<PAGE> 1
As filed with the Securities and Exchange Commission on September 2, 1997
Registration No. 333-31675
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
AMENDMENT NO. 1
FORM S-4
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
----------------------
FORCENERGY INC
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 1311 65-0429338
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
E. JOSEPH GRADY
VICE PRESIDENT -- TREASURER
AND CHIEF FINANCIAL OFFICER
2730 SW 3RD AVENUE, SUITE 800 2730 SW 3RD AVENUE, SUITE 800
MIAMI, FLORIDA 33129-2237 MIAMI, FLORIDA 33129-2237
(305) 856-8500 (305) 856-8500
(Address, including zip code, and telephone (Name, address, including zip code, and
number, including area code, of telephone number, including area
registrant's principal executive offices) code, of agent for service)
Copies to:
T. MARK KELLY PAUL E. PRYZANT JOHN F. WOMBWELL
VINSON & ELKINS L.L.P. SNELL & SMITH, P.C. ANDREWS & KURTH L.L.P.
1001 FANNIN, SUITE 2300 1000 LOUISIANA, SUITE 3650 4200 TEXAS COMMERCE TOWER
HOUSTON, TEXAS 77002-6760 HOUSTON, TEXAS 77002 HOUSTON, TEXAS 77002
(713) 758-4592 (713) 652-3323 (713) 220-4396
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES 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. [ ]
----------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
<PAGE> 2
[EDISTO LOGO]
EDISTO RESOURCES CORPORATION
2401 FOUNTAIN VIEW DRIVE, SUITE 700
HOUSTON, TEXAS 77057
(713) 782-0095
Dear Stockholders:
You are cordially invited to attend a Special Meeting of Stockholders (the
"Edisto Special Meeting") of Edisto Resources Corporation ("Edisto") to be held
at 2401 Fountain View Drive, Suite 700, Houston, Texas 77057, on ,
October , 1997 at a.m. local time.
At the Edisto Special Meeting, you will be asked to consider and vote upon
a proposal to approve an Amended and Restated Agreement and Plan of Merger dated
as of July 15, 1997, as amended (the "Merger Agreement"), among Edisto, Convest
Energy Corporation ("Convest"), Forcenergy Inc ("Forcenergy") and a Forcenergy
subsidiary providing for the mergers (the "Mergers") of the Forcenergy
subsidiary into Edisto and Convest into Forcenergy. After the Mergers are
consummated, Edisto will be liquidated. If the Mergers are consummated, each
share of Common Stock of Edisto will be converted into the right to receive (i)
$4.886 in cash and (ii) a fractional interest in a share of Forcenergy Common
Stock equal to $5.064 divided by the average weighted daily trading price of
Forcenergy Common Stock for the ten trading days ending two trading days prior
to the closing date; provided, however, that the price of the Forcenergy Common
Stock used in such calculation will not be less than $28.96 nor more than
$34.96.
The Merger Agreement and the Mergers are discussed in more detail in the
accompanying Joint Proxy Statement/Prospectus. Please review and consider the
enclosed materials carefully.
THE BOARD OF DIRECTORS OF EDISTO BELIEVES THAT THE PROPOSED MERGER
AGREEMENT IS FAIR TO, AND IN THE BEST INTERESTS OF, EDISTO'S STOCKHOLDERS AND
UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR APPROVAL OF THE MERGER AGREEMENT.
In making that recommendation, the Board of Directors of Edisto received
and took into account the written opinion dated June 19, 1997 of Rauscher Pierce
Refsnes, Inc. ("Rauscher Pierce"), an investment banking firm retained by Edisto
for that purpose, that, as of such date, the consideration to be received by
stockholders of Edisto in the Merger Agreement is fair to the stockholders of
Edisto from a financial point of view, Rauscher Pierce subsequently delivered to
the Board of Directors of Edisto its written opinion to the same effect dated
the date of the Joint Proxy Statement/Prospectus (the "Rauscher Pierce
Opinion"). A copy of the Rauscher Pierce Opinion is included in the accompanying
Joint Proxy Statement/Prospectus as Appendix C thereto.
Whether or not you plan to attend the Edisto Special Meeting, please
complete, sign, date and return your proxy card in the enclosed envelope. If you
attend the Edisto Special Meeting, you may vote in person even though you have
previously returned your proxy. It is important that your shares be represented
and voted at the Edisto Special Meeting.
Sincerely,
Michael Y. McGovern
Chairman and Chief Executive Officer
<PAGE> 3
EDISTO RESOURCES CORPORATION
2401 FOUNTAIN VIEW DRIVE, SUITE 700
HOUSTON, TEXAS 77057
(713) 782-0095
NOTICE OF SPECIAL MEETING OF EDISTO STOCKHOLDERS
TO BE HELD ON OCTOBER , 1997
To the Stockholders of Edisto Resources Corporation:
A Special Meeting of Stockholders (the "Edisto Special Meeting") of Edisto
Resources Corporation, a Delaware corporation ("Edisto"), will be held on
, October , 1997 at :00 a.m., local time, at 2401 Fountain View
Drive, Suite 700, Houston, Texas 77057 for the following purposes:
1. To consider and vote upon a proposal to approve the Amended and
Restated Agreement and Plan of Merger dated as of July 15, 1997, as amended
(the "Merger Agreement"), among Forcenergy Inc, a Delaware corporation
("Forcenergy"), a Forcenergy subsidiary, Convest Energy Corporation, a
Texas corporation ("Convest"), and Edisto, a copy of which is attached as
Appendix A to the accompanying Joint Proxy Statement/Prospectus. Pursuant
to the Merger Agreement, the Forcenergy subsidiary will be merged into
Edisto and Convest will be merged into Forcenergy (the "Mergers") and,
among other things, each share of Common Stock of Edisto outstanding at the
effective time of the Merger would be converted into (i) $4.886 in cash and
(ii) a fractional interest in a share of Forcenergy Common Stock valued at
$5.064 divided by the average weighted daily trading price of Forcenergy
Common Stock for the ten trading days ending two trading days prior to the
closing date; provided, however, that the price of the Forcenergy Common
Stock used in such calculation will not be less than $28.96 nor more than
$34.96. After the Mergers are consummated, Edisto will be liquidated. The
Mergers and other related matters are described in the accompanying Joint
Proxy Statement/Prospectus and in the Appendices thereto; and
2. To transact such other business as may properly come before the
Edisto Special Meeting or any adjournment thereof.
The Board of Directors of Edisto has fixed the close of business on
September 9, 1997 as the record date for the determination of stockholders
entitled to notice of, and to vote at, the Edisto Special Meeting and any
adjournment thereof. Only holders of record of shares of Edisto Common Stock at
the close of business on the record date are entitled to notice of, and to vote
at, the Edisto Special Meeting. A complete list of such stockholders will be
available for examination at the offices of Edisto in Houston, Texas during
normal business hours by any Edisto stockholder, for any purpose germane to the
Edisto Special Meeting, for a period of ten days prior to the meeting.
Stockholders of Edisto may be entitled to appraisal or dissenter's rights under
the Delaware General Corporation Law in respect of the Merger Agreement.
Your vote is important. The affirmative vote of the holders of a majority
of the outstanding shares of Edisto Common Stock is required for approval and
adoption of the Merger Agreement. Even if you plan to attend the Edisto Special
Meeting in person, we request that you sign and return the enclosed proxy or
voting instruction card and thus ensure that your shares will be represented at
the Edisto Special Meeting if you are unable to attend. If you do attend the
Edisto Special Meeting and wish to vote in person, you may withdraw your proxy
and vote in person.
By Order of the Board of Directors
Steven G. Ives
Corporate Secretary
Houston, Texas
September , 1997
<PAGE> 4
[CONVEST LOGO]
CONVEST ENERGY CORPORATION
2401 FOUNTAIN VIEW DRIVE, SUITE 700
HOUSTON, TEXAS 77057
(713) 780-1952
Dear Stockholders:
You are cordially invited to attend a Special Meeting of Stockholders (the
"Convest Special Meeting") of Convest Energy Corporation ("Convest") to be held
at 2401 Fountain View Drive, Suite 700, Houston, Texas 77057, on ,
October , 1997 at a.m. local time.
At the Convest Special Meeting, you will be asked to consider and vote upon
a proposal to approve and adopt an Amended and Restated Agreement and Plan of
Merger dated as of July 15, 1997 and related Plan and Agreement of Merger, as
amended (collectively, the "Merger Agreement"), among Convest, Edisto Resources
Corporation ("Edisto"), Forcenergy Inc ("Forcenergy") and a Forcenergy
subsidiary providing for the mergers (the "Mergers") of Convest into Forcenergy
and the Forcenergy subsidiary into Edisto. If the Mergers are consummated, each
share of Common Stock of Convest will be converted into the right to receive a
fractional interest in a share of Forcenergy Common Stock equal to $8.88 divided
by the average weighted daily trading price of Forcenergy Common Stock for the
ten trading days ending two trading days prior to the closing date; provided,
however, that the price of the Forcenergy Common Stock used in such calculation
will not be less than $28.96 nor more than $34.96.
The Merger Agreement and the Mergers are discussed in more detail in the
accompanying Joint Proxy Statement/Prospectus. Please review and consider the
enclosed materials carefully.
THE BOARD OF DIRECTORS OF CONVEST BELIEVES THAT THE PROPOSED MERGER
AGREEMENT IS FAIR TO, AND IN THE BEST INTERESTS OF, CONVEST'S STOCKHOLDERS AND
UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR APPROVAL OF THE MERGER AGREEMENT.
In making that recommendation, the Board of Directors of Convest received
and took into account the written opinion dated June 19, 1997 of Petrie Parkman
& Co. ("Petrie Parkman"), an investment banking firm retained by Convest for
that purpose, that, as of such date, the consideration to be received by
stockholders of Convest in the Merger Agreement is fair to the stockholders of
Convest from a financial point of view. Petrie Parkman subsequently delivered to
the Board of Directors of Convest its written opinion to the same effect dated
the date of the Joint Proxy Statement/Prospectus (the "Petrie Parkman Opinion").
A copy of the Petrie Parkman Opinion is included in the accompanying Joint Proxy
Statement/Prospectus as Appendix D thereto.
Whether or not you plan to attend the Convest Special Meeting, please
complete, sign, date and return your proxy card in the enclosed envelope. If you
attend the Convest Special Meeting, you may vote in person even though you have
previously returned your proxy. It is important that your shares be represented
and voted at the Convest Special Meeting.
Sincerely,
Michael Y. McGovern
Chairman and Chief Executive Officer
<PAGE> 5
CONVEST ENERGY CORPORATION
2401 FOUNTAIN VIEW DRIVE, SUITE 700
HOUSTON, TEXAS 77057
(713) 780-1952
NOTICE OF SPECIAL MEETING OF CONVEST STOCKHOLDERS
TO BE HELD ON OCTOBER , 1997
To the Stockholders of Convest Energy Corporation:
A Special Meeting of Stockholders (the "Convest Special Meeting") of
Convest Energy Corporation, a Texas corporation ("Convest"), will be held on
, October , 1997 at :00 a.m., local time, at , for the
following purposes:
1. To consider and vote upon a proposal to approve the Amended and
Restated Agreement and Plan of Merger dated as of July 15, 1997, among
Forcenergy Inc, a Delaware corporation ("Forcenergy"), Convest, Edisto
Resources Corporation, a Delaware corporation ("Edisto"), and a Forcenergy
subsidiary and related Plan and Agreement of Merger among Forcenergy and
Convest, as amended (collectively, the "Merger Agreement"), a copy of which
is attached as Appendix A to the accompanying Joint Proxy
Statement/Prospectus. Pursuant to the Merger Agreement, Convest will be
merged into Forcenergy and the Forcenergy subsidiary will be merged into
Edisto (the "Mergers") and, among other things, each share of Common Stock
of Convest outstanding at the effective time of the Merger would be
converted into a fractional interest in a share of Forcenergy Common Stock
equal to $8.88 divided by the average weighted daily trading price of
Forcenergy Common Stock for the ten trading days ending two trading days
prior to the closing date; provided, however, that the price of the
Forcenergy Common Stock used in such calculation will not be less than
$28.96 nor more than $34.96. The Mergers and other related matters are
described in the accompanying Joint Proxy Statement/Prospectus and in the
Appendices thereto; and
2. To transact such other business as may properly come before the
Convest Special Meeting or any adjournment thereof.
The Board of Directors of Convest has fixed the close of business on
September 9, 1997 as the record date for the determination of stockholders
entitled to notice of, and to vote at, the Convest Special Meeting and any
adjournment thereof. Only holders of record of shares of Convest Common Stock at
the close of business on the record date are entitled to notice of, and to vote
at, the Convest Special Meeting. A complete list of such stockholders will be
available for examination at the offices of Convest in Houston, Texas during
normal business hours by any Convest stockholder, for any purpose germane to the
Convest Special Meeting, for a period of ten days prior to the meeting.
Stockholders of Convest are not entitled to any appraisal or dissenter's rights
under the Texas Business Corporation Act in respect of the Merger Agreement.
Your vote is important. The affirmative vote of the holders of two-thirds
of the outstanding shares of Convest Common Stock is required for approval and
adoption of the Merger Agreement. Even if you plan to attend the Convest Special
Meeting in person, we request that you sign and return the enclosed proxy or
voting instruction card and thus ensure that your shares will be represented at
the Convest Special Meeting if you are unable to attend. If you do attend the
Convest Special Meeting and wish to vote in person, you may withdraw your proxy
and vote in person.
By Order of the Board of Directors
Steven G. Ives
Corporate Secretary
Houston, Texas
September , 1997
<PAGE> 6
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES
MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE
REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR
SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH
OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED SEPTEMBER 2, 1997
EDISTO RESOURCES CORPORATION
AND
CONVEST ENERGY CORPORATION
JOINT PROXY STATEMENT
---------------------
FORCENERGY INC.
PROSPECTUS
SPECIAL MEETING OF STOCKHOLDERS OF EDISTO RESOURCES
CORPORATION TO BE HELD ON OCTOBER , 1997
SPECIAL MEETING OF STOCKHOLDERS OF CONVEST ENERGY
CORPORATION TO BE HELD ON OCTOBER , 1997
This Joint Proxy Statement/Prospectus ("Joint Proxy Statement/Prospectus')
is being furnished to stockholders of Edisto Resources Corporation, a Delaware
corporation ("Edisto"), and to shareholders of Convest Energy Corporation, a
Texas corporation ("Convest"), in connection with the solicitation of proxies by
the Board of Directors of each corporation for use at the Special Meeting of
Stockholders of Edisto (the "Edisto Special Meeting") and the Special Meeting of
Stockholders of Convest (the "Convest Special Meeting," and together with the
Edisto Special Meeting, the "Special Meetings"), respectively, in each case
including any adjournments or postponements thereof. The Special Meetings are
both scheduled to be held on , 1997. This Joint Proxy
Statement/Prospectus relates to the proposed mergers which are contingent upon
each other (collectively, the "Mergers") that will result in both a subsidiary
of Forcenergy Inc, a Delaware corporation ("Forcenergy") being merged into
Edisto and Convest being merged into Forcenergy, pursuant to the Amended and
Restated Agreement and Plan of Merger dated as of July 15, 1997, as amended,
among Edisto, Convest, Forcenergy and a Forcenergy subsidiary and related Plan
and Agreement of Merger among Forcenergy and Convest (collectively, the "Merger
Agreement"). After the Mergers are consummated, Edisto will be liquidated and
Forcenergy will be the surviving corporation. Edisto holds approximately 72% of
the outstanding Convest Common Stock.
As a result of the Mergers, (a) each issued and outstanding share of common
stock, $.01 par value per share, of Edisto ("Edisto Common Stock") will be
converted into the right to receive (i) $4.886 in cash and (ii) a fractional
interest in a share of common stock, $.01 par value per share, of Forcenergy
("Forcenergy Common Stock") equal to $5.064 divided by the Weighted Average
Trading Price (as defined) of Forcenergy Common Stock, and (b) each issued and
outstanding share of common stock, $.01 par value per share, of Convest
("Convest Common Stock") will be converted into the right to receive a
fractional interest in a share of Forcenergy Common Stock equal to $8.88 divided
by the Weighted Average Trading Price of Forcenergy Common Stock; provided,
however, that in no event shall the Weighted Average Trading Price of Forcenergy
Common Stock be less than $28.96 nor more than $34.96. Using the minimum and
maximum Weighted Average Trading Price, the shares of Forcenergy Common Stock to
be issued for each share of Edisto Common Stock will range between .14 and .17
shares and for each share of Convest Common Stock will range between .25 and .31
shares. Using the last reported sales price of the Forcenergy Common Stock on
August 28, 1997, the Weighted Average Trading Price would have been $34.44 and
an aggregate of 2,855,335 shares would have been issued. However, the actual
number of shares to be issued may differ from this example since such number of
shares will not be determined until two trading days prior to the Closing Date
of the Mergers. See "Summary -- The Mergers and the Merger Agreement -- Terms of
the Merger" and "Certain Terms of the Merger Agreement -- Manner and Basis of
Converting Shares."
This Joint Proxy Statement/Prospectus also constitutes a prospectus of
Forcenergy with respect to shares of Forcenergy Common Stock to be issued
pursuant to the Merger Agreement in exchange for currently outstanding shares of
Edisto Common Stock and Convest Common Stock and additional shares of Edisto
Common Stock and Convest Common Stock that may become outstanding prior to the
Mergers upon the exercise of options to purchase Edisto Common Stock and Convest
Common Stock outstanding on the date of the Merger Agreement ("Edisto Options"
and "Convest Options," respectively).
The shares of Forcenergy Common Stock are listed on the New York Stock
Exchange ("NYSE") under the symbol "FEN," the shares of Edisto Common Stock are
listed on the American Stock Exchange ("ASE") under the symbol "EDT," and the
shares of Convest Common Stock are listed on the ASE under the symbol ("COV").
On August 28, 1997, the last reported sales price of Forcenergy Common Stock on
the NYSE Composite Tape was $34.44 and the closing prices of the Edisto Common
Stock and Convest Common Stock, as reported by the ASE, were $9.69 and $8.63,
respectively.
Following the Mergers, Forcenergy AB and FMR Corp. will own approximately
34% and 5% of the outstanding Forcenergy Common Stock (assuming a Weighted
Average Trading Price of $31.96 per share).
SEE "RISK FACTORS" BEGINNING ON PAGE FOR INFORMATION ON CERTAIN RISKS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE SECURITIES
OFFERED HEREBY.
This Joint Proxy Statement/Prospectus, the accompanying applicable form of
proxy and the other enclosed documents are first being mailed to shareholders of
Edisto and Convest on or about September , 1997.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY OTHER STATE COMMISSION NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The date of this Joint Proxy Statement/Prospectus is September , 1997
<PAGE> 7
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS IN CONNECTION WITH THE SOLICITATION OF PROXIES OR THE
OFFERING OF SECURITIES MADE HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY FORCENERGY,
EDISTO OR CONVEST. NEITHER THE DELIVERY OF THIS JOINT PROXY STATEMENT/PROSPECTUS
NOR ANY DISTRIBUTION OF THE SECURITIES OFFERED HEREBY SHALL UNDER ANY
CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS
OF FORCENERGY, EDISTO OR CONVEST SINCE THE DATE HEREOF OR THAT THE INFORMATION
SET FORTH OR INCORPORATED BY REFERENCE HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE. THIS JOINT PROXY STATEMENT/PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO PURCHASE, ANY
SECURITIES, 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.
THIS JOINT PROXY STATEMENT/PROSPECTUS INCORPORATES CERTAIN DOCUMENTS BY
REFERENCE THAT ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. FORCENERGY,
EDISTO AND CONVEST EACH UNDERTAKE TO PROVIDE COPIES OF SUCH DOCUMENTS (OTHER
THAN EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY
INCORPORATED BY REFERENCE), WITHOUT CHARGE, TO ANY PERSON, INCLUDING ANY
BENEFICIAL OWNER, TO WHOM THIS JOINT PROXY STATEMENT/ PROSPECTUS IS DELIVERED,
UPON WRITTEN OR ORAL REQUEST TO, IN THE CASE OF DOCUMENTS RELATING TO
FORCENERGY, 2730 SW 3RD AVENUE, SUITE 800, MIAMI, FL 33129-2237, ATTENTION:
MICHAEL MCNAMARA, IN THE CASE OF DOCUMENTS RELATING TO EDISTO OR CONVEST, 2401
FOUNTAIN VIEW DRIVE, SUITE 700, HOUSTON, TX 77057, ATTENTION: KAREN CLINGAN. IN
ORDER TO ENSURE DELIVERY OF THE DOCUMENTS, SUCH REQUESTS SHOULD BE RECEIVED BY
, 1997.
AVAILABLE INFORMATION
Forcenergy, Edisto and Convest are subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and, in accordance therewith, file reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission").
Reports, proxy statements and other information filed by Forcenergy, Edisto and
Convest can be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, NW, Washington, D.C. 20549,
and at the Commission's Regional Offices at Seven World Trade Center, 13th
Floor, New York, New York 10048 and CitiCorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60621-2511. Copies of such material can be
obtained by mail from the Public Reference Section of the Commission at 450
Fifth Street, NW, Washington, D.C. 20549, at prescribed rates. In addition,
reports, proxy statements and other information concerning Forcenergy may be
inspected at the offices of the NYSE, 20 Broad Street, New York, New York 10005.
Edisto Common Stock and Convest Common Stock are traded and listed on the ASE
and certain of their reports, proxy statements and other information can be
inspected at the offices of the ASE, 86 Trinity Place, New York, New York 10006.
Certain of such reports, proxy statements and other information filed by
Forcenergy, Edisto and Convest are also available on the Commission's World Wide
Web site at http://www.sec.gov.
Forcenergy has filed with the Commission a Registration Statement on Form
S-4 (together with all amendments, supplements and exhibits thereto, the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the Forcenergy Common Stock to be issued
pursuant to the Merger Agreement. The information contained herein with respect
to Forcenergy and its affiliates, including its subsidiary, EDI Acquisition
Corporation ("EDI-Sub"), has been provided by Forcenergy, and the information
contained herein with respect to Edisto and Convest and their affiliates has
2
<PAGE> 8
been provided by Edisto and Convest. This Joint Proxy Statement/Prospectus does
not contain all of the information set forth in the Registration Statement,
certain parts of which were omitted in accordance with the rules and regulations
of the Commission. For further information, reference is hereby made to the
Registration Statement. Any statements contained herein concerning the
provisions of any document filed as an exhibit to the Registration Statement or
otherwise filed with the Commission are not necessarily complete, and in each
instance reference is made to the copy of such document so filed. Each such
statement is qualified in its entirety by such reference.
3
<PAGE> 9
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which have been filed with the Commission pursuant
to the Exchange Act, are incorporated herein by reference:
1. For Forcenergy:
(a) Annual Report on Form 10-K for the fiscal year ended December 31,
1996;
(b) Quarterly Reports on Form 10-Q for the quarters ended March 31,
1997 and June 30, 1997;
(c) Current Reports on Form 8-K filed on January 14, 1997 and as
amended on March 17, 1997 and on February 21, 1997; and
(d) The description of Forcenergy Common Stock contained in
Forcenergy's Registration Statement on Form 8-A filed with the Commission
on July 17, 1995, and any amendment or report filed for the purpose of
updating such description.
2. For Edisto:
(a) Annual Report on Form 10-K for the fiscal year ended December 31,
1996;
(b) Amendment to Annual Report on Form 10-K/A for the fiscal year
ended December 31, 1996;
(c) Quarterly Reports on Form 10-Q for the quarters ended March 31,
1997 and June 30, 1997; and
(d) Current Report on Form 8-K filed on July 3, 1997.
3. For Convest:
(a) Annual Report on Form 10-K for the fiscal year ended December 31,
1996;
(b) Amendment to Annual Report on Form 10-K/A for the fiscal year
ended December 31, 1996;
(c) Quarterly Reports on Form 10-Q for the quarters ended March 31,
1997 and June 30, 1997; and
(d) Current Report on Form 8-K filed on July 3, 1997.
All documents filed by Forcenergy pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Joint Proxy
Statement/Prospectus and prior to the date of the special meetings of the
stockholders of Edisto and Convest shall be deemed to be incorporated herein by
reference and to be a part hereof from the date of filing of such documents. Any
statement contained in a document incorporated or deemed to be incorporated
herein by reference shall be deemed to be modified or superseded for purposes of
this Joint Proxy Statement/Prospectus to the extent that a statement contained
herein or in any other subsequently filed document that also is or is deemed to
be incorporated herein by reference modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Joint Proxy
Statement/Prospectus.
4
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TABLE OF CONTENTS
<TABLE>
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PAGE
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AVAILABLE INFORMATION.......................................
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.............
SUMMARY.....................................................
The Companies.............................................
The Special Meetings......................................
Recommendations of the Board of Directors.................
Opinions of Financial Advisors............................
Interests of Certain Persons in the Mergers...............
The Mergers and the Merger Agreement......................
Certain Federal Income Tax Consequences...................
Anticipated Accounting Treatment..........................
Appraisal Rights..........................................
Exchange of Stock Certificates............................
Comparative Rights of Edisto and Forcenergy
Stockholders...........................................
Comparative Rights of Convest and Forcenergy
Stockholders...........................................
Risk Factors..............................................
Forward-Looking Statements................................
Market Price Data.........................................
Forcenergy -- Summary Historical Consolidated Financial
Information............................................
Edisto -- Summary Historical Consolidated Financial
Information............................................
Convest -- Summary Historical Consolidated Financial
Information............................................
Comparative Per Share Data................................
RISK FACTORS................................................
THE COMPANIES...............................................
Forcenergy................................................
EDI-Sub...................................................
Edisto....................................................
Convest...................................................
THE SPECIAL MEETINGS........................................
Date, Time and Place......................................
Purposes of the Special Meetings..........................
Record Date and Outstanding Shares........................
Voting and Revocation of Proxies..........................
Vote Required.............................................
Solicitation of Proxies...................................
Other Matters.............................................
THE MERGERS.................................................
General Description of the Mergers........................
Background of Edisto/Convest Turnaround...................
Background of the Mergers.................................
Recommendation of the Boards of Directors of Edisto and
Convest; Reasons for the Mergers.......................
Forcenergy's Reasons for the Mergers......................
Opinions of Financial Advisors............................
Interests of Certain Persons in the Mergers...............
Certain Federal Income Tax Consequences...................
Accounting Treatment......................................
Restrictions on Resales by Affiliates.....................
Rights of Dissenting Stockholders of Edisto...............
</TABLE>
5
<PAGE> 11
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CERTAIN TERMS OF THE MERGER AGREEMENT.......................
Effective Time of the Mergers.............................
Manner and Basis of Converting Shares.....................
Edisto Options............................................
Convest Options...........................................
Conditions to the Mergers.................................
Representations and Warranties............................
Certain Covenants; Conduct of Business Prior to the
Mergers................................................
No Solicitation...........................................
Termination...............................................
Expenses and Termination Fees.............................
Indemnification...........................................
SHAREHOLDER AGREEMENTS......................................
PRO FORMA FINANCIAL INFORMATION.............................
INFORMATION REGARDING FORCENERGY............................
INFORMATION REGARDING EDISTO................................
INFORMATION REGARDING CONVEST...............................
DESCRIPTION OF FORCENERGY CAPITAL STOCK.....................
COMPARATIVE RIGHTS OF FORCENERGY AND EDISTO STOCKHOLDERS....
LEGAL MATTERS...............................................
EXPERTS.....................................................
EDISTO FINANCIAL STATEMENTS................................. F-
CONVEST FINANCIAL STATEMENTS................................ F-
Appendices:
A -- Merger Agreement
B -- Plan and Agreement of Merger
C -- Opinion of Rauscher Pierce
D -- Opinion of Petrie Parkman
E -- Section 262 of the Delaware General Corporation Law
</TABLE>
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SUMMARY
The following is a summary of certain information contained elsewhere in
this Joint Proxy Statement/ Prospectus. Reference is made to, and this summary
is qualified in its entirety by, the more detailed information contained in or
incorporated by reference in this Joint Proxy Statement/Prospectus and the
Appendices hereto. Stockholders are urged to read carefully this Joint Proxy
Statement/Prospectus and the Appendices hereto in their entirety. As used in
this Joint Proxy Statement/Prospectus, unless otherwise required by the context,
the term "Forcenergy" means Forcenergy Inc and its consolidated subsidiaries,
the term "Edisto" means Edisto Resources Corporation and its consolidated
subsidiaries, and the term "Convest" means Convest Energy Corporation and its
consolidated subsidiaries. Capitalized terms used herein without definition are,
unless otherwise indicated, defined in the Merger Agreement and used herein with
such meanings.
GENERAL
At the Special Meetings, the stockholders of Edisto and Convest will be
asked to approve an Amended and Restated Agreement and Plan of Merger dated as
of July 15, 1997, as amended, among Edisto, Convest, Forcenergy and a Forcenergy
subsidiary and related Plan and Agreement of Merger among Forcenergy and Convest
(collectively, the "Merger Agreement") pursuant to which the Forcenergy
subsidiary, EDI-Sub, will merge with and into Edisto; Edisto will be
subsequently liquidated, and Convest will merge with and into Forcenergy
(collectively, the "Mergers"). A copy of the Merger Agreement is attached to the
Joint Proxy Statement/Prospectus as Appendix A. Upon consummation of the
Mergers, the separate existence of Edisto and Convest will cease.
As a result of the Mergers, (a) each share of Edisto Common Stock will be
converted into the right to receive (i) $4.886 in cash and (ii) a fractional
interest in a share of Forcenergy Common Stock equal to $5.064 divided by the
Weighted Average Trading Price of Forcenergy Common Stock, and (b) each share of
Convest Common Stock will be converted into the right to receive a fractional
interest in a share of Forcenergy Common Stock equal to $8.88 divided by the
Weighted Average Trading Price of Forcenergy Common Stock. The Weighted Average
Trading Price of Forcenergy Common Stock will be determined during the ten
trading days ending two days prior to the closing date (which is expected to be
the same day as the Special Meetings); provided, however, that the Weighted
Average Trading Price of Forcenergy Common Stock will in no event be less than
$28.96 nor more than $34.96.
Certain affiliates of Trust Company of the West, which hold approximately
51% of the outstanding shares of Edisto Common Stock, have agreed to vote their
shares for approval of the Merger Agreement. See "Quorum; Vote Required" below.
Edisto owns approximately 72% of the outstanding shares of Convest Common Stock
and has agreed in the Merger Agreement to vote for approval of the Merger
Agreement. Accordingly, the approvals of the Merger Agreement by the Edisto and
Convest stockholders are expected to occur.
Following the Mergers, Forcenergy AB and FMR Corp. will own approximately
34% and 5% of the outstanding Forcenergy Common Stock (assuming a Weighted
Average Trading Price of $31.96 per share).
This Joint Proxy Statement/Prospectus describes these matters in more
detail below.
THE COMPANIES
Forcenergy and EDI-Sub. Forcenergy is an independent oil and gas company
engaged in the exploration, acquisition, development, exploitation and
production of oil and natural gas properties. EDI-Sub is a wholly owned
subsidiary of Forcenergy. The principal executive offices of Forcenergy are
located at 2730 SW 3rd Avenue, Suite 800, Miami, Florida 33129-2237, and its
telephone number at such offices is (305) 856-8500. See "Information Regarding
Forcenergy."
Forcenergy has experienced significant growth in the last six years,
primarily through the exploitation, enhancement and development of acquired
producing properties in the Gulf of Mexico and the 1996
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<PAGE> 13
acquisition of producing properties in the Cook Inlet, Alaska. At December 31,
1996, Forcenergy had net proved reserves of approximately 585 Bcfe, 58% of which
were located in the Gulf of Mexico and 27% of which were located in Alaska.
Approximately 56% of Forcenergy's net proved reserves on such date were oil and
approximately 78% of proved reserves were classified as proved developed.
Forcenergy currently operates approximately 75% of its Gulf of Mexico
production. Forcenergy's primary focus is its Gulf of Mexico and Alaska
activities; however, Forcenergy has also acquired interests in certain
undeveloped international leasehold acreage, primarily in Gabon, Africa and
Australia.
Edisto. Edisto is involved in oil and gas exploration and production by
virtue of its 72% interest in Convest. Edisto has no significant operations
independent of its interest in Convest. Edisto's principal executive offices are
located at 2401 Fountain View Drive, Suite 700, Houston, Texas 77057, and its
telephone number is (713) 782-0095.
Convest. Convest is an independent oil and gas exploration and production
company. At December 31, 1996, Convest had net estimated proved reserves of
approximately 6,344 mbbls of oil and 37,582 Mmcf of natural gas and held
interests in approximately 965 producing wells consisting of working interests,
royalty interests and overriding royalty interests. The producing wells are
primarily located in Alabama, Kansas, Louisiana, Nebraska, Oklahoma, Texas,
Utah, Wyoming and offshore Gulf of Mexico. Approximately 49% of Convest's oil
and gas reserves are oil and approximately 51% are gas, measured in energy
equivalent barrels of oil basis (natural gas being converted to oil equivalent
at the rate of six Mcf of gas for each barrel of oil).
In addition to its interests in producing oil and gas properties, Convest
owns an undivided interest of approximately 13% in the Altamont Gas Plant.
Producing and nonproducing acreage holdings aggregate approximately 105,966 net
acres as of December 31, 1996. Convest serves as the operator of approximately
30% of the producing wells in which it owns a working interest, and the
remaining 70% are operated by other working interest owners in the properties.
Convest's principal executive offices are located at 2401 Fountain View Drive,
Suite 700, Houston, Texas 77057, and its telephone number is (713) 780-1952.
THE SPECIAL MEETINGS
DATE, TIME AND PLACE
The Special Meeting of stockholders of Edisto (the "Edisto Special
Meeting") will be held on , October , 1997, at 2401 Fountain View,
Suite 700, Houston, Texas 77057 commencing at :00 a.m. local time.
The Special Meeting of stockholders of Convest (the "Convest Special
Meeting") will be held on , October , 1997, at 2401 Fountain
View, Suite 700, Houston, Texas 77057 commencing at :00 a.m. local time.
PURPOSES
The purposes of the Edisto Special Meeting are (i) to consider and vote
upon a proposal to approve and adopt the Merger Agreement; and (ii) to transact
such other business as may properly come before the Edisto Special Meeting.
The purposes of the Convest Special Meeting are (i) to consider and vote
upon a proposal to approve and adopt the Merger Agreement; and (ii) to transact
such other business as may properly come before the Convest Special Meeting.
RECORD DATES; SHARES ENTITLED TO VOTE
The Board of Directors of Edisto has fixed the close of business on
September 9, 1997 as the record date (the "Edisto Record Date") for the
determination of stockholders entitled to notice of, and to vote at, the Edisto
Special Meeting and any adjournment thereof. Only holders of record of shares of
Edisto Common Stock at the close of business on the Edisto Record Date are
entitled to notice of and to vote at the Edisto
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<PAGE> 14
Special Meeting. On such date, there were shares of Edisto Common
Stock outstanding, each of which will be entitled to one vote on each matter to
be acted upon at the Edisto Special Meeting.
