<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 22, 1997
REGISTRATION NO. 333-42045
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
--------------------
SOUTHERN MINERAL CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<CAPTION>
<S> <C> <C>
NEVADA 1311 36-2068676
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
</TABLE>
500 DALLAS STREET, SUITE 2800
HOUSTON, TEXAS 77002
(713) 658-9444
(Address Including Zip Code, and Telephone Number,
Including Area Code, of the Registrant's Principal Executive Offices)
--------------------
STEVEN H. MIKEL
PRESIDENT AND CHIEF EXECUTIVE OFFICER
500 DALLAS, SUITE 2800
HOUSTON, TEXAS 77002
(713) 658-9444
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
--------------------
With copies to:
<TABLE>
<S> <C>
DAVID S. PETERMAN JAMES L. RICE III
AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P. WEIL, GOTSHAL & MANGES LLP
711 LOUISIANA STREET, SUITE 1900 - SOUTH TOWER 700 LOUISIANA STREET, SUITE 1600
HOUSTON, TEXAS 77002 HOUSTON, TEXAS 77002
(713) 220-5800 (713) 546-5000
</TABLE>
--------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable following the effectiveness of this Registration Statement.
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, please 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(c) 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. [ ]
--------------------
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, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
================================================================================
<PAGE> 2
[LOGO OF SOUTHERN
MINERAL CORPORATION]
December 22, 1997
To the Stockholders of Southern Mineral Corporation:
You are cordially invited to attend a Special Meeting of Stockholders
(the "Special Meeting") of Southern Mineral Corporation ("SMC") to be held on
January 28, 1998 at 10:00 a.m., local time, at the Hyatt Regency Houston, 1200
Louisiana Street, Houston, Texas. Notice of the Special Meeting is enclosed.
At the Special Meeting you will be asked to consider and vote upon the
approval of the issuance (the "Share Issuance") of shares of common stock, par
value $0.01 per share, of SMC ("SMC Common Stock") in accordance with an
Amended and Restated Agreement and Plan of Merger (the "Merger Agreement")
pursuant to which, among other things, a wholly owned subsidiary of SMC will
merge (the "Merger") with and into Amerac Energy Corporation ("Amerac"), and
Amerac will become a wholly owned subsidiary of SMC. The terms of the Merger
Agreement provide that holders of common stock, par value $0.05 per share, of
Amerac ("Amerac Common Stock") will receive shares of SMC Common Stock in
exchange for all of the issued and outstanding shares of Amerac Common Stock
upon consummation of the Merger. The number of shares of SMC Common Stock to be
issued to the stockholders of Amerac will be between 2,727,272 shares and
3,333,333 shares based on the average closing sale price of SMC Common Stock as
quoted on The Nasdaq National Market for the 20 consecutive trading days ending
three trading days prior to the consummation of the Merger, all as more
particularly described in the enclosed Joint Proxy Statement/Prospectus. The
closing sale price of SMC Common Stock as quoted on The Nasdaq National Market
on December 19, 1997 was $5.75.
In addition, at the Special Meeting you will be asked to consider and
vote upon (a) the approval and adoption of amended and restated articles of
incorporation of SMC which (i) increase the number of authorized shares of SMC
Common Stock from 20 million to 50 million and (ii) authorize the issuance of
up to five million shares of "blank check" preferred stock (the "SMC Restated
Articles") and (b) the approval and adoption of the Southern Mineral
Corporation 1997 Stock Option Plan (the "Plan").
PLEASE READ CAREFULLY THE ENCLOSED JOINT PROXY STATEMENT/PROSPECTUS IN
ITS ENTIRETY FOR A MORE COMPLETE DESCRIPTION OF THE MERGER AGREEMENT, THE
MERGER, THE SHARE ISSUANCE, THE SMC RESTATED ARTICLES AND THE PLAN.
After careful consideration, the Board of Directors of SMC (the "SMC
Board") has approved the Share Issuance, the adoption of the SMC Restated
Articles and the Plan, believes each of the Share Issuance, the SMC Restated
Articles and the Plan is in the best interest of SMC and its stockholders and
recommends that all stockholders of SMC vote FOR the approval of the Share
Issuance and the approval and adoption of the SMC Restated Articles and the
Plan.
<PAGE> 3
All stockholders are invited to attend the Special Meeting in person.
The affirmative vote of a majority of the outstanding shares of SMC Common
Stock, in person or by proxy, will be necessary for the approval and adoption
of the SMC Restated Articles. The affirmative vote of a majority of the
outstanding shares of SMC Common Stock present, in person or by proxy, at the
Special Meeting will be necessary for the approval of the Share Issuance and
for the approval and adoption of the Plan.
In order that your shares may be represented at the Special Meeting,
you are urged to promptly complete, sign, date and return the accompanying
proxy in the enclosed envelope, whether or not you plan to attend the Special
Meeting. If you attend the Special Meeting in person, you may, if you wish,
vote personally on all matters brought before the Special Meeting even if you
have previously returned your proxy.
It is expected that the combination of the businesses of SMC and
Amerac will provide growth and profit opportunities. The SMC Board believes
that the combined companies will have a stronger financial position due to
enhanced cash flow and an improved balance sheet, as more fully described in
the attached Joint Proxy Statement/Prospectus.
We are gratified by your continued support.
Sincerely,
/s/ STEVEN H. MIKEL
Steven H. Mikel
President and Chief Executive Officer
2
<PAGE> 4
[LOGO OF AMERAC
ENERGY CORPORATION]
December 22, 1997
Dear Fellow Stockholders:
You are cordially invited to attend a Special Meeting of Stockholders
(the "Special Meeting") of Amerac Energy Corporation ("Amerac") to be held on
January 28, 1998 at 10:00 a.m., local time, at the Hyatt Regency Houston, 1200
Louisiana Street, Houston, Texas. Notice of the Special Meeting is enclosed.
At the Special Meeting, you will be asked to consider and vote upon the
approval and adoption of an Amended and Restated Agreement and Plan of Merger
(the "Merger Agreement") pursuant to which, among other things, a wholly owned
subsidiary of Southern Mineral Corporation ("SMC") will merge (the "Merger")
with and into Amerac, and Amerac will become a wholly owned subsidiary of SMC.
The terms of the Merger Agreement provide that holders of common stock, par
value $0.05 per share, of Amerac ("Amerac Common Stock") will receive shares of
common stock, par value $0.01 per share, of SMC ("SMC Common Stock") in exchange
for all of the issued and outstanding shares of Amerac Common Stock upon
consummation of the Merger. The number of shares of SMC Common Stock to be
issued to the stockholders of Amerac will be between 2,727,272 shares and
3,333,333 shares based on the average closing sale price of SMC Common Stock as
quoted on The Nasdaq National Market for the 20 consecutive trading days ending
three trading days prior to the consummation of the Merger, all as more
particularly described in the enclosed Joint Proxy Statement/Prospectus. The
closing sale price of SMC Common Stock as quoted on The Nasdaq National Market
on December 19, 1997 was $5.75. Based on such closing sale price, which would
result in an exchange ratio of .8560 shares of SMC Common Stock for each issued
and outstanding share of Amerac Common Stock (assuming 3,894,288 shares
outstanding), holders of Amerac Common Stock would receive SMC Common Stock with
a current market value of $4.92 for each share of Amerac Common Stock so held.
The last reported sale price of Amerac Common Stock on the American Stock
Exchange on December 19, 1997 was $4.25 per share.
After careful consideration, the Board of Directors of Amerac (the
"Amerac Board") has approved the Merger, believes the Merger is in the best
interest of Amerac and its stockholders and unanimously recommends that all
stockholders vote FOR approval and adoption of the Merger Agreement.
All stockholders are invited to attend the Special Meeting in person.
The affirmative vote of a majority of the outstanding shares of Amerac Common
Stock, in person or by proxy, will be necessary for approval and adoption of
the Merger Agreement.
In order that your shares may be represented at the Special Meeting,
you are urged to complete, sign, date and promptly return the accompanying
proxy in the enclosed envelope, whether or not you plan to attend the Special
Meeting. If you attend the Special Meeting in person, you may, if you wish,
vote personally on all matters brought before the Special Meeting even if you
have previously returned your proxy.
<PAGE> 5
PLEASE READ CAREFULLY THE ENCLOSED JOINT PROXY STATEMENT/PROSPECTUS IN
ITS ENTIRETY FOR A MORE COMPLETE DESCRIPTION OF THE MERGER AGREEMENT AND THE
MERGER.
McDonald & Company Securities, Inc. has acted as financial advisor to
Amerac in connection with the Merger and delivered its oral opinion on November
14, 1997 and its written opinion dated November 18, 1997 to the Amerac Board to
the effect that, based upon and subject to certain matters stated therein, as of
the date of such opinion, the exchange ratio is fair to Amerac stockholders from
a financial point of view. The full text of the McDonald & Company Securities,
Inc. opinion, which sets forth a description of the assumptions made, matters
considered and limitations on the review undertaken, is included as Appendix H
to the accompanying Joint Proxy Statement/Prospectus and should be read
carefully in its entirety.
The Amerac Board believes that the Merger offers Amerac stockholders
an opportunity to participate in an entity that, following the Merger, will
have greater financial flexibility and better opportunities for enhanced growth
and financial performance than Amerac would have if it were to continue on a
stand-alone basis, as more fully described in the attached Joint Proxy
Statement/Prospectus.
We are gratified by your continued support.
Sincerely yours,
/s/ JEFFREY B. ROBINSON
Jeffrey B. Robinson
President and Chief Executive Officer
2
<PAGE> 6
SOUTHERN MINERAL CORPORATION
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON JANUARY 28, 1998
NOTICE IS HEREBY GIVEN that a Special Meeting of stockholders of
Southern Mineral Corporation, a Nevada corporation ("SMC"), will be held on
January 28, 1998 at 10:00 a.m., local time, at the Hyatt Regency Houston, 1200
Louisiana Street, Houston,Texas and any adjournment or postponement thereof
(the "Special Meeting"), for the following purposes:
1. To consider and vote upon a proposal for the issuance (the "Share
Issuance") of shares of common stock, par value $0.01 per share, of
SMC ("SMC Common Stock"), pursuant to an Amended and Restated
Agreement and Plan of Merger, dated as of November 17, 1997 (the
"Merger Agreement"), by and among Amerac Energy Corporation, a
Delaware corporation ("Amerac"), SMC and SMC Acquisition Corp., a
Delaware corporation and a wholly owned subsidiary of SMC ("Sub").
Upon the terms and subject to the conditions of the Merger Agreement,
Sub will merge (the "Merger") with and into Amerac, and Amerac will
become a wholly owned subsidiary of SMC. In the Merger, and as more
fully described in the accompanying Joint Proxy Statement/Prospectus
and in the Merger Agreement included as Appendix A thereto, the shares
of common stock, par value $0.05 per share, of Amerac issued and
outstanding immediately prior to the effective time of the Merger will
be converted into the right to receive between 2,727,272 shares and
3,333,333 shares of SMC Common Stock based on the average closing sale
price of SMC Common Stock as quoted on The Nasdaq National Market for
the 20 consecutive trading days ending three trading days prior to the
consummation of the Merger. Cash will be paid in lieu of fractional
shares.
2. To consider and vote upon the approval and adoption of amended and
restated articles of incorporation of SMC which (i) increase the
number of authorized shares of SMC Common Stock from 20 million to 50
million and (ii) authorize the issuance of up to five million shares
of "blank check" preferred stock (the "SMC Restated Articles").
3. To consider and vote upon a proposal to approve and adopt the Southern
Mineral Corporation 1997 Stock Option Plan (the "Plan").
4. To transact such other business as may properly come before the
Special Meeting.
The close of business on December 26, 1997 has been fixed as the
record date for the determination of the stockholders entitled to notice of
and to vote at the Special Meeting.
<PAGE> 7
Approval and adoption of the SMC Restated Articles requires the
affirmative vote of a majority of the outstanding shares of SMC Common Stock.
Approval of the Share Issuance and approval and adoption of the Plan each
requires the affirmative vote of a majority of the outstanding shares of SMC
Common Stock present, in person or by proxy, at the Special Meeting. Holders of
shares of SMC Common Stock do not have rights of dissenting owners in
connection with the Share Issuance.
Stockholders are invited to attend the Special Meeting. Whether or not
you expect to attend, WE URGE YOU TO COMPLETE, SIGN, DATE AND PROMPTLY RETURN
THE ENCLOSED PROXY CARD IN THE ENCLOSED POSTAGE-PAID ENVELOPE. If you attend
the Special Meeting, you may vote your shares in person, which will revoke any
previously executed proxy.
If your shares are held of record by a broker, bank or other nominee
and you wish to attend the Special Meeting, you must obtain a letter from the
broker, bank or other nominee confirming your beneficial ownership of such
shares and bring it to the Special Meeting. In order to vote your shares at the
Special Meeting you must obtain from the record holder a proxy issued in your
name.
If you have any questions regarding your share ownership, please call
American Stock Transfer & Trust Company, the transfer agent of SMC, at (718)
921-8293. If you have any questions regarding voting your shares, please call
D.F. King & Co., Inc., whom SMC has retained to assist in the solicitation of
proxies, at (800) 207-3158.
Regardless of how many shares you own, your vote is very important.
By order of the Board of Directors
/S/ MARGIE C. EWALD
Margie C. Ewald
Corporate Secretary
December 22, 1997
500 Dallas Street, Suite 2800
Houston, Texas 77002
2
<PAGE> 8
AMERAC ENERGY CORPORATION
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON JANUARY 28, 1998
NOTICE IS HEREBY GIVEN that a Special Meeting of stockholders of
Amerac Energy Corporation, a Delaware corporation ("Amerac"), will be held on
January 28, 1998 at 10:00 a.m., local time, at the Hyatt Regency Houston, 1200
Louisiana Street, Houston, Texas and any adjournment or postponement thereof
(the "Special Meeting"), for the following purposes:
1. To consider and vote upon a proposal to approve and adopt an Amended
and Restated Agreement and Plan of Merger, dated as of November 17,
1997 (the "Merger Agreement"), by and among Amerac, Southern Mineral
Corporation, a Nevada corporation ("SMC"), and SMC Acquisition Corp.,
a Delaware corporation and a wholly owned subsidiary of SMC ("Sub").
Upon the terms and subject to the conditions of the Merger Agreement,
Sub will merge (the "Merger") with and into Amerac, and Amerac will
become a wholly owned subsidiary of SMC. In the Merger, and as more
fully described in the accompanying Joint Proxy Statement/Prospectus
and in the Merger Agreement included as Appendix A thereto, the shares
of common stock, par value $0.05 per share, of Amerac ("Amerac Common
Stock") issued and outstanding immediately prior to the effective time
of the Merger will be converted into the right to receive between
2,727,272 shares and 3,333,333 shares of common stock, par value $0.01
per share, of SMC ("SMC Common Stock") based on an exchange ratio
calculated on the basis of the average closing sale price of SMC
Common Stock as quoted on The Nasdaq National Market for the 20
consecutive trading days ending three trading days prior to the
consummation of the Merger. Cash will be paid in lieu of fractional
shares. In addition, each outstanding option and warrant to purchase
Amerac Common Stock will be adjusted to represent the right to purchase
that number of shares of SMC Common Stock equal to the number of shares
of Amerac Common Stock issuable immediately prior to the effective time
of the Merger upon exercise of such option or warrant, as the case may
be, multiplied by such exchange ratio, with an exercise price equal to
the exercise price which existed under the corresponding option or
warrant divided by such exchange ratio.
2. To transact such other business as may properly come before the
Special Meeting.
The close of business on December 26, 1997 has been fixed as the
record date for the determination of the stockholders entitled to notice of and
to vote at the Special Meeting. The list of stockholders of Amerac may be
examined at the principal executive offices of Amerac located at 1201
Louisiana, Suite 3350, Houston, Texas 77002.
Approval and adoption of the Merger Agreement requires the affirmative
vote of a majority of the outstanding shares of Amerac Common Stock. Holders of
Amerac Common Stock do not have rights of appraisal in connection with the
Merger.
<PAGE> 9
Stockholders are invited to attend the Special Meeting. Whether or not
you expect to attend, WE URGE YOU TO COMPLETE, SIGN, DATE AND PROMPTLY RETURN
THE ENCLOSED PROXY CARD IN THE ENCLOSED POSTAGE-PAID ENVELOPE. If you attend
the Special Meeting, you may vote your shares in person, which will revoke any
previously executed proxy.
If your shares are held of record by a broker, bank or other nominee
and you wish to attend the Special Meeting, you must obtain a letter from the
broker, bank or other nominee confirming your beneficial ownership of the
shares and bring it to the Special Meeting. In order to vote your shares at the
Special Meeting you must obtain from the record holder a proxy issued in your
name.
If you have any questions regarding your share ownership, please call
Continental Stock Transfer & Trust Company, the transfer agent of Amerac, at
(212) 509-4000. If you have any questions regarding voting your shares,
please call D.F. King & Co., Inc., whom Amerac has retained to assist in the
solicitation of proxies, at (800) 207-3158.
Regardless of how many shares you own, your vote is very important.
By order of the Board of Directors
/S/ JEFFREY L. STEVENS
Jeffrey L. Stevens
Corporate Secretary
December 22, 1997
1201 Louisiana, Suite 3350
Houston, Texas 77002
2
<PAGE> 10
JOINT PROXY STATEMENT/PROSPECTUS
PROXY STATEMENT AND PROSPECTUS PROXY STATEMENT
SOUTHERN MINERAL CORPORATION AMERAC ENERGY CORPORATION
500 Dallas Street, Suite 2800 1201 Louisiana Street, Suite 3350
Houston, Texas 77002 Houston, Texas 77002
This Joint Proxy Statement/Prospectus ("Joint Proxy
Statement/Prospectus") relates to a proposed merger pursuant to an Amended and
Restated Agreement and Plan of Merger, dated as of November 17, 1997 (the
"Merger Agreement"), by and among Southern Mineral Corporation, a Nevada
corporation ("SMC"), SMC Acquisition Corp., a Delaware corporation and a wholly
owned subsidiary of SMC ("Sub"), and Amerac Energy Corporation, a Delaware
corporation ("Amerac"). A copy of the Merger Agreement is included as Appendix A
to this Joint Proxy Statement/Prospectus.
Upon the terms and subject to the conditions of the Merger Agreement,
Sub will be merged with and into Amerac (the "Merger") and Amerac will become a
wholly owned subsidiary of SMC upon the filing of a certificate of merger (the
"Certificate of Merger") with the Secretary of State of the State of Delaware
or at such later time as may be agreed by SMC and Amerac and specified in the
Certificate of Merger (the "Effective Time"). In the Merger, and as more fully
described in this Joint Proxy Statement/Prospectus and in the Merger Agreement,
each share of common stock, par value $0.05 per share, of Amerac ("Amerac
Common Stock") issued and outstanding immediately prior to the Merger (except
as otherwise provided in the Merger Agreement) will be converted (the "Share
Issuance") into the right to receive (i) that number of shares of common stock,
par value $0.01 per share, of SMC ("SMC Common Stock") calculated by dividing
the Aggregate Consideration (as defined herein) by the total number of shares
of Amerac Common Stock issued and outstanding immediately prior to the
Effective Time (the "Exchange Ratio") and (ii) cash in lieu of any fractional
shares. "Aggregate Consideration" means that number of shares (rounded to the
nearest whole share) of SMC Common Stock determined by dividing (i) $22,500,000
by (ii) the average closing sale price of a share of SMC Common Stock as quoted
on The Nasdaq National Market for the 20 consecutive trading days immediately
preceding the third trading day prior to the Closing Date, as reported (absent
manifest error in the printing thereof) by The Wall Street Journal (the
"Average Closing Sale Price"); provided, however, that if the Aggregate
Consideration as calculated pursuant to the foregoing would be (a) fewer than
2,727,272 shares of SMC Common Stock, then the Aggregate Consideration shall be
deemed to be 2,727,272 shares of SMC Common Stock (the "Minimum Consideration")
or (b) greater than 3,333,333 shares of SMC Common Stock, then the Aggregate
Consideration shall be deemed to be 3,333,333 shares of SMC Common Stock (the
"Maximum Consideration"). In addition, each outstanding option and warrant to
purchase Amerac Common Stock will be adjusted to represent the right to
purchase that number of shares of SMC Common Stock equal to the number of
shares of Amerac Common Stock issuable immediately prior to the Effective Time
upon exercise of such option or warrant, as the case may be, multiplied by the
Exchange Ratio, with an exercise price equal to the exercise price which
existed under the corresponding option or warrant divided by the Exchange
Ratio.
As of December 19, 1997, (i) 3,894,288 shares of Amerac Common Stock
were issued and outstanding, (ii) 201,385 shares of Amerac Common Stock were
issuable upon the exercise of outstanding options and (iii) 154,175 shares of
Amerac Common Stock were issuable upon the exercise of outstanding warrants.
Assuming that the Average Closing Sale Price of SMC Common Stock were $5.75
(which was the last reported sale price of SMC Common Stock on The Nasdaq
National Market on December 19, 1997), and that no additional shares of Amerac
Common Stock or options or warrants to acquire shares of Amerac Common Stock had
been issued since December 19, 1997, and that no options or warrants to acquire
shares of Amerac Common Stock had been exercised since such date, the Exchange
Ratio would be .8560, and approximately (i) 3,333,333 shares of SMC Common
Stock would be issued in connection with the Merger at the Effective Time, (ii)
172,386 shares of SMC Common Stock would be issuable upon exercise of
outstanding Amerac options and (iii) 131,974 shares of SMC Common Stock would
be issuable upon exercise of outstanding Amerac warrants.
The consummation of the Merger is subject, among other things, to: (i)
the approval of the Share Issuance by the affirmative vote of a majority of the
outstanding shares of SMC Common Stock present, in person or by proxy, at the
Special Meeting of SMC stockholders and (ii) the approval and adoption of the
Merger Agreement by the affirmative vote of a majority of the outstanding
shares of Amerac Common Stock.
This Joint Proxy Statement/Prospectus constitutes the Prospectus of SMC
filed as part of a Registration Statement on Form S-4 (Registration No.
333-42045) (the "Registration Statement") with the Securities and Exchange
Commission (the "Commission") under the Securities Act of 1933, as amended (the
"Securities Act"), relating to the registration of the SMC Common Stock to be
issued upon consummation of the Merger. This Joint Proxy Statement/Prospectus
also serves as the proxy statement of (i) SMC relating to the solicitation of
proxies by its Board of Directors (the "SMC Board") for use at a special meeting
of SMC stockholders (including any adjournments or postponements thereof) to be
held at 10:00 a.m., local time, on January 28, 1998 at the Hyatt Regency
Houston, 1200 Louisiana Street, Houston, Texas (the "SMC Special Meeting") and
(ii) Amerac relating to the solicitation of proxies by its Board of Directors
(the "Amerac Board") for use at a special meeting of Amerac stockholders
(including any adjournments or postponements thereof) to be held at 10:00 a.m.,
local time, on January 28, 1998 at the Hyatt Regency Houston, 1200 Louisiana
Street, Houston, Texas (the "Amerac Special Meeting"). At the SMC Special
Meeting, SMC stockholders will be asked to consider and vote upon proposals (i)
to approve the Share Issuance, (ii) to approve and adopt amended and restated
articles of incorporation of SMC which will (a) increase the number of
authorized shares of SMC Common Stock from 20 million to 50 million and (b)
authorize the issuance of up to five million shares of "blank check" preferred
stock (the "SMC Restated Articles"), a copy of which SMC Restated Articles is
included as Appendix B to this Joint Proxy Statement/Prospectus, and (iii) to
approve and adopt the Southern Mineral Corporation 1997 Stock Option Plan (the
"Plan"), a copy of which Plan is included as Appendix C to this Joint Proxy
Statement/Prospectus. Approval and adoption of the SMC Restated Articles and the
Plan are not conditions to the Merger. At the Amerac Special Meeting, Amerac
stockholders will be asked to consider and vote upon a proposal to approve and
adopt the Merger Agreement.
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN
FACTORS TO BE CONSIDERED REGARDING AN INVESTMENT IN SMC.
SMC Common Stock is quoted on The Nasdaq National Market under the
symbol "SMIN." On December 19, 1997, the last reported sale price of SMC
Common Stock on The Nasdaq National Market was $5.75 per share. Amerac Common
Stock is listed on the American Stock Exchange ("AMEX") under the symbol "AMC."
The last reported sale price of Amerac Common Stock on the AMEX on December 19,
1997 was $4.25 per share.
This Joint Proxy Statement/Prospectus and the accompanying proxies are
expected to be first mailed or delivered to SMC stockholders and Amerac
stockholders on or about December 29, 1997.
THE SMC COMMON STOCK TO BE ISSUED IN CONNECTION WITH THE MERGER HAS NOT BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS JOINT
PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The date of this Joint Proxy Statement/Prospectus is December 22, 1997.
<PAGE> 11
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
AVAILABLE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE . . . . . . . . . . . . . . . . . . . . . . . . . 2
SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
The Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
The Special Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
The Merger and Certain Provisions of the Merger Agreement . . . . . . . . . . . . . . . . . . 6
Market Price Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
FORWARD-LOOKING STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Integration of Amerac. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Volatility of Oil and Gas Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Shortages of Rigs, Equipment, Supplies and Personnel . . . . . . . . . . . . . . . . . . . . . 11
Limited History of Operating Profits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Uncertainty of Estimates of Reserves and Future Net Cash Flows . . . . . . . . . . . . . . . . 11
Finding and Acquiring Additional Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Acquisition Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Operating Hazards and Uninsured Risks; Production Curtailments . . . . . . . . . . . . . . . . 13
Dependence on Key Personnel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Need for Additional Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Exploratory Drilling Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Market Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Exchange Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Governmental and Environmental Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Concentration of Ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Shares Eligible for Future Sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Nevada Takeover Statute . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
THE SPECIAL MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Time, Date and Place of the Special Meetings . . . . . . . . . . . . . . . . . . . . . . . . . 17
Matters to be Considered at the Special Meetings . . . . . . . . . . . . . . . . . . . . . . . 17
Voting at Meetings; Record Dates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Vote Required . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
SMC Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Amerac Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Solicitation of Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Stockholder Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
THE PROPOSED MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Background of the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Amerac's Reasons for the Merger;
Recommendation of the Amerac Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Fairness Opinion of McDonald . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
SMC's Reasons for the Merger;
Recommendations of the SMC Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Interests of Certain Persons in the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . 34
TERMS OF THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
The Merger; Effective Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Conversion of Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Treatment of Amerac Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Treatment of Amerac Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
No Fractional Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Exchange of Stock Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Directors and Officers of Amerac . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Certificate of Incorporation and Bylaws of Amerac . . . . . . . . . . . . . . . . . . . . . . 38
Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Conduct of Business Pending the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Employees and Employee Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Severance Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
New Director of SMC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Other Acquisition Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Indemnification and Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Special Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Conditions to the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Termination Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Amendment and Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Regulatory Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Accounting Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Certain Federal Income Tax Consequences of the Merger . . . . . . . . . . . . . . . . . . . . 46
Restrictions on Sales of Shares by Affiliates . . . . . . . . . . . . . . . . . . . . . . . . 48
MANAGEMENT AND OPERATIONS AFTER
THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Board of Directors of SMC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Committees of the Board of Directors of SMC . . . . . . . . . . . . . . . . . . . . . . . . . 48
Officers of SMC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF SMC . . . . . . . . . . . . . . . . . . . . . . . . . . 49
SELECTED HISTORICAL AND UNAUDITED PRO FORMA COMBINED FINANCIAL DATA . . . . . . . . . . . . . . . 49
PRICE RANGE OF SMC COMMON STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
DIVIDEND POLICY OF SMC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
DESCRIPTION OF SMC CAPITAL STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
COMPARISON OF STOCKHOLDER RIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Size and Classification of the Board of Directors. . . . . . . . . . . . . . . . . . . . . . . 55
Removal of Directors; Filling Vacancies on the Board of Directors. . . . . . . . . . . . . . . 56
Stockholder Action by Written Consent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Meetings of Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Required Vote for Authorization of Certain Actions . . . . . . . . . . . . . . . . . . . . . . 57
Amendment of Articles/Certificate of Incorporation and Bylaws . . . . . . . . . . . . . . . . 58
Appraisal and Dissenters' Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
State Anti-Takeover Statutes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Limitation on Directors' Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Indemnification of Officers and Directors . . . . . . . . . . . . . . . . . . . . . . . . . . 61
No Cumulative Voting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Conflict-of-Interest Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Dividends and Other Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Duties of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
RELATIONSHIPS BETWEEN SMC AND AMERAC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
RELATIONSHIPS WITH INDEPENDENT ACCOUNTANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
LEGAL OPINIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
APPENDICES
Appendix A - Amended and Restated Agreement and Plan of Merger . . . . . . . . . . . . . . . . A-1
Appendix B - Proposed Restated Articles of Incorporation of SMC. . . . . . . . . . . . . . . . B-1
Appendix C - Southern Mineral Corporation 1997 Stock Option Plan . . . . . . . . . . . . . . . C-1
Appendix D - SMC's Annual Report on Form 10-KSB/A for the fiscal year ended
December 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D-1
Appendix E - SMC's Quarterly Report on Form 10-QSB for the quarterly period ended
September 30, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E-1
Appendix F - Amerac's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
Appendix G - Amerac's Quarterly Report on Form 10-QSB/A for the quarterly period ended
September 30, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . G-1
Appendix H - Fairness Opinion of McDonald . . . . . . . . . . . . . . . . . . . . . . . . . . H-1
</TABLE>
<PAGE> 12
AVAILABLE INFORMATION
SMC and Amerac are currently subject to the informational requirements
of the Securities Exchange Act of 1934, as amended, and the rules and
regulations promulgated thereunder (the "Exchange Act") and, in accordance
therewith, file reports, proxy statements and other information with the
Commission. All such information may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C. 20549-1004, and at the
following Regional Offices of the Commission: Chicago Regional Office, Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511; and
New York Regional Office, 7 World Trade Center, 13th Floor, New York, New York
10048. Copies of such materials may also be obtained at prescribed rates from
the Public Reference Section of the Commission at its principal office at 450
Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549-1004. The
Commission maintains a site on the World Wide Web that contains certain
documents filed with the Commission electronically. The address of such site is
http://www.sec.gov and the Registration Statement may be inspected at such
site. In addition, the SMC Common Stock is listed for quotation on The Nasdaq
National Market and such reports and other information concerning SMC may also
be inspected at the offices of The Nasdaq Stock Market, Inc., Nasdaq Regulatory
Filings, 1735 K Street, N.W., Washington, D.C. 20006. Amerac Common Stock is
listed on the AMEX and certain of Amerac's reports, proxy statements and other
information can be inspected at the offices of the AMEX, 86 Trinity Place, New
York, New York 10006.
SMC has filed with the Commission the Registration Statement with
respect to the SMC Common Stock offered by this Joint Proxy
Statement/Prospectus. This Joint Proxy Statement/Prospectus, which is a part of
the Registration Statement, does not contain all the information set forth in
the Registration Statement, certain parts of which have been omitted in
accordance with the rules and regulations of the Commission. Such additional
information may be obtained from the Commission's principal office in
Washington, D.C. Statements made in this Joint Proxy Statement/Prospectus as to
the contents of any contract, agreement or other document referred to are not
necessarily complete (but are accurate statements of those matters considered
by SMC and Amerac to be material to SMC stockholders and Amerac stockholders in
connection with this Joint Proxy Statement/Prospectus) and, with respect to each
such contract, agreement or other document filed as an exhibit to the
Registration Statement, reference is made to the exhibit for a more complete
description of the matter involved, and each such statement is qualified in its
entirety by such reference. The Registration Statement may be inspected,
without charge, at the Commission's principal office in Washington, D.C., and
copies may be obtained from the Commission at prescribed rates or may be
examined without charge at the public reference facilities of the Commission.
1
<PAGE> 13
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
SMC incorporates herein by reference the following documents filed by
it with the Commission (File No. 0-8043) pursuant to the Exchange Act: Annual
Report on Form 10-KSB/A for the fiscal year ended December 31, 1996; Quarterly
Reports on Form 10-QSB for the quarters ended March 31, 1997, June 30, 1997 and
September 30, 1997; and Current Reports on (i) Form 8-K dated April 10, 1997,
April 14, 1997, May 20, 1997, November 18, 1997 and November 23, 1997 and (ii)
Form 8-K/A dated February 10, 1997, February 13, 1997, April 13, 1997, July 13,
1997 and November 25, 1997.
Copies of SMC's Annual Report on Form 10-KSB/A for the fiscal year
ended December 31, 1996 (the "SMC Annual Report") and Quarterly Report on Form
10-QSB for the quarterly period ended September 30, 1997 (the "SMC Quarterly
Report") are attached to this Joint Proxy Statement/Prospectus as Appendix D
and Appendix E, respectively. The following information contained in the SMC
Annual Report is specifically incorporated herein by reference: (i)
Management's Discussion and Analysis of Financial Condition and Results of
Operations set forth on pages D-16 through D-18 of the SMC Annual Report and
(ii) the audited consolidated financial statements of SMC and its subsidiaries
and the related notes thereto set forth on pages D-22 through D-36 of the SMC
Annual Report and the independent auditor's reports thereon set forth on pages
D-20 and D-21 of the SMC Annual Report.
Amerac incorporates herein by reference the following documents filed
by it with the Commission (File No. 1-9933) pursuant to the Exchange Act:
Annual Report on Form 10-KSB for the fiscal year ended December 31, 1996;
Quarterly Reports on Form 10-QSB for the quarters ended March 31, 1997 and June
30, 1997 and Quarterly Report on Form 10-QSB/A for the quarter ended September
30, 1997; and Current Reports on Form 8-K dated February 28, 1997, September
22, 1997 and November 17, 1997.
Copies of Amerac's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1996 (the "Amerac Annual Report") and Quarterly Report on
Form 10-QSB/A for the quarterly period ended September 30, 1997 are attached to
this Joint Proxy Statement/Prospectus as Appendix F and Appendix G,
respectively. The following information contained in the Amerac Annual Report
is specifically incorporated herein by reference: (i) Management's Discussion
and Analysis or Plan of Operations set forth on pages F-8 through F-11 of the
Amerac Annual Report and (ii) the audited consolidated financial statements of
Amerac and its subsidiaries and the related notes thereto set forth on pages
F-17 through F-35 of the Amerac Annual Report and the independent auditor's
report thereon set forth on page F-16 of the Amerac Annual Report.
2
<PAGE> 14
THIS JOINT PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY
REFERENCE WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. SMC AND AMERAC
HEREBY UNDERTAKE TO PROVIDE WITHOUT CHARGE TO EACH PERSON, INCLUDING ANY
BENEFICIAL OWNER OF SMC COMMON STOCK OR AMERAC COMMON STOCK TO WHOM A COPY OF
THIS JOINT PROXY STATEMENT/PROSPECTUS HAS BEEN DELIVERED, ON THE WRITTEN OR
ORAL REQUEST OF ANY SUCH PERSON, A COPY OF ANY AND ALL OF THE DOCUMENTS
REFERRED TO ABOVE WHICH HAVE BEEN INCORPORATED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS BY REFERENCE, OTHER THAN EXHIBITS TO SUCH DOCUMENTS (UNLESS
SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE INTO SUCH DOCUMENTS).
SUCH REQUESTS FOR SMC DOCUMENTS SHOULD BE DIRECTED TO DIRECTOR OF INVESTOR
RELATIONS, SOUTHERN MINERAL CORPORATION, 500 DALLAS, SUITE 2800, HOUSTON, TEXAS
77002, TELEPHONE NUMBER (713) 658-9444. SUCH REQUESTS FOR AMERAC DOCUMENTS
SHOULD BE DIRECTED TO AMERAC ENERGY CORPORATION, 1201 LOUISIANA, SUITE 3350,
HOUSTON, TEXAS 77002, TELEPHONE NUMBER (713) 308-5250. IN ORDER TO ENSURE
DELIVERY OF THE DOCUMENTS PRIOR TO THE APPLICABLE SPECIAL MEETING, REQUESTS
SHOULD BE RECEIVED ON OR BEFORE JANUARY 21, 1998.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS, AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED. THIS JOINT PROXY STATEMENT/PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO PURCHASE, ANY OF
THE SECURITIES OFFERED BY THIS JOINT PROXY STATEMENT/PROSPECTUS, OR THE
SOLICITATION OF A PROXY, IN ANY JURISDICTION IN WHICH, OR TO ANY PERSON TO
WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION OF AN OFFER OR PROXY
SOLICITATION. NEITHER THE DELIVERY OF THIS JOINT PROXY STATEMENT/PROSPECTUS NOR
ANY DISTRIBUTION OF THE SECURITIES OFFERED HEREBY SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF SMC OR AMERAC SINCE THE DATE HEREOF.
3
<PAGE> 15
SUMMARY
The following is a summary of certain information contained elsewhere
in this Joint Proxy Statement/Prospectus and does not purport to be complete.
Reference is made to, and this Summary is qualified in its entirety by, the
more detailed information contained elsewhere or incorporated by reference in
this Joint Proxy Statement/Prospectus. Unless otherwise defined herein,
capitalized terms used in this Summary have the respective meanings ascribed to
them elsewhere in this Joint Proxy Statement/Prospectus. Stockholders of each
of SMC and Amerac are urged to read this Joint Proxy Statement/Prospectus and
the Merger Agreement in their entirety. A copy of the Merger Agreement is
included as Appendix A to this Joint Proxy Statement/Prospectus.
THE PARTIES
SMC and Sub. SMC is an independent oil and gas company engaged in the
acquisition, exploitation, exploration and development of oil and gas
properties in the United States, Canada and Ecuador, with a primary focus on
the United States Gulf Coast Basin, both onshore and offshore. SMC was
incorporated in Nevada in 1982. SMC Common Stock is quoted on The Nasdaq
National Market under the symbol "SMIN." SMC's principal executive offices are
located at 500 Dallas, Suite 2800, Houston, Texas 77002, where its telephone
number is (713) 658-9444.
Sub is a wholly owned subsidiary of SMC incorporated in Delaware in
1997 for the sole purpose of effectuating the Merger in accordance with the
terms of the Merger Agreement. Sub's principal executive offices are located at
500 Dallas, Suite 2800, Houston, Texas 77002, where its telephone number is
(713) 658-9444.
Amerac. Amerac is engaged in the acquisition, production and
development of oil and gas properties primarily in Texas and Oklahoma. In
addition, Amerac owns an interest in the South Timbalier 198 field, an offshore
Gulf of Mexico property, which accounted for approximately 55% of Amerac's 1996
lease cash flow (revenues less operating expenses). Amerac was incorporated in
Delaware in 1987. Amerac Common Stock is listed on the AMEX under the symbol
"AMC." Amerac's principal executive offices are located at 1201 Louisiana, Suite
3350, Houston, Texas 77002, where its telephone number is (713) 308-5250.
THE SPECIAL MEETINGS
Time, Date, Place and Purposes. The SMC Special Meeting will be held on
January, 28, 1998, at the Hyatt Regency Houston, 1200 Louisiana Street, Houston,
Texas, commencing at 10:00 a.m., local time, for the purpose of considering and
voting upon proposals, as required by the Nevada General Corporation Law (the
"NGCL") and in accordance with the Marketplace Rules of the National Association
of Securities Dealers, Inc., (i) to approve the Share Issuance, (ii) to approve
and adopt the SMC Restated Articles and (iii) to approve and adopt the Plan
(collectively, the "SMC Proposals"). See "The Special Meetings."
4
<PAGE> 16
The Amerac Special Meeting will be held on January 28, 1998, at the
Hyatt Regency Houston, 1200 Louisiana Street, Houston, Texas, commencing at
10:00 a.m., local time, for the purpose of considering and voting upon a
proposal, as required by the Delaware General Corporation Law (the "DGCL"), to
approve and adopt the Merger Agreement (the "Amerac Proposal"). See "The Special
Meetings."
Record Date. Only those stockholders of SMC and Amerac of record at the
close of business on December 26, 1997 (the "Record Date") are entitled to
notice of, and to vote at, the SMC Special Meeting and the Amerac Special
Meeting, respectively. See "The Special Meetings -- Voting at the Meeting;
Record Date."
Votes Required for SMC Proposals. The affirmative vote of a majority
of the outstanding shares of SMC Common Stock is required to approve and adopt
the SMC Restated Articles. The affirmative vote of a majority of the
outstanding shares of SMC Common Stock present in person or by proxy at the SMC
Special Meeting is required to approve the Share Issuance and to approve and
adopt the Plan. Abstentions and broker non-votes will have the effect of a vote
against the SMC Restated Articles, as will the failure of holders of SMC Common
Stock to sign and return their proxies. Abstentions and broker non-votes will
be counted in determining whether a quorum is present at the SMC Special
Meeting; abstentions will have the effect of a vote against the Share Issuance
or against the Plan, but broker non-votes will not have any effect.
On December 19, 1997, there were a total of 9,128,741 shares of SMC
Common Stock outstanding and entitled to vote at the SMC Special Meeting.
Directors and executive officers of SMC and their affiliates held on December
19, 1997 approximately 26% of the shares of SMC Common Stock entitled to vote at
the SMC Special Meeting. All such directors and officers have advised SMC that
they intend to vote for approval and/or adoption of the SMC Proposals. See "The
Special Meetings -- Voting at the Meeting; Record Date" and "-- Vote Required."
Vote Required for Amerac Proposal. The affirmative vote of a majority
of the outstanding shares of Amerac Common Stock will be required to approve and
adopt the Merger Agreement. Abstentions and broker non-votes will be counted in
determining whether a quorum is present at the Amerac Special Meeting and will
have the effect of a vote against the Amerac Proposal, as will the failure of
holders of Amerac Common Stock to sign and return their proxies.
On December 19, 1997, there were a total of 3,894,288 shares of Amerac
Common Stock outstanding and entitled to vote at the Amerac Special Meeting.
Directors and executive officers of Amerac and their affiliates held on December
19, 1997 approximately 6.4% of the shares of Amerac Common Stock entitled to
vote at the Amerac Special Meeting. All such directors and officers have advised
Amerac that they intend to vote for the approval and adoption of the Amerac
Proposal. In connection with the Merger, holders of Amerac Common Stock will not
be entitled to appraisal rights under Section 262 of the DGCL. See "The Special
Meetings -- Voting at the Meeting; Record Date," "-- Vote Required" and
"Comparison of Stockholder Rights -- Appraisal and Dissenters' Rights."
5
<PAGE> 17
THE MERGER AND CERTAIN PROVISIONS OF THE MERGER AGREEMENT
General. If the requisite SMC and Amerac stockholder approvals are
obtained and all other terms and conditions to the Merger are satisfied (or
waived, if permissible), then at the Effective Time, Sub will be merged with
and into Amerac, and Amerac will be the surviving corporation (the "Surviving
Corporation"), whereupon Amerac will become a wholly owned subsidiary of SMC.
In the Merger, each share of Amerac Common Stock outstanding immediately prior
to the Effective Time will be converted into the right to receive shares of SMC
Common Stock in accordance with the Exchange Ratio, and cash in lieu of any
fractional shares. See " -- Procedures for Exchange of Certificates."
Recommendation of the Boards of Directors. The SMC Board has approved
the Merger, the Share Issuance, the SMC Restated Articles and the Plan and the
consummation of the transactions contemplated thereby, and recommends that SMC
stockholders vote FOR approval of the Share Issuance and approval and adoption
of each of the SMC Restated Articles and the Plan. Approval and adoption of the
SMC Restated Articles and the Plan are not conditions to the Merger. See "The
Proposed Merger -- SMC's Reasons for the Merger; Recommendations of the SMC
Board."
The Amerac Board has unanimously approved the Merger and the
consummation of the transactions contemplated thereby and unanimously recommends
that Amerac stockholders vote FOR the approval and adoption of the Merger
Agreement. See "The Proposed Merger -- Amerac's Reasons for the Merger;
Recommendation of the Amerac Board."
Effective Time. The Effective Time will occur (upon the filing of the
Certificate of Merger with the Secretary of State of the State of Delaware) as
soon as practicable after the requisite approvals of the stockholders of SMC
and Amerac have been obtained, and all other conditions to the Merger have been
satisfied or waived, but in no event later than the second business day
thereafter, unless the parties agree otherwise.
Fairness Opinion. McDonald & Company Securities, Inc. ("McDonald") has
rendered its written opinion to the Amerac Board dated November 18, 1997 that,
as of that date, the Exchange Ratio was fair, from a financial point of view,
to the Amerac stockholders. A copy of such opinion is included as Appendix H to
this Joint Proxy Statement/Prospectus and should be read carefully by Amerac
stockholders in its entirety with respect to the assumptions made, other
matters considered and the limitations on the review undertaken in arriving at
such opinion. See "The Proposed Merger -- Fairness Opinion of McDonald."
Certain United States Federal Income Tax Consequences. The Merger is
intended to qualify, for federal income tax purposes, as a tax-free
"reorganization" so that generally no gain or loss would be recognized by Amerac
stockholders who exchange their shares of Amerac Common Stock for shares of SMC
Common Stock. Holders of shares of Amerac Common Stock who receive cash in lieu
of fractional shares generally will recognize gain or loss measured by the
difference between such stockholder's basis in the fractional share and the
amount of cash received. SMC has received the opinion of Akin, Gump, Strauss,
Hauer & Feld, L.L.P., its counsel (the "Tax Opinion"), that the Merger should
constitute a reorganization within the meaning of Section 368(a) of the Internal
Revenue Code of 1986, as amended (the "Code"), and that, generally, Amerac
stockholders should not recognize gain or loss on the
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exchange of their shares of Amerac Common Stock for shares of SMC Common Stock
pursuant to the Merger, other than cash received in lieu of fractional shares.
There is no assurance that the assumptions upon which the Tax Opinion is in
part based will be correct, and in the event that such assumptions are
incorrect, (i) the Tax Opinion would be rendered inapplicable and (ii) the
Merger may or may not be treated as a tax-free "reorganization" depending on
all the facts and circumstances. Although the matter is not free from doubt,
the Merger should not result in the recognition of gain or loss to holders of
warrants to purchase shares of Amerac Common Stock ("Amerac Warrants").
However, the Internal Revenue Service or a court of law could disagree with
such characterization and instead treat the Amerac Warrants as having been
exchanged in a taxable transaction. Any such gain or loss recognized by a
holder of Amerac Warrants would be equal to the difference between the fair
market value of the Amerac Warrants after the Merger and the adjusted tax basis
of such Amerac Warrants in the hands of such holder.
Each holder of Amerac Common Stock and each holder of Amerac Warrants
should consult his or her tax advisor with respect to the tax consequences of
the Merger and the effect of federal, state, local and foreign income and other
tax laws. See "Terms of the Merger -- Certain Federal Income Tax Consequences of
the Merger."
Regulatory Approvals. SMC and Amerac are not aware of any material
governmental or regulatory approvals required to be obtained for consummation
of the Merger, other than compliance with federal securities laws and with
state securities "Blue Sky" laws.
Accounting Treatment. SMC intends to account for the Merger under the
purchase method of accounting in accordance with Accounting Principles Board
Opinion No. 16 and, without limitation, the FASB, Accounting Standards, FASB
EITF Abstracts, FASB Bulletins and SEC Accounting Bulletins and Accounting
Series Releases relating thereto. See "Terms of the Merger -- Accounting
Treatment."
The Nasdaq National Market Listing. The shares of SMC Common Stock to
be issued in connection with the Merger will be listed for quotation on The
Nasdaq National Market. See "Terms of the Merger -- Conditions to the Merger."
Interests of Certain Persons in the Merger. In considering the
recommendation of the Amerac Board with respect to the Merger Agreement, Amerac
stockholders should be aware that certain members of the management of Amerac
and the Amerac Board have certain interests in the Merger that are in addition
to the interests of stockholders of Amerac generally including, without
limitation, rights to receive certain bonus compensation and to
indemnification. See "The Proposed Merger -- Interests of Certain Persons in
the Merger" and "-- Management."
Management. After the Merger, Jeffery B. Robinson, who is currently a
director and the President and Chief Executive Officer of Amerac, will become a
director of SMC. Other than the addition of Mr. Robinson to the SMC Board, the
officers and directors of SMC will not change as a result of the Merger.
Pursuant to the Merger Agreement, upon the consummation of the Merger, the
officers and directors of Sub immediately prior to the Effective Time will be
the initial officers and directors of the Surviving Corporation at and as of
the Effective Time. See "Terms of the Merger -- New Director of SMC" and
" -- Directors and Officers of Amerac."
Procedures for Exchange of Certificates. As soon as reasonably
practicable after the Effective Time, a letter of transmittal and instructions
for surrendering stock certificates will be mailed to each holder of shares of
Amerac Common Stock for use in exchanging such holder's stock certificates for
certificates evidencing shares of SMC Common Stock and cash in lieu of
fractional shares, and any dividends or other distributions declared or made by
SMC to SMC stockholders of record after the Effective Time to which such holder
is entitled as a result of the Merger. AMERAC STOCKHOLDERS SHOULD NOT SEND ANY
AMERAC COMMON STOCK CERTIFICATES WITH THE ENCLOSED PROXY CARD. INSTEAD, AMERAC
STOCKHOLDERS SHOULD SEND SUCH CERTIFICATES TO THE EXCHANGE AGENT IN ACCORDANCE
WITH THE INSTRUCTIONS CONTAINED IN THE EXCHANGE TRANSMITTAL
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<PAGE> 19
MATERIALS WHICH WILL BE MAILED TO AMERAC STOCKHOLDERS AS SOON AS REASONABLY
PRACTICABLE AFTER THE EFFECTIVE TIME. See "Terms of the Merger -- Exchange of
Stock Certificates."
Representations and Warranties. The Merger Agreement contains various
representations and warranties of SMC, Sub and Amerac. See "Terms of the Merger
- -- Representations and Warranties."
Conduct of Business Pending the Merger. The Merger Agreement restricts
the ability of SMC and Amerac to take certain actions and enter into certain
transactions pending the Merger. See "Terms of the Merger -- Conduct of
Business Pending the Merger" and "-- Other Acquisition Proposals."
Conditions to the Consummation of the Merger. The obligations of SMC,
Sub and Amerac to consummate the Merger are subject to the satisfaction or,
where legally permissible, waiver of various conditions, including, among
others: (i) the effectiveness of the Registration Statement and the absence of
any stop order suspending the effectiveness thereof; (ii) approval and adoption
of the Merger Agreement by the stockholders of Amerac; (iii) approval of the
Share Issuance by the stockholders of SMC; (iv) the absence of any order,
executive order, stay, decree, judgment, injunction, statute, rule or
regulation issued by any United States (federal, state or local) or foreign
government, or governmental, regulatory or administrative authority, agency or
commission or court of competent jurisdiction prohibiting consummation of the
Merger or making the Merger illegal; and (v) evidence from The Nasdaq National
Market that the shares of SMC Common Stock to be issued to the holders of
Amerac Common Stock in the Merger will be listed for quotation on The Nasdaq
National Market immediately following the Effective Time. See "Terms of the
Merger -- Conditions to the Merger."
Termination. The Merger Agreement may be terminated at any time prior
to the Effective Time by mutual consent of SMC and Amerac, or by either SMC or
Amerac if, subject to certain limitations: (i) there exists any permanent
injunction or other order or decree which is final and nonappealable preventing
the consummation of the Merger; (ii) the Effective Time has not occurred on or
before April 30, 1998; (iii) the stockholders of Amerac fail to approve and
adopt the Merger Agreement; (iv) the stockholders of SMC fail to approve the
Share Issuance; or (v) the other party has breached any representation,
warranty, covenant or agreement in the Merger Agreement such that the related
closing conditions would not be satisfied (unless the breach is curable by the
breaching party). In addition, (i) Amerac may terminate the Merger Agreement if
the Amerac Board shall determine to engage in an Amerac Competing Transaction
(as defined herein) and (ii) SMC may terminate the Merger Agreement if the
Amerac Board shall have materially modified or rescinded its recommendation of
the Merger or its approval of the Merger Agreement. See "Terms of the Merger --
Termination."
Termination Fee; Expenses. In connection with the termination of the
Merger Agreement upon the occurrence of certain events, Amerac would be
required to pay to SMC a fee of $1.0 million (which amount is inclusive of all
expenses incurred by SMC related to the Merger), and upon the occurrence of
certain other events, Amerac would be required to pay to SMC its expenses, up
to a maximum of $500,000. Likewise, in connection with the termination of the
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<PAGE> 20
Merger Agreement upon the occurrence of certain events, SMC would be required
to pay Amerac a fee of $1.0 million (which amount is inclusive of all expenses
incurred by Amerac related to the Merger). See "Terms of the Merger --
Expenses" and " -- Termination Fees."
Stockholders' Rights. Holders of SMC Common Stock and Amerac Common
Stock are not entitled to appraisal or dissenters' rights in connection with
the Merger. See "Comparison of Stockholder Rights -- Appraisal and Dissenters'
Rights."
Treatment of Amerac Options. Pursuant to the Merger Agreement, all
options to purchase shares of Amerac Common Stock ("Amerac Options")
outstanding under Amerac's stock option plan (the "Amerac Option Plan") will be
adjusted at the Effective Time to represent the right to purchase that number
of shares of SMC Common Stock equal to the number of shares of Amerac Common
Stock issuable immediately prior to the Effective Time upon exercise of the
Amerac Option (without regard to actual restrictions on exercisability)
multiplied by the Exchange Ratio, with an exercise price equal to the exercise
price which existed under the corresponding Amerac Option divided by the
Exchange Ratio, and with other terms and conditions of such Amerac Option
immediately before the Effective Time. See "Terms of the Merger -- Treatment of
Amerac Options."
Treatment of Amerac Warrants. Pursuant to the Merger Agreement, all
Amerac Warrants outstanding under Amerac's various warrant agreements will be
adjusted at the Effective Time to represent the right to purchase that number of
shares of SMC Common Stock equal to the number of shares of Amerac Common Stock
issuable immediately prior to the Effective Time upon exercise of the Amerac
Warrant (without regard to actual restrictions on exercisability) multiplied by
the Exchange Ratio, with an exercise price equal to the exercise price which
existed under the corresponding Amerac Warrant divided by the Exchange Ratio,
and with other terms and conditions of such Amerac Warrant, including, without
limitation, certain registration rights, immediately before the Effective Time.
See "Terms of the Merger -- Treatment of Amerac Warrants."
Treatment of Amerac Benefit Plans. SMC and Amerac have agreed that
Amerac will terminate all of Amerac's employee benefit plans prior to the
Effective Time. See "Terms of the Merger -- Employees and Employee Benefits."
MARKET PRICE DATA
The following table sets forth historical per share market prices for
SMC Common Stock and Amerac Common Stock and the equivalent pro forma market
price per share of Amerac Common Stock on November 14, 1997, the last trading
day prior to public announcement of the Merger. The historical per share market
prices shown represent the last sale price of SMC Common Stock as reported by
The Nasdaq National Market on November 14, 1997 and the last sale price of
Amerac Common Stock as reported by the AMEX on November 13, 1997 (no sale of
Amerac Common Stock was reported by the AMEX on November 14, 1997). The
equivalent pro forma market price per share of Amerac Common Stock shown
represents the historical market price per share of SMC Common Stock multiplied
by .8560, a pro forma Exchange Ratio based on the last sale price
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<PAGE> 21
of SMC Common Stock on November 14, 1997.
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL EQUIVALENT PRO FORMA
SMC AMERAC AMERAC
--------- ----------- --------------------
<S> <C> <C> <C>
Market Price Per Share on
November 14, 1997 . . . $6.75 $5.00 $5.78
</TABLE>
Following the Merger, SMC Common Stock will continue to be quoted on
The Nasdaq National Market and there will be no further public market for
Amerac Common Stock. The closing sale price of SMC Common Stock as quoted on
The Nasdaq National Market on December 19, 1997 was $5.75 per share.
FORWARD-LOOKING STATEMENTS
This Joint Proxy Statement/Prospectus includes "forward-looking
statements" within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act. All statements of historical fact included in this
Joint Proxy Statement/Prospectus, including, without limitation, statements
under "Summary," "The Special Meetings," "The Proposed Merger" and "Management
and Operations After the Merger" regarding the financial condition, estimated
quantities of reserves, business strategy and plans and objectives for future
operations of SMC, Amerac and the combined entity are forward-looking
statements. These forward-looking statements are commonly identified by the use
of such terms and phrases as "intends," "estimates," "expects," "projects,"
"anticipates," "foreseeable future," "seeks," "believes" and "scheduled" and in
many cases are followed by cross-references to "Risk Factors." Although SMC
believes that the assumptions upon which such forward-looking statements are
based are reasonable, it can give no assurance that such assumptions will prove
to be correct. Important factors that would cause actual results to differ
materially from SMC's expectations ("Cautionary Statements") are disclosed
under "Risk Factors" and elsewhere in this Joint Proxy Statement/Prospectus.
All forward-looking statements in this Joint Proxy Statement/Prospectus are
expressly qualified by the Cautionary Statements.
RISK FACTORS
The stockholders of each of Amerac and SMC should carefully review the
information contained elsewhere in this Joint Proxy Statement/Prospectus and
should particularly consider the following risk factors.
INTEGRATION OF AMERAC
The success of the proposed Merger will depend, in part, on SMC's
ability to effectively integrate the business and operations of Amerac into
SMC. The process of integrating any acquired business may involve unforeseen
difficulties and may require a disproportionate amount of management's
attention and SMC's financial and other resources. No assurance can be given
that SMC will be able to successfully integrate Amerac into SMC. SMC's failure
to achieve consolidation savings, to incorporate the business and assets of
Amerac into SMC's existing operations successfully or to minimize any
unforeseen operational difficulties could have a material adverse effect on
SMC's financial condition and results of operations. See "The Proposed Merger"
and "Management and Operations After the Merger."
VOLATILITY OF OIL AND GAS PRICES
SMC's revenues, profitability, future growth and value of its oil and
gas properties are highly dependent upon the prices of oil and gas. In
addition, borrowings under SMC's secured reducing revolving line of credit (the
"Credit Facility") are limited by a borrowing base which is determined in part
on the prices for oil and gas. Market conditions make it difficult to
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<PAGE> 22
estimate future prices of oil and natural gas. In the past, SMC's average
annual sales price for oil and natural gas has been volatile, and it is likely
that oil and gas prices will continue to fluctuate in the future. Various
factors beyond SMC's control affect prices of oil and natural gas, including
worldwide and domestic supplies of oil and natural gas, the ability of the
members of the Organization of Petroleum Exporting Countries ("OPEC") to agree
to and maintain oil price and production controls, political instability or
armed conflict in oil-producing regions, the price of foreign imports, the
level of consumer demand, the price and availability of alternative fuels, the
availability of pipeline capacity and changes in existing federal regulation
and price controls. A material or extended decline in the price of oil or gas
may render the development of SMC's oil and gas properties commercially
unattractive, have a material adverse effect on its financial condition and
results of operations, and limit its ability to incur indebtedness or otherwise
finance its operations and future capital expenditures.
SHORTAGES OF RIGS, EQUIPMENT, SUPPLIES AND PERSONNEL
There is a general shortage of drilling rigs, equipment and supplies
which SMC believes may intensify. The costs and delivery times of rigs,
equipment and supplies are substantially greater than in recent years and are
currently escalating. Shortages of drilling rigs, equipment or supplies could
delay and adversely affect SMC's exploration and development operations, which
could have a material adverse effect on its financial condition and results of
operations.
The demand for, and wage rates of, qualified rig crews have begun to
rise in the drilling industry in response to the increasing number of active
rigs in service. Such shortages have in the past occurred in the industry in
times of increasing demand for drilling services. If the number of active
drilling rigs continues to increase, the oil and gas industry may experience
shortages of qualified personnel to operate drilling rigs, which could delay
SMC's drilling operations and adversely affect SMC's financial condition and
results of operations.
LIMITED HISTORY OF OPERATING PROFITS
SMC incurred net losses from operations of $1,044,000, $537,000,
$3,133,000 and $137,000 for each of the years ended December 31, 1992, 1993,
1994 and 1995, respectively. For the year ended December 31, 1996 and the nine
months ended September 30, 1997, SMC reported net income of $2,434,000 and
$1,393,000, respectively. No assurance can be made that SMC will operate
profitably in the future. The likelihood of SMC's future profitability must be
considered in light of the financial, business and operating risks, expenses,
difficulties and delays frequently encountered in connection with the oil and
gas acquisition, exploration, development and production business in which SMC
is engaged. The financial statements included and incorporated by reference
herein do not include any adjustments that may result from these uncertainties.
UNCERTAINTY OF ESTIMATES OF RESERVES AND FUTURE NET CASH FLOWS
Estimated proved reserves of oil and natural gas are estimated
quantities that geological and engineering data demonstrate with reasonable
certainty to be economically producible
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<PAGE> 23
under existing conditions. There are numerous uncertainties inherent in
estimating quantities and values of proved reserves and in projecting future
rates of production and the timing of development expenditures, including
factors involving reservoir engineering, pricing and operating and regulatory
constraints. Reserve assessment is a subjective process of estimating the
recovery from underground accumulations of hydrocarbons that cannot be measured
in an exact way. All reserve estimates are to some degree speculative, and
various classifications of reserves only constitute attempts to define the
degree of speculation involved. The accuracy of any reserve estimate is a
function of available data, engineering and geological interpretations and
judgments based on the data and assumptions regarding oil and gas prices and
costs to operate such wells. Accordingly, as further information is acquired
relating to SMC's oil and gas properties, reserve estimates are likely to differ
from the quantities of hydrocarbons that are ultimately recovered. Results of
drilling, testing and production history from the properties in which SMC has an
interest and changes in oil and gas prices and cost estimates subsequent to the
date of its reserve estimates could require substantial adjustments, either
upward or downward, to such estimates. Any downward adjustment could adversely
affect SMC's financial condition and future prospects and the market value of
the SMC Common Stock.
The estimated discounted pre-tax cash flows attributable to SMC's
estimated net proved reserves, at an annual rate of 10%, should not be construed
as the current market value of SMC's reserves. In accordance with applicable
requirements of the Commission, the future net cash flows attributable to
estimated net proved reserves are generally based on prices and costs as of the
date of the estimate, whereas actual future prices and costs may be materially
higher or lower. Actual future net cash flows also will be affected by the
amount and timing of both the production and the lifting and development costs.
The 10% discount rate, which is the rate required by the Commission, is not
necessarily the most appropriate discount rate based on interest rates in
effect from time to time and risks associated with SMC or the oil and gas
industry in general.
FINDING AND ACQUIRING ADDITIONAL RESERVES
SMC's future success depends upon its ability to find, develop and
acquire additional oil and gas reserves that are economically recoverable.
Unless SMC conducts successful exploration or development activities or
acquires properties containing reserves, the reserves of SMC will generally
decline as they are produced. There can be no assurance that SMC's development
projects and acquisition, development or exploration activities will result in
additional reserves. If prevailing oil and gas prices were to increase
significantly, SMC's finding costs (calculated by dividing the capitalized
costs of oil and gas properties as of a particular date by the amount of net
proved reserves shown on a reserve report at the same date) to add new reserves
could increase. The business of purchasing oil and gas properties involves a
high degree of business and financial risk, especially the risk that prices may
subsequently decline or that the reserves actually recovered may be less than
those anticipated by SMC at the time of purchase. The cost of drilling,
completing and operating wells is uncertain, and drilling or production may be
curtailed or delayed as a result of many factors.
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<PAGE> 24
ACQUISITION RISKS
SMC intends to continue acquiring oil and gas properties. Generally,
it is not feasible to review in detail every individual property involved in an
acquisition. Ordinarily, review efforts are focused on the higher-valued
properties. A detailed review of all potential properties and records may not
adequately reveal existing or potential problems or permit SMC to become
sufficiently familiar with the properties to assess fully their deficiencies
and capabilities. Inspections are not always performed on every well and
environmental problems, such as groundwater contamination, are not necessarily
revealed when an inspection is undertaken. Property acquisition decisions
generally are based on various assumptions and subjective judgments that are
speculative. If SMC overestimates the potential oil and gas reserves of a
property to be acquired or if subsequent operations on the property are
unsuccessful, then acquisition of the property could result in substantial
losses to SMC.
There can be no assurance that any acquisitions will be made by SMC.
Additionally, larger acquisitions may involve substantially higher costs and
may pose additional operating issues regarding the integration of operations.
The rate at which SMC is able to sustain any future growth may be limited to
the extent that it requires, but is unable to obtain, suitable financing or to
timely expand its existing staff and operating capabilities.
OPERATING HAZARDS AND UNINSURED RISKS; PRODUCTION CURTAILMENTS
The oil and gas business involves a variety of operating risks,
including, but not limited to, unexpected formations or pressures,
uncontrollable flows of oil, gas, brine or well fluids into the environment
(including groundwater contamination), blowouts, cratering, fires, explosions,
pollution and other risks, any of which could result in personal injuries, loss
of life, damage to properties and substantial losses. Although SMC carries
insurance which it believes is reasonable, it is not fully insured against all
risks. Losses and liabilities arising from uninsured or under-insured events
could have a material adverse effect on the financial condition and results of
operations of SMC.
From time to time, due to contract terms, pipeline interruptions,
weather conditions or other factors, the producing wells in which SMC owns an
interest may be subject to production curtailments. Such curtailments may range
from production being partially restricted to wells being completely shut-in.
The duration of curtailments may vary from a few days to several months.
DEPENDENCE ON KEY PERSONNEL
SMC depends, and will continue to depend for the foreseeable future,
on the services of its officers and key employees with extensive experience in
the oil and gas business. The ability of SMC to retain its officers and key
employees is important to the continued success and growth of SMC. The loss of
key personnel could have a material adverse effect on SMC. SMC does not
maintain key person life insurance on any of its officers or employees.
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<PAGE> 25
NEED FOR ADDITIONAL CAPITAL
The oil and gas industry is capital intensive. SMC's ability to expand
its reserve base is dependent upon the availability of internally generated
cash flows and financing alternatives. Such financing may consist of bank or
other commercial debt, forward sales of production, the issuance of equity or
debt securities or any combination thereof. There can be no assurance that SMC
will be successful in obtaining additional financing if and when required. Any
substantial increase in SMC's level of indebtedness through borrowings or the
issuance of debt securities may significantly decrease the financial
flexibility of SMC. If SMC is unable to obtain such financing if and when
needed, SMC may be forced to curtail property acquisition and development
activities.
EXPLORATORY DRILLING ACTIVITIES
Exploratory drilling involves a high degree of financial and operating
risk, including the risk that no commercially productive natural gas or oil
reservoirs will be encountered. The cost of drilling and completing exploratory
and development wells may vary materially from initial estimates. Drilling
operations may be curtailed, delayed or canceled as a result of many factors,
including, but not limited to, unexpected formations and drilling conditions,
pressure or mechanical irregularities in formations, equipment failures or
accidents, as well as title problems, weather conditions, compliance with
governmental requirements, shortages or delays in the delivery of equipment, and
financial instability of well operators, major working interest owners and well
servicing companies. With respect to its properties for which it is not the
operator, SMC is dependent upon the independent operator of the wells to
properly conduct leasing, drilling and completion activities and ongoing
operations of the wells. The independent operator's failure to properly perform
could adversely affect SMC. SMC's decisions to participate in the drilling of
exploratory wells and, ultimately, the success of SMC's participation depends
largely on the results of seismic survey data and other geological and
geophysical data. The acquisition and interpretation of such data involves
subjective professional judgment. Reliance upon such data and the
interpretations thereof poses the risk that a decision to participate in the
drilling of an exploratory well may be founded on incorrect, insufficient data,
erroneous interpretations of the data, or both.
MARKET RISKS
The availability of a ready market for SMC's oil and gas production
depends on numerous factors beyond its control, including the demand for and
supply of oil and gas, the proximity of SMC's natural gas reserves to
pipelines, the capacity of such pipelines, fluctuations in production and
seasonal demand, the effects of inclement weather and governmental regulation.
New gas wells may be shut-in for lack of a market until a gas pipeline or
gathering system with available capacity is extended into the area. Successful
exploration wells, especially offshore wells, may have production delayed
until production facilities and pipelines are constructed.
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<PAGE> 26
EXCHANGE RATES
Approximately 30% of SMC's revenues for each of the year ended
December 31, 1996 and the nine months ended September 30, 1997 was
derived from its Canadian properties. The revenues and expenses of SMC's
Canadian operations are denominated in Canadian dollars. SMC records its
transactions and prepares its financial statements in U.S. dollars.
Fluctuations in the value of the two currencies may cause currency translation
losses for SMC or reduced revenues and earnings, or both, with respect to its
Canadian operations. SMC cannot predict the effect of exchange rate
fluctuations upon future operating results.
GOVERNMENTAL AND ENVIRONMENTAL REGULATION
Exploring for, producing and selling oil and gas are subject to a
variety of federal, state, local and international governmental regulations,
including regulation concerning the prevention of waste, the discharge of
materials into the environment, the conservation of natural gas and oil
production, permits for drilling operations, drilling bonds, reports concerning
operations, the spacing of wells, the unitization and pooling of properties,
the clean-up of well sites and various other matters, including taxes. Laws and
regulations protecting the environment are stringent and may in certain
circumstances impose strict liability, rendering a person liable for
environmental damage without regard to negligence or fault on the part of such
person. Such laws and regulations may expose SMC to liability for the conduct
of operations or conditions caused by others or for acts of SMC which were in
compliance with all applicable laws at the time such acts were performed. An
increase in federal, state or local production or property taxes, the
modification of existing laws or regulations or the adoption of new laws or
regulations relating to environmental matters could have a material adverse
effect on SMC's results of operations.
The Federal Water Pollution Control Act ("FWPCA") imposes restrictions
and strict controls regarding the discharge of produced waters and other oil
and gas wastes into navigable waters. Permits must be obtained to discharge
pollutants into state and federal waters. The FWPCA and analogous state laws
provide for civil, criminal and administrative penalties for any unauthorized
discharges of oil and other hazardous substances in reportable quantities and
may impose substantial potential liability for the costs of removal,
remediation and damages. State water discharge regulations and the federal
permits prohibit or are expected to prohibit within the next year the discharge
of water, sand and certain other substances related to the oil and gas industry
into coastal waters. Although the costs to comply with zero discharge mandates
under federal or state law may be significant, the entire industry will
experience similar costs and SMC believes that these costs will not have a
material adverse effect on SMC's financial condition and results of
operations. Some oil and gas exploration and production facilities are required
to obtain permits for their storm water discharges. Costs may be incurred in
connection with treatment of wastewater or developing storm water pollution
prevention plans.
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<PAGE> 27
COMPETITION
The oil and gas industry is highly competitive in many respects,
including identification of attractive oil and gas properties and personnel to
conduct operations and activities. In seeking suitable opportunities, SMC
competes with a number of other companies, including large oil and gas
companies, numerous independent operators, individual proprietors and others
with greater financial resources and, in some cases, with more experience. Many
other oil and gas companies in the industry have financial resources, personnel
and facilities substantially greater than those of SMC, and there can be no
assurance that SMC can compete effectively with these competitors.
DIVIDENDS
SMC does not currently pay cash dividends on the SMC Common Stock and
does not anticipate paying such dividends in the foreseeable future. The Credit
Facility restricts the payment of dividends and other distributions. See
"Dividend Policy of SMC."
CONCENTRATION OF OWNERSHIP
After giving effect to the Share Issuance, SMC's directors and
officers would beneficially own, directly and through incentive stock options,
approximately 25% of the outstanding SMC Common Stock (assuming the exercise
of all outstanding stock options). Accordingly, if such stockholders voted
together, they could significantly influence the election of SMC's directors
and other matters requiring action by SMC stockholders.
SHARES ELIGIBLE FOR FUTURE SALE
Subject to the volume and other limitations of Rule 144 under the
Securities Act, all of the shares of SMC Common Stock beneficially owned by
directors and officers of SMC will be eligible for public sale. In addition,
SMC may issue additional shares of SMC Common Stock in the future. Sales of
substantial amounts of SMC Common Stock in the public market, or the perception
of the availability of shares for sale, could adversely affect the prevailing
market price of the SMC Common Stock and could impair SMC's ability to raise
capital through the sale of its securities.
NEVADA TAKEOVER STATUTE
Provisions of the NGCL requiring disinterested director or stockholder
approval of certain business combinations between SMC and holders of 10% or
more of the voting securities of SMC could have the effect of delaying,
deferring or preventing a change in control of SMC. See "Comparison of
Stockholder Rights -- State Anti-Takeover Statutes."
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THE SPECIAL MEETINGS
TIME, DATE AND PLACE OF THE SPECIAL MEETINGS
This Joint Proxy Statement/Prospectus is being furnished to the holders
of shares of SMC Common Stock in connection with the solicitation of proxies by
the SMC Board for use at the SMC Special Meeting to be held on January 28, 1998,
at the Hyatt Regency Houston, 1200 Louisiana Street, Houston, Texas, commencing
at 10:00 a.m., local time, and at any adjournments or postponements thereof.
This Joint Proxy Statement/Prospectus is also being furnished to the
holders of shares of Amerac Common Stock in connection with the solicitation of
proxies by the Amerac Board for use at the Amerac Special Meeting to be held on
January 28, 1998, at the Hyatt Regency Houston, 1200 Louisiana Street, Houston,
Texas, commencing at 10:00 a.m., local time, and at any adjournments or
postponements thereof.
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETINGS
SMC Proposals
At the SMC Special Meeting, holders of SMC Common Stock will be asked
to consider and vote upon the approval of the Share Issuance contemplated by
the Merger Agreement pursuant to which Sub will be merged with and into Amerac,
and Amerac will become a wholly owned subsidiary of SMC at the Effective Time,
all as more fully described elsewhere in this Joint Proxy Statement/Prospectus.
See "Summary," "The Proposed Merger" and "Terms of the Merger." In addition,
holders of SMC Common Stock will be asked to consider and vote upon the
approval and adoption of the SMC Restated Articles (discussed below) and the
Plan (discussed below) and to act on such other matters as may properly be
brought before the SMC Special Meeting or any adjournments or postponements
thereof. Approval and adoption of the SMC Restated Articles and the Plan are not
conditions to the Merger.
Article Fourth of the current SMC Articles of Incorporation, as
amended (the "SMC Articles"), provides that the total number of shares of all
classes of stock which SMC has authority to issue is 20 million shares, all of
which shares, $.01 par value per share, are designated "Common Stock."
Stockholders of SMC are being asked to vote on a proposal to amend and restate
the SMC Articles to increase the number of authorized shares of SMC Common
Stock from 20 million to 50 million and to authorize the issuance of up to five
million shares of "blank check" preferred stock. Upon the approval by the
holders of a majority of the issued and outstanding shares of SMC Common
Stock, the number of authorized shares of SMC Common Stock will be increased
from 20 million to 50 million and the SMC Board will be authorized to issue up
to five million shares of "blank check" preferred stock without further approval
by stockholders of SMC. A copy of the proposed SMC Restated Articles is
included as Appendix B to this Joint Proxy Statement/Prospectus.
Whether or not the Merger is consummated, the SMC Board considers it
prudent and in the best interests of SMC and its stockholders to increase the
number of authorized shares of
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SMC Common Stock and authorize the "blank check" preferred stock in order to
provide SMC with financing and business flexibility. SMC Common Stock or
preferred stock of SMC may be issued by SMC in connection with future
acquisitions or equity financings, upon conversion or exchange of outstanding
securities, in connection with employee benefit plans or under other
circumstances. The issuance of a substantial amount of SMC Common Stock or
preferred stock of SMC, or the granting of an option to purchase a substantial
amount of SMC Common Stock or preferred stock of SMC, might impede a business
combination by enabling a holder thereof to exercise voting rights. Though the
SMC Board is required to make any determination to issue any such stock based
on its judgment as to the best interests of the stockholders of SMC, the SMC
Board could act in a manner that would discourage an acquisition attempt or
other transaction that some, or a majority, of the stockholders of SMC might
believe to be in their best interests, or in which such stockholders might
receive a premium for their stock over the then-current market price of such
stock.
The SMC Board has adopted resolutions approving and recommending to the
stockholders of SMC, for their approval, the adoption of the Plan, which is
included as Appendix C to this Joint Proxy Statement/Prospectus. The NGCL does
not require the approval of the stockholders of SMC as a condition to the
effectiveness of the Plan. The SMC Board is seeking the approval of the SMC
stockholders in order to qualify the granting of certain options for beneficial
tax treatment upon exercise of such option under the Code and pursuant to Rule
4460 of the Marketplace Rules promulgated by the National Association of
Securities Dealers, Inc. ("Rule 4460")
Purposes, Effectiveness and Term of the Plan. The SMC Board believes
that an important factor in attracting and retaining desirable officers, key
employees and consultants for SMC is stock-based incentive compensation. Such
compensation advances the interests of SMC by encouraging, and providing for,
the acquisition of equity interests in SMC by officers, key employees and
consultants, thereby providing substantial motivation for superior performance.
In order to provide the SMC Board with greater flexibility to adapt to changing
economic and competitive conditions, and to implement stock-based compensation
strategies which will attract and retain those employees and consultants who
are important to the long-term success of SMC, the SMC Board adopted, subject
to stockholder approval, the Plan on November 17, 1997 (the "Plan Effective
Date"). The Plan will terminate ten years after the Plan Effective Date. A
summary of the Plan follows, but this summary is qualified in its entirety by
reference to the full text of the Plan, which is included as Appendix C to this
Joint Proxy Statement/Prospectus.
Administration, Eligibility and Shares Subject to the Plan. The Plan
will require SMC to reserve and keep available for distribution thereunder
700,000 authorized and unissued shares of SMC Common Stock. Any number of
shares of SMC Common Stock may be awarded to a grantee; provided, however, the
total number of shares of SMC Common Stock awarded under the Plan to any
Covered Employee (as defined in the Plan) may not exceed 500,000 shares in any
calendar year. Any shares as to which an option expires, lapses unexpired or is
terminated or canceled may be subject to a new option. The Plan awards may be
made to officers, key employees of and consultants for SMC. A committee of the
SMC Board (the "Committee") has the authority to grant stock options under the
Plan. No award
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may be granted later than the tenth anniversary of the Plan Effective Date, but
awards granted prior to such tenth anniversary may extend beyond that date. To
date, 170,000 awards have been granted under the Plan. Information is not
otherwise determinable with respect to the number of shares subject to awards
which may be received by any specific individual or groups of individuals
pursuant to the Plan, because the grant of such awards is subject to the
discretion of the Committee.
Stock Options. Incentive stock options ("ISOs") and nonstatutory stock
options ("NSOs") may be granted for such number of shares of SMC Common Stock
as the Committee may determine and may be granted alone, or in tandem with,
cash awards outside the Plan. A stock option will be exercisable at such times
and subject to such terms and conditions as the Committee will determine and
over a term to be determined by the Committee; provided, however, in the case
of an ISO, the term will be no more than ten years after the date of grant
(five years in the case of ISOs for certain 10% stockholders). The option price
for any ISO will not be less than 100% (110% in the case of certain 10%
stockholders) of the fair market value of the SMC Common Stock as of the date
of grant, and the option price for any NSO will be not less than 50% of such
fair market value as of the date of grant. To the extent that the aggregate
fair market value of SMC Common Stock with respect to ISOs that are exercisable
for the first time by the grantee during a single calendar year exceeds
$100,000, such ISOs shall be treated as NSOs to the extent in excess of
$100,000.
Supplemental Payment on Exercise of NSOs. The Committee may provide
for a supplemental payment by SMC to the grantee of an NSO, which shall not
exceed the amount necessary to pay federal and state income tax payable with
respect to both the exercise of the NSO and the receipt of the supplemental
payment. The Committee has the discretion to grant such supplemental payment in
cash, SMC Common Stock or a combination of cash and SMC Common Stock.
Change in Control. If there is a Change in Control (as defined in the
Plan), any stock options which are not then exercisable will become fully
exercisable and vested.
Adjustment Upon Changes in Capitalization. In the case of a stock
split, stock dividend, recapitalization, merger, reorganization or other change
in SMC's structure affecting SMC capital stock, appropriate adjustments will be
made by the Committee, in its sole discretion, in the number of shares reserved
under the Plan and in the number of shares covered by options and other awards
then outstanding under the Plan and, where applicable, the exercise price for
awards under the Plan.
Non-Transferability of Stock Options. Stock options issued under the
Plan are not transferable, except by will or by the laws of descent and
distribution.
Certain Federal Income Tax Consequences. The following is a brief
summary of certain federal income tax laws in effect on the date hereof. This
summary is not intended to be exhaustive and the exact tax consequences to any
grantees will depend upon their particular circumstances and other factors. The
Plan participants must consult their own tax advisors
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with respect to any state, local or foreign tax considerations or specific
federal tax implications of awards granted under the Plan.
Incentive Stock Options. Neither the grant nor the exercise of an ISO
will result in taxable income to the grantee. The tax treatment upon sale of SMC
Common Stock acquired upon exercise of an ISO depends upon whether the holding
period requirement is satisfied. The holding period is met if the disposition by
the grantee occurs (i) at least two years after the date of grant of the option,
(ii) at least one year after the date the shares were transferred to the grantee
and (iii) while the grantee remains employed by SMC or not more than three
months after such grantee's termination of employment (or not more than one year
in the case of a disabled grantee). If the holding period is satisfied, the
excess of the amount realized upon the sale of the acquired SMC Common Stock
over the price paid for such stock will be treated as a mid-term or long-term
capital gain. If the grantee disposes of such capital stock before the holding
period is satisfied (a "disqualifying disposition") the excess of the fair
market value of the stock on the date of exercise or, if less, the fair market
value on the date of disposition, over the exercise price will be taxable as
ordinary, compensation income to the grantee at the time of disposition, and SMC
will be entitled to a corresponding deduction. The balance of the gain, if any,
will be a capital gain for the grantee. Any capital gain realized by the grantee
will be long-term capital gain if the grantee's holding period for SMC Common
Stock at the time of disposition is more than 18 months, and mid-term capital
gain if such holding period is more than one year but less than 18 months;
otherwise it will be short-term.
Although the exercise of an ISO will not result in taxable income to
the grantee, the excess of the fair market value of the shares on the date of
exercise over the exercise price will be included in the grantee's "alternative
minimum taxable income" under Section 56 of the Code. This inclusion might
subject the grantee to, or increase such grantee's liability for, the
alternative minimum tax under Section 55 of the Code.
