the Internal Revenue Code of 1986, as
amended, including statements by St. Mary and St. Mary Energy Company concerning
the continuation of the historical business of King Ranch Energy and the use of
assets of King Ranch Energy after the merger.
Based upon the representation letters provided to Locke Liddell & Sapp
LLP, which will be confirmed by King Ranch, King Ranch Energy, St. Mary and St.
Mary Energy Company before the closing of the merger and assuming that the
stock distribution meets all of the necessary requirements to be non-taxable to
the stockholders of King Ranch, it is the opinion of Locke Liddell & Sapp LLP
that
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the merger will qualify as a reorganization under Section 368(a) of the Code.
Accordingly, based upon these assumptions and representation, no gain or loss
will be recognized by King Ranch Energy or the King Ranch Energy stockholders.
Federal Income Tax Risks of Merger. If the merger does not qualify as a
reorganization within the meaning of Section 368(a) of the Code, the merger
would be treated as a taxable exchange for Federal income tax purposes. In that
event, each King Ranch Energy stockholder would be required to recognize gain or
loss equal to the difference between:
. the sum of:
. the fair market value of the St. Mary stock received
by that King Ranch Energy stockholder, plus
. any cash received by that King Ranch Energy
stockholder in lieu of fractional shares of St. Mary
stock, if any, and
. the adjusted tax basis of the King Ranch Energy stock held by
that King Ranch Energy stockholder immediately before the
Merger.
The highest marginal individual Federal income tax rate applicable to
ordinary income and gain from the sale or exchange of capital assets held for
one year or less is 39.6%. The maximum regular Federal income tax rate on
capital gains derived by individual taxpayers generally is 20% for sales and
exchanges of capital assets held for more than one year. All net capital gain of
a corporate taxpayer is subject to tax at ordinary corporate income tax rates of
up to 35%.
Regulatory Matters
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, some
acquisition transactions may not be completed until notifications have been
given, required information has been furnished to the Antitrust Division of the
Justice Department and the FTC, and specified waiting period requirements have
been satisfied. However, the merger is exempt from the pre-merger reporting and
waiting period requirements of the Hart-Scott-Rodino Act since:
. the merger involves the acquisition of King Ranch Energy which
holds primarily oil and gas properties that have a value of
less than $500 million and the value of the other assets of
King Ranch Energy is less than $15 million, and
. the St. Mary common stock to be held after the merger by any
individual shareholder of King Ranch will have a value of less
than $15 million and be less than 15% of the outstanding
shares of St. Mary common stock
At any time before or after the completion of the merger, the Antitrust
Division, the FTC or another third party could seek to enjoin or rescind the
merger on antitrust grounds. In addition, at any time before or after the
completion of the merger, any state could take action
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under state antitrust laws that it deems necessary or desirable in the public
interest. We do not believe that the merger will violate any antitrust laws.
However, we cannot assure you that there will be no challenge to the merger on
antitrust grounds, or if a challenge is made, what the result will be. See "The
Merger Agreement--Conditions to Closing" on page 74.
Termination of King Ranch Energy Employees
As discussed under "The Distribution and the King Ranch Energy
Stockholders Forum -- Interests of King Ranch Insiders in the Merger --
Termination of King Ranch Energy Employees; Severance Arrangements," the
employment of a substantial number of King Ranch Energy employees has been
terminated. If the merger is not completed for any reason, King Ranch Energy
will either be required to incur substantial costs in hiring and training new
employees or to liquidate its assets.
THE MERGER AGREEMENT
The following summary of the merger agreement is qualified by reference
to the complete text of the merger agreement, which is attached as Annex A and
incorporated in this document by reference.
Structure of the Merger
Under the merger agreement, a St. Mary subsidiary will merge into King
Ranch Energy so that King Ranch Energy becomes a wholly owned subsidiary of St.
Mary.
Timing of Closing
The closing will occur on the first business day after the conditions
to closing of the merger agreement have been satisfied or waived, unless the
parties agree to a different date. We expect that the foregoing will occur
immediately after the meeting of the stockholders of St. Mary and King Ranch
Energy, if they approve the transaction, and that immediately after the closing
of the merger we will file a merger certificate with the Delaware Secretary of
State and the Colorado Secretary of State at which time the merger will be
effective.
Merger Consideration
The merger agreement provides that the total number of shares of King
Ranch Energy common stock outstanding immediately before the completion of the
merger will be converted into a total of 2,666,252 shares of St. Mary common
stock. Certificates representing the shares of St. Mary common stock to be
issued in the merger will be delivered pro rata to the King Ranch Energy
stockholders, after all shares of King Ranch Energy common stock have been
distributed on a pro rata basis to the King Ranch stockholders, at the closing
of the merger in exchange for their surrender of all King Ranch Energy common
stock certificates.
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Restrictions on the Transfer of St. Mary Common Stock to be Issued in the Merger
The merger agreement provides that King Ranch stockholders will
generally not be able to sell or transfer any of the shares of St. Mary common
stock issued to them in the merger until March 31, 2001.
This restriction on transfer does not prevent transfers under the laws
of decent and distribution or for customary estate planning purposes. It also
does not prevent transfer in connection with any acquisition of St. Mary.
In addition to the transfer restrictions until March 31, 2001 under the
merger agreement, persons who are deemed under the Securities Act of 1933 to be
"affiliates" of King Ranch or King Ranch Energy before the merger may resell
their St. Mary common stock only in transactions allowed by Rule 145 under the
Securities Act, or as otherwise permitted under the Securities Act. Persons who
may be deemed to be affiliates of King Ranch or King Ranch Energy generally
include individuals that may control King Ranch or King Ranch Energy, and may
include executive officers and directors of King Ranch and King Ranch
Energy.
After the merger agreement transfer restrictions terminate on March 31,
2001, Rule 145 would allow resales of St. Mary common stock by an affiliate of
King Ranch or King Ranch Energy if St. Mary continues to meet SEC informational
reporting requirements and if that person is not then an affiliate of St. Mary.
Two years after the completion of the merger, an affiliate of King Ranch or King
Ranch Energy may resell St. Mary common stock without any restrictions so long
as that person has not been an affiliate of St. Mary in the prior three months.
This document does not cover any resales of the St. Mary common stock
to be issued to the stockholders of King Ranch Energy upon completion of the
merger, and no person is authorized to make any use of this document in
connection with any resale.
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St. Mary Board of Directors after the Merger
Change in the St. Mary Board of Directors
Under the merger agreement, St. Mary will take the necessary corporate
actions so that, as of the closing:
. The St. Mary board size will be increased from nine to eleven,
and
. Two individuals will be appointed as new directors of St.
Mary. The two new directors will be Jack Hunt, President of
King Ranch, and William Gardiner, Vice President and Chief
Financial Officer of King Ranch.
In addition, until March 31, 2001 St. Mary must use commercially
reasonable efforts at each annual meeting of St. Mary stockholders to cause Mr.
Hunt and Mr. Gardiner or their replacements to be elected to the St. Mary board
of directors.
Information about Designees for St. Mary Board of Directors
Jack Hunt. Mr. Hunt, 54, is a director and the President and Chief Executive
Officer of King Ranch, having been elected a director in April 1995, and as
President and Chief Executive Officer in May 1995. He was employed for the prior
fourteen years by Tejon Ranch Co., a publicly-held land development and
agribusiness company, serving as its president for nine years before April 1995.
Mr. Hunt currently serves as a trustee on the board of trustees of Baylor
College of Medicine and was appointed by the Governor of Texas as a director of
the Texas Water Development Board. Mr. Hunt also currently serves as a director
of the Texas Coastal Coordination Council.
William Gardiner. Mr. Gardiner, 45, is the Vice President and Chief Financial
Officer of King Ranch. He has served in this position since his date of hire on
April 15, 1996. Before his employment with King Ranch, Mr. Gardiner served as
the Executive Vice President and Chief Financial Officer of CRSS, Inc., a
publicly traded independent power producer. Mr. Gardiner was employed by CRSS
for approximately twenty years.
Information about the nine current St. Mary directors is contained in
the 1998 annual report that St. Mary has filed with the SEC and incorporated in
this document by reference. See "Where You Can Find More Information" on page
98.
Representations and Warranties
The merger agreement contains substantially reciprocal disclosure
representations and warranties made by St. Mary and King Ranch Energy to each
other. The most significant of these relate to:
. organization and good standing of the companies,
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. corporate authorization to enter into the merger agreement,
. absence of any conflict of the merger agreement with
organizational documents, law or other material agreements of
the companies,
. capitalization,
. financial statements,
. absence of undisclosed material liabilities,
. litigation,
. compliance with laws,
. title to properties and assets,
. oil and gas leases and wells,
. absence of material adverse changes,
. tax matters,
. environmental compliance,
. employee benefits plans,
. Year 2000 matters,
. finders or advisors,
. King Ranch ownership of King Ranch Energy and the corporate
authorization of the distribution of King Ranch Energy common
stock to the King Ranch stockholders before the stockholders
meeting and the merger,
. St. Mary filings with the SEC, and
. general full disclosure of all material facts.
The representations and warranties in the merger agreement will survive
the closing for a period of one year after the closing, except that:
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. representations and warranties will survive the closing for a
period of two years after the closing to the extent that any
inaccuracy in any representation or warranty involves a claim
by a third party, and
. representations and warranties related to taxes or employee
benefit plans will survive the closing until 90 days after the
applicable statute of limitations period for those matters has
expired.
Covenants
The merger agreement contains various covenants by the parties. Some of
the significant covenants are summarized below.
Interim Operations of St. Mary and King Ranch Energy
Both St. Mary and King Ranch Energy have agreed to separate covenants
that place restrictions on the companies and their subsidiaries until the
closing. In general, St. Mary and its subsidiaries and King Ranch Energy and its
subsidiaries are required to conduct their business in the ordinary course
consistent with past practices and to use all reasonable efforts to preserve
intact their business organizations and relationships with third parties, except
that King Ranch Energy will substantially reduce or possible eliminate its
drilling, exploration, development and related activities if it can do so
without penalty or materially breaching a written commitment, contract or
agreement. King Ranch Energy must give St. Mary written notice if King Ranch
Energy elects not to pursue a material drilling, exploration, development or
related opportunity presented by a third party before closing. St. Mary has the
right to pursue that opportunity at its own expense. The companies have also
agreed to some specific restrictions which are subject to exceptions described
in the merger agreement. The following table summarizes the more significant of
these restrictions on each company:
<TABLE>
<CAPTION>
Restriction St. Mary King Ranch Energy
<S> <C> <C>
making capital or other expenditures in excess of . .
specified amounts
declaring dividends, except for the regular quarterly . .
cash dividends by St. Mary
splitting, combining or reclassifying its capital stock . .
redeeming or repurchasing its capital stock, except . .
under St. Mary's current share repurchase program,
which is not to be expanded or altered
</TABLE>
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<TABLE>
<CAPTION>
Restriction St. Mary King Ranch Energy
<S> <C> <C>
issuing equity securities, options or other securities . .
convertible into or exercisable for equity securities
amending its organizational documents, except to . .
comply with obligations under the merger agreement or
law
acquiring another company No restriction .
disposing of assets, except in the ordinary course of No restriction .
business
making investments or loans or incurring any new debt No restriction .
or paying down debt, except in the ordinary course of
business
taking any action which would prevent the merger from . .
qualifying as a tax-free reorganization
increasing compensation or benefits of senior employees No restriction .
changing its accounting methods or making a material No restriction .
income tax election
</TABLE>
Other Covenants
The merger agreement contains other substantially reciprocal covenants
of the parties, including covenants to cooperate with each other and use
reasonable efforts to do all things necessary or advisable under the merger
agreement and applicable laws to complete the merger.
Other Agreements
King Ranch Trademark and Brand
St. Mary has agreed that as soon as possible following the closing it
will not use the names "King Ranch," "King Ranch Energy," "King Ranch Oil &
Gas," Running W," or any confusingly similar name in connection with its
business. Accordingly, after the merger the name of King Ranch Energy will be
changed to St. Mary Energy Company.
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King Ranch Energy Employee Severance Payments
See "The Distribution and the King Ranch Energy Stockholders Forum --
Interests of King Ranch Insiders in the Merger --Termination of King Ranch
Energy Employees; Severance Arrangements."
Under the merger agreement King Ranch must reimburse King Ranch Energy
or St. Mary up to a maximum of $850,000 for severance payments made to:
. King Ranch Energy employees not offered continued employment
by St. Mary and who remain employed by King Ranch Energy until
closing or an earlier date as agreed upon by King Ranch Energy
and St. Mary, and
. King Ranch Energy employees whose employment is continued by
St. Mary after the closing for a transition period of six
months or less.
St. Mary will be liable for all severance payments in excess of this $850,000
threshold.
The severance packages described above were established by King Ranch
and St. Mary, and include a lump sum severance payment together with the
provision of out-placement services. Except for contractual severance payments
made to six senior management employees, the severance payments were based on at
least two weeks salary for each year of service to King Ranch Energy, with a
minimum of one month of salary.
Retained Litigation
King Ranch has agreed that it will retain all liability associated
with, and responsibility for the defense of, the Pi Energy Corporation
litigation described in Note 6 of the Notes to Consolidated Financial Statements
of King Ranch Energy contained in this document, as well as liability for all
other currently pending and threatened King Ranch Energy litigation as described
in the disclosure schedules to the merger agreement.
Consent Commitments by Principal King Ranch Energy Stockholders
King Ranch agreed to obtain from Stephen J. Kleberg, John D. Alexander,
Jr., and James H. Clement, Jr., members of the King Ranch board of directors who
will have the right to vote a total of 13.8 % of the outstanding shares of King
Ranch Energy voting common stock following the distribution, commitments to:
. consent to the merger agreement, and
. recommend, subject to their fiduciary obligations, to the
members of their immediate families who will hold King Ranch
Energy voting common stock that they consent to the merger
agreement.
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No Solicitation by King Ranch and King Ranch Energy of Other Acquisition
Proposals
King Ranch and King Ranch Energy have agreed that each company and
their representatives will not take action to solicit or encourage a proposal
for an acquisition of King Ranch Energy by any company other than St. Mary.
Restricted actions include engaging in discussions or negotiations with
any party regarding an alternative acquisition proposal and the furnishing of
nonpublic information about King Ranch Energy to another party. However, King
Ranch or King Ranch Energy may respond to an unsolicited alternative acquisition
inquiry by another party if and to the extent that a response is required by the
fiduciary duties of King Ranch and King Ranch Energy directors under applicable
law and is based on the advice of outside legal counsel, and if St. Mary is
promptly notified.
Indemnification
St. Mary and King Ranch have agreed to generally reciprocal
indemnification provisions. Under these provisions, St. Mary or King Ranch will
indemnify the other party in the event of losses resulting from an inaccuracy in
a St. Mary or King Ranch representation or warranty under the merger agreement.
In addition, King Ranch has agreed to indemnify St. Mary against any claim by a
third party arising out of an act or omission of King Ranch Energy occurring
before the merger, and King Ranch has agreed to indemnify St. Mary for any loss
relating to retained litigation against King Ranch Energy existing at the time
of the merger. St. Mary has agreed to indemnify King Ranch against any claim by
a third party arising out of an act or omission of St. Mary occurring after the
merger.
Neither St. Mary nor King Ranch will be liable for indemnification to
the other on account of any loss which does not exceed $100,000. For any loss
which exceeds $100,000, the full amount of the loss will be reimbursed. At the
time that as all losses under $100,000 total more than $600,000, thereafter all
losses must be reimbursed including the first $600,000 of those losses. In no
event however will the liability of King Ranch or of St. Mary for
indemnification exceed $25 million. King Ranch's liability to St. Mary for any
retained litigation of King Ranch Energy will not be affected by the foregoing
limitations.
Conditions to Closing
Mutual Closing Conditions
The obligations of each party to complete the merger are subject to the
satisfaction or waiver of the following conditions:
. approval by the St. Mary stockholders of the issuance of St.
Mary common stock under the merger agreement and approval by
the King Ranch stockholders of the merger agreement,
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. absence of any legal prohibition on completion of the merger,
. St. Mary's registration statement on Form S-4 relating to this
document being declared effective by the SEC,
. approval for quotation on the Nasdaq National Market of the
shares of St. Mary common stock to be issued under the merger
agreement,
. the distribution by King Ranch before the merger of all shares
of King Ranch Energy common stock to the King Ranch
stockholders,
. accuracy as of the closing of the representations and
warranties made by the other party to the extent specified in
the merger agreement, and
. performance in all material respects by the other party of the
obligations required to be performed by it at or before
closing.
Additional Closing Conditions for St. Mary's Benefit
St. Mary's obligation to complete the merger is also subject to the
following significant conditions for St. Mary's benefit:
. the reimbursement of King Ranch Energy by King Ranch for the
net amount of any funds transferred by King Ranch Energy to
King Ranch from May 31, 1999 to the closing date,
. the cancellation by King Ranch of any obligation of King Ranch
Energy to reimburse King Ranch for the funds advanced by King
Ranch to King Ranch Energy for King Ranch Energy to acquire
the Flour Bluff properties in February 1999, and any debt
obligation of King Ranch Energy to King Ranch at May 31, 1999,
and
. no exercise of dissenters' appraisal rights in connection with
the merger by the holders of more than five percent of the
outstanding shares of King Ranch Energy common stock. To the
extent that the holders of more than five percent but less
than ten percent of the outstanding shares of King Ranch
Energy common stock exercise appraisal rights and that
exercise results in an obligation to pay an amount which is
equivalent to more than $19.76 per St. Mary share, King Ranch
may elect to satisfy this condition by paying that excess.
Additional Closing Conditions for King Ranch's Benefit
King Ranch's obligation to complete the merger is also subject to the
following significant conditions for King Ranch's benefit:
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. the reimbursement of King Ranch by King Ranch Energy for the
net amount of any funds transferred by King Ranch to King
Ranch Energy from May 31, 1999 to the closing date, excluding
the funds advanced by King Ranch to King Ranch Energy for King
Ranch Energy to acquire the Flour Bluff properties in February
1999, and
. receipt of opinions from its legal counsel and independent
accountants that the merger will be tax-free and that the
distribution of the King Ranch Energy stock to the King Ranch
stockholders will be tax free to them. These opinions were
delivered to King Ranch on July 27, 1999 and have been filed
with the SEC as exhibits to the registration statement
relating to this document. These opinions must also be true
and correct at closing, or King Ranch will not have to
complete the merger.
Termination of the Merger Agreement
Right to Terminate
The merger agreement may be terminated at any time before the closing
in any of the following ways:
. by mutual written consent of St. Mary, King Ranch and King
Ranch Energy.
. by St. Mary or King Ranch Energy if the merger has not been
completed by December 31, 1999,
. by St. Mary or King Ranch Energy if there is a permanent legal
prohibition to closing the merger,
. by St. Mary or King Ranch Energy if the St. Mary stockholders
do not approve the issuance of St. Mary common stock under the
merger agreement or the King Ranch Energy stockholders do not
approve the merger agreement.
. by St. Mary if there has been a material uncured breach of a
representation, warranty, covenant or agreement of King Ranch
or King Ranch Energy in the merger agreement, or
. by King Ranch if there has been a material uncured breach of a
representation, warranty, covenant or agreement of St. Mary in
the merger agreement.
Neither St. Mary nor King Ranch Energy can terminate the merger
agreement for the reasons described in the second and third bullet points above
if it has failed in any material respect to fulfill its obligations under the
merger agreement and that failure has resulted in the circumstances referred to
in those bullet points.
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Effect of Termination
If the merger agreement is validly terminated, the agreement will
become void without any liability on the part of any party. However, the
provisions of the merger agreement relating to expenses and termination fees,
damages and losses, as well as the confidentiality agreements entered into
between St. Mary and King Ranch, will continue in effect notwithstanding
termination of the merger agreement.
Termination Fees
King Ranch has agreed to pay St. Mary a cash termination fee of $1
million if St. Mary terminates the merger agreement because there has been a
material uncured breach of a representation, warranty, covenant or agreement of
King Ranch or King Ranch Energy in the merger agreement. If after a termination
fee is due to St. Mary there is a third party acquisition proposal for King
Ranch Energy by December 31, 1999 which is subsequently consummated, King Ranch
will be obligated to pay St. Mary an additional fee of $2 million upon the
completion of that transaction.
St. Mary has agreed to pay King Ranch a cash termination fee of $1
million if King Ranch terminates the merger agreement because of a material
uncured breach of a representation, warranty, covenant or agreement of St. Mary
in the merger agreement.
As an alternative to the above termination fees, St. Mary or King
Ranch can elect to pursue a claim for damages against the other party for its
breach.
If the merger agreement is terminated because the St. Mary stockholders
do not approve the issuance of St. Mary common stock under the merger agreement
or the King Ranch Energy stockholders do not consent to the merger agreement,
there will be no termination fee. However, if the King Ranch Energy stockholders
do not consent to the merger agreement and there is a third party acquisition
proposal for King Ranch Energy by December 31, 1999 which is subsequently
consummated, King Ranch will be obligated to pay St. Mary a termination fee of
$3 million upon the completion of that transaction.
In the event either King Ranch or St. Mary is entitled to terminate the
merger agreement and receive a termination fee, but elects not to do so, then
either King Ranch or St. Mary will have the right to seek specific performance
of the merger agreement.
Other Expenses
Except as described above, all costs and expenses incurred in
connection with the merger agreement and related transactions will be paid by
the party incurring those costs or expenses. We estimate that merger-related
fees and expenses, consisting primarily of SEC filing fees, fees and expenses of
investment bankers, attorneys and accountants, and financial printing and other
related charges, will total approximately $2.2 million assuming the merger is
completed.
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Amendments; Waivers
Any provision of the merger agreement may be amended or waived before
the closing if the amendment or waiver is in writing and signed by each of the
parties. No amendment can be made after the St. Mary stockholders approve the
issuance of St. Mary common stock under the merger agreement or the King Ranch
Energy stockholders consent to the merger agreement unless:
. under the Nasdaq rules or other applicable law that amendment
does not require further stockholder approval or consent, or
. the stockholders approve or consent to that amendment.
THE COMPANIES
Business of St. Mary
St. Mary is engaged in the exploration, development, acquisition and
production of natural gas and crude oil with operations focused in five core
operating areas in the United States:
. the Mid-Continent region in western Oklahoma and northern
Texas,
. the ArkLaTex region that spans northern Louisiana and portions
of eastern Texas, Arkansas and Mississippi,
. south Louisiana,
. the Williston Basin in eastern Montana and western North
Dakota, and
. the Permian Basin in eastern New Mexico and west Texas.
St. Mary's objective is to build value per share by focusing its
resources within selected basins in the United States where management believes
established acreage positions, long-standing industry relationships and
specialized geotechnical and engineering expertise provide a significant
competitive advantage. For further information about St. Mary's business, you
should read St. Mary's 1998 Annual Report on Form 10-K incorporated by reference
into this document. See "Where You Can Find Information" on page 98.
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Selected Historical Consolidated Financial Data of St. Mary
The following selected historical consolidated financial data for St.
Mary for each of the years 1994 through 1998 has been derived from St. Mary's
audited consolidated financial statements. The selected historical consolidated
financial data for the six months ended June 30, 1999 has been derived from St.
Mary's unaudited consolidated financial statements for the six months ended June
30, 1999. This information is only a summary and you should read it together
with St. Mary's historical financial statements and related notes contained in
the annual and quarterly reports and other information that we have filed with
the SEC and incorporated in this document by reference. See "Where You Can Find
More Information" on page 100.
<TABLE>
<CAPTION>
Six Months
Ended
June 30, Years Ended December 31,
---------------- ---------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ---- ----
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Operating revenues:
Oil production $28,060 $34,872 $16,545 $22,415 $22,100 $17,090 $14,006
Gas production 1,518 4,386 54,103 53,349 34,674 19,479 24,233
Gain on sale of Russian joint venture - - - 9,671 - - -
Gain (loss) on sale of proved properties 114 (14) 7,685 4,220 2,254 1,292 418
Gas contract settlements and other 323 202 411 1,391 523 789 6,128
------- ------- ------- ------- ------- ------- -------
Total operating revenues 30,015 39,446 78,744 91,046 59,551 38,650 44,785
------- ------- ------- ------- ------- ------- -------
Operating expenses:
Oil and gas production 7,954 8,116 17,005 15,258 12,897 10,646 10,496
Depletion, depreciation & amortization 10,683 11,880 24,912 18,366 12,732 10,227 10,134
Impairment of proved properties 247 1,445 17,483 5,202 408 2,676 4,219
Exploration 2,942 6,473 11,705 6,847 8,185 5,073 8,104
Abandonment and impairment of
unproved properties 800 615 4,457 2,077 1,469 2,359 1,023
General and administrative 3,638 4,424 7,097 7,645 7,603 5,328 5,261
Writedown of Russian convertible
receivable - - 4,553 - - - -
Writedown of investment in
Summo Minerals - - 3,949 - - - -
Other 338 92 141 281 78 152 493
(Income) loss in equity investees 58 571 661 325 (1,272) 579 348
------- ------- ------- ------- ------- ------- -------
Total operating expenses 26,660 33,616 91,963 56,001 42,100 37,040 40,078
------- ------- ------- ------- ------- ------- -------
Income (loss) from operations 3,355 5,830 (13,219) 35,045 17,451 1,610 4,707
Non-operating expense (income) (122) 228 1,027 99 1,951 896 525
Income tax expense (benefit) 1,161 1,896 (5,415) 12,325 5,333 (723) 445
------- ------- ------- ------- ------- ------- -------
Income (loss) from continuing operations 2,316 3,706 (8,831) 22,621 10,167 1,437 3,737
Gain on sale of discontinued operations,
net of income taxes - 34 34 488 159 306 -
------- ------- ------- ------- ------- ------- -------
Net income (loss) $2,316 $3,740 $(8,797) $23,109 $10,326 $1,743 $3,737
======= ======= ======= ======= ======= ======= =======
</TABLE>
79
<PAGE>
<TABLE>
<CAPTION>
Six Months
Ended
June 30, Years Ended December 31,
------------------- -------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
--------- -------- --------- -------- -------- ------- -------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data (continued):
Basic net income (loss) per common share:
Income (loss) from continuing operations $ 0.21 $ 0.34 $ (0.81) $ 2.13 $ 1.16 $ 0.17 $ 0.43
Gain on sale of discontinued operations - - - 0.05 0.02 0.03 -
--------- -------- --------- -------- -------- ------- -------
Basic net income (loss) per share $ 0.21 $ 0.34 $ (0.81) $ 2.18 $ 1.18 $ 0.20 $ 0.43
========= ======== ========= ======== ======== ======= =======
Diluted net income (loss) per common share:
Income (loss) from continuing operations $ 0.21 $ 0.33 $ (0.81) $ 2.10 $ 1.15 $ 0.17 $ 0.43
Gain on sale of discontinued operations - - - 0.05 0.02 0.03 -
--------- -------- --------- -------- -------- ------- -------
Diluted net income (loss) per share $ 0.21 $ 0.33 $ (0.81) $ 2.15 $ 1.17 $ 0.20 $ 0.43
========= ======== ========= ======== ======== ======= =======
Cash dividends per share $ 0.10 $ 0.10 $ 0.20 $ 0.20 $ 0.16 $ 0.16 $ 0.16
Basic weighted average common share
outstanding 10,879 10,984 10,937 10,620 8,759 8,760 8,763
Diluted weighted average common shares
outstanding 10,892 11,102 10,937 10,753 8,826 8,801 8,803
Balance Sheet Data (end of period):
Working capital $ 8,550 $ 3,592 $ 9,785 $ 9,618 $ 13,926 $ 3,102 $ 9,444
Net property and equipment 152,198 170,987 143,825 157,481 101,510 71,645 59,655
Total assets 183,266 215,849 184,497 212,135 144,271 96,126 89,392
Long-term obligations 20,087 26,615 19,398 22,607 43,589 19,602 11,130
Total stockholders' equity 138,969 150,669 134,742 147,932 75,160 66,282 66,034
</TABLE>
King Ranch
King Ranch is a privately-held company engaged primarily in ranching,
agricultural and energy development businesses. It owns he historic 825,000 acre
"King Ranch" in South Texas. King Ranch's oil and gas exploration and production
business is conducted through its subsidiary King Ranch Energy which St. Mary is
to acquire in the merger.
Business of King Ranch Energy
King Ranch Energy is a privately held oil and gas company based in Houston,
Texas, and is an indirect wholly-owned subsidiary of King Ranch. Effective on
the close of business on December 31, 1997, King Ranch reorganized the structure
of its energy operations. On that date, all of the onshore and offshore working
interests and related assets owned by King Ranch were transferred to King Ranch
Energy. The information presented for the periods before January 1, 1998
reflects the financial position, results of operations, cash flows and other
information attributable to the contributed assets. The oil and gas operations
of King Ranch Energy began during the early 1980's through direct working
interest participation in drilling projects and producing properties on a non-
operated basis. In March 1986, King Ranch began to assemble a team of
geophysicists with its acquisition of Barrick Exploration. The acquisition of
Barrick Exploration also included a significant seismic database and provided
King Ranch Energy with exposure to several exploration joint ventures. During
the later portions of the 1980's, King Ranch Energy brought its geoscience
expertise and seismic database to numerous exploration
80
<PAGE>
joint ventures with onshore and offshore operators along the Gulf Coast.
Currently, King Ranch Energy is an oil and gas exploration, development, and
production company operating primarily in the Gulf Coast region with emphasis in
the Gulf of Mexico. King Ranch Energy identifies exploratory prospects by:
* integrating 3-D and 2-D seismic technology with information about
surrounding geological features, and
* high-grading prospects that exhibit "bright spot" seismic anomalies by
using extensive computer-aided geophysical modeling and
amplitude.
Oil and Gas Reserves
The following table shows information on the total proved reserves,
estimated future net cash flow before income taxes from proved reserves, and the
present value, discounted at 10%, of estimated future net cash flow from proved
reserves for King Ranch Energy during the periods indicated. Information in the
following table is based upon the Reserve Reports in accordance with the rules
and regulations of the SEC.
<TABLE>
<CAPTION>
Future Net Cash Flow
Net Proved Reserves After-Tax
---------------------------------- -------------------------
Discounted
-------------
Gas Oil Total Total at 10%
---------- -------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Proved Reserves (MMcf) (MBbl) (MMcfe) (in thousands)
December 31, 1996 38,787 1,717 49,089 $94,992 $ 71,401
December 31, 1997 38,201 1,407 46,643 $59,480 $ 46,844
December 31, 1998 42,303 1,675 52,353 $52,763 $ 42,854
</TABLE>
There are numerous uncertainties inherent in estimating quantities of
proved reserves, including many factors beyond the control of King Ranch Energy.
The reserve data set forth herein represents only estimates. Reservoir
engineering is a subjective process of estimating underground accumulations of
crude oil and natural gas that cannot be measured in an exact manner, and the
accuracy of any reserve estimate is a function of the quality of available data
and of engineering and geological interpretations and judgment. As a result,
estimates of different engineers often vary. In addition, results of drilling,
testing and production subsequent to the date of an estimate may justify
revision of that estimate. Accordingly, reserve estimates are often different
from the quantities of crude oil and natural gas that are ultimately recovered.
The meaningfulness of these estimates is highly dependent upon the accuracy of
the assumptions upon which they were based. In general, the volume of production
from oil and gas properties owned by King Ranch Energy declines as reserves are
depleted. Except to the extent King Ranch Energy conducts successful exploration
and development activities or acquires additional properties containing proved
reserves, or both, the proved reserves of King Ranch Energy will decline as
reserves are produced.
In accordance with the SEC's guidelines, the estimates of King Ranch
Energy's proved reserves, future net cash flow from proved reserves and the
discounted present value of future net
81
<PAGE>
cash flow from proved reserves are made using oil and natural gas sales prices
in effect as of the dates of these estimates and are held constant throughout
the life of the properties except where those guidelines permit alternate
treatment, including the use of fixed or determinable contractual price
escalations. Prices for natural gas and crude oil are subject to substantial
fluctuations as a result of numerous factors. In accordance with SEC guidelines,
the estimates of King Ranch Energy's proved reserves, future net cash flow from
proved reserves and the discounted present value of future net cash flow from
proved reserves are made using current lease and well operating costs estimated
by King Ranch Energy. Lease operating expenses for wells operated by King Ranch
Energy were estimated using a combination of fixed and variable-by-volume costs
consistent with King Ranch Energy's experience in the areas for those wells. For
purposes of calculating estimated future net cash flow and the discounted
present value thereof, operating costs exclude accounting and administrative
overhead expenses attributable to King Ranch Energy's working interest in wells
operated under joint operating agreements, but include administrative costs
associated with production offices. The discounted present value of estimated
future net cash flow from proved reserves set forth herein should not be
construed as the current market value of the estimated proved oil and gas
reserves attributable to King Ranch Energy's properties.
Exploration and Development Activity
King Ranch Energy drilled, or participated in the drilling of, the
following numbers of wells during the periods indicated.
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------
1998 1997 1996
----------------- ----------------- ----------------
Gross Net Gross Net Gross Net
------- -------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Exploratory Wells:
Producing......................... 11.0 3.1 6.0 1.3 3.0 1.3
Dry............................... 9.0 3.1 6.0 1.8 5.0 0.9
Total.......................... 20.0 6.2 12.0 3.1 8.0 2.2
Development Wells:
Producing......................... 20.0 5.8 13.0 3.6 14.0 6.7
Dry............................... 0 0 1.0 0.3 0 0
Total.......................... 20.0 5.8 14.0 3.9 14.0 6.7
Total Wells......................... 40.0 12.0 26.0 7.0 22.0 8.9
</TABLE>
The information contained in the foregoing table should not be considered
indicative of future drilling performance, nor should it be assumed that there
is any necessary correlation between the number of productive wells drilled and
the amount of oil and gas that may ultimately be recovered from those
wells.
Present Activities
In the first six months of 1999 King Ranch Energy has completed the
drilling of 8 gross (1.8 net) exploratory wells and 5 gross (1.6 net)
development wells. Of these wells, 2 gross (1.1 net) of the exploratory wells
were productive while all of the development wells were productive.
82
<PAGE>
Net Production, Unit Prices and Production Costs
As of July 1, 1999, King Ranch Energy had an ownership interest in 404
gross (80.3 net) productive wells, including 231 gross (45.5 net) productive
natural gas wells and 173 gross (34.8 net) productive crude oil wells.
The following table shows information regarding the net production volumes,
average sales prices received, and average production costs associated with King
Ranch Energy's sales of oil and natural gas for the periods indicated.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Production:
Oil and condensate (MBbls)......... 429 369 325
Gas (MMcf)......................... 14,826 13,535 13,464
------- ------- -------
Total production (MMcfe)......... 17,400 15,748 15,414
Average Realized Price:/(1)/
Oil and condensate (per Bbl)....... $ 12.25 $ 18.85 $ 19.58
Gas (per Mcf)/(2)/................. $ 2.24 $ 2.65 $ 2.54
Average Production Cost:
($/Mcfe)/(3)/...................... $ 0.46 $ 0.37 $ 0.28
</TABLE>
____________
(1) Excludes hedging gains of $815,000, $33,000 and $0 for 1998, 1997 and 1996,
respectively.
(2) Includes product processing revenue of $342,000, $359,000 and $500,000 for
1998, 1997 and 1996, respectively.
(3) Excludes production taxes of $294,000, $335,000 and $264,000 for 1998, 1997
and 1996, respectively.
Development, Exploration and Acquisition Expenditures
King Ranch Energy's total capital expenditures on oil and gas properties in
1998 were $65.5 million, with $27.8 million spent on exploration drilling, $12.4
million spent on development drilling, and $25.3 million spent on acquisitions.
The following table shows information regarding the costs incurred by King Ranch
Energy in its exploration, development and acquisition activities during the
periods indicated.
83
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1998 1997 1996
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Acquisition Costs:
Proved properties........................ $ 16,341 $ 0 $ 0
Unproved properties...................... 8,981 8,990 8,415
Exploration costs............................... 27,819 16,611 6,443
Development costs............................... 12,359 11,798 1,430
-------- -------- --------
Total Capital Expenditures................... $ 65,500 $ 37,399 $ 16,288
======== ======== ========
</TABLE>
Acreage
As of July 1, 1999, King Ranch Energy had an interest in approximately
528 thousand gross (157 thousand net) acres, including approximately 304
thousand gross (106 thousand net) offshore acres, and approximately 224 thousand
gross (51 thousand net) onshore acres. Total producing offshore acres are 160
thousand gross (44 thousand net), while total non-producing offshore acres are
143 thousand gross (62 thousand net). Acreage in which King Ranch Energy's
interest is limited to royalty, over-ridding royalty and similar interests is
insignificant and, therefore, excluded.
Oil and Gas Marketing
The revenues generated from King Ranch Energy's oil and gas operations
are highly dependent upon the prices of and the demand for its oil and gas
production. The prices received by King Ranch Energy for its oil and gas
production depend upon numerous factors beyond King Ranch Energy's control.
Generally, King Ranch Energy's gas production is sold under short-term
contracts with index related pricing while oil production is sold to various
purchasers under short-term arrangements at prices no less than those
purchasers' posted prices for the respective areas less standard deductions.
Total sales of gas accounted for 85% of King Ranch Energy's revenues during 1998
while total sales of oil accounted for 15% of King Ranch Energy's revenues. In
1998, the weighted average price of gas sold was $2.24/Mcf and the weighted
average price of oil sold was $12.25/Bbl.
Hedging
From time to time, King Ranch Energy utilizes hedging transactions with
respect to a portion of its oil and gas production to achieve a more predictable
cash flow, as well as to reduce its exposure to price fluctuations. While the
use of these hedging arrangements limits the downside risk of adverse price
movements, they may also limit future revenues from favorable price movements.
As a result of hedging activities for gas production for 1998 and 1997, King
Ranch Energy realized gains of $815,000 and $33,000, respectively. During 1998,
approximately 10% of King Ranch Energy's equivalent gas production was subject
to hedge positions as compared to 9% in 1997.
84
<PAGE>
The use of hedging transactions also involves the risk that the
counterparties will be unable to meet the financial terms of those transactions.
All of King Ranch Energy's hedging transactions to date were carried out in the
over-the-counter market and the obligations of the counterparties have been
guaranteed by entities with at least an investment grade rating or secured by
letters of credit. King Ranch Energy accounts for these transactions as hedging
activities and, accordingly, gains or losses are included in oil and gas
revenues when the hedged production is delivered. Neither the hedging contracts
nor the unrealized gains or losses on these contracts are recognized in the
financial statements.
Competition
The exploration for and production of oil and gas is highly
competitive. In seeking to obtain desirable properties, leases and exploration
prospects, King Ranch Energy faces competition from both major and independent
oil and natural gas companies, as well as from numerous individuals and drilling
programs. Many of these competitors have financial and other resources
substantially in excess of those available to King Ranch Energy and,
accordingly, may be better positioned to acquire and exploit prospects, hire
personnel and market production. In addition, many of King Ranch Energy's larger
competitors may be better able to respond to factors that affect the demand for
oil and natural gas production such as changes in worldwide oil and natural gas
prices and levels of production, the cost and availability of alternative fuels
and the application of government regulations.
Employees
As of July 31, 1999, following the termination of 14 full-time
employees after the execution of the merger agreement with St. Mary, King Ranch
Energy had 12 full-time employees, none of whom is represented by any labor
union. King Ranch Energy considers its relations with its employees to be good
considering the pending merger. See "King Ranch Energy Stockholders Meeting -
Interests of King Ranch Insiders in the Merger - Termination of King Ranch
Energy Employees; Severance Agreements."
Facilities
King Ranch Energy currently leases approximately 16,000 square feet of
office space in Houston, Texas, where its administrative offices are located.
Title to Properties
King Ranch Energy believes it has satisfactory title to all of its
producing properties in accordance with standards generally accepted in the oil
and gas industry. King Ranch Energy's properties are subject to customary
royalty interests, liens incident to operating agreements, liens for current
taxes and other burdens which King Ranch Energy believes do not materially
interfere with the use of or affect the value of those properties.
85
<PAGE>
Operating Hazards and Uninsured Risks
King Ranch Energy operations are subject to hazards and risks inherent
in drilling for and production and transportation of oil and natural gas, such
as fires, natural disasters, explosions, encountering formations with abnormal
pressures, blowouts, cratering, pipeline ruptures and spills, any of which can
result in loss of hydrocarbons, environmental pollution, personal injury claims,
and other damage to properties of King Ranch Energy and others. Additionally, a
substantial amount of King Ranch Energy's oil and gas operations are located in
an area that is subject to tropical weather disturbances, some of which can be
severe enough to cause substantial damages to facilities and possibly interrupt
production. As protection against operating hazards, King Ranch Energy maintains
insurance coverage against some, but not all, potential losses. King Ranch
Energy believes that its insurance coverage is adequate and customary for
companies of a similar size engaged in operations similar to those of King Ranch
Energy, but losses could occur for uninsurable or uninsured risks or in amounts
in excess of existing insurance coverage. The occurrence of an event that is not
fully covered by insurance could have an adverse impact on King Ranch Energy's
financial condition and results of operations.