The Board of Directors of Convest has fixed the close of business on
September 9, 1997 as the record date (the "Convest Record Date") for the
determination of stockholders entitled to notice of, and to vote at, the Convest
Special Meeting and any adjournment thereof. Only holders of record of shares of
Convest Common Stock at the close of business on the Convest Record Date are
entitled to notice of and to vote at the Convest Special Meeting. On such date,
there were shares of Convest Common Stock outstanding, each of which will
be entitled to one vote on each matter to be acted upon at the Convest Special
Meeting.
QUORUM; VOTE REQUIRED
The presence, in person or by proxy, at the Edisto Special Meeting of the
holders of a majority of the shares of Edisto Common Stock outstanding and
entitled to vote at the Edisto Special Meeting is necessary to constitute a
quorum at the meeting. The affirmative vote of the holders of a majority of the
shares of Edisto Common Stock outstanding and entitled to vote thereon at the
Edisto Special Meeting is required under the General Corporation Law of the
State of Delaware (the "DGCL") to approve and adopt the Merger Agreement. In
determining whether the Merger Agreement has received the requisite number of
affirmative votes, abstentions and broker non-votes will have the same effect as
a vote against the Merger Agreement.
Investment funds and accounts managed by TCW Special Credits and Oaktree
Capital Management, L.L.C., affiliates of Trust Company of the West (the "TCW
Entities"), which hold approximately 51% of the outstanding shares of Edisto
Common Stock as of the Edisto Record Date, have agreed to vote for the Merger
Agreement. In addition, certain officers and directors of Edisto who own in the
aggregate 20,214 shares of Edisto Common Stock have agreed to vote for the
Merger Agreement. Accordingly, the approval of the Merger Agreement by the
requisite vote of Edisto stockholders is expected to occur irrespective of
whether or the manner in which other Edisto stockholders vote their shares.
The presence, in person or by proxy, at the Convest Special Meeting of the
holders of a majority of the shares of Convest Common Stock outstanding and
entitled to vote at the Convest Special Meeting is necessary to constitute a
quorum at the meeting. The affirmative vote of the holders of two-thirds of the
shares of Convest Common Stock outstanding and entitled to vote thereon at the
Convest Special Meeting is required under the Texas Business Corporation Act
(the "TBCA") to approve and adopt the Merger Agreement. In determining whether
the Merger Agreement has received the requisite number of affirmative votes,
abstentions and broker non-votes will have the same effect as a vote against the
Merger Agreement.
Edisto and certain officers and directors of Convest, holders of
approximately 72.0% and 0.4%, respectively, of the outstanding shares of Convest
Common Stock as of the Convest Record Date, have agreed to vote for the Merger
Agreement, unless the Merger Agreement is terminated in accordance with its
terms. Accordingly, the approval of the Merger Agreement by the requisite vote
of Convest stockholders is expected to occur irrespective of whether or the
manner in which other Convest stockholders vote their shares.
RECOMMENDATIONS OF THE BOARD OF DIRECTORS
RECOMMENDATION OF THE BOARD OF DIRECTORS OF EDISTO. THE BOARD OF DIRECTORS
OF EDISTO HAS DETERMINED THAT THE MERGER OF THE FORCENERGY SUBSIDIARY, EDI-SUB,
WITH AND INTO EDISTO (THE "EDISTO MERGER") IS FAIR TO, AND IN THE BEST INTERESTS
OF, THE STOCKHOLDERS OF EDISTO AND UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS
OF EDISTO APPROVE THE MERGER AGREEMENT. See "The Mergers -- Background of the
Mergers" and "Recommendations of the Boards of Directors of Edisto and Convest;
Reasons for the Mergers." In considering the recommendation of the Edisto Board
with respect to the Edisto Merger, Edisto stockholders should be aware that
certain officers and directors of Edisto have certain interests respecting the
Edisto Merger, apart from their interests as stockholders of Edisto. See "The
Mergers -- Interests of Certain Persons in the Mergers."
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<PAGE> 15
Recommendation of the Board of Directors of Convest. THE BOARD OF DIRECTORS
OF CONVEST HAS DETERMINED THAT THE MERGER OF CONVEST WITH AND INTO FORCENERGY
(THE "CONVEST MERGER") IS FAIR TO, AND IN THE BEST INTERESTS OF, THE
STOCKHOLDERS OF CONVEST AND RECOMMENDS THAT THE STOCKHOLDERS OF CONVEST APPROVE
THE MERGER AGREEMENT. See "The Mergers -- Background of the Mergers" and
"Recommendations of the Boards of Directors of Edisto and Convest; Reasons for
the Mergers." In considering the recommendation of the Convest Board with
respect to the Convest Merger, Convest stockholders should be aware that certain
officers and directors of Convest have certain interests respecting the Convest
Merger, apart from their interests as stockholders of Convest. See "The
Mergers -- Interests of Certain Persons in the Mergers."
OPINIONS OF FINANCIAL ADVISORS
Rauscher Pierce Refsnes, Inc. ("Rauscher Pierce") has delivered its written
opinion dated June 19, 1997 to the Board of Directors of Edisto that the
consideration to be received by stockholders of Edisto pursuant to the Merger
Agreement is fair, from a financial point of view, to the holders of Edisto
Common Stock. For information regarding the opinion of Rauscher Pierce,
including the assumptions made, matters considered and limits of such opinion,
see "The Mergers -- Opinions of Financial Advisors -- Opinion of Edisto
Financial Advisor." Stockholders of Edisto are urged to read in its entirety the
opinion of Rauscher Pierce, a copy of which is included in this Joint Proxy
Statement/Prospectus as Appendix C.
Petrie Parkman & Co., Inc. ("Petrie Parkman") has delivered its written
opinion dated June 19, 1997 to the Board of Directors of Convest that the
consideration to be received by the Convest stockholders in the Convest Merger
is fair, from a financial point of view, to the holders of Convest Common Stock.
For information regarding the opinion of Petrie Parkman, including the
assumptions made, matters considered and limits of such opinion, see "The
Mergers -- Opinions of Financial Advisors -- Opinion of Convest Financial
Advisor." Stockholders of Convest are urged to read in its entirety the opinion
of Petrie Parkman, a copy of which is attached to this Joint Proxy
Statement/Prospectus as Appendix D.
INTERESTS OF CERTAIN PERSONS IN THE MERGERS
Severance and Bonus Agreements with Edisto and Convest Officers. Upon the
consummation of the Mergers, Michael Y. McGovern will be terminated as the
Chairman and CEO of Edisto and Convest. Pursuant to his Employment Agreement,
Mr. McGovern will receive a severance payment of $275,000 and he will be
entitled to participate, for a period of twelve months after his termination, in
all health, life and disability insurance and other employee benefit programs in
which he was participating immediately prior to such termination. If such
participation is not allowed because he is no longer an employee, then
comparable benefits must be provided. Mr. McGovern also will receive a special
bonus of $183,333 which is contingent upon Mr. McGovern staying employed with
Convest until the closing date. This special bonus ("Stay Bonus") was offered by
the Convest Board at the beginning of the sale process to Mr. McGovern and six
executive officers of Convest to provide an appropriate incentive to close a
transaction.
Also upon consummation of the Mergers, it is anticipated that each of the
other executive officers of Edisto and Convest will be terminated. Under the
Company's severance policy for executive officers, any executive officer (other
than Mr. McGovern) who is terminated for any reason other than cause is entitled
to receive a severance payment in a lump sum equal to six months of salary and
is eligible to receive an additional six months of severance pay if approved by
the Board of Directors. Convest has six executive officers covered by this
policy (other than Mr. McGovern) and the maximum amount payable is approximately
$580,000. Each of these executive officers also is eligible to receive a Stay
Bonus of between one-third to two-thirds of such officer's base salary. The
maximum Stay Bonus payable to these officers is approximately $385,000.
Employee Stock Options held by Edisto and Convest Officers and Directors.
Under the Merger Agreement, each of the Edisto Options and Convest Options
outstanding under the respective stock option plans of Edisto and Convest is
required to be redeemed or exercised prior to the Mergers. Each of the Edisto
Options outstanding immediately prior to the Mergers will be redeemed for a cash
payment equal to the difference between $9.95 and the exercise price of such
Edisto Option. Each of the Convest Options
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<PAGE> 16
outstanding immediately prior to the Mergers will be redeemed for a cash payment
equal to the difference between $8.88 and the exercise price of such Convest
Options. Michael Y. McGovern has 240,000 Edisto Options and 112,924 Convest
Options and will receive an aggregate of $1,533,642 in cash to redeem such stock
options upon consummation of the Mergers.
Also upon consummation of the Mergers, (i) the outside directors of Edisto
will receive an aggregate of $161,175 in cash to redeem their Edisto Options,
(ii) the outside directors of Convest will receive an aggregate of $362,900 in
cash to redeem their Convest Options and (iii) the six Convest executive
officers (other than Mr. McGovern) will receive an aggregate of $532,430 in cash
to redeem their Convest Options.
Joint Representations on Edisto and Convest Boards. Four of the six members
of the Convest Board are also directors of Edisto. To avoid any conflict of
interest between Edisto and Convest relating to the allocation of the purchase
price between the two companies, the members of the Affiliate Transaction Review
Committee of the Convest Board were requested by the Convest Board to review the
Mergers from the perspective of the minority shareholders of Convest. The
purpose of this review was to examine the fairness of the purchase price
allocation between Edisto and Convest. The two members of this Committee, Murray
Gullatt and Franklin Myers, have no affiliation with Edisto. On June 19, 1997,
this Committee met with representatives of Petrie Parkman and Convest's outside
legal counsel to review the terms of the Mergers. The Committee subsequently
recommended to the full Convest Board that it approve the Merger Agreement. For
their service, Murray Gullatt, as Chairman, received $7,500 and Franklin Myers
received $5,000.
Indemnification of Edisto and Convest Directors and Officers. The Merger
Agreement provides for the indemnification by Forcenergy of the present and
former directors and officers of Edisto and Convest after the Mergers. In
addition, Forcenergy has agreed to maintain liability insurance for such
persons, subject to certain conditions.
THE MERGERS AND THE MERGER AGREEMENT
Terms of the Mergers. As a result of the Mergers, (a) each share of Edisto
Common Stock will be converted into the right to receive (i) $4.886 in cash and
(ii) a fractional interest in a share of Forcenergy Common Stock equal to $5.064
divided by the Weighted Average Trading Price of Forcenergy Common Stock, and
(b) each share of Convest Common Stock will be converted into the right to
receive a fractional interest in a share of Forcenergy Common Stock equal to
$8.88 divided by the Weighted Average Trading Price of Forcenergy Common Stock.
The Weighted Average Trading Price of Forcenergy Common Stock will be determined
during the ten trading days ending two days prior to the closing date (which is
expected to be the same day as the Special Meetings); provided, however, that
the Weighted Average Trading Price of Forcenergy Common Stock will in no event
be less than $28.96 nor more than $34.96. The "Weighted Average Trading Price"
of Forcenergy Common Stock will be calculated by taking the average of the
following daily calculations to be made for each of the ten trading days ending
two trading days prior to the closing date for the Mergers: (i) grouping
together all shares of Forcenergy Common Stock traded on such day at the same
trading price, (ii) multiplying the aggregate number of shares in each price
group by the trading price for such group to calculate a product (the total sold
shares value) for each group, (iii) adding all of such products from each group,
and (iv) dividing the resulting total by the aggregate number of shares traded
on such trading day.
Based on the number of shares of Forcenergy Common Stock, Edisto Common
Stock and Convest Common Stock outstanding as of the Edisto Record Date and the
Convest Record Date and assuming a trading price of $34.96 and $28.96 per share
of Forcenergy Common stock (the maximum and minimum per share trading price for
calculation of the Weighted Average Trading Price of Forcenergy Common Stock
pursuant to the Merger Agreement), between 2,812,864 shares and 3,395,640
shares, respectively, of Forcenergy Common Stock would be issuable in exchange
for Edisto Common Stock and Convest Common Stock pursuant to the Merger
Agreement (assuming no exercise prior to the Edisto Merger Effective Time of
Edisto Options or Convest Options), representing approximately 11% and 13%,
respectively, of the total Forcenergy Common Stock to be outstanding after the
issuance of the shares in the Mergers.
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Effective Time of the Mergers. The Edisto Merger will become effective upon
the filing of a certificate of merger with the Secretary of State of the State
of Delaware which will be the Edisto Merger Effective Time, unless the
certificate of merger specifies a later Edisto Merger Effective Time. Assuming
all conditions to the Edisto Merger contained in the Merger Agreement are
satisfied or, if permissible, waived prior thereto, it is anticipated that the
Edisto Merger Effective Time of the Edisto Merger will occur as soon as
practicable following the Edisto Special Meeting.
The Convest Merger will become effective upon the later to occur of (i) the
filing of articles of merger with the Secretary of State of the State of Texas
and the issuance of a certificate of merger and (ii) the filing of a certificate
of merger with the Secretary of State of the State of Delaware which will be the
Convest Merger Effective Time, unless the articles of merger specify a later
Convest Merger Effective Time. Assuming all conditions to the Convest Merger
contained in the Merger Agreement are satisfied or, if permissible, waived prior
thereto, it is anticipated that the Convest Merger Effective Time of the Convest
Merger will occur as soon as practicable following the Convest Special Meeting.
Certain Conditions to the Consummation of the Mergers. The respective
obligations of Forcenergy, Edisto and Convest to consummate the Mergers are
subject to the satisfaction of certain conditions, including: (a) the Merger
Agreement and the Edisto Merger shall have been approved and adopted by the
requisite vote of the stockholders of Edisto and the Merger Agreement and the
Convest Merger shall have been approved and adopted by the requisite vote of the
stockholders of Convest (which approvals are expected to occur); (b) the receipt
of the opinion of Coopers & Lybrand L.L.P. to the effect that the Convest Merger
will qualify as a tax-free reorganization; and (c) other conditions customary
for transactions of this nature.
No Solicitation. As an inducement to Forcenergy to enter into the Merger
Agreement, Edisto and Convest have agreed not to initiate, solicit, negotiate,
encourage or provide confidential information to facilitate any proposal or
offer to acquire all or any substantial part of the business and properties of
either Edisto or Convest or any of their subsidiaries or any capital stock of
either Edisto or Convest or any of their subsidiaries, whether by merger,
purchase of assets, tender offer or otherwise, whether for cash, securities or
any other consideration or combination thereof. See "Certain Terms of the Merger
Agreement -- No Solicitation."
Termination of the Merger Agreement. The Merger Agreement may be terminated
at any time prior to the Closing Date, whether before or after approval by the
stockholders of Convest and Edisto, by the mutual written consent of Forcenergy,
Edisto and Convest. It may also be terminated by the parties in certain events,
including, if the Mergers are not completed by October 31, 1997.
Either Edisto or Convest may terminate the Merger Agreement if it receives
an offer or proposal with respect to a merger, sale of substantial assets or
other business combination, and such company's Board of Directors determines, in
good faith and after consultation with an independent financial advisor, that
such offer or proposal (if consummated pursuant to its terms) would result in a
transaction more favorable to such company's stockholders from a financial point
of view than the relevant Merger and such company's Board of Directors shall
conclude in good faith after consultation with its legal counsel that such
action is necessary in order for such Board of Directors to act in a manner that
is consistent with its fiduciary obligations under applicable law and Forcenergy
fails to agree to amend the Merger Agreement so that the Mergers would be, in
the good faith determination of such Board of Directors, at least as favorable
to such company's stockholders from a financial point of view as the other
proposal. Upon termination of the Merger Agreement under the circumstances
described in the preceding sentence, Edisto and Convest would be required to pay
Forcenergy a termination fee of $3 million. See "Certain Terms of the Merger
Agreement -- Termination" and "-- Expenses and Termination Fees."
Shareholder Agreements. Concurrently with the execution of the Merger
Agreement, Forcenergy and the TCW Entities, which own approximately 51% of the
outstanding shares of Edisto Common Stock, entered into a Shareholder Agreement
pursuant to which the TCW Entities have agreed to vote their shares of Edisto
Common Stock in favor of the Merger Agreement, unless Edisto's Board of
Directors approves an alternative transaction with a value of at least $10.95
per share. The TCW Entities also have agreed to not solicit or encourage any
offer from any party concerning the possible disposition of all or any
substantial portion of
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Edisto's or Convest's business assets or a controlling equity interest in Edisto
or Convest. For a period of 180 days after the Mergers have been consummated,
the TCW Entities have agreed that they will not sell or otherwise dispose of 80%
of the shares of Forcenergy Common Stock they receive pursuant to the Mergers.
Forcenergy has agreed to file a shelf registration statement to register the
shares of Forcenergy Common Stock to be received by the TCW Entities pursuant to
the Mergers under the Securities Act, and has also granted the TCW Entities
certain piggyback registration rights.
Pursuant to the Merger Agreement, Edisto, which owns 72% of the outstanding
shares of Convest Common Stock, has agreed to vote its shares of Convest Common
Stock in favor of the Merger Agreement. Edisto has also agreed not to solicit or
encourage any offer from any party concerning the possible disposition of all or
any substantial portion of Edisto's or Convest's business assets or a
controlling equity interest in Convest.
Concurrently with the execution of the Merger Agreement, Forcenergy and
certain affiliated stockholders, each of the directors and executive officers of
Edisto and Convest (each, a "Supporting Stockholder") also entered into
agreements pursuant to which each Supporting Stockholder has agreed that such
Supporting Stockholder will vote its respective shares of Edisto Common Stock
and Convest Common Stock in favor of the Merger Agreement. The Supporting
Stockholders own an aggregate of 20,214 shares of Edisto Common Stock and 40,284
shares of Convest Common Stock.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Forcenergy has received a tax opinion from Coopers & Lybrand L.L.P., tax
advisors to Forcenergy, regarding the federal income tax consequences of the
Edisto and Convest Mergers. Each Edisto and Convest stockholder should consult
his or her own tax advisor regarding the tax consequences of the Mergers in
light of such stockholder's own situation, including the application and the
effect of any state, local or foreign income and other tax laws. For a more
detailed discussion of these and other federal income tax considerations for
Edisto and Convest stockholders, see "The Mergers -- Material Federal Income Tax
Consequences."
Edisto Stockholders. For U.S. federal income tax purposes, the Edisto
Merger will be treated as an acquisition of the Edisto Common Stock by
Forcenergy in a taxable transaction and not as a tax-free reorganization.
Accordingly, a stockholder of Edisto who exchanges shares of Edisto Common Stock
for Forcenergy Common Stock and cash will recognize taxable gain or loss in an
amount equal to the difference between such stockholder's basis in such shares
of Edisto Common Stock and the amount of cash and fair market value of
Forcenergy Common Stock received in the Edisto Merger.
Convest Stockholders. For U.S. federal income tax purposes, the Convest
Merger is intended to qualify as a reorganization under Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code"), and if it so qualifies,
no gain or loss will be recognized by Convest stockholders upon the conversion
of their Convest Common Stock into shares of Forcenergy Common Stock, except to
the extent of cash received, if any, in lieu of fractional shares of Forcenergy
Common Stock.
ANTICIPATED ACCOUNTING TREATMENT
Forcenergy will record the acquisition of the Edisto Common Stock and
Convest Common Stock as a purchase in accordance with Accounting Principles
Board Opinion No. 16 and generally accepted accounting principles.
13
<PAGE> 19
APPRAISAL RIGHTS
In connection with the Edisto Merger, holders of Edisto Common Stock who
comply with certain requirements and procedures set forth in Section 262 of the
DGCL may be entitled to seek an appraisal of their shares and to obtain the
"fair value" of their shares. To exercise appraisal rights, holders of Edisto
Common Stock must either vote against the Edisto Merger or abstain from voting
on the Edisto Merger and must comply strictly with the procedural requirements
of Section 262 of the DGCL, a description of which is set forth under "The
Mergers -- Rights of Dissenting Stockholders of Edisto," and the full text of
which is included as Appendix E hereto.
Under Texas law, holders of Convest Common Stock will not be entitled to
any appraisal or dissenter's rights in connection with the Convest Merger. See
"The Mergers -- Rights of Dissenting Stockholders of Edisto."
EXCHANGE OF STOCK CERTIFICATES
Within ten business days after consummation of the Mergers, Forcenergy will
mail a letter of transmittal with instructions to each holder of record of
Edisto Common Stock and Convest Common Stock immediately before the Edisto
Merger Effective Time and Convest Merger Effective Time for use in exchanging
certificates formerly representing shares of Edisto Common Stock and Convest
Common Stock for certificates representing shares of Forcenergy Common Stock and
cash as well as cash in lieu of any fractional shares. Certificates should not
be surrendered by the holders of Edisto Common Stock and Convest Common Stock
until they have received the letter of transmittal from Forcenergy. For more
detailed information in this regard, see "Certain Terms of the Merger
Agreement -- Manner and Basis of Converting Shares."
COMPARATIVE RIGHTS OF EDISTO AND FORCENERGY STOCKHOLDERS
Rights of stockholders of Edisto are currently governed by the DGCL, the
Certificate of Incorporation, as amended, of Edisto (the "Edisto Charter") and
Edisto's Bylaws, as amended (the "Edisto Bylaws"). Upon consummation of the
Edisto Merger, Edisto stockholders will become stockholders of Forcenergy and
their rights as stockholders of Forcenergy will be governed by the DGCL, the
Amended and Restated Certificate of Incorporation of Forcenergy (the "Forcenergy
Charter") and Forcenergy's Bylaws (the "Forcenergy Bylaws"). There are various
differences between the rights of Edisto stockholders and the rights of
Forcenergy stockholders. See "Comparative Rights of Forcenergy and Edisto
Stockholders" and "Description of Forcenergy Capital Stock."
COMPARATIVE RIGHTS OF CONVEST AND FORCENERGY STOCKHOLDERS
Rights of stockholders of Convest are currently governed by the TBCA, the
Certificate of Incorporation, as amended, of Convest (the "Convest Charter") and
Convest's Bylaws, as amended (the "Convest Bylaws"). Upon consummation of the
Convest Merger, Convest stockholders will become stockholders of Forcenergy and
their rights as stockholders of Forcenergy will be governed by the DGCL, the
Forcenergy Charter and the Forcenergy Bylaws. There are various differences
between the rights of Convest stockholders and the rights of Forcenergy
stockholders. See "Comparative Rights of Forcenergy and Convest Stockholders"
and "Description of Forcenergy Capital Stock."
RISK FACTORS
Edisto and Convest stockholders are urged to consider the matters set forth
under "Risk Factors," in deciding whether to vote for the approval and adoption
of the Merger Agreement.
14
<PAGE> 20
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. The words "anticipate," "believe," "expect," "plan," "intend,"
"estimate," "project," "will," "could," "may," "predict" and similar expressions
are intended to identify forward-looking statements. No assurance can be given
that actual results may not differ materially from those in the forward-looking
statements herein for reasons including the effect of competition, the level of
petroleum industry exploration and production expenditures, world economic
conditions, prices of and the demand for crude oil and natural gas, drilling
activity, weather, the legislative environment in the United States and other
countries, OPEC policy, conflict in the Middle East and other major petroleum
producing regions and the condition of the capital and equity markets.
15
<PAGE> 21
MARKET PRICE DATA
Market Prices. Forcenergy Common Stock commenced trading on the New York
Stock Exchange (the "NYSE") under the symbol "FEN" on June 18, 1997. Prior to
then, Forcenergy Common Stock was quoted on the Nasdaq National Market (the
"NASDAQ"). Edisto Common Stock is listed on the American Stock Exchange (the
"ASE") under the symbol "EDT." Convest Common Stock is listed on the ASE under
the symbol "COV." The following table sets forth, for the periods indicated, the
range of high and low per share sales prices for Forcenergy Common Stock, Edisto
Common Stock and Convest Common Stock as reported on the NASDAQ, NYSE and the
ASE.
<TABLE>
<CAPTION>
FORCENERGY EDISTO CONVEST
--------------- -------------- -------------
HIGH LOW HIGH LOW HIGH LOW
------ ------ ------ ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
1995
First Quarter.............................. -- -- $ 6.38 $5.63 $4.81 $3.13
Second Quarter............................. -- -- $ 8.63 $5.88 $4.38 $3.13
Third Quarter(1)........................... $11.38 $10.00 $ 7.38 $6.00 $3.88 $3.06
Fourth Quarter............................. $11.50 $ 9.25 $ 7.38 $5.00 $4.00 $3.06
1996
First Quarter.............................. $11.69 $10.50 $ 8.25 $5.88 $4.69 $3.25
Second Quarter............................. $19.25 $11.63 $10.75 $8.00 $5.63 $4.38
Third Quarter.............................. $24.88 $17.75 $11.50 $9.13 $5.63 $4.63
Fourth Quarter............................. $37.88 $22.75 $10.50 $8.00 $6.63 $4.75
1997
First Quarter.............................. $37.13 $25.38 $10.25 $8.38 $6.38 $5.06
Second Quarter............................. $35.13 $27.13 $11.50 $9.00 $8.63 $5.56
Third Quarter (through August 28, 1997).... $34.56 $26.75 $ 9.69 $8.94 $9.00 $7.75
</TABLE>
- ---------------
(1) Forcenergy commenced trading on the NASDAQ on July 28, 1995. No public
market existed for Forcenergy Common Stock prior to that date.
On June 19, 1997, the last trading day prior to the date of the joint
announcement by Forcenergy, Edisto and Convest that they had entered into the
Merger Agreement, the closing per share sales prices of Forcenergy Common Stock,
Edisto Common Stock and Convest Common Stock, as reported on the NYSE and the
ASE, were $30.50, $11.00 and $8.50 respectively. See the cover page of this
Joint Proxy Statement/Prospectus for recent closing prices of Forcenergy Common
Stock, Edisto Common Stock and Convest Common Stock.
Following the Mergers, Forcenergy Common Stock will continue to be traded
on the NYSE, Edisto Common Stock and Convest Common Stock will cease to be
traded on the ASE and there will be no further market for the Edisto Common
Stock and the Convest Common Stock.
The following table illustrates the number of shares of Forcenergy Common
Stock that would be issued to Edisto and Convest shareholder groups applying the
conversion formula using the minimum, midpoint and maximum Forcenergy Common
Stock prices in the range. This illustration is based on the number of shares of
Edisto and Convest Common Stock outstanding as of June 30, 1997. If the
Forcenergy Common Stock price is outside of the range, the minimum or maximum
price, as appropriate, is used.
<TABLE>
<CAPTION>
COMBINED
EDISTO CONVEST EDISTO AND CONVEST
----------------------- ----------------------- -----------------------
SHARES SHARES SHARES
PRICE ISSUED VALUE ISSUED(1) VALUE ISSUED VALUE
----- --------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
$28.96............... 2,489,780 $72,104,029 3,235,214 $93,691,797 3,395,640 $98,337,724
$31.96............... 2,256,071 $72,104,029 2,931,533 $93,691,797 3,076,900 $98,337,724
$34.96............... 2,062,472 $72,104,029 2,679,971 $93,691,797 2,812,864 $98,337,724
</TABLE>
- ---------------
(1) This column reflects the total number of shares that would be issued to all
Convest shareholders including Edisto which owns 72% of the outstanding
Convest shares. As the mergers are contingent upon one another, Forcenergy
will not issue shares representing Edisto's 72% interest in Convest.
16
<PAGE> 22
FORCENERGY
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The following selected historical financial information for each of the
years ended December 31, 1992 through 1994 and for December 31, 1995 through
December 31, 1996 have been derived from Forcenergy's Consolidated Financial
Statements, which have been audited by Price Waterhouse LLP and Coopers &
Lybrand L.L.P., independent public accountants, respectively. The selected
consolidated financial data for the six months ended June 30, 1996 and 1997 have
been derived from the unaudited consolidated financial statements of Forcenergy,
which have been prepared on the same basis as the Consolidated Financial
Statements of Forcenergy and, in the opinion of Forcenergy, reflect and include
all adjustments (consisting only of normal recurring adjustments) necessary for
a fair presentation of the financial position and results of operations of
Forcenergy for such periods. The information set forth below is qualified by
reference to and should be read in conjunction with the consolidated financial
statements and related notes included in Forcenergy's Annual Report on Form 10-K
for the year ended December 31, 1996 and its Quarterly Report on Form 10-Q for
the quarter ended June 30, 1997, incorporated by reference in this Joint Proxy
Statement/ Prospectus. No cash dividends have been declared for any of the
periods presented.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
------------------- --------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Oil and gas sales..................... $134,131 $ 57,477 $138,698 $ 72,147 $ 58,354(1) $ 49,652(1) $ 24,937
Other................................. 1,015 276 683 494 388(1) 441(1) 475
-------- -------- -------- -------- -------- -------- --------
135,146 57,753 139,381 72,641 58,742 50,093 25,412
-------- -------- -------- -------- -------- -------- --------
Expenses:
Lease Operating....................... 35,366 16,819 38,786 24,507 23,744 16,632 7,769
Depreciation, depletion and
amortization........................ 53,356 24,162 58,464 31,295 24,572 19,889 8,014
Production taxes...................... 2,231 1,653 3,454 1,868 1,701 1,560 606
General and administrative, net....... 7,141 3,575 7,971 5,670 6,463 3,166 2,523
-------- -------- -------- -------- -------- -------- --------
Total operating expenses.......... 98,094 46,209 108,675 63,340 56,480 41,247 18,912
-------- -------- -------- -------- -------- -------- --------
Income from operations.................. 37,052 11,544 30,706 9,301 2,262 8,846 6,500
Interest and other income (loss)........ 1,748 237 650 (561) 789 545 197
Interest expense, net of amounts
capitalized........................... (14,760) (5,913) (13,367) (11,668) (9,529) (6,192) (2,303)
-------- -------- -------- -------- -------- -------- --------
Income (loss) before income taxes....... 24,040 5,868 17,989 (2,928) (6,478) 3,199 4,394
Income tax provision (benefit)(2)....... 8,920 2,188 6,711 (1,075) (2,403) 2,337 --
Minority interest....................... -- -- -- -- -- 107 132
-------- -------- -------- -------- -------- -------- --------
Net income (loss)(2).................... $ 15,120 $ 3,680 $ 11,278 $ (1,853) $ (4,075) $ 755 $ 4,262
======== ======== ======== ======== ======== ======== ========
Net income (loss) per common and common
equivalent share(2)................... $ .63 $ .20 $ .57 $ (.14) $ (.50)
======== ======== ======== ======== ========
UNAUDITED PRO FORMA DATA(2):
Income before income taxes, including
minority interest..................... $ 3,092 $ 4,262
Income tax provision.................... 1,207 1,639
-------- --------
Net income.............................. 1,885 2,623
======== ========
Net income per share.................... $ .29 $ .41
======== ========
Weighted average common and common
equivalent shares..................... 23,963 18,261 19,726 12,910 8,188 6,520 6,451
BALANCE SHEET DATA (AT END OF PERIOD):
Property, plant and equipment, net...... $681,517 356,030 $523,711 $298,832 $186,241 $152,659 $112,441
Total assets............................ 758,542 391,674 585,925 335,090 220,287 187,786 127,685
Total long-term debt.................... 375,100 175,135 272,932 130,729 131,646 127,234 75,758
Stockholders' equity.................... 265,905 158,710 248,936 154,961 71,061 43,336 45,252
OTHER FINANCIAL DATA:
Capital Expenditures(3)................. 204,211 81,168 $283,977 $144,689 $ 58,169 $ 53,371 $ 67,660
EBITDA(4)............................... 92,156 35,943 89,820 40,035 27,623 29,280 14,711
Ratio of Earnings to Fixed Charges(5)... 2.3x 1.7x 2.0x 1.4x 2.9x
EBITDA Interest Coverage(6)............. 5.5x 5.2x 5.8x 2.8x 2.5x 4.5x 6.4x
Net cash flows provided by (used in):
Operating activities.................. 87,609 27,052 65,228 28,574 22,433 19,473 9,162
Investing activities.................. (191,361) (73,007) (279,864) (75,862) (55,298) (63,144) (69,206)
Financing activities.................. 97,174 43,132 221,309 47,096 34,172 43,883 60,574
</TABLE>
17
<PAGE> 23
- ---------------
(1) Natural gas liquid revenues for 1993 and 1994 have been reclassified from
plant processing and other revenues to oil and gas sales for consistent
presentation with 1995 and 1996 revenues.
(2) Prior to September 14, 1993, Forcenergy was exempt from United States
federal and certain state income taxes as a result of its partnership
status. The unaudited pro forma data reflects the income tax expense that
would have been recorded had Forcenergy not been exempt from paying such
income taxes. Net income per share data for 1992 and 1993 is described as
unaudited pro forma because of Forcenergy's former partnership status.
(3) Capital expenditures include acquisitions of oil and gas properties,
including a $46.4 million non-cash item relating to a 1995 acquisition and
normal end of period capital expenditure accruals of $21.2 million, $19.9
million, $14.2 million and $6.4 million for the years ended 1996 and 1995,
and for the periods ended June 30, 1997 and 1996, respectively.
(4) EBITDA is defined as earnings (including interest and other income) before
interest expense, taxes, depletion, depreciation and amortization and is
presented because it is a widely accepted financial indication of a
company's ability to service and incur debt. EBITDA is a non-GAAP financial
indicator and it is not a measure of net cash flows from operating
activities. EBITDA should not be considered as an alternative to earnings
(loss) as an indicator of Forcenergy's operating performance or to cash
flows as a measure of liquidity.
(5) For purposes of determining the ratio of earnings to fixed charges, earnings
are computed as net income (loss) before income taxes, plus fixed charges.
Fixed charges consist of interest expense, whether expensed or capitalized,
on all indebtedness plus amortization of debt issuance costs. Earnings were
not adequate to cover fixed charges in the years ended December 31, 1995 and
1994 by $5.5 million and $8.0 million, respectively.
(6) Represents the multiple by which EBITDA exceeds interest expense prior to
capitalization.
18
<PAGE> 24
EDISTO
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth summary consolidated financial information
for Edisto as of the dates and for the periods indicated. The summary historical
consolidated financial information for each of the years ended December 31, 1992
through 1996 have been derived from Edisto's Consolidated Financial Statements,
which have been audited by Arthur Andersen LLP, independent public accountants.
The summary consolidated financial information for the six months ended June 30,
1996 and 1997 have been derived from the unaudited consolidated financial
statements of Edisto, which have been prepared on the same basis as that of the
Consolidated Financial Statements of Edisto and, in the opinion of Edisto,
reflect and include all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the financial position and
results of operations of Edisto for such periods. Edisto's results of operations
for the periods after June 30, 1993 are not comparable in all respects to its
results of operations for the periods prior to June 30, 1993 due to the adoption
of fresh-start reporting in conjunction with Edisto's emergence from bankruptcy
on June 29, 1993. Prior periods for the predecessor entity have not been
restated to reflect the discontinued transmission, marketing and manufacturing
segments. The summary consolidated financial information should be reviewed in
conjunction with the consolidated financial statements of Edisto and the notes
thereto and Edisto's Management's Discussion and Analysis of Financial Condition
and Results of Operations set forth elsewhere in this Joint Proxy
Statement/Prospectus. See "Information Regarding Edisto." The information set
forth in the table below is not covered by the report of Edisto's independent
public accountants included elsewhere in this Joint Proxy Statement/Prospectus.