Non-Statutory Stock Options. There will be no federal income tax
consequences to SMC or to the grantee upon the grant of NSOs under the Plan. The
grantee, however, except as noted below, will realize ordinary income for
federal income tax purposes in an amount equal to the excess of the fair market
value of the shares of SMC Common Stock purchased over the exercise price. SMC
will generally be entitled to a tax deduction at such time equal to the amount
of the grantee's recognized ordinary income. If SMC Common Stock so acquired is
later sold or exchanged, then the difference between the sales price and the
fair market value of such SMC Common Stock on the date of the exercise of the
option is generally taxable as long-term, mid-term or short-term capital gain or
loss depending upon the holding period of such stock after such date.
As stated above, generally ordinary income is realized by a grantee
upon exercise of an NSO. In the case of the exercise of such an option by a
grantee whose sale of shares of SMC Common Stock at a profit could subject the
grantee to suit under Section 16(b) of the Exchange Act, however, realization
of income is postponed so long as a sale of the shares would expose the grantee
to such suit, unless the grantee elects under Section 83(b) of the Code within
30 days after exercise to recognize taxable ordinary income on the exercise
date
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equal to the excess of the fair market value of the shares of SMC Common Stock
purchased over the exercise price. Absent such election, such a grantee will
realize ordinary income at the time a sale would no longer expose such grantee
to such suit in an amount equal to the excess of the fair market value of the
shares of SMC Common Stock at that time over the exercise price. That fair
market value will also govern for purposes of SMC's deduction and for
determining the grantee's basis for such stock for determining gain or loss upon
subsequent disposition of the shares of SMC Common Stock.
Payment in Stock. A grantee who pays the exercise price upon exercise
of an ISO or NSO, in whole or in part, by delivering shares of SMC Common Stock
already owned by such grantee will realize no gain or loss for federal income
tax purposes on the shares surrendered, but otherwise will be taxed according
to the rules described above. Shares of SMC Common Stock acquired upon exercise
which are equal in number to the shares of SMC Common Stock surrendered will
have a basis equal to the basis of the share of SMC Common Stock surrendered,
and, except as noted below, with respect to disqualifying dispositions, the
holding period of such shares of SMC Common Stock will include the holding
period of the shares of SMC Common Stock surrendered. In the case of an NSO,
the basis of additional shares of SMC Common Stock received upon exercise of
the NSO will be equal to the fair market value of such shares on the date of
exercise, and the holding period for such additional shares of SMC Common Stock
will commence on the date the option is exercised. In the case of an ISO, the
basis of the additional shares received will be zero, and the holding period of
such shares of SMC Common Stock will commence on the date of the exchange. If
the grantee disposes of any of the shares of SMC Common Stock received upon
exercise of the ISO within two years of the date of grant of the ISO or within
one year after exercise, the grantee will be deemed to have disposed of the
shares with the lowest basis (i.e., zero basis) first, and such disposition
will be a disqualifying disposition requiring the recognition of ordinary
income as previously discussed above.
Status of the Plan. The Plan is not intended to be a "qualified plan"
under Section 401(a) of the Code. The Plan is intended to constitute an
"unfunded" plan for incentive and deferred compensation. With respect to any
payments not yet made to a participant, grantee or optionee by SMC, nothing
contained herein shall give any such participant, grantee or optionee any
rights that are greater than those of a general creditor of SMC.
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Amendment of the Plan. The Plan may be amended by the SMC Board,
except that the SMC Board may not, without the approval of the stockholders of
SMC, increase the number of shares available for issuance under the Plan,
change the class of employees eligible to receive awards under the Plan,
increase the maximum limit on awards to Covered Employees, extend the term
within which awards may be granted or decrease the authority granted to the
Committee under the Plan in contravention of Rule 16b-3 promulgated under the
Exchange Act.
Amerac Proposal
At the Amerac Special Meeting, holders of Amerac Common Stock will be
asked to consider and vote upon the approval and adoption of the Merger
Agreement and to act on such other matters as may properly be brought before
the Amerac Special Meeting or any adjournments or postponements thereof.
Boards of Directors' Recommendations
THE SMC BOARD HAS APPROVED EACH OF (I) THE SHARE ISSUANCE, (II) THE
SMC RESTATED ARTICLES AND (III) THE PLAN AND RECOMMENDS THAT THE STOCKHOLDERS
OF SMC VOTE FOR APPROVAL OF THE SHARE ISSUANCE, FOR APPROVAL AND ADOPTION OF
THE SMC RESTATED ARTICLES AND FOR APPROVAL AND ADOPTION OF THE PLAN.
THE AMERAC BOARD HAS UNANIMOUSLY APPROVED THE MERGER AND UNANIMOUSLY
RECOMMENDS THAT AMERAC'S STOCKHOLDERS VOTE FOR APPROVAL AND ADOPTION OF THE
MERGER AGREEMENT.
VOTING AT MEETINGS; RECORD DATES
SMC. SMC has established the close of business on December 26, 1997 as
the Record Date for the determination of stockholders entitled to notice of and
to vote at the SMC Special Meeting. Only holders of record of SMC Common Stock
at the close of business on the Record Date are entitled to vote at the SMC
Special Meeting. On December 19, 1997, SMC had outstanding and entitled to vote
9,128,741 shares of SMC Common Stock, each of which is entitled to one vote
per share. On such date, there were approximately 613 holders of record of SMC
Common Stock.
As of December 19, 1997, directors and executive officers of SMC and
their affiliates beneficially owned approximately 26% of the outstanding
shares of SMC Common Stock. Each such director and executive officer has
advised SMC that he intends to vote or direct the vote of all shares of SMC
Common Stock over which he has voting control for the approval of the Share
Issuance and for the approval and adoption of the SMC Restated Articles and the
Plan.
Amerac. Amerac has established the close of business on December 26,
1997 as the Record Date for the determination of stockholders entitled to
notice of and to vote at the Amerac Special Meeting. Only holders of record of
Amerac Common Stock at the close of business on the Record Date are
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entitled to vote at the Amerac Special Meeting. On December 19, 1997, Amerac
had outstanding and entitled to vote 3,894,288 shares of Amerac Common
Stock, each of which is entitled to one vote per share. On such date, there
were approximately 3,660 holders of record of Amerac Common Stock.
As of December 19, 1997, directors and executive officers of Amerac
and their affiliates beneficially owned approximately 6.4% of the outstanding
shares of Amerac Common Stock. Each such director and executive officer has
advised Amerac that he intends to vote or direct the vote of all shares of
Amerac Common Stock over which he has voting control for the approval and
adoption of the Merger Agreement.
SMC does not own any shares of Amerac Common Stock.
VOTE REQUIRED
SMC. Although neither the NGCL nor the SMC Articles require that the
stockholders of SMC approve the Share Issuance, Rule 4460 does require such
approval. The affirmative vote of a majority of the outstanding shares of SMC
Common Stock eligible to vote thereon, voting as a single class, at a meeting
at which a quorum is present will be required to approve the Share Issuance.
Under the NGCL and the SMC Bylaws, a quorum is constituted by the presence, in
person or by proxy, of stockholders entitled to cast at least a majority of
the votes which all stockholders are entitled to cast on the particular
matters to be voted on.
SMC stockholder approval is required for the approval and adoption of
the SMC Restated Articles pursuant to the NGCL. SMC stockholder approval is
required for the approval and adoption of the Plan pursuant to Rule 4460 and
pursuant to the Code, in order to obtain beneficial tax treatment for the
grantees under the Plan. Under the NGCL, the affirmative vote of a majority of
the outstanding shares of SMC Common Stock is required to approve and adopt the
SMC Restated Articles. Approval and adoption of the Plan, like approval of the
Share Issuance, merely require the affirmative vote of a majority of the
outstanding shares of SMC Common Stock eligible to vote thereon, voting as a
single class, represented in person or by proxy at a meeting at which a quorum
is present.
Shares of SMC Common Stock present in person at the SMC Special
Meeting, but not voting, and shares of SMC Common Stock for which SMC has
received proxies, but with respect to which holders of shares have abstained on
any matter, will be counted as present at the SMC Special Meeting for purposes
of determining the presence or absence of a quorum for the transaction of
business. Such nonvoting shares and abstentions will not be counted as votes
cast for purposes of determining whether a majority has been attained and
therefore will have the effect of a vote against each of the SMC Proposals. In
addition, brokers who hold shares of SMC Common Stock in street name for
customers who are the beneficial owners of such stock are prohibited from
giving a proxy to vote shares held for such customers in favor of the approval
of the SMC Proposals without specific instruction from such customers.
Accordingly, the failure of such customers to provide instructions with respect
to their shares of SMC Common Stock to their broker will have the effect of
such shares not being voted and therefore will have no effect
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on the vote to approve the Share Issuance and to approve and adopt the Plan,
but will have the effect of a vote against the SMC Restated Articles. Such
instances, if any, are referred to as broker non-votes. Broker non-votes, if
any, will be counted as present for determining the presence or the absence of
a quorum for the transaction of business.
Amerac. The affirmative vote of a majority of the outstanding shares
of Amerac Common Stock is required to approve and adopt the Merger Agreement.
Abstentions and broker non-votes will have the effect of a vote against the
Amerac Proposal, as will the failure of holders of Amerac Common Stock to sign
and return a proxy. Broker non-votes, if any, will be counted as present for
determining the presence or the absence of a quorum for the transaction
of business. In connection with the Merger, holders of Amerac Common Stock will
not be entitled to appraisal rights under Section 262 of the DGCL. See
"Comparison of Stockholder Rights -- Appraisal and Dissenters' Rights."
SMC PROXIES
Shares of SMC Common Stock represented by proxies received by SMC
prior to or at the SMC Special Meeting will be voted in accordance with the
instructions contained therein. Shares of SMC Common Stock represented by
proxies for which no instruction is given will be voted FOR each of the SMC
Proposals.
Holders of shares of SMC Common Stock are requested to complete, sign,
date and return promptly the enclosed proxy card in the postage paid envelope
provided for this purpose in order to ensure that their shares are voted. A
proxy may be revoked at any time prior to the exercise of the authority granted
thereunder. Revocation may be accomplished by the granting of a later dated
proxy with respect to the same shares or by giving notice thereof to SMC in
writing or at the SMC Special Meeting at any time prior to the vote on the
matters to be considered at the SMC Special Meeting. The presence at the SMC
Special Meeting of a stockholder who signed a proxy does not in itself revoke
the proxy.
The SMC Board is aware of no matters to be presented at the SMC
Special Meeting other than those described in this Joint Proxy
Statement/Prospectus. If other matters are properly brought before the SMC
Special Meeting, it is the intention of the persons named in the proxies to
vote the shares to which such proxies relate in accordance with their judgment.
AMERAC PROXIES
Shares of Amerac Common Stock represented by proxies received by
Amerac prior to or at the Amerac Special Meeting will be voted in accordance
with the instructions contained therein. Shares of Amerac Common Stock
represented by proxies for which no instruction is given will be voted FOR the
Amerac Proposal.
Holders of shares of Amerac Common Stock are requested to complete,
sign, date and return promptly the enclosed proxy card in the postage paid
envelope provided for this purpose in order to ensure that their shares are
voted. A proxy may be revoked at any time prior to the exercise of the
authority granted thereunder. Revocation may be accomplished by the granting of
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a later dated proxy with respect to the same shares or by giving notice thereof
to Amerac in writing or at the Amerac Special Meeting at any time prior to the
vote on the matters to be considered at the Amerac Special Meeting. The
presence at the Amerac Special Meeting of a stockholder who signed a proxy does
not in itself revoke the proxy.
The Amerac Board is aware of no matters to be presented at the Amerac
Special Meeting other than those described in this Joint Proxy
Statement/Prospectus. If other matters are properly brought before the Amerac
Special Meeting, it is the intention of the persons named in the proxies to
vote the shares to which such proxies relate in accordance with their judgment.
SOLICITATION OF PROXIES
D.F. King & Co., Inc. has been retained to solicit proxies on behalf of
SMC for a fee of approximately $4,500 plus out-of-pocket expenses and Amerac for
a fee of approximately $2,000 plus out-of-pocket expenses. SMC and Amerac will
each bear the cost of the solicitation of proxies from their respective
stockholders. In addition to solicitation by D.F. King & Co., Inc., officers and
employees of SMC and Amerac, who will receive no compensation in excess of their
regular salaries for their services, may solicit proxies from their respective
stockholders by telephone or otherwise. SMC and Amerac will also reimburse
brokers and other nominees for their reasonable expenses in communicating with
the persons for whom they hold SMC Common Stock and Amerac Common Stock,
respectively.
STOCKHOLDER PROPOSALS
Stockholder proposals intended to be presented at SMC's 1998 Annual
Meeting of Stockholders must be received by SMC's corporate secretary at SMC's
principal executive offices no later than January 14, 1998. In the event that
the Merger Agreement is not approved and adopted by Amerac stockholders,
stockholder proposals intended to be presented at Amerac's 1998 Annual Meeting
of Stockholders must be received by Amerac's corporate secretary at Amerac's
principal executive offices no later than December 19, 1997.
THE PROPOSED MERGER
BACKGROUND OF THE MERGER
In December of 1996, Amerac's A-3 well in the South Timbalier 198
field began to produce water. This event, while anticipated by Amerac and its
reservoir engineers, highlighted Amerac's dependence on this single property,
which accounted for approximately 55% of Amerac's 1996 lease cash flow
(revenues less lease operating expenses). Amerac had been actively seeking to
find and acquire producing properties with a high component of proved producing
reserves to supplement and replace the expected decline in cash flow as the
South Timbalier 198 field depleted. Amerac had received and considered an offer
to sell its South Timbalier 198 property but had determined the offer to be
inadequate. At a meeting on May 29, 1997, the Amerac Board expressed concern
about the expected decline in the South Timbalier 198 cash flow; the
exploration risk and projected cash requirements of Amerac's Eastern Shelf
Program, an exploitation joint venture targeting opportunities in the Permian
Basin ("Amerac's
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Eastern Shelf Program"); the lack of potential acquisition candidates with
substantial proved producing reserves; and the continuing high level of general
and administrative expenses.
In early June of 1997, the Amerac Board requested management to
continue to pursue aggressively a property acquisition in which the bulk of
value would be attributable to proved producing reserves with established
production histories. Further, the Amerac Board directed that a plan be
developed to reduce general and administrative expenses as a percentage of
revenues, to identify non-core properties and develop a plan for divesting
them, to farm-out or otherwise promote the drilling of some of Amerac's
exploration properties, and to develop an updated set of cash flow projections.
The Amerac Board met on August 4, 1997 to consider the plans developed
by management. At that meeting, the Amerac Board decided that a special
committee of the Amerac Board, namely, Messrs. Nicoletti and Peak (the "Special
Committee") should be formed to undertake a process to explore strategic
alternatives designed to enhance stockholder value. The Special Committee was
responsible for developing and recommending various alternatives, including the
possible merger or business combination of Amerac with another entity or a
possible sale of Amerac or its assets. Formation of the Special Committee was
publicly announced August 6, 1997. On August 29, 1997, the Special Committee
retained McDonald to act as financial advisor in connection with evaluating
Amerac's alternatives. McDonald reviewed Amerac's various options and presented
these options to the Amerac Board on September 17, 1997. McDonald recommended
that Amerac pursue a merger with another exploration and production company of
comparable or larger size that offered sound management, adequate
capitalization and upside potential. On September 22, 1997, Amerac announced
that the Amerac Board had authorized the initiation of discussions with a
select group of companies regarding a possible strategic merger or similar
business combination.
McDonald undertook to identify and review approximately 40 exploration
and production companies. On September 29, 1997, the first of a select group of
companies received a detailed briefing on Amerac. Over the next four weeks, 12
companies received similar briefings on Amerac. After significant review, due
diligence and negotiation, SMC and three other of these candidates were invited
to make an offer to merge with Amerac and each did so. The Amerac Board and
McDonald reviewed each of these offers in detail and in a special meeting of
the Amerac Board held on November 4, 1997 that was attended by a senior
representative of McDonald, the Amerac Board unanimously determined that the
SMC offer best matched Amerac's goals and offered the highest potential return
for Amerac's stockholders, and therefore instructed management and the members
of the Special Committee to negotiate certain terms of SMC's written proposal.
On November 5, 1997, a member of the Special Committee and a representative of
McDonald met with SMC's President and Chief Executive Officer and finalized the
principal terms of the transaction. At this meeting, Amerac executed a
confidentiality agreement with SMC and, as required by SMC, agreed to negotiate
exclusively with SMC for a limited period of time. On November 6, 1997, counsel
to Amerac provided counsel to SMC with a draft Merger Agreement, and the
parties commenced negotiation of the definitive documentation for the
transaction and preparation of related disclosure schedules. As negotiations on
the definitive Merger Agreement proceeded through the following week, on
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November 13, 1997, five members of the Amerac Board, including the President
and Chief Executive Officer and both members of the Special Committee, received
a presentation from SMC's senior management with respect to SMC and its
business, operations, earnings and financial condition on a historical,
prospective and pro forma basis. The following day the Amerac Board convened a
special meeting at which McDonald's representative presented McDonald's oral
opinion that at such time the proposed transaction and the Exchange Ratio were
fair to Amerac and its stockholders from a financial point of view. Following
discussion of the McDonald oral fairness opinion, a review of the presentation
received from SMC the prior day and discussion of the current draft of the
definitive Merger Agreement, the Amerac Board unanimously approved proceeding
with the transaction and directed management and counsel over the weekend to
negotiate the final terms of a definitive Merger Agreement. The parties worked
through the weekend negotiating the transaction documentation and on Monday
morning, November 17, 1997, the parties executed the Merger Agreement and
issued a press release announcing the transaction.
AMERAC'S REASONS FOR THE MERGER; RECOMMENDATION OF THE AMERAC BOARD
Amerac's Reasons for the Merger. The Amerac Board has unanimously
determined that the Merger is fair to Amerac and its stockholders, has approved
the Merger and unanimously recommends that the stockholders of Amerac vote in
favor of the approval and adoption of the Merger Agreement.
In reaching its conclusion, the Amerac Board requested that financial
advisor McDonald evaluate the strategic alternatives available to Amerac with
the overriding objective of increasing stockholder value. This evaluation
considered various alternatives, including merging Amerac with another company
for common stock; selling Amerac or its assets for cash; attempting to raise
additional capital and continuing to pursue producing property acquisitions to
grow Amerac; or producing out Amerac's existing properties and concurrently
reducing general and administrative expenses as Amerac's reserve base was
depleted. McDonald concluded that a merger with another exploration and
production company of comparable or larger size provided the greatest
opportunity to maximize stockholder value. This conclusion was based on the
belief that the greatest incremental value could be realized in a merger as a
result of Amerac's dependence on South Timbalier 198 for near-term cash flow;
the difficulty Amerac was experiencing in competing for producing properties in
an increasingly competitive acquisition market; Amerac's inventory of immature
development projects and their ongoing requirement for capital expenditures;
greater value as a going concern; greater property diversification; maintenance
of a continued public company vehicle and the liquidity afforded stockholders
as a result; resulting synergies and cost savings, including general and
administrative expense savings; obtaining a larger revenue base to cover
overhead; the ability of a larger company to command greater investor attention
and enhanced valuation; an increased ability to attract less costly debt and
equity capital; and the opportunity to continue under stable management.
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In evaluating SMC and determining SMC to be the preferred merger
candidate, the Amerac Board and McDonald considered Amerac's historic stock
price relative to the implied value of SMC's offer; proposals of other merger
candidates; accretion or dilution to Amerac's stockholders with respect to key
valuation statistics; the value of comparable public companies relative to
Amerac's value implied by SMC's offer; the implied value of SMC's offer
relative to comparable merger and acquisition transactions; and the implied
value of SMC's offer relative to Amerac's estimated Net Asset Value (as defined
below; see "Fairness Opinion of McDonald") using different commodity pricing
scenarios. In addition, the Amerac Board and McDonald considered SMC's proven
and entrepreneurial management team; the likelihood of additional acquisition
opportunities for SMC after the Merger; the recent and prior market prices of
Amerac Common Stock and SMC Common Stock; SMC's strong balance sheet and the
upside potential of SMC's reserve position; potential synergies and cost
savings; the ability of Amerac to have an impact on the combined operation; the
complementary nature of Amerac's and SMC's respective operating areas, and
geographical diversity thereof; and the potential for greater investor
attention and investment community sponsorship after the Merger as a result of
the increased size and stock float of the two combined companies.
In analyzing SMC, the Amerac Board was furnished with extensive
information concerning SMC's reserves, prospect inventory, other assets,
financial results, capital structure and operations. The Amerac Board did not
attach specific weight to any of the foregoing factors. The decision was based
on an overall balancing of all of the factors that supported the conclusion of
the Amerac Board that the terms of the Merger Agreement and the Merger
contemplated thereby are fair to, and in the best interest of, Amerac and its
stockholders.
FAIRNESS OPINION OF MCDONALD
On August 29, 1997, the Amerac Board retained McDonald to serve as its
financial advisor in connection with a possible transaction and to render an
opinion to the Amerac Board concerning the fairness, from a financial point of
view, to the stockholders of Amerac of the Exchange Ratio contemplated by the
Merger Agreement. McDonald was retained by the Amerac Board on the basis of,
among other things, its experience and expertise and familiarity with Amerac
and the industry. As part of its investment banking business, McDonald is
customarily engaged in the valuation of businesses and securities in connection
with mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements
and valuations for corporate and estate planning purposes.
Representatives of McDonald attended the November 14, 1997 meeting of
the Amerac Board at which Amerac directors considered the SMC Merger proposal
and approved the Merger. At such meeting, representatives of McDonald made
presentations and reviewed various aspects of the proposed Merger, including
the financial terms and conditions of the Merger.
At the November 14, 1997 meeting of the Amerac Board, McDonald
rendered its oral opinion to the Amerac Board to the effect that, as of that
date, the Exchange Ratio was fair, from a financial point of view, to the
stockholders of Amerac. That opinion was subsequently
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confirmed in writing as of November 18, 1997. McDonald's written opinion is
included as Appendix H to this Joint Proxy Statement/Prospectus and is
incorporated herein by reference, and the description of the opinion set forth
herein is qualified in its entirety by reference thereto. Stockholders are urged
to read the opinion in its entirety for a description of the procedures
followed, assumptions and qualifications made, matters considered and
limitations undertaken by McDonald.
McDonald's opinion is directed to the Amerac Board and addresses only
the fairness, from a financial point of view, to the Amerac stockholders of the
Exchange Ratio. The opinion does not constitute a recommendation to any
stockholder as to how such stockholder should vote at the Amerac Special
Meeting.
In connection with rendering this opinion, McDonald reviewed and
analyzed, among other things, the following: (i) the Merger Agreement,
including the exhibits and schedules thereto; (ii) certain publicly available
information concerning Amerac, including its Annual Reports to Stockholders and
Annual Reports on Form 10-KSB for each of the last three fiscal years and its
Quarterly Reports on Form 10-QSB for each of the first three quarters of fiscal
1997; (iii) certain publicly available information concerning SMC, including
its Annual Reports to Stockholders and Annual Reports on Form 10-KSB for the
last three fiscal years and its Quarterly Reports on Form 10-QSB for the first
three quarters of fiscal 1997; (iv) certain reserve information provided by
each of Amerac and SMC, including reserve reports audited by independent
petroleum engineering firms for each of the two companies; (v) certain other
internal information, primarily financial in nature, including projections,
concerning the business and operations of Amerac and SMC furnished to McDonald
by Amerac and SMC for purposes of its analysis; (vi) certain publicly available
information concerning the trading of, and the trading markets for, Amerac
Common Stock and the SMC Common Stock; (vii) certain publicly available
information with respect to certain other companies that McDonald believed to
be comparable to Amerac or to SMC and the trading markets for certain of such
other companies' securities; and (viii) certain publicly available information
concerning the nature and terms of certain other transactions that McDonald
considered relevant to its inquiry. McDonald also met with certain officers and
employees of Amerac and SMC to discuss the business and prospects of the
respective companies, and considered such other matters as McDonald believed
relevant to its inquiry.
McDonald assumed and relied upon the accuracy and completeness of all
of the financial and other information provided to it or publicly available,
and assumed and relied upon the representations and warranties of Amerac and
SMC contained in the Merger Agreement. McDonald was not engaged, and did not
independently attempt, to verify any of such information. McDonald also relied
upon the management of Amerac and SMC as to the reasonableness of the financial
and operating projections (and the assumptions and bases therefor) provided to
it and, with Amerac's consent, assumed that such projections were reasonably
prepared on bases reflecting the best currently available estimates and
judgments of management as to the matters covered thereby. McDonald was not
engaged to assess the achievability of such projections or the assumptions on
which they were based and has expressed no opinion with respect to such
matters. In addition, McDonald did not conduct an evaluation or appraisal of
any
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of the assets, properties or facilities of either Amerac or SMC and was not
furnished with any such evaluation or appraisal. McDonald also assumed that the
conditions to the Merger as set forth in the Merger Agreement would be
satisfied and that the Merger would be consummated on a timely basis in the
manner contemplated by the Merger Agreement.
The following is a summary of analyses presented orally by McDonald to
the Amerac Board on November 14, 1997 (the "McDonald Report") in connection
with its opinion.
Discounted Cash Flow Analysis. Under this analysis, McDonald calculated
estimates of future discounted pre-tax cash flows for the reserve assets of
Amerac based on Amerac's reserve reports and certain projections provided by
Amerac and for the non-reserve assets of Amerac utilizing information and
projections provided by Amerac. Three scenarios were evaluated in which the
principal variables were oil and natural gas prices. The three pricing scenarios
used by McDonald were based on closing sale prices on the New York Mercantile
Exchange ("NYMEX") for crude oil and natural gas ("Scenario I", "Scenario II"
and "Scenario III"). To these benchmark prices, McDonald applied the appropriate
quality and transportation adjustments as advised by Amerac. In addition,
McDonald applied a discount to the value attributed to all proved non-producing
and proved undeveloped reserves to reflect the associated risk inherent in each
reserve category. For Scenario I, benchmark oil and natural gas prices were
projected to be flat at $19.80 per barrel and $2.14 per million British thermal
units ("MMBtu"), respectively, based on NYMEX closing prices as of June 30,
1997. For Scenario II, benchmark oil and natural gas prices were projected to
be flat at $21.00 per barrel and $3.08 per MMBtu, respectively, based on NYMEX
closing prices as of September 30, 1997. For Scenario III, benchmark oil and
natural gas prices were projected to be flat at $19.80 per barrel and $2.14 per
MMBtu, respectively, during the remaining months of 1997 and to escalate at 2.5%
per year thereafter. For Scenario III, operating and capital costs were also
escalated at 2.5% per year. This methodology resulted in reference value ranges
for Amerac Common Stock of $12.91 million to $18.39 million in Scenario I,
$24.74 million to $32.86 million in Scenario II, and $16.14 million to $22.34
million in Scenario III. McDonald calculated estimates of future discounted
pre-tax cash flows for the reserve assets of SMC based on the reserve reports
and certain projections provided by SMC and for the non-reserve assets of SMC
utilizing information and projections provided by SMC. Benchmark oil prices were
projected to be flat at $20.00 per barrel and benchmark natural gas prices were
projected to be flat at $2.25 per million cubic feet ("Mcf"). McDonald applied a
discount to the value attributed to all proved non-producing and proved
undeveloped reserves to reflect the associated risk inherent in each reserve
category. This methodology resulted in a reference value range for SMC Common
Stock of $48.55 million to $67.47 million.
Common Stock Comparison. Using publicly available information, McDonald
calculated market capitalization multiples of various operating and financial
statistics for certain publicly traded oil and gas companies it deemed relevant.
The total market capitalization for such companies (the "Comparable Companies")
ranged in value from $21.41 million to $247.41 million, and averaged $105.53
million in value. The Comparable Companies are Arch Petroleum Inc., Basin
Exploration, Inc., Bellwether Exploration Co., Costilla Energy, Inc., Edge
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Petroleum Corp., Harcor Energy, Inc., Inland Resources Inc., Key Production,
Inc., Magnum Hunter Resources Inc., Middle Bay Oil Company, Inc. and Sheridan
Energy, Inc. In comparing the trading attributes of the Comparable Companies to
Amerac, McDonald focused on, among other things, an analysis of the following
valuation measures: (i) stock price divided by (A) the projected fiscal year
1997 and 1998 discretionary cash flow (generally defined as cash flow from
operations before working capital and extraordinary items) per share; (B) net
asset value ("Net Asset Value"; generally defined as the estimate of future
discounted pre-tax cash flow for proved reserve assets, plus the value of
non-reserve assets and net working capital, less long-term debt and other
liabilities) per share; and (ii) enterprise value ("Enterprise Value";
generally defined as aggregate equity market value ("Equity Value"; generally
defined as an amount equal to the total shares of common stock outstanding
multiplied by the latest reported closing stock price per share), plus
long-term debt, preferred equity and minority interest less cash and cash
equivalents) divided by projected fiscal year 1997 and 1998 earnings before
interest, taxes, depletion, depreciation, amortization and exploration expenses
("EBITDAX"). For these 11 companies, the highest, median and lowest Enterprise
Value multiples of estimated 1997 EBITDAX were 15.6x, 7.4x and 5.5x,
respectively. The highest, median and lowest Enterprise Value multiples of
estimated 1998 EBITDAX were 8.0x, 5.8x and 3.9x, respectively. The highest,
median and lowest stock price multiples of estimated 1997 discretionary cash
flow per share were 11.5x, 5.4x and 4.7x, respectively. The highest, median and
lowest stock price multiples of estimated 1998 discretionary cash flow per
share were 6.5x, 4.4x and 3.3x, respectively. The highest, median and lowest
stock price multiples of Net Asset Value were 241%, 106% and 58%, respectively.
The Comparable Companies' medians were applied by McDonald to Amerac's
estimated discretionary cash flow, EBITDAX and Net Asset Value. From the asset
reference value range implied by these multiples, McDonald determined a
composite asset reference value range under this method of $6.96 million to
$30.30 million.
Comparable Transactions Analysis. McDonald reviewed certain publicly
available information on nine comparable transactions ("Comparable
Transactions") which it deemed relevant to the Merger. The total consideration
for such transactions ranged in value from $22.60 million to $385.00 million,
and averaged $197.33 million in value. The Comparable Transactions are the
acquisition of Plains Petroleum Co. by Barrett Resources Corp., the acquisition
of Consolidated Oil & Gas by Hugoton Energy Corp., the acquisition of Tide West
Oil Co. by HS Resources, Inc., the acquisition of Brock Exploration Corp. by
Key Production Co., the acquisition of Alexander Energy Corp. by National
Energy Group, the acquisition of American Cometra, Inc.'s properties located in
West Texas, South Texas and the Gulf of Mexico by Lomak Petroleum, Inc., the
acquisition of Burlington Resources Inc.'s Permian Basin properties by Magnum
Hunter Resources, Inc., the pending acquisition of DLB Oil & Gas, Inc. by
Chesapeake Energy Corp., and the pending acquisition of Coda Energy, Inc. by
Belco Oil & Gas Corp. Using publicly available information, McDonald analyzed
certain ratio and multiple information relating to the Comparable Transactions.
The analysis indicated that valuations per barrel of equivalent ("BOE")
reserves for the Comparable Transactions ranged from $4.39 to $8.87, with a
median of $5.29 as compared with an indicated BOE Value of $5.70 for Amerac.
The analysis indicated that valuations of latest 12 months' EBITDAX as a
multiple of Enterprise Value for the Comparable Transactions ranged from 5.0x
to 13.1x, with a median of 7.0x as compared with an indicated latest 12 months'
EBITDAX multiple of 8.1x for Amerac. The analysis indicated that the equity
consideration as a multiple of the latest 12 months' discretionary cash flow
for the Comparable Transactions ranged from 2.6x to 11.7x, with a median of
7.4x, as compared with an equity consideration as a multiple of the latest 12
months' discretionary cash flow of 7.3x for Amerac. The
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analysis also indicated that the equity consideration as a multiple of the Net
Asset Value for the Comparable Transactions ranged from 90% to 158%, with the
median of 98%, as compared with an equity consideration (i.e., stock price
multiple) as a multiple of the Net Asset Value of 122% for Amerac.
Pro Forma Merger Analysis. McDonald analyzed certain pro forma
financial effects from the Merger projected for the period 1997 through 1998,
after considering the aforementioned information. In connection with such
analysis, McDonald assessed the past performance of the management of SMC,
reviewed the estimates and projections prepared or provided by the managements
of Amerac and SMC, and had discussions with members of the management of SMC on
a stand-alone basis and after giving effect to the Merger, but relied only to
a limited degree on these estimates and projections in conducting its pro forma
Merger analysis. This analysis indicated that the contemplated transaction
would be anti-dilutive to projected SMC key valuation statistics on a per share
basis. McDonald concluded that, based on these projections, the contemplated
transaction would not be dilutive over the period analyzed and would not result
in higher financial leverage, thus supporting its opinion.
McDonald believes that its analyses and the summary set forth above
must be considered as a whole and that selecting portions of such analyses,
without considering all analyses, or of the above summary, without considering
all factors and analyses, would create an incomplete view of the processes
underlying the analyses set forth in the McDonald fairness opinion. The fact
that any specific analysis has been referred to in the summary above is not
meant to indicate that such analysis was given greater weight than any other
analysis.
In rendering its fairness opinion, McDonald applied its judgment to a
variety of complex analyses and assumptions. McDonald may have deemed various
assumptions more or less probable than other assumptions. The assumptions made
and the judgments applied by McDonald in rendering its opinion are not readily
susceptible to description beyond that set forth in the written text of the
fairness opinion itself.
In developing its view of the consideration to be received in the
Merger, McDonald assumed that, because of common practices used in the oil and
gas industry to evaluate assets, the methodologies described above provided a
reasonable and consistent basis for determining the reference values for the
Amerac Common Stock, the SMC Common Stock and the combined entity resulting
from the Merger.
McDonald has expressed no opinion as to the prices at which Amerac
Common Stock or SMC Common Stock may trade following the date of its opinion.
In October 1997, McDonald served as a co-managing underwriter for
SMC's public offering of its 6.875% Convertible Subordinated Debentures due
2007, and received customary compensation for such services.
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Pursuant to an engagement letter dated August 29, 1997, Amerac agreed
to and did pay McDonald a fee of $50,000 upon delivery of the opinion. In
addition, contingent upon consummation of the Merger, McDonald will be entitled
to additional compensation in the amount of $300,000 from Amerac. Amerac has
also agreed to reimburse McDonald for its out-of-pocket expenses (not to exceed
$25,000) and to indemnify McDonald against certain liabilities, including
liabilities under the federal securities laws.
SMC'S REASONS FOR THE MERGER; RECOMMENDATIONS OF THE SMC BOARD
The SMC Board believes that the terms of the Merger Agreement are fair
to and in the best interest of SMC and its stockholders. Accordingly, the SMC
Board has approved the Merger Agreement and the Share Issuance and recommends
approval of the Share Issuance by the stockholders of SMC. In reaching its
conclusion, the SMC Board consulted with the management of SMC, as well as its
legal, financial and accounting advisors, and considered a number of factors,
including, without limitation, the following:
(i) the SMC Board's review, based in part on a presentation by
SMC's management, of the business, operations, earnings and financial
condition of Amerac on a historical, prospective and pro forma basis;
(ii) the overall quality of Amerac's oil and gas properties and its
business operations;
(iii) the belief of SMC's management that overall economies of scale
and certain operating efficiencies, including the reduction of general
and administrative expenses of the combined entity, can be realized as
a result of the Merger, further enhancing the profitability of the
combined entity;
(iv) the continued recognition of the perceived growth
opportunities in the oil and gas industry and the fact that the Merger
will allow SMC to further its business strategy to increase reserves
and stockholder value through a balanced program of acquisitions,
controlled risk exploration and management of producing properties,
with a focus on higher risk projects with potential significant
reserves but reduced financial exposure by participating with
established industry partners;
(v) the enhanced geographic diversification of the combined entity
with greater financial and management resources to exploit oil and gas
properties of Amerac, including Amerac's Eastern Shelf Program and
further development of the Golden Trend and Texan Garden properties;
(vi) the pro forma Exchange Ratio between SMC Common Stock and
Amerac Common Stock;
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(vii) the increase in the quantity of publicly traded shares of SMC
Common Stock as a result of the Merger and the expected corresponding
increase in market capitalization, trading volume and institutional
interest in SMC's business and securities;
(viii) the terms of the Merger Agreement and the related transaction
documents; and
(ix) the initial results of the SMC management's due diligence
efforts, in conjunction with its legal, financial and accounting
advisors, further confirmed management's belief in the quality of
Amerac's oil and gas properties, business, operations, earnings and
financial condition, and SMC management's on-going due diligence
efforts that will continue to be conducted until the Effective Time.
The foregoing discussion of the information and factors considered and
given weight by the SMC Board is not intended to be exhaustive but is believed
to include the material factors considered by the SMC Board. In making the
decision to approve and recommend approval of the Share Issuance, in view of
the wide variety of factors considered in connection with its evaluation
thereof, the SMC Board did not find it practical to, and did not quantify or
otherwise attempt to, assign any relative or specific weights to the foregoing
factors, and individual directors may have given differing weights to different
factors.
The SMC Board's analysis relies, in part, on projected financial and
operating results of SMC and Amerac, which were prepared by the respective
managements of such companies. The methods and assumptions used in preparing
such projected financial and operating information involved significant
elements of subjective judgment on the part of the respective managements of
SMC and Amerac. Consequently, none of the projections should be relied on as
accurate or reliable predictions of the future financial performance of SMC,
Amerac or the combined entity.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
SMC stockholders and Amerac stockholders should be aware that certain
directors and members of management of Amerac may be deemed to have certain
interests in the Merger in addition to their interests as SMC stockholders and
Amerac stockholders, as the case may be. The SMC Board and the Amerac Board
were aware of these interests and considered them, among other matters, in
approving the Merger Agreement and the Merger and the other transactions
contemplated by the Merger Agreement and in recommending for stockholder
approval the Share Issuance, in the case of the SMC Board, and for stockholder
approval and adoption the Merger Agreement, in the case of the Amerac Board.
Indemnification and Insurance. SMC has agreed to indemnify the
Indemnified Parties (as defined herein), including the members of the Amerac
Board, for certain losses and maintain or procure insurance coverage for such
persons. See "Terms of the Merger -- Indemnification and Insurance."
Severance Policy. In the Merger Agreement, the Surviving Corporation
has agreed to provide three former employees, including the President and Chief
Executive Officer, of Amerac and one consultant with severance benefits of up to
six months salary and a
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comparable number of months of fully paid health insurance, if and when Amerac
terminates such persons for any reason. The aggregate value of all such
severance benefits is approximately $157,000, of which the President and Chief
Executive Officer is eligible to receive approximately $90,000.
New Director. Pursuant to the Merger Agreement, the SMC Board has
approved an increase in the number of directors comprising the SMC Board from
nine to ten, with such increase to be effective at the Effective Time, and
resolved to cause Jeffrey B. Robinson to be elected to the SMC Board to fill
the vacancy created by such increase. In addition, SMC agreed to take, or cause
to be taken, all action necessary to nominate Mr. Robinson for election to the
SMC Board at the 1998 Annual Meeting of SMC Stockholders, and, in accordance
with its normal solicitation efforts, solicit proxies for his election to the
SMC Board. See "New Director of SMC."
Certain Agreements. Amerac has entered into an agreement, dated
effective as of August 4, 1997 (the "Peak Agreement"), with Peak Enernomics,
Inc. ("Enernomics"), a corporation owned and controlled by Kenneth R. Peak, a
director and executive officer of Amerac, which provides that Amerac shall pay
Enernomics $100,000 upon the consummation of the Merger (or another merger or
business combination transaction involving Amerac). In addition, the Peak
Agreement provides that Amerac shall (i) pay Enernomics $5,000 per month until
consummation of the Merger and (ii) deliver to Enernomics 6,000 shares of Amerac
Common Stock, which shall vest in Enernomics on a monthly basis at a rate of
1,000 shares per month (but no later than upon consummation of the Merger) for
furnishing Mr. Peak's services as a member of the Special Committee.
Amerac has entered into an agreement, dated effective as of August 4,
1997 (the "Nicoletti Agreement"), with William P. Nicoletti, Chairman of the
Board of Amerac, which provides that Amerac shall, in lieu of Mr. Nicoletti's
compensation as Chairman of the Board of Amerac, (i) pay Mr. Nicoletti $2,500
per month until consummation of the Merger and (ii) deliver to Mr. Nicoletti
3,000 shares of Amerac Common Stock, which shall vest in Mr. Nicoletti on a
monthly basis at a rate of 500 shares per month (but no later than upon
consummation of the Merger) for Mr. Nicoletti's services as a member of the
Special Committee.
TERMS OF THE MERGER
The following is a summary of the material provisions of the Merger
Agreement. A copy of the Merger Agreement is attached as Appendix A to this
Joint Proxy Statement/Prospectus and is incorporated herein by reference. The
following summary does not purport to be complete and is qualified in its
entirety by reference to the Merger Agreement.
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THE MERGER; EFFECTIVE TIME
Upon the terms and subject to the conditions of the Merger Agreement,
at the Effective Time, Sub will merge with and into Amerac and the separate
corporate existence of Sub will terminate. Amerac will be the surviving
corporation in the Merger, and will continue its corporate existence under the
DGCL under the same name as a wholly owned subsidiary of SMC. The Certificate
of Incorporation and Bylaws of Sub as in effect immediately prior to the
Effective Time will be the initial certificate of incorporation and bylaws,
respectively, of Amerac, as the Surviving Corporation. The Merger will become
effective upon the execution and filing of the Certificate of Merger with the
Secretary of State of the State of Delaware or at such subsequent date or time
as shall be agreed by SMC and Amerac and be specified in the Certificate of
Merger. Such filing will be made or otherwise become effective on the Closing
Date, which Closing Date will be no later than two business days after
satisfaction or waiver of the conditions set forth in Article VI of the Merger
Agreement or such later date as the parties agree.
CONVERSION OF SECURITIES
Upon the terms and subject to the conditions of the Merger Agreement,
at the Effective Time each outstanding share of Amerac Common Stock will be
converted into the right to receive that number of shares of SMC Common Stock
calculated by dividing the Aggregate Consideration by the Exchange Ratio.
"Aggregate Consideration" means that number of shares (rounded to the nearest
whole share) of SMC Common Stock determined by dividing (i) $22,500,000 by (ii)
the Average Closing Sale Price, provided, that in no event shall the Aggregate
Consideration be less than the Minimum Consideration nor more than the Maximum
Consideration. All shares of Amerac Common Stock that are owned by Amerac as
treasury shares, and any shares of Amerac Common Stock directly or indirectly
owned by SMC, will be canceled and will cease to exist at the Effective Time
and no capital stock of SMC or other consideration will be delivered in
exchange therefor.
A description of the rights and privileges of Amerac stockholders and
certain material differences between the rights of SMC stockholders and Amerac
stockholders is set forth under the caption "Comparison of Stockholder Rights."
TREATMENT OF AMERAC OPTIONS
At the Effective Time, each Amerac Option granted under the Amerac
Option Plan which is unexpired and unexercised immediately prior thereto will
cease to represent a right to acquire shares of Amerac Common Stock and will be
adjusted into an option to purchase the number of shares of SMC Common Stock
equal to the number of shares of Amerac Common Stock subject to the Amerac
Option (without regard to actual restrictions on exercisability) multiplied by
the Exchange Ratio, at an exercise price equal to the exercise price per share
of Amerac Common Stock under the Amerac Option divided by the Exchange Ratio,
and with terms and conditions that are the same as the terms and conditions of
such Amerac Option immediately before the Effective Time. As of December 19,
1997, approximately 201,385 shares of Amerac Common Stock were issuable upon
exercise of Amerac Options.
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TREATMENT OF AMERAC WARRANTS
Pursuant to the Merger Agreement, all Amerac Warrants outstanding
under Amerac's various warrant agreements will be adjusted at the Effective
Time to represent the right to purchase that number of shares of SMC Common
Stock equal to the number of shares of Amerac Common Stock issuable immediately
prior to the Effective Time upon exercise of the Amerac Warrant (without regard
to actual restrictions on exercisability) multiplied by the Exchange Ratio,
with an exercise price equal to the exercise price which existed under the
corresponding Amerac Warrant divided by the Exchange Ratio, and with other
terms and conditions of such Amerac Warrant, including, without limitation,
certain registration rights, immediately before the Effective Time. As of
December 19, 1997, approximately 154,175 shares of Amerac Common Stock were
issuable upon exercise of Amerac Warrants.
NO FRACTIONAL SHARES
No fractional shares of SMC Common Stock will be issued to any of the
Amerac stockholders in the Merger. In lieu of any such fractional share, SMC
will pay cash in an amount equal to the value of such fractional interest
(determined with reference to the last reported sale price of SMC Common Stock
on The Nasdaq National Market on the last full trading day immediately prior to
the Effective Time). No interest will be paid or accrued on the cash in lieu of
fractional shares (and unpaid dividends and distributions, if any) payable to
holders of certificates of Amerac Common Stock. No such holder will be entitled
to dividends, voting rights or any other rights as an SMC stockholder in
respect of any fractional shares of SMC Common Stock that such holder otherwise
would have been entitled to receive.
No dividends or other distributions declared with respect to shares of
SMC Common Stock with a record date after the Effective Time will be paid to
the holder of any certificate representing shares of Amerac Common Stock until
such certificate has been surrendered for exchange. Holders of certificates
representing shares of Amerac Common Stock will be paid the amount of dividends
or other distributions with a record date after the Effective Time after
surrender of such certificates without any interest thereon.
EXCHANGE OF STOCK CERTIFICATES
As of the Effective Time, SMC will make available to an exchange agent
designated by SMC and reasonably acceptable to Amerac (the "Exchange Agent"),
for the benefit of Amerac stockholders, certificates representing the shares of
SMC Common Stock (and cash in lieu of fractional shares of SMC Common Stock and
unpaid dividends and distributions, if any).
As soon as practical after the Effective Time, SMC shall cause the
Exchange Agent to mail a form of transmittal letter to the holders of
certificates representing shares of Amerac Common Stock. The form of
transmittal letter will contain instructions with respect to the surrender of
such certificates in exchange for shares of SMC Common Stock (and cash in lieu
of fractional shares of SMC Common Stock and unpaid dividends and
distributions, if any).
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AMERAC STOCK CERTIFICATES SHOULD NOT BE RETURNED WITH THE ENCLOSED
PROXY CARD AND SHOULD NOT BE PROVIDED TO THE EXCHANGE AGENT EXCEPT WITH A
TRANSMITTAL FORM, WHICH WILL BE PROVIDED TO AMERAC STOCKHOLDERS FOLLOWING THE
EFFECTIVE TIME.
If a certificate representing shares of Amerac Common Stock has been
lost, stolen or destroyed, the Exchange Agent will issue the consideration
properly payable in accordance with the Merger Agreement upon receipt of
appropriate evidence as to such loss, theft or destruction, appropriate
evidence as to the ownership of such certificate and appropriate and customary
indemnification.
DIRECTORS AND OFFICERS OF AMERAC
Pursuant to the Merger Agreement, the directors of Sub immediately
prior to the Effective Time will be the initial directors of Amerac following
the Merger, and the officers of Sub immediately prior to the Effective Time
will be the officers of Amerac following the Merger, in each case until their
respective successors are duly elected or appointed and duly qualified.
CERTIFICATE OF INCORPORATION AND BYLAWS OF AMERAC
Pursuant to the Merger Agreement, the Certificate of Incorporation and
the Bylaws of Sub, as in effect prior to the Effective Time, will be the
initial certificate of incorporation and bylaws of the Surviving Corporation
following the Merger.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties
of SMC, Sub and Amerac regarding, among other things corporate organization and
standing, subsidiaries, corporate power and authority, capitalization,
conflicts, consents and approvals, absence of certain changes, filings with the
Commission, taxes and tax returns, compliance with applicable law, this Joint
Proxy Statement/Prospectus and the Registration Statement, litigation,
brokerage and finder's fees, the opinion of McDonald, accounting matters,
tax-free reorganization, employee benefit plans, contracts, labor relations,
permits, environmental matters and stock ownership in SMC and Amerac. The
representations and warranties of each of SMC, Sub and Amerac will not survive
the Merger.
CONDUCT OF BUSINESS PENDING THE MERGER
During the period from the date of the Merger Agreement to the
Effective Time, Amerac agreed to, and agreed to cause each of its subsidiaries
to, generally conduct their operations in the ordinary course except as
expressly contemplated by the Merger Agreement and the Merger and the other
transactions contemplated by the Merger Agreement, including without limitation
not to, and not to allow its subsidiaries to, without the prior written consent
of SMC: (i) effect certain actions with respect to its securities; (ii) sell,
encumber or otherwise dispose of any material
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property or assets, other than in the ordinary course of business consistent
with past practice; (iii) make or propose any changes in its certificate of
incorporation, bylaws or other organizational documents; (iv) merge or
consolidate with any other person or acquire a material amount of assets or
capital stock of any other person or enter into any confidentiality agreement
with any person, other than in connection with the Merger Agreement and the
Merger and the other transactions contemplated by the Merger Agreement; (v)
incur, or otherwise become liable for, indebtedness other than in the ordinary
course of business consistent with past practice, but in no event in excess of
$100,000, or guarantee, endorse or otherwise become liable for obligations of
any other entity, other than in the ordinary course of business consistent with
past practice; (vi) enter into or modify any employment, severance or similar
agreements or arrangements with, or otherwise increase the compensation or
benefits provided to, any employee other than salary increases and bonuses
granted to employees who are not officers or directors in the ordinary course
of business consistent with past practice; (vii) change its method of doing
business or change any method or principle of accounting in a manner that is
inconsistent with past practice; (viii) settle any legal actions involving an
amount in excess of $100,000; (ix) modify, terminate, release or assign any
material rights or claims with respect to any material contract to which Amerac
is a party; (x) incur or commit to any capital expenditures, obligations or
liabilities in respect thereof, other than in the ordinary course of business
consistent with past practice, but in no event in excess of $50,000
individually or $250,000 in the aggregate; (xi) take any other action that
would reasonably be expected to prevent or materially delay Amerac from
consummating the transactions contemplated by the Merger Agreement; (xii) take
any action to make any person or entity (other than SMC or Sub) not subject to
Section 203 of the DGCL; or (xiii) agree to take any action prohibited by the
foregoing.
During the period from the date of the Merger Agreement to the
Effective Time, SMC agreed to, and agreed to cause each of its subsidiaries to,
generally conduct their operations in the ordinary course except as expressly
contemplated by the Merger Agreement and the transactions contemplated thereby,
including without limitation not to, and not to allow certain of its
subsidiaries to, without the prior written consent of Amerac: (i) make or
propose any change in its certificate of incorporation or bylaws or other
organizational documents, except as contemplated by the Merger Agreement or
this Joint Proxy Statement/Prospectus; (ii) subject to certain limitations and
exceptions, merge or consolidate with any other person or acquire a material
amount of assets or capital stock of any other person that would involve, in
any case, individually or in the aggregate, the issuance of more than 20% of
the outstanding SMC Common Stock on the date of the Merger Agreement, other
than in connection with the Merger Agreement and the Merger and the other
transactions contemplated by the Merger Agreement; (iii) take any other action
that would reasonably be expected to prevent or materially delay SMC or Sub
from consummating the Merger and the other transactions contemplated by the
Merger Agreement; or (iv) agree to take any action prohibited by the foregoing.
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EMPLOYEES AND EMPLOYEE BENEFITS
In the Merger Agreement, Amerac agreed to take any and all action to
cause all directors, officers and employees of Amerac and its subsidiaries to
resign and/or be terminated from all positions with Amerac and its
subsidiaries, including termination of any employment agreements, and to
terminate any and all of Amerac's employee benefit plans, such termination to
be effective prior to the Effective Time, without cost or penalty to Amerac,
except with respect to certain severance benefits with respect to certain
individuals as agreed by SMC and Amerac.
SEVERANCE POLICY
SMC has agreed to cause the Surviving Corporation to provide its
employees with certain severance benefits if Amerac terminates such employees
for any reason. See "The Proposed Merger -- Interests of Certain Persons in
the Merger."
NEW DIRECTOR OF SMC
Pursuant to the Merger Agreement, the SMC Board has approved an
increase in the number of directors comprising the SMC Board from nine to ten,
with such increase to be effective at the Effective Time, and resolved to cause
Jeffrey B. Robinson to be elected to the SMC Board to fill the vacancy created
by such increase. In addition, SMC agreed to take, or cause to be taken, all
action necessary to nominate Mr. Robinson for election to the SMC Board at the
1998 Annual Meeting of SMC Stockholders, and, in accordance with its normal
solicitation efforts, solicit proxies for his election to the SMC Board.
OTHER ACQUISITION PROPOSALS
Amerac has agreed that, during the term of the Merger Agreement, it
shall not, and shall not authorize or permit any of its subsidiaries or any of
its or its subsidiaries' directors, officers, employees, agents or
representatives, directly or indirectly, to (i) initiate contact with, (ii)
make, solicit or encourage any inquiries or proposals from, (iii) enter into,
or participate in, any discussions or negotiations with, (iv) disclose,
directly or indirectly, any information not customarily disclosed concerning
the business and properties of Amerac or its subsidiaries to or (v) afford any
access to Amerac's or its subsidiaries' properties, books and records to any
person (other than SMC, Sub or their respective directors, officers, employees,
agents and representatives) in connection with any possible proposal relating
to (a) the disposition of Amerac's business or all or substantially all of its
assets (except for disposition of assets in the ordinary course of business
consistent with past practice), (b) the acquisition of equity or debt
securities of Amerac or its subsidiaries (except in connection with the
exercise of options) or (c) the merger, share exchange or business combination,
or similar acquisition transaction, of or involving Amerac or its subsidiaries
with any person other than SMC (each or any combination of the foregoing an
"Amerac Competing Transaction"); provided that Amerac may (1) furnish
information (subject to a confidentiality agreement in reasonably customary
form) to, and
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negotiate or otherwise engage in discussions with, any party who delivers a
written proposal for an Amerac Competing Transaction if and so long as the
Amerac Board determines in good faith, based upon advice of its outside legal
counsel, that failing to take such action would reasonably be expected to
constitute a breach of the fiduciary duties of the Amerac Board and (2) take a
position with respect to the Merger or an Amerac Competing Transaction, or
amend or withdraw such position, in compliance with Rule 14d-9 or Rule 14e-2
promulgated under the Exchange Act with regard to an Amerac Competing
Transaction. Amerac also agreed to immediately advise SMC of the receipt of any
inquiries, discussions, negotiations or proposals relating to an Amerac
Competing Transaction and promptly furnish to SMC a copy of any such proposal
or inquiry in addition to any information provided to or by any third party
relating thereto.
INDEMNIFICATION AND INSURANCE
From and after the Effective Time, SMC has agreed to, and has agreed
to cause the Surviving Corporation to, indemnify and hold harmless to the
fullest extent permitted under applicable law each person who was, at or prior
to the date of the Merger Agreement, an officer, director, employee, trustee or
agent of Amerac (or any subsidiary or division thereof), including, without
limitation, each person controlling any of the foregoing persons (individually,
an "Indemnified Party" and collectively, the "Indemnified Parties"), against
all losses, claims, damages, liabilities, costs or expenses (including
attorneys' fees), judgments, fines, penalties and amounts paid in settlement in
connection with any claim, action, suit, proceeding or investigation arising
out of or pertaining to acts or omissions, or alleged acts or omissions, by
them in their capacities as such, whether commenced, asserted or claimed before
the Effective Time. SMC has also agreed to cause the Surviving Corporation to
keep in effect in its Certificate of Incorporation and Bylaws provisions
providing for exculpation of director and officer liability and indemnification
of the Indemnified Parties to the fullest extent permitted under the DGCL. In
the event of any actual or threatened claim, action, suit, proceeding or
investigation in respect of such acts or omissions, SMC agreed to cause the
Surviving Corporation to cooperate in the defense of any such matter.
From and after the Effective Time, SMC has agreed to, and has agreed
to cause the Surviving Corporation to, maintain in effect for not less than six
years the current policies of directors' and officers' liability insurance
maintained by Amerac; provided that SMC may substitute therefor policies of at
least the same coverage and amounts containing terms and conditions that are no
less advantageous in any material respect to the Indemnified Parties; provided
further, however, that in no event shall SMC or the Surviving Corporation be
required to expend for such insurance more than the current annual premiums
paid by Amerac for such insurance and, in the event the cost of such coverage
shall exceed that amount, SMC or the Surviving Corporation shall purchase as
much coverage as possible for such amount.
SPECIAL MEETINGS
Each of SMC and Amerac has agreed to duly call, give notice of,
convene and hold a meeting of its respective stockholders, to be held as
promptly as practicable following the date of the Merger Agreement for the
purpose of obtaining the requisite stockholder approvals and
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adoption in connection with the Merger Agreement, the Merger and the Share
Issuance, and each shall use reasonable efforts to cause such meetings to occur
on the same date. SMC and Amerac have also agreed that each of the SMC Board
and Amerac Board, subject to their fiduciary duties under applicable law as
advised by counsel, will (i) recommend that its stockholders approve such
matters and (ii) use reasonable efforts to obtain any necessary approvals by
its stockholders.
CONDITIONS TO THE MERGER
The respective obligations of each party to consummate the Merger are
generally subject to fulfillment of the following conditions: (i) no order or
decree which prevents the consummation of the Merger shall have been issued and
remain in effect, and no statute, rule or regulation shall have been enacted by
any Governmental Authority (as defined in the Merger Agreement) which prevents
the consummation of the Merger; (ii) all material consents, approvals, permits
or authorizations required to be obtained prior to the Effective Time from any
Governmental Authority shall have been obtained; (iii) the Merger Agreement and
the Merger and the other transactions contemplated by the Merger Agreement shall
have been approved and adopted by the Amerac stockholders, and the Share
Issuance shall have been approved by the SMC stockholders; (iv) the Registration
Statement shall have become effective under the Securities Act and no stop order
suspending the effectiveness of the Registration Statement shall have been
issued and no proceedings for that purpose shall have been initiated by the
Commission or any other Governmental Authority; (v) no Action (as defined in the
Merger Agreement) shall have been instituted by any Governmental Authority which
seeks to prevent consummation of the Merger, or which seeks material damages,
shall continue to be outstanding; (vi) the SMC Common Stock to be issued in the
Merger shall have been authorized for quotation on The Nasdaq National Market,
subject to official notice of issuance; (vii) all consents, waivers and
approvals of third parties required in connection with the transactions
contemplated by the Merger Agreement shall have been obtained, except where the
failure to obtain such consents, waivers and approvals, in the aggregate, would
not be expected to result in a material adverse effect on SMC or Amerac, as the
case may be; and (viii) SMC shall have received an opinion dated as of the
Closing Date of Akin, Gump, Strauss, Hauer & Feld, L.L.P. to the effect that (a)
the Merger should constitute a reorganization within the meaning of Section
368(a)(2)(E) of the Code and (b) no gain or loss should be recognized by Amerac
stockholders with respect to shares of SMC Common Stock received in the Merger
in exchange for shares of Amerac Common Stock, except with respect to cash
received in lieu of fractional shares of SMC Common Stock.
The obligations of Amerac to consummate the Merger shall be subject to
the fulfillment of the following conditions unless waived by Amerac: (i) the
representations and warranties of each of SMC and Sub shall be true and correct
on the date of the Merger Agreement and on and as of the Closing Date (as
defined in the Merger Agreement), (ii) each of SMC and Sub shall have performed
in all material respects each of its obligations in the Merger Agreement and
(iii) McDonald shall have delivered an opinion to the Amerac Board confirming,
as of the date of this Joint Proxy Statement/Prospectus, its fairness opinion.
See "The Proposed Merger -- Fairness Opinion of McDonald."
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The obligations of SMC and Sub to consummate the Merger and the other
transactions contemplated hereby shall be generally subject to the fulfillment
of the following conditions unless waived by each of SMC and Sub: (i) the
representations and warranties of Amerac shall be true and correct on the date
of the Merger Agreement and on and as of the Closing Date; (ii) Amerac shall
have performed in all material respects each of its obligations in the Merger
Agreement; and (iii) each person who was identified by Amerac as an "affiliate"
of Amerac, within the meaning of Rule 145 under the Securities Act, shall have
executed and delivered to SMC an Affiliate Agreement (as defined in the Merger
Agreement) (see "-- Restrictions on Sales of Shares by Affiliates").
TERMINATION
The Merger Agreement may be terminated at any time prior to the
Effective Time, whether before or after approval and adoption of the Merger
Agreement by Amerac stockholders: (i) by mutual consent of SMC and Amerac; (ii)
by either SMC or Amerac if any permanent injunction or other order or decree of
a court or other competent Governmental Authority preventing the consummation of
the Merger shall have become final and nonappealable; (iii) by either SMC or
Amerac if the Merger shall not have been consummated before April 30, 1998;
provided, however, if the Registration Statement was filed as of such date, then
on or after the date 60 days after the Registration Statement is declared
effective, unless extended by both the SMC Board and the Amerac Board; (iv) by
SMC or Amerac if at the meeting of Amerac stockholders held for such purpose the
requisite vote of Amerac stockholders to approve the Merger and the transactions
contemplated by the Merger Agreement shall not have been obtained; (v) by SMC or
Amerac if at the meeting of SMC stockholders held for such purpose the requisite
vote of the SMC stockholders to approve the Share Issuance shall not have been
obtained; (vi) by SMC or Amerac if there shall have been a material breach of
any of the covenants or agreements or any of the representations or warranties
set forth in the Merger Agreement on the part of the other party, which breach
is not cured within 30 days following written notice, or which breach, by its
nature, cannot be cured prior to the Closing (as defined in the Merger
Agreement), but only if such breach would constitute a failure of a condition to
closing; (vii) by Amerac if the Amerac Board shall determine to engage in an
Amerac Competing Transaction and Amerac shall have delivered to SMC a written
notice of the determination by the Amerac Board to terminate the Merger
Agreement pursuant to this clause; provided, however, that Amerac may not
terminate the Merger Agreement pursuant to this clause unless (a) five business
days shall have elapsed after delivery to SMC of such notice, (b) at the end of
such five business day period the Amerac Board shall continue to believe that
the failure to engage in such Amerac Competing Transaction would reasonably be
expected to be a breach of the fiduciary duties of the Amerac Board (after
giving effect to any adjustment to the terms and conditions of such transactions
proposed by SMC in response to such Amerac Competing Transaction) and (c) at the
time of such termination, Amerac shall have paid to SMC the Amerac Termination
Fee (as defined herein); or (viii) by SMC if the Amerac Board shall not have
recommended the Merger to Amerac stockholders, or shall have resolved not to
make such recommendation, or shall have materially modified or rescinded its
recommendation of the Merger to Amerac stockholders, or shall have modified or
rescinded its approval of the Merger Agreement, or shall have resolved to do any
of the foregoing.
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EXPENSES
Except as otherwise provided below, whether or not the Merger is
consummated, all costs and expenses incurred in connection with the Merger
Agreement and the transactions contemplated thereby, including, without
limitation, the fees and disbursements of counsel, financial advisors and
accountants, will be paid by the party incurring such costs and expenses,
provided that all printing and mailing expenses and filing fees will be divided
equally between SMC and Amerac.
TERMINATION FEES
If the Merger Agreement is terminated: (i) by SMC or Amerac because at
the meeting of Amerac stockholders held for such purpose the requisite vote of
Amerac stockholders to approve the Merger and the transactions contemplated by
the Merger Agreement shall not have been obtained and (a) a Prior Event (as
defined herein) shall have occurred prior to such termination and (b) either
(1) Amerac enters into a definitive agreement with respect to an Amerac
Competing Transaction within twelve months following such termination and such
Amerac Competing Transaction is thereafter consummated, or (2) an Amerac
Competing Transaction is consummated within twelve months following such
termination; (ii) by Amerac because the Amerac Board determines to engage in an
Amerac Competing Transaction; or (iii) by SMC because the Amerac Board shall
have materially modified or rescinded its recommendation of the Merger or its
approval of the Merger Agreement, then in any such case Amerac will pay to SMC
in cash a termination fee in an amount equal to $1.0 million; provided,
however, that if the Merger Agreement is terminated by SMC pursuant to clause
(iii) above and the Amerac Board has not recommended the Merger to the Amerac
stockholders, or has resolved not to make such recommendation, or has
materially modified or rescinded its recommendation of the Merger to Amerac
stockholders, or has modified or rescinded its approval of the Merger
Agreement, or has entered into an acquisition, merger or similar agreement to
effect, or has effected, an Amerac Competing Transaction, or has resolved to do
any of the foregoing, in any case because McDonald shall not have delivered its
opinion confirming, as of the date this Joint Proxy Statement/Prospectus, its
fairness opinion, then the amount to be paid by Amerac shall be the amount of
SMC's out-of-pocket expenses incurred in connection with the Merger, up to a
maximum of $500,000.
A "Prior Event" means any of the following events: (i) any person
(other than SMC or any of its subsidiaries) shall have commenced, or shall have
filed a registration statement under the Securities Act with respect to, a
tender offer or exchange offer to purchase any shares of Amerac Common Stock,
such that, upon consummation of such offer, such person would beneficially own
or control 50% or more of the then outstanding shares of Amerac Common Stock;
(ii) Amerac or any of its subsidiaries shall have entered into, authorized,
recommended, proposed or publicly announced an intention to enter into,
authorize, recommend or propose, an agreement, arrangement or understanding
with any person (other than SMC or any of its subsidiaries) to, or any person
(other than SMC or any of its subsidiaries) shall have announced a bona fide
intention to, or Amerac shall have announced that any person (other than SMC or
any
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of it subsidiaries) has proposed or communicated its intention to, or Amerac
shall have received a bona fide proposal or communication regarding an
intention to, (a) effect any Amerac Competing Transaction, (b) purchase, lease
or otherwise acquire 40% or more of the assets of Amerac or any of its
subsidiaries or (c) purchase or otherwise acquire beneficial ownership of
securities representing 30% or more of the voting power of Amerac or any of its
subsidiaries; or (iii) any person (other than SMC or any subsidiary of SMC)
shall have acquired beneficial ownership of a number of shares of Amerac Common
Stock in addition to the number of shares of Amerac Common Stock beneficially
owned by such person on November 17, 1997 equal to 30% or more of the voting
power of Amerac.
If the Merger Agreement is terminated by SMC or Amerac because SMC
stockholders have failed to approve the Share Issuance, and (i) an SMC Prior
Event (as defined herein) shall have occurred prior to such termination and
(ii) either (a) SMC shall enter into a definitive agreement with respect to an
SMC Competing Transaction (as defined herein) within twelve months following
such termination and such SMC Competing Transaction (as defined herein) is
thereafter consummated, or (b) an SMC Competing Transaction is consummated
within twelve months following such termination, then SMC will pay to Amerac in
cash by wire transfer in immediately available funds to an account designated
by Amerac a termination fee in an amount equal to $1.0 million.
As used herein, the term "SMC Prior Event" shall have the same meaning
with respect to SMC as the term "Prior Event" has with respect to Amerac, with
such changes in the definition thereof as are appropriate to contemplate SMC in
lieu of Amerac. As used herein, the term "SMC Competing Transaction" shall mean
a transaction involving the acquisition of the business or all or substantially
all of the assets of SMC, or the merger, share exchange or business
combination, or similar acquisition transaction of or involving SMC in which
(i) persons who immediately prior to the consummation of such transaction were
serving as directors of SMC do not comprise a majority of the directors of the
acquiring or surviving entity immediately following the consummation of such
transaction and (ii) the stockholders of SMC as of the date hereof do not hold
collectively a majority of the shares or entity interests of the acquiring or
surviving entity immediately following the consummation of such transaction.
AMENDMENT AND WAIVER
The Merger Agreement may be amended by the parties thereto, at any
time before or after approval and adoption of the Merger Agreement by the
Amerac stockholders or authorization of the Share Issuance by the SMC
stockholders, but after such approval or authorization, no amendment shall be
made which by law requires further approval or authorization by the Amerac
stockholders or the SMC stockholders, as the case may be, without such further
approval or authorization. Notwithstanding the foregoing, the Merger Agreement
may not be amended except by an instrument in writing signed on behalf of each
of the parties thereto.
At any time prior to the Effective Time, SMC (with respect to Amerac)
and Amerac (with respect to SMC and Sub) may, to the extent legally allowed,
(a) extend the time for the performance of any of the obligations or other acts
of such party, (b) waive any inaccuracies in
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the representations and warranties contained in the Merger Agreement or in any
document delivered pursuant thereto and (c) waive compliance with any of the
agreements or conditions contained in the Merger Agreement. Any agreement on
the part of a party thereto to any such extension or waiver shall be valid only
if set forth in a written instrument signed on behalf of such party.
REGULATORY APPROVALS
SMC and Amerac are not aware of any material governmental or regulatory
approvals required to be obtained for consummation of the Merger, other than
compliance with federal securities laws and with state securities "Blue Sky"
laws.
ACCOUNTING TREATMENT
It is intended that SMC will account for the Merger as a purchase under
the purchase method of accounting in accordance with Accounting Principles Board
Opinion No. 16, and, without limitation, the FASB, Accounting Standards, FASB
EITF Abstracts, FASB Bulletins and SEC Accounting Bulletins and Accounting
Series Releases relating thereto. The effect of purchase accounting treatment is
that the acquired assets and assumed liabilities will be recorded at their fair
values at the Effective Time. Any excess of consideration paid by SMC over the
estimated fair value of Amerac's assets will be recorded as additional oil and
gas properties.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following is a discussion of the material United States federal
income tax consequences of the Merger to the Amerac stockholders. The
discussion is based on provisions of the Code, Treasury Regulations thereunder,
current administrative rulings and court decisions which are in effect on the
date of this Joint Proxy Statement/Prospectus. All of the foregoing are subject
to change and any such change could be made with retroactive effect and/or
affect the continuing validity of this discussion. Amerac and SMC have not
sought and will not seek any rulings from the Internal Revenue Service with
respect to any of the matters discussed herein.
The federal income tax discussion set forth below does not consider
the facts and circumstances of particular Amerac stockholders and may not be
applicable to certain classes of special status taxpayers, including insurance
companies, securities dealers, financial institutions, tax-exempt
organizations, investment companies, foreign persons and persons who acquired
Amerac Common Stock pursuant to the exercise of employee stock options or
rights or otherwise as compensation. The following discussion does not address
the federal income tax consequences of any of the transactions described in the
section of this Joint Proxy Statement/Prospectus entitled "The Proposed Merger
- -- Interests of Certain Persons in the Merger." In addition, no information is
provided herein with respect to the tax consequences of the Merger under
applicable foreign, state or local laws. Amerac stockholders are urged to
consult their tax advisors as to their respective personal tax situations
including the applicability and effect of foreign, state, local and other tax
laws.
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The obligation of Amerac to effect the Merger is conditioned on
delivery to SMC of an opinion dated as of the Closing Date from Akin, Gump,
Strauss, Hauer & Feld, L.L.P., counsel to SMC, based on certain representations
to be made by Amerac and SMC and on assumptions set forth in the opinion, that
for federal income tax purposes (i) the Merger should constitute a
reorganization within the meaning of Section 368(a) of the Code and (ii) no gain
or loss should be recognized by Amerac stockholders with respect to SMC Common
Stock received in the Merger in exchange for Amerac Common Stock except with
respect to cash received in lieu of fractional shares of SMC Common Stock.
Based on such opinion, the material federal income tax consequences of
the Merger for Amerac stockholders are the following:
(i) no gain or loss will be recognized by Amerac
stockholders upon their exchange of Amerac Common Stock for SMC Common
Stock, except that any Amerac stockholder who receives cash proceeds
in lieu of a fractional share of SMC Common Stock will recognize gain
or loss equal to the difference between such proceeds and the tax
basis allocated to the fractional share of SMC Common Stock (any such
gain or loss will constitute capital gain or loss if such
stockholder's shares of Amerac Common Stock are held as a capital
asset at the Effective Time);
(ii) the tax basis of the SMC Common Stock, including any
fractional share of SMC Common Stock deemed received and exchanged for
a cash payment, received by an Amerac stockholder in exchange for
shares of Amerac Common Stock will be the same as such stockholder's
tax basis in the Amerac Common Stock surrendered in exchange therefor;
and
(iii) the holding period of the SMC Common Stock (including
any fractional share of SMC Common Stock deemed received and exchanged
for a cash payment) received by an Amerac stockholder will include the
period during which the shares of Amerac Common Stock surrendered in
exchange therefor were held; provided such shares of Amerac Common
Stock were held by such Amerac stockholder as a capital asset at the
Effective Time.
Although the matter is not free from doubt, the Merger should not
result in the recognition of gain or loss under Section 1001 of the Code to
holders of Amerac Warrants. The Internal Revenue Service or a court of law could
disagree with this conclusion and instead treat the transaction in connection
with the Amerac Warrants as a taxable exchange. In such event, each holder of
Amerac Warrants will recognize gain or loss on the deemed exchange equal to the
fair market value of the holder's Amerac Warrants after the Merger and the
holder's adjusted tax basis in the Amerac Warrants. Any such gain or loss
recognized by a holder of Amerac Warrants generally will be long-term capital
gain or loss if the holder of the Amerac Warrants has held the Amerac Warrant
for more than 18 months at the time of disposition. The distinction between
capital gain or loss and ordinary income or loss is important for purposes of
the limitations of an Amerac Warrant holder's ability to offset capital gains
against ordinary income and for purposes of determining whether individuals may
be entitled to a preferential tax rate on long-term capital gains. In
particular, the Taxpayer Relief of Act 1997 further reduces rates on capital
gains recognized by individuals in respect of assets held for more than 18
months. Holders of Amerac Warrants are advised to consult their own tax advisors
as to the consequences of the Merger in their particular circumstances.
THE FOREGOING IS A GENERAL DISCUSSION OF CERTAIN MATERIAL FEDERAL
INCOME TAX CONSEQUENCES OF THE MERGER AND IS INCLUDED FOR GENERAL INFORMATION
ONLY. THE FOREGOING DISCUSSION DOES NOT TAKE INTO ACCOUNT THE PARTICULAR FACTS
AND CIRCUMSTANCES OF EACH AMERAC STOCKHOLDER'S OR AMERAC WARRANTHOLDER'S TAX
STATUS AND ATTRIBUTES. AS A RESULT, THE FEDERAL INCOME TAX CONSEQUENCES
DESCRIBED IN THE FOREGOING DISCUSSION MAY NOT APPLY TO EVERY AMERAC STOCKHOLDER
OR AMERAC WARRANTHOLDER. ACCORDINGLY, EACH STOCKHOLDER IS ENCOURAGED TO CONSULT
HIS OR HER TAX ADVISOR AS TO PARTICULAR FACTS AND CIRCUMSTANCES WHICH MAY BE
SPECIFIC TO SUCH PERSON AND NOT COMMON TO STOCKHOLDERS OR AMERAC WARRANTHOLDERS
AS A WHOLE AND ALSO AS TO ANY ESTATE, GIFT, STATE, LOCAL OR FOREIGN TAX
CONSEQUENCES THAT MAY ARISE OUT OF THE MERGER AND/OR ANY SALE THEREAFTER OF
SHARES OF SMC COMMON STOCK RECEIVED IN THE MERGER.
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<PAGE> 59
RESTRICTIONS ON SALES OF SHARES BY AFFILIATES
The shares of SMC Common Stock issuable to former Amerac stockholders
pursuant to the Merger have been registered under the Securities Act. Such
shares will be freely transferable under the Securities Act, except for shares
issued to any person who may be deemed to be an affiliate of Amerac or SMC, as
the case may be, for purposes of Rule 145 under the Securities Act (an
"Affiliate").
Pursuant to the terms of the Merger Agreement, Amerac has agreed to
use its best efforts to cause each person who is an Affiliate of Amerac to
deliver to SMC a written agreement providing that such person will agree not to
sell, transfer or otherwise dispose of shares of SMC Common Stock to be
received by such person in the Merger except in compliance with the applicable
provisions of the Securities Act and the rules and regulations promulgated
thereunder.
MANAGEMENT AND OPERATIONS AFTER THE MERGER
BOARD OF DIRECTORS OF SMC
Pursuant to the Merger Agreement, the SMC Board has approved an
increase in the number of directors comprising the SMC Board from nine to ten,
with such increase to be effective at the Effective Time, and resolved to cause
Jeffrey B. Robinson to be elected to the SMC Board to fill the vacancy created
by such increase. In addition, SMC agreed to take, or cause to be taken, all
action necessary to nominate Mr. Robinson for election to the SMC Board at the
1998 Annual Meeting of SMC Stockholders, and, in accordance with its normal
solicitation efforts, solicit proxies for his election to the SMC Board.
COMMITTEES OF THE BOARD OF DIRECTORS OF SMC
SMC's operations are managed under the broad supervision and direction
of the SMC Board, which has the ultimate responsibility for the establishment
and implementation of SMC's general operating philosophy, objectives, goals and
policies. Pursuant to delegated authority, certain SMC Board functions are
discharged by four of the SMC Board's standing committees, the Executive,
Audit, Compensation and Nominating Committees. Members of each committee for a
given year are selected by the SMC Board following the annual stockholders'
meeting.
The Executive Committee was established during 1996 and is authorized
to exercise, to the extent permitted by law, the power of the full SMC Board
when a meeting of the full SMC Board is not practicable or necessary. Its
current members are Steven H. Mikel, Thomas R. Fuller and Donald H. Weise, Jr.
The Audit Committee recommends to the SMC Board the independent
accountants of SMC, reviews SMC's annual report on Form 10-KSB, reviews SMC's
internal controls and accounting operations, and reviews any transactions of
SMC in which management or controlling persons of SMC have an interest. Other
matters which the Audit Committee reviews
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<PAGE> 60
with SMC's independent accountants include financial policies and practices,
the arrangement, scope and results of the annual audit and the independent
accountants' findings and recommendations relating to SMC's accounting
practices, internal controls and accounting procedures. The current members of
the Audit Committee are B. Travis Basham, Robert R. Hillery, E. Ralph Hines,
Jr. and James E. Nielson.
The Compensation Committee is responsible for formulating and adopting
or recommending to the SMC Board executive compensation plans and policies,
including those relating to incentive compensation and benefits. This Committee
also supervises the administration of all employee benefit and executive
compensation programs, including the establishment of specific criteria against
which executive officers' annual performance-based compensation is measured.
Compensation Committee decisions regarding aggregate executive compensation,
corporate performance goals relating to incentive compensation, and the Chief
Executive Officer's compensation are subject to approval by the SMC Board. The
current members are Howell H. Howard, E. Ralph Hines, Jr. and James E. Nielson.
The Nominating Committee is responsible for considering and nominating
candidates for election as directors. This Committee will consider nominees
submitted by stockholders. Stockholders who wish to suggest individuals for
possible future consideration for SMC Board positions should direct
recommendations to the Nominating Committee at SMC's principal executive
offices. The current members are E. Ralph Hines, Jr., Thomas R. Fuller, Howell
H. Howard, James E. Nielson and Spencer L. Youngblood.
OFFICERS OF SMC
Each of the current officers of SMC will continue as an executive
officer of SMC after the Merger. Each such officer serves at the discretion
of the SMC Board.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF SMC
Stockholders of each of SMC and Amerac are urged to read, in its
entirety, the management's discussion and analysis of financial condition and
results of operations of SMC as set forth in the SMC Annual Report and the SMC
Quarterly Report included in this Joint Proxy Statement/Prospectus as Appendix
D and Appendix E, respectively.
SELECTED HISTORICAL AND UNAUDITED
PRO FORMA COMBINED FINANCIAL DATA
SELECTED FINANCIAL DATA OF SMC
Stockholders of each of SMC and Amerac are urged to read, in its
entirety, the SMC Annual Report, included as Appendix D to this Joint Proxy
Statement/Prospectus.
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<PAGE> 61
SELECTED FINANCIAL DATA OF AMERAC
Stockholders of each of SMC and Amerac are urged to read, in its
entirety, the Amerac Annual Report on Form 10-KSB included as Appendix F to
this Joint Proxy Statement/Prospectus.
SELECTED PRO FORMA COMBINED FINANCIAL DATA
In April 1997, SMC acquired a 22.68% working interest in the Albert
Philyaw Unit 8-1 #1 and the Turner 6-1 wells for $3,300,000. In May 1997, SMC
acquired the oil and gas assets and outstanding capital stock of BEC Energy,
Inc. ("BEC") for $10,640,000. The acquisitions included interests in 14 wells
located in the Big Escambia Creek Field in Escambia County, Alabama and were
recorded using the purchase price method of accounting. Pursuant to the Merger
Agreement, the terms and conditions of which are elsewhere described in this
Joint Proxy Statement/Prospectus, Amerac will merge with and into a wholly owned
subsidiary of SMC, with Amerac, as a wholly owned subsidiary of SMC, being the
surviving corporation. Pursuant to the Merger, each share of Amerac Common Stock
outstanding as of the Effective Time will be converted into the right to receive
shares of SMC Common Stock, plus cash in lieu of fractional shares. The purchase
price is approximately $22,500,000 which will be recorded using the purchase
price method of accounting. In October 1997, SMC issued $36,000,000 of its
6.875% Convertible Subordinated Debentures due 2007 (the "Debentures"). Each
Debenture is convertible into 121.07 shares of SMC Common Stock at a conversion
price of $8.26 per share. The final subscription amounted to $41,400,000, which
(i) was used to pay off existing debt of $20,700,000, (ii) was used to pay the
costs associated with the issuance of the Debentures, (iii) will be used to
retire Amerac's debt and (iv) will be used to fund future acquisitions and
capital expenditures. The following pro forma statement of operations for the
twelve months ended December 31, 1996, and for the nine months ended September
30, 1997, present the foregoing acquisitions and the offering of the Debentures
as if they had occurred at January 1, 1996. The pro forma statement of
operations for the twelve months ended December 31, 1996 also includes the
results of SMC Development, L.P., for the period prior to its acquisition by SMC
in August 1996. The following pro forma financial statements should be read in
conjunction with the separate financial statements and notes thereto in the SMC
Annual Report and in SMC's Quarterly Reports and are not necessarily indicative
of the results of operations of SMC as it may be in the future or as if it might
have been had the foregoing acquisition been effective at January 1, 1996.