Governmental Regulations
King Ranch Energy's oil and gas exploration, production and related
operations are subject to extensive rules and regulations promulgated by federal
and state agencies. Failure to comply with those rules and regulations can
result in substantial penalties. The regulatory burden on the oil and gas
industry increases King Ranch Energy's cost of doing business and affects its
profitability. To date, expenditures related to complying with these rules and
regulations have not been significant in relation to the results of the
operations of King Ranch Energy. However, because those rules and regulations
are frequently amended or reinterpreted, King Ranch Energy is unable to predict
the future cost or impact of complying with those laws.
Environmental Matters
King Ranch Energy's operations and properties are subject to extensive
and changing federal, state and local laws and regulations relating to
environmental protection, including the generation, storage, handling, emission,
transportation and discharge of materials into the environment, and relating to
safety and health. The recent trend in environmental legislation and regulations
generally is toward stricter standards, and this trend will likely continue.
These laws and regulations may require the acquisition of a permit or other
authorization before construction or drilling commences and for other
activities, limit or prohibit construction, drilling and other activities on
lands lying within wilderness or wetlands and other protected areas and impose
substantial liabilities for pollution resulting from King Ranch Energy's
operations. The permits required for various aspects of King Ranch Energy's
operations are subject to revocation, modification and renewal by issuing
authorities. King Ranch Energy believes that its operations currently are in
substantial compliance with applicable environmental regulations.
86
<PAGE>
Selected Historical Consolidated Financial Data of King Ranch Energy
The following selected historical consolidated financial data has been
derived from (1) the audited financial statements of King Ranch Energy as
of and for the years ended December 31, 1998, 1997 and 1996, (2) the
accounting records of King Ranch as of and for the years ended December 31,
1995 and 1994 and (3) the unaudited interim financial statements of King
Ranch Energy as of June 30, 1999 and for the six month periods ended June
30, 1999 and 1998. This information is only a summary and you should read
it together with King Ranch Energy's historical financial statements and
related notes contained in this document.
<TABLE>
<CAPTION>
Six Months
Ended
June 30, Years Ended December 31,
-------------------- ------------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ---- ----
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Operating revenues:
Working and royalty interest $ 20,869 $ 19,791 $ 39,290 $43,239 $41,115 $ 26,384 $ 38,422
Other 60 76 117 365 404 - (460)
-------- -------- -------- ------- ------- -------- --------
Total operating revenues 20,929 19,867 39,407 43,604 41,519 26,384 37,962
Operating expenses:
Oil and gas operating expenses 3,550 3,417 8,373 6,848 4,402 4,965 6,408
Depletion, depreciation, amortization,
and impairment of properties 12,081 11,024 26,363 16,217 20,916 16,544 15,193
Exploration expenses 5,646 6,768 12,301 11,935 7,240 13,086 5,337
General and administrative 1,162 1,387 2,970 3,001 2,980 2,903 2,541
Abandoned Independent Power
Production projects - - - 163 44 1,280 3,379
-------- -------- -------- ------- ------- -------- --------
Total operating expenses 22,439 22,596 50,007 38,164 35,582 38,778 32,858
-------- -------- -------- ------- ------- -------- --------
Income (loss) from operations (1,510) (2,729) (10,600) 5,440 5,937 (12,394) 5,104
Trademark fee - affiliate 250 250 500 250 250 - -
Non-operating expense 633 25 103 146 28 (1,673) -
(Gain) loss on sale of proved properties - - 37 (238) (294) - -
-------- -------- -------- ------- ------- -------- --------
Income (loss) before taxes (2,393) (3,004) (11,240) 5,282 5,953 (10,721) 5,104
Income tax provision (benefit) (825) (794) (4,121) 1,680 1,836 - -
-------- -------- -------- ------- ------- -------- --------
Net income (loss) $ (1,568) $ (2,210) $ (7,119) $ 3,602 $ 4,117 $(10,721) $ 5,104
======== ======== ======== ======= ======= ======== ========
Basic net income (loss) per share $ (1,568) $ (2,210) $ (7,119) $ 3,602 $ 4,117 $(10,721) $ 5,104
Diluted net income (loss) per share (1,568) (2,210) (7,119) 3,602 4,117 (10,721) 5,104
Cash dividends per share - - $ 4,655 - - - -
Basic weighted average common shares
outstanding(1) 1 1 1 1 1 1 1
Diluted weighted average common shares
outstanding(1) 1 1 1 1 1 1 1
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data (end of period):
Working capital $(15,267) $ (2,049) $(14,210) $23,429 $22,830 $ (1,712) $ 11,013
Net property and equipment 67,613 68,356 68,542 41,105 31,986 42,602 53,287
Total assets 81,794 79,734 84,889 74,126 71,198 57,612 85,481
Long-term obligations - - - - - 6,927 23,038
Total stockholders' equity 46,782 59,045 48,350 60,682 52,517 34,792 39,671
</TABLE>
(1) Before the merger with St. Mary the 1,000 outstanding shares of King Ranch
Energy common stock will be split to equal the number and class of outstanding
shares of King Ranch common stock and then distributed on a pro rata basis to
the King Ranch stockholders if all other conditions to the merger have been
satisfied. There are currently 410,266 shares of King Ranch common stock
outstanding, comprised of 42,938 shares of voting common stock and 367,328
shares of non-voting common stock.
87
<PAGE>
King Ranch Energy Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following is a discussion of the consolidated financial condition
and results of operations of King Ranch Energy and its subsidiaries for the
three years ended December 31, 1998 and the six months ended June 30, 1999 and
1998. This discussion should be read in conjunction with our "Selected Financial
Data" and our Consolidated Financial Statements, and the notes thereto, included
elsewhere herein. This discussion includes forward-looking information
concerning our future plans, financial condition, liquidity and capital
resources. If the merger with St. Mary is consummated, our plans will not be
implemented and the financial condition of the combined company will be
materially different.
General
As an independent oil and gas producer, our revenue, profitability and
future rate of growth are substantially dependent upon prevailing prices for
natural gas, oil and condensate, which are dependent upon numerous factors
beyond our control, such as economic, political and regulatory developments and
competition from other sources of energy. The energy markets have historically
been very volatile and there can be no assurance that oil and gas prices will
not be subject to wide fluctuations in the future. A substantial or extended
decline in oil and gas prices could have a material adverse effect on our
financial position, results of operations, cash flows, quantities of oil and gas
reserves that may be economically produced and access to capital.
We use the successful efforts method of accounting for oil and gas
properties. Costs to acquire mineral interests in oil and gas properties, to
drill and equip exploratory wells, which find proved reserves, and to drill and
equip developmental wells are capitalized. Exploratory geological and
geophysical costs, delay rentals, and costs to drill exploratory wells which do
not find proved reserves are expensed. Depletion, depreciation, and amortization
of costs incurred in connection with the drilling and development of proved oil
and gas reserves and estimated future abandonment and dismantlement costs are
amortized on a field-by-field basis using the units-of-production method based
upon estimates of proved developed oil and gas reserves. The property
acquisition costs of producing properties are amortized on a field-by-field
basis using the units-of-production method based on estimates of total proved
reserves.
The Company reviews its producing properties for impairments when
events or changes in circumstances indicate that an impairment may have
occurred. The impairment test compares the expected undiscounted future net
revenues on a field-by-field basis with the related net capitalized costs at the
end of each period. When the net capitalized costs exceed the undiscounted
future net revenues, the cost of property is written down to "fair value," which
is determined using discounted future net revenues discounted at 10% for the
producing property. Future net revenues are estimated using a five-year
historical average price plus a three percent escalation factor and include the
estimated effects of the Company's hedging contracts in place at December 31,
1998. All proved reserve categories at their full estimated value and probable
and possible reserves, risk adjusted downward to 65% and 10% of the estimated
values, respectively, are used in the impairment test. Probable and possible
reserves are risk-adjusted to recognize their lower likelihood of
occurrence.
88
<PAGE>
This risk adjustment factors are subject to periodic review based on current
economic conditions. Reserve volumes are based on independent engineering
consistent with engineering used in evaluating property acquisitions.
The Company also impairs nonproducing leaseholds and unproved
properties when such leases and properties are determined to have a recoverable
value less than cost. In determining if an impairment exists and arriving at
impairment charges for nonproducing leaseholds and unproved properties we
considers such factors as (1) whether any dry holes have been drilled, (2) the
length of time remaining on the lease, and (3) our current drilling
budgets.
Forward-Looking Statements
This document includes "forward-looking statements." All statements
other than statements of historical facts included in this document, including
statements regarding production targets, anticipated production rates, planned
capital expenditures, the availability of capital resources to fund capital
expenditures, estimates of proved reserves, wells planned to be drilled in the
future, our financial position, business strategy and other plans and objectives
for future operations, are forward-looking statements. Although we believe that
the expectations reflected in the forward-looking statements are reasonable,
those statements are based upon assumptions and anticipated results that are
subject to numerous uncertainties. See "Cautionary Information About Forward-
Looking Statements" at page 100.
Results of Operations
The following table shows operating information with respect to our oil
and gas operations.
<TABLE>
<CAPTION>
Six Month Period Ended
June 30,
----------------------------
1999 1998
---- ----
<S> <C> <C>
Production:
Oil and condensate (Mbbls) 219 212
Gas (Mmcf) 8,877 7,114
Total production (Mmcfe) 10,191 8,386
Average Realized Price:
Oil and condensate (per Bbl) $ 12.76 $13.28
Gas (per Mcf) $ 1.99 $ 2.35
</TABLE>
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
Production. Net production increased 22%, from 8.4 Bcfe for the 1998
period to 10.2 Bcfe for the 1999 period. Oil and condensate production during
1999 increased 7 MBbls, or 3%, compared to the same period in 1998. Increased
oil production for 1999 was due to production increases from development
activities at the Pittencrief properties (36 Mbbls) and successful results from
exploration activities on Vermilion blocks 115 and 116 (17 Mbbls). These
activities more than offset the decline
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in production from the Clarksville Field (46 Mbbls). Gas production increased by
1.8 Bcf, or 25%, from 7.1 Bcf for 1998 period to 8.9 Bcf for 1999. Increased gas
production was due to production increases from development drilling activities
during the fourth quarter of 1998 at the Judge Digby Field. These increases were
partially offset by natural production decline on other properties held.
Operating Revenues. Oil and gas revenues for 1999 period increased by
$1.1 million, or 5%, compared to the same period ended in 1998, as a result of
the 1,753 Mmcf increase in natural gas production levels as discussed in the
previous paragraph. This increased production was offset by lower realized oil
and gas prices. The average realized price of natural gas decreased by 15% while
the average realized price for oil decreased by 5%. For the 1999 period, the
average realized gas price was $1.99 per Mcf as compared to an average price of
$2.35 per Mcf for the same period in 1998. As a result of hedging activities for
gas production during the six month periods ended June 30, 1999 and 1998, we
realized gains of $297 thousand and $67 thousand, respectively. During the 1999
period, approximately 17% of our equivalent gas production was subject to hedge
positions as compared to 1% for the same period in 1998. The average realized
oil and condensate price was $12.76 per barrel during 1999 as compared to an
average price of $13.47 per barrel for the same period in 1998.
Oil and Gas Operating Expenses. Lease operating expense for 1999
increased to $3.6 million from $3.4 million for the same period in 1998. Lease
operating expense per Mcfe deceased from $0.40 for 1998 to $0.35 for the 1999
period. This decrease in expense per Mcfe is attributable to higher production
volumes from the Judge Digby Field without a corresponding increase in lease
operating expense.
Exploration Expense. Exploration expense for the 1999 period decreased
to $5.6 million from $6.8 million for the same period in 1998. Dry hole costs
decreased by $3.0 million while geological and geophysical expense increase by
$1.8 million over the comparable periods. Impairment of non-producing leaseholds
decreased during 1999 to $190 thousand from $1.1 million during the comparable
period in 1998.
Depreciation, Depletion and Amortization Expense. During the 1999
period, depreciation, depletion and amortization expense increased to $12.1
million from $11.0 million for the comparable 1998 period. The increase was due
to the increased production volumes noted above. The depletion rate per unit for
1999 decreased to $1.19 per Mcfe, from $1.30 per Mcfe for 1998.
General and Administrative Expense. General and administrative
expense, which is net of overhead reimbursements received from other working
interest owners, decreased to $1.2 million, or $0.11 per Mcfe during 1999, as
compared to $1.4 million, or $0.16 per Mcfe, for 1998 period. The reduction in
general and administrative expense per Mcfe resulted from increasing production
levels without a corresponding increase in the number of employees.
Trademark Fee. We pay a trademark fee to King Ranch, Inc. of $500,000
per year for the use of the King Ranch name and the Running W trademark.
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Other Expense. From 1998 to 1999, other expense increased by $600
thousand as a result of interest expense related to the intercompany note
payable that was established in December 1998.
Net Income. As a result of the foregoing, we had a net loss of $1.6
million for the 1999 period, as compared to a net loss of $2.2 million for
comparable 1998 period.
Results of Operations
The following table shows operating information with respect to our
oil and gas operations.
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Production:
Oil and condensate (MBbls) 429 369 325
Gas (MMcf) 14,826 13,535 13,464
--------- --------- ---------
Total production (MMcfe) 17,400 15,749 15,414
Average Realized Price:
Oil and condensate (per Bbl) $ 12.25 $ 18.85 $ 19.58
Gas (per Mcf) $ 2.24 $ 2.65 $ 2.54
</TABLE>
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Production. Net production increased 11%, from 15.75 Bcfe for 1997 to
17.4 Bcfe for 1998. Oil and condensate production for 1998 increased 60 MBbls,
or 16%, compared to 1997. Increased oil production for 1998 was due to
production increases from exploratory drilling activities at Eugene Island 341
and from the acquisition of the Pittencrieff Americas properties. Production
from Eugene Island 341 increased 22 Mbbls in 1998 and the acquisition of
Pittencrieff added 132 Mbbls of oil production. These increases were offset by
decreases from the Clarksville Field of 40 Mbbls, the East Cameron 57 Field of
24 Mbbls and the Eugene Island 136 Field of 23 Mbbls. Gas production increased
by 1.3 Bcf, or 10%, from 13.5 Bcf for 1997 to 14.8 Bcf for 1998. Increased gas
production was due to production increases from development drilling activities
during 1998 at the Judge Digby Field, from the acquisition of interests in
several offshore blocks from NCX Exploration in May 1998, and from exploratory
wells drilled and placed on production during the third quarter of 1998 at
Vermilion 115 and West Cameron 306. These increases were partially offset by
natural production decline on other properties held and by the loss of reserves
from the Shelton Royalty, which was contributed to an affiliated entity on
January 1, 1998.
Operating Revenues. Oil and gas revenues for 1998 decreased by $4.2
million, or 10%, compared to 1997, Lower realized oil and gas prices reduced
revenues by $8.9 million with increases in volumes offsetting the lower prices
by $4.6 million. The average realized price of natural gas decreased by 15%
while the average realized price for oil decreased by 35%. For 1998, the average
realized gas price was $2.24 per Mcf as compared to an average price of $2.65
per Mcf for 1997. As a result of hedging activities for gas production for 1998
and 1997, we realized gains of $815 thousand and $33 thousand, respectively.
During 1998, approximately 10% of our equivalent gas production
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was subject to hedge positions as compared to 9% in 1997. For 1998, the average
realized oil and condensate price was $12.25 per barrel as compared to an
average price of $18.85 per barrel for 1997.
Oil and Gas Operating Expenses. Lease operating expense for 1998
increased to $8.4 million from $6.9 million for 1997. Lease operating expense
per Mcfe increased from $0.43 for 1997 to $0.48 for 1998. The acquisition of
Pittencrieff properties added $1.7 million of additional lease operating
expenses. A variety of other properties had minor reductions in lease operating
expense which net the total of the increase to $1.5 million.
Exploration Expense. Exploration expense for 1998 increased to $12.3
million from $11.9 million for 1997. The increase in 1998 is a result of
slightly higher dry hole expense. Dry hole costs for 1997 were $7.4 million
while 1998 dry hole costs were $8.4 million. Impairment of non-producing
leaseholds decreased in 1998 to $1.8 million from $2.7 million during 1997.
Depreciation, Depletion and Amortization Expense. During 1998,
depreciation, depletion and amortization expense increased to $26.4 million from
$16.2 million for 1997. The increase was due both increased production volumes
and an increased depletion rate per Mcfe. This increase in rate of depletion is
directly related to lower year-end reserve balances of existing reserves prior
to acquisitions. The depletion rate per unit for 1998 increased to $1.52 per
Mcfe, from $1.03 per Mcfe for 1997.
General and Administrative Expense. General and administrative expense,
which is net of overhead reimbursements received from other working interest
owners, remained the same as the 1997 amount of $3.0 million, however, decreased
per Mcfe to $0.17 in 1998 from $0.19 for 1997. The reduction in general and
administrative expense per Mcfe resulted from increasing production levels
without a corresponding increase in the number of employees.
Trademark Fee. We pay a trademark fee to King Ranch, Inc. for the use
of the King Ranch name and the Running W trademark. This fee was increased from
$250,000 per year in 1997 to $500,000 per year in 1998.
Net Income. As a result of the foregoing, we had a net loss of $7.1
million for 1998, as compared to net income of $3.6 million for 1997.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Production. Net production increased 2%, from 15.4 Bcfe for 1996, to
15.7 Bcfe for 1997. Oil and condensate production for 1997 increased 44 MBbls,
or 14%, compared to 1996. Increased oil production for 1997 was due to 64 Mbbls
of production increases from development drilling activities during 1997 at the
Clarksville Field. This increase was offset by natural production decline on
other properties held. Gas production increased by 0.1 Bcf, or 1%, from 13.4 Bcf
for 1996 to 13.5 Bcf for 1997. Increased gas production was due to production
increases from exploratory drilling activities during 1996 at Vermilion Block
281. These increases were partially offset by natural production decline on
other properties held.
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Operating Revenues. Oil and gas revenues for 1997 increased by $2.1
million, or 5%, compared to 1996, as a result of increased oil and gas
production as described in the previous paragraph and slightly higher realized
gas prices. The increase in volume makes up $1.0 of the $2.1 million increase
with increased prices comprising the remaining $1.1 of the increases. The
average realized price of natural gas increased by 4%. For 1997, the average
realized gas price was $2.65 per Mcf as compared to an average price of $2.54
per Mcf for 1996. As a result of hedging activities for gas production for 1997,
we realized a gain of $33 thousand. During 1997, approximately 9% of our
equivalent gas production was subject to hedge positions. We did not hedge any
of its production during 1996. For 1997, the average realized oil and condensate
price was $18.85 per barrel as compared to an average price of $19.58 per barrel
for 1996.
Oil and Gas Operating Expenses. Lease operating expense for 1997
increased to $6.9 million from $4.4 million for 1996. Lease operating expense
per Mcfe increased from $0.29 for 1996 to $0.43 for 1997. These increases are
attributable to the following:
<TABLE>
<S> <C>
1) Increased workover activities at the
Clarksville Field $0.2 million
2) Increased workover activities at East
Cameron 56/57 $0.3 million
3) Increased workover activities at West
Cameron 306 $0.4 million
4) Increased workover activities at
Matagorda 650 $0.3 million
5) Increased workover activities at
Carter Ranch $0.2 million
6) General increase in costs in the
oilfield service industry $1.1 million
------------
$2.5 million
</TABLE>
Exploration Expense. Exploration expense for 1997 increased to $11.9
million from $7.2 million for 1996. The increase in 1997 is a result of higher
dry hole expense. Dry hole costs for 1997 were $7.4 million while 1996 dry hole
costs were $3.2 million. Impairment of non-producing leaseholds in 1997 was $2.7
million while no leases were impaired during 1996.
Depreciation, Depletion and Amortization Expense. During 1997,
depreciation, depletion and amortization expense decreased to $16.2 million from
$20.9 million for 1996. The decrease is attributable to lower finding costs
related to the discoveries at Vermilion Blocks 273 and 281. These discoveries
produced higher year-end reserve balances and contributed to a decrease in the
depletion rate, which went from $1.36 per Mcfe in 1996 to $1.03 per Mcfe in
1997.
General and Administrative Expense. General and administrative expense
for 1997, which is net of overhead reimbursements received from other working
interest owners, remained the same as the 1996 figures of $3.0 million, or $0.19
per Mcfe.
Trademark Fee. We pay a trademark fee to King Ranch, Inc. of $250,000
per year for the use of the King Ranch name and the Running W trademark.
Net Income. As a result of the foregoing, we had net income of $3.6
million for 1997, as compared to $4.1 million for 1996.
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Liquidity and Capital Resources
For the six-month periods ending June 30, 1999 and June 30, 1998, we
had negative working capital of ($177) thousand and ($2.1) million,
respectively. The June 30, 1999 working capital amount excludes an intercompany
note payable to our parent company King Ranch, Inc. We had working capital at
December 31, 1998 of $240 thousand excluding the intercompany note payable to
our parent company. Our working capital at December 31, 1997 was $23.4 million.
The $23.2 million decrease in working capital from December 31, 1997 to December
31, 1998 is attributable to three reserve acquisitions made in 1998 as well as
oil and gas exploration activities. The three reserve acquisitions account for
$21.3 million or 92% of the $23.2 million decrease and were as follows:
<TABLE>
<S> <C>
50% interest in Pittencrieff Resources - $ 12.5 million
Selected properties from NCX Exploration- $ 5.0 million
Selected properties from Taurus Exploration $ 3.8 million
---------------
$ 21.3 million
</TABLE>
For the six-month periods ending June 30, 1999 and June 30, 1998, our
net cash flows from operations were $12.2 million and $43.3 million,
respectively. The large decrease is the result of a $23.6 million decrease in
intercompany receivable from our parent during the first six months of 1998. Our
net cash flow from operations for 1998 was $52.0 million compared to $28.0
million for 1997 and $3.9 million for 1996. The $24.0 million increase in cash
flow from operations between 1997 and 1998 is largely due to a $23.6 million net
change in the intercompany received from our parent that occurred in 1998. The
1996 cash flow from operations is substantially below 1997 because of a $24.6
million increase in the intercompany receivable from our parent.
For the six-month period ending June 30, 1999, capital expenditures
were $12.9 million, consisting of $4.9 million for exploration, $3.1 million for
development and $4.9 million for acquisitions of properties. For the six-month
period ending June 30, 1998, capital expenditures were $44.0 million, consisting
of $8.0 million for exploration, $15.0 million for development and $20.9 million
for acquisitions of properties. Capital expenditures for 1998 were $63.2
million, consisting of $25.5 million for exploration, $12.4 million for
development and $25.3 million for acquisitions of properties. Capital
expenditures for 1997 were $33.2 million, consisting of $12.4 million for
exploration, $11.8 million for development and $9.0 million for acquisitions of
properties while in 1996 total capital expenditures were $14.0 million,
consisting of $4.2 million for exploration, $1.4 million for development and
$8.4 million for acquisitions of properties. Our exploration capital expenditure
budget for 1999 is approximately $19 million, of which only $4.9 million had
been spent. While we continue to pursue attractive development opportunities,
the timing and size of its capital commitments are unpredictable. As of June 30,
1999, there were no outstanding short-term or long-term material capital
commitments.
For purposes of reporting cash flows, we add back to operating
activities all exploration costs expensed in the current year which were
previously deferred, such as dryhole costs. If such costs had been included in
operating activities rather than in investing activities, cash provided by
operating activities would have been $43,613, $20,552, $694, $9,828 and $37,574
and cash used in investing activities would have been $54,735, $25,115, $9,847,
$10,468 and $38,147 for the years ended December 31, 1998, 1997 and 1996 and for
the six-month periods ended June 30, 1999 and 1998, respectively.
Actual levels of capital expenditures may vary significantly due to
many factors, including drilling results, oil and gas prices, industry
conditions, the prices and availability of goods and
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services and the extent to which proved properties are acquired. We anticipate
that capital expenditures will be funded principally from cash flow from
operations. In the event capital expenditures were to exceed cash flow from
operations, it is anticipated that such expenditures would be funded through
additional borrowings from our parent.
We participate in revolving credit and cash management with our parent.
Under this policy our cash requirements are provided by our parent, and our
excess cash is remitted to our parent for investment. During December 1998, our
parent began to charge interest to us at a rate of 8.75 % (prime rate + 1%) on
the outstanding balance borrowed, before December 1998, no interest income or
expense was recognized as a result of this policy.
To cover the various obligations of lessees on the Outer Continental
Shelf ("OCS"), the Minerals and Management Service ("MMS") generally requires
that lessees post substantial bonds or other acceptable assurances that those
obligations will be met. The cost of those bonds or other surety can be
substantial and there is no assurance that bonds or other surety can be obtained
in all cases. Additionally, the MMS may require operators in the OCS to post
supplemental bonds in excess of lease and area wide bonds to assure that
abandonment obligations on specific properties will be met. For each of the
periods presented, the total costs of all area wide and supplemental bonds was
less than $50,000. Under some circumstances, the MMS may require operations on
federal leases to be suspended or terminated. Any suspension or termination
could materially and adversely affect our financial condition, results of
operations and cash flows.
Our operations are subject to various federal, state and local laws and
regulations relating to the protection of the environment. We believe our
current operations are in material compliance with current environmental laws
and regulations. There can be no assurance, however, that current regulatory
requirements will not change, currently unforeseen environmental incidents will
not occur or past non-compliance with environmental laws will not be discovered.
Financial Instrument Market Risk
Our Board of Directors has adopted a policy regarding the use of
derivative instruments. This policy requires every derivative used by us to
relate to underlying offsetting positions or firm commitments. It prohibits the
use of speculative, highly complex or leveraged derivatives. Under the policy,
the Chief Executive Officer and Vice President of Finance must review and
approve all risk management programs that use derivatives. The Audit Committee
of our Board of Directors also periodically reviews these programs.
Commodity Price Risk. From time to time, we utilize hedging
transactions with respect to a portion of our oil and gas production to achieve
a more predictable cash flow, as well as to reduce our exposure to price
fluctuations. While the use of these hedging arrangements limits the downside
risk of adverse price movements, they may also limit future revenues from
favorable price movements. The use of hedging transactions also involves the
risk that the counterparties will be unable to meet the financial terms of the
transactions. All of our hedging transactions to date were carried out in the
over-the-counter market and the obligations of the counterparties have been
guaranteed by entities with at least an investment grade rating or secured by
letters of credit. We account for these
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transactions as hedging activities and, accordingly, gains or losses are
included in oil and gas revenues when the hedged production is delivered.
Neither the hedging contracts nor the unrealized gains or losses on these
contracts are recognized in the financial statements.
Interest Rate Risk. Market risk is estimated as the potential change in
fair-value resulting from an immediate hypothetical one percentage point
parallel shift in the yield curve. The sensitivity analysis presents the
hypothetical change in fair-value of the financial instrument we held at
December 31, 1998. For floating rate debt, interest rate changes generally do
not affect the fair market value but do impact future results of operations and
cash flows, assuming other factors are held constant. At December 31, 1998, we
had intercompany floating debt of $14.45 million and had no fixed debt. Assuming
constant debt levels, the results of operations and cash flows for the next year
resulting from a one percentage point change in interest rates would be
approximately $145,000 before taxes.
Year 2000 Issues
Year 2000 issues result from the inability of computer programs or
computerized equipment to accurately calculate, store or use a date subsequent
to December 31, 1999. The erroneous date can be interpreted in a number of
different ways; typically the year 2000 is represented as the year 1900. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices or engage in similar normal business.
Because we were recently formed, we were aware of, and considered year
2000 issues at the time of purchase or development of our software and hardware
systems. In addition, we have recently completed an assessment of our core
financial and operational systems to ensure year 2000 compliance. As a result of
our assessments we have determined that our land and lease records software
system is not Year 2000 compliant. Further assessment of other less critical
systems and various types of equipment is continuing and should be completed
during the third quarter of 1999. We do not have a contingency plan to address
unavoidable risks, but we intend to formulate one upon completion of our
assessment and testing in the third quarter of 1999. We believe that the
potential impact, if any, of these systems not being year 2000 compliant will at
most require employees to manually complete otherwise automated tasks or
calculations and it should not impact our ability to continue exploration,
drilling, production or sales activities.
We rely on other producers and transmission companies to conduct our
basic operations. Should any third party with which we have a material
relationship fail, the impact could impair our ability to perform basic
operations. We have initiated communications with these significant suppliers,
business partners and customers to determine the extent to which we are
vulnerable to those third parties' failure to correct their own year 2000
issues. There can be no guarantee, however, that the systems of other companies
on which our systems rely will be timely converted, or that a failure to convert
by another company, or a conversion that is incompatible with our systems would
not have a material adverse effect on our operations.
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We have and will continue to utilize both internal and external resources
to complete tasks and perform testing necessary to address the year 2000 issue.
Costs of developing and carrying out our assessment and testing have been funded
from our operations and have not represented a material expense. We have not
completed our assessment and testing; however, we do not anticipate any
significant costs relating to remediation efforts resulting from the year 2000
issues.
King Ranch Energy Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure
During King Ranch Energy's two most recent fiscal years and through the
date of this document, King Ranch Energy has not had any changes in or
disagreements with its independent accountants on accounting and financial
disclosure.
LEGAL MATTERS
The validity of the St. Mary common stock to be issued in the merger has
been passed upon by Ballard Spahr Andrews & Ingersoll, LLP.
Locke Liddell & Sapp LLP has issued an opinion as to the Federal income tax
consequences of the merger and the distribution and Ernst & Young LLP has issued
an opinion as to the Federal income tax consequences of the distribution. These
opinions have been filed with the SEC as exhibits to the registration statement
relating to this document. See "The Merger Transaction--Material Federal Income
Tax Consequences of the Merger."
EXPERTS
The consolidated financial statements of St. Mary incorporated by reference
in this document to the extent and for the periods indicated in their report,
have been audited by Arthur Andersen LLP, independent public accountants, and
are included herein in reliance upon the authority of that firm as experts in
auditing and accounting in giving that report.
The consolidated financial statements of St. Mary for the year ended
December 31, 1996 incorporated by reference in this document, have been
incorporated herein in reliance on the report of PricewaterhouseCoopers LLP,
independent public accountants, given on the authority of that firm as experts
in accounting and auditing.
The consolidated financial statements of King Ranch Energy, Inc. as of
December 31, 1998 and 1997 and for each of the three years in the period ended
December 31, 1998 included in this proxy and consent statement/prospectus have
been audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein, and have been so included in reliance upon the report
of that firm given upon their authority as experts in accounting and
auditing.
Some of the estimates of oil and gas reserves included or incorporated by
reference in this document were based upon engineering reports prepared by the
independent petroleum engineering
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firms of Ryder Scott Company, L.P. and Netherland Sewell & Associates, Inc.
Those estimates are included herein in reliance on the authority of those firms
as experts in those matters.
WHERE YOU CAN FIND MORE INFORMATION
St. Mary files annual, quarterly and special reports, proxy statements and
other information with the SEC. You may read and copy any reports, statements or
other information St. Mary files at the SEC's public reference rooms in
Washington, D.C., New York, New York and Chicago, Illinois. Please call the SEC
at 1-800-SEC-0330 for further information on the public reference rooms. St.
Mary's SEC filings are also available to the public from commercial document
retrieval services and at the web site maintained by the SEC at
"http://www.sec.gov."
St. Mary has filed a registration statement on Form S-4 to register with
the SEC the St. Mary common stock to be issued in the merger. This document is a
part of that registration statement and constitutes a prospectus of St. Mary in
addition to being a proxy statement for the King Ranch stockholders meeting to
vote on the merger agreement. As allowed by SEC rules, this document does not
contain all the information you can find in the registration statement or the
exhibits to the registration statement.
The SEC allows St. Mary to "incorporate by reference" information into this
document, which means that St. Mary can disclose important information to you by
referring you to another document filed separately with the SEC. The information
incorporated by reference is deemed to be part of this document even though it
is not included or delivered with this document, except for any information
superseded by information included or incorporated by reference in this
document. This document incorporates by reference those documents set forth
below that St. Mary has previously filed with the SEC. Those documents contain
important business and financial information about St. Mary.
You can obtain any of the other documents incorporated by reference through
us or the SEC. Documents incorporated by reference are available from us without
charge, excluding all exhibits unless we have specifically incorporated by
reference an exhibit in this document. Stockholders may obtain other documents
incorporated by reference in this document by requesting them in writing or by
telephone from St. Mary at the following address:
St. Mary Land & Exploration Company
Attn: Secretary
1776 Lincoln Street, Suite 1100
Denver, CO 80203
Telephone: (303) 861-8140
If you would like to request from St. Mary documents which are incorporated
by reference, please do so by December 9, 1999 to receive them before the St.
Mary stockholders meeting or the King Ranch Energy stockholders forum.
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St. Mary SEC Filings Period
(SEC File No. 0-20872)
Annual Report on Form 10-K Fiscal Year ended December 31, 1998
Amendment to Annual Report on Fiscal Year ended December 31, 1998
Form 10-K/A filed April 14, 1999
Amendment No. 2 to Annual Report on Fiscal Year ended December 31, 1998
Form 10-K/A filed October 4, 1999
Amendment No. 3 to Annual Report on Fiscal Year ended December 31, 1998
Form 10-K/A-3 filed November 12, 1999
Quarterly Report on Form 10-Q Quarter ended March 31, 1999
Quarterly Report on Form 10-Q Quarter ended June 30, 1999
Amendment to Quarterly Report on Quarter ended June 30, 1999
Form 10-Q/A filed August 17, 1999
Amendment No. 2 to Quarterly Report Quarter ended June 30, 1999
on Form 10-Q/A-2 filed October 4, 1999
Amendment No. 3 to Quarterly Report Quarter ended June 30, 1999
on Form 10-Q/A-3 filed November 12,
1999
Current Report on Form 8-K filed
July 28, 1999
Registration Statement on Form 8-A
filed November 18, 1992
We are also incorporating by reference additional documents that we file
with the SEC between the date of this document and the date of the St. Mary
stockholders meeting and the King Ranch Energy stockholders forum.
St. Mary has supplied all information contained or incorporated by
reference in this document relating to St. Mary, and King Ranch and King Ranch
Energy has supplied all information contained in this document relating to King
Ranch and King Ranch Energy.
You can also get more information by visiting St. Mary's web site at
www.stmaryland.com and King Ranch's web site at www.king-ranch.com. Web site
materials are not part of this document.
You should rely only on the information contained or incorporated by
reference in this document to vote on the St. Mary share issuance at the St.
Mary stockholder meeting or to consent to the merger as a King Ranch Energy
stockholder. We have not authorized anyone to provide you with information that
is different from what is contained in this document. This document is dated
November 10, 1999. You should not assume that the information contained in the
document is accurate
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as of any date other than that date, and neither the mailing of this document to
stockholders nor the issuance of St. Mary common stock in the merger shall
create any implication to the contrary.
FUTURE ST. MARY STOCKHOLDER PROPOSALS
Any St. Mary stockholder proposal for the annual meeting of stockholders in
2000 must have been received by St. Mary by November 1, 1999 for the proposal to
be included in the St. Mary proxy statement and form of proxy for that meeting.
If notice of a proposal for which a stockholder will conduct his or her own
proxy solicitation is not received by St. Mary by March 1, 2000, proxies
solicited by the St. Mary board of directors may use their discretionary voting
authority when the matter is raised at the meeting, without including any
discussion of the matter in the proxy statement.
CAUTIONARY INFORMATION ABOUT FORWARD-LOOKING STATEMENTS
This document includes or incorporates by reference "forward-looking
statements" that are subject to risks and uncertainties. These forward-looking
statements include statements about:
. synergies expected from the merger
. efficiencies and costs savings expected to be realized from the merger
. revenue enhancements expected from the merger
. the timetable for closing the merger
. capital productivity and returns on capital employed by St. Mary after the
closing
. oil and gas reserve estimates, including estimates of future net revenues
associated with those reserves and the present value of future net
revenues
. planned expansion and growth of St. Mary's operations
. future capital spending and availability
. repayment of debt
. expected oil and natural gas production
. asset portfolios
. Year 2000 readiness
. oil and natural gas potential
. future development and exploration expenditures (including the amount and
nature thereof)
. planned drilling of wells
. business strategies
The sections of this document which contain forward-looking statements
include:
. Summary,
. The Merger Transaction--Background of the Merger;
100
<PAGE>
. The Merger Transaction--Our Reasons for the Merger,
. Unaudited Pro Forma Condensed Combined Financial Statements, and
. Opinions of Financial Advisors.
Our forward-looking statements are also identified by words such as:
. "believes,"
. "expects,"
. "anticipates,"
. "intends,"
. "projects,"
. "estimates," or
. similar expressions.
For those statements by St. Mary, St. Mary claims the protection of the
safe harbor for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995.
You should understand that the following important factors, in addition to
those discussed elsewhere in this document and in the documents which are
incorporated by reference, could affect the future results of St. Mary and King
Ranch Energy, and of St. Mary after the closing of the merger, and could cause
those results or other outcomes to differ materially from those expressed in our
forward-looking statements:
101
<PAGE>
Economic and Industry Conditions
. material adverse changes in economic or industry conditions generally or in
the market served by our companies
. supply and demand for and pricing of crude oil and natural gas
. changes in demographics and consumer preferences
. the uncertainty of estimated oil and gas resources
Project/Technology Factors
. supply disruptions oil and natural gas project advancement
. supply disruptions the development and use of new technology
. the impact of the Year 2000 on our technology systems or the technology
systems of third parties with which we have material relationships
Transaction or Commercial Factors
. the outcome of negotiations with partners, customers or others
. our ability to integrate the business of St. Mary and King Ranch Energy
successfully after the merger
Political/Governmental Factors
. political developments and laws and regulations, such as restrictions on
production, price controls, tax increases and retroactive tax claims, and
environmental regulations
. permitting delays
Operating Factors
. supply disruptions
. technical difficulties
. changes in operating conditions and costs
. weather
. marketing delays
Competitive Factors
. the competitiveness of suppliers of alternative energy sources or product
substitutes
. the actions of competitors
. the challenges inherent in diverting management's focus and resources
from other strategic opportunities and from operational matters during the
merger and integration process
102
<PAGE>
We caution you that our forward-looking statements are not guarantees of
future performance and that actual results or developments may differ materially
from those expressed or implied by the forward-looking statements.
SEC POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Delaware General Corporation Law provides for indemnification by a
corporation of costs incurred by directors, employees, and agents in connection
with an action suit, or proceeding brought by reason of their position as a
director, employee, or agent. The person being indemnified must have acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation.
Provisions of St. Mary's certificate of incorporation and by-laws obligate
St. Mary to indemnify its directors and officers to the fullest extent permitted
under Delaware law. Provisions of King Ranch Energy's bylaws obligate King Ranch
Energy to indemnify its directors and officers in a manner consistent with
Delaware General Corporation Law.
In so far as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or persons controlling St.
Mary, King Ranch or King Ranch Energy under the foregoing provisions or
otherwise, St. Mary, King Ranch and King Ranch Energy have been advised that in
the opinion of the SEC that indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial statements
combine the historical consolidated balance sheets and statements of operations
of St. Mary and King Ranch Energy giving effect to the merger using the purchase
method of accounting for business combinations.
We are providing the following information to aid you in your analysis of
the financial aspects of the merger. We derived this information from the
audited financial statements of St. Mary for 1998 and the unaudited financial
statements for the six months ended June 30, 1999 and from the audited financial
statements of King Ranch Energy for 1998 and the unaudited financial statements
for the six months ended June 30, 1999. The information is only a summary and
you should read it in conjunction with our historical financial statements and
related notes contained in the annual reports and other information that St.
Mary has filed with the SEC and incorporated in this document by reference and
the historical financial statements of King Ranch Energy and related notes
contained in this document. See "Where You Can Find More Information" on page
98.
The unaudited pro forma condensed combined statements of operations for the
year ended December 31, 1998 and the six months ended June 30, 1999 assume the
merger was effected on January 1, 1998. The unaudited pro forma condensed
combined balance sheet gives effect to the merger as if it had occurred on June
30, 1999. The accounting policies of St. Mary and King Ranch Energy are
substantially comparable. Therefore, we did not make adjustments to the
unaudited pro
103
<PAGE>
forma condensed combined financial statements to conform the accounting policies
of the combining companies.
The unaudited pro forma condensed combined financial information is for
illustrative purposes only. The companies may have performed differently had
they always been combined. You should not rely on the pro forma condensed
combined financial information as being indicative of the historical results
that would have been achieved had the companies always been combined or the
future results that the combined company will experience after the merger.