No cash dividends have been declared for the periods presented.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED SIX MONTHS SIX MONTHS
JUNE 30, YEAR ENDED DECEMBER 31, ENDED ENDED YEAR ENDED
------------------- ------------------------------ DECEMBER 31, JUNE 30, DECEMBER 31,
1997 1996 1996 1995 1994 1993 1993 1992
-------- -------- -------- -------- -------- ------------ ---------- ------------
(UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Oil and gas production
revenues....................... $ 25,917 $ 22,033 $ 47,222 $ 51,450 $ 46,788 $ 29,520 $ 35,419 $ 64,491
Gas marketing revenues.......... -- -- -- -- -- -- 172,514 315,070
Total revenues.................. 25,917 22,033 47,222 51,450 46,788 29,520 212,282 385,469
Income (loss) from continuing
operations..................... 6,755 1,471 5,603 (3,174) 8,735 8,934 (71,188) (40,341)
Net income (loss) attributable
to Common Stock................ 6,755 2,943 20,154 (6,597) 7,151 5,600 (66,217) (46,124)
Net income (loss) per common
share:
Continuing operations.......... .48 .11 .41 (.25) .68 .70 (52.77) (35.25)
Discontinued operations........ -- .12 1.08 (.26) (.13) (.26) (4.85) (4.65)
Extraordinary gain............. -- -- -- -- -- -- 8.53 --
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) per common
share...................... $ .48 $ .23 $ 1.49 $ (.51) $ .55 $ .44 $ (49.09) $ (39.90)
======== ======== ======== ======== ======== ======== ======== ========
Weighted average common shares
outstanding.................... 14,019 12,930 13,496 12,954 12,926 12,848 1,349 1,156
Current assets.................. $ 86,532 $ 69,177 $ 84,459 $ 58,669 $ 66,542 $ 50,601 $ 48,596 $104,911
Total assets.................... 143,281 128,212 141,437 125,852 116,463 111,877 131,855 325,769
Current liabilities............. 17,691 17,254 21,816 19,232 28,705 27,620 55,250 117,429
Long-term liabilities........... 20,085 31,707 22,898 39,092 13,576 18,167 16,115 57,082
Pre-petition liabilities:
Subject to compromise -- long-
term......................... -- -- -- -- -- -- -- 112,726
Not subject to compromise --
long-term.................... -- -- -- -- -- -- -- 13,046
Stockholders' equity............ 105,505 79,250 96,723 67,528 74,182 66,090 60,490 25,486
</TABLE>
19
<PAGE> 25
CONVEST
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
On June 26, 1995, Convest purchased from Edisto all of the capital stock of
Edisto's oil and gas subsidiary, Edisto Exploration & Production Company
("Edisto E&P"). The consideration paid to Edisto was shares of newly issued
Convest Common Stock and combined with Edisto's existing 31% interest, gave
Edisto approximately 72% of the outstanding shares of Convest Common Stock. This
transaction resulted in a "reverse acquisition" by Edisto E&P of Convest (e.g.,
as an acquisition of Convest by Edisto E&P) since Edisto's interest in Convest
increased to 72% and Edisto's affiliates became a majority of Convest's Board of
Directors. Accordingly, under applicable accounting rules, Edisto E&P's
historical financial statements replaced Convest's financial statements as the
historical financial statements of Convest for periods prior to June 26, 1995.
The following summary consolidated financial information for each of the
years ended December 31, 1992 through 1996 have been derived from Convest's
Consolidated Financial Statements, which have been audited by Arthur Andersen
LLP, independent public accountants. The summary consolidated financial
information for the six months ended June 30, 1996 and 1997 have been derived
from the unaudited consolidated financial statements of Convest, which have been
prepared on the same basis as the Consolidated Financial Statements of Convest
and, in the opinion of Convest, reflect and include all adjustments (consisting
only of normal recurring adjustments) necessary for a fair presentation of the
financial position and results of operations of Convest for such periods. The
accompanying historical financial information is that of Edisto E&P and NRM
Energy Company, L.P. (the predecessor to Edisto E&P) ("NRM Energy"). Edisto
E&P's results of operations are not comparable in all respects to the results of
NRM Energy for the periods prior to June 30, 1993 due to the adoption of
fresh-start reporting in conjunction with Edisto's emergence from bankruptcy on
June 29, 1993. Further, because of the accounting treatment used for a reverse
acquisition, Convest's financial information for the years ended December 31,
1995 and 1996 is not comparable to the financial information for prior periods.
No cash dividends have been declared for the periods presented.
This financial information should be reviewed in conjunction with the
consolidated financial statements of Convest and the notes thereto and Convest's
Management's Discussion and Analysis of Financial Condition and Results of
Operations set forth elsewhere in this Joint Proxy Statement/Prospectus. See
"Information Regarding Convest." This information set forth in the tables is not
covered by the report of Convest's independent public accountants included
elsewhere in this Joint Proxy Statement/Prospectus.
20
<PAGE> 26
<TABLE>
<CAPTION>
CONVEST NRM ENERGY
-------------------------------------------------------------- -------------------------
SIX MONTHS SIX MONTHS SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31, ENDED ENDED YEAR ENDED
----------------- --------------------------- DECEMBER 31, JUNE 30, DECEMBER 31,
1997 1996 1996 1995 1994 1993 1993 1992
------- ------- ------- ------- ------- ------------ ---------- ------------
(UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............................. $26,194 $23,055 $49,745 $50,980 $51,868 $31,980 $ 32,768 $ 59,392
Reorganization items................. -- -- -- -- (51,335) (12,365)
Income (loss) from continuing
operations......................... 8,819 1,449 8,070 (940) 11,266 7,696 (52,526) (41,733)
Net income (loss).................... 8,819 1,449 8,070 (940) 11,266 7,696 (41,018) (45,603)
Net income (loss) per weighted
average common share(1)(2)......... .84 .14 .77 (.11) 1.82 1.24 -- --
Net income (loss) per unit(2):
Continuing operations.............. -- -- -- -- -- -- (20.49) (16.28)
Discontinued operations............ -- -- -- -- -- -- -- (1.51)
Extraordinary gain................. -- -- -- -- -- -- 4.49 --
------- ------- ------- ------- ------- ------- -------- --------
Net income (loss) per unit......... $ -- $ -- $ -- $ -- $ -- $ -- $ (16.00) $ (17.79)
======= ======= ======= ======= ======= ======= ======== ========
Weighted average common shares
outstanding(1)(2).................. 10,472 10,413 10,413 8,374 6,185 6,185 -- --
Weighted average common units
outstanding........................ -- -- -- -- -- -- 2,563 2,563
Current assets....................... $15,317 $15,254 $14,784 $15,440 $11,514 $27,317 $ 24,198 $ 33,406
Total assets......................... 72,517 74,675 72,212 81,957 58,178 88,592 97,979 157,771
Current liabilities.................. 14,069 15,929 17,342 17,597 26,463 31,909 28,009 10,890
Long-term liabilities................ 6,038 22,280 11,732 29,343 12,088 18,167 15,496 12,125
Pre-petition liabilities:
Subject to
compromise -- long-term.......... -- -- -- -- -- -- -- 112,726
Not subject to compromise -- long-
term............................. -- -- -- -- -- -- -- 26,733
Equity:
Stockholders'...................... 52,410 36,466 43,138 35,017 19,627 38,516 -- --
Partners'.......................... -- -- -- -- -- -- 54,474 (4,703)
</TABLE>
- ---------------
(1) In accordance with the rules of accounting for a reverse acquisition, Edisto
E&P's capital structure was retroactively restated for periods prior to the
Edisto Transaction as more fully discussed under Notes 1 and 3 under "Notes
to Consolidated Financial Statements" included elsewhere herein.
(2) Convest considers net income per share information for periods prior to June
30, 1995 to be of limited value since Edisto E&P was a wholly-owned
subsidiary of Edisto prior to the Edisto Transaction.
21
<PAGE> 27
COMPARATIVE PER SHARE DATA
The information set forth below should be read in conjunction with the
respective audited and unaudited consolidated financial statements and related
notes of Forcenergy, Edisto and Convest incorporated by reference in this Joint
Proxy Statement/Prospectus and the unaudited pro forma condensed financial
information and notes thereto included elsewhere in this Joint Proxy
Statement/Prospectus.
FORCENERGY
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1996 1997
------------ -------------
<S> <C> <C>
HISTORICAL PER COMMON SHARE DATA:
Income from continuing operations......................... $ 0.57 $ 0.63
Book value................................................ 11.03 11.72
PRO FORMA PER COMMON SHARE DATA:
Income from continuing operations......................... $ 1.29 $ .84
Book value................................................ 13.57 14.20
</TABLE>
EDISTO
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1996 1997
------------ ------------
<S> <C> <C>
HISTORICAL PER COMMON SHARE DATA:
Income from continuing operations......................... $ 0.41 $ .48
Book value................................................ 6.94 7.41
</TABLE>
CONVEST
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1996 1997
------------ ------------
<S> <C> <C>
HISTORICAL PER COMMON SHARE DATA:
Income from continuing operations......................... $ 0.77 $ .84
Book value................................................ 4.14 4.97
</TABLE>
22
<PAGE> 28
RISK FACTORS
The following risk factors, as well as the other information set forth in
this Joint Proxy Statement/Prospectus, should be carefully evaluated prior to
making a decision with respect to the Mergers.
VOLATILITY OF NATURAL GAS AND OIL PRICES AND HEDGING RISK
Revenues generated from Forcenergy's operations are highly dependent upon
the price of, and demand for, oil and natural gas. Historically, the markets for
oil and natural gas have been volatile and are likely to continue to be volatile
in the future. Prices for oil and natural gas are subject to wide fluctuations
in response to relatively minor changes in the supply of and demand for oil and
natural gas, market uncertainty and a variety of additional factors that are
beyond the control of Forcenergy. These factors include the level of consumer
product demand, weather conditions, domestic and foreign governmental
regulations, the price and availability of alternative fuels, political
conditions in the Middle East, the foreign supply of oil and natural gas, the
price of foreign imports and overall economic conditions. It is impossible to
predict future oil and natural gas price movements with any certainty. Declines
in oil and natural gas prices may materially adversely affect Forcenergy's
financial condition, liquidity and results of operations. Lower oil and natural
gas prices also may reduce the amount of Forcenergy's oil and natural gas that
can be produced economically. In order to reduce its exposure to price risks in
the sale of its oil and natural gas, Forcenergy enters into hedging arrangements
from time to time. Forcenergy's hedging arrangements apply to only a portion of
its production and provide only limited price protection against fluctuations in
the oil and natural gas markets. While the use of hedging arrangements limits
the downside risk of adverse price movements, they may also limit future
revenues from favorable price movements.
IMPAIRMENT OF OIL AND GAS PROPERTIES
Forcenergy uses the full cost method of accounting for its investment in
oil and natural gas properties. Under the full cost method of accounting, all
costs of acquisition, exploration and development of oil and natural gas
reserves are capitalized into a "full cost pool" as incurred, and properties in
the pool are depleted and charged to operations using the unit-of-production
method based on the ratio of current production to total proved oil and natural
gas reserves. To the extent that such capitalized costs (net of accumulated
depreciation, depletion and amortization) less deferred taxes exceed the present
value (using a 10% discount rate) of estimated future net cash flows from proved
oil and natural gas reserves, and the lower of cost or fair value of unproved
properties after income tax effects, such excess costs are charged to
operations. Once incurred, a write-down of oil and natural gas properties is not
reversible at a later date even if oil or natural gas prices increase. While
Forcenergy has never been required to write-down its asset base, significant
downward revisions of reserve estimates or declines in oil and gas prices which
are not offset by other factors could result in a write-down for impairment of
oil and gas properties.
REPLACEMENT OF RESERVES
In general, the volume of production from oil and gas properties declines
as reserves are depleted. The rate of decline depends on reservoir
characteristics, and varies from the steep decline rate characteristic of Gulf
of Mexico reservoirs, where Forcenergy has a significant portion of its
production, to the relatively slow decline rate characteristic of the long-lived
fields in the Rocky Mountain, Gulf Coast, Southwest and Appalachian regions.
Except to the extent Forcenergy acquires properties containing proved reserves
or conducts successful development and exploration activities, or both, the
proved reserves of Forcenergy will decline as reserves are produced.
Forcenergy's future oil and natural gas production is, therefore, highly
dependent upon its level of success in finding or acquiring additional reserves.
The business of exploring for, developing or acquiring reserves is capital
intensive. To the extent cash flows from operations is reduced and external
sources of capital become limited or unavailable, Forcenergy's ability to make
the necessary capital investment to maintain or expand its asset base of oil and
natural gas reserves would be impaired. In addition, there can be no assurance
that Forcenergy's future development, acquisition and exploration activities
will result in additional proved reserves or that Forcenergy will be able to
drill productive wells at acceptable costs.
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TITLE TO PROPERTIES
Substantially all of Forcenergy's oil and gas properties are and will
continue to be mortgaged to secure borrowings under its bank loan agreement
("the Senior Credit Facility").
UNCERTAINTY OF RESERVE INFORMATION AND FUTURE NET REVENUE ESTIMATES
There are numerous uncertainties inherent in estimating oil and natural gas
reserves and their estimated values, including many factors beyond the control
of the producer. The reserve data set forth in Forcenergy's Annual Report
represents only estimates. Reservoir engineering is a subjective process of
estimating underground accumulations of oil and natural gas that cannot be
measured in an exact manner. Estimates of economically recoverable oil and gas
reserves and of future net cash flows necessarily depend upon a number of
variable factors and assumptions, such as historical production from the area
compared with production from other producing areas, the assumed effects of
regulations by governmental agencies and assumptions concerning future oil and
gas prices, future operating costs, severance and excise taxes, development
costs and workover and remedial costs, all of which may in fact vary
considerably from actual results. For these reasons, estimates of the
economically recoverable quantities of oil and natural gas attributable to any
particular group of properties, classifications of such reserves based on risk
of recovery, and estimates of the future net cash flows expected therefrom
prepared by different engineers or by the same engineers at different times may
vary substantially and such reserve estimates may be subject to downward or
upward adjustment based upon such factors. Actual production, revenues and
expenditures with respect to Forcenergy's reserves will likely vary from
estimates, and such variances may be material.
The present values of estimated future net cash flows referred to in
Forcenergy's Annual Report should not be construed as the current market value
of the estimated oil and natural gas reserves attributable to Forcenergy's
properties. In accordance with applicable requirements of the Commission, the
estimated discounted future net cash flows from 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. In fact, prices received for
production have declined since the date on which such values were calculated.
Actual future net cash flows also will be affected by factors such as the amount
and timing of actual production, supply and demand for oil and natural gas,
curtailments or increases in consumption by gas purchasers and changes in
governmental regulations or taxation. The timing of actual future net cash flows
from proved reserves, and their actual present value, will be affected by the
timing of both the production and the incurrence of expenses in connection with
development and production of oil and gas properties. In addition, the
calculation of the present value of the future net revenues using a 10% discount
as required by the Commission, is not necessarily the most appropriate discount
factor based on interest rates in effect from time to time and risks associated
with Forcenergy's reserves or the oil and gas industry in general.
CONTROL BY PRINCIPAL SECURITYHOLDERS
Forcenergy's principal stockholder, Forcenergy AB ("FAB"), as of May 31,
1997 owned approximately 39% of the outstanding shares of Common Stock of
Forcenergy. After consummation of the Mergers, FAB would own approximately 34%
of the outstanding shares of Forcenergy Common Stock. FAB is a publicly traded
Swedish company with two classes of stock, A shares and B shares. As of May 31,
1997, there were 1,000,000 outstanding A shares, each of which is entitled to
one vote per share, and 13,392,000 outstanding B shares, each of which is
entitled to 1/10th of a vote per share. The B shares of FAB are listed on the
Stockholm Stock Exchange. Victor Forss, his family and certain of their
affiliates owned all 1,000,000 A shares and 1,820,733 B shares of FAB as of May
31, 1997. Accordingly, the Forss family had a 50.5% voting interest and a 19.6%
economic interest in FAB. Under Swedish law, new issues of FAB securities are
subject to preferential rights of existing stockholders which gives the Forss
family the ability to maintain voting control over FAB in the event of future
stock issuances.
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SUBSTANTIAL CAPITAL REQUIREMENTS
Forcenergy makes, and will continue to make, substantial capital
expenditures for the development, exploration, acquisition and production of oil
and natural gas reserves. Historically, Forcenergy has financed these
expenditures primarily with proceeds from bank borrowings, private placements
and public offerings of debt and equity securities and cash generated by
operations. Forcenergy made capital expenditures (including expenditures for
acquisitions) of $144.7 million during 1995 and $284.0 million during 1996.
Forcenergy plans to make capital expenditures, not including expenditures for
acquisitions, of approximately $195 million in 1997. If revenues decrease as a
result of lower oil and gas prices or operating difficulties, Forcenergy may be
limited in its ability to expend the capital necessary to undertake or complete
its drilling program in future years. There can be no assurance that additional
debt or equity financing or cash generated by operations will be available to
meet these requirements.
DRILLING RISKS
Drilling involves numerous risks, including the risk that no commercially
productive natural gas or oil reservoirs will be encountered. The cost of
drilling, completing and operating wells is often uncertain, and drilling
operations may be curtailed, delayed or canceled as a result of a variety of
factors, including unexpected drilling conditions, pressure or irregularities in
formations, equipment failures or accidents, adverse weather conditions and
shortages or delays in the delivery of equipment. Forcenergy's future drilling
activities may not be successful and, if unsuccessful, such failure will have an
adverse effect on Forcenergy's future results of operations and financial
condition.
ACQUISITION RISKS
Forcenergy's rapid growth in recent years has been largely the result of
acquisitions of producing properties. Forcenergy expects to continue to evaluate
and pursue acquisition opportunities which are available on terms management
considers favorable to Forcenergy. The successful acquisition of producing
properties requires an assessment of recoverable reserves, future oil and gas
prices, operating costs, potential environmental and other liabilities and other
factors beyond Forcenergy's control. Such assessments are necessarily inexact
and their accuracy inherently uncertain. In connection with such an assessment,
Forcenergy performs a review of the subject properties that it believes to be
generally consistent with industry practices. Such a review, however, will not
reveal all existing or potential problems nor will it permit a buyer to become
sufficiently familiar with the properties to fully assess their deficiencies and
capabilities. Inspections may not always be performed on every platform or well,
and structural and environmental problems are not necessarily observable even
when an inspection is undertaken. Forcenergy is generally not entitled to
contractual indemnification for pre-closing liabilities, including environmental
liabilities, and generally acquires interests in the properties on an "as is"
basis.
POTENTIAL FLUCTUATIONS IN VALUE OF MERGER CONSIDERATION
The aggregate number of shares of Forcenergy Common Stock to be issued in
the Mergers is dependent upon the Weighted Average Trading Price of Forcenergy
Common Stock. Such calculation will be determined during the ten trading days
ending two days prior to the closing date (which is expected to be the same day
as the Special Meetings) and may fluctuate between a low of $28.96 and a high of
$34.96. Accordingly, the aggregate number of shares of Forcenergy Common Stock
to be issued in the Mergers will range from 2,812,864 to 3,395,640 (based on the
number of shares of Forcenergy Common Stock, Edisto Common Stock and Convest
Common Stock outstanding as of the Edisto Record Date and the Convest Record
Date) and will result in fluctuations in the value of the consideration
attributable to the Mergers.
DEPENDENCE ON KEY PERSONNEL
Forcenergy depends to a large extent on the services of its founder, Stig
Wennerstrom, and certain other senior management personnel. The loss of the
services of Mr. Wennerstrom and other senior management personnel could have a
material adverse effect on Forcenergy's operations. Forcenergy has entered into
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employment agreements with Messrs. Wennerstrom, J. Russell Porter and E. Joseph
Grady. Forcenergy does not maintain any key-man insurance on its senior
management. Forcenergy believes that its success is also dependent upon its
ability to continue to employ and retain skilled technical personnel.
GOVERNMENT REGULATION AND ENVIRONMENTAL MATTERS
Forcenergy's business is regulated by certain local, state and federal laws
and regulations relating to the exploration for, and the development,
production, marketing, pricing, transportation and storage of, oil and natural
gas. Forcenergy's business is also subject to extensive and changing
environmental and safety laws and regulations governing plugging and
abandonment, the discharge of materials into the environment or otherwise
relating to environmental protection. As with any owner of property, Forcenergy
is also subject to cleanup costs and liability for hazardous materials, asbestos
or any other toxic or hazardous substance that may exist on or under any of its
properties. In addition, Forcenergy is subject to changing and extensive tax
laws, and the effect of newly enacted tax laws cannot be predicted. The
implementation of new, or the modification of existing, laws or regulations,
including amendments to the Oil Pollution Act of 1990 or regulations which may
be promulgated thereunder, could have a material adverse effect on Forcenergy.
COMPETITION
The oil and gas industry is highly competitive. Forcenergy encounters
competition from other oil and gas companies in all areas of its operations,
including the acquisition of producing properties. Forcenergy's competitors
include major integrated oil and natural gas companies and numerous independent
oil and gas companies, individuals and drilling and income programs. Many of its
competitors are large, well-established companies with substantially larger
operating staffs and greater capital resources than Forcenergy and which, in
many instances, have been engaged in the energy business for a much longer time
than Forcenergy. Such companies may be able to pay more for productive oil and
natural gas properties and exploratory prospects and to define, evaluate, bid
for and purchase a greater number of properties and prospects than Forcenergy's
financial or human resources permit. Forcenergy's ability to acquire additional
properties and to discover reserves in the future will be dependent upon its
ability to evaluate and select suitable properties and to consummate
transactions in a highly competitive environment.
OPERATING RISKS OF OIL AND GAS OPERATIONS
The oil and gas business involves certain operating hazards such as well
blowouts, cratering, explosions, uncontrollable flows of oil, natural gas or
well fluids, fires, formations with abnormal pressures, pollution, releases of
toxic gas and other environmental hazards and risks, any of which could result
in substantial losses to Forcenergy. Forcenergy's offshore operations also are
subject to the additional hazards of marine operations, such as severe weather,
capsizing and collision. The availability of a ready market for Forcenergy's oil
and natural gas production also depends on the proximity of reserves to, and the
capacity of, oil and gas gathering systems, pipelines and trucking or terminal
facilities. In addition, Forcenergy may be liable for environmental damages
caused by previous owners of property purchased and leased by Forcenergy. As a
result, substantial liabilities to third parties or governmental entities may be
incurred, the payment of which could reduce or eliminate the funds available for
development, acquisitions or exploration, or result in the loss of Forcenergy's
properties. In accordance with customary industry practices, Forcenergy
maintains insurance against some, but not all, of such risks and losses.
Forcenergy does not carry business interruption insurance. The occurrence of an
event not fully covered by insurance could have a material adverse effect on the
financial condition and results of operations of Forcenergy.
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THE COMPANIES
FORCENERGY
Forcenergy is an independent oil and gas company engaged in the
exploration, acquisition, development, exploitation and production of oil and
natural gas. Forcenergy has experienced significant growth in the last six
years, primarily through the exploitation, enhancement and development of
acquired working interests in producing properties in the Gulf of Mexico and the
acquisition of producing properties in the Cook Inlet, Alaska. At December 31,
1996, Forcenergy had net proved reserves of 585 Bcfe, 58% of which were located
in the Gulf of Mexico and 27% of which were located in Alaska. Approximately 56%
of Forcenergy's net proved reserves on such date were oil and approximately 78%
of proved reserves were classified as proved developed. Forcenergy currently
operates approximately 75% of its Gulf of Mexico production. Although
Forcenergy's primary focus is its Gulf of Mexico and Alaska activities,
Forcenergy has also acquired interests in certain undeveloped international
leasehold acreage, primarily in Gabon, Africa and Australia. See "Information
Regarding Forcenergy," elsewhere in this Joint Proxy Statement/Prospectus.
Additional information concerning Forcenergy and its subsidiaries is included in
the Forcenergy documents filed with the Commission, which are incorporated by
reference herein. See "Incorporation of Certain Documents by Reference."
EDI-SUB
EDI-Sub is a wholly owned subsidiary of Forcenergy incorporated on June 11,
1997 in the State of Delaware for the sole purpose of effecting the Edisto
Merger. EDI-Sub conducts no business and has no material assets or liabilities.
EDISTO
Edisto's operating activities include only oil and gas exploration and
production, which is conducted through its 72% interest in Convest.
Prior to December 10, 1996, Edisto was engaged in the purchase and resale
of natural gas to a diversified customer base, primarily industrial/commercial
companies, local distribution companies, and industry partners. Edisto conducted
its gas marketing operations (i) in the United States through its subsidiary
Energy Source, Inc. ("Energy Source"), and (ii) in Western Canada through its
subsidiary Energy Source Canada, Inc. Energy Source aggregated natural gas
supplies from producing basins in the United States and Canada, arranged
transportation through pipelines from points of purchase to points of sale, and
resold natural gas volumes to customers under a variety of standard and
customized arrangements. These arrangements included a variety of short-term and
long-term market sensitive and fixed priced contracts and financial instruments.
On December 10, 1996, Energy Source and Energy Source Canada sold substantially
all of their assets to two subsidiaries of Pacific Gas Transmission Company.
Prior to the completion of Edisto's acquisition of a majority interest in
Convest on June 26, 1995, Edisto's oil and gas operations were conducted through
its subsidiary, Edisto E&P. Edisto E&P was formed in June 1993, upon the
emergence from bankruptcy of Edisto and certain of its exploration and
production subsidiaries.
On November 18, 1994, Edisto purchased 1,321,371 shares of Common Stock of
Convest from two subsidiaries of Windsor Energy Corp. The purchased shares
constituted approximately 31% of the outstanding Convest Common Stock. The
purchase price was $8.9 million in cash, or $6.74 per share.
On June 26, 1995, Convest purchased the stock of Edisto's oil and gas
exploration and production subsidiary, Edisto E&P, in consideration for
6,185,400 newly issued shares of Convest Common Stock and $10,000 in cash. These
newly issued shares increased Edisto's interest in Convest from 31% to 72% of
the outstanding Common Stock of Convest. Upon the closing of the transaction
with Convest, the Convest Board of Directors was restructured so that affiliates
of Edisto constituted a majority of Convest's Board of Directors.
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In April 1996, Edisto purchased an additional 92,000 shares of Convest Common
Stock on the open market which increased its interest in Convest to 73%. Edisto
owns 7,598,771 shares of Convest Common Stock.
See "Information Regarding Edisto," elsewhere in this Joint Proxy
Statement/Prospectus. Additional information concerning Edisto and its
subsidiaries is included in the Edisto documents filed with the Commission,
which are incorporated by reference herein. See "Incorporation of Certain
Documents by Reference."
CONVEST
Convest is an independent oil and gas exploration and production company.
At December 31, 1996, Convest held interests in approximately 965 producing
wells consisting of working interests, royalty interests and overriding royalty
interests. The producing wells are primarily located in Alabama, Kansas,
Louisiana, Nebraska, Oklahoma, Texas, Utah, Wyoming and offshore Gulf of Mexico.
Approximately 49% of Convest's oil and gas reserves are oil and approximately
51% are gas, measured in energy equivalent barrels of oil basis (natural gas
being converted to oil equivalent at the rate of six Mcf of gas for each barrel
of oil). In addition to its interests in producing oil and gas properties,
Convest owns an undivided interest of approximately 13% in a gas processing
plant located in Duchesne County, Utah (the "Altamont Gas Plant"). Producing and
nonproducing acreage holdings aggregate approximately 105,966 net acres as of
December 31, 1996. Convest serves as the operator of approximately 30% of the
producing wells in which it owns a working interest, and the remaining 70% are
operated by other working interest owners in the properties.
See "Information Regarding Convest," elsewhere in this Joint Proxy
Statement/Prospectus. Additional information concerning Convest and its
subsidiaries is included in the Convest documents filed with the Commission,
which are incorporated by reference herein. See "Incorporation of Certain
Documents by Reference."
THE SPECIAL MEETINGS
DATE, TIME AND PLACE
The Edisto Special Meeting of stockholders of Edisto will be held on
, October , 1997, at 2401 Fountain View Drive, Suite 700, Houston,
Texas 77057 commencing at :00 a.m. local time.
The Convest Special Meeting of stockholders of Convest will be held on
, October , 1997, at 2401 Fountain View Drive, Suite 700, Houston,
Texas 77057 commencing at :00 a.m. local time.
PURPOSES OF THE SPECIAL MEETINGS
The purpose of the Edisto Special Meeting is to consider and vote upon (i)
a proposal to approve and adopt the Merger Agreement and the Edisto Merger; and
(ii) such other matters as may properly be brought before the Edisto Special
Meeting.
The purpose of the Convest Special Meeting is to consider and vote upon (i)
a proposal to approve and adopt the Merger Agreement and the Convest Merger; and
(ii) such other matters as may properly be brought before the Convest Special
Meeting.
RECORD DATE AND OUTSTANDING SHARES
Only holders of record of Edisto Common Stock at the close of business on
the Edisto Record Date (September 9, 1997) are entitled to notice of, and to
vote at, the Edisto Special Meeting. There were approximately holders of
record of Edisto Common Stock on the Edisto Record Date, with shares
of Edisto Common Stock issued and outstanding. Each share of Edisto Common Stock
entitles the holder thereof to one vote on each matter submitted for stockholder
approval. See "Principal Stockholders of Forcenergy, Edisto and Convest" for
information regarding persons known to the management of Edisto to be the
beneficial owners of more than 5% of the outstanding Edisto Common Stock.
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Only holders of record of Convest Common Stock at the close of business on
the Convest Record Date (September 9, 1997) are entitled to notice of, and to
vote at, the Convest Special Meeting. There were approximately holders
of record of Convest Common Stock on the Convest Record Date, with
shares of Convest Common Stock issued and outstanding. Each share of Convest
Common Stock entitles the holder thereof to one vote on each matter submitted
for stockholder approval. See "Principal Stockholders of Forcenergy, Edisto and
Convest" for information regarding persons known to the management of Convest to
be the beneficial owners of more than 5% of the outstanding Convest Common
Stock.
VOTING AND REVOCATION OF PROXIES
All properly executed proxies that are not revoked will be voted at the
Edisto Special Meeting in accordance with the instructions contained therein. If
a holder of Edisto Common Stock executes and returns a proxy and does not
specify otherwise, the shares represented by such proxy will be voted "for"
approval and adoption of the Merger Agreement in accordance with the
recommendation of the Board of Directors of Edisto. A stockholder of Edisto who
has executed and returned a proxy may revoke it at any time before it is voted
at the Edisto Special Meeting by (i) executing and returning a proxy bearing a
later date, (ii) filing written notice of such revocation with the Secretary of
Edisto, stating that the proxy is revoked or (iii) attending the Edisto Special
Meeting and voting in person.
All properly executed proxies that are not revoked will be voted at the
Convest Special Meeting in accordance with the instructions contained therein.
If a holder of Convest Common Stock executes and returns a proxy and does not
specify otherwise, the shares represented by such proxy will be voted "for"
approval and adoption of the Merger Agreement in accordance with the
recommendation of the Board of Directors of Convest. A stockholder of Convest
who has executed and returned a proxy may revoke it at any time before it is
voted at the Convest Special Meeting by (i) executing and returning a proxy
bearing a later date, (ii) filing written notice of such revocation with the
Secretary of Convest, stating that the proxy is revoked or (iii) attending the
Convest Special Meeting and voting in person.
VOTE REQUIRED
The presence at the Edisto Special Meeting, in person or by proxy, of the
holders of a majority of the outstanding shares of Edisto Common Stock entitled
to vote thereat will constitute a quorum for the transaction of business, and
approval and adoption of the Merger Agreement requires the affirmative vote of a
majority of the issued and outstanding Edisto Common Stock entitled to vote
thereon. On the Edisto Record Date, there were shares of Edisto Common
Stock outstanding and entitled to vote at the Edisto Special Meeting. In
determining whether the Merger Agreement has received the requisite number of
affirmative votes, abstentions and broker non-votes will have the same effect as
a vote against the Merger Agreement.
The TCW Entities, representing approximately 51% of the outstanding shares
of Edisto Common Stock as of the Edisto Record Date, have agreed to vote for the
Merger Agreement. In addition, certain officers and directors of Edisto who own
in the aggregate 20,214 shares of Edisto Common Stock have agreed to vote for
the Merger Agreement. Accordingly, the approval of the Merger Agreement by the
requisite vote of Edisto stockholders is expected to occur irrespective of
whether or the manner in which other Edisto stockholders vote their shares. See
"Shareholders Agreements."
The presence at the Convest Special Meeting, in person or by proxy, of the
holders of a majority of the outstanding shares of Convest Common Stock entitled
to vote thereat will constitute a quorum for the transaction of business, and
approval and adoption of the Merger Agreement requires the affirmative vote of
two-thirds of the issued and outstanding Convest Common Stock entitled to vote
thereon. On the Convest Record Date, there were shares of Convest
Common Stock outstanding and entitled to vote at the Convest Special Meeting. In
determining whether the Merger Agreement has received the requisite number of
affirmative votes, abstentions and broker non-votes will have the same effect as
a vote against the Merger Agreement.
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Edisto and certain officers and directors of Convest, representing
approximately 72.0% and 0.4% of the outstanding shares of Convest Common Stock
as of the Convest Record Date, have agreed to vote for the Merger Agreement,
unless the Merger Agreement is terminated in accordance with its terms.
Accordingly, the approval of the Merger Agreement by the requisite vote of
Convest stockholders is expected to occur irrespective of whether or the manner
in which other Convest stockholders vote their shares. See "Shareholder
Agreements."
SOLICITATION OF PROXIES
In addition to solicitation by mail, the directors, officers, employees and
agents of Edisto may solicit proxies from its stockholders by personal
interview, telephone, telegram or otherwise. Edisto will bear the costs of the
solicitation of proxies from its stockholders, except that Forcenergy will pay
one-half and Edisto will pay one-quarter of the cost of printing this Joint
Proxy Statement/Prospectus. Arrangements will also be made with brokerage firms
and other custodians, nominees and fiduciaries who hold of record voting
securities of Edisto for the forwarding of solicitation materials to the
beneficial owners thereof. Edisto will reimburse such brokers, custodians,
nominees and fiduciaries for the reasonable out-of-pocket expenses incurred by
them in connection therewith. Edisto has engaged the services of Corporate
Investor Communications to distribute proxy solicitation materials to brokers,
banks and other nominees and to assist in the solicitation of proxies from
Edisto stockholders for a fee of approximately $2,500 plus reasonable
out-of-pocket expenses.