SOUTHERN MINERAL CORPORATION
PRO FORMA COMBINED BALANCE SHEET
SEPTEMBER 30, 1997
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Southern Amerac Total
Mineral Energy Pro Forma Note Pro Forma
Corporation Corporation Adjustments Reference Consolidated
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 551 $ 53 $ 10,371 (6) $ 10,975
Receivables and other 3,546 1,485 -- 5,031
--------- --------- --------- ---------
Total current assets 4,097 1,538 10,371 16,006
Property, plant and equipment, at cost 44,428 34,313 (6,347) (1) 72,394
Accumulated depletion, depreciation and
amortization (7,650) (16,593) 16,593 (1) (7,650)
--------- --------- --------- ---------
36,778 17,720 10,246 (1) 64,744
Deferred tax asset -- -- 984 (2) 984
Properties held for sale and other 3,142 335 2,500 (6) 5,977
--------- --------- --------- ---------
TOTAL ASSETS $ 44,017 $ 19,593 $ 24,101 $ 87,711
========= ========= ========= =========
CURRENT LIABILITIES
Accounts payable and accrued
liabilities $ 1,712 $ 610 $ -- $ 2,322
Note payable 512 -- -- 512
Current portion of long-term debt -- 579 (579) (6) --
--------- --------- --------- ---------
Total current liabilities 2,224 1,189 (579) 2,834
Long-term debt 20,700 7,250 13,450 (6) 41,400
Deferred income taxes 1,316 -- (1,316) (2) --
--------- --------- --------- ---------
TOTAL LIABILITIES 24,240 8,439 11,555 $ 44,234
STOCKHOLDERS' EQUITY
Common stock 91 195 (162) (1) 124
Additional paid-in capital 14,031 151,181 (127,514) (1) 37,698
Retained earnings (deficit) 5,707 (140,222) 140,222 (1) 5,707
--------- --------- --------- ---------
19,829 11,154 12,546 43,529
Less treasury stock (52) -- -- (52)
--------- --------- --------- ---------
TOTAL STOCKHOLDERS' EQUITY 19,777 11,154 12,546 43,477
--------- --------- --------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 44,017 $ 19,593 $ 24,101 $ 87,711
========= ========= ========= =========
</TABLE>
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<PAGE> 62
SOUTHERN MINERAL CORPORATION
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Southern Jan-Aug BEC Amerac Pro Total
Mineral SMC Energy, A. Philyaw Energy Forma Note Pro Forma
Corporation Development L.P. Inc. Unit 8-1 #1 Corporation Adjustments Reference Consolidated
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues
Oil and Gas $ 11,780 $ 220 $ 1,061 $ 1,015 $ 10,458 $ 920 (3) $ 25,454
Gain on sale 453 -- -- -- 22 -- 475
-------- -------- ------- -------- -------- -------- --------
Total revenues 12,233 220 1,061 1,015 10,480 920 25,929
Expenses
Production 2,742 87 363 143 2,588 (5) (3) 5,918
Exploration 865 -- -- -- 305 -- 1,170
Depletion, depreciation
and amortization 2,875 61 264 -- 2,947 1,320 (4) 7,467
General and
administrative 1,682 6 53 -- 2,309 (2,357) (5) 1,693
-------- -------- ------- -------- -------- -------- --------
Total expenses 8,164 154 680 143 8,149 (1,042) 16,248
Income from operations 4,069 66 381 872 2,331 1,962 9,681
Other income expenses
and deduction
Interest and other
income 286 29 -- -- 186 -- 501
Interest and debt
expense 1,242 -- 211 -- 888 1,810 (6) 4,151
-------- -------- ------- -------- -------- -------- --------
Income before income
taxes 3,113 95 170 872 1,629 152 6,031
Income tax expense 679 -- -- -- 50 942 (2) 1,671
Net income before -------- -------- ------- -------- -------- -------- --------
preferred dividends 2,434 95 170 872 1,579 (790) 4,360
Preferred dividends and
consideration -- -- -- -- (5,434) -- (5,434)
Net income (loss) -------- -------- ------- -------- -------- -------- --------
applicable to common
stockholders $ 2,434 $ 95 $ 170 $ 872 $( 3,855) $( 790) $( 1,074)
======== ======== ======= ======== ======== ======== ========
Primary net income
(loss) per share $ 0.34 $( 0.10)
======== ========
Primary weighted
average shares
outstanding 7,215 3,333 (7) 10,548
======== ======== ========
</TABLE>
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<PAGE> 63
SOUTHERN MINERAL CORPORATION
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Southern Amerac Total Pro
Mineral BEC Energy, A. Philyaw Energy Pro Forma Note Forma
Corporation Inc. Unit 8-1 #1 Corporation Adjustments Reference Consolidated
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues
Oil and Gas $10,253 $ 539 $ 289 $ 7,206 $ 223 (2) $18,510
Gain on sale 503 -- -- -- -- 503
------- ------- ------- ------- ------- -------
Total Revenues 10,756 539 289 7,206 223 19,013
Expenses
Production 2,610 189 46 2,317 (43) (2) 5,119
Exploration 1,517 -- -- 314 -- 1,831
Depletion, depreciation and
amortization 2,512 159 -- 2,144 281 (4) 5,096
Valuation reduction -- -- -- 2,269 -- 2,269
General and administrative 1,518 15 -- 1,997 (1,997) (5) 1,533
------- ------- ------- ------- ------- -------
Total Expenses 8,157 363 46 9,041 (1,759) 15,848
Income from operations 2,599 176 243 (1,835) 1,982 3,165
Other income expenses and deductions
Interest and other income 135 -- -- 19 -- 154
Interest and debt expense 785 66 -- 510 1,189 (6) 2,550
------- ------- ------- ------- ------- -------
Income before income taxes 1,949 110 243 (2,326) 793 769
Income tax expense (benefit) 556 -- -- 30 (431) (2) 155
------- ------- ------- ------- ------- -------
Net income before preferred dividend 1,393 110 243 (2,356) 1,224 614
Preferred dividends and excess
conversion consideration -- -- -- -- -- --
------- ------- ------- ------- ------- -------
Net income (loss) applicable to
common stockholders $ 1,393 $ 110 $ 243 $(2,356) $ 1,224 $ 614
======= ======= ======= ======= ======= =======
Primary net income per share $ 0.14 $ 0.05
======= =======
Primary weighted average shares
outstanding 10,108 3,333 (7) 13,441
======= ======= =======
</TABLE>
- ---------------------------
(1) To record the acquisition of Amerac using the purchase method of accounting.
Assumes the issuance of 3,333,333 shares of SMC Common Stock valued at
$22,500,000 in exchange for all of the outstanding shares of Amerac Common
Stock, plus expenses related to such acquisition. The allocation of the
purchase price to the acquisition assets and liabilities is preliminary and,
therefore, subject to change.
(2) Tax adjustment to reflect taxes computed as if the combining entities were a
single taxpaying entity.
(3) Reflects subsequent acquisition by BEC of additional property interests in
the Albert Philyaw 8-1 #1 and the Turner 6-1 wells in April 1997, Amerac's
properties and the reduction in operating costs of the Amerac properties due to
the elimination of third party operating costs, which will be absorbed by SMC's
personnel.
(4) Reflects additional depreciation, depletion and amortization related to oil
and gas properties step-up in basis for the effect of the above-described
acquisitions.
(5) Reflects elimination of $48,000 payment of management fees to related
parties of BEC and elimination of Amerac's general and administrative expenses
because such third party expenses will not be incurred by SMC subsequent to the
Merger.
(6) Reflects effect of issuing $41,400,000 of Debentures and related interest
expense at 6.875%. Approximately $20,700,000 of the proceeds from the offering
of the Debentures was utilized to retire debt balances related to the Credit
Facility and $7,829,000 will be used to retire Amerac's outstanding debt.
Offering costs of $2,500,000 related to Debentures are amortized over the life
of the Debentures.
(7) Reflects the issuance of an estimated 3,333,333 shares of SMC Common Stock
in exchange for all of the outstanding shares of Amerac Common Stock pursuant
to the Merger Agreement.
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<PAGE> 64
PRICE RANGE OF SMC COMMON STOCK
SMC Common Stock is quoted on The Nasdaq National Market under the
symbol "SMIN." Until July 22, 1997, SMC Common Stock was quoted on The Nasdaq
Stock Market's SmallCap Market under the same symbol. The following table sets
forth the range of high and low bid prices of SMC Common Stock as reported by
The Nasdaq SmallCap Market for each of the quarters indicated through July 22,
1997 and the high and low bid prices of SMC Common Stock on The Nasdaq National
Market from July 23, 1997 for the periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C> <C>
1994
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2.13 $1.63
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.00 0.69
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.38 0.94
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.13 0.44
1995
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1.25 $0.63
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.25 0.94
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.06 0.75
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.63 0.75
1996
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2.13 $1.25
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.38 1.81
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.00 2.88
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.00 4.25
1997
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $7.75 $4.00
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.50 3.50
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.13 4.13
Fourth Quarter (through December 19, 1997) . . . . . . . . . . . . . . . 8.13 5.50
</TABLE>
On December 19, 1997, the closing sale price for SMC Common Stock as
quoted on The Nasdaq National Market was $5.75 per share. As of December 19,
1997, there were approximately 613 holders of record of SMC Common Stock.
DIVIDEND POLICY OF SMC
SMC has not declared or paid a cash dividend on SMC Common Stock
since 1994 and it is anticipated that SMC will continue to reinvest its earnings
in its business and will not pay cash dividends. Declaration of dividends is
within the discretion of the SMC Board. In addition, declaration of dividends is
subject to certain restrictive covenants contained in the Credit Facility.
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<PAGE> 65
DESCRIPTION OF SMC CAPITAL STOCK
SMC's authorized capital stock currently consists of 20,000,000 shares
of common stock, par value $0.01 per share, of which as of December 19, 1997,
9,128,741 shares were issued and outstanding and 1,970,080 shares were reserved
for issuance upon exercise of outstanding options and warrants and for issuance
under SMC's various stock option and compensation plans. All outstanding shares
of SMC Common Stock are fully paid and nonassessable.
Holders of SMC Common Stock are entitled to received dividends, if, as
and when declared by the SMC Board out of funds legally available therefor, and
are entitled on liquidation to share ratably in all assets of SMC remaining
after the payment of liabilities. Since 1994, SMC has reinvested all earnings
in SMC and, accordingly, has not paid any dividends on SMC Common Stock.
Although SMC intends to continue to reinvest future earnings SMC may determine
to pay dividends in the future. SMC's ability to declare and pay any such
dividends will depend upon, among other things, the earnings and financial
condition of SMC and restrictive provisions contained in the Credit Facility
and any other financing arrangements to which SMC may be subject from time to
time.
Each share of SMC Common Stock has one vote on all matters presented
to the stockholders. A majority of issued and outstanding shares of SMC Common
Stock entitled to vote and represented at a stockholders meeting in person or
by proxy constitutes a quorum for the transaction of business. The affirmative
vote of a majority of shares present and entitled to vote at a meeting at which
a quorum is present generally will constitute stockholder action. Certain
fundamental corporate changes such as amending the articles of incorporation, a
merger or a disposition of all of SMC's assets require the approval of a
majority of outstanding shares entitled to vote thereon. Directors are elected
by a plurality of votes cast by stockholders entitled to vote therefor. Since
SMC Common Stock does not have cumulative voting rights, holders of more than
50% of the shares present and entitled to vote for directors at a meeting at
which a quorum is present may, if they choose to do so, elect all of the
directors and, in that event, the holders of the remaining shares will not be
able to elect any directors.
Since the SMC Articles do not deny preemptive rights, under Section
78.265 of the NGCL holders of SMC Common Stock have preemptive rights to
acquire uninsured shares, treasury shares or securities convertible into such
shares except with respect to (i) shares issued to directors, officers or
employees pursuant to approval by the affirmative vote of stockholders, (ii)
shares sold for a consideration other than cash, (iii) shares issued at the
same time that the stockholder who claims a preemptive right acquired his
shares, (iv) shares issued as part of the same offering in which the
stockholder who claims a preemptive right acquired his shares, (v) shares (or
shares into which convertible securities may be converted) which upon issuance
are registered pursuant to Section 12 of the Exchange Act or (vi) shares of any
class that is preferred or limited as to dividends or assets or to any
obligations, unless convertible into SMC Common Stock or carrying a right to
subscribe to or acquire SMC Common Stock. To the extent any preemptive right
exists, it is only an opportunity to acquire shares or other securities upon
such terms as the SMC Board may fix for the purpose of providing a fair and
reasonable opportunity
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<PAGE> 66
for the exercise of such right. SMC Common Stock is registered under Section 12
of the Exchange Act and holders thereof will have no preemptive rights in
respect of SMC Common Stock issuances for so long as SMC Common Stock remains
so registered.
American Stock Transfer & Trust Company, New York, New York, is the
transfer agent and registrar for SMC Common Stock.
For additional information concerning provisions of the SMC Articles
and the SMC Bylaws that could delay, defer or prevent a change in control of
SMC, see "Comparison of Stockholder Rights -- Appraisal and Dissenters' Rights,"
"-- State Anti-Takeover Statutes," " -- Limitation on Directors' Liability" and
"-- Indemnification of Officers and Directors."
COMPARISON OF STOCKHOLDER RIGHTS
GENERAL
As a result of the Merger, stockholders of Amerac will become
stockholders of SMC and the rights of all such former holders of Amerac Common
Stock will thereafter be governed by the SMC Articles, as they may be amended at
the SMC Special Meeting, the SMC Bylaws and the NGCL. The rights of the holders
of Amerac Common Stock are presently governed by the Amerac Certificate of
Incorporation, as amended (the "Amerac Certificate"), the Amerac Bylaws and the
DGCL. The following summary, which does not purport to be a complete statement
of the general differences between the rights of the stockholders of SMC and
Amerac, sets forth certain differences between the NGCL and the DGCL, between
the SMC Articles and the Amerac Certificate and between the SMC Bylaws and the
Amerac Bylaws. This summary is qualified in its entirety by reference to the
full text of each of such documents, the NGCL and the DGCL. For information as
to how such documents may be obtained, see "Incorporation of Certain Documents
by Reference."
SIZE AND CLASSIFICATION OF THE BOARD OF DIRECTORS
SMC. Nevada law provides that a corporation's board of directors shall
consist of at least one member and the authorized number of directors may be
fixed or variable within a fixed minimum or maximum as provided in either the
corporation's articles of incorporation or in the bylaws as the SMC Bylaws
provide. The SMC Articles and the SMC Bylaws provide that the maximum number of
directors is twelve and the minimum number is three, except in the case where
all the shares of SMC Common Stock are owned beneficially and of record by
either one or two stockholders, and then the SMC Board cannot be less than the
number of stockholders. Pursuant to the SMC Bylaws, at least one director must
be a U.S. citizen. Currently, the SMC Board has fixed the number of directors
comprising the SMC Board at ten. Although Nevada law allows directors to be
divided into three separate classes with staggered terms of office, neither the
SMC Articles nor the SMC Bylaws provide for classification of directors.
Amerac. The Amerac Bylaws provide that the number of directors of
Amerac will be determined by a resolution of the Amerac Board, but in no event
can there be less than two or
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<PAGE> 67
more than ten. Although the DGCL allows directors to be divided into three
separate classes with staggered terms of office, neither the Amerac Certificate
nor the Amerac Bylaws provide for the classification of directors.
Pursuant to the Merger Agreement, the Board of Directors of the
Surviving Corporation shall consist of the directors of Sub. See "Management
and Operations After the Merger."
REMOVAL OF DIRECTORS; FILLING VACANCIES ON THE BOARD OF DIRECTORS
SMC. Pursuant to Section 78.335 of the NGCL, a director may be removed
by the vote of the holders of not less than two-thirds of the voting power of
the voting stock, subject to certain restrictions concerning cumulative voting.
However, a Nevada corporation may include in its articles of incorporation a
provision requiring the approval of a larger percentage of the voting power to
remove a director. This section also provides that any vacancy in the board of
directors may be filled by a majority of the remaining directors, even if the
remaining directors do not constitute a quorum. The SMC Bylaws provide that the
SMC Board will fill all vacancies created by reason of resignation, an increase
in the number of directors or otherwise, by the affirmative vote of a majority
of the remaining directors, with the director so elected to serve for the
remainder of the term of the departed director, in the case of a resignation,
or otherwise until the next annual meeting of stockholders where such newly
appointed director would stand for election. All directors will continue in
office until the election and qualification of their respective successors in
office.
Amerac. Pursuant to the Amerac Certificate and the Amerac Bylaws, any
director or the entire Amerac Board may be removed with or without cause, at
any time, by the affirmative vote of the holders of record of a majority of the
outstanding shares of Amerac stock entitled to vote for the election of
directors. The Amerac Bylaws provide that any vacancy occurring on the Amerac
Board resulting from an increase in the number of directors may be filled by
the vote of a majority of the directors remaining in office at such time
although less than a quorum, with such successor to serve until the next annual
election and until his successor is elected and qualified, unless sooner
displaced.
STOCKHOLDER ACTION BY WRITTEN CONSENT
SMC. Under the NGCL, unless otherwise provided in the articles of
incorporation or the bylaws, stockholders may take action without a meeting
upon the written consent of stockholders holding at least a majority of the
voting power, except that if a different proportion of voting power is required
for such an action at a meeting, then that proportion of written consent is
required. The SMC Bylaws provide for this use of written consent except with
respect to the election of directors or the alteration, amendment or repeal of
the SMC Bylaws, if stockholder approval is sought.
Amerac. Under the DGCL, unless otherwise provided in the certificate
of incorporation, stockholders may take action without a meeting, without prior
notice and without a vote, upon the written consent of stockholders having not
less than the minimum number of votes that
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<PAGE> 68
would be necessary to authorize the proposed action at a meeting at which all
shares entitled to vote were present and voted. The Amerac Bylaws conform to
the statutory provisions, except that the Amerac Bylaws require a stockholder
meeting for the election of directors.
MEETINGS OF STOCKHOLDERS
SMC. Under the SMC Bylaws, special meetings of stockholders may be
called by the president and shall be called by the president or secretary at
the request in writing of a majority of the (i) SMC Board or (ii) SMC
stockholders owning a majority of the voting stock issued and outstanding.
Under NGCL, unless the articles of incorporation or the bylaws provide
otherwise, stockholders holding at least a majority of the voting power are
necessary to constitute a quorum for the transaction of business. The SMC
Bylaws provide that the presence in person or by proxy of a majority of the
voting stock entitled to vote at a meeting constitutes a quorum for the
transaction of business at that meeting.
Amerac. Pursuant to the Amerac Bylaws, a special meeting of
stockholders may be called (i) by order of the Amerac Board or (ii) by
stockholders holding at least a majority of the shares of Amerac entitled to
vote at the meeting.
The Amerac Bylaws provide that the holders of record of a majority of
the voting power entitled to vote at a meeting, present in person or by proxy,
constitutes a quorum at such meeting. The DGCL provides that quorum and voting
requirements may be increased or decreased by amendment of the Amerac
Certificate and the Amerac Bylaws (which, in the case of bylaw amendments, may
be effected by the Amerac Board) so long as the requirement for a quorum does
not fall below one-third of the shares entitled to vote and subject to
provisions of the DGCL setting forth voting requirements for certain specified
actions, such as mergers.
REQUIRED VOTE FOR AUTHORIZATION OF CERTAIN ACTIONS
SMC. Nevada law requires that the board of directors of a corporation
that is a merging or surviving entity to recommend a plan of merger to its
stockholders and that the stockholders approve the plan. The approval of the
stockholders of an entity surviving the merger is not required if (i) the
articles of incorporation of the surviving corporation will not differ from its
articles before the merger, (ii) each stockholder of the surviving corporation
whose shares were outstanding immediately before the merger will hold the same
number of shares, with identical designations, preferences, limitations, and
relative rights immediately after the merger and (iii) the number of shares of
common stock (voting or participating) to be issued in the merger (or to be
issuable upon conversion of any convertible instruments to be issued in the
merger) will not exceed twenty percent of the shares of common stock
outstanding immediately before the merger.
Amerac. Under the DGCL, the recommendation of the Amerac Board and the
approval of a majority of the outstanding shares of Amerac entitled to vote
thereon are required to effect a
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merger or consolidation or to sell, lease or exchange substantially all of
Amerac's assets. Subject to the provisions of Section 203 of the DGCL, no vote
of the stockholders of Amerac would be required in connection with a merger if
(i) Amerac were the surviving corporation, (ii) the merger agreement did not
amend the Amerac Certificate, (iii) each share of stock of Amerac outstanding
immediately before the merger was an identical outstanding or treasury share of
Amerac after such merger and (iv) the number of shares of Amerac Common Stock
to be issued in the merger (or to be issuable upon conversion of any
convertible instruments to be issued in the merger) did not exceed twenty
percent of the shares of stock of Amerac outstanding immediately before the
merger.
AMENDMENT OF ARTICLES/CERTIFICATE OF INCORPORATION AND BYLAWS
SMC. Under Nevada law, the articles of incorporation may be amended by
the affirmative vote of a majority of the outstanding stock, unless a greater
proportion of the voting power is required in the articles of incorporation.
While the NGCL provides that the board of directors may amend the
bylaws if the bylaws so provide, the stockholders also have the power to amend
the bylaws. The SMC Bylaws provide that the SMC Board shall have the power to
alter or repeal any of the bylaws at any regular meeting of the Board or at any
special meeting of the SMC Board by a majority of the SMC Board. The SMC Bylaws
also allow for stockholder alteration or repeal of the bylaws by a majority of
the holders of the voting stock at a special or regular meeting of
stockholders.
Amerac. Under the DGCL, an amendment to the certificate of
incorporation generally requires the recommendation of the board of directors,
the approval of the holders of a majority of all shares entitled to vote
thereon, voting together as a single class, and the holders of a majority of
the outstanding stock of each class entitled to vote thereon.
Under the DGCL, the board of directors may amend the bylaws if the
certificate of incorporation contains a provision entitling the directors to
amend the bylaws. Even if the certificate of incorporation contains such a
provision, the stockholders also have the power to amend the bylaws. The Amerac
Certificate states that it may be amended by any method allowed under the DGCL.
The Amerac Bylaws may be altered, amended or repealed by the Amerac Board. In
addition, the Amerac Bylaws may be altered, amended or repealed by the
affirmative vote of 66 2/3% of the outstanding stock entitled to vote.
APPRAISAL AND DISSENTERS' RIGHTS
SMC. Under Nevada law, a stockholder is entitled to dissent from, and
receive the fair value of shares owned in the event of, a plan of merger or
exchange, if the stockholder is entitled to vote on the transaction. However,
there is no right to dissent to a plan of merger or exchange in favor of the
holders of shares of any class or series which were either listed on a national
securities exchange, designated as a national market security of an interdealer
quotation system by the National Association of Securities Dealers, Inc. or
held by at least 2,000 stockholders of record, unless either (i) the articles
of incorporation provide otherwise or (ii) the holders are
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required to receive anything other than cash, shares of the surviving or
acquiring corporation or a combination thereof.
Amerac. The DGCL provides appraisal rights for certain mergers and
consolidations. Appraisal rights are not available to holders of (i) shares
listed on a national securities exchange or held of record by more than 2,000
stockholders or (ii) shares of the surviving corporation of the merger, if the
merger did not require the approval of the stockholders of such corporation,
unless in either case, the holders of such shares are required pursuant to the
merger to accept anything other than (a) shares of stock of the surviving
corporation, (b) shares of stock of another corporation which are also listed
on a national securities exchange or held by more than 2,000 holders or (c)
cash in lieu of fractional shares of such stock. Appraisal rights are not
available for a sale of assets or an amendment to the certificate of
incorporation.
STATE ANTI-TAKEOVER STATUTES
SMC. Under Nevada law, once a person has acquired or offers to acquire
twenty or more percent of the shares of the stock of a corporation (deemed the
"Control Shares") and requests and undertakes to pay for the expense of a
special stockholders meeting, one must be held so that the stockholders can
vote on whether the Control Shares may exercise voting rights. Except as
otherwise provided in the articles of incorporation, the approval of the
holders of a majority of the outstanding stock not held by the acquiror is
required for the stock held by the acquiror to receive voting rights. If the
Control Shares represent a majority or greater interest and are accorded full
voting rights by a majority of the other shares, then, unless the charter or
bylaws of the corporation in effect on the tenth day following the acquisition
of a controlling interest by an acquiror provide otherwise, any stockholder who
did not vote in favor of full voting rights for the Control Shares may require
the corporation to repurchase any or all of such stockholder's shares for the
fair value thereof. The provisions of the NGCL regarding the acquisition of
Control Shares (the "Control Share Acquisition Provisions") are applicable to
any acquisition of Control Shares unless the articles of incorporation or
bylaws of the corporation in effect on the tenth day following the acquisition
of a controlling interest by an acquiring person provide that the Control Share
Acquisition Provisions do not apply. Although a corporation may expressly
exclude itself from application of the foregoing Control Share Acquisition
Provisions, SMC has not done so.
Nevada law provides that a resident domestic corporation may not
engage in any "combination" (broadly defined to include a wide range of
transactions with an interested stockholder or an affiliate or associate of an
interested stockholder) with an interested stockholder (defined as the
beneficial owner of ten percent or more of the outstanding voting power) for
three years after the interested stockholder's date of acquiring shares, unless
the combination or the purchase of shares made by the interested stockholder on
the interested stockholder's date of acquiring shares is approved by the board
of directors before that date or if the consideration to be paid by the
interested stockholder is at least equal to the highest of (i) the highest
price per share paid by the interested stockholder within the three years
immediately preceding the date of the announcement of the combination or in the
transaction in which he became an interested stockholder, whichever is higher,
(ii) the market value per common share on the date of announcement of the
combination or the date the interested stockholder acquired
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the shares, whichever is higher, or (iii) if higher for the holders of
preferred stock, the highest liquidation value of the preferred stock.
Under Nevada law, the selection of a period for the achievement of
corporate goals is the responsibility of the directors. In addition, the
directors and officers, in exercising their respective powers with a view to
the interests of the corporation, may consider (i) the interests of the
corporation's employees, suppliers, creditors and customers, (ii) the economy
of the state and nation, (iii) the interests of the community and of society
and (iv) the long-term as well as short-term interests of the corporation and
its stockholders, including the possibility that these interests may be best
served by the continued independence of the corporation. The directors also may
resist a change or potential change in control of the corporation if the
directors by a majority vote of a quorum determine that the change or potential
change is opposed to or not in the best interests of the corporation "upon
consideration of the interests of the corporation's stockholders" or for one of
the other reasons described above. Finally, the directors may take action to
protect the interests of the corporation and its stockholders by adopting or
executing plans that deny rights, privileges, power or authority to a holder of
a specified number of shares or percentage of share ownership or voting power.
Amerac. Section 203 of the DGCL would prohibit a "business
combination" (as defined in Section 203, generally including mergers, sales and
leases of assets, issuances of securities and similar transactions) by Amerac
or a subsidiary with an "interested stockholder" (as defined in Section 203,
generally the beneficial owner of 15 percent or more of Amerac's voting stock)
within three years after the person or entity becomes an interested
stockholder, unless (i) prior to the person or entity becoming an interested
stockholder, the business combination or the transaction pursuant to which such
person or entity became an interested stockholder shall have been approved by
the Amerac Board, (ii) upon the consummation of the transaction in which the
person or entity became an interested stockholder, the interested stockholder
held at least 85 percent of the voting stock of Amerac (excluding for purposes
of determining the number of shares outstanding, shares held by persons who are
both officers and directors of Amerac and shares held by certain employee
benefit plans) or (iii) the business combination is approved by the Amerac
Board and by the holders of at least two-thirds of the outstanding voting stock
of Amerac, excluding shares held by the interested stockholder.
LIMITATION ON DIRECTORS' LIABILITY
SMC. As permitted under Nevada law, the SMC Articles provide that a
director or officer shall not be personally liable to SMC or its stockholders
for damages for breach of fiduciary duty as a director or officer, except for
liability for acts or omissions which involve intentional misconduct, fraud or
a knowing violation of the law or for the unlawful payment of dividends.
Amerac. Section 102 of the DGCL allows a corporation to limit or
eliminate the personal liability of directors to the corporation and its
stockholders for monetary damages for breach of fiduciary duty as a director.
However, this provision excludes any limitation on liability (i) for any breach
of the director's duty of loyalty to the corporation or its stockholders, (ii)
for acts or
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omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) for intentional or negligent payment of
unlawful dividends or stock purchase or redemption or (iv) for any transaction
from which the director derived an improper personal benefit. The Amerac
Certificate provides for the limitation on directors' liability as permitted by
this section.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
SMC. Under Nevada law, a corporation may, and in certain circumstances
must, indemnify its officers, directors, employees or agents for expenses,
judgments or settlements, actually and reasonably incurred by them in
connection with suits and other legal proceedings, if they acted in good faith
and in a manner reasonably believed to be in or not opposed to the best
interests of the corporation, and with respect to criminal proceedings, had no
reasonable cause to believe that their conduct was unlawful. A corporation may
adopt procedures for advancing expenses to directors and officers prior to
final adjudication, as long as they undertake to repay the amounts advanced if
it is ultimately determined that they were not entitled to be indemnified. The
SMC Bylaws allow for indemnification and, pursuant to certain procedures,
advancement of expenses.
Amerac. Section 145 of the DGCL provides that a corporation may
indemnify its officers and directors who were or are a party to any action,
suit or proceeding by reason of the fact that he or she was a director, officer
or employee of the corporation by, among other things, a majority vote of a
quorum consisting of directors who were not parties to such action, suit or
proceeding, provided that such officers and directors acted in good faith and
in a manner they reasonably believed to be in or not opposed to the best
interests of the corporation. The Amerac Certificate and the Amerac Bylaws
provide for indemnification of officers and directors to the fullest extent
permitted by the DGCL. The Amerac Certificate also provides for the payment of
expenses incurred by directors and officers in defending a proceeding in
advance of the final disposition of such proceeding as authorized by the Amerac
Board.
NO CUMULATIVE VOTING
SMC. Although permitted by the NGCL, the SMC Articles do not provide
for cumulative voting for directors.
Amerac. Although permitted by the DGCL, the Amerac Certificate does
not provide for cumulative voting for directors.
CONFLICT-OF-INTEREST TRANSACTIONS
SMC. The NGCL generally permits transactions involving a Nevada
corporation and an interested director or officer of that corporation if (i)
the fact of the common directorship, office or financial interest is known or
disclosed to the board of directors and a majority of disinterested directors
consents, (ii) the fact of the common directorship, office or financial
interest is known or disclosed to the stockholders and a majority of shares
entitled to vote thereon consents, (iii)
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the fact of the common directorship, office or financial interest is not
disclosed or known to the director or officer at the time the transaction is
brought before the board of directors for action or (iv) the contract or
transaction is fair to the corporation at the time it is authorized or
approved.
Amerac. The DGCL generally permits transactions involving a Delaware
corporation and an interested director or officer of that corporation if (i)
the material facts are disclosed and a majority of disinterested directors
consents, (ii) the material facts are disclosed and a majority of shares
entitled to vote thereon consents or (iii) the transaction is fair to the
corporation at the time it is authorized by the board of directors, a committee
thereof, or the stockholders.
DIVIDENDS AND OTHER DISTRIBUTIONS
SMC. Under the NGCL, a corporation may pay dividends or make other
distributions with respect to its stock unless, after giving effect to the
dividend or distribution, either the corporation would not be able to pay its
debts as they become due in the usual course of business or, except as
otherwise specifically allowed by its articles of incorporation, the
corporation's total assets would be less than the sum of its total liabilities
plus the amount that would be needed, if the corporation were to be dissolved
at that time, to satisfy the preferential rights of stockholders whose rights
are superior to those stockholders receiving the dividend or distribution.
Amerac. The DGCL generally allows dividends to be paid out of surplus
of the corporation or, in case there is no surplus, out of the net profits of
the corporation for the current fiscal year and/or the prior fiscal year. No
dividends may be paid if it would result in the capital of the corporation
being less than the capital represented by the preferred stock of the
corporation.
DUTIES OF DIRECTORS
SMC. The NGCL permits a board of directors to consider, including in
connection with a change or potential change in control of the corporation, (i)
the interests of the corporation's employees, suppliers, creditors and
customers, (ii) the economy of the state and nation, (iii) the interests of the
community and of society and (iv) the long-term as well as short-term interests
of the corporation and its stockholders, including the possibility that these
interests may be best served by the continued independence of the corporation.
Amerac. The DGCL does not contain a specific provision elaborating on
the duties of a board of directors with respect to the best interests of the
corporation. Delaware courts have permitted directors to consider various
constituencies provided that there be some rationally related benefit to the
stockholders.
RELATIONSHIPS BETWEEN SMC AND AMERAC
On November 17, 1997, SMC and Amerac agreed to enter into a definitive
farmout agreement covering an undivided one-third of Amerac's working interest
in Amerac's South Timbalier 198 property insofar as pertains to an exploration
well proposed by the operator, a
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major independent oil company. Under such agreement, by participating in the
drilling of the well as to such interest, SMC would earn an assignment thereof
from Amerac, and Amerac would retain a 10% overriding royalty interest
(proportionately reduced to the extent of the interest assigned) without any
"back-in" or conversion option. Terms of the definitive farmout agreement with
SMC would be substantially the same as the terms of a farmout agreement Amerac
expects to enter into with the operator covering the remaining two-thirds of
Amerac's working interest in the property.
On November 21, 1997, SMC and Amerac entered into an agreement with
respect to Amerac's acquisition from Richland Minerals, Inc. (the "Richland
Acquisition") of certain leasehold and other interests. In accordance with the
Merger Agreement, SMC consented to Amerac's effecting the Richland Acquisition
and to Amerac's borrowing of certain funds to finance the $480,000 net purchase
price to be paid in connection therewith (the "Purchase Price") under Amerac's
credit agreement with Bank One, Texas, National Association. In addition, SMC
reimbursed Amerac for 50% of the Purchase Price (i.e., $240,000) and Amerac in
turn assigned to SMC an undivided 50% of the interest Amerac proposed to
acquire pursuant to the Richland Acquisition. SMC and Amerac further agreed (i)
to negotiate a joint operating agreement covering such interests and the
interests of Amerac and Amerac's Eastern Shelf Program participants in the
properties affected thereby and (ii) that if the Merger Agreement is terminated
prior to consummation of the Merger, Amerac would resign as operator under such
joint operating agreement and vote its interests covered thereby in favor of
the election of SMC as successor operator.
RELATIONSHIPS WITH INDEPENDENT ACCOUNTANTS
KPMG Peat Marwick LLP has acted as independent certified public
accountants for SMC since December 31, 1996, and Price Waterhouse LLP has acted
as independent accountants for Amerac for a period in excess of five
years. It is expected that representatives of KPMG Peat Marwick LLP and Price
Waterhouse LLP will be present at the SMC Special Meeting and the Amerac
Special Meeting, respectively, to respond to appropriate questions of
stockholders and to make a statement if they so desire.
LEGAL OPINIONS
Certain legal matters with respect to the Merger and securities
offered hereby will be passed upon for SMC by Akin, Gump, Strauss, Hauer &
Feld, L.L.P., Houston, Texas. Mr. Todd L. Gremillion, a partner of Akin, Gump,
Strauss, Hauer & Feld, L.L.P., beneficially owns 83,000 shares of SMC Common
Stock.
EXPERTS
The financial statements included in this Joint Proxy
Statement/Prospectus, except as they relate to the unaudited nine month periods
ended September 30, 1997 and 1996, have been audited by various independent
accountants. The firms and periods covered by these audits are indicated in
the individual accountants' reports. Such financial statements have been so
incorporated by reference in reliance on the reports of the various independent
accountants given on the authority of such firms as experts in auditing and
accounting.
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The financial statements of SMC as of December 31, 1996 and for the
year then ended have been included in this Joint Proxy Statement/Prospectus and
in the Registration Statement in reliance upon the report of KPMG Peat Marwick
LLP, independent certified public accountants, appearing elsewhere in this
Joint Proxy Statement/Prospectus, and upon the authority of said firm as
experts in auditing and accounting.
The consolidated financial statements of SMC, as of December 31, 1995
and for each of the two years in the period ended December 31, 1995,
incorporated by reference in this Joint Proxy Statement/Prospectus, have been
audited by Grant Thornton LLP, independent certified public accountants, as
stated in their report thereon incorporated by reference in this Joint Proxy
Statement/Prospectus, and so incorporated by reference in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
The financial statements of BEC Energy Inc. as of December 31, 1996,
and for the year then ended have been incorporated by reference in this Joint
Proxy Statement/Prospectus in reliance upon the report of KPMG Peat Marwick
LLP, independent certified public accountants, incorporated by reference
herein, and upon the authority of said firm as experts in accounting and
auditing.
The financial statements of Amerac as of December 31, 1995 and 1996
and for each of the three years in the period ended December 31, 1996 included
in this Joint Proxy Statement/Prospectus have been so included in reliance on
the report of Price Waterhouse LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
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APPENDIX A
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
This Amended and Restated Agreement and Plan of Merger (this
"Agreement") is made and entered into as of the 17th day of November, 1997, by
and among Southern Mineral Corporation, a Nevada corporation ("Parent"), SMC
Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of
Parent ("Sub"), and Amerac Energy Corporation, a Delaware corporation (the
"Company").
PRELIMINARY STATEMENTS
A. Parent desires to combine its business and operations with the
business and operations of the Company through the merger (the "Merger") of Sub
with and into the Company, with the Company as the surviving corporation,
pursuant to which each share of Company Common Stock (as defined in Section
4.4) outstanding at the Effective Time (as defined in Section 1.2) will be
converted into the right to receive shares of Parent Common Stock (as defined
in Section 3.4) as more fully provided herein.
B. The Company desires to combine its business and operations with the
business and operations of Parent and to become a wholly owned subsidiary of
Parent and for the holders of shares of Company Common Stock ("Company
Stockholders") to have a continuing equity interest in the combined businesses
of Parent and the Company.
C. The parties intend that the Merger constitute a tax-free
"reorganization" within the meaning of Section 368(a) of the Internal Revenue
Code of 1986, as amended (the "Code").
D. The parties intend that the Merger be accounted for under the
purchase method of accounting.
E. The respective Boards of Directors of Parent, Sub and the Company
have determined that the Merger in the manner contemplated herein is fair to
and in the best interests of their respective stockholders and, by duly adopted
resolutions, have approved and adopted this Agreement.
F. Parent, Sub and the Company have entered into that certain
Agreement and Plan of Merger, dated as of November 17, 1997 (the "Original
Agreement"), and this Agreement amends and restates the Original Agreement in
its entirety.
AGREEMENT
Now, therefore, in consideration of these premises and the
mutual and dependent promises hereinafter set forth, the parties hereto agree
as follows:
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ARTICLE I
THE MERGER
1.1 The Merger. Upon the terms and subject to the conditions hereof,
and in accordance with the provisions of the Delaware General Corporation Law
(the "DGCL"), Sub shall be merged with and into the Company as soon as
practicable following the satisfaction or waiver of the conditions set forth in
Article VI, but in no event later than two business days thereafter (the date
of such merger being referred to herein as the "Closing Date"). Following the
Merger, the separate corporate existence of Sub shall cease and the Company
shall continue its existence under the laws of the State of Delaware. The
Company, in its capacity as the corporation surviving the Merger, is
hereinafter sometimes referred to as the "Surviving Corporation".
1.2 Effective Time. The Merger shall be consummated by filing with the
Secretary of State of the State of Delaware (the "Delaware Secretary of State")
a certificate of merger (the "Certificate of Merger") in such form as is
required by and executed in accordance with the DGCL. The Merger shall become
effective (the "Effective Time") when the Certificate of Merger has been filed
with the Delaware Secretary of State or at such later time as may be agreed by
Parent and the Company and specified in the Certificate of Merger. Prior to the
filing referred to in this Section 1.2, a closing (the "Closing") shall be held
at the offices of Akin, Gump, Strauss, Hauer & Feld, L.L.P. at 711 Louisiana,
Suite 1900, Houston, Texas 77002, or such other place as the parties may agree.
1.3 Effects of the Merger. The Merger shall have the effects set forth
in the DGCL.
1.4 Certificate of Incorporation and By-laws. The Certificate of
Incorporation of Sub, as in effect immediately prior to the Effective Time,
shall be the initial Certificate of Incorporation of the Surviving Corporation.
The By-laws of Sub, as in effect immediately prior to the Effective Time, shall
be the initial By-laws of the Surviving Corporation.
1.5 Directors and Officers. From and after the Effective Time, the
officers and the directors of Sub shall be the officers and the directors of
the Surviving Corporation, in each case until their respective successors are
duly elected and qualified.
1.6 Additional Actions. If, at any time after the Effective Time, the
Surviving Corporation shall consider or be advised that any further deeds,
assignments or assurances in law or any other acts are necessary or desirable
to carry out the provisions of this Agreement, the proper officers and
directors of Parent and the Company shall take all such necessary action.
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ARTICLE II
CONVERSION OF SECURITIES
2.1 Conversion of Capital Stock. At the Effective Time, by virtue of
the Merger and without any action on the part of Parent, Sub or the Company:
(a) Each share of common stock of Sub issued and outstanding
immediately prior to the Effective Time shall be converted into one share of
common stock of the Surviving Corporation. Such shares shall thereafter
constitute all of the issued and outstanding capital stock of the Surviving
Corporation.
(b) For purposes of this Agreement, "Aggregate Consideration"
shall mean that number of shares (rounded to the nearest whole share) of common
stock, $.01 par value per share, of Parent ("Parent Common Stock") determined
by dividing (i) $22,500,000.00 (the "Purchase Price") by (ii) the average
closing sale price of a share of Parent Common Stock as quoted on the Nasdaq
Stock Market ("Nasdaq") for the twenty consecutive trading days which precede
the third trading day which is immediately prior to the Closing, as reported
(absent manifest error in the printing thereof) by The Wall Street Journal (the
"Average Closing Sale Price"); provided, however, that if the Aggregate
Consideration as calculated pursuant to the foregoing would be (X) less than
2,727,272 shares of Parent Common Stock, then the Aggregate Consideration shall
be deemed to be 2,727,272 shares of Parent Common Stock or (Y) more than
3,333,333 shares of Parent Common Stock, then the Aggregate Consideration shall
be deemed to be 3,333,333 shares of Parent Common Stock. Each share of Company
Common Stock (other than shares to be canceled in accordance with Section
2.1(c)) issued and outstanding immediately prior to the Effective Time shall be
converted into the right to receive that number of shares of Parent Common
Stock calculated by dividing the Aggregate Consideration by the total number of
shares of Company Common Stock issued and outstanding immediately prior to the
Effective Time (the "Exchange Ratio").
(c) Each share of capital stock of the Company held in the
treasury of the Company or held by Parent or any of its subsidiaries shall be
canceled and retired and no payment shall be made in respect thereof.
2.2 Exchange Ratio, Fractional Shares. No certificates for fractional
shares of Parent Common Stock shall be issued as a result of the conversion
provided for in Section 2.1(b). To the extent that an outstanding share of
Company Common Stock would otherwise have become a fractional share of Parent
Common Stock, the holder thereof, upon presentation of such fractional interest
represented by an appropriate certificate for Company Common Stock to the
Exchange Agent pursuant to Section 2.3, shall be entitled to receive a cash
payment therefor in an amount equal to the value (determined with reference to
the last reported sales price of Parent Common Stock on Nasdaq on the last full
trading day immediately prior to the Effective Time) of such fractional
interest. Such payment with respect to fractional shares is merely intended to
provide a mechanical rounding off of, and is not a separately bargained for,
consideration. If more than one certificate representing shares of Company
Common Stock shall be surrendered for the account of
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the same holder, the number of shares of Parent Common Stock for which
certificates have been surrendered shall be computed on the basis of the
aggregate number of shares represented by the certificates so surrendered. In
the event that prior to the Effective Time Parent or the Company shall declare
a stock dividend or other distribution payable in shares of its common stock or
securities convertible into shares of its common stock, or effect a stock
split, reclassification, combination or other change with respect to its common
stock, the Exchange Ratio shall be adjusted to reflect such dividend,
distribution, stock split, reclassification, combination or other change.
2.3 Exchange of Certificates.
(a) Exchange Agent. As of the Effective Time, Parent shall
make available to an exchange agent designated by Parent and reasonably
acceptable to the Company (the "Exchange Agent"), for the benefit of Company
Stockholders, for exchange in accordance with this Section 2.3, certificates
representing shares of Parent Common Stock issuable pursuant to Section 2.1 in
exchange for outstanding shares of Company Common Stock and shall from time to
time deposit cash in an amount reasonably expected to be paid pursuant to
Section 2.2 (such shares of Parent Common Stock and cash, together with any
dividends or distributions with respect thereto, being hereinafter referred to
as the "Exchange Fund").
(b) Exchange Procedures. Promptly after the Effective Time,
Parent shall cause the Exchange Agent to mail to each holder of record of a
certificate or certificates (the "Certificates") which immediately prior to the
Effective Time represented outstanding shares of Company Common Stock whose
shares were converted into the right to receive shares of Parent Common Stock
pursuant to Section 2.1(b) hereof (i) a letter of transmittal (which shall
specify that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon delivery of the Certificates to the Exchange
Agent and shall be in such form and have such other provisions as Parent may
reasonably specify) and (ii) instructions for effecting the surrender of the
Certificates in exchange for certificates representing shares of Parent Common
Stock. Upon surrender of a Certificate for cancellation to the Exchange Agent,
together with a duly executed letter of transmittal, the holder of such
Certificate shall be entitled to receive in exchange therefor (x) a certificate
representing that number of shares of Parent Common Stock which such holder has
the right to receive pursuant to Section 2.1 and (y) a check representing the
amount of cash in lieu of fractional shares, if any, and unpaid dividends and
distributions, if any, which such holder has the right to receive pursuant to
the provisions of this Article II, after giving effect to any required
withholding tax, and the shares represented by the Certificate so surrendered
shall forthwith be canceled. No interest will be paid or accrued on the cash in
lieu of fractional shares, if any, and unpaid dividends and distributions, if
any, payable to holders of shares of Company Common Stock. In the event of a
transfer of ownership of shares of Company Common Stock which is not registered
on the transfer records of the Company, a certificate representing the proper
number of shares of Parent Common Stock, together with a check for the cash to
be paid in lieu of fractional shares, if any, and unpaid dividends and
distributions, if any, may be issued to such transferee if the Certificate
representing such shares of Company Common Stock held by such transferee is
presented to the Exchange Agent, accompanied by all documents required to
evidence and effect such transfer and to evidence that any applicable stock
transfer taxes have been paid. Until surrendered as contemplated by this
Section 2.3, each Certificate shall be deemed at any time after
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the Effective Time to represent only the right to receive upon surrender a
certificate representing shares of Parent Common Stock and cash in lieu of
fractional shares, if any, and unpaid dividends and distributions, if any, as
provided in this Article II.
(c) Distributions with Respect to Unexchanged Shares.
Notwithstanding any other provisions of this Agreement, no dividends or other
distributions declared or made after the Effective Time with respect to shares
of Parent Common Stock having a record date after the Effective Time shall be
paid to the holder of any unsurrendered Certificate, and no cash payment in
lieu of fractional shares shall be paid to any such holder, until the holder
shall surrender such Certificate as provided in this Section 2.3. Subject to
the effect of Applicable Law (as defined in Section 3.9), following surrender
of any such Certificate, there shall be paid to the holder of the certificates
representing whole shares of Parent Common Stock issued in exchange therefor,
without interest, (i) at the time of such surrender, the amount of dividends or
other distributions with a record date after the Effective Time theretofore
payable with respect to such whole shares of Parent Common Stock and not paid,
less the amount of any withholding taxes which may be required thereon, and
(ii) at the appropriate payment date subsequent to surrender, the amount of
dividends or other distributions with a record date after the Effective Time
but prior to surrender and a payment date subsequent to surrender payable with
respect to such whole shares of Parent Common Stock, less the amount of any
withholding taxes which may be required thereon.
(d) No Further Ownership Rights in Company Common Stock. All
shares of Parent Common Stock issued upon surrender of Certificates in
accordance with the terms hereof (including any cash paid pursuant to this
Article II) shall be deemed to have been issued in full satisfaction of all
rights pertaining to such shares of Company Common Stock represented thereby,
and from and after the Effective Time there shall be no further registration of
transfers on the stock transfer books of the Company of shares of Company
Common Stock. If, after the Effective Time, Certificates are presented to the
Surviving Corporation for any reason, they shall be canceled and exchanged as
provided in this Section 2.3.
(e) Termination of Exchange Fund. Any portion of the
Exchange Fund which remains undistributed to Company Stockholders for six
months after the Effective Time shall be delivered to Parent or the Surviving
Corporation, upon demand thereby, and holders of shares of Company Common Stock
who have not theretofore complied with this Section 2.3 shall thereafter look
only to Parent for payment of any claim to shares of Parent Common Stock, cash
in lieu of fractional shares thereof, or dividends or distributions, if any, in
respect thereof.
(f) No Liability. None of Parent, the Surviving Corporation
or the Exchange Agent shall be liable to any person in respect of any shares of
Company Common Stock (or dividends or distributions with respect thereto) or
cash from the Exchange Fund delivered to a public official pursuant to any
applicable abandoned property, escheat or similar law. If any Certificates
shall not have been surrendered prior to seven years after the Effective Time
of the Merger (or immediately prior to such earlier date on which any cash, any
cash in lieu of fractional shares or any dividends or distributions with
respect to whole shares of Company Common Stock in respect of such Certificate
would otherwise escheat to or become the property of any Governmental Authority
(as defined in Section 3.5)), any such cash, dividends or distributions in
respect of such Certificate shall, to the extent permitted by Applicable Law,
become the property of
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Parent, free and clear of all claims or interest of any person previously
entitled thereto.
(g) Investment of Exchange Fund. The Exchange Agent shall
invest any cash included in the Exchange Fund, as directed by Parent, on a
daily basis. Any interest and other income resulting from such investments
shall be paid to Parent. In the event the Exchange Fund shall realize a loss on
any such investment, Parent shall promptly thereafter deposit, or cause to be
deposited, in such Exchange Fund on behalf of the Surviving Corporation cash in
an amount equal to such loss.
2.4 Treatment of Stock Options and Warrants.
(a) Prior to the Effective Time, Parent and the Company shall
take all such actions as may be necessary to cause each unexpired and
unexercised option or right to purchase shares of Company Common Stock granted
(or subject to being granted on a contingent basis) under the Company's various
stock option plans in effect on the date hereof to current or former directors,
officers, employees, consultants or independent contractors of the Company
(each, a "Company Option") to cease to represent the right to purchase Company
Common Stock and to be adjusted at the Effective Time to represent the right
(an "Adjusted Option") to purchase that number of shares of Parent Common Stock
equal to the number of shares of Company Common Stock issuable immediately
prior to the Effective Time upon exercise of the Company Option (without regard
to actual restrictions on exercisability) multiplied by the Exchange Ratio,
with an exercise price equal to the exercise price which existed under the
corresponding Company Option divided by the Exchange Ratio, and with other
terms and conditions that are the same as the terms and conditions of such
Company Option immediately before the Effective Time. In connection with the
issuance of Adjusted Options, Parent shall (i) reserve for issuance the number
of shares of Parent Common Stock that will become subject to Adjusted Options
pursuant to this Section 2.4 and (ii) from and after the Effective Time, upon
exercise of Adjusted Options, make available for issuance all shares of Parent
Common Stock covered thereby, subject to the terms and conditions applicable
thereto.
(b) Parent agrees to file with the Securities and Exchange
Commission (the "Commission") as soon as reasonably practicable after the
Closing Date a registration statement on Form S-8 or other appropriate form
under the Securities Act of 1933, as amended (together with the rules and
regulations thereunder, the "Securities Act"), to register shares of Parent
Common Stock issuable upon exercise of the Adjusted Options and use its
reasonable efforts to cause such registration statement to remain effective
until the exercise or expiration of such options.
(c) Prior to the Effective Time, Parent and the Company shall
take all such actions as may be necessary to cause each unexpired and
unexercised warrant to purchase shares of Company Common Stock granted (or
subject to being granted on a contingent basis) under the Company's various
warrant agreements in effect on the date hereof (each, a "Company Warrant") to
cease to represent the right to purchase Company Common Stock and to be
adjusted at the Effective Time to represent the right (an "Adjusted Warrant")
to purchase that number of shares of Parent Common Stock equal to the number of
shares of Company Common Stock issuable immediately prior to the Effective Time
upon exercise of the Company Warrant (without regard to actual restrictions on
exercisability) multiplied by the Exchange Ratio, with an exercise price equal
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to the exercise price which existed under the corresponding Company Warrant
divided by the Exchange Ratio, and with other terms and conditions that are the
same as the terms and conditions of such Company Warrant immediately before the
Effective Time. In connection with the issuance of Adjusted Warrants, Parent
shall (i) reserve for issuance the number of shares of Parent Common Stock that
will become subject to Adjusted Warrants pursuant to this Section 2.4; (ii)
from and after the Effective Time, upon exercise of Adjusted Warrants, make
available for issuance all shares of Parent Common Stock covered thereby,
subject to the terms and conditions applicable thereto; (iii) comply, and cause
the Surviving Corporation to comply, with the terms and conditions set forth in
the Company Warrants; and (iv) deliver to the holders of Adjusted Warrants such
shares of Parent Common Stock that such holders are entitled to purchase upon
the exercise of Adjusted Warrants. To the extent required by the respective
Company Warrants, prior to the Effective Time, Parent shall deliver its
undertaking to assume, as of the Effective Time, the obligation to deliver to
the holders of warrants under such Company Warrants the shares of Parent Common
Stock that such holders are entitled to purchase upon the exercise of Adjusted
Warrants by written instrument executed and delivered to each Warrant Agent, as
such term is defined in the respective Company Warrants.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB
In order to induce the Company to enter into this Agreement, Parent
and Sub hereby make the following representations and warranties to the
Company:
3.1 Organization and Standing. Each of Parent and its subsidiaries is
a corporation duly organized, validly existing and in good standing under the
laws of its state of incorporation with full power and authority to own, lease,
use and operate its properties and to conduct its business as and where now
owned, leased, used, operated and conducted. Each of Parent and its
subsidiaries is duly qualified to do business and in good standing in each
jurisdiction in which the nature of the business conducted by it or the
property it owns, leases or operates makes such qualification necessary, except
where the failure to be so qualified or in good standing in such jurisdiction
would not have a material adverse effect on Parent.
3.2 Subsidiaries. As of the date hereof, other than immaterial
interests, Parent does not own, directly or indirectly, any equity or other
ownership interest in any corporation, partnership, joint venture or other
entity or enterprise, except as set forth in Section 3.2 to the disclosure
schedule (the "Parent Disclosure Schedule") delivered by Parent to the Company
and dated the date hereof. Except as set forth in Section 3.2 to the Parent
Disclosure Schedule, each of the outstanding shares of capital stock of each of
Parent's subsidiaries is duly authorized, validly issued, fully paid and
nonassessable, and is owned, directly or indirectly, by Parent free and clear
of all liens, pledges, security interests, claims or other encumbrances, other
than the pledge of such shares under Parent's credit agreement with Compass
Bank and liens imposed by law which could not reasonably be expected to have,
in the aggregate, a material adverse effect on Parent. All of the outstanding
shares of the capital stock of Sub will be directly owned by Parent. Other than
as set forth in Section 3.2 to the Parent Disclosure Schedule, there are no
outstanding shares of capital stock or
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subscriptions, options, warrants, puts, calls, agreements, understandings,
claims or other commitments or rights of any type relating to the issuance,
sale or transfer of any securities of any subsidiary of Parent, nor are there
outstanding any securities which are convertible into or exchangeable for any
shares of capital stock of any subsidiary of Parent; and no subsidiary of
Parent has any obligation of any kind to issue any additional securities or to
pay for securities of any subsidiary of Parent or any predecessor thereof. As
used in this Section 3.2, "capital stock" shall include capital stock or other
ownership interests having by their terms ordinary voting power to elect
directors or others performing similar functions with respect to such entity.
3.3 Corporate Power and Authority.
(a) Parent has full corporate power and authority to execute
and deliver this Agreement and to consummate the transactions contemplated
hereby, subject to the approval of the Share Issuance (as defined below) by the
requisite votes of the stockholders of Parent (the "Parent Stockholders") in
accordance with the rules of Nasdaq and this Agreement. The execution and
delivery of this Agreement by Parent and the consummation by Parent of the
transactions contemplated hereby have been duly and validly approved by the
Board of Directors of Parent. The Board of Directors of Parent has directed
that the issuance of Parent Common Stock pursuant hereto (the "Share Issuance")
be submitted to the Parent Stockholders for approval at a stockholders meeting
and, except for the approval of the Share Issuance by the Parent Stockholders
in accordance with the rules of Nasdaq, no other corporate proceedings on the
part of Parent are necessary to approve this Agreement and to consummate the
transactions contemplated hereby. This Agreement has been duly and validly
executed and delivered by Parent and constitutes a valid and binding obligation
of Parent, enforceable against Parent in accordance with its terms.
(b) At or prior to Closing, Sub will have full corporate
power and authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
by Sub and the consummation by Sub of the transactions contemplated hereby will
have been duly and validly approved by the Board of Directors of Sub and by
Parent as the sole stockholder of Sub at or prior to Closing, and no other
corporate proceedings on the part of Sub will be necessary to consummate the
transactions contemplated hereby. This Agreement will have been duly and
validly executed and delivered by Sub and will constitute a valid and binding
obligation of Sub, enforceable against Sub in accordance with its terms.
3.4 Capitalization of Parent. Parent's authorized capital stock
consists solely of (a) 20,000,000 shares of Parent Common Stock. As of October
31, 1997, (i) 9,120,741 shares of Parent Common Stock were issued and
outstanding, (ii) 1,810,000 shares of Parent Common Stock were issuable upon
the exercise of options or warrants and 5,012,107 shares of Parent Common Stock
were issuable upon conversion of convertible securities granted or issuable by
Parent. Except as set forth on Section 3.4 of the Parent Disclosure Schedule,
since October 31, 1997, Parent has not issued any shares of its capital stock
except upon the exercise of such options, warrants or convertible securities.
Each outstanding share of Parent capital stock is, and all shares of Parent
Common Stock to be issued in connection with the Merger will be, duly
authorized and validly issued, fully paid and nonassessable and free of any
preemptive rights. As of the date hereof, other than as set forth above, in the
Parent SEC Documents (as defined in Section 3.7) or in Section 3.4
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to the Parent Disclosure Schedule, there are no outstanding shares of capital
stock or subscriptions, options, warrants, puts, calls, agreements,
understandings, claims or other commitments or rights of any type relating to
the issuance, sale or transfer by Parent of any securities of Parent, nor are
there outstanding any securities which are convertible into or exchangeable for
any shares of capital stock of Parent; and Parent has no obligation of any kind
to issue any additional securities or to pay for securities of Parent or any
predecessor. Parent has no outstanding bonds, debentures, notes or other
similar obligations the holders of which have the right to vote generally with
holders of Parent Common Stock.
3.5 Conflicts, Consents and Approvals. Neither the execution and
delivery of this Agreement by Parent or Sub nor the consummation of the
transactions contemplated hereby will:
(a) conflict with, or violate any provision of the Certificate
of Incorporation or By-laws (or any similar organizational document)
of Parent or any subsidiary of Parent;
(b) violate, or conflict with, or result in a breach of any
provision of, or constitute a default (or an event which, with the
giving of notice, the passage of time or otherwise, would constitute a
default) under, or entitle any party (with the giving of notice, the
passage of time or otherwise) to terminate, accelerate, modify or call
a default under, or result in the termination, acceleration or
cancellation of, or result in the creation of any lien, security
interest, charge or encumbrance upon any of the properties or assets
of Parent or any of its subsidiaries under any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, deed
of trust, license, contract, undertaking, agreement, lease or other
instrument or obligation to which Parent or any of its subsidiaries is
a party or by which any of their respective properties or assets may
be bound;
(c) violate any order, writ, injunction, decree, statute, rule
or regulation, applicable to Parent or any of its subsidiaries or
their respective properties or assets; or
(d) require any action or consent or approval of, or review by,
or registration or filing by Parent or any of its affiliates with any
third party or any court, arbitral tribunal, administrative agency or
commission or other governmental or regulatory body, agency,
instrumentality or authority (a "Governmental Authority"), other than
(i) approval of the Share Issuance by Parent Stockholders, (ii)
actions required, if any, by the Hart-Scott-Rodino Antitrust
Improvements act of 1976, as amended (the "HSR Act"), (iii) approval
of the quotation of the shares of Parent Common Stock to be issued in
the Merger on NASDAQ, subject to official notice of issuance, and (iv)
registrations or other actions required under federal and state
securities laws as are contemplated by this Agreement;
except for any of the foregoing that are set forth in subsections (b), (c) or
(d) of Section 3.5 to the Parent Disclosure Schedule or, in the case of (b),
(c) and (d), for any of the foregoing that would neither, in the aggregate,
have a material adverse effect on Parent nor prevent the consummation of the
transactions contemplated hereby.
3.6 Absence of Certain Changes. Except as set forth in the Parent SEC
Documents filed with the Commission as of the date hereof, since January 1,
1997, (i) each of Parent and its
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subsidiaries has conducted its business in the ordinary course, consistent with
past practice, (ii) no event, fact or development has occurred or exists which
has or which would reasonably be expected to have, in the aggregate, a material
adverse effect on Parent (but, excluding for such purposes, events that are
generally applicable in the oil and gas exploration and production industry and
the United States, Canada and Latin America economies), and (iii) neither
Parent nor any of its subsidiaries has taken any action which would be
prohibited by Section 5.2(a).
3.7 Parent SEC Documents. Each of Parent and its subsidiaries has
timely filed with the Commission all forms, reports, schedules, statements,
exhibits and other documents required to be filed by it since January 1, 1995
under the Securities Exchange Act of 1934, as amended (together with the rules
and regulations thereunder, the "Exchange Act"), or the Securities Act (such
documents, as supplemented and amended since the time of filing, collectively,
the "Parent SEC Documents"). The Parent SEC Documents, including, without
limitation, any financial statements or schedules included therein, at the time
filed (and, in the case of registration statements and proxy statements, on the
dates of effectiveness and the dates of mailing, respectively) (a) did not
contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading, and (b) complied in all material respects with the applicable
requirements of the Exchange Act and the Securities Act, as the case may be.
The financial statements (including the related notes) of Parent included in
the Parent SEC Documents were prepared in accordance with generally accepted
accounting principles applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto), and fairly present (subject
in the case of unaudited statements to normal, recurring and year-end audit
adjustments) in all material respects the consolidated financial position of
Parent as of the dates thereof and the consolidated results of its operations
and cash flows for the periods then ended.
3.8 Taxes. Except as set forth in the Parent SEC Documents or in
Section 3.8 to the Parent Disclosure Schedule, (i) each of Parent and its
subsidiaries has duly filed all federal and state income tax returns and all
other material tax returns (including, but not limited to, those filed on a
consolidated, combined or unitary basis) required to have been filed by Parent
or any of its subsidiaries prior to the date hereof and will file, on or before
the Effective Time, all such returns which are required to be filed after the
date hereof and on or before the Effective Time, (ii) all of the foregoing
returns and reports are true and correct in all material respects, and each of
Parent and its subsidiaries has paid or, prior to the Effective Time, will pay
all taxes required to be paid in respect of the periods covered by such returns
or reports to any federal, state, foreign, local or other taxing authority,
(iii) each of Parent and its subsidiaries has paid or made adequate provision
(in accordance with generally accepted accounting principles) in the financial
statements of Parent included in the Parent SEC Documents for all taxes payable
in respect of all periods ending on or prior to September 30, 1997, (iv)
neither Parent nor any of its subsidiaries will have any material liability for
any taxes in excess of the amounts so paid or reserves so established and
neither Parent nor any of its subsidiaries is delinquent in the payment of any
material tax, assessment or governmental charge and none of them has requested
any extension of time within which to file any returns in respect of any fiscal
year which have not since been filed, (v) no deficiencies for any tax,
assessment or governmental charge have been proposed, asserted or assessed in
writing (tentatively or definitely), in each case, by any taxing authority,
against Parent or any of its subsidiaries for which there are not adequate
reserves in its financial statements (in accordance with generally
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accepted accounting principles), (vi) as of the date of this Agreement, there
are no extensions or waivers or pending requests for extensions or waivers of
the time to assess or collect any such tax, (vii) since the tax year 1989 and
except with respect to the tax years 1990 and 1993, the federal income tax
returns of Parent have not been audited by the Internal Revenue Service,
Department of the Treasury ("IRS"), and the federal income tax returns of its
subsidiaries have not been audited by the IRS, (viii) neither Parent nor any of
its subsidiaries is or has been a party to any tax sharing agreement with any
corporation which is not currently a member of the affiliated group of which
Parent is currently a member, (ix) there are no liens for taxes on any assets
of Parent or any of its subsidiaries (other than statutory liens for taxes not
yet due or liens for which adequate reserves have been established in its
financial statements in accordance with generally accepted accounting
principles), (x) Parent and its subsidiaries have withheld and paid (and until
the Effective Time will withhold and pay) all income, social security,
unemployment, and all other material payroll taxes required to be withheld
(including, without limitation, pursuant to Sections 1441 and 1442 of the Code
or similar provisions under foreign law) and paid in connection with amounts
paid to any employee, independent contractor, stockholder, creditor or other
third party, and (xi) Parent has not filed an election under Section 341(f) of
the Code to be treated as a consenting corporation. For purposes of this
Agreement, the term "tax" shall include all federal, state, local and foreign
taxes including interest and penalties thereon and additions to tax. In
addition, the term "tax return" shall mean any return, declaration, statement,
report, schedule, certificate, form information return, or any other document
(including any related or supporting information) required to be supplied to,
or filed with, a taxing authority (foreign or domestic) in connection with
taxes.
3.9 Compliance with Law. Each of Parent and its subsidiaries is in
compliance with, and at all times since January 1, 1995 has been in compliance
with, all applicable laws, statutes, orders, rules, regulations, policies or
guidelines promulgated, or judgments, decisions or orders entered, by any
Governmental Authority (collectively, "Applicable Law") relating to it or its
business or properties, except for any such failures to be in compliance
therewith which, in the aggregate, would not have a material adverse effect on
Parent.
3.10 Registration Statement. None of the information provided by
Parent or any of its subsidiaries for inclusion in the registration statement
on Form S-4 to be filed with the Commission by Parent under the Securities Act,
including the prospectus (as amended, supplemented or modified, the
"Prospectus") relating to shares of Parent Common Stock to be issued in the
Merger and the joint proxy statement and form of proxies relating to the vote
of Company Stockholders with respect to the Merger and the Parent Stockholders
with respect to the Share Issuance (collectively with the Prospectus and as
amended, supplemented or modified, the "Proxy Statement") contained therein
(such registration statement as amended, supplemented or modified, the
"Registration Statement"), at the time the Registration Statement becomes
effective or, in the case of the Proxy Statement, at the date of mailing, will
contain any untrue statement of a material fact or 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 are made, not
misleading. Each of the Registration Statement and Proxy Statement, except for
such portions thereof that relate only to the Company and its subsidiaries,
will comply in all material respects with the provisions of the Securities Act
and the Exchange Act.
3.11 Litigation. Except as set forth in the Parent SEC Documents,
there is no suit, claim,
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action, proceeding or investigation (an "Action") pending or, to the knowledge
of Parent, threatened against Parent or any of its subsidiaries which, in the
aggregate, could reasonably be expected to have a material adverse effect on
Parent. Neither Parent nor any of its subsidiaries is subject to any
outstanding order, writ, injunction or decree which, in the aggregate, could
reasonably be expected to have a material adverse effect on Parent.
3.12 Brokerage and Finder's Fees. Parent has not incurred and will not
incur, directly or indirectly, any brokerage, finder's or similar fee in
connection with the transactions contemplated by this Agreement. Parent is not
aware of any claim for payment of any finder's fees, brokerage or agent's
commissions or other like payments from Parent in connection with the
negotiation of this Agreement or in connection with the transactions
contemplated hereby.
3.13 Tax-Free Reorganization. To the best knowledge of Parent, neither
Parent nor any of its subsidiaries has taken any action or failed to take any
action which action or failure would prevent the qualification of the Merger as
a reorganization within the meaning of Section 368(a) of the Code.
3.14 Contracts. None of Parent, any of its subsidiaries, or, to the
knowledge of Parent, any other party thereto is in violation of or in default
in respect of, nor has there occurred an event or condition which with the
passage of time or giving of notice (or both) would constitute a default by
Parent under, any contract, agreement, guarantee, lease or executory commitment
(each a "Contract") to which it is a party, except such violations or defaults
under such Contracts which, in the aggregate, would not have a material adverse
effect on Parent.
3.15 Labor Relations. There is no unfair labor practice complaint
against Parent or any of its subsidiaries pending before the National Labor
Relations Board ("NLRB") and there is no labor strike, dispute, slowdown or
stoppage, or any union organizing campaign, actually pending or, to the
knowledge of Parent, threatened against or involving Parent or any of its
subsidiaries, except for any such proceedings which would not have a material
adverse effect on Parent. Except as disclosed in the Parent SEC Documents,
neither Parent nor any of its subsidiaries is a party to, or bound by, any
collective bargaining agreement, contract or other agreement or understanding
with a labor union or labor organization. To the knowledge of Parent, there are
no organizational efforts with respect to the formation of a collective
bargaining unit presently being made or threatened involving employees of
Parent or any of its subsidiaries.
3.16 Permits. Each of Parent and its subsidiaries is in possession of
all franchises, grants, authorizations, licenses, permits, easements,
variances, exemptions, consents, certificates, approvals and orders
(collectively, "Permits") necessary to own, lease and operate its properties
and to carry on its business as it is now being conducted, except for any such
Permits the failure of which to possess, in the aggregate, would not reasonably
be expected to have a material adverse effect on Parent.
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3.17 Environmental Matters.
(a) As used herein, the term "Environmental Laws" means all
applicable federal, state, local or foreign laws relating to pollution or
protection of human health or the environment (including, without limitation,
ambient air, surface water, groundwater, land surface or subsurface strata),
including, without limitation, laws relating to emissions, discharges, releases
or threatened releases of chemicals, pollutants, contaminants, or toxic or
hazardous substances or wastes (collectively, "Hazardous Materials") into the
environment, or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
Hazardous Materials, as well as all applicable authorizations, codes, decrees,
demands or demand letters, injunctions, judgments, licenses, notices or notice
letters, orders, permits, plans or regulations issued, entered, promulgated or
approved thereunder to the extent applicable to the specific operations of
Parent or the Company, as applicable.
(b) Except as set forth in the Parent SEC Documents filed
with the Commission as of the date hereof or in Section 3.17(a) of the Parent
Disclosure Schedule, there are, with respect to Parent, its subsidiaries or any
predecessor of the foregoing, no past or present violations of Environmental
Laws, releases of any materials into the environment, actions, activities,
circumstances, conditions, events, incidents, or contractual obligations which
may give rise to any common law environmental liability or any liability under
the Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended, or similar federal, state, local or foreign laws, other than
those which, in the aggregate, would not reasonably be expected to have a
material adverse effect on Parent, and none of Parent and its subsidiaries has
received any notice with respect to any of the foregoing, nor is any Action
pending or, to the knowledge of Parent, threatened, in connection with any of
the foregoing that, if adversely determined, could reasonably be expected to
have a material adverse effect on Parent.
(c) Except as set forth in the Parent SEC Documents filed
with the Commission as of the date hereof, no Hazardous Materials are contained
on or about any real property currently owned, leased or used by Parent or any
of its subsidiaries and no Hazardous Materials were released on or about any
real property previously owned, leased or used by Parent or any of its
subsidiaries during the period the property was so owned, leased or used, other
than those which, in the aggregate, would not reasonably be expected to have a
material adverse effect on Parent.
3.18 Company Stock Ownership. Except as set forth in Section 3.18
to the Parent Disclosure Schedule, neither Parent nor any of its "affiliates" or
"associates" "owns" (as each of such terms is defined in Section 203 of the
DGCL) any shares of Company Common Stock or other securities convertible into
Company Common Stock, except to the extent that entering into this Agreement
constitutes "ownership" of Company Common Stock pursuant to the foregoing.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
In order to induce Parent and Sub to enter into this Agreement, the
Company hereby makes the following representations and warranties to Parent and
Sub:
4.1 Organization and Standing. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware with full power and authority to own, lease, use and operate its
properties and to conduct its business as and where now owned, leased, used,
operated and conducted. The Company is duly qualified to do business and in
good standing in each jurisdiction in which the nature of the business
conducted by it or the property it owns, leases or operates makes such
qualification necessary, except where the failure to be so qualified or in good
standing in such jurisdiction would not have a material adverse effect on the
Company. The copies of the Certificate of Incorporation and By-laws (or similar
organizational documents) of the Company, which have previously been made
available to Parent, are true, complete and correct copies of such documents as
in effect as of the date of this Agreement.
4.2 Subsidiaries. As of the date hereof, other than immaterial
interests, the Company does not own, directly or indirectly, any equity or
other ownership interest in any corporation, partnership, joint venture or
other entity or enterprise, except as set forth in Section 4.2 to the
disclosure schedule (the "Company Disclosure Schedule") delivered by the
Company to Parent and dated the date hereof. Each of the entities listed on
Section 4.2 to the Company Disclosure Schedule (individually a "Subsidiary" and
collectively the "Subsidiaries") is a corporation duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation with full power and authority to own, lease, use and operate its
properties and to conduct its business as and where now owned, leased, used,
operated and conducted. Each Subsidiary is duly qualified to do business and in
good standing in each jurisdiction in which the nature of the business
conducted by it or the property it owns, leases or operates makes such
qualification necessary, except where the failure to be so qualified or in good
standing in such jurisdiction would not have a material adverse effect on the
Company. The Company is the sole legal, beneficial and record owner, directly
or indirectly, of all outstanding capital stock of the Subsidiaries, all of
which are owned by the Company free and clear of all liens, claims and
encumbrances. The Subsidiaries have no assets or liabilities, and are not
parties to any agreements or contracts, other than those which would not have a
material adverse effect on the Company.
4.3 Corporate Power and Authority. The Company has full corporate
power and authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby, subject to the approval of the Merger and the
adoption and authorization of this Agreement by the stockholders of the Company
in accordance with the DGCL and this Agreement. The execution and delivery of
this Agreement by the Company and the consummation by the Company of the
transactions contemplated hereby have been duly and validly approved by the
Board of Directors of the Company. The Board of Directors of the Company has
directed that this Agreement and the transactions contemplated hereby be
submitted to the Company Stockholders for adoption at a stockholders meeting
and, except for the adoption of this Agreement by the
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affirmative vote of the holders of a majority of shares of Company Common Stock
in accordance with the Applicable Law, no other corporate proceedings on the
part of the Company are necessary to approve this Agreement and to consummate
the transactions contemplated hereby. This Agreement has been duly and validly
executed and delivered by the Company and constitutes a valid and binding
obligation of the Company, enforceable against the Company in accordance with
its terms.
4.4 Capitalization of the Company and its Subsidiaries. The Company's
authorized capital stock consists solely of (a) 20,000,000 shares of common
stock, $0.05 par value per share ("Company Common Stock"), and (b) 10,000,000
shares of preferred stock, $1.00 par value per share ("Company Preferred
Stock"). As of October 31, 1997, (i) 3,891,981 shares of Company Common Stock
were issued and outstanding, (ii) 201,385 shares of Company Common Stock were
issuable upon the exercise of outstanding options, an additional 230,749 shares
of Company Common Stock were issuable upon the exercise of options that are not
currently outstanding but are reserved for issuance upon the designation of
optionees by the Board of Directors of the Company and 154,175 shares of
Company Common Stock were issuable upon the exercise or conversion of
outstanding warrants or convertible securities granted or issuable (on a
contingent basis or otherwise) by the Company, and (iii) no shares of Company
Preferred Stock were issued and outstanding. Since October 31, 1997, except as
disclosed in Section 4.4 of the Company Disclosure Schedule, the Company has
not issued any shares of its capital stock except upon the exercise of such
options, warrants or convertible securities. Each outstanding share of capital
stock of the Company and each Subsidiary is duly authorized and validly issued,
fully paid and nonassessable and free of any preemptive rights. As of the date
hereof, other than as set forth above, in the Company SEC Documents (as defined
in Section 4.7) or in Section 4.4 to the Company Disclosure Schedule, there are
no outstanding shares of capital stock or subscriptions, options, warrants,
puts, calls, agreements, understandings, claims or other commitments or rights
of any type relating to the issuance, sale or transfer by the Company or either
Subsidiary of any securities of the Company or either Subsidiary, nor are there
outstanding any securities which are convertible into or exchangeable for any
shares of capital stock of the Company or either Subsidiary; and neither the
Company nor either Subsidiary has any obligation of any kind to issue any
additional securities or to pay for securities of the Company or either
Subsidiary or any predecessor. The Company has no outstanding bonds,
debentures, notes or other similar obligations the holders of which have the
right to vote generally with holders of Company Common Stock.
4.5 Conflicts; Consents and Approvals. Neither the execution and
delivery of this Agreement by the Company, nor the consummation of the
transactions contemplated hereby will:
(a) conflict with, or violate any provision of the Certificate
of Incorporation or By-laws (or any similar organizational document) of the
Company or either Subsidiary;
(b) violate, or conflict with, or result in a breach of any
provision of, or constitute a default (or an event which, with the giving of
notice, the passage of time or otherwise, would constitute a default) under, or
entitle any party (with the giving of notice, the passage of time or otherwise)
to terminate, accelerate, modify or call a default under, or result in the
termination, acceleration or cancellation of, or result in the creation of any
lien, security interest, charge or
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encumbrance upon any of the properties or assets of the Company or the
Subsidiaries under any of the terms, conditions or provisions of any note,
bond, mortgage, indenture, deed of trust, license, contract, undertaking,
agreement, lease or other instrument or obligation to which the Company or any
of the Subsidiaries is a party or by which any of its properties or assets may
be bound;
(c) violate any order, writ, injunction, decree, statute, rule or
regulation applicable to the Company or its Subsidiaries or any of its
properties or assets; or
(d) require any action or consent or approval of, or review by,
or registration or filing by the Company or its Subsidiaries or any of its
affiliates with any third party or any Governmental Authority, other than (i)
authorization of the Merger and the transactions contemplated hereby by Company
Stockholders, (ii) actions required, if any, by the HSR Act and (iii)
registrations or other actions required under federal and state securities laws
as are contemplated by this Agreement;
except for any of the foregoing that are set forth in subsections (b), (c) or
(d) of Section 4.5 of the Company Disclosure Schedule or, in the case of (b),
(c) and (d), for any of the foregoing that would neither, in the aggregate,
have a material adverse effect on the Company nor prevent the consummation of
the transactions contemplated hereby.
4.6 Absence of Certain Changes. Except as set forth in the Company SEC
Documents filed with the Commission as of the date hereof, since January 1,
1997, (i) each of the Company and its Subsidiaries has conducted its business
in the ordinary course, consistent with past practice, (ii) no event, fact or
development has occurred or exists which has or which would (A) reasonably be
expected to have, in the aggregate, a material adverse effect on the Company
(but excluding for such purposes events that are generally applicable in the
oil and gas exploration and production industry and the United States economy)
or (B) render materially inaccurate any of the factual data or assumptions
utilized by Ryder Scott in auditing the Company's reserve report dated July
1997, and (iii) the Company has not taken any action which would be prohibited
by Section 5.3(a).
4.7 Company SEC Documents. The Company has timely filed with the
Commission all forms, reports, schedules, statements, exhibits and other
documents required to be filed by it under the Exchange Act or the Securities
Act (such documents, as supplemented and amended since the time of filing,
collectively, the "Company SEC Documents"). The Company SEC Documents,
including, without limitation, any financial statements or schedules included
therein, at the time filed (and, in the case of registration statements and
proxy statements, on the dates of effectiveness and the dates of mailing,
respectively) (a) did not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading, and (b) complied in all material respects with
the applicable requirements of the Exchange Act and the Securities Act, as the
case may be. The financial statements (including the related notes) of the
Company included in the Company SEC Documents were prepared in accordance with
generally accepted accounting principles applied on a consistent basis during
the periods involved (except as may be indicated in the notes thereto), and
fairly present (subject in the case of unaudited statements to normal,
recurring and year-end audit adjustments) in all material respects the
consolidated financial position of the Company as of the dates thereof and the
consolidated results
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of its operations and cash flows for the periods then ended.
4.8 Taxes. Except as set forth in the Company SEC Documents or in
Section 4.8 to the Company Disclosure Schedule, (i) the Company and each
Subsidiary has duly filed all federal and state income tax returns and all
other material tax returns (including, but not limited to, those filed on a
consolidated, combined or unitary basis) required to have been filed by it
prior to the date hereof and will file, on or before the Effective Time, all
such returns which are required to be filed after the date hereof and on or
before the Effective Time, (ii) all of the foregoing returns and reports are
true and correct in all material respects, and the Company and each Subsidiary
has paid or, prior to the Effective Time, will pay all taxes required to be
paid in respect of the periods covered by such returns or reports to any
federal, state, foreign, local or other taxing authority, (iii) the Company and
each Subsidiary has paid or made adequate provision (in accordance with
generally accepted accounting principles) in the financial statements of the
Company and its Subsidiaries included in the Company SEC Documents for all
taxes payable in respect of all periods ending on or prior to September 30,
1997, (iv) neither the Company nor either Subsidiary will have any material
liability for any taxes in excess of the amounts so paid or reserves so
established and neither the Company nor either Subsidiary is delinquent in the
payment of any material tax, assessment or governmental charge and has not
requested any extension of time within which to file any returns in respect of
any fiscal year which have not since been filed, (v) no deficiencies for any
tax, assessment or governmental charge have been proposed, asserted or assessed
in writing (tentatively or definitely), in each case, by any taxing authority,
against the Company or either Subsidiary for which there are not adequate
reserves in its financial statements (in accordance with generally accepted
accounting principles), (vi) as of the date of this Agreement, there are no
extensions or waivers or pending requests for extensions or waivers of the time
to assess or collect any such tax, (vii) the federal income tax returns of the
Company and its Subsidiaries have not been audited by the IRS, (viii) neither
the Company nor either Subsidiary is or has been a party to any tax sharing
agreement with any corporation which is not currently a member of the
affiliated group of which the Company or either Subsidiary is currently a
member, (ix) there are no liens for taxes on any assets of the Company or
either Subsidiary (other than statutory liens for taxes not yet due or liens
for which adequate reserves have been established in its financial statements
in accordance with generally accepted accounting principles), (x) the Company
and each Subsidiary has withheld and paid (and until the Effective Time will
withhold and pay) all income, social security, unemployment, and all other
material payroll taxes required to be withheld (including, without limitation,
pursuant to Sections 1441 and 1442 of the Code or similar provisions under
foreign law) and paid in connection with amounts paid to any employee,
independent contractor, stockholder, creditor or other third party, and (xi)
neither the Company nor either Subsidiary has filed an election under Section
341(f) of the Code to be treated as a consenting corporation.