ST. MARY LAND & EXPLORATION COMPANY AND SUBSIDIARIES
KING RANCH ENERGY, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
June 30, 1999
(In thousands, except share amounts)
<TABLE>
<CAPTION>
St. Mary/
King Ranch
King Ranch Pro Forma Energy
St. Mary Energy Adjustment Pro Forma
--------- ----------- ---------- ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,244 $ - $ $ 5,244
Accounts receivable 12,775 7,651 (2) 4,000 24,426
Prepaid expenses and other 816 584 1,400
Refundable income taxes 211 - 211
Refundable income taxes - affiliate - 5,700 (1) (5,700) -
Deferred income taxes 91 - 91
--------- ---------- ---------- ------------
Total current assets 19,137 13,935 (1,700) 31,372
--------- ---------- ---------- ------------
Property and equipment (successful efforts method), at cost:
Proved oil and gas properties 252,803 257,331 (2) (210,260) 299,874
Unproved oil and gas properties, net 31,455 22,074 (2) (14,074) 39,455
Other, net 4,654 473 5,127
--------- ---------- ---------- ------------
288,912 279,878 (224,334) 344,456
Less accumulated depletion, depreciation, amortization
and impairment (136,714) (212,265) (2) 212,265 (136,714)
--------- ---------- ---------- ------------
Net property and equipment 152,198 67,613 (12,069) 207,742
--------- ---------- ---------- ------------
Other assets:
Khanty Mansiysk Oil Corporation receivable 6,839 - 6,839
and stock
Summo Minerals Corporation investment and 1,566 - 1,566
receivable
Other assets 3,526 246 (1) (246) 3,526
--------- ---------- ---------- ------------
Total other assets 11,931 246 (246) 11,931
--------- ---------- ---------- ------------
Total assets $ 183,266 $ 81,794 $ (14,015) $ 251,045
========= ========== ========== ============
</TABLE>
104
<PAGE>
ST. MARY LAND & EXPLORATION COMPANY AND SUBSIDIARIES
KING RANCH ENERGY, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET (Continued)
June 30, 1999
(In thousands, except share amounts)
<TABLE>
<CAPTION>
St. Mary/
King Ranch
King Ranch Pro Forma Energy
St. Mary Energy Adjustment Pro Forma
-------- ------ ---------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C> <C> <C>
Current liabilities:
Accounts payable and accrued expenses $ 10,315 $ 4,795 $ 15,110
Accounts payable - parent 9,317 (1) $ (9,317) -
Current notes payable - affiliate 15,090 (1) (15,090) -
Current portion of stock appreciation rights 272 - 272
--------- -------- --------- ---------
Total current liabilities 10,587 29,202 (24,407) 15,382
--------- -------- --------- ---------
Long-term liabilities:
Long-term debt 20,087 - 20,087
Deferred income taxes 11,918 - (2) 4,346 16,264
Stock appreciation rights 455 - 455
Future platform abandonment - 5,782 5,782
Other noncurrent liabilities 1,250 28 1,278
--------- -------- --------- ---------
33,710 5,810 4,346 43,866
--------- -------- --------- ---------
Stockholders' equity:
Common stock, $.01 par value: authorized -
50,000,000 shares issued and outstanding -
11,269,361 for St. Mary - Pro forma, 13,935,613
issued and outstanding 113 1 (2) 26 140
Additional paid-in capital 71,083 55,468 (2) (21,374) 123,884
(1) 18,707
Treasury stock - 182,800 shares, at cost for St.
Mary (2,995) - (2,995)
Retained earnings (deficit) 70,573 (8,687) (2) 8,687 70,573
Unrealized gain on marketable equity securities- 195 195
available for sale --------- -------- --------- ---------
Total stockholders' equity 138,969 46,782 6,046 191,797
--------- -------- --------- ---------
Total liabilities and stockholders' equity $ 183,266 $ 81,794 $ (14,015) $ 251,045
========= ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these pro forma financial
statements.
105
<PAGE>
ST. MARY LAND & EXPLORATION COMPANY AND SUBSIDIARIES
KING RANCH ENERGY, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
For the Year Ended December 31, 1998
(In thousands, except per share amounts)
The unaudited pro forma condensed combined statement of operations for the
fiscal year ended December 31, 1998 gives effect to the merger as if it occurred
on January 1, 1998 by combining the results of operations for St. Mary and King
Ranch Energy applying the purchase method of accounting.
<TABLE>
<CAPTION> St. Mary/
King Ranch
King Ranch Pro Forma Energy
St. Mary Energy Adjustments Pro Forma
-------- ------ ----------- ---------
<S> <C> <C> <C> <C>
Operating revenues:
Oil and gas production $70,648 $39,290 $109,938
Gain on sale of proved properties 7,685 - 7,685
Other revenues 411 117 528
------- ------- ----------- --------
Total operating revenues 78,744 39,407 - 118,151
------- ------- ----------- --------
Operating expenses:
Oil and gas production 17,005 8,373 25,378
Depletion, depreciation, amortization and
impairment - 26,363 (5) $(12,617) 56,141
(7) 42,395
Depletion, depreciation, and amortization 24,912 - (7) (24,912) -
Impairment of proved properties 17,483 - (7) (17,483) -
Exploration 11,705 12,301 (8) 4,457 28,463
Abandonment and impairment of unproved properties 4,457 - (8) (4,457) -
General and administrative 7,097 2,970 10,067
Writedown of Russian convertible receivable 4,553 - 4,553
Writedown of investment in Summo
Minerals Corporation 3,949 - 3,949
Loss in equity investees 661 - 661
Other 141 - 141
------- -------- ----------- --------
Total operating expenses 91,963 50,007 (12,617) 129,353
------- -------- ----------- --------
Loss from operations (13,219) (10,600) 12,617 (11,202)
Nonoperating income and (expense):
Trademark fee-affiliate - (500) (3) 500 -
Interest income 638 - 638
Interest expense (1,665) - (1,665)
Gain (loss) on sale of properties - (37) (37)
Other - (103) (4) 50 (53)
------- ------- ------- ------
Loss from continuing operations before income taxes (14,246) (11,240) 13,167 (12,319)
Income tax benefit (5,415) (4,121) (6) 4,740 (4,796)
------- ------- ------- -------
Net loss from continuing operations $(8,831) $(7,119) $ 8,427 $(7,523)
======= ======= ======= =======
Basic net loss per common share from continuing
operations $ (.81) $ (.55)
======= ======= ======= =======
Diluted net loss per common share from continuing
operations $ (.81) $ (.55)
======= =======
Basic weighted average shares outstanding 10,937 (2) 2,666 13,603
====== ======
Diluted weighted average shares outstanding 10,937 (2) 2,666 13,603
====== ======
</TABLE>
The accompanying notes are an integral part
of these pro forma financial statements.
106
<PAGE>
ST. MARY LAND & EXPLORATION COMPANY AND SUBSIDIARIES
KING RANCH ENERGY, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 1999
(In thousands, except per share amounts)
The unaudited pro forma condensed combined statement of operations for the six
months ended June 30, 1999 gives effect to the merger as if it occurred on
January 1, 1999 by combining the results of operations for St. Mary and King
Ranch Energy applying the purchase method of accounting.
<TABLE>
<CAPTION>
St. Mary/
King
King Ranch
Ranch Pro Forma Energy
St. Mary Energy Adjustments Pro Forma
-------- ------ ----------- ---------
<S> <C> <C> <C> <C>
Operating revenues:
Oil and gas production $ 29,578 $ 20,869 $ 50,447
Gain on sale of proved properties 114 - 114
Other revenues 323 60 383
-------- -------- -------- --------
Total operating revenues 30,015 20,929 - 50,944
-------- -------- -------- --------
Operating expenses:
Oil and gas production 7,954 3,550 11,504
Depletion, depreciation, amortization and impairment - 12,081 (5) $ (4,029) 18,982
- (7) 10,930
Depletion, depreciation, and amortization 10,683 - (7) (10,683) -
Impairment of proved properties 247 - (7) (247) -
Exploration 2,942 5,646 (8) 800 9,388
Abandonment and impairment of unproved properties 800 - (8) (800) -
General and administrative 3,638 1,162 4,800
Loss in equity investees 58 - 58
Other 338 - 338
-------- -------- -------- --------
Total operating expenses 26,660 22,439 (4,029) 45,070
-------- -------- -------- --------
Income (loss) from operations 3,355 (1,510) 4,029 5,874
Nonoperating income and (expense):
Trademark fee-affiliate - (250)(3) 250 -
Interest income 638 - 638
Interest expense (516) - - (516)
Other - (633)(4) 600 (33)
-------- -------- -------- --------
Income (loss) from continuing operations before income 3,477 (2,393) 4,879 5,963
taxes
Income tax expense (benefit) 1,161 (825)(6) 1,757 2,093
-------- -------- -------- --------
Net income (loss) from continuing operations $ 2,316 $ (1,568) $ 3,122 $ 3,870
======== ======== ======== ========
Basic net income per common share from continuing
operations $ .21 $ .29
======== ========
Diluted net income per common share from continuing
operations $ .21 $ .29
======== ========
Basic weighted average shares outstanding 10,879 (2) 2,666 13,545
======== ========
Diluted weighted average shares outstanding 10,892 (2) 2,666 13,558
======== ========
</TABLE>
The accompanying notes are an integral part
of these pro forma financial statements.
107
<PAGE>
ST. MARY LAND & EXPLORATION COMPANY AND SUBSIDIARIES
KING RANCH ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
Note 1 - Basis of Presentation
On July 27, 1999, St. Mary Land & Exploration Company ("St. Mary") signed
an agreement to acquire King Ranch Energy, Inc. ("King Ranch Energy") located in
Houston, Texas in a merger in which St. Mary will issue 2,666,252 common shares
to shareholders of King Ranch. King Ranch Energy will become a wholly owned
subsidiary of St. Mary. The acquisition will be accounted for as a
purchase.
The unaudited pro forma condensed combined statements of income are based
on the consolidated financial statements of St. Mary and King Ranch Energy for
the year ended December 31, 1998 and the six months ended June 30, 1999. The
unaudited pro forma condensed combined balance sheet is based on the unaudited
consolidated financial statements of St. Mary and King Ranch Energy at June 30,
1999.
The St. Mary and King Ranch Energy consolidated financial statements are
prepared in accordance with generally accepted accounting principles and require
St. Mary and King Ranch Energy to make estimates that affect the reported
amounts of assets, liabilities, revenues and expenses and the disclosure of
contingent assets and liabilities. In the opinion of St. Mary and King Ranch
Energy, the unaudited pro forma condensed combined financial statements include
all adjustments necessary to present fairly the results of the periods
presented.
The accompanying pro forma statements do not include all information and
notes required by generally accepted accounting principles for complete
financial statements. However, except as disclosed herein, there has been no
material change in the information disclosed in the notes to consolidated
financial statements included in the Annual Report on Form 10-K of St. Mary Land
& Exploration Company and Subsidiaries for the year ended December 31, 1998. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the periods presented are not necessarily indicative of
the results that may be expected for the full year.
The accounting policies followed by St. Mary are set forth in Note 1 to St.
Mary's financial statements in the Form 10-K for the year ended December 31,
1998. It is suggested that these financial statements be read in conjunction
with the financial statements and notes included in the Form 10-K.
The accompanying condensed pro forma balance sheet includes pro forma
adjustments to give effect to the acquisition of King Ranch Energy as of June
30, 1999. The condensed pro
108
<PAGE>
forma statements of operations for the year ended December 31, 1998 and the six
months ended June 30, 1999 include the historical revenue and direct operating
expenses of St. Mary and King Ranch Energy for the respective periods presented
and adjustments for the pro forma effects of the acquisition as if the
transaction had occurred January 1, 1998.
Note 2 - Accounting Policies and Financial Statement Classifications
The accounting policies of St. Mary and King Ranch Energy are substantially
comparable. Consequently, no adjustments were made to the unaudited pro forma
condensed combined financial statements to conform to the accounting policies of
the combining companies.
Note 3 - Pro Forma Adjustments
The following pro forma adjustments have been made to the balance sheet of
St. Mary and King Ranch Energy at June 30, 1999 and to the statements of
operations for the six months ended June 30, 1999 and for the year ended
December 31, 1998:
(1) To eliminate all inter-company receivables and payables between
King Ranch Energy and its parent company, King Ranch, Inc. These
intercompany amounts will be retained by the parent company in
accordance with Section 7.2(c) of the merger agreement. In
addition, the merger agreement calls for King Ranch, Inc. to
retain the litigation liability for the Pi Energy suit and to
fund up to $850,000 in severance costs for King Ranch Energy
employees not retained in the merger. The total amount of
severance costs that will be paid is approximately $963,000,
and King Ranch has agreed to absorb an additional $78,000 of
those costs in excess of $850,000. St. Mary does not expect to
incur additional material severance charges in the future related
to this transaction.
(2) To record the purchase transaction and allocate the purchase
price. The market price of St. Mary common stock on the day of
announcement of the merger agreement was $22.625. The cost of the
acquisition reflects a 15 percent discount from the average of
that price and the prices of St. Mary common stock for the two
days preceding and following the announcement, which average
price was $23.31. St. Mary determined that discount based
principally on the negotiated net asset values of the companies
that determined the negotiated purchase price of King Ranch
Energy and the restriction on resale of the stock by the King
Ranch shareholders until March 31, 2001. The purchase price was
allocated to the assets and liabilities acquired based on the
fair market values of each item. The details of the purchase
price allocation to the assets and liabilities acquired
follows:
<TABLE>
<CAPTION>
Amount
Asset or Liability Allocated Allocation Basis Depreciation Method
------------------ --------- ---------------- --------------------
<S> <C> <C> <C>
Accounts receivable $11,651 Estimated fair value based on N/A
King Ranch Energy book value
Other current assets 584 Estimated fair value based on N/A
King Ranch Energy book value
Oil & gas properties:
Non-producing properties 8,000 Estimated fair value based on Not depleted until reserves are
(including WIP) undeveloped reserve values produced-evaluated for
impairment annually
Producing properties 47,071 Estimated fair value based on Units of production method
proved producing reserve values based on estimated reserve
quantities
Other PP&E 473 Estimated fair value based on Straight line method over useful
King Rancy energy book value life of assets (3 to 15 years)
Accounts payable 4,795 Estimated fair value based on N/A
King Ranch Energy book value
Long-term liability- 5,810 Estimated fair value based on N/A
Platform abandonment King Ranch Energy book value
Deferred taxes 4,346 Estimated fair value based on N/A
King Ranch Energy book value
Common stock 52,828 Estimated fair value as N/A
described above
</TABLE>
(3) To eliminate the trademark fee paid by King Ranch Energy to King
Ranch, Inc. for use of logo. This logo will not be used by St.
Mary.
(4) To eliminate the interest expense paid on the note payable owed
to King Ranch, Inc. This debt will not be assumed by St. Mary.
109
<PAGE>
(5) To adjust depreciation, depletion, and amortization to reflect
the allocation of purchase price to oil and gas properties
using the fair market values assigned by the purchase
transaction. The fair value of assets acquired was lower than
King Ranch Energy's book value and this negative goodwill was
allocated to producing properties. Depreciation, depletion and
amortization of proved oil and gas properties is calculated
using the units of production method based on proved reserves.
The adjustment to historical DD&A was computed by applying the
new per unit DD&A rate, computed by taking the fair value of
producing oil and gas properties divided by the proved reserves
acquired, to the production for each period.
(6) To account for the tax effect of the pro forma adjustments, using
the expected income tax rate of the combined companies. This 35%
pro-forma rate reflects a federal statutory rate of 34% and a
state income tax rate of 2%, less Section 29 tax credits of 1%.
The permanent book over tax basis in the properties of $2 million
results in no material impact on the overall rate.
(7) To reclassify the two separate line items for (a) depreciation,
depletion and amortization and (b) impairment of proved
properties per St. Mary's historical financial statements into
single line item for depreciation, depletion, amortization and
impairment which conforms to King Ranch Energy's historical
financial statement presentation.
(8) To reclassify the separate line item for abandonment and
impairment of unproved properties per St. Mary's historical
financial statements into the line item for exploration which
conforms to King Ranch Energy's historical financial statement
presentation.
There are no adjustments to general and administrative, exploration or
other similar expenses for prospective information for what may happen once the
companies are combined.
110
<PAGE>
INDEX TO KING RANCH ENERGY CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report................................................................................... F-2
Consolidated Balance Sheets as of June 30, 1999 (unaudited) and
December 31, 1998 and 1997............................................................................... F-3
Consolidated Statements of Income for the six months ended
June 30, 1999 and 1998 (unaudited) and the years ended
December 31, 1998, 1997 and 1996......................................................................... F-4
Consolidated Statements of Stockholder's Equity for the six months ended June 30, 1999
(unaudited) and for the years ended December 31, 1998, 1997 and 1996..................................... F-5
Consolidated Statements of Cash Flows for the six months ended
June 30, 1999 and 1998 (unaudited) and the years ended
December 31, 1998, 1997 and 1996......................................................................... F-6
Notes to Consolidated Financial Statements..................................................................... F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
King Ranch, Inc.
Houston, Texas
We have audited the accompanying consolidated balance sheets of King Ranch
Energy, Inc. and subsidiaries (the "Company") as of December 31, 1998 and 1997,
and the related consolidated statements of income, stockholder's equity, and
cash flows for each of the three years in the period then ended. 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, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 1998
and 1997, and the results of its operations and cash flows for each of the three
years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles.
/S/ DELOITTE & TOUCHE LLP
Houston, Texas
March 2, 1999
F-2
<PAGE>
King Ranch Energy, Inc. and Subsidiaries
Consolidated Balance Sheets
(In Thousands, Except Shares)
<TABLE>
<CAPTION>
June 30, December 31,
-----------------------
Assets 1999 1998 1997
- ----------------------------------------------------------------- ---- ---- ----
(Unaudited)
Current Assets:
<S> <C> <C> <C>
Accounts receivable:
Affiliate $ - $ - $ 23,603
Trade 7,651 8,856 8,543
Current income tax receivable - Affiliate 5,700 5,484 -
Prepaids and other assets 505 1,928 417
Inventories 79 79 134
--------- --------- ---------
Total Current Assets 13,935 16,347 32,697
--------- --------- ---------
Property and Equipment:
Oil and gas properties, successful efforts method:
Producing properties 257,331 254,011 210,315
Nonproducing leaseholds 18,223 17,235 14,014
Wells-in-progress 7,464 5,228 5,538
--------- --------- ---------
Total 283,018 276,474 229,867
Other property and equipment 1,907 1,907 1,647
Accumulated depletion, depreciation and amortization (217,312) (209,839) (190,409)
--------- --------- ---------
Total Property and Equipment, net 67,613 68,542 41,105
--------- --------- ---------
Deferred Tax Asset 246 - 324
--------- --------- ---------
Total Assets $ 81,794 $ 84,889 $ 74,126
========= ========= =========
Liabilities and Stockholder's Equity
Current Liabilities:
Accounts payable:
Parent $ 9,317 $ 4,271 $ -
Trade 3,620 10,360 6,117
Oil and gas 1,175 1,476 2,776
Notes payable - Affiliate 15,090 14,450 -
Current income taxes payable - Affiliate - - 375
--------- --------- ---------
Total Current Liabilities 29,202 30,557 9,268
Future platform abandonment 5,782 5,091 4,148
Other 28 35 28
Deferred tax liability - 856 -
--------- --------- ---------
Total Liabilities 35,012 36,539 13,444
--------- --------- ---------
Stockholder's Equity:
Common stock, $1 par value -
Authorized, issued, and outstanding shares - 1,000 1 1 1
Paid-in capital 55,468 55,468 60,681
Retained deficit (8,687) (7,119) -
--------- --------- ---------
Total Stockholder's Equity 46,782 48,350 60,682
--------- --------- ---------
Total Liabilities and Stockholder's Equity $ 81,794 $ 84,889 $ 74,126
========= ========= =========
</TABLE>
See accompanying notes.
F-3
<PAGE>
King Ranch Energy, Inc. and Subsidiaries
Consolidated Statements of Income
(In Thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
------------------------- --------------------------------------
1999 1998 1998 1997 1996
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Operating Revenues:
Working and royalty interest $ 20,869 $ 19,791 $ 39,290 $ 43,239 $ 41,115
Other 60 76 117 365 404
--------- ---------- ---------- -------- ----------
Total Operating Revenues 20,929 19,867 39,407 43,604 41,519
--------- ---------- ---------- -------- ----------
Operating Expenses:
Oil and gas operating expenses 3,550 3,417 8,373 6,848 4,402
Exploration expenses 5,646 6,768 12,301 11,935 7,240
Depletion, depreciation,
amortization and impairment
of properties 12,081 11,024 26,363 16,217 20,916
General and administrative
expenses 1,162 1,387 2,970 3,001 2,980
Abandoned independent Power
Production projects - - - 163 44
--------- ---------- ---------- -------- ----------
Total Operating Expenses 22,439 22,596 50,007 38,164 35,582
--------- ---------- ---------- -------- ----------
Income (Loss) From Operations (1,510) (2,729) (10,600) 5,440 5,937
Other Income (Expense):
Trademark fee - Affiliate (250) (250) (500) (250) (250)
Gain (loss) on sale of properties - - (37) 238 294
Other (633) (25) (103) (146) (28)
--------- ---------- ---------- -------- ----------
Income (Loss) Before Taxes (2,393) (3,004) (11,240) 5,282 5,953
Income Tax Provision (Benefit) (825) (794) (4,121) 1,680 1,836
--------- ---------- ---------- -------- ----------
Net Income (Loss) $ (1,568) $ (2,210) $ (7,119) $ 3,602 $ 4,117
========= ========== ========== ======== ==========
</TABLE>
See accompanying notes.
F-4
<PAGE>
King Ranch Energy, Inc. and Subsidiaries
Consolidated Statements of Stockholder's Equity
(In Thousands, Except Shares)
<TABLE>
<CAPTION>
Common Stock Paid-In Retained
Shares Amount Capital Deficit Total
------ ------ ------- --------- -----
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996 - $ - $ 40,891 $ - $ 40,891
Paid-in capital - - 7,509 - 7,509
Parent's equity in division - - 4,117 - 4,117
--------- --------- --------- -------- --------
Balance at December 31, 1996 - - 52,517 - 52,517
Paid-in capital - - 4,562 - 4,562
Parent's equity in division - - 3,602 - 3,602
Issuance of common stock 1,000 1 - - 1
--------- --------- --------- -------- --------
Balance at December 31, 1997 1,000 1 60,681 - 60,682
Paid-in capital - - 1,328 - 1,328
Distribution of certain royalty interests
to parent - - (1,886) - (1,886)
Net loss - - - (7,119) (7,119)
Dividends paid - - (4,655) - (4,655)
--------- --------- --------- -------- --------
Balance at December 31, 1998 1,000 1 55,468 (7,119) 48,350
Net loss (unaudited) - - - (1,568) (1,568)
--------- --------- --------- -------- --------
Balance at June 30, 1999 (unaudited) 1,000 $ 1 $ 55,468 $ (8,687) $ 46,782
========= ========= ========= ======== ========
</TABLE>
See accompanying notes.
F-5
<PAGE>
King Ranch Energy, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In Thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
--------------------- ---------------------------------
1999 1998 1998 1997 1996
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Operating Activities
Net income (loss) $ (1,568) $ (2,210) $ (7,119) $ 3,602 $ 4,117
Adjustments to reconcile net income (loss) to
net cash provided by operations:
Depletion, depreciation, amortization and
impairment of properties 12,081 11,024 26,363 16,217 20,916
Dry hole costs 2,393 5,774 8,397 7,401 3,175
Gain on sale of unproved properties - - - (238) (294)
Deferred income tax provision (benefit) (1,102) 3,282 1,793 1,570 (2,334)
Deferred revenues - - - - (412)
Changes in assets and liabilities that provided
(used) cash:
Accounts receivable - Affiliate - 23,603 23,603 1,849 (24,576)
Accounts receivable - Trade 1,205 2,195 (313) 2,575 941
Inventories, prepaid and other assets 1,423 (219) (1,456) 197 117
Accounts payable - Affiliate 5,046 4,266 4,271 - -
Accounts payable - Non Affiliate (7,041) 268 2,943 (1,601) 3,859
Current income taxes receivable/payable -
Affiliate (216) (4,635) (6,472) (3,619) (1,640)
-------- -------- -------- ------- --------
Net Cash by Operating Activities 12,221 43,348 52,010 27,953 3,869
-------- -------- -------- ------- --------
Investing Activities
Proceeds from the sale of properties - 300 300 755 1,445
Additions to oil and gas properties (12,854) (43,976) (63,180) (33,169) (13,990)
Additions to other property and equipment - (260) (260) (85) (498)
Other (7) 15 7 (17) 21
-------- -------- -------- ------- --------
Net Cash Used in Investing Activities (12,861) (43,921) (63,133) (32,516) (13,022)
-------- -------- -------- ------- --------
Financing Activities
Dividends paid - - (4,655) - -
Paid-in capital - 573 1,328 4,562 7,509
Issuance of common stock - - - 1 -
Notes payable - Affiliate 640 - 14,450 - -
-------- -------- -------- ------- --------
Net Cash Provided by Financing Activities 640 573 11,123 4,563 7,509
-------- -------- -------- ------- --------
Net Increase in Cash - - - - (1,644)
Cash and Cash Equivalents at Beginning of Year - - - - 1,644
-------- -------- -------- ------- --------
Cash and Cash Equivalents at End of Year $ - $ - $ - $ - $ -
======== ======== ======== ======= ========
Noncash Transaction - Distribution of certain
royalty interests to parent $ - $ 1,886 $ 1,886 $ - $ -
======== ======== ======== ======= ========
</TABLE>
See accompanying notes.
F-6
<PAGE>
King Ranch Energy, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Significant Accounting Policies
-------------------------------
Basis of Presentation
King Ranch Energy, Inc. (the "Company"), a Delaware corporation, is a
wholly owned subsidiary of King Ranch Minerals, Inc. ("KRM" or
"Parent"). KRM is a wholly owned subsidiary of King Ranch, Inc. ("KRI").
Effective on the close of business on December 31, 1997, KRI reorganized
the structure of its energy operations. On that date, all of the onshore
and offshore working interests and related assets owned by KRM were
transferred to the Company and recorded at KRM's historical cost. The
accompanying consolidated financial statements as of and for the years
ended December 31, 1997 and 1996 represent the balances and results of
operations applicable to the contributed assets while the accompanying
consolidated financial statements as of and for the year ended December
31, 1998 represent the balances and results of operations of the
Company.
The consolidated financial statements presented herein at June 30, 1999
and for the six-month periods ended June 30, 1999 and 1998 are
unaudited; however, all adjustments which are, in the opinion of
management, necessary for a fair presentation of the financial position,
results of operations, and cash flows for the periods covered have been
made and are of a normal recurring nature. Accounting measurements at
interim dates inherently involve greater reliance on estimates than at
year end. The results of the interim periods are not necessarily
indicative of results to be expected for the full year.
Recent Events (Unaudited)
In July 1999, KRI entered into a merger agreement whereby KRI is to sell
the Company to St. Mary Land & Exploration Company ("St. Mary").
Consideration for the sale is to be through newly issued shares of St.
Mary's common stock. The closing is expected to occur during the fourth
quarter of 1999.
As contemplated by the merger agreement, before the merger the
outstanding shares of the Company's common stock will be split to
equal the number and class of outstanding shares of KRI common stock
and then distributed on a pro rata basis to the KRI stockholders if
all other conditions to the merger have been satisfied. There are
currently 410,266 shares of KRI common stock outstanding, comprised
of 42,938 shares of voting common stock and 367,328 shares of
non-voting common stock.
Nature of Operations
The Company is an independent oil and gas exploration and production
company with operations primarily onshore in Texas, Oklahoma, Louisiana,
North Dakota, and Utah and in the Gulf of Mexico, offshore Texas and
Louisiana.
Revenue Recognition
The Company recognizes oil and gas revenue from its royalty and working
interests in producing wells as oil and gas is produced and sold from
those wells. Oil and gas sold by the Company is not significantly
different from the Company's share of production. The Company records
gas revenue based on the entitlement method. Under this method,
F-7
<PAGE>
King Ranch Energy, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Significant Accounting Policies (continued)
------------------------------------------
recognition of revenue is based on the Company's pro-rata share of each
well's production. During such time as the Company's sales of gas exceed
its pro-rata ownership in a well, a liability is recorded, and
conversely a receivable is recorded for wells in which the Company's
sales of gas are less than its pro-rata share. There were no significant
imbalances at December 31, 1998 or 1997.
Property and Equipment and Depletion, Depreciation, and Amortization
Oil and Gas Properties
The Company accounts for oil and gas properties using the successful
efforts method of accounting. Costs to acquire mineral interests in oil
and gas properties, to drill and equip exploratory wells which find
proved reserves, and to drill and equip developmental wells are
capitalized. Exploratory geological and geophysical costs, delay
rentals, and costs to drill exploratory wells which do not find proved
reserves are expensed. If a determination as to whether an exploratory
well has found proved reserves cannot be made within one year of the
completion of drilling, the related costs are deemed to be impaired and
are expensed. For purposes of reporting cash flows, the Company adds
back to operating activities all exploration costs expensed in the
current year which have been previously deferred, such as dry hole
costs. Properties are periodically reviewed for impairment with
valuation reserves provided as required.
Depletion, depreciation, and amortization of costs incurred in
connection with the drilling and development of proved oil and gas
reserves are amortized on a field-by-field basis using the unit-of-
production method based upon estimates of proved developed oil and gas
reserves. The property acquisition costs of producing properties are
amortized on a field-by-field basis using the unit-of-production method
based on estimates of total proved reserves.
Other Property and Equipment
Other property and equipment are stated at cost. Depreciation is
determined using accelerated methods over the estimated useful lives of
the assets.
Repair and maintenance costs are charged to expense as incurred. Major
additions and betterments are capitalized. Asset and accumulated
depreciation accounts are relieved for dispositions with resulting
gains or losses reflected in income.
F-8
<PAGE>
King Ranch Energy, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Significant Accounting Policies (continued)
------------------------------------------
Accrual for Future Platform Abandonment Costs
The Company provides an accrual for the cost of dismantlement,
restoration and abandonment of off-shore production facilities, at
current prices, over the estimated producing life of each property. Such
provision is amortized to expense on a field-by-field basis using the
units-of-production method based upon estimates of proved developed oil
and gas reserves.
Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairments when events or
changes in circumstances indicate that an impairment may have occurred.
The impairment test compares the expected undiscounted future net
revenues on a field-by-field basis with the related net capitalized
costs at the end of each period. Reserve categories included in the
future net cash flow calculation for impairment purposes include proved
developed producing, proved developed nonproducing and proved
undeveloped. Probable and possible reserves are also included in the
calculation but are risk adjusted to 65% and 10%, respectively, of their
estimated future cash flow amounts. When the net capitalized costs
exceed the undiscounted future net revenues, the cost of the property is
written down to "fair value," which is determined using discounted
future net revenues, discounted at 10%, from the producing property. An
impairment loss of approximately $2,511,000, $1,867,000 and $4,370,000
was recorded for the years ended December 31, 1998, 1997 and 1996,
respectively.
The Company also impairs nonproducing leaseholds and unproved properties
when such leases and properties are determined to have a recoverable
value less than cost. In determining if an impairment exists and
arriving at impairment charges for nonproducing leaseholds and unproved
properties we consider such factors as (1) whether any dry holes have
been drilled, (2) the length of time remaining on the lease, and (3)
current drilling budgets. An impairment loss of $1,823,000, $2,670,000
and $1,533,000 was recorded for the years ended December 31, 1998, 1997
and 1996, respectively.
Income Taxes
The Company follows the liability method of accounting for income taxes.
Deferred income taxes reflect the impact of temporary differences
between the amount of assets and liabilities recognized for financial
reporting purposes and such amounts recognized for tax purposes at the
enacted tax rates at the end of the period. KRI files a consolidated
federal income tax return which includes the Company. The Company will
pay or receive from KRI the amount of income taxes currently payable or
refundable computed as if the Company filed its annual tax return on a
separate Company basis, except that income tax benefits are recognized
only to the extent utilized by KRI. The Company paid KRI approximately
$514,000, $2,893,000 and $1,026,000 related to their portion of taxes
due during 1998, 1997 and 1996, respectively.
F-9
<PAGE>
King Ranch Energy, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Significant Accounting Policies (continued)
------------------------------------------
Financial Instruments
The Company uses financial instruments on a limited basis (primarily
futures contracts and swap agreements) as an extension of its natural
gas sales. All such transactions are for natural gas produced by the
Company and hedge future price fluctuations. Accordingly, gains or
losses are deferred until such time as the hedged production is sold.
The following table shows the Company's open hedging contracts for
natural gas and the weighted average fixed prices hedged under various
swap agreements entered into as of December 31, 1998. Under these
contracts the Company will receive the fixed price displayed below and
will pay the prevailing NYMEX price at the maturity date of the
respective hedge contracts. As of December 31, 1998, the prevailing
NYMEX price was $1.83 per MMBTU.
<TABLE>
<CAPTION>
Natural Gas
-----------
MMBTU Price
--------- -----
<S> <C> <C>
1999 580,000 $2.33
1999 1,260,000 2.35
2000 219,000 2.26
2000 780,000 2.29
</TABLE>
Concentration of Risk
Substantially all of the Company's trade accounts receivable result
from oil and gas sales or joint interest billings to third parties in
the oil and gas industry. Historically, the Company has not experienced
credit losses on such receivables.
F-10
<PAGE>
King Ranch Energy, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Significant Accounting Policies (continued)
-------------------------------------------
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts. Actual results could differ from
these estimates.
Reclassifications
Certain reclassifications have been made to the prior years consolidated
financial statements for consistency with the current year presentation.
2. Income Taxes
------------
Significant components of the Company's deferred tax assets and liabilities
as of December 31, 1998 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Difference between tax and book bases of oil and gas
properties $(856) $324
----- ----
Net Deferred Tax Assets (Liabilities) $(856) $324
</TABLE>
Significant components of the income tax provision (benefit) are as follows
for the years ended December 31, 1998, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $ (5,958) $ (81) $ 4,246
State 44 191 (76)
-------- ------ -------
Total Current (5,914) 110 4,170
-------- ------ -------
Total Deferred - Federal 1,793 1,570 (2,334)
-------- ------ -------
$ (4,121) $1,680 $ 1,836
======== ====== =======
</TABLE>
F-11
<PAGE>
King Ranch Energy, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
2. Income Taxes (continued)
The reconciliation of income tax computed at the U.S. federal statutory tax
rates to income tax expense for the years ended December 31, 1998, 1997 and
1996 are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
--------------------- -------------------- ----------------------
Amount Percent Amount Percent Amount Percent
------- ------- ------ ------- ------ -------
<S> <C> <C> <C> <C>
Tax at U.S. $(3,934) (35.00)% $1,849 35.00% $2,084 35.00%
statutory rates
Percentage (161) (1.43) (279) (5.28) (172) (2.89)
depletion
State income tax 29 0.26 191 3.61 (76) (1.27)
Other, net (55) (0.49) (81) (1.52) - -
------- ----- ------ ------ ------ ------
Total Expense $(4,121) (36.66)% 1,680 31.81% $1,836 30.84%
======= ===== ====== ====== ====== ======
</TABLE>
3. Employee Benefit Plans
----------------------
Substantially all employees of the Company are covered by KRI's defined
benefit pension plan. The benefits are based on years of service and the
employee's compensation during the last five years of employment. KRI
contributes amounts to the pension plan sufficient to meet the minimum
funding requirements as set forth in the Employee Retirement Income
Security Act of 1974. At December 31, 1998, 1997 and 1996, the plan's
assets at fair value were in excess of the projected benefit obligation.
KRI allocated $9,000, $36,000 and $93,000 of expenses associated with
this plan to the Company for the years ended December 31, 1998, 1997
and 1996, respectively.
Employees of the Company who have one year of service and are age 21 or
older are eligible to participate in KRI's defined contribution 401(k)
Employee Retirement Savings plan. Contributions are discretionary and
payable by KRI. KRI allocated $65,000, $47,000 and $46,000 of expenses
associated with this plan to the Company for the years ended December 31,
1998, 1997 and 1996, respectively.
Retired employees of the Company are eligible to participate in KRI's
noncontributory defined-benefit postretirement plan covering all full-time
U.S. employees who retire after age 60 with 15 years of service after age
44 (except for certain grandfathered retirees). The plan provides for
comprehensive medical benefits and term life insurance benefits. KRI
allocated $16,000, $24,000 and $50,000 of expenses associated with this
plan to the Company for the years ended December 31, 1998, 1997 and 1996,
respectively.
4. Related Party Transactions
--------------------------
At December 31, 1998, the Company had an account payable and a note payable
to an affiliate in the amount of $4,271,000 and $14,450,000, respectively.
At December 31, 1997, the Company had a receivable from an affiliate in the
amount of $23,603,000. These related funds are borrowed from or swept into
the consolidated entity for cash management and investment purposes. During
December 1998, the affiliate charged the
F-12
<PAGE>
King Ranch Energy. Inc. and Subsidiaries
Notes to Consolidated Financial Statements
4. Related Party Transactions (continued)
--------------------------------------
Company $50,000 in interest related to amounts outstanding under the note
payable. Prior to December 1998, the Company did not record interest income
or expense associated with such funds.
The Company was charged an annual fee of $500,000, $250,000 and $250,000 by
an affiliate for the use of the King Ranch trademark and brand for 1998,
1997 and 1996, respectively.
Effective January 1, 1998, the Company distributed $1,886,000 of certain
royalty interests to KRM.
5. Lease Commitments
-----------------
The Company leases office space under a noncancelable operating lease
agreement which expires on July 31, 2001. The lease comprises 18,063 square
feet, of which KRI utilizes square footage as needed from the Company.
Rent expense charged to operations was $198,000 for the years ended
December 31, 1998 and 1997 and $45,000 for the year ended December 31,
1996.
Future minimum lease payments under noncancellable operating leases as of
December 31, 1998 are as follows (in thousands):
<TABLE>
<S> <C>
1999 $ 181
2000 217
2001 126
-----
524
-----
Less: Sublease rental income
210
-----
$ 314
=====
</TABLE>
6. Contingencies
-------------
The Company is party to other litigation and claims which management
believes are normal in the course of its operations, all of which are
routine in nature except for the matters noted below. While the results of
such litigation and claims cannot be predicted with certainty, the Company
believes the final outcome of such matters will not have a material adverse
effect on its results of operations, financial position or cash flows;
however, as with any litigation, the ultimate outcome is unknown.
Accordingly, no provision for any liability that might result has been made
in the consolidated financial statements.
F-13
<PAGE>
King Ranch Energy, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
6. Contingencies (continued)
-------------------------
The Company was sued on October 5, 1998 by Pi Energy Corporation alleging
that the Company failed to perform under the terms of a letter of intent
(and other alleged agreements) to purchase an interest in certain leases in
Redfish Bay, located in state watersoff of Corpus Christi, Texas, for $10.5
million. Although the Company believes Pi Energy claims are without merit,
the case is in a preliminary stage which makes it difficult to predict the
ultimate result.
KRI and KRM are 2 of more than 100 named defendants in a suit originally
brought in the 28th District Court of Nueces County, Texas styled No. 95-
2273-A; William Warren Chapman, III et. al. v. The King Ranch, Inc., King
Ranch Oil and Gas, Inc., et. al. The plaintiffs seek a one-half interest in
approximately 15,500 acres in Kleberg County, Texas-owned or previously
owned by KRI, its predecessors in title, and some of its stockholders. In
addition, the plaintiffs seek rentals, royalties, and other income from the
property since 1883. KRM currently owns mineral interests underlying the
property. On January 13, 1998, the Court entered a summary judgment in
favor of all defendants. The plaintiffs have appealed. The Company believes
that the final outcome of this matter will not have a material adverse
effect on its results of operations, financial position or cash flows.
7. Subsequent Events
-----------------
On February 18, 1999, the Company acquired a 50% interest in the Flour
Bluff field located in Nueces County, Texas for $4,375,000. The
transaction, which was effective January 4, 1999, added approximately 12.7
Bcfe of proven reserves, 90% of which is natural gas, based on a report by
Ryder Scott Company. The field has an estimated reserve life of 28 years
and encompasses approximately 6,500 net acres.
8. Supplemental Information Related to Oil and Gas Producing Activities
--------------------------------------------------------------------
(Unaudited)
-----------
The following information concerning the Company's oil and gas operations
has been prepared in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 69, "Disclosure about Oil and Gas Producing
Activities."
The information concerning sales prices and production costs, capitalized
costs of oil and gas properties, costs incurred in property acquisition,
exploration, and development, and operating results from oil and gas
producing activities is taken from the Company's accounting records with
the exception of income taxes. Income tax provisions are
F-14
<PAGE>
King Ranch Energy, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
8. Supplemental Information Related to Oil and Gas Producing Activities
--------------------------------------------------------------------
(Unaudited) (continued)
-----------------------
calculated using statutory tax rates and reflect permanent differences and
tax credits and allowances relating to oil and gas operations that are
reflected in the Company's consolidated income tax provision for the
period. The pretax income from oil and gas producing activities does not
agree with the Company's accounting records due to the exclusion of certain
expenses from the information shown as required by SFAS No. 69.
The following table presents the average sales price per unit of natural
gas and crude oil produced and the production costs per MCF of gas
equivalent for the years ended December 31, 1998, 1997 and 1996:
Sales Prices and Production Costs
<TABLE>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Average Sales Price (1):
Natural Gas (per MCF) (2) $ 2.24 $ 2.65 $ 2.54
Crude Oil (per barrel) $12.25 $18.85 $19.58
Production Costs per MCF Equivalent (3) $ 0.46 $ 0.37 $ 0.28
</TABLE>
__________
(1) Excludes hedging gains of $815,000, $33,000 and $0 for 1998, 1997
and 1996, respectively.
(2) Includes product processing revenue of $342,000, $359,000 and
$500,000 for 1998, 1997 and 1996, respectively.
(3) Excludes production taxes of $294,000, $335,000 and $264,000 for
1998, 1997 and 1996, respectively.