In addition to solicitation by mail, the directors, officers, employees and
agents of Convest may solicit proxies from its stockholders by personal
interview, telephone, telegram or otherwise. Convest will bear the costs of the
solicitation of proxies from its stockholders, except that Forcenergy will pay
one-half and Convest will pay one-quarter of the cost of printing this Joint
Proxy Statement/Prospectus. Arrangements will also be made with brokerage firms
and other custodians, nominees and fiduciaries who hold of record voting
securities of Convest for the forwarding of solicitation materials to the
beneficial owners thereof. Convest will reimburse such brokers, custodians,
nominees and fiduciaries for the reasonable out-of-pocket expenses incurred by
them in connection therewith. Convest has engaged the services of Corporate
Investor Communications to distribute proxy solicitation materials to brokers,
banks and other nominees and to assist in the solicitation of proxies from
Convest stockholders for a fee of approximately $2,500 plus reasonable
out-of-pocket expenses.
OTHER MATTERS
At the date of this Joint Proxy Statement/Prospectus, the Board of
Directors of Edisto does not know of any business to be presented at the Edisto
Special Meeting other than as set forth in the notice accompanying this Joint
Proxy Statement/Prospectus. If any other matters should properly come before the
Edisto Special Meeting, it is intended that the shares represented by proxies
will be voted with respect to such matters in accordance with the judgment of
the persons voting such proxies.
At the date of this Joint Proxy Statement/Prospectus, the Board of
Directors of Convest does not know of any business to be presented at the
Convest Special Meeting other than as set forth in the notice accompanying this
Joint Proxy Statement/Prospectus. If any other matters should properly come
before the Convest Special Meeting, it is intended that the shares represented
by proxies will be voted with respect to such matters in accordance with the
judgment of the persons voting such proxies.
THE MERGERS
GENERAL DESCRIPTION OF THE MERGERS
Edisto Merger
The Merger Agreement provides that, at the Edisto Merger Effective Time,
EDI-Sub will be merged with and into Edisto with Edisto being the surviving
corporation. Also at the Edisto Merger Effective Time, each outstanding share of
Edisto Common Stock (other than shares of Edisto Common Stock held in the
treasury of Edisto or owned by Forcenergy or by any direct or indirect wholly
owned subsidiary of Forcenergy
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or of Edisto, all of which will be canceled) will be converted into (i) $4.886
in cash and (ii) a fractional interest in a share of Forcenergy Common Stock
equal to $5.064 divided by the Weighted Average Trading Price of Forcenergy
Common Stock; provided, however, that the price of Forcenergy Common Stock used
in such calculation will not be less than $28.96 nor more than $34.96. The
"Weighted Average Trading Price" of Forcenergy Common Stock will be calculated
by taking the average of the following daily calculations to be made for each of
the ten trading days ending two trading days prior to the closing date for the
Mergers: (i) grouping together all shares of Forcenergy Common Stock traded on
such day at the same trading price, (ii) multiplying the aggregate number of
shares in each price group by the trading price for such group to calculate a
product (the total sold shares value) for each group, (iii) adding all of such
products from each group, and (iv) dividing the resulting total by the aggregate
number of shares traded on such trading day. Cash will be paid in lieu of
fractional shares of Forcenergy Common Stock. Any resulting fractional shares
will be settled in cash in the manner described under "Certain Terms of the
Merger Agreement -- Manner and Basis of Converting Shares." Following the Edisto
Merger Effective Time, the surviving corporation of the Edisto Merger will be
liquidated, with its assets distributed to Forcenergy.
Convest Merger
The Merger Agreement provides that, at the Convest Merger Effective Time,
Convest will be merged with and into Forcenergy with Forcenergy being the
surviving corporation. Also at the Convest Merger Effective Time, each
outstanding share of Convest Common Stock (other than shares of Convest Common
Stock held in the treasury of Convest or owned by Forcenergy or by any direct or
indirect wholly owned subsidiary of Forcenergy or of Convest, all of which will
be canceled) will be converted into a fractional interest in a share of
Forcenergy Common Stock valued at $8.88. The valuation of Forcenergy Common
Stock will be based on the Weighted Average Trading Price of Forcenergy Common
Stock; provided, however, that the price of Forcenergy Common Stock used in such
valuation will not be less than $28.96 nor more than $34.96. Any resulting
fractional shares will be settled in cash in the manner described under "Certain
Terms of the Merger Agreement -- Manner and Basis of Converting Shares."
Based on the number of shares of Forcenergy Common Stock, Edisto Common
Stock and Convest Common Stock outstanding as of the Edisto Record Date and the
Convest Record Date and assuming a trading price of $34.96 and $28.96 per share
of Forcenergy Common Stock (the maximum and minimum of the Weighted Average
Trading Price of Forcenergy Common Stock pursuant to the Merger Agreement),
shares and shares, respectively, of Forcenergy Common Stock
will be issuable in exchange for Edisto Common Stock and Convest Common Stock
pursuant to the Merger Agreement (assuming no exercise prior to the Edisto
Merger Effective Time of Edisto Options or Convest Options), representing
approximately % and %, respectively, of the total Forcenergy Common
Stock to be outstanding after the issuance of the shares in the Mergers.
BACKGROUND OF EDISTO/CONVEST TURNAROUND
Bankruptcy and Sale of Non-Core Assets. On October 26, 1992, Edisto and
certain of its affiliates filed voluntary petitions for reorganization under
Chapter 11 of the United States Bankruptcy Code. On June 29, 1993, Edisto's plan
of reorganization became effective, and Edisto substantially consummated its
restructuring.
The bankruptcy caused a change of control of Edisto, and subsequently,
Edisto's Board of Directors and senior management were replaced. Subsequent to
the effective date of the plan on June 29, 1993, (i) the existing Board of
Directors resigned and a new Board was elected, (ii) the new Board elected
Michael Y. McGovern as Edisto's new Chairman of the Board and Chief Executive
Officer, and (iii) all of the senior management of Edisto, including management
of its oil and gas operations and its pipeline and gas marketing operations,
either resigned or were terminated and were replaced.
From March 1990 until March 1994, Edisto's 80% owned subsidiary, Multiflex
International, Inc., manufactured subsea umbilical connections used in the
offshore oil and gas industry. In March 1994, this
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subsidiary sold the stock of its operating subsidiaries to Oceaneering
International, Inc. for net proceeds of approximately $9.0 million after
repayment of debt.
From July 1990 until February 1994, Edisto conducted gas transmission
operations in Missouri. In February 1994, Edisto executed a definitive agreement
to sell its 218-mile Missouri intrastate natural gas pipeline to UtiliCorp
United Inc. The sale closed in January 1995 for net proceeds of approximately
$32.5 million, after repayment of debt.
Natural Gas Marketing Operations. Prior to December 10, 1996, Edisto was
engaged in the purchase and resale of natural gas to a diversified customer
base, primarily industrial/commercial companies, local distribution companies,
and industry partners. Edisto conducted its gas marketing operations (i) in the
United States through its subsidiary, Edisto Source, Inc., and (ii) in Western
Canada through its subsidiary Energy Source Canada, Inc. The gas marketing
operations grew dramatically from daily average sales volumes of .3 Bcf in 1994
to 2.5 Bcf in November 1996.
In March 1996, Edisto engaged an investment banking firm, Petrie Parkman &
Co., Inc., to identify and evaluate strategic partners for Edisto's gas
marketing operations. Edisto made this decision because it concluded that the
critical mass necessary to compete effectively in the gas marketing industry had
risen substantially and would continue to rise in the future. In 1995 and early
1996, the gas marketing industry had consolidated so that the industry was being
divided into either companies with a large market share, such as Enron Corp.,
NGC Corporation and PanEnergy Corporation, or smaller niche companies that had
limited growth potential. Edisto also concluded that its lack of strategic
assets, such as pipelines or gas production, would continue to hinder Edisto's
growth as the gas marketing industry continued to consolidate. Therefore, Edisto
began looking for a strategic partner with strategic assets that could create
operational and financial synergies with Edisto's gas marketing operations.
On December 10, 1996, Energy Source and Energy Source Canada sold
substantially all of their assets to two subsidiaries of Pacific Gas
Transmission Company, a subsidiary of PG&E Corp. The sale price was $23.3
million in cash, plus the working capital of Energy Source at July 31, 1996
(approximately $20.0 million). In connection with the sale, all employees of
Edisto and Energy Source became employees of the purchaser, other than Michael
Y. McGovern, the Chairman and CEO of Edisto.
Oil and Gas Exploration and Production. Edisto's oil and gas operations are
conducted through its 72% owned subsidiary, Convest. Prior to Edisto's
acquisition of a majority interest in Convest on June 26, 1995, Edisto's oil and
gas operations were conducted through its subsidiary, Edisto E&P. Edisto E&P was
formed in June 1993, upon the emergence from bankruptcy of Edisto and certain of
its exploration and production subsidiaries.
On November 18, 1994, Edisto purchased 1,321,371 shares of Common Stock of
Convest for $8.9 million in cash, or $6.74 per share. The purchased shares
constituted approximately 31% of Convest's outstanding Common Stock.
On June 26, 1995, Convest purchased the stock of Edisto's oil and gas
exploration and production subsidiary, Edisto E&P, in consideration for
6,185,400 newly issued shares of Convest Common Stock and $10,000 in cash. These
newly issued shares increased Edisto's interest in Convest from 31% to 72% of
the outstanding Common Stock of Convest. Upon the closing of this transaction,
the Convest Board of Directors was restructured so that affiliates of Edisto
constituted a majority of Convest's Board of Directors. In April 1996, Edisto
purchased an additional 92,000 shares of Convest Common Stock on the open market
which increased its shares of Convest Common Stock to 7,598,771.
BACKGROUND OF THE MERGERS
Although the June 1995 transaction between Edisto and Convest substantially
increased the size of the reserves under Convest management, Convest was still
small in relation to other industry participants. The management of Edisto and
Convest believed that an oil and gas company needed at least $200 million of
assets to be cost efficient and compete effectively in the industry. This
conclusion was based on the operating economies of scale and greater access to
capital available to larger companies, as well as the inability of
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smaller companies to spread their drilling risks over a larger number of
drilling prospects. The available options were to: (i) sell or merge Convest
with another oil and gas company, (ii) acquire additional oil and gas reserves
by purchasing either properties or another company, or (iii) substantially
increase Convest's drilling activities to explore for additional oil and gas
reserves. In the last half of 1995 and 1996, Convest's management held
discussions with various parties for a merger of Convest with other similarly
sized or larger oil and gas companies, but there were no opportunities that
management felt were sufficiently attractive or that resulted in formal offers.
Throughout this period, Convest substantially increased its drilling activities,
especially offshore in the Gulf of Mexico, with over $10 million of annual
capital expenditures in each of 1995 and 1996.
In late 1995 and early 1996, Edisto made the strategic decision to sell its
gas marketing operations for the reasons discussed above. In planning the sale,
Edisto analyzed different structures for the sale including (i) the sale of
Edisto and Convest together, (ii) the sale of Edisto by itself after a
distribution to Edisto's stockholders of its Convest shares, or (iii) the sale
of only the gas marketing operations. After this analysis, Edisto concluded that
a sale of only the gas marketing operations would maximize the value of this
business unit. During the sale process, which took nine months, Edisto's
conclusions were confirmed because no buyers for the gas marketing operations
emerged who were interested in either Edisto and Convest together or Edisto by
itself.
After the sale of the gas marketing operations in December 1996, Edisto was
left with approximately $68 million in cash, its interest in Convest and certain
contingent assets and liabilities. Edisto believed that Edisto's cash and
Convest's oil and gas properties would be an attractive combination to a larger
oil and gas company, especially if the purchaser issued its stock for all or a
portion of the purchase price. In late December 1996 and early January 1997,
Edisto held very preliminary discussions with an interested purchaser who wanted
to make a pre-emptive bid, but the discussions were terminated prior to a formal
offer being made because the purchase price range being discussed was not high
enough to justify exclusive negotiations and Edisto decided to continue with the
competitive sales process in which this party was invited to participate.
At a joint meeting of the Edisto and Convest Boards of Directors on January
7, 1997, representatives of Petrie Parkman discussed different alternatives for
maximizing stockholder value for Edisto and Convest. Among the alternatives
discussed were a stock merger involving only Edisto or only Convest, a stock
merger for Edisto and Convest, a cash merger, and increasing Convest's asset
base through the acquisition of additional reserves and/or a substantial
increase in drilling activities. A press release was issued on January 9, 1997
announcing that Petrie Parkman had been hired by both Edisto and Convest to
recommend strategic alternatives to enhance stockholder value including
identifying and evaluating potential strategic partners in the oil and gas
industry.
In February and March 1997, Petrie Parkman contacted 31 parties to
ascertain their interest in acquiring Edisto and Convest. As part of the
process, Edisto and Convest entered into confidentiality agreements with
potentially interested parties, including Forcenergy, and provided 13 companies
with information about Edisto and Convest. For the five parties expressing
continued interest, Edisto and Convest also provided access to a data room
containing more detailed information about Edisto and Convest and to their
management personnel. Although a sixth party did not visit the data room, this
party continued to express interest.
J. Russell Porter, the Vice President -- Corporate Development of
Forcenergy, called Michael Y. McGovern, the Chairman and CEO of Edisto and
Convest, in January 1997 shortly after the press release regarding Petrie
Parkman. On January 30, 1997, Mr. Porter visited Mr. McGovern at Edisto's office
and a potential business combination was discussed. Forcenergy representatives
visited the data room in Houston on March 3, 1997 and Convest's independent
engineering firms on March 13-14, 1997. Mr. McGovern also had dinner on March
10, 1997 in Miami with Mr. Porter and Forcenergy's President and Chief Executive
Officer, Stig Wennerstrom, to discuss a possible merger of the companies.
On March 25, 1997, Forcenergy submitted a written proposal for a merger
with only Convest. At that time, Forcenergy had recently completed a debt
offering of $200 million of senior subordinated notes, and accordingly was less
interested in Edisto's cash holdings. Edisto also received written proposals
from two other parties on March 24, 1997 and March 31, 1997, respectively, for a
merger with both Edisto and Convest.
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On April 7, 1997, Edisto, Convest and Petrie Parkman performed preliminary
due diligence at Forcenergy's offices in Metairie, Louisiana. Edisto and Convest
also performed preliminary due diligence on the other two bidders during April
1997.
In mid-April 1997, discussions with Forcenergy were put on hold since it
had bid on only Convest, and the other two potential purchasers had submitted
more attractive bids for both Edisto and Convest. During late April and early
May, Edisto, Convest and Petrie Parkman continued discussions with the two other
potential purchasers regarding potential transaction structures. During this
time period, Mr. McGovern also met in Los Angeles with one of the potential
purchasers and representatives of Edisto's majority stockholder group,
investment funds and accounts managed by Oaktree Capital Management, L.L.C. and
TCW Special Credits. Mr. McGovern initiated this meeting because the potential
transactions being discussed would result in these investment funds becoming
substantial stockholders in the purchaser. In this meeting and subsequent
discussions with representatives of Edisto's majority stockholder group, these
representatives expressed a preference for a portion of the consideration to be
paid in cash and for the merger partner to be a larger company with a more
liquid stock than Edisto or Convest.
In early May, one of the potential purchasers terminated further
discussions when its board of directors directed management to pursue another
alternative. Mr. McGovern terminated discussions with the other potential
purchaser because of concerns with the proposed transaction structure and the
low liquidity of the purchaser's stock.
During that same time period, Mr. McGovern reopened discussions with Mr.
Porter of Forcenergy for a transaction that would pay a portion of the
consideration to Edisto's shareholders in cash with the Convest minority
stockholders receiving only stock. Accordingly, Mr. McGovern and Mr. Porter
negotiated a deal structure that would use Edisto's cash holdings of
approximately $68 million as the cash portion of the consideration for Edisto
with the remainder of the consideration in Forcenergy Common Stock. This deal
structure provided for only stock consideration to be paid to the Convest
minority stockholders (i.e., the non-Edisto stockholders with approximately 28%
of the outstanding Convest stock) because Convest believed that an all stock
transaction would be more attractive to the Convest stockholders because it
would be tax-free to the Convest stockholders, would provide greater value and
would allow the Convest stockholders to continue their investment in the oil and
gas industry with a much larger industry player.
On May 13, 1997, Petrie Parkman held a meeting with representatives of
another potential purchaser and received a verbal expression of interest for a
cash merger offer for Edisto and Convest. Further discussions between Petrie
Parkman and this other potential purchaser failed to produce an offer with a
higher purchase price than Forcenergy's offer.
On May 16, 1997, Forcenergy submitted a written offer providing for a
payment of $4.886 in cash and $5.064 in Forcenergy Common Stock for each share
of Edisto Common Stock, and $8.88 in Forcenergy Common Stock for each share of
Convest Common Stock. During the week of May 26, 1997, Forcenergy performed
additional due diligence on Edisto and Convest in Houston. During the week of
June 2, 1997, Edisto, Convest and Petrie Parkman performed financial/legal due
diligence on Forcenergy at its corporate offices in Miami, and negotiated the
terms of a definitive merger agreement.
In early June, Edisto hired Rauscher Pierce to render a fairness opinion to
the Edisto stockholders. Even though Petrie Parkman had served as the financial
advisor to both Edisto and Convest during the sale process, the Edisto and
Convest Boards had jointly agreed at the beginning of the sale process that if a
transaction for both Edisto and Convest was pursued, Petrie Parkman would render
a fairness opinion for only Convest to avoid any potential conflict of interest
over the allocation of the purchase price between the two companies. Therefore,
it was necessary for Edisto to hire a separate investment banking firm to render
a fairness opinion for its stockholders.
At the beginning of the sale process, the Edisto and Convest Boards of
Directors also had agreed that once a transaction was negotiated, the Affiliate
Transaction Review Committee of the Convest Board of Directors would review the
terms of the transaction from the standpoint of the minority stockholders of
Convest. The purpose of this review would be to examine the fairness of the
purchase price allocation between
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Edisto and Convest. This Committee was composed of the two outside members of
the Convest Board who have no affiliation with Edisto, Murray Gullatt and
Franklin Myers. On June 19, 1997, the Committee met with Petrie Parkman
representatives and Edisto's outside legal counsel to review the terms of the
Merger Agreement and the fairness of the purchase price allocation between
Edisto and Convest. The Committee subsequently recommended approval of the
Merger Agreement to the full Convest Board. For their services on this
Committee, Murray Gullatt, as Chairman, received $7,500 and Franklin Myers
received $5,000.
The Convest Board of Directors met on June 19, 1997 immediately after the
Committee meeting. At the meeting, the Convest Board reviewed the terms of the
Merger Agreement with management, outside legal counsel and Petrie Parkman, and
received a fairness opinion from Petrie Parkman on the fairness from a financial
point of view of the consideration to be received by the Convest stockholders in
the Convest Merger. After these reviews, the Convest Board unanimously approved
the Merger Agreement.
After the Convest Board meeting, the Edisto Board met to review the terms
of the Merger Agreement with management, outside legal counsel, Petrie Parkman
and Rauscher Pierce, and received a fairness opinion from Rauscher Pierce on the
fairness from a financial point of view. After these reviews, the Edisto Board
unanimously approved the Merger Agreement. Later that day, representatives of
Edisto, Convest and Forcenergy executed the Merger Agreement.
RECOMMENDATION OF THE BOARDS OF DIRECTORS OF EDISTO AND CONVEST; REASONS FOR THE
MERGERS
THE BOARDS OF DIRECTORS OF EDISTO AND CONVEST HAVE UNANIMOUSLY APPROVED THE
MERGER AGREEMENT, DETERMINED THAT THE MERGERS ARE IN THE BEST INTEREST OF THE
RESPECTIVE STOCKHOLDERS OF EDISTO AND CONVEST, AND RECOMMENDED THAT EDISTO AND
CONVEST STOCKHOLDERS VOTE FOR THE APPROVAL OF THE MERGERS.
In reaching their respective decisions to approve the Merger Agreement and
to recommend that the Edisto and Convest stockholders vote to approve the Merger
Agreement, the Boards of Directors of Edisto and Convest considered, among other
things, the following factors:
1. Their knowledge of the business, reserves, results of operations
and financial condition of Edisto and Convest, and their assessment that
shareholder value would be enhanced more by accepting Forcenergy's offer
than by remaining independent.
2. The advantages that the Mergers would bring to the combined entity,
which include the following:
(a) the economies of scale and operating efficiencies resulting
from combining Convest's assets with those of Forcenergy, including a
substantial reduction of the general and administrative expenses
associated with operating Edisto and Convest as separate public
companies; and
(b) the strategic fit of Convest's and Forcenergy's respective
offshore and Altamont/Bluebell properties.
3. The fact that the Mergers would provide Edisto stockholders an
opportunity to continue to participate in the oil and gas business for a
portion of their investment and the Convest stockholders for all of their
investment, with the following advantages for the Edisto and Convest
stockholders:
(a) such investment would be in a much larger oil and gas company
with a market capitalization nearly ten times larger than Convest;
(b) the Forcenergy Common Stock is a more actively traded stock
that offers greater liquidity than the Edisto Common Stock or the
Convest Common Stock;
(c) Forcenergy has a solid reserve base with more upside potential
for future growth than Convest;
(d) Forcenergy has greater access to the capital markets than
Convest, as evidenced by its recent $200 million debt financing at
attractive interest rates, and;
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(e) Forcenergy has a management team with a track record of growth
and an orientation to increasing stockholder value.
4. The presentation of Edisto's financial advisor, Petrie Parkman,
including its evaluations of Convest and Forcenergy from various
perspectives, and Petrie Parkman's opinion that the consideration to be
received by Convest's stockholders in the Convest Merger is fair to them
from a financial point of view.
5. The presentation of Edisto's financial advisor, Rauscher Pierce,
including its evaluations of Edisto, Convest and Forcenergy from various
perspectives, and Rauscher Pierce's opinion that the consideration to be
received by Edisto's stockholders in the Edisto Merger is fair to them from
a financial point of view.
6. The structure of the Convest Merger would permit the Convest
stockholders to exchange all of their shares of Convest Common Stock in a
transaction intended, in general, to be tax-free for federal income tax
purposes except to the extent of cash received in lieu of fractional shares
of Forcenergy Common Stock.
7. The sales process conducted by Petrie Parkman which resulted in the
receipt of proposals from other companies and provided Edisto's and
Convest's Board of Directors with comparison proposals to use in evaluating
the offer of Forcenergy which was higher and offered greater liquidity than
the other offers.
8. The terms of the Merger Agreement which were the product of
extensive arms' length negotiations.
The foregoing discussion of the information and factors considered and
given weight by the Convest and Edisto Boards of Directors is not intended to be
exhaustive. In view of the variety of factors considered in connection with
their respective evaluations of the Mergers, the Boards of Directors of Edisto
and Convest did not quantify or otherwise assign any weights to the specific
factors considered in reaching their respective determinations. In addition,
individual directors of Edisto and Convest may have given different weights to
different factors. For a discussion of the interests of the members of Edisto's
and Convest's management and their respective Boards of Directors in the Mergers
and the interrelationships between Edisto and Convest, see "The
Mergers -- Interests of Certain Persons in the Mergers."
FORCENERGY'S REASONS FOR THE MERGERS
Forcenergy's purpose for pursuing Edisto and Convest is that the
acquisitions provide Forcenergy both near-term and longer-term benefits to
Forcenergy through a stock transaction that is accretive on a discretionary cash
flow basis while also strengthening the balance sheet. Convest is a unique
strategic and operating fit with Forcenergy's existing assets and operating
capabilities and the acquisitions increase Forcenergy's prospect inventory of
under-exploited Gulf of Mexico blocks. Specifically, it is an opportunity to
acquire, on an economical basis, substantial proved producing reserves in 43
blocks in the Gulf of Mexico and in two long-life shallow decline properties in
which Forcenergy already owns a sizeable interest and provides Forcenergy the
opportunity to utilize its state-of-the-art 3-D technology and geological and
geophysical experience and expertise to create additional shareholder value
through exploitation and exploratory drilling on the Gulf of Mexico blocks. The
management of the producing properties and the further evaluation of the
exploitation potential of the offshore blocks can be performed by current
Forcenergy personnel.
Therefore, efficiencies in operating costs and general and administrative
expenses can be obtained by combining the entities. The use of Forcenergy stock
in the transaction also allows Forcenergy the opportunity to reduce its leverage
ratio (debt to total capitalization) from 59% to 51% through a cash flow
accretive acquisition.
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OPINIONS OF FINANCIAL ADVISORS
Opinion of Rauscher Pierce to Edisto Board of Directors. The Edisto Board
of Directors engaged Rauscher Pierce to evaluate the fairness, from a financial
point of view, to the stockholders of Edisto Common Stock of the consideration
to be received by them in connection with the Edisto Merger and, in such regard,
to conduct such investigations as Rauscher Pierce deemed appropriate for such
purpose.
On June 19, 1997, Rauscher Pierce rendered its written opinion to the
Edisto Board that, as of such date, the consideration to be received by the
stockholders of Edisto Common Stock was fair to them from a financial point of
view. Rauscher Pierce confirmed, by delivery of its written opinion as of the
date of this Joint Proxy Statement/Prospectus, its opinion of June 19, 1997. In
rendering such confirmation, Rauscher Pierce performed procedures to update
certain of its analyses made in connection with its June 19, 1997 opinion and
reviewed the assumptions on which such analyses were based and the factors
considered in connection therewith.
THE FULL TEXT OF RAUSCHER PIERCE'S WRITTEN OPINION, WHICH CONTAINS A
DESCRIPTION OF THE ASSUMPTION MADE, THE MATTERS CONSIDERED BY RAUSCHER PIERCE,
AND THE LIMITS OF ITS REVIEW IS ATTACHED HERETO AS APPENDIX C, AND IS
INCORPORATED HEREIN BY REFERENCE. EDISTO STOCKHOLDERS ARE ENCOURAGED TO READ THE
OPINION CAREFULLY IN ITS ENTIRETY.
Rauscher Pierce, as part of its investment banking business, is continually
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, secondary distributions of
listed and unlisted securities, private placements and valuations for estate,
corporate and other purposes.
In connection with its opinion, Rauscher Pierce reviewed certain internal
financial information and certain publicly available information. Rauscher
Pierce also held discussions with members of the senior management of Edisto
regarding the business and prospects of Edisto. In addition, Rauscher Pierce (i)
compared certain financial information with similar information for selected
companies within the industry whose securities are publicly traded, (ii)
reviewed the financial terms of certain recent business combinations which were
deemed comparable in whole or in part and (iii) performed such other studies and
analyses and considered such other factors as they deemed appropriate. Rauscher
Pierce also reviewed the Merger Agreement.
Rauscher Pierce did not independently verify the information described
above and, for purposes of its opinion, assumed the accuracy and completeness
thereof. With respect to information relating to the prospects of Edisto,
Rauscher Pierce assumed that such information reflects the best currently
available estimates and judgments of management of Edisto as to the likely
future financial performance of Edisto's assets. In addition, Rauscher Pierce
did not make an independent evaluation or appraisal of Edisto's assets. Rauscher
Pierce's opinion was based on market, economic and other conditions as they
existed and could be evaluated as of the date of Rauscher Pierce's opinion.
The following paragraphs summarize the principal analyses conducted by
Rauscher Pierce as a basis for its fairness opinion. Rauscher Pierce primarily
considered factors that would have been logical items to be considered by an
actual buyer of Edisto.
As part of its analysis, Rauscher Pierce considered the net asset value
("NAV") of Edisto. The majority of Edisto's asset value was derived from two
components: (i) its $68.7 million cash balance (as of 3/31/97) and (ii) its
investment in Convest. Convest's stock traded at $7.50 per share on May 30,
1997, prior to the announcement of Forcenergy's pending acquisition. Edisto's
ownership of 7,598,771 Convest Common Stock valued at $7.50 per share, plus
Edisto's cash, other assets and liabilities, indicated a NAV of $9.03 per Edisto
share, which is well below the $9.95 Forcenergy offer. By using the Forcenergy
offer price for Convest of $8.88 per share in a similar calculation, the NAV of
Edisto was also estimated by Rauscher Pierce at $9.76 per share.
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Rauscher Pierce considered the NAV of Convest as estimated independently of
Convest's stock price or the Forcenergy offer. Convest's NAV was estimated at
$86.0 million, or $62.8 million for Edisto's 72% interest. Using the estimated
Convest NAV ($62.8 million), Edisto would have an NAV of $9.43 per share.
Rauscher Pierce considered that much of the oil and gas industry knew that
Edisto was essentially for sale after the press release was issued on January 7,
1997 announcing that Petrie Parkman had been hired. A company interested in
acquiring Edisto could have seen the public disclosure and had the opportunity
to contact Edisto or its advisors indicating its level of interest. In addition,
Edisto's financial advisors contacted 31 oil and gas companies between December,
1996 and June, 1997, in an effort to sell Edisto. This process provided comfort
to Rauscher Pierce that all likely purchasers were aware of the sales process
and had the opportunity to participate.
Rauscher Pierce reviewed information concerning Forcenergy and concluded
that the market price of Forcenergy's Common Stock in recent weeks appeared to
represent a normal and reliable fair market value for that security.
Rauscher Pierce compared selected financial data of Edisto's assets with
certain data from selected publicly traded companies, but Rauscher Pierce did
not consider any of those companies to be comparable to Edisto.
Rauscher Pierce reviewed 10 recent oil and gas acquisitions, but Rauscher
Pierce did not consider any of the acquisition ratios to be useful in evaluating
the fairness of the offer for Edisto from Forcenergy. Rauscher Pierce believes
that such acquisition ratios are only general rules of thumb, and more detailed,
non-public information on each company's reserves would be needed to make these
ratios meaningful for comparison purposes. The 10 recent acquisitions reviewed
by Rauscher Pierce are listed below: (1) the acquisition of The Phoenix
Resources Companies by Apache Corporation announced on March 28, 1996, (2) the
acquisition of Tidewest Oil Company by HS Resources announced on February 26,
1996, (3) the acquisition of Energy Development Corporation by Noble Affiliates,
Inc. (Samedan Oil) closed on August 30, 1996, (4) the acquisition of Alexander
Energy Corporation by National Energy Group closed on August 30, 1996, (5) the
acquisition of Global Natural Resources by Seagull Energy Corporation announced
on July 22, 1996, (6) the acquisition of Presidio Oil Company by Tom Brown Inc.
announced on August 5, 1996, (7) the acquisition of Great Western Resources by
Forcenergy Inc. announced on December 12, 1996, (8) the acquisition of Greenhill
Petroleum Corp. by Mesa Inc. announced on April 7, 1997, (9) the acquisition of
Beldon & Blake Corp. by Texas Pacific Group announced on March 31, 1997, and 10)
the acquisition of Parker & Parsley Petroleum by Mesa Inc. announced on April 7,
1997.
Rauscher Pierce also considered 88 oil and gas property acquisitions which
occurred during 1996-1997. The acquisition value per barrel of oil equivalent
("BOE") ranged from $1.56 to $12.12, but these amounts were not meaningful in
Rauscher Pierce's analysis.
Rauscher Pierce believes that its analyses must be considered as a whole
and that selecting portions of its analyses and factors considered, without
considering all factors and analyses, could create an incomplete view of the
processes underlying its opinion. The preparation of a fairness opinion is a
complex process and not necessarily susceptible to partial analyses or summary
description. In its analyses, Rauscher Pierce considered numerous assumptions
with respect to industry performance, general business and economic conditions
and other matters, many of which are beyond Edisto's control. Any estimates
contained therein are not necessarily indicative of actual values, which may be
significantly more or less favorable than as set forth therein.
Pursuant to the terms of the engagement letter between Rauscher Pierce and
Edisto dated June 9, 1997, Edisto has paid Rauscher Pierce a fee of $75,000. In
addition, Edisto has also agreed to reimburse Rauscher Pierce for its
out-of-pocket expenses, including reasonable fees and expenses of counsel, and
to indemnify Rauscher Pierce and certain related persons against certain
liabilities relating to or arising out of its engagement, including certain
liabilities under the federal securities laws.
Opinion of Petrie Parkman to Convest Board of Directors. The Convest and
Edisto Boards of Directors announced on January 9, 1997 that they had hired
Petrie Parkman to make recommendations to each of them for strategic
alternatives to enhance shareholder value. In connection with such engagement,
Petrie Parkman
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identified and evaluated potential strategic partners for Edisto and Convest in
the oil and gas industry. In addition, the Convest Board instructed Petrie
Parkman, in its role as financial advisor, to evaluate the fairness, from a
financial point of view, to the holders of Convest Common Stock of the
consideration to be received by them in connection with the Convest Merger and,
in such regard, to conduct such investigations as Petrie Parkman deemed
appropriate for such purpose.
On June 19, 1997, Petrie Parkman rendered its written opinion to the
Convest Board that, as of such date, the consideration to be received by the
holders of Convest Common Stock was fair to them from a financial point of view.
Petrie Parkman confirmed, by delivery of its written opinion as of the date of
this Joint Proxy Statement/Prospectus, its opinion of June 19, 1997. In
rendering such confirmation, Petrie Parkman performed procedures to update
certain of its analyses made in connection with its June 19, 1997 opinion and
reviewed the assumptions on which such analyses were based and the factors
considered in connection therewith. Petrie Parkman considered, among other
things, Convest's and Forcenergy's recent financial performance and recent
market conditions and developments based on the foregoing.
THE FULL TEXT OF PETRIE PARKMAN'S WRITTEN OPINION, WHICH CONTAINS A
DESCRIPTION OF THE ASSUMPTIONS MADE, THE MATTERS CONSIDERED BY PETRIE PARKMAN,
AND THE LIMITS OF ITS REVIEW IS ATTACHED HERETO AS APPENDIX D, AND IS
INCORPORATED HEREIN BY REFERENCE. CONVEST'S STOCKHOLDERS ARE ENCOURAGED TO READ
THE OPINION CAREFULLY IN ITS ENTIRETY.