4.9 Compliance with Law. The Company and each of its Subsidiaries is
in compliance with, and at all times since December 31, 1994 has been in
compliance with, all Applicable Law relating to it or its business or
properties, except for any such failures to be in compliance therewith which,
in the aggregate, would not have a material adverse effect on the Company.
4.10 Registration Statement. None of the information provided by the
Company for inclusion in the Registration Statement at the time it becomes
effective or, in the case of the Proxy Statement, at the date of mailing, will
contain any untrue statement of a material fact or omit to
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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 are
made, not misleading. Each of the Registration Statement and Proxy Statement,
except for such portions thereof that relate only to Parent and its
subsidiaries, will comply in all material respects with the provisions of the
Securities Act and the Exchange Act.
4.11 Litigation. Except as set forth in the Company SEC Documents,
there is no Action pending or, to the knowledge of the Company, threatened
against the Company or its Subsidiaries which, in the aggregate, could
reasonably be expected to have a material adverse effect on the Company.
Neither the Company nor either of the Subsidiaries is subject to any
outstanding order, writ, injunction or decree which, in the aggregate, could
reasonably be expected to have a material adverse effect on the Company.
4.12 Brokerage and Finder's Fees. Except for the Company's obligation
to McDonald & Company Securities, Inc. ("McDonald") and to Peak Enernomics,
Inc. ("Peak") (a copy of the written agreements relating to such obligations
having previously been provided to Parent), neither the Company nor the
Subsidiaries has incurred and will not incur, directly or indirectly, any
brokerage, finder's or similar fee in connection with the transactions
contemplated by this Agreement. Other than the foregoing obligations to
McDonald and Peak, the Company is not aware of any claim for payment of any
finder's fees, brokerage or agent's commissions or other like payments from the
Company or the Subsidiaries in connection with the negotiation of this
Agreement or in connection with the transactions contemplated hereby.
4.13 Opinion of Financial Advisor. The Company has received the oral
opinion of McDonald to the effect that, as of the date hereof, the Exchange
Ratio is fair to the Company Stockholders from a financial point of view.
4.14 Tax-Free Reorganization. To the best knowledge of the Company,
neither the Company nor the Subsidiaries has taken any action or failed to take
any action which action or failure would prevent the qualification of the
Merger as a reorganization within the meaning of Section 368(a) of the Code.
4.15 Employee Benefit Plans.
For purposes of this Agreement, the following terms have the
definitions given below:
"Controlled Group Liability" means any and all liabilities
under (i) Title IV of ERISA, (ii) section 302 of ERISA, (iii) sections 412 and
4971 of the Code, (iv) the continuation coverage requirements of section 601 et
seq. of ERISA and section 4980B of the Code, and (v) corresponding or similar
provisions of foreign laws or regulations, in each case other than pursuant to
the Parent Plans with respect to Parent, or Company Plans (as defined below)
with respect to the Company and its Subsidiaries.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended, and the regulations thereunder.
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"ERISA Affiliate" means, with respect to any entity, trade
or business, any other entity, trade or business that is a member of a group
described in Section 414(b), (c), (m) or (o) of the Code or Section 4001(b)(1)
of ERISA that includes the first entity, trade or business, or that is a member
of the same "controlled group" as the first entity, trade or business pursuant
to Section 4001(a)(14) of ERISA.
(a) For purposes of this Agreement, "Company Plans" means all
employee benefit plans, programs, policies, practices, and other arrangements
providing benefits to any employee or former employee or beneficiary or
dependent thereof, whether or not written, and whether covering one person or
more than one person, sponsored or maintained by the Company or to which the
Company contributes or is obligated to contribute. Without limiting the
generality of the foregoing, the term "Company Plans" includes all employee
welfare benefit plans within the meaning of Section 3(1) of ERISA and all
employee pension benefit plans within the meaning of Section 3(2) of ERISA.
(b) Section 4.15(b) to the Company Disclosure Schedule lists
all Company Plans. With respect to each Company Plan, the Company has made
available to Parent a true, correct and complete copy of: (i) each writing
constituting a part of such Company Plan, including, without limitation all
plan documents, benefit schedules, trust agreements, and insurance contracts
and other funding vehicles; (ii) the most recent Annual Report (Form 5500
Series) and accompanying schedule, if any; (iii) the current summary plan
description, if any; (iv) the most recent annual financial report, if any; and
(v) the most recent determination letter from the IRS, if any.
(c) The IRS has issued a favorable determination letter with
respect to each Company Plan that is intended to be a "qualified plan" within
the meaning of Section 401(a) of the Code (a "Qualified Company Plan") and
there are no existing circumstances nor any events that have occurred that
could adversely affect the qualified status of any Qualified Company Plan or
the related trust.
(d) All contributions required to be made to any Company Plan
by Applicable Law or by any plan document or other contractual undertaking, and
all premiums due or payable with respect to insurance policies funding any
Company Plan, for any period through the date hereof have been timely made or
paid in full and through the Closing Date will be timely made or paid in full
or, to the extent not required to be made or paid on or before the date hereof
or the Closing Date, as applicable, have been or will be fully reflected in the
Company's financial statements contained in the Company SEC Documents.
(e) The Company has complied, and is now in compliance, in
all material respects, with all provisions of ERISA, the Code and all laws and
regulations applicable to the Company Plans. There is not now, and there are no
existing, circumstances that standing alone could give rise to, any requirement
for the posting of security with respect to a Company Plan or the imposition of
any lien on the assets of the Company or any of its subsidiaries under ERISA or
the Code.
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(f) Except as set forth in Section 4.15(f) to the Company
Disclosure Schedule, no Company Plan is subject to Title IV or Section 302 of
ERISA or Section 412 or 4971 of the Code. No Company Plan is a Multiemployer
Plan (as defined in Section 3.16) or a Multiple Employer Plan (as defined in
Section 3.16), nor has the Company or any of its ERISA Affiliates, at any time
within five years before the date hereof, contributed to or been obligated to
contribute to any Multiemployer Plan or Multiple Employer Plan.
(g) There does not now exist, and there are no existing,
circumstances that could result in any Controlled Group Liability that would be
a liability of the Company following the Closing, other than normal funding
responsibilities. Without limiting the generality of the foregoing, neither the
Company nor any of its ERISA Affiliates has engaged in any transaction
described in Section 4069 or Section 4204 of ERISA.
(h) Except as set forth in Section 4.15(h) to the Company
Disclosure Schedule and except for health continuation coverage as required by
Section 4980B of the Code or Part 6 of Title I of ERISA, the Company has no
liability for life, health, medical or other welfare benefits to former
employees or beneficiaries or dependents thereof.
(i) Except as set forth in Section 4.15(i) to the Company
Disclosure Schedule, neither the execution and delivery of this Agreement nor
the consummation of the transactions contemplated hereby will result in, cause
the accelerated vesting or delivery of, or increase the amount or value of, any
payment or benefit to any employee or director or former employee or former
director of the Company, pursuant to a "change in control" or "change of
control" or otherwise. Without limiting the generality of the foregoing and
except as set forth in Section 4.15(i) to the Company Disclosure Schedule, no
amount paid or payable by the Company in connection with the transactions
contemplated hereby either solely as a result thereof or as a result of such
transactions in conjunction with any other events will be an "excess parachute
payment" within the meaning of Section 280G of the Code.
(j) There are no pending or threatened claims (other than
claims for benefits in the ordinary course), lawsuits or arbitrations which
have been asserted or instituted against the Company Plans, any fiduciaries
thereof with respect to their duties to the Company Plans or the assets of any
of the trusts under any of the Company Plans which could reasonably be expected
to result in any material liability of the Company to the Pension Benefit
Guaranty Corporation, the Department of Treasury, the Department of Labor or
any Multiemployer Plan.
4.16 Contracts. Except as set forth in Section 4.16 of the
Company Disclosure Schedule, none of the Company or its Subsidiaries or, to the
knowledge of the Company, any other party thereto is in violation of or in
default in respect of, nor has there occurred an event or condition which with
the passage of time or giving of notice (or both) would constitute a default by
the Company or its Subsidiaries under, any Contract to which any of them is a
party, except such violations or defaults under such Contracts which, in the
aggregate, would not have a material adverse effect on the Company.
4.17 Labor Relations. There is no unfair labor practice
complaint against the Company or any Subsidiaries pending before the NLRB and
there is no labor strike, dispute, slowdown or
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stoppage, or any union organizing campaign, actually pending or, to the
knowledge of the Company, threatened against or involving the Company or any
Subsidiaries, except for any such proceedings which would not have a material
adverse effect on the Company. Except as disclosed in the Company SEC
Documents, neither the Company nor any Subsidiary is a party to, or bound by,
any collective bargaining agreement, contract or other agreement or
understanding with a labor union or labor organization. To the knowledge of the
Company, there are no organizational efforts with respect to the formation of a
collective bargaining unit presently being made or threatened involving
employees of the Company or any Subsidiary.
4.18 Permits. The Company and each Subsidiary is in possession of all
Permits necessary to own, lease and operate its properties and to carry on its
business as it is now being conducted, except for any such Permits the failure
of which to possess, in the aggregate, would not reasonably be expected to have
a material adverse effect on the Company.
4.19 Environmental Matters.
(a) Except as set forth in the Company SEC Documents filed with
the Commission as of the date hereof or in Section 4.19(a) of the Company
Disclosure Schedule, there are, with respect to the Company, each Subsidiary or
any predecessor thereof, no past or present violations of Environmental Laws,
releases of any materials into the environment, actions, activities,
circumstances, conditions, events, incidents, or contractual obligations which
may give rise to any common law environmental liability or any liability under
the Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended, or similar federal, state, local or foreign laws, other than
those which, in the aggregate, would not reasonably be expected to have a
material adverse effect on the Company, and the Company has not received any
notice with respect to any of the foregoing, nor is any Action pending or
threatened in connection with any of the foregoing that, if adversely
determined, could reasonably be expected to have a material adverse effect on
the Company.
(b) Except as set forth in Section 4.19(b) to the Company
Disclosure Schedule or set forth in the Company SEC Documents filed with the
Commission as of the date hereof, no Hazardous Materials are contained on or
about any real property currently owned, leased or used by the Company and no
Hazardous Materials were released on or about any real property previously
owned, leased or used by the Company or either Subsidiary during the period the
property was so owned, leased or used, other than those which, in the
aggregate, would not reasonably be expected to have a material adverse effect
on the Company.
4.20 Parent Stock Ownership. Except as set forth in Section 4.20 to
the Company Disclosure Schedule, neither the Company nor any of its
"affiliates" or "associates" "owns" (as each of such terms is defined in
Section 203 of the DGCL) any shares of Parent Common Stock or other securities
convertible into Parent Common Stock.
4.21 DGCL Section 203 and State Takeover Laws. Assuming the accuracy
of the representations and warranties set forth in Section 3.18, prior to the
date hereof, the Board of Directors of the Company has taken all action
necessary to exempt under or make not subject to Section 203 of the DGCL: (i)
the execution of this Agreement, (ii) the Merger and (iii) the
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transactions contemplated hereby.
ARTICLE V
COVENANTS OF THE PARTIES
The parties hereto agree as follows with respect to the
period from and after the execution of this Agreement.
5.1 Mutual Covenants.
(a) General. Each of the parties shall use its reasonable
efforts to take all action and to do all things necessary, proper or advisable
to consummate the Merger and the transactions contemplated by this Agreement as
promptly as possible (including, without limitation, using its reasonable
efforts to cause the conditions set forth in Article VI for which they are
responsible to be satisfied as soon as reasonably practicable and to prepare,
execute and deliver such further instruments and take or cause to be taken such
other and further action as any other party hereto shall reasonably request).
(b) Governmental Matters. Each of the parties shall use its
reasonable efforts to take any action that may be necessary, proper or
advisable in connection with any other notices to, filings with, and
authorizations, consents and approvals of any Governmental Authority that it
may be required to give, make or obtain.
(c) Tax-Free Treatment. Each of the parties shall use its
reasonable efforts to cause the Merger to constitute a tax-free
"reorganization" under Section 368(a) of the Code and to permit Akin, Gump,
Strauss, Hauer & Feld, L.L.P. to issue its opinion provided for in Section
6.1(h).
(d) Public Announcements. At all times prior to the earlier
of the Effective Time or termination of this Agreement pursuant to Section 7.1,
none of Parent, the Company or any of their affiliates shall issue any press
release or make any other public statement or disclosure concerning this
Agreement or the Merger without first obtaining the written consent of Parent
if the disclosure is to be made by the Company or any of its affiliates, or of
the Company if the disclosure is to be made by Parent or any of its affiliates,
as to the contents, the manner of presentation and the publication thereof;
provided, however, that notwithstanding the foregoing, Parent, the Company, or
any of their affiliates may make any disclosure required by applicable law (as
determined after consultation with the disclosing party's outside counsel),
provided that such disclosing party shall use its reasonable best efforts to
first notify the other parties in writing of the proposed disclosure and
provide the other parties with reasonable opportunity to comment on such
disclosure.
(e) Access. Subject to Applicable Law, from and after the
date of this Agreement until the Effective Time (or the termination of this
Agreement), Parent and the Company shall permit representatives of the other to
have reasonable access to the other's officers, employees, premises,
properties, books, records, contracts, tax records and documents. Information
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obtained by Parent and the Company pursuant to this Section 5.1(e) shall be
subject to the provisions of the confidentiality agreements between them dated
September 25, 1997 and November 5, 1997 (the "Confidentiality Agreements"),
which agreements remain in full force and effect.
(f) Stockholders Meetings. Each of Parent and the Company
shall duly call, give notice of, convene and hold a meeting of its stockholders
(each a "Stockholders Meeting"), to be held as promptly as practicable
following the date hereof for the purpose of obtaining the requisite
stockholder approvals and adoptions in connection with this Agreement, the
Share Issuance and the Merger, and each shall use reasonable efforts to cause
such meetings to occur on the same date. Subject to its fiduciary duties under
Applicable Law as advised by counsel, the Board of Directors of each of Parent
and the Company will (i) recommend that its stockholders approve such matters
and (ii) use reasonable efforts to obtain any necessary approvals by its
stockholders.
(g) Preparation of Proxy Statement and Registration
Statement. Each of Parent and the Company shall cooperate to, and shall, as
soon as is reasonably practicable, prepare and file the Proxy Statement with
the Commission on a confidential basis. Each of Parent and the Company shall
cooperate to prepare and file, and Parent shall prepare and file, the
Registration Statement with the Commission as soon as is reasonably practicable
following clearance of the Proxy Statement by the Commission and each of Parent
and the Company shall cooperate to, and shall, use all reasonable efforts to
have the Registration Statement declared effective by the Commission as
promptly as practicable and to maintain the effectiveness of the Registration
Statement through the Effective Time. Parent shall advise the Company promptly
after it receives notice of (i) the Registration Statement being declared
effective or any supplement or amendment thereto being filed with the
Commission, (ii) the issuance of any stop order in respect of the Registration
Statement, and (iii) the receipt of any correspondence, comments or requests
from the Commission in respect of the Registration Statement. If at any time
prior to the Effective Time, any information pertaining to the Company
contained in or omitted from the Registration Statement makes statements
contained in the Registration Statement false or misleading, the Company shall
promptly so inform Parent and provide Parent with the information necessary to
make such statements contained therein not false and misleading. Each of Parent
and Company shall also cooperate to, and shall, take such other reasonable
actions (other than qualifying to do business in any jurisdiction in which it
is not so qualified) required to be taken under any applicable state securities
laws in connection with the Share Issuance.
(h) Notification of Certain Matters. Each of Parent and the
Company shall give prompt notice to the other party of (i) the occurrence or
nonoccurrence of any event the occurrence or nonoccurrence of which would cause
any representation or warranty contained in this Agreement made by such party
to be untrue or inaccurate at or prior to the Effective Time and (ii) any
material failure of such party to comply with or satisfy any covenant,
condition or agreement to be complied with or satisfied by it hereunder;
provided, however, that the delivery of any notice pursuant to this Section
5.1(i) shall not limit or otherwise affect the remedies available hereunder to
any party.
(i) Pooling of Interests. Notwithstanding anything herein to
the contrary, Parent and the Company agree to continue to evaluate whether the
Merger can or should be
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accounted for under the pooling-of-interests method of accounting, and if so,
to amend the relevant provisions of this Agreement so as to comply with
pooling-of-interest requirements.
5.2 Covenants of Parent.
(a) Conduct of Parent's Operations. During the period from
the date of this Agreement to the Effective Time, Parent shall, and shall cause
its subsidiaries to, conduct its operations in the ordinary course except as
expressly contemplated by this Agreement and the transactions contemplated
hereby and shall use its reasonable efforts to maintain and preserve its
business organization and its material rights and franchises and to retain the
services of its officers and key employees and maintain relationships with
customers, suppliers and other third parties to the end that their goodwill and
ongoing business shall not be impaired in any material respect. Without
limiting the generality of the foregoing, during the period from the date of
this Agreement to the Effective Time or the earlier termination of this
Agreement pursuant to Section 7.1, Parent shall not, and with respect to clause
(ii) below, Sub shall not, and with respect to clauses (ii) and (iii) below,
Parent shall cause each of its subsidiaries to not, except as otherwise
expressly contemplated by this Agreement and the transactions contemplated
hereby, without the prior written consent of the Company:
(i) make or propose any change in its Certificate of
Incorporation, as amended, or By-laws, as amended, or other
organizational documents, except with respect to those changes
described on Schedule 5.2A hereto;
(ii) except with respect to the transaction described on
Schedule 5.2B hereto, and subject to the limitations of clause (iii)
below, merge or consolidate with any other person or acquire a
material amount of assets or capital stock of any other person, that
would involve, in any case, individually or in the aggregate, the
issuance of more than 20% of the outstanding Parent Common Stock on
the date hereof, other than in connection with this Agreement and the
transactions contemplated hereby;
(iii) except with respect to that transaction described on
Schedule 5.2B hereto, conduct its business in a manner or take, or,
subject to its fiduciary duties under Applicable Law, cause to be
taken, any other action that would or might reasonably be expected to
prevent or materially delay Parent or Sub from consummating the
transactions contemplated by this Agreement (regardless of whether
such action would otherwise be permitted or not prohibited hereunder),
including, without limitation, any action that may materially limit or
delay the ability of Parent or Sub to consummate the transactions
contemplated by this Agreement as a result of antitrust or securities
laws or other regulatory concerns; or
(iv) agree to take any action prohibited by the foregoing.
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(b) Indemnification; Insurance.
(i) From and after the Effective Time, Parent shall, and
shall cause the Surviving Corporation to, indemnify and hold harmless
to the fullest extent permitted under Applicable Law each person who
is now, or has been at any time prior to the date hereof, an officer,
director, employee, trustee or agent of the Company (or any subsidiary
or division thereof), including, without limitation, each person
controlling any of the foregoing persons (individually, an
"Indemnified Party" and collectively, the "Indemnified Parties"),
against all losses, claims, damages, liabilities, costs or expenses
(including attorneys' fees), judgments, fines, penalties and amounts
paid in settlement in connection with any claim, action, suit,
proceeding or investigation (and shall pay expenses for legal fees in
advance of the final disposition of any such action or proceeding to
each Indemnified Party to the fullest extent permitted under Delaware
law, provided that the Indemnified Party agrees that, in the event
that it is ultimately determined that such Indemnified Party is not
entitled to the payment of such expenses, for any reason, such
Indemnified Party shall reimburse Parent and the Surviving Corporation
for such expenses paid in advance) arising out of or pertaining to
acts or omissions, or alleged acts or omissions, by them in their
capacities as such, whether commenced, asserted or claimed before the
Effective Time and including, without limitation, liabilities arising
under the Securities Act, the Exchange Act and state corporation laws
in connection with the Merger; provided that the Parent and the
Surviving Corporation shall pay for only one law firm (in addition to
local counsel) for all Indemnified Parties, unless the use of one law
firm for all Indemnified Parties would present such law firm with a
conflict of interest. Parent shall cause the Surviving Corporation to
keep in effect the Company's current provisions in its Certificate of
Incorporation and By-laws providing for exculpation of director and
officer liability and indemnification of the Indemnified Parties to
the fullest extent permitted under the DGCL. In the event of any
actual or threatened claim, action, suit, proceeding or investigation
in respect of such acts or omissions, Parent shall, and shall cause
the Surviving Corporation to cooperate in the defense of any such
matter; provided, however, that the Parent and the Surviving
Corporation shall not be liable for any settlement effected without
their written consent (which consent shall not be unreasonably
withheld).
(ii) From and after the Effective Time, Parent shall, or
shall cause the Surviving Corporation to, maintain in effect for not
less than 6 years, the current policies of directors' and officers'
liability insurance maintained by the Company; provided that Parent
may substitute therefor policies of at least the same coverage and
amounts containing terms and conditions that are no less advantageous
in any material respect to the Indemnified Parties; provided, however,
that in no event shall the Parent or the Surviving Corporation be
required to expend pursuant to this Section 5.2(b)(ii) more than the
current annual premiums paid by the Company for such insurance and, in
the event the cost of such coverage shall exceed that amount, the
Parent or the Surviving Corporation shall purchase as much coverage as
possible for such amount.
(c) Listing Application. Parent shall, as soon as
practicable following the date hereof, prepare and submit to NASDAQ a
subsequent listing application covering the shares of
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Parent Common Stock issuable in the Merger, and shall use its reasonable
efforts to obtain, prior to the Effective Time, approval for the listing of
such shares of Parent Common Stock, subject to official notice of issuance.
(d) Directors of Parent. Immediately after the Effective
Time, Parent will take such action as may be necessary to create one additional
seat on the Board of Directors of Parent and to cause Jeffrey B. Robinson (such
individual being referred to herein as the "New Member") to be elected to the
Board of Directors of Parent, to serve until his successor is duly elected and
qualified. Parent shall take, or cause to be taken, all action necessary to
nominate the New Member for election to the Board of Directors of Parent at the
1998 Annual Meeting of Parent Stockholders and, in accordance with its normal
solicitation efforts, solicit proxies for his election to such Board of
Directors.
5.3 Covenants of the Company.
(a) Conduct of the Company's and the Subsidiaries'
Operations. During the period from the date of this Agreement to the Effective
Time, the Company shall conduct its and its Subsidiaries operations in the
ordinary course except as expressly contemplated by this Agreement and the
transactions contemplated hereby and shall use its reasonable efforts to
maintain and preserve its business organization and its material rights and
franchises and to retain the services of its officers and key employees and
maintain relationships with customers, suppliers and other third parties to the
end that its goodwill and ongoing business shall not be impaired in any
material respect. Without limiting the generality of the foregoing, during the
period from the date of this Agreement to the Effective Time or the earlier
termination of this Agreement pursuant to Section 7.1, neither the Company nor
the Subsidiaries shall, except as otherwise expressly contemplated by this
Agreement and the transactions contemplated hereby, without the prior written
consent of Parent:
(i) take or effect any of the following actions with
respect to its securities: (A) adjust, split, combine or reclassify
its capital stock, (B) make, declare or pay any dividend or
distribution on, or directly or indirectly redeem, purchase or
otherwise acquire any of its securities (except in connection with the
use of shares of capital stock of the Company to pay the exercise
price or tax withholding in connection with stock-based employee
benefit plans of the Company), (C) grant any person any right or
option to acquire any of its securities, (D) issue, deliver or sell or
agree to issue, deliver or sell any additional securities (except
pursuant to the exercise of outstanding warrants or options to
purchase Company Common Stock) or amend the terms of any of its
securities (provided, however, that the Company may amend any option
agreement(s) to which the Company is a party to provide that the
optionee(s) under such agreement(s) will have the right to exercise
any or all of such options, subject to the terms otherwise applicable
under such agreement(s), for a period of one year following the
termination of the employment of such optionee by the Company or any
successor thereto, if, on the date of this Agreement, the optionee is
an employee of the Company, or the termination of the optionee's
membership on the Board of Directors of the Company, if, on the date
of this Agreement, the optionee is a member of the Board of Directors
of the Company), or (E) enter into any agreement, understanding or
arrangement with respect to the sale or voting of its capital stock;
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(ii) sell, transfer, lease, pledge, mortgage, encumber or
otherwise dispose of any of its property or assets which are material,
in the aggregate, other than with respect to sales of oil and gas in
the ordinary course of business consistent with past practice;
(iii) make or propose any changes in its Certificate of
Incorporation, as amended, or its By-laws, as amended, or other
organizational documents;
(iv) merge or consolidate with any other person or acquire
a material amount of assets or capital stock of any other person or
enter into any confidentiality agreement with any person, other than
in connection with this Agreement and the transactions contemplated
hereby;
(v) incur, create, assume or otherwise become liable for
indebtedness for borrowed money, other than in the ordinary course of
business consistent with past practice, but in no event in excess of
$100,000, or assume, guarantee, endorse or otherwise as an
accommodation become responsible or liable for obligations of any
other individual, corporation or other entity, other than in the
ordinary course of business consistent with past practice;
(vi) enter into or modify any employment, severance,
termination or similar agreements or arrangements with, or grant any
bonuses, salary increases, severance or termination pay to, any
officer, director, consultant or employee other than salary increases
and bonuses granted to employees who are not officers or directors in
the ordinary course of business consistent with past practice, or
otherwise increase the compensation or benefits provided to any
officer, director, consultant or employee except as may be required by
Applicable Law, this Agreement, any applicable collective bargaining
agreement or a binding written contract in effect on the date of this
Agreement, or adopt any new employee benefit plan;
(vii) change its method of doing business or change any
method or principle of accounting in a manner that is inconsistent
with past practice;
(viii) settle any Actions, whether now pending or hereafter
made or brought involving, in any Action or related series of Actions,
which individually or in the aggregate are in an amount in excess of
$100,000;
(ix) modify, amend or terminate, or waive, release or
assign any material rights or claims with respect to, any material
Contract to which it is a party or any confidentiality agreement to
which it is a party;
(x) incur or commit to any capital expenditures,
obligations or liabilities in respect thereof, other than in the
ordinary course of business consistent with past practice, but in no
event in excess of $50,000 individually or $250,000 in the aggregate;
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(xi) conduct its business in a manner or take, or cause to
be taken, any other action that would or might reasonably be expected
to prevent or materially delay the Company from consummating the
transactions contemplated by this Agreement (regardless of whether
such action would otherwise be permitted or not prohibited hereunder),
including, without limitation, any action that may materially limit or
delay the ability of the Company to consummate the transactions
contemplated by this Agreement as a result of antitrust or securities
laws or other regulatory concerns;
(xii) take any action to exempt under or make not subject
to Section 203 of the DGCL, any person or entity (other than Parent or
its subsidiaries) or any action taken thereby, which person, entity or
action would have otherwise been subject to the restrictive provisions
thereof and not exempt therefrom; or
(xiii) agree to take any action prohibited by the foregoing.
(b) No Solicitation. The Company agrees that, during the
term of this Agreement, it will not negotiate with any person other than Parent
with respect to the acquisition of the Company or its Subsidiaries and it will
not, and will not permit any of its officers, directors, employees, affiliates,
agents or representatives (including, without limitation, investment bankers,
attorneys and accountants) to (a) initiate contact with, (b) make, solicit or
encourage any inquiries or proposals from, (c) enter into, or participate in,
any discussions or negotiations with, (d) disclose, directly or indirectly, any
information not customarily disclosed concerning the business and properties of
the Company or its Subsidiaries to or (e) afford any access to the Company's or
its Subsidiaries properties, books and records to any person (other than
Parent, Sub or their respective directors, officers, employees, agents and
representatives) in connection with any possible proposal relating to (i) the
disposition of its respective businesses or all or substantially all of its
assets (except for disposition of assets in the ordinary course of business
consistent with past practice), (ii) the acquisition of equity or debt
securities of the Company or its Subsidiaries (except in connection with the
exercise of options, as permitted in Section 5.3(a)) or (iii) the merger, share
exchange or business combination, or similar acquisition transaction of or
involving the Company or its Subsidiaries with any person other than Parent
(each or any combination of the foregoing a "Company Competing Transaction");
provided that the Company may (x) furnish information (subject to a
confidentiality agreement in reasonably customary form) to, and negotiate or
otherwise engage in discussions with, any party who delivers a written proposal
for a Company Competing Transaction if and so long as the Board of Directors of
the Company determines in good faith, based upon the written opinion of its
outside legal counsel, that failing to take such action would reasonably be
expected to constitute a breach of the fiduciary duties of the Board and (y)
take a position with respect to the Merger or a Company Competing Transaction,
or amend or withdraw such position, in compliance with Rule 14d-9 or Rule 14e-2
promulgated under the Exchange Act with regard to a Company Competing
Transaction. From and after the execution of this Agreement, the Company and
each of its Subsidiaries will immediately notify Parent orally, and
subsequently confirm in writing, all the relevant details relating to all
inquiries and proposals which it may receive relating to any such matters.
Subject to the foregoing, the Company will not, and will not permit any of its
representatives or Subsidiaries to enter, at any time, into or participate in
any discussions or negotiations regarding, or accept, any proposal for a
Company Competing Transaction received by them from a third party or that a
third party expresses a desire to
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communicate with them.
(c) Directors, Officers and Employees. The Company shall
take any and all action to cause all directors, officers and employees of the
Company and the Subsidiaries to resign and/or be terminated from all positions
with the Company and the Subsidiaries, including termination of any employment
agreements, and to terminate any and all Company Plans, effective prior to the
Effective Time, without cost or penalty to the Company, except with respect to
the severance benefits set forth in Section 4.15(h) and Section 4.15(i) to the
Company Disclosure Schedule.
(d) Agreements of Affiliates. The Company shall deliver to
Parent, prior to the date the Registration Statement becomes effective under
the Securities Act, a letter (the "Affiliate Letter") identifying all persons
who are, at the time of the Company Stockholders' Meeting, "affiliates" of the
Company for purposes of Rule 145 under the Securities Act. The Company shall
use its best efforts to cause each person who is identified as an "affiliate"
in the Affiliate Letter to deliver to Parent, prior to the Effective Time, a
written agreement (an "Affiliate Agreement") providing that each such person
will agree not to sell, pledge, transfer or otherwise dispose of, the shares of
Parent Common Stock to be received by such person in the Merger except in
compliance with the applicable provisions of the Securities Act and the
applicable rules and regulations thereunder.
ARTICLE VI
CONDITIONS
6.1 Mutual Conditions. The obligations of the parties hereto to
consummate the Merger shall be subject to fulfillment of the following
conditions:
(a) No temporary restraining order, preliminary or permanent
injunction or other order or decree which prevents the consummation of
the Merger shall have been issued and remain in effect, and no
statute, rule or regulation shall have been enacted by any
Governmental Authority which prevents the consummation of the Merger.
(b) All material consents, approvals, permits or
authorizations required to be obtained prior to the Effective Time
from any Governmental Authority in connection with the execution and
delivery of this Agreement and the consummation of the transactions
contemplated hereby shall have been obtained.
(c) This Agreement and the transactions contemplated hereby
shall have been approved and adopted by the affirmative vote of a
majority of the outstanding shares of Company Common Stock entitled to
vote thereon, in accordance with Applicable Law, at the Company's
stockholders' meeting, and the Share Issuance shall have been approved
by the Parent Stockholders in accordance with the rules of Nasdaq.
(d) The Registration Statement shall have become effective
under the Securities
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Act and no stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for
that purpose shall have been initiated or, to the knowledge of Parent
or the Company, threatened by the Commission or any other
Governmental Entity.
(e) No Action shall be instituted by any Governmental
Authority which seeks to prevent consummation of the Merger or which
seeks material damages in connection with the transactions
contemplated hereby which continues to be outstanding.
(f) The shares of Parent Common Stock to be issued in the
Merger shall have been authorized for quotation on Nasdaq, subject to
official notice of issuance.
(g) All consents, waivers and approvals of third parties
required in connection with the transactions contemplated hereby shall
have been obtained, except where the failure to obtain such consents,
waivers or approvals, in the aggregate, would not reasonably be
expected to result in a material adverse effect on Parent or the
Company, as the case may be, provided that a party which has not used
all reasonable efforts to obtain a consent, approval or waiver may not
assert this condition with respect to such consent, approval or
waiver.
(h) Parent shall have received an opinion dated as of the
Closing Date of Akin, Gump, Strauss, Hauer & Feld, L.L.P., to the
effect that (1) the Merger should constitute a reorganization within
the meaning of Section 368(a) of the Code and (2) no gain or loss
should be recognized by Company Stockholders with respect to shares of
Parent Common Stock received in the Merger in exchange for shares of
Company Common Stock, except with respect to cash received in lieu of
fractional shares of Parent Common Stock. In rendering such opinion,
such counsel may require and rely on representations contained in
certificates of Parent, the Company, Sub and others, as they deem
reasonably appropriate.
6.2 Conditions to Obligations of the Company. The obligations of the
Company to consummate the Merger and the transactions contemplated hereby shall
be subject to the fulfillment of the following conditions unless waived by the
Company:
(a) The representations and warranties of each of Parent and
Sub shall be true and correct on the date hereof and on and as of the
Closing Date as though made on and as of the Closing Date (except for
representations and warranties made as of a specified date, which need
be true and correct only as of the specified date), other than such
breaches of representations and warranties which would not have or
which would not be reasonably expected to have, in the aggregate, a
material adverse effect on Parent.
(b) Each of Parent and Sub shall have performed in all
material respects each obligation and agreement and shall have
complied in all material respects with each covenant to be performed
and complied with by it hereunder at or prior to the Effective Time.
(c) McDonald shall have delivered an opinion to the Board of
Directors of the
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Company, in form reasonably satisfactory to the Company, confirming,
as of the date of the Proxy Statement, its opinion referred to in
Section 4.13 hereof.
6.3 Conditions to Obligations of Parent and Sub. The obligations of
Parent and Sub to consummate the Merger and the other transactions contemplated
hereby shall be subject to the fulfillment of the following conditions unless
waived by each of Parent and Sub:
(a) The representations and warranties of the Company shall
be true and correct on the date hereof and on and as of the Closing
Date as though made on and as of the Closing Date (except for
representations and warranties made as of a specified date, which need
be true and correct only as of the specified date), other than such
breaches of representations and warranties which would not have or
which would not be reasonably expected to have, in the aggregate, a
material adverse effect on the Company.
(b) The Company shall have performed in all material respects
each obligation and agreement and shall have complied in all material
respects with each covenant to be performed and complied with by it
hereunder at or prior to the Effective Time.
(c) Parent shall have received from each person who is
identified in the Affiliate Letter as an "affiliate" of the Company,
an Affiliate Agreement in form and substance satisfactory to Parent.
ARTICLE VII
TERMINATION AND AMENDMENT
7.1 Termination. This Agreement may be terminated at any time
prior to the Effective Time, whether before or after approval and adoption of
this Agreement by Company Stockholders:
(a) by mutual written consent of Parent and the Company;
(b) by either Parent or the Company if any permanent
injunction or other order or decree of a court or other competent
Governmental Authority preventing the consummation of the Merger shall
have become final and non-appealable;
(c) by either Parent or the Company if the Merger shall not
have been consummated before the later of (i) April 30, 1998 and (ii)
if as of April 30, 1998 the Registration Statement was filed, the date
that is 60 days after the Registration Statement is declared effective,
unless extended by the Boards of Directors of both Parent and the
Company (provided that the right to terminate this Agreement under this
Section 7.1(c) shall not be available to any party whose failure to
perform any material covenant or obligation under this Agreement has
been the cause of or resulted in the failure of the Merger to occur on
or before such date);
(d) by Parent or the Company if at the meeting of Company
Stockholders held
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for such purpose (including any adjournment or postponement thereof)
the requisite vote of the Company Stockholders to approve the Merger
and the transactions contemplated hereby shall not have been obtained;
(e) by Parent or the Company if at the meeting of Parent
Stockholders held for such purpose (including any adjournment or
postponement thereof) the requisite vote of the Parent Stockholders to
approve the Share Issuance shall not have been obtained;
(f) by Parent or the Company (provided that the terminating
party is not then in material breach of any representation, warranty,
covenant or other agreement contained herein) if there shall have been
a material breach of any of the covenants or agreements or any of the
representations or warranties set forth in this Agreement on the part
of the other party, which breach is not cured within 30 days following
written notice given by the terminating party to the party committing
such breach, or which breach, by its nature, cannot be cured prior to
the Closing, but only if such breach would constitute a failure of a
condition contained in Section 6.2 or Section 6.3, as applicable;
(g) by the Company if the Board of Directors of the Company
shall determine to engage in a Company Competing Transaction and the
Company shall have delivered to Parent a written notice of the
determination by the Company Board of Directors to terminate this
Agreement pursuant to this Section 7.1(g); provided, however, that the
Company may not terminate this Agreement pursuant to this clause (g)
unless (w) five business days shall have elapsed after delivery to
Parent of the notice referred to above, (x) at the end of such five
business day period the Company Board of Directors shall continue to
believe that the failure to engage in such Company Competing
Transaction would reasonably be expected to be a breach of the
fiduciary duties of the Board of Directors of the Company (after
giving effect to any adjustment to the terms and conditions of such
transactions proposed by Parent in response to such Company Competing
Transaction) and (y) at the time of such termination, the Company
shall have paid to Parent the Termination Fee (as hereinafter
defined);
(h) by Parent if the Board of Directors of the Company shall
not have recommended the Merger to the Company Stockholders, or shall
have resolved not to make such recommendation, or shall have
materially modified or rescinded its recommendation of the Merger to
the Company Stockholders, or shall have modified or rescinded its
approval of this Agreement, or shall have entered into an acquisition,
merger or similar agreement to effect, or shall have effected, a
Company Competing Transaction, or shall have resolved to do any of the
foregoing; or
(i) by Parent or the Company if at the meeting of Parent
Stockholders held for such purpose (including any adjournment or
postponement thereof) the requisite vote of the Parent Stockholders to
approve the Share Issuance shall not have been obtained.
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7.2 Effect of Termination.
(a) In the event of the termination of this Agreement
pursuant to Section 7.1, this Agreement, except for the provisions of the last
sentence of Section 5.1(e) and the provisions of Sections 7.2 and 8.10, shall
become void and have no effect, without any liability on the part of any party
or its directors, officers, employees or stockholders. Notwithstanding the
foregoing, nothing in this Section 7.2 shall relieve any party to this
Agreement of liability for a breach of any provision of this Agreement prior to
such termination.
(b) If this Agreement is terminated
(i) by Parent or the Company pursuant to Section 7.1(d),
if (A) a Prior Event (as defined below) shall have occurred prior to
such termination and (B) either (x) the Company shall enter into a
definitive agreement with respect to a Company Competing Transaction
within twelve months following such termination and such Company
Competing Transaction is thereafter consummated or (y) a Company
Competing Transaction is consummated within twelve months following
such termination; or
(ii) by the Company pursuant to Section 7.1(g) or by
Parent pursuant to Section 7.1(h);
then in any such case the Company will pay to Parent in cash by wire transfer
in immediately available funds to an account designated by Parent a termination
fee in an amount equal to $1,000,000; provided, however, that if this Agreement
has been terminated by Parent pursuant to Section 7.1(h) and the Board of
Directors of the Company has taken any of the actions referenced in Section
7.1(h) because McDonald shall not have delivered its opinion referred to in
Section 6.2(c), then the amount to be paid by the Company shall be the amount
of Parent's out-of-pocket expenses incurred in connection with this
transaction, up to a maximum of $500,000. Such payment shall be made (a) in the
case of clause (i) above, within one business day following the consummation of
such Company Competing Transaction and (b) in the case of clause (ii), no later
than immediately prior to such termination.
(c) If this Agreement is terminated by Parent or the Company
pursuant to Section 7.1(i) and (A) a Parent Prior Event (as defined below)
shall have occurred prior to such termination, and (B) either (x) Parent shall
enter into a definitive agreement with respect to a Parent Competing
Transaction (as defined below) within twelve months following such termination
and such Parent Competing Transaction (as it may be amended) is thereafter
consummated, or (y) a Parent Competing Transaction is consummated within twelve
months following such termination, then Parent will pay to the Company in cash
by wire transfer in immediately available funds to an account designated by the
Company a termination fee in an amount equal to $1,000,000. Such payment shall
be made within one business day following the consummation of the Parent
Competing Transaction.
(d) As used herein, a "Prior Event" shall mean any of the
following events:
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(i) any person (other than Parent or any of its
subsidiaries) shall have commenced (as such term is defined in Rule
14d-2 under the Exchange Act), or shall have filed a registration
statement under the Securities Act, with respect to, a tender offer or
exchange offer to purchase any shares of Company Common Stock such
that, upon consummation of such offer, such person would Beneficially
Own (as defined below) or control 50% or more of the then outstanding
Company Common Stock;
(ii) the Company or any of its subsidiaries shall have
entered into, authorized, recommended, proposed or publicly announced
an intention to enter into, authorize, recommend, or propose, an
agreement, arrangement or understanding with any person (other than
Parent or any of its subsidiaries) to, or any person (other than
Parent or any of its subsidiaries) shall have announced a bona fide
intention to, or the Company shall have announced that any person
(other than Parent or any of it subsidiaries) has proposed or
communicated its intention to, or the Company shall have received a
bona fide proposal or communication regarding an intention to, (A)
effect any Competing Transaction, (B) purchase, lease or otherwise
acquire 40% or more of the assets of the Company or (C) purchase or
otherwise acquire (including by way of merger, consolidation, tender
or exchange offer or similar transaction) Beneficial Ownership of
securities representing 30% or more of the voting power of the
Company; or
(iii) any person (other than Parent or any subsidiary of
Parent) shall have acquired Beneficial Ownership of a number of shares
of Company Common Stock in addition to the number of shares of Company
Common Stock Beneficially Owned by such person on the date hereof
equal to 30% or more of the voting power of the Company.
(e) As used herein, the term "Parent Prior Event" shall have
the same meaning with respect to Parent as the term "Prior Event" has with
respect to the Company, with such changes in the definition thereof as are
appropriate to contemplate Parent in lieu of the Company.
(f) As used herein, the term "Parent Competing Transaction"
shall mean a transaction involving the acquisition of the businesses or all or
substantially all of the assets of Parent, or the merger, share exchange or
business combination, or similar acquisition transaction of or involving Parent
in which (A) persons who immediately prior to the consummation of such
transaction were serving as directors of Parent do not comprise a majority of
the directors of the acquiring or surviving entity immediately following the
consummation of such transaction and (B) the stockholders of Parent as of the
date hereof do not hold collectively a majority of the shares or equity
interests of the acquiring or surviving entity immediately following the
consummation of such transaction.
(g) As used herein, the terms "Beneficial Ownership" and
"Beneficially Own" shall have the meanings ascribed to them in Rule 13d-3 under
the Exchange Act. As used herein, "person" shall have the meaning specified in
Sections 3(a)(9) and 13(d)(3) of the Exchange Act.
7.3 Amendment. This Agreement may be amended by the parties hereto, at
any time before or after adoption of this Agreement by Company Stockholders or
authorization of the Share Issuance by Parent Stockholders, but after such
approval or authorization, no amendment shall be
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made which by law requires further approval or authorization by the Company
Stockholders or Parent Stockholders, as the case may be, without such further
approval or authorization. Notwithstanding the foregoing, this Agreement may
not be amended except by an instrument in writing signed on behalf of each of
the parties hereto.
7.4 Extension; Waiver. At any time prior to the Effective Time, Parent
(with respect to the Company) and the Company (with respect to Parent and Sub)
may, to the extent legally allowed, (a) extend the time for the performance of
any of the obligations or other acts of such party, (b) waive any inaccuracies
in the representations and warranties contained herein or in any document
delivered pursuant hereto and (c) 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 such party.
ARTICLE VIII
MISCELLANEOUS
8.1 Survival of Representations and Warranties. The representations
and warranties made herein by the parties hereto shall not survive the
Effective Time. Notwithstanding the foregoing, this Section 8.1 shall not limit
any covenant or agreement of the parties hereto, which by its terms
contemplates performance after the Effective Time or the termination of this
Agreement.
8.2 Notices. All notices and other communications hereunder shall be
in writing and shall be deemed given upon receipt if delivered personally,
telecopied (which is confirmed) or dispatched by a nationally recognized
overnight courier service to the parties at the following addresses (or at such
other address for a party as shall be specified by like notice):
(a) if to Parent or Sub:
Southern Mineral Corporation
500 Dallas Street, Suite 2800
Houston, Texas 77002-4708
Attention: Steven H. Mikel
Telecopy No.: (713) 658-9447
with a copy to
Akin, Gump, Strauss, Hauer & Feld, L.L.P.
711 Louisiana, Suite 1900 - South Tower
Houston, Texas 77002
Attention: David S. Peterman
Telecopy No.: (713) 236-0822
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(b) if to the Company:
Amerac Energy Corporation
1201 Louisiana, Suite 3350
Houston, Texas 77002-5609
Attention: Kenneth R. Peak
Telecopy No.: (713) 308-5285
with a copy to
James L. Rice III, Esq.
Weil, Gotshal & Manges LLP
700 Louisiana, Suite 1600
Houston, Texas 77002
Telecopy No.: (713) 224-9511
8.3 Interpretation. When a reference is made in this Agreement to an
Article or Section, such reference shall be to an Article or Section of this
Agreement unless otherwise indicated. The headings and the table of contents
contained in this Agreement are for reference purposes only and shall not
affect in any way the meaning or interpretation of this Agreement. For the
purposes of this Agreement, a "material adverse effect" shall mean, as to any
party, a material adverse effect on the assets, liabilities, results of
operations, business or financial condition of such party and its subsidiaries,
taken as a whole, or on such party's ability to consummate the transactions
contemplated hereby.
8.4 Counterparts. This Agreement may be executed in counterparts,
which together shall constitute one and the same agreement. The parties may
execute more than one copy of this Agreement, each of which shall constitute an
original.
8.5 Entire Agreement. This Agreement (including the documents and the
instruments referred to herein) and the Confidentiality Agreement constitute
the entire agreement among the parties and supersede all prior agreements and
understandings by or among the parties, written and oral, with respect to the
subject matter hereof.
8.6 Third Party Beneficiaries. Nothing in this Agreement, express or
implied, is intended or shall be construed to create any third party
beneficiaries, except for the provisions of Section 5.2(b) which may be
enforced by the beneficiaries thereof.
8.7 Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of Texas without regard to principles of
conflict of laws.
8.8 Specific Performance. The transactions contemplated by this
Agreement are unique and monetary damages would not be an adequate remedy for a
breach hereof. Accordingly, each of the parties acknowledges and agrees that,
in addition to all other remedies to which it may be entitled, each of the
parties hereto is entitled to a decree of specific performance, provided that
such party is not in material default hereunder.
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8.9 Assignment. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any of the parties
hereto (whether by operation of law or otherwise) without the prior written
consent of the other parties. Subject to the preceding sentence, this Agreement
shall be binding upon, inure to the benefit of and be enforceable by the
parties and their respective successors and permitted assigns.
8.10 Expenses. Parent and the Company shall pay their own costs and
expenses associated with the transactions contemplated by this Agreement,
except that the Company and Parent shall share equally (i) the filing fees in
connection with the filing of the Proxy Statement and Registration Statement
with the Commission and (ii) the expenses incurred in connection with printing
and mailing the Proxy Statement to the Company Stockholders and the Parent
Stockholders.
8.11 Incorporation of Disclosure Schedules. The Company Disclosure
Schedule and the Parent Disclosure Schedule are hereby incorporated herein and
made a part hereof for all purposes as if fully set forth herein.
8.12 Severability. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of
this Agreement is so broad as to be unenforceable, the provision shall be
interpreted to be only so broad as is enforceable.
8.13 Subsidiaries and Affiliates. As used in this Agreement, the word
"subsidiary" when used with respect to any party means any corporation or other
organization, whether incorporated or unincorporated, of which such party
directly or indirectly owns or controls at least a majority of the securities
or other interests 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, or any organization of which
such party is a general partner, and unless otherwise specified, the word
"affiliate" has the meaning ascribed thereto in the Investment Company Act of
1940, as amended.
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IN WITNESS WHEREOF, Parent, Sub and the Company have signed this
Agreement as of the date first written above.
SOUTHERN MINERAL CORPORATION
By: /s/ STEVEN H. MIKEL
--------------------------------------
Steven H. Mikel
President and Chief Executive Officer
SMC ACQUISITION CORP.
By: /s/ STEVEN H. MIKEL
--------------------------------------
Steven H. Mikel
President
AMERAC ENERGY CORPORATION
By: /s/ JEFFREY B. ROBINSON
--------------------------------------
Jeffrey B. Robinson
President and Chief Executive Officer
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APPENDIX B
RESTATED ARTICLES OF INCORPORATION
OF
SOUTHERN MINERAL CORPORATION
Steve H. Mikel certifies:
1. That he is the President and Chief Executive Officer of
Southern Mineral Corporation, a Nevada corporation (the "COMPANY").
2. That the Board of Directors (the "BOARD") of the Company, by unanimous
written consent dated November 17, 1997, resolved to amend and restate
the articles of incorporation of the Company, pursuant to Section
78.403 of the Nevada General Corporation Law (the "NGCL").
3. That the stockholders of the Company, at meeting duly called and held
on January 28, 1998, resolved to amend and restate the articles of
incorporation of the Company, pursuant to Section 78.403 of the NGCL.
4. That as a result of the adoption of such resolutions, the articles of
incorporation of the Company, as amended to date, have been amended
and restated to read in their entirety as follows:
ARTICLE IX
NAME
The name of the Company is: Southern Mineral Corporation
ARTICLE X
DEFINITIONS
In addition to the above-defined terms, the following terms have the
meanings given for purposes of these amended and restated articles of
incorporation:
"ANNOUNCEMENT DATE" shall have the meaning set forth in Section
(b)(iii)(B)(1) of Article VII.
"ARTICLES" means these amended and restated articles of incorporation.
"BUSINESS COMBINATION" means: (a) any merger, reorganization or
consolidation of the Company or any of its subsidiaries with or into a Related
Person, (b) any sale, lease, exchange, transfer or other disposition of all or
substantially all of the property and assets of the Company or any of its
subsidiaries (including the issuance of any voting securities) to a Related
Person, (c) any merger or consolidation of a Related Person with or into the
Company or any of its subsidiaries, (d) any sale, lease, exchange, transfer or
other disposition of all or any substantial part of the assets of the Related
Person (including the issuance of any securities of the Related Person) to the
Company or any of its
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subsidiaries, or (e) any liquidation or dissolution of the Company of any of
its subsidiaries.
"BYLAWS" shall have the meaning set forth in Article III.
"CHANGE" shall have the meaning set forth in Section (a) of Article X.
"COMMON STOCK" shall have the meaning set forth in Article V.
"CONTINUING DIRECTOR" means a director (a) who was a member of the
Board of the Company immediately prior to the time that a Related Person
involved in a Business Combination (as those terms are defined in these
Articles) became the owner of more than 20% of the outstanding shares of
capital stock of the Company entitled to vote on the election of directors or
(b) who was elected, appointed or nominated as a director by a majority of the
Continuing Directors.
"DETERMINATION DATE" shall have the meaning set forth in Section
(b)(iii)(B)(1) of Article VII.
"LIQUIDATION" means any voluntary or involuntary liquidation,
dissolution or winding-up of the Company.
"PERSON" means any natural person, partnership (general or limited),
corporation, group or other entity (other than the Company, any subsidiary of
the Company or a trustee holding stock for the benefit of employees of the
Company or its subsidiaries, or any one of them, pursuant to one or more
employee benefit plans or arrangement). When two or more Persons act as a
partnership (general or limited), syndicate, association or other group for the
purpose of acquiring, holding or disposing of shares of stock, such partnership
(general or limited), syndicate, association or group shall be deemed a Person.
"PREFERRED STOCK" shall have the meaning set forth in Article V.
"RELATED PERSON" means any Person which is the beneficial owner (as
such term is defined in Rule 13d-3 of the General Rules and Regulations under
the Securities Exchange Act of 1934) as of the Determination Date or
immediately prior to the consummation of a Business Combination, of 20% or more
of the capital stock of the Company entitled to vote on the election of
directors, and any "affiliate" or "associate" (as such terms are defined in
Rule 12b-2 of the General Rules and Regulations under the Securities Exchange
Act of 1934) of any such Person.
"STOCKHOLDER MEETING" shall have the meaning set forth in Section (a)
of Article IX.
"VOTING STOCK" means (a) Common Stock and (b) Preferred Stock granted
voting rights pursuant to Article V, paragraph (b)(ii).
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ARTICLE XI
RESIDENT OFFICE
The resident office of the Company is located at One East First
Street, Reno, Nevada 89501 and the name of the initial registered agent at such
address is The Corporation Trust Company of Nevada. The Company may maintain an
office or offices in such towns, cities and places within or outside of the
State of Nevada as the Board may from time to time determine or as may be
designated by the By-Laws of the Company (the "BYLAWS").
ARTICLE XII
PURPOSE
The nature of the business, or object, or purposes, proposed to be
transacted, promoted or carried on by the Company are as follows: To engage in
any lawful activity.
The enumeration of the foregoing powers shall not in anyway be deemed
to be a limitation upon the powers of the Company, but shall be in furtherance
of and in addition to the powers which it is authorized to exercise under "An
Act to Provide a General Corporation Law," approved March 21, 1925, and acts
amendatory and supplemental thereto.
ARTICLE XIII
CAPITALIZATION
The total number of shares of all classes of stock that the Company
shall have authority to issue is 50,000,000 shares, consisting of 50,000,000
shares of Common Stock, par value $.01 per share (the "COMMON Stock"), and
5,000,000 shares of Preferred Stock, par value $.01 per share (the "PREFERRED
STOCK").
(a) TERMS OF COMMON STOCK.
(i) GENERAL. Except as otherwise required by law or as
otherwise provided in these Articles, each share of Common Stock shall
have identical powers, preferences, qualifications, limitations and
other rights.
(ii) VOTING RIGHTS. Except as otherwise required by law or as
otherwise provided in these Articles each share of Common Stock shall
be entitled to one vote per share.
(iii) DIVIDENDS. Subject to the rights of any outstanding
class or series of capital stock ranking senior to Common Stock as to
dividends, dividends may be paid upon Common Stock in cash, property
or securities as and when declared by the Board out of funds legally
available therefor. As and when dividends are so declared and paid,
the holders of Common Stock shall be entitled to participate in such
dividends ratably on a per share basis.
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(iv) LIQUIDATION. Upon any Liquidation, the holders of Common
Stock are entitled to share ratably in the net assets, if any,
remaining after payment in full of all debts and liabilities of the
Company and after the holders of any outstanding class or series of
capital stock ranking senior to Common Stock shall have been paid in
full the amounts to which such holders shall be entitled, or an amount
sufficient to pay the aggregate amount to which such holders are
entitled shall have been set aside for the benefit of the holders of
such senior stock.
(v) NO PREEMPTIVE RIGHTS. The Board may from time to time
issue any class or series of authorized stock of the Company, or any
notes, debentures, bonds, or other securities convertible into or
carrying options or warrants to purchase authorized stock of any class
or series without offering any such stock, either in whole or in part,
to the existing stockholders. No stockholder of the Company shall
because of his holding shares have any preemptive or preferential
rights to purchase or subscribe to stock of any class or series of the
Company now or hereafter to be authorized, or any notes, debentures,
bonds, or other securities convertible into or carrying options or
warrants to purchase stock of any class or series now or hereafter to
be authorized, whether or not the issuance of any such stock, or such
notes, debentures, bonds or other securities, would adversely affect
the dividend or voting rights of such stockholder; provided, however,
all such newly authorized shares of stock of any class or series, or
notes, debentures, bonds or other securities convertible into, or
carrying options or warrants to purchase, stock of any class or
series, may be issued and disposed of or sold by the Board on such
terms and for such consideration, so far as may be permitted by law,
and to such person or persons as the Board may determine in its
discretion from time to time.
(b) PREFERRED STOCK. The Preferred Stock may be issued from time to
time in one or more series, each of such series to have such voting powers,
designation, preferences, and relative participating, optional or other special
rights, and the qualifications, limitations or restrictions thereof, as are
stated and expressed herein or in a resolution or resolutions providing for the
issuance of such series, adopted by the Board as hereinafter provided. The
Board is hereby expressly empowered, subject to this Article V, to provide for
the issuance of the Preferred Stock from time to time in series and to fix by
resolution or resolutions providing for the issuance of such series:
(vi) NUMBER. The number of shares to constitute such series
and the designation thereof.
(vii) VOTING RIGHTS. The voting rights, full or limited, if
any, to which holders of shares of any series of Preferred Stock may
be entitled.
(viii) DIVIDENDS. The dividend rate of the shares of such
series, and whether such dividends shall be cumulative.
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(ix) REDEMPTION PROVISIONS. Whether the shares of such series
shall be redeemable and, if redeemable, the redemption price and the
terms and conditions thereof.
(x) LIQUIDATION PREFERENCE. The amount, if any, which the
shares of any such series shall be entitled to receive, before any
distribution or payment shall be made to holders of the Common Stock,
upon a Liquidation, or of any proceedings resulting in any
distribution of all, or substantially all, of its assets to its
stockholders; provided, however, the sale of all, or substantially
all, of the property and assets of the Company to, or the merger or
consolidation of the Company into or with, any other corporation shall
not be deemed to be a Liquidation within the meaning of this Section
(b)(v) of Article V.
(xi) SINKING FUNDS. Whether the shares of such series shall
be subject to the operation of retirement or sinking funds to be
applied to the purchase or redemption of such shares and, if such
funds are established, the annual amount thereof, and the terms and
provisions relative to the operation thereof.
(xii) CONVERSION RIGHTS. Whether the shares of such series
shall be convertible into, or exchangeable for, shares of any other
class or classes of any other series of the same or any other class of
stock of the Company and, if convertible, the conversion price or
prices or rate or rates of conversion or exchange and the terms of
adjustments, if any, upon such conditions as shall be stated in said
resolution or resolutions.
(xiii) OTHER RIGHTS. Such other designations, preferences and
relative participating, optional or other special rights and
qualifications, limitations or restrictions thereof as it may deem
advisable and shall be stated in said resolution or resolutions.
ARTICLE XIV
ELECTION OF DIRECTORS
(a) The business and affairs of the Company shall be conducted and
managed by, or under the direction of, the Board. Except as otherwise provided
for or fixed pursuant to Article V relating to the rights of the holders of any
series of Preferred Stock to elect additional directors, the total number of
directors constituting the entire Board shall be fixed from time to time by or
pursuant to a resolution passed by the Board.
(b) The number of directors which shall constitute the whole Board
shall be as specified pursuant to the Bylaws and may be altered from time to
time as may be provided therein. Each director shall serve for a term expiring
at the third annual meeting following the annual meeting at which such director
was elected. The foregoing notwithstanding, except as otherwise provided in
these Articles or
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any resolution or resolutions of the Board designating a series of Preferred
Stock, directors who are elected at an annual meeting of stockholders, and
directors elected in the interim to fill vacancies and newly created
directorships, shall hold office for the term for which elected and until their
successors are elected and qualified or until their earlier death, resignation
or removal. Whenever the holders of any class or classes of stock or any series
thereof shall be entitled to elect one or more directors pursuant to these
Articles or any resolution or resolutions of the board designating a series of
Preferred Stock, and, except as otherwise provided herein or therein, vacancies
and newly created directorships of such class or classes or series thereof may
be filled by a majority of the directors elected by such class or classes or
series thereof then in office, by a sole remaining director so elected or by
the unanimous written consent or the affirmative vote of a majority of the
outstanding shares of such class or classes or series entitled to elect such
director or directors.
(c) Except as otherwise provided for or fixed pursuant to Article V
relating to the rights of the holders of any series of Preferred Stock to elect
additional directors, and subject to the provisions hereof, newly created
directorships resulting from any increase in the authorized number of
directors, and any vacancies on the Board resulting from death, resignation,
disqualification, removal or other cause, may be filled only by the affirmative
vote of a majority of the remaining directors then in office, even though less
than a quorum of the Board. Any director elected in accordance with the
preceding sentence shall hold office for the remainder of the full term of the
newly created directorship or for the directorship in which the vacancy
occurred, and until such director's successor shall have been duly elected and
qualified, subject to such director's earlier death, disqualification,
resignation or removal. Subject to the provisions of these Articles, no
decrease in the number of directors constituting the Board shall shorten the
term of any incumbent director.
(d) During any period when the holders of any series of Preferred
Stock have the right to elect additional directors as provided for or fixed
pursuant to Article V, then upon commencement and for the duration of the
period during which such right continues (i) the then otherwise total
authorized number of directors of the Company shall automatically be increased
by such specified number of directors, and the holders of such Preferred Stock
shall be entitled to elect the additional directors so provided for or fixed
pursuant to said provisions, and (ii) each such additional director shall serve
until such director's successor shall have been duly elected and qualified, or
until such director's right to hold such office terminates pursuant to said
provisions, whichever occurs earlier, subject to his earlier death,
disqualification, resignation or removal. Except as otherwise provided by the
Board in the resolution or resolutions establishing such series, whenever the
holders of any series of Preferred Stock having such right to elect additional
directors are divested of such right pursuant to the provisions of such stock,
the terms of office of all such additional directors elected by the holders of
such stock, or elected to fill any vacancies resulting from death,
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resignation, disqualification or removal of such additional directors, shall
forthwith terminate and the total and authorized number of directors of the
Company shall be reduced accordingly. Notwithstanding the foregoing, whenever,
pursuant to Article V, the holders of any one or more series of Preferred Stock
shall have the right, voting separately as a series or together with holders of
other such series, to elect directors at an annual or special meeting of
stockholders, the election, term of office, filling of vacancies and other
features of such directorships shall be governed by the terms of these Articles
and the Certificate of Designations applicable thereto, and such directors so
elected shall not be divided into classes pursuant to this Section 6(d) of
Article VI, unless expressly provided by such terms.
(e) Except for such additional directors, if any, as are elected by
the holders of any series of Preferred Stock as provided for or fixed pursuant
to Article V, any director may be removed from office only by the affirmative
vote of the holders of 66 2/3% or more of the combined voting power of the
then-outstanding shares of Voting Stock at a meeting of stockholders called for
that purpose, voting together as a single class.
ARTICLE XV
RESTRICTIONS ON BUSINESS COMBINATIONS
(a) Except as set forth in Section 7(b) of this Article VII, any
Business Combination shall require the affirmative vote of the holders of
shares representing at least 66 2/3% of the outstanding shares of capital stock
of the Company entitled to vote on the election of directors.
(b) The provisions of Section 7(a) of this Article VII shall not apply
to any Business Combination if:
(i) the Business Combination is approved by majority of the
Continuing Directors;
(ii) the Business Combination is with another corporation, a
majority of the outstanding shares of stock of which is owned of
record or beneficially, directly or indirectly, by the Company or its
subsidiaries and none of which is owned by a Related Person; or
(iii) the form of consideration and minimum price
requirements described below are satisfied:
(A) in a Business Combination, the cash or
consideration to be paid to the Company's stockholders is
either cash or the same type of consideration used by the
Related Person in acquiring the largest portion of its shares
of the Company's voting capital stock prior to the first
public announcement of the proposed Business Combination; and
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(B) the fair market value per share of such payments
to the Company's stockholders in a Business Combination is at
least equal in value to the higher of (1) the highest per
share price (including brokerage commissions, soliciting
dealers' fees, dealer-manager compensation and other
expenses, and as appropriately adjusted to take account of
stock splits, reverse stock splits, stock dividends and
similar transactions) paid or agreed to be paid by the
Related Person to acquire any shares of the Company's voting
capital stock during the two years prior to the first public
announcement of the proposed Business Combination (the
"ANNOUNCEMENT DATE") or in the transaction in which the
Related Person first became a Related Person (the date of
such transaction herein referred to as the "DETERMINATION
DATE"), whichever is higher, or (2) the fair market value per
share of the Common Stock on the Announcement Date or on the
Determination Date, whichever is higher.
ARTICLE XVI
NO WRITTEN CONSENTS OF STOCKHOLDERS
Except as otherwise provided for or fixed pursuant to Article IV
relating to the rights of the holders of any series of Preferred Stock, no
action that is required or permitted to be taken by the stockholders at any
annual or special meeting of stockholders may be effected by written consent of
stockholders in lieu of a meeting of stockholders, unless the action to be
effected by written consent of stockholders and the taking of such action by
such written consent have expressly been approved in advance by the Board.
ARTICLE XVII
STOCKHOLDER MEETINGS
(a) Meetings of stockholders of the Company ("STOCKHOLDER MEETINGS")
may be held within or without the State of Nevada, as the Bylaws may provide.
Except as otherwise provided for or fixed pursuant to Article V relating to the
rights of the holders of any series of Preferred Stock, special Stockholder
Meetings may be called only by (i) the Chairman of the Board or (ii) the Board
pursuant to a resolution adopted by a majority of the seated Continuing
Directors of the Company. Special Stockholder Meetings may not be called by any
other Person or Person or in any other manner. Elections of directors need not
be by written ballot unless the Bylaws shall so provide.
(b) In addition to the powers conferred on the Board by these Articles
and by the NGCL, and without limiting the generality thereof, the Board is
specifically authorized from time to time, by resolution of the Board without
additional authorization by the stockholders of the Company, to adopt, amend or
repeal the Bylaws, in such form and with such terms as the Board may determine,
including, without limiting the generality of the foregoing, Bylaws relating to
(i)
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regulation of the procedure for submission by stockholders of nominations of
persons to be elected to the Board, (ii) regulation of the attendance at annual
or special Stockholder Meetings by Persons other than holders of record or
their proxies, and (iii) regulation of the business that may properly be
brought by a stockholder of the Company before an annual or special meeting of
stockholders of the Company.
ARTICLE XVIII
AMENDMENT OF CORPORATE DOCUMENTS
(a) ARTICLES. Whenever any vote of the holders of Voting Stock is
required by law to amend, alter, repeal or rescind any provision of these
Articles, then in addition to any affirmative vote required by applicable law
and in addition to any vote of the holders of any series of Preferred Stock
provided for or fixed pursuant to Article V, such alteration, amendment, repeal
or rescission (a "CHANGE") of any provision of these Articles must be approved
by at least a majority of the then-combined voting power of the
then-outstanding shares of Voting Stock, voting together as a single class;
provided, however, that if any such Change relates to Articles II, VI, VII,
VIII, IX, or to this Article X, such Change must also be approved by the
affirmative vote of the holders of at least 66 2/3% of the combined voting power
of the then-outstanding shares of Voting Stock, voting together as a single
class; provided further, however, that the vote(s) required by the immediately
preceding clause shall not be required if such Change has been first approved
by at least two-thirds of the then-authorized number of directors. Subject to
the provisions hereof, the Company reserves the right at any time, and from
time to time, to amend, alter, repeal or rescind any provision contained in
these Articles in the manner now or hereafter prescribed by law, and other
provisions authorized by the laws of the State of Nevada at the time in force
may be added or inserted, in the manner now or hereafter prescribed by law; and
all rights, preferences and privileges of whatsoever nature conferred upon
stockholders, directors or any other Persons whomsoever by and pursuant to
these Articles in its present form or as hereafter amended are granted subject
to the rights reserved in this article.
(b) BYLAWS. In addition to any affirmative vote required by law, any
Change of the Bylaws may be adopted either (i) by the Board by the affirmative
vote of at least a majority of the then-authorized number of directors, or (ii)
by the stockholders by the affirmative vote of the holders of at least 66 2/3%
of the combined voting power of the then-outstanding shares of Voting Stock,
voting together as a single class.
ARTICLE XIX
The corporation elects to be governed by Sections 78.411 to 78.444,
inclusive, of the NGCL.
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ARTICLE XX
INDEMNIFICATION OF OFFICERS AND DIRECTORS
No director or officer shall be personally liable to the Company or
stockholder for damages for breach of fiduciary duty as a director or officer,
except that this Article XII shall not eliminate or limit the liability of a
director or officer for (i) acts or omissions which involve intentional
misconduct, fraud or a knowing violation of law or (ii) the payment of
dividends in violation of Section 78.300 of the NCGL. If the NGCL is hereafter
amended or interpreted to eliminate or limit further the personal liability of
directors or officers, then the liability of all directors and officers shall
be eliminated or limited to the full extent then so permitted. Neither the
amendment nor repeal of this Article XII, nor the adoption of any provision of
these Articles inconsistent with this Article XII, shall eliminate or reduce
the effect of Article XII in respect of any act or omission that occurred prior
to such amendment, repeal or adoption of an inconsistent provision.
ARTICLE XXI
CONFLICT OF INTEREST
No contract or other transaction between the Company and any other
Person and no other acts of the Company with relation to any other Person
shall, in the absence of fraud, in any way be invalidated or otherwise affected
by the fact that any one or more of the directors or officers of the Company
are pecuniarily or otherwise interested in, or are directors or officers of,
such other Person. Any director or officer of the Company individually, or any
firm or association of which any director or officer may be a member, may be a
party to, or may be pecuniarily or otherwise interested in, any contract or
transaction of the Company, provided, however, the fact that he individually or
as a member of such firm or association is such a party or is so interested
shall be disclosed or shall have been known to the board of directors or a
majority of such members thereof as shall be present at any meeting of the
board of directors at which action upon any such contract or transaction shall
be taken; and any director of the Company who is also a director or officer of
such other Person or who is such a party or so interested may be counted in
determining the existence of a quorum at any meeting of the board of directors
which shall authorize any such contract or transaction and may vote thereat to
authorize any such contract or transaction, with like force and effect as if he
were not such a director or officer of such other Person or not so interested.
Any director of the Company may vote upon any contract or any other transaction
between the Company and any subsidiary or affiliated Person without regard to
the fact that he is also a director or officer of such subsidiary or affiliated
Person.
Any contract, transaction, act of the Company or of the directors,
which shall be ratified at any annual meeting of the stockholders of the
Company, or at any special meeting of the stockholders of the Company, or at
any special meeting called for such purpose, shall, insofar as permitted by
law, be as valid and as binding as though ratified by every stockholder of the
Company; provided,
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however, any failure of the stockholders to approve or ratify any such
contract, transaction or act, when and if submitted shall not be deemed in any
way to invalidate the terms or deprive the Company, its directors, officers or
employees, of its or their right to proceed with such contract, transaction or
act.
Subject to any express agreement which may from time to time be in
effect, any stockholder, director or officer of the Company may carry on and
conduct in his own right and for his own personal account, or as a partner in
any partnership, or as a joint venturer in any joint venture, or as an officer,
director or stockholder of any Person, or as a participant in any syndicate,
pool, trust or association, any business which competes with the business of
the Company and shall be free in all such capacities to make investments in any
kind of property in which the Company may make investments.
ARTICLE XXII
TERM
This corporation is to have a perpetual existence.
ARTICLE XXIII
NO ASSESSMENTS
The capital stock of the Company after the amount of the subscription
price, or par value, has been paid in, shall not be subject to assessment to
pay debts of the Company, and no paid up stock, and no stock issued as fully
paid, shall ever be assessable or assessed.
The undersigned does hereby make and file these Restated Articles of
Incorporation this ____ day of ___________, 1998.
------------------------------
STEVEN H. MIKEL, President and
Chief Executive Officer
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APPENDIX C
SOUTHERN MINERAL CORPORATION
1997 STOCK OPTION PLAN
AS EFFECTIVE NOVEMBER 14, 1997
SECTION 1.
GENERAL PROVISIONS RELATING TO
PLAN GOVERNANCE, COVERAGE AND BENEFITS
1.1 PURPOSE
The purpose of the Southern Mineral Corporation 1997 Stock Option Plan
(the "PLAN") is to foster and promote the long-term financial success of
Southern Mineral Corporation (the "COMPANY") and to increase stockholder value
by: (a) encouraging the commitment of selected key Employees and Consultants
(b) motivating superior performance of key Employees and Consultants by means
of long-term performance related incentives, (c) encouraging and providing key
Employees and Consultants with a program for obtaining ownership interests in
the Company which link and align their personal interests to those of the
Company's stockholders, (d) attracting and retaining key Employees and
Consultants by providing competitive incentive compensation opportunities, and
(e) enabling key Employees and Consultants to share in the long-term growth and
success of the Company.
The Plan provides for Option Awards of Nonstatutory Stock Options and
Incentive Stock Options and, therefore, is not intended to be a plan that is
subject to the Employee Retirement Income Security Act of 1974, as amended
(ERISA). The Plan shall be interpreted, construed and administered consistent
with its status as a plan that is not subject to ERISA.
Subject to approval by the Company's stockholders, pursuant to Section
4.1, the Plan shall become effective as of November 14, 1997 (the "EFFECTIVE
DATE"). The Plan shall commence on the Effective Date, and shall remain in
effect, subject to the right of the Board to amend or terminate the Plan at any
time pursuant to Section 4.5, until all Shares subject to the Plan have been
purchased or acquired according to its provisions. However, in no event may an
Option Award be granted under the Plan after the expiration of ten (10) years
from the Effective Date. Any Option Award granted prior to obtaining
stockholder approval of the Plan shall be subject to the subsequent receipt of
stockholder approval of the Plan.
1.2 DEFINITIONS
The following terms shall have the meanings set forth below:
(a) AUTHORIZED OFFICER. The Chairman of the Board or the
Chief Executive Officer of the Company or any other senior officer of
the Company to whom either of them delegate the authority to execute
any Option Agreement for and on behalf of the Company provided that
such Option Agreement has been approved or ratified by the Committee.
No officer shall be an Authorized Officer with respect to any Option
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Agreement for himself, nor act in any matter hereunder relating
directly to himself.
(b) BOARD. The Board of Directors of the Company.
(c) CAUSE. When used in connection with the termination of a
Grantee's Employment for purposes of the Plan, shall mean the
termination of the Grantee's Employment by the Company by reason of
(i) failure to perform the Grantee's duties diligently and with
reasonable care, which failure(s) the Board determines remains uncured
thirty (30) days after the Board has caused written notice of such
failure(s) to be delivered to the Grantee; (ii) use of drugs or
alcohol that impairs the Grantee's job performance; (iii) commission
of an act of fraud or misappropriation against the Company or a
Subsidiary, Parent or other affiliated entity; (iv) conviction of, or
plea of no contest to, any felony, or to a misdemeanor involving moral
turpitude; (v) the knowing engagement by the Grantee in any direct,
material conflict of interest with the Company (or Parent or
Subsidiary) without compliance with the Company's conflict of interest
policy, if any, then in effect; (vi) the knowing engagement by the
Grantee, without the written approval of the Board, in any activity
which competes with the business of the Company (or Parent or
Subsidiary) or which would result in a material injury to the Company;
or (vii) the knowing engagement in any activity which would constitute
a material violation of the provisions of the Company's insider
trading policy or business ethics policy, if any, then in effect.
(d) CHANGE IN CONTROL. Any of the events described in and
subject to Section 3.7.
(e) CODE. The Internal Revenue Code of 1986, as amended, and
regulations and other authority promulgated thereunder by the
appropriate governmental authority. References herein to any provision
of the Code shall refer to any successor provision thereto.
(f) COMMITTEE. Any Committee appointed by the Board
consisting of not less than two directors who fulfill the
"non-employee director" requirements of Rule 16b-3 under the Exchange
Act and the "outside director" requirements of Section 162(m) of the
Code. Without limitation, the Committee may be the Compensation
Committee of the Board, or any subcommittee of the Compensation
Committee, provided that the members of the Committee satisfy the
requirements of the previous sentence. The Board shall have the power
to fill vacancies on the Committee arising by resignation, death,
removal or otherwise. The Board, in its sole discretion, may bifurcate
the powers and duties of the Committee among one or more separate
committees, or retain all powers and duties of the Committee in a
single Committee. The members of the Committee shall serve at the
discretion of the Board.
(g) COMMON STOCK. The common stock of the Company, $.01 par
value per share, and any class of common stock into which such common
shares may hereafter be converted, reclassified or recapitalized.
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(h) COMPANY. Southern Mineral Corporation, a corporation
organized under the laws of the State of Nevada, and any successor in
interest thereto.
(i) CONSULTANT. An independent agent, consultant, attorney or
other individual who is not an Employee of the Company (or any Parent
or Subsidiary) and who, in the opinion of the Committee, is in a
position to contribute materially to the growth or financial success
of the Company (or any Parent or Subsidiary).
(j) COVERED EMPLOYEE. A named executive officer who is one of
the group of "covered employees" as defined in Section 162(m) of the
Code and Treasury Regulation ss. 1.162-27(c) or its successor.
(k) DISABILITY. As determined by the Committee in its
discretion exercised in good faith, a physical or mental condition of
the Employee that would entitle him to payment of disability income
payments under the Company's long term disability insurance policy or
plan for employees, as then effective, if any; or in the event that
the Grantee is not covered, for whatever reason, under the Company's
long-term disability insurance policy or plan, "Disability" means a
permanent and total disability as defined in Section 22(e)(3) of the
Code. A determination of Disability may be made by a physician
selected or approved by the Committee and, in this respect, the
Grantee shall submit to an examination by such physician upon request.
(l) EFFECTIVE DATE. November 14, 1997, the effective date of
the Plan.
(m) EMPLOYEE. Any employee of the Company (or any Parent or
Subsidiary) within the meaning of Section 3401(c) of the Code and who,
in the opinion of the Committee, is one of a select group of executive
officers, other officers, or other key personnel of the Company (or
any Parent or Subsidiary), who is in a position to contribute
materially to the growth and development and to the financial success
of the Company (or any Parent or Subsidiary), including, without
limitation, officers who are members of the Board.
(n) EMPLOYMENT. Employment by the Company (or any Parent or
Subsidiary), or by any corporation issuing or assuming an Option Award
in any transaction described in Section 424(a) of the Code, or by a
parent corporation or a subsidiary corporation of such corporation
issuing or assuming such Option Award, as the parent-subsidiary
relationship is determined at the time of the corporate action
described in Section 424(a) of the Code. In this regard, neither the
transfer of a Grantee from Employment by the Company to Employment by
any Parent or Subsidiary, nor the transfer of a Grantee from
Employment by any Parent or Subsidiary to Employment by the Company,
shall be deemed to be a termination of Employment of the Grantee.
Moreover, the Employment of a Grantee shall not be deemed to have been
terminated because of an approved leave of absence from active
Employment on account of illness, vacation or for reasons of
professional advancement, education, health, or government service, or
during military leave for any period (if the Grantee returns to active
Employment within 90 days after the termination of military leave), or
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during any period required to be treated as a leave of absence by
virtue of any valid law or agreement. Whether an authorized leave of
absence shall constitute termination of Employment shall be determined
by the Committee in its absolute discretion.
Unless otherwise provided in the Option Agreement, the term
"Employment" for purposes of the Plan will also include compensatory
services performed by a Consultant for the Company (or any Parent or
Subsidiary).
(o) EXCHANGE ACT. The Securities Exchange Act of 1934, as
amended.
(p) FAIR MARKET VALUE. The fair market value of one Share of
Common Stock, which shall be (i) the closing sales price on the
immediately preceding business day of a Share as reported on the
principal national securities exchange on which Shares are then listed
or admitted to trading, or (ii) if not so reported, the last reported
sales price for a Share on such date as quoted on The Nasdaq National
Market ("NASDAQ"), or (iii) if not quoted on NASDAQ, the average of
the closing bid and asked prices for a Share as quoted by the National
Quotation Bureau's "Pink Sheets" or the National Association of
Securities Dealers' OTC Bulletin Board System. If there was no public
trade of Common Stock on the date in question, Fair Market Value shall
be determined by reference to the last preceding date on which such a
trade was so reported.
If the Common Stock is not traded in accordance with clauses
(i), (ii) or (iii) of the preceding paragraph at the time a
determination of its Fair Market Value is required to be made
hereunder, the determination of Fair Market Value for purposes of the
Plan shall be made by the Committee in its absolute discretion
exercised in good faith. In this respect, the Committee may rely on
such financial data, valuations or experts as it deems advisable under
the circumstances.
In the event that a Grantee uses a cashless exercise method
or a Share withholding method to exercise a Stock Option, as provided
in Section 2.3, Fair Market Value shall be based on the sale prices of
the Shares sold to pay the Option Price.
(q) GRANTEE. Any Employee or Consultant who is granted an
Option Award under the Plan.
(r) INCENTIVE STOCK OPTION. A Stock Option granted by the
Committee to an Employee which is designated by the Committee as an
Incentive Stock Option and intended to qualify as an Incentive Stock
Option under Section 422 of the Code.
(s) INSIDER. An individual who is, on the relevant date, an
officer, director or ten percent (10%) beneficial owner of any class
of the Company's equity securities that is registered pursuant to
Section 12 of the Exchange Act, all as defined under Section 16 of the
Exchange Act.
(t) NONSTATUTORY STOCK OPTION. A Stock Option granted by the
Committee
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to a Grantee which is not designated by the Committee as an Incentive
Stock Option.
(u) OPTION AGREEMENT. The written agreement entered into
between the Company and the Grantee setting forth the terms and
conditions pursuant to which an Option Award is granted under the
Plan, as such agreement is further defined in Section 3.1(a).
(v) OPTION AWARD. A Nonstatutory Stock Option or Incentive
Stock Option, as well as any Supplemental Payment, awarded under the
Plan to a Grantee.