The following table presents the Company's aggregate capitalized costs
relating to oil and gas producing activities, all located in the United
States, and the aggregate amount of related depletion, depreciation, and
amortization for the years ended December 31, 1998, 1997 and 1996 (in
thousands):
F-15
<PAGE>
King Ranch Energy, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
8. Supplemental Information Related to Oil and Gas Producing Activities
--------------------------------------------------------------------
(Unaudited) (continued)
-----------------------
Capitalized Costs of Oil and Gas Properties
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Capitalized Costs:
Proved Developed Properties $ 254,011 $210,315 $208,971
Proved Undeveloped Properties 5,228 5,538 3,383
Unproved Properties 17,235 14,014 6,321
-------- -------- --------
276,474 229,867 218,675
-------- -------- --------
Reserves for Depletion, Depreciation, and Amortization:
Proved Developed Properties 204,016 184,205 184,749
Unproved Properties 4,509 5,071 2,608
--------- -------- --------
208,525 189,276 187,357
--------- -------- --------
Net Capitalized Costs $ 67,949 $ 40,591 $ 31,318
========= ======== ========
</TABLE>
The following table presents both capitalized and expensed costs incurred
by the Company for oil and gas property acquisition, exploration, and
development activities, all located in the United States, for the years
ended December 31, 1998, 1997 and 1996 (in thousands):
Costs Incurred in Property Acquisition, Exploration, and Development
Activities
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Acquisition costs:
Proved properties $16,341 $ - $ -
Unproved properties 8,981 8,990 8,415
Exploration costs 27,819 16,611 6,443
Development costs 12,359 11,798 1,430
------- ------- -------
$65,500 $37,399 $16,288
======= ======= =======
</TABLE>
The results of operations from oil and gas producing activities, all
located in the United States, for the years ended December 31, 1998, 1997
and 1996, consisted of the following (in thousands):
F-16
<PAGE>
King Ranch Energy, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
8. Supplemental Information Related to Oil and Gas Producing Activities
--------------------------------------------------------------------
(Unaudited) (continued)
-----------------------
Results of Operations for Oil and Gas Producing Activities
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Sales and services $ 39,290 $ 43,239 $ 41,115
Production costs 8,373 6,848 4,402
Exploration expenses 12,301 11,935 7,240
Depletion, depreciation, amortization expense, and
impairment of properties 26,183 16,025 20,711
Income tax expense (benefit) (4,338) 1,644 1,402
-------- -------- --------
Results of Operations from Producing Activities* $ (3,229) $ 6,787 $ 7,360
======== ======== ========
</TABLE>
*Before deducting general, administrative, and interest expense
Oil and Gas Reserve Information
The following table shows the Company's reconciliation of the changes from
January 1, 1996 to December 31, 1998 in estimated net proved oil and gas
reserve quantities. This information has been determined by independent and
Company oil and gas reservoir engineers. All of the Company's reserves are
located in the United States.
The Company's proved gas and oil reserves are located in the United States.
Proved oil and gas reserves are the estimated quantities of crude oil,
natural gas, and natural gas liquids which geological and engineering data
demonstrate with reasonable certainty to be recoverable in future years
from known reservoirs under existing economic and operating conditions,
i.e., prices and costs as of the date the estimate is made. Proved
developed oil and gas reserves are reserves that can be expected to be
recovered through existing wells with existing equipment and operating
methods. Proved undeveloped oil and gas reserves are reserves that are
expected to be recovered from new wells on undrilled acreage, or from
existing wells where a relatively major expenditure is required for
recompletion.
It should be stressed that these reserve quantities are estimates and may
be subject to substantial upward or downward revisions as indicated by past
experience. The estimates are based on the most current and reliable
information available; however, additional information obtained through
future production experience and additional development of existing
reservoirs may significantly alter previous estimates of proved reserves.
Future changes in the costs to develop and produce reserves can also result
in substantial revisions to proved reserve estimates.
F-17
<PAGE>
King Ranch Energy, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
8. Supplemental Information Related to Oil and Gas Producing Activities
--------------------------------------------------------------------
(Unaudited) (continued)
-----------------------
These estimates relate only to those reserves which meet the
Securities and Exchange Commission's (the "SEC") definition of proved
reserves and do not consider probable reserves and the likelihood of
their recovery which, if considered, could result in substantial
increases in reported reserves.
<TABLE>
<CAPTION>
MBbls Bcf
----- ---
<S> <C> <C>
Net Proved Reserves at January 1, 1996 1,043 45.332
Revisions of previous estimates 852 (3.052)
Extensions, discoveries and other additions 147 9.971
Production (325) (13.464)
------- -------
Net Proved Reserves at December 31, 1996 1,717 38.787
Revisions of previous estimates 33 3.624
Extensions, discoveries and other additions 54 9.040
Sales and transfers of minerals in place (28) (0.014)
Purchases of reserves in place 0 0.299
Production (369) (13.535)
------- -------
Net Proved Reserves at December 31, 1997 1,407 38.201
Revisions of previous estimates (2,052) (3.698)
Extensions, discoveries and other additions 823 13.490
Transfer of minerals in place to KRM (56) (2.713)
Purchases of reserves in place 1,982 11.849
Production (429) (14.826)
------- -------
Net Proved Reserves at December 31, 1998 1,675 42.303
======= =======
Net Proved Developed Reserves:
January 1, 1996 989 38.092
December 31, 1996 1,581 30.964
December 31, 1997 1,406 37.345
December 31, 1998 1,434 39.910
</TABLE>
F-18
<PAGE>
King Ranch Energy, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
8. Supplemental Information Related to Oil and Gas Producing Activities
--------------------------------------------------------------------
(Unaudited) (continued)
-----------------------
The information presented below concerning the net present value of after-
tax cash flows for the Company's oil and gas producing operations is
required by SFAS No. 69 in an attempt to make comparable information
concerning oil and gas producing operations available for financial
statement users. The information is based on proved reserves as of December
31 for each year and has been prepared in the following manner:
1 Estimates were made of the future periods in which proved reserves
would be produced based on year-end economic conditions.
2. The estimated future production streams of proved reserves have been
priced using year-end prices.
3. The resulting future gross cash inflows have been reduced by the
estimated future costs to develop and produce the proved reserves at
year-end cost levels.
4. Future income tax payments have been computed by the Company at
statutory rates based on the net future cash inflows, the remaining
tax basis in oil and gas properties, permanent differences between
book and tax income, and tax credits or other tax benefits available
related to the oil and gas operations.
5. The resulting after-tax future net cash flows are discounted to
present value amounts by applying a 10% annual discount factor.
The net present value of future cash flows, computed as prescribed by SFAS
No. 69, should not be construed as the fair value of the Company's oil and gas
operations. The computation is based on assumptions which in some cases may not
be realistic and estimates which are subject to substantial uncertainties. Since
the discounted cash flows are based on proved reserves as defined by the SEC,
they are subject to the same uncertainties and limitations inherent in the
reserve estimates which include, among others, no consideration of probable
reserves. Additionally, the timing of future production and cash flows, given
the current state of the U.S. natural gas market, is subject to significant
uncertainty. The use of a 10% discount factor by all companies does not provide
a basis for quantifying differences in risk with respect to oil and gas
operations among different companies. The computation also ignores the impact
future exploration and development activities may have on profitability.
F-19
<PAGE>
King Ranch Energy, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
8. Supplemental Information Related to Oil and Gas Producing Activities
--------------------------------------------------------------------
(Unaudited) (continued)
-----------------------
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved
Reserves (In Thousands)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Future cash inflows $ 104,725 $ 111,099 $ 167,201
Future production costs 30,177 26,643 26,560
Future development costs 15,920 10,899 13,355
Future income tax payments 5,865 14,077 32,294
--------- --------- ---------
Future net cash flows 52,763 59,480 94,992
10% annual discount 9,909 12,636 23,591
--------- --------- ---------
Standardized Measure of Discounted
Future Net Cash Flows $ 42,854 $ 46,844 $ 71,401
========= ========= =========
Changes in Standardized Measure of Discounted Future Net Cash Flows
Relating to Proved Reserves (In Thousands)
1998 1997 1996
---- ---- ----
Sales and transfers, net of production costs $ (30,917) $ (36,391) $ (36,713)
Net changes in prices and production costs (14,265) (37,111) 43,366
Extensions and discoveries, net of future
production and development costs 16,848 13,432 25,876
Changes in estimated future development costs (9,020) (3,955) (1,206)
Development costs incurred during the year
which were previously estimated 10,466 9,424 4,614
Revisions of quantity estimates (18,605) 5,802 4,468
Sales of reserves (2,786) (361) -
Purchases of reserves in place 27,597 223 -
Accretion of discount 5,816 10,022 4,611
Net change in income taxes 6,124 13,755 (12,810)
Changes in production rates, timing and other 4,752 603 (6,911)
--------- --------- ---------
Net Change (3,990) (24,557) 25,295
Standardized Measure, Beginning of Year 46,844 71,401 46,106
--------- --------- ---------
Standardized Measure, End of Year $ 42,854 $ 46,844 $ 71,401
========= ========= =========
</TABLE>
F-20
<PAGE>
Annex A
AGREEMENT AND PLAN OF MERGER
dated
July 27, 1999
among
ST. MARY LAND & EXPLORATION COMPANY,
ST. MARY ENERGY COMPANY,
KING RANCH, INC.
and
KING RANCH ENERGY, INC.
as amended by
AMENDMENT NOS. 1 AND 2 TO
AGREEMENT AND PLAN OF MERGER
dated
November 8, 1999
COMPOSITE COPY
A-1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
RECITALS ......................................................................... A-8
ARTICLE I THE MERGER .................................................... A-9
Section 1.1 The Merger .................................................... A-9
Section 1.2 Closing ....................................................... A-9
Section 1.3 Effective Time ................................................ A-9
Section 1.4 Effects of the Merger ......................................... A-9
Section 1.5 Certificate of Incorporation .................................. A-9
Section 1.6 Bylaws ........................................................ A-10
Section 1.7 Directors of Surviving Corporation ............................ A-10
Section 1.8 Officers of Surviving Corporation ............................. A-10
ARTICLE II EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE
CONSTITUENT CORPORATIONS;
EXCHANGE OF CERTIFICATES; CASH SETTLEMENT ............................. A-10
Section 2.1 Effect on Capital Stock ....................................... A-10
(a) Conversion of KRE Common Stock ................................ A-10
(b) Capital Stock of Merger Sub ................................... A-10
Section 2.2 Exchange of Certificates ...................................... A-10
(a) Exchange at Closing ........................................... A-10
(b) No Further Ownership Rights in KRE Capital Stock .............. A-11
(c) Further Assurances ............................................ A-11
ARTICLE III REPRESENTATIONS AND WARRANTIES ................................ A-11
Section 3.1 Representations and Warranties of KRI ......................... A-11
(a) Organization and Standing of KRI .............................. A-11
(b) Authority; No Conflicts ....................................... A-11
(c) Ownership and Distribution of KRE Common Stock ................ A-12
(d) Finders or Advisors ........................................... A-12
Section 3.2 Representations and Warranties of KRI and KRE ................. A-12
(a) Organization and Standing of KRE .............................. A-12
(b) Authority; No Conflicts ....................................... A-13
(c) Capitalization of KRE and Indebtedness for Borrowed Moneys .... A-14
(d) KRE Financial Statements ...................................... A-14
(e) Present Status ................................................ A-14
(f) Litigation .................................................... A-14
(g) Compliance With the Law and Other Instruments ................. A-15
(h) Title to Properties and Assets ................................ A-15
(i) Oil and Gas Leases and Wells .................................. A-15
(j) Records ....................................................... A-16
(k) Absence of Certain Changes or Events .......................... A-16
A-2
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
(l) Taxes ......................................................... A-16
(m) Environmental Matters ......................................... A-16
(n) KRE Benefit Plans ............................................. A-17
(o) Year 2000 Matters ............................................. A-20
(p) Confidentiality Agreements .................................... A-21
(q) Vote Required ................................................. A-21
(r) Fairness Opinion .............................................. A-21
(s) Full Disclosure ............................................... A-21
Section 3.3 Representations and Warranties by St. Mary .................... A-21
(a) Organization and Standing of St. Mary ......................... A-21
(b) Authority; No Conflicts ....................................... A-22
(c) Capitalization of St. Mary and Indebtedness for Borrowed Moneys A-22
(d) St. Mary SEC Reports and Financial Statements ................. A-23
(e) Present Status ................................................ A-24
(f) Litigation .................................................... A-24
(g) Compliance With the Law and Other Instruments ................. A-24
(h) Title to Properties and Assets ................................ A-24
(i) Oil and Gas Leases and Wells .................................. A-24
(j) Records ....................................................... A-25
(k) Absence of Certain Changes or Events .......................... A-25
(l) Taxes ......................................................... A-25
(m) Environmental Matters ......................................... A-26
(n) St. Mary Benefit Plans ........................................ A-26
(o) Year 2000 Matters ............................................. A-29
(p) Finders and Advisors .......................................... A-29
(q) Vote Required ................................................. A-29
(r) Fairness Opinion .............................................. A-29
(s) Full Disclosure ............................................... A-30
Section 3.4 Representations and Warranties of St. Mary and Merger Sub ..... A-30
(a) Organization and Standing of Merger Sub ....................... A-30
(b) Authority ..................................................... A-30
(c) Non-Contravention ............................................. A-30
(d) No Business Activities by Merger Sub .......................... A-30
ARTICLE IV COVENANTS RELATING TO CONDUCT OF BUSINESS ........................... A-30
Section 4.1 Covenants of KRI and KRE ...................................... A-30
(a) Ordinary Course ............................................... A-31
(b) Dividends; Changes in Share Capital ........................... A-31
(c) Issuance of Securities ........................................ A-32
(d) Governing Documents ........................................... A-32
(e) No Acquisitions ............................................... A-32
(f) No Dispositions ............................................... A-32
(g) Investments; Indebtedness ..................................... A-32
(h) Tax-Free Qualification ........................................ A-33
(i) Compensation .................................................. A-33
A-3
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
(j) Accounting Methods; Income Tax Elections ...................... A-33
(k) Preservation of Property ...................................... A-33
Section 4.2 Covenants of St. Mary ......................................... A-33
(a) Ordinary Course ............................................... A-33
(b) Dividends; Changes in Share Capital ........................... A-34
(c) Issuance of Securities ........................................ A-34
(d) Governing Documents ........................................... A-34
(e) Tax-Free Qualification ........................................ A-34
Section 4.3 Advice of Changes; Governmental Filings ....................... A-35
ARTICLE V ADDITIONAL AGREEMENTS A-35
Section 5.1 Preparation of Proxies and Registration Statement; Meeting of
St. Mary Shareholders ......................................... A-35
Section 5.2 Confidentiality - Access to Information ....................... A-36
Section 5.3 Commercially Reasonable Efforts ............................... A-37
Section 5.4 Public Announcements .......................................... A-37
Section 5.5 Restrictions on Transfer of St. Mary Common Stock ............. A-37
Section 5.6 Representation on St. Mary Board of Directors ................. A-38
Section 5.7 Expenses ...................................................... A-39
Section 5.8 King Ranch Trademark and Brand ................................ A-39
Section 5.9 KRE Employee Severance Payments ............................... A-39
Section 5.10 368(a) Reorganization ......................................... A-39
Section 5.11 355 Distribution .............................................. A-39
Section 5.12 Continuity of Business ........................................ A-40
Section 5.13 Indemnification of Officers and Directors ..................... A-40
Section 5.14 Retained Litigation ........................................... A-40
Section 5.15 Stockholder's Representative .................................. A-40
Section 5.16 Voting Commitments ............................................ A-40
Section 5.17 No Solicitation ............................................... A-40
Section 5.18 Seismic Data. ................................................. A-40
ARTICLE VI INDEMNIFICATION ...................................................... A-42
Section 6.1 Indemnification by KRI ........................................ A-42
Section 6.2 Indemnification by St. Mary ................................... A-42
Section 6.3 Notice and Defense of Third-Party Claims ...................... A-42
Section 6.4 Limitation of Liability ....................................... A-43
Section 6.5 Exclusivity ................................................... A-45
Section 6.6 Waiver of Consequential Damages ............................... A-45
ARTICLE VII CONDITIONS TO CLOSING ......................................... A-45
Section 7.1 Conditions to Each Party's Obligation to Effect the Merger .... A-45
(a) Shareholder Approvals ......................................... A-45
(b) No Injunctions, Restraints or Illegality ...................... A-45
(c) Effectiveness of the Form S-4 ................................. A-45
(d) Nasdaq Listing ................................................ A-45
A-4
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
(e) Consummation of the Distribution .............................. A-45
Section 7.2 Additional Conditions to Obligations of St. Mary and Merger Sub A-46
(a) Representations and Warranties ................................ A-46
(b) Performance of Obligations of KRI and KRE ..................... A-46
(c) Settlement for KRI-KRE Intercompany Balances .................. A-46
(d) Certificate of Officers ....................................... A-46
(e) Opinion of Financial Advisor .................................. A-46
(f) Opinion of Counsel ........................................... A-46
(g) Non-Exercise of Appraisal Rights .............................. A-46
(h) Eugene Island Block 341 ....................................... A-47
(i) Affiliate Restrictions ........................................ A-47
Section 7.3 Additional Conditions to Obligations of KRE and the Shareholders
of KRE ........................................................ A-47
(a) Representations and Warranties ................................ A-47
(b) Performance of Obligations of St. Mary and Merger Sub ......... A-47
(c) Settlement of KRI-KRE Intercompany Balances ................... A-48
(d) Certificate of Officers ....................................... A-48
(e) Opinion of Financial Advisor .................................. A-48
(f) Opinion of Counsel ............................................ A-48
(g) Tax Certificate ............................................... A-48
(h) Tax Opinion ................................................... A-48
ARTICLE VIII TERMINATION AND AMENDMENT ..................................... A-48
Section 8.1 Termination ................................................... A-48
Section 8.2 Effect of Termination ......................................... A-50
Section 8.3 Amendment ..................................................... A-51
Section 8.4 Extension; Waiver ............................................. A-51
ARTICLE IX ARBITRATION ................................................... A-51
Section 9.1 Mediation ..................................................... A-51
Section 9.2 Arbitration ................................................... A-52
Section 9.3 Costs; Enforcement ............................................ A-53
ARTICLE X MISCELLANEOUS ................................................. A-53
Section 10.1 Nature of Representations and Warranties; Survival ............ A-53
Section 10.2 Counterparts and Facsimile Signatures ......................... A-53
Section 10.3 Assignment .................................................... A-54
Section 10.4 Representative of KRH, KRM and KRE ............................ A-54
Section 10.5 Entire Agreement .............................................. A-54
Section 10.6 Governing Law ................................................. A-54
Section 10.7 Severability .................................................. A-54
Section 10.8 Notices ....................................................... A-54
Section 10.9 Attorney Fees ................................................. A-55
Section 10.10 Certain Definitions ........................................... A-56
</TABLE>
A-5
<PAGE>
SCHEDULES/EXHIBITS
3.1 KRI Disclosure Schedule
3.1(b)(iii) Consents
3.2 KRE Disclosure Schedule
3.2(b)(ii) No Conflicts
3.2(b)(iii) Consents
3.2(e) Present Status
3.2(f) Litigation
3.2(h) Title to Properties and Assets
3.2(k) Absence of Certain Changes or Events
3.2(l) Taxes
3.2(m) Environmental Matters
3.2(n) KRE Benefit Plans
3.2(n)(vii) Severance or Other Compensation
3.2(o) Year 2000 Matters
3.3 St. Mary Disclosure Schedule
3.3(a) St. Mary Subsidiaries
3.3(c) Additional Options
3.3(f) Litigation
3.3(h) Title to Properties and Assets
3.3(n) St. Mary Benefit Plans
4.1(a)(ii) KRE Capital Expenditures Over $500,000
4.2(a)(ii) St. Mary Capital Expenditures Over $1,000,000
5.9 KRE Employee Severance Payments
7.3(g) Form of Tax Certificate
A-6
<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (the "Agreement") is entered into this
27th day of July, 1999 among St. Mary Land & Exploration Company, a Delaware
corporation ("St. Mary"), St. Mary Energy Company, a Colorado corporation and
newly formed first-tier wholly owned subsidiary of St. Mary ("Merger Sub"), King
Ranch, Inc., a Texas corporation ("KRI"), and King Ranch Energy, Inc., a
Delaware corporation and a wholly owned third-tier subsidiary of KRI
("KRE").
RECITALS
WHEREAS, the respective Boards of Directors of St. Mary, Merger Sub, KRI
and KRE have each determined that the merger of Merger Sub with and into KRE
(the "Merger") is advisable and is in their best interests and in the best
interests of their respective shareholders, and such Boards of Directors have
approved such Merger, upon the terms and subject to the conditions set forth in
this Agreement;
WHEREAS, St. Mary desires to avoid the concentration of the ownership of
the St. Mary Common Stock in a single shareholder, and therefore, to induce St.
Mary to enter into this Agreement and consummate the transactions described
herein, immediately prior to the Merger all of the shares of common stock of KRE
shall be distributed (A) by King Ranch Minerals, Inc., a Delaware corporation
("KRM"), the sole shareholder of KRE and a wholly owned subsidiary of King Ranch
Holdings, Inc., a Delaware corporation ("KRH") and a wholly owned subsidiary of
KRI, to KRH, (B) by KRH to KRI, and (C) by KRI pro rata to the shareholders of
KRI (the "Spin-Off") (all of the foregoing, together with the Spin-Off,
collectively referred to as the "Distributions");
WHEREAS, as a result of the Distributions, the shareholders of KRI will
receive all of the common stock of KRE while maintaining their current ownership
of KRI;
WHEREAS, pursuant to the terms of this Agreement, upon consummation of the
Merger, St. Mary will issue to the shareholders of KRE, with respect to their
ownership of all of the shares of common stock of KRE, shares of common stock,
par value $.01 per share, of St. Mary ("St. Mary Common Stock") as set forth in
Section 2.1 hereof;
WHEREAS, St. Mary, Merger Sub, KRI and KRE desire to make certain
representations, warranties, covenants and agreements in connection with the
transactions contemplated hereby and also to set forth various conditions to the
transactions contemplated hereby; and
WHEREAS, for federal income tax purposes it is intended that the Merger
qualify as a tax-free reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code"), and the regulations
promulgated thereunder, and St. Mary, Merger Sub, KRE and the shareholders of
KRI as the subsequent shareholders of KRE intend, by approving resolutions
authorizing this Agreement, to adopt this Agreement as a plan of reorganization
within the meaning of Section 368(a) of the Code and the regulations promulgated
thereunder.
A-7
<PAGE>
NOW, THEREFORE, in consideration of the representations, warranties,
covenants and agreements set forth herein, and intending to be legally bound
hereby, the parties hereto agree as follows:
ARTICLE I
THE MERGER
Section 1.1 The Merger. Upon the terms and subject to the conditions
----------
set forth in this Agreement, and in accordance with the corporate laws of
Delaware and Colorado, Merger Sub shall be merged with and into KRE at the
Effective Time (as defined in Section 1.3). Following the Merger, the separate
corporate existence of Merger Sub shall cease and KRE shall continue as the
surviving corporation (the "Surviving Corporation") under the name St. Mary
Energy Company and shall succeed to and assume all the rights and obligations of
Merger Sub in accordance with the corporate laws of Delaware and Colorado.
Section 1.2 Closing. The closing of the Merger (the "Closing") will
-------
take place at 2:00 p.m. Denver, Colorado time on the first business day after
the satisfaction or waiver (subject to applicable law) of the conditions set
forth in Article VII of this Agreement (the "Closing Date"), at the offices of
Ballard Spahr Andrews & Ingersoll, 1225 17/th/ Street, Suite 2300, Denver,
Colorado, unless another date or place is agreed to in writing by the parties
hereto. The parties agree to use all reasonable efforts to close the Merger as
soon as practicable, subject to Article VII hereof.
Section 1.3 Effective Time. Immediately following the Closing, the
--------------
parties shall execute and file a certificate of merger or other appropriate
documents (in any such case, the "Certificate of Merger") in accordance with the
relevant provisions of the corporate laws of Delaware and Colorado and shall
make all other filings or recordings required under the corporate laws of
Delaware and Colorado. The Merger shall become effective at such time as the
Certificate of Merger is duly filed with the Delaware Secretary of State and the
Colorado Secretary of State, or at such subsequent time as the parties shall
agree, which subsequent time shall be specified in the Certificate of Merger
(the time the Merger becomes effective being hereinafter referred to as the
"Effective Time").
Section 1.4 Effects of the Merger. At and after the Effective Time, the
---------------------
Merger shall have the effects set forth in the corporate laws of Delaware and
Colorado. Without limiting the generality of the foregoing, and subject
thereto, at the Effective Time all the property, rights, privileges, powers and
franchises of KRE and Merger Sub shall be vested in the Surviving Corporation,
and, except for the indemnification obligations of KRI set forth in Article VI
hereof, all debts, liabilities and duties of KRE and Merger Sub shall become the
debts, liabilities and duties of the Surviving Corporation.
Section 1.5 Certificate of Incorporation. At the Effective Time, the
----------------------------
certificate of incorporation of the Surviving Corporation shall be amended in
accordance with the corporate laws of Delaware such that the certificate of
incorporation of the Surviving Corporation shall consist of the provisions of
the articles of incorporation of Merger Sub, except that Article I of the
certificate
A-8
<PAGE>
of incorporation of the Surviving Corporation shall be amended to read in its
entirety as follows: "The name of the corporation shall be St. Mary Energy
Company."
Section 1.6 Bylaws. The bylaws of Merger Sub as in effect at the
------
Effective Time shall be the bylaws of the Surviving Corporation until thereafter
changed or amended as provided therein or by applicable law.
Section 1.7 Directors of Surviving Corporation. The directors of Merger
----------------------------------
Sub immediately prior to the Effective Time 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 1.8 Officers of Surviving Corporation. The officers of Merger
---------------------------------
Sub immediately prior to the Effective Time 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.
ARTICLE II
EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT
CORPORATIONS; EXCHANGE OF CERTIFICATES; CASH SETTLEMENT
Section 2.1 Effect on Capital Stock. At the Effective Time, by virtue
-----------------------
of the Merger:
(a) Conversion of KRE Common Stock. The total number of shares of
------------------------------
KRE Common Stock issued and outstanding immediately prior to the Effective
Time shall be automatically converted into a total of 2,666,252 shares of
St. Mary Common Stock (the "St. Mary Share Issuance"). Certificates
representing the shares of St. Mary Common Stock to be issued hereby shall
be delivered pro rata to the shareholders of KRE at the Closing in exchange
for their surrender of all KRE Common Stock certificates. At the Effective
Time, all such shares of KRE Common Stock shall cease to be outstanding and
shall automatically be canceled and retired and shall cease to exist, and
KRM, KRH, KRI and the shareholders of KRI shall thereafter cease to have
any rights with respect to such shares of KRE Common Stock.
(b) Capital Stock of Merger Sub. Each share of common stock, par
---------------------------
value $.01 per share, of Merger Sub issued and outstanding immediately
prior to the Effective Time shall be automatically converted into and
become one fully paid and nonassessable share of common stock, par value
$.01 per share, of the Surviving Corporation.
Section 2.2 Exchange of Certificates.
(a) Exchange at Closing. At the Closing, St. Mary shall deliver
--------------------
pro rata to the shareholders of KRE certificates aggregating the number of
shares of St. Mary Common
A-9
<PAGE>
Stock set forth in Section 2.1(a) and the shareholders of KRE shall
surrender to St. Mary all certificates representing all issued and
outstanding shares of KRE Common Stock.
(b) No Further Ownership Rights in KRE Capital Stock. All shares
------------------------------------------------
of St. Mary Common Stock issued upon the surrender of KRE Common Stock
certificates in accordance with the terms of this Article II shall be
deemed to have been issued and paid in full satisfaction of all rights
pertaining to the shares of KRE Common Stock theretofore represented by
such certificates.
(c) Further Assurances. If at any time after the Effective Time,
------------------
any further assignments or assurances in law or any other things are
necessary or desirable to vest or to perfect or confirm of record in the
Surviving Corporation the title to any property or rights of either KRE or
Merger Sub, or otherwise to carry out the purposes and provisions of this
Agreement, the officers and directors of the Surviving Corporation are
hereby authorized and empowered, in the name of and on behalf of KRE and
Merger Sub, to execute and deliver any and all things necessary or proper
to vest or perfect or confirm title to such property or rights in the
Surviving Corporation, and otherwise to carry out the purposes and
provisions of this Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
Section 3.1 Representations and Warranties of KRI. Except as set forth
-------------------------------------
in the KRI Disclosure Schedule attached to this Agreement as Schedule 3.1 (each
section of which qualifies the correspondingly numbered representation and
warranty to the extent specified therein), KRI represents and warrants to St.
Mary as follows:
(a) Organization and Standing of KRI. KRI is a corporation duly
--------------------------------
organized and validly existing and in good standing under the laws of the
State of Texas. KRI has all requisite corporate power and authority to
enter into this Agreement and to carry out and perform the terms and
provisions of this Agreement.
(b) Authority; No Conflicts.
-----------------------
(i) The execution, delivery and performance of this Agreement
have been duly authorized by all requisite corporate action on the
part of KRI and KRE. This Agreement has been executed and delivered
by KRI and KRE and constitutes valid and binding obligations of KRI
and KRE enforceable in accordance with its terms (except as limited
by bankruptcy, insolvency, or other laws affecting the enforcement of
creditors' rights).
A-10
<PAGE>
(ii) The execution and delivery of this Agreement by KRI and
KRE does not, and the consummation of the Merger pursuant to this
Agreement and the other transactions contemplated hereby will not,
conflict with or result in any violation of, or constitute a default
(with or without notice or lapse of time, or both) under, any
provision of the certificate of incorporation or bylaws of KRI or KRE.
(iii) No consent, approval, order or authorization of, or
registration, declaration or filing with, any national, state,
municipal or local government, any instrumentality, subdivision,
court, administrative agency or commission or other authority thereof,
or any quasi-governmental or private body exercising any regulatory,
taxing or other governmental or quasi-governmental authority (a
"Governmental Entity"), is required by or is necessary with respect to
KRI or KRE in connection with their execution and delivery of this
Agreement or the consummation of the Merger and the other transactions
contemplated thereby, except for those required under or in relation
to (A) the Securities Act of 1933, as amended (the "Securities Act"),
(B) the corporate laws of Delaware and Colorado with respect to the
filing of the Certificate of Merger with the Delaware Secretary of
State and Articles of Merger with the Colorado Secretary of State, (C)
the rules and regulations of Nasdaq, and (D) such consents, approvals,
orders, authorizations, registrations, declarations and filings the
failure of which to make or obtain would not have a Material Adverse
Effect on any party hereto. Consents, approvals, orders,
authorizations, registrations, declarations and filings required under
or in relation to any of the foregoing clauses (A) through (D) are
hereinafter referred to as the "Required Consents."
(c) Ownership and Distribution of KRE Common Stock. KRM owns all
----------------------------------------------
of the issued and outstanding shares of KRE Common Stock free and clear of
any lien, encumbrance or adverse claim. The Boards of Directors of KRM, KRH
and KRI have duly authorized the Distributions.
(d) Finders or Advisors. Except for Nesbitt Burns Securities Inc.
-------------------
("Nesbitt Burns"), a copy of whose engagement agreement with KRI has been
provided to St. Mary, there is no investment banker, broker, finder or
other intermediary which has been retained by or is authorized to act on
behalf of KRI, KRH, KRM, KRE or the shareholders of KRI who might be
entitled to any fee or commission in connection with the transactions
contemplated by this Agreement.
Section 3.2 Representations and Warranties of KRI and KRE. Except as
---------------------------------------------
set forth in the KRE Disclosure Schedule attached to this Agreement as Schedule
3.2 (the "KRE Disclosure Schedule") (each section of which qualifies the
correspondingly numbered representation and warranty to the extent specified
therein), KRI and KRE represent and warrant to St. Mary as follows:
(a) Organization and Standing of KRE. KRE and each of its
--------------------------------
Subsidiaries is a corporation duly organized and validly existing and in
good standing under the laws of its jurisdiction of incorporation or
organization, has all requisite power and authority to own,
A-11
<PAGE>
lease and operate its properties and to carry on its business as now being
conducted and is duly qualified to do business and in good standing in each
jurisdiction in which the nature of its business or the ownership or
leasing of its properties makes such qualification necessary other than in
such jurisdictions where the failure to so qualify would not, either
individually or in the aggregate, have a Material Adverse Effect on KRE.
KRE is duly qualified to enter into this Agreement and to carry out and
perform the terms and provisions of this Agreement. Except with respect to
the KRE Subsidiaries set forth on the KRE Disclosure Schedule, KRE has no
direct or indirect interest, either by way of stock ownership or otherwise,
in any other firm, corporation, association or business. The copies of the
certificate of incorporation and bylaws of KRE which were previously
furnished to St. Mary are true, complete and correct copies of such
documents as in effect on the date of this Agreement.
(b) Authority; No Conflicts.
-----------------------
(i) The execution, delivery and performance of this Agreement
have been duly authorized by all requisite corporate action on the
part of KRE subject to the Required KRE Vote (as defined below). This
Agreement has been executed and delivered by KRE and constitutes a
valid and binding obligation of KRE enforceable in accordance with its
terms (except as limited by bankruptcy, insolvency, or other laws
affecting the enforcement of creditors' rights).
(ii) The execution and delivery of this Agreement by KRE does
not, and the consummation of the Merger by KRE and the other
transactions contemplated hereby will not, conflict with, or result in
a violation pursuant to: (A) any provision of the certificate of
incorporation or bylaws of KRE, or (B) any loan or credit agreement,
note, mortgage, bond, indenture, lease, benefit plan or other
agreement, obligation, instrument, permit, concession, franchise,
license, judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to KRE or any Subsidiary of KRE or any of their
properties or assets, except as would not have a Material Adverse
Effect on to KRE, subject to obtaining the consents, approvals,
orders, authorizations, registrations, declarations and filings
referred to in paragraph (iii) below.
(iii) No consent, approval, order or authorization of, or
registration, declaration or filing with, any Governmental Entity is
required by or with respect to KRE or its Subsidiaries in connection
with the execution and delivery of this Agreement by KRE or the
consummation of the Merger and the other transactions contemplated
thereby, except for (A) the Required Consents, (B) such consents,
approvals, orders, authorizations, registrations and declarations by
Governmental Entities (including, without limitation, the Minerals
Management Service, the Bureau of Land Management and all other
federal and state regulatory entities having jurisdiction) in
connection with the transfer, sale or conveyance of oil and gas leases
or interests therein if the same are customarily obtained by a
purchaser subsequent to such sale or conveyance, and (C) such
consents, approvals, orders, authorizations,
A-12
<PAGE>
registrations, declarations and filings the failure of which to make
or obtain would not have a Material Adverse Effect on KRE or its
Subsidiaries.
(iv) Except as set forth in the KRE Disclosure Schedule, all
material contracts of KRE shall remain in full force and effect
following, and notwithstanding the consummation of, the Merger.
(c) Capitalization of KRE and Indebtedness for Borrowed Moneys. KRE
----------------------------------------------------------
is duly and lawfully authorized by its certificate of incorporation, to
issue 1,000 shares of KRE Common Stock, of which as of the date hereof
there are issued and outstanding 1,000 shares. All outstanding shares of
KRE Common Stock have been issued to and are held by KRM. KRE has no
treasury stock and no other authorized series or class of stock. All the
outstanding shares of KRE Common Stock have been duly authorized and
validly issued and are fully paid and nonassessable and free of preemptive
rights. Neither KRE nor any of its Subsidiaries is obligated to issue any
additional capital stock or voting securities as a result of any options,
warrants, rights, conversion rights, obligations upon default, subscription
agreements or other obligations of any kind. KRE is not presently liable
on account of any indebtedness for borrowed moneys, except as reflected in
the KRE Financial Statements (as hereinafter defined) or the KRE Disclosure
Schedule.
(d) KRE Financial Statements. KRE has furnished to St. Mary its
------------------------
audited balance sheets as of December 31, 1996, 1997 and 1998, its audited
statements of income and retained earnings and cash flows for each of the
three years ended December 31, 1998, its unaudited balance sheet as of May
31, 1999, and its unaudited statements of income and cash flows for the
five months ended May 31, 1999 (collectively, the "KRE Financial
Statements"). All of the KRE Financial Statements present fairly, in all
material respects, the financial position of KRE as of the respective
balance sheet dates and the results of its operations and cash flows for
the respective periods therein specified. The KRE Financial Statements
have been prepared in accordance with generally accepted accounting
principles ("GAAP") applied on a consistent basis.
(e) Present Status. Except as otherwise disclosed in the KRE
--------------
Disclosure Schedule, from May 31, 1999 to the date of this Agreement, KRE
and its Subsidiaries have not incurred any liabilities that are of a nature
that would be required to be disclosed on a consolidated balance sheet of
KRE and its Subsidiaries or the notes thereto prepared in accordance with
GAAP, other than liabilities incurred in the ordinary course of business of
KRE and which do not have a Material Adverse Effect on KRE.
(f) Litigation. Except as disclosed in the KRE Financial Statements
----------
or Schedule 3.2(f) hereto, there are no legal actions, suits, arbitrations
or other legal or administrative proceedings pending or, to the Knowledge
of KRI or KRE, threatened against KRE or any Subsidiary of KRE which would
reasonably be expected to have a Material Adverse Effect on KRE and its
Subsidiaries. In addition, neither KRI nor KRE is aware of any facts which
to the best of its Knowledge would reasonably be expected to result in any
action, suit, arbitration or other proceeding which would reasonably be
expected to have a Material
A-13
<PAGE>
Adverse Effect on KRE and its Subsidiaries. Neither KRE nor any of its
Subsidiaries is in default of any judgment, order or decree of any court
or, in any material respect of, any requirements of a government agency or
instrumentality, except as set forth in the KRE Financial Statements or on
the KRE Disclosure Schedule.
(g) Compliance With the Law and Other Instruments. To the best of
---------------------------------------------
KRE's and KRI's Knowledge, the business operations of KRE and its
Subsidiaries have been and are being conducted in compliance in all
material respects with all applicable laws, rules, and regulations of all
authorities. Neither KRE nor any of its Subsidiaries are in violation of,
or in default under, any term or provision of its certificate of
incorporation or its bylaws or in any material respect of any lien,
mortgage, lease, agreement, instrument, order, judgment or decree, except
those violations, defaults and restrictions which do not, individually or
in the aggregate, have a Material Adverse Effect on KRE and its
Subsidiaries, or which do not prohibit KRE from entering into this
Agreement.
(h) Title to Properties and Assets. Except as set forth on Schedule
------------------------------
3.2(h) hereto, each of KRE and its Subsidiaries has good and defensible
title to the leasehold or well interests set forth in the Ryder Scott
Company reports as of January 1, 1999, dated April 9, 1999 and as of
January 1, 1999 dated May 21, 1999 (the "Ryder Scott Reports") and the
Netherland Sewell and Associates, Inc. report as of January 1, 1999, dated
April 9, 1999 (the "Netherland Sewell Report"), and as to all of its
material properties and assets, including without limitation those
reflected in the KRE Financial Statements and those used or located on
property controlled by KRE or any of its Subsidiaries in its business
(except assets leased or sold in the ordinary course of business), subject
to no mortgage, pledge, lien, charge, security interest, encumbrance or
restriction except those which (a) are disclosed in the KRE Financial
Statements or the KRE Disclosure Schedule; or (b) do not have a Material
Adverse Effect on KRE and its Subsidiaries, taken together.
(i) Oil and Gas Leases and Wells. KRE has furnished to St. Mary
----------------------------
lists of all oil and gas leases and wells in which either KRE or its
Subsidiaries own or claim any type of right or interest, whether legal,
equitable, or beneficial (the "KRE Leases and Wells Lists"), and the KRE
Leases and Wells Lists are accurate and complete in all material respects.
All leases listed on the KRE Leases and Wells Lists are valid and in full
force and effect, and all rentals, royalties, shut-in payments, minimum
royalties, and other payments due thereunder have been timely and properly
made. Except as specifically set forth on the KRE Leases and Wells Lists,
KRE and its Subsidiaries enjoy and are in peaceful and undisturbed
possession under each lease and for each well so listed. Neither KRE nor
any of its Subsidiaries has received any notice of, and there does not
exist, any default, event, occurrence or act which, with the giving of
notice or lapse of time or both, would become a default under any such
lease, and neither KRE nor any of its Subsidiaries has violated any of the
terms or conditions under any such lease in any material respect. To the
Knowledge of KRI and KRE, such real property and the wells, pipelines,
gathering lines and facilities, processing facilities, flow lines, tanks,
pumps, production platforms, equipment and any and all other buildings,
fixtures, equipment and other property attached or appurtenant thereto or
situated thereon are in good operating condition and repair, in compliance
in all material respects with all
A-14
<PAGE>
applicable laws and are adequate and suitable for the purposes for which
they are presently being used, except for such matters which in the
aggregate, would not have a Material Adverse Effect on KRE and its
Subsidiaries, taken together.
(j) Records. To the best of KRI's and KRE's Knowledge, the books of
-------
account and other records of KRE and its Subsidiaries are complete and
correct in all material respects, and there have been no material
transactions involving the business of KRE and its Subsidiaries which
properly should have been set forth in such records, other than those set
forth therein.