In connection with its opinion, Petrie Parkman, among other things (i)
reviewed certain publicly available business and financial information relating
to Convest and Forcenergy, including the audited financial statements on Form
10-K for Convest and Forcenergy as of December 31, 1996, (ii) reviewed the
unaudited financial statements on Form 10-Q for Convest and Forcenergy as of
March 31, 1997, and the audited financial statements of Great Western Resources
Inc. ("Great Western") as of September 30, 1996, (iii) reviewed the unaudited
consolidated statement of operations of Great Western for the six month period
ending March 31, 1996 and the three month, 21 day period ending January 21, 1997
(iv) reviewed certain estimates of reserves including: estimates of proved,
probable, and possible oil and gas reserves of Convest, as prepared by Ryder
Scott Company Petroleum Engineers as of December 31, 1996 and Netherland, Sewell
& Associates, Inc. as of January 1, 1997, (v) reviewed certain estimates of oil
and gas reserves of Convest in the Gulf of Mexico as prepared by the management
and staff of Convest as of March 31, 1997, (vi) reviewed certain estimates of
proved oil and gas reserves of Forcenergy in the Gulf of Mexico and onshore
United States including Alaska, as prepared by Netherland Sewell & Associates,
Inc. as of January 1, 1997, (vii) reviewed certain estimates of proved,
probable, and possible reserves of Forcenergy in the Gulf of Mexico, as prepared
by Collarini Engineering Inc. as of January 1, 1997; (viii) reviewed certain
estimates of oil and gas reserves of Great Western in the Gulf of Mexico and
onshore United States as prepared by Ryder Scott Company Petroleum Engineers as
of September 30, 1996, (ix) reviewed certain estimates of oil reserves of
Stewart Petroleum Company in Alaska as prepared by the management and staff of
Forcenergy as of January 1, 1997, (x) analyzed certain financial and operating
data and budgets concerning Convest and Forcenergy, all of which were prepared
or provided by the managements of Convest and Forcenergy, as the case may be,
(xi) discussed the current operations and prospects of Convest and Forcenergy
with the managements and operating staffs of Convest and Forcenergy, as the case
may be, (xii) reviewed the historical trading histories and prices of the shares
of Convest Common Stock and Forcenergy Common Stock, (xiii) compared recent
stock market capitalization indicators for Convest and Forcenergy with the
recent stock market capitalization indicators for certain other publicly-traded
independent energy companies, (xiv) compared the financial terms of the Convest
Merger with the financial terms of certain other transactions which they deemed
to be relevant, (xv) reviewed the Merger Agreement and the form of Shareholder
Agreement between Forcenergy and the Stockholder party thereto, both dated June
19, 1997, and (xvi) made such other analyses and examinations as they deemed
necessary or appropriate.
In rendering its opinion, Petrie Parkman assumed and relied upon, without
assuming any responsibility for verification, the accuracy and completeness of
the financial, operating, and other information reviewed by it and assumed that
the financial and operating data and budgets provided to it had been reasonably
prepared on bases reflecting the best currently available estimates and
judgments relating to the future financial and operational performance of
Convest and Forcenergy (including taking into account the impact of the Merger).
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Petrie Parkman did not make independent evaluations or appraisals of the assets
or liabilities of Convest or Forcenergy nor, except for the reserve estimates
referred to in its opinion, was Petrie Parkman furnished with any such
evaluations or appraisals. Petrie Parkman's opinion relates only to the
consideration to be received by the Convest stockholders in the Convest Merger
and does not constitute a recommendation to any holder of Convest Common Stock
as to how such holder should vote at the Convest Special Meeting.
In rendering its opinion, Petrie Parkman conducted several analyses
including (i) discounted cash flow analyses of each of Convest and Forcenergy
("Discounted Cash Flow Analyses"); (ii) comparisons with selected
publicly-traded companies ("Capital Market Comparisons"); (iii) analyses of
selected comparable industry transactions ("Comparable Transactions Analyses");
(iv) analyses of the potential future financial performance of Forcenergy
("Going Concern Analyses"); and (v) an analysis of the potential financial
effects of the Convest Merger ("Pro Forma Merger Analysis"). These analyses are
described below. Based upon the reference value ranges resulting from the
various analyses and subject to the assumptions and limitations set forth in its
opinion, Petrie Parkman came to a composite range of equity reference values for
Convest of $7.50 to $9.00 per primary share of Convest Common Stock and for
Forcenergy of $29.00 to $36.00 per primary share of Forcenergy Common Stock.
Discounted Cash Flow Analysis -- Convest. Under this method, Petrie Parkman
calculated estimates of future after-tax cash flows for the reserve assets based
on the reserve estimates referred to above and for the non-reserve assets
utilizing information provided by Convest. Three scenarios were evaluated in
which the principal variables were oil and gas prices. The three pricing
scenarios used by Petrie Parkman were based on benchmarks for posted prices for
West Texas Intermediate equivalent crude oil and for spot sales of Louisiana
offshore gas delivered to an interstate pipeline ("Pricing Case I", "Pricing
Case II", "Pricing Case III"). To these benchmarks, Petrie Parkman applied
appropriate quality and transportation adjustments. For Pricing Cases I, II, and
III, benchmark oil prices were projected to be $19.00, $21.00, and $22.50 per
barrel, respectively, for 1997 and were escalated annually thereafter at the
rates of 4.0%, 5.0%, and 5.0%, respectively; oil prices in each pricing case
were capped at $50.00 per barrel. For Pricing Cases I, II, and III benchmark gas
prices were projected to be $1.90, $2.10, and $2.25 per million British thermal
units ("MMBtu"), respectively, for 1997 and were escalated annually thereafter
at the rates of 4.0%, 5.0%, and 5.0%, respectively; gas prices in each pricing
case were capped at $6.00 per MMBtu. Operating and capital costs were escalated
at 3.0% per year. Other factors involved in this analysis included the use of
after-tax discount rates ranging from 10.0% to 50.0% depending on reserve
category, a carry-over of Convest's existing tax positions, and the evaluation
of certain non-reserve assets of Convest. This methodology resulted in asset
reference value ranges of $72.1 million to $80.5 million for Pricing Case I,
$85.2 million to $94.9 million for Pricing Case II, and $93.5 million to $103.9
million for Pricing Case III. Convest has no long-term debt so that dividing the
asset reference value ranges by the number of primary shares of Convest Common
Stock outstanding yields equity reference value ranges per primary share of
$6.86 to $7.66 for Pricing Case I, $8.11 to $9.03 for Pricing Case II, and $8.90
to $9.89 for Pricing Case III.
Comparable Transactions Analysis -- Convest. Petrie Parkman reviewed
certain publicly-available information on 50 oil and gas property acquisition
transactions with consideration greater than five million dollars involving Gulf
of Mexico, Rocky Mountain, and Mid-Continent assets which took place between
January 1995 and April 1997 (and two such transactions for which Petrie Parkman
had proprietary information). Petrie Parkman calculated purchase price multiples
of equivalent reserves for the acquired assets in each transaction. The highest,
average, and lowest multiples of equivalent reserves for the Gulf of Mexico
transactions were $1.49, $0.90, and $0.18 per thousand cubic feet equivalent
using a six thousand cubic feet ("Mcf") of gas to one barrel of oil conversion
ratio ("Mcfe6"), respectively. The highest, average, and lowest multiples of
Mcfe6 for the Rocky Mountain transactions were $0.82, $0.55, and $0.30,
respectively. The highest, average, and lowest multiples of Mcfe6 for the
Mid-Continent transactions were $1.22, $0.71, and $0.34, respectively. The
highest, average, and lowest multiples of equivalent reserves for the Gulf of
Mexico transactions were $1.49, $0.77, and $0.18 per thousand cubic feet
equivalent using a ten Mcf of gas to one barrel of oil conversion ratio
("Mcfe10"), respectively. The highest, average, and lowest multiples of Mcfe10
for the Rocky Mountain transactions were $0.80, $0.49, and $0.19, respectively.
The highest, average, and lowest multiples of Mcfe10 for the Mid-Continent
transactions were $1.15, $0.61, and $0.20, respectively.
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Petrie Parkman determined that, with respect to Convest, the appropriate
benchmark multiples for equivalent proved reserves for the Gulf of Mexico, Rocky
Mountain, and Mid-Continent assets were in the ranges of $0.90 to $1.10 per
Mcfe6, $0.55 to $0.80 per Mcfe6, and $0.75 to $0.85 per Mcfe6, respectively, and
in the ranges of $0.80 to $1.00 per Mcfe10, $0.55 to $0.65 per Mcfe10, and $0.50
to $0.60 per Mcfe10, respectively. These benchmarks were applied by Petrie
Parkman to Convest's corresponding proved and proved plus probable reserve
figures for each of the geographic regions to yield asset reference value ranges
for Convest's reserves. Following adjustments for Convest's non-reserve assets,
Petrie Parkman determined from the asset reference value ranges implied by these
multiples a composite asset reference value range under this method of $65.0
million to $80.0 million. Convest has no long-term debt so that dividing the
composite asset reference value range by the number of primary shares of Convest
Common Stock outstanding yields a composite equity reference value range per
primary share of $6.19 to $7.62.
In addition, Petrie Parkman reviewed certain publicly-available information
on 20 company acquisition transactions and offers for control in the oil and gas
exploration and production industry which took place between March 1995 and May
1997. Using publicly-available information, Petrie Parkman calculated total
investment (purchase price of equity plus net obligations assumed) multiples of
gross pre-tax cash flow for the target company in each transaction. For these 20
transactions, the highest, average, and lowest multiples of gross pre-tax cash
flow were 29.8x, 9.1x, and 0.7x, respectively. Petrie Parkman also calculated
purchase price multiples of discretionary cash flow and implied purchase price
of reserves (total investment less estimated values of non-reserve assets)
multiples of equivalent proved reserves for the target company in each
transaction. "Discretionary cash flow" as used herein means net income plus all
non-cash charges plus cash exploration expenses. The highest, average, and
lowest multiples of discretionary cash flow were 24.6x, 7.5x, and 0.8x,
respectively. The highest, average, and lowest multiples of equivalent proved
reserves were $2.08, $0.96, and $0.47 per Mcfe6, respectively. The highest,
average, and lowest multiples of equivalent proved reserves were $1.25, $0.77,
and $0.35 per Mcfe10, respectively. Petrie Parkman determined that, with respect
to Convest, the appropriate benchmark multiples for gross pre-tax cash flow,
discretionary cash flow, and equivalent proved reserves were in the ranges of
3.5 to 5.0x, 3.0 to 5.0x, $0.75 to $1.00 per Mcfe6 and $0.60 to $0.70 per
Mcfe10, respectively. These benchmark multiples were applied by Petrie Parkman
to Convest's historical gross pre-tax cash flow, discretionary cash flow and
equivalent proved reserves. Petrie Parkman also performed a premium analysis
which compared the offer price per target company share with the target
company's share price for the periods of one day, 30 days, and 60 days prior to
public announcement of the offer. The highest, average, and lowest premiums
(excess of offer price over target company's price stated as a percentage above
the target company's share price) were 86.6%, 20.8%, and -2.9% for one day
prior, respectively, 75.6%, 27.3%, and 2.8% for 30 days prior, respectively, and
86.6%, 24.8%, and 5.9% for 60 days prior, respectively. Petrie Parkman
determined that, with respect to Convest, the appropriate benchmarks for premium
to target company's price one day prior, 30 days prior, and 60 days prior were
in the ranges of 15% to 25%, 20% to 30%, and 20% to 30%, respectively. These
premium benchmarks were applied by Petrie Parkman to the corresponding stock
prices of Convest. Petrie Parkman determined from the asset reference value
ranges implied by these multiples a composite asset reference value range under
this method of $75.0 million to $95.0 million. Convest has no long-term debt so
that dividing the composite asset reference value range by the number of primary
shares of Convest Common Stock outstanding yields a composite equity reference
value range per primary share of $7.14 to $9.04. The acquisitions reviewed by
Petrie Parkman were the following: (1) the acquisition of Alamco, Inc. by
Columbia Gas System Inc. announced on May 27, 1997, (2) the acquisition of
Parker & Parsley Petroleum by Mesa Inc. announced on April 7, 1997, (3) the
acquisition of Beldon & Blake Corp. by Texas Pacific Group announced on March
31, 1997, (4) the acquisition of Great Western Resources by Forcenergy Inc.
announced on December 12, 1996, (5) the acquisition of InterCoast Oil & Gas by
KCS Energy Inc. announced on October 17, 1996, (6) the acquisition of Presidio
Oil Company by Tom Brown Inc. announced on August 5, 1996, (7) the acquisition
of Global Natural Resources by Seagull Energy Corporation announced on July 22,
1996, (8) the acquisition of Petrocorp Inc. by Kaiser Francis announced on June
27, 1996, (9) the acquisition of Clinton Gas Systems by Enron Capital & Trade
Resources Corp. announced on May 24, 1996, (10) the acquisition of Phoenix
Resource Companies by Apache Corp. announced on March 28, 1996, (11) the
acquisition of Tide West Oil Company by HS Resources, Inc. announced on February
26, 1996, (12) the acquisition of Gerrity Oil and
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Gas Corp. by Snyder Oil Corp. announced on January 17, 1996, (13) the
acquisition of Brock Exploration Corp. by Key Production Company announced on
December 21, 1995, (14) the acquisition of KNPC by Tom Brown, Inc. announced on
December 14, 1995, (15) the acquisition of Coda Energy, Inc. by Enron Capital &
Trade Resources Corp. announced on August 24, 1995, (16) the acquisition of
Consolidated Oil & Gas by Hugoton Energy Corp. announced on May 30, 1995, (17)
the acquisition of Plains Petroleum Co. by Barrett Resources Corp. announced on
May 3, 1995, (18) the acquisition of Dalen Corp. by Enserch Exploration Inc.
announced on April 13, 1995, (19) the acquisition of Edisto Exploration and
Production by Convest Energy Corp. announced on April 5, 1995, and (20) the
acquisition of Patrick Petroleum Co. by La/Cal Energy Partners announced on
March 10, 1995.
Common Stock Comparison -- Convest. Using publicly-available information,
Petrie Parkman calculated adjusted capitalization multiples of certain
historical financial criteria (such as gross pre-tax cash flow and operating
cash flow) and of equivalent proved reserves, and market capitalization (market
value of common equity) multiples of certain historical financial criteria (such
as discretionary cash flow) for a universe of 124 publicly-traded independent
oil and gas companies. The adjusted capitalization of each company was obtained
by adding the sum of its long-term and short-term debt to the sum of the market
value of its common equity, the market value of its preferred stock (if
publicly-traded, otherwise liquidation or book value), and the book value of its
minority interest in other companies and subtracting its cash.
Nineteen of these companies -- Abraxas Petroleum Corporation, American
Exploration Company, Bellwether Exploration Company, Cairn Energy USA, Inc.,
Chieftain International, Inc., Clayton Williams Energy, Inc., Columbus Energy
Corp., DLB Oil & Gas, Inc., Equity Oil Company, Forcenergy Inc, Forest Oil
Corporation, Goodrich Petroleum Corporation, Key Production Company, Inc.,
Maynard Oil Company, PetroCorp Incorporated, Snyder Oil Corporation, Southern
Mineral Corporation, St. Mary Land & Exploration Company, and Stone Energy
Corporation -- which in Petrie Parkman's judgment were relevant to an evaluation
of Convest in the context of reserve location and reserve life, were examined in
greater detail. For these 19 companies, the highest, average, and lowest
adjusted capitalization multiples of gross pre-tax cash flow were 14.7x, 7.0x,
and 3.7x, respectively. The highest, average, and lowest adjusted capitalization
multiples of operating cash flow were 13.4x, 6.2x, and 3.3x, respectively. The
highest, average, and lowest adjusted capitalization multiples of equivalent
proved reserves were $2.23, $1.41, and $0.66 per Mcfe6, respectively. The
highest, average, and lowest adjusted capitalization multiples of equivalent
proved reserves were $1.34, $0.84, and $0.39 per Mcfe10, respectively. The
highest, average, and lowest market capitalization multiples of discretionary
cash flow were 11.3x, 6.1x, and 1.7x, respectively. Petrie Parkman determined
that, with respect to Convest, the appropriate benchmarks for adjusted
capitalization multiples for gross pre-tax cash flow, operating cash flow, and
equivalent proved reserves were in the ranges of 3.5 to 5.5x, 3.0 to 5.0x, $1.00
to $1.20 per Mcfe6 and $0.70 to 0.80 per Mcfe10, respectively, and that the
appropriate benchmark market capitalization multiples for discretionary cash
flow were in the range of 3.0 to 5.0x. These benchmark multiples were applied by
Petrie Parkman to Convest's historical gross pre-tax cash flow, operating cash
flow, equivalent proved reserves, and discretionary cash flow, respectively.
From the asset reference value ranges implied by these multiples, Petrie Parkman
determined a composite asset reference value range under this method of $90.0
million to $110.0 million. Convest has no long-term debt so that dividing the
composite asset reference value range by the number of primary shares of Convest
Common Stock outstanding yields a composite equity reference value range per
primary share of $8.57 to $10.47.
Discounted Cash Flow Analysis -- Forcenergy. Under this method, Petrie
Parkman calculated estimates of future after-tax cash flows for the reserve
assets based on the reserve estimates referred to above and for the non-reserve
assets utilizing information provided by Forcenergy. Three scenarios were
evaluated in which the principal variables were the oil and gas price scenarios
described above. Other factors involved in this analysis included the use of
after-tax discount rates ranging from 10.0% to 40.0% depending on reserve
category, a carry-over of Forcenergy's existing tax positions, and the
evaluation of certain other assets of Forcenergy. This methodology resulted in
asset reference value ranges of $673.2 million to $782.0 million for Pricing
Case I, $843.5 million to $985.8 million for Pricing Case II, and $941.7 million
to $1,100.7 million for Pricing Case III. After deducting long-term obligations
of Forcenergy of $375.1 million from the asset reference value ranges and
dividing by the number of primary shares of Forcenergy Common Stock outstanding,
the equity
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reference value ranges per primary share are $13.15 to $17.95 for Pricing Case
I, $20.66 to $26.94 for Pricing Case II, and $25.00 to $32.01 for Pricing Case
III.
Comparable Transactions Analysis -- Forcenergy. Petrie Parkman reviewed
certain publicly-available information on 62 oil and gas property acquisition
transactions with consideration greater than five million dollars involving Gulf
of Mexico, Rocky Mountains, Mid-Continent/Permian, and Alaska assets which took
place between January 1995 and May 1997 (and two such transactions for which
Petrie Parkman had proprietary information). Petrie Parkman calculated purchase
price multiples of equivalent reserves for the acquired assets in each
transaction. The highest, average, and lowest multiples of equivalent reserves
for the Gulf of Mexico transactions were $8.96, $5.43, and $1.06 per barrel of
oil equivalent using a six Mcf of gas to one barrel of oil conversion ratio
("BOE6"), respectively . The highest, average, and lowest multiples of BOE6 for
the Rocky Mountain transactions were $4.90, $3.30, and $1.78, respectively. The
highest, average, and lowest multiples of BOE6 for the Mid-Continent/Permian
transactions were $9.23, $4.21, and $1.39, respectively. The highest, average,
and lowest multiples of BOE6 for the Alaska transactions were $7.08, $5.62, and
$4.16, respectively. The highest, average, and lowest multiples of equivalent
reserves for the Gulf of Mexico transactions were $14.94, $7.67, and $1.77 per
barrel of oil equivalent using a ten Mcf of gas to one barrel of oil conversion
ratio ("BOE10"), respectively. The highest, average, and lowest multiples of
BOE10 for the Rocky Mountain transactions were $8.00, $4.90, and $1.94,
respectively. The highest, average, and lowest multiples of BOE10 for the
Mid-Continent/Permian transactions were $15.38, $5.92, and $1.39, respectively.
The highest, average, and lowest multiples of BOE10 for the Alaska transactions
were $7.08, $5.62, and $4.16, respectively. Petrie Parkman determined that, with
respect to Forcenergy, the appropriate benchmark multiples for equivalent proved
reserves for the Gulf of Mexico, Rocky Mountain, Mid-Continent/Permian, and
Alaska assets were in the ranges of $7.00 to $8.25 per BOE6, $3.50 to $5.00 per
BOE6, $4.50 to $5.50 per BOE6, and $4.00 to $7.50 per BOE6, respectively, and in
the ranges of $9.00 to $12.00 per BOE10, $5.50 to $6.50 per BOE10, $5.50 to
$6.50 per BOE10, and $4.00 to $7.50 per BOE10, respectively. These benchmarks
were applied by Petrie Parkman to Forcenergy's corresponding proved and proved
plus probable reserve figures for each of the geographic regions to yield asset
reference value ranges for Forcenergy's reserves. Following adjustments for
Forcenergy's non-reserve assets, Petrie Parkman determined from the asset
reference value ranges implied by these multiples a composite asset reference
value range under this method of $650 million to $850 million. After deducting
long-term obligations of Forcenergy of $375.1 million from the composite asset
reference value range and dividing by the number of primary shares of Forcenergy
Common Stock outstanding, the resulting composite equity reference value range
per primary share is $12.13 to $20.95.
In addition, Petrie Parkman reviewed certain publicly-available information
on 20 company acquisition transactions and offers for control in the oil and gas
exploration and production industry which took place between March 1995 and May
1997. Using publicly-available information, Petrie Parkman calculated total
investment multiples of gross pre-tax cash flow for the target company in each
transaction. For these 20 transactions, the highest, average, and lowest
multiples of gross pre-tax cash flow were 29.8x, 9.1x, and 0.7x, respectively.
Petrie Parkman also calculated purchase price multiples of discretionary cash
flow and implied purchase price of reserves multiples of equivalent proved
reserves for the target company in each transaction. The highest, average, and
lowest multiples of discretionary cash flow were 24.6x, 7.5x, and 0.8x,
respectively. The highest, average, and lowest multiples of equivalent proved
reserves were $12.50, $5.77, and $2.84 per BOE6, respectively. The highest,
average, and lowest multiples of equivalent proved reserves were $12.50, $7.66,
and $3.50 per BOE10, respectively. Petrie Parkman determined that, with respect
to Forcenergy, the appropriate benchmark multiples for gross pre-tax cash flow,
discretionary cash flow, and equivalent proved reserves were in the ranges of
5.0 to 6.5x, 4.5 to 6.0x, and $5.00 to $6.50 per BOE6, respectively. These
benchmark multiples were applied by Petrie Parkman to Forcenergy's historical
gross pre-tax cash flow, discretionary cash flow, and equivalent proved
reserves. Petrie Parkman also performed a premium analysis which compared the
offer price per target company share with the target company's share price for
the periods of one day, 30 days, and 60 days prior to public announcement of the
offer. The highest, average, and lowest premiums for each of these three periods
were 86.6%, 20.8%, and -2.9% for one day prior, respectively, 75.6%, 27.3%, and
2.8% for 30 days prior, respectively, and 86.6%, 24.8%, and 5.9% for 60 days
prior, respectively. Petrie Parkman determined that, with respect to Forcenergy,
the appropriate benchmarks for premium to
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target company's share price one day prior, 30 days prior, and 60 days prior
were in the ranges of 15% to 25%, 20% to 30%, and 20% to 30%, respectively.
These premium benchmarks were applied by Petrie Parkman to the corresponding
share price of Forcenergy. Petrie Parkman determined from the asset reference
value ranges implied by these multiples a composite asset reference value range
under this method of $1,100.0 million to $1,250.0 million. After deducting
long-term obligations of Forcenergy of $375.1 million from the composite asset
reference value range and dividing by the number of primary shares of Forcenergy
Common Stock outstanding, the resulting composite equity reference value range
per primary share is $31.98 to $38.60.
Common Stock Comparisons -- Forcenergy. Using publicly-available
information, Petrie Parkman calculated adjusted capitalization multiples of
certain historical financial criteria (such as gross pre-tax cash flow,
operating cash flow, and standardized measure of after-tax discounted future net
cash flows ("SEC Value")) and of equivalent proved reserves, and market
capitalization multiples of certain historical financial criteria (such as
discretionary cash flow) for a universe of 124 publicly-traded independent oil
and gas companies.
Thirteen of these companies -- Apache Corporation, Cross Timbers Oil
Company, Devon Energy Corporation, Enron Oil & Gas Company, Forest Oil
Corporation, HS Resources, Inc., Louisiana Land and Exploration Company,
Newfield Exploration Company, Pogo Producing Company, Santa Fe Energy Resources,
Inc., Seagull Energy Corporation, United Meridian Corporation, and Vastar
Resources, Inc -- which in Petrie Parkman's judgement were more relevant to an
evaluation of Forcenergy in terms of reserve location and reserve life, were
examined in greater detail. For these 13 companies, the highest, average, and
lowest adjusted capitalization multiples of gross pre-tax cash flow were 10.4x,
7.3x, and 4.7x, respectively. The highest, average, and lowest adjusted
capitalization multiples of operating cash flow were 9.7x, 6.6x, and 4.4x,
respectively. The highest, average, and lowest adjusted capitalization multiples
of SEC Value were 2.4x, 1.3x, and 0.8x, respectively. The highest, average, and
lowest adjusted capitalization multiples of equivalent proved reserves were
$15.17, $8.32, and $4.47 per BOE6, respectively. The highest, average, and
lowest market capitalization multiples of discretionary cash flow were 10.8x,
6.5x, and 4.2x, respectively. Petrie Parkman determined that, with respect to
Forcenergy, the appropriate benchmark adjusted capitalization multiples for
gross pre-tax cash flow, operating cash flow, SEC Value, and equivalent proved
reserves were in the ranges of 6.0 to 7.5x, 5.5 to 6.5x, 1.1 to 1.3x, and $6.50
to $8.50 per BOE6, respectively, and that the appropriate benchmark market
capitalization multiples for discretionary cash flow were in the range of 5.5 to
7.0x. These benchmark multiples were applied by Petrie Parkman to Forcenergy's
historical gross pre-tax cash flow, operating cash flow, SEC Value,
discretionary cash flow, and equivalent proved reserves based on the reserve
estimates referred to above. From the asset reference value ranges implied by
these multiples, Petrie Parkman determined a composite asset reference value
range under this method of $1,025.0 million to $1,225.0 million. After deducting
long-term obligations of Forcenergy of $375.1 million from the composite asset
reference value range and dividing by the number of primary shares of Forcenergy
Common Stock outstanding, the resulting composite equity reference value range
per primary share is $28.67 to $37.49.
Going Concern Analysis -- Forcenergy. Under this method, Petrie Parkman
projected potential financial performance of Forcenergy without giving effect to
the Mergers for the five year period 1997 through 2001 using the three oil and
gas pricing scenarios described above. These projections were prepared utilizing
certain information and projections prepared or provided by Forcenergy
management as well as numerous assumptions, including two capital cases ("No
Reinvestment Case" and "Budget Case", respectively). The No-Reinvestment Case
was based on Forcenergy's development plan as set forth in its December 31, 1996
reserve reports plus estimates of its exploration efforts in Alaska and the Gulf
of Mexico and free cash flow was assumed to accrue and was not reinvested beyond
currently identified projects. The Budget Case employed the same assumptions as
the No-Reinvestment Case but assumed reserve additions based on a finding cost
of $6.00 per BOE6. Capital expenditure levels were based on Forcenergy's 1997
estimated capital budget with 10% annual escalation thereafter. Other factors
included discount rates of 15.0% to 17.5%, terminal multiples of 5.0x, 6.0x, and
7.0x projected 2001 discretionary cash flow, and utilization of Forcenergy's
existing tax position.
This methodology resulted in ranges of equity reference values per primary
share of Forcenergy Common Stock using a terminal multiple of 5.0x projected
2001 discretionary cash flow under the No-Reinvestment Case of $15.83 to $17.26
using Pricing Case I, $27.22 to $29.66 using Pricing Case II, and $37.70 to
$41.08
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using Pricing Case III, and under the Budget Case of $25.23 to $27.50 using
Pricing Case I, $33.81 to $36.85 using Pricing Case II, and $43.10 to $46.98
using Pricing Case III. Using a terminal multiple of 6.0x projected 2001
discretionary cash flow yielded equity reference values per primary share of
Forcenergy Common Stock under the No-Reinvestment Success Case of $19.35 to
$21.09 using Pricing Case I, $32.14 to $35.03 using Pricing Case II, and $43.81
to $47.75 using Pricing Case III, and under the Budget Case of $30.35 to $33.08
using Pricing Case I, $40.86 to $44.53 using Pricing Case II, and $51.62 to
$56.26 using Pricing Case III. Using a terminal multiple of 7.0x projected 2001
discretionary cash flow yielded equity reference values per primary share of
Forcenergy Common Stock under the No-Reinvestment Case of $22.87 to $24.93 using
Pricing Case I, $37.06 to $40.39 using Pricing Case II, and $49.93 to $54.41
using Pricing Case III, and under the Budget Case of $35.47 to $38.65 using
Pricing Case I, $47.90 to $52.21 using Pricing Case II, and $60.14 to $65.55
using Pricing Case III. From these equity reference value ranges, Petrie Parkman
determined a composite equity reference value range per primary share of
Forcenergy Common Stock under this method of $32.00 to $37.00 for the
No-Reinvestment Case and $37.00 to $44.00 for the Budget Case.
Pro Forma Merger Analysis. Petrie Parkman analyzed certain pro forma
financial effects of the Mergers for the five-year period 1997 through 2001. In
connection with such analysis, Petrie Parkman assessed the past performance of
the managements of Convest and Forcenergy, reviewed the estimates and
projections prepared or provided by the managements of Convest and Forcenergy,
and had discussions with members of the management of Convest and Forcenergy
with respect to the current operations and the future financial and operating
performance of Forcenergy 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 accretive to projected Forcenergy earnings per
share for the period 1997 through 2001 and accretive to Forcenergy's
discretionary cash flow per share over the two year period 1997 through 1998 but
dilutive to discretionary cash flow from 1999 through 2001. The analysis also
indicated that the contemplated transaction would result in lower total debt to
total book capitalization ratios than projected for Forcenergy on a stand-alone
basis for the period 1997 through 2001. Petrie Parkman concluded that, based on
these projections, the contemplated transaction would not be dilutive to
earnings per share over the period analyzed and would not result in higher
financial leverage, thus supporting its opinion.
The description set forth above constitutes a summary of the material
analyses and assumptions employed by Petrie Parkman in rendering its opinion to
the Convest Board of Directors. Petrie Parkman believes that it analyses must be
considered as a whole and that selecting portions of its analyses or the factors
considered by it, without considering all analyses and factors, could create an
incomplete view of the process underlying its opinion. The preparation of a
fairness opinion is a complex process, judgmental in nature, and not necessarily
susceptible to partial analysis or summary description. In its analyses, Petrie
Parkman made numerous assumptions with respect to industry performance, capital
market conditions, general business, political, and economic conditions, and
other matters, many of which are beyond the control of Convest and Forcenergy.
Any estimates contained therein are not necessarily indicative of actual values,
which may be significantly more or less favorable than as set forth therein. The
analyses were prepared solely for the purpose of Petrie Parkman's providing its
opinion to the Convest Board of Directors as to the fairness of the Convest
Merger to the Convest stockholders. Analyses based on forecasts of future
results are not necessarily indicative of future results, which may be
significantly more or less favorable than suggested by such analyses. Estimates
of reference values of companies do not purport to be appraisals or necessarily
reflect the prices at which companies may actually be sold. Because such
estimates are inherently subject to uncertainty and based upon numerous factors
or events beyond the control of the parties or their respective advisors, no
assurances can be given that such estimates will prove to be accurate.
As described above, Petrie Parkman's opinion and presentation to the
Convest Board of Directors was one of many factors taken into consideration by
the Convest Board of Directors in making its determination to approve and
recommend the Convest Merger as contemplated in the Merger Agreement.
Petrie Parkman, as part of its investment banking business, is continually
engaged in the evaluation of energy-related businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, secondary
distributions of listed and unlisted securities, private placements, and
valuations for
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corporate and other purposes. Convest selected Petrie Parkman as its financial
advisor because it is a nationally recognized investment banking firm that has
substantial experience in transactions similar to the Mergers.
Pursuant to the terms of the engagement letter between Petrie Parkman and
Convest dated February 6, 1997, Convest has paid Petrie Parkman an advisory fee
of $37,500 which will be fully creditable against a transaction fee to be
calculated as 1.50% of the aggregate consideration to be received by Convest
and/or its shareholders (the "Convest Transaction Fee") which is contingent upon
and payable upon consummation of the Mergers. Pursuant to the terms of the
engagement letter between Petrie Parkman and Edisto, dated February 6, 1997,
Edisto has paid Petrie Parkman an advisory fee of $37,500 which will be fully
creditable against a transaction fee of $200,000 (the "Edisto Transaction Fee")
and which is contingent upon and payable upon consummation of a transaction
involving Edisto. The Edisto Transaction Fee is fully creditable against the
Convest Transaction Fee. If the Mergers are consummated, the aggregate amount of
the Convest Transaction Fee and Edisto Transaction Fee would be approximately
$1,436,000. Whether or not the Mergers are consummated, Convest and Edisto have
also agreed to reimburse Petrie Parkman for its out-of-pocket expenses,
including reasonable fees and expenses of counsel, and to indemnify Petrie
Parkman and certain related persons against certain liabilities relating to or
arising out of its engagement, including certain liabilities under the federal
securities laws.
INTERESTS OF CERTAIN PERSONS IN THE MERGERS
Severance and Bonus Agreements with Edisto and Convest Officers. Upon the
consummation of the Mergers, Michael Y. McGovern will be terminated as the
Chairman and CEO of Edisto and Convest. Pursuant to his Employment Agreement,
Mr. McGovern will receive a severance payment of $275,000 and he will be
entitled to participate, for a period of twelve months after his termination, in
all health, life and disability insurance and other employee benefit programs in
which he was participating immediately prior to such termination. If such
participation is not allowed because he is no longer an employee, then
comparable benefits must be provided. Mr. McGovern also will receive a Stay
Bonus of $183,333 which is contingent upon Mr. McGovern staying employed with
Convest until the closing date. This Stay Bonus was offered by the Convest Board
at the beginning of the sale process to Mr. McGovern and six executive officers
of Convest to provide an appropriate incentive to close a transaction.
Also upon consummation of the Mergers, it is anticipated that each of the
other executive officers of Edisto and Convest will be terminated. Under
Convest's severance policy for executive officers, any executive officer (other
than Mr. McGovern) who is terminated for any reason other than cause is entitled
to receive a severance payment in a lump sum equal to six months of salary and
is eligible to receive an additional six months of severance pay if approved by
the Board of Directors. Convest has six executive officers covered by this
policy (other than Mr. McGovern) and the maximum amount payable is approximately
$580,000. Each of these executive officers also is eligible to receive a Stay
Bonus of between one-third to two-thirds of such officer's base salary. The
maximum Stay Bonus payable to these officers is approximately $385,000.
Employee Stock Options Held by Edisto and Convest Officers and
Directors. Under the Merger Agreement, each of the Edisto Options and Convest
Options outstanding under the respective stock option plans of Edisto and
Convest is required to be redeemed or exercised prior to the Mergers. Each of
the Edisto Options, outstanding immediately prior to the Mergers will be
redeemed for a cash payment equal to the difference between $9.95 and the
exercise price of such Edisto Option. Each of the Convest Options outstanding
immediately prior to the Mergers will be redeemed for a cash payment equal to
the difference between $8.88 an the excise price of such Convest Option. Michael
Y. McGovern has 240,000 Edisto Options and 112,924 Convest Options and will
receive an aggregate of $1,533,642 in cash to redeem such stock options upon
consummation of the Mergers.
Also upon consummation of the Mergers, (i) the outside directors of Edisto
will receive an aggregate of $161,175 in cash to redeem their Edisto Options,
(ii) the outside directors of Convest will receive an aggregate of $362,900 in
cash to redeem their Convest Options and (iii) the six Convest executive
officers (other than Mr. McGovern) will receive an aggregate of $532,430 in cash
to redeem their Convest Options.