(w) OPTION PRICE. The price at which a Share may be purchased
by the Grantee upon exercise of a Stock Option.
(x) PARENT. Any corporation (whether now or hereafter
existing) which constitutes a "parent" of the Company, as defined in
Section 424(e) of the Code.
(y) PERFORMANCE-BASED EXCEPTION. The performance-based
exception from the tax deductibility limitations of Code Section
162(m), as prescribed in Code Section 162(m) and Treasury Regulation
ss. 1.162-27(e) (or its successor).
(z) PLAN. Southern Mineral Corporation 1997 Stock Option
Plan, as set forth herein and as it may be amended from time to time.
(aa) RETIREMENT. The voluntary termination of Employment from
the Company and any Parent or Subsidiary constituting retirement for
age on any date after the Employee attains the normal retirement age
of 65 years, or such other age as may be designated by the Committee
in the Employee's Option Agreement.
(bb) SHARE. A share of the Common Stock of the Company.
(cc) SHARE POOL means the number of shares authorized for
issuance under Section 1.4, as adjusted for granted Options under
Section 1.5 and as adjusted for changes in corporate capitalization
under Section 3.5.
(dd) STOCK OPTION OR OPTION. Pursuant to Section 2, (i) an
Incentive Stock Option or Nonstatutory Stock Option granted to an
Employee, or (ii) a Nonstatutory Stock Option granted to a Consultant,
whereunder the Grantee has the right to purchase Shares of Common
Stock. In accordance with Section 422 of the Code, no Consultant shall
be granted an Incentive Stock Option.
(ee) SUBSIDIARY. Any corporation (whether now or hereafter
existing) which constitutes a "subsidiary" of the Company, as defined
in Section 424(f) of the Code.
(ff) SUPPLEMENTAL PAYMENT. Any amount, as described in
Section 2.4, dedicated to payment of income taxes that are payable by
the Grantee on exercise of a Nonstatutory Stock Option.
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1.3 PLAN ADMINISTRATION
(a) AUTHORITY OF THE COMMITTEE. Except as may be limited by
law or by the Certification of Incorporation or Bylaws of the Company,
and subject to the provisions herein, the Committee shall have full
power to (i) select Grantees who shall participate in the Plan; (ii)
determine the sizes, duration and types of Option Awards; (iii)
determine the terms and conditions of Option Awards and Option
Agreements; (iv) determine whether any shares which are subject to
Options will be subject to any restrictions on transfer after exercise
of the Options; (v) construe and interpret the Plan and any Option
Agreement or other agreement entered into under the Plan; and (vi)
establish, amend, or waive rules for the Plan's administration.
Further, the Committee shall make all other determinations which may
be necessary or advisable for the administration of the Plan.
(b) MEETINGS. The Committee shall designate a chairman from
among its members who shall preside at all of its meetings, and shall
designate a secretary, without regard to whether that person is a
member of the Committee, who shall keep the minutes of the proceedings
and all records, documents, and data pertaining to its administration
of the Plan. Meetings shall be held at such times and places as shall
be determined by the Committee and the Committee may hold telephonic
meetings. The Committee may take any action otherwise proper under the
Plan by the affirmative vote, taken with or without a meeting, of a
majority of its members. The Committee may authorize any one or more
of their members or any officer of the Company to execute and deliver
documents on behalf of the Committee.
(c) DECISIONS BINDING. All determinations and decisions made
by the Committee shall be made in its discretion pursuant to the
provisions of the Plan, and shall be final, conclusive and binding on
all persons including the Company, its stockholders, Employees,
Grantees, and their estates and beneficiaries. The Committee's
decisions and determinations under the Plan and with respect to any
Option Award need not be uniform and may be made selectively among
Option Awards, Employees or Consultants, whether or not such Option
Awards are similar or such Employees or Consultants are similarly
situated.
(d) MODIFICATION OF OUTSTANDING OPTION AWARDS. Subject to the
stockholder approval requirements of Section 4.5 if applicable, the
Committee may, in its discretion, provide for the extension of the
exerciseability of an Option Award, accelerate the vesting or
exerciseability of an Option Award, eliminate or make less restrictive
any restrictions contained in an Option Award, waive any restriction
or other provisions of an Option Award, or otherwise amend or modify
an Option Award in any manner that is either (i) not adverse to the
Grantee to whom such Option Award was granted or (ii) consented to by
such Grantee. The Committee may grant an Option Award to an individual
who it expects to become an Employee within the next six months, with
such Option Award being subject to such individual actually becoming
an Employee within such time period, and subject to such other terms
and conditions as
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may be established by the Committee in its discretion.
(e) DELEGATION OF AUTHORITY. The Committee may delegate to
the Authorized Officers, or any of them, any of its assigned duties
under this Plan pursuant to such conditions or limitations as the
Committee may establish from time to time, except that the Committee
may not delegate to any person the authority to (i) grant Option
Awards or (ii) to take any action which would contravene the
requirements of Rule 16b-3 under the Exchange Act or the
Performance-Based Exception under Section 162(m) of the Code.
(f) EXPENSES OF COMMITTEE. The Committee may employee legal
counsel, including, without limitation, independent legal counsel and
counsel regularly employed by the Company, consultants and agents as
the Committee may deem appropriate for the administration of the Plan,
and may rely upon any opinion received from any such counsel or
consultant and any computations received from any such consultant or
agent. All expenses incurred by the Committee in interpreting and
administering the Plan, including, without limitation, meeting fees
and expenses and professional fees, shall be paid by the Company.
(g) SURRENDER OF PREVIOUS OPTION AWARDS. The Committee may,
in its absolute discretion, grant Option Awards to Grantees on the
condition that such Grantees surrender to the Committee for
cancellation such other Option Awards (including, without limitation,
Option Awards with higher exercise prices) as the Committee directs.
Option Awards granted on the condition precedent of surrender of
outstanding Option Awards shall not count against the limits set forth
in Section 1.4 until such time as such previous Option Awards are
surrendered and cancelled.
(h) INDEMNIFICATION. Each person who is or was a member of
the Committee, or of the Board, shall be indemnified by the Company
against and from any loss, cost, liability, or expense that may be
imposed upon or reasonably incurred by him in connection with or
resulting from any claim, action, suit, or proceeding to which he may
be a party or in which he may be involved by reason of any action
taken or failure to act under the Plan, except for any such act or
omission constituting willful misconduct or gross negligence. Such
person shall be indemnified by the Company for all amounts paid by him
in settlement thereof, with the Company's approval, or paid by him in
satisfaction of any judgment in any such action, suit, or proceeding
against him, provided he shall give the Company an opportunity, at its
own expense, to handle and defend the same before he undertakes to
handle and defend it on his own behalf. The foregoing right of
indemnification shall not be exclusive of any other rights of
indemnification to which such persons may be entitled under the
Company's Articles of Incorporation or Bylaws, as a matter of law, or
otherwise, or any power that the Company may have to indemnify them or
hold them harmless.
1.4 SHARES OF COMMON STOCK SUBJECT TO THE PLAN
Subject to the provisions of Sections 1.5 and 3.5, the number of
Shares of Common
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Stock which may be issued pursuant to the exercise of Options under this Plan
shall be Seven Hundred Thousand (700,000) Shares as of the Effective Date.
Except for an adjustment in accordance with Section 3.5, the number of Shares
which may be issued for Incentive Stock Options granted hereunder shall not
exceed 700,000 Shares.
Unless the Committee designates that a particular Option Award granted
to a Covered Employee is not intended to comply with the Performance-Based
Exception, subject to adjustment as provided in Section 3.5, the maximum
aggregate number of Options for Shares that may be granted by the Committee to
any Covered Employee shall be Five Hundred Thousand (500,000) in any calendar
year. With respect to any Stock Option granted to a Covered Employee that is
canceled or repriced, the number of Shares subject to such Option shall
continue to count against the maximum number of Shares that may be the subject
of Stock Options granted to such Covered Employee hereunder and, in this
regard, such maximum number shall be determined in accordance with regulations
promulgated under Section 162(m) of the Code.
1.5 SHARE POOL ADJUSTMENTS FOR AWARDS AND PAYOUTS.
Options granted under the Plan shall reduce, on a one Share for one
Share basis, the number of Shares authorized for issuance under the Share Pool.
A cancellation, termination, expiration, forfeiture, or lapse for any
reason of any Option, and payment of an Option Price with previously acquired
Shares or by withholding Shares which otherwise would be acquired on exercise
(i.e., the number of Shares turned in or withheld as payment of the Option
Price), shall restore, on a one Share for one Share basis, the number of Shares
authorized for issuance under the Plan.
1.6 SOURCES OF COMMON STOCK AVAILABLE FOR ISSUANCE.
The Common Stock available for issuance upon the exercise of Options
under the Plan shall be made available from Shares now or hereafter (a) held in
the treasury of the Company, (b) authorized but unissued shares, or (c) Shares
to be purchased or acquired by the Company. No fractional Shares shall be
issued under the Plan; payment for fractional Shares shall be made in cash.
1.7 ELIGIBILITY FOR PARTICIPATION
(a) ELIGIBILITY. The Committee shall from time to time
designate those Employees and/or Consultants, if any, to be granted
Option Awards under the Plan, the number and type of Stock Options
granted, and any other terms or conditions relating to the Option
Awards as it may deem appropriate to the extent consistent with the
provisions of the Plan. A Grantee who has been granted an Option Award
may, if otherwise eligible, be granted additional Option Awards at any
time. The grant of any Option hereunder in any one year to a Grantee
shall neither guarantee nor preclude a further grant of an Option to
such Grantee in that year or in any subsequent year.
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(b) INCENTIVE STOCK OPTION ELIGIBILITY. No Consultant shall
be eligible for the grant of any Incentive Stock Option. In addition,
no Employee shall be eligible for the grant of any Incentive Stock
Option who owns, or would own immediately before the grant of such
Incentive Stock Option, directly or indirectly, stock possessing more
than ten percent (10%) of the total combined voting power of all
classes of stock of the Company, or any Parent or Subsidiary. This
restriction does not apply if, at the time such Incentive Stock Option
is granted, the Incentive Stock Option exercise price is at least one
hundred and ten percent (110%) of the Fair Market Value on the date of
grant and the Incentive Stock Option by its terms is not exercisable
after the expiration of five (5) years from the date of grant. For the
purpose of the immediately preceding sentence, the attribution rules
of Section 424(d) of the Code shall apply for the purpose of
determining an Employee's percentage ownership in the Company or any
Parent or Subsidiary. This paragraph shall be construed consistent
with the requirements of Section 422 of the Code.
1.8 TYPES OF OPTION AWARDS
The types of Option Awards available under the Plan are Nonstatutory
Stock Options, Incentive Stock Options and Supplemental Payments as described
in Section 2.
SECTION 2.
STOCK OPTIONS
2.1 GRANT OF STOCK OPTIONS
The Committee is authorized to grant (a) Nonstatutory Stock Options to
Employees and Consultants and (b) Incentive Stock Options to Employees only, in
accordance with the terms and conditions of the Plan and with such additional
terms and conditions, not inconsistent with the Plan, as the Committee shall
determine in its discretion. Successive grants may be made to the same Grantee
whether or not any Stock Option previously granted to such person remains
unexercised.
2.2 STOCK OPTION TERMS
(a) WRITTEN AGREEMENT. Each grant of an Stock Option shall be
evidenced by a written Option Agreement. Among its other provisions,
each Option Agreement shall set forth the extent to which the Grantee
shall have the right to exercise the Stock Option following
termination of the Grantee's Employment. Such provisions shall be
determined in the discretion of the Committee, shall be included in
the Grantee's Option Agreement, need not be uniform among all Stock
Options issued pursuant to the Plan, and may reflect distinctions
based on the reasons for termination of Employment.
(b) NUMBER OF SHARES. Each Stock Option shall specify the
number of Shares of Common Stock to which it pertains.
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(c) EXERCISE PRICE. The exercise price per Share of Common
Stock under each Stock Option shall be determined by the Committee and
specified in the Option Agreement; provided, however, (i) in the case
of an Incentive Stock Option, such exercise price shall not be less
than one hundred percent (100%) of the Fair Market Value per Share on
the date the Incentive Stock Option is granted and (ii) in the case of
a Nonstatutory Stock Option, shall not be less than fifty percent
(50%) of the Fair Market Value on the date the Nonstatutory Stock
Option is granted; provided, however, if the Nonstatutory Stock Option
is intended to qualify for the Performance-Based Exception, the
exercise price shall not be less than one hundred percent (100%) of
the Fair Market Value on the date the Nonstatutory Stock Option is
granted. Each Option Agreement may also specify the method of exercise
which shall not be inconsistent with the requirements of Section
2.3(a).
(d) TERM. In the Option Agreement, the Committee shall fix
the term of each Stock Option which shall be not more than ten (10)
years from the date of grant. In the event no term is fixed, such term
shall be ten (10) years from the date of grant.
(e) EXERCISE. In the Option Agreement, the Committee shall
specify the time or times at which a Stock Option may be exercised in
whole or in part. An Option Agreement may require a period of
continuous Employment and/or performance objectives to be achieved
before the Stock Option or any portion thereof will become vested and
exercisable. Each Stock Option, the exercise or timing of which is
dependent, in whole or in part, on the achievement of designated
performance objectives, may specify a minimum level of achievement in
respect of the specified performance objectives below which no Stock
Options will be exercisable, and a method for determining the number
of Stock Options that will be exercisable if performance is at or
above such minimum but short of full achievement of the performance
objectives. Options may be exercisable in installments (which may be
cumulative or noncumulative or subject to acceleration) during the
term of the Option. All such terms and conditions of the Option, as
determined by the Committee in its discretion, shall be set forth in
the Option Agreement.
(f) $100,000 LIMIT ON INCENTIVE STOCK OPTIONS.
Notwithstanding any contrary provision in the Plan, to the extent that
the aggregate Fair Market Value (determined as of the time the
Incentive Stock Options are granted) of the Shares of Common Stock
with respect to which Incentive Stock Options are exercisable for the
first time by any Grantee during any single calendar year (under the
Plan and any other stock option plans of the Company and its
Subsidiaries or Parent) exceeds the sum of $100,000, such Incentive
Stock Options shall be treated as a Nonstatutory Stock Option to the
extent in excess of the $100,000 limit, and not an Incentive Stock
Option, but all other terms and provisions of such Stock Option shall
remain unchanged. This paragraph shall be applied by taking Incentive
Stock Options into account in the order in which they are granted and
shall be construed in accordance with Section 422(d) of the Code. In
the absence of such regulations or other authority, or if such
regulations or other authority require or permit a designation of the
Options which shall cease to
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constitute Incentive Stock Options, Incentive Stock Options shall, to
the extent of such excess and in the order in which they were granted,
automatically be deemed to be Nonstatutory Stock Options, but all
other terms and provisions of such Incentive Stock Options, and in
corresponding Option Awards, shall remain unchanged.
2.3 STOCK OPTION EXERCISES
(a) METHOD OF EXERCISE AND PAYMENT. Stock Options shall be
exercised by the delivery of a signed written notice of exercise to
the Company as of the date specified by the Company in advance of the
proposed exercise date. The notice shall set forth the number of
Shares with respect to which the Option is to be exercised,
accompanied by full payment for the Shares.
The Option Price upon exercise of any Stock Option shall be
payable to the Company in full either: (i) in cash or its equivalent,
or (ii) by tendering previously acquired whole Shares, free and clear
of all liens and encumbrances valued at their Fair Market Value
(provided that the Shares which are tendered must have been held by
the Grantee for at least six (6) months prior to their tender to
satisfy the Option Price), or (iii) subject to prior approval by the
Committee in its absolute discretion, by (A) tendering previously
acquired whole shares, free and clear of all liens and encumbrances or
(B) withholding Shares which otherwise would be acquired on exercise,
or (iv) subject to prior approval by the Committee in its absolute
discretion, by a combination of (i), (ii), and (iii) above. Any
payment in Shares shall be effected by the delivery of such Shares to
the Secretary of the Company, duly endorsed in blank or accompanied by
stock powers duly executed in blank, together with any other documents
and evidences as the Secretary of the Company shall require from time
to time.
In the absolute discretion of the Committee, any Option
granted under the Plan may be exercised by a broker-dealer acting on
behalf of a Participant if (i) the broker-dealer has received from the
Grantee or the Company a duly endorsed agreement evidencing such
Option and instructions signed by the Grantee requesting the Company
to deliver the shares of Common Stock subject to such Option to the
broker-dealer on behalf of the Grantee and specifying the account into
which such shares should be deposited, (ii) adequate provision has
been made with respect to the payment of any withholding taxes due on
such exercise, and (iii) the broker-dealer and the Grantee have
otherwise complied with Section 220.3(e)(4) of Federal Reserve Board
Regulation T, 12 CFR Part 220 (or its successor).
The Committee, in its absolute discretion (but subject to
applicable securities law, financial accounting implications and tax
withholdings) may also allow exercise by any other means which the
Committee determines to be consistent with the Plan's purpose and
applicable law.
As soon as practicable after receipt of a written
notification of exercise and full payment, the Company shall deliver
to or on behalf of the Grantee, in the name of the
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Grantee (or other appropriate recipient in the event of Grantee's
death), stock certificates for the number of Shares purchased pursuant
to exercise of the Stock Option. Such delivery shall be deemed
effected for all purposes when a stock transfer agent of the Company
shall have deposited such certificates in the United States mail,
addressed to Grantee or other appropriate recipient.
(b) RESTRICTIONS ON OPTION TRANSFERABILITY. During the
lifetime of a Grantee, each Option granted to him shall be exercisable
only by the Grantee or his legal guardian in the event of his
Disability (or by a broker-dealer pursuant to a cashless exercise
under Section 2.3(a) if permitted by the Committee). No Option shall
be assignable or transferable by Grantee otherwise than by will or by
the laws of descent and distribution.
(c) RESTRICTIONS ON SHARE TRANSFERABILITY. The Committee may
impose such restrictions on any Shares acquired pursuant to the
exercise of a Stock Option as it may deem advisable in its discretion,
including, without limitation, restrictions under either (i) any
buy/sell agreement or right of first refusal, (ii) applicable federal
securities laws, (iii) the requirements of any stock exchange or
market upon which such Shares are then traded or listed, or (iv) any
blue sky or state securities law applicable to such Shares. Any
certificate issued to evidence Shares issued upon the exercise of an
Option may bear such legends and statements as the Committee shall
deem advisable to assure compliance with federal and state laws and
regulations.
Any Grantee or other person exercising an Option may be
required by the Committee to give a written representation that the
Option and the Shares subject to the Option will be acquired for
investment and not with a view to public distribution; provided,
however, that the Committee, in its sole discretion, may release any
person receiving an Option from any such representations either prior
to or subsequent to the exercise of the Option.
(d) NOTIFICATION OF DISQUALIFYING DISPOSITION OF SHARES FROM
INCENTIVE STOCK OPTIONS. Notwithstanding any other provision of the
Plan, a Grantee who disposes of Shares of Common Stock acquired upon
the exercise of an Incentive Stock Option by a sale or exchange either
(i) within two (2) years after the date of the grant of the Incentive
Stock Option under which the Shares were acquired or (ii) within one
(1) year after the transfer of such Shares to him pursuant to
exercise, shall promptly notify the Company of such disposition, the
amount realized and his adjusted basis in such Shares.
(e) PROCEEDS OF OPTION EXERCISE. The proceeds received by the
Company from the sale of Shares pursuant to Stock Options exercised
under the Plan shall be used for general corporate purposes.
2.4 SUPPLEMENTAL PAYMENT ON EXERCISE OF NONSTATUTORY STOCK OPTIONS
The Committee may provide in the Option Agreement for a supplemental
payment (the
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"SUPPLEMENTAL Payment") by the Company to the Grantee with respect to the
exercise of any Nonstatutory Stock Option. The Supplemental Payment shall be in
the amount specified by the Committee, which amount shall not exceed the amount
necessary to pay the federal and state income tax payable with respect to both
the exercise of the Nonstatutory Stock Option and the receipt of the
Supplemental Payment, assuming the holder is taxed either at the maximum
effective income tax rate applicable thereto or at a lower effective tax rate
as deemed appropriate by the Committee. The Committee shall have the discretion
to grant Supplemental Payments that are payable solely in cash or Supplemental
Payments that are payable in cash, Common Stock, or a combination of both, as
determined by the Committee.
SECTION 3.
PROVISIONS RELATING TO PLAN PARTICIPATION
3.1 PLAN CONDITIONS
(a) OPTION AGREEMENT. Each Grantee to whom an Option Award is
granted shall be required to enter into an Option Agreement with the
Company, in such a form as is provided by the Committee. The Option
Agreement shall contain specific terms as determined by the Committee,
in its discretion, with respect to the Grantee's particular Option
Award. Such terms need not be uniform among all Grantees or any
similarly-situated Grantees. The Option Agreement may include, without
limitation, vesting, forfeiture and other provisions particular to the
particular Grantee's Option Award, as well as, for example, provisions
to the effect that the Grantee (i) shall not disclose any confidential
information acquired during Employment with the Company, (ii) shall
abide by all the terms and conditions of the Plan and such other terms
and conditions as may be imposed by the Committee, (iii) shall not
interfere with the employment or other service of any employee, (iv)
shall not compete with the Company or become involved in a conflict of
interest with the interests of the Company, (v) shall forfeit an
Option Award if terminated for Cause, and (vi) shall be subject to any
other agreement between the Grantee and the Company regarding Shares
that may be acquired under an Option Award including, without
limitation, an agreement restricting the transferability of Shares by
Grantee. An Option Agreement shall include such terms and conditions
as are determined by the Committee, in its discretion, to be
appropriate with respect to any individual Grantee. The Option
Agreement shall be signed by the Grantee to whom the Option Award is
made and by an Authorized Officer.
(b) NO RIGHT TO EMPLOYMENT. Nothing in the Plan or any
instrument executed pursuant to the Plan shall create any Employment
rights (including without limitation, rights to continued Employment)
in any Grantee or affect the right of the Company to terminate the
Employment of any Grantee at any time without regard to the existence
of the Plan.
(c) SECURITIES REQUIREMENTS. The Company shall be under no
obligation to effect the registration pursuant to the Securities Act
of 1933 of any Shares of Common
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Stock to be issued hereunder or to effect similar compliance under any
state laws. Notwithstanding anything herein to the contrary, the
Company shall not be obligated to cause to be issued or delivered any
certificates evidencing Shares pursuant to the Plan unless and until
the Company is advised by its counsel that the issuance and delivery
of such certificates is in compliance with all applicable laws,
regulations of governmental authorities, and the requirements of any
securities exchange on which Shares are traded. The Committee may
require, as a condition of the issuance and delivery of certificates
evidencing Shares of Common Stock pursuant to the terms hereof, that
the recipient of such Shares make such covenants, agreements and
representations, and that such certificates bear such legends, as the
Committee, in its discretion, deems necessary or desirable.
If the Shares issuable on exercise of an Option Award are not
registered under the Securities Act of 1933, the Company may imprint on
the certificate for such Shares the following legend or any other
legend which counsel for Company considers necessary or advisable to
comply with the Securities Act of 1933:
THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR UNDER THE
SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD OR
TRANSFERRED EXCEPT UPON SUCH REGISTRATION OR UPON RECEIPT BY
THE CORPORATION OF AN OPINION OF COUNSEL SATISFACTORY TO THE
CORPORATION, IN FORM AND SUBSTANCE SATISFACTORY TO THE
CORPORATION, THAT REGISTRATION IS NOT REQUIRED FOR SUCH SALE
OR TRANSFER.
3.2 NON-TRANSFERABLE OPTIONS.
No Option Award and no right under the Plan, contingent or otherwise,
will be (i) assignable, saleable, or otherwise transferable by a Grantee except
by will or by the laws of descent and distribution, or (ii) subject to any
encumbrance, pledge, lien, assignment or charge of any nature.
No transfer by will or by the laws of descent and distribution shall
be effective to bind the Company unless the Committee has been furnished with a
copy of the deceased Grantee's enforceable will or such other evidence as the
Committee deems necessary to establish the validity of the transfer. Any
attempted transfer in violation of this Section 3.2 shall be void and
ineffective.
3.3 RIGHTS AS A STOCKHOLDER
(a) NO STOCKHOLDER RIGHTS. A Grantee of an Option Award (or a
permitted transferee of such Grantee) shall have no rights as a
stockholder with respect to any Shares of Common Stock until the
issuance of a stock certificate for such Shares.
(b) REPRESENTATION OF OWNERSHIP. In the case of the exercise
of an Option
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Award by a person or estate acquiring the right to exercise such
Option Award by reason of the death or Disability of a Grantee, the
Committee may require reasonable evidence as to the ownership of such
Option Award or the authority of such person and may require such
consents and releases of taxing authorities as the Committee may deem
advisable.
3.4 LISTING AND REGISTRATION OF SHARES OF COMMON STOCK
The exercise of any Option Award granted hereunder shall only be
effective at such time as counsel to the Company shall have determined that the
issuance and delivery of Shares of Common Stock pursuant to such exercise is in
compliance with all applicable laws, regulations of governmental authorities
and the requirements of any securities exchange on which Shares of Common Stock
are traded. The Committee may, in its discretion, defer the effectiveness of
any exercise of an Option Award in order to allow the issuance of Shares of
Common Stock to be made pursuant to registration or an exemption from
registration or other methods for compliance available under federal or state
securities laws. The Committee shall inform the Grantee in writing of its
decision to defer the effectiveness of the exercise of an Option Award. During
the period that the effectiveness of the exercise of an Option Award has been
deferred, the Grantee may, by written notice to the Committee, withdraw such
exercise and obtain the refund of any amount paid with respect thereto.
3.5 CHANGE IN STOCK AND ADJUSTMENTS
(a) CHANGES IN LAW OR CIRCUMSTANCES. Subject to Section 3.7
(which only applies in the event of a Change in Control), in the event
of any change in applicable laws or any change in circumstances which
results in or would result in any dilution of the rights granted under
the Plan, or which otherwise warrants equitable adjustment because it
interferes with the intended operation of the Plan, then, if the
Committee should determine, in its absolute discretion, that such
change equitably requires an adjustment in the number or kind of
shares of stock or other securities or property theretofore subject,
or which may become subject, to issuance or transfer under the Plan or
in the terms and conditions of outstanding Option Awards, such
adjustment shall be made in accordance with such determination. Such
adjustments may include changes with respect to (i) the aggregate
number of Shares that may be issued under the Plan, (ii) the number of
Shares subject to Option Awards, and (iii) the price per Share for
outstanding Option Awards. Any adjustment under this paragraph of an
outstanding Incentive Stock Option shall be made only to the extent
not constituting a "modification" within the meaning of Section
424(h)(3) of the Code unless otherwise agreed to by the Grantee in
writing. The Committee shall give notice to each applicable Grantee of
such adjustment which shall be effective and binding.
(b) EXERCISE OF CORPORATE POWERS. The existence of the Plan
or outstanding Option Awards hereunder shall not affect in any way the
right or power of the Company or its stockholders to make or authorize
any or all adjustments, recapitalization, reorganization or other
changes in the Company's capital structure or its business or any
merger or consolidation of the Company, or any issue of bonds,
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debentures, preferred or prior preference stocks ahead of or affecting
the Common Stock or the rights thereof, or the dissolution or
liquidation of the Company, or any sale or transfer of all or any part
of its assets or business, or any other corporate act or proceeding
whether of a similar character or otherwise.
(c) RECAPITALIZATION OF THE COMPANY. Subject to Section 3.7,
if while there are Option Awards outstanding, the Company shall effect
any subdivision or consolidation of Shares of Common Stock or other
capital readjustment, the payment of a stock dividend, stock split,
combination of Shares, recapitalization or other increase or reduction
in the number of Shares outstanding, without receiving compensation
therefor in money, services or property, then the number of Shares
available under the Plan and the number of Option Awards which may
thereafter be exercised shall (i) in the event of an increase in the
number of Shares outstanding, be proportionately increased and the
Fair Market Value of the Option Awards awarded shall be
proportionately reduced; and (ii) in the event of a reduction in the
number of Shares outstanding, be proportionately reduced, and the Fair
Market Value of the Option Awards awarded shall be proportionately
increased. The Committee shall take such action and whatever other
action it deems appropriate, in its discretion, so that the value of
each outstanding Option Award to the Grantee shall not be adversely
affected by a corporate event described in this subsection (c).
(d) REORGANIZATION OF THE COMPANY. Subject to Section 3.7, if
the Company is reorganized, merged or consolidated, or is a party to a
plan of exchange with another corporation, pursuant to which
reorganization, merger, consolidation or exchange, stockholders of the
Company receive any Shares of Common Stock or other securities or
property, or if the Company should distribute securities of another
corporation to its stockholders, each Grantee shall be entitled to
receive, in lieu of the number of unexercised Option Awards previously
awarded, the number of Stock Options, with a corresponding adjustment
to the Fair Market Value of said Option Awards, to which he would have
been entitled if, immediately prior to such corporate action, such
Grantee had been the holder of record of a number of Shares equal to
the number of the outstanding Option Awards payable in Shares that
were previously awarded to him. In this regard, the Committee shall
take whatever other action it deems appropriate to preserve the rights
of Grantees holding outstanding Option Awards.
(e) ISSUE OF COMMON STOCK BY THE COMPANY. Except as
hereinabove expressly provided in this Section 3.5 and subject to
Section 3.7, the issue by the Company of shares of stock of any class,
or securities convertible into shares of stock of any class, for cash
or property, or for labor or services, either upon direct sale or upon
the exercise of rights or warrants to subscribe therefor, or upon any
conversion of shares or obligations of the Company convertible into
such shares or other securities, shall not affect, and no adjustment
by reason thereof shall be made with respect to, the number of, or
Fair Market Value of, any Option Awards then outstanding under
previously granted Option Awards.
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(f) ACQUISITION OF THE COMPANY. Subject to Section 3.7, in
the case of any sale of assets, merger, consolidation or combination
of the Company with or into another corporation other than a
transaction in which the Company is the continuing or surviving
corporation and which does not result in the outstanding Shares being
converted into or exchanged for different securities, cash or other
property, or any combination thereof (an "Acquisition"), in the
absolute discretion of the Committee, any Grantee who holds an
outstanding Option Award shall have the right (subject to any
limitation applicable to the Option Award) thereafter and during the
term of the Option Award, to receive upon exercise thereof the
Acquisition Consideration (as defined below) receivable upon the
Acquisition by a holder of the number of Shares which would have been
obtained upon exercise of the Option Award immediately prior to the
Acquisition. The term "Acquisition Consideration" shall mean the kind
and amount of shares of the surviving or new corporation, cash,
securities, evidence of indebtedness, other property or any
combination thereof receivable in respect of one Share upon
consummation of an Acquisition. The Committee, in its discretion,
shall have the authority to take whatever action it deems appropriate
to effectuate the provisions of this subsection (f).
(g) ASSUMPTION OF OUTSTANDING OPTION AWARDS UNDER THE PLAN.
Notwithstanding any other provision of the Plan, the Committee, in its
absolute discretion, may authorize the assumption and continuation
under the Plan of outstanding and unexercised stock options that were
granted under a stock option plan (or other type of stock option plan
or agreement) that is or was maintained by a corporation or other
entity that was merged into, consolidated with, or whose stock or
assets were acquired by, the Company as the surviving corporation. Any
such action shall be upon such terms and conditions as the Committee,
in its discretion, may deem appropriate, including provisions to
preserve the holder's rights under the previously granted and
unexercised stock option, such as, for example, retaining an existing
exercise price under an outstanding stock option. Any such assumption
and continuation of any such previously granted and unexercised stock
option shall be treated as an outstanding Option Award under the Plan
and shall thus count against the number of Shares reserved for
issuance pursuant to Section 1.4. With respect to an incentive stock
option (as described in Section 422 of the Code) subject to this
subsection (g), no adjustment to such incentive stock option shall be
made to the extent constituting a "modification" within the meaning of
Section 424(h)(3) of the Code unless otherwise agreed to by the
optionee in writing.
(h) ASSUMPTION OF OPTION AWARDS BY A SUCCESSOR. In the event
of a dissolution or liquidation of the Company, a sale of all or
substantially all of the Company's assets, a merger or consolidation
involving the Company in which the Company is not the surviving
corporation, or a merger or consolidation involving the Company in
which the Company is the surviving corporation but the holders of
Shares of Common Stock receive securities of another corporation
and/or other property, including cash, the Committee shall, in its
absolute discretion, have the right and power to:
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(i) cancel, effective immediately prior to the
occurrence of such corporate event, each outstanding Option
Award (whether or not then exercisable), and, in full
consideration of such cancellation, pay to the Grantee to
whom such Option Award was granted an amount in cash equal to
the excess of (A) the value, as determined by the Committee,
in its absolute discretion, of the property (including cash)
received by the holder of a Share of Common Stock as a result
of such event over (B) the exercise price of such Option
Award, if any; or
(ii) provide for the exchange of each Option Award
outstanding immediately prior to such corporate event
(whether or not then exercisable) for an option on some or
all of the property for which such Option Award is exchanged
and, incident thereto, make an equitable adjustment as
determined by the Committee in its absolute discretion, in
the exercise price of the Option Award, or the number of
shares or amount of property (including cash) subject to the
Option Award or, if appropriate, provide for a cash payment
to the Grantee to whom such Option Award was granted in
consideration for the exchange of his Option Award.
The Committee, in its discretion, shall have the authority to take
whatever action it deems appropriate to effectuate the provisions of
this subsection (h).
3.6 TERMINATION OF EMPLOYMENT, DEATH, DISABILITY AND RETIREMENT
(a) TERMINATION OF EMPLOYMENT. Unless otherwise expressly
provided in the Grantee's Option Agreement, if the Grantee's
Employment is terminated for any reason other than due to his death,
Disability, Retirement or for Cause, any non-vested portion of any
Stock Option at the time of such termination shall automatically
expire and terminate and no further vesting shall occur. In such
event, except as otherwise expressly provided in his Option Agreement,
the Grantee shall be entitled to exercise his rights only with respect
to the portion of the Option Award that was vested as of the
termination date for a period that shall end on the earlier of (i) the
expiration date set forth in the Option Agreement with respect to the
vested portion of such Option Award or (ii) the date that occurs
ninety (90) calendar days after his termination date.
(b) TERMINATION OF EMPLOYMENT FOR CAUSE. Unless otherwise
expressly provided in the Grantee's Option Agreement, in the event of
the termination of a Grantee's Employment for Cause, all vested and
non-vested Stock Options granted to such Grantee shall immediately
expire, and shall not be exercisable, as of the commencement of
business on the date of such termination.
(c) RETIREMENT. Unless otherwise expressly provided in the
Grantee's Option Agreement, upon the Retirement of any Employee who is
a Grantee:
(i) any non-vested portion of any outstanding Option
shall
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immediately terminate and no further vesting shall occur; and
(ii) any vested Option shall expire on the earlier
of (A) the expiration date set forth in the Option Agreement for such
Option; or (B) the expiration of (1) six months after the date of
Retirement in the case of any Nonstatutory Stock Option or (2) three
months after the date of Retirement in the case of an Incentive Stock
Option.
(d) DISABILITY OR DEATH. Unless otherwise expressly
provided in the Grantee's Option Agreement, upon termination
of Employment as a result of the Grantee's Disability or
death:
(i) any nonvested portion of any
outstanding Option shall immediately terminate upon
termination of Employment, as applicable, and no further
vesting shall occur; and
(ii) any vested Option Award shall expire
upon the earlier of either (A) the expiration date set forth
in the Option Agreement or (B) the first anniversary of the
Grantee's termination of Employment, as applicable, as a
result of his Disability or death.
In the case of any vested Incentive Stock Option held by an
Employee following termination of Employment, notwithstanding the
definition of "Disability" in Section 1.2, whether the Employee has
incurred a "Disability" for purposes of determining the length of the
Option exercise period following termination of Employment under this
paragraph (d) shall be determined by reference to Section 22(e)(3) of
the Code to the extent required by Section 422(c)(6) of the Code. The
Committee shall determine whether a Disability for purposes of this
subsection (d) has occurred.
(e) CONTINUATION. Subject to the conditions and
limitations of the Plan and applicable law and regulation in
the event that a Grantee ceases to be an Employee or
Consultant, as applicable, for whatever reason, the Committee
and Grantee may mutually agree with respect to any
outstanding Option Award then held by the Grantee (i) for an
acceleration or other adjustment in any vesting schedule
applicable to the Option, (ii) for a continuation of the
exercise period following termination for a longer period
than is otherwise provided under such Option Award, or (iii)
to any other change in the terms and conditions of the
Option. In the event of any such change to an outstanding
Option, a written amendment to the Grantee's Option Agreement
shall be required.
3.7 CHANGE IN CONTROL
Notwithstanding any contrary provision in the Plan, in the event of a
Change in Control (as defined below), all of the Stock Options then outstanding
shall become 100% vested and immediately and fully exercisable, as of the day
immediately preceding the Change in Control date unless expressly provided
otherwise in the Grantee's Option Agreement.
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Notwithstanding any other provision of this Plan, unless expressly
provided otherwise in the Grantee's Option Agreement, the provisions of this
Section 3.7 may not be terminated, amended, or modified to adversely affect any
Option Award theretofore granted under the Plan without the prior written
consent of the Grantee with respect to his outstanding Option Awards subject,
however, to the last paragraph of this Section 3.7.
For all purposes of this Plan, a "CHANGE IN CONTROL" of the Company
shall mean:
(a) The acquisition by an individual, entity or group (within
the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act (a
"PERSON") of beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act) of fifty percent (50%) or more of
the total voting power of all the Company's then outstanding
securities entitled to vote generally in the election of directors to
the Board.
(b) During the period of two consecutive calendar years,
individuals who at the beginning of such period constitute the Board,
and any new director(s) whose election by the Board or nomination for
election by the Company's shareholders was approved by a vote of at
least two-thirds of the directors then still in office, who either
were directors at the beginning of the two-year period or whose
election or nomination for election was previously so approved, cease
for any reason to constitute a majority of the Board; or
(c) The Company becomes a party to a merger, plan of
reorganization, consolidation or share exchange in which either (i)
the Company will not be the surviving corporation or (ii) the Company
will be the surviving corporation and any outstanding Shares of the
Company's common stock will be converted into shares of any other
company (other than a reincorporation or the establishment of a
holding company involving no change of ownership of the Company) or
other securities, cash or other property (excluding payments made
solely for fractional shares); or
(d) The shareholders of the Company approve a merger, plan of
reorganization, consolidation or share exchange with any other
corporation, and immediately following such merger, plan of
reorganization, consolidation or share exchange, the holders of the
voting securities of the Company outstanding immediately prior thereto
hold securities representing fifty percent (50%) or less of the
combined voting power of the voting securities of the Company or such
surviving entity outstanding immediately after such merger, plan of
reorganization, consolidation or share exchange; provided, however,
that notwithstanding the foregoing, no Change in Control shall be
deemed to have occurred if one-half (1/2) or more of the members of
the Board of the Company or such surviving entity immediately after
such merger, plan of reorganization, consolidation or share exchange
is comprised of persons who served as directors of the Company
immediately prior to such merger, plan of reorganization,
consolidation or share exchange or who are otherwise designees of the
Company; or
(e) Upon approval by the Company's stockholders of a complete
liquidation
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and dissolution of the Company or the sale or other disposition of all
or substantially all of the assets of the Company other than to a
Parent or Subsidiary; or
(f) Any other event that a majority of the Board, in its sole
discretion, shall determine constitutes a Change in Control.
Notwithstanding the occurrence of any of the foregoing events of this
Section 3.7 which would otherwise result in a Change in Control, the Board may
determine in its discretion, if it deems it to be in the best interest of the
Company, that an event or events otherwise constituting a Change in Control
shall not be considered a Change in Control. Such determination shall be
effective only if it is made by the Board prior to the occurrence of an event
that otherwise would be or probably would lead to a Change in Control; or after
such event if made by the Board a majority of which is composed of directors
who were members of the Board immediately prior to the event that otherwise
would be or probably would lead to a Change in Control.
3.8 EXCHANGE OF OPTION AWARDS
The Committee may, in its discretion, permit any Grantee to surrender
outstanding Option Awards in order to exercise or realize his rights under
other Option Awards or in exchange for the grant of new Option Awards, or
require holders of Option Awards to surrender outstanding Option Awards (or
comparable rights under other plans or arrangements) as a condition precedent
to the grant of new Option Awards.
3.9 FINANCING
The Company may extend and maintain, or arrange for and guarantee, the
extension and maintenance of financing to any Grantee to purchase Shares
pursuant to exercise of an Option Award upon such terms as are approved by the
Committee in its discretion.
SECTION 4.
GENERAL
4.1 EFFECTIVE DATE AND GRANT PERIOD
This Plan is adopted by the Board effective as of November 14, 1997
(the "EFFECTIVE DATE"), subject to the approval of the stockholders of the
Company by December 31, 1998. Options may be granted under the Plan at any time
prior to receipt of such stockholder approval; provided, however, if the
requisite stockholder approval is not obtained, then any Option Awards granted
under the Plan shall automatically become null and void and not exercisable.
Unless sooner terminated by the Board, no Option Award shall be granted under
the Plan after ten (10) years from the Effective Date.
4.2 FUNDING AND LIABILITY OF COMPANY
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No provision of the Plan shall require the Company, for the purpose of
satisfying any obligations under the Plan, to purchase assets or place any
assets in a trust or other entity to which contributions are made, or otherwise
to segregate any assets. In addition, the Company shall not be required to
maintain separate bank accounts, books, records or other evidence of the
existence of a segregated or separately maintained or administered fund for
purposes of the Plan. Although bookkeeping accounts may be established with
respect to Grantees who are entitled to cash, Common Stock or rights thereto
under the Plan, any such accounts shall be used merely as a bookkeeping
convenience. The Company shall not be required to segregate any assets that may
at any time be represented by cash, Common Stock or rights thereto. The Plan
shall not be construed as providing for such segregation, nor shall the
Company, the Board or the Committee be deemed to be a trustee of any cash,
Common Stock or rights thereto. Any liability or obligation of the Company to
any Grantee with respect to an Option Award shall be based solely upon any
contractual obligations that may be created by this Plan and any Option
Agreement, and no such liability or obligation of the Company shall be deemed
to be secured by any pledge or other encumbrance on any property of the
Company. Neither the Company, the Board nor the Committee shall be required to
give any security or bond for the performance of any obligation that may be
created by the Plan.
4.3 WITHHOLDING TAXES
(a) TAX WITHHOLDING. The Company shall have the power and the
right to deduct or withhold, or require a Grantee to remit to the
Company, an amount sufficient to satisfy federal, state, and local
taxes, domestic or foreign, required by law or regulation to be
withheld with respect to any taxable event arising as a result of the
Plan or an Option Award hereunder.
(b) SHARE WITHHOLDING. With respect to tax withholding
required upon the exercise of Stock Options, Grantees may elect,
subject to the approval of the Committee in its absolute discretion,
to satisfy the withholding requirement, in whole or in part, by having
the Company withhold Shares having a Fair Market Value on the date the
tax is to be determined equal to the minimum statutory total tax which
could be imposed on the transaction. All such elections shall be made
in writing, signed by the Grantee, and shall be subject to any
restrictions or limitations that the Committee, in its discretion,
deems appropriate.
(c) INCENTIVE STOCK OPTIONS. With respect to Shares received
by a Grantee pursuant to the exercise of an Incentive Stock Option, if
such Grantee disposes of any such Shares within (i) two years from the
date of grant of such Option or (ii) one year after the transfer of
such shares to the Grantee, the Company shall have the right to
withhold from any salary, wages or other compensation payable by the
Company to the Grantee an amount sufficient to satisfy federal, state
and local tax withholding requirements attributable to such
disqualifying disposition.
(d) LOANS. The Committee may provide for loans, on either a
short term or demand basis, from the Company to a Grantee who is an
Employee or Consultant to
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permit the payment of taxes required by law.
4.4 NO GUARANTEE OF TAX CONSEQUENCES
Neither the Company nor the Committee makes any commitment or
guarantee that any federal, state or local tax treatment will apply or be
available to any person participating or eligible to participate hereunder.
4.5 AMENDMENT AND TERMINATION
The Board shall have complete power and authority to terminate or
amend the Plan at any time; provided, however, that the Board shall not,
without the approval of the stockholders of the Company within the time period
required by applicable law, (a) except as provided in Section 3.5, increase the
maximum number of Shares which may be issued under the Plan pursuant to Section
1.4, (b) amend the requirements as to the class of Employees eligible to
receive Common Stock under the Plan, (c) increase the maximum limits on Option
Awards to Covered Employees as set for compliance with the Performance-Based
Exception, (d) extend the term of the Plan, or (e) decrease the authority
granted to the Committee under the Plan in contravention of Rule 16b-3 under
the Exchange Act.
No termination, amendment, or modification of the Plan shall adversely
affect in any material way any outstanding Option Award previously granted to a
Grantee under the Plan, without the written consent of such Grantee or other
designated holder of such Option Award.
In addition, to the extent that the Committee determines that (a) the
listing for qualification requirements of any national securities exchange or
quotation system on which the Company's Common Stock is then listed or quoted,
or (b) the Code (or regulations promulgated thereunder), require stockholder
approval in order to maintain compliance with such listing requirements or to
maintain any favorable tax advantages or qualifications, then the Plan shall
not be amended in such respect without approval of the Company's stockholders.
4.6 REQUIREMENTS OF LAW
The granting of Option Awards and the issuance of Shares under the
Plan shall be subject to all applicable laws, rules, and regulations, and to
such approvals by any governmental agencies or national securities exchanges as
may be required. Certificates evidencing shares of Common Stock delivered under
this Plan (to the extent that such shares are so evidenced) may be subject to
such stop transfer orders and other restrictions as the Committee may deem
advisable under the rules and regulations of the Securities and Exchange
Commission, any securities exchange or transaction reporting system upon which
the Common Stock is then listed or to which it is admitted for quotation, and
any applicable federal or state securities law. The Committee may cause a
legend or legends to be placed upon such certificates (if any) to make
appropriate reference to such restrictions.
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4.7 RULE 16B-3 SECURITIES LAW COMPLIANCE
With respect to Insiders, transactions under the Plan are intended to
comply with all applicable conditions of Rule 16b-3 under the Exchange Act. Any
ambiguities or inconsistencies in the construction of an Option Award or the
Plan shall be interpreted to give effect to such intention. However, to the
extent any provision of the Plan or action by the Committee fails to so comply,
it shall be deemed null and void to the extent permitted by law and deemed
advisable by the Committee in its discretion.
4.8 COMPLIANCE WITH CODE SECTION 162(M)
Unless otherwise determined by the Committee with respect to any
particular Option Award, it is extended that the Plan comply fully with and
meet all the requirements of Section 162(m) of the Code so that any applicable
types of Option Awards that are granted to Covered Employees shall qualify for
the Performance-Based Exception. If any provision of the Plan or an Option
Agreement would disqualify the Plan or would not otherwise permit the Plan or
Option Award to comply with the Performance-Based Exception as so intended,
such provision shall be construed or deemed amended to conform to the
requirements of the Performance-Based Exception to the extent permitted by
applicable law and deemed advisable by the Committee; provided that no such
construction or amendment shall have an adverse effect on the prior grant of an
Option Award or the economic value to a Grantee of any outstanding Option
Award.
4.9 SUCCESSORS
All obligations of the Company under the Plan with respect to Option
Awards granted hereunder shall be binding on any successor to the Company,
whether the existence of such successor is the result of a direct or indirect
purchase, merger, consolidation, or otherwise, of all or substantially all of
the business and/or assets of the Company.
4.10 MISCELLANEOUS PROVISIONS
(a) No Employee or Consultant or other person shall have any
claim or right to be granted an Option Award under the Plan. Neither
the Plan, nor any action taken hereunder, shall be construed as giving
any Employee or Consultant any right to be retained in the Employment
or other service of the Company or any Parent or Subsidiary.
(b) No Shares of Common Stock shall be issued hereunder
unless counsel for the Company is then reasonably satisfied that such
issuance will be in compliance with federal and state securities laws,
if applicable.
(c) The expenses of the Plan shall be borne by the Company.
(d) By accepting any Option Award, each Grantee and each
person claiming by or through him shall be deemed to have indicated
his acceptance of the Plan.
4.11 SEVERABILITY
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In the event that any provision of this Plan shall be held illegal,
invalid or unenforceable for any reason, such provision shall be fully
severable, but shall not affect the remaining provisions of the Plan, and the
Plan shall be construed and enforced as if the illegal, invalid, or
unenforceable provision was not included herein.
4.12 GENDER, TENSE AND HEADINGS
Whenever the context so requires, words of the masculine gender used
herein shall include the feminine and neuter, and words used in the singular
shall include the plural. Section headings as used herein are inserted solely
for convenience and reference and constitute no part of the interpretation or
construction of the Plan.
4.13 GOVERNING LAW
The Plan shall be interpreted, construed and constructed in accordance
with the laws of the State of Texas, without regard to its conflicts of law
provisions, except as superseded by applicable the laws of the United States.
IN WITNESS WHEREOF, Southern Mineral Corporation has caused this Plan
to be duly executed in its name and on its behalf by its duly authorized
officer, to be effective as of November 17, 1997.
ATTEST: SOUTHERN MINERAL CORPORATION
By:/S/ James H. Price By:/S/ Steven H. Mikel
--------------------------- -----------------------------------------
Name: James H. Price Name: Steven H. Mikel
----------------------- -------------------------------------
Title: Vice President-Finance Title: President and Chief Executive Officer
----------------------- -------------------------------------
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APPENDIX D
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____ TO ____
COMMISSION FILE NUMBER 0-8043
SOUTHERN MINERAL CORPORATION
(Exact name of Registrant as specified in its charter.)
Nevada 36-2068676
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
500 Dallas, Suite 2800
Houston, Texas 77002-4708
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 658-9444
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Name of each exchange
Title of each class on which registered
- ------------------- ---------------------
<S> <C>
None None
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $0.01
(TITLE OF CLASS)
Check whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
--- ---
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB/A. [X]
Revenues for the year ended December 31, 1996 are approximately $12,233,000.
As of March 18, 1997, 9,100,832 shares of Common Stock were outstanding and the
aggregate market value of these shares at such date (based upon the last
reported sales price in the NASDAQ SmallCap Market of $4.75) held by
non-affiliates of the Registrant was approximately $34,133,847. Determination
of Common Stock ownership by affiliates was made solely for the purpose of
responding to this requirement and the Registrant is not bound by this
determination for any other purpose.
Portions of the Registrant's definitive proxy statement for the 1996 Annual
Meeting of Stockholders are incorporated herein by reference in Part III, Items
9, 10, 11 and 12
Transitional Small Business Disclosure Format (check one): Yes No X .
--- ---
===============================================================================
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Southern Mineral Corporation, a Nevada corporation, with its subsidiaries (the
"Company"), is an independent oil and gas company headquartered in Houston,
Texas. The Company is engaged in the acquisition, exploitation, exploration and
operation of oil and gas properties, primarily along the Gulf Coast, the
Mid-continent and in Canada, with a primary focus on the Gulf Coast Basin, both
onshore and offshore. The Company owns interests in more than 1,900 oil and gas
properties in those three regions. The Company's business strategy is to
increase reserves and shareholder value through a balanced program of
acquisitions, exploitation and controlled risk exploration. In addition to oil
and gas leasehold interests, the Company owns fee interests in the oil and gas
under some 665,148 gross surface acres (comprising some 346,760 net mineral
acres) in Mississippi, Texas and New Mexico. The Company has no current
development or other plans with respect to these fee interests other than
leasing them to third parties for exploration and development.
BACKGROUND
The Company was incorporated in 1937 as a vehicle to consolidate mineral tracts
retained as it lumbered large tracts of southern Mississippi forest lands. For
the next fifty years, the Company was largely a passive participant in the oil
and gas business, merely granting leases on its spread of mineral interests in
Mississippi. In the mid-1980's, the Company became a more active participant in
the oil and gas business, redeploying its significant cash flow from revenues
derived from the Poplarville Field into exploration activities. For the next
ten years, the Company pursued the sole strategy of exploration for oil and
gas. As a result of generally poor results, the Company changed its focus
beginning in 1995 to one of a more balanced approach to the oil and gas
business. The Company currently pursues acquisitions, exploitation and
controlled risk exploration.
ACQUISITION ACTIVITIES
Beginning in 1995, the Company began to seek out and evaluate potential oil and
gas property acquisitions as well as the acquisition of oil and gas companies.
The Company intends to finance such acquisitions from multiple funding sources.
Such funding sources may include internally generated funds, issuance of the
Company's capital stock, public or private borrowings or a combination of such
sources. The Company's recent acquisition activity is generally described
below.
SMC DEVELOPMENT, L. P.
The Company acquired the limited partner interest in SMC Development, L. P., a
Texas limited partnership, for $3,000,000 cash on August 30, 1996. Upon the
acquisition of the limited partner's interest, the partnership was dissolved,
resulting in the Company obtaining a direct working interest in sixteen oil and
gas properties with proved reserves estimated to be 4.2 billion cubic feet of
gas and 149,000 barrels of liquids located primarily in south Louisiana. The
limited partnership was co-managed by the Company and Diasu Oil & Gas Co.,
Inc., a Texas corporation ("Diasu") principally engaged in the exploration and
production of oil and gas in south Louisiana. In January 1996, Diasu sold for
$1,200,000 cash certain oil and gas properties to the limited partnership. The
sole limited partner of the limited partnership was Torch Energy Finance Fund
Limited Partnership I, whose general partner was Torch Energy Finance Company
(collectively, "Torch"). On August 30, 1996, the Company purchased from Torch
100% of the limited partnership interest in the limited partnership for
$3,000,000 cash, the limited partnership was dissolved and its oil and gas
properties distributed to the Company and Diasu as follows: the Company and
Diasu acquired an undivided 93% and 7% interest in the properties,
respectively, except that the Company's interest in certain of the properties
will decrease to 81.5% after the Company has recovered its costs of acquiring
Torch's limited partnership interest.
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STONE & WEBSTER ACQUISITION
On December 20, 1995, the Company completed the acquisition of certain oil and
gas assets and outstanding capital stock of three subsidiaries of Stone &
Webster, Inc. ("S&W"). The oil and gas assets acquired include interests in
more than 1,400 wells, including 14 wells operated by Company personnel in two
Wilcox formation fields in DeWitt and Lavaca Counties, Texas. One of the
acquired subsidiaries is Spruce Hills Production Company, Inc., a Delaware
corporation that owns interests in approximately 1,200 wells located in Canada.
Another acquired subsidiary, San Salvador Development Company, Inc., a Texas
corporation, was merged into the Company during 1996. As a result of the
merger, the Company became the direct owner of San Salvador's interests in
approximately 270,000 gross mineral acres in the Texas panhandle and New Mexico
together with associated producing royalties. The third acquired S&W
subsidiary, Venture Resources, Inc., was sold by the Company in March 1996 for
$1,143,000 in cash. Venture held interests in 10 pipeline and gathering systems
in Oklahoma, Texas and Louisiana, which were not a part of the Company's core
businesses. The purchase price for the S&W assets and three subsidiaries
acquired in the transaction was approximately $16,400,000, including
adjustments and related transaction costs.
The Company financed the S&W acquisition with working capital and two loans
aggregating $15,215,000 from Compass Bank - Houston. The Company borrowed
$3,500,000 pursuant to a term loan arrangement due July 1, 1996, which was
subsequently refinanced by the Company. The Company borrowed $11,715,000
pursuant to a reducing revolving credit arrangement with an initial borrowing
base of $12,500,000.
EXPLOITATION AND EXPLORATION ACTIVITIES
In line with the Company's current strategy of pursuing controlled risk
exploration, the Company has entered into two separate joint ventures. These
joint ventures are described below.
SOUTHERN LINKS GROUP JOINT VENTURE
In September, 1995, the Company entered into a joint venture with The Links
Group, Inc., called Southern Links Group Joint Venture ("Southern Links").
Southern Links was formed to jointly develop exploration prospects in the
shallow offshore Texas state waters. The application of new technologies,
including 3-D seismic surveys, makes the area more appealing to a growing
market of potential participants. Southern Links defines prospects in the area
and packages and markets the prospects to industry participants. The joint
venture intends to continue to redeploy proceeds from the sale of its prospects
into new tracts at subsequent lease auctions.
DIASU JOINT VENTURE
The Company also entered into a joint venture with Diasu in January, 1996. The
Company has the option to pay leasehold, seismic and other third party costs in
the development of exploration prospects located primarily in south Louisiana
with Diasu for a two year period. Under the arrangement, as funded prospects
are sold the Company will recoup its prospect costs plus one-third of any
potential promote or carried interest received by Diasu after the sale of the
prospect. The Company has an option to receive this carried interest or to take
a one-third interest in each prospect and drill the property without further
burden or profit by Diasu. This arrangement provides the Company with
considerable flexibility in structuring its risk profile on a prospect by
prospect basis.
In addition to the two joint ventures, the Company has either initiated or
agreed to participate in various exploration opportunities. The Company intends
that its exploration effort is primarily composed of internally generated
projects. However, a portion of the Company's budget is earmarked for
exploratory opportunities brought to the Company by individuals and other
companies. The Company will limit its exploration exposure to any given
prospect to no more than a few hundred thousand dollars of risk capital.
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Brazos Block 480, Offshore, Gulf of Mexico. To date, one prospect, Brazos Block
480, has been developed, defined and marketed from the Southern Links joint
venture. It is expected that the initial test well will begin drilling in the
first quarter, with test results expected in sixty to ninety days from
commencement of drilling operations. The joint venture has marketed 100% of the
prospect to larger oil and gas companies and has retained a carried interest
through the testing of the first well.
Southern Eagle, Offshore, Gulf of Mexico. The Company has initiated a project
called Southern Eagle along the shallow state waters offshore Matagorda Island,
Texas. In January, 1997, the Company licensed and took delivery of over 320
square miles of 3-D seismic data. Company personnel are working the data to
define prospects on which it is expected that acreage will be leased by the
Company during 1997. If the leasing of acreage on prospects is successful in
1997, it is anticipated that one or more initial test wells will be drilled
prior to year end 1997. It is expected that the Southern Eagle project will
continue for one or two years beyond 1997.
Matthews Project, Texas. The Company initiated a project with another
independent that is named the Matthews Project. Farmout acreage or seismic
options have been taken on approximately 6,500 acres along the DeWitt and
Lavaca County lines, Texas. It is anticipated that a nineteen square mile 3-D
seismic survey will be shot during the first half of 1997, and that drillable
prospects will be available for commencement prior to year end. The Company
owns rights to 25% of this prospect and will receive a promoted interest on any
of the remaining 75% placed by the co-ventures with third party investors.
Alta Loma Project, Texas. The Company has also leased acreage on a project
called Alta Loma in Galveston County, Texas. Discussions are underway with a
3-D seismic company regarding a joint effort to combine acreage and conduct a
twenty square mile 3-D seismic survey in 1997. It is currently anticipated that
drilling would not commence on this project until the beginning of 1998.
Maple Gap Project, Texas. The Company has agreed to participate for a
12.5%working interest in a project called Maple Gap, Orange County, Texas. The
initial test well is expected to be drilled during the first half of 1997.
Following evaluation of the initial well, it is expected that the working
interest parties will shoot a 3-D seismic survey over the project to delineate
the exploitation and development of the field.
BUSINESS RISKS
The Company's operations are subject to numerous federal, state and local laws,
rules and regulations relating to the protection of the environment, health and
safety, including but without limitation, laws concerning the release and
containment and disposal of pollutants and wastes that can be produced by
operations in which the Company owns interests. In addition, the Company's
operations are affected by numerous federal, state and local laws, rules and
regulations relating to the exploration, production, transportation, marketing
and sales of oil and natural gas. In the past, the Company's compliance with
such laws, rules and regulations has not had a material adverse effect on its
capital expenditures, earnings or competitive position. However, the Company
cannot predict whether its future compliance with, or the effect of, such laws,
rules and regulations would have a material adverse effect on its capital
expenditures, earnings or competitive position.
The Company anticipates that in the near term it will rely on various sources
to fund its principal business activity of acquiring oil and gas producing
reserves. Such funding sources may include, but not be limited to, use of
working capital, the issuance of the Company's capital stock, public and
private equity and debt markets and lending institutions such as banks and
energy investment firms. The Company's ability to access any or all of these
sources of funds may be impacted by a wide variety of factors that may include
its own financial condition as well as specific or general economic conditions
that each capital or debt market may experience at the time the Company
requires funding. There can be no assurances that the Company will be
successful in utilizing any of these sources to fund its acquisitions.
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The Company is not dependent on any patents, trademarks, licenses, franchises,
or concessions.
Approximately 30% of the Company's revenues during the year ended December 31,
1996 were derived from Canadian properties acquired in December 1995. The costs
and revenues associated with the Company's Canadian operations are denominated
in Canadian dollars. The Company records its transactions and prepares its
financial statements in U.S. dollars. Fluctuations in the value of the two
currencies may cause currency translations losses for the Company or reduced
revenues and earnings, or both, with respect to its Canadian operations. The
Company cannot predict the effect of exchange rate fluctuations upon future
operating results.
COMPETITION
There is a high degree of competition in the acquisition of producing oil and
gas properties and the oil and gas exploration industry. Consequently, the
Company competes with many other entities for desirable potential acquisitions
and exploration and development prospects. The Company's competitors include
the major integrated oil companies as well as numerous independent oil and gas
companies and other producers of energy sources and fuels. Many of these
competitors have capital resources and other competitive advantages much
greater than that of the Company, and may therefore be better able than the
Company to withstand and compete during adverse market conditions. The
Company's ability to generate revenues and reserves in the future will be
dependent upon, among other things, its success in competing with these
competitors, as to which there can be no assurances. With respect to the oil
and gas mineral rights owned by the Company, the Company considers proposals to
lease its mineral rights on the basis of the best offer from prospective
lessees.
REGULATIONS
Domestic Environmental Regulation. Operations of the Company are subject to
numerous federal, state, and local laws and regulations governing the discharge
of materials into the environment or otherwise relating to environmental
protection. These laws and regulations may require the acquisition of a permit
before drilling commences; restrict or prohibit the types, quantities and
concentration of substances that can be released into the environment in
connection with drilling and production activities; prohibit drilling
activities on certain lands lying within wetlands or other protected areas; and
impose substantial liabilities for pollution resulting from drilling and
production operations. Moreover, state and federal environmental laws and
regulations may become more stringent. These environmental laws and regulations
may affect the Company's operations and costs as a result of their effect on
oil and gas development, exploration, and production operations. For instance,
legislation has been proposed in Congress from time to time that would amend
the federal Resource Conservation and Recovery Act of 1976 ("RCRA") to
reclassify oil and gas production wastes as "hazardous waste". If such
legislation were enacted, it could have a significant impact on the Company's
operating costs, as well as on the oil and gas industry in general. It is not
anticipated that the Company will be required in the near future to expend
amounts that are material in relation to its total capital expenditure program
by reason of environmental laws and regulations, but inasmuch as such laws and
regulations are frequently changed, the Company is unable to predict the
ultimate cost of compliance. In addition, the Comprehensive Environmental
Response, Compensation and Liability Act of 1980 ("CERCLA" or "Superfund") and
certain state laws and regulations impose liability for cleanup of waste sites.
The Oil Pollution Act ("OPA") currently requires persons responsible for
"offshore facilities" to establish $150,000,000 in financial responsibility to
cover environmental cleanup and restoration costs likely to be incurred in
connection with an oil spill in the waters of the United States. On September
30, 1996 Congress passed legislation that would lower the financial
responsibility requirement under OPA to $35,000,000, subject to increase to
$150,000,000 if a formal risk assessment indicates the increase is warranted.
The Company cannot predict whether the President will sign this legislation.
The impact of any legislation is not expected to be any more burdensome to the
Company than it will be to other similarly situated companies involved in oil
and gas exploration and production.
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OPA imposes a variety of additional requirements on "responsible parties" for
vessels or oil and gas facilities related to the prevention of oil spills and
liability for damages resulting from such spills in waters of the United
States. The "responsible party" includes the owner or operator of an onshore
facility, pipeline, or vessel or the lessee or permittee of the area in which
an offshore facility is located. OPA assigns liability to each responsible
party for oil spill removal costs and a variety of public and private damages
from oil spills. While liability limits apply in some circumstances, a party
cannot take advantage of liability limits if the spill is caused by gross
negligence or willful misconduct or resulted from violation of a federal
safety, construction or operating regulation. If a party fails to report a
spill or to cooperate fully in the cleanup, liability limits likewise do not
apply. OPA establishes a liability limit for offshore facilities (including
pipelines) of all removal costs plus $75,000,000. Few defenses exist to the
liability for oil spills imposed by OPA. OPA also imposes other requirements on
facility operators, such as the preparation of an oil spill contingency plan.
Failure to comply with ongoing requirements or inadequate cooperation in a
spill event may subject a responsible party to civil or criminal enforcement
actions.
The Federal Water Pollution Control Act ("FWPCA") imposes restrictions and
strict controls regarding the discharge of produced waters and other oil and
gas wastes into navigable waters. Permits must be obtained to discharge
pollutants to state and federal waters. The FWPCA and analogous state laws
provide for civil, criminal and administrative penalties for any unauthorized
discharges of oil and other hazardous substances in reportable quantities and,
along with the OPA, may impose substantial potential liability for the costs of
removal, remediation and damages. State water discharge regulations and the
federal ("NPDES") permits prohibit or are expected to prohibit within the next
year the discharge of produced water and sand, and some other substances
related to the oil and gas industry, to coastal waters. Although the costs to
comply with zero discharge mandates under federal or state law may be
significant, the entire industry will experience similar costs and the Company
believes that these costs will not have a material adverse impact on the
Company's financial conditions and operations. Some oil and gas exploration and
production facilities are required to obtain permits for their storm water
discharges. Costs may be incurred in connection with treatment of wastewater or
developing storm water pollution prevention plans.
Canadian Environmental Regulation. Operations of the Company are subject to
numerous federal, provincial and local laws and regulations. Environmental
legislation provides for restrictions and prohibitions on releases or emissions
of various substances produced in association with certain oil and gas industry
operations and can affect the location and operation of wells and other
facilities and the extent to which exploration and development is permitted.
Legislation also requires that well and facility sites be abandoned and
reclaimed to the satisfaction of provincial authorities and local landowners. A
breach of such legislation may result in the suspension or revocation of
licences and authorizations, and the suspension of operations, as well as the
imposition of clean-up orders, fines and penalties. In addition, certain types
of operations may require environmental assessment and reviews to be completed
before approvals are obtained and before exploration or development projects
are begun. The Company does not anticipate that it will be required to make
capital or other expenditures by reason of environmental laws and regulations
that are material in relation to the Company's total capital expenditure
program or that would have a material adverse effect on the Company's earnings,
but inasmuch as such laws and regulation are frequently changed, the Company is
unable to predict the ultimate cost of compliance.
Domestic Oil and Gas Regulation. Complex regulations concerning all phases of
energy development at the local, state and federal levels apply to the
Company's operations and often require interpretation by the Company's
professional staff or outside advisors. The federal government and various
state governments have adopted numerous laws and regulations respecting the
production, transportation, marketing and sale of oil and natural gas.
Regulation by state and local governments usually covers matters such as the
spacing of wells, allowable production rates, environmental protection,
pollution control, taxation and other related matters. Moreover, future changes
in local, state or federal laws and regulations could adversely affect the
operations of the Company.
Domestic exploration for, and production and sale of, oil and gas are
extensively regulated at both the federal and state levels. Legislation
affecting the oil and gas industry is under constant review for amendment or
expansion, frequently increasing the regulatory burden. Numerous departments
and agencies, both federal and state, are also authorized by statute to issue,
and have issued, rules and regulations binding on the oil and gas industry that
often are costly to
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comply with and that carry substantial penalties for non-compliance. In
addition, production operations are affected by changing tax and other laws
relating to the petroleum industry, by constantly changing administrative
regulations, and possible interruption or termination by government
authorities.
Effective January 1, 1993, all price controls on natural gas were eliminated,
ending decades of federal pricing control of natural gas. The impact of price
decontrol on the Company is uncertain at present, but would appear not to cause
a material adverse effect on the business of the Company.
In the late 1980's, the Federal Energy Regulatory Commission ("FERC"), through
a series of orders, made major changes in certain of its regulations that have
since significantly affected the transportation and marketing of gas. These
regulations require gas pipelines to transport gas on a non-discriminatory
basis. As a result, many pipelines have become transporters of gas owned by
others and have greatly reduced their purchases of gas for resale.
Commencing in April, 1992, the FERC issued Order Nos. 636, 636-A, and
636-B ("Order No. 636"), which require interstate pipelines to provide
transportation separate, or "unbundled", from the pipelines' sales of gas.
Also, Order No. 636 requires pipelines to provide open-access transportation on
a basis that is equal for all gas shippers. Although Order No. 636 does not
directly regulate the Company's activities, the FERC has stated that it intends
for Order No. 636 to foster increased competition within all phases of the
natural gas industry. It is unclear what impact, if any, increased competition
within the natural gas industry under Order No. 636 will have on the Company's
activities. Although Order No. 636, assuming it is upheld in its entirety,
could provide the Company with additional market access and more fairly applied
transportation service rates, Order No. 636 could also subject the Company to
more restrictive pipeline imbalance tolerances and greater penalties for
violation of those tolerances. In July 1996, the United States Court of Appeals
for the District of Columbia Circuit largely upheld Order No. 636. The FERC has
issued final orders of virtually all Order No. 636 pipeline restructuring
proceedings. Appeals of Order No. 636, as well as orders in the individual
pipeline restructuring proceedings, are currently pending, and the Company
cannot predict the ultimate outcome of court review. This review may result in
the reversal, in whole or in part, of Order No. 636.
In December 1992, the FERC issued Order No. 547, governing the issuance of
blanket marketer sales certificates to all natural gas sellers other than
interstate pipelines. Order No. 547 applies to non-first sales that remain
subject to the FERC's NGA jurisdiction. The FERC intends Order No. 547, in
tandem with Order No. 636, to foster a competitive market for natural gas by
giving natural gas purchasers access to multiple supply sources at
market-driven prices. Order No. 547 may increase competition in markets in
which the Company's natural gas is sold which may negatively affect revenues in
the future.
Commencing in May 1994, the FERC has issued a series of orders in individual
cases that delineate its gathering policy as a result of the comments received.
Among other matters, the FERC slightly narrowed its statutory tests for
establishing gathering status and reaffirmed that it does not have jurisdiction
over natural gas gathering facilities and services and that such facilities and
services are properly regulated by state authorities. As a result, natural gas
gathering may receive greater regulatory scrutiny by state agencies. In
addition, the FERC has approved several transfers by interstate pipelines of
gathering facilities to unregulate gathering companies, including affiliates.
This could allow such companies to compete more effectively with independent
gatherers. The FERC's orders delineating its new gathering policy are subject
to possible court appeals.
The FERC has announced its intention to reexamine certain of its
transportation-related policies, including the appropriate manner for setting
rates for new interstate pipeline construction and the manner in which
interstate pipelines release transportation capacity under Order No. 636. While
any resulting FERC action would affect the Company only indirectly, these
inquiries are intended to further enhance competition in natural gas markets.
Canadian Oil and Gas Regulation. The oil and natural gas industry is subject to
extensive legislation and regulation governing its operations including land
tenure, exploration, development, production, refining, transportation,
marketing, environmental protection, exports, taxes, labor standards and health
and safety standards imposed by legislation enacted by various levels of
government. In addition, extensive legislation and regulation exists with
respect to pricing and taxation of oil and natural gas and related products.
D-7
<PAGE> 157
CUSTOMERS
Oil and gas hydrocarbons are the principal products produced by the Company and
sales of such products are usually made in the spot market or on such other
bases that may be impacted by the effect of changes in current market prices.
Future oil and natural gas prices may be affected by a variety of factors
including, but not limited to, supply and demand, world and regional market
conditions, political conditions and seasonal factors, all of which the Company
is unable to control or accurately predict. In the past, there have not been,
and management does not expect there to be in the near term, any material
adverse effects on the Company's business due to seasonal aspects. Backlog is
not a factor in the Company's operations. The Company is principally engaged in
a single industry segment, the acquisition, exploration, development, and
production of oil and gas reserves, all in the United States and Canada. Sales
of oil and gas to customers accounting for 10% or more of revenues were as
follows:
<TABLE>
<CAPTION>
CUSTOMER 1996 1995 1994
-------- ------ ------ ------
(in thousands)
<S> <C> <C> <C>
G C Marketing Company $3,212 $ -- $ --
Mike Rogers Drilling Company 591 746 651
Ashtola Exploration Company -- 208 283
</TABLE>
OPERATIONAL HAZARDS AND INSURANCE
The Company's operations are subject to all of the risks normally incident to
the production of oil and gas, including blowouts, cratering, pipe failure,
casing collapse, oil spills and fires, each of which could result in severe
damage to or destruction of oil and gas wells, production facilities or other
property, or injury to persons. The energy business also is subject to
environmental hazards, such as oil spills, gas leaks, and ruptures and
discharge of toxic substances or gases that could expose the Company to
substantial liability due to pollution and other environmental damage. Although
the Company maintains insurance coverage considered to be customary in the
industry, it is not fully insured against certain of these risks, either
because such insurance is not available or because of high premium costs. The
occurrence of a significant event that is not fully insured against could have
a material adverse effect on the Company's financial position.
EMPLOYEES
At March 18, 1997, the Company employed sixteen full-time persons including one
engineer, two geologists, one landman and thirteen administrative, technical
and accounting personnel. In addition, the Company employed three consultants
including one geologist, one engineer and one engineering technical assistant.
D-8
<PAGE> 158
SELECTED FINANCIAL DATA (in thousands)
COMPARATIVE CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------------------------------------------------------
ASSETS 1996 1995 1994 1993 1992
----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Current assets $ 2,918 $ 2,071 $ 1,973 $ 2,865 $ 2,343
Property and equipment 20,599 18,042 1,347 4,106 5,384
Oil and gas properties held for sale and other 869 1,554 50 350 376
----------- ----------- ----------- ----------- -----------
$ 24,386 $ 21,667 $ 3,370 $ 7,321 $ 8,103
=========== =========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities $ 683 $ 5,960 $ 290 $ 561 $ 421
Deferred income taxes 1,169 606 --- 547 730
Long term debt 3,900 9,920 --- --- ---
Stockholders' equity 18,634 5,181 3,080 6,213 6,952
----------- ----------- ----------- ----------- -----------
$ 24,386 $ 21,667 $ 3,370 $ 7,321 $ 8,103
=========== =========== =========== =========== ===========
WORKING CAPITAL $ 2,235 $ (3,889) $ 1,683 $ 2,304 $ 1,922
=========== =========== ========== =========== ===========
COMPARATIVE STATEMENTS OF OPERATIONS
REVENUES
Oil and gas $ 11,780 $ 2,044 $ 1,747 $ 2,891 $ 2,465
Gains (losses) on sales of properties 453 170 66 146 (26)
----------- ----------- ----------- ----------- ------------
12,233 2,214 1,813 3,037 2,439
EXPENSES 8,164 2,488 5,580 3,959 4,048
----------- ----------- ----------- ----------- -----------
Income (loss) from operations 4,069 (274) (3,767) (922) (1,609)
Other income, expenses and deductions
Interest and other income 286 146 76 41 78
Interest and debt expense (1,242) --- --- --- ---
----------- ----------- ------------ ------------ -----------
Income (loss) before income taxes and the cumulative
effect of a change in accounting for income taxes 3,113 (128) (3,691) (881) (1,531)
Provision (benefit) for income taxes 679 9 (558) (279) (487)
----------- ----------- ----------- ----------- -----------
Income (loss) before the cumulative effect of a change
in accounting for income taxes 2,434 (137) (3,133) (602) (1,044)
Cumulative effect of a change in accounting for
income taxes --- --- --- 65 ---
----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 2,434 $ (137) $ (3,133) $ (537) $ (1,044)
=========== =========== ============ ============ ============
PER PRIMARY SHARE OF STOCK:
Net income (loss) before the cumulative effect of a
change in accounting for income taxes $ .34 $ (0.02) $ (0.78) $ (0.15) $ (0.26)
Cumulative effect of a change in accounting for
income taxes --- --- --- 0.02 ---
----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS) $ .34 $ (0.02) $ (0.78) $ (0.13) $ (0.26)
=========== =========== =========== =========== ===========
Primary weighted average number of shares 7,215 5,701 4,162 4,131 4,016
=========== ============ =========== ============ ============
Fully diluted weighted average number of shares 7,336 5,701 4,162 4,131 4,016
=========== ============ ============ ============ ============
</TABLE>
Note A Pursuant to the provisions of Financial Accounting Standards Board
Statement No. 109, "Accounting for Income Taxes", the Company changed
its method of accounting for income taxes and recorded an adjustment
of $65 benefitting 1993.
Note B In 1994, Company recognized a Valuation Reduction of $1,724 in
connection with the write-down of its investment in certain producing
oil and gas properties.
D-9
<PAGE> 159
ITEM 2. DESCRIPTION OF PROPERTIES
GENERAL
At December 31, 1996, the Company held interests in excess of 700 gross wells
in the continental United States and in excess of 1,200 gross wells in Canada
consisting of working interests, royalty interests and overriding royalty
interests. Approximately 23% of the Company's proved oil and gas reserves are
oil and approximately 77% are gas, measured in energy equivalent barrels of oil
basis (natural gas is converted at the rate of six thousand cubic feet of gas
for each barrel of oil).
OIL AND GAS RESERVE INFORMATION
The following two tables reflect the estimated proved reserves of the Company.
The oil and gas reserves are principally located onshore in the continental
United States and Canada. The Company's reserve information has been based on
estimates prepared by an independent consulting petroleum engineer. The
independent consultant who prepared the reserve estimate information as of
December 31, 1994, was Hedrick and Associates. Hedrick and Associates is no
longer in business as of December 31, 1995. Netherland, Sewell & Associates,
Inc. has prepared the domestic reserve estimates as of December 31, 1995 and
audited the December 31, 1996 domestic reserve estimates which were prepared by
the Company. McDaniel & Associates Consultants LTD. prepared the Canadian
reserve estimates as of December 31, 1995 and 1996. Since the beginning of the
last fiscal year, the Company has not filed any estimates of its reserves with
any Federal authority or agency.
<TABLE>
<CAPTION>
U.S. CANADA TOTAL
--------------------------- --------------------------- ---------------------------
OIL GAS OIL GAS OIL GAS
PROVED RESERVES (BBLS) (MCF) (BBLS) (MCF) (BBLS) (MCF)
- --------------- ----------- ------------ ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 474,486 1,238,857 -- -- 474,486 1,238,857
Extensions, discoveries and additions 45,834 245,190 -- -- 45,834 245,190
Revisions of previous estimates (213,258) (397,443) -- -- (213,258) (397,443)
Production (78,866) (300,544) -- -- (78,866) (300,544)
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1994 228,196 786,060 -- -- 228,196 786,060
Extensions, discoveries and additions 66 8,449 -- -- 66 8,449
Revisions of previous estimates (24,715) (145,903) -- -- (24,715) (145,903)
Purchase of minerals in place 568,702 20,400,151 868,495 5,786,239 1,437,197 26,186,390
Production (84,848) (404,319) -- -- (84,848) (404,319)
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1995 687,401 20,644,438 868,495 5,786,239 1,555,896 26,430,677
Extensions, discoveries and additions 6,081 479,336 31,351 1,506,458 37,432 1,985,794
Revisions of previous estimates 33,975 (519,051) (35,593) 528,330 (1,618) 9,279
Purchase of minerals in place 109,252 4,590,014 -- -- 109,252 4,590,014
Production (120,855) (2,396,379) (112,563) (961,527) (233,418) (3,357,906)
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1996 715,854 22,798,358 751,690 6,859,500 1,467,544 29,657,858
=========== =========== =========== =========== =========== ===========
PROVED DEVELOPED RESERVES
Balance, December 31, 1994 228,196 786,060 -- -- 228,196 786,060
Balance, December 31, 1995 661,852 20,446,505 868,495 5,786,239 1,530,347 26,232,744
Balance, December 31, 1996 608,705 19,361,667 751,690 6,859,500 1,360,395 26,221,167
</TABLE>
D-10
<PAGE> 160
PRODUCTION AND PRICE HISTORY
The following table sets forth certain information concerning the Company's
annual net oil and gas production and average price information for the year
ended December 31:
<TABLE>
<CAPTION>
Production: 1996 1995 1994
------------ ----------- ----------
<S> <C> <C> <C>
Oil (Bbls)
U.S. 120,855 84,848 78,866
Canada 112,563 --- ---
----------- ---------- -----------
Total 233,418 84,848 78,866
Gas (Mcf)
U.S. 2,396,379 404,319 300,544
Canada 961,527 --- ---
----------- ---------- -----------
Total 3,357,906 404,319 300,544
Average sales price:
Oil ($ per Bbl)
U.S. 19.69 16.23 15.31
Canada 18.09 --- ---
----------- ---------- -----------
Average 18.92 16.23 15.31
Gas ($ per Mcf)
U.S. 2.29 1.65 1.80
Canada 1.17 --- ---
----------- ---------- -----------
Average 1.97 1.65 1.80
Average lifting costs ($ per Mcfe)
Operating expenses and pr 0.58 0.72 0.71
Depreciation, depletion a 0.60 0.87 0.91
</TABLE>
PRODUCTIVE WELLS STATISTICS
The following table sets forth information concerning productive wells in which
the Company has an interest as of December 31, 1996:
<TABLE>
<CAPTION>
OIL GAS TOTAL
-------------- ----------- ---------------
GROSS NET GROSS NET GROSS NET
-------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Canada 699 15.1 510 6.5 1,209 21.6
U. S.(1) 224 15.4 487 52.8 711 68.2
</TABLE>
(1) Includes producing units that contain numerous wells. Each unit is counted
as one gross well and the unit working interest is included in the net wells.