(k) Absence of Certain Changes or Events. Except as set forth in
------------------------------------
Schedule 3.2(k) hereto, since May 31, 1999, (i) there has not been any
material adverse change in, or event or condition which has had a Material
Adverse Effect on, the condition (financial or otherwise), properties,
assets, liabilities or, to the best of KRI's and KRE's Knowledge, the
business of KRE and its Subsidiaries, taken together, (other than any
change or circumstance relating to the economy or securities markets in
general or to the oil and gas industry in general and not specifically
relating to KRE) and (ii) KRE has not declared or paid any dividend or made
any other distribution in respect of any of its capital stock or
repurchased or redeemed or otherwise acquired any shares of its capital
stock or obligated itself to do any of the foregoing.
(l) Taxes. To the Knowledge of KRI and KRE, except as set forth in
-----
Schedule 3.2(l) hereto, KRE and KRE's Subsidiaries have duly filed all
federal, state, county, local and foreign income, franchise, excise, real
and personal property and other tax returns and reports (including, but not
limited to, those relating to social security, withholding, unemployment
insurance and occupation (sales) and use taxes) required to have been filed
up to the date hereof. To the Knowledge of KRI and KRE, all of the
foregoing returns are true and correct in all material respects and KRE and
KRE's Subsidiaries have paid or provided for all taxes, interest and
penalties shown on such returns or reports as being due. To the Knowledge
of KRI and KRE, KRE and KRE's Subsidiaries have no liability for any amount
of taxes, interest or penalties of any nature whatsoever, except for those
taxes which may have arisen up to the Closing Date in the ordinary course
of business and are properly accrued on the books of KRI, KRE and KRE's
Subsidiaries as of the Closing Date.
(m) Environmental Matters. Neither KRI nor KRE is aware of any
---------------------
actions, proceedings or investigations pending or, to the best of KRI's and
KRE's Knowledge, threatened before any federal, state or foreign
environmental regulatory body or before any federal, state or foreign court
alleging material noncompliance by KRE or any of its Subsidiaries with
CERCLA or any other laws or regulations regulating the discharge of
materials into the environment ("Environmental Laws"). To the best of
KRI's and KRE's Knowledge: (i) there is no reasonable basis for the
institution of any material action, proceeding or investigation against KRE
or any of its Subsidiaries for violation of any Environmental Law; (ii)
neither KRE nor any of its Subsidiaries is responsible under any
Environmental Law for any release by any person at or in the vicinity of
real property of any hazardous substance (as defined by CERCLA) caused by
the spilling, leaking, pumping,
A-15
<PAGE>
pouring, emitting, emptying, discharging, injecting, escaping, leaching,
dumping or disposing of any such hazardous substance into the environment,
other than routine incidental releases associated with normal operations
the remediation of which is required under the Environmental Laws and the
cost of which will not be material to KRE; (iii) neither KRE nor any of its
Subsidiaries is responsible for any costs of any remedial action required
by virtue of any release of any hazardous substance, pollutant or
contaminant into the environment, other than routine incidental releases
associated with normal operations the remediation of which is required
under the Environmental Laws and the cost of which will not be material to
KRE; (iv) KRE and its Subsidiaries are in compliance in all material
respects with all applicable Environmental Laws; and (v) no real property
used, owned, managed or controlled by KRE or any of its Subsidiaries
contains any toxic or hazardous substance including, without limitation,
any asbestos, PCBs or petroleum products or byproducts in any form, the
presence, location or condition of which violates any Environmental Law in
any material respect.
(n) KRE Benefit Plans.
-----------------
(i) Attached hereto as Schedule 3.2(n) is a list identifying
each Benefit Plan of KRE or any of its Subsidiaries or in which they
participate. For purposes of this Agreement, the term "Benefit Plan"
means, with respect to any Person (as defined in Section 7.5), any
employee benefit plan (within the meaning of Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended
("ERISA")), written or oral employment or consulting agreement,
severance pay plan or agreement, employee relations policy (or
practice, agreement or arrangement), agreements with respect to leased
or temporary employees, vacation plan or arrangement, sick pay plan,
stock purchase plan, stock option plan, fringe benefit plan, incentive
plan, bonus plan, cafeteria or flexible spending account plan and any
deferred compensation agreement, (or plan, program, or arrangement)
covering any present or former employee of such Person or a Subsidiary
of such Person and which is, or at any time was, sponsored or
maintained by (or to which contributions are, were, or at any time
were required to have been, made by such Person or a Subsidiary of
such Person).
(ii) With respect to each KRE Benefit Plan, there has been
delivered to St. Mary, (i) copies of each such KRE Benefit Plan
(including all trust agreements, insurance or annuity contracts,
descriptions, general notices to employees or beneficiaries and any
other material documents or instruments relating thereto); (ii) the
most recent audited (if required or otherwise available) or unaudited
financial statement with respect to each such KRE Benefit Plan; (iii)
copies of the most recent determination letters with respect to any
such KRE Benefit Plan which is an employee pension benefit plan (as
such term is defined under ERISA) intended to qualify under the
Internal Revenue Code of 1986 (the "Code") ; and (iv) copies of the
most recent actuarial reports, if any, of each such KRE Benefit Plan.
(iii) With respect to each KRE Benefit Plan:
A-16
<PAGE>
(A) each such KRE Benefit Plan which is an employee
pension benefit plan intended to qualify under the Code so
qualifies and has received a favorable determination letter as to
its qualification under the Code, and no event has occurred that
will or could reasonably be expected to give rise to
disqualification or loss of tax-exempt status of any such plan or
related trust;
(B) KRE has complied in all material respects with all
provisions of ERISA and no act or omission by KRE in connection
with any KRE Benefit Plan has occurred that will or could
reasonably be expected to give rise to liability for a breach of
fiduciary responsibilities under ERISA or to any fines or
penalties under ERISA;
(C) all insurance and annuity premiums, if any, required
for all periods up to and including the Closing have been or will
be paid;
(D) no KRE Benefit Plan provides for any post-retirement
life, medical, dental or other welfare benefits (whether or not
insured) for any current or former employee except as required
under the Code or ERISA or applicable state or local Law;
(E) all contributions required to have been made by law
or under the terms of any contract, agreement or KRE Benefit Plan
for all complete and partial periods up to and including the
Closing have been made or will be made;
(F) the transactions contemplated by this Agreement will
not be the direct or indirect cause of any amount paid or payable
from such KRE Benefit Plan being classified as an excess
parachute payment under the Code;
(G) there are no matters pending before the United States
Internal Revenue Service, the United States Department of Labor
or the Pension Benefit Guaranty Corporation ("PBGC");
(H) there have been no claims or notice of claims filed
under any fiduciary liability insurance policy covering any KRE
Benefit Plan;
(I) each and every such KRE Benefit Plan which is a group
health plan (as such term is defined under the Code or ERISA)
complies in all material respects, and in each and every case has
complied in all material respects, with the applicable
requirements of the Code, ERISA, the applicable requirements of
the Health Insurance Portability and Accountability Act of 1996,
and all other federal, state or local Laws or ordinances
requiring the provision or continuance of health or medical
benefits;
A-17
<PAGE>
(J) each and every KRE Benefit Plan which is a cafeteria
plan or flexible spending account plan complies in all material
respects, and in each and every case has complied in all material
respects, with the applicable requirements of the Code and all
other applicable federal, state, or local Laws or ordinances; and
(K) each and every KRE Benefit Plan which is a dependent
care assistance program complies in all material respects, and in
each and every case has complied in all material respects, with
the applicable requirements of the Code and all other applicable
federal, state or local Laws or ordinances.
(iv) With respect to any employee benefit plan (within the
meaning of ERISA), stock purchase plan, stock option plan, fringe
benefit plan, bonus plan or any deferred compensation agreement, plan
or program (whether or not any such plan, program, or agreement is
currently in effect):
(A) there are no actions, suits, or claims (other than
routine claims for benefits in the ordinary course) pending or,
to the best Knowledge of KRE threatened, and to the best
Knowledge of KRE there are no facts which could give rise to any
such actions, suits, or claims (other than routine claims for
benefits in the ordinary course), which could subject KRE to any
material liability;
(B) KRE has not engaged in a prohibited transaction, as
such term is defined in the Code which would subject KRE to any
taxes, penalties or other liabilities resulting from prohibited
transactions under the Code or under ERISA; and
(C) KRE is not subject to (1) any liability, lien or other
encumbrance under any agreement imposing secondary liability on
KRE as a seller of the assets of a business under ERISA or the
Code, (2) contingent liability under ERISA to the PBGC or to any
plan, participant, or other person or (3) a lien or other
encumbrance under ERISA.
(v) (A) KRE is not subject to any legal, contractual,
equitable, or other obligation to continue any KRE Benefit Plan of any
nature, including, without limitation any KRE Benefit Plan or any
other pension, profit sharing, welfare, or post-retirement welfare
plan, or any stock option, stock or cash award, non-qualified deferred
compensation or executive compensation plan, policy or practice (or to
continue participation in any such benefit plan, policy or practice)
on or after the Closing;
(B) KRE may, in any manner, and without the consent of
any employee, beneficiary or other person, terminate, modify or
amend any such
A-18
<PAGE>
KRE Benefit Plan (or its participation in such KRE Benefit Plan
or any other plan, program or practice) effective as of any date
on or after the Closing; and
(C) no representations or communications (directly or
indirectly, orally, in writing or otherwise) with respect to
participation, eligibility for benefits, vesting, benefit accrual
coverage or other material terms of any KRE Benefit Plan have
been made prior to the Closing to any employee, beneficiary or
other person other than those which are in accordance with the
terms and provisions of each such KRE Benefit Plan as in effect
immediately prior to the Closing.
(vi) KRE has at no time participated in a multi-employer
pension plan defined under Section 3(37) of ERISA.
(vii) With respect to each and every KRE Benefit Plan subject to
ERISA: (A) no such KRE Benefit Plan or related trust has been
terminated or partially terminated; (B) no liability to the PBGC has
been or is expected to be incurred with respect to such KRE Benefit
Plan; (C) the PBGC has not instituted and to the best Knowledge of KRE
is not expected to institute any proceedings to terminate such KRE
Benefit Plan; (D) there has been no reportable event (within the
meaning of ERISA); (E) there exists no condition or set of
circumstances that presents a material risk of the termination of such
KRE Benefit Plan by the PBGC; (F) no accumulated funding deficiency
(as defined under ERISA and the Code), whether or not waived, exists
with respect to such KRE Benefit Plan; and (G) the current value of
all vested accrued benefits under each such KRE Benefit Plan did not
as of the last day of the most recently ended fiscal year of each KRE
Benefit Plan, and will not as of the Closing, exceed the current value
of the assets of each such KRE Benefit Plan allocable to such vested
accrued benefits determined by KRE Benefit Plans' actuary on an
ongoing basis.
(viii) Except as set forth on Schedule 3.2(n)(viii) hereto, no
director or officer or other employee of KRE or any of its
Subsidiaries will become entitled to any retirement, severance or
similar benefit or enhanced or accelerated benefit (including any
acceleration of vesting or lapse of repurchase rights or obligations
with respect to any employee stock option or other benefit under any
stock option plan or compensation plan or arrangement of KRE) solely
as a result of the transactions contemplated by this Agreement.
(o) Year 2000 Matters. Except as set forth on Schedule 3.2(o)
-----------------
hereto, the computer software operated by KRE and each of its Subsidiaries
is capable of providing or is being adapted to provide uninterrupted
millennium functionality to record, store, process and present calendar
dates falling on or after January 1, 2000 in substantially the same manner
and with the same functionality as such software records, stores, processes
and presents such calendar dates falling on or before December 31, 1999.
The costs of the adaptations referred to in the prior sentence will not be
material to KRE and its Subsidiaries. To the Knowledge
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<PAGE>
of KRI and KRE, neither KRE nor any of its Subsidiaries has relationships
with third parties the failure of whose systems to be Year 2000 compliant
will be material to KRE.
(p) Confidentiality Agreements. All current employees of KRE and its
--------------------------
Subsidiaries have executed the KRE Information Resources User
Acknowledgment and have received a copy of the KRE Information Resources
Use and Protection Policy.
(q) Vote Required. The affirmative vote of the holders of the
-------------
majority of the outstanding shares of KRE Common Stock at a duly held
meeting of such holders (the "Required KRE Vote") to approve the Merger is
the only vote of the shareholders of KRE, KRH, KRM or KRI required, other
than the votes of the Boards of Directors of KRM, KRH and KRI to approve
the Merger.
(r) Fairness Opinion. KRI has received from Nesbitt Burns, KRI's
----------------
financial advisor with respect to the transactions contemplated by this
Agreement, an opinion to the effect that the consideration to be received
by the KRI shareholders in the Merger is fair to the KRI shareholders from
a financial point of view.
(s) Full Disclosure. To the best of KRI's and KRE's Knowledge, this
---------------
Agreement and any Schedules, certificates and the KRE Leases and Wells
Lists delivered by KRI and KRE in connection herewith or with the
transactions contemplated hereby, taken as a whole, neither contain any
untrue statement of a material fact nor omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. To the best of KRI's and KRE's Knowledge, there are no facts or
circumstances relating to KRE or any Subsidiary of KRE that will have, or
would be reasonably likely to have, a Material Adverse Effect on St. Mary
following the Closing Date, other than any facts or circumstances (A)
disclosed in this Agreement or any schedule, exhibit or other document
delivered in connection herewith, or (B) previously disclosed to St. Mary
by KRI or KRE.
Section 3.3 Representations and Warranties by St. Mary. Except as set
------------------------------------------
forth in the St. Mary Disclosure Schedule attached to this Agreement as Schedule
3.3 (the "St. Mary Disclosure Schedule") (each section of which qualifies the
correspondingly numbered representation and warranty or covenant to the extent
specified therein), St. Mary hereby represents and warrants to KRI as follows:
(a) Organization and Standing of St. Mary. St. Mary and each of its
-------------------------------------
Subsidiaries is a corporation duly organized and validly existing and in
good standing under the laws of its jurisdiction of incorporation or
organization, has all requisite power and authority to own, lease and
operate its properties and to carry on its business as now being conducted,
and is duly qualified to do business and is in good standing in each
jurisdiction in which the nature of its business or the ownership or
leasing of its properties make such qualification necessary other than in
jurisdictions where the failure to so qualify would not, either
individually or in the aggregate, have a Material Adverse Effect on St.
Mary. Except with respect to the St. Mary Subsidiaries set forth on the
St. Mary Disclosure Schedule, St. Mary has no direct or
A-20
<PAGE>
indirect interest, either by way of stock ownership or otherwise, in any
other firm, corporation, association, or business. The copies of the
certificate of incorporation and bylaws of St. Mary which were previously
furnished to KRI and KRE are true, complete and correct copies of such
documents as in effect on the date of this Agreement.
(b) Authority; No Conflicts.
-----------------------
(i) The execution, delivery and performance of this Agreement
have been duly authorized by all requisite corporate action on the
part of St. Mary, subject to the Required St. Mary Vote (as defined
below). This Agreement has been executed and delivered by St. Mary and
constitutes a valid and binding obligation of St. Mary enforceable in
accordance with its terms (except as limited by bankruptcy,
insolvency, or other laws affecting the enforcement of creditors'
rights).
(ii) The execution and delivery of this Agreement by St. Mary
does, and the consummation by St. Mary of the Merger and the other
transactions contemplated hereby will not, conflict with or result in
a violation pursuant to: (A) any provision of the certificate of
incorporation or bylaws of St. Mary, (B) any loan or credit agreement,
note, mortgage, bond, indenture, lease, benefit plan or other
agreement, obligation, instrument, permit, concession, franchise,
license, judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to St. Mary or any Subsidiary of St. Mary or any
of its properties or assets, except as would not have a Material
Adverse Effect on St. Mary, subject to obtaining the consents,
approvals, orders, authorizations, registrations, declarations and
filings referred to in paragraph (iii) below.
(iii) No consent, approval, order or authorization of, or
registration, declaration or filing with, a Governmental Entity is
required by or with respect to St. Mary or its Subsidiaries in
connection with the execution and delivery of this Agreement by St.
Mary or the consummation of the Merger and the other transactions
contemplated hereby, except for the Required Consents and such
consents, approvals, orders, authorizations, registrations,
declarations and filings the failure of which to make or obtain would
not have a Material Adverse Effect on St. Mary or its Subsidiaries.
(c) Capitalization of St. Mary and Indebtedness for Borrowed Moneys.
---------------------------------------------------------------
St. Mary is duly and lawfully authorized by its certificate of
incorporation to issue 50,000,000 shares of St. Mary Common Stock, of which
as of the date hereof there are 11,276,938 shares issued and outstanding
and 182,800 shares held by St. Mary as treasury stock. St. Mary has no
other authorized series or class of stock. All the outstanding shares of
St. Mary Common Stock have been duly authorized and validly issued and are
fully paid and nonassessable and free of preemptive rights. All of the
shares of St. Mary Common Stock to be issued upon consummation of the
Merger will be, at the time of issuance, duly authorized and validly
issued, and will be fully paid and nonassessable and free of preemptive
rights. St. Mary has a Stock Option Plan and an Incentive Stock Option
Plan (collectively, the "St. Mary Option
A-21
<PAGE>
Plans") which provide for the issuance of up to an aggregate of 1,650,000
shares of St. Mary Common Stock pursuant to the exercise of options granted
under the St. Mary Option Plans. As of the date hereof, options
representing in the aggregate the right to purchase 684,322 shares of St.
Mary Common Stock have been granted under the St. Mary Option Plans and
remain outstanding. St. Mary has an Employee Stock Purchase Plan for the
purchase of up to 500,000 shares of St. Mary Common Stock, under which
24,821 shares of St. Mary Common Stock have been purchased through the date
hereof. Except with respect to the foregoing and to this Agreement, and
except as set forth on Schedule 3.3(c), neither St. Mary nor any of its
Subsidiaries is obligated to issue any additional capital stock or voting
securities as a result of any options, warrants, rights, conversion rights,
obligations upon default, subscription agreement or other obligation of any
kind. St. Mary is not presently liable on account of any indebtedness for
borrowed moneys, except as reflected in the St. Mary Financial Statements
(as hereinafter defined).
(d) St. Mary SEC Reports and Financial Statements.
---------------------------------------------
(i) St. Mary has filed all required reports, schedules, forms,
statements and other documents required to be filed with the SEC
(collectively, including all exhibits thereto, the "St. Mary SEC
Reports"). No Subsidiary of St. Mary is required to file any form,
report or other document with the SEC. None of the St. Mary SEC
Reports, as of their respective dates (and, if amended or superseded
by filings prior to the date of this Agreement or the Closing Date,
then on the date of such filing), contained any untrue statement of a
material fact or omitted 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 made, not misleading. Each
of the financial statements (including the related notes) included in
the St. Mary SEC Reports presents fairly, in all material respects,
the consolidated financial position and consolidated results of
operations and cash flows of St. Mary and its Subsidiaries as of the
respective dates or for the respective periods set forth therein, all
in accordance with GAAP consistently applied during the periods
involved except as otherwise noted therein. All of such St. Mary SEC
Reports, as of their respective dates (and as of the date of any
amendment to the respective St. Mary SEC Report), complied as to form
in all material respects with the applicable requirements of the
Securities Act and the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and the rules and regulations promulgated
thereunder.
(ii) St. Mary has furnished to KRM and KRI its audited
balance sheets as of December 31, 1996, 1997 and 1998, its audited
statements of operations and statements of cash flows for each of the
three years ended December 31, 1998, its unaudited balance sheet as of
May 31, 1999, and its unaudited income statement and statement of cash
flows for the five months ended May 31, 1999 and 1998 (collectively,
the "St. Mary Financial Statements"). All of the St. Mary Financial
Statements present fairly, in all material respects, the financial
position of St. Mary as of the respective balance sheet dates, and the
results of its operations and cash flows for the respective periods
therein specified. The St. Mary Financial Statements
A-22
<PAGE>
were prepared in accordance with GAAP (except in the case of unaudited
interim financial statements, as permitted by the rules and
regulations of the SEC) applied on a consistent basis.
(e) Present Status. Except as otherwise disclosed in the St. Mary
--------------
Disclosure Schedule, from May 31, 1999 to the date of this Agreement, St.
Mary and its Subsidiaries have not incurred any liabilities that are of a
nature that would be required to be disclosed on a consolidated balance
sheet of St. Mary and its Subsidiaries or the notes thereto prepared in
accordance with GAAP, other than liabilities incurred in the ordinary
course of business of St. Mary and which do not have a Material Adverse
Effect on St. Mary.
(f) Litigation. Except as disclosed in the St. Mary Financial
----------
Statements, the St. Mary Disclosure Schedule or Schedule 3.3(f) hereto,
there are no legal actions, suits, arbitrations, or other legal or
administrative proceedings pending or, to the Knowledge of St. Mary,
threatened against St. Mary or any Subsidiary of St. Mary which would
reasonably be expected to have a Material Adverse Effect on St. Mary and
its Subsidiaries. In addition, St. Mary is not aware of any facts which to
the best of its Knowledge would reasonably be expected to result in any
action, suit, arbitration or other proceeding which would reasonably be
expected to have a Material Adverse Effect on St. Mary and its
Subsidiaries. Neither St. Mary nor any of its Subsidiaries is in default
of any judgment, order or decree of any court or, in any material respect
of, any requirements of a government agency or instrumentality.
(g) Compliance With the Law and Other Instruments. To the best of
---------------------------------------------
St. Mary's Knowledge, the business operations of St. Mary have been and are
being conducted in compliance in all material respects with all applicable
laws, rules, and regulations of all authorities. St. Mary is not in
violation of, or in default under, any term or provision of its certificate
of incorporation or its bylaws or in any material respect of any lien,
mortgage, lease, agreement, instrument, order, judgment or decree, except
those violations, defaults and restrictions which do not, individually and
in the aggregate, have a Material Adverse Effect on St. Mary and its
Subsidiaries, or which do not prohibit St. Mary from entering into this
Agreement.
(h) Title to Properties and Assets. Except as set forth on Schedule
------------------------------
3.3(h) hereto, St. Mary and its Subsidiaries have good and defensible title
to all of its material properties and assets, including without limitation
those reflected in the St. Mary Financial Statements and those used or
located on property controlled by St. Mary or any of its Subsidiaries in
its business (except assets leased or sold in the ordinary course of
business), subject to no mortgage, pledge, lien, charge, security interest,
encumbrance or restriction except those which (a) are disclosed in the St.
Mary Financial Statements; or (b) do not have a Material Adverse Effect on
St. Mary and its Subsidiaries, taken together.
(i) Oil and Gas Leases and Wells. St. Mary has furnished to KRI
----------------------------
lists of all oil and gas leases and wells in which St. Mary owns or claims
any type of right or interest whether legal, equitable, or beneficial (the
"St. Mary Leases and Wells Lists") and the St. Mary Leases and Wells Lists
are accurate and complete in all material respects. All leases listed
A-23
<PAGE>
on the St. Mary Leases and Wells Lists are valid and in full force and
effect, and all rentals, royalties, shut-in payments, minimum royalties,
and other payments due thereunder have been timely and properly made.
Except as specifically set forth on the St. Mary Leases and Wells Lists,
St. Mary enjoys and is in peaceful and undisturbed possession under each
lease and for each well so listed. St. Mary has not received any notice of,
and there does not exist, any default, event, occurrence or act which, with
the giving of notice or lapse of time or both, would become a default under
any such lease, and St. Mary has not violated any of the terms or
conditions under any such lease in any material respect. To the Knowledge
of St. Mary, such real property and the wells, pipelines, gathering lines
and facilities, processing facilities, flow lines, tanks, pumps, production
platforms, equipment and any and all other buildings, fixtures, equipment
and other property attached or appurtenant or situated thereon are in good
operating condition and repair, in compliance in all material respects with
all applicable laws and are adequate and suitable for the purposes for
which they are presently being used, except for such matters which in the
aggregate, would not have a Material Adverse Effect on St. Mary.
(j) Records. To the best of St. Mary's Knowledge, the books and
-------
other records of St. Mary and its Subsidiaries are complete and correct in
all material respects, and there have been no material transactions
involving the business of St. Mary and its Subsidiaries which properly
should have been set forth in such records, other than those set forth
therein.
(k) Absence of Certain Changes or Events. Since May 31, 1999, (i)
------------------------------------
there has not been any material adverse change in, or event or condition
which has had a Material Adverse Effect on, the condition (financial or
otherwise), properties, assets, liabilities or, to the best of St. Mary's
Knowledge, the business of St. Mary and its Subsidiaries, taken together
(other than any change or circumstance relating to the economy or
securities markets in general or to the oil and gas industry in general and
not specifically relating to St. Mary), and (ii) except for its $0.05 per
share St. Mary Common Stock dividend per quarter, St. Mary has not declared
or paid any dividend or made any other distribution in respect of any of
its capital stock, and except for the purchase of 182,800 shares of St.
Mary Common Stock under its open market share repurchase program, St. Mary
has not repurchased or redeemed or otherwise acquired any shares of its
capital stock or obligated itself to do any of the foregoing.
(l) Taxes. To the Knowledge of St. Mary, St. Mary and its
-----
Subsidiaries have duly filed all federal, state, county, local and foreign
income, franchise, excise, real and personal property and other tax returns
and reports (including, but not limited to, those relating to social
security, withholding, unemployment insurance, and occupation (sales) and
use taxes) required to have been filed by St. Mary and its Subsidiaries up
to the date hereof. To the Knowledge of St. Mary, all of the foregoing
returns are true and correct in all material respects and St. Mary and its
Subsidiaries have paid or provided for all taxes, interest and penalties
shown on such returns or reports as being due. To the Knowledge of St.
Mary, St. Mary and its Subsidiaries have no liability for any amount of
taxes, interest or penalties of any nature whatsoever, except for those
taxes which may have arisen up to the Closing Date
A-24
<PAGE>
in the ordinary course of business and are properly accrued on the books of
St. Mary and its Subsidiaries as of the Closing Date.
(m) Environmental Matters. St. Mary is not aware of any actions,
---------------------
proceedings or investigations pending or, to the best of St. Mary's
Knowledge, threatened before any federal, state or foreign environmental
regulatory body or before any federal, state or foreign court alleging
material noncompliance by St. Mary or any of its Subsidiaries with any
Environmental Laws. To the best of St. Mary's Knowledge: (i) there is no
reasonable basis for the institution of any material action, proceeding or
investigation against St. Mary or any of its Subsidiaries for violation of
any Environmental Law; (ii) neither St. Mary nor any of its Subsidiaries is
responsible under any Environmental Law for any release by any person at or
in the vicinity of real property of any hazardous substance (as defined by
CERCLA) caused by the spilling, leaking, pumping, pouring, emitting,
emptying, discharging, injecting, escaping, leaching, dumping or disposing
of any such hazardous substance into the environment, other than routine
incidental releases associated with normal operations the remediation of
which is required under the Environmental Laws and the cost of which will
not be material to St. Mary; (iii) neither St. Mary nor any of its
Subsidiaries is responsible for any costs of any remedial action required
by virtue of any release of any hazardous substance, pollutant or
contaminant into the environment, other than routine incidental releases
associated with normal operations the remediation of which is required
under the Environmental Laws and the cost of which will not be material to
St. Mary; (iv) St. Mary and its Subsidiaries are in compliance in all
material respects with all applicable Environmental Laws; and (v) no real
property used, owned, managed or controlled by St. Mary or any of its
Subsidiaries contains any toxic or hazardous substance including, without
limitation, any asbestos, PCBs or petroleum products or byproducts in any
form, the presence, location or condition of which violates any
Environmental Law in any material respect.
(n) St. Mary Benefit Plans.
----------------------
(i) Attached hereto as Schedule 3.3(n) is a list identifying
each Benefit Plan of St. Mary or any of its Subsidiaries.
(ii) With respect to each St. Mary Benefit Plan, there has been
delivered to KRM and KRI, (i) copies of each such St. Mary Benefit
Plan (including all trust agreements, insurance or annuity contracts,
descriptions, general notices to employees or beneficiaries and any
other material documents or instruments relating thereto); (ii) the
most recent audited (if required or otherwise available) or unaudited
financial statement with respect to each such St. Mary Benefit Plan;
(iii) copies of the most recent determination letters with respect to
any such St. Mary Benefit Plan which is an employee pension benefit
plan (as such term is defined under ERISA) intended to qualify under
the Code; and (iv) copies of the most recent actuarial reports, if
any, of each such St. Mary Benefit Plan.
(iii) With respect to each St. Mary Benefit Plan:
A-25
<PAGE>
(A) each such St. Mary Benefit Plan which is an employee
pension benefit plan intended to qualify under the Code so
qualifies and has received a favorable determination letter as to
its qualification under the Code, and no event has occurred that
will or could reasonably be expected to give rise to
disqualification or loss of tax-exempt status of any such plan or
related trust;
(B) St. Mary has complied in all material respects with all
provisions of ERISA and no act or omission by St. Mary in
connection with any St. Mary Benefit Plan has occurred that will
or could reasonably be expected to give rise to liability for a
breach of fiduciary responsibilities under ERISA or to any fines
or penalties under ERISA;
(C) all insurance and annuity premiums, if any, required
for all periods up to and including the Closing have been or will
be paid;
(D) no St. Mary Benefit Plan provides for any
post-retirement life, dental or other welfare benefits (whether
or not insured) for any current or former employee except as
required under the Code or ERISA or applicable state or local
Law;
(E) all contributions required to have been made by law
or under the terms of any contract, agreement or St. Mary Benefit
Plan for all complete and partial periods up to and including the
Closing have been made or will be made;
(F) the transactions contemplated by this Agreement will
not be the direct or indirect cause of any amount paid or payable
from such St. Mary Benefit Plan being classified as an excess
parachute payment under the Code;
(G) there are no matters pending before the United States
Internal Revenue Service, the United States Department of Labor
or the PBGC ;
(H) there have been no claims or notice of claims filed
under any fiduciary liability insurance policy covering any St.
Mary Benefit Plan;
(I) each and every such St. Mary Benefit Plan which is a
group health plan (as such term is defined under the Code or
ERISA), complies in all material respects, and in each and every
case has complied in all material respects, with the applicable
requirements of the Code, ERISA, the applicable requirements of
the Health Insurance Portability and Accountability Act of 1996,
and all other federal, state or local Laws or ordinances
requiring the provision or continuance of health or medical
benefits;
(J) each and every St. Mary Benefit Plan which is a
cafeteria plan or flexible spending account plan complies in all
material respects, and in each
A-26
<PAGE>
and every case has complied in all material respects, with the
applicable requirements of the Code and all other applicable
federal, state, or local Laws or ordinances; and
(K) each and every St. Mary Benefit Plan which is a
dependent care assistance program complies in all material
respects, and in each and every case has complied in all material
respects, with the applicable requirements of the Code and all
other applicable federal, state or local Laws or ordinances.
(iv) With respect to any employee benefit plan (within the
meaning of ERISA), stock purchase plan, stock option plan, fringe
benefit plan, bonus plan or any deferred compensation agreement, plan
or program (whether or not any such plan, program, or agreement is
currently in effect):
(A) there are no actions, suits, or claims (other than
routine claims for benefits in the ordinary course) pending or,
to the best Knowledge of St. Mary threatened, and to the best
Knowledge of St. Mary there are no facts which could give rise to
any such actions, suits, or claims (other than routine claims for
benefits in the ordinary course), which could subject St. Mary to
any material liability;
(B) St. Mary has not engaged in a prohibited transaction,
as such term is defined in the Code which would subject St. Mary
to any taxes, penalties or other liabilities resulting from
prohibited transactions under the Code or under ERISA; and
(C) St. Mary is not subject to (1) any liability, lien or
other encumbrance under any agreement imposing secondary
liability on St. Mary as a seller of the assets of a business
under ERISA or the Code, (2) contingent liability under ERISA to
the PBGC or to any plan, participant, or other person or (3) a
lien or other encumbrance under ERISA.
(v) St. Mary has at no time participated in a multi-employer
pension plan defined under Section 3(37) of ERISA.
(vi) With respect to each and every St. Mary Benefit Plan
subject to ERISA: (A) no such St. Mary Benefit Plan or related trust has
been terminated or partially terminated; (B) no liability to the PBGC has
been or is expected to be incurred with respect to such St. Mary Benefit
Plan; (C) the PBGC has not instituted and to the best Knowledge of St. Mary
is not expected to institute any proceedings to terminate such St. Mary
Benefit Plan; (D) there has been no reportable event (within the meaning of
ERISA); (E) there exists no condition or set of circumstances that presents
a material risk of the termination of such St. Mary Benefit Plan by the
PBGC; (F) no accumulated funding deficiency (as defined under ERISA and the
Code), whether or not waived, exists with respect to such St. Mary Benefit
Plan; and
A-27
<PAGE>
(G) the current value of all vested accrued benefits under each such
St. Mary Benefit Plan did not as of the last day of the most recently
ended fiscal year of each St. Mary Benefit Plan, and will not as of
the Closing, exceed the current value of the assets of each such St.
Mary Benefit Plan allocable to such vested accrued benefits determined
by St. Mary Benefit Plans' actuary on an ongoing basis.
(vii) No director or officer or other employee of St. Mary or
any of its Subsidiaries will become entitled to any retirement,
severance or similar benefit or enhanced or accelerated benefit
(including any acceleration of vesting or lapse of repurchase rights
or obligations with respect to any employee stock option or other
benefit under any stock option plan or compensation plan or
arrangement of St. Mary) solely as a result of the transactions
contemplated by this Agreement.
(o) Year 2000 Matters. The computer software operated by St. Mary is
-----------------
capable of providing or is being adapted to provide uninterrupted
millennium functionality to record, store, process and present calendar
dates falling on or after January 1, 2000 in substantially the same manner
and with the same functionality as such software records, stores, processes
and presents such calendar dates falling on or before December 31, 1999.
The costs of the adaptations referred to in the prior sentence will not be
material to St. Mary and its Subsidiaries. To the Knowledge of St. Mary,
neither St. Mary nor any of its Subsidiaries has relationships with third
parties the failure of whose systems to be Year 2000 compliant will be
material to St. Mary.
(p) Finders and Advisors. Except for Deutsche Bank Securities Inc. a
--------------------
copy of whose engagement agreement with St. Mary has been provided to KRM
and KRI, there is no investment banker, broker, finder or other
intermediary which has been retained by or is authorized to act on behalf
of St. Mary or any of its Subsidiaries who might be entitled to any fee or
commission in connection with the transactions contemplated by this
Agreement.
(q) Vote Required. The affirmative vote of the holders of shares of
-------------
St. Mary Common Stock representing a majority of the total shares
represented at a duly held meeting of the holders of outstanding shares of
St. Mary Common Stock (the "Required St. Mary Vote") to approve the St.
Mary Share Issuance pursuant to the terms of this Agreement is the only
vote of the holders of St. Mary capital stock necessary for the Merger.
(r) Fairness Opinion. St. Mary has received from Deutsche Bank
----------------
Securities Inc., St. Mary's financial advisor with respect to the
transactions contemplated by this Agreement, an opinion to the effect that
the consideration to be paid by St. Mary in the Merger is fair to St. Mary
from a financial point of view.
(s) Full Disclosure. To the best of St. Mary's Knowledge, this
---------------
Agreement, and any Schedules, certificates and other St. Mary Leases and Wells
Lists delivered by St. Mary in connection herewith or with the transactions
contemplated hereby, taken as a whole, neither contain any untrue statement of a
material fact nor omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they
A-28
<PAGE>
were made, not misleading. To the best of St. Mary's Knowledge, there are no
facts or circumstances relating to St. Mary or any Subsidiary of St. Mary that
will have, or would be reasonably likely to have, a Material Adverse Effect on
St. Mary following the Closing Date, other than any facts or circumstances (A)
disclosed in this Agreement or any schedule, exhibit or other document delivered
in connection herewith, or (B) previously disclosed to KRI or KRE by St. Mary.
Section 3.4 Representations and Warranties of St. Mary and Merger Sub.
---------------------------------------------------------
St. Mary and Merger Sub represent and warrant to KRI and KRE as follows:
(a) Organization and Standing of Merger Sub. Merger Sub is a
---------------------------------------
corporation duly incorporated, validly existing and in good standing under
the laws of the State of Colorado. Merger Sub is a first-tier wholly owned
subsidiary of St. Mary.
(b) Authority. Merger Sub has all requisite corporate power and
---------
authority to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution, delivery and performance by Merger Sub
of this Agreement and the consummation by Merger Sub of the transactions
contemplated hereby have been duly authorized by all necessary corporate
action on the part of Merger Sub. This Agreement has been duly executed
and delivered by Merger Sub and constitutes a valid and binding agreement
of Merger Sub, enforceable against it in accordance with its terms, except
as such enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium and other similar laws relating to or affecting
creditors generally.
(c) Non-Contravention. The execution, delivery and performance by
-----------------
Merger Sub of this Agreement and the consummation by Merger Sub of
transactions contemplated hereby do not and will not contravene or conflict
with the certificate of incorporation or bylaws of Merger Sub.
(d) No Business Activities by Merger Sub. Merger Sub has not
------------------------------------
conducted any activities other than in connection with the organization of
Merger Sub, the negotiation and execution of this Agreement and the
consummation of the transactions contemplated hereby. Merger Sub has no
subsidiaries.
ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS
Section 4.1 Covenants of KRI and KRE. During the period from the date
------------------------
of this Agreement and continuing until the Effective Time, KRI and KRE agree
that (except as expressly contemplated or permitted by this Agreement or as
otherwise indicated on the KRE Disclosure Schedule or as required by a
Governmental Entity of competent jurisdiction or to the extent that St. Mary
shall otherwise consent in writing):
A-29
<PAGE>
(a) Ordinary Course.
---------------
(i) KRE and its Subsidiaries shall carry on their respective
businesses in the usual, regular and ordinary course in all material
respects, in substantially the same manner as heretofore conducted,
and shall use all reasonable efforts to preserve intact their present
lines of business, maintain their rights and franchises and preserve
their relationships with customers, suppliers and other having
business dealings with them to the end that their ongoing businesses
shall not be impaired in any material respect at the Effective Time;
provided, however, that no action by KRE or its Subsidiaries with
respect to matters specifically addressed by any other provision of
this Section 4.1 shall be deemed a breach of this Section 4.1(a)(i)
unless such action would constitute a breach of one or more of such
other provisions.
(ii) KRI or KRE shall promptly give St. Mary notice of what it
reasonably believes to be any material occurrence in the business of
KRE or any of its Subsidiaries. KRE shall not, and shall not permit
any of its Subsidiaries to, incur or commit to any capital or other
expenditure, whether or not in the ordinary course of business, in
excess (as to KRE and its Subsidiaries) of $500,000 without the prior
written consent of St. Mary, except for capital or other expenditures
set forth on Schedule 4.1(a)(ii) attached to this Agreement.
(iii) Notwithstanding the provisions of Section 4.1(a)(i), the
parties agree and acknowledge that from the date hereof through the
Closing Date, KRE will substantially reduce (and possibly eliminate)
its drilling, exploration, development and related activities,
provided that such reduction (or elimination) does not constitute, or
result in, a material breach by KRE of a written commitment, contract
or agreement in effect as of the date hereof or otherwise does not
result in a penalty which would have a Material Adverse Effect on KRE.
The parties further agree and acknowledge that any such reduction (or
elimination) will not constitute a violation of the obligations of KRI
and KRE hereunder. In the event that KRE elects not to pursue a
material drilling, exploration, development or related opportunity
presented to KRE by a third party from the date hereof through the
Closing Date, KRE shall give St. Mary written notice thereof, and St.
Mary shall have the right to pursue such opportunity for its own
benefit and at its own cost and expense. KRE will use its
commercially reasonable efforts to assist St. Mary in exercising the
right to pursue any such opportunity.
(b) Dividends; Changes in Share Capital. KRE shall not (i)
-----------------------------------
declare or pay any dividends on or make other distributions in respect of
any of its capital stock, (ii) split, combine or reclassify any of its
capital stock or issue or authorize or propose the issuance of any other
securities in respect of, in lieu of or in substitution for, shares of its
capital stock, except for any such transaction by a wholly owned Subsidiary
of KRE which remains a wholly owned Subsidiary after consummation of such
transactions, or (iii) repurchase, redeem or otherwise acquire any shares
of its capital stock or any securities convertible into or exercisable for
any shares of its capital stock; provided, however, that KRE may increase
A-30
<PAGE>
its authorized capital stock and take such other action as necessary to
insure that the distribution of KRE stock to shareholders of KRI is on a
one for one basis; and provided, further, that this provision shall not
prohibit intercompany transactions in the ordinary course of business
consistent with past practice.
(c) Issuance of Securities. KRE shall not, and shall not permit any
----------------------
of its Subsidiaries to, issue, deliver or sell, or authorize or propose the
issuance, delivery or sale of, any shares of its capital stock of any
class, any voting securities or any securities convertible into or
exercisable for, or any rights, warrants or options to acquire, any such
shares or voting securities, or enter into any agreement with respect to
any of the foregoing, other than issuances by a wholly owned Subsidiary of
KRE of capital stock to such Subsidiary's parent.
(d) Governing Documents. Except to the extent required to comply
-------------------
with obligations hereunder or required by law, KRE and its Subsidiaries
shall not amend in any material respect or propose to so amend their
respective certificates of incorporation, bylaws or other governing
documents.