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Joint Representations on Edisto and Convest Boards. Four of the six members
of the Convest Board are also directors of Edisto. To avoid any conflict of
interest between Edisto and Convest relating to the allocation of the purchase
price between the two companies, the members of the Affiliate Transaction Review
Committee of the Convest Board were requested by the Convest Board to review the
Mergers from the perspective of the minority shareholders of Convest. The
purpose of this review was to examine the fairness of the purchase price
allocation between Edisto and Convest. The two members of this Committee, Murray
Gullatt and Franklin Myers, have no affiliation with Edisto. On June 19, 1997,
this Committee met with representatives of Petrie Parkman and Convest's outside
legal counsel to review the terms of the Merger Agreement. The Committee
subsequently recommended to the full Convest Board that it approve the Mergers.
For their service, Murray Gullatt, as Chairman, received $7,500 and Franklin
Myers received $5,000.
Indemnification of Edisto and Convest Officers and Directors. Pursuant to
the Merger Agreement, Forcenergy has agreed to indemnify and hold harmless the
present and former directors and officers of Edisto and Convest, against any
costs or expenses (including reasonable attorneys' fees), judgments, fines,
losses, claims, damages or liabilities arising out of the fact that he or she
was a director or officer of Edisto or Convest or any of their subsidiaries
prior to the Edisto Merger Effective Time and the Convest Merger Effective Time,
respectively, to the full extent permitted under Delaware law, Edisto and
Convest's respective Certificates of Incorporation and Bylaws, and any written
indemnification agreements in effect on the date of the Merger Agreement. In
addition, Forcenergy has agreed to maintain in effect for a period of six years
after the Edisto Merger Effective Time and the Convest Merger Effective Time,
respectively, Edisto's and Convest's existing directors and officers liability
insurance or equivalent liability insurance, which will provide coverage for
those persons who are directors and officers of Edisto and Convest as of such
effective time, so long as the annual premium therefor is not in excess of 150%
of the last annual premium paid by Edisto or Convest prior to the date of the
Merger Agreement.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the opinion of Coopers & Lybrand
L.L.P., tax advisors to Forcenergy, regarding the federal income tax
consequences of the Edisto Merger and the Convest Merger. This discussion does
not include a complete analysis of the consequences that may vary with or are
contingent upon individual circumstances, such as a taxpayer who is subject to
special provisions of the Code and is not a citizen or resident of the United
States. This discussion does not address any aspect of state, local or foreign
tax laws. HOLDERS OF EDISTO COMMON STOCK AND HOLDERS OF CONVEST COMMON STOCK ARE
ADVISED TO CONSULT THEIR OWN TAX ADVISORS REGARDING THE FEDERAL INCOME TAX
CONSEQUENCES OF THE EDISTO MERGER AND THE CONVEST MERGER IN LIGHT OF THEIR
PERSONAL CIRCUMSTANCES AND THE CONSEQUENCES UNDER STATE, LOCAL AND FOREIGN TAX
LAWS.
In rendering its opinion, Coopers & Lybrand L.L.P. has relied upon certain
written representations of Forcenergy, Edisto and Convest. Such opinion is not
binding on the IRS, and no assurance can be given that the IRS will not adopt a
contrary position or that a contrary IRS position would not be sustained by a
court. None of Edisto, Convest or Forcenergy has requested a ruling from the IRS
with respect to the federal income tax consequences of the Edisto Merger or the
Convest Merger. No assurance can be given that future legislation, regulations,
administrative pronouncements or court decisions will not significantly change
the law and materially affect the conclusions expressed herein. Any such change,
even though made after the consummation of the Edisto Merger and the Convest
Merger, could be applied retroactively.
Edisto Merger. The Edisto Merger will be treated as an acquisition of the
Edisto Common Stock by Forcenergy in a taxable transaction and not as a tax-free
reorganization. Accordingly, a stockholder of Edisto who exchanges shares of
Edisto Common Stock for Forcenergy Common Stock and cash will recognize taxable
gain or loss in an amount equal to the difference between such stockholder's
basis in such shares of Edisto Common Stock and the amount of cash and fair
market value of Forcenergy Common Stock received in the Edisto Merger. The
stockholder's basis in the Forcenergy Common Stock received in connection with
the Edisto Merger will be equal to its fair market value at the Edisto Merger
Effective Time.
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Edisto stockholders who perfect their dissenter's rights and receive cash
in exchange for their shares of Edisto Common Stock will realize taxable income
or loss in an amount equal to the difference between their basis in the shares
of Edisto Common Stock and the amount of cash they receive.
Neither Edisto nor Forcenergy should realize a gain or loss upon
consummation of the Edisto Merger.
Convest Merger. The Convest Merger will, under current law, constitute a
reorganization within the meaning of section 368(a) of the Code, and Convest and
Forcenergy will each be a party to that reorganization. As a reorganization
under section 368(a) of the Code, the Convest Merger will have the following
federal income tax consequences:
(a) no gain or loss will be recognized by Convest or Forcenergy by
reason of the Convest Merger;
(b) no gain or loss will be recognized by a holder of Convest Common
Stock upon the exchange of all of such holder's shares of Convest Common
Stock solely for shares of Forcenergy Common Stock pursuant to the Convest
Merger;
(c) the aggregate basis of the shares of Forcenergy Common Stock
received by a holder of Convest Common Stock will be the same as the
aggregate basis of the shares of Convest Common Stock surrendered in
exchange therefor, less any amount allocable to fractional share interests
for which cash is received;
(d) the holding period of the shares of Forcenergy Common Stock
received by a holder of Convest Common Stock will include the holding
period of the shares of Convest Common Stock surrendered in exchange
therefor, provided that such shares of Convest Common Stock are held as
capital assets at the Convest Merger Effective Time; and
(e) a holder of Convest Common Stock who receives cash in lieu of a
fractional share of Forcenergy Common Stock will be treated as receiving
such cash in exchange for such fractional share and will recognize gain or
loss equal to the difference, if any, between such stockholder's basis
allocable to the fractional share and the amount of cash received.
Such gain or loss will be eligible for long-term capital gain or loss
treatment if the Convest Common Stock is held by such stockholder as a capital
asset at the Convest Merger Effective Time and the holding period allocable to
the fractional share is more than one year.
ACCOUNTING TREATMENT
The Edisto Merger and the Convest Merger will be accounted for as
purchases. Under the purchase method of accounting, the purchase price, based on
the fair market value of Forcenergy Common Stock issued for Edisto Common Stock
and Convest Common Stock in the Mergers and the cash consideration, will be
compared to the fair value of the net assets acquired and the difference (after
an acquisition adjustment) generally will be recorded as additional investment
in oil and gas properties and will be amortized over the productive life of
Forcenergy's reserves.
RESTRICTIONS ON RESALES BY AFFILIATES
The shares of Forcenergy Common Stock to be received by Edisto and Convest
stockholders in connection with the Mergers have been registered under the
Securities Act and, except as set forth in this paragraph, may be traded without
restriction. The shares of Forcenergy Common Stock to be issued in connection
with the Mergers and received by persons who are deemed to be "affiliates" (as
that term is defined in Rule 144 under the Securities Act) of Edisto or Convest
prior to the Mergers may be resold by them only in transactions permitted by the
resale provisions of Rule 145 under the Securities Act (or, in case any such
person should become an affiliate of Forcenergy, Rule 144 under the Securities
Act) or as otherwise permitted under the Securities Act. Accordingly, the Merger
Agreement provides that each of Edisto and Convest will use all reasonable
efforts to cause its affiliates to execute an agreement (an "Affiliates
Agreement"), to the effect that such persons will not sell, transfer or
otherwise dispose of any shares of Edisto Common Stock, Convest Common Stock or
Forcenergy Common Stock, as the case may be, at any time in
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violation of the Securities Act or the rules and regulations promulgated
thereunder, including Rule 145. Forcenergy, Edisto and Convest have heretofore
obtained executed Affiliates Agreements from all persons known to the
managements of Forcenergy, Edisto or Convest to be affiliates of such
corporations, respectively.
RIGHTS OF DISSENTING STOCKHOLDERS OF EDISTO
A holder of Edisto Common Stock who makes the demand described below with
respect to such shares, who continuously is the holder of record of such shares
through the Edisto Merger Effective Time, and who otherwise complies strictly
with the statutory requirements of Section 262 of the DGCL ("Section 262") will
be entitled to have such shares of Edisto Common Stock appraised by the Delaware
Court of Chancery (the "Delaware Court") and to receive payment of the "fair
value" of such shares in lieu of the shares of Forcenergy Common Stock and cash
to be received by holders of Edisto Common Stock pursuant to the Merger
Agreement.
In order to exercise appraisal rights, holders of Edisto Common Stock must
demand and perfect their rights in strict accordance with the conditions
established by Section 262. All references in this summary of appraisal rights
to a "holder" or "holders of Edisto Common Stock" are to be the holder or
holders of record of Edisto Common Stock.
THE FOLLOWING DISCUSSION IS NOT A COMPLETE STATEMENT OF THE LAW RELATING TO
APPRAISAL RIGHTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SECTION 262,
WHICH IS REPRINTED IN ITS ENTIRETY AS APPENDIX E TO THIS JOINT PROXY
STATEMENT/PROSPECTUS. THIS DISCUSSION SHOULD BE REVIEWED CAREFULLY BY ANY HOLDER
OF EDISTO COMMON STOCK WHO WISHES TO EXERCISE STATUTORY APPRAISAL RIGHTS, OR WHO
WISHES TO PRESERVE THE RIGHT TO DO SO, BECAUSE FAILURE TO TIMELY AND STRICTLY
COMPLY WITH THE PROCEDURES SET FORTH HEREIN OR THEREIN WILL RESULT IN THE LOSS
OF APPRAISAL RIGHTS. IN THE EVENT THAT SHAREHOLDERS DO NOT PROPERLY EXERCISE
THEIR APPRAISAL RIGHTS, OR IF THEY DELIVER TO FORCENERGY A WRITTEN WITHDRAWAL OF
A DEMAND FOR APPRAISAL, EITHER WITHIN 60 DAYS AFTER THE EFFECTIVE DATE OF THE
MERGER OR THEREAFTER WITH THE WRITTEN APPROVAL OF FORCENERGY, THEY SHALL STILL
BE ENTITLED TO RECEIVE THE CONSIDERATION PAYABLE IN THE EDISTO MERGER.
Under Section 262, where a merger is to be submitted for approval at a
meeting of stockholders, as in the case of the Edisto Special Meeting, not less
than 20 days prior to such meeting, each constituent corporation must notify
each of the holders of its stock for which appraisal rights are available that
such appraisal rights are available and include in each such notice a copy of
Section 262. This Joint Proxy Statement/Prospectus shall constitute such notice
to holders of Edisto Common Stock.
Each holder of Edisto Common Stock electing to exercise appraisal rights
must deliver to Edisto written demand for appraisal before the vote on the
adoption of the Merger Agreement and approval of the Edisto Merger. In general,
stockholders electing to exercise their appraisal rights (if available) must
satisfy all of the conditions of Section 262 and must not vote for adoption of
the Merger Agreement and approval of the Edisto Merger. It is unsettled under
Delaware law whether a stockholder (other than a record owner of shares held by
multiple beneficial owners, as discussed below) can split its holdings (whether
by class or by shares within the same class) and vote some shares in favor of
the adoption of the Merger Agreement and approval of the Edisto Merger while
abstaining or voting against adoption of the Merger Agreement and approval of
the Edisto Merger with respect to other shares in an effort to preserve
appraisal rights with respect to the shares not voted in favor of adoption of
the Merger Agreement and approval of the Edisto Merger. A stockholder who signs
and returns a proxy without expressly specifying that such shares be voted
against adoption of the Merger Agreement and approval of the Edisto Merger or
that an abstention be registered with respect to such shares in connection with
the Edisto Merger will effectively have thereby waived his or her appraisal
rights because, in the absence of express contrary instructions, such shares
will be voted in favor of the Edisto Merger. See "The Special Meetings -- Voting
and Revocation of Proxies."
Only a holder of record of Edisto Common Stock is entitled to exercise
appraisal rights for the Edisto Common Stock registered in that holder's name. A
demand for appraisal must be executed by or on behalf of the holder of record
fully and correctly, as such holder's name appears on his or her stock
certificates, and must reasonably inform Edisto of the identity of the holder of
record and that such holder intends thereby to demand appraisal of the Edisto
Common Stock. A person having a beneficial interest in Edisto Common
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Stock held of record in the name of another person, such as a broker, fiduciary
(such as a trustee, guardian or custodian) or other nominee, must act promptly
to cause the record holder to follow properly and in a timely manner the steps
summarized herein to perfect such person's appraisal rights. If the Edisto
Common Stock is owned of record by a person other than the beneficial owner,
including a broker, fiduciary or other nominee, such demand must be executed by
or on behalf of the record owner. If the Edisto Common Stock is owned of record
by more than one person, as in a joint tenancy or tenancy in common, such demand
must be executed by or on behalf of all joint owners. An authorized agent,
including an agent for two or more joint owners, may execute the demand for
appraisal for a holder of record; however, the agent must identify the record
owner or owners and expressly disclose the fact that, in exercising the demand,
such person is acting as agent for the record owner. A record owner, such as a
broker, fiduciary or other nominee, who holds Edisto Common Stock as a nominee
for others, may exercise appraisal rights with respect to the shares held for
all or less than all beneficial owners of shares as to which such person is the
record owner. In such case, the written demand must set forth the number of
shares covered by such demand. Where the number of shares is not expressly
stated, the demand will be presumed to cover all Edisto Common Stock outstanding
in the name of such record owner.
A holder of Edisto Common Stock who elects to exercise appraisal rights
should mail or deliver his or her written demand to Edisto at its principal
executive offices, attention: Corporate Secretary. The written demand for
appraisal should specify the holder's name and mailing address, the number of
shares of Edisto Common Stock owned, and that the stockholder is thereby
demanding appraisal of his or her shares.
Within ten days after the Edisto Merger Effective Time, Edisto, as the
surviving corporation, must provide notice to all holders, who have complied
with Section 262 that the Merger has become effective. Within 120 days after the
Effective Time, either Edisto, as the surviving corporation, or any holder of
Edisto Common Stock who has complied with the required conditions of Section
262, may file a petition in the Delaware Court demanding a determination of the
fair value of the shares of all holders seeking appraisal. There is no present
intent on the part of Edisto to file an appraisal petition, and holders of
Edisto Common Stock seeking to exercise appraisal rights should not assume that
Edisto will file such a petition. Holders of Edisto Common Stock who desire to
have their shares appraised should initiate any steps required to perfect their
appraisal rights within the time periods and in the manner prescribed in Section
262. Within 120 days after the Edisto Merger Effective Time, any holder of
Edisto Common Stock who has theretofore complied with subsections (a) and (d) of
Section 262 will be entitled, upon written request, to receive from Edisto a
statement setting forth the aggregate number of shares of Edisto Common Stock
with respect to which demands for appraisal have been received by Edisto, and
the aggregate number of holders of such shares. Such statement must be mailed
within ten days after the written request therefor has been received by Edisto
or within ten days after expiration of the time for delivery of demands for
appraisal under Section 262, whichever is later. If no petition for appraisal is
filed with the Delaware Court within 120 days after the Edisto Merger Effective
Time, the rights of holders of Edisto Common Stock to appraisal shall cease.
If a petition for an appraisal is timely filed, at the hearing on such
petition, the Delaware Court will determine the holders of Edisto Common Stock,
if any, entitled to appraisal rights. The Delaware Court may require the holders
who have demanded an appraisal of the Edisto Common Stock and who had stock
represented by certificates to submit their certificates of stock to the
Register in Chancery for notation thereon of the pendency of the appraisal
proceedings; and if any holder of Edisto Common Stock fails to comply with such
direction, the Delaware Court may dismiss the proceedings as to such holder.
After determining the holders of Edisto Common Stock entitled to appraisal, the
Delaware Court will appraise the Edisto Common Stock owned by such holders,
determining the fair value of such shares exclusive of any element of value
arising from the accomplishment of expectation of the Edisto Merger, together
with a fair rate of interest, if any, to be paid upon the amount determined to
be the fair value. In determining fair value, the Delaware Court is to take into
account all relevant factors. In Weinberger v. UOP Inc., the Delaware Court
discussed the factors that could be considered in determining fair value in an
appraisal proceeding, stating that "proof of value by any techniques or methods
which are generally considered acceptable in the financial community and
otherwise admissible in court" should be considered, and that "fair price
obviously requires consideration of all relevant factors involving the value of
the company." The Delaware Supreme Court stated that in making this
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determination of fair value the court must consider "market value, asset value,
dividends, earnings prospect, the nature of the enterprise and any other facts
which were known or which could be ascertained as of the date of the merger
which throw light on future prospects of the merged corporation." In Weinberger,
the Delaware Supreme Court stated that "elements of future value, including the
nature of the enterprise, which are known or susceptible of proof as of the date
of the merger and not the product of speculation, may be considered." Section
262, however, provides that fair value is to be "exclusive of any element of
value arising from the accomplishment of expectation of the merger." Delaware
courts have decided that the statutory appraisal remedy, depending on factual
circumstances, may or may not be a dissenter's exclusive remedy.
Holders of Edisto Common Stock considering demanding appraisal of their
shares should recognize that the fair value of their shares to be received as
determined under Section 262 could be more than, the same as or less than the
consideration they are entitled to receive pursuant to the Merger Agreement if
they do not seek appraisal of their shares, and that investment banking opinions
as to fairness from a financial point of view are not necessarily opinions as to
fair value as determined under Section 262. If the fair value of their shares as
determined under Section 262 is less than the Merger Consideration, such holder
will not be entitled at that time to elect to receive the Merger Consideration.
The cost of the appraisal proceeding may be determined by the Delaware Court and
assessed against the parties as the Delaware Court deems equitable in the
circumstances. Upon application of a holder of Edisto Common Stock seeking
appraisal, the Delaware Court may order that all or a portion of the expenses
incurred by any holder of Edisto Common Stock in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, be charged pro rata against the value of all
Edisto Common Stock entitled to appraisal. In the absence of such a
determination or assessment, each party bears its own expenses.
Any holder of Edisto Common Stock who has duly demanded appraisal in
compliance with Section 262 will not, after the Edisto Merger Effective Time, be
entitled to vote for any purposes any shares subject to such demand or to
receive payment of dividends or other distributions on such shares, except for
dividends or distributions payable to holders of record of Edisto Common Stock
at a date prior to the Edisto Merger Effective Time.
Any holder of Edisto Common Stock may withdraw such holder's demand for
appraisal by delivering to Edisto a written withdrawal of such demand for
appraisal and acceptance of the terms of the Edisto Merger, except (i) that any
such attempt to withdraw such demand made more than 60 days after the Edisto
Merger Effective Time will require written approval of Edisto and (ii) that no
appraisal proceeding properly instituted in the Delaware Court shall be
dismissed as to any holder of Edisto Common Stock without the approval of the
Delaware Court, and such approval may be conditioned upon such terms as the
Delaware Court deems just.
Under Texas law, holders of Convest Common Stock will not be entitled to
any appraisal or dissenter's rights in connection with the Convest Merger.
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MATERIAL TERMS OF THE MERGER AGREEMENT
The following description does not purport to be complete and is qualified
in its entirety by reference to the Merger Agreement, a copy of which is
attached as Appendix A to this Joint Proxy Statement/Prospectus and is
incorporated herein by reference.
EFFECTIVE TIME OF THE MERGERS
The Merger Agreement provides that, as promptly as practicable following
the satisfaction or waiver of the conditions to effecting the Mergers or at such
other time as the parties to the Merger Agreement may agree, the parties shall
cause the Edisto Merger to be consummated by filing Certificates of Merger with
the Secretary of State of the State of Delaware, in such form as required by,
and executed in accordance with, the relevant provisions of the DGCL and the
Convest Merger to be consummated by filing articles or a certificate of merger
with the Secretary of State of the States of Texas and Delaware, in such forms
as required by, and executed in accordance with, the relevant provisions of the
TBCA and the DGCL. It is anticipated that, if the Merger Agreement is approved
and adopted at the Special Meetings and all other conditions to the Mergers have
been satisfied or waived, (i) the Edisto Merger Effective Time will occur on the
date of the Edisto Special Meeting or as soon thereafter as practicable and (ii)
the Convest Merger Effective Time will occur as soon as practicable following
the Edisto Merger Effective Time.
MANNER AND BASIS OF CONVERTING SHARES
As a result of the Mergers, (a) each share of Edisto Common Stock will be
converted into the right to receive (i) $4.886 in cash and (ii) a fractional
interest in a share of Forcenergy Common Stock equal to $5.064 divided by the
Weighted Average Trading Price of Forcenergy Common Stock, and (b) each share of
Convest Common Stock will be converted into the right to receive a fractional
interest in a share of Forcenergy Common Stock equal to $8.88 divided by the
Weighted Average Trading Price of Forcenergy Common Stock. The Weighted Average
Trading Price of Forcenergy Common Stock will be determined during the ten
trading days ending two days prior to the closing date (which is expected to be
the same day as the Special Meetings); provided, however, that the Weighted
Average Trading Price of Forcenergy Common Stock will in no event be less than
$28.96 nor more than $34.96.
The "Weighted Average Trading Price" of Forcenergy Common Stock shall be
calculated by (a) making the following calculation for each of the ten trading
days ending on the day that is two trading days prior to the Closing Date: (i)
grouping together all shares of Forcenergy Common Stock traded on such day at
the same trading price, (ii) multiplying the aggregate number of shares in each
price group by the trading price for such group to calculate a product (the
total sold shares value) for each group, (iii) adding all of such products from
each group and (iv) dividing the resulting total by the aggregate number of
shares traded on such trading day, and (b) calculating the arithmetic mean of
the resulting ten amounts.
Promptly following the Convest Merger Effective Time but in no event later
than ten business days, American Stock Transfer & Trust Company, which has been
selected by Forcenergy to act as exchange agent pursuant to the Merger Agreement
(the "Exchange Agent"), will mail to each record holder of Edisto Common Stock
and Convest Common Stock immediately prior to the Edisto Merger Effective Time
and the Convest Merger Effective Time, as the case may be, information advising
such holder of the consummation of the Mergers and a letter of transmittal for
use in exchanging certificates of Edisto Common Stock and Convest Common Stock,
as the case may be, for Forcenergy Common Stock certificates and cash in lieu of
fractional shares. Letters of transmittal will also be available following the
Convest Merger Effective Time at the offices of the Exchange Agent at 6201 15th
Avenue, Brooklyn, NY 11219, and holders of certificates that previously
evidenced Edisto Common Stock or Convest Common Stock may, at their option after
the Convest Merger Effective Time, surrender such certificates for certificates
evidencing Forcenergy Common Stock at the offices of the Exchange Agent in
person. After the Edisto Merger Effective Time and the Convest Merger Effective
Time, there will be no further registration of transfers on the stock transfer
books of Edisto or Convest of shares of Edisto Common Stock or Convest Common
Stock, respectively, that were outstanding immediately prior to the Edisto
Merger Effective Time or the Convest Merger Effective Time, respectively.
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Share certificates should not be surrendered for exchange by stockholders of
Edisto or Convest prior to the Edisto Merger Effective Time and the Convest
Merger Effective Time.
No fractional shares of Forcenergy Common Stock will be issued in the
Mergers. Each stockholder of Edisto and Convest entitled to a fractional share
will receive an amount in cash, without interest thereon, equal to such
fractional amount multiplied by the Weighted Average Trading Price, $34.96 or
$28.96, depending on which price is used for purposes of the merger exchange
ratio calculations described above.
Until so surrendered and exchanged, each certificate previously evidencing
Edisto Common Stock or Convest Common Stock shall be deemed, for all purposes
other than the payment of dividends and other distributions, to evidence whole
shares of Forcenergy Common Stock and the right to receive cash and cash in lieu
of fractional shares of Forcenergy Common Stock. Unless and until any such
certificates that previously evidenced Edisto Common Stock or Convest Common
Stock shall be so surrendered and exchanged, no dividends or other distributions
payable to the holders of record of Forcenergy Common Stock as of any time on or
after the Edisto Merger Effective Time and the Convest Merger Effective Time
shall be paid to the holders of such certificates previously evidencing Edisto
Common Stock or Convest Common Stock; provided, however, that, upon any such
surrender and exchange of such certificates, there shall be paid to the record
holders of the certificates issued and exchanged therefor (i) the amount,
without interest thereon, of dividends and other distributions, if any, with a
record date on or after the Edisto Merger Effective Time and the Convest Merger
Effective Time theretofore paid with respect to such whole shares of Forcenergy
Common Stock and (ii) at the appropriate payment date, the amount of dividends
or other distributions, if any, with a record date on or after the Edisto Merger
Effective Time and the Convest Merger Effective Time but prior to surrender and
a payment date occurring after surrender, payable with respect to such whole
shares of Forcenergy Common Stock.
EDISTO OPTIONS
The Merger Agreement provides that each outstanding stock option or warrant
granted to employees and directors of Edisto and its subsidiaries or to any
other persons with respect to Edisto Common Stock (an "Edisto Option") shall be
either (i) redeemed by Edisto or (ii) exercised or canceled in accordance with
its terms, in each case, prior to the Edisto Merger. If any Edisto Option is
redeemed, the Merger Agreement requires such redemption to be at a price no
greater than the amount (if any) by which $9.95 exceeds the exercise price of
such Edisto Option (unless otherwise consented to by Forcenergy). The total
amount that may be expended to effect any such redemptions may not exceed
$1,500,000.
CONVEST OPTIONS
The Merger Agreement provides that each outstanding stock option or warrant
granted to employees and directors of Convest and its subsidiaries or to any
other persons with respect to Convest Common Stock (a "Convest Option") shall be
either (i) redeemed by Convest or (ii) exercised or canceled in accordance with
its terms, in each case, prior to the Convest Merger. If any Convest Option is
redeemed, the Merger Agreement requires redemption to be at a price no greater
than the amount (if any) by which $8.88 exceeds the exercise price of such
Convest Option. The total amount that may be expended to effect any such
redemptions may not exceed $2,300,000.
CONDITIONS TO THE MERGERS
The respective obligations of Forcenergy, Edisto and Convest to consummate
the Mergers are subject to the satisfaction of the following conditions, any or
all of which may be waived in writing by Edisto, Convest and Forcenergy, in
whole or in part, to the extent permitted by applicable law: (a) the Merger
Agreement and the Edisto Merger shall have been approved and adopted by the
requisite vote of the stockholders of Edisto and the Merger Agreement and the
Convest Merger shall have been approved and adopted by the requisite vote of the
stockholders of Convest; (b) the shares of Forcenergy Common Stock to be issued
in the Mergers and those to be reserved for issuance upon exercise of stock
options or warrants or the conversion of convertible securities shall have been
authorized for listing on the NYSE or such other exchange on which
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Forcenergy Common Stock is then primarily traded, upon official notice of
issuance; (c) the Registration Statement shall have been declared effective by
the Commission under the Securities Act, no stop order suspending the
effectiveness of the Registration Statement shall have been issued by the
Commission and no proceedings for that purpose shall have been initiated by the
Commission or any state regulatory authority; (d) no preliminary or permanent
injunction or other order or decree by any federal or state court which prevents
the consummation of any of the Mergers shall have been issued and remain in
effect; (e) no action shall have been taken, and no statute, rule or regulation
shall have been enacted, by any state or federal government or governmental
agency in the United States which would prevent the consummation of any of the
Mergers or make the consummation of any of the Mergers illegal; (f) all
governmental waivers, consents, orders and approvals legally required for the
consummation of the Mergers and the transactions contemplated by the Merger
Agreement, and all consents from lenders required to consummate the Mergers,
shall have been obtained and be in effect at the Edisto Merger Effective Time,
except where the failure to obtain the same would not be reasonably likely to
have a Material Adverse Effect following the Edisto Merger Effective Time; and
(g) the parties shall have received an opinion of Coopers & Lybrand L.L.P. to
the effect that the Convest Merger will qualify as a reorganization under
Section 368 of the Code. The opinion of Coopers & Lybrand L.L.P. has been
received.
The obligations of Edisto and Convest (collectively, the "Sellers") to
effect the Mergers are also subject to the satisfaction at or prior to the
Closing Date of the following conditions, any or all of which may be waived in
writing by the Sellers, in whole or in part, to the extent permitted by
applicable law: (a) Forcenergy and EDI-Sub (collectively, the "Purchasers")
shall have performed in all material respects their agreements contained in the
Merger Agreement required to be performed on or prior to the Closing Date and
the representations and warranties of the Purchasers contained in the Merger
Agreement shall be true and correct in all material respects as of the date of
the Merger Agreement and as of the Closing Date as though made again as of the
Closing Date; (b) since the date of the Merger Agreement, there shall have been
no changes that constitute, and no events (including, without limitation,
litigation developments) shall have occurred which have resulted in or
constitute, either individually or in the aggregate, a Material Adverse Change
(as defined below); (c) all governmental waivers, consents, orders, and
approvals legally required for the consummation of the Mergers and the
transactions contemplated by the Merger Agreement shall have been obtained and
be in effect at the Closing Date except for such waivers, consents, orders and
approvals the failure of which to have been obtained would not have, either
individually or in the aggregate, a Material Adverse Effect (as defined below),
and no governmental authority shall have promulgated after the date of the
Merger Agreement any statute, rule or regulation which, when taken together with
all such promulgations, would cause a Material Adverse Change; and (d) the
respective financial advisors shall have delivered their bring-down fairness
opinions.
The obligations of the Purchasers to effect the Mergers are also subject to
the satisfaction at or prior to the Closing Date of the following conditions,
any or all of which may be waived in writing by the Purchasers, in whole or in
part, to the extent permitted by applicable law: (a) the Sellers shall have
performed in all material respects their agreements contained in the Merger
Agreement required to be performed on or prior to the Closing Date and the
representations and warranties of the Sellers contained in the Merger Agreement
shall be true and correct in all material respects as of the date of the Merger
Agreement and as of the Closing Date as though made again as of the Closing
Date; (b) Forcenergy shall have received the Affiliate Agreements and the
Shareholders Agreements; (c) each Edisto Option and each Convest Option shall
have either been redeemed, exercised or canceled pursuant to the Merger
Agreement; (d) since the date of the Merger Agreement, there shall have been no
changes that constitute, and no event or events (including, without limitation,
litigation developments) shall have occurred which have resulted in or
constitute, either individually or in the aggregate, a Material Adverse Change;
(e) all governmental waivers, consents, orders, and approvals legally required
for the consummation of the Mergers and the transactions contemplated by the
Merger Agreement shall have been obtained and be in effect at the Closing Date
except for such waivers, consents, orders and approvals the failure of which to
have been obtained would not have, either individually or in the aggregate, a
Material Adverse Effect, and no governmental authority shall have promulgated
after the date of the Merger Agreement any statute, rule or regulation which,
when taken together with all such promulgations, would cause a Material Adverse
Change; (f) the number of Dissenting Shares shall not exceed
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three percent of the total number of shares of Edisto Common Stock outstanding
on the date of the Merger Agreement; (g) Sellers shall have obtained a waiver in
writing of the preferential purchase rights of Coral Reserves Energy Corp.
("Coral") or Coral shall have exercised such preferential right; and (h) Sellers
shall have obtained a written consent of Enron Reserve Acquisition Corp.
("ERAC") to transfer the interest of Edisto E&P in the subject property pursuant
to the Merger Agreement and the succession by Forcenergy or its subsidiaries to
the interest and obligations of Edisto E&P under such agreement.
"Material Adverse Change" means an adverse change in the business,
operations, assets, liabilities, properties, condition (financial or other) or
results of operations which (i), in the case of Sellers and their respective
subsidiaries, taken as a whole, may result in an aggregate change or liability
of $2.0 million or greater or (ii), in the case of Forcenergy and its
subsidiaries, taken as a whole, may result in an aggregate change or liability
of $15.0 million or greater.
"Material Adverse Effect" means an adverse effect on the business,
operations, assets, liabilities, properties, condition (financial or other), or
results of operations which (i), in the case of Sellers and their respective
subsidiaries, taken as a whole, may result in an aggregate change or liability
of $2.0 million or greater or (ii), in the case of Forcenergy and its
subsidiaries, taken as a whole, may result in an aggregate change or liability
of $15.0 million or greater.
There can be no assurance that all of the conditions to the Mergers will be
satisfied.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties of
each of the Sellers and the Purchasers relating to, among other things, (i) its
organization and similar corporate matters, (ii) its capitalization, (iii) the
authorization, execution, delivery, performance and enforceability of the Merger
Agreement, (iv) the absence of conflicts, violations and defaults under its
charter and bylaws and certain other agreements and documents, (v) the filings
and statutory approvals required to effect the Mergers, (vi) its financial
statements, (vii) the absence of undisclosed liabilities, (viii) the absence of
certain changes and events, (ix) its litigation, (x) accuracy of the information
in the Registration Statement and this Joint Proxy Statement/Prospectus, (xi)
compliance with laws, (xii) compliance with agreements, (xiii) its taxes, (xiv)
its employee benefit plans, (xv) the absence of labor controversies, (xvi)
certain environmental matters, (xvii) its reserve report and exploration project
information, (xviii) title to its properties, (xix) insurance, (xx) compliance
with production quotas, (xxi) certain gas payment and balancing matters, (xxii)
the absence of prepayments or refunds owed, (xxiii) its drilling obligations,
and (xxiv) its development operations.
CERTAIN COVENANTS; CONDUCT OF BUSINESS PRIOR TO THE MERGERS
Business Maintenance. Each of the Sellers has agreed that, prior to the
Closing Date, unless expressly contemplated by the Merger Agreement or otherwise
consented to in writing by Forcenergy, it will and will cause its subsidiaries
(a) to conduct their respective businesses in the ordinary course of business
consistent with past custom and practice (including with respect to quantity and
frequency) ("Ordinary Course of Business"); (b) to use all reasonable efforts to
preserve intact their respective business organizations and goodwill, keep
available the services of their respective present officers and key employees,
and preserve the goodwill and business relationships with customers and others
having business relationships with them and not engage in any action, directly
or indirectly, with the intent to adversely impact the transactions contemplated
by the Merger Agreement; (c) confer on a regular and frequent basis with one or
more representatives of Forcenergy to report operational matters of materiality
and the general status of ongoing operations (subject to restrictions imposed by
applicable law); and (d) use commercially reasonable efforts to maintain with
financially responsible insurance companies insurance on its tangible assets and
its businesses in such amounts and against such risks and losses as are
consistent with past practice.