DEVELOPMENT AND EXPLORATORY WELLS DRILLED
The following table includes the drilling results of wells in which the Company
has a working interest for the year ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
-------------- --------------- -------------
EXPLORATORY: GROSS NET GROSS NET GROSS NET
------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Oil 0 .000 0 .000 0 .000
Gas 1 .150 0 .000 3 .307
Dry hole 3 .335 0 .000 3 .430
DEVELOPMENT:
Oil 21 .246 0 .000 1 .250
Gas 15 .257 2 .020 0 .000
Dry hole 6 .174 1 .150 2 .068
TOTAL
Productive 37 .653 2 .020 4 .557
Dry hole 9 .509 1 .150 5 .498
</TABLE>
D-11
<PAGE> 161
DEVELOPED AND UNDEVELOPED LEASEHOLD ACREAGE:
The following table shows the Company's leasehold interest in developed and
undeveloped oil and gas acreage as of December 31, 1996. This table does not
reflect certain mineral acreage owned by the Company. In the following data
"Gross" refers to the total acres in which the Company has a working interest
and "Net" refers to gross acres multiplied by the percentage of the working
interest owned by the Company.
<TABLE>
<CAPTION>
DEVELOPED UNDEVELOPED
ACREAGE ACREAGE
----------------------------- -------------------------------
UNITED STATES GROSS NET GROSS NET
- ------------- ----------- ------------ ----------- ------
<S> <C> <C> <C> <C>
Alabama 651 26 188 7
Arkansas 1,040 247 1,799 450
Colorado 288 21 0 0
Kansas 204 53 0 0
Louisiana 4,895 765 486 452
Michigan 96 2 0 0
Mississippi 972 115 1,207 132
Montana 24 2 0 0
New Mexico 3,012 213 0 0
North Dakota 400 177 0 0
Oklahoma 2,360 379 0 0
Texas 19,577 3,555 2,426 1,083
Texas - Offshore 5,760 105 1,440 1,440
Wyoming 10,384 500 0 0
Utah 672 148 0 0
----------- ------------ ----------- ------------
Total-Domestic 50,335 6,308 7,546 3,564
=========== ============ =========== ============
CANADA
Alberta 85,280 3,057 209,176 12,957
Saskatchewan 2,160 1 960 1
British Columbia 2,086 260 28,715 1,737
----------- ------------ ----------- ------------
Total-Canadian 89,526 3,318 238,851 14,695
=========== ============ =========== ============
Total Leasehold Acreage 139,861 9,626 246,397 18,259
=========== ============ =========== ============
</TABLE>
"Developed acreage" consists of lease acres spaced or assignable to production
on which wells have been drilled or completed to a point that would permit
production of commercial quantities of oil or gas.
The Company's ownership of mineral rights is set forth below:
<TABLE>
<CAPTION>
GROSS NET
STATE MINERAL ACRES MINERAL ACRES
- ----- ------------- -------------
<S> <C> <C>
Mississippi 262,000 118,000
Wisconsin 121,000 110,000
Texas 212,514 84,183
New Mexico 67,634 32,577
Other 2,000 2,000
------- -------
Total 665,148 346,760
======= =======
</TABLE>
The Company is not aware of any valuable minerals appurtenant to the mineral
rights in Wisconsin, and therefore has no plans to develop minerals on such
properties. Currently, the Company has 2,885 net mineral acres in southern
Mississippi, 18,194 net mineral acres in Texas and 3,177 net mineral acres in
New Mexico under lease to others.
D-12
<PAGE> 162
ITEM 3. LEGAL PROCEEDINGS
No material legal proceedings are pending.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders during the fourth
quarter of the Company's last fiscal year.
D-13
<PAGE> 163
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET FOR COMPANY'S COMMON STOCK
Prices are based on trades made while the Company was listed on the NASDAQ
National Market System through March 9, 1995. Since March 10, 1995, the
Company's Common Stock has been traded on the NASDAQ SmallCap Market with the
trading symbol SMIN.
The following table sets forth the high and low sales prices on the market
systems noted above for the Company's Common Stock for the periods indicated:
<TABLE>
<CAPTION>
1996 1995 1994
------------------- ----------------- ------------------
HIGH LOW HIGH LOW HIGH LOW
<S> <C> <C> <C> <C> <C> <C>
First Quarter $ 2.13 $ 1.25 $ 1.25 $ .63 $ 2.13 $ 1.63
Second Quarter 3.38 1.81 1.25 .94 2.00 .69
Third Quarter 5.00 2.88 1.06 .75 1.38 .94
Fourth Quarter 6.00 4.25 1.63 .75 1.13 .44
-------- ------- ------- ------- ------- -------
For the Year $ 6.00 $ 1.25 $ 1.63 $ .63 $ 2.13 $ .44
======== ======= ======= ======= ======= =======
</TABLE>
The Company did not declare any dividends in fiscal 1996, 1995 or 1994. The
payment of future dividends on Common Stock, if any, will be reviewed
periodically by the Company's Board of Directors, and will depend upon, among
other things, Company's financial condition, funds available from operations,
the amount of anticipated capital and other expenditures, and the Company's
future business prospects. It is likely that for the foreseeable future, funds
available for dividends on Common Stock, if any, will be retained by the
Company to finance the growth of its business. Payment of dividends is
currently restricted by the terms of the Company's bank loan agreement.
There were 669 stockholders of record on March 18, 1997.
RECENT SALES OF UNREGISTERED SECURITIES
The following information is given with respect to securities issued by the
Company during 1996 in transactions which were not registered under the
Securities Act of 1933, as amended (the "1933 Act"). A claim of exemption under
Section 4(2) of the 1933 Act is claimed with respect these transactions. The
subject securities are either nontransferable or each issuee thereof
represented that it understood that the securities acquired could not be sold
or otherwise transferred without registration under the 1933 Act or the
availability of an exemption therefrom, and each certificate representing such
securities bears (or upon issuance will bear) a restrictive legend to that
effect.
December 1996 Private Placement. On December 23, 1996, the Company sold
2,500,000 shares of its Common Stock at a price of $4.50 per share or an
aggregate $11,250,000 in a private placement to institutional and accredited
investors for which Morgan Keegan & Company, Inc. ("MKC") was the placement
agent (the "Private Placement"). Net proceeds to the Company were $10,687,500
after payment to the placement agent of a 5% fee of $562,500. As part of MKC's
compensation for acting as placement agent, the Company issued to MKC a warrant
exercisable for 120,000 shares of Common Stock at $4.50 per share until
December 23, 2001, subject to certain anti-dilution adjustments. The Company
currently has pending a Form S-3 registration statement to register under the
1933 Act the resale of the shares of Common Stock sold in the private placement
and underlying MKC's warrant (the "Pending Form S-3").
D-14
<PAGE> 164
EnCap Investments, L.C. In November 1996, the Company issued to EnCap
Investments, L.C. 20,000 shares of Common Stock under a November 5, 1996
agreement between EnCap and the Company as a retainer for EnCap's efforts to
target acquisition candidates for the Company. If and when the consideration
paid by the Company for such acquisitions exceeds $5,000,000, the Company
agreed to issue EnCap warrants exercisable for three years for 80,000 shares of
Common Stock at an exercise price equal to the Common Stock's market price at
the time the $5,000,000 threshold is exceeded. The resale of the 20,000 shares
issued to EnCap is covered by the Pending Form S-3.
Diasu and its Principals. In January 1996, the Company issued 87,500 shares of
Common Stock to to each of Gary L. Chitty and Thomas J. McMinn pursuant to a
Subscription Agreement and Assumption of Obligations between the Company and
Messrs. Chitty and McMinn, dated January 5, 1996 ("Subscription Agreement").
The resale of these aggregate 175,000 shares is covered by the Pending Form
S-3. Each of Messrs. Chitty and McMinn is a director, executive officer and
beneficial owner of 50% of the outstanding equity securities of Diasu Oil & Gas
Co., Inc., a Texas corporation ("Diasu") principally engaged in the exploration
and production of oil and gas. On January 5, 1996, Diasu and the Company
entered into an Option Agreement granting the Company an option to participate
as an investor in any oil and gas exploration and development projects proposed
by Diasu or its affiliates during the following 24-month period (the "Option
Agreement"). Pursuant to the Subscription Agreement, each of Messrs. Chitty and
McMinn agreed to cause Diasu to honor its obligations under the Option
Agreement and to make the Option Agreement applicable to any oil and gas
prospects that either of Messrs. Chitty or McMinn and certain of their
affiliates might pursue. In consideration for the Company's rights under the
Subscription Agreement, the Company issued each of Messrs. Chitty and McMinn
87,500 shares of Common Stock and a presently exercisable warrant for 200,000
shares of Common Stock (collectively, the "First Warrants"). Pursuant to the
Option Agreement, the Company issued Diasu warrants exercisable for 200,000
shares of Common Stock (the "Second Warrants"). Diasu subsequently transferred
a Second Warrant exercisable for 100,000 shares to each of Messrs. Chitty and
McMinn. Each of the First Warrants and Second Warrants may be exercised until
January 5, 2001 at $2.00 per share and are subject to certain anti-dilution
adjustments. The Company negotiated the $2.00 per share exercise price of these
warrants to be at a premium of the average last sale price for the Common Stock
on the NASDAQ SmallCap Market on January 2, 3 and 4, 1996 of $1.5625 per share.
The Company agreed to register the resale of shares of Common Stock actually
issued to Messrs. Chitty and McMinn under the Subscription Agreement and upon
exercise of the First Warrants and Second Warrants.
1996 Stock Option Plan. During 1996, the Company granted options exercisable
for 130,000 shares of Common Stock under the Company's 1996 Stock Option Plan
(the "SOP"). Pursuant to the SOP, the Company may grant options to purchase up
to 300,000 shares (subject to customary anti-dilution adjustments) of its
Common Stock to key employees of the Company. The SOP is administered by the
Compensation Committee of the Company's Board of Directors which generally has
authority to establish who receives options and the terms and conditions
thereof, including vesting and exercise price. The exercise price of each
option granted in 1996 is the market price for the Common Stock on the date of
grant, determined by reference to the most recent closing price therefor
reported on the NASDAQ SmallCap Market.
1996 Employee Stock Purchase Plan. Subsequent to 1996, the Company granted
options exercisable for 5,313 shares of Common Stock under the Company's 1996
Employee Stock Purchase Plan (the "SPP"). The SPP is intended to constitute an
"employee stock purchase plan" within the meaning of Section 423 of the
Internal Revenue Code of 1986, as amended. Pursuant to the SPP, the Company may
grant options to purchase up to 300,000 shares (subject to customary
anti-dilution adjustments) of its Common Stock to employees of the Company.
Options may be granted on January 1 and July 1 of each year to eligible
employees who elect to participate in the SPP. The term of each option is six
months from the date of grant. The number of options granted to each
participant equals the quotient of (i) the total payroll deductions authorized
by the participant as extended during the full applicable option period,
divided by (ii) 85% of the fair market value of the Common Stock as of the date
of grant of such option. The exercise price of options under SPP is 85% of the
fair market value of the Common Stock as of the date of grant or the date of
exercise of such option, whichever is less, determined by reference to the most
recent closing price therefor reported on the NASDAQ SmallCap Market.
D-15
<PAGE> 165
The Company's Form S-8 Registration Statement No. 333-12375 generally covers
the issuance and resale (subject, in the case of affiliates, to Rule 144 under
the 1933 Act) of Common Stock issuable upon exercise of options under the SOP
and SPP.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FOR THE PERIOD ENDED DECEMBER 31, 1996
AS COMPARED TO THE PERIOD ENDED DECEMBER 31, 1995
Oil and gas revenues for 1996 were $11,780,000, up 476% compared to oil and gas
revenues for 1995 of $2,044,000. The increase in revenues reflects higher
production volumes of both natural gas and crude oil and higher commodity
prices for both natural gas and oil. Higher production volumes were primarily
due to the acquisitions of certain assets and companies of Stone & Webster,
Inc. ("Stone & Webster"), acquired in December 1995, and the acquisition of the
limited partnership interest in SMC Development, L.P. ("SMD") in August 1996.
Natural gas production in 1996 was 3,358 Mmcf, a 731% increase compared to 1995
production of 404 Mmcf. The Company's crude oil production in 1996 increased
175% to 233,418 barrels compared to 84,848 barrels in 1995.
The average natural gas price in 1996 increased 19% to $1.97 per Mcf compared
to $1.65 per Mcf in 1995. Crude oil prices increased 17% in 1996 to $18.92,
compared to $16.23 per barrel in 1995.
As part of the Company's on-going operations, the Company may sell
non-strategic assets or oil and gas properties. The proceeds would be used to
pay down debt or redeploy capital to opportunities that may have a higher rate
of return. These activities resulted in gains on sale of assets of $453,000 in
1996 and $170,000 in 1995. The gain on sale in 1996 was primarily the result of
the sale of Venture Resources, Inc. for $1,143,000, which was a non-core asset
acquired as part of the Stone & Webster acquisition. The gain on sale in 1995
was primarily the result of the sale of non-strategic oil and gas interests in
the Bandera and Equipo prospects located in Maverick County, Texas.
Production costs, including production and ad valorem taxes, increased in 1996
to $2,742,000, up 318% from $656,000 in 1995, primarily due to the above
mentioned acquisitions. However, on a cost per Mcfe basis, production costs for
1996 declined to $0.58 per Mcfe, or 19% from $0.72 per Mcfe in 1995.
General and administrative expenses increased as a result of the above
mentioned acquisitions to $1,682,000 in 1996, up 105% from $819,000 in 1995.
However, on a cost per Mcfe basis, general and administrative expenses declined
to $0.35 per Mcfe, or 61% from $0.90 Mcfe in 1995.
Exploration, dry hole and lease impairment expenses increased in 1996 to
$865,000, up 291% compared to $221,000 in 1995, which was primarily due to
lease impairment expenses of approximately $600,000 in the fourth quarter of
1996. Since the Company uses successful efforts method of accounting,
exploration expenses may vary greatly from year to year based upon the level of
exploration activity during the year.
Depreciation, depletion and amortization ("DD&A") expense for 1996 increased to
$2,875,000, up 263% from $792,000 in 1995, which was due primarily to the above
mentioned acquisitions and downward revisions to reserve estimates in the
Company's oil and gas property located in Yoakum, Texas. The Company computes
depreciation and depletion on each producing property on a unit-of-production
method. Since this method employs estimates of remaining reserves, depreciation
and depletion expenses may vary from year to year because of revisions to
reserve estimates, production rates and other factors. DD&A expenses declined
per Mcfe in 1996 to $0.60 per Mcfe, down 31% from $0.87 per Mcfe in 1995.
Interest and debt expense in 1996 was $1,242,000, which was a result of the
bank debt incurred to consummate the above mentioned acquisitions. The Company
had no interest expense in 1995.
D-16
<PAGE> 166
The Company had a net operating loss carryforward of approximately $2,293,000
at the end of 1995, which was fully utilized in 1996. Tax expense in 1996 and
1995 was $679,000 and $9,000, respectively, with the increase related to higher
1996 net income before taxes.
The Company reported earnings in 1996 of $2,434,000 or $0.34 per share compared
to a loss of $137,000 or $0.02 per share in 1995.
FOR THE PERIOD ENDED DECEMBER 31, 1995
AS COMPARED TO THE PERIOD ENDED DECEMBER 31, 1994
The Company reported a net loss in 1995 of $137,000 or $.02 per share compared
to a loss of $3,133,000 or $.78 per share in 1994. Revenues, including interest
and other income, for 1995 were $2,360,000, up 25% compared to revenues for
1994 of $1,889,000. Expenses for 1995 were $2,488,000, down 55% compared to
expenses of $5,580,000 for 1994.
The increase in revenues reflects higher production volumes of both natural gas
and crude oil and higher prices for crude oil. Natural gas production in 1995
was 404 Mmcf, a 34% increase compared to 1994 production of 301 Mmcf. The
Company's crude oil production in 1995 increased 8% to 84,848 barrels compared
to 78,866 barrels in 1994. The Company's average gas price in 1995 decreased 8%
to $1.65 per Mcf compared to $1.80 per Mcf in 1994. Offsetting lower gas
prices, crude oil prices in 1995 increased 6% to $16.23 per barrel as compared
to $15.31 per barrel in 1994. Higher production volumes were primarily due to
the acquisition of an interest in Diverse GP III, which was acquired in April
of 1995. Revenues also increased as a result of an increase in the gain on the
sale of assets to $170,000 in 1995 from $66,000 in 1994. The gain in 1995 was
primarily a result of the Company's sale of its interest in the Bandera and
Equipo prospects located in Maverick County, Texas.
The reduction in expenses in 1995 was primarily the result of special charges
of $1,724,000 related to write-downs in valuation of three producing properties
in 1994, which were non-recurring in 1995. Substantial exploration losses in
early 1994 caused the Company to reexamine its exploration and production
strategy. The Company decided that non-core properties should be sold, and
accordingly wrote-down the assets to the estimated sales price. Production
expenses increased 20% to $656,000 in 1995 from $548,000 in 1994. The increase
in production expenses was primarily due to the inclusion of Diverse GP III in
1995. Exploration expenses declined 86% to $221,000 in 1995 from $1,566,000 in
1994. Since the Company uses the successful efforts method of accounting,
exploration expenses may generally vary greatly from year to year based upon
the level of exploration activity during the year. The decline in exploration
expenses in 1995 was primarily the result of decreased exploration activity due
to a change in the Company's focus away from higher risk exploration and
towards the acquisition of existing reserves, exploitation and controlled risk
exploration. The Company participated in the drilling of three gross wells
drilled in 1995 compared to nine gross wells in 1994. Drilling results in 1995
included one dry hole drilled in Refugio County, Texas and two development
wells drilled in Roger Mills County, Oklahoma and Lavaca County, Texas,
respectfully. Depreciation and depletion increased 13% to $792,000 in 1995 from
$704,000 in 1994, due to the inclusion of Diverse GP III in 1995 and
adjustments in reserve estimates for certain properties owned by the Company.
The Company computes depreciation and depletion expenses on each producing
property on a unit-of-production method. Since this method employs estimates of
remaining reserves, depreciation and depletion expenses may vary from year to
year because of revisions to reserve estimates, production rates and other
factors. General and administrative costs were $819,000 in 1995, down 21% from
$1,038,000 in 1994. The decline in general and administrative expenses was a
result of the Company's ongoing cost cutting plans implemented in 1994 and
carried out in 1995.
The revisions in the Company's estimated reserves in 1994 were primarily the
results of downward adjustments to the Company's oil and gas properties in
Bandera, Stateline and Cascade Deep fields. Production from these fields was
substantially below those projected by the Company's independent petroleum
engineering firm due primarily to water encroachment and lack of production
facilities in the Stateline field and lower than projected production in the
Bandera and Cascade Deep fields, resulting in the downward adjustments.
D-17
<PAGE> 167
LIQUIDITY AND CAPITAL RESOURCES
FOR THE PERIOD ENDED DECEMBER 31, 1996
The Company has historically funded its operations, acquisitions, exploration
and development expenditures from cash flows from operating activities, bank
borrowings, issuance of common stock and sales of non-strategic assets and oil
and gas properties.
The Company's cash flows provided by operating activities for the years ended
December 31, 1996, 1995, and 1994 were $5,098,000, $823,000, and $779,000,
respectively. Additional cash in the amounts of $1,401,000, $608,000 and
$136,000 was realized in 1996, 1995 and 1994, respectively from property sales
of non-strategic assets.
Effective December 17, 1996, the Company amended its bank credit facility that
consists of a secured reducing revolving line of credit. As of December 31,
1996, the borrowing base under the credit facility was $18,000,000, and the
Company had outstanding borrowings thereunder of $3,900,000, leaving
$14,100,000 available to borrow.
The credit facility borrowing base reduces $300,000 per month commencing
January 1, 1997, and is reviewed by the bank semi-annually until maturity on
June 1, 1998. The obligations under the credit facility are secured by
substantially all of the assets of the Company and its subsidiaries. The credit
facility contains certain covenants relating to the financial condition of the
Company. The credit facility bears interest at the Company's option, of either
prime rate floating or at the LIBOR rate plus two and one-quarter percent. On
December 23, 1996, the Company sold in a private placement, 2,500,000 shares of
common stock at $4.50 per share for proceeds of $10,600,000 after related cash
expenses. The proceeds of the offering were used to retire bank debt under the
Company's credit facility.
Capital spending in 1996 for acquisitions, exploration, and development totaled
$6,036,000, and was primarily funded from cash flows from operating activities.
The Company's capital spending budget for 1997 is expected to be approximately
$6,000,000 to $8,000,000, consisting of both exploration and development
drilling, with primary emphasis being the U.S. Gulf Coast region. The Company
will evaluate its level of capital spending throughout the year based upon
drilling results, commodity prices, cash flows from operations and property
acquisitions. Actual capital spending may vary from the initial capital
expenditure budget.
The Company believes that it will have sufficient capital available from the
credit facility described above, together with cash flows from operating
activities, to fund its 1997 capital expenditure program, and to meet the
Company's other obligations. The Company also believes that the funds available
from such sources will enable the Company to continue to selectively pursue
strategic corporate and property acquisitions.
The Company's debt to total capitalization ratio was 17.3% at December 31,
1996, compared to 65.7% at December 31, 1995. The Company's interest coverage
ratio (calculated as income from operations plus depreciation, depletion and
amortization, and exploration expenses divided by cash expenditures for
interest) was 6.45 to 1 for 1996.
The Company did not declare dividends in fiscal 1996, 1995 and 1994. It is
likely that for the foreseeable future, funds available for dividends on common
stock, if any, will be retained by the Company to finance future growth.
ITEM 7. FINANCIAL STATEMENTS
Financial Statements are filed as a part of this report. See page 19, Index to
Financial Statements. The Financial Statement Schedules are not applicable and
have been omitted.
D-18
<PAGE> 168
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
Description Number
----------- ------
<S> <C>
Independent Auditor's Report D-20
Report of Independent Certified Public Accountants D-21
Financial Statements:
Consolidated Balance Sheets at December 31, 1996 and 1995 D-22
Statements of Consolidated Operations
for the Years Ended December 31, 1996, 1995 and 1994 D-23
Statements of Consolidated Stockholders' Equity
for the Years Ended December 31, 1994, 1995 and 1996 D-24
Statements of Consolidated Cash Flows
for the Years Ended December 31, 1996, 1995 and 1994 D-25
Notes to Consolidated Financial Statements
for the Years Ended December 31, 1996, 1995 and 1994 D-26
</TABLE>
D-19
<PAGE> 169
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Southern Mineral Corporation:
We have audited the accompanying consolidated balance sheet of Southern
Mineral Corporation and subsidiaries as of December 31, 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit 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 misstatements. 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 audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Southern
Mineral Corporation and subsidiaries as of December 31, 1996, and the results
of their operations and their cash flows for the year then ended in conformity
with generally accepted accounting principles.
/s/KPMG Peat Marwick LLP
Houston, Texas
August 28, 1997
D-20
<PAGE> 170
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders of
Southern Mineral Corporation:
We have audited the accompanying consolidated balance sheets of Southern
Mineral Corporation (a Nevada corporation) and subsidiaries as of December 31,
1995, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the two years in the period ended December
31, 1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Southern Mineral Corporation
and subsidiaries as of December 31, 1995, and the consolidated results of their
operations and their consolidated cash flows for each of the two years in the
period ended December 31, 1995, in conformity with generally accepted
accounting principles.
/s/Grant Thornton LLP
Houston, Texas
February 21, 1996
D-21
<PAGE> 171
SOUTHERN MINERAL CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------
1996 1995
---------- -----------
(in thousands)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 471 $ 562
Receivables 2,292 1,122
Other 155 387
---------- ----------
Total current assets 2,918 2,071
PROPERTY AND EQUIPMENT, AT COST USING SUCCESSFUL
EFFORTS METHOD FOR OIL AND GAS ACTIVITIES
Oil and gas producing properties 24,888 20,530
Mineral rights 167 167
Unproven properties 525 15
Office equipment 251 178
Accumulated depreciation, depletion and amortization (5,232) (2,848)
---------- ----------
20,599 18,042
PROPERTIES HELD FOR SALE AND OTHER 869 1,554
---------- ----------
Total assets $ 24,386 $ 21,667
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 683 $ 665
Note payable bank --- 3,500
Current maturities of long term debt --- 1,795
---------- ----------
Total current liabilities 683 5,960
LONG TERM DEBT 3,900 9,920
DEFERRED INCOME TAXES 1,169 606
STOCKHOLDERS' EQUITY
Common stock - par value $.01 per share; authorized 20,000,000 and
10,000,000 shares at December 31, 1996 and 1995;
issued 9,088,519 and 6,369,519 at December 31, 1996 and 1995 91 64
Additional paid-in capital 14,030 3,038
Retained earnings 4,565 2,131
---------- ----------
18,686 5,233
Less: Treasury stock (52) (52)
---------- ----------
Total stockholders' equity 18,634 5,181
---------- ----------
Total liabilities and stockholders' equity $ 24,386 $ 21,667
========== ==========
</TABLE>
The accompanying notes to consolidated financial statements of
Southern Mineral Corporation and subsidiaries are an
integral part of these statements.
D-22
<PAGE> 172
SOUTHERN MINERAL CORPORATION
STATEMENTS OF CONSOLIDATED OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
---------------------------------------------
1996 1995 1994
---------- ---------- ----------
(in thousands, except per share amounts)
<S> <C> <C> <C>
REVENUES
Oil and gas $ 11,780 $ 2,044 $ 1,747
Gains on sales of properties and other assets 453 170 66
---------- ---------- ---------
12,233 2,214 1,813
EXPENSES
Production 2,742 656 548
Exploration 865 221 1,566
Depreciation, depletion and amortization 2,875 792 704
General and administrative 1,682 702 903
Valuation reduction --- --- 1,724
Severance benefit --- 117 135
--------- --------- ---------
8,164 2,488 5,580
--------- --------- ---------
Income (loss) from operations 4,069 (274) (3,767)
Other income, expenses and deductions
Interest and other income 286 146 76
Interest and debt expense (1,242) --- ---
--------- --------- ---------
Income (loss) before income taxes 3,113 (128) (3,691)
Provision (benefit) for federal and state income taxes
Current provision (benefit) 400 9 (11)
Deferred provision (benefit) 279 --- (547)
--------- ---------- ---------
679 9 (558)
--------- ---------- ---------
Net income (loss) $ 2,434 $ (137) $ (3,133)
========== ========= =========
Primary net income (loss) per share $ .34 $ (0.02) $ (0.78)
========= ========= =========
Fully diluted net income (loss) per share $ .33 $ (0.02) $ (0.78)
--------- ========= =========
Primary weighted average number of shares outstanding 7,215 5,701 4,162
========= ========= =========
Fully diluted weighted average number of shares outstanding 7,336 5,701 4,162
========= ========= =========
</TABLE>
The accompanying notes to consolidated financial statements of
Southern Mineral Corporation and subsidiaries are an
integral part of these statements.
D-23
<PAGE> 173
SOUTHERN MINERAL CORPORATION
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY
For the Year Ended December 31,
(in Thousands)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TREASURY STOCK
--------------------- PAID-IN RETAINED ----------------------
SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT
-------------------- ---------- ----------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1994 4,162 $ 42 $ 843 $ 5,401 137 $ 73
Net loss --- --- --- (3,133) --- ---
------- ------- -------- --------- -------- --------
BALANCE AT DECEMBER 31, 1994 4,162 42 843 2,268 137 73
Stock issued for directors' fees 14 --- 12 --- --- ---
Odd lot tender offer --- --- --- --- 4 6
Sale of treasury stock --- --- 11 --- (50) (27)
Issuance of common stock for acquisition of
Diverse Production Co. 2,194 22 2,172 --- --- ---
Net loss --- --- --- (137) --- ---
------- ------- -------- --------- -------- --------
BALANCE AT DECEMBER 31, 1995 6,370 64 3,038 2,131 91 52
Stock issued for directors' fees 24 --- 72 --- --- ---
Issuance of common stock for private
placement of 2,500,000 shares of stock, net 2,500 25 10,596 --- --- ---
Issuance of common stock for property
acquisitions and acquisition services 195 2 324 --- --- ---
Net income --- --- --- 2,434 --- ---
------- ------- -------- --------- -------- --------
BALANCE AT DECEMBER 31, 1996 9,089 $ 91 $ 14,030 $ 4,565 91 $ 52
======= ======= ======== ========= ======== ========
</TABLE>
The accompanying notes to consolidated financial statements of Southern Mineral
Corporation and subsidiaries are an integral part of these statements.
D-24
<PAGE> 174
SOUTHERN MINERAL CORPORATION
STATEMENTS OF CONSOLIDATED CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES 1996 1995 1994
-------- -------- ----------
<S> <C> <C> <C>
Net income (loss) $ 2,434 $ (137) $ (3,133)
Adjustments to reconcile net income (loss) to cash provided by operating
activities:
Depreciation, depletion and amortization 2,875 792 704
Gains on sales of properties and other assets (453) (170) (66)
Valuation reduction -- -- 1,724
Exploration expenses 865 221 1,566
Increase (decrease) in deferred taxes 279 -- (547)
Common stock issued as compensation 72 12 --
Change in assets and liabilities, net of effects of acquisition and
disposition in 1996 and acquisitions in 1995:
(Increase) decrease in receivables (1,224) 214 216
Decrease (increase) in other current assets 231 (39) 259
Increase in other assets (115) -- --
Increase (decrease) in payables 134 (70) 56
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,098 823 779
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of:
Producing properties 258 511 42
Properties held for sale and unproven properties -- 97 94
Decrease (increase) in marketable securities:
Purchases -- (1,914) (3,810)
Maturities and sales -- 3,483 4,201
Capital expenditures:
Acquisition, exploration and development (2,836) (651) (1,107)
Properties held for sale (470) (684) --
Cash paid for partnership interest, net of cash received (2,590) -- --
Cash paid for acquisition of Stone & Webster properties, net of cash received -- (16,215) --
Cash received for sale of Venture Resources, Inc., net of cash transferred 1,143
Other -- (63) (8)
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES (4,495) (15,436) (588)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long term debt and note payable 4,300 15,215 --
Payments on long term debt and note payable (15,615) -- --
Loan acquisition costs -- (127) --
Proceeds from sale of treasury stock -- 38 --
Purchase of treasury stock -- (6) --
Proceeds from equity offering, net 10,621 -- --
Dividends paid -- -- (202)
-------- -------- --------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (694) 15,120 (202)
-------- -------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (91) 507 (11)
Cash and cash equivalents at beginning of year 562 55 66
-------- -------- --------
Cash and cash equivalents at end of year $ 471 $ 562 $ 55
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Taxes $ 363 $ (5) $ (271)
Interest $ 1,210 $ -- $ --
NON CASH TRANSACTIONS
Issuance of common stock for property acquisitions
and acquisition services $ 326 $ -- $ --
Change in deferred tax liability on property acquisitions $ 284 $ -- $ --
</TABLE>
The accompanying notes to consolidated financial statements of Southern
Mineral Corporation and subsidiaries are an integral part of these
statements.
D-25
<PAGE> 175
SOUTHERN MINERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GENERAL BUSINESS - Southern Mineral Corporation, a Nevada corporation, with its
subsidiaries (the "Company"), is an independent oil and gas company
headquartered in Houston, Texas. The Company is engaged in the acquisition,
exploitation, exploration and operation of oil and gas properties, primarily
along the Gulf Coast, the Mid-continent and in Canada, with a primary focus on
the Gulf Coast Basin, both onshore and offshore. The Company owns interests in
more than 1,900 oil and gas properties in those three regions. The Company's
business strategy is to increase reserves and shareholder value through a
balanced program of acquisitions, exploitation and controlled risk exploration.
In addition to oil and gas leasehold interests, the Company owns fee interests
in the oil and gas under some 665,148 gross surface acres (comprising some
346,760 net mineral acres) in Mississippi, Texas and New Mexico. The Company
has no current development or other plans with respect to these fee interests
other than leasing them to third parties for exploration and development.
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the
accounts of Southern Mineral Corporation and its wholly-owned subsidiaries. All
significant intercompany transactions have been eliminated. The Company
accounts for its investment in oil and gas partnerships and joint ventures
using the proportional consolidation method.
REVENUES - Natural gas revenues generally are recorded using the sales method,
whereby the Company recognizes natural gas revenues based on the amount of gas
sold to purchasers on its behalf. All other revenues also are recorded using
the sales method. The Company believes that imbalances related to the sales of
natural gas are insignificant.
PROPERTY AND EQUIPMENT - The Company uses the successful efforts method of
accounting for its oil and gas properties. Under this method of accounting, the
tangible and intangible development costs of productive wells and development
dry holes are capitalized, and dry hole costs on exploratory wells are charged
against income when the well is determined to be non-productive. Other
exploratory expenditures, including geological and geophysical costs and delay
rentals, are expensed as incurred. The cost of unevaluated leasehold
acquisitions and wells in progress are included in unproven properties pending
evaluation.
Depreciation and depletion of producing oil and gas properties are computed
separately on each individual property on the unit-of-production method based
on estimated proved reserves. Depreciation of other property and equipment is
computed on the straight-line method over the estimated useful lives of the
assets ranging from 3 to 7 years.
The Company currently has only onshore producing properties and estimates that
residual salvage values of equipment would approximate any future
dismantlement, restoration or abandonment costs.
Maintenance and repairs are charged to expense as incurred.
OIL AND GAS PROPERTIES HELD FOR SALE - The costs of non-producing exploratory
properties held for sale, including lease bonuses and other acquisition costs,
are capitalized. Geological, geophysical, and other exploration costs of
non-producing properties are capitalized to the extent such costs are
reimbursed upon sale of the property, determined by management based on the
attributes of each property. Otherwise, such costs, if any, are expensed. For
those properties in which the Company sells a portion of its interest, the cost
of such properties, net of reimbursements, are removed from this account and
are included in property and equipment.
Producing oil and gas properties, which have been identified for sale, are
carried at the lower of cost or estimated market. The 1994 valuation reduction
is primarily the result of write downs of producing properties that management
identified for sale.
D-26
<PAGE> 176
SOUTHERN MINERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
Properties held for sale and other assets at December 31, 1995, include ten
non-contiguous pipeline and gathering systems, which are not part of the
Company's core business operations. The carrying value of these assets was
$675,000.
INCOME TAXES - The Company accounts for income taxes using the asset and
liability method. The asset and liability method requires the recognition of
deferred tax assets and liabilities for the expected future tax consequences of
temporary differences between tax bases and financial reporting bases of other
assets and liabilities. (See Note 4.) The effect on deferred taxes of a change
in tax rates is recognized in income in the period the change occurs. The
Company deducts intangible development costs as incurred and deducts statutory
depletion (percentage depletion) when it exceeds cost depletion for federal
income tax purposes.
CASH EQUIVALENTS - Management considers all highly liquid investments with a
maturity of three months or less when purchased to be cash equivalents.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS - The preparation
of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS (SFAS) NOS. 121 AND 123 Effective
January 1, 1996, the Company adopted SFAS No. 121 Accounting for Impairment of
Long-Lived Assets to be Disposed Of. This standard requires that long-lived
assets that are held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. When it is determined that an asset's estimated
future net cash flows will not be sufficient to recover its carrying amount, an
impairment charge must be recorded to reduce the carrying amount for the asset
to its estimated fair value. The effect of the adoption of SFAS 121 was not
material to the Company.
During 1996, the Company chose to continue the use of APB No. 25 and related
Interpretations in accounting for stock-based compensation. As required by SFAS
No. 123 Accounting for Stock-Based Compensation, the Company has disclosed in
pro-forma presentation the effects on earnings of calculating the fair value of
a stock option using the method prescribed in SFAS No. 123.
EARNINGS (LOSS) PER SHARE - Earnings (loss) per share is based on the weighted
average number of common shares outstanding during the year. Outstanding
options and warrants are included where they have a dilutive effect. The share
amounts used to compute earnings (loss) per share were 7,214,585, 5,701,400 and
4,161,600 for the years 1996, 1995 and 1994, respectively. The weighted average
number of common shares outstanding on a fully diluted basis were 7,336,480,
5,701,400 and 4,161,600 for the years 1996, 1995 and 1994 respectively.
RECLASSIFICATIONS - Certain amounts in prior financial statements have been
reclassified to conform to the 1996 financial statement presentation.
D-27
<PAGE> 177
SOUTHERN MINERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE 2 ACQUISITIONS
On August 30, 1996, the Company acquired the limited partner interest in SMC
Development, L.P., a Texas limited partnership, for $3,000,000. Upon the
acquisition of the limited partner's interest, the partnership was dissolved,
resulting in the Company obtaining a direct working interest in sixteen oil and
gas properties with proved reserves estimated to be 4.2 billion cubic feet of
gas and 149,000 barrels of liquids. The acquisition was financed from proceeds
under the Company's bank revolving line of credit. The acquisition was
accounted for as a purchase.
On December 20, 1995, the Company completed the acquisition of certain oil and
gas assets of Stone & Webster Oil Company, Inc., and the outstanding capital
stock of Spruce Hills Production Company, Inc., San Salvador Development
Company, Inc., and Venture Resources, Inc., which are engaged primarily in oil
and gas exploration and production. The total cost of the acquisition was
approximately $16,400,000. The acquisition was financed by bank borrowings of
$15,215,000 and internally generated working capital of $1,209,000. The
acquisition was accounted for as a purchase.
On April 6, 1995, the Company completed the acquisition of Diverse Production
Co. (subsequently renamed SMC Production Co.), a Texas corporation, whose
primary asset is its 15% general partner interest in Diverse GP III, a Texas
general partnership. The total cost of the acquisition was approximately
$2,300,000. The Company issued 2,193,919 shares of common stock and 325,000
share options at an exercise price of $1.25 per share for a term of five years.
The acquisition was accounted for as a purchase.
The following summarized pro forma (unaudited) information assumes the
acquisitions had occurred on January 1, 1995.
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED DECEMBER 31,
--------------------------------
1996 1995
------- -------
(In thousands, except per share data)
<S> <C> <C>
Revenues $12,000 $ 9,139
Net income (loss) 2,305 (1,088)
Net income (loss) per share $ .32 $ (.17)
</TABLE>
These pro forma results are not necessarily indicative of those that would have
occurred had the acquisitions taken place at the beginning of 1995 or 1996,
respectively. The above amounts reflect adjustments for interest on notes
payable issued as part of the purchase price and depreciation on revalued
property, plant and equipment.
NOTE 3 LONG TERM DEBT AND NOTE PAYABLE BANK
On December 17, 1996, the Company entered into a revised credit facility
consisting of a secured reducing revolving line of credit with an initial
borrowing base of $18,000,000 ("Revolver Note"). Proceeds advanced under the
Revolver Note were used to retire an existing Term Note of $4,000,000, which
was increased from $3,500,000, on December 17, 1996. The borrowing base of the
Revolver Note reduces by $300,000 per month commencing August 1, 1997, and is
reviewed by the bank semi-annually until maturity on June 1, 2000. Under the
terms of the Revolver Note, the borrowing base is redetermined semi-annually by
the lending bank based upon its calculation of changes in the underlying
reserve values securing the credit facility. As of December 31, 1996, the
Company had borrowed $3,900,000 under the Revolver Note leaving an unfunded
commitment of $14,100,000. The Revolver Note bears interest at the Company's
option, of either prime rate or at the LIBOR rate plus two and one-quarter
percent. The credit facility contains certain covenants relating to the
Company's financial condition and is secured by substantially all the assets of
the Company. The Revolver Note has no payments due in 1997.
D-28
<PAGE> 178
SOUTHERN MINERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
Long-term debt consisted of the following at December 31, 1996 and 1995
(in thousands)
<TABLE>
<CAPTION>
1996 1995
------------------------
<S> <C> <C>
Revolving Note $ 3,900 $ 11,715
Less: current maturities --- 1,795
---------- ----------
Long-term debt $ 3,900 $ 9,920
========== ==========
</TABLE>
NOTE 4 FEDERAL AND STATE INCOME TAXES
Differences between the effective tax rate and the statutory federal rate are
as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Statutory rate for expense (benefit) 34.0% (34.0%) (34.0%)
Valuation allowance (13.1) 33.6 18.7
Foreign taxes, net of federal benefit 7.6 ------- ------
State taxes, net of federal benefit 0.7 4.5 .1
Percentage depletion (8.1) --- ------
Other .7 2.9 .1
------- ------- ------
Effective tax rate 21.8% 7.0% (15.1%)
======= ======= ======
</TABLE>
The tax effects of temporary differences that result in significant portions of
deferred income tax assets and liabilities and a description of the financial
statement items creating these differences are as follows:
<TABLE>
<CAPTION>
At December 31,
-----------------------------
Deferred tax assets: 1996 1995
----------- ------------
<S> <C> <C>
Net operating loss carry forward $ --- $ 779,000
Alternative minimum tax credits 92,000 96,000
Other 10,000 ---
Statutory depletion carry forward 159,000 110,000
----------- -----------
261,000 985,000
Valuation allowance --- (405,000)
----------- -----------
261,000 580,000
Deferred tax liabilities:
Oil and gas properties 572,000 580,000
Oil and gas properties - Canadian taxes 858,000 606,000
----------- -----------
1,430,000 1,186,000
----------- -----------
$(1,169,000) $ (606,000)
=========== ===========
</TABLE>
For the year ended December 31, 1995, the income tax benefit was limited by the
Company's inability to recognize all of the tax benefits of its net operating
loss and future deductible temporary differences in the calculation of its tax
expense. The Company had a net operating loss carryforward of approximately
$2,293,000 at December 31, 1995, which was utilized in 1996. The Company has an
alternative minimum tax credit carryforward of approximately $92,000 and
statutory depletion carry forward of $468,000 at December 31, 1996. The
valuation allowance was eliminated during 1996, due to the current earnings of
the Company. Management believes it is more likely than not that the deferred
income tax assets will be realized in future years through the reversal of
taxable temporary differences.
D-29
<PAGE> 179
SOUTHERN MINERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE 5 RELATED PARTY TRANSACTIONS
In September, 1995, the Company entered into a joint venture, Southern Links
Group Joint Venture ("Southern Links"), to acquire, develop and market
exploration prospects. The Company's joint venture partner is The Links Group,
Inc. ("Links"), a company that is controlled by Robert Hillery, a director of
the Company. The Company has agreed to fund third party costs of Southern
Links. Any proceeds from the sale of prospects or oil and gas from such
prospects is distributed 100% to the Company until it receives an amount equal
to the return of its invested capital, after which time all such proceeds and
property interests, if any, are to be distributed 75% to the Company and 25% to
Links. At December 31, 1996 the Company has funded $552,000 of third party
costs of Southern Links, recording such amounts in properties held for sale.
NOTE 6 MAJOR CUSTOMERS
The Company is principally engaged in a single industry segment, the
exploration, development, and production of oil and gas reserves in the United
States and Canada. Sales of oil and gas to customers accounting for 10% or more
of revenues were as follows:
<TABLE>
<CAPTION>
CUSTOMER 1996 1995 1994
- -------- -------- --------- ---------
(in thousands)
<S> <C> <C> <C>
G C Marketing Company $ 3,212 $ --- $ ---
Mike Rogers Drilling Company 591 746 651
Ashtola Exploration Company --- 208 283
</TABLE>
NOTE 7 COMMON STOCK
During 1996, the Company adopted the 1996 Stock Option Plan ("1996 Plan") in
which certain key employees of the Company may receive stock options, in
addition to any other compensation they may receive from the Company. An
aggregate of 300,000 shares of the Company's common stock is reserved for
issuance upon the exercise of options granted under the 1996 Plan. Under the
1996 Plan, the exercise price of the option equals the market price of the
Company's stock on the date of grant and an option's maximum term is up to ten
years with varying vesting periods. During 1996, the Company granted 130,000
options under this plan.
During 1996, the Company established the 1996 Stock Purchase Plan, which covers
substantially all employees. An aggregate of 300,000 shares of the Company's
common stock are reserved for issuance upon the exercise of options granted
under the Employee Stock Purchase Plan. Subsequent to 1996, 5,313 options were
granted under the Employee Stock Purchase Plan.
During 1995, the Company established the "1995 NonEmployee Director
Compensation Plan" in order to compensate nonemployee Directors with shares of
the Company's common stock in lieu of cash fees. The plan authorizes a total of
100,000 shares of common stock for issuance and provides that for attending a
regular or special meeting of the Board of Directors each nonemployee Director
will be issued 1,000 shares of common stock.
The Company applies APB 25 and related Interpretations in accounting for
stock-based compensation. Had compensation costs been determined based on the
fair value at the grant dates for awards consistent with the method of FASB
Statement 123, the Company's net income (loss) and earnings (loss) per share
would have been as follows:
D-30
<PAGE> 180
SOUTHERN MINERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
<TABLE>
<CAPTION>
1996 1995
----------- --------
<S> <C> <C>
Net income (loss) As reported $ 2,434 $ (137)
Pro Forma 2,401 (137)
Primary earnings per share As reported .34 (0.02)
Pro Forma .34 (0.02)
Fully diluted earnings per share As reported .33 0.02)
Pro Forma $ .33 $ (0.02)
</TABLE>
The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for the grants issued in 1996:
<TABLE>
<S> <C>
Expected volatility 52% to 74%
Risk free rate 5.86% to 6.23%
Expected life of options 3 to 7.5 years
Expected dividend yield 0%
</TABLE>
During 1996, the Company entered into an exploration arrangement with Diasu Oil
& Gas Co., Inc. ("Diasu") and Diasu's two principal shareholders. Pursuant to
the arrangement, the Company issued the Diasu shareholders 175,000 shares of
common stock and warrants to purchase up to 600,000 shares at $2.00 a share for
a term of five years.
In connection with the acquisition of Diverse Production Company ("DPC") in
1995, the Company granted options exercisable for 325,000 shares of its common
stock at $1.25 a share through April 2000. Each of the individuals that
received the options became directors of the Company in connection with the
acquisition of DPC.
In consideration for initiating the transactions pursuant to which the Company
acquired DPC, the Company granted a director of the Company an option to
acquire 43,878 shares of the Company's common stock at $1.00 per share
exercisable through April 2000.
In 1994, in connection with the offer and acceptance of employment, the
Company's President was granted a non-qualified option to purchase 450,000
shares of the Company's common stock at a price of $1.00 per share. The option
is non-assignable, and is exercisable until December, 2004. Payment for the
option can be made in cash, common stock of the Company, or a combination
thereof.
In consideration for services as financial advisor and placement agent for the
private placement in December, 1996, the Company granted Morgan Keegan &
Company, Inc. 120,000 warrants of the Company's common stock at $4.50 per share
exercisable through December, 2001.
A summary of the Company's stock options and warrants of December 31, 1996,
1995 and 1994, and changes during the years ending on those dates is presented
below:
<TABLE>
<CAPTION>
1996 1995 1994
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 818,878 $ 1.09 450,000 $ 1.00 --- $ ---
Granted 850,000 2.49 368,878 1.22 450,000 1.00
Exercised --- --- ---
Forfeited --- --- ---
--------- ------- -------
Outstanding at
end of year 1,668,878 $ 1.71 818,878 $ 1.09 450,000 $ 1.00
========= ======= =======
Options exercisable
at end of year 1,548,878 818,878 450,000
========= ======= =======
</TABLE>
D-31
<PAGE> 181
SOUTHERN MINERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
The weighted-average fair value of compensatory options granted
during 1996 was $1.54 per option.
On December 23, 1996 the Company issued 2,500,000 shares of
common stock at $4.50 per share for net proceeds of $10,621,000. All of the
proceeds from the Offering were used to retire outstanding debt. Supplemental
pro forma earnings per share data for the year ended December 31, 1996
disclosing the effect of the issuance of the shares and retirement of the debt
as if they had occurred at January 1, 1996 are as follows:
<TABLE>
<S> <C>
Primary net income per share .................... $0.31
Fully diluted net income per share .............. $0.31
</TABLE>
The following table summarizes information about options and
warrants outstanding at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS AND WARRANTS OUTSTANDING OPTIONS AND WARRANTS EXERCISABLE
-------------------------------- --------------------------------
WEIGHTED-AVERAGE
RANGE OF NUMBER REMAINING WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE OUTSTANDING EXERCISE PRICE
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$1.00 to 1.50 828,878 5.91 years $ 1.10 828,878 $ 1.10
2.00 to 3.00 720,000 4.08 years 2.17 600,000 2.00
3.50 to 4.50 120,000 4.98 years 4.50 120,000 4.50
--------- ---------
1,668,878 1,548,878
========= =========
</TABLE>
NOTE 8 COMMITMENTS AND CONTINGENCIES
The Company leases office space under a noncancellable operating lease expiring
December 31, 1998. Lease commitments at December 31, 1996, are payable $136,192
in 1997 and $134,184 in 1998. Lease payments in 1996, 1995 and 1994 were
$133,755, $66,212 and $84,747, respectively.
No material legal proceedings are pending.
The Company is unaware of any possible exposure from actual or potential claims
or lawsuits involving environmental matters. As such, no liability has been
accrued as of December 31, 1996 and 1995.
NOTE 9 SUBSEQUENT EVENTS (UNAUDITED)
On May 20, 1997, the Company purchased all of the outstanding capital stock of
BEC. The purchase price was approximately $10,640,000. BEC's assets consist of
working interests in fourteen oil and gas wells located in the Big Escambia
Creek Field in Escambia County, Alabama. The acquisition was financed with a
$10,600,000 advance under the Revolver Note. In addition, the Company acquired
other interests in oil and gas properties, including a 10% interest in a
concession in the Santa Elena Peninsula in Ecuador for approximately $2,500,000
and 22.68% working interest in the Albert Philyaw Unit 8-1 #1 well located in
the Big Excambia Creek Field in Escambia County, Alabama, for approximately
$3,300,000. The acquisition of the interests were financed through a
combination of cash flow from operations and advances under the Revolver Note.
These transactions will be accounted for under the purchase method of
accounting.
NOTE 10 QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data of the Company are presented below for the
years ended December 31, 1996 and 1995:
<TABLE>
<CAPTION>
FULLY
INCOME PRIMARY DILUTED
(LOSS) NET INCOME INCOME
1996 FROM INCOME (LOSS) (LOSS)
QUARTER REVENUES OPERATIONS (LOSS) PER SHARE PER SHARE
- ------- -------------- ------------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
March 31 $ 3,010,000 $ 1,006,000 $ 825,000 $ .13 $ .12
June 30 2,819,000 1,386,000 620,000 .09 .09
September 30 3,031,000 1,051,000 627,000 .09 .08
December 31 3,373,000 626,000 362,000 .05 .05
-------------- ------------- ------------- ------------ ----------
$ 12,233,000 $ 4,069,000 $ 2,434,000 $ .34 $ .33
============== ============= ============= ============ ==========
1995
QUARTER
March 31 $ 441,000 $ (132,000) $ (101,000) $ (.02) $ (.02)
June 30 656,000 (40,000) (9,000) (.00) (.00)
September 30 590,000 61,000 92,000 .01 .01
December 31 527,000 (163,000) (119,000) (.02) (.02)
-------------- ------------- ------------- ------------ ----------
$ 2,214,000 $ (274,000) $ (137,000) $ (.02) $ (.02)
============== ============= ============= ============ ==========
</TABLE>
D-32
<PAGE> 182
SOUTHERN MINERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE 11 RETIREMENT BENEFITS
The Company terminated its 401(k) Retirement Plan in 1995, and adopted a
Simplified Employee Pension Plan ("SEP"). The SEP allows employees to defer
part of their salary. Employer contributions are optional, and the Company will
determine annually whether it will contribute and at what level. The maximum
amount that can be contributed annually per SEP plan participant from a
combination of salary deferrals plus Company optional contributions is $22,500.
In 1996, the Company's contribution, totaling $22,554, was 50% of the amount
contributed by each of the participants in the plan.
Prior to October 1, 1995, the Company had a 401(k) retirement plan covering
all of its eligible employees. Under the 401(k) plan, subject to certain plan
limitations and certain provisions of the Internal Revenue Code, plan
participants could contribute up to 15% of their pre-tax compensation. For the
years ended December 31, 1994 and 1995, the Company contributed a matching
contribution limited to 5% of each plan participant's compensation, except an
additional qualified non-elective contribution of 3% of participant's
compensation was made for non-key employees. The Company's contributions
amounted to $5,000 and $16,000 in 1995 and 1994, respectively.
NOTE 12 GEOGRAPHIC DATA
The Company is an independent oil and gas company engaged in the acquisition,
development and exploration of oil and natural gas properties. All earnings
before January 1, 1996 were domestic earnings. Information about the Company's
operations by geographic area for the year ended December 31, 1996 is as
follows (in thousands):
<TABLE>
<CAPTION>
U. S. CANADA TOTAL
------------- ------------ --------------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
Oil & Gas Sales $ 8,136 $ 3,644 $ 11,780
Gains on sales of properties and other assets 424 29 453
------------- ------------- --------------
Total Revenue 8,560 3,673 12,233
Expense:
Production 1,880 862 2,742
Exploration 821 44 865
Depreciation, depletion and amortization 1,896 979 2,875
General & administrative 802 880 1,682
------------- ------------- --------------
5,399 2,765 8,164
------------- ------------- --------------
Interest & other income 99 187 286
Interest expense (1,242) 0 (1,242)
-------------- ------------- ---------------
Income before income taxes 2,018 1,095 3,113
Income taxes 319 360 679
------------- ------------- --------------
Net income $ 1,699 $ 735 $ 2,434
============= ============= ==============
IDENTIFIABLE ASSETS AS OF DECEMBER 31, 1996 $ 17,646 $ 6,269 $ 23,915
Corporate assets-cash and cash equivalents 471
--------------
Total assets $ 24,386
==============
IDENTIFIABLE ASSETS AS OF DECEMBER 31, 1995 $ 14,878 $ 6,227 $ 21,105
Corporate assets-cash and cash equivalents 562
--------------
Total assets $ 21,667
==============
</TABLE>
D-33
<PAGE> 183
SOUTHERN MINERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE 13 OIL AND GAS PRODUCING ACTIVITIES
The Company's capitalized costs of all oil and gas properties and related
allowances for depreciation and depletion are as follows at December 31: (in
thousands)
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
Proved properties $ 24,888 $ 20,530
Unproven properties 525 15
Less accumulated depreciation,
depletion and amortization (5,072) (2,758)
----------- ----------
Total $ 20,341 $ 17,787
=========== ==========
</TABLE>
The Company's share of oil and gas revenues produced from its royalty interests
was $979,000, $169,000 and $170,000 for the years ended December 31, 1996,
1995, and 1994, respectively.
Costs incurred in oil and gas property acquisition, exploration and development
activities were as follows (in thousands):
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996 UNITED STATES CANADA TOTAL
------------- ------ -----
<S> <C> <C> <C>
Property acquisition costs
Proved $ 4,595 $ --- $ 4,595
Unproved --- --- ---
Exploration costs 373 --- 373
Development cost 426 642 1,068
------------ ------------ -----------
Total costs incurred 5,394 642 6,036
============ ============ ===========
AS OF DECEMBER 31, 1995
Property acquisition costs
Proved 17,785 --- 17,785
Unproved 876 --- 876
Exploration costs 214 --- 214
Development cost 248 --- 248
------------ ------------ -----------
Total costs incurred 19,123 --- 19,123
============ ============ ===========
AS OF DECEMBER 31, 1994
Property acquisition costs
Proved --- --- ---
Unproved 225 --- 225
Exploration costs 657 --- 657
Development cost 225 --- 225
------------ ------------ -----------
Total costs incurred $ 1,107 $ --- $ 1,107
============ ============ ===========
</TABLE>
RESERVE QUANTITY INFORMATION (unaudited) -
The following two tables reflect the estimated proved reserves of the Company.
The oil and gas reserves are principally located onshore in the continental
United States and Canada. The information is provided by the Company and
audited by independent petroleum engineering firms Netherland, Sewell and
McDaniel & Associates for the United States and Canadian reserves,
respectively.
D-34
<PAGE> 184
SOUTHERN MINERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
<TABLE>
<CAPTION>
U. S. CANADA TOTAL
---------------------------- --------------------------- -------------------------
OIL GAS OIL GAS OIL GAS
PROVED RESERVES (BBLS) (MCF) (BBLS) (MCF) (BBLS) (MCF)
--------------- ------------- ------------ ------------- ------------ ------------ ---------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1993 474,486 1,238,857 --- --- 474,486 1,238,857
Extensions, discoveries and additions 45,834 245,190 --- --- 45,834 245,190
Revisions of previous estimates (213,258) (397,443) --- --- (213,258) (397,443)
Production (78,866) (300,544) --- --- (78,866) (300,544)
------------ ----------- ----------- ------------ ---------- -----------
BALANCE, DECEMBER 31, 1994 228,196 786,060 --- --- 228,196 786,060
Extensions, discoveries and additions 66 8,449 --- --- 66 8,449
Revisions of previous estimates (24,715) (145,903) --- --- (24,715) (145,903)
Purchases of minerals in place 568,702 20,400,151 868,495 5,786,239 1,437,197 26,186,390
Production (84,848) (404,319) --- --- (84,848) (404,319)
------------ ----------- ----------- ----------- ---------- -----------
BALANCE, DECEMBER 31, 1995 687,401 20,644,438 868,495 5,786,239 1,555,896 26,430,677
Extensions, discoveries and additions 6,081 479,336 31,351 1,506,458 37,432 1,985,794
Revisions of previous estimates 33,975 (519,051) (35,593) 528,330 (1,618) 9,279
Purchase of minerals in place 109,252 4,590,014 --- --- 109,252 4,590,014
Production (120,855) (2,396,379) (112,563) (961,527) (233,418) (3,357,906)
------------ ----------- ---------- ----------- ---------- -----------
BALANCE, DECEMBER 31, 1996 715,854 22,798,358 751,690 6,859,500 1,467,544 29,657,858
============ =========== =========== =========== ========= ===========
PROVED DEVELOPED RESERVES
Balance, December 31, 1994 228,196 786,060 --- --- 228,196 786,060
Balance, December 31, 1995 661,852 20,446,505 868,495 5,786,239 1,530,347 26,232,744
Balance, December 31, 1996 608,705 19,361,667 751,690 6,859,500 1,360,395 26,221,167
</TABLE>
The revisions in the Company's estimated reserves in 1994 were primarily the
result of downward adjustments to the Company's oil and gas properties in the
Hub, Bandera, Stateline and Cascade Deep fields. Production from these fields
was substantially below those projected by an independent petroleum engineering
firm, resulting in subsequent downward adjustments.
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS (UNAUDITED)-
The information that follows has been developed by the Company pursuant to
procedures prescribed by Statement No. 69 of the Financial Accounting Standards
Board and utilizes reserve data estimated by Netherland, Sewell and McDaniel &
Associates, independent petroleum engineering firms and by the Company. The
information may be useful for certain comparison purposes, but should not be
solely relied upon in evaluating the Company or its performance. Moreover, the
projections should not be construed as realistic estimates of future cash
flows, nor should the standardized measure be viewed as representing current
value.
The future cash flows are based on sales prices, costs, and statutory income
tax rates in existence at the dates of the projections. Since future
projections are inherently imprecise, material revisions to reserve estimates
may occur in the future. Further, production of the oil and gas reserves may
not occur in the periods assumed, and actual prices realized and actual costs
incurred are expected to vary from those used. Management does not rely upon
the information that follows in making investment and operating decisions;
rather, those decisions are based upon a wide range of factors, including
estimates of probable reserves, proved reserves, and price and cost assumptions
different from those reflected herein.
The following table sets forth the standardized measure of discounted future
net cash flows from projected production of the Company's proved oil and gas
reserves as of December 31 (all Company reserves were located in the United
States prior to 1995): (in thousands)
D-35
<PAGE> 185
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996 U.S. CANADA TOTAL
--------- ---------- -------
<S> <C> <C> <C>
Future cash inflows $ 109,510 $ 29,283 $ 138,793
Future production and development costs (22,340) (10,569) (32,909)
Future income taxes (22,719) (4,869) (27,588)
--------- --------- ---------
Future net cash flows 64,451 13,845 78,296
10% Annual discount (24,842) (4,119) (28,961)
--------- --------- ---------
Standardized measure of discounted
future net cash flows 39,609 9,726 49,335
========= ========= =========
AT DECEMBER 31, 1995
Future cash inflows 53,075 21,063 74,138
Future production and development costs (12,827) (9,520) (22,347)
Future income taxes (9,165) (1,938) (11,103)
--------- --------- ---------
Future net cash flows 31,083 9,605 40,688
10% Annual discount (13,793) (2,295) (16,088)
--------- --------- ---------
Standardized measure of discounted
future net cash flows 17,290 7,310 24,600
========= ========= =========
AT DECEMBER 31, 1994
Future cash inflows 4,891 --- 4,891
Future production and development costs (1,412) --- (1,412)
Future income taxes (697) --- (697)
--------- --------- ---------
Future net cash flows 2,782 --- 2,782
10% Annual discount (448) --- (448)
--------- --------- ---------
Standardized measure of discounted
future net cash flows $ 2,334 $ --- $ 2,334
========= ========= =========
</TABLE>
The following are the principal sources of change in the standardized measure
of discounted future net cash flows: (in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Standardized measure -- Beginning of year $ 24,600 $ 2,334 $ 4,035
Oil and gas sales, net of production costs (9,038) (1,388) (1,199)
Sales of reserves in place (166) --- ---
Purchases of reserves in place 13,001 25,346 ---
Net changes in prices, net of production costs 21,735 (73) (78)
Extensions and discoveries 6,259 14 810
Revisions to previous quantity estimates (1,528) (390) (1,835)
Net change in income taxes (11,930) (2,311) ---
Accretion of discount 2,725 284 454
Changes in estimated future development costs (786) 230 27
Developmental costs incurred during the period
that reduced future development costs 480 --- ---
Changes in production rates and other 3,983 554 120
--------- --------- ---------
Standardized measure -- end of year $ 49,335 $ 24,600 $ 2,334
========= ========= =========
</TABLE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Described in the Company's Form 8-K dated April 10, 1997.
D-36
<PAGE> 186
PART III
ITEMS 9 THROUGH 12 of this Part III are omitted since the Company filed with
the Securities and Exchange Commission within 120 days after the close of its
fiscal year ended December 31, 1996 a definitive proxy statement pursuant to
Regulation 14A under the Securities Exchange Act of 1934 which involves the
election of directors. Items 9 through 12 are hereby incorporated by reference
herein from such proxy statement.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
2.1 Exchange Agreement by and among Diverse Production
Co., The Shareholders of Diverse Production Co., and
Southern Mineral Corporation dated March 2, 1995
(incorporated by reference to Exhibit (I) to the
Company's annual report on Form 10-K for year ended
December 31, 1994).
2.2 Purchase and Sale Agreement, dated as of October 31,
1995, by and among Stone & Webster, Incorporated,
Stone & Webster Oil Company, Inc. and Southern
Mineral Corporation (incorporated by reference to
Exhibit 2.1 to Form 8-K of Registrant dated October
31, 1995).
2.3 Purchase and Sale Agreement and Assignment of
Partnership Interest, dated August 30, 1996 by and
between Torch Energy Finance Fund Limited Partnership
I and Southern Mineral Corporation (incorporated by
reference to Exhibit 2.1 to Form 8-K of the Company
dated August 30, 1996).
2.4 Agreement Regarding Dissolution of Partnerships,
dated August 30, 1996, between Southern Mineral
Corporation and Diasu Oil & Gas Co., (incorporated by
reference to Exhibit 2.2 to Form 8-K of the Company
dated August 30, 1996).
3.1 Amended and Restated Articles of Incorporation of the
Company, as amended.(incorporated herein by reference
to Exhibit 3.1 to Form 8-K of the Company dated May
17, 1996)
3.2 Amended and Restated Bylaws of the Company, as
amended (incorporated herein by reference to Exhibit
(a)(3)(b) of Item 14, Part IV of the Company's Annual
Report on Form 10-K filed for the year ended December
31, 1989).
10.1 Stock Option Agreement made as of December 31, 1994
between Southern Mineral Corporation and Steven H.
Mikel (incorporated by reference to Exhibit (h) to
the Company's annual report on Form 10-K for year
ended December 31, 1994).
10.2 Southern Mineral Corporation 1995 Non-Employee
Director Compensation Plan (incorporated by reference
to Exhibit (k) to annual report on Form 10-K dated
December 31, 1994).
10.3 Credit Agreement, dated December 20, 1995, between
Southern Mineral Corporation, SMC Production Co., San
Salvador Development Company, Inc., Venture
Resources, Inc., Venture Pipeline Company, VenGas
Pipeline Company, Spruce Hills Production Company,
Inc., and Compass Bank-Houston for Reducing Revolver
Line of Credit of up to $25,000,000 (incorporated by
reference to Exhibit 10.1 to Form 8-K of Registrant
dated December 20, 1995).
D-37
<PAGE> 187
10.4 Promissory Note, dated December 20, 1995, in the
original principal amount of $25,000,000 made by
Southern Mineral Corporation, SMC Production Co., San
Salvador Development Company, Inc., Venture Resources,
Inc., Venture Pipeline Company, VenGas Pipeline
Company, Spruce Hills Production Company, Inc. in
favor of Compass Bank-Houston (incorporated by
reference to Exhibit 10.2 to Form 8-K of Registrant
dated December 20, 1995).
10.5 Credit Agreement, dated December 20, 1995, between
Southern Mineral Corporation, SMC Production Co., San
Salvador Development Company, Inc., Venture Resources,
Inc., Venture Pipeline Company, VenGas Pipeline
Company, Spruce Hills Production Company, Inc. and
Compass Bank-Houston for Term Loan of $3,500,000
(incorporated by reference to Exhibit 10.3 to Form 8-K
of Registrant dated December 20, 1995).
10.6 Promissory Note, dated December 20, 1995, in the
original principal amount of $3,500,000 made by
Southern Mineral Corporation, SMC Production Co., San
Salvador Development Company, Inc., Venture
Resources, Inc., Venture Pipeline Company, VenGas
Pipeline Company, Spruce Hills Production Company,
Inc. in favor of Compass Bank-Houston (incorporated
by reference to Exhibit 10.4 to Form 8-K of
Registrant dated December 20, 1995).
10.7 1996 Stock Option Plan (incorporated by reference to
to Exhibit 10.10 to Form 10KSB dated December 31,
1995).
10.8 1996 Employee Stock Purchase Plan (incorporated by
reference to Exhibit 10.11 to Form 10KSB dated
December 31, 1995).
10.9 Joint Venture Agreement, dated October 1, 1995,
between Southern Mineral Corporation and The
Links Group, Inc. (incorporated by reference to
Exhibit 10.12 to Form 10KSB dated December 31, 1995).
10.10 Option Agreement, dated January 5, 1996, between
Southern Mineral Corporation and Diasu Oil & Gas
Company, Inc. covering the exploration joint venture
(incorporated by reference to Exhibit 10.13 to Form
10KSB dated December 31, 1995).
10.11 Stock Option Agreement dated April 6, 1995, between
Southern Mineral Corporation and Robert R. Hillery
(incorporated by reference to Exhibit 10.14 to Form
10KSB dated December 31, 1995).
10.12 Subscription Agreement and Assumption of
Obligations, dated January 5, 1995, between Southern
Mineral Corporation and Gary L. Chitty, and Thomas J
McMinn (incorporated by reference to Exhibit 10.15
to Form 10KSB/A-1 dated December 31, 1995).
10.13 Amendment to Credit Agreement between Southern
Mineral Corporation et al and Compass Bank-Houston
dated August 30, 1996 (incorporated by reference to
Exhibit 10.1 to Form 8-K of the Company dated August
30, 1996).
10.14 Second Amendment to Credit Agreements between the
Company and Compass Bank dated December 17, 1996
(incorporated by reference to Exhibit 10.14 to Form
10-KSB dated December 31, 1996).
11.1 Computation of earnings per common and equivalent
share (filed herewith).
21.1 Subsidiaries of the Company
<TABLE>
<CAPTION>
Other Name Under Which Jurisdiction of
Name of Subsidiary Subsidiary Conducts Business Incorporation
- ------------------ ---------------------------- -------------------
<S> <C> <C>
SMC Production Co. None Texas
Spruce Hills Production Company, Inc. None Delaware
</TABLE>
D-38
<PAGE> 188
23.1 Consent of KPMG Peat Marwick LLP (filed herewith).
23.2 Consent of Grant Thornton LLP (filed herewith).
23.3 Consent of Netherland, Sewell & Associates, Inc.
(filed herewith)
23.4 Consent of McDaniel & Associates Consultants, Ltd.
(filed herewith)
27.1 Financial Data Schedule (filed herewith).
99.1 Application and Affidavit Pursuant to Rule 437 under
the Securities Act of 1933 regarding
impracticability of obtaining written consent of
Hedrick and Associates (filed herewith).
(b) Report on Form 8-K
Form 8-K of the Company dated December 23, 1996 reporting the
issuance and sale of 2,500,000 shares of common stock of the
Company.
D-39
<PAGE> 189
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
SOUTHERN MINERAL CORPORATION
BY: /s/ STEVEN H. MIKEL
---------------------------------------
Steven H. Mikel
President and Chief Executive Officer
Date: December 5, 1997
In accordance with the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
Director
- --------------------------------------------
B. Travis Basham
/s/ THOMAS R. FULLER Director December 5, 1997
- --------------------------------------------
Thomas R. Fuller
Director
- --------------------------------------------
Robert R. Hillery
/s/ E. RALPH HINES, JR. Director December 5, 1997
- --------------------------------------------
E. Ralph Hines, Jr.
/s/ HOWELL H. HOWARD Director and Chairman December 5, 1997
- -------------------------------------------- of the Board of Directors
Howell H. Howard
/s/ STEVEN H. MIKEL Director, President and Chief December 5, 1997
- -------------------------------------------- Executive Officer
Steven H. Mikel
/s/ JAMES E. NIELSON Director December 5, 1997
- --------------------------------------------
James E. Nielson
/s/ DONALD H. WIESE, JR. Director December 5, 1997
- --------------------------------------------
Donald H. Wiese, Jr.
Director
- --------------------------------------------
Spencer L. Youngblood
/s/ JAMES H. PRICE Vice President-Finance December 5, 1997
- -------------------------------------------- (principal financial and
James H. Price accounting officer)
</TABLE>
D-40
<PAGE> 190
APPENDIX E
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ to ______________
COMMISSION FILE NUMBER: 0-8043
SOUTHERN MINERAL CORPORATION
(Exact Name of Small Business Issuer as Specified In Its Charter)
NEVADA 36-2068676
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
500 DALLAS, SUITE 2800 77002-4708
HOUSTON, TEXAS (Zip Code)
(Address of Principal Executive Offices)
Issuer's Telephone Number, Including Area Code: (713) 658-9444
Check whether the issuer: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or such shorter period that the issuer was required to
file such reports) and (2) has been subject to such filing requirements for the
past 90 days.
Yes X No
------ ------
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practical date: As of November 7, 1997,
there were 9,120,741 shares of the Issuer's common stock outstanding.
Transitional Small Business Disclosure Format (check one):
Yes No X
------ ------
================================================================================
E-1
<PAGE> 191
SOUTHERN MINERAL CORPORATION
TABLE OF CONTENTS
================================================================================
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED FINANCIAL STATEMENTS:
<TABLE>
<S> <C>
Condensed Consolidated Balance Sheet as of September 30, 1997 and December 31,1996............E-3
Condensed Consolidated Statement of Operations for the
three and nine months ended September 30, 1997 and 1996...................................E-4
Condensed Consolidated Statement of Cash Flows for the
nine months ended September 30, 1997 and 1996...........................................E-5
Notes to Condensed Consolidated Financial Statements..........................................E-6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Financial Condition and Results of Operations.................................................E-8
Liquidity and Capital Resources...............................................................E-10
PART II. OTHER INFORMATION..........................................................................E-12
Item 6. Exhibits and Reports on Form 8-K...........................................................E-12
</TABLE>
E-2
<PAGE> 192
SOUTHERN MINERAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(thousands omitted)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 1997 1996
------------- ------------
(unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash $ 551 $ 471
Receivables and other 3,546 2,447
-------- --------
Total current assets 4,097 2,918
PROPERTY AND EQUIPMENT, AT COST USING SUCCESSFUL
EFFORTS METHOD FOR OIL AND GAS ACTIVITIES
Property, plant and equipment 44,428 25,831
Accumulated depreciation, depletion and amortization (7,650) (5,232)
-------- --------
36,778 20,599
PROPERTIES HELD FOR SALE AND OTHER 3,142 869
-------- --------
Total assets $ 44,017 $ 24,386
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 1,712 $ 683
Notes payable 512 0
-------- --------
Total current liabilities 2,224 683
Long-term debt 20,700 3,900
DEFERRED INCOME TAXES 1,316 1,169
STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share; authorized 20,000,000
shares at September 30, 1997, and December 31, 1996, respectively;
issued 9,110,413 and 9,088,519 shares at September 30, 1997 and
December 31, 1996 91 91
Additional paid-in capital 14,031 14,030
Retained earnings 5,707 4,565
-------- --------
19,829 18,686
Less: Treasury stock (52) (52)
-------- --------
Total stockholders' equity 19,777 18,634
-------- --------
Total liabilities and stockholders' equity $ 44,017 $ 24,386
======== ========
</TABLE>
The accompanying notes are an integral part of this statement.
E-3
<PAGE> 193
SOUTHERN MINERAL CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(thousands omitted, except share and per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ------------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
REVENUE
Oil and gas $ 3,533 $ 2,997 $ 10,253 $ 8,430
Gain (loss) on sale (41) 25 503 421
------------ ------------ ------------ ------------
3,492 3,022 10,756 8,851
EXPENSES
Production 999 701 2,610 2,051
Exploration 1,302 103 1,517 186
Depreciation, depletion and amortization 1,020 756 2,512 1,937
General and administrative 383 420 1,518 1,243
------------ ------------ ------------ ------------
3,704 1,980 8,157 5,417
------------ ------------ ------------ ------------
Income (loss) from operations (212) 1,042 2,599 3,434
Other income, expenses and deductions
Interest and other income 80 65 135 258
Interest and debt expense (545) (295) (785) (914)
------------ ------------ ------------ ------------
Income (loss) before income taxes (677) 812 1,949 2,778
Provision (benefit) for federal and state
Current provision 53 (79) 391 274
Deferred provision (461) 264 165 432
------------ ------------ ------------ ------------
(408) 185 556 706
------------ ------------ ------------ ------------
Net income (loss) $ (269) $ 627 $ 1,393 $ 2,072
============ ============ ============ ============
Primary net income (loss) per share $ (0.03) $ 0.09 $ 0.14 $ 0.30
Fully diluted net income (loss) per share $ (0.03) $ 0.09 $ 0.14 $ 0.29
Primary weighted average shares outstanding 10,097,992 7,325,308 10,107,903 7,005,999
Fully diluted weighted average shares outstanding 10,254,128 7,452,471 10,144,789 7,145,648
</TABLE>
The accompanying notes are an integral part of this
E-4
<PAGE> 194
SOUTHERN MINERAL CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(thousands omitted)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1997 1996
---------- -----------
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,393 $ 2,072
Adjustments to net income, net of the effects
of disposition in 1996 3,420 1,618
-------- --------
Net cash provided by operating activities 4,813 3,690
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of properties 1,047 184
Acquisition of partnership interest, net of cash
received Capital expenditures 0 (2,112)
Net cash received on disposition of assets (21,615) (2,874)
Net cash used in investing activities 0 1,143
-------- --------
(20,568) (3,659)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments of long-term debt (6,682) (3,815)
Proceeds from long-term debt 22,600 3,500
Fees paid to facilitate equity offering (68) 0
-------- --------
Net cash provided by (used in) financing activities 15,850 (315)
-------- --------
Effect of exchange rate changes on cash (15) 0
-------- --------
Net increase (decrease) in cash 80 (284)
Cash at beginning of period 471 562
-------- --------
Cash at end of period $ 551 $ 278
======== ========
NON-CASH INVESTING AND FINANCING ACTIVITIES
Issuance of 175,000 shares of common stock for
property acquisitions $ 0 $ 241
Change in property and equipment additions 1,394 0
Assumption of debt with property acquisitions $ 1,394 $ 0
Directors fees 69 0
Cash paid for interest $ 759 $ 850
Cash paid for taxes $ 652 $ 381
</TABLE>
The accompanying notes are an integral part of this statement.
E-5
<PAGE> 195
SOUTHERN MINERAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The condensed consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, though the Company believes that the
disclosures are adequate to make the information presented not misleading.
These condensed consolidated financial statements should be read in conjunction
with the financial statements and the notes thereto included in the Company's
latest Annual Report to the Securities and Exchange Commission on Form 10-KSB
for the year ended December 31, 1996. In the opinion of the Company, all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the financial position as of September 30, 1997, and December
31, 1996, the results of operations for the three and nine months ended
September 30, 1997 and 1996 and statements of cash flows for the nine months
then ended have been included.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NOTE 2 - ACQUISITIONS
On May 20, 1997, the Company purchased from Mario Garcia and Dolores E. Garcia,
the outstanding capital stock of BEC Energy, Inc. ("BEC"). The purchase price
was $10,640,000. BEC's assets consist of working interests in fourteen oil and
gas wells located in the Big Escambia Creek Field, Escambia County, Alabama.
The Company financed the acquisition with a $10,600,000 advance under the
Company's credit facility with Compass Bank-Houston.
On August 30, 1996, the Company acquired for $3,000,000 the limited partnership
interest in SMC Development, L.P., which then was dissolved. The Company
previously owned a 7% general partnership interest in the partnership. The
partnership assets consisted of proved undeveloped oil and gas properties, with
most of the value related to the proved undeveloped properties that were
drilled in 1996. The acquisition was financed through an increase in the
Company's Revolving Bank Note of $1,600,000, and from internally generated
working capital.
In addition, during 1997 the Company has acquired other interests, including a
10% interest in a concession in the Santa Elena Peninsula in Ecuador for
approximately $2,400,000, none of which would have had a material effect on the
historical results of the Company.
E-6
<PAGE> 196
The following summarizes pro forma (unaudited) information and assumes the
acquisitions of BEC and SMD had occurred on January 1, 1996, and assumes the
acquisition of BEC had occurred on January 1, 1997.
<TABLE>
<CAPTION>
Nine Months Ended September 30,
--------------------------------------
(000's omitted, except per share data)
1997 1996
------- ---------
<S> <C> <C>
Revenues $11,518 $10,012
Net Income 1,103 1,972
Net Income per share $ .11 $ .28
</TABLE>
These pro forma results are not necessarily indicative of those that would have
occurred had the acquisitions taken place at the beginning of 1996 and 1997.
The above amounts reflect adjustments for interest on notes payable issued as
part of the purchase price and depreciation on revalued property.
NOTE 3 - NOTE PAYABLE
The Company acquired 3-D seismic in January of 1997 for $1,394,000 payable in
14 monthly payments commencing January 31, 1997 of $105,000 per month, with an
imputed interest rate of 10% per annum. The note balance at September 30, 1997,
is $512,000 and the purchase is included in properties held for sale as of
September 30, 1997.
NOTE 4 - SUBSEQUENT EVENTS
On October 7, 1997, the Company completed the placement of $41,400,000 of
6.875% convertible subordinated debentures due October 1, 2007. The debentures
are convertible at any time prior to maturity into 121.07 shares of common
stock at a price of $8.26 per share. Net proceeds of approximately $39,000,000
were used to retire bank debt of $20,700,000 and to fund future capital
spending.
E-7
<PAGE> 197
SOUTHERN MINERAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE QUARTER ENDED SEPTEMBER 30, 1997
AS COMPARED TO THE QUARTER ENDED SEPTEMBER 30, 1996
Oil and gas revenues for the quarter ended September 30,1997, are $3,533,000,
compared to oil and gas revenues for the same period in 1996 of $2,997,000. The
increase in revenues reflects higher production volumes of both natural gas and
crude oil, which are partially offset by lower commodity prices for both
natural gas and crude oil. Higher production volumes are primarily due to the
acquisition of BEC Energy, Inc., acquired on May 20, 1997, the acquisition of
a working interest in the A. Philyaw 8-1 #1 on April 7, 1997, and the
acquisition on June 13, 1997 of a 10% interest in the Santa Elena Concession
located in the Santa Elena Peninsula in Ecuador.
Natural gas production for the three months ended September 30, 1997 is 949
Mmcf, a 7% increase as compared to production for the same period in 1996 of
884 Mmcf. The Company's crude oil production for the three months ended
September 30, 1997 increased 60% to 97,997 barrels as compared to 61,122
barrels for the same period in 1996.
The average natural gas price in 1997 decreased 4% to $1.89 per Mcf compared to
$1.97 per Mcf in 1996. Crude oil prices decreased 10% in 1997 to $16.60 per
barrel, compared to $18.51 per barrel in 1996.
Production costs, including production and ad valorem taxes, increased in 1997
to $999,000, up 43% from $701,000 in 1996, due partly to the above mentioned
acquisitions. On a cost per Mcfe basis, production costs for 1997 increased to
$.65 per Mcfe, or 16% from $0.56 per Mcfe in 1996.
General and administrative expenses decreased to $383,000 in 1997, down 9% from
$420,000 in 1996. On a cost per Mcfe basis, general and administrative expenses
declined to $0.25 per Mcfe from $0.34 Mcfe in 1996.
Exploration, dry hole and lease impairment expenses increased in the quarter
ended September 30, 1997 to $1,302,000, compared to $103,000 in the same period
of 1996, which was due to the geological and geophysical expenses of
approximately $655,000 primarily associated with the Matthews Prospect seismic
shoot and the drilling of three dry holes drilled costing approximately
$647,000 in Terrebonne Parish, Louisiana, Orange County, and LaVaca County,
Texas. Since the Company uses the successful efforts method of accounting,
exploration expenses may vary greatly from year to year based upon the level of
exploration activity during the year.
Depreciation, depletion and amortization ("DD&A") expense for 1997 increased
to $1,020,000, up 35% from $756,000 in 1996, which was due primarily to the
above mentioned acquisitions. The Company computes depreciation and depletion
on each producing property on a unit-of-production method. Since this method
employs estimates of remaining reserves, depreciation and depletion expenses
may vary from period to period because of revisions to reserve estimates,
production rates and other factors. DD&A expenses increased in 1997 to $.66
per Mcfe, up 10% from $0.60 per Mcfe in 1996.