(e) No Acquisitions. KRE shall not, and shall not permit any of its
---------------
Subsidiaries to, acquire or agree to acquire by merging or consolidating
with, or by purchasing a substantial equity interest in or a substantial
portion of the assets of, or by any other manner, any business or any
corporation, partnership, association or other business organization or
division thereof or otherwise acquire or agree to acquire any assets (other
than the acquisition of assets used in the operations of the business of
KRE and its Subsidiaries in the ordinary course subject to Section
4.1(a)(ii)); provided, however, that the foregoing shall not prohibit (y)
internal reorganizations or consolidations involving existing Subsidiaries
of KRE, or (z) the creation of new Subsidiaries of KRE organized to conduct
or continue activities otherwise permitted by this Agreement.
(f) No Dispositions. Other than (i) internal reorganizations or
---------------
consolidations involving existing Subsidiaries of KRE, or (ii) in the
ordinary course of business, KRE shall not, and shall not permit any
Subsidiary of KRE to, sell, lease, encumber or otherwise dispose of, or
agree to sell, lease, encumber or otherwise dispose of, any of its assets
(including capital stock of Subsidiaries of KRE) which are material
individually or in the aggregate to KRE.
(g) Investments; Indebtedness. Subject to the provisions of Section
-------------------------
7.2(c) and 7.3(c), KRE shall not, and shall not permit any of its
Subsidiaries to, (i) make any loans, advances or capital contributions to,
or investments in, any other Person, (ii) pay, discharge or satisfy any
claims, liabilities or obligations (absolute, accrued, asserted or
unasserted, contingent or otherwise), other than payments, discharges or
satisfactions incurred or committed to in the ordinary course of business
consistent with past practice, or (iii), subject to Section 4.1(a)(ii),
create, incur, assume or suffer to exist any indebtedness, issuances of
debt securities, guarantees, loans or advances not in existence as of the
date of this Agreement other than the incurring of accounts payable and
accrued expenses, extensions of credit,
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<PAGE>
advances of funds and intercompany transactions in the ordinary course of
business consistent with past practices.
(h) Tax-Free Qualification. KRI and KRE shall not, and shall not
----------------------
permit any of KRI's or KRE's Subsidiaries to, take any action that would
reasonably be expected to prevent or impede the Merger from qualifying as a
reorganization under Section 368 of the Code.
(i) Compensation. Except as contemplated in Section 5.9 hereof, KRE
------------
shall not, and shall not permit any of its Subsidiaries to, increase the
amount of compensation of any executive officer or other senior employee,
make any increase in, or commitment to increase, any employee benefits,
adopt or make any commitment to adopt any additional employee benefit plan
or make any contribution, other than regularly scheduled contributions, to
any KRE Benefit Plan.
(j) Accounting Methods; Income Tax Elections. Except as required by
----------------------------------------
a Governmental Entity, KRE shall not change its methods of accounting in
effect at December 31, 1998, except as required by changes in GAAP as
concurred in by KRE's independent auditors. KRE shall not (i) change its
fiscal year or (ii) make any material tax election.
(k) Preservation of Property. KRE shall take such reasonable actions
------------------------
and institute such reasonable procedures as St. Mary may from time to time
specify for assuring that the property of KRE, including but not limited to
its equipment and records, is preserved for the benefit of St. Mary upon
the completion of the Merger, and all reasonable costs associated with such
actions and procedures shall be borne by KRI.
Section 4.2 Covenants of St. Mary. During the period from the date of
---------------------
this Agreement and continuing until the Effective Time, St. Mary agrees as to
itself and its Subsidiaries that (except as expressly contemplated or permitted
by this Agreement or as otherwise indicated on the St. Mary Disclosure Schedule
or as required by a Governmental Entity of competent jurisdiction or to the
extent that KRM, KRI and KRE shall otherwise consent in writing):
(a) Ordinary Course.
---------------
(i) St. Mary and its Subsidiaries shall carry on their
respective business in the usual, regular and ordinary course in all
material respects, in substantially the same manner as heretofore
conducted, and shall use all reasonable efforts to preserve intact
their present lines of business, maintain their rights and franchises
and preserve their relationships with customers, suppliers and others
having business dealings with them to the end that their ongoing
businesses shall not be impaired in any material respect at the
Effective Time; provided, however, that no action by St. Mary or its
Subsidiaries with respect to matters specifically addressed by any
other provisions of this Section 4.2 shall be deemed a breach of this
Section 4.2(a)(i) unless such action would constitute a breach of one
or more of such other provisions.
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(ii) St. Mary shall promptly give KRE notice of what it
reasonably believes to be any material occurrence in the business of
St. Mary or any of its Subsidiaries. St. Mary shall not, and shall not
permit any of its Subsidiaries to, incur or commit to any capital or
other expenditure, whether or not in the ordinary course of business,
in excess of $1,000,000 without the prior written consent of KRE,
which consent shall not be unreasonably withheld or delayed, except
for capital or other expenditures set forth on Schedule 4.2(a)(ii)
attached to this Agreement.
(b) Dividends; Changes in Share Capital. St. Mary shall not (i)
-----------------------------------
declare or pay any dividends on or make other distributions in respect of
any of its capital stock, except for a dividend not to exceed $0.05 per
share of St. Mary Common Stock per quarter, (ii) split, combine or
reclassify any of its capital stock or issue or authorize or propose the
issuance of any other securities in respect of, in lieu of or in
substitution for, shares of its capital stock, except for any such
transaction by a wholly owned Subsidiary of St. Mary which remains a wholly
owned Subsidiary after consummation of such transaction, or (iii) except
under its current open market St. Mary Common Stock share repurchase
program (which shall not be expanded or altered), repurchase, redeem or
otherwise acquire any shares of its capital stock or any securities
convertible into or exercisable for any shares or its capital stock.
(c) Issuance of Securities. St. Mary shall not, and shall not permit
----------------------
any of its Subsidiaries to, issue, deliver or sell, or authorize or propose
the issuance, delivery or sale of, any shares of its capital stock of any
class or any securities convertible into or exercisable for, or any rights,
warrants or options to acquire, any such shares, or enter into any
agreement with respect to any of the foregoing, other than (i) the issuance
of St. Mary Common Stock upon the exercise of stock options pursuant to the
St. Mary Option Plans or pursuant to the St. Mary Employee Stock Purchase
Plan, (ii) issuances by a wholly owned Subsidiary of St. Mary of capital
stock to such Subsidiary's parent or another wholly owned Subsidiary of St.
Mary, (iii) issuances of equity-related awards pursuant to St. Mary Benefit
Plans consistent with past practices, and (iv) issuances in respect of any
acquisitions, mergers, share exchanges, consolidations, business
combinations or similar transactions by St. Mary or its Subsidiaries which
issuances shall not exceed in the aggregate 550,000 shares.
(d) Governing Documents. Except to the extent required to comply
-------------------
with their respective obligations hereunder, required by law or required by
the rules and regulations of Nasdaq, St. Mary and its Subsidiaries shall
not amend in any material respect, or propose to so amend their respective
certificates of incorporation, bylaws or other governing documents.
(e) Tax-Free Qualification. St. Mary shall not, and shall not permit
----------------------
any of its Subsidiaries to, take any action that would reasonably be
expected to (i) prevent or impede the Merger from qualifying as a
reorganization under Section 368 of the Code, or (ii) prevent the Spin-Off
from qualifying as a distribution in which Section 355(e) applies or
prevent such distribution from not being taxable to the shareholders of
KRI.
Section 4.3 Advice of Changes; Governmental Filings. Each party shall
---------------------------------------
(a) confer on a regular and frequent basis with the other and (b) promptly
report to the other parties on material
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operational matters or any event or circumstance which (alone or together with
other such matters) may have a Material Adverse Effect on such party. KRE and
St. Mary shall file all reports required to be filed by each of them with the
SEC and all other Governmental Entities between the date of this Agreement and
the Effective Time and shall deliver to the other party copies of all such
reports promptly after the same are filed. Each of KRE and St. Mary shall have
the right to review in advance, and will consult with the other with respect to,
all the information relating to the other party and each of their respective
Subsidiaries which appears in any filings, announcements or publications made
with, or written materials submitted to, any third party or any Governmental
Entity in connection with the transactions contemplated by this Agreement. In
exercising the foregoing right, each of the parties hereto agrees to act
reasonably and as promptly as necessary with respect to such materials. Each
party agrees that, to the extent practicable and as timely as practicable, it
will consult with, and provide all appropriate and necessary assistance to, the
other party with respect to the obtaining of all permits, consents, approvals
and authorizations of all third parties and Governmental Entities necessary or
advisable to consummate the transactions contemplated by this Agreement and each
party will keep the other party apprised of the status of matters relating to
completion of the transactions contemplated hereby.
ARTICLE V
ADDITIONAL AGREEMENTS
Section 5.1 Preparation of Proxies and Registration Statement; Meeting
----------------------------------------------------------
of St. Mary Shareholders.
- ------------------------
(a) As promptly as practicable following the execution of this
Agreement, St. Mary shall, in cooperation with KRI and KRE, prepare and
file with the SEC materials which shall constitute the proxy statements and
the registration statement on Form S-4 with respect to the approval of the
Merger by the shareholders of KRI and the St. Mary Share Issuance by the
shareholders of St. Mary (such proxy statements and registration statement
being hereinafter together referred to as the "Form S-4"). St. Mary shall
cause the Form S-4 to comply as to form in all material respects with the
applicable provisions of the Securities Act and the rules and regulations
thereunder. St. Mary shall, as promptly as practicable after receipt
thereof, provide copies to KRI and KRE of any written comments received
from the SEC with respect to the Form S-4 and advise KRI and KRE of any
oral comments with respect to the Form S-4 received from the SEC. St. Mary
agrees that none of the information supplied or to be supplied by St. Mary
for inclusion or incorporation by reference in the Form S-4 and each
amendment or supplement thereto, at the time of mailing thereof and at the
time of the St. Mary Shareholders Meeting and the KRE Shareholders Meeting
(as defined below), will contain an 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 made, not misleading. KRI and KRE agree that none of the information
supplied or to be supplied by KRI or KRE for inclusion in the Form S-4 and
each amendment or supplement thereto, at the time of mailing thereof and at
the times of the St. Mary and KRE Shareholders Meetings, will contain an
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make
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<PAGE>
the statements therein, in light of the circumstances under which they were
made, not misleading. For purposes of the foregoing, it is understood and
agreed that information concerning or related to St. Mary and the St. Mary
shareholders meeting will be deemed to have been supplied by St. Mary and
information concerning or related to KRI and KRE, and the KRE Shareholders
Meeting, shall be deemed to have been supplied by KRI. St. Mary will
provide KRI and KRE with a reasonable opportunity to review and comment on
any amendment or supplement to the Form S-4 prior to filing such with the
SEC, and will provide KRI and KRE with a copy of all such filings made with
the SEC. No amendment or supplement for inclusion in the Form S-4 shall be
made without the approval of KRI and KRE, which approvals shall not be
unreasonably withheld or delayed.
(b) St. Mary shall, as promptly as practicable following the date on
which the Form S-4 is declared effective by the SEC, duly call, give notice
of, convene and hold a special meeting of its shareholders (the "St. Mary
Shareholders Meeting") for the purpose of obtaining the Required St. Mary
Vote, shall take all lawful action to solicit the approval of the St. Mary
Share Issuance by the Required St. Mary Vote and the Board of Directors of
St. Mary shall, subject to its fiduciary duties, recommend approval of the
St. Mary Share Issuance by the shareholders of St. Mary.
(c) KRE shall, as promptly as practicable following the date on which
the Form S-4 is declared effective by the SEC, duly call, give notice of,
convene and hold a special meeting of those persons who will be its
shareholders ("KRE Shareholders") following the Distributions (the "KRE
Shareholders Meeting") for the purpose of obtaining the Required KRE Vote,
shall take all lawful action to solicit the approval of the Merger by the
Required KRE Vote and the Boards of Directors of KRI and KRE shall, subject
to their fiduciary duties, recommend approval of the Merger by the
shareholders of KRE.
Section 5.2 Confidentiality - Access to Information. Notwithstanding
---------------------------------------
anything contained in this Agreement to the contrary, all of the parties hereto
agree and acknowledge that they are bound by those certain confidentiality
agreements between KRI and St. Mary dated February 25, 1999, and April 21, 1999
(the "Confidentiality Agreements"), which remain in full force and effect and
shall also govern the information disclosed pursuant to this Agreement. Upon
reasonable notice, and subject to the Confidentiality Agreements, each party
shall (and shall cause its subsidiaries to) afford to the officers, employees,
accountants, counsel, financial advisors and other representatives of the other
party reasonable access during normal business hours, during the period prior to
the Effective Time, to all its properties, books, contracts, commitments and
records and, during such period, such party shall (and shall cause its
subsidiaries to) furnish promptly to the other party (a) a copy of each report,
schedule and other document filed, published, announced or received by it during
such period pursuant to the requirements of federal or state securities laws, as
applicable (other than documents which such party is not permitted to disclose
under applicable law), and (b) consistent with its legal obligations, all other
information concerning its business, properties and personnel as such other
party may reasonably request. The parties shall hold any such information which
is non-public in confidence in accordance with the Confidentiality Agreements.
Any investigation by St. Mary, KRI or KRE shall not affect the representations
and warranties of KRI and KRE or of St. Mary, as the case may be.
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<PAGE>
Section 5.3 Commercially Reasonable Efforts.
-------------------------------
(a) Subject to the terms and conditions of this Agreement, each
party will use its commercially reasonable 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 the
Merger and the other transactions contemplated by this Agreement as soon as
practicable after the date hereof.
(b) In furtherance and not in limitation of the covenants of the
parties contained in Section 5.3(a), if any administrative or judicial
action or proceeding, including any proceeding by a private party, is
instituted (or threatened to be instituted) challenging any transaction
contemplated by this Agreement, each of the parties shall cooperate in all
respects with each other and use its respective commercially reasonable
efforts to contest and resist any such action or proceeding and to have
vacated, lifted, reversed or overturned any decree, judgment, injunction or
other order, whether temporary, preliminary or permanent, that is in effect
and that prohibits, prevents or restricts consummation of the transactions
contemplated by this Agreement.
Section 5.4 Public Announcements. St. Mary shall consult with KRI and
--------------------
KRE before issuing any press release or otherwise making any public statements
with respect to the transactions contemplated by this Agreement, and shall not
issue any such press release or make any such public statement, including a
public statement required by applicable law or by obligations pursuant to St.
Mary's listing agreement with Nasdaq, prior to such consultation and approval,
which approval shall not be unreasonably withheld or delayed. Neither KRI nor
KRE nor any Subsidiary of KRI shall issue any press release or otherwise make
any public statements with respect to the transactions contemplated by this
Agreement without the prior approval of St. Mary, which approval shall not be
unreasonably withheld or delayed.
Section 5.5 Restrictions on Transfer of St. Mary Common Stock.
-------------------------------------------------
(a) The KRE Shareholders shall not make any disposition by sale,
pledge or any other transfer of all or any portion of the shares of St.
Mary Common Stock acquired by them pursuant to this Agreement until the
close of busines on March 31, 2001. The certificates representing the
shares of St. Mary Common Stock to be issued to the KRE Shareholders
pursuant to this Agreement shall be stamped or otherwise imprinted with a
legend substantially similar to the following:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE
TERMS AND CONDITIONS OF AN AGREEMENT AND PLAN OF MERGER WHICH PLACES
CERTAIN RESTRICTIONS ON THE TRANSFER OF THE SHARES REPRESENTED HEREBY.
A COPY OF SUCH AGREEMENT AND PLAN OF MERGER IS AVAILABLE AT THE
COMPANY'S PRINCIPAL EXECUTIVE OFFICES.
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<PAGE>
(b) Notwithstanding the foregoing, the above-referenced transfer
restrictions shall not apply to the following transactions or under the
following circumstances:
(i) The KRE Shareholders may, prior to March 31, 2001,
transfer, without consideration the shares of St. Mary Common Stock
acquired under this Agreement pursuant to the laws of descent and
distribution and for customary estate planning purposes, and such
shares shall, in the hands of the transferee, continue to be bound by
the restrictions set forth in this Section 5.5 until March 31, 2001,
as evidenced by the above-referenced legend;
(ii) In the event of an Acquisition of St. Mary (as
hereinafter defined), the restrictions on the sale, pledge or other
transfer of shares of St. Mary Common Stock described in Section
5.5(a) above shall terminate and any shares of capital stock of the
acquirer (or an affiliate of the acquirer) received by the former
shareholders of KRE in the Acquisition of St. Mary shall not be
subject to such restrictions. For purposes of this Agreement, the
term "Acquisition of St. Mary" means the occurrence of any of the
following events: (i) St. Mary shall not be the surviving entity in
any merger (other than a merger with a subsidiary of St. Mary), share
exchange, consolidation or other reorganization (or survives only as a
subsidiary of an entity other than an Affiliate of St. Mary); or (ii)
St. Mary sells, leases or exchanges all or substantially all of its
assets to any other person or entity (other than a wholly owned
subsidiary of St. Mary). In the event of a Tender Offer which is
approved by the Board of Directors of St. Mary pursuant to a plan
intended to result in a subsequent Acquisition of St. Mary, the former
shareholders of KRE may participate in such
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<PAGE>
Tender Offer to the extent of up to all of his, her or its aggregate
shares of St. Mary Common Stock.
Section 5.6 Representation on St. Mary Board of Directors. At the
---------------------------------------------
Effective Time, St. Mary shall cause the Board of Directors of St. Mary to
consist of not more than eleven directors, nine of whom shall be the Directors
of St. Mary immediately prior to the Effective Time and two of whom shall be
Jack Hunt and William Gardiner (the "KRE Board Designees"). Thereafter until
March 31, 2001, St. Mary shall utilize commercially reasonable efforts at the
time of each annual meeting of the shareholders of St. Mary to cause the KRE
Board Designees to be elected to the St. Mary Board of Directors. In the event
one or both of the KRE Board Designees are unwilling or unable to serve on the
Board of Directors of St. Mary for any reason during the foregoing period, the
first alternate to replace a KRE Board Designee shall be John Alexander and the
second alternate KRE Board Designee shall be James Clement.
Section 5.7 Expenses. St. Mary shall be responsible for all of its own
--------
expenses, including but not limited to legal, accounting and other professional
fees and the fees of Deutsche Bank Securities Inc. incurred with respect to this
Agreement and the transactions provided for herein. Without limiting the
generality of the foregoing, St. Mary shall also be responsible for all costs
and registration fees associated with the preparation and filing of the Form S-
4. KRI shall be responsible for all the expenses of KRI and KRE, including but
not limited to legal, accounting and other professional fees and the fees of
Nesbitt Burns, incurred by them with respect to this Agreement and the
transactions provided for herein including the preparation of the Form S-4
except that St. Mary shall pay up to $12,000 of the fees of Deloitte & Touche
LLP incurred on behalf of KRI and KRE in connection with the Form S-4.
Section 5.8 King Ranch Trademark and Brand. As soon as practicable
------------------------------
following the Effective Date, St. Mary and its Subsidiaries, shall not utilize
the names "King Ranch," "King Ranch Energy," "King Ranch Oil & Gas," "Running W"
or any confusingly similar derivation thereof in connection with their
businesses and they shall within such period utilize their commercially
reasonable efforts to remove such names, or logos which include such names, from
any stationery, purchase orders, equipment or machinery owned by them.
Effective January 1, 1999, KRE will not be liable for any fees associated with
the use of the "King Ranch" trademark or brand.
Section 5.9 KRE Employee Severance Payments. KRI shall reimburse KRE or
-------------------------------
St. Mary for severance payments to (i) KRE employees to whom St. Mary does not
offer continued employment and who remain employed by KRE until the Closing Date
or until such earlier date as agreed upon by KRE and St. Mary and (ii) KRE
employees whose employment is continued by St. Mary after the Closing Date for a
transition period not in excess of six months. Notwithstanding anything to the
contrary contained in the foregoing, (A) the severance payment reimbursement
liability of KRI for KRE employees described above shall be based, in St. Mary's
discretion, upon not more than two weeks for each full year of prior employment
by KRE except for those employees who are entitled to severance payments
computed in accordance with existing agreements with them, as described on
Schedule 5.9 hereto, provided that the severance payment to any such employee
shall not be less than thirty days salary, (B) the aggregate liability of KRI
under this Section 5.9 shall not
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<PAGE>
exceed $850,000, and any excess shall be paid by St. Mary and (C) the payment of
severance may be conditioned upon an employee's agreement to a customary
confidentiality covenant with respect to KRE's confidential information.
Section 5.10 368(a) Reorganization. St. Mary, Merger Sub, KRI and KRE
---------------------
shall each use commercially reasonable efforts to cause the business combination
to be effected by the Merger to be treated as a reorganization within the
meaning of Section 368(a) of the Code. From and after the date of this Agreement
and after the Effective Time, each party shall use its commercially reasonable
efforts to cause the Merger to qualify, and shall not knowingly take any actions
or cause any actions to be taken which could prevent the Merger from qualifying,
as a reorganization under the provisions of Section 368(a) of the Code.
Section 5.11 355 Distribution. St. Mary, Merger Sub, KRI and KRE shall
----------------
each use commercially reasonable efforts to cause the Spin-Off to qualify as a
distribution in which Section 355(e) of the Code applies and to prevent such
distribution from being taxable to the shareholders of KRI. From and after the
date of this Agreement and after the Effective Time, each party shall use its
commercially reasonable efforts to cause the Spin-Off to qualify, and shall not
knowingly take any actions or cause any actions to be taken which are reasonably
likely to prevent the Spin-Off from qualifying as a distribution to which
Section 355(e) of the Code applies.
Section 5.12 Continuity of Business. Following the Merger, St. Mary
----------------------
intends to cause Merger Sub to continue to a significant extent the historic
business of KRE or to use a significant portion of the historic business assets
of KRE in a business in substantially the same manner as such business was
conducted prior to Closing.
Section 5.13 Indemnification of Officers and Directors. The
-----------------------------------------
indemnification obligations set forth in KRE's Certificate of Incorporation and
KRE's Bylaws shall survive the Merger, and shall not be amended, repealed or
otherwise modified for a period of two years after the Effective Time in any
manner that would adversely affect the rights thereunder of the individuals who
on or prior to the Effective Time were directors, officers, employees or agents
of KRE.
Section 5.14 Retained Litigation. KRI shall retain all liability
-------------------
associated with, and responsibility for the defense of and the costs thereof,
the Pi Energy Corporation litigation described in Note 6 of the Notes to the KRE
Financial Statements as of December 31, 1998, and any other litigation or
threatened litigation set forth on Schedule 3.2(f) hereto (the "Retained
Litigation"). Notwithstanding the foregoing, St. Mary shall be obligated to use
its commercially reasonable efforts to cooperate with KRI in connection with the
defense of the Retained Litigation, including, without limitation, providing KRI
access to St. Mary's documents and/or employees, which obligation shall survive
the Closing.
Section 5.15 Stockholder's Representative. KRI shall act as the agent and
----------------------------
attorney-in-fact with full power and authority in connection with the
administration of this Agreement on behalf of the KRE shareholders, including
the prosecution of indemnification claims against St. Mary. This appointment
shall be coupled with an interest and shall be irrevocable and binding in all
respects upon St. Mary and the KRE shareholders and their successors and
assigns, and heirs and devisees.
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<PAGE>
Section 5.16 Voting Commitments. KRI shall obtain from Stephen Kleberg,
------------------
John Alexander and James Clement, members of the KRI Board of Directors and
substantial shareholders of KRI, commitments to (i) vote the shares of stock of
KRE which they will receive in the Distributions in favor of the Merger and (ii)
subject to their fiduciary obligations as Directors, recommend to the members of
their immediate families who are shareholders of KRI that they vote the shares
of KRE stock which they will receive in the Distributions in favor of the
Merger.
Section 5.17 No Solicitation.
---------------
(a) KRI and KRE shall immediately cease and cause to be terminated all
existing discussions and negotiations, if any, with any parties conducted
heretofore with respect to any Acquisition Proposal. As used in this
Section 5.17, "Acquisition Proposal" means any tender offer or exchange
offer by a non-affiliated third party for fifty percent or more of the
outstanding shares of KRE common stock or any proposal or offer by a non-
affiliated third party for a merger, consolidation, amalgamation or other
business combination involving KRE or any equity securities (or securities
convertible into equity securities) of KRE, or any proposal or offer by a
non-affiliated third party to acquire in any manner a fifty percent or
greater equity or beneficial interest in, or a material amount of the
assets or value of, KRE, other than pursuant to the transactions
contemplated by this Agreement.
(b) Unless and until this Agreement shall have been terminated, KRI
and KRE shall not permit any of their officers, directors, employees,
agents, financial advisors, counsel or other representatives (collectively,
the "Representatives") to, directly or indirectly, (i) solicit, initiate or
take any action with the intent of facilitating the making of, any offer or
proposal that constitutes or that is reasonably likely to lead to any
Acquisition Proposal, (ii) participate in any discussions or negotiations
regarding any Acquisition Proposal or (iii) furnish to any Person (other
than St. Mary or any Affiliate or Representative of KRI) any nonpublic
information or nonpublic data outside the ordinary course of conducting
KRE's business; provided, however, that to the extent required by their
fiduciary duties under applicable law and after consultation with and based
upon the advice of outside legal counsel, KRI's or KRE's Board of Directors
and officers may in response to a Person who initiates communication with
KRI or KRE, without there having occurred any action prohibited by clause
(i) of this sentence, take such actions as would otherwise be prohibited by
clauses (ii) and (iii). KRI shall notify St. Mary of any such inquiries,
offers or proposals (including the identity of the Person making any
inquiry, offer or proposal) as promptly as possible and in any event within
24 hours after receipt thereof or the occurrence of such events, as
appropriate, and shall give St. Mary ten days' advance notice of any
agreement to be entered into with, or any information or data to be
furnished to, any Person in connection with any such inquiry, offer or
proposal.
Section 5.18 Seismic Data. The parties agree that neither KRI nor KRE is
------------
making any representation or warranty regarding the continued access of St. Mary
or the Surviving Corporation following the consummation of the Merger to any of
the seismic data under the seismic licenses to which KRE or any Subsidiary of
KRE is a party. Furthermore, the parties agree that (A) certain of such seismic
data and licenses are not transferrable to St. Mary or the Surviving Corporation
upon
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<PAGE>
consummation of the Merger, and (B) certain of the seismic data and licenses
will transfer to St. Mary or the Surviving Corporation only upon the payment of
a transfer fee or other penalty. Neither KRI nor KRE shall have any liability to
St. Mary or Surviving Corporation in the event that any such seismic data or
licenses are not transferrable, or in the event that the consummation of the
Merger triggers the payment of a transfer fee or other penalty.
ARTICLE VI
INDEMNIFICATION
Section 6.1 Indemnification by KRI. KRI agrees to and shall defend,
----------------------
indemnify and hold harmless St. Mary, the Surviving Corporation, and each of
their subsidiaries, stockholders, affiliates, officers, directors, employees,
counsel, agents, successors, assigns and legal representatives (St. Mary and all
such other Persons are collectively referred to as the "St. Mary Indemnified
Persons") from and against, and shall reimburse the St. Mary Indemnified Persons
for, each and every Loss paid, imposed on or incurred by the St. Mary
Indemnified Persons, directly or indirectly, relating to, resulting from or
arising out of (i) any inaccuracy in any representation or warranty of KRI or
KRE under this Agreement, or the KRI or KRE Disclosure or other Schedules hereto
or any agreement or certificate delivered or to be delivered by KRI or KRE
pursuant hereto, (ii) any claim by a third party against St. Mary Indemnified
Persons arising out of an act or omission of KRI or KRE occurring before the
Closing Date, or (iii) the Retained Litigation. The indemnification obligations
set forth herein shall be that of KRI, and the shareholders of KRI shall have
absolutely no liability or obligation hereunder.
Section 6.2 Indemnification by St. Mary. St. Mary agrees to and shall
---------------------------
defend, indemnify and hold harmless KRI and each of KRI's respective
subsidiaries, stockholders, affiliates, officers, directors, employees, counsel,
agents, successors, assigns and legal representatives (KRI and all such other
Persons are collectively referred to as the "KRI Indemnified Persons") from and
against, and shall reimburse the KRI Indemnified Persons for, each and every
Loss paid, imposed on or incurred by the KRI Indemnified Persons, directly or
indirectly, relating to, resulting from or arising out of (i) any inaccuracy in
any representation or warranty of St. Mary or Merger Sub under this Agreement,
or the St. Mary Disclosure Schedule hereto or any agreement or certificate
delivered or to be delivered by St. Mary pursuant hereto, or (ii) any claim by a
third party against KRI Indemnified Persons arising out of an act or omission of
St. Mary or KRE occurring after the Closing Date.
Section 6.3 Notice and Defense of Third-Party Claims. If any Proceeding
----------------------------------------
shall be brought or asserted under this Article against an indemnified party or
any successor thereto (the "Indemnified Person") in respect of which indemnity
may be sought under this Article from an indemnifying Person or any successor
thereto (the "Indemnifying Person"), the Indemnified Person shall give prompt
written notice of such Proceeding to the Indemnifying Person who shall assume
the defense thereof, including the employment of counsel reasonably satisfactory
to the Indemnified Person and the payment of all expenses; provided, that any
delay or failure to so notify the Indemnifying Person shall relieve the
Indemnifying Person of its obligations hereunder only to the extent, if at all,
that it
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is prejudiced by reason of such delay or failure. In no event shall any
Indemnified Person be required to make any expenditure or bring any cause of
action to enforce the Indemnifying Person's obligations and liability under and
pursuant to the indemnifications set forth in this Article. In addition, actual
or threatened action by a Governmental Entity or other entity is not a condition
or prerequisite to the Indemnifying Person's obligations under this Article.
The Indemnified Person shall have the right to employ separate counsel in any of
the foregoing Proceedings and to participate in the defense thereof, but the
fees and expenses of such counsel shall be at the expense of the Indemnified
Person unless the Indemnified Person shall in good faith determine that there
exist actual or potential conflicts of interest which make representation by the
same counsel inappropriate, as evidenced by the written opinion of outside
counsel to the Indemnified Person. The Indemnified Person's right to participate
in the defense or response to any Proceeding should not be deemed to limit or
otherwise modify its obligations under this Article. In the event that the
Indemnifying Person, within 15 days after notice of any such Proceeding, fails
to assume the defense thereof, the Indemnified Person shall have the right to
undertake the defense, compromise or settlement of such Proceeding for the
account of the Indemnifying Person, subject to the right of the Indemnifying
Person to assume the defense of such Proceeding with counsel reasonably
satisfactory to the Indemnified Person at any time prior to the settlement,
compromise or final determination thereof. Anything in this Article to the
contrary notwithstanding, the Indemnifying Person shall not, without the
Indemnified Person's prior written consent, which consent shall not be
unreasonably withheld, settle or compromise any Proceeding or consent to the
entry of any judgment with respect to any Proceeding; provided, however, that
the Indemnifying Person may, without the Indemnified Person's prior written
consent, settle or compromise any such Proceeding or consent to entry of any
judgment with respect to any such Proceeding that requires solely the payment of
money damages by the Indemnifying Person and that includes as an unconditional
term thereof the release by the claimant or the plaintiff of the Indemnified
Person from all liability in respect of such Proceeding.
Section 6.4 Limitation of Liability.
-----------------------
(a) Survival. An Indemnifying Person shall have no liability under
this Article unless notice of a claim for indemnity, or notice of facts as
to which an indemnifiable Loss is expected to be incurred, shall have been
given within one year after the Closing Date, except that (i) an
Indemnified Person may give notice of and may make a claim for
indemnification for any indemnifiable Loss which results from any claim by
any third party at any time within two years after the Closing Date, (ii)
an Indemnified Person may give notice of and may make a claim relating to
the payment of federal or state taxes (including with respect to matters
set forth on Schedule 3.2(l)), or compliance with or obligations under
ERISA at any time prior to ninety days after the expiration of the
appropriate statute of limitation, if any, with respect thereto, and (iii)
St. Mary's Indemnified Persons may give notice of and may make a claim
relating to the Retained Litigation at any time.
(b) Limitation on KRI Liability. In addition to the other
limitations set forth in Section 6.4 (a) and (d), the liability of KRI to
St. Mary's Indemnified Persons shall be subject to the following
limitations:
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(i) No St. Mary Indemnified Person shall be entitled to
indemnification from KRI pursuant to Section 6.1 hereof, except for
single Losses in excess of $100,000 (for which the full Loss shall be
indemnified and not solely the amount of the Loss in excess of
$100,000), unless and until the aggregate of all Losses (excluding
single Losses in excess of $100,000 which have been indemnified) for
which indemnification would (but for the limitation of this sentence)
be required to be paid by KRI hereunder exceeds $600,000 (the "KRI
Loss Threshold") after which the St. Mary Indemnified Persons shall be
entitled to recover for all Losses and for which indemnification is
required to be paid hereunder (including such $600,000).
(ii) In no event shall the aggregate liability of KRI
hereunder exceed $25,000,000 ("KRI Loss Ceiling"). KRI shall have no
further obligations under this Article VI of this Agreement at the
earlier of the time when KRI has paid or is required to pay to St.
Mary's Indemnified Persons an amount equal to the KRI Loss Ceiling.
(iii) Notwithstanding anything in this Section 6.4(b) to the
contrary, amounts paid by KRI in connection with the Retained
Litigation, including attorneys' fees, court costs, settlements or
judgements shall not be used in calculating the KRI Loss Threshold,
shall not be limited by the KRI Loss Ceiling and shall be due from KRI
irrespective of the provisions of paragraphs (i) and (ii) above.
(c) Limitation on St. Mary Liability. In addition to the other
limitations set forth in Section 6.4(a) and (d), the liability of St. Mary
to KRI's Indemnified Persons shall be subject to the following limitations:
(i) No KRI Indemnified Person shall be entitled to
indemnification from St. Mary pursuant to Section 6.2 hereof, except
for single Losses in excess of $100,000 (for which the full Loss shall
be indemnified and not solely the amount of the Loss in excess of
$100,000), unless and until the aggregate of all Losses (excluding
single Losses in excess of $100,000 which have been indemnified) for
which indemnification would (but for the limitation of this sentence)
be required to be paid by St. Mary hereunder exceeds $600,000 (the
"St. Mary Loss Threshold") after which the KRI Indemnified Persons
shall be entitled to recover for all Losses and for which
indemnification is required to be paid hereunder (including such
$600,000).
(ii) In no event shall the aggregate liability of St. Mary
hereunder exceed $25,000,000 ("St. Mary Loss Ceiling"). St. Mary shall
have no further obligations under this Article VI of this Agreement at the
earlier of the time when St. Mary has paid or is required to pay to KRI an
amount equal to the St. Mary's Loss Ceiling.
(d) Tax Benefits; Insurance Recoveries. In calculating the amount of
any Loss for which any Indemnifying Person is liable under this Article,
there shall be taken into consideration (i) the value of any federal or
state income tax benefits and (ii) the amount of
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any insurance recoveries, net of any amounts which are in effect self-
insured, whether through deductibles, co-payments, retention amounts,
retroactive premium adjustments or other similar adjustments, the
Indemnified Person in fact receives as a direct consequence of the
circumstances to which the Loss related or from which the Loss resulted or
arose.
Section 6.5 Exclusivity. After the Effective Time, the provisions of
-----------
this Article shall be the exclusive basis for the assertion of claims by or
imposition of liability on the parties hereto arising under or as a result of
this Agreement; provided, however, nothing herein shall preclude any party
hereto from asserting a claim for equitable non-monetary remedies.
Section 6.6 Waiver of Consequential Damages. With respect to any and
-------------------------------
all Losses for which indemnification may be available hereunder, each party
hereby expressly waives any consequential and punitive damages with respect to a
claim against the other party hereto; provided, however, that this waiver shall
not apply to the extent such consequential or punitive damages are awarded in a
Proceeding brought or asserted by a third party against an Indemnified Person.
ARTICLE VII
CONDITIONS TO CLOSING
Section 7.1 Conditions to Each Party's Obligation to Effect the Merger.
----------------------------------------------------------
Except as may be waived in writing by the Parties, all of the obligations of the
Parties under this Agreement are subject to the fulfillment, prior to or at the
Closing, of each of the following conditions:
(a) Shareholder Approvals. St. Mary shall have obtained the
---------------------
Required St. Mary Vote in connection with the approval of the St. Mary
Share Issuance by the shareholders of St. Mary and KRI shall have obtained
the Required KRE Vote in connection with the approval of the Merger by the
shareholders of KRE.
(b) No Injunctions, Restraints or Illegality. No laws shall have
----------------------------------------
been adopted or promulgated, and no temporary restraining order,
preliminary or permanent injunction or other order issued by a court or
other governmental entity of competent jurisdiction shall be in effect,
having the effect of making the Merger illegal or otherwise prohibiting
consummation of the Merger, provided however, that the provisions of this
Section 7.1(b) shall not be available to any party whose failure to fulfill
its obligations pursuant to Section 5.3 shall have been the cause of, or
shall have resulted in, such order or injunction.
(c) Effectiveness of the Form S-4. The Form S-4 shall have been
-----------------------------
declared effective by the SEC and shall have become effective in all states
where required.
(d) Nasdaq Listing. The shares of St. Mary Common Stock to be
--------------
issued pursuant to this Agreement shall have been approved upon official
notice of issuance for quotation on Nasdaq.
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(e) Consummation of the Distribution. The shares of KRE shall have
--------------------------------
been distributed to the KRI shareholders in accordance with the
Distributions.
Section 7.2 Additional Conditions to Obligations of St. Mary and Merger
-----------------------------------------------------------
Sub. The obligations of St. Mary and Merger Sub to effect the Merger are
- ---
subject to the satisfaction of, or waiver by St. Mary, on or prior to the
Closing Date of the following conditions:
(a) Representations and Warranties. The representations and
-------------------------------
warranties of KRI and KRE set forth in Sections 3.1 and 3.2 shall be true
and correct in all respects as of the Closing Date and as if made on the
Closing Date subject to any changes contemplated by this Agreement.
(b) Performance of Obligations of KRI and KRE. KRI and KRE shall
-----------------------------------------
have performed or complied in all material respects with all agreements and
covenants required to be performed by it under this Agreement at or prior
to the Closing Date.
(c) Settlement for KRI-KRE Intercompany Balances. KRI shall have
--------------------------------------------
paid to KRE an amount equal to the amount, if any, of intercompany
transactions subsequent to May 31, 1999 and up to the Closing Date between
KRE (together with any KRE Subsidiary) and KRI (together with any other
Subsidiary of KRI), net of any intercompany transactions between KRI
(together with any other Subsidiary of KRI) and KRE (together with any KRE
Subsidiary) subsequent to that date. No interest shall have accrued from
and after December 31, 1998 on any outstanding obligations between KRE or
any KRE Subsidiary and KRI or any other KRI Subsidiary. KRI shall provide
evidence of the cancellation of any obligation of KRE to repay KRI, or any
other Subsidiary of KRI, for (i) the funds advanced by KRI to KRE for the
acquisition by KRE of the Flour Bluff properties, and (ii) any indebtedness
of KRE to KRI or any other Subsidiary of KRI existing on May 31, 1999. In
connection with the foregoing, KRI shall represent to St. Mary that its
basis in such intercompany indebtedness equals the face value thereof.
(d) Certificate of Officers. KRI shall have delivered to St. Mary
-----------------------
certificates dated as of the Closing Date, executed in their respective
corporate names by, and verified by, the oath of its chief executive
officer and chief financial officer certifying to the fulfillment of the
conditions specified in subsections (a) and (b) of this Section 7.2.
(e) Opinion of Financial Advisor. The opinion referred to in
----------------------------
Section 3.3(r) shall not have been withdrawn by Deutsche Bank Securities
Inc.
(f) Opinion of Counsel. St. Mary shall have received a customary
-------------------
opinion of Locke Liddell & Sapp LLP, counsel to KRE and KRI, in a form
approved by St. Mary, which approval shall not be unreasonably withheld or
delayed.
(g) Non-Exercise of Appraisal Rights. In connection with the
--------------------------------
Required KRE Vote, the holders of no more than five percent of the
outstanding shares of common stock of KRE shall have exercised the rights
of dissenting shareholders under Section 262 of the Delaware General
Corporation Law ("Dissenting Shares"); provided, however, that if more than
five percent, but less than ten percent, of the shares of KRE common shares
are Dissenting Shares
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("Excess Shares"), KRI shall have the right, but not the obligation, to
assume the liability for any Excess Payment (as hereinafter defined). In
the event that KRI assumes the liability for any Excess Payment, this
condition shall be deemed satisfied. The term "Excess Payment" is the
amount by which St. Mary's per share liability for Excess Shares (as
adjusted by the exchange ratio into shares of St. Mary Common Stock)
exceeds $19.76 per share of St. Mary Common Stock.
(h) Eugene Island Block 341. With respect to the Eugene Island Block
-----------------------
341 oil and gas property, KRE shall have obtained in a form substantially
similar to that previously provided to St. Mary the assignment of interest
contemplated by that certain Participation Agreement dated February 17,
1998 between NCX Company, Inc. ("NCX") and KRE, which assignment shall be
subject to a contract operations agreement between NCX and Chevron U.S.A.