Negative Covenants. Each of the Sellers has agreed that, prior to the
Closing Date, subject to certain exceptions and unless expressly contemplated by
the Merger Agreement or otherwise consented to in writing by Forcenergy, it will
not do, and will not permit any of its subsidiaries to do, any of the following:
(i) (A) amend or propose to amend their respective charter or by-laws, (B)
split, combine or reclassify their outstanding capital stock or (C) declare, set
aside or pay any dividend or distribution payable in cash, stock,
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property or otherwise, except for the payment of dividends or distributions by a
wholly owned subsidiary; (ii) issue, sell, pledge or dispose of, or agree to
issue, sell, pledge or dispose of, any additional shares of, or any options,
warrants or rights of any kind to acquire any shares of their capital stock of
any class or any debt or equity securities convertible into or exchangeable for
such capital stock, except that a Seller may issue shares upon conversion of
convertible securities and exercise of options and warrants outstanding on the
date of the Merger Agreement; (iii) (A) incur or become contingently liable with
respect to any indebtedness for borrowed money other than (x) borrowings in the
Ordinary Course of Business or (y) borrowings to refinance existing indebtedness
on terms which are reasonably acceptable to Forcenergy, (B) except as
contemplated by the Merger Agreement, redeem, purchase, acquire or offer to
purchase or acquire any shares of its capital stock or any options, warrants or
rights to acquire any of its capital stock or any security convertible into or
exchangeable for its capital stock, (C) take or fail to take any action which
action or failure to take action would cause either Seller or its stockholders
(except to the extent that any stockholders receive cash) to recognize gain or
loss for federal income tax purposes as a result of the consummation of the
Convest Merger or would otherwise cause the Convest Merger not to qualify as a
reorganization under Section 368 of the Code, (D) make any acquisition of any
assets or businesses other than expenditures for current assets in the ordinary
course of business, (E) sell, pledge, dispose of or encumber any assets or
businesses without the approval of Forcenergy or (F) enter into any binding
contract, agreement, commitment or arrangement with respect to any of the
foregoing; (iv) enter into or amend any employment, severance, special pay
arrangement with respect to termination of employment or other similar
arrangements or agreements with any directors, officers or employees; (v) adopt,
enter into or amend any bonus, profit sharing, compensation, stock option,
pension, retirement, deferred compensation, health care, employment or other
employee benefit plan, agreement, trust, fund or arrangement for the benefit or
welfare of any employee or retiree, except as required to comply with changes in
applicable law; (vi) make, change or revoke any material tax election or make
any material agreement or settlement regarding taxes with any taxing authority;
(vii) change any method of accounting or accounting practice, except for any
such change required by GAAP; and (viii) enter into any future, hedge, swap,
collar, put, call, floor, cap, option or other contracts that are intended to
benefit from or reduce or eliminate the risk of fluctuations in the price of
commodities, including hydrocarbons, or securities, other than such as are
entered into in the Ordinary Course of Business solely for the purpose of
terminating an existing hedge.
Access to Information. During the pendency of the Merger Agreement,
Forcenergy, Edisto and Convest have each agreed to afford, and to cause its
subsidiaries to afford, to the other party and its representatives full access
during normal business hours to their respective properties, books, contracts,
commitments, books and records. Each of them has also agreed to furnish, and to
cause its subsidiaries to furnish, to the other party and its representatives
such information concerning the business, properties, and personnel of such
party and its subsidiaries as may be reasonably requested. If the Merger
Agreement is terminated in accordance with its terms, a party that has received
information pursuant to the Merger Agreement is obligated to return all
non-public information.
NO SOLICITATION
As an inducement to Forcenergy to enter into the Merger Agreement, the
Sellers have agreed not to (and have agreed to not permit any of their
subsidiaries, officers, directors, employees or representatives to initiate,
solicit, negotiate, encourage or provide confidential information to facilitate
any proposal or offer to acquire all or any substantial part of the business and
properties of either Seller or any of their Subsidiaries or any capital stock of
either Seller or any of their Subsidiaries, whether by merger, purchase of
assets, tender offer or otherwise, whether for cash, securities or any other
consideration or combination thereof ("Acquisition Transaction"). The Sellers
will immediately notify Forcenergy of any such inquiries and proposals received
by the Sellers or any of their subsidiaries provided, however, that (i) either
Seller may, in response to an unsolicited written proposal or unsolicited
written indication of interest with respect to a potential or proposed
Acquisition Transaction ("Acquisition Proposal"), furnish (subject to the
execution of a confidentiality agreement and standstill agreement in
substantially the form executed by Forcenergy) confidential or non-public
information to a financially capable corporation, partnership, person or other
entity or group (a "Potential Acquirer") and negotiate with such Potential
Acquirer if the Board of Directors of such Seller
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after consulting with its outside legal counsel, determines in good faith that
the failure to provide such confidential or non-public information to or
negotiate with such Potential Acquirer would constitute a breach of its
fiduciary duty to its stockholders and (ii) such Seller's Board of Directors may
take and disclose to its stockholders a position contemplated by Rule 14e-2
under the Exchange Act.
TERMINATION
The Merger Agreement may be terminated at any time prior to the Closing
Date, whether before or after approval by the stockholders of the Sellers, by
the mutual written consent of Forcenergy and the Sellers or as follows:
(i) The Sellers shall have the right to terminate the Merger
Agreement:
(A) if the representations and warranties of Purchasers in the
Merger Agreement shall fail to be true and correct in all material
respects on and as of the date made or, except in the case of any such
representations and warranties made as of a specified date, on and as of
any subsequent date as if made at and as of such subsequent date and
such failure shall not have been cured in all material respects within
30 days after written notice of such failure is given to Forcenergy by
the Sellers;
(B) if the Mergers are not completed by October 31, 1997 (unless
due to a delay or default on the part of a Seller);
(C) if any of the Mergers is enjoined by a final, unappealable
court order not entered at the request or with the support of a Seller
and if the Sellers shall have used reasonable efforts to prevent the
entry of such order;
(D) if (w) a Seller receives an offer or proposal from any
Potential Acquirer (excluding any affiliate of a Seller or any group of
which any affiliate of a Seller is a member) with respect to a merger,
sale of substantial assets or other business combination involving such
Seller, (x) such Seller's Board of Directors determines, in good faith
and after consultation with an independent financial advisor, that such
offer or proposal (if consummated pursuant to its terms) would result in
an Acquisition Transaction more favorable to such Seller's stockholders
from a financial point of view than the relevant Merger (any such offer
or proposal being referred to as a "Superior Proposal" and resolves to
accept such Superior Proposal, (y) the Board of Directors of the Seller
shall conclude in good faith after consultation with its legal counsel
that such action is necessary in order for the Board of Directors of the
Seller to act in a manner that is consistent with its fiduciary
obligations under applicable law and (z) the Seller shall have furnished
Forcenergy with a copy of the definitive agreement at least five
business days prior to its execution and Forcenergy shall have failed
within such five business day period to offer to amend the terms of this
Agreement so that the Mergers would be, in the good faith determination
of the Board of Directors of the Seller, at least as favorable to the
Seller's stockholders from a financial point of view as the Acquisition
Transaction; provided however, that such termination shall not be
effective until such time as the termination fee (described below) shall
have been received by Forcenergy;
(E) if (w) a tender or exchange offer is commenced by a Potential
Acquirer (excluding any Affiliate of a Seller or any group of which any
Affiliate of a Seller is a member) for all outstanding shares of such
Seller's common stock, (x) such Seller's Board of Directors determines,
in good faith and after consultation with an independent financial
advisor, that such offer constitutes a Superior Proposal and resolves to
accept such Superior Proposal or recommend to the stockholders that they
tender their shares in such tender or exchange offer, (y) the Board of
Directors of the Seller shall conclude in good faith after consultation
with its legal counsel that such action is necessary in order for the
Board of Directors of the Seller to act in a manner that is consistent
with its fiduciary obligations under applicable law and (z) the Seller
shall have furnished Forcenergy with a copy of the definitive agreement
at least five business days prior to its execution and Forcenergy shall
have failed within such five business day period to offer to amend the
terms of this Agreement so that the Mergers would be, in the good faith
determination of the Board of Directors of the Seller, at least as
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favorable to the Seller's stockholders from a financial point of view as
the Acquisition Transaction; provided, however, that such termination
shall not be effective until such time as the termination fee (described
below) shall have been received by Forcenergy; or
(F) if (x) Forcenergy fails to perform in any material respect any
of its material covenants in this Agreement ("Default"), (y) Forcenergy
does not cure such Default in all material respects within 30 days after
notice of such Default is given to Forcenergy by the Sellers and (z)
neither Seller is itself in Default.
(ii) Forcenergy shall have the right to terminate the Merger
Agreement:
(A) if the representations and warranties of the Sellers shall fail
to be true and correct in all material respects on and as of the date
made or, except in the case of any such representations and warranties
made as of a specified date, on and as of any subsequent date as if made
at and as of such subsequent date and such failure shall not have been
cured in all material respects within 30 days after written notice of
such failure is given to the Sellers by Forcenergy;
(B) if the Mergers are not completed by October 31, 1997 (unless
due to a delay or default on the part of Forcenergy);
(C) if any of the Mergers is enjoined by a final, unappealable
court order not entered at the request or with the support of Forcenergy
and if Forcenergy shall have used reasonable efforts to prevent the
entry of such order;
(D) if the Board of Directors of a Seller shall have resolved to
accept a Superior Proposal or shall have recommended to the stockholders
of such Seller that they tender their shares in a tender or an exchange
offer commenced by a third party (excluding any affiliate of Forcenergy
or any group of which any affiliate of Forcenergy is a member);
(E) if (A) a Seller is in Default, (B) such Seller does not cure
such Default in all material respects within 30 days after notice of
such Default is given to such Seller by Parent, and (C) Forcenergy is
not itself in Default; or
(F) if the Sellers fail to receive the requisite stockholder
approvals for the Mergers.
EXPENSES AND TERMINATION FEES
All costs and expenses incurred by the Sellers and the Purchasers will be
borne by the party incurring such expenses; provided, however, that the
allocable share of Forcenergy and the Sellers for all expenses related to
printing, filing and mailing this Joint Proxy Statement/Prospectus and all
Commission and other regulatory filing fees incurred in connection with the
Registration Statement or this Joint Proxy Statement/Prospectus shall be shared
equally by Forcenergy and the Sellers.
The Merger Agreement provides that the Sellers will pay Forcenergy a fee
equal to $3,000,000, if:
(A) either Seller terminates the Merger Agreement pursuant to clause
(i) (D) or (E) as described above under "Termination";
(B) Forcenergy terminates the Merger Agreement pursuant to clause (ii)
(D) as described above under "Termination"; or
(C) Forcenergy terminates the Merger Agreement pursuant to clause (ii)
(F) as described above under "Termination" as a result of a failure of
Convest to receive the requisite stockholder approvals.
The Merger Agreement provides that Forcenergy will pay to the Sellers, a
fee equal to $3,000,000 if Sellers are not in breach or violation of the Merger
Agreement and Forcenergy terminates the Merger Agreement for any reason other
than pursuant to clause (ii) as described above under "Termination."
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INDEMNIFICATION
The Merger Agreement provides that, (i) from and after the Edisto Merger
Effective time, with respect to Edisto, and the Convest Merger Effective Time,
with respect to Convest, Forcenergy will indemnify and hold harmless each
present and former director and/or officer of a Seller, determined as of such
effective time (the "Indemnified Parties"), that is made a party or threatened
to be made a party to any threatened, pending or completed, action, suit,
proceeding or claim, whether civil, criminal, administrative or investigative,
by reason of the fact that he or she was a director or officer of a Seller or
any subsidiary of a Seller prior to such effective time and arising out of
actions or omissions of the Indemnified Party in any such capacity occurring at
or prior to such effective time (a "Claim") against any costs or expenses
(including reasonable attorneys' fees), judgments, fines, losses, claims,
damages or liabilities reasonably incurred in connection with any Claim, whether
asserted or claimed prior to, at or after such effective time, to the fullest
extent that such Seller would have been permitted under Delaware law, the
respective charters or by-laws of such Seller or written indemnification
agreements in effect at the date hereof, including provisions therein relating
to the advancement of expenses incurred in the defense of any action or suit;
(ii) for a period of six years after the Edisto Merger Effective Time and the
Convest Merger Effective Time, respectively, Purchasers shall maintain the
Sellers' existing directors and officers liability insurance or equivalent
liability insurance, which will provide coverage for those persons who are
directors and officers of the Sellers as of such effective time, so long as the
annual premium therefor is not in excess of 150% of the last annual premium paid
by the Sellers prior to the date hereof.
In lieu of such insurance arrangement, Purchasers may, on or before the
Closing, enter into alternative insurance arrangements, providing that such
arrangements are approved by each of the Sellers and are no less advantageous to
the Indemnified Parties so long as no lapse in coverage occurs as a result of
such substitution.
SHAREHOLDER AGREEMENTS
Concurrently with the execution of the Merger Agreement, Forcenergy and the
TCW Entities, which own approximately 51% of the outstanding shares of Edisto
Common Stock, entered into a Shareholder Agreement pursuant to which the TCW
Entities have agreed to vote their shares of Edisto Common Stock in favor of the
Merger Agreement, unless Edisto's Board of Directors approves an alternative
transaction with a value of at least $10.95 per share. The TCW Entities also
have agreed to not solicit or encourage any offer from any party concerning the
possible disposition of all or any substantial portion of Edisto's or Convest's
business assets or a controlling equity interest in Edisto or Convest. For a
period of 180 days after the Mergers have been consummated, the TCW Entities
have agreed that they will not sell or otherwise dispose of 80% of the shares of
Forcenergy Common Stock they receive pursuant to the Mergers. Forcenergy has
agreed to file a shelf registration statement to register the shares of
Forcenergy Common Stock to be received by the TCW Entities pursuant to the
Mergers under the Securities Act, and has also granted the TCW Entities certain
piggyback registration rights.
Pursuant to the Merger Agreement, Edisto, which owns 72% of the outstanding
shares of Convest Common Stock, has agreed to vote its shares of Convest Common
Stock in favor of the Convest Merger and the Merger Agreement. Edisto has also
agreed not to solicit or encourage any offer from any party concerning the
possible disposition of all or any substantial portion of Edisto's or Convest's
business assets or a controlling equity interest in Convest.
Concurrently with the execution of the Merger Agreement, Forcenergy and
certain affiliated stockholders, each of the directors and executive officers of
Edisto and Convest (each, a "Supporting Stockholder") also entered into
agreements pursuant to which each Supporting Stockholder has agreed that such
Supporting Stockholder will vote their respective shares of Edisto Common Stock
and Convest Common Stock in favor of the Merger Agreement. The Supporting
Stockholders own an aggregate of 20,214 shares of Edisto Common Stock and 40,284
shares of Convest Common Stock.
59
<PAGE> 65
PRO FORMA FINANCIAL INFORMATION
The unaudited pro forma consolidated statement of operations for the six
months ended June 30, 1997 gives effect to the Edisto and Convest Mergers, the
acquisition of Great Western Resources, Inc. ("Great Western") and the
acquisition of Cook Inlet properties from Stewart Petroleum Company (the "1997
Acquisitions"), as if such transactions had been consummated on January 1, 1996.
The effective dates of the Great Western acquisition and the acquisition of Cook
Inlet properties from Stewart Petroleum Company are January 21, 1997, and June
4, 1997, respectively. The unaudited pro forma consolidated statement of
operations for the year ended December 31, 1996 gives effect to the Marathon
Acquisition (effective December 30, 1996), the Amerada Hess Acquisition
(effective June 28, 1996) (the 1996 "Acquisitions"), the conversion during 1996
of the 7% Exchangeable Subordinated Notes (the "Exchangeable Notes") into
2,343,047 shares of Forcenergy Common Stock, the 1996 exercise of 214,866
options to purchase Forcenergy Common Stock by certain holders of the
Exchangeable Notes, the sale of 1,635,408 shares of Forcenergy Common Stock in
1996 (the "Common Stock Offering"), the 1996 issuance of $175,000,000 of 9 1/2%
Senior Subordinated Notes (the "1996 Notes Offering") (collectively, the "1996
Transactions"), the 1997 issuance of the $200,000,000 of 8 1/2% Senior
Subordinated Notes (the "1997 Notes Offering"), the Edisto and Convest Mergers
and the 1997 Acquisitions as if such transactions had occurred on January 1,
1996. The results of operations of the 1996 Acquisitions and the Stewart
Acquisition include only the historical oil revenues and direct operating
expenses for periods presented which does not constitute a complete statement of
operations. The results of operations of Edisto and Great Western excludes the
results of discontinued operations for the year ended December 31, 1996. The
unaudited pro forma consolidated balance sheet as of June 30, 1997 gives effect
to the issuance of 3,076,900 shares of Forcenergy's Common Stock and $72 million
in cash to purchase all of the outstanding stock of Edisto and Convest as if
such transactions had been consummated on June 30, 1997. The unaudited pro forma
information has been prepared based on estimates and assumptions deemed by
Forcenergy to be appropriate and does not purport to be indicative of the
financial position or results of operations which would actually have been
obtained if the 1996 Acquisitions, the 1996 Transactions, the 1997 Notes
Offering, the Edisto and Convest Mergers and the 1997 Acquisitions had occurred
as presented in such statements or the results which may be obtained in the
future. Future results may vary significantly from the results reflected in such
statements due to price changes, production declines, supply and demand,
acquisitions and other factors.
The pro forma financial information presented does not incorporate
anticipated reductions in the general and administrative expenses (the "G&A")
associated with Edisto, Convest and Great Western. In the opinion of its
management, Forcenergy will be able to eliminate substantially all of the G&A of
Edisto and Convest, and the majority of the G&A associated with Great Western.
Forcenergy has realized a significant reduction in the G&A associated with Great
Western subsequent to the acquisition, and such reductions are reflected in
Forcenergy's historical consolidated results of operations for the six months
ended June 30, 1997. Forcenergy anticipates eliminating substantially all of the
G&A associated with Edisto, Convest and Great Western in the future.
The pro forma financial information should be read in conjunction with the
historical financial statements of Forcenergy and the audited financial
information on the Amerada Hess Acquisition and the Marathon Acquisition, which
are incorporated herein by reference and the historical financial statements of
Edisto and Convest which are presented elsewhere within this Joint Proxy
Statement/Prospectus.
60
<PAGE> 66
FORCENERGY INC
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
FORCENERGY GREAT PRO FORMA
HISTORICAL EDISTO(A) CONVEST(B) WESTERN(C) STEWART(D) ADJUSTMENTS PRO FORMA
---------- --------- ---------- ---------- ---------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Oil and gas sales.......... $134,131 $ 10 $25,907 $2,105 $4,030 $ -- $166,183
Other...................... 1,015 -- -- 13 -- 1,028
-------- ------- ------- ------ ------ ------- --------
Total revenues....... 135,146 10 25,907 2,118 4,030 -- 167,211
Operating Expenses:
Lease operating............ 35,366 67 5,974 578 808 -- 42,793
Depletion, depreciation and
amortization............. 53,356 -- 7,305 498 10,951(E) 64,307
(7,803)(E)
Abandonment and exploration
costs.................... -- 104 1,147 (1,251)(F) --
Production taxes........... 2,231 -- 533 10 -- 2,774
General and administrative,
net...................... 7,141 980 2,188 745 --(G) 11,054
-------- ------- ------- ------ ------ ------- --------
Total operating
expenses........... 98,094 1,151 17,147 1,821 818 1,897 120,928
-------- ------- ------- ------ ------ ------- --------
Income from operations....... 37,052 (1,141) 8,760 297 3,212 (1,897) 46,283
Interest and other income.... 1,748 1,814 287 66 -- 3,915
Interest expense, net of
amounts capitalized........ (14,760) -- (72) (196) 1,764(H) (13,264)
Minority interest............ -- -- -- (I) --
-------- ------- ------- ------ ------ ------- --------
Income before income taxes... 24,040 673 8,975 167 3,212 (133) 36,934
Income tax provision......... 8,920 100 156 4,970(J) 14,146
-------- ------- ------- ------ ------ ------- --------
Net income................... $ 15,120 $ 573 $ 8,819 $ 167 $3,212 $(5,103) $ 22,788
======== ======= ======= ====== ====== ======= ========
Net income per share......... $ 0.63 $ 0.84
======== ========
Weighted average shares
outstanding................ 23,963 27,092
</TABLE>
61
<PAGE> 67
FORCENERGY INC
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
FORCENERGY AMERADA
HISTORICAL(K) HESS(L) MARATHON(M) EDISTO(N) CONVEST(O)
------------- ------- ----------- --------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues:
Oil and gas
sales............ $138,698 $9,263 $49,619 $ 83 $47,139
Other.............. 683 -- -- -- --
-------- ------ ------- ------- -------
Total
revenues... 139,381 9,263 49,619 83 47,139
-------- ------ ------- ------- -------
Operating Expenses:
Lease operating.... 38,786 2,317 19,338 209 13,508
Depletion,
depreciation and
amortization..... 58,464 -- -- 68 16,473
Abandonment and
exploration
costs............ -- -- -- 246 1,775
Impairments of oil
and gas
properties....... -- -- -- -- 2,633
Production taxes... 3,454 -- 297 -- 1,272
General and
administrative,
net.............. 7,971 -- -- 1,584 4,792
-------- ------ ------- ------- -------
Total
operating
expenses... 108,675 2,317 19,635 2,107 40,453
-------- ------ ------- ------- -------
Income (loss) from
operations......... 30,706 6,946 29,984 (2,024) 6,686
Interest and other
income............. 650 -- -- 2,529 2,606
Interest expense,
net................ (13,367) -- -- (3) (1,065)
Minority interest.... -- -- -- -- --
-------- ------ ------- ------- -------
Income before income
taxes.............. 17,989 6,946 29,984 502 8,227
Income tax
provision.......... 6,711 -- -- 230 157
-------- ------ ------- ------- -------
Net income........... $ 11,278 $6,946 $29,984 $ 272 $ 8,070
======== ====== ======= ======= =======
Net income per
share.............. $ 0.57
========
Weighted average
shares
outstanding........ 19,727
<CAPTION>
GREAT PRO FORMA
WESTERN(P) STEWART(Q) ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues:
Oil and gas
sales............ $27,409 $14,928 $ -- $287,139
Other.............. -- -- -- 683
------- ------- -------- --------
Total
revenues... 27,409 14,928 -- 287,822
------- ------- -------- --------
Operating Expenses:
Lease operating.... 4,599 4,014 -- 82,771
Depletion,
depreciation and
amortization..... 8,882 -- 51,280(E) 109,744
(25,423)(E)
Abandonment and
exploration
costs............ 3,081 (5,102)(F) --
Impairments of oil
and gas
properties....... (2,633)(F) --
Production taxes... 42 -- 5,065
General and
administrative,
net.............. 3,306 --(G) 17,653
------- ------- -------- --------
Total
operating
expenses... 19,868 4,056 18,122 215,233
------- ------- -------- --------
Income (loss) from
operations......... 7,541 10,872 (18,122) 72,589
Interest and other
income............. 740 (1,586)(F) 4,389
(550)(R)
Interest expense,
net................ (1,923) (4,915)(S) (21,273)
Minority interest.... --(I) --
------- ------- -------- --------
Income before income
taxes.............. 6,358 10,872 (25,173) 55,705
Income tax
provision.......... 77 -- 13,603(J) 20,778
------- ------- -------- --------
Net income........... $ 6,281 $10,872 $(38,776) $ 34,927
======= ======= ======== ========
Net income per
share.............. $ 1.29
========
Weighted average
shares
outstanding........ 27,048
</TABLE>
62
<PAGE> 68
FORCENERGY INC
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1997
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
ADJUSTMENTS
FORCENERGY ----------------------------------
HISTORICAL EDISTO(T) CONVEST(U) EDISTO CONVEST FORCENERGY PRO FORMA
---------- --------- ---------- --------- --------- ---------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
CURRENT ASSETS
Cash................................... $ 3,091 $ 69,870 $ 7,036 (1,500)(W) (2,300)(W) $(72,000)(V) $ 4,197
Restricted cash........................ -- -- 332 332
Margin deposits........................ -- -- 56 56
Accounts receivable, net............... 28,497 1,715 7,129 (372)(V) (898)(V) 36,071
Other current assets................... 23,179 3 762 23,944
-------- -------- -------- --------- --------- -------- --------
Total current assets............. 54,767 71,588 15,315 (1,872) (3,198) (72,000) 64,600
INVESTMENTS IN SURETY BONDS, AT COST..... 4,037 -- -- 4,037
PROPERTY, PLANT & EQUIPMENT, AT COST
(full cost method) net of accumulated
depletion, depreciation and
amortization........................... 681,517 73 54,582 52,296(V) 788,468
INVESTMENT IN SUBSIDIARY -- CONVEST...... 38,414 (38,414)(V)
OTHER ASSETS............................. 18,221 27 2,618 (1,503)(V) 23,102
(550)(V)
4,289(V)
-------- -------- -------- --------- --------- -------- --------
$758,542 $110,102 $ 72,515 $ (40,286) $ 51,334 $(72,000) $880,207
======== ======== ======== ========= ========= ======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable....................... $ 16,254 $ 616 $ 7,466 $ $ $ $ 24,336
Other accrued liabilities.............. 71,570 3,380 6,601 6,704 84,418
(1,871)(V)
(1,966)(V)
-------- -------- -------- --------- --------- -------- --------
Total current liabilities........ 87,824 3,996 14,067 2,867 108,754
LONG TERM DEBT........................... 375,100 -- 3 72,000(V) 375,103
(72,000)(V)
DEFERRED REVENUE......................... -- -- 530 (530)(V) --
MINORITY INTEREST........................ -- -- -- --
Other noncurrent liabilities............. 51 5,505 (7,450)(V) 2,395
4,289(V)
DEFERRED INCOME TAXES.................... 29,713 -- -- 29,713
STOCKHOLDER'S EQUITY
Preferred stock, $.01 par value;
5,000,000 shares authorized; none
issued or outstanding................
Common stock, $.01 par value;
50,000,000 authorized; 22,643,396
issued and outstanding at March 31,
1997................................. 227 143 105 (143)(V) (105)(V) 31(V) 258
Capital in excess of par value......... 247,880 72,700 48,301 (72,700)(V) (48,301)(V) 98,306(V) 346,186
Retained earnings...................... 17,798 33,611 4,004 (33,611)(V) (4,004)(V) 17,798
Foreign currency translation........... -- (37) -- 37(V) --
Treasury stock, at cost, 52,214
shares............................... -- (362) -- 362(V) --
-------- -------- -------- --------- --------- -------- --------
Total stockholder's equity....... 265,905 106,055 52,410 (106,055) (52,410) 98,337 364,242
-------- -------- -------- --------- --------- -------- --------
$758,542 $110,102 $ 72,515 $(106,055) $ (53,234) $ 98,337 $880,207
======== ======== ======== ========= ========= ======== ========
</TABLE>
63
<PAGE> 69
ADJUSTMENTS
(A) This column reflects Edisto unaudited historical results of operations for
the six months ended June 30, 1997 which excludes the results of operations
of Convest.
(B) This columns reflects Convest unaudited historical results of operations
for the six months ended June 30, 1997.
(C) This column reflects Great Western unaudited historical results of
operations for the twenty-one days ended January 21, 1997, exclusive of
approximately $1.6 million in severance payments.
(D) This column reflects the unaudited historical oil revenues and direct
operating expenses for the properties acquired in the Stewart Acquisition
from the period January 1, 1997 to June 4, 1997.
(E) Adjustment to depletion, depreciation and amortization of oil and gas
properties giving consideration to the transactions reflected herein.
(F) Adjustments to convert Convest and Great Western from the successful
efforts method of accounting to the full cost method of accounting utilized
by Forcenergy.
(G) Though it is inappropriate to reflect an increase in the results of
operations for anticipated reductions in general and administrative costs
subsequent to acquisition, in the opinion of management, the Company will
eliminate substantially all of the general and administrative expenses of
Edisto and a majority of those of Great Western.
(H) Net decrease in interest expense assuming a weighted average interest rate
of 8.97% and average actual debt outstanding for the period adjusted for
capitalized interest.
(I) The adjustment to eliminate the minority interest in Convest acquired
pursuant to the Edisto and Convest Mergers is offset against the
Edisto-Convest consolidation entry to recognize the minority interest of
approximately $2.6 million.
(J) Adjustment to income tax expense reflecting the results of transactions
herein using Forcenergy's historical combined federal and state statutory
rate of 38.3% and 37.3% for the periods ended June 30, 1997 and December
31, 1996, respectively.
(K) Forcenergy Historical Results include the historical oil and gas revenues
and direct operating expenses for the Amerada Hess Acquisition from closing
date June 28, 1996 to December 31, 1996 and Marathon Acquisition from
December 30, 1996 to December 31, 1996.
(L) This column includes the historical oil revenues and direct operating
expenses for the Amerada Hess Acquisition from January 1, 1996 to June 27,
1996.
(M) This column indicates the historical oil revenues and direct operating
expenses for the Marathon Acquisition from January 1, 1996 to December 29,
1996.
(N) This column reflects Edisto historical results of operations for the year
ended December 31, 1996, excluding the effects of discontinued operations
and the historical results of operations of Convest.
(O) This column reflects Convest historical results of operations for the year
ended December 31, 1996.
(P) This column reflects Great Western's unaudited historical results of
operations for the year ended December 31, 1996, excluding the effect of
discontinued operations.
(Q) This column reflects the unaudited historical oil revenues and direct
operating expenses for the properties acquired in the Stewart Acquisition
for the year ended December 31, 1996.
(R) Adjustment to eliminate the sale of assets from Edisto to Convest.
(S) Net increase in interest expense assuming the following transactions
occurred on January 1, 1996: (i) the 1996 conversion of the Exchangeable
Notes; (ii) the 1996 Common Stock Offering; (iii) the 1996 Notes Offering;
(iv) the 1997 Notes Offering; (v) the Edisto and Convest Mergers; and (vi)
the
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<PAGE> 70
1997 Acquisitions; and assuming a weighted average interest rate of 8.97% and
average actual debt outstanding for the period (excluding the Exchangeable
Notes) adjusted for 1996 Acquisitions costs, debt issuance cost and capitalized
interest.
(T) This column reflects Edisto's unaudited historical financial position as of
June 30, 1997 which excludes the financial position of Convest.
(U) This column reflects Convest's unaudited historical financial position as
of June 30, 1997.
(V) Purchase accounting adjustments and consolidating entries to reflect the
Edisto and Convest Mergers. The allocation of the purchase price to the
various summarized components of assets and liabilities of Edisto and
Convest are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Current assets.............................................. $ 81,833
Property plant & equipment.................................. 106,951
Noncurrent Assets........................................... 4,881
Current liabilities......................................... (20,930)
Noncurrent liabilities...................................... (2,398)
--------
Purchase Price.............................................. $170,337
========
</TABLE>
(W) Adjustment to redeem all of the outstanding stock options or warrants of
Edisto and Convest. The cost of such redemptions are borne by Edisto and
Convest and cannot exceed $1.5 million and $2.3 million respectively.
65
<PAGE> 71
INFORMATION REGARDING FORCENERGY
OVERVIEW
Forcenergy, formerly Forcenergy Gas Exploration, Inc., is an independent
oil and gas company engaged in the exploration, acquisition, development,
exploitation and production of oil and natural gas. Forcenergy, and its
predecessors, have been engaged in the oil and gas exploration and production
business since 1982, the year in which it was founded by the President and Chief
Executive Officer, Stig Wennerstrom.
On August 2, 1995, Forcenergy completed an initial public offering of
6,210,000 shares of common stock of Forcenergy, at $10.00 per share, resulting
in net proceeds of $55.7 million (the "1995 Offering").
Forcenergy has experienced significant growth in the last six years,
primarily through the exploitation, enhancement and development of acquired
producing properties in the Gulf of Mexico and the 1996 acquisition of producing
properties in the Cook Inlet, Alaska. At December 31, 1996, Forcenergy had net
proved reserves of approximately 585 Bcfe, 58% of which were located in the Gulf
of Mexico and 27% of which were located in Alaska. Approximately 56% of
Forcenergy's net proved reserves on such date were oil and approximately 78% of
proved reserves were classified as proved developed. Forcenergy currently
operates approximately 75% of its Gulf of Mexico production. Forcenergy's
primary focus is its Gulf of Mexico and Alaska activities, however, Forcenergy
has also acquired interests in certain high-potential undeveloped international
leasehold acreage, primarily in Gabon, Africa and Australia.
STRATEGY
Gulf of Mexico. Forcenergy's business strategy is to increase reserves and
cash flows primarily through the exploration, exploitation and development of
its producing properties while also acquiring additional properties in the Gulf
of Mexico. Forcenergy believes it has assembled at least a three year inventory
of development, exploitation and exploratory drilling opportunities in the Gulf
of Mexico on acreage currently held by production. Most of the prospects
comprising this inventory are located in fields which have prolific production
histories and which Forcenergy believes, based on the past success of Forcenergy
and other industry participants in applying 3D technology to mature producing
properties, will yield additional reserves through the application of modern
exploration and development technologies. Forcenergy believes that its high
quality asset base positions it for future growth through a continuing program
of further development through selective exploitation and exploratory drilling
and through the enhancement of production through workovers and recompletions.
Forcenergy emphasizes the use of 3-D seismic and computer-aided exploration
technology together with geologic and engineering studies of its properties to
evaluate and prioritize drilling prospects. Focusing drilling activities on
producing properties in a relatively concentrated area in the Gulf of Mexico
permits Forcenergy to utilize its base of geological, engineering and production
experience in the region to maximize its drilling success and to minimize
finding and development costs. Furthermore, Forcenergy's concentration of
drilling activities on its producing properties allows the utilization of
existing infrastructure which greatly reduces incremental lease operating
expenses and capital costs associated with new production facilities and
minimizes timing delays in commencing production. Forcenergy plans to continue
to pursue acquisitions of working interests in producing properties that offer
further development potential and provide operating synergies with existing
properties.
Forcenergy prefers to operate its Gulf of Mexico properties because
functioning in that capacity positions it to more effectively manage production
performance and operating expenses and allows it to control the timing and
amount of capital expenditures. Forcenergy operates 91 structures and 177 wells
in the Gulf of Mexico, and believes that the operating expertise and experience
of its personnel have been instrumental in its ability to significantly enhance
and improve production rates and cash flows. Of particular importance, a
significant portion of the drilling prospects Forcenergy expects to pursue
during the next three to five years are accessible from existing production
facilities operated by Forcenergy.
Cook Inlet, Alaska. Forcenergy's business strategy in the Cook Inlet area
is to increase production and cash flow through the exploitation of existing
producing properties as well as conducting selective exploration activities.
Forcenergy believes that it has assembled a high quality producing asset base
with exploitation potential as well as exploratory lease positions that will
give Forcenergy an opportunity to add significant new
66
<PAGE> 72
reserves through drilling. Since its discovery, oil and gas activities in the
Cook Inlet area have been dominated by major oil companies. Forcenergy believes
that it will be able to economically exploit opportunities previously not
pursued by the major oil companies by utilizing proprietary 3-D seismic data,
smaller, automated offshore production facilities and other methods that have
proven successful in Forcenergy's operations in the Gulf of Mexico.