Interest and debt expense in the quarter ended September 30, 1997 was $545,000,
compared to $295,000 in 1996. Interest expense increased as a result of an
increase in the outstanding bank debt, which was due primarily to the financing
of the above mentioned acquisitions. During the 1997 third quarter, bank debt
increased to $20,700,000.
Tax (benefit) expense in 1997 and 1996 was( $408,000) and $185,000,
respectively, with the decrease related to a loss in the 1997 period. The tax
rate in 1996 was reduced by a net operating loss carryforward that was
available in the 1996 quarter, which was not available in the second quarter of
1997.
E-8
<PAGE> 198
The Company reported a loss in the quarter ended September 30, 1997, of
$269,000, or $(.03) per share, compared to earnings of $627,000, or $0.09 per
share, in the same period in 1996. The number of shares outstanding increased
by 2,500,000 in December of 1996 as a result of a private placement of common
stock.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
AS COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 1996
Oil and gas revenues for the nine months ended September 30, 1997, are
$10,253,000, up 22% compared to oil and gas revenues for the same period in
1996 of $8,430,000. The increase in revenues reflects higher production volumes
of both natural gas and crude oil along with higher commodity prices for both
natural gas and crude oil. Higher production volumes are primarily due to the
acquisition of BEC Energy, Inc., acquired on May 20, 1997, and the acquisition
of a working interest in the A. Philyaw 8-1 #1 on April 7, 1997. The Company
also acquired on June 13, 1997 a 10% interest in the Santa Elena Concession
located in the Santa Elena Peninsula in Ecuador.
Natural gas production in the first nine months of 1997 is 2,750 Mmcf, a 13%
increase compared to 1996 production of 2,427 Mmcf. The Company's crude oil
production in the first nine months of 1997 increased 25% to 220,598 barrels
compared to 176,760 barrels in 1996.
The average natural gas price in the first nine months of 1997 increased 11% to
$2.12 per Mcf compared to $1.91 per Mcf in the same period of 1996. Crude oil
prices increased 3% in the first nine months of 1997 to $18.58 compared to
$18.07 per barrel in the same period of 1996.
As part of the Company's on-going operations, the Company may sell
non-strategic assets or oil and gas properties. The proceeds would be used to
pay down debt or redeploy capital to opportunities that may have a higher rate
of return. These activities resulted in gains on sales of assets of $503,000
in the first nine months of 1997, and $421,000 in the same period of 1996. The
gain on sale in 1996 was primarily the result of the sale of Venture Resources,
Inc. for $1,143,000, which was a non-core asset acquired as part of the
Company's acquisition of certain oil and gas assets from Stone & Webster, Inc.
in December 1995. The gain on sale in 1997 was primarily the result of the
sales of an oil and gas prospect located in the state waters offshore Texas and
a working interest in a oil and gas property in Canada, which the Company has
sold for approximately $360,000.
Production costs, including production and ad valorem taxes, increased in the
first nine months of 1997 to $2,610,000, up 27% from $2,051,000 in the same
period of 1996, primarily due to the above mentioned acquisitions. On a cost
per Mcfe basis, production costs for 1997 increased to $0.64 per Mcfe, or 8%,
from $0.59 per Mcfe in 1996.
General and administrative expenses increased as a result of increased staffing
to facilitate future growth to $1,518,000 in the first nine months of 1997, up
22% from $1,243,000 in 1996. On a cost per Mcfe basis, general and
administrative expenses increased in 1997 to $0.37 per Mcfe, or 3% from $0.36
Mcfe in 1996.
Exploration, dry hole and lease impairment expenses increased in the first nine
months of 1997 to $1,517,000, compared to $186,000 in the same period of 1996,
which was due to the geological and geophysical expenses of approximately
$655,000 primarily associated with the Matthews Prospect seismic shoot and the
drilling of four dry holes drilled costing approximately $862,000 in Terrebonne
Parish and Jefferson Parish, Louisiana and Orange County and LaVaca County,
Texas. Since the Company uses the successful efforts method of accounting,
exploration expenses may vary greatly from year to year based upon the level of
exploration activity during the year.
DD&A expense for the first nine months of 1997 increased to $2,512,000, up 30%
from $1,937,000 in 1996, primarily due to the above mentioned acquisitions. The
Company computes depreciation and depletion on each producing property on a
unit-of-production method. Since this method employs estimates of remaining
reserves, depreciation and depletion expenses may vary from period to period
because of revisions to reserve estimates, production rates and other factors.
DD&A expenses increased in the first nine months of 1997 to $0.62 per Mcfe, up
11% from $0.56 per Mcfe in 1996.
E-9
<PAGE> 199
Interest and debt expense decreased in the first nine months of 1997 to
$785,000, down 14% compared to $914,000 in 1996. The decline resulted from a
reduction in bank debt, which was reduced from the net proceeds of approximately
$10,600,000 from the Company's private placement of 2,500,000 shares of common
stock in December 1996. Bank debt increased in the first nine months of 1997
primarily to fund the above mentioned acquisitions.
Tax expense in 1997 and 1996 was $556,000 and $706,000, respectively, with the
decrease related to lower 1997 net income before taxes and a net operating loss
carryforward that was available in the 1996 nine month period, which was not
available in the nine months ended September 30,1997.
The Company reported earnings in 1997 of $1,393,000, or $0.14 per share,
compared to earnings of $2,072,000, or $0.30 per share in 1996. The number of
shares outstanding increased by 2,500,000 in December of 1996 as a result of
the private placement of common stock.
LIQUIDITY AND CAPITAL RESOURCES
FOR THE PERIOD ENDED SEPTEMBER 30, 1997
The Company has historically funded its operations, acquisitions, exploration
and development expenditures from cash flows from operating activities, bank
borrowings, issuance of common stock and sales of non-strategic assets and oil
and gas properties. Total available liquidity at September 30, 1997, and 1996,
was $5,251,000 and $1,078,000, respectively.
The Company's cash flows provided by operating activities for the nine months
ended September 30, 1997 and 1996 were $4,813,000 and $3,690,000, respectively.
Additional cash of $1,047,000 and $184,000 was realized in the first nine
months of 1997 and 1996, respectively, from property sales of non-strategic
assets.
Effective June 30, 1997, the Company amended its bank credit agreement
increasing its borrowing base from $16,200,000 to $26,000,000. As of September
30, 1997, the borrowing base under the credit facility is $25,400,000, with
outstanding borrowings thereunder of $20,700,000, leaving $4,700,000 available
to borrow.
The credit facility borrowing base reduces $300,000 per month commencing August
1, 1997, and is reviewed by the bank semi-annually until maturity on June 1,
2000. The obligations under the credit facility are secured by substantially
all of the assets of the Company and its subsidiaries. The credit facility
contains certain covenants relating to the financial condition of the Company.
The credit facility bears interest at the Company's option, of either prime
rate floating, or at the LIBOR rate plus two and one-quarter percent.
Capital spending in the first nine months of 1997 totaled $21,615,000, and was
primarily funded from bank debt and cash flow generated from operations. The
Company will evaluate its level of capital spending throughout the year based
upon drilling results, commodity prices, cash flows from operations and
property acquisitions.
On October 7, 1997, the Company completed the placement of $41,400,000 of
6.875% convertible subordinated debentures due October 1, 2007. The debentures
are convertible at any time prior to maturity into 121.07 shares of common
stock at a price of $8.26 per share. Net proceeds of approximately $39,000,000
were used to retire bank debt of $20,700,000.
The Company believes that it will have sufficient capital available from the
credit facility described above, together with the proceeds from the debenture
offering, and cash flows from operating activities, to fund its 1997 capital
expenditure program, and to meet the Company's other obligations. The Company
also believes that the funds available from such sources will enable the
Company to continue to pursue strategic corporate and property acquisitions.
The Company's debt to total capitalization ratio is 51% at September 30, 1997,
as compared to 56% at September 30, 1996. The Company's interest coverage
ratio (calculated as net income plus depreciation, depletion and amortization,
deferred income taxes, and exploration expenses divided by cash expenditures
for interest) is 7 to 1 for the first nine months of 1997.
E-10
<PAGE> 200
The Company did not declare dividends in the nine months ended September 30,
1997, fiscal 1996, 1995 or 1994. It is likely that for the foreseeable future
funds available for dividends on common stock, if any, will be retained by the
Company to finance future growth.
CHANGE IN ACCOUNTING METHODS
Effective December 1997, the Company will be required to adopt Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). SFAS
128 introduces the concept of basic earnings per share, which represents net
income divided by the weighted average common shares outstanding -- without the
dilutive effects of common stock equivalents (options, warrants, etc.). Diluted
earnings per share, giving effect to common stock equivalents, will be reported
when SFAS 128 is adopted in the fourth quarter of 1997.
Effective December 1997, the Company will be required to adopt Statement of
Financial Accounting Standards No. 129, "Disclosure of Information about
Capital Structure" ("SFAS 129"). SFAS 129 requires that all entities disclose
in summary form within the financial statements the pertinent rights and
privileges of the various securities outstanding. An entity is to disclose
within the financial statements the number of shares issued upon conversion,
exercise, or satisfaction of required conditions during at least the most
recent annual fiscal period and any subsequent interim period presented. Other
special provisions apply to preferred and redeemable stock. The Company will
adopt SFAS 129 in the fourth quarter of 1997.
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS 130"), which establishes standards for reporting and display of
comprehensive income and its components. The components of comprehensive
income refer to revenues, expenses, gains and losses that are excluded from net
income under current accounting standards, including foreign currency
translation items, minimum pension liability adjustments and unrealized gains
and losses on certain investments in debt and equity securities. SFAS 130
requires that all items that are recognized under accounting standards as
components of comprehensive income be reported in a financial statement
displayed in equal prominence with other financial statements; the total of
other comprehensive income for a period is required to be transferred to a
component of equity that is separately displayed in a statement of financial
position at the end of an accounting period. SFAS 130 is effective for both
interim and annual periods beginning after December 15, 1997.
In June, 1997, the FASB issued Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). SFAS 131 establishes standards for the way public enterprises
are to report information about operating segments in annual financial
statements and requires the reporting of selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services, and
major customers. SFAS 131 is effective for periods beginning after December
15, 1997.
FORWARD-LOOKING STATEMENTS
The Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") contains "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended (the "Securities
Act"), and Section 21E of the Securities Exchange Act of 1937, as amended (the
"Exchange Act"). All statements other than statements of historical fact
included in MD&A, including statements regarding the Company's operating
strategy, plans, objectives and beliefs of management for future operations,
planned capital expenditures and acquisitions are forward-looking statements.
Although the Company believes that the assumptions upon which such
forward-looking statements are based are reasonable, it can give no assurance
that such assumptions will prove to be correct.
E-11
<PAGE> 201
PART II
OTHER INFORMATION
Items 1, 2, 3, 4, and 5 for which provision is made in the applicable
regulations of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable, and therefore have been omitted.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
11.1 Computation of earnings per common and equivalent
share (filed herewith)
27.1 Financial Data Schedule
(b) REPORT ON FORM 8-K:
None
E-12
<PAGE> 202
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
SOUTHERN MINERAL CORPORATION
Date: November 13, 1997 By /s/ James H. Price
-------------------------------------
James H Price
Vice President-Finance
E-13
<PAGE> 203
APPENDIX F
===============================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
[X]Annual report under Section 13 or 15(d) of the
Securities Exchange Act of 1934 (Fee required)
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1996
OR
[ ]Transition report under Section 13 or 15(d) of the
Securities Exchange Act of 1934 (No fee required)
For the transition period from ______ to _______
Commission file number 1-9933
AMERAC ENERGY CORPORATION
(Name of Small Business Issuer in Its Charter)
DELAWARE 75-2181442
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1201 LOUISIANA, SUITE 3350
HOUSTON, TEXAS 77002-5609
(Address of Principal Executive Offices) (Zip Code)
ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 308-5250
SECURITIES REGISTERED UNDER SECTION 12(B) OF THE EXCHANGE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
Common Stock (Par Value $.05 per share) American Stock Exchange
Common Stock (Par Value $.05 per share) Boston Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE EXCHANGE ACT:
None
Check whether the issuer: (1) has filed all reports required by Section 13
or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES X NO
--- ---
Check if there is no disclosure of delinquent filers pursuant to Item 405
of Regulation S-B contained in this form and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB: [X]
For the twelve-month period ended December 31, 1996, the issuers revenue
was $10,644,000.
As of March 20, 1997, the aggregate market value of the issuers Common
Stock held by non-affiliates was approximately $32,565,000.
The number of shares outstanding of the issuer's Common Stock as of March
22, 1997, was 3,885,588.
DOCUMENTS INCORPORATED BY REFERENCE
The issuers definitive proxy statement for the 1996 Annual Meeting of
Stockholders is incorporated by reference into Part III of the Form 10-KSB.
Transitional Small Business Disclosure Format (check one): YES NO X
--- ---
===============================================================================
F-1
<PAGE> 204
PART I
ITEM 1. DESCRIPTION OF BUSINESS
THE COMPANY
Amerac Energy Corporation (the "Company" or "Amerac") is engaged in the
acquisition, development and enhancement of and exploration for oil and gas in
the United States. While the Company was formed in 1969, it is only since mid
1994 that the Company has been focused on growth through acquisitions and
exploitation. Since that time, the Company has grown its asset base and market
capitalization substantially. Total proved reserves increased from 12.8 billion
cubic feet equivalent ("Bcfe") at December 31, 1995 to 30.1 Bcfe at December 31,
1996, an increase of 135%. Since the beginning of 1996, the Company has
increased its estimated undiscounted future net cash flows assuming unescalated
prices prevailing at the time from $14.1 million to $31.3 million at December
31, 1996, a 122% increase. The Company's finding and development cost for 1996
was $4.89 per barrel of oil equivalent ("BOE"). As of March 20, 1997, the market
value of the Company's common stock was approximately $33 million.
The Company's headquarters is in Houston, Texas. At December 31, 1996,
Amerac employed ten people.
ACQUISITIONS
During 1996, the Company spent $10.1 million in cash and issued 220,000
common shares in connection with five acquisitions of oil and gas properties
located primarily in Texas and Oklahoma. Those acquisitions, which included
interests in 174 producing wells, increased the Company's reserve base by nearly
21 Bcfe.
In 1995, the Company spent $4.3 million in cash in connection with three
acquisitions in Texas. The 1995 acquisitions included interests in ten producing
wells and added 7.4 Bcfe of reserves.
In 1994, Amerac acquired interests in four wells with reserves of 1.8 Bcfe
for $1.5 million.
(See Note 2 to the Consolidated Financial Statements.)
SIGNIFICANT PROPERTY
The Company's South Timbalier 198 offshore property accounted for
approximately 44% of the Company's gross revenues in 1996. In December 1996, the
property began to produce water. It is anticipated that the primary well on this
property, which at year-end was producing at a rate of 567 million cubic feet
("MMcf") a month (109 MMcf per month net to the Company's interest), is expected
to deplete in 1997. Should the second of the two wells on this property deplete,
and if no additional drilling takes place, the Company estimates that its share
of the cost of plugging the existing wells and abandoning the offshore platform
could be as much as $600,000. The Company will need to replace the revenue from
this property by acquisitions of producing properties in order to maintain its
revenues and earnings.
SIGNIFICANT OIL AND GAS PURCHASERS
Oil sales are made on a day-to-day basis or under short-term contracts at
approximately the current area posted price. The loss of any oil purchaser would
not be expected to have an adverse effect upon the Company's operations. The
following is a listing of significant oil purchasers during the three-year
period ended December 31, 1996, and the approximate percentage of oil
F-2
<PAGE> 205
revenue derived from each:
<TABLE>
<CAPTION>
CRUDE OIL PURCHASERS PERCENT
- -------------------- ------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Sun Refining & Marketing Company ................. 28 31 13
Transco Liquids Company .......................... 14 11 16
EOTT Energy Corporation .......................... 13 -- --
Koch Oil Company ................................ 10 -- 10
Union Pacific Fuels, Inc. ........................ 5 15 10
Marathon ......................................... -- 34 55
</TABLE>
A majority of the Company's natural gas is sold pursuant to short-term
contracts at prices that fluctuate at a premium or discount to the spot market.
Under the terms of the contracts, the gas purchasers may elect to purchase less
gas than the wells are able to produce, and the Company may be unable to sell
the excess production to other purchasers. Following is a listing of the
significant natural gas purchasers during the three-year period ended December
31, 1996, and the approximate percentage of natural gas revenues derived from
each:
<TABLE>
<CAPTION>
NATURAL GAS PURCHASERS PERCENT
- ---------------------- ---------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
MG Natural Gas Corporation...................... 27 18 --
Amoco Production Company........................ 22 -- --
Energy Source................................... 12 -- --
Transco Liquids Company......................... -- 39 77
</TABLE>
There are no other customers of the Company that individually accounted for
more than 10% of the Company's revenues during the three years ended December
31, 1996.
COMPETITION
The oil and gas acquisitions market is highly competitive and thus the
opportunities for high rates of return on investment are limited. The price paid
for in-place oil and gas reserves is highly dependent on forecast oil and gas
prices, which historically has been very volatile (see Price Volatility). Many
companies with which the Company competes possess resources far greater than
those of the Company.
The marketing of oil and gas is affected by a number of factors that are
beyond the control of the operators of the properties, the effect of which
cannot be accurately predicted. These factors include, among others, crude oil
imports, the availability of adequate pipeline and other transportation
facilities, the marketing of competitive fuels, and other matters affecting the
availability of a ready market, such as fluctuating supply and demand.
PRICE VOLATILITY
The revenues generated by the company are highly dependent upon the prices
of oil and natural gas. Approximately 55% of the Company's future gross revenues
attributable to its proved reserves as of December 31, 1996, are from natural
gas based on an average price of approximately $2.95
F-3
<PAGE> 206
per thousand cubic feet ("Mcf"), and the balance of such revenues are from oil
based on an average price of approximately $24.25 per barrel ("Bbl"). In the
past five years the Company's annual average sales price for natural gas has
ranged from a high of $2.29 per Mcf in 1996 to a low of $1.62 per Mcf in 1995,
and its annual average sales price for oil has ranged from a low of $14.52 per
Bbl in 1993 to a high of $21.12 per Bbl for 1996. Various factors beyond the
control of the Company will continue to affect oil and gas prices.
Pursuant to requirements of the Securities and Exchange Commission,
calculations of the Company's reserves and present value of future net cash
flows from proved reserves ("PV-10") are based upon prices prevailing at the end
of the year. Crude oil and natural gas prices at December 31, 1996 were
substantially higher than those realized on average by the Company over the past
five years. Also, prices at the end of the first quarter of 1997 are below those
at year-end 1996. For purposes of assessing the sensitivity of the Company's
PV-10 to changes in prices, the Company estimates that if the natural gas and
crude oil prices in its calculations were reduced by $.10 per Mcf and $1.00 per
Bbl, the PV-10 value would be reduced by approximately $0.5 million and $1.0
million, respectively. Such calculations assume that quantities of recoverable
reserves remain constant and therefore would not be accurate if prices decreased
to a level at which reserves would no longer be economically recoverable.
REGULATION
The Company's operations are affected in various degrees by political
developments, federal, and state laws and regulations. In particular, oil and
gas production operations and economics are affected by price controls, tax and
other laws relating to the petroleum industry, by changes in such laws and by
constantly changing administrative regulations and the interpretation and
application of such rules and regulations.
Environmental Laws. The Company's activities are subject to existing
federal and state laws and regulations governing environmental quality and
pollution control. Such laws and regulations may substantially increase the
costs of exploring for, developing or producing oil and gas and may prevent or
delay the commencement or continuation of a given operation. In the opinion of
the Company's management, its operations comply with all applicable
environmental laws and regulations, and the cost of such compliance has not been
material. Where the Company's properties are operated by other companies, the
Company relies on the operator to comply with environmental laws.
General. The Company's activities are subject to statutory provisions
regulating oil and gas drilling and production. Such statutes and regulations
require permits for drilling operations, drilling bonds and reports to be filed
concerning operations and production from oil and gas wells. Such statutes and
regulations may limit the rate at which oil and gas could otherwise be produced
from the Company's properties. Some jurisdictions have enacted statutes
prescribing ceiling prices for gas sold therein.
TAXATION
Certain provisions of the Internal Revenue Code of 1986 (the "Code"), as
amended, applicable to the petroleum industry affect the Company's oil and gas
operations. Current law permits the Company to deduct currently, rather than
capitalize, intangible drilling and development costs incurred or borne by it.
The Company, as an independent producer, is also entitled to a deduction for
percentage depletion with respect to the first 1,000 barrels per day of domestic
crude oil (and/or
F-4
<PAGE> 207
equivalent units of domestic natural gas) produced by it, if
such percentage depletion exceeds cost depletion. Generally, this deduction is
15% of gross income from an oil or gas property, without reference to the
taxpayer's basis in the property. Beginning in 1991, percentage depletion may
not exceed 100% of the taxable income from any property (computed without
allowance for depletion), and as limited, however, may be carried forward
indefinitely.
The Company has accumulated a substantial net operating loss ("NOL")
carryforward. Under federal tax law, the amount and availability of NOL
carryforwards are subject to a variety of interpretations and restrictive tests.
Under the Code, the utilization of such NOL carryforwards could be limited or
effectively lost upon certain changes in ownership. In determining the amount of
NOL available after an "ownership change", the use of a corporation's NOL
carryforward is limited annually to a prescribed rate times the value of the
loss corporation's stock immediately before the ownership change. In general, an
ownership change occurs if more than 50% in value of the stock of the loss
corporation changes during the three-year period preceding the test date. Due to
the conversion of its preferred stock into common shares on July 12, 1996, and
in conjunction with other recent equity transactions, management believes that
there was an ownership change sufficient to trigger an additional limitation on
the NOL carryforwards. Based on the aggregate trading value of the stock
immediately before the conversion, and the prescribed applicable federal rate
for the period, the Company believes the limitation on future utilization of the
NOL carryforwards to be $990,000 per taxable year. Any unused NOL's accumulate
for use in subsequent taxable years, subject to the 15-year limitation. In
addition, any losses occurring in years after the ownership change are added
(without limitation) to arrive at the amount of NOL available for use in any
post change year. Subsequent additional ownership changes could result in
adjustments to the annual limitation amount. The Company at December 31, 1996,
has a total NOL carryforward of approximately $198 million for regular tax
purposes and approximately $170 million for alternative minimum tax purposes
ITEM 2. DESCRIPTION OF PROPERTY
OIL AND GAS OPERATIONS
The following tables set forth information with respect to Amerac's
properties and drilling and production activities. As used in these tables,
"gross" refers to the total acres or wells in which Amerac has an interest;
"net" as it applies to acres or wells refers to gross acres or wells multiplied
by the percentage interest owned by Amerac; "producing wells" include all wells
estimated by independent petroleum engineers to be capable of economic
production, including shut-in wells; "Mcfe" refers to one thousand cubic feet of
natural gas on an equivalent basis using a 6 Mcf to 1 Bbl gas-to-oil conversion
ratio; ("MMcfe") refers to one million cubic feet of natural gas on an
equivalent basis, using a 6 Mcf to 1 Bbl gas-to-oil conversion ratio; "MBbl"
refers to one thousand barrels of crude oil or other liquid hydrocarbons; and
"MBOE" refers to one thousand barrels of crude oil on an equivalent basis using
a 6 Mcf to 1 Bbl gas-to-oil conversion ratio.
F-5
<PAGE> 208
Oil and Gas Acreage. The following table sets forth Amerac's acreage
position at December 31, 1996:
<TABLE>
<CAPTION>
DEVELOPED UNDEVELOPED
--------- -----------
GROSS NET GROSS NET
----- --- ----- ---
<S> <C> <C> <C> <C>
Texas ............................................. 5,496 3,251 6,779 4,270
Oklahoma .......................................... 3,540 1,714 -- --
Kansas ............................................ 640 224 -- --
Offshore Louisiana ................................ 6,328 1,463 -- --
Wyoming ........................................... -- -- 14,079 3,522
Utah .............................................. -- -- 18,084 4,586
------ ------ ------ ------
Totals ........................................ 16,004 6,652 38,942 12,378
====== ====== ====== ======
</TABLE>
Productive Wells. The following table sets forth both the gross and net
productive wells at December 31, 1996:
<TABLE>
<CAPTION>
GROSS NET
--------------------- ---------------------
SHUT-IN SHUT-IN
OIL GAS GAS OIL GAS GAS
--- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C>
Texas ......................................... 44 29 -- 37.0 16.9 --
Oklahoma ...................................... 29 40 -- 11.5 17.5 --
Kansas ........................................ 37 1 -- 34.4 0.4 --
Offshore Louisiana ............................ -- 2 4 -- 0.4 0.8
Wyoming ....................................... 1 2 -- -- -- --
Utah .......................................... 3 -- -- -- -- --
New Mexico .................................... 1 -- -- -- -- --
Oregon ........................................ -- 2 -- -- -- --
---- ---- ---- ---- ---- ----
Totals .................................... 115 76 4 82.9 35.2 0.8
==== ==== ==== ==== ==== ====
</TABLE>
Drilling Activity. The following table sets forth the results of drilling
activity for the years ended December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
GROSS WELLS NET WELLS
-------------------------- ------------------------
TOTAL PRODUCTIVE DRY TOTAL PRODUCTIVE DRY
----- ---------- --- ----- ---------- ---
<S> <C> <C> <C> <C> <C> <C> <C>
1996 Exploratory................... -- -- -- -- -- --
Development................... 16 16 -- 12.7 12.7 --
1995 Exploratory................... -- -- -- -- -- --
Development................... 1 1 -- 0.8 0.8 --
1994 Exploratory................... 4 4 -- 1.6 1.6 --
Development................... -- -- -- -- -- --
</TABLE>
Production. The following table shows, for the period indicated, net
production and revenues and average prices received by the Company and average
production costs per BOE of crude oil and per Mcfe of natural gas:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1996 1995 1994 1993 1992
-------- ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
Net Production
Crude oil and condensate (MBbls) ... 185 127 95 112 233
Natural gas (MMcf) ................. 2,867 1,349 1,332 1,467 5,425
MBOE ............................... 663 352 317 357 1,137
MMcfe .............................. 3,976 2,111 1,902 2,139 6,823
Revenues (thousands)
Crude oil and condensate ........... $ 3,902 $ 2,146 $ 1,449 $ 1,626 $ 4,345
Natural gas ........................ 6,556 2,182 2,676 2,753 8,810
-------- ------- ------- ------- -------
Total .............................. $10,458 $ 4,328 $ 4,125 $ 4,379 $13,155
======= ======= ======= ======= =======
</TABLE>
F-6
<PAGE> 209
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1996 1995 1994 1993 1992
---------------------------------------------
Average sales price
<S> <C> <C> <C> <C> <C>
Crude oil and condensate ($/Bbl).......... $21.12 $16.53 $15.25 $14.52 $18.64
Natural gas ($/Mcf)....................... 2.29 1.62 2.01 1.88 1.62
All products ($/BOE)...................... 15.78 12.29 13.01 12.27 11.57
All products ($/Mcfe)..................... 2.63 2.05 2.17 2.05 1.93
Average production costs
All products ($/BOE)...................... $ 3.82 $ 3.15 $ 2.82 $ 2.87 $ 2.61
All products ($/Mcfe)..................... .64 .53 .47 .48 .44
</TABLE>
LEASE COMMITMENTS
The Company is committed to various lease contracts for office space and
miscellaneous office equipment expiring at various intervals through 2003, with
total minimum payments aggregating $763,000 at December 31, 1996. The Company
incurred net rent expense of approximately $72,000, $85,000 and $93,000 for the
years ended December 31, 1996, 1995 and 1994, respectively. The minimum annual
rental commitments are $105,000 for 1997.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently a party to any litigation that would have a
material impact on its financial statements. However, due to the nature of its
business, certain legal or administrative proceedings may arise in the ordinary
course of its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
On November 20, 1996, the shareholders approved an amendment to the
Company's Certificate of Incorporation to effect a one for fifteen reverse stock
split and to reduce the number of authorized shares from 100 million to 20
million. The approximate shares voted on the amendment were 32.8 million for; .7
million against; .1 million abstained; and .4 million not voted.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Company's securities currently are traded on the American Stock
Exchange and the Boston Stock Exchange. In 1996 and 1995, the Company's
securities traded on the OTC Bulletin Board. At March 1, 1997, there were
approximately 2,500 holders of record of the Common Stock.
During the past two years, trading of the Common Stock has been limited.
The following table sets forth the reported high and low sales prices quoted by
National Quotations Bureau, Inc. for 1995 and 1996, as adjusted for the effect
of the one for fifteen reverse stock split in November 1996.
F-7
<PAGE> 210
<TABLE>
<CAPTION>
1996 1995
---------------- ------------------
HIGH LOW HIGH LOW
---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter.................. $ 5.10 $3.00 $3.00 $0.45
Second Quarter................. 7.95 3.75 5.25 1.20
Third Quarter.................. 6.45 4.65 3.30 1.20
Fourth Quarter................. 10.25 4.50 3.30 1.20
</TABLE>
COMMON STOCK DIVIDENDS
The Company has not paid any Common Stock dividends since its organization,
and it is not contemplated that it will pay such dividends in the foreseeable
future. The Company's ability to declare and pay dividends on Common Stock is
restricted under certain conditions under its bank loan agreement.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
With the exception of historical information, the matters discussed herein
involve risk and uncertainties including, but not limited to, oil and gas price
fluctuations, oil and gas reserve estimates, economic conditions, interest rate
fluctuations, the regulatory and political environments and other risks
indicated in filings with the Securities and Exchange Commission. All prior
period share and per share information has been restated to reflect the one for
fifteen reverse stock split in November 1996.
CAPITAL RESOURCES AND LIQUIDITY
Liquidity Issues and Capital Requirements
As a result of two private offerings completed in 1996, higher production
and improved prices for oil and natural gas, the Company's financial position
has improved from 1995. Primarily, the funds raised in the private offerings
were used to eliminate the $1.0 million bridge loan entered into during 1996,
and reduce the outstanding indebtedness under the Company's existing revolving
bank loan ("Revolver"). During 1996, the Company negotiated an extension of the
term of the Revolver to May 31, 1998 and increased its credit line to $30
million. The Company as of March 26, 1997, had $6 million outstanding under the
Revolver with a borrowing base of $9.8 million. Subsequent to year end, the
Company increased the line to $50 million and extended the agreement until June
30, 1999. The Company has planned $5.6 million in capital expenditures on
existing properties in 1997. Management anticipates that cash flow from
operations and additional bank indebtedness will be sufficient to fund these
expenditures.
The Company also completed its Eastern Shelf Exploitation Agreement in
1997. The agreement provides among other things that an investor group will fund
half of the Company's expenditures in this project up to at least $1.2 million
and the Company plans to fund its half from cash flow from operations and
additional bank indebtedness. Pursuant to this agreement the investor group will
also reimburse the Company for a portion of the Company's general and
administrative costs related to the project. (See Note 10 to the Consolidated
Financial Statements.)
The Company anticipates that it must seek additional sources of financing
to fund its acquisition activities. Amerac may finance additional acquisitions
through a combination of working capital, bank borrowings, mezzanine financing,
production payments and equity. However, there is no assurance that the Company
will be successful in obtaining such additional financing. Also, the sale of
additional equity and the utilization of equity in acquisitions may further
limit the Company's utilization of its net operating loss carryforward.
F-8
<PAGE> 211
Recent Developments
On March 18, 1997, the Company commenced trading on the American Stock
Exchange under the symbol "AMC". Management believes that the listing on the
American Stock Exchange will have a number of advantages to both the Company and
its shareholders. Primarily, the listing is expected to give the Company greater
market exposure and reduce shareholder transaction costs. The listing was made
possible as a result of among other things, the Company's improved financial
condition and the one for fifteen reverse stock split approved by shareholders
in November 1996. The shareholders, at the same November 1996 meeting, also
approved a reduction in the authorized common shares from 100 million to 20
million.
Acquisitions
During 1996, the Company spent $10.1 million in cash and issued 220,000
common shares in connection with five acquisitions, primarily in Texas and
Oklahoma. Those acquisitions, which included interests in 174 producing wells,
increased the Company's reserve base by nearly 21 Bcfe. (See Note 2 to the
Consolidated Financial Statements.)
1996 Sources and Uses of Cash
During 1996, the Company received $3.8 million from operations, $1.3
million from the sale of properties, approximately $5 million from the sale of
Common Stock and Warrants and borrowed $10.9 million. The Company's primary uses
of cash were $10.1 million for the acquisition of oil and gas properties, $6.7
million to repay bank indebtedness and its bridge financing and $3.5 million for
property development leaving a net cash increase of $0.6 million for the year
and a cash and cash equivalents balance at December 31, 1996 of $712,000.
RESULTS OF OPERATIONS
1996 Compared with 1995
Operations for 1996 resulted in net income of $1.6 million (a loss of $1.65
per common share) as compared to net income of $208,000 (a loss of $.46 per
common share) for the comparable period in 1995. The improved results are
primarily attributable to increased production due to acquisitions in 1996 and
higher oil and natural gas prices. The 1996 and 1995 losses per share are due to
a deduction from net income, which approximated $5 million, to arrive at
earnings available to common stockholders for the excess of the fair value of
Common Stock issued to preferred shareholders in the July 1996 conversion over
the carrying value of the Preferred Stock and preferred dividends of $411,000
and $807,000 in 1996 and 1995, respectively. If the Common Stock transactions,
including the conversion of preferred stock, described in Note 5 to the
Consolidated Financial Statements had occurred at January 1, 1996, the Company
estimates that its net income per share would have been approximately $0.50 for
the full year 1996. Also in 1996, the Company recorded a gain of $132,000 on the
settlement of a contractual obligation and in 1995 reported a gain of $850,000
on the sales of properties.
Oil and gas revenues increased from $4.3 million in 1995 to $10.5 million
during 1996 primarily as a result of increased oil and gas production from
acquisitions in 1996 and higher prices. Oil production increased to 507 barrels
per day in 1996 from approximately 348 barrels per day in 1995 and gas
production increased to 7.8 million cubic feet of gas per day from approximately
3.7 million cubic feet of gas per day in 1995. Average prices for the year also
increased for oil from $16.53 per barrel in 1995 to $21.12 per barrel for 1996
and the average price for natural gas increased from $1.62 per Mcf for 1995 to
$2.29 per Mcf for 1996.
Lease operating expenses increased from $1.1 million during 1995 to $2.6
million during 1996 as a result of increased operations from acquisitions and
higher workover expense. Exploration
F-9
<PAGE> 212
expenses increased from $246,000 during 1995 to $305,000 for 1996 as a result of
higher seismic expenditures.
Depreciation, depletion and amortization also increased from $1.7 million
during 1995 to $2.9 million during 1996 due to both an increase in overall
production, investment in oil and gas properties and downward revisions to
reserves, primarily attributable to the Company's South Timbalier 198 offshore
property.
Interest expense increased from $237,000 in 1995 to $888,000 in 1996 as the
Company's debt increased due to acquisitions made using the Bank Credit
Agreement, which had an outstanding balance of $7.7 million at year end 1996.
1995 Compared with 1994
Operations for 1995 resulted in net income of $208,000 (a loss of $0.46 per
common share) as compared to net income of $272,000 (a loss of $3.61 per common
share) for the comparable period in 1994. The comparison of 1995 versus 1994 was
affected by the net gain on sale of various producing properties and other
assets totaling $850,000 in 1995, the recognition of a gain in 1994 related to
the settlement of contractual obligations (see Note 7 to the Consolidated
Financial Statements) in the amount of $474,000, and a $102,000 loss on sale of
asset in 1994.
Oil and gas revenues increased slightly from $4.1 million in 1994 to $4.3
million in 1995, as a result of increases in both oil and gas production. The
average price for oil for the year increased from $15.25 per barrel in 1994 to
$16.53 per barrel for 1995 while the average price for natural gas decreased
from $2.01 per Mcf for 1994 to $1.62 per Mcf for 1995. Oil production increased
to 348 barrels per day in 1995 from approximately 260 barrels per day in 1994
and gas production increased from approximately 3.6 million cubic feet of gas
per day in 1994 to 3.7 million cubic feet of gas per day for the comparable
period in 1995.
During 1994, the Company recorded a loss of $102,000 from the sale of
property, primarily warehouse inventories and other small items. During 1995,
the Company recognized an $850,000 gain on sales of properties, $736,000 related
to Northwest Arapahoe and a $106,000 gain on the sale of Riley Ridge properties.
Lease operating expenses increased from $894,000 during 1994 to $1.1
million during 1995, as a result of acquisition activity and workover expense.
Exploration expenses decreased from $345,000 during 1994 to $246,000 for 1995 as
the Company discontinued substantially all of its exploration activities. The
1995 expenses are related to 3D seismic for extensions for the North Blackwell
Field.
Depreciation, depletion and amortization also increased from $1.2 million
during 1994 to $1.7 million during 1995, due to both an increase in overall
production and investment in oil and gas properties and the downward revisions
to reserves, primarily at the Company's South Timbalier 198 offshore property.
Interest expense increased from $229,000 in 1994 to $237,000 in 1995, as
the Company's debt increased due to acquisitions made using the Bank Credit
Agreement, which had an outstanding balance of $3.5 million at year end 1995.
ACCOUNTING STANDARDS ADOPTED IN 1996
The Company has adopted Statement of Financial Accounting Standards
("SFAS") 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of", which requires that long-lived assets
(i.e. property, plant and equipment) held and used by an
F-10
<PAGE> 213
entity be reviewed for impairment whenever events or changes in circumstances
indicate that the net book value of the asset may not be recoverable. An
impairment loss will be recognized if the sum of the expected future cash flows
(undiscounted and before interest) from the use of the asset is less than the
net book value of the asset. SFAS 121 had no material impact on the Company in
1996.
The Company has adopted SFAS 123 "Accounting for Stock Based Compensation"
which establishes financial accounting and reporting standards for stock based
employee compensation plans. The pronouncement defines a fair-value based method
of accounting for an employee stock option or similar equity instrument.
However, it also allows an entity to continue to measure compensation cost for
those plans using the intrinsic-value based method of accounting as prescribed
by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"). The Company has elected to continue accounting for stock
based compensation plans pursuant to APB 25 and has made pro forma disclosures
of net income and earnings per share as if the fair-value based method of
accounting defined in SFAS 123 had been applied. (See Note 5 to the Consolidated
Financial Statements.)
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by Item 7 is set forth in the Report of
Independent Accountants and Consolidated Financial Statements included herein
following the signature page.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEMS 9, 10, 11 AND 12. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information required by these items is included in issuer's definitive
proxy statement for the 1996 Annual Meeting of Stockholders and is incorporated
herein by reference.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
The following exhibits are filed as a part hereof:
3-(1) Certificate of Incorporation of Wolverine Exploration Company
(incorporated by reference as Exhibit 3-(1) to the Company's
Registration Statement No. 33-21824 filed May 13, 1988).
3-(2) Amendment to Certificate of Incorporation of Wolverine Exploration
Company dated September 12, 1988 (incorporated by reference as
Exhibit 3-(1 )(a) to the Company's Registration Statement No.
33-24429 filed September 28, 1988).
3-(3) Amendment to Certificate of Incorporation of Wolverine Exploration
Company dated March 28, 1995 (incorporated by reference to Annex IV
to Exhibit (a)(1) to Schedule 13E-4, dated November 15, 1994)
F-11
<PAGE> 214
3-(4) Amendment to Certificate of Incorporation of Amerac Energy
Corporation dated July 12, 1996 (incorporated by reference to Exhibit
4(i).4 and 4(i).5 to the Company's Current Report on Form 8-K dated
February 28, 1997).
3-(5) Amendment to Certificate of Incorporation of Amerac Energy
Corporation dated November 21, 1996 (Incorporated by reference to
Exhibit 4(i).6 to the Company's Current Report on Form 8-K dated
February 28, 1997).
3-(6) Corporate Bylaws (Incorporated by reference to Exhibit 3C to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1987, File No. 0-5003).
4-(1) Warrant Agreement, dated November 18, 1996, between Amerac Energy
Corporation and Petroleum Financial, Inc. (Incorporated by reference
to Exhibit 4.(i).9 to the Company's Form 8-K dated February 28, 1997.
4-(2) Form of Warrant (Incorporated by reference to Exhibit 4(i).10 to the
Company's Form 8-K dated February 28, 1997).
4-(3) Registration Rights Agreement, (Incorporated by reference to Exhibit
4(i).8 to the Company's Form 8-K dated February 28, 1997, included as
Exhibit VII to the Exploitation Agreement).
10-(1) Wolverine Exploration Company Stock Option Plan (incorporated by
reference to Exhibit 10M to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1987, File No. 0-5003).
10-(2) Restated Agreement for financial and accounting services between the
Company and Petroleum Financial, Inc., dated October 26, 1995 for
1996. (Incorporated by reference, as Exhibit 10-(8) by reference to
Form 10K for year ended December 31, 1995.)
10-(3) Acquisition Agreement including amendment number 1 to said agreement
among Amerac Energy Corporation, as Buyer, Powell Resources, Inc.,
and the Other Stockholders named herein as Seller and Ridgepointe
Resources, Inc., Fremont Energy Corporation and Fremont Petroleum
Corporation Dated January 5, 1996. (Incorporated by reference, as
Exhibit 10-(9) to Form 10K for year ended December 31, 1995.)
10-(4) Registration Rights Agreement, dated January 16, 1996 among Amerac
Energy Corporation, Powell Resources, Inc., The Langestroth Family
Limited I, Thomas O. Goldsworthy and James B. Tollerton. Related to
acquisition of Fremont Energy Corporation Properties. (Incorporated
by reference, as Exhibit 10-(10) to Form 10K for year ended December
31, 1995.)
10-(5) Assignment, conveyance and Bill of Sale, Northwest Arapahoe
Properties, Cheyenne County, Colorado. (Incorporated by reference, as
Exhibit 10-(11) to Form 10K for year ended December 31, 1995.)
10-(6) Agreement with Bentley Securities Corporation dated May 17, 1996,
relating to the private placement of preferred stock. (Incorporated
by reference, as Exhibit 10-(12) to the Company's Quarterly Report on
Form 10-QSB for the period ended June 30, 1996.)
10-(7) Credit Agreement between Amerac Energy Corporation and Bank One dated
August 15, 1996. (Incorporated by reference, as Exhibit 10-(13) to
the Company's Quarterly Report on Form 10-QSB for the period ended
September 30, 1996.)
F-12
<PAGE> 215
10-(8) First Amendment to Amended and Restated Credit Agreement dated
January 16, 1996. (Incorporated by reference, as Exhibit 10-(14) to
the Company's Quarterly Report on Form 10-QSB for the period ended
September 30, 1996.)
10-(9) Second Amendment to Amended and Restated Credit Agreement dated
August 15, 1996. (Incorporated by reference, as Exhibit 10-(15) to
the Company's Quarterly Report on Form 10-QSB for the period ended
September 30, 1996.)
10-(10) Third Amendment to Amended and Restated Credit Agreement dated
February 3, 1997, filed herewith.
10-(11) Exploitation Agreement, dated effective January 1, 1997, between
Amerac Energy Corporation and the parties identified therein
(incorporated by reference to Exhibit 4(i).8 to the Company's Current
Report on Form 8-K dated February 28, 1997.)
19-(1) Form of Indemnification Agreement between the Company and its
officers and directors (incorporated by reference as Exhibit 19-(1)
to the Company's Annual Report on Form 10-K for the fiscal year
ending December 31, 1995).
27 Financial Data Schedule
REPORTS ON FORM 8-K
The following Reports on Form 8-K were filed during the fourth quarter of
1996:
On October 31, 1996 the Company filed a Form 8-K and a Form 8-KA in
conjunction with its acquisition of the certain properties in the Texan Gardens
Field it acquired from L.B. Industries and Larry Barnes for $1.8 million on
August 16, 1996.
On December 3, 1996, the Company filed a Form 8-K in conjunction with the
shareholder approval of the one for fifteen reverse stock split and the
reduction of authorized shares from 100 million to 20 million.
F-13
<PAGE> 216
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE COMPANY HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
AMERAC ENERGY CORPORATION
Company
/s/ Richard B. Hallett
-------------------------------------
RICHARD B. HALLETT
PRINCIPAL FINANCIAL OFFICER
Date: March 28, 1997
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE COMPANY
AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Jeffrey B. Robinson DIRECTOR AND PRESIDENT AND MARCH 28, 1997
- ------------------------------------- CHIEF EXECUTIVE OFFICER
JEFFREY B. ROBINSON (PRINCIPAL EXECUTIVE OFFICER)
/s/ Jeffrey L. Stevens DIRECTOR MARCH 28, 1997
- -------------------------------------
JEFFREY L. STEVENS
/s/ Kenneth R. Peak DIRECTOR MARCH 28, 1997
- -------------------------------------
KENNETH R. PEAK
/s/ Michael L. Harvey DIRECTOR MARCH 28, 1997
- -------------------------------------
MICHAEL L. HARVEY
</TABLE>
F-14
<PAGE> 217
AMERAC ENERGY CORPORATION
INDEX TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants............................................................ F-16
Consolidated Balance Sheets.................................................................. F-17
Consolidated Statements of Operations........................................................ F-18
Consolidated Statements of Cash Flows........................................................ F-19
Consolidated Statements of Changes in Stockholders' Equity................................... F-20
Notes to Consolidated Financial Statements................................................... F-21 through F-35
</TABLE>
FINANCIAL STATEMENT SCHEDULES
All financial statement schedules are omitted because they are not
applicable or the required information is shown in the consolidated financial
statements or notes thereto.
F-15
<PAGE> 218
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Amerac Energy Corporation
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of Amerac
Energy Corporation and its subsidiaries at December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles. 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 of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
Fort Worth, Texas
March 25, 1997
F-16
<PAGE> 219
AMERAC ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------
1996 1995
---- ----
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents .......................................... $ 712,000 $ 144,000
Receivables
Receivable from property sale .................................. -- 1,005,000
Trade and other, net of allowance for bad debts of $41,000 ..... 473,000 111,000
Gas and oil receivable ......................................... 1,451,000 993,000
------------- -------------
Total current assets .................................. 2,636,000 2,253,000
------------- -------------
PROPERTY AND EQUIPMENT
Oil and gas properties at cost ..................................... 32,290,000 20,614,000
Less accumulated depreciation, depletion and amortization .......... (12,949,000) (12,020,000)
------------- -------------
Net property and equipment ..................................... 19,341,000 8,594,000
OTHER ASSETS ............................................................ 395,000 347,000
------------- -------------
TOTAL ASSETS ............................................................ $ 22,372,000 $ 11,194,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Trade payables .................................................... $ 199,000 $ 234,000
Accrued liabilities ............................................... 527,000 372,000
Obligation under gas contract ..................................... 370,000 --
------------- -------------
Total current liabilities ...................................... 1,096,000 606,000
------------- -------------
LONG-TERM LIABILITIES
Notes payable banks ................................................ 7,704,000 3,547,000
Other long-term liabilities ........................................ 140,000 406,000
Obligation under gas contract ...................................... -- 641,000
------------- -------------
Total long-term liabilities .................................... 7,844,000 4,594,000
------------- -------------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 7)
STOCKHOLDERS' EQUITY
Preferred shares, $1 par value
10,000,000 shares authorized; $4.00 Senior
Preferred, outstanding 1,786,347 at December 31, 1995 .......... -- 1,786,000
Common stock, $.05 par value; 20,000,000 shares authorized;
outstanding 3,883,526 shares at December 31, 1996
and 1,375,294 at December 31, 1995 ( as adjusted ) ............. 194,000 1,031,000
Additional paid-in capital ......................................... 151,104,000 142,211,000
Accumulated deficit ................................................ (137,866,000) (139,034,000)
------------- -------------
Total stockholders' equity ..................................... 13,432,000 5,994,000
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .............................. $ 22,372,000 $ 11,194,000
</TABLE>
(The accompanying notes are an integral part
of these consolidated financial statements.)
F-17
<PAGE> 220
AMERAC ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
REVENUES
Oil, gas and related product sales ............... $ 10,458,000 $ 4,328,000 $ 4,125,000
Gain on contractual settlements .................. 132,000 -- 474,000
Interest income .................................. 19,000 74,000 237,000
Other income ..................................... 35,000 -- 3,000
------------ ------------ ------------
Total revenues ................................ 10,644,000 4,402,000 4,839,000
------------ ------------ ------------
EXPENSES
Lease operating .................................. 2,588,000 1,108,000 894,000
Exploration expenses, including dry hole costs and
impairments ................................... 305,000 246,000 345,000
Depreciation, depletion and amortization ......... 2,947,000 1,686,000 1,222,000
Administrative ................................... 2,309,000 1,767,000 1,775,000
Loss (gain) on sale of oil and gas properties .... (22,000) (850,000) 102,000
Interest ......................................... 888,000 237,000 229,000
------------ ------------ ------------
Total expenses ................................ 9,015,000 4,194,000 4,567,000
------------ ------------ ------------
Income before income taxes ............................ 1,629,000 208,000 272,000
Provision for federal income taxes .................... 50,000 -- --
------------ ------------ ------------
NET INCOME ............................................ 1,579,000 208,000 272,000
Preferred dividends and excess conversion consideration (5,434,000) (807,000) (4,100,000)
------------ ------------ ------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS ............ $ (3,855,000) $ (599,000) $ (3,828,000)
============ ============ ============
NET LOSS PER COMMON SHARE ............................. $ (1.65) $ (0.46) $ (3.61)
============ ============ ============
Average common shares and equivalents outstanding ..... 2,331,000 1,306,000 1,059,000
============ ============ ============
</TABLE>
(The accompanying notes are an integral part
of these consolidated financial statements.)
F-18
<PAGE> 221
AMERAC ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1996 1995 1994
------------ ------------ ------------
CASH FLOW FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income .................................................... $ 1,579,000 $ 208,000 $ 272,000
Adjustments needed to reconcile net income to net cash flow
provided by operating activities
Depreciation, depletion and amortization ................... 2,947,000 1,686,000 1,222,000
Exploration expenses, including dry holes and
impairments ......................................... 305,000 -- 345,000
(Gain) loss on sale of properties .......................... (22,000) (850,000) 102,000
Recognition of deferred revenue ............................ (140,000) (116,000) (289,000)
Gain on contractual settlements ............................ (132,000) -- (474,000)
Other ...................................................... 23,000 37,000 24,000
Changes in operating assets and liabilities:
Trade receivables .................................... (362,000) 31,000 81,000
Oil and gas receivables .............................. (458,000) (637,000) 105,000
Trade payables ....................................... (35,000) 187,000 (117,000)
Accrued and other long-term liabilities .............. 74,000 97,000 (212,000)
------------ ------------ ------------
NET CASH FLOW PROVIDED BY OPERATING ACTIVITIES ..................... 3,779,000 643,000 1,059,000
------------ ------------ ------------
CASH FLOW FROM INVESTING ACTIVITIES
Proceeds from sale of assets .................................. 1,304,000 140,000 102,000
Oil and gas acquisitions ...................................... (10,101,000) (4,275,000) (1,500,000)
Oil and gas expenditures ...................................... (3,500,000) (1,202,000) (879,000)
Purchases of other assets ..................................... (84,000) (94,000) (14,000)
------------ ------------ ------------
NET CASH USED FOR INVESTING ACTIVITIES ............................. (12,381,000) (5,431,000) (2,291,000)
------------ ------------ ------------
CASH FLOW FROM FINANCING ACTIVITIES
Subordinated debt repayment ................................... -- (1,879,000) (574,000)
Bank borrowings ............................................... 10,881,000 3,547,000 --
Bank repayments ............................................... (6,725,000) (50,000) --
Proceeds from sale of Common Stock ............................ 5,004,000 -- --
Other ......................................................... 10,000 (123,000) (102,000)
------------ ------------ ------------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES ............... 9,170,000 1,495,000 (676,000)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............... 568,000 (3,293,000) (1,908,000)
Cash and cash equivalents at beginning of period .............. 144,000 3,437,000 5,345,000
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ......................... $ 712,000 $ 144,000 $ 3,437,000
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest ........................................ $ 888,000 $ 276,000 $ 315,000
Cash paid for income taxes .................................... 30,000 -- --
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Exchanged $2.25 Convertible Exchangeable Preferred for
Senior Preferred Stock (See Note 5) ....................... $ -- $ -- $ --
Senior Preferred Stock conversion to Common Stock
(See Note 5) ............................................... -- -- --
Senior Preferred Stock dividends (See Note 5) ................. 410,000 807,000 --
Compensation paid in Common Stock ............................. 157,000 30,000 --
Approximate value of Common Stock issued for Fremont
Acquisition ................................................ 640,000 -- --
</TABLE>
(The accompanying notes are an integral part
of these consolidated financial statements.)
F-19
<PAGE> 222
AMERAC ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
DECEMBER 31, 1993 TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
$2.25 CONVERTIBLE
$4.00 SENIOR EXCHANGEABLE
PREFERRED STOCK PREFERRED SHARES
------------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
------------- -------------- ---------- ------------
<S> <C> <C> <C> <C>
BALANCE -- DECEMBER 31, 1993................... -- $ -- 1,822,592 $ 1,823,000
------------- -------------- ---------- ------------
BALANCE -- DECEMBER 31, 1994................... -- -- 1,822,592 1,823,000
------------- ------------- ----------- ------------
Preferred exchange........................ 1,634,305 1,634,000 (1,822,592) (1,823,000)
Preferred stock dividend.................. 152,042 152,000 -- --
------------- -------------- ----------- ------------
BALANCE -- DECEMBER 31, 1995................... 1,786,347 1,786,000 -- $ --
------------- -------------- =========== ============
Preferred exchange........................ (1,867,584) (1,867,000)
Preferred stock dividend.................. 81,237 81,000
------------- --------------
BALANCE -- DECEMBER 31, 1996................... -- $ --
============= ==============
</TABLE>
<TABLE>
<CAPTION>
COMMON SHARES
($.05 PAR VALUE) ADDITIONAL
------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------ ------ ------- ------- -----
<S> <C> <C> <C> <C> <C>
BALANCE -- DECEMBER 31, 1993 ............. 1,058,915 $ 53,000 $ 143,677,000 $(140,071,000) $ 5,482,000
Exercise of warrants ................ 3 -- -- -- --
Net income .......................... -- -- -- 272,000 272,000
------------- ------------- ------------- ------------- -------------
BALANCE -- DECEMBER 31, 1994 ............. 1,058,918 53,000 143,677,000 (139,799,000) 5,754,000
Preferred exchange .................. 303,315 15,000 (1,190,000) 1,364,000 --
Stock issued for director's fees .... 10,395 1,000 29,000 -- 30,000
Options exercised ................... 2,667 -- 2,000 -- 2,000
Preferred stock dividend ............ -- -- 655,000 (807,000) --
Net income .......................... -- -- -- 208,000 208,000
------------- ------------- ------------- ------------- -------------
BALANCE -- DECEMBER 31, 1995 ............. 1,375,295 69,000 143,173,000 (139,034,000) 5,994,000
Preferred exchange .................. 1,120,550 56,000 1,811,000 -- --
Fremont acquisition ................. 219,554 11,000 629,000 -- 640,000
Stock issued for director's fees .... 18,688 1,000 88,000 -- 89,000
Options exercised ................... 9,890 -- 10,000 -- 10,000
Preferred dividend .................. -- -- 329,000 (410,000) --
Stock issued for compensation
and payment of services .......... 14,624 1,000 67,000 -- 68,000
Stock issued in private placements... 1,123,040 56,000 4,994,000 -- 5,050,000
Net income .......................... -- -- -- 1,579,000 1,579,000
Other ............................... 1,885 -- 3,000 (1,000) 2,000
------------- ------------- ------------- ------------- -------------
BALANCE -- DECEMBER 31, 1996 ............. 3,883,526 $ 194,000 $ 151,104,000 $(137,866,000) $ 13,432,000
============= ============= ============= ============= =============
</TABLE>
(The accompanying notes are an integral part
of these consolidated financial statements.)
F-20
<PAGE> 223
AMERAC ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS AND CONSOLIDATION
Amerac Energy Corporation ("Amerac" or the "Company"), formerly Wolverine
Exploration Company was formed in 1969. The Company, incorporated in the state
of Delaware, changed its name to Amerac in March 1995. In 1994, the Company
changed its primary focus from oil and gas exploration to acquisitions and
development of proved oil and gas properties. The Company's producing properties
are primarily located in Texas and Oklahoma and its only offshore property is
located offshore Louisiana.
The consolidated financial statements include the accounts of Amerac and
its wholly-owned subsidiaries. All significant intercompany transactions and
accounts have been eliminated.
OIL AND GAS EXPLORATION AND DEVELOPMENT COSTS
The Company follows the successful efforts method of accounting for its oil
and gas operations as prescribed in Statement of Financial Accounting Standards
("SFAS") 19 issued by the Financial Accounting Standards Board.
Under the successful efforts method, costs of productive wells, development
dry holes and productive leases are capitalized and amortized on a
unit-of-production basis over the life of remaining proved reserves. Cost
centers for amortization purposes are determined on a field-by-field basis.
Prior to January 1, 1996, capitalized costs of proved properties were
reviewed for impairment on a field by field basis limiting capitalized costs to
estimated future net revenues from proved properties assuming current prices and
costs. Commencing January 1, 1996 the Company adopted SFAS 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of". Pursuant to SFAS 121, the Company assesses the need for an impairment of
capitalized costs of proved oil and gas properties on a field-by-field basis
utilizing undiscounted expected future cash flows. If an impairment is
indicated, the amount of such impairment is recognized to the extent that the
net capitalized costs of the proved oil and gas property exceeds the fair market
value so determined.
Oil and gas leasehold costs are capitalized when incurred. The acquisition
costs of all unproved properties that are not individually significant are
aggregated, and the portion of such costs estimated to be non-productive, based
on historical experience, is amortized on an average holding period basis. Any
individually significant unproved properties are assessed periodically, and any
impairments in value are charged to expense. Costs of such properties
surrendered are charged against the valuation allowance.
Exploratory expenses, including geological and geophysical expenses and
delay rentals for oil and gas leases, are charged to expense as incurred.
Exploratory drilling costs, including stratigraphic test wells, are initially
capitalized, but charged to expense if and when the well is determined to be
unsuccessful.
F-21
<PAGE> 224
Future obligations for site restoration costs, including dismantling and
abandoning properties, are accrued using the unit of production method and
expensed as depletion.
Sales of oil and gas properties result in adjustments to the cost and
accumulated depreciation, depletion and amortization as provided under the
successful efforts method of accounting. Gain or loss is recognized if the
entire amortization base is sold and represents the difference between the
proceeds and book basis of the properties sold. See Note 2 regarding significant
Sales of Oil and Gas Properties.
CASH EQUIVALENTS
Cash equivalents are highly liquid investments with original maturities of
three months or less.
REVENUE RECOGNITION
The Company follows the "sales method" of accounting for its oil and gas
revenue whereby the Company recognizes sales revenue on all oil or gas sold to
its purchasers, regardless of whether the sales are proportionate to the
Company's ownership in the property. A receivable or liability is recognized
only to the extent that the Company has an imbalance on a specific property
greater than the expected remaining life of the reservoir. As of December 31,
1996, the Company had gas imbalances of approximately $456,000 under its
entitlements on its South Timbalier 198 Property and $70,000 over its
entitlements on its Texan Gardens Properties. These imbalances were resolved in
the normal course of business subsequent to year end.
NET INCOME OR LOSS PER COMMON SHARE
Net income or loss per common share is computed by dividing the net income
or loss applicable to common stockholders by the weighted average number of
shares of common stock and common stock equivalents outstanding. In computing
net income or loss per common share for 1995 and 1994, the Convertible Preferred
dividends, either declared or in arrearage for the period, decreases the income
or increases the loss applicable to common stockholders. For computation of the
1996 loss per common share, the Senior Preferred dividends of $411,000 and the
excess of the fair value of common stock issued over the net carrying amount of
preferred stock converted which approximated $5.0 million related to the
conversion of Senior Preferred Stock to Common Stock (see Note 5) decreases net
income applicable to common stockholders. The Company has also presented a
supplemental net income per share for 1996 (see Note 5). For 1995 and 1994,
stock options and convertible debt are anti-dilutive and were not included in
the calculation of net income or loss per common share.
FINANCIAL INSTRUMENTS
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash equivalents, short-term investments and
receivables.
The Company's cash equivalents and short-term investments represent
high-quality securities placed with various investment grade institutions. This
investment practice limits the Company's exposure to concentrations of credit
risk.
Financial instruments which potentially expose the Company to
concentrations of credit risk, as defined by SFAS 105, consist primarily of
trade and oil and gas receivables. The Company's trade and oil and gas
receivables are dispersed among various domestic customers and purchasers;
therefore, concentrations of credit risk are limited. Generally the Company
receives no collateral
F-22
<PAGE> 225
from its customers.
SFAS 107, "Disclosures about Fair Value of Financial Instruments",
requires the disclosure of the estimated fair value of financial instruments.
The estimated fair value amounts have been determined by the Company using
available market information and appropriate valuation methodologies. At
December 31, 1996, the estimated fair values of the Company's financial
instruments, primarily receivables and debt, approximate their carrying value
because either the receivables are short term in nature or debt instruments have
variable interest rates.
ACCOUNTING FOR INCOME TAXES
The Company recognizes deferred tax assets and liabilities for the expected
future tax consequences of tax credits and other carry forwards, as well as
temporary differences between the book and tax basis of assets and liabilities.
A valuation allowance for deferred tax assets is recorded when it is more likely
than not that the benefit from the deferred tax asset will not be realized.
The Company files a consolidated tax return and the consolidated group
follows a policy of allocating consolidated income tax charges and credits, and
providing charges in lieu of taxes, based on each member's contribution to
consolidated income or loss.
PERVASIVENESS OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities, and
related revenues and expenses, and disclosure of gain and loss contingencies at
the date of the financial statements. Actual results could differ from estimated
amounts.
RECLASSIFICATIONS AND RESTATEMENTS
Reclassifications have been made to prior year amounts to conform to
current year presentations.
As described in Note 5, the Company's shareholders approved a 1 for 15
reverse common stock split in November, 1996. Earnings per share amounts as well
as the weighted average common shares outstanding have been retroactively
restated to reflect the reverse split. All footnote disclosures herein are
presented on a post reverse split basis unless otherwise stated.
2. PROPERTY ACQUISITIONS AND DISPOSITIONS
PROPERTY ACQUISITIONS
During 1996, the Company made three significant acquisitions described
below:
Effective January 1, 1996, the Company acquired the Common Stock of Fremont
Energy Corporation, an Oklahoma-based oil and gas company, for $7 million paid
in cash and 220,000 million shares of Common Stock of the Company valued at
approximately $600,000 at the date of purchase.
The Company acquired on August 16, 1996 a majority interest in sixteen gas
wells in the Texan Gardens Field, located in Hidalgo County, Texas for $1.8
million. The field is situated in the heart of the Vicksburg Trend of the Texas
Gulf Coast region. The Company's average working interest in these properties
approximates 58%, with a net revenue interest averaging 40%.
The Company acquired on August 19, 1996 a majority non-operated interest in
22 producing
F-23
<PAGE> 226
wells from numerous working interest owners on the McLemore-Drummonds Ranch and
the Sloan X's Ranch in Shackelford, Stephens, Throckmorton, and Haskell Counties
of Central Texas for $1.1 million. Amerac's working interest in the
McLemore-Drummonds Ranch and the Sloan X's Ranch approximates 76% and 82%,
respectively. The net revenue interests in the two ranches are 57% and 65%,
respectively.
During 1995, the company made three acquisitions described below:
In October 1995, the Company acquired a portion of the Truby field located
in Jones County, Texas for $650,000. This acquisition included a 320-acre lease
with two producing wells and a 200-acre undeveloped lease. The additional
acreage will provide the Company with both proved and probable drilling
locations.
In May 1995, the Company acquired the Myrtle B field in Loving County,
Texas for $725,000. This acquisition included four producing wells and four
proved undeveloped locations. The Company has a 100% working interest and a 75%
revenue interest in this property.
In April 1995, the Company announced the acquisition of the Cosden field in
Bee County, Texas for $2.9 million. This field produces from three wells. The
Company has a 68% working interest and a 52% revenue interest in this property.
These acquisitions were accounted for under the purchase accounting method
and results of operations were consolidated from the date of the respective
consummation.
The unaudited pro forma impact of the Fremont acquisition, the Texan
Gardens Field acquisition, the 1995 Cosden acquisition, and the December 1995
sale of N.W. Arapahoe, assuming the transactions had occurred at January 1,
1995, would have been as follows for the twelve months ended December 31, 1996
and December 31, 1995. The 1996 Throckmorton acquisition and the 1996 Cosden
acquisition would not have a material impact on the Pro Forma Statement of
Operations, and, thus have not been included.
<TABLE>
<CAPTION>
1996 1995
---- ----
(unaudited)
<S> <C> <C>
Net income .............................................................. $ 1,777,000 $ 50,000
Net loss applicable to common stockholders............................... (3,657,000) (757,000)
Net loss per common share ............................................... (1.57) (.58)
</TABLE>
SALE OF OIL AND GAS PROPERTIES
The Company sold certain minor properties in 1996 for proceeds of $299,000
resulting in a reported gain of approximately $22,000.
In December 1995, the Company agreed to sell its interest in the Northwest
Arapahoe field, in Colorado for $1.0 million. The Company recognized a gain of
approximately $.7 million in 1995 relating to this transaction.
F-24
<PAGE> 227
3. PROPERTY AND EQUIPMENT
Property and equipment, at cost, are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1995
-------------------
(in thousands)
<S> <C> <C>
Proved properties .......................................................... $24,603 $15,047
Undeveloped properties ..................................................... 1,034 191
Wells and related equipment and facilities ................................. 6,653 5,376
------- -------
Total ...................................................................... $32,290 $20,614
======= =======
</TABLE>
4. NOTES PAYABLE, LONG-TERM INDEBTEDNESS AND PLEDGED ASSETS
At December 31, 1996, the Company had a $30 million revolving line of
credit agreement with BankOne, Texas National Association ("Bank Credit
Agreement"). This line was increased to $50 million in February 1997. The Bank
Credit Agreement is a facility with interest due monthly and principal due June
30, 1999. The Bank Credit Agreement is secured by all of the Company's oil and
gas properties, and contains various restrictive covenants which may, if not
met, cause the Company to be in default or reduce its access to additional
borrowings. The borrowing base at December 31, 1996 was approximately $11
million. At December 31, 1996, approximately $7.7 million was outstanding under
the Bank Credit Agreement, accruing interest at the BankOne Texas Base Rate plus
three-quarter percent (9.00% at December 31, 1996).
At December 31, 1996 and 1995, the Company had a $125,000 letter of credit
issued on its behalf collateralized by a $125,000 certificate of deposit, which
is reflected in other assets.
During May 1995, the Company extinguished its subordinated indebtedness of
$1,879,000.
5. STOCKHOLDERS' EQUITY AND STOCK COMPENSATION
COMMON STOCK
Each share of Common Stock entitles the holder thereof to one vote on all
matters on which holders are permitted to vote. No stockholder has any right or
other similar right to purchase or subscribe to any additional securities issued
by the Company, and no stockholder has any right to convert Common Stock into
other securities. The holders of shares of Common Stock are entitled to
dividends when and if declared by the Board of Directors from funds legally
available and, upon liquidation, on a pro rata share in any distribution to
stockholders. The Company is restricted under certain conditions by its loan
agreement from declaring or paying any cash dividend on the Common Stock.
In July 1995, the Company filed a registration statement with the
Securities and Exchange Commission for the purpose of registering the 243,413
shares of Common Stock held by Investment Limited Partnership ("ILP") who in
turn sold the shares to certain individuals. Three of these individuals, Jeffrey
Robinson, President and Chief Executive Officer, Kenneth R. Peak and William P.
Nicoletti are Directors of the Company, and acquired from ILP 53,333, 13,333 and
13,333 shares, respectively.
In June 1996, the Company completed a private sale of 72,000 shares of
Common Stock at an average price of approximately $5.10 per share.
On November 18, 1996, the Company completed a private sale of approximately
1.04 million shares of Common Stock at a price of $4.80 per share. The private
placement also included warrants to purchase 104,175 additional shares of Common
Stock. Each purchaser received the right, through warrants, to purchase one
share of Common Stock for every 10 shares of Common Stock purchased in the
private placement at an exercise price of $5.76 per share at any time on or
before November 18, 1999.
F-25
<PAGE> 228
On November 20, 1996, the shareholders of the Company approved a 1 for 15
reverse stock split and a change in the authorized shares of Common Stock from
100 million shares to 20 million shares.
PREFERRED STOCK
In March 1995, the Company exchanged, with holders who accepted the
exchange, one share of its Senior Preferred, with a stated value and liquidation
value of $4.00 per share, par value $1.00 per share and an initial dividend rate
of $.36 per share, and .1667 shares of Common Stock (the "Exchange Offer") for
each outstanding share of $2.25 Convertible Exchangeable Preferred Stock ("Old
Preferred"), which carried a stated value of $25.00 per share and a dividend
rate of $2.25 per share. At the time of the Exchange Offer, the Company had
dividends in arrears on the Old Preferred of approximately $14.4 million and a
liquidation preference of approximately $45.6 million. The Exchange Offer was
approved by the holders of the majority of the Common Stock and by approximately
90% of the holders of Old Preferred. As a result, 1,634,305 shares of Old
Preferred were exchanged for 1,634,305 shares of Senior Preferred and 271,937
shares of Common Stock. Holders of Old Preferred that did not exchange received
.1667 shares of Common Stock for each share of Old Preferred not exchanged,
resulting in the issuance of 31,378 shares of Common Stock. This Exchange Offer
eliminated all Old Preferred and related dividend arrearages. This Exchange
Offer did not have any material impact on the supplemental earnings per share
disclosed herein.
In July 1996, the Company converted the $4.00 Senior Preferred Stock to
Common Stock based on an exchange ratio of one share of $4.00 Senior Preferred
Stock into .6 shares of Common Stock. At December 31, 1996, the Company did not
have any preferred stock outstanding. As described in Note 1, this transaction
reduced earnings applicable to Common Stock holders by approximately $5 million
for the year ended December 31, 1996. This reduction represents the difference
between the estimated fair value of the Common Stock and the net carrying value
of the Senior Preferred Stock.
SUPPLEMENTARY NET INCOME PER COMMON SHARE
The supplementary net income per common share of the Company for the year
ended December 31, 1996, approximated $0.50, giving effect to Common Stock
transactions as if they had been outstanding for all of 1996. The dividends and
excess conversion value attributable to the Senior Preferred Stock as well as
the interest expense associated with proceeds from the sale of common stock were
added back to the historical net loss applicable to common stockholders to
determine net income used to compute supplemental net income per share.
STOCK OPTION PLANS
Under the Company's Stock Option Plan, as amended February 1, 1988, ("the
Plan") stock options may be granted to officers, directors, employees and
independent contractors at exercise prices which are not less than the fair
market value at the date of grant. The options vest either after one year or
equally over three years and expire ten years from the date of grant. As of
December 31, 1996, the Company had reserved 317,999 shares of Common Stock for
issuance upon exercise of stock options.
As allowed by SFAS 123 "Accounting for Stock Based Compensation", the
Company accounts for stock options and any other similar instruments issued to
employees in accordance with Accounting Principles Board Opinion No. 25, under
which no compensation cost is recognized
F-26
<PAGE> 229
when stock options are issued at exercise prices not less than the fair market
value of the Common Stock on the date of grant. Had the Company recognized
compensation cost for options granted to employees and directors consistent with
the fair value method specified by SFAS 123, the Company's net income and loss
per common share would have been impacted as presented below on a pro forma
basis:
<TABLE>
<CAPTION>
1996 1995
-------------- ---------
<S> <C> <C> <C>
Net income As reported............. $ 1,579,000 $ 208,000
Pro Forma............... 1,518,000 182,000
Loss per common share As reported............. (1.65) (.46)
Pro Forma............... (1.68) (.48)
</TABLE>
Because the SFAS 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
Information about the Company's stock option plan for the three years ended
December 31, 1996, is set forth below:
<TABLE>
<CAPTION> WEIGHTED SHARES
NUMBER AVERAGE EXERCISABLE
OF SHARES EXERCISE PRICE AT YEAR END
--------- -------------- -----------
<S> <C> <C> <C>
Options outstanding at December 31, 1993....... 71,532 $15.99 64,866
Granted.................................... 2,667 .90
Expired.................................... (43,265) 16.63
--------
Options outstanding at December 31, 1994....... 30,934 13.78 28,267
Granted.................................... 62,667 2.40
Exercised.................................. (2,667) .90
Expired.................................... (9,467) 9.77
--------
Options outstanding at December 31, 1995....... 81,467 5.92 18,800
Granted.................................... 50,001 5.13
Exercised.................................. (12,667) 1.98
Expired.................................... (2,333) 43.13
---------
Options outstanding at December 31, 1996....... 116,468 5.26 35,356
=========
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
RANGE OF AVERAGE AVERAGE AVERAGE
EXERCISE SHARES REMAINING EXERCISE SHARES EXERCISE
PRICES OUTSTANDING CONTRACT LIFE PRICE EXERCISABLE PRICE
---------------- ----------- ------------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 108.75-118.13 1,467 1.6 years $ 110.88 1,467 $ 110.88
7.50-15.00 8,334 7.0 years 9.60 5,000 10.00
4.65-6.30 46,667 9.3 years 4.85 -- --
2.34-2.58 60,000 8.2 years 2.40 28,889 2.45
---------------- --------- --------
$ 2.34-118.13 116,468 8.4 years 5.26 35,356 8.02
================ ========= ========
</TABLE>
The weighted average per share fair values of options and warrants granted
in 1996 and 1995 were $1.75 and $.87, respectively. The fair value of each
option and warrant grant is estimated on the date of grant, using the Black
Scholes option pricing model with the following weighted average assumptions
used for options issued in 1996 and 1995, respectively: risk-free interest rates
of 6.4% and 7.2%, volatility of 47.4% for 1996 and 51.6% for 1995,
F-27
<PAGE> 230
dividend yields of 0% in both years, and expected lives of 3 years for warrants
and 10 years for options in both years.
6. INCOME TAXES
The provision for income taxes differs from the amount of income taxes,
computed by applying the U.S. statutory federal tax rate to pretax income before
extraordinary items, as a result of the following differences:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Provision based on statutory rate ............................ $ 537,389 $ 71,000 $ 95,000
Changes in valuation allowance related to net
operating losses.............................................. (449,936) (71,000) (95,000)
Other ........................................................ (37,453) -- --
--------- --------- ---------
Provision for income taxes ................................... $ 50,000 $ -- $ --
========= ========= =========
</TABLE>
Deferred tax assets (liabilities) are comprised of the following at
December 31:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Net operating loss carryforwards ...... $ 69,232,000 $ 70,200,000
Oil and gas properties ................ (1,703,000) (259,000)
Small producers' depletion carryforward 4,553,000 4,324,000
Tax credit carryforwards .............. 1,031,000 2,792,000
Asset valuation allowance ............. (73,113,000) (77,057,000)
------------ ------------
Net deferred tax asset ................ $ -- $ --
============ ============
</TABLE>
The current year change to the deferred tax balances primarily relates to
the purchase of Fremont Energy Corporation and the expiration of certain tax
credits. For tax purposes, the Fremont acquisition had carryover basis, whereas,
for financial statement purposes the acquisition was treated as a purchase with
a step up basis in the acquired assets equal to the estimated fair value of the
consideration given. As a result, the financial statements reflect a basis in
the assets of Fremont greater than the carryover basis assigned for tax. This
results in a deferred tax liability of approximately $2.0 million. As Amerac
anticipates filing a consolidated return with Fremont in the future, it is
expected that any future tax liability related to the Fremont purchase will be
fully offset by the deferred tax assets of Amerac. Therefore, the valuation
allowance was reduced by approximately $2.0 million, which represents the
estimated deferred tax liability at acquisition date. Additionally, the
valuation allowance decreased as a result of the expiration of approximately
$1.8 million of investment tax credit carryovers in the current year.
Based on management's analysis of future taxable income and potential
future annual limitations of the remaining deferred tax assets, including net
operating loss carryforwards, the Company does not believe it is more likely
than not that it will realize the benefits of its remaining net deferred tax
assets. As a result, a valuation allowance remains on the net deferred tax
assets.
Due to the conversion of its preferred stock into common shares on July 12,
1996, and in conjunction with other recent equity transactions, management
believes that there was an ownership change sufficient to trigger an additional
limitation on the net operating loss ("NOL") carryforwards into the future.
Based on the aggregate trading value of the stock immediately before the
conversion, and the prescribed applicable federal income tax rate for the
period, the Company believes the limitation on future utilization of the NOL
carryforwards to be $990,000 per taxable year relating to losses incurred prior
to the ownership change in 1996. Any unused NOL's, pursuant to the limitation
imposed by the ownership change, accumulate for use in subsequent
F-28
<PAGE> 231
taxable years, subject to the 15-year limitation on NOL carryforwards. In
addition, any losses occurring in years after the ownership change are added
(without limitation) to arrive at the amount of NOL available for use in any
post change year. Subsequent additional ownership changes could result in
adjustments to the annual limitation amount. During 1996, the Company utilized
its NOL related to the 1996 ownership change.
The Company at December 31, 1996 had a regular NOL of approximately $198
million and approximately $170 million for alternative minimum tax purposes,
subject to the ownership change limitation of $990,000 per year as discussed
above. The NOLs are scheduled to expire as follows:
<TABLE>
<CAPTION>
ALTERNATIVE
REGULAR MINIMUM
YEAR TAX TAX
---- ----------- -----------
<S> <C> <C>
1998 .................. $13,161,000 $12,861,000
1999 .................. 47,624,000 47,624,000
2000 .................. 33,818,000 33,818,000
2001 .................. 6,403,000 6,403,000
2002 .................. 16,452,000 11,528,000
2004 .................. 33,063,000 19,106,000
2005 .................. 11,379,000 7,144,000
2006 .................. 6,783,000 4,816,000
2007 .................. 19,600,000 18,084,000
2008 .................. 4,784,000 4,091,000
2009 .................. 4,545,000 4,269,000
</TABLE>
The Company has approximately $987,000 of unused investment tax credits
expiring through the year 2000, with the majority expiring in 1997. These
carryovers will also be subject to limitation, due to the change in ownership.
The Company also has small producers depletion carry forwards of
approximately $13 million which may be carried forward indefinitely to offset
the Company's future taxable income.
7. COMMITMENTS AND CONTINGENCIES
In 1988, the Company settled a gas contract dispute with El Paso Natural
Gas Company ("El Paso") relating to the Shurley Ranch properties in Sutton
County, Texas. These properties had been the subject of litigation until late
1993, at which time El Paso began purchasing gas on these properties. Pursuant
to the terms of the gas contract settlement, El Paso applied 65% of the current
production to a prepayment received by the Company in 1988. The Company's 1996
revenue of $140,000 from this portion of the production has been applied against
this prepayment at an imputed price of $3.25 per Mcf. The gas contract expired
in February 1997, and at that time, as provided in the contract, the Company is
obligated to pay El Paso the lesser of the remaining prepayment balance or
$360,000. During the fourth quarter of 1994, the Company concluded that it was
relatively certain that the Shurley Ranch properties could not produce
sufficient gas to recover El Paso's prepayment and the Company released a
portion of the delivered balance to income of $450,000 representing the excess
of the remaining prepayment balance over the sum of the expected production from
January 1995 through February 1997 and the expected $360,000 minimum payment.
The Company updated this assessment during 1996, resulting in a release of
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<PAGE> 232
the delivered balance to income of $132,000 in the fourth quarter. As of
December 31, 1996, the remaining prepayment balance was $370,000 and is
classified as a current liability.
The Company is subject to various possible contingencies which arise
primarily from interpretation of federal and state laws and regulations
affecting the oil and gas industry. Such contingencies include differing
interpretations as to the prices at which oil and gas sales may be made, the
prices at which royalty owners may be paid for production from their leases and
other matters. Although management believes it has complied with the various
laws and regulations, administrative rulings and interpretations thereof,
adjustment could be required as new interpretations and regulations are issued.
In addition, production rates, marketing and environmental matters are subject
to regulation by various federal and state agencies.
The Company is not currently a party to any litigation which would have a
material impact on its financial statements. However, due to the nature of its
business, certain legal or administrative proceedings may arise in the ordinary
course of its business.
The Company is committed to various lease contracts for office space and
miscellaneous office equipment expiring at various intervals through 2003, with
total minimum payments aggregating $794,000 at December 31, 1996. The Company
incurred net rent expense of approximately $72,000, $85,000 and $93,000 for the
years ended December 31, 1996, 1995 and 1994, respectively. At December 31,
1996, the minimum payments required over the next five years and thereafter are
as follows:
<TABLE>
<CAPTION>
NET
LEASE SUBLEASE LEASE
YEAR EXPENSE INCOME EXPENSE
---- ------- ------ -------
<S> <C> <C> <C>
1997 ................ $136,000 $(31,000) $105,000
1998 ................ 116,000 -- 116,000
1999 ................ 124,000 -- 124,000
2000 ................ 126,000 -- 126,000
2001 ................ 134,000 -- 134,000
Thereafter .......... 158,000 -- 158,000
--------
Total ............... $794,000 $(31,000) $763,000
======== ======== ========
</TABLE>
8. CERTAIN RELATIONSHIPS WITH RELATED PARTIES
In 1991, the Company entered into a service contract with Petroleum
Financial, Inc. ("PFI") to perform all of the Company's financial and
administrative functions. Through 1996, PFI was owned by the Company (26%) and
Mr. Jeffrey Stevens, Senior Vice President and Chief Financial Officer (through
January 1997) and Director of the Company. Effective December 31, 1996, the
Company agreed to relinquish its investment in PFI in exchange for final
settlement of amounts owed to PFI for 1996 services rendered to the Company. As
a result, the Company gave accounting recognition to the services received in
exchange for its equity interest in PFI, resulting in a charge to earnings of
$121,000. The aggregate service fees for the years ended December 31, 1996,
1995, and 1994 were $385,000, $300,000 and $408,000, respectively. For 1997, PFI
has agreed to perform its services for the Company at a monthly fee of $18,000,
with possible upward or downward adjustments dependent on the workload and
achievement of certain goals.