Production Company ("Chevron"), a throughput agreement between NCX and
Chevron, and an operating agreement between NCX and KRE. If such
assignment is not obtained, KRI shall indemnify St. Mary in accordance with
the provisions of Article VI hereof to the extent that St. Mary is unable
to recover currently non-producing reserves solely due to a lack of rights
or interests in such reserves, and this condition to closing shall be
deemed satisfied thereby. The liability for such indemnity obligation
shall be the values used by St. Mary in the net asset value determination
for KRE in connection with the Merger on a case-by-case basis as to each
currently non-producing interval covered by such assignment. Such
indemnification obligation of KRI shall remain in full force and effect for
a period of five years after the Closing Date or until any earlier
obtaining of such assignment. If there exists any conflict between this
provision and any other provision contained in this Agreement, the
provisions set forth in this Section shall control. Notwithstanding the
foregoing, no indemnification shall apply if such reserves are not
recoverable for any reason other than as specified herein.
(i) Affiliate Restrictions. KRI shall have notified, in writing,
----------------------
persons who are affiliates of KRI or KRE within the meaning of the
Securities Act (i) of the application to them of Rule 145 under the
Securities Act with respect to St. Mary Common Stock to be issued to them
pursuant to this Agreement and (ii) that the certificates of St. Mary
Common Stock issued to such persons will bear an additional restrictive
legend with respect to the foregoing.
Section 7.3 Additional Conditions to Obligations of KRE and the
---------------------------------------------------
Shareholders of KRE. The obligations of the shareholders of KRE and KRE to
- -------------------
effect the Merger are subject to the satisfaction of, or waiver by KRI on or
prior to the Closing Date of the following conditions:
(a) Representations and Warranties. The representations and
-------------------------------
warranties of St. Mary and Merger Sub set forth in Section 3.3 and Section
3.4 shall be true and correct in all respects as of the Closing Date and as
if made on the Closing Date, subject to any changes contemplated by this
Agreement.
(b) Performance of Obligations of St. Mary and Merger Sub. St. Mary
-----------------------------------------------------
and Merger Sub shall have performed or complied in all material respects
with all agreements and
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<PAGE>
covenants required to be performed by them under this Agreement at or prior
to the Closing Date.
(c) Settlement of KRI-KRE Intercompany Balances. KRE shall have paid
-------------------------------------------
KRI an amount equal to the amount, if any, of intercompany transactions
subsequent to May 31, 1999 and up to the Closing Date between KRI (together
with any other Subsidiary of KRI) and KRE (together with any KRE
Subsidiary), net of any intercompany transactions between KRE (together
with any KRE Subsidiary) and KRI (together with any other Subsidiary of
KRI) subsequent to that date, exclusive of funds advanced by KRI to KRE for
the acquisition by KRE of the Flour Bluff properties.
(d) Certificate of Officers. St. Mary shall have delivered to KRI a
-----------------------
certificate dated as of the Closing Date, executed in its corporate name
by, and verified by, the oath of its chief executive officer and vice
president of finance certifying to the fulfillment of the conditions
specified in subsections (a) and (b) of this Section 7.3.
(e) Opinion of Financial Advisor. The opinion referred to in
----------------------------
Section 3.2(r) shall not have been withdrawn by Nesbitt Burns.
(f) Opinion of Counsel. KRI shall have received a customary opinion
------------------
of Ballard Spahr Andrews & Ingersoll, LLP, counsel to St. Mary, in a form
approved by KRI, which approval shall not be unreasonably withheld or
delayed.
(g) Tax Certificate. Counsel to KRI shall have received a tax
---------------
certificate from St. Mary in the form attached hereto as Exhibit 7.3(g).
(h) Tax Opinion. KRI shall have received the opinions of Locke
-----------
Liddell & Sapp LLP and Ernst & Young LLP that (i) the Merger qualifies as a
reorganization under Section 368(a) of the Code, and (ii) the Spin-Off
qualifies as a tax-free distribution to the shareholders of KRI under
Section 355 of the Code.
ARTICLE VIII
TERMINATION AND AMENDMENT
Section 8.1 Termination. This Agreement may be terminated at any time
-----------
prior to the Effective Time by action taken or authorized by the Board of
Directors of the terminating party or parties, whether before or after approval
of the St. Mary Share Issuance by the shareholders of St. Mary and approval of
the Merger by the shareholders of KRE, as follows:
(a) by mutual written consent of St. Mary, KRI and KRE, by action of
their respective Boards of Directors;
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<PAGE>
(b) by KRE or by St. Mary if the Effective Time shall not have
occurred on or before December 31, 1999 (the "Termination Date"); provided,
however, that the right to terminate this Agreement under this Section
8.1(b) shall not be available to any party whose failure to fulfill any
obligation under this Agreement (including without limitation Section 5.3)
has to any material extent been the cause of, or resulted in, the failure
of the Effective Time to occur on or before the Termination Date;
(c) by KRE or by St. Mary if any Governmental Entity (i) shall have
issued an order, decree or ruling or taken any other action (which the
parties shall have used their commercially reasonable efforts to resist,
resolve or lift, as applicable, in accordance with Section 5.3) permanently
restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Agreement, and such order, decree, ruling or other
action shall have become final and nonappealable or (ii) shall have failed
to issue an order, decree or ruling or to take any other action (which
order, decree, ruling or other action the parties shall have used their
commercially reasonable efforts to obtain, in accordance with Section 5.3),
in each case of (i) and (ii) which is necessary to fulfill the conditions
set forth in subsections 7.1(b) and 7.1(c) as applicable, and such denial
of a request to issue such order, decree, ruling or take such other action
shall have become final and nonappealable; provided however, that the right
to terminate this Agreement under this Section 8.1(c) shall not be
available to any party whose failure to comply with Section 5.3 has to any
material extent been the cause of such action or inaction;
(d) by KRE or by St. Mary if (i) the approval by the shareholders of
St. Mary required for the St. Mary Share Issuance to consummate the Merger
shall not have been obtained by reason of the failure to obtain the
Required St. Mary Vote, upon the taking of such vote at a duly held meeting
of the shareholders of St. Mary or at any reconvened meeting after any
adjournment or postponement thereof, or (ii) the approval by the
shareholders of KRE required for the Merger shall not have been obtained by
reason of the failure to obtain the Required KRE Vote, upon the taking of
such vote at a duly held meeting of the shareholders of KRE or at any
reconvened meeting after any adjournment or postponement thereof;
(e) by St. Mary if there has been a material breach of a
representation, warranty, covenant or agreement contained in this Agreement
on the part of KRI or KRE, and as a result of such breach the conditions
precedent set forth in Section 7.1 or Section 7.2, as the case may be,
would not then be satisfied; provided, however, that if such breach is
curable by KRI or KRE through the exercise of commercially reasonable
efforts within the earlier of (i) thirty days from the receipt of written
notice of breach by KRI from St. Mary or (ii) December 31, 1999, then for
so long as KRI continues to exercise such commercially reasonable efforts,
St. Mary may not terminate this Agreement under this Section 8.1(e) unless
the breach is not cured in full within such time period; and
(f) by KRI if there has been a material breach of a representation,
warranty, covenant or agreement contained in this Agreement on the part of
St. Mary, and as a result of such breach the conditions precedent set forth
in Section 7.1 or Section 7.3, as the case may be,
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<PAGE>
would not then be satisfied; provided, however, that if such breach is
curable by St. Mary through the exercise of commercially reasonable efforts
within the earlier of (i) thirty days from receipt of written notice of
breach by St. Mary from KRI or (ii) December 31, 1999, then for so long as
St. Mary continues to exercise such commercially reasonable efforts, KRI
may not terminate this Agreement under this Section 8.1(f) unless the
breach is not cured in full within such time period.
Section 8.2 Effect of Termination.
---------------------
(a) In the event of termination of this Agreement by KRE or by St.
Mary as provided in Section 8.1, this Agreement shall forthwith become void
and there shall be no liability or obligation on the part of St. Mary or
KRI or their respective subsidiaries, affiliates, employees, officers,
directors or counsel, except with respect to the first sentence of Section
5.2, Section 5.7 and this Section 8.2.
(b) If St. Mary shall terminate this Agreement pursuant to Section
8.1(e) hereof, St. Mary may elect (i) to require KRI to pay to it the sum
of $1,000,000 (the "Termination Fee"), or (ii) in lieu of the Termination
Fee, to exercise its legal right to assert a claim for all available legal
monetary and equitable non-monetary remedies against KRI and KRE with
respect to such breach. If St. Mary shall terminate this Agreement
pursuant to Section 8.1(e) hereof, and on or before December 31, 1999 there
is a proposal reflected by a written document (an "Alternative Acquisition
Proposal") for an Alternative Transaction (as hereinafter defined), KRI
shall be obligated to pay to St. Mary an additional sum of $2,000,000 (the
"Alternative Transaction Fee") upon the closing of such Alternative
Transaction. An "Alternative Transaction" shall mean a merger, a tender
offer or exchange offer for substantially all or the outstanding capital
stock of KRE, or a sale of substantially all of the assets of KRE to one
or more non-affiliated purchasers but shall not mean a liquidation or
dissolution of KRE which is not a part of one of the foregoing
transactions. KRI acknowledges that St. Mary will have incurred significant
costs and will have invested significant amounts of time and resources
investigating and negotiating the acquisition of KRE, and agrees that the
Termination Fee and the Alternative Transaction Fee constitute, if
applicable, reasonable liquidated damages in light of the anticipated or
actual harm to St. Mary that would be caused by a termination subject to
this Section 8.2(b). KRI and KRE further acknowledge that St. Mary may
suffer irreparable harm as a result of entering into this Agreement, and in
the event St. Mary shall be entitled to terminate this Agreement pursuant
to Section 8.1(e) hereof, but elects not to so terminate, St. Mary shall
have the right to seek specific enforcement of this Agreement.
(c) If KRI shall terminate this Agreement pursuant to Section 8.1(f)
hereof, KRI may elect (i) to require St. Mary to pay to it the Termination
Fee, or (ii) in lieu of the Termination Fee, to exercise its legal right to
assert a claim for all available legal monetary and equitable non-monetary
remedies against St. Mary with respect to such breach. St. Mary
acknowledges that KRI will have incurred significant costs and will have
invested significant amounts of time and resources investigating and
negotiating the acquisition of KRE, and agrees that the Termination Fee, if
applicable, constitutes reasonable liquidated damages in
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<PAGE>
light of the anticipated or actual harm to KRI that would be caused by a
termination subject to this Section 8.2(b). St. Mary further acknowledges
that KRE may suffer irreparable harm through the loss of personnel and/or
business opportunities as a result of entering into this Agreement, and in
the event KRE shall be entitled to terminate this Agreement pursuant to
Section 8.1(f) hereof, but elects not to so terminate, KRI and KRE shall
have the right to seek specific enforcement of this Agreement.
(d) Notwithstanding the provisions of paragraphs (a) and (b) above,
if this Agreement is terminated because of a failure to obtain the Required
St. Mary Vote or the Required KRE Vote, a Termination Fee shall not be
payable. However, if this Agreement is terminated because of a failure to
obtain the Required KRE Vote, and on or before December 31, 1999 there is
an Alternative Acquisition Proposal, an Alternative Transaction Fee shall
be payable as set forth in paragraph (b) above upon the closing of such
Alternative Transaction, and in that event the Alternative Transaction Fee
payable upon the closing of such Alternative Transaction shall be
$3,000,000.
(e) Any payment required to be made pursuant to Sections 8.2(b) and
(c) shall be made by wire transfer not later than ten business days after
first due.
Section 8.3 Amendment. This Agreement may be amended by the parties
---------
hereto, by action taken or authorized by their respective Boards of Directors,
at any time before or after approval of the St. Mary Share Issuance by the
shareholders of St. Mary and the approval of the Merger by the shareholders of
KRI, but, after any such approval, no amendment shall be made which by law or in
accordance with the rules of Nasdaq requires further approval by such
shareholders without such further approval. This Agreement may not be amended
except by an instrument in writing signed on behalf of each of the parties
hereto.
Section 8.4 Extension; Waiver. At any time prior to the Effective Time,
-----------------
the parties hereto, by action taken or authorized by their respective Boards of
Directors, may, to the extent legally allowed, (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 a written instrument signed on behalf of all parties hereto. The
failure of any party to this Agreement to assert any of its rights under this
Agreement or otherwise shall not constitute a waiver of those rights.
ARTICLE IX
ARBITRATION
Section 9.1 Mediation. The parties hereto agree that if any claim,
---------
action, dispute or controversy of any kind arises out of or relates to this
Agreement or concerns any aspect of performance by any party under the terms of
this Agreement, prior to seeking any other remedies, including arbitration or
litigation, the aggrieved party shall give written notice to the other party
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describing the disputed issue. Within ten days after the receipt of such a
notice, the parties shall mutually appoint a single mediator to assist in the
resolution of the dispute. If the parties cannot agree upon a mediator, either
KRI or St. Mary shall have the right to apply to the American Arbitration
Association ("AAA") for a single mediator to be appointed to mediate the dispute
in accordance with the rules applicable to AAA sponsored proceedings and, upon
the appointment of such a mediator by AAA, such mediator shall be deemed to be
accepted by the parties hereto. Within twenty days after the appointment of a
mediator, either by the parties hereto or, if necessary, by AAA, the parties
shall meet one or more times with such mediator in an effort to resolve the
matters in dispute. If after such meeting or meetings any aspect of the dispute
remains unresolved for a period of an additional ten days, the parties shall be
obligated to submit the dispute to arbitration in accordance with the provisions
of Section 9.2 immediately below. Any meeting or meetings with the mediator
appointed pursuant to this Article IX shall be conducted in Denver, Colorado.
The costs and expenses of the mediator shall be borne equally by KRI and St.
Mary.
Section 9.2 Arbitration.
-----------
(a) Any claim, action, dispute or controversy of my kind arising out
of or relating to this Agreement or concerning any aspect of performance by
any party under the terms of this Agreement that is not resolved by the
mediation process set forth in Section 9.1 above ("Dispute") shall be
resolved by mandatory and binding arbitration administered by the AAA
pursuant to the Federal Arbitration Act (Title 9 of the United States Code)
in accordance with this Agreement and the then-applicable Commercial
Arbitration Rules of the AAA. The parties acknowledge and agree that the
transactions evidenced and contemplated hereby involve "commerce" as
contemplated in Section 2 of the Federal Arbitration Act. To the extent
that any inconsistency exists between this Agreement and the foregoing
statutes or rules, this Agreement shall control. Judgment upon the award
rendered by the arbitrator acting pursuant to this Agreement may be entered
in, and enforced by, any court having jurisdiction absent manifest
disregard by such arbitrator of applicable law; provided, however, that the
arbitrator shall not amend, supplement or reform in any manner any of the
rights or obligations of any party hereunder or the enforceability of any
of the terms of this Agreement. Any arbitration proceedings under this
Agreement shall be conducted in Denver, Colorado, before a single
arbitrator being a member of the State Bar of Colorado for over ten years
and having recognized expertise in the field or fields of the matter(s) in
dispute.
(b) After first exhausting the mediation process set forth in Section
9.1 upon the request by written notice delivered in accordance with the
terms hereof, whether made before or after the institution of any legal
proceeding, but prior to the expiration of the statutory time period within
which a party must respond upon receipt of valid service of process in
order to avoid a default judgment, any Dispute shall be resolved by
mandatory and binding arbitration in accordance with the terms of this
Agreement. Within ten days after a party's receipt of such notice, each of
the parties shall select one qualified arbitrator. The two arbitrators
selected by the parties shall then mutually select a third arbitrator (the
"Third Arbitrator"), and the Third Arbitrator shall resolve the Dispute in
accordance with this Agreement and the applicable AAA rules. If a
replacement arbitrator is necessary for any reason, such replacement
arbitrator shall be appointed by the Third Arbitrator or,
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alternatively, if the Third Arbitrator is to be replaced, mutually by the
two arbitrators selected by the parties.
(c) All statutes of limitation that would otherwise be applicable
shall apply to my arbitration proceeding. Any attorney-client privilege and
other protection against disclosure of privileged or confidential
information including, without limitation, any protection afforded the
work-product of any attorney, that could otherwise be claimed by any party
shall be available to, and may be claimed by, any such party in any
mediation or arbitration proceeding. No party waives my attorney-client
privilege or any other protection against disclosure of privileged or
confidential information by reason of anything contained in, or done
pursuant to, the mediation or arbitration provisions of this Agreement.
(d) The arbitration shall be conducted and concluded as soon as
reasonably practicable, based on a schedule established by the Third
Arbitrator. Any arbitration award shall be based on and accompanied by
findings of fact and conclusions of law, shall be conclusive as to the
facts so found and shall be confirmable by my court having jurisdiction
over the Dispute, provided that such award, findings and conclusions are
not in manifest disregard of applicable law. The Third Arbitrator shall
have no authority to award punitive damages or any other damages not
measured by the prevailing party's actual damages, and may not, in my
event, make any ruling, finding or award that does not conform to the terms
and conditions of this Agreement.
(e) In order for an arbitration award to be conclusive, binding and
enforceable under this Agreement, the arbitration must follow the
procedures set forth in the portions of this Agreement relating to such
arbitration and any award or determination shall not be in manifest
disregard of applicable law. The obligation to mediate or arbitrate my
Dispute shall be binding upon the successors and assigns of each of the
parties hereto.
(f) Notwithstanding anything to the contrary contained in this
Article IX, the obligation of the parties hereto to mediate and arbitrate
shall not apply to any dispute in which injunctive or other equitable
relief is sought.
Section 9.3 Costs; Enforcement. Each party shall bear its own expenses,
------------------
including, without limitation, expenses of counsel incident to any mediation or
arbitration. The expenses of the Third Arbitrator and the AAA shall be born
equally by KRI and St. Mary. The Third Arbitrator shall have the power and
authority to award expenses to the prevailing party if the Third Arbitrator
elects to do so. A party may bring summary proceedings (including, without
limitation, a plea in abatement or motion to stay further proceedings) in court
to compel mediation or arbitration of any Dispute in accordance with this
Agreement.
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ARTICLE X
MISCELLANEOUS
Section 10.1 Nature of Representations and Warranties; Survival. The
--------------------------------------------------
representations and warranties of the parties under this Agreement shall survive
for a period of one year from the Closing Date; provided, however, that (i) the
representations and warranties shall survive for a period of two years from the
Closing Date to the extent that any inaccuracy in any representation or warranty
results in or involves a claim by any third party and (ii) the representations
and warranties made with respect to taxes and benefit plans shall survive until
ninety days after the expiration of the appropriate statue of limitation, if
any, with respect thereto. Further, the Confidentiality Agreements (defined in
Section 5.2) and the obligations with respect to the Retained Litigation (as
defined in Section 5.13), shall survive the Closing and remain in full force and
effect without a time limitation.
Section 10.2 Counterparts and Facsimile Signatures. In order to
-------------------------------------
facilitate the execution of this Agreement, the same may be executed in any
number of counterparts and signature pages may be delivered by telefax, with
original executed signature pages to be furnished promptly thereafter.
Section 10.3 Assignment. Neither this Agreement nor any right created
----------
hereby shall be assignable by KRI, KRE or St. Mary without the prior written
consent of the other parties. Nothing in this Agreement, express or implied, is
intended to confer upon any person, other than the parties hereby and their
respective successors, assigns, heirs, executors, administrators, or personal
representatives, any rights or remedies under or by reason of this Agreement.
Section 10.4 Representative of KRH, KRM and KRE Any executive officer of
KRI is hereby authorized to execute any document or take any other action on
behalf of KRH, KRM or KRE.
Section 10.5 Entire Agreement. This Agreement, the schedules hereto, and
----------------
the other documents delivered pursuant hereby constitute the full and entire
understanding and agreement between the parties with regard to the subject
hereof and no party shall be liable or bound to any other in any manner by any
representations, warranties, covenants or agreements except as specifically set
forth herein. All prior agreements and understandings are superseded by this
Agreement and the schedules hereto.
Section 10.6 Governing Law. This Agreement shall be governed by the laws
-------------
of the State of New York, except that the Delaware General Corporation Law
shall govern as to matters of corporate law pertaining to St. Mary and KRE, the
corporate laws of Texas shall govern as to the matters of corporate law
pertaining to KRI and the corporate laws of Colorado shall govern as to matters
of corporate law pertaining to Merger Sub. Subject to the alternative dispute
resolution provisions set forth in Article IX, any action brought to enforce
this Agreement or any term thereof shall be brought in a court of competent
jurisdiction in Denver, Colorado and each party hereto affirmatively agrees to
submit to the jurisdiction in that city and state.
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Section 10.7 Severability. In case any provision of this Agreement shall
------------
be invalid, illegal or unenforceable, the validity, legality and enforceability
of the remaining provisions shall not in any way be affected or impaired
thereby.
Section 10.8 Notices. Any notice, communication, request, reply or
-------
advice, hereinafter severally and collectively called "notice," in this
Agreement provided or permitted to be given, made or accepted by either party to
the other must be in writing and may be given by personal delivery or U.S. mail
or confirmed telefax. If given by mail, such notice must be sent by registered
or certified mail, postage prepaid, mailed to the party at the respective
address set forth below, and shall be effective only if and when received by the
party to be notified. For purposes of notice, the addresses of the parties
shall, until changed as hereinafter provided, be as follows:
(a) If to St. Mary and/or Merger Sub:
St. Mary Land & Exploration Company
Attn: Mr. Mark A. Hellerstein
President and Chief Executive Officer
1776 Lincoln Street, Suite 1100
Denver, CO 80203-1080
Telefax: (303) 861-0934
With a copy to:
Milam Randolph Pharo, Esq.
Vice President Land & Legal
St. Mary Land & Exploration Company
1776 Lincoln Street, Suite 1100
Denver, CO 80203-1080
Telefax: (303) 863-1040
(b) If to KRH, KRM, KRI and/or KRE:
King Ranch Inc.
Attn: Mr. Jack Hunt, President
1415 Louisiana, Suite 2300
Houston, TX 77002
Telefax: (713) 752-0101
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With a copy to:
Greg Hill, Esq.
Locke Liddell & Sapp LLP
3400 Chase Tower
600 Travis
Houston, Texas 77002
Telefax: (713) 223-3717
or at such other address or telefax number as any party may have advised the
others in writing.
Section 10.9 Attorney Fees. Except as otherwise provided herein, in the
-------------
event any party hereto institutes a proceeding against any other party hereto
for a claim arising out of or to enforce this Agreement, the parties agree that
the judge or arbitrator in any such proceeding shall be entitled to determine
the extent to which any party shall pay the reasonable attorneys' fees incurred
by the other party in connection with such proceeding, which determination shall
take into consideration the outcome of such Proceeding and such other factors as
the judge may determine to be equitable in the circumstances.
Section 10.10 Certain Definitions.
-------------------
(a) "Affiliate" means, with respect to any Person, any other Person
that directly, or indirectly through one or-more intermediaries, controls
or is controlled by or is under common control with, such Person; as used
in this definition, "control" means the possession, directly or indirectly,
of the power to direct or cause the direction of the management and
policies of a Person, whether through ownership of voting securities, by
contract, or otherwise.
(b) "Knowledge" means (i) with respect to KRI and KRE, the actual
conscious knowledge of Jack Hunt, William Gardiner, Tom Fiorito, William
Silk, Brian Romere, Sonny Bryant, Dwight Bowles and Dennis Haydel and (ii)
with respect to St. Mary or Merger Sub, the actual conscious knowledge of
Thomas E. Congdon, Mark Hellerstein, Ronald Boone, Douglas York, Milam
Randolph Pharo, Richard Norris and Gary Wilkering.
(c) "Loss" means any loss, damage, injury, diminution in value,
liability, claim, demand, proceeding, judgment, punitive damage, fine,
penalty, tax, cost or expense (including reasonable costs of investigation
and the fees, disbursements and expenses of attorneys, accountants and
other professionals incurred in proceedings, investigations or disputes
involving third parties, including governmental agencies).
(d) "Material Adverse Effect" means, with respect to KRE or St. Mary,
or any of their respective Subsidiaries, any adverse change, circumstance
or effect that, individually or in the aggregate with all other adverse
changes, circumstances and effects, or is reasonably likely to be
materially adverse to the business, properties, assets, financial
conditions or results or such operations of such entity and its
Subsidiaries, taken as a whole, other than any
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change, circumstance or effect relating to the economy or securities
markets in general, the price or oil or natural gas, or the industries in
which KRE or St. Mary operates and are not specifically relating to KRE or
St. Mary.
(e) "Person" means an individual, corporation, limited liability
company, partnership, association, trust, unincorporated organization,
other entity or group (as defined in the Exchange Act).
(f) "Proceeding" means any action, arbitration, audit, hearing,
investigation, litigation, or suit (whether civil, criminal,
administrative, investigative, or informal) commenced, brought, conducted,
or heard by or before, or otherwise involving, any Governmental Entity or
arbitrator.
(g) "Subsidiary" when used with respect to any party means any
corporation or other organization, whether incorporated or unincorporated,
(i) of which such party or any other Subsidiary of such party is a general
partner (excluding partnerships, the general partnership interests of which
held by such party or any Subsidiary of such party do not have a majority
of the voting interests in such partnership) or (ii) at least a majority of
the securities or other interests of which having by their terms ordinary
voting power to elect a majority of the Board of Directors or others
performing similar functions with respect to such corporation or other
organization is directly or indirectly owned or controlled by such party or
by any one or more or its Subsidiaries, or by such party and one or more of
its Subsidiaries.
{Remainder of Page Intentionally Left Blank}
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IN WITNESS WHEREOF, this Agreement is hereby duly executed by each party
hereto as of the date first written above.
ST. MARY:
ST. MARY LAND & EXPLORATION COMPANY,
a Delaware corporation
By: /S/ MARK A HELLERSTEIN
----------------------------------------------------
Mark A. Hellerstein, President and
Chief Executive Officer
MERGER SUB:
ST. MARY ENERGY COMPANY,
a Colorado corporation
By: /S/ MARK A. HELLERSTEIN
----------------------------------------------------
Mark A. Hellerstein, President
KRI:
KING RANCH INC.,
a Texas corporation
By: /S/ JACK HUNT
----------------------------------------------------
Jack Hunt, President
KRE:
KING RANCH ENERGY, INC.,
a Delaware corporation
By: /S/ WILLIAM GARDINER
----------------------------------------------------
William Gardiner, Vice President
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Annex B
July 27, 1999
Board of Directors
St. Mary Land & Exploration Company
1776 Lincoln Street
Suite 1100
Denver, Colorado 80203
Gentlemen:
Deutsche Bank Securities Inc. ("Deutsche Bank") has acted as financial
advisor to St. Mary Land & Exploration Company ("St. Mary") in connection with
the proposed merger of St. Mary Acquisition Corporation ("Merger Sub"), a
wholly-owned subsidiary of St. Mary, and King Ranch Energy, Inc. ("KRE"), a
wholly-owned subsidiary of King Ranch, Inc. ("KRI"), pursuant to the Agreement
and Plan of Merger, dated July 27, 1999, among St. Mary, Merger Sub, KRI and KRE
(the "Merger Agreement"), which provides, among other things, for the merger of
Merger Sub with and into KRE (the "Transaction"), as a result of which KRE will
become a wholly-owned subsidiary of St. Mary. As set forth more fully in the
Merger Agreement, as a result of the Transaction, the total number of shares of
the Common Stock, par value $0.01 per share, of KRE ("KRE Common Stock") issued
and outstanding will be converted into the right to receive 2,666,252 shares
(the "Exchange Ratio") of Common Stock, par value $0.01 per share, of St. Mary
("St. Mary Common Stock"). Immediately prior to the completion of the
Transaction, all the issued and outstanding shares of KRE Common Stock will be
distributed pro rata to the shareholders of KRI (the "Distribution"). Each of
the shareholders of KRE who receives St. Mary Common Stock will be restricted
from selling such St. Mary Common Stock for a period of two years following the
effectiveness of the Transaction, subject to limited exceptions specified in the
Merger Agreement. The terms and conditions of the Transaction are more fully
set forth in the Merger Agreement.
You have requested Deutsche Bank's opinion, as investment bankers, as to
the fairness, from a financial point of view, to St. Mary of the Exchange Ratio.
In connection with Deutsche Bank's role as financial advisor to St. Mary,
and in arriving at its opinion, Deutsche Bank has reviewed certain publicly
available financial and other information concerning KRE and St. Mary and
certain internal analyses and other information furnished to it by KRE and St.
Mary. Deutsche Bank has also held discussions with members of the senior
managements of KRE and St. Mary regarding the businesses and prospects of their
respective companies and the joint prospects of a combined company. In
addition, Deutsche Bank has (i) reviewed the reported prices and trading
activity for St. Mary Common Stock, (ii) compared certain financial information
for KRE and St. Mary, and certain stock market information for St. Mary, with
similar information for certain other companies whose securities are publicly
traded, (iii) reviewed the financial terms of certain recent business
combinations
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St. Mary Land & Exploration Company
July 27, 1999
Page 2
which it deemed comparable in whole or in part, (iv) reviewed the terms of the
Merger Agreement and certain related documents, and (v) performed such other
studies and analyses and considered such other factors as it deemed appropriate.
Deutsche Bank has not assumed responsibility for independent verification
of, and has not independently verified, any information, whether publicly
available or furnished to it, concerning KRE or St. Mary, including, without
limitation, any financial information, forecasts or projections considered in
connection with the rendering of its opinion. Accordingly, for purposes of its
opinion, Deutsche Bank has assumed and relied upon the accuracy and completeness
of all such information and Deutsche Bank has not conducted a physical
inspection of any of the properties or assets, and has not prepared or obtained
any independent evaluation or appraisal of any of the assets or liabilities, of
KRE or St. Mary. With respect to the financial forecasts and projections,
including any analyses and forecasts of certain cost savings, operating
efficiencies, revenue effects and financial synergies expected by St. Mary to be
achieved as a result of the Transaction (collectively, the "Synergies"), made
available to Deutsche Bank and used in its analyses, Deutsche Bank has assumed
that they have been reasonably prepared on bases reflecting the best currently
available estimates and judgments of the management of St. Mary, as the case may
be, as to the matters covered thereby. In rendering its opinion, Deutsche Bank
expresses no view as to the reasonableness of such forecasts and projections,
including the Synergies, or the assumptions on which they are based. Deutsche
Bank's opinion is necessarily based upon economic, market and other conditions
as in effect on, and the information made available to it as of, the date
hereof.
For purposes of rendering its opinion, Deutsche Bank has assumed that, in
all respects material to its analysis, the representations and warranties of St.
Mary, Merger Sub, KRI and KRE contained in the Merger Agreement are true and
correct, St. Mary, Merger Sub, KRI and KRE will each perform all of the
covenants and agreements to be performed by it under the Merger Agreement and
all conditions to the obligations of each of St. Mary, Merger Sub, KRI and KRE
to consummate the Transaction will be satisfied without any waiver thereof.
Deutsche Bank has also assumed that all material governmental, regulatory or
other approvals and consents required in connection with the consummation of the
Transaction will be obtained and that in connection with obtaining any necessary
governmental, regulatory or other approvals and consents, or any amendments,
modifications or waivers to any agreements, instruments or orders to which any
of St. Mary, Merger Sub, KRI or KRE is a party or is subject or by which it is
bound, no limitations, restrictions or conditions will be imposed or amendments,
modifications or waivers made that would have a material adverse effect on St.
Mary or KRE or materially reduce the contemplated benefits of the Transaction to
St. Mary. In addition, you have informed Deutsche Bank, and accordingly for
purposes of rendering its opinion Deutsche Bank has assumed, that the
Transaction will be tax-free to each of St. Mary and KRE.
This opinion is addressed to, and for the use and benefit of, the Board of
Directors of St. Mary and is not a recommendation to the stockholders of St.
Mary to approve the Transaction or
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St. Mary Land & Exploration Company
July 27, 1999
Page 3
the issuance of shares of St. Mary Common Stock in the Transaction. This opinion
is limited to the fairness, from a financial point of view, to St. Mary of the
Exchange Ratio, and Deutsche Bank expresses no opinion as to the merits of the
underlying decision by St. Mary to engage in the Transaction.
Deutsche Bank will be paid a fee for its services as financial advisor to
St. Mary in connection with the Transaction, a substantial portion of which is
contingent upon consummation of the Transaction. We are an affiliate of
Deutsche Bank AG (together with its affiliates, the "DB Group"). One or more
members of the DB Group have, from time to time, provided investment banking and
other financial services to St. Mary or its affiliates for which it has received
compensation, including certain transactions to hedge price fluctuations of oil
and gas. In the ordinary course of business, members of the DB Group may
actively trade in the securities and other instruments and obligations of St.
Mary for their own accounts and for the accounts of their customers.
Accordingly, the DB Group may at any time hold a long or short position in such
securities, instruments and obligations.
Based upon and subject to the foregoing, it is Deutsche Bank's opinion as
investment bankers that the Exchange Ratio is fair, from a financial point of
view, to St. Mary.
Very truly yours,
DEUTSCHE BANK SECURITIES INC.
/S/ DEUTSCHE BANK SECURITIES INC.
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Annex C
July 26, 1999
The Board of Directors
King Ranch, Inc.
1415 Louisiana, Suite 2300
Houston, Texas 77002
Members of the Board:
You have requested our opinion as to the fairness from a financial point of
view to the holders of the outstanding shares of common stock (the "Common
Stock") of King Ranch, Inc. ("KRI") of the consideration to be received by such
shareholders in connection with the proposed merger (the "Merger") of St. Mary
Acquisition Corporation ("Merger Sub"), a wholly-owned subsidiary of St. Mary
Land & Exploration Company ("St. Mary"), with and into King Ranch Energy, Inc.
("KRE"), a wholly-owned third-tier subsidiary of KRI pursuant to the Agreement
and Plan of Merger substantially in the form of the draft dated July 25, 1999,
among KRI, KRE, St. Mary and Merger Sub (the "Merger Agreement"). We understand
the Merger Agreement provides, among other things, that (i) immediately prior to
the Merger all of the shares of common stock of KRE shall be distributed pro
rata to the shareholders of KRI, and (ii) upon consummation of the Merger, the
KRE common stock held by the holders of Common Stock will be converted into the
right to receive 2,666,252 shares of St. Mary common stock in the manner and
more fully described in the Merger Agreement (the "Merger Consideration"). We
also understand the shares of St. Mary common stock to be received by the
holders of KRE common stock in the Merger will be subject, except as set forth
in the Merger Agreement, to certain restrictions on transfer for a period of two
years from the Closing Date (as such term is defined in the Merger Agreement).
In arriving at our opinion, we have, among other things:
(i) reviewed certain publicly available business and
financial information relating to KRI, KRE and St. Mary;
(ii) reviewed certain internal financial and operating
information, including financial forecasts of the
respective results of operations of KRE and St. Mary as
well as certain estimates of the expected operational and
financial benefits expected to result from the Merger
("the Expected Synergies"), prepared and provided to us
by the managements of KRI, KRE and St. Mary,
respectively;
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(iii) held discussions with certain senior officers,
directors and other representatives and advisors of KRI,
KRE and St. Mary concerning their respective strategic
objectives, businesses, operations, assets, financial
condition and prospects before and after giving effect to
the Merger and the Expected Synergies;
(iv) reviewed the reported prices and trading activity for St.
Mary common stock;
(v) considered, to the extent publicly available, the
financial terms of certain other similar transactions
recently effected which we considered relevant in
evaluating the transaction contemplated by the Merger
Agreement;
(vi) analyzed certain financial, stock market and other
publicly available information relating to the businesses
of other companies whose operations we considered
relevant in evaluating those of KRE and St. Mary;
(vii) participated in discussions and negotiations among
representatives of KRI, KRE and St. Mary and their
respective legal and financial advisors;
(viii) reviewed the draft Merger Agreement and certain related
agreements (the "Reviewed Documents"); and
(ix) conducted such other analyses, inquiries and examinations
and considered such other financial, engineering,
economic and market criteria as we deemed appropriate in
arriving at our opinion.
In rendering our opinion, we have assumed and relied upon, without
independent verification, the accuracy, fair representation and completeness of
all financial and other information, data, advice, opinions and representations
publicly available or furnished to or otherwise reviewed by or discussed with us
and our opinion is conditional upon such accuracy, fairness and completeness.
With respect to financial forecasts, Expected Synergies and other information
provided to or otherwise reviewed by or discussed with us by management of KRI,
KRE or St. Mary, we have assumed that they have been reasonably prepared and
reflect the best currently available estimates and judgment of KRI's, KRE's or
St. Mary's management as to the expected future financial performance of KRE or
St. Mary, as the case may be. Subject to the exercise of professional judgment
and except as expressly described herein, we have not assumed any responsibility
or attempted to verify independently the accuracy or completeness of any such
information, data, advice, opinions and representations. We have further
assumed that the Merger will be accounted for as a purchase under generally
accepted accounting principles and that it will qualify as a tax-free
reorganization for U.S. Federal income tax purposes. We have
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also assumed that the final form of the transaction documents, including the
Merger Agreement, will be substantially similar to the Reviewed Documents.
We have not made or been provided with an independent evaluation of the
assets or liabilities (contingent or otherwise) of KRI, KRE, or St. Mary nor
have we made any physical inspection of the properties or assets of KRI, KRE or
St. Mary. Our opinion is also based upon the condition and prospects, financial
and otherwise, of KRE and St. Mary as they were reflected in the information and
documents reviewed by us and as they were represented to us in our discussions
with management of KRI, KRE and St. Mary. In our analyses and in connection
with the preparation of our opinion, we made numerous assumptions with respect
to industry performance, general business, market and economic conditions and
other matters, many of which are beyond the control of any party involved. For
the purpose of rendering this opinion, we have assumed that in the course of
obtaining the necessary regulatory or other consents or approvals (contractual
or otherwise) for the Merger, no restriction, including any divestiture
requirements or amendments or modifications, will be imposed that will have a
material adverse effect on the contemplated benefits of the Merger.
Our opinion is necessarily rendered on the basis of information available
to us including financial and securities markets, economic and general business
and financial conditions and other conditions and circumstances existing and
disclosed to us, as at the date hereof. The opinion expressed herein is the
opinion of Nesbitt Burns and the form and content herein have been approved for
release by a committee of its directors, each of whom is experienced in merger,
acquisition, divestiture and valuation matters.
We are acting as financial advisor to KRI in connection with the Merger and
will receive a fee from KRI for our services, a significant portion of which is
contingent upon the consummation of the Merger. In addition, KRI has agreed to
indemnify us for certain liabilities arising out of our engagement.
In the ordinary course of our business, we and certain of our affiliates
may actively trade the securities of St. Mary for our own account or for the
account of our customers and, accordingly, may at any time hold a long or short
position in such securities. We have in the past provided certain financial
advisory and investment banking services to KRI and may continue to do so and
have received, and may receive, compensation for the rendering of such services.
Our advisory services and the opinion expressed herein are provided for the
use and benefit of the Board of Directors of KRI in its evaluation of the
Merger. Our opinion does not address the merits of the underlying decision by
KRI to engage in the Merger and is not intended to be and does not constitute a
recommendation to any shareholder of KRI or KRE as to how such shareholder
should vote on the proposed Merger or any matter related thereto. We are not
expressing any opinion herein as to the prices at which the St. Mary common
stock will trade following the announcement or consummation of the Merger. Our
opinion may not be published or otherwise used or referred to, nor shall any
public reference to Nesbitt Burns be made, without our prior written consent in
each specific instance, except that this opinion may be included in its
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entirety in any proxy statement to be distributed to the holders of Common Stock
in connection with the Merger.
Based upon and subject to all the foregoing, our experience as investment
bankers, our work as described above and other factors we deemed relevant, we
are of the opinion that, as of the date hereof, the Merger Consideration to be
received by the holders of Common Stock is fair from a financial point of view
to the holders of Common Stock.
Yours truly,
/S/ NESBITT BURNS SECURITIES INC.
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Annex D
SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW
Section 262. Appraisal rights.
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to Section 228
of this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Section 251 (other than a merger effected pursuant to
Section 251(g) of this title), Section 252, Section 254, Section 257, Section
258, Section 263 or Section 264 of this title :
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by National Association of Securities Dealers, Inc. or (ii) held of
record by more than 2,000 holders; and further provided that no appraisal
rights shall be available for any shares of stock of the constituent
corporation surviving a merger if the merger did not require for its
approval the vote of the stockholders of the surviving corporation as
provided in subsection (f) of Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
Sections 251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
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a. Shares of stock of the corporation surviving or resulting
from such merger or consolidation, or depository receipts in respect
thereof;
b. Shares of stock of any other corporation, or depository
receipts in respect thereof, which shares of stock (or depository
receipts in respect thereof) or depository receipts at the effective
date of the merger or consolidation will be either listed on a
national securities exchange or designated as a national market system
security on an interdealer quotation system by the National
Association of Securities Dealers, Inc. or held of record by more than
2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts
and cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a., b. and c. of
this paragraph.
(3) In the event all of the stock of a subsidiary Delaware
corporation party to a merger effected under Section 253 of this title is
not owned by the parent corporation immediately prior to the merger,
appraisal rights shall be available for the shares of the subsidiary
Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d)
and(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsections (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of such
stockholder's shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of
such stockholder's shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of such stockholder's
shares. A proxy or vote against the merger or consolidation shall not
constitute such a demand. A stockholder electing to take such
D-2
<PAGE>
action must do so by a separate written demand as herein provided. Within
10 days after the effective date of such merger or consolidation, the
surviving or resulting corporation shall notify each stockholder of each
constituent corporation who has complied with this subsection and has not
voted in favor of or consented to the merger or consolidation of the date
that the merger or consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to Section
228 or Section 253 of this title, each constituent corporation, either
before the effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within 20 days after the date of mailing
of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall be
not more than 10 days prior to the date the notice is given, provided, that
if the notice is given on or after the effective date or the merger or
consolidation, the record date shall be such effective date. If no record
date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the
day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of
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Chancery demanding a determination of the value of the stock of all such
stockholders. Notwithstanding the foregoing, at any time within 60 days after
the effective date of the merger or consolidation, any stockholder shall have
the right to withdraw his demand for appraisal and to accept the terms offered
upon the merger or consolidation. Within 120 days after the effective date of
the merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or resulting from
the consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10 days
after his written request for such a statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or execution of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion,
D-4
<PAGE>
permit discovery or other pretrial proceedings and may proceed to trial upon the
appraisal prior to the final determination of the stockholder entitled to an
appraisal. Any stockholder whose name appears on the list filed by the surviving
or resulting corporation pursuant to subsection (f) of this section and who has
submitted his certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that he is not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
D-5
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers.
Indemnification Under Delaware Law and St. Mary Certificate of Incorporation and
By-Laws
As permitted by the provisions of the Delaware General Corporation Law,
the St. Mary certificate of incorporation eliminates in certain circumstances
the monetary liability of directors of St. Mary for a breach of their fiduciary
duty as directors. These provisions do not eliminate the liability of a director
for:
. a breach of the director's duty of loyalty to St. Mary or its
stockholders,
. acts or omissions by a director not in good faith or which
involve intentional misconduct or a knowing violation of law,
. liability arising under Section 174 of the Delaware General
Corporation Law (relating to the declaration of dividends and
purchase or redemption of shares in violation of the Delaware
General Corporation Law), or
. any transaction from which the director derived an improper
personal benefit.
In addition, these provisions do not eliminate the liability of a
director for violations of federal securities laws, nor do they limit the rights
of St. Mary or its stockholders, in appropriate circumstances, to seek equitable
remedies such as injunctive or other forms of non-monetary relief. Such remedies
may not be effective in all cases.
St. Mary's certificate of incorporation and by-laws provide that St.
Mary shall indemnify all directors and officers of St. Mary to the full extent
permitted by the Delaware General Corporation Law. Under such provisions, any
director or officer who in his capacity as such is made or threatened to be made
a party to any suit or proceeding may be indemnified if the St. Mary board of
directors determines such director or officer acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
St. Mary. The St. Mary certificate of incorporation, by-laws and the Delaware
General Corporation Law further provide that such indemnification is not
exclusive of any other rights to which such individuals may be entitled under
the certificate of incorporation, the by-laws, any agreement, vote of
stockholders or disinterested directors or otherwise.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or persons controlling St.
Mary pursuant to the foregoing provisions, St. Mary has been informed that in
the opinion of the SEC such indemnification is against public policy as
expressed in the Securities Act of 1933 and is therefore unenforceable.
<PAGE>
St. Mary D&O Insurance
The directors and officers of St. Mary are insured under a policy of
directors' and officers' liability insurance issued by Executive Risk.
Merger Agreement Provisions For King Ranch Energy Directors and Officers
Under the merger agreement, the provisions in the King Ranch Energy
certificate of incorporation and bylaws for the indemnification of King Ranch
Energy officers and directors will survive the merger for a period of two years.
While the King Ranch Energy certificate of incorporation does not
contain any express provisions concerning the indemnification of directors and
officers, the King Ranch Energy bylaws generally provide that a directors or
officer who in the capacity as such is made or threatened to be made a party to
a lawsuit or proceeding shall be indemnified if the individual acted in good
faith and in a manner the individual reasonably believed to be in or not opposed
to the best interests of King Ranch Energy. The King Ranch Energy bylaws further
provide that such indemnification is not exclusive of any other rights to which
such individual may be entitled under the certificate of incorporation, any
agreement, vote of stockholders or disinterested directors or otherwise.
Item 21. Exhibits and Financial Statement Schedules.
(a) List of Exhibits
The following exhibits are furnished as part of this registration
statement:
Exhibit
No. Description
- ------- -----------------------------------------------------------------------
2.1 Agreement and Plan of Merger dated July 27, 1999 among St. Mary Land &
Exploration Company, St. Mary Energy Company, King Ranch, Inc. and King
Ranch Energy, Inc., as amended by Amendment No. 1 and Amendment No. 2
to Agreement and Plan of Merger dated November 8, 1999 (included as
Annex A to the joint proxy/consent statement and prospectus contained
in this registration statement)*
3.1 Restated Certificate of Incorporation of St. Mary Land & Exploration
Company dated November 11, 1992 (filed as Exhibit 3.1A to the
registrant's Registration Statement on Form S-1 (Registration No. 33-
53512) and incorporated herein by reference)
3.2 Certificate of Amendment to Certificate of Incorporation of St. Mary
Land & Exploration Company dated June 22, 1998 (filed as Exhibit 3.2 to
the registrant's Registration Statement on Form S-4 (Registration No.
333-85537) filed on August 19, 1999 and incorporated herein by
reference)
3.3 Restated By-laws of St. Mary Land & Exploration Company as of June 15,
1994 (filed as Exhibit 3.3 to the registrant's Registration Statement
on Form S-4 (Registration No. 333-85537) filed on August 19, 1999 and
incorporated herein by reference)
<PAGE>
3.4 Certificate of Incorporation of King Ranch Energy, Inc. (filed as
Exhibit 3.4 to the registrant's Registration Statement on Form S-4
(Registration No. 333-85537) filed on August 19, 1999 and incorporated
herein by reference)
3.5 Bylaws of King Ranch Energy, Inc. (filed as Exhibit 3.5 to the
registrant's Registration Statement on Form S-4 (Registration No. 333-
85537) filed on August 19, 1999 and incorporated herein by reference)
4.1 St. Mary Land & Exploration Company Shareholder Rights Plan adopted on
July 15, 1999 (filed as Exhibit 4.1 to the registrant's Quarterly
Report on Form 10-Q/A (File No. 0-20872) for the quarter ended June 30,
1999 and incorporated herein by reference)
5.1 Opinion of Ballard Spahr Andrews & Ingersoll, LLP regarding the
validity of the securities being registered (filed as Exhibit 5.1 to
the registrant's Registration Statement on Form S-4 (Registration No.
333-85537) filed on August 19, 1999 and incorporated herein by
reference)
8.1 Opinion of Locke Liddell & Sapp LLP regarding certain federal income
tax consequences relating to the merger*
8.2 Opinion of Ernst & Young LLP regarding certain federal income tax
consequences relating to the merger (filed as Exhibit 8.2 to the
registrant's Registration Statement on Form S-4 (Registration No. 333-
85537) filed on August 19, 1999 and incorporated herein by reference)
10.1 Stock Option Plan (filed as Exhibit 10.3 to the registrant's
Registration Statement on Form S-1 (Registration No. 33-53512) and
incorporated herein by reference)
10.2 Stock Appreciation Rights Plan (filed as Exhibit 10.4 to the
registrant's Registration Statement on Form S-1 (Registration No. 33-
53512) and incorporated herein by reference)
10.3 Cash Bonus Plan (filed as Exhibit 10.5 to the registrant's Registration
Statement on Form S-1 (Registration No. 33-53512) and incorporated
herein by reference)
10.4 Net Profits Interest Bonus Plan (filed as Exhibit 10.6 to the
registrant's Registration Statement on Form S-1 (Registration No. 33-
53512) and incorporated herein by reference)
10.5 Summary Plan Description/Pension Plan dated January 1, 1985 (filed as
Exhibit 10.7 to the registrant's Registration Statement on Form S-1
(Registration No. 33-53512) and incorporated herein by reference)
10.6 Non-qualified Unfunded Supplemental Retirement Plan, as amended (filed
as Exhibit 10.8 to the registrant's Registration Statement on Form S-1
(Registration No. 33-53512) and incorporated herein by reference)
10.7 Summary Plan Description Custom 401(k) Plan and Trust (filed as Exhibit
10.10 to the registrant's Registration Statement on Form S-1
(Registration No. 33-53512) and incorporated herein by reference)
10.8 Stock Option Agreement - Mark A. Hellerstein (filed as Exhibit 10.11 to
the registrant's Registration Statement on Form S-1 (Registration No.
33-53512) and incorporated herein by reference)
10.9 Stock Option Agreement - Ronald D. Boone (filed as Exhibit 10.12 to the
registrant's Registration Statement on Form S-1 (Registration No. 33-
53512) and incorporated herein by reference)
<PAGE>
10.10 Employment Agreement between Registrant and Mark A. Hellerstein (filed
as Exhibit 10.13 to the registrant's Registration Statement on Form S-1
(Registration No. 33-53512) and incorporated herein by reference)
10.11 Summary Plan Description 401(k) Profit Sharing Plan( filed as Exhibit
10.34 to the registrant's Annual Report on Form 10-K (File No. 0-20872)
for the year ended December 31, 1994 and incorporated herein by
reference)
10.12 Summary Plan Description/Pension Plan dated December 30, 1994 (filed as
Exhibit 10.35 to the registrant's Annual Report on Form 10-K (File No.
0-20872) for the year ended December 31, 1994 and incorporated herein
by reference)
10.13 Second Restated Partnership Agreement - Panterra Petroleum (filed as
Exhibit 10.41 to the registrant's Annual Report on Form 10-K (File No.
0-20872) for the year ended December 31, 1995 and incorporated herein
by reference)
10.14 Purchase and Sale Agreement between Siete Oil & Gas Corporation and St.
Mary Land & Exploration Company (filed as Exhibit 10.42 filed to the
registrant's Current Report on Form 8-K (File No. 0-20872) dated June
28, 1996, as amended by Registrant's Current Report on Form 8-K/A (File
No. 0-20872) dated June 28, 1996 and incorporated herein by reference)
10.15 Acquisition Agreement regarding the sale of the St. Mary Land &
Exploration Company's interest in the Russian joint venture (filed as
Exhibit 10.43 filed to the registrant's Current Report on Form 8-K
(File No. 0-20872) dated December 16, 1996 and incorporated herein by
reference)
10.16 Employment Agreement between registrant and Ralph H. Smith, effective
October 1, 1995 (filed as Exhibit 99 filed to the registrant's Current
Report on Form 8-K (File No. 0-20872) dated January 28, 1997 and
incorporated herein by reference)
10.17 St. Mary Land & Exploration Company Employee Stock Purchase Plan (filed
as Exhibit 10.48 filed to the registrant's Annual Report on Form 10-K
(File No. 0-20872) for the year ended December 31, 1997 and
incorporated herein by reference)
10.18 Credit Agreement dated June 30, 1998 (filed as Exhibit 10.52 to the
registrant's Quarterly Report on Form 10-Q (File No. 0-20872) for the
quarter ended June 30, 1998 and incorporated herein by reference)
10.19 Purchase and Sale Agreement dated November 12, 1998 between ONEOK
Resources Company (filed as Exhibit 10.53 filed to the registrant's
Current Report on Form 8-K (File No. 0-20872) dated December 30, 1998
and incorporated herein by reference)
10.20 Credit Agreement between Panterra Petroleum and Colorado National Bank
dated June 17, 1997 (filed as Exhibit 10.25 to the registrant's Annual
Report on Form 10-K (File No. 0-20872) for the year ended December 31,
1998 and incorporated herein by reference)
10.21 Agreement between Summo Minerals Corporation, Summo USA Corporation,
St. Mary Land & Exploration Company, and St. Mary Minerals Inc. re the
formation of Lisbon Valley Mining Company dated May 15, 1997 (filed as
Exhibit 10.26 to the registrant's Annual Report on Form 10-K (File No.
0-20872) for the year ended December 31, 1998 and incorporated herein
by reference)
10.22 Pledge and Security Agreement From Summo USA Corporation and Lisbon
Valley Mining Co. LLC to St. Mary Minerals Inc. dated November 23, 1998
(filed as Exhibit 10.27 to the registrant's Annual Report on Form 10-K
(File No. 0-20872) for the year ended December 31, 1998 and
incorporated herein by reference)
<PAGE>
10.23 Deed of Trust, Assignment of Rents and Security Agreement by Lisbon
Valley Mining Co. LLC and Stewart Title Guaranty Company for the
benefit of St. Mary Minerals Inc. dated November 23, 1998 (filed as
Exhibit 10.28 to the registrant's Annual Report on Form 10-K (File No.
0-20872) for the year ended December 31, 1998 and incorporated herein
by reference)
10.24 St. Mary Land & Exploration Company Incentive Stock Option Plan, As
Amended on March 25, 1999 (filed as Exhibit 10.1 to registrant's
Quarterly Report on Form 10-Q (File No. 0-20872) for the quarter ended
March 31, 1999 and incorporated herein by reference)
10.25 St. Mary Land & Exploration Company Stock Option Plan, As Amended on
March 25, 1999 (filed as Exhibit 10.2 to registrant's Quarterly Report
on Form 10-Q (File No. 0-20872) for the quarter ended March 31, 1999
and incorporated herein by reference)
10.26 Net Profits Interest Bonus Plan, As Amended on September 19, 1996 and
July 24, 1997 and January 28, 1999 filed as Exhibit 10.3 to
registrant's Quarterly Report on Form 10-Q (File No. 0-20872) for the
quarter ended March 31, 1999 and incorporated herein by reference)
10.27 Stock Exchange Agreement dated June 1, 1999 among St. Mary Land &
Exploration Company, Robert L. Nance, Penni W. Nance, Amy Nance Cebull
and Robert Scott Nance (filed as Exhibit 10.27 to the registrant's
Registration Statement on Form S-4 (Registration No. 333-85537) filed
on August 19, 1999 and incorporated herein by reference)
10.28 Stock Exchange Agreement dated June 1, 1999 between St. Mary Land &
Exploration Company and Robert T. Hanley (filed as Exhibit 10.28 to the
registrant's Registration Statement on Form S-4 (Registration No. 333-
85537) filed on August 19, 1999 and incorporated herein by reference)
10.29 Stock Exchange Agreement dated June 1, 1999 among St. Mary Land &
Exploration Company, Robert L. Nance and Robert T. Hanley (filed as
Exhibit 10.29 to the registrant's Registration Statement on Form S-4
(Registration No. 333-85537) filed on August 19, 1999 and incorporated
herein by reference)
10.30 Loan and Stock Purchase Agreement dated June 25, 1999 among Resource
Capital Fund L.P., St. Mary Land & Exploration Company and St. Mary
Minerals Inc.(filed as Exhibit 10.30 to the registrant's Registration
Statement on Form S-4 (Registration No. 333-85537) filed on August 19,
and incorporated herein by reference)
10.31 Credit Agreement dated June 25, 1999 among Summo Minerals Corporation,
Summo USA Corporation, Resource Capital Fund L.P. and St. Mary Minerals
Inc.(filed as Exhibit 10.31 to the registrant's Registration Statement
on Form S-4 (Registration No. 333-85537) filed on August 19, 1999 and
incorporated herein by reference)
10.32 Replacement Promissory dated June 25, 1999 payable to St. Mary Minerals
Inc. in the amount of $1,400,000 (filed as Exhibit 10.32 to the
registrant's Registration Statement on Form S-4 (Registration No. 333-
85537) filed on August 19, 1999 and incorporated herein by reference)
10.33 Pledge and Security Agreement dated June 25, 1999 among Summo Minerals
Corporation, Resource Capital Fund L.P., and St. Mary Minerals
Inc.(filed as Exhibit 10.33 to the registrant's Registration Statement
on Form S-4 (Registration No. 333-85537) filed on August 19, 1999 and
incorporated herein by reference)
10.34 Pledge and Security Agreement dated June 25, 1999 among Summo USA
Corporation, Resource Capital Fund L.P., and St. Mary Minerals Inc.
(filed as Exhibit 10.34 to the
<PAGE>
registrant's Registration Statement on Form S-4 (Registration No. 333-
85537) filed on August 19, 1999 and incorporated herein by reference)
10.35 Warrant Agreement dated June 25, 1999 among Summo Minerals Corporation,
Resource Capital Fund L.P. and St. Mary Minerals Inc. (filed as Exhibit
10.35 to the registrant's Registration Statement on Form S-4
(Registration No. 333-85537) filed on August 19, 1999 and incorporated
herein by reference)
21.1 Subsidiaries of St. Mary Land & Exploration Company*
23.1 Consent of Arthur Andersen LLP*
23.2 Consent of PricewaterhouseCoopers LLP*
23.3 Consent of Deloitte & Touche LLP*
23.4 Consent of Ballard Spahr Andrews & Ingersoll, LLP (included in the
opinion filed as Exhibit 5.1 to this Registration Statement)
23.5 Consent of Locke Liddell & Sapp LLP*
23.6 Consent of Ernst & Young LLP*
23.7 Consent of Ryder Scott Company, L.P. with respect to St. Mary reserve
reports*
23.8 Consent of Deutsche Bank Securities Inc.*
23.9 Consent of Nesbitt Burns Securities Inc.*
23.10 Consent of Ryder Scott Company, L.P. with respect to King Ranch Energy
reserve reports*
23.11 Consent of Netherland Sewell & Associates, Inc. with respect to King
Ranch Energy reserve reports*
24.1 Power of Attorney (filed as Exhibit 24.1 to the registrant's
Registration Statement on Form S-4 (Registration No. 333-85537) filed
on August 19, 1999 and incorporated herein by reference)
99.1 Form of St. Mary Proxy Card*
99.2 Form of King Ranch Energy Written Consent*
_____________________
* Filed herewith.
Item 22. Undertakings.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities
<PAGE>
offered (if the total dollar value of securities offered would
not exceed that which was registered) and any deviation from
the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the SEC
pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than 20 % change in the
maximum aggregate offering price set forth in the "Calculation
of Registration Fee" table in the effective registration
statement; and
(iii) To include any material information with
respect to the plan of distribution not previously disclosed
in the registration statement or any material change to such
information in the registration statement; and
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof;
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering;
(4) That, for purposes of determining any liability under the
Securities Act of 1933, each filing of the registrant's annual report
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934 (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to Section 15(d) of the Securities Exchange Act
of 1934) that is incorporated by reference in the registration
statement shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof;
(5) That prior to any public reoffering of the securities
registered hereunder through use of a prospectus which is a part of
this registration statement, by any person or party who is deemed to be
an underwriter within the meaning of Rule 145(c), such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be
deemed underwriters, in addition to the information called for by the
other items of the applicable form;
(6) That every prospectus (i) that is filed pursuant to
paragraph (5) immediately preceding, or (ii) that purports to meet the
requirements of section 10(a)(3) of the Securities Act of 1933 and is
used in connection with an offering of securities subject to Rule 415,
will be filed as a part of an amendment to the registration statement
and will not be used until such amendment is effective, and that, for
purposes of determining any liability under the Securities Act of 1933,
each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof; and
<PAGE>
(7) Insofar as indemnification for liabilities arising under
the Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to any provision or
arrangement whereby the registrant may indemnify a director, officer or
controlling person or the registrant against liabilities arising under
the Securities Act, or otherwise, the registrant has been advised that
in the opinion of the SEC such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid
by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion
of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such
issue.
(b) The undersigned registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus pursuant
to Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(c) The undersigned registrant hereby undertakes to supply by means of
a post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has
duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Denver, State of
Colorado, on November 12, 1999.
ST. MARY LAND & EXPLORATION COMPANY
By:
/s/ Thomas E. Congdon
------------------------------------------
Thomas E. Congdon, Chairman of the Board
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- ------------------------------------ ------------------------------------ --------------------
<S> <C> <C>
/s/ Thomas E. Congdon Chairman of the Board and Director November 12, 1999
- ------------------------------------
Thomas E. Congdon
/s/ Mark A. Hellerstein President, Chief Executive Officer November 12, 1999
- ------------------------------------
Mark A. Hellerstein and Director
Executive Vice President, Chief November 12, 1999
____________________________________
Ronald D. Boone Operating Officer and Director
/s/ RICHARD C. NORRIS* Vice President - Finance, Secretary November 12, 1999
- ------------------------------------
Richard C. Norris and Treasurer
/s/ GARRY A. WILKENING* Vice President - Administration and November 12, 1999
- ------------------------------------
Garry A. Wilkening Controller
/s/ LARRY W. BICKLE* Director November 12, 1999
- ------------------------------------
Larry W. Bickle
/s/ DAVID C. DUDLEY* Director November 12, 1999
- ------------------------------------
David C. Dudley
/s/ RICHARD C. KRAUS* Director November 12, 1999
- ------------------------------------
Richard C. Kraus
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
- ------------------------------------ --------------------- --------------------------
<S> <C> <C>
Director November 12, 1999
____________________________________
R. James Nicholson
/s/ AREND J. SANBULTE*
- ------------------------------------
Arend J. Sandbulte Director November 12, 1999
Director November 12, 1999
____________________________________
John M. Seidl
</TABLE>
* By:
/s/ Mark A. Hellerstein
------------------------
Mark A. Hellerstein
Attorney-in-fact
<PAGE>
EXHIBIT 8.1
July 27, 1999
King Ranch, Inc.
1415 Louisiana, Suite 2300
Wedge International Tower
Houston, Texas 77002
Gentlemen:
We have acted as counsel to King Ranch, Inc., a Texas corporation ("King
----
Ranch"), in connection with the merger (the "Merger") between St. Mary
- ----- ------
Acquisition Corporation, a Colorado corporation ("Sub"), and King Ranch Energy,
---
Inc., a Delaware corporation ("Energy"), in which Energy will be the surviving
------
entity, pursuant to that certain Agreement and Plan of Merger dated the 27th day
of July, 1999 ("Agreement and Plan of Merger") by and between St. Mary Land &
----------------------------
Exploration Company, a Delaware corporation ("St. Mary"), Sub, King Ranch and
--------
Energy. King Ranch, King Ranch Holdings, Inc., a Delaware corporation
("Holdings"), King Ranch Minerals, Inc., a Delaware corporation ("Minerals") and
- ---------- --------
Energy are sometimes referred to as the "Consolidated Group." We have been
------------------
asked to render an opinion as to whether a distribution from King Ranch of all
of the stock of Energy in the manner described herein ("Stock Distribution")
------------------
will be an income taxable event for Federal tax purposes to the shareholders of
King Ranch (collectively, the "Shareholders" or singularly, a "Shareholder")
------------ -----------
under Section 355 of the Internal Revenue Code of 1986, as amended ("Code;" all
----
Section references in this opinion are references to the Code, unless otherwise
indicated).
As of the date of this opinion, the Consolidated Group is structured as
follows: King Ranch owns all of the outstanding stock of Holdings; Holdings owns
all of the outstanding stock of Minerals; and Minerals owns all of the
outstanding stock of Energy. You have represented to us that Energy was formed
on December 31, 1997 through a contribution by Minerals to Energy in a non-
taxable transfer of assets to a corporation qualifying under Code Section 351.
In anticipation of the Stock Distribution and the Merger, Minerals will
distribute the stock of Energy to Holdings which will in turn distribute the
stock of Energy to King Ranch. In addition and as a condition to the Merger,
Holdings will forgive a debt obligation ("Debt") of Energy in an amount
----
approximately equal to $14 million which may have certain Federal and state tax
consequences. This opinion will not discuss any state or Federal tax
consequences of the distribution of the stock of Energy through the Consolidated
Group to King Ranch or any issues related to the cancellation of the Debt. It
is our understanding that Ernst & Young LLP will undertake the tax analysis with
respect to such issues.
In order to facilitate the Merger, King Ranch will distribute all of the
stock of Energy that it owns, which constitutes 100 percent of all of the issued
and outstanding stock of Energy, to the Shareholders. You have represented that
the Shareholders have not and will not receive any cash or any other property as
a distribution from King Ranch and will not exchange or redeem any of their
stock of King Ranch due to the Stock Distribution. The Shareholders will
receive a number
<PAGE>
of shares of Energy in proportion to each Shareholder's ownership interest of
King Ranch as of the record date for the Stock Distribution. The shareholders
will subsequently exchange their stock of Energy for stock of St. Mary, and Sub
will be merged into Energy under the applicable provisions of Delaware and
Colorado law.
Our opinions are based upon the provisions of the Code, the Treasury
Regulations (the "Regulations") and the interpretation thereof by the Internal
-----------
Revenue Service (the "IRS") and relevant case law, all as of the date of this
---
opinion. These opinions are also based upon certain assumptions and
representations as stated below. There can be no assurance that the provisions
of the Code, the Regulations or that the interpretations of the IRS or the
courts will not change in a manner such that the conclusions expressed herein
would change. Moreover, any such changes in the Code, the Regulations or the
interpretations thereof may have retroactive effect. We do not accept the
responsibility to inform you of any such changes. Because none of our opinions
are binding upon the IRS or the courts, there can be no assurance that contrary
positions may not be successfully asserted by the IRS. Because there may be
certain ancillary Federal income tax consequences for each Shareholder with
respect to issues not specifically addressed in this opinion, each individual
Shareholder is urged to consult his, her or its own tax advisor as to the
Federal income tax consequences associated with the Stock Distribution to such
Shareholder.
In rendering this opinion, we have examined and are relying upon such
documents (including all exhibits and schedules attached thereto) as we have
deemed relevant or necessary, including (1) the Agreement and Plan of Merger,
(2) certain tax representation letters (the "Tax Representation Letters") of
--------------------------
King Ranch, Energy, St. Mary and Sub satisfactory to us which have been received
prior to the date of this opinion, and (3) such other documents as we have
deemed necessary or appropriate in order to enable us to render the opinion
below, and our opinion is conditioned on (without any independent investigation
or review thereof) the truth and accuracy, at all relevant times, of the
representations and warranties, covenants and statements contained therein. The
initial and continuing truth and accuracy of the representations contained in
the Tax Representation Letters constitutes an integral basis for the opinions
expressed herein and this opinion is conditioned upon the initial and continuing
truth of the accuracy of these representations.
In rendering this opinion, we have assumed (without any independent
investigation or review thereof) and our opinion is conditioned upon the
correctness of, the following: (1) each original document submitted to us
(including signatures thereto) is authentic, each document submitted to us as a
copy conformed to the original documents, and all documents have been (or will
be by the date of this opinion) duly and validly executed and delivered where
due execution and delivery are a prerequisite to the effectiveness thereof; (2)
all representations, warranties and statements made or agreed to in connection
with the Merger by King Ranch, Energy, Holdings, Minerals, St. Mary and Sub,
their managements, employees, officers, directors, and shareholders, including,
but not limited to, those set forth in the Agreement and Plan of Merger
(including the exhibits thereto) and the Tax Representation Letters, are true
and accurate at all relevant times; (3) all covenants contained in the Agreement
and Plan of Merger (including exhibits thereto) and the Tax Representation
Letters are performed without waiver or breach of any material provision
thereof; (4) the Merger will be reported by King Ranch, Energy, Holdings,
Minerals, St. Mary and Sub on their respective Federal income tax returns in a
manner consistent with the opinion
<PAGE>
set forth below; and (5) any representation or statement made "to the best of
knowledge" or similarly qualified is correct without qualification. We have also
assumed in connection with rendering this opinion that the Merger will be
consummated in accordance with the Agreement and Plan of Merger (and without any
waiver, breach or amendment of any of the provisions thereof).
In rendering the opinion for the Merger, we have assumed that the Stock
Distribution has met all applicable requirements under Code Section 355 and the
Regulations.
Based on our examination of the foregoing items and subject to the
limitations, qualifications, assumptions and caveats set forth herein, we are of
the opinion that:
(i) For the United States Federal income tax purposes, the Stock
Distribution, when made as provided herein, should qualify as a
distribution to which Code Section 355(e) applies and, accordingly,
the receipt of the stock of Energy by the Shareholders upon the
Stock Distribution should not be taxable to the Shareholders for
Federal income tax purposes.
(ii) The Merger of Sub with and into Energy, when consummated as provided
herein, will qualify as a reorganization within the meaning of Code
Section 368(a).
(iii) Upon the consummation of the Merger of Sub with and into Energy as
provided herein, St. Mary, Sub and Energy will each be a party to
the reorganization within the meaning of Code Section 368(b).
An opinion of counsel merely represents counsel's best judgment with
respect to the probable outcome on the merits and is not binding on the IRS or
the courts. There can be no complete assurance that positions contrary to our
opinions will not be taken by the IRS, or that a court considering the issues
would not hold contrary to such an opinion.
This opinion has been prepared and delivered effective as of the date
hereof, and based upon certain facts, assumptions, representations and
warranties as of the date hereof, as provided herein. This opinion may not be
used or relied upon by any person other than the addressee and the Shareholders
as of the record date of the Stock Distribution. This opinion may not be used
for any other purpose and may not be disclosed, quoted, circulated, published,
filed with a governmental agency or otherwise referred to without our prior
written consent.
Very truly yours,
/S/ LOCKE LIDDELL & SAPP LLP
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES
OF
ST. MARY LAND & EXPLORATION COMPANY
A. Wholly owned subsidiaries of St. Mary Land & Exploration Company, a
Delaware corporation:
1. St. Mary Minerals, Inc., a Colorado corporation
2. Parish Corporation, a Colorado corporation
3. St. Mary Operating Company, a Colorado corporation
4. Nance Petroleum Corporation, a Montana corporation
5. St. Mary Energy Company, a Colorado corporation
B. Wholly owned subsidiaries of Parish Corporation:
1. Natasha Corporation, a Colorado corporation
2. Lucy Corporation, a Colorado corporation
3. Chelsea Corporation, a Colorado corporation
C. Partnership interests held by Parish Corporation:
1. Hilltop Investment Partners, a Colorado general partnership (50%)
2. C-470 Venture, a Colorado general partnership (68.858%)
3. Parish Ventures, a Colorado general partnership (100%)
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
by reference in this registration statement of our report dated February 17,
1999 included in St. Mary Land & Exploration Company's Form 10-K/A-3 for the
year ended December 31, 1998 and to all references to our Firm included in this
registration statement.
/S/ ARTHUR ANDERSEN LLP
Denver, Colorado
November 12, 1999
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement
of St. Mary Land & Exploration Company and Subsidiaries on Form S-4 of our
report dated March 3, 1997, except for the effects of adopting Statement of
Financial Accounting Standards No. 128, "Earnings Per Share," as discussed in
Note 1, as to which the date is March 19, 1998, on our audits of the financial
statements of St. Mary Land & Exploration Company and Subsidiaries for the year
ended December 31, 1996, which report is included in the Annual Report on Form
10-K/A-3. We also consent to the reference to our firm under the caption
"Experts."
/S/ PRICEWATERHOUSECOOPERS LLP
-----------------------------------
PricewaterhouseCoopers LLP
Denver, Colorado
November 12, 1999
<PAGE>
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 2 to Registration Statement No.
333-85537 of St. Mary Land & Exploration Company of our report on King Ranch
Energy, Inc. and subsidiaries dated March 2, 1999, appearing in this proxy and
consent statement/prospectus, which is a part of this Registration Statement,
and to the reference to us under the heading "Experts" in such prospectus.
/S/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Houston, Texas
November 12, 1999
<PAGE>
EXHIBIT 23.5
November 10, 1999
King Ranch, Inc.
1415 Louisiana, Suite 2300
Wedge International Tower
Houston, Texas 77002
Gentlemen:
We hereby consent to the filing of our opinion to you dated July 27, 1999,
with the Securities and Exchange Commission as Exhibit 8.1 to the St. Mary Land
& Exploration Company Registration Statement on Form S-4, and to the use of our
name in the Joint Proxy/Consent Statement forming a part of the Registration
Statement under the caption "Legal Matters."
Very truly yours,
/S/ LOCKE LIDDELL & SAPP LLP
-----------------------------------
Locke Liddell & Sapp LLP
<PAGE>
EXHIBIT 23.6
November 11, 1999
Mr. Bill Gardiner
Chief Financial Officer
King Ranch, Inc.
1415 Louisiana, Suite 2300
Wedge International Tower
Houston, TX 77002
Dear Bill:
We hereby consent to the inclusion of our opinion as an exhibit to the Form
S-4 Registration Statement under the Securities Act of 1933 of the Company and
the reference to and summary of our opinion in such Form S-4 Registration
Statement.
/S/ ERNST & YOUNG LLP
-----------------------------------
Ernst & Young LLP
<PAGE>
EXHIBIT 23.7
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
The undersigned hereby consents to the incorporation by references in the
joint proxy statement/prospectus constituting part of the St. Mary Land &
Exploration Company registration statement on Form S-4 (Registration No. 333-
85537) of data derived from our reserve report dated January 15, 1999 relating
to the oil and gas reserves of St. Mary Land & Exploration Company at December
31, 1998. We also consent to the reference to this firm under the caption
"Experts" and elsewhere in such joint proxy statement/prospectus.
/s/ RYDER SCOTT COMPANY, L.P.
-----------------------------
Ryder Scott Company, L.P.
Denver, Colorado
November 11, 1999
<PAGE>
EXHIBIT 23.8
CONSENT OF DEUTSCHE BANK SECURITIES INC.
We hereby consent to (i) the use of our opinion letter to the Board of
Directors of St. Mary Land & Exploration Company (the "Company") included as
Annex B to the proxy and consent statement/prospectus constituting a part of the
Registration Statement on Form S-4 relating to the proposed merger of the
Company and King Ranch Energy, Inc., and (ii) the references to such opinion in
such proxy and consent statement/prospectus. In giving such consent, we do not
admit that we come within the category of persons whose consent is required
under Section 7 of the Securities Act of 1933, as amended, or the rules and
regulations of the Securities and Exchange Commission thereunder, nor do we
hereby admit that we are experts with respect to any part of such Registration
Statement within the meaning of the term "experts" as used in the Securities Act
of 1933, as amended, or the rules and regulations of the Securities and Exchange
Commission thereunder.
DEUTSCHE BANK SECURITIES INC.
By: /S/ CLIVE R. HOLMES
-------------------------------
Clive R. Holmes
Managing Director
November 12, 1999
<PAGE>
EXHIBIT 23.9
CONSENT OF NESBITT BURNS SECURITIES INC.
We hereby consent to (i) the use of our opinion letter to the Board of
Directors of King Ranch, Inc. as Annex C to the proxy and consent
statement/prospectus constituting a part of the Registration Statement on
Form S-4 relating to the proposed merger of King Ranch Energy, Inc. and St. Mary
Land & Exploration Company, and (ii) the references to such opinion in such
proxy and consent statement/prospectus. In giving such consent, we do not admit
that we come within the category of persons whose consent is required under
Section 7 of the Securities Act of 1933, as amended, or the rules and
regulations of the Securities and Exchange Commission thereunder, nor do we
hereby admit that we are experts with respect to any part of such Registration
Statement within the meaning of the term "experts" as used in the Securities Act
of 1933, as amended, or the rules and regulations of the Securities and Exchange
Commission thereunder.
NESBITT BURNS SECURITIES INC.
By: /S/ SYLVIA K. BARNES
-----------------------------------------
Sylvia K. Barnes
Senior Vice President & Managing Director
November 12, 1999
<PAGE>
EXHIBIT 23.10
CONSENT OF INDEPENDENT PETROLEUM AND GEOLOGICAL ENGINEERS
The undersigned hereby consents to the incorporation by reference in the
joint proxy statement/prospectus constituting part of the St. Mary Land &
Exploration Company registration statement on Form S-4 (Registration No. 333-
85537) of data derived from our reserve report dated February 5, 1999 relating
to the oil and gas reserves of King Ranch Energy, Inc. at December 31, 1998. We
also consent to the reference to this firm under the caption "Experts" and
elsewhere in such joint proxy statement/prospectus.
/S/ RYDER SCOTT COMPANY, L.P.
-----------------------------------
Ryder Scott Company, L.P.
November 11, 1999
<PAGE>
EXHIBIT 23.11
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS AND GEOLOGISTS
We hereby consent to the incorporation by reference in the joint proxy
statement/prospectus constituting part of the St. Mary Land & Exploration
Company registration statement on Form S-4 (Registration No. 333-85537) of data
derived from our reserve report dated April 9, 1999 relating to the oil and gas
reserves of King Ranch Energy, Inc. at December 31, 1998. We also consent to the
reference to our firm under the caption "Experts" and elsewhere in such joint
proxy statement/prospectus.
NETHERLAND, SEWELL & ASSOCIATES, INC.
By: /S/ FREDERIC D. SEWELL
------------------------------------
Frederic D. Sewell
President
Dallas, Texas
November 11, 1999
<PAGE>
EXHIBIT 99.1
FORM OF ST. MARY LAND & EXPLORATION COMPANY PROXY CARD
[Front]
PROXY ST. MARY LAND & EXPLORATION COMPANY PROXY
1776 Lincoln Street, Suite 1100
Denver, Colorado 80203
This Proxy is Solicited by the Board of Directors
For the Special Meeting of Stockholders on October 29, 1999
The undersigned hereby appoints Mark A. Hellerstein and Richard C. Norris,
or either of them, with power of substitution, as proxies for the undersigned to
vote all shares of St. Mary Land & Exploration Company common stock which the
undersigned is entitled to vote at the special meeting of stockholders to be
held on October 29, 1999, and at any reconvened meeting after any adjournment
thereof, as directed on the matter referred to below and described in the
accompanying proxy statement for the meeting, and at their discretion on any
other matters that may properly be presented at the meeting.
. To approve the issuance of a total of 2,666,252 shares of St. Mary
common stock under the merger agreement whereby St. Mary will acquire
King Ranch Energy, Inc.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
The St. Mary board of directors recommends a vote "FOR" approval of
the issuance of a total of 2,666,252 shares of St. Mary common stock
under the merger agreement.
<PAGE>
[Back]
This proxy when properly executed will be voted in the manner directed by
the undersigned stockholder.
If this proxy is properly executed but no voting direction is given, this
proxy will be voted "FOR" approval of the issuance of a total of 2,666,252
shares of St. Mary common stock under the merger agreement.
This proxy also confers discretionary authority to the proxies to vote on
any other matters that may properly be presented at the meeting. As of the date
of the accompanying proxy statement, St. Mary management did not know of any
other matters to be presented at the meeting. If any other matters are properly
presented at the meeting, this proxy will be voted in accordance with the
recommendations of St. Mary management.
Please sign exactly as your name appears below. When shares are held by
joint tenants, both should sign. When signing as attorney, executor,
administrator, trustee or guardian, please give full title as such. If a
corporation, please sign in full corporate name by the president or other
authorized officer. If a partnership or limited liability company, please sign
in such name by an authorized person.
Please complete, date and sign this proxy card and return it promptly in
the accompanying envelope.
Dated: _____________________, 1999
Signature: ___________________________
Signature: ___________________________
(If held jointly)
<PAGE>
EXHIBIT 99.2
KING RANCH ENERGY, INC.
WRITTEN CONSENT
Unless otherwise indicated below, the undersigned, a holder of record of
shares of Class A Common Stock, par value $.01 per share, of King Ranch Energy,
Inc. (the "Corporation"), hereby waives notice of a meeting and hereby consents
to the following action:
(1) ADOPTION OF THE AGREEMENT AND PLAN OF MERGER, DATED AS OF JULY 27, 1999,
AMONG KING RANCH, INC., THE CORPORATION, ST. MARY LAND & EXPLORATION
COMPANY AND ST. MARY ENERGY COMPANY, AND THE TRANSACTIONS CONTEMPLATED BY
SUCH AGREEMENT AND PLAN OF MERGER
_____ FOR _____ AGAINST _____ ABSTAIN
In the absence of a denotation that you do not consent or that you abstain
being indicated above, the undersigned hereby consents to the action listed
above.
THE UNDERSIGNED UNDERSTANDS AND ACKNOWLEDGES THAT (1) EXECUTION AND
DELIVERY OF THIS CONSENT CONSTITUTES A WAIVER OF THE UNDERSIGNED=S RIGHT TO
DEMAND APPRAISAL OF SHARES OF CLASS A AND CLASS B COMMON STOCK OF THE
CORPORATION, IF ANY, HELD BY THE UNDERSIGNED, PURSUANT TO SECTION 262 OF THE
GENERAL CORPORATION LAW OF THE STATE OF DELAWARE, (2) IF THE UNDERSIGNED
PREVIOUSLY DELIVERED A DEMAND FOR APPRAISAL WITH RESPECT TO ANY SUCH SHARES, THE
EXECUTION AND DELIVERY OF THIS CONSENT CONSTITUTES A WITHDRAWAL OF SUCH DEMAND
AND (3) THE UNDERSIGNED HAS RECEIVED THE CONSENT STATEMENT AND THE NOTICE OF
DISTRIBUTION AND STOCKHOLDER FORUM OF THE CORPORATION (WITH A COPY OF SECTION
262 OF THE GENERAL CORPORATION LAW OF THE STATE OF DELAWARE ATTACHED THERETO),
DATED OCTOBER ___, 1999.
Shares of Class A Common Stock
Owned:________________________
(Please sign exactly as your name appears below)
------------------------------------------
Dated: _________