The Company utilized the services of Bentley Securities Corporation
("Bentley") during 1996 in connection with the private placement of Common Stock
and warrants and its Eastern Shelf Exploitation Agreement. William P. Nicoletti,
Chairman of the Board of Directors of the Company is a Senior Advisor to
Bentley. Total fees paid to Bentley in 1996 were $327,500 ($280,000 in cash and
$47,500 in stock).
F-30
<PAGE> 233
At December 31, 1996, the Company had a receivable outstanding from an
employee of $100,000. This receivable was collected in January 1997 and is
classified in Other Receivables.
9. ADDITIONAL OPERATIONS AND BALANCE SHEET INFORMATION
SIGNIFICANT OIL AND GAS PURCHASES
Oil sales are made on a day-to-day basis or under short-term contracts at
approximately the current area posted price. The loss of any oil purchaser would
not be expected to have a material adverse effect upon operations. Following is
a listing of significant oil purchasers during the three-year period ended
December 31, 1996, and the approximate percentage of oil revenues derived from
each:
<TABLE>
<CAPTION>
CRUDE OIL PURCHASERS PERCENT
-------------------- ------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Sun Refining & Marketing Company ...... 28 31 13
Transco Liquids Company ............... 14 11 16
EOTT Energy Corporation ............... 13 -- --
Koch Oil Company ...................... 10 -- --
Union Pacific Fuels, Inc. ............. 5 15 10
Marathon .............................. -- 34 55
</TABLE>
A majority of the Company's natural gas is sold pursuant to short-term
contracts at prices which fluctuate at a premium or discount to the spot market.
Under the terms of the contracts, the gas purchasers may elect to purchase less
gas than the wells are able to produce, and the Company may be unable to sell
the excess production to other purchasers. Following is a listing of significant
natural gas purchasers during the three-year period ended December 31, 1996, and
the approximate percentage of natural gas revenues derived from each:
<TABLE>
<CAPTION>
NATURAL GAS PURCHASERS PERCENT
---------------------- -------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
MG Natural Gas Corporation ...... 27 18 --
Amoco Production Company ........ 22 -- --
Energy Source ................... 12 -- --
Transco Liquids Company ......... -- 39 77
</TABLE>
There are no other customers of the Company which individually accounted
for more than 10% of the Company's revenues during the three years ended
December 31, 1996.
ACCRUED LIABILITIES
Accrued liabilities as of December 31, 1996, and 1995 consist of the
following:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Operating expenses ............. $209,000 $ 97,000
Accrued salaries and other ..... 318,000 275,000
-------- --------
Total .......................... $527,000 $372,000
======== ========
</TABLE>
F-31
<PAGE> 234
10. SUBSEQUENT EVENTS
Effective January 1, 1997, the Company entered into an agreement with a
group of investors to participate in a program of three dimensional seismic
evaluation, lease acquisition, drilling and development operations in certain
undeveloped properties in a defined area on the Eastern Shelf of the Permian
Basin in Texas. The group is to invest a minimum of $1.2 million for 50% of the
Company's interest in these properties. After payout the Company will have a 20%
reversionary interest in the property from the investor group in the first ten
prospects and a 10% reversionary interest in the next ten prospects. The
investor group will reimburse the Company for a portion of the general and
administrative costs related to the project. The agreed upon reimbursement for
1997 is $200,000. For each $1,000 invested by the investor group they will earn
warrants that allow the investor to purchase 41.667 shares of the Company's
Common Stock at $5.76 per share, which represented a premium over the price of
the underlying common stock at the time the warrants were priced . The warrants
will expire on November 18, 1999 and the maximum number of common shares that
can be acquired pursuant to the exercise of warrants under this agreement is
50,000 shares.
11. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for the year ended December 31, 1996 is
set forth below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Net revenues .......................................... $ 2,326,000 $ 2,613,000 $ 2,580,000 $ 3,125,000
Net income (loss) ..................................... 706,000 791,000 385,000 (303,000)
Net income (loss) applicable to common
stockholders, as restated ......................... 491,000 595,000 (4,638,000) (303,000)
Net income (loss) applicable to common
stockholders, as previously reported .............. 491,000 595,000 385,000 N/A
Net income (loss) applicable to common
stockholders per share, as restated ............... .31 .37 (1.64) (.13)
Net income (loss) applicable to common
stockholders per share, as previously reported .... .31 .37 .14 N/A
</TABLE>
During the third quarter ended September 30, 1996, the Company converted
its outstanding preferred stock into Common Stock (see Note 5). As restated, the
September 30, 1996 net loss applicable to common shareholders has been reduced
by the excess fair value of Common Stock issued over the net carrying value of
the preferred stock converted, which approximated $5 million. This amount, as
well as preferred stock dividends, reduced the net loss applicable to common
shareholders for earnings per share computational purposes. As previously
reported, the excess of fair value of the Common Stock exchanged for the
preferred stock was not deducted in determining the net loss applicable to
common shareholders for the quarter ended September 30, 1996. The restatement
for the quarter ended September 30, 1996 had no effect on the Company's
previously reported revenues, gross profit or net income.
The Company recognized 1996 fourth quarter adjustments approximating
$400,000, primarily related to increased depreciation, depletion and
amortization resulting from downward reserve revisions. In addition, the Company
recorded a gain in the fourth quarter of 1996 of $132,000 in connection with
certain gas contract contingencies as described in Note 7.
F-32
<PAGE> 235
12. SUPPLEMENTAL OIL AND GAS DISCLOSURES (UNAUDITED)
The following table summarizes costs incurred in oil and gas property
acquisition, exploration and development activities. Property acquisition costs
are those costs incurred to purchase, lease, or otherwise acquire property,
including both undeveloped leasehold and the purchase of reserves in place.
Exploration costs include costs of identifying areas that may warrant
examination and in examining specific areas that are considered to have
prospects containing oil and gas reserves, including costs of drilling
exploratory wells, geological and geophysical costs and carrying costs of
undeveloped properties. Development costs are incurred to obtain access to
proved reserves, including the cost of drilling development wells and to provide
facilities for extracting, treating, gathering and storing the oil and gas.
Costs incurred in oil and gas activities for the three years ended December
31 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
(amounts in thousands)
<S> <C> <C> <C>
Property acquisition ... $11,046 $ 4,605 $ 1,933
Exploration ............ 208 246 449
Development ............ 2,815 872 --
------- ------- -------
$14,069 $ 5,723 $ 2,382
======= ======= =======
</TABLE>
Selected data for the three years ended December 31 follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
(amounts in thousands except per unit amounts)
<S> <C> <C> <C>
Net oil and gas revenues ............... $ 7,870 $ 3,220 $ 3,231
Depletion per Mcfe ..................... .73 .80 .60
Average sales price per barrel of oil .. 21.12 16.53 15.25
Average sales prices per Mcf of gas .... 2.29 1.62 2.01
Production costs per equivalent Mcf .... .63 .53 .47
</TABLE>
Net proved oil and gas reserves as of December 31, 1996, 1995 and 1994 have
been prepared by the Company and audited by Rider Scott Company, the Company's
independent reservoir engineers. The reserves were prepared in accordance with
guidelines established by the Securities and Exchange Commission and
accordingly, were based on existing economic and operating conditions. Oil and
gas prices in effect at December 31 of each year were used except in those
instances where the sale is covered by contract, in which case the applicable
contract prices including fixed and determinable escalations were used for the
duration of the contract, and thereafter the last contract price was used. Oil
and gas prices December 31, 1996 were substantially higher than those realized
on average by the Company over the past five years. Also, prices at the end of
the first quarter of 1997 are below those at year-end 1996. Changes in prices
could have a material effect on reserve estimates and related future net cash
flow amounts. Operating costs, production and ad valorem taxes and future
development costs were based on current costs with no escalation.
There are numerous uncertainties inherent in estimating quantities of
proved reserves and in projecting the future rates of production and timing of
development expenditures. The following reserve data represents estimates only
and should not be construed as being exact. Moreover, the present values should
not be construed as the current market value of the Company's oil and gas
reserves or the costs that would be incurred to obtain equivalent reserves.
F-33
<PAGE> 236
ESTIMATED QUANTITIES OF RESERVES
Oil quantities are expressed in thousands of barrels and gas volumes in
millions of cubic feet. Natural gas liquids are combined with oil quantities.
<TABLE>
<CAPTION>
1996 1995 1994
--------------------- ------------------- -------------------
OIL GAS OIL GAS OIL GAS
(MBBL) (MMCF) (MBBL) (MMCF) (MBBL) (MMCF)
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
PROVED RESERVES
Balance beginning of year ..................... 689.5 8,704.3 544.6 5,961.2 329.0 5,078.8
Revisions of previous estimates ............... 60.3 (1,521.1) (11.7) (1,009.3) 55.1 1,879.0
Extensions, discoveries and other additions ... 409.9 415.8 -- -- 4.6 174.2
Production .................................... (187.3) (2,867.3) (127.1) (1,348.6) (94.6) (1,332.3)
Acquisition of minerals in place .............. 939.4 14,251.4 397.0 5,101.0 250.5 161.5
Sales of minerals in place .................... (18.8) (269.1) (113.3) -- -- --
-------- -------- -------- -------- -------- --------
Balance end of year ........................... 1,893.0 18,714.0 689.5 8,704.3 544.6 5,961.2
======== ======== ======== ======== ======== ========
PROVED DEVELOPED RESERVES
Balance beginning of year ..................... 492.7 6,932.4 544.6 5,961.2 329.0 5,078.8
Balance end of year ........................... 1,345.1 17,276.5 492.7 6,932.4 544.6 5,961.2
</TABLE>
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS AND CHANGES THEREIN
RELATING TO PROVED OIL AND GAS RESERVES
Standardized Measure Of Discounted Future Net Cash Flows And Changes
Therein Relating To Proved Oil And Gas Reserves ("Standardized Measure") does
not purport to present the fair market value of a Company's oil and gas
properties. An estimate of such value should consider, among other factors,
anticipated future prices of oil and gas the probability of recoveries in excess
of existing proved reserves, the value of probable reserves and acreage
prospects, and perhaps different discount rates. It should be noted that
estimates of reserve quantities, especially from new discoveries, are inherently
imprecise and subject to substantial revision.
Under the Standardized Measure, future cash inflows were estimated by
applying year-end prices, adjusted for fixed and determinable escalations, to
the estimated future production of year-end proved reserves. Future cash inflows
were reduced by estimated future production and development costs based on
year-end costs to determine pre-tax cash inflows. Future income taxes were
computed by applying the statutory tax rate to the excess of pre-tax cash
inflows over the Company's tax basis in the associated proved oil and gas
properties. Tax credits and net operating loss carryforwards were also
considered in the future income tax calculation. Future net cash inflows after
income taxes were discounted using a 10% annual discount rate to arrive at the
Standardized Measure.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------
1996 1995 1994
--------- --------- ---------
(amounts in thousands)
<S> <C> <C> <C>
Future cash inflows ........................................ $ 101,056 $ 31,175 $ 17,826
Future production and development costs .................... (39,038) (11,894) (6,811)
Future income tax expense .................................. (7,133) -- --
--------- --------- ---------
Future net cash flows ...................................... 54,885 19,281 11,015
10% annual discount for estimated timing of cash flows ..... (23,598) (5,230) (2,625)
--------- --------- ---------
Standardized measure of discounted future net cash flows ... $ 31,287 $ 14,051 $ 8,390
========= ========= =========
</TABLE>
F-34
<PAGE> 237
The following table sets forth an analysis of changes in the Standardized
Measure:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(amounts in thousands)
<S> <C> <C> <C>
Beginning of the year ................................................ $ 14,051 $ 8,390 $ 9,683
Sales of oil and gas produced, net of production costs ............... (7,870) (3,220) (3,231)
Net changes in sales prices and production costs , and other (1) ..... 7,086 3,919 (2,041)
Extensions and discoveries, less applicable future development
and production costs ............................................ 3,768 -- 163
Previously estimated development costs incurred during the period .... 150 230 12
Revisions of previous estimates, including revised estimates of
development costs, reserves and rates of production ............. (4,736) (1,406) 1,138
Accretion of discount ................................................ 1,405 839 968
Purchase of reserves ................................................. 21,417 6,062 1,698
Sales of reserves .................................................... (441) (763) --
Net change in income taxes ........................................... (3,543) -- --
-------- -------- --------
End of year (2) ...................................................... $ 31,287 $ 14,051 $ 8,390
======== ======== ========
</TABLE>
- ---------
(1) During 1996, 1995 and 1994, the prices the Company received from its sales
of oil and gas averaged $21.12, $16.53 and $15.25 per barrel of oil and
$2.29, $1.62 and $2.01 per Mcf of gas, respectively.
(2) The revenues generated by the Company are highly dependent upon the prices
of oil and gas. In accordance with the guidelines established by the
Securities and Exchange Commission, the year-end reserves are valued at
prices in effect at December 31 of each year, even though these prices may
differ significantly from prices actually received during the year. Prices
used to value reserves were approximately $24.25, $17.98 and $14.61 per
barrel of oil and $2.95, $2.14 and $1.65 per Mcf of gas as of December 31,
1996, 1995 and 1994, respectively.
F-35
<PAGE> 238
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 1O-QSB/A
(Amendment No. 1)
[X] Quarterly report under Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
[_] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from ___________ to ___________
Commission file number 1-9933
AMERAC ENERGY CORPORATION
(Exact Name of Small Business Issuer as Specified in Its Charter)
DELAWARE 75-2181442
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1201 LOUISIANA, SUITE 3350
HOUSTON, TEXAS 77002-5609
(Address of Principal Executive Offices)
(713) 308-5250
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No
The number of shares of Common Stock, $0.05 par value, outstanding on October
31, 1997 was 3,891,981
Transitional Small Business Disclosure Format (check one):
Yes [_] No [X]
================================================================================
G-1
<PAGE> 239
AMERAC ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED)
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents..................................... $ 53,000 $ 712,000
Receivables
Trade and other, net of allowance for bad debts of $32,000.. 338,000 327,000
Gas and oil receivable...................................... 1,001,000 1,451,000
Prepaid expenses............................................ 146,000 146,000
------------- -------------
Total current assets...................................... 1,538,000 2,636,000
------------- -------------
PROPERTY AND EQUIPMENT
Oil and gas properties at cost.............................. 34,313,000 32,290,000
Less accumulated depreciation, depletion and amortization... (16,593,000) (12,949,000)
------------- -------------
Net oil and gas properties................................ 17,720,000 19,341,000
OTHER ASSETS................................................... 335,000 395,000
------------- -------------
TOTAL ASSETS................................................... $ 19,593,000 $ 22,372,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Trade payables............................................... $ 314,000 $ 199,000
Accrued liabilities.......................................... 288,000 527,000
Current portion of long-term debt............................ 579,000 ----
Obligation under gas contract................................ ---- 370,000
------------- -------------
Total current liabilities................................ 1,181,000 1,096,000
------------- -------------
LONG-TERM LIABILITIES
Notes payable banks (less current portion).................. 7,250,000 7,704,000
Other long-term liabilities................................. 8,000 140,000
------------- -------------
Total long-term liabilities............................... 7,258,000 7,844,000
------------- -------------
COMMITMENTS AND CONTINGENT LIABILITIES (see Note 4)
STOCKHOLDERS' EQUITY
Common stock, $0.05 par value; authorized - 20,000,000
shares; outstanding -3,891,981 shares at September 30, 1997
and 3,883,526 shares at December 31, 1996................. 195,000 194,000
Additional paid-in capital.................................. 151,181,000 151,104,000
Accumulated deficit......................................... (140,222,000) (137,866,000)
------------- -------------
Total stockholders' equity............................... 11,154,000 13,432,000
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $ 19,593,000 $ 22,372,000
============= =============
</TABLE>
(The accompanying notes are an integral part of these consolidated financial
statements).
G-2
<PAGE> 240
AMERAC ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- -----------------------
1997 1996 1997 1996
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES
Oil, gas and related product sales................... $ 1,889,000 $ 2,584,000 $ 7,206,000 $ 7,432,000
Other income......................................... 2,000 (4,000) 19,000 42,000
----------- ----------- ----------- -----------
Total revenues.................................... 1,891,000 2,580,000 7,225,000 7,474,000
----------- ----------- ----------- -----------
EXPENSES
Lease operating...................................... 658,000 597,000 2,317,000 1,577,000
Exploration expenses, including dry hole costs....... 29,000 22,000 314,000 29,000
Provision for impairment of properties (see Note 2).. 1,573,000 --- 2,269,000 ---
Depreciation, depletion and amortization............. 733,000 699,000 2,144,000 1,693,000
General and administrative........................... 761,000 627,000 1,997,000 1,749,000
(Gain) Loss on sale of oil and gas properties........ ---- ---- ---- (124,000)
Interest............................................. 183,000 245,000 510,000 662,000
----------- ----------- ----------- -----------
Total expenses.................................... 3,937,000 2,190,000 9,551,000 5,586,000
----------- ----------- ----------- -----------
Income (loss)before income taxes..................... (2,046,000) 390,000 (2,326,000) 1,888,000
Provision for federal income taxes................... --- 5,000 30,000 5,000
----------- ----------- ----------- -----------
NET INCOME (LOSS).................................... (2,046,000) 385,000 (2,356,000) 1,883,000
Preferred dividends.................................. ---- (5,023,000) ---- (5,434,000)
----------- ----------- ----------- -----------
INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS...... $(2,046,000) $(4,638,000) $(2,356,000) $(3,551,000)
=========== =========== =========== ===========
INCOME (LOSS) PER COMMON SHARE
(as adjusted, see Note 1).......................... $ (.53) $ (1.64) $ (.61) $ (1.75)
=========== =========== =========== ===========
AVERAGE COMMON SHARES AND EQUIVALENTS
outstanding (as adjusted, see Note 1).............. 3,889,000 2,828,000 3,886,000 2,031,000
=========== =========== =========== ===========
</TABLE>
(The accompanying notes are an integral part of these consolidated
financial statements).
G-3
<PAGE> 241
AMERAC ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1997 1996
-------------- ------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net income (loss)............................................ $ (2,356,000) $ 1,883,000
Adjustments needed to reconcile net income to net cash flow
provided by operating activities
Depreciation, depletion and amortization................... 2,144,000 1,693,000
Exploration expenses, including dry holes and impairments.. 2,071,000 29,000
Gain on sale of properties................................. ---- (124,000)
Stock issued for compensation.............................. 50,000 180,000
Recognition of deferred revenue............................ (370,000) (105,000)
Other...................................................... (44,000) ----
Changes in operating assets and liabilities:
Oil and gas receivables and other........................ 438,000 (931,000)
Trade payables........................................... 115,000 72,000
Accrued and other long-term liabilities.................. (372,000) (84,000)
---------- -----------
NET CASH FLOW PROVIDED BY OPERATING ACTIVITIES................ 1,676,000 2,613,000
---------- -----------
CASH FLOW FROM INVESTING ACTIVITIES
Proceeds from sale of assets................................. ---- 1,281,000
Oil and gas acquisitions and expenditures.................... (2,486,000) (12,995,000)
Other........................................................ 19,000 (268,000)
---------- -----------
NET CASH USED FOR INVESTING ACTIVITIES........................ (2,467,000) (11,982,000)
---------- -----------
CASH FLOW FROM FINANCING ACTIVITIES
Bank borrowings, net......................................... 125,000 8,951,000
Sale of common stock......................................... ---- 364,000
Other........................................................ 7,000 10,000
---------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES..................... 132,000 9,325,000
---------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.......... (659,000) (44,000)
Cash and cash equivalents at beginning of period............. 712,000 144,000
---------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................... $ 53,000 $ 100,000
========== ===========
</TABLE>
(The accompanying notes are an integral part of these consolidated financial
statements).
G-4
<PAGE> 242
AMERAC ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
DECEMBER 31, 1996 TO SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON SHARES
($0.05 PAR VALUE) ADDITIONAL
-------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------- -------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE - DECEMBER 31, 1996......... 3,883,526 $194,000 $151,104,000 $(137,866,000) $13,432,000
Stock issued for director's fees.. 8,295 1,000 50,000 ---- 51,000
Options exercised................. 2,667 ---- 7,000 ---- 7,000
Net income........................ ---- ---- ---- (2,356,000) (2,356,000)
Other............................. (2,507) ---- 20,000 ---- 20,000
--------- -------- ------------ ------------- -----------
BALANCE - SEPTEMBER 30, 1997........ 3,891,981 $195,000 $151,181,000 $(140,222,000) $11,154,000
========= ======== ============ ============= ===========
</TABLE>
(The accompanying notes are an integral part of these consolidated financial
statements.)
G-5
<PAGE> 243
AMERAC ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB of the Securities
and Exchange Commission. In the opinion of management, all normal and recurring
adjustments necessary for a fair presentation of results of operations and
financial position for the interim periods have been included. The results of
operations for the interim periods shown in this report are not necessarily
indicative of results to be expected for the year or any other interim period.
These financial statements and notes should be read in conjunction with Amerac
Energy Corporation's (the "Company") annual report for the year ended December
31, 1996.
Earnings per share and weighted average common shares outstanding for the
three and nine months ended September 30, 1996, have been retroactively restated
to reflect the one for fifteen reverse Common Stock split approved by the
Company's stockholders in November 1996.
Certain prior year amounts have been reclassified to conform with the
current year presentation.
2. IMPAIRMENTS
The Company follows the successful efforts method of accounting for its oil
and gas operations, as prescribed in Statement of Financial Accounting Standards
("SFAS") 19 issued by the Financial Accounting Standards Board. Under the
successful efforts method, costs of productive wells, development dry holes and
productive leases are capitalized and amortized on a unit-of-production basis
over the life of remaining proved reserves. Costs centers for amortization
purposes are determined on a field-by-field basis.
Prior to January 1, 1996, capitalized costs of proved properties were
reviewed for impairment on a field-by-field basis limiting capitalized costs to
estimated future net revenues from proved properties, assuming current prices
and costs. Commencing January 1, 1996, the Company adopted SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of". Pursuant to SFAS 121, the Company assesses the need for an
impairment of capitalized costs of proved oil and gas properties on a field-by-
field basis utilizing undiscounted expected future cash flows. If an impairment
is indicated, the amount of such impairment is recognized to the extent that the
net capitalized costs of the proved oil and gas properties exceeds the fair
market value so determined.
Based on such an assessment, the Company has recorded a Provision for
impairment for the nine months ended September 30, 1997 of $2,269,000. This
provision primarily was attributable to the $534,000 non-cash write off in the
second quarter of 1997 of the Company's Sacatosa project and a $1,523,000 non-
cash write-down of the Company's Blackwell/RQS field in the third quarter of
1997.
G-6
<PAGE> 244
AMERAC ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1997 1996
------------ -------------
<S> <C> <C>
Cash payments for:
Interest.............................................. $ 510,000 $ 662,000
Income taxes.......................................... 60,000 5,000
Non-cash investing and financing activities:
Senior Preferred Stock dividends...................... ---- 5,434,000
Compensation paid in Common Stock..................... 50,000 180,000
Approximate value of Common Stock issued for Fremont
acquisition......................................... ---- 640,000
</TABLE>
4. CONTINGENCIES
The Company has a reserve established for the estimated costs associated
with platform abandonment at its South Timbalier 198 property. At September 30,
1997, the reserve for such abandonment was $454,000, compared with $389,000 at
December 31, 1996. Such amounts are included in Accumulated Depreciation,
Depletion and Amortization.
The Company is subject to various possible contingencies which arise
primarily from interpretation of federal and state laws and regulations
affecting the oil and gas industry. Such contingencies include differing
interpretations as to the prices at which oil and gas sales may be made, the
prices at which royalty owners may be paid for production from their leases and
other matters. Although management believes it has complied with the various
laws and regulations, administrative rulings and interpretations thereof,
adjustment could be required as new interpretations and regulations are issued.
In addition, production rates, marketing and environmental matters are subject
to regulation by various federal and state agencies.
The Company is not currently a party to any litigation which would have a
material impact on its financial statements. However, due to the nature of its
business, certain legal or administrative proceedings may arise in the ordinary
course of its business.
G-7
<PAGE> 245
AMERAC ENERGY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Three Months Ended September 30, 1997, Compared With Three Months Ended
September 30, 1996
The Company reported a loss of $2,046,000 for the three months ended September
30, 1997, compared with net income of $385,000 for the three months ended
September 30, 1996. This loss primarily was attributable to a $1,523,000 non-
cash impairment of the Blackwell/RQS field and, to a lesser extent, to lower
revenues for both oil and natural gas and to generally higher expenses.
Oil and gas revenues decreased from approximately $2.6 million during the
third quarter of 1996 to approximately $1.9 million during the third quarter of
1997, primarily due to lower volumes and lower realized prices. The decline in
production volumes was due primarily to lower natural gas production at the
Company's South Timbalier 198. The primary well at South Timbalier began to
produce water during December of 1996, and net production declined from
approximately 382,200 thousand cubic feet ("Mcf") of natural gas during the
third quarter of 1996 to approximately 259,300 Mcf of natural gas during the
third quarter of 1997.
During the third quarter of 1997, the Company's net production was
approximately 40,000 barrels ("Bbls") of oil and 566,600 Mcf of natural gas,
compared with approximately 48,800 Bbls of oil and 649,200 Mcf of natural gas
produced during the third quarter of 1996.
The Company's average realized prices during the third quarter of 1997 were
$17.23 per Bbl of oil and $2.12 per Mcf of natural gas. During the three months
ended September 30, 1996, the Company's realized prices for oil and natural gas
were $20.42 per Bbl and $2.37 per Mcf, respectively.
Lease operating expense increased from $597,000 in the third quarter of 1996
to $658,000 in the third quarter of 1997. This increase is attributable to
higher lease operating expense per unit of production and to workovers of
approximately $55,000 incurred in the third quarter of 1997.
Provision for impairments for the three months ended September 30, 1997 was
$1,573,000, compared with no provision for the comparable period of 1996. This
provision was essentially attributable to a $1,523,000 non-cash write-down of
the Company's Blackwell/RQS field, resulting from unsuccessful or marginal
drilling activity in the field and the subsequent downward evaluation of the
field's reserves.
Depreciation, depletion and amortization ("DD&A") expense increased from
approximately $699,000 during the third quarter of 1996 to approximately
$733,000 during the third quarter of 1997. This increase was due primarily to a
revision in the DD&A rate in the third quarter of 1997 and to additional
investments in oil and gas properties made subsequent to the third quarter of
1996.
General and administrative expenses increased from approximately $627,000 in
the third quarter of 1996 to approximately $761,000 in the third quarter of
1997, primarily as a result of increased staffing due to property acquisitions
made in 1996. This increase was partially offset by overhead billed by the
Company to other working interest owners and reimbursement of general and
administrative costs by certain of the Company's joint interest partners.
Interest expense decreased from approximately $245,000 in the third quarter of
1996 to approximately $183,000 in the third quarter of 1997, primarily as a
result of lower levels of bank debt outstanding during the third quarter of
1997.
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AMERAC ENERGY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Nine Months Ended September 30, 1997, Compared With Nine Months Ended September
30, 1996
The Company reported a net loss of $2,356,000 for the nine months ended
September 30, 1997, compared with net income of $1,883,000 for the nine months
ended September 30, 1996. This nine month loss was attributable primarily to an
aggregate of $2,980,000 of increases in expenses comprised of increases in:
Provision for impairments ($2,269,000); Exploration expenses ($285,000),
primarily geological and geophysical; and workovers, a component of Lease
operating expense, ($426,000).
Oil and gas revenues decreased from approximately $7.4 million for the nine
months ended September 30, 1996 to approximately $7.2 million for the nine
months ended September 30, 1997. This decrease was primarily the result of
lower production due to production declines in various of the Company's
properties, which was partially offset by production from properties acquired
during the third quarter of 1996.
During the nine months ended September 30, 1997, the Company's net production
was approximately 140,900 Bbls of oil and 1,898,900 Mcf of natural gas. During
the comparable period of 1996, the Company's net production was approximately
142,000 Bbls of oil and 2,102,400 Mcf of natural gas.
During the nine months ended September 30, 1997, the Company's average
realized price for oil was $19.76 per Bbl and for natural gas was $2.33 per Mcf,
compared with prices during the nine months ended September 30, 1996 of $19.96
per Bbl of oil and $2.37 per Mcf of natural gas.
Lease operating expense increased from approximately $1.6 million for the nine
months ended September 30, 1996 to approximately $2.3 million for the nine
months ended September 30, 1997. This increase primarily is attributable to
approximately $426,000 of workover expense incurred in the 1997 period, compared
with less than $1,000 of workover expense incurred during the comparable period
of 1996. Additionally, higher lease operating expense resulted from costs
incurred in operating oil and gas properties acquired during the third quarter
of 1996.
Exploratory costs increased from approximately $29,000 for the nine months
ended September 30, 1996 to approximately $314,000 for the nine months ended
September 30, 1997. This increase primarily was attributable to increases in
geological and geophysical costs incurred in connection with the Company's
prospect development activities in the Easter Shelf of the Permian Basin.
Provision for impairments for the nine months ended September 30, 1997 was
$2,269,000, compared with no provision during the comparable period of 1996.
This provision was attributable primarily to the $534,000 non-cash write-off in
the second quarter of 1997 of the Company's Sacatosa project and to a $1,523,000
non-cash write-down of the Company's Blackwell/RQS field in the third quarter of
1997.
DD&A expense for the nine months ended September 30, 1997 was approximately
$2.1 million, exceeding the approximate $1.7 million reported for the comparable
period in 1996. This increase was due primarily to a revision in the DD&A rate
in the third quarter of 1997 and to additional investments in oil and gas
properties made subsequent to the third quarter of 1996.
General and administrative expenses increased from approximately $1.7 million
for the nine months ended September 30, 1996 to approximately $2.0 million for
the nine months ended September 30, 1997. This increase was primarily
attributable to increased salaries and benefits expense due to the hiring of
additional employees subsequent to the third quarter of 1996; costs incurred in
connection with listing of its Common Stock on the American Stock Exchange; and
the preparation of a "shelf" registration statement, as required by agreements
with certain stockholders. These increases were partially offset by overhead
billed by the Company to other working interest owners/partners.
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AMERAC ENERGY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Interest expense decreased from approximately $662,000 for the nine months
ended September 30, 1996 to approximately $510,000 for the nine months ended
September 30, 1997, primarily as a result of lower levels of bank debt
outstanding during the comparable 1997 period.
DRILLING AND DEVELOPMENT ACTIVITIES
In September 1997, the Company announced that it had revised upward its proved
undeveloped reserves in the Golden Trend Field in Garvin County, Oklahoma with
the identification of ten additional proved undeveloped drilling locations in
the field. The gross drilling and completion cost per well is approximately
$700,000, and if all ten wells are drilled and completed, the Company's
estimated share of the aggregate drilling and completion costs would be
approximately $5.8 million. The Company has not yet formalized a timetable for
drilling these proved undeveloped locations.
LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of 1997, the Company generated cash flow from
operations of approximately $1.7 million and had net borrowings of $125,000,
which were used primarily to fund its exploration and development drilling
activities. At the end of the third quarter of 1997, the Company had
outstanding debt of approximately $7.8 million under its bank credit facility.
Effective August 1, 1997, the Company's borrowing base was increased to $10.5
million, which decreases $250,000 on the first day of each month, commencing
September 1, 1997. The Company's borrowing base at September 30, 1997 was
approximately $10.2 million, providing available borrowing capacity of
approximately $2.4 million. At November 14, 1997, the Company's borrowing base
was approximately $9.8 million, which with bank debt of $8.3 million provided
the Company with borrowing capacity of approximately $1.5 million.
The Company's working capital position at September 30, 1997 was $357,000,
down from approximately $1.5 million of working capital reported at December 31,
1996. Working capital at June 30, 1997 was approximately $1.6 million. The
decline primarily was attributable to a reclassification of $579,000 in long-
term debt to current maturities during the third quarter of 1997 and to the
reduction of cash to pay for the Company's drilling and other development
activities. The Company expects to further draw on its working capital which,
together with additional bank borrowing, will be used to fund the Company's
participation in drilling and other development activities anticipated during
the fourth quarter of 1997. The Company believes it has sufficient borrowing
capacity, together with internally generated cash flow, to fund its fourth
quarter drilling and other development plans.
In early 1998, the Company anticipates it will need additional funds to
augment internally generated cash flow to fund its operations and capital
spending plans. The Company may seek to raise such additional funds through
supplemental bank borrowing, mezzanine financing, sale of production payments or
equity offerings, or some combination of the foregoing, or through a merger with
an adequately capitalized merger partner. However, there is no assurance the
Company will be successful in obtaining any such additional financing or in
consummating any such merger.
RECENT DEVELOPMENTS
In September, the Company announced that pursuant to a previously announced
plan to consider alternatives for maximizing shareholder value, its Board of
Directors authorized and had initiated discussions with a select group of
companies regarding a possible strategic merger or similar business combination.
The Company's financial advisor recommended this course of action as a result of
their analysis of the various options available to the Company.
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AMERAC ENERGY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). SFAS
128 requires dual presentation of "basic earnings per share" and "diluted
earnings per share" on the face of the Consolidated Statement of Operations.
SFAS 128 will be effective for fiscal yearend reporting and requires restatement
of all prior period earnings per share data presented. The impact of adopting
this statement in not expected to have a material effect on the Company's
earnings per share.
FORWARD-LOOKING STATEMENTS
When included in this report, the words "expects," "intends," "plans,"
"anticipates," "estimates," and analogous expressions are intended to identify
forward-looking statements. Such statements inherently are subject to a variety
of risks and uncertainties that could cause actual results to differ materially
from those projected. Such risks and uncertainties include, among others,
general economic and business conditions, changes in foreign and domestic oil
and gas exploration and production activity, information regarding oil and gas
reserves, future drilling and operations, future production of oil and gas,
future net cash flows, competition, changes in foreign, political, social and
economic conditions, regulatory initiatives and compliance with governmental
regulations, and various other matters, many of which are beyond the Company's
control. These forward-looking statements speak only as of the date of this
report. The Company expressly disclaims any obligation or undertaking to
release publicly any updates or revisions to any forward-looking statement
contained herein to reflect any changes in the Company's expectations with
regard thereto or any changes in events, conditions or circumstances on which
any such statement is based.
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PART II
OTHER INFORMATION
ITEM 5. OTHER INFORMATION
The Company has entered into an agreement, dated October 20, 1997 and
effective August 4, 1997, with Peak Enernomics, Inc. ("Enernomics"), a
corporation owned and controlled by Kenneth R. Peak, a director and executive
officer of the Company, which provides that the Company will pay Enernomics
$100,000 upon consummation of a possible merger or similar business combination.
In addition, the Company will (i) pay Enernomics $5,000 per month until the
consummation of such a transaction and (ii) deliver to Enernomics 6,000 shares
of Company common stock, which will vest in Enernomics on a monthly basis at a
rate of 1,000 shares per month, but no later than upon consummation of such a
transaction, for furnishing Mr. Peak's services as a member of a Special
Committee formed to evaluate possible strategic alternatives for the Company.
The Company has entered into an agreement, dated October 20, 1997 and
effective August 4, 1997, with William P. Nicoletti, Chairman of the Board of
the Company, which provides that the Company will, in lieu of Mr. Nicoletti's
compensation as Chairman of the Board of the Company, (i) pay Mr. Nicoletti
$2,500 per month until consummation of a possible merger or similar business
combination and (ii) deliver to Mr. Nicoletti 3,000 shares of Company common
stock, which will vest in Mr. Nicoletti on a monthly basis at a rate of 500
shares per month, but no later than upon consummation of such a transaction, for
furnishing his services as a member of a Special Committee formed to evaluate
possible strategic alternatives for the Company.
On August 29, 1997, the Company retained McDonald & Company Securities, Inc.
("McDonald") to act as investment advisor in connection with evaluating the
Company's strategic alternatives and to render an opinion to the Company's Board
of Directors concerning the fairness, from a financial point of view, of a
possible transaction. Pursuant to an engagement letter, the Company agreed to
pay McDonald a fee of $50,000 upon delivery of such opinion. In addition, upon
consummation of a transaction, McDonald will be entitled to additional
compensation in the amount of $300,000 from the Company. The Company has also
agreed to reimburse McDonald for its out-of-pocket expenses (not to exceed
$25,000) and to indemnify McDonald against certain liabilities.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
See Exhibit Index following this page.
A report on Form 8-K was filed on September 24, 1997 reporting the Company had
issued a press release on September 22, 1997 announcing that its Board of
Directors had authorized the initiation of discussions with a select group of
companies regarding a possible strategic merger or similar business combination.
The Company also announced that it was revising upward its proved undeveloped
reserves in the Golden Trend Field in Garvin County, Oklahoma.
SIGNATURE
In accordance with the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned, hereunto duly authorized.
AMERAC ENERGY CORPORATION
(Registrant)
/s/ Jeffrey B. Robinson
-------------------------------------
Date: December 17, 1997 Jeffrey B. Robinson
President and Chief Executive Officer
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EXHIBIT INDEX
3-(1) Certificate of Incorporation of Wolverine Exploration Company
(incorporated by reference to Exhibit 3-(1) to the Company's Registration
Statement No. 33-21824 filed May 13, 1988).
3-(2) Amendment to Certificate of Incorporation of Wolverine Exploration
Company dated September 12, 1988 (incorporated by reference to Exhibit 3-
(1)(a) to the Company's Registration Statement No. 33-24429 filed
September 28, 1988).
3-(3) Amendment to Certificate of Incorporation of Wolverine Exploration
Company, dated March 16, 1995.
3-(4) Amendment to Certificate of Incorporation of Wolverine Exploration
Company dated March 28, 1995 (incorporated by reference to Annex IV to
Exhibit (a)(1) to the Company's Schedule 13E-4, dated November 15, 1994).
3-(5) Amendment to Certificate of Incorporation of Amerac Energy Corporation
dated July 12, 1996 (incorporated by reference to Exhibit 4(i).4 to the
Company's Current Report on Form 8-K dated February 28, 1997).
3-(6) Amendment to Certificate of Incorporation of Amerac Energy Corporation
dated July 12, 1996 (incorporated by reference to Exhibit 4(i).5 to the
Company's Current Report on Form 8-K dated February 28, 1997).
3-(7) Amendment to Certificate of Incorporation of Amerac Energy Corporation
dated November 20, 1996 (incorporated by reference to Exhibit 4(i).6 to
the Company's Current Report on Form 8-K dated February 28, 1997).
3-(8) Corporate Bylaws (filed herewith).
4-(1) Warrant Agreement, dated November 18, 1996, between Amerac Energy
Corporation and Petroleum Financial, Inc. (incorporated by reference to
Exhibit 4(I).8 to the Company's Registration Statement No. 333-24643
filed April 4, 1997).
4-(2) Form of Warrant (incorporated by reference to Exhibit I to the Warrant
Agreement referred to in Exhibit 4-(1)).
4-(3) Registration Rights Agreement, dated November 18, 1996, between Amerac
Energy Corporation and the party identified therein. A document identical
to this document, except for the name of the Holder and the Holder's
address for notices, was entered into by the Company with each purchaser
of Common Stock in the Company's private sale of Common Stock completed
on November 18, 1996 (incorporated by reference to Exhibit 4(I).10 to the
Company's Registration Statement No. 333-24643 filed April 4, 1997).
4-(4) Form of Warrant Agreement (incorporated by reference to Exhibit VI to the
Exploitation Agreement filed as Exhibit 10-(11) to the Company's Current
Report on Form 8-K, dated February 28, 1997).
4-(5) Form of Warrant (incorporated by reference to Exhibit I to the Form of
Warrant Agreement referred to in Exhibit 4-(4)).
4-(6) Form of Registration Rights Agreement (incorporated by reference to
Exhibit VII to the Exploitation Agreement filed as Exhibit 10-(11) to the
Company's Current Report on Form 8-K, dated February 28, 1997)).
4-(7) Registration Rights Agreement, dated January 16, 1996 among Amerac Energy
Corporation, Powell Resources, Inc., The Langstroth Family Limited I,
Thomas O. Goldsworthy and James B. Tollerton. Related to acquisition of
Fremont Energy Corporation Properties (incorporated by reference to
exhibit 10-(10) to Form 10-K for the fiscal year ended December 31,
1995).
10-(1) Agreement between the Company and William P. Nicoletti, dated October 20,
1997.
10-(2) Agreement between the Company and Peak Enernomics, Inc., dated October
20, 1997.
27 Financial Data Schedule
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APPENDIX H
[LETTERHEAD OF MCDONALD & COMPANY SECURITIES, INC.]
McDONALD INVESTMENT CENTER
800 SUPERIOR AVENUE
CLEVELAND, OHIO 44114-2603
216-443-2300
November 18, 1997
PERSONAL & CONFIDENTIAL
Board of Directors
Amerac Energy Corporation
1201 Louisiana, Suite 3350
Houston TX 77002-5609
Gentlemen:
You have requested our opinion as to the fairness, from a financial point
of view, of the consideration to be paid to the holders of the issued and
outstanding shares of Common Stock, par value $.01 per share, (the "Common
Stock"), of Amerac Energy Corporation, a Delaware corporation (the "Company")
pursuant to the Amended and Restated Agreement and Plan of Merger (the
"Agreement") dated as of November 17, 1997, by and among the Company and SMC
Acquisition Corp., a Delaware corporation ("Merger Sub"), a wholly owned
subsidiary of Southern Mineral Corporation, a Nevada corporation ("SMC").
You have advised us that, pursuant to the Agreement, Merger Sub will be
merged with and into the Company, all of the shares of Common Stock issued and
outstanding prior to the Merger (other than shares held in treasury) will be
converted into the right to receive the consideration specified in the
Agreement, and the Company will become a wholly owned subsidiary of SMC. Under
the terms of the Agreement, the issued and outstanding shares of the Company's
Common Stock will be converted into the right to receive the number of shares of
the Common Stock, par value $.01 per share, of SMC (the "SMC Stock") determined
by dividing (i) $22,500,000 by (ii) the average closing sale price of a share of
the Common Stock as quoted on the Nasdaq Stock Market for the 20 consecutive
trading days preceding the third trading day prior to the closing (the
"Consideration"). You have also advised us that the Agreement provides that no
fewer than 2,727,272 shares of SMC Common Stock, and no more than 3,333,333
shares of SMC Common Stock, will be issued in connection with the Merger.
McDonald & Company Securities, Inc., as part of its investment banking
business, is customarily engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, competitive biddings, secondary
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distributions of listed and unlisted securities, private placements of
valuations for estate, corporate and other purposes.
In connection with rendering this opinion, we reviewed and analyzed, among
other things, the following: (i) the Agreement, including the exhibits and
schedules thereto; (ii) certain publicly available information concerning the
Company, including its Annual Reports to Shareholders and Annual Reports on Form
10-K for each of the last three fiscal years and its Quarterly Reports on Form
10-Q for each of the first three quarters of fiscal 1997; (iii) certain publicly
available information concerning SMC, including its Annual Reports to
Shareholders and Annual Reports on Form 10-K for the last three fiscal years and
its quarterly reports on Form 10-Q for the first three quarters of fiscal 1997;
(iv) certain reserve information provided by each of the Company and SMC,
including reserve reports prepared by independent petroleum engineering firms
for each of the two companies; (v) certain other internal information, primarily
financial in nature, including projections, concerning the business and
operations of the Company and SMC furnished to us by the Company and SMC for
purposes of our analysis; (vi) certain publicly available information concerning
the trading of, and the trading markets for, the Company Common Stock and the
SMC Stock; (vii) certain publicly available information with respect to certain
other companies that we believed to be comparable to the Company or to SMC and
the trading markets for certain of such other companies' securities; and (viii)
certain publicly available information concerning the nature and terms of
certain other transactions that we considered relevant to our inquiry. We also
met with certain officers and employees of the Company and SMC to discuss the
business and prospects of the respective companies, and considered such other
matters as we believed relevant to our inquiry.
In our review and analysis, and in arriving at our opinion, we have assumed
and relied upon the accuracy and completeness of all of the financial and other
information provided to us or publicly available and have assumed and relied
upon the representations and warranties contained in the Agreement. We have not
been engaged to, and have not independently attempted to, verify any of such
information. We have also relied upon the management and consultants of the
Company as to the reasonableness and achievability of the financial and
operating projections (and the assumptions and bases therefor) prepared by us
and, with your consent, we have assumed that such projections reflect the best
currently available estimates and judgments of the management of the Company. We
have not been engaged to assess the achievability of such projections or
assumptions. In addition, we have not conducted a physical inspection or
appraisal of any of the assets, properties or facilities of the Company nor have
we been furnished with any such evaluation or appraisal. We have also assumed
that the conditions to the Merger as set forth in the Agreement would be
satisfied and that the Merger would be consummated on a timely basis in the
manner contemplated by the Agreement.
It should be noted that this opinion is based on economic and market
conditions and other circumstances existing on, and information made available
as of the date hereof, and does not address any matters subsequent to such date.
In addition, our opinion is, in any event,
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limited to the fairness, as of the date hereof, from a financial point of view,
of the Consideration to be received by the holders of the Company's Common Stock
pursuant to the Merger and does not address the Company's underlying business
decision to the Merger or any other terms of the Merger.
We have acted as financial advisor to the Company in connection with the
Merger and will receive from the Company a fee for our services, a significant
portion of which is contingent upon the consummation of the Merger, as well as
the Company's agreement to indemnify us under certain circumstances. We will
also receive a fee for rendering this opinion.
We served as a co-managing underwriter for SMC's 1997 public offering of
Convertible Subordinated Debentures, and received customary compensation for
such services. In the ordinary course of our business, we may actively trade
securities of both the Company and SMC for our own account and for the accounts
of customers and, accordingly, may at any time hold a long or short position in
such securities.
It is understood that this opinion was prepared for the confidential use of
the Board of Directors and senior management of the Company and may not be
disclosed, summarized, excerpted from or otherwise publicly referred to without
our prior written consent. Our opinion is directed to the Board of Directors and
does not constitute a recommendation to any stockholder of the Company as to how
such stockholder should vote at the stockholders' meeting held in connection
with the Merger.
Based upon and subject to the foregoing and such other matters as we
consider relevant, it is our opinion that as of the date hereof, the
Consideration to be received by the holders of the Common Stock pursuant to the
Agreement is fair, from a financial point of view, to the holders of such Common
Stock.
Very truly yours,
/s/ McDONALD & COMPANY SECURITIES, INC.
McDONALD & COMPANY SECURITIES, INC.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article Ninth of the Registrant's amended and restated articles of
incorporation permits, and Article VII of the Registrant's Bylaws contains
indemnification provisions which make mandatory the indemnification permitted
by Section 78.751 of the General Corporation Law of Nevada ("NGCL").
Accordingly, the Registrant generally must indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative, by reason of the fact that such person is or was a director,
officer, employee or agent of the Registrant or is or was serving at the
request of the Registrant as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by such person in connection with
such action, suit or proceeding. However, with respect to an action or suit
brought to obtain a judgment in the Registrant's favor, whether by the
Registrant itself or derivatively by a stockholder, (i) such indemnification is
limited to expenses, including amounts paid in settlement and attorneys' fees
actually and reasonably incurred by him in connection with the defense or
settlement of the action or suit, and (ii) indemnification may not be made for
any claim, issue or matter as to which such a person has been adjudged by a
court of competent jurisdiction, after exhaustion of all appeals therefrom, to
be liable to the Registrant or for amounts paid in settlement to the
Registrant, unless and only to the extent that the court in which the action or
suit was brought or other court of competent jurisdiction determines upon
application that in view of all the circumstances of the case, the person is
fairly and reasonably entitled to indemnity for such expenses as the court
deems proper. In all cases, the person seeking indemnification must have acted
in good faith and in a manner such person reasonably believed to be in, or not
opposed to, the Registrant's best interests. In the case of criminal actions or
proceedings, the person must also have had no reasonable cause to believe such
person's conduct was unlawful. The determination as to whether a person seeking
indemnification has met the required standard of conduct must be made by the
Registrant's stockholders, by a majority vote of a quorum of its disinterested
directors, or by independent legal counsel in a written opinion if such a
quorum does not exist or if the disinterested directors so direct. To the
extent that a director, officer, employee or agent of the Registrant has been
successful on the merits or otherwise in defending any action, suit or
proceeding for which indemnification is permissible under the NGCL, or in
defending any claim, issue or matter therein, the Registrant must, under both
the NGCL and its bylaws, indemnify such person against expenses, including
attorneys' fees, actually and reasonably incurred by such person in connection
with the defense. As permitted by the NGCL, the Registrant's bylaws require it
to advance expenses which its officers and directors incur in defending any
civil or criminal action, suit or proceeding upon receipt of an undertaking by
such person or on such person's behalf to repay such amounts if it is
ultimately determined by a court of competent jurisdiction that such person is
not entitled to be indemnified by the Registrant. The NGCL and the Registrant's
Bylaws provide that the indemnification and advancement of expenses authorized
therein are not exclusive. Accordingly, the Registrant could provide for other
indemnification of its directors
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and officers acting in either or both of their official capacities or other
capacities while holding office. However, excepting advancement of expenses and
court-ordered indemnification explicitly provided for by the NGCL, the NGCL and
the Registrant's bylaws prohibit the Registrant from indemnifying any director
or officer if a final adjudication establishes that such person's acts or
omissions involved intentional misconduct, fraud or a knowing violation of the
law and was material to the cause of action. Consistent with Section 78.752 of
the NGCL, the Registrant's bylaws empower it to procure and maintain insurance
on behalf of any person who is or was a director, officer, employee or agent of
the Registrant, or at the Registrant's request, of another entity, against any
liability asserted against such person and incurred by such person in such
capacity, or arising out of such person's status as such, regardless of whether
the Registrant could indemnify such person against such liability. The
Registrant has purchased insurance on behalf of its directors and officers
against certain liabilities that may be asserted against, or incurred by, such
persons in their capacities as directors or officers of the Registrant, or that
may arise out of their status as directors or officers of the Registrant,
including liabilities under federal and state securities laws. As permitted by
Section 78.037 of the NGCL, the Registrant's current amended and restated
articles of incorporation eliminate the liability of its directors and officers
to the Registrant and its stockholders for damages for breach of fiduciary
duty, except for acts or omissions which involve intentional misconduct, fraud
or a knowing violation of law, or for the payment of distributions in violation
of Section 78.300 of the NGCL. To the extent that this provision limits the
remedies of the Registrant and its stockholders to equitable remedies, it might
reduce the likelihood of derivative litigation and discourage the Registrant's
management or stockholders from initiating litigation against its directors or
officers for breach of their fiduciary duties. Additionally, equitable remedies
may not be effective in many situations. If a stockholder's only remedy is to
enjoin the completion of an action, such remedy would be ineffective if the
stockholder does not become aware of a transaction or event until after it has
been completed. In such a situation, it is possible that the Registrant and its
stockholders would have no effective remedy against directors or officers. The
Registrant has purchased insurance on behalf of its directors and officers
against certain liabilities that may be asserted against, or incurred by, such
persons in their capacities as directors or officers of the Registrant, or that
may arise out of their status as directors or officers of the Registrant,
including liabilities under the federal and state securities laws.
The above discussion of the NGCL and the Registrant's current amended
and restated articles of incorporation and bylaws is not intended to be
exhaustive and is qualified in its entirety by the NGCL and such articles of
incorporation and bylaws.
II-2
<PAGE> 256
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The following exhibits and documents are filed as part of this Registration
Statement:
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
- ------ ---------------------
<S> <C>
+2.1 Amended and Restated Agreement and Plan of Merger, dated as of November 17, 1997, by and
among the Registrant, SMC Acquisition Corp. and Amerac Energy Corporation.
3.1 Amended and restated articles of incorporation of the Registrant, as amended (incorporated
by reference to Exhibit 3.1 to Form 8-K dated May 17, 1996).
3.2 Amended and Restated Bylaws of the Company, as amended (incorporated by reference to
Exhibit (a)(3)(b) of Item 14, Part IV on Form 10-K for fiscal year ended December 31,
1989 (Commission File Reference No.0-8043)).
4.1 Indenture relating to the Registrant's 6 7/8% Subordinated Debentures due 2007, dated
October 7, 1997, between Registrant and American Stock Transfer & Trust Company
(incorporated by reference to Exhibit 4.5 to Form S-2 (Commission File No. 333-35843)).
4.2 Form of Subordinated Debentures (included in Exhibit 4.1).
*5.1 Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
*8.1 Tax Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
10.1 Stock Option Agreement made as of December 31, 1994 between the Registrant and Steven H.
Mikel (incorporated by reference to Exhibit (h) to Form 10-K for fiscal year ended
December 31, 1994).
10.2 Southern Mineral Corporation 1995 Non-Employee Director Compensation Plan (incorporated
by reference to Exhibit (k) to Form 10-K for fiscal year ended December 31, 1994).
10.3 Credit Agreement, dated December 20, 1995, between the Registrant, SMC Production Co.,
San Salvador Development Company, Inc., Venture Resources, Inc., Venture Pipeline
Company, VenGas Pipeline Company, Spruce Hills Production Company, Inc., and Compass
Bank-Houston for Reducing Revolver Line of Credit up to $25,000,000 (incorporated by
reference to Exhibit 10.1 to Form 8-K dated December 20, 1995).
10.4 Promissory Note, dated December 20, 1995, in the original principal amount of $25,000,000
made by the Registrant, SMC Production Co., San Salvador Development Company, Inc.,
Venture Resources, Inc., Venture Pipeline Company, VenGas Pipeline Company, Spruce Hills
Production Company, Inc. in favor of Compass Bank-Houston (incorporated by reference to
Exhibit 10.2 to Form 8-K dated December 20, 1995).
10.5 Credit Agreement, dated December 20, 1995, between the Registrant, SMC Production Co.,
San Salvador Development Company, Inc., Venture Resources, Inc., Venture Pipeline
Company, VenGas Pipeline Company, Spruce Hills Production Company, Inc. and Compass Bank-
Houston for Term Loan of $3,500,000 (incorporated by reference to Exhibit 10.3 to Form 8-K
dated December 20, 1995).
</TABLE>
II-3
<PAGE> 257
<TABLE>
<S> <C>
10.6 Promissory Note, dated December 20, 1995, in the original principal amount of $3,500,000
made by the Registrant, SMC Production Co., San Salvador Development Company, Inc.,
Venture Resources, Inc., Venture Pipeline Company, VenGas Pipeline Company, Spruce Hills
Production Company, Inc. in favor of Compass Bank-Houston (incorporated by reference to
Exhibit 10.4 to Form 8-K dated December 20, 1995).
10.7 Southern Mineral Corporation 1996 Stock Option Plan (incorporated by reference to Exhibit
10.10 to Form 10-KSB for fiscal year ended December 31, 1995).
10.8 Southern Mineral Corporation 1996 Employee Stock Purchase Plan (incorporated by reference
to Exhibit 10.11 to Form 10-KSB for fiscal year ended December 31, 1995).
10.9 Joint Venture Agreement, dated October 1, 1995, between the Registrant and The Links
Group, Inc. (incorporated by reference to Exhibit 10.12 to Form 10-KSB for fiscal year
ended December 31, 1995).
10.10 Option Agreement, dated January 5, 1996, between the Registrant and Diasu Oil & Gas
Company, Inc. covering the exploration joint venture (incorporated by reference to
Exhibit 10.13 to Form 10-KSB for fiscal year ended December 31, 1995).
10.11 Stock Option Agreement dated April 6, 1995, between the Registrant and Robert R. Hillery
(incorporated by reference to Exhibit 10.14 to Form 10-KSB for fiscal year ended
December 31, 1995).
10.12 Subscription Agreement and Assumption of Obligations, dated January 5, 1995, between the
Registrant and Gary L. Chitty, and Thomas J. McMinn (incorporated by reference to Exhibit
10.15 to Form 10-KSB/A for fiscal year ended December 31, 1995).
10.13 Amendment to Credit Agreement between the Registrant et al and Compass Bank-Houston dated
August 30, 1996 (incorporated by reference to Exhibit 10.1 to Form 8-K dated August 30,
1996).
10.14 Second Amendment to Credit Agreements between the Registrant and Compass Bank for fiscal
year ended December 17, 1996 (incorporated by reference to Exhibit 10.14 to Form 10-KSB
for the fiscal year ended December 31, 1996).
10.15 Third Amendment to Credit Agreement between the Registrant and Compass Bank, dated June
10, 1997 (incorporated by reference to Exhibit 10.15 to Form S-2 (Commission File No.
333-35843)).
10.16 Fourth Amendment to Credit Agreement between the Registrant and Compass Bank dated June
30, 1997 (incorporated by reference to Exhibit 10.1 to Form 10-QSB for the quarterly
period ended June 30, 1997).
10.17 Incentive Stock Option Agreement between the Registrant and M. Michael Jenson, dated
August 26, 1997 (incorporated by reference to Exhibit 10.17 to Form S-2 (Commission File
No. 333-35843)).
+10.18 Letter Agreement between the Registrant and Amerac, dated November 17, 1997.
</TABLE>
II-4
<PAGE> 258
<TABLE>
<S> <C>
+10.19 Letter Agreement between the Registrant and Amerac, dated November 21, 1997.
+11.1 Computation of earnings per common and equivalent share.
+13.1 Annual Report on Form 10-KSB/A for the fiscal year ended December 31, 1996.
+13.2 Quarterly Report on Form 10-QSB for the quarterly period ended September 30, 1997.
+16.1 Letter of Registrant regarding change in certifying accountant.
*23.1 Consent of Grant Thornton LLP.
*23.2 Consent of KPMG Peat Marwick LLP.
*23.3 Consent of Price Waterhouse LLP.
23.4 Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P. (included in its opinions filed as
Exhibit 5.1 and Exhibit 8.1).
*23.5 Consent of Netherland, Sewell & Associates, Inc.
+23.6 Consent of McDaniel & Associates Consultants, Ltd.
+23.7 Consent of Ryder Scott Company, Petroleum Engineers.
*23.8 Consent of McDonald & Company Securities, Inc.
24.1 Power of Attorney (included with signature page of this registration statement).
+27.1 Financial Data Schedule.
*99.1 Form of SMC Proxy Card.
*99.2 Form of Amerac Proxy Card.
</TABLE>
- ----------------
* Filed herewith.
+ Previously filed.
(b) Financial Statement Schedules:
None.
(c) Reports, Opinions and Appraisals:
1. Opinion of McDonald & Company Securities, Inc. relating to the
fairness of the consideration to be received by the
stockholders of Amerac in the Merger (see Appendix H of the
Joint Proxy Statement/Prospectus).
ITEM 22. UNDERTAKINGS.
(a) Undertakings Required by Item 512 of Regulation S-B.
Rule 415 Offering Undertaking.
II-5
<PAGE> 259
The Registrant will:
(1) file, during any period in which it offers or sells
securities, a post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section
10(a)(3) of the Securities Act of 1933, as amended (the
"Securities Act");
(ii) reflect in the prospectus any facts or events
which, individually or together, represent a fundamental
change in the information in the registration statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities 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 Commission pursuant to Rule 424(b)
if, in the aggregate, the changes in volume and price
represent not more than a 20 percent change in the maximum
aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration
statement; and
(iii) include any additional or changed material
information on the plan of distribution;
(2) for determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering, and
(3) file a post-effective amendment to remove from registration
any of the securities that remain unsold at the end of the offering.
Request for Acceleration of Effective Date.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
(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.
II-6
<PAGE> 260
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-4 and has duly caused this Amendment
No. 1 to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Houston, State of Texas,
on the 22nd day of December 1997.
SOUTHERN MINERAL CORPORATION
(Registrant)
By: /s/ STEVEN H. MIKEL
-------------------------------------
Steven H. Mikel,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act, this Amendment No. 1 to the
Registration Statement has been signed by the following persons in the
capacities indicated on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ STEVEN H. MIKEL Director and President December 22, 1997
- ------------------------- and Chief Executive Officer
Steven H. Mikel (principal executive officer)
/s/ * Vice President - Finance December 22, 1997
- ------------------------- (principal financial and
James H. Price accounting officer)
/s/ * Chairman of the Board December 22, 1997
- ------------------------- and Director
Howell H. Howard
/s/ * Director December 22, 1997
- -------------------------
B. Travis Basham
/s/ * Director December 22, 1997
- -------------------------
Thomas R. Fuller
/s/ * Director December 22, 1997
- -------------------------
Robert R. Hillery
/s/ * Director December 22, 1997
- -------------------------
E. Ralph Hines, Jr.
/s/ * Director December 22, 1997
- -------------------------
James E. Nielson
</TABLE>
<PAGE> 261
<TABLE>
<S> <C> <C>
Director
- -------------------------
Donald H. Weise, Jr.
* Director December 22, 1997
- -------------------------
Spencer L. Youngblood
*By: /s/ STEVEN H. MIKEL December 22, 1997
--------------------
Steven H. Mikel
Attorney-in-Fact
</TABLE>
<PAGE> 262
INDEX TO EXHIBITS
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
- ------ ---------------------
<S> <C>
+ 2.1 Amended and Restated Agreement and Plan of Merger, dated as of November 17, 1997, by and
among the Registrant, SMC Acquisition Corp. and Amerac Energy Corporation.
3.1 Amended and restated articles of incorporation of the Registrant, as amended (incorporated
by reference to Exhibit 3.1 to Form 8-K dated May 17, 1996).
3.2 Amended and Restated Bylaws of the Company, as amended (incorporated by reference to
Exhibit (a)(3)(b) of Item 14, Part IV on Form 10-K for fiscal year ended December 31,
1989; Commission File Reference No. 0-8043).
4.1 Indenture relating to the Registrant's 6 7/8% Subordinated Debentures due 2007, dated
October 7, 1997, between Registrant and American Stock Transfer & Trust Company
(incorporated by reference to Exhibit 4.5 to Form S-2 (Commission File No. 333-35843).
4.2 Form of Subordinated Debentures (included in Exhibit 4.1).
*5.1 Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
*8.1 Tax Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
10.1 Stock Option Agreement made as of December 31, 1994 between the Registrant and Steven H.
Mikel (incorporated by reference to Exhibit (h) to Form 10-K for fiscal year ended
December 31, 1994).
10.2 Southern Mineral Corporation 1995 Non-Employee Director Compensation Plan (incorporated
by reference to Exhibit (k) to Form 10-K for fiscal year ended December 31, 1994).
10.3 Credit Agreement, dated December 20, 1995, between the Registrant, SMC Production Co.,
San Salvador Development Company, Inc., Venture Resources, Inc., Venture Pipeline
Company, VenGas Pipeline Company, Spruce Hills Production Company, Inc., and Compass
Bank-Houston for Reducing Revolver Line of Credit up to $25,000,000 (incorporated by
reference to Exhibit 10.1 to Form 8-K dated December 20, 1995).
10.4 Promissory Note, dated December 20, 1995, in the original principal amount of $25,000,000
made by the Registrant, SMC Production Co., San Salvador Development Company, Inc.,
Venture Resources, Inc., Venture Pipeline Company, VenGas Pipeline Company, Spruce Hills
Production Company, Inc. in favor of Compass Bank-Houston (incorporated by reference to
Exhibit 10.2 to Form 8-K dated December 20, 1995).
10.5 Credit Agreement, dated December 20, 1995, between the Registrant, SMC Production Co.,
San Salvador Development Company, Inc., Venture Resources, Inc., Venture Pipeline
Company, VenGas Pipeline Company, Spruce Hills Production Company, Inc. and Compass Bank-
Houston for Term Loan of $3,500,000 (incorporated by reference to Exhibit 10.3 to Form 8-K
dated December 20, 1995).
</TABLE>
<PAGE> 263
<TABLE>
<S> <C>
10.6 Promissory Note, dated December 20, 1995, in the original principal amount of $3,500,000
made by the Registrant, SMC Production Co., San Salvador Development Company, Inc.,
Venture Resources, Inc., Venture Pipeline Company, VenGas Pipeline Company, Spruce Hills
Production Company, Inc. in favor of Compass Bank-Houston (incorporated by reference to
Exhibit 10.4 to Form 8-K dated December 20, 1995).
10.7 Southern Mineral Corporation 1996 Stock Option Plan (incorporated by reference to Exhibit
10.10 to Form 10-KSB for fiscal year ended December 31, 1995).
10.8 Southern Mineral Corporation 1996 Employee Stock Purchase Plan (incorporated by reference
to Exhibit 10.11 to Form 10-KSB for fiscal year ended December 31, 1995).
10.9 Joint Venture Agreement, dated October 1, 1995, between the Registrant and The Links
Group, Inc. (incorporated by reference to Exhibit 10.12 to Form 10-KSB for fiscal year
ended December 31, 1995).
10.10 Option Agreement, dated January 5, 1996, between the Registrant and Diasu Oil & Gas
Company, Inc. covering the exploration joint venture (incorporated by reference to
Exhibit 10.13 to Form 10-KSB for fiscal year ended December 31, 1995).
10.11 Stock Option Agreement dated April 6, 1995, between the Registrant and Robert R. Hillery
(incorporated by reference to Exhibit 10.14 to Form 10-KSB for fiscal year ended
December 31, 1995).
10.12 Subscription Agreement and Assumption of Obligations, dated January 5, 1995, between the
Registrant and Gary L. Chitty, and Thomas J. McMinn (incorporated by reference to Exhibit
10.15 to Form 10-KSB/A for fiscal year ended December 31, 1995).
10.13 Amendment to Credit Agreement between the Registrant et al. and Compass Bank-Houston dated
August 30, 1996 (incorporated by reference to Exhibit 10.1 to Form 8-K dated August 30,
1996).
10.14 Second Amendment to Credit Agreements between the Registrant and Compass Bank for fiscal
year ended December 17, 1996 (incorporated by reference to Exhibit 10.14 to Form 10-KSB
for the fiscal year ended December 31, 1996).
10.15 Third Amendment to Credit Agreement between the Registrant and Compass Bank, dated June
10, 1997 (incorporated by reference to Exhibit 10.15 to Form S-2 (Commission File No.
333-35843)).
10.16 Fourth Amendment to Credit Agreement between the Registrant and Compass Bank dated June
30, 1997 (incorporated by reference to Exhibit 10.1 to Form 10-QSB for the quarterly
period ended June 30, 1997).
10.17 Incentive Stock Option Agreement between the Registrant and M. Michael Jenson, dated
August 26, 1997 (incorporated by reference to Exhibit 10.17 to Form S-2 (Commission File
No. 333-35843)).
+ 10.18 Letter Agreement between the Registrant and Amerac, dated November 17, 1997.
+ 10.19 Letter Agreement between the Registrant and Amerac, dated November 21, 1997.
+ 11.1 Computation of earnings per common and equivalent share.
+ 13.1 Annual Report on Form 10-KSB/A for the fiscal year ended December 31, 1996.
+ 13.2 Quarterly Report on Form 10-QSB for the quarterly period ended September 30, 1997.
+ 16.1 Letter of Registrant regarding change in certifying accountant.
*23.1 Consent of Grant Thornton LLP.
*23.2 Consent of KPMG Peat Marwick LLP.
*23.3 Consent of Price Waterhouse LLP.
23.4 Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P. (included in its opinions filed as
Exhibit 5.1 and Exhibit 8.1).
*23.5 Consent of Netherland, Sewell & Associates, Inc.
+ 23.6 Consent of McDaniel & Associates Consultants, Ltd.
+ 23.7 Consent of Ryder Scott Company, Petroleum Engineers.
*23.8 Consent of McDonald & Company Securities, Inc.
24.1 Power of Attorney (included with signature page of this registration statement).
+ 27.1 Financial Data Schedule.
*99.1 Form of SMC Proxy Card.
*99.2 Form of Amerac Proxy Card.
</TABLE>
- ----------------
* Filed herewith.
+ Previously filed.
<PAGE> 1
EXHIBIT 5.1
(AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P. LETTERHEAD)
December 22, 1997
Southern Mineral Corporation
500 Dallas, Suite 2800
Houston, Texas 77002-4708
RE: REGISTRATION STATEMENT ON FORM S-4
Dear Ladies and Gentlemen:
In connection with the registration under the Securities Act of 1933, as
amended (the "Act"), of 3,333,333 shares of common stock, par value $.01 per
share (the "Common Stock"), issuable upon consummation of the merger (the
"Merger") contemplated by that certain Amended and Restated Agreement and Plan
of Merger, dated as of November 17, 1997, by and among Southern Mineral
Corporation, a Nevada corporation (the "Company"), SMC Acquisition Corp., a
Delaware corporation and wholly owned subsidiary of the Company, and Amerac
Energy Corporation (the "Merger Agreement"), we, as your counsel, have examined
such corporate records, certificates and other documents and such questions of
law as we have considered necessary or appropriate for the purposes of this
opinion.
Based upon the foregoing and such other matters as we have deemed relevant,
we are of the opinion that (i) the Company has been duly incorporated and is an
existing corporation in good standing under the laws of the State of Nevada and
(ii) upon consummation of the Merger in accordance with the Merger Agreement,
the Common Stock will be duly and validly issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement relating to the Common Stock and to the reference to us
under the heading "Legal Matters" in the Prospectus contained therein. In giving
such consent, we do not thereby admit that we are in the category of person
whose consent is required under Section 7 of the Act.
Very truly yours,
/S/ AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P.
<PAGE> 1
EXHIBIT 8.1
(AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P. LETTERHEAD)
December 22, 1997
Southern Mineral Corporation
500 Dallas Street, Suite 2800
Houston, Texas 77002
Gentlemen:
Pursuant to Section 6.1(h) of the Amended and Restated Agreement and
Plan of Merger, dated as of November 17, 1997 (the "Merger Agreement"), by and
among Southern Mineral Corporation, a Nevada corporation ("SMC"), Amerac Energy
Corporation, a Delaware Corporation ("Amerac"), and SMC Acquisition Corp., a
Delaware corporation and wholly owned subsidiary of SMC ("Acquisition Corp."),
our opinion has been requested with respect to certain of the federal income tax
consequences of the merger (the "Merger") of Acquisition Corp. with and into
Amerac. As a result of the Merger, the stockholders of Amerac will receive
shares of SMC voting common stock.
DOCUMENTS EXAMINED
In connection with the rendering of our opinion, we have examined the
following:
1. The Merger Agreement.
2. The Registration Statement on Form S-4 under the Securities
Act of 1933 filed by SMC with respect to the SMC common stock
to be issued in connection with the Merger (the "Registration
Statement") and amendments thereto.
3. Such other documents, records and matters of law as we have
deemed necessary or appropriate in connection with rendering
this opinion.
<PAGE> 2
Southern Mineral Corporation
December 22, 1997
Page 2
In our review and examination of the foregoing, we have assumed the
genuineness of all signatures and the authenticity of all documents submitted to
us as originals and the conformity to original documents of all documents
submitted to us as certified or duplicate copies thereof. We have further
assumed that the execution and delivery of any of the foregoing have been duly
authorized by all necessary corporate action in order to make the foregoing
valid and legally binding obligations of the parties, enforceable in accordance
with their terms, except as enforcement thereof may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws, both state and
federal, affecting the enforcement of creditors' rights or remedies in general
from time to time in effect and by general principles of equity (regardless of
whether such enforcement is considered in a proceeding in equity or at law).
FACTUAL ASSUMPTIONS
In rendering this opinion, we have made the following assumptions as to
factual matters.
1. The representations and warranties of the parties contained in
the documents listed in the section entitled Documents
Examined that may be deemed material to this opinion are all
true in all material respects as of the date hereof.
2. The representations contained in the Representation
Certificates received from Amerac and from SMC and Acquisition
Corp. are all true in all material respects as of the date
hereof.
3. The Merger shall be consummated, and all transactions related
thereto or contemplated by the Merger Agreement and the
Registration Statement shall be consummated in accordance with
the terms and conditions of the applicable documents.
4. The Merger will qualify as a merger under applicable state
law.
LIMITATIONS ON OPINION
The following limitations apply with respect to this opinion:
1. This opinion is based upon the current provisions of the
Internal Revenue Code of 1986, as amended, the Treasury
Regulations promulgated thereunder, and the interpretations
thereof by the Internal Revenue Service and those courts
having jurisdiction over such matters as of the date hereof,
all of which are subject to change either prospectively or
retroactively. No opinion is rendered with respect
<PAGE> 3
Southern Mineral Corporation
December 22, 1997
Page 3
to the effect, if any, of any pending or future legislation
or administrative regulation or ruling which may have a
bearing on any of the foregoing.
2. We have neither been asked to render an opinion with respect
to any federal income tax matters, except those set forth
below, nor have we been asked to render an opinion with
respect to any state or local tax consequences of the Merger.
Accordingly, this opinion should not be construed as applying
in any manner to any tax aspect of the Merger other than set
forth below.
3. All factual assumptions set forth above are material to all
opinions herein rendered and have been relied upon by us in
rendering all such opinions. Any material inaccuracy in any
one or more of the assumed facts may render all or part of
this opinion inapplicable to the Merger.
4. Our opinion is not binding upon either the Internal Revenue
Service or a court of law. Accordingly, no assurance can be
given that either the Internal Revenue Service or a court
would agree with our conclusions.
OPINION
Based upon and subject to the foregoing, it is our opinion that:
1. The Merger should be treated as a reorganization within the
meaning of Section 368(a) of the Code.
2. No gain or loss should be recognized by the stockholders of
Amerac on the exchange of their shares of Amerac stock for
shares of SMC common stock, except with respect to cash
received in lieu of fractional shares of SMC common stock.
The foregoing opinions represent our best judgment as to the likely
conclusions that a court of law would reach with respect to such issues.
This letter and the matters addressed herein are as of the date hereof,
and we undertake no, and hereby disclaim any, obligation to advise you of any
change in any matter set forth herein occurring after the date hereof. This
letter is solely for your benefit and no other persons shall be entitled to rely
upon the opinions herein expressed. This letter is limited to the matters stated
herein and no opinion is implied or may be inferred beyond the matters expressly
stated. Without our prior written consent, this letter may not be quoted in
whole or in part or otherwise referred to in any document and may not be
furnished to any other person or entity.
<PAGE> 4
Southern Mineral Corporation
December 22, 1997
Page 4
We hereby consent to the references made to us in the Joint Proxy
Statement/Prospectus of SMC and Amerac and to the filing of this opinion as an
exhibit to the Registration Statement on Form S-4 of SMC. In giving such consent
we do not hereby admit that we are within the category of the persons whose
consent is required under Section 7 of the Securities Act of 1933, as amended,
or the rules or regulations of the Securities and Exchange Commission
thereunder.
Sincerely yours,
/s/ AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated February 21, 1996 accompanying the
consolidated financial statements of Southern Mineral Corporation and
Subsidiaries appearing in its Annual Report on Form 10-KSB/A for the year ended
December 31, 1996, which is incorporated by reference in Amendment No. 1 to this
Registration Statement and Joint Proxy Statement/Prospectus. We consent to the
incorporation by reference in this Registration Statement and Joint Proxy
Statement/Prospectus of the aforementioned report, and to the use of our name as
it appears under the caption "Experts".
/s/ GRANT THORNTON LLP
Houston, Texas
December 22, 1997
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Southern Mineral Corporation:
We consent to incorporation by reference in Amendment No. 1 to the Registration
Statement on Form S-4 of Southern Mineral Corporation of our report dated August
28, 1997 relating to the consolidated balance sheet of Southern Mineral
Corporation and subsidiaries as of December 31, 1996 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended, which report appears in the December 31, 1996 annual report
on Form 10-KSB/A of Southern Mineral Corporation.
/s/ KPMG PEAT MARWICK LLP
Houston, Texas
December 22, 1997
<PAGE> 1
EXHIBIT 23.3
We hereby consent to the incorporation by reference in the Joint Proxy
Statement/Prospectus constituting part of this Registration Statement on Form
S-4 of Southern Mineral Corporation of our report dated March 25, 1997
appearing on page F-2 of Amerac Energy Corporation's Annual Report on Form
10-KSB for the year ended December 31, 1996. We also consent to the references
to us under the headings "Relationships with Independent Accountants" and
"Experts" in such Joint Proxy Statement/Prospectus.
/s/ PRICE WATERHOUSE LLP
Fort Worth, TX
December 8, 1997
<PAGE> 1
EXHIBIT 23.5
[LETTERHEAD OF NETHERLAND, SEWELL & ASSOCIATES, INC.]
CONSENT OF NETHERLAND, SEWELL, & ASSOCIATES, INC.
We consent to the incorporation by reference into Amendment No. 1 to the
Form S-4 Registration Statement of Southern Mineral Corporation, a Nevada
corporation (the "Company"), of the references to this firm and to its reports
listed below regarding the Southern Mineral Corporation proved reserves
estimates contained in its Annual Report on Form 10-KSB/A for the year ended
December 31, 1996.
1. Report of domestic proved reserves estimates as of January 1, 1996
dated March 1, 1996.
2. Audit of domestic proved reserves estimates as of January 1, 1997 dated
February 25, 1997.
NETHERLAND, SEWELL, & ASSOCIATES, INC.
By: /s/ DANNY D. SIMMONS
--------------------------------
Danny D. Simmons
Senior Vice President
Houston, Texas
December 22, 1997
<PAGE> 1
EXHIBIT 23.8
[Letterhead of McDonald & Company Securities, Inc.]
December 22, 1997
We hereby consent to the use of our opinion letter, dated November 18,
1997, to the Board of Directors of Amerac Energy Corporation included as
Appendix H to the Joint Proxy Statement/Prospectus which forms a part of
Amendment No. 1 to the Registration Statement on Form S-4 of Southern Mineral
Corporation, and to all references to our firm and such opinion therein.
In giving this consent, we do not thereby admit that we are included in
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.
/s/ MCDONALD & COMPANY SECURITIES, INC.
<PAGE> 1
EXHIBIT 99.1
[FRONT SIDE OF PROXY]
PROXY
SOUTHERN MINERAL CORPORATION
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned appoints Steven H. Mikel and James H. Price, and either of
them, as proxies (the "Proxies"), with the power of substitution, and authorizes
the Proxies to represent and to vote at the Special Meeting of Stockholders to
be held on January 28, 1998, or any adjournment thereof, all the shares of
common stock, par value $0.01 per share, of Southern Mineral Corporation held of
record by the undersigned on December 26, 1997, as designated below.
1. The approval of the issuance of up to 3,333,333 shares of common
stock, par value $0.01 per share, of Southern Mineral Corporation
upon consummation of the merger, as contemplated by the Amended
and Restated Agreement and Plan of Merger, pursuant to which a
wholly owned subsidiary of Southern Mineral Corporation will
merge with and into Amerac Energy Corporation, and Amerac Energy
Corporation will become a wholly owned subsidiary of Southern
Mineral Corporation.
|_| FOR |_| AGAINST |_| ABSTAIN
2. The approval and adoption of Amended and Restated Articles of
Incorporation of Southern Mineral Corporation which (i) increase
the number of authorized shares of common stock, par value $0.01
per share, of Southern Mineral Corporation from 20 million to 50
million and (ii) authorize the issuance of up to five million
shares of "blank check" preferred stock.
|_| FOR |_| AGAINST |_| ABSTAIN
3. The approval and adoption of the Southern Mineral Corporation
1997 Stock Option Plan.
|_| FOR |_| AGAINST |_| ABSTAIN
4. The Proxies are authorized to vote in their best judgment upon
such other business as may properly come before the Special
Meeting.
|_| FOR |_| AGAINST |_| ABSTAIN
[REVERSE SIDE OF PROXY]
This Proxy, when properly executed, will be voted in the manner directed by
the undersigned. Please refer to the Joint Proxy Statement/Prospectus for a
discussion of each of these matters. IF NO DIRECTION IS GIVEN, THIS PROXY WILL
BE VOTED FOR THE PROPOSALS. As to any other matter, the Proxies shall vote in
accordance with their best judgment.
Please sign exactly as your name appears on this Proxy Card. When signing
as attorney, executor, administrator, trustee, guardian or corporate, limited
liability company or partnership official, please give your full title as such
and the full name of the entity on behalf of whom you are signing.
Dated:
------------------------- -------------------------
Signature of Stockholder
-------------------------
Signature if held jointly
PLEASE COMPLETE, SIGN, DATE AND PROMPTLY RETURN THIS PROXY CARD USING THE
ENCLOSED ENVELOPE.
<PAGE> 1
EXHIBIT 99.2
[FRONT SIDE OF PROXY]
PROXY
AMERAC ENERGY CORPORATION
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned appoints Jeffrey B. Robinson and Kenneth R. Peak, and
either of them, as proxies of the undersigned (the "Proxies"), with the power of
substitution, and authorizes the Proxies to represent and to vote at the Special
Meeting of Stockholders to be held on January 28, 1998, or any adjournment
thereof, all the shares of common stock, per value $0.05 per share, of Amerac
Energy Corporation held of record by the undersigned on December 26, 1997, as
designated below.
1. The approval of the merger, as contemplated by the Amended and
Restated Agreement and Plan of Merger, pursuant to which a wholly
owned subsidiary of Southern Mineral Corporation will merge with
and into Amerac Energy Corporation, and Amerac Energy Corporation
will become a wholly owned subsidiary of Southern Mineral
Corporation.
|_| FOR |_| AGAINST |_| ABSTAIN
2. The Proxies are authorized to vote in their best judgment upon
such other business as may properly come before the Special
Meeting.
|_| FOR |_| AGAINST |_| ABSTAIN
[REVERSE SIDE OF PROXY]
This Proxy, when properly executed, will be voted in the manner directed by
the undersigned. Please refer to the Joint Proxy Statement/Prospectus for a
discussion of each of these matters. IF NO DIRECTION IS GIVEN, THIS PROXY WILL
BE VOTED FOR THE PROPOSAL. As to any other matter, the Proxies shall vote in
accordance with their best judgment.
Please sign exactly as your name appears on this Proxy Card. When signing
as attorney, executor, administrator, trustee, guardian or corporate, limited
liability company or partnership official, please give your full title as such
and the full name of the entity on behalf of whom you are signing.
Dated:
---------------------- -------------------------
Signature of Stockholder
-------------------------
Signature if held jointly
PLEASE COMPLETE, SIGN, DATE AND PROMPTLY RETURN THIS PROXY CARD USING
THE ENCLOSED ENVELOPE.