TECHNOLOGY
Forcenergy utilizes advanced technology in its exploration and development
activities in order to reduce drilling risks and finding costs and to more
effectively prioritize drilling prospects based on return potential. Forcenergy
currently has acquired 825 square miles of 3-D seismic surveys on 64 of its
offshore Gulf of Mexico lease blocks and 635 square miles on other Gulf of
Mexico blocks in which Forcenergy currently does not own an interest. Forcenergy
also owns approximately 64,500 linear miles of high quality 2-D seismic data on
Gulf of Mexico blocks. The ability to obtain the 3-D seismic data for offshore
properties at reasonable costs has enabled Forcenergy to identify multiple
development and exploratory prospects in mature producing fields which were not
identified through earlier technologies. Forcenergy currently employs 18
geologists/geophysicists experienced in interpreting 3-D data and has invested
in 23 Landmark geophysical workstations for that purpose.
RECENT DEVELOPMENTS
From January 1996 to June 1997, Forcenergy has spent an aggregate of
approximately $234.4 million on several acquisitions including, (1) Marathon Oil
Company's interest in certain producing crude oil properties in the Cook Inlet
area and Prudhoe Bay Unit, Alaska, (the "Marathon Acquisition") and a 30%
interest in the Cook Inlet Pipeline Company, (2) Great Western Resources, Inc.,
an independent oil and gas company ("Great Western Acquisition"), (3) interests
in certain producing crude oil properties in the West McArthur River Field,
located in Cook Inlet, Alaska from Stewart Petroleum Company (the "Stewart
Acquisition") and (4) various working interests in other oil and gas properties
in the Gulf of Mexico and the Permian Basin.
The Marathon Acquisition. In December 1996, Forcenergy acquired the 48%
average working interest of Marathon Oil Company ("Marathon") in the McArthur
River Field (Trading Bay Unit) and Marathon's 50% interest in the Trading Bay
Field, both in the Cook Inlet, and Marathon's 0.05% working interest in the
Prudhoe Bay Unit for $107.8 million. In January 1997, Forcenergy acquired
Marathon's interest in the Cook Inlet Pipeline Company for $7.4 million in cash
and the guarantee of $6.7 million in Cook Inlet Pipeline Company debt. Net
production from the interests acquired is currently approximately 7,000 Bbls of
oil per day ("BOPD"). Net proved reserves associated with the Trading Bay Unit,
Trading Bay Field and Prudhoe Bay Unit totaled approximately 25.9 MMbbls of oil
as of December 31, 1996.
The Unocal Alliance. In December 1996, Forcenergy entered into an alliance
with Union Oil Company of California ("Unocal"), operator of Forcenergy's
properties in the Cook Inlet, to jointly pursue lease sale activities and to
further develop Unocal's existing Cook Inlet properties in Alaska. The agreement
requires Forcenergy to expend on behalf of the alliance up to $30 million within
the next five years on lease acquisition and development and exploratory
drilling on prospects generated as a result of this alliance. It also provides
Forcenergy access to Unocal's geologic and geophysical data base in the Cook
Inlet, including approximately 37,000 linear miles of 2-D seismic data and 6,000
square miles of 3-D seismic data. Forcenergy and Unocal will share equally the
net oil and gas proceeds attributable to the working interest. The agreement
also provides that Forcenergy and Unocal shall each contribute technical staff
to the alliance in a joint effort to identify development prospects in and
around Unocal's existing Cook Inlet properties as well as exploratory
opportunities in the area. Forcenergy has identified a number of prospects that
will be further evaluated for drilling potential. During 1997, Forcenergy plans
to spend $15.0 million on several development and exploitation wells and to
undertake a 3-D seismic survey over a Cook Inlet prospect. To date during 1997,
Forcenergy has expended approximately $2.5 million for the acquisition of
seismic data.
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<PAGE> 73
As part of its alliance with Unocal, in December 1996, Forcenergy acquired
a 50% interest in 17 State of Alaska lease tracts. Forcenergy's net expenditure
in the lease sale was approximately $1.7 million.
Great Western Acquisition. In January 1997, Forcenergy acquired all of the
outstanding stock of Great Western for approximately $48.3 million. Great
Western had oil and gas operations located primarily in the onshore Gulf Coast
regions of Louisiana and Texas and offshore Gulf of Mexico. Great Western's
highest value asset was South Marsh Island 18, which is strategically located
adjacent to Forcenergy's recent SMI 11 #54 discovery. Great Western also had a
20% interest in an exploration concession in Peru. As of September 30, 1996,
Great Western had total proved reserves of approximately 33.2 Bcfe of natural
gas. Great Western's current net daily production is approximately 1,000 Bbls of
oil and 12,000 Mcf of natural gas.
Stewart Acquisition. In June 1997, Forcenergy acquired a 97.75% working
interest in the West McArthur River Field, located in Cook Inlet, Alaska from
Stewart Petroleum Company for $18.7 million and assumed operations of the field.
Net production is currently approximately 1100 Bbls of oil per day. Net proved
reserves approximated 2.6 MMbbl at June 5, 1997.
Other Working Interest Acquisitions. In June 1996, Forcenergy acquired
working interests in eleven Gulf of Mexico producing fields from Amerada Hess
Corporation (the "Amerada Hess Acquisition") for a cash consideration of $6.9
million. In August 1996, Forcenergy acquired an additional working interest in
one of these fields, Mustang Island 742/754, for approximately $4.0 million,
increasing its total working interest in this field to 100%. In December 1996,
Forcenergy acquired interests in eight fields in the Gulf of Mexico in three
separate transactions for an aggregate purchase price of $23.5 million. The
first transaction involved the acquisition of a 33% working interest position in
Mustang Island Block 746, bringing Forcenergy's ownership in the block to 100%.
In the second transaction Forcenergy acquired a 33% working interest position in
the South Marsh Island Block 136/137 field, also bringing Forcenergy's ownership
in the field to 100%. In the third transaction, Forcenergy acquired an average
20% working interest in seven fields in the Gulf of Mexico. Estimated net proven
reserves associated with these acquisitions include approximately 862 Mbbls of
oil and 21.7 Bcfe of natural gas. The interests acquired were producing
approximately 500 BOPD and 12,000 Mcf of natural gas per day ("MCFPD"), net to
Forcenergy's interest at the end of 1996. In February 1997, Forcenergy acquired
an average 75% non-operated working interest in producing fields in the Permian
Basin for an aggregate purchase price of $14.5 million. Estimated proven
reserves associated with the properties totaled approximately 3.4 MMbbls of oil
and 7.2 Bcf of natural gas as of the acquisition date. Current average net daily
production from the properties is approximately 300 Bbls of oil and 700 Mcf of
natural gas.
During 1996, Forcenergy also acquired interests in certain undeveloped
leasehold acreage or concessions in international areas primarily offshore
Australia and Gabon, Africa. Exploratory activities in these areas have begun in
1997.
68
<PAGE> 74
GULF OF MEXICO PROPERTIES
Forcenergy currently holds working interests in 121 Gulf of Mexico and Gulf
Coast lease blocks, including a 100% working interest in 43 of these blocks and
50% or greater working interest in 18 other blocks, and operates 53 of the
producing blocks representing 75% of its current Gulf of Mexico/Gulf Coast
production. On a pro forma basis, reflecting the Edisto and Convest Mergers,
interests held in the Gulf of Mexico/Gulf Coast area will be increased to 164
lease blocks, including 64 blocks with greater than 50% working interests. The
following table lists the average working interest, net proved reserves and the
operator for Forcenergy's 13 largest offshore Gulf of Mexico properties,
comprising approximately 82% of Forcenergy's net proved reserves in the Gulf of
Mexico and 47% of Forcenergy's total net proved reserves, as of December 31,
1996:
<TABLE>
<CAPTION>
ESTIMATED NET
PROVED RESERVES AT
DECEMBER 31, 1996
-----------------------------
AVERAGE NATURAL
WORKING OIL GAS TOTAL
FIELD INTEREST (MBBLS) (MMCF) (MMCFE) OPERATOR
----- -------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
South Marsh Island
6/10/11/18/19/285
Complex:.................... 100% 5,352 30,471 62,583 Forcenergy
South Marsh Island Block 106
North and Block 106
South/Block 115............. 100% 3,519 12,156 33,270 Forcenergy
South Marsh Island 137 Field,
Block 136/137............... 100% 886 21,071 26,387 Forcenergy
Ship Shoal 230 Field, Block
219......................... 100% 1,963 5,835 17,613 Forcenergy
West Cameron 205 Field........ 100% 103 13,719 14,337 Forcenergy
High Island A-467 Field....... 100% 93 10,453 11,011 Forcenergy
Ship Shoal 26 Field........... 100% 292 8,392 10,144 Forcenergy
Chandeleur 25 Field........... 100% -- 8,959 8,959 Forcenergy
High Island A-280 Field....... 100% 38 8,979 9,207 Forcenergy
Mustang Island 754............ 100% 20 4,604 4,724 Forcenergy
Vermilion 262 Field........... 88% 873 8,525 13,763 Forcenergy
East Cameron 14 Field......... 50% 358 12,150 14,298 Forcenergy
South Pass 24 Field........... 71% 6,606 10,405 50,041 Third Party
</TABLE>
ALASKA PROPERTIES
Forcenergy currently holds an average 48% working interest in the McArthur
River Field (Trading Bay Unit) and a 50% working interest in the Trading Bay
Field located in the Cook Inlet. These fields had estimated net proved reserves
of 25.9 million barrels of oil and comprised approximately 27% of Forcenergy's
total estimated net proved reserves at December 31, 1996. Forcenergy also
purchased in June 1997 a 97.75% working interest in the West McArthur River
Field located in the Cook Inlet. Forcenergy operates this field which had net
proved reserves of 2.6 MMbbls of oil at June 5, 1997.
1996 AND 1997 OFFSHORE AND GULF COAST DRILLING ACTIVITY
During 1996 and continuing through July 1997, Forcenergy has continued to
focus on increasing reserves and cash flow by targeting development,
exploitation and exploration prospects on recently acquired properties,
developed in most cases through the use of 3-D seismic data. Forcenergy spent
$130.4 million in capital drilling expenditures during 1996, including $4.5
million in capitalized internal costs and $4.4 million on geological and
geophysical costs, including 3-D seismic data. During the seven months ended
July 1997, Forcenergy spent $137.2 million on capital drilling expenditures,
including $6.4 million in capitalized internal costs and $8.0 million on
geological and geophysical costs. In the Gulf of Mexico, Forcenergy successfully
drilled nineteen of nineteen development wells and seven of ten exploratory
wells during 1996. All five development wells drilled and eleven of nineteen
exploratory wells drilled proved successful during the seven
69
<PAGE> 75
months ended July 1997. The following is a brief description of properties where
significant activity occurred during 1996 and through the first seven months of
1997, all of which were operated by Forcenergy except for South Pass 24 field.
The working interest ownership of Forcenergy is noted in parenthesis.
South Marsh Island Block 106 North (SMI 106 N/2) and Block 106 South (SMI
106 S/2) and South Marsh Island 115 (100% working interest). Forcenergy acquired
its working interests in these fields in a series of acquisitions from 1993 to
1995. During 1996, Forcenergy successfully drilled and completed six development
and two exploratory wells in SMI 106 N/2. As of December 31, 1996, these eight
wells were producing at a combined net average rate of 2,581 BOPD and 8,862
MCFPD. During 1997, two development wells were successfully drilled and are
currently producing 152 BOPD and 3,608 MCFPD, net to Forcenergy's interest.
East Cameron 14 Field (50% average working interest). A development well
was completed in the first quarter of 1996. The well averaged 2,667 MCFPD, net
to Forcenergy, increasing total net production in this field to 84 BOPD and
3,317 MCFPD by the end of 1996. Reserves were encountered in seven other zones
in this well. Forcenergy is currently evaluating plans for additional drilling
in the field.
South Pass 24 Field (approximate 71% average working interest). During
1996, five development wells were drilled, all of which were completed. Initial
production tests from the five completed wells totaled 335 BOPD and 238 MCFPD,
net to Forcenergy increasing total net production in this field to 2,623 BOPD
and 3,368 MCFPD by the end of 1996, compared with net production of 891 BOPD and
501 MCFPD at the time of acquisition of the properties. Under Louisiana law, new
wells permitted prior to June 30, 1996, or wells which have been shut in for
more than two years and which are permitted prior to that date, qualify for a
five year exemption from the state severance tax of 12.5% on the value of oil
production sold and $.07 per Mcf on the volume of natural gas sold during the
five years following June 30, 1996. Three development wells are planned for the
remainder of 1997, two of which are currently being drilled.
Ship Shoal 230 Field, Block 219 (100% working interest). One dually
completed well was drilled and completed in April 1996. Production from this
well was averaging 450 BOPD and 618 MCFPD, net to Forcenergy by the end of 1996.
Currently, average net production in this field is 860 BOPD and 2,079 MCFPD.
High Island 467 Field (100% working interest). Forcenergy completed all
three wells of a three-well drilling project during 1996. Two development wells
and one exploratory well were drilled and were producing at a combined average
rate of 153 BOPD and 10,118 MCFPD, net to Forcenergy, as of December 31, 1996.
Total net field production was 116 BOPD and 14,674 MCFPD based on July 1997
production. Forcenergy plans to drill one exploratory well at High Island 467
during 1997. Additionally, Forcenergy drilled an exploratory well in the
adjacent High Island 470 field which is currently producing at an average rate
of 16 BOPD and 5,693 MCFPD, net to Forcenergy. Forcenergy plans to drill one
development well at High Island 470 in 1997.
South Marsh Island 6/10/11/18/19/285 Complex (100% working interest). In
September 1996, Forcenergy completed drilling operations on an exploratory well
which encountered approximately 140 feet of TVD (true vertical depth) pay in
four sands and which added approximately 22.1 BCFE in estimated net proved
reserves. This well was producing at net rates of 647 BOPD and 4,416 MCFPD as of
December 31, 1996. During the fourth quarter of 1996, Forcenergy completed two
development wells and drilled one exploratory dryhole. The two development wells
were producing at a combined net rate of 578 BOPD and 5,699 MCFPD by the end of
1996. These drilling activities brought total net field production to 1,499 BOPD
and 12,542 MCFPD for the field complex, as of December 31, 1996. In 1997,
Forcenergy completed a development well and an exploratory well that added 17.5
BCFE in estimated net proved reserves and are currently producing approximately
837 BOPD and 14,083 MCFPD. Three exploitation/exploratory wells are planned for
the remainder of 1997.
South Timbalier 148 (15.5% working interest). One exploratory well was
completed during 1996. The well was producing 150 BOPD and 3,984 MCFPD, net to
Forcenergy as of December 31, 1996. During 1997, two exploratory wells were
completed and are currently producing 2,547 BOPD and 8,085 MCFPD, net to
70
<PAGE> 76
Forcenergy, prior to pipeline curtailments. Forcenergy plans to drill one
additional exploratory well during the remainder of 1997.
High Island 551 and High Island 552 (100% working interest). During April
1997, two exploratory wells were successfully completed in the High Island 552
field and are currently producing 11,361 MCFPD, net to Forcenergy. Forcenergy
plans to drill two additional exploratory wells in this field during the
remainder of 1997. In 1997, Forcenergy successfully drilled two exploratory
wells in the High Island 551 field. Forcenergy anticipates that production from
these wells will be established in early 1998.
ADDITIONAL FUTURE PROJECTS
In addition to the activity described above, Forcenergy has identified a
substantial inventory of additional exploitation, development, exploratory,
workover and recompletion projects on its existing offshore properties which it
may undertake over the next three to five years. Many of these projects are
currently being reviewed by Forcenergy's geologists and geophysicists utilizing
3-D seismic data acquired in the last three years. No assurance can be given
that any future exploration or development projects will lead to additional
commercially viable reserves.
ONSHORE PROPERTIES
Forcenergy owns working and royalty interests in approximately 2,461
producing oil and gas wells in 224 fields in the Rocky Mountain, Gulf Coast,
Permian Basin and Appalachian regions of the United States. Management believes
that Forcenergy's stable reserve base of long-lived, primarily non-operated,
onshore properties complements the Gulf of Mexico operations by providing an
additional source of cash flow that requires limited management involvement.
Forcenergy's onshore properties accounted for approximately 15% of estimated net
proved reserves at December 31, 1996. Approximately $4.3 million in capital was
spent on onshore properties during 1996, 40% of which was incurred on the
waterflood project in the Howard Glasscock/Snyder field. Capital expenditures on
onshore properties were insignificant during the five months ended May 31, 1997.
The following is a summary of Forcenergy's most significant onshore properties:
Altamont/Bluebell Field. The Altamont/Bluebell Field is located in Duchesne
and Uinta Counties, Utah. Forcenergy owns working interests ranging from less
than 1% to 27.9% (average approximately 7%) in approximately 250 active wells
and has overriding royalty interests in another 190 wells. Forcenergy also owns
an 8.125% working interest in the Altamont natural gas processing plant. In the
month of May 1997, Forcenergy's net production, including gas plant liquids,
averaged 411 BOPD and 1,212 MCFPD. Estimated net proved reserves as of December
31, 1996 were 1,108 Mbbls and 3,189 MMcf.
Whitney Canyon Field. Forcenergy owns working interests ranging from 14.1%
to 18.9% in three wells in this Uinta County, Wyoming field and a 3.02% working
interest in the Whitney Canyon gas processing plant. Forcenergy's share of total
sales from processed gas and condensate and plant liquids currently averages 135
BOPD and 1,090 MCFPD. Net proved reserves as of December 31, 1996 for
Forcenergy's Whitney Canyon wells and share of the gas processing plant were
estimated at 223 Mbbls and 10,913 MMcf. Nine wells were connected during 1996 to
the gas processing plant along a recently installed extension of the gathering
system which currently processes gas from the Yellow Creek field located
approximately 35 miles south of the plant.
Howard Glasscock/Snyder Field. During 1995, Forcenergy acquired an
approximate 50% non-operated working interest position in the Howard
Glasscock/Snyder Field located in Howard County, Texas. During May 1996,
Forcenergy increased its position in the Howard Glasscock/Snyder Field to 75%.
Forcenergy and its partners drilled twenty water injection wells during 1996 and
completed its planned secondary waterflood project in December 1996, with
response anticipated during the second half of 1997. The field is experiencing
an initial response to the waterflood project on several leases. During May
1997, production increased by 8% over the prior month. This response is expected
to increase over the next three to four years. As of December 31, 1996,
Forcenergy's net proved reserves were estimated at 2,170 Mbbls. Current daily
production from primary recovery methods is 274 BOPD, net to Forcenergy.
71
<PAGE> 77
ACREAGE DATA
The following table sets forth the approximate developed and undeveloped
acreage in which Forcenergy held a leasehold, mineral or other interest at
December 31, 1996. Undeveloped acreage includes leased acres on which wells have
not been drilled or completed to a point that would permit the production of
commercial quantities of oil and gas, regardless of whether or not such acreage
contains proved reserves.
<TABLE>
<CAPTION>
DEVELOPED ACRES UNDEVELOPED ACRES
-------------------- ----------------------
GROSS NET GROSS NET
--------- ------- --------- ---------
<S> <C> <C> <C> <C>
Offshore -- Gulf of Mexico............. 364,660 172,354 138,062 87,592
Offshore -- Coastal Alaska............. 113,348 76,658 43,907 22,772
Onshore -- United States............... 717,189 78,120 348,980 90,702
Offshore -- Australia.................. -- -- 2,786,623 696,656
Offshore -- Gabon, Africa.............. -- -- 682,428 102,364
Onshore -- Other international......... -- -- 649,393 266,100
--------- ------- --------- ---------
Total........................ 1,195,197 327,132 4,649,393 1,266,186
========= ======= ========= =========
</TABLE>
OIL AND GAS RESERVES
The following table summarizes the estimates of Forcenergy's historical net
proved reserves as of January 1, 1997 and the present values attributable to
those reserves on such date using constant prices and operating costs as of the
valuation date, discounted at a rate of 10% per annum, in accordance with
Commission guidelines. The reserve data and present values as of January 1, 1997
for the onshore properties, the Alaska properties and a small portion of the
offshore properties have been estimated by Netherland, Sewell & Associates,
Inc., independent petroleum engineering consultants. The reserve data and
present values as of January 1, 1997 for the majority of the offshore properties
have been estimated by Collarini Engineering Inc., independent petroleum
engineering consultants. (See Note 15 to Forcenergy's Financial Statements)
<TABLE>
<CAPTION>
AS OF JANUARY 1, 1997
---------------------
<S> <C>
Net Proved Reserves:
Liquids (Mbbls)(1).......................................... 54,659
Natural gas (Mmcf).......................................... 256,913
Total (MMcfe)..................................... 584,867
Present value of future net revenues before income taxes
(thousands)............................................... $1,055,911
Standardized measure of discounted future net cash flows
(thousands)(2)............................................ 802,145
</TABLE>
- ---------------
(1) Includes crude oil, condensate and natural gas liquids.
(2) The standardized measure of discounted future net cash flows represents the
present value of future net revenues after income taxes discounted at 10% in
accordance with Statement of Financial Accounting Standards No. 69.
Since January 1, 1996, Forcenergy has not filed any estimates of proved oil
and gas reserves with any federal authority or agency other than with the
Commission.
72
<PAGE> 78
DRILLING ACTIVITY
The following table sets forth the drilling activity of Forcenergy on its
properties for the twelve month periods ended December 31, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1996 1995 1994
------------ ----------- -----------
GROSS NET GROSS NET GROSS NET
----- ---- ----- --- ----- ---
<S> <C> <C> <C> <C> <C> <C>
OFFSHORE DRILLING ACTIVITY:
Development:
Oil................................................... 11 10.4 8 5.9 1 1.0
Gas................................................... 8 5.7 2 1.7 5 3.7
Non productive........................................ 1 .2 -- -- 1 1.0
-- ---- -- --- -- ---
Total......................................... 20 16.3 10 7.6 7 5.7
== ==== == === == ===
Exploratory:
Oil................................................... 5 4.4 5 5.0 -- --
Gas................................................... 2 1.3 2 1.5 1 0.3
Non productive........................................ 4 1.4 2 2.0 -- --
-- ---- -- --- -- ---
Total......................................... 11 7.1 9 8.5 1 0.3
== ==== == === == ===
ONSHORE DRILLING ACTIVITY:
Development:
Oil................................................... 4 2.0 2 0.1 9 0.5
Gas................................................... -- -- -- -- 4 1.7
Non productive........................................ -- -- -- -- -- --
-- ---- -- --- -- ---
Total......................................... 4 2.0 2 0.1 13 2.2
== ==== == === == ===
Exploratory:
Oil................................................... -- -- -- -- -- --
Gas................................................... -- -- 1 0.5 4 0.2
Non productive........................................ 1 .2 3 2.0 4 2.8
-- ---- -- --- -- ---
Total......................................... 1 .2 4 2.5 8 3.0
== ==== == === == ===
</TABLE>
PRODUCTIVE WELLS
The following table sets forth the number of productive oil and gas wells
in which Forcenergy owned a working interest at December 31, 1996:
<TABLE>
<CAPTION>
TOTAL PRODUCTIVE WELLS GROSS NET
---------------------- ----- ---
<S> <C> <C>
Oil......................................................... 1,540 543
Gas......................................................... 512 250
----- ---
Total............................................. 2,052 793
===== ===
</TABLE>
Productive wells consist of producing wells and wells capable of
production, including gas wells awaiting pipeline connections. Forcenergy has
only 16 wells that are completed in more than one producing horizon; those wells
have been counted as single wells.
73
<PAGE> 79
SELECTED FINANCIAL INFORMATION
The following table sets forth selected historical financial data for
Forcenergy as of and for each of the periods indicated. The following data
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Forcenergy's financial
statements included elsewhere in this prospectus or incorporated by reference.
No cash dividends have been declared for any of the periods presented.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, FOR THE YEARS ENDED DECEMBER 31,
------------------ -------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
-------- ------- -------- -------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
REVENUES:
Oil and gas sales(1)................. $134,131 $57,477 $138,698 $ 72,147 $58,354 $49,652 $24,937
Other(1)............................. 1,015 276 683 494 388 441 475
-------- ------- -------- -------- ------- ------- -------
135,146 57,753 139,381 72,641 58,742 50,093 25,412
EXPENSES:
Lease operating 35,366 16,819 38,786 24,507 23,744 16,632 7,769
Depletion, depreciation and
amortization...................... 53,356 24,162 58,464 31,295 24,572 19,889 8,014
Production taxes..................... 2,231 1,653 3,454 1,868 1,701 1,560 606
General and administrative........... 7,141 3,575 7,971 5,670 6,463 3,166 2,523
-------- ------- -------- -------- ------- ------- -------
98,094 46,209 108,675 63,340 56,480 41,247 18,192
-------- ------- -------- -------- ------- ------- -------
INCOME FROM OPERATIONS................. 37,052 11,544 30,706 9,301 2,262 8,846 6,500
Interest and other income (loss)....... 1,748 237 650 (561) 789 545 197
Interest expense, net of amounts
capitalized.......................... (14,760) (5,913) (13,367) (11,668) (9,529) (6,192) (2,303)
-------- ------- -------- -------- ------- ------- -------
Income (loss) before income taxes...... 24,040 5,868 17,989 (2,928) (6,478) 3,199 4,394
Income tax provision (benefit)(2)...... 8,920 2,188 6,711 (1,075) (2,403) 2,337 --
Minority interest...................... -- -- -- -- -- 107 132
-------- ------- -------- -------- ------- ------- -------
Net income (loss)(2)................... $ 15,120 $ 3,680 $ 11,278 $ (1,853) $(4,075) $ 755 $ 4,262
======== ======= ======== ======== ======= ======= =======
Net income (loss) per common and common
equivalent share(2).................. $ .63 $ .20 $ .57 $ (.14) $ (.50)
======== ======= ======== ======== =======
UNAUDITED PRO FORMA DATA(2):
Income before income taxes, including
minority interest................. $ 3,092 $ 4,262
Income tax provision................. 1,207 1,639
------- -------
Net income........................... $ 1,885 $ 2,623
======= =======
Net income per common share.......... $ .29 $ .41
======= =======
Weighted average common and common
equivalent shares................. 19,726 12,910 8,188 6,520 6,451
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30 AS OF DECEMBER 31,
------------------- ----------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)........ $(33,057) $(15,097) $ 6,745 $(11,775) $ 5,445 $ 1,865 $ (1,246)
Total assets..................... 758,542 391,674 585,925 335,090 220,287 187,786 127,684
Total liabilities................ 492,637 232,964 336,989 180,129 149,226 144,450 82,432
Long-term debt................... 375,100 175,135 272,932 130,729 131,646 127,234 75,758
Stockholders' equity............. 265,905 158,710 248,936 154,961 71,061 43,336 45,252
</TABLE>
- ---------------
(1) Natural gas liquid revenues for 1992, 1993 and 1994 have been reclassified
from other revenues to oil and gas sales for consistent presentation with
1995 and 1996 revenues.
(2) Prior to September 14, 1993, Forcenergy was exempt from United States
federal and certain state income taxes as a result of its partnership
status. The unaudited pro forma data reflects the income tax expense that
would have been recorded had Forcenergy not been exempt from paying such
income taxes. Net income per share data for 1993 and 1992 is described as
unaudited pro forma because of Forcenergy's former partnership status.
74
<PAGE> 80
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion is intended to assist in an understanding of
Forcenergy's historical financial position and results of operations for each
year of the three-year periods ended December 31, 1996 and the six month periods
ended June 30, 1997 and 1996 and should be read in conjunction with the
financial statements of Forcenergy incorporated by reference herein.
RESULTS OF OPERATIONS
Production Data
The following table sets forth Forcenergy's historical oil and natural gas
production data during the periods indicated (production in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30 YEAR ENDED DECEMBER 31,
----------------- ---------------------------
1997 1996 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Production:
Liquids (Mbbls)(1)..................... 3,965 1,778 4,006 2,343 1,753
Natural gas (MMcf)..................... 26,598 12,772 32,738 21,112 17,121
Total (MBOE)........................... 8,398 3,907 9,462 5,862 4,607
Average realized sales prices:
Oil (per Bbl).......................... $ 18.45 $ 17.01 $ 17.07 $ 17.23 $ 15.69
Plant products (per Bbl)............... 15.17 13.10 14.96 10.00 9.96
Liquids(1)............................. 18.30 16.75 16.93 16.46 15.04
Natural gas (per Mcf).................. 2.31 2.17 2.16 1.59 1.87
Expenses (per MBOE):
Lease operating........................ $ 4.21 $ 4.31 $ 4.08 $ 4.20 $ 5.16
Production taxes....................... .27 .42 .36 .30 .36
Depletion, depreciation and
amortization........................ 6.36 6.18 6.18 5.28 5.28
General and administrative, net........ .85 .92 .84 .96 1.18
</TABLE>
- ---------------
(1) Includes crude oil, condensate and natural gas liquids.
COMPARISON OF THE SIX MONTH PERIODS ENDED JUNE 30, 1997 AND JUNE 30, 1996
Operating and Net Income. Forcenergy's operating income increased to $37.1
million for the six months ended June 30, 1997 compared to $11.5 million for the
same period last year, a 221% improvement. Net income for the first half of 1997
increased 311% to $15.1 million compared to net income of $3.7 million for the
six months ended June 30, 1996. The increase in both operating income and net
income was primarily attributable to higher production levels and, to a lesser
extent, higher average net realized liquids and gas prices.
Production. Net liquid production increased by 123% to 3,965 Mbbls for the
first six months of 1997 compared to the 1,778 Mbbls produced during the same
period last year. Net gas production increased to 26,598 Mmcf in the 1997
period, an 108% improvement over the 12,772 Mmcf reported for the first six
months of 1996. The increase in both liquids and gas production stems primarily
from Forcenergy's successful drilling activities during the latter part of 1996
and 1997, the acquisition of producing properties in the Gulf of Mexico, and the
acquisition of crude oil producing properties in the Cook Inlet area, Alaska.
Revenues. Revenues for the six months ended June 30, 1997 increased 134% to
$135.1 million as compared to $57.8 million for the same period in 1996,
primarily due to higher production volumes and, to a lesser degree, higher
average net realized liquids and gas prices. Average net realized liquids prices
increased by 9% to $18.30 compared to the $16.75 reported for the same period in
1996. Net realized natural gas prices rose to $2.31 for the 1997 period, a 7%
increase over the $2.17 received for the comparable period of 1996.
For the first six months of 1997, average prices received for field
production were $19.16 per barrel and $2.47 per Mcf for oil and natural gas,
respectively. Hedging activities during 1997, specifically a $2.7 million
75
<PAGE> 81
reduction in oil revenue and a $4.2 million reduction in natural gas revenue,
reduced prices to $18.45 per barrel for oil and $2.31 per Mcf for natural gas.
Average prices received for field production were $19.03 per barrel and $2.31
per Mcf for oil and natural gas, respectively, for the six months ended June 30,
1996. Hedging activities during the same period reduced oil and gas prices to
$17.01 per barrel and $2.17 per Mcf, respectively, as a result of a $3.4 million
reduction in oil revenue and a $1.8 million reduction in natural gas revenue.
Forcenergy's hedging activities consist of forward sales contracts and commodity
swaps that guarantee a certain level of cash flow from production.
Lease Operating Expenses. For the six months ended June 30, 1997, lease
operating expenses increased by 110% to $35.4 million as compared to the $16.8
million reported for the comparable period in 1996. The increase primarily
related to properties acquired in the latter half of 1996 and, to a lesser
degree, higher workover costs during the 1997 period. On an equivalent unit of
production basis, lease operating expenses decreased by 2% from $4.31 per BOE
for the first six months of 1996 to $4.21 per BOE for the first six months of
1997. The decrease was mainly attributable to increased production on existing
properties as a result of successful drilling activities and generally higher
operating costs associated with crude oil properties acquired in the Cook Inlet
area, Alaska which was partially offset by higher workover costs during the 1997
period.
Depletion, Depreciation and Amortization. During the six months ended June
30, 1997, depletion, depreciation and amortization increased to $53.4 million a
compared to the $24.2 million reported for the comparable period in 1996. The
increase was attributable to increased production from acquisitions and drilling
activities and, to a lesser extent, an increase in the depletion rate per unit
of production to $6.36 per BOE in the first six months of 1997 from $6.18 per
BOE for the comparable period of 1996.
General and Administrative. General and administrative expense, which is
net of overhead reimbursements and capitalized internal costs, was $7.1 million
in the first six months of 1997 compared with the $3.6 million reported for the
comparable period of 1996. This increase was attributable to the overall growth
of Forcenergy during the latter part of 1996 and the first half of 1997. On a
barrel equivalent basis, general and administrative expenses decreased by 8% to
$.85 per BOE for the first six months of 1997, from $.92 per BOE for the same
period in 1996, as a result of higher production levels in the 1997 period.
Interest and Other Income. Interest and other income increased to $1.7
million in the 1997 period as compared to the $237,000 reported for the
comparable 1996 period. The increase resulted primarily from Forcenergy's equity
in the net income of Cook Inlet Pipeline Company (a 30% owned subsidiary
acquired in January 1997 as part of the acquisition of producing oil properties
in the Cook Inlet area of Alaska) which amounted to $900,000.
Interest Expense. Interest expense, net of amounts capitalized, increased
to $14.8 million in the six months ended June 30, 1997 as compared to the $5.9
million reported for the comparable period of 1996. The increase in interest
expense was primarily due to the increase in long-term debt and, to a lesser
extent, higher interest rates.
Income Tax Provision. Income tax expense increased by $6.7 million to $8.9
million, primarily as a result of the improvement in results of operations for
the first six months of 1997 as compared to the same period in 1996.
Earnings Per Share. Earnings per share improved by 215% to $.63 per common
and common equivalent share for the first six months of 1997 as compared to the
$.20 per common and common equivalent share reported for the comparable 1996
period, calculated on weighted average common and common equivalent shares of
approximately 24.0 million and 18.3 million for 1997 and 1996, respectively.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1996 AND DECEMBER 31, 1995
Operating and Net Income. Operating income increased to $30.7 million for
the year ended December 31, 1996, a 230% improvement compared to the $9.3
million reported for the prior year. Net income for 1996 rose to $11.3 million
compared to a net loss of $1.9 million in 1995. The improvement in both
operating income and net income/loss was attributable primarily to higher
production volumes and higher net realized oil and gas prices.
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<PAGE> 82
Production. Forcenergy's net liquids production rose to 4,006 Mbbls for
the year ended December 31, 1996 from 2,343 Mbbls in 1996, a 71% improvement.
Net gas production increased to 32,738 Mmcf in 1996, a 55% increase over the
21,112 Mmcf produced last year. On an equivalent unit basis, 1996 oil and gas
production increased to 56,774 Mmcfe, 61% more than the 35,170 Mmcfe produced
during 1995. The increase in both oil and gas production was attributable to new
production from recent acquisitions of oil and gas properties as well as from
successful drilling and workover programs begun in late 1995 and continuing
through 1996.
Revenues. Revenues for the 1996 year increased to $139.4 million, a 92%
improvement over the $72.6 million reported last year, primarily because of
higher production volumes and higher net realized prices. Average net realized
liquid prices rose to $16.93 per barrel in 1996, a 3% increase over the $16.46
per barrel received in 1995. Average net realized gas prices rose to $2.16 per
Mcf in 1996, a 36% increase over the $1.59 per Mcf reported in 1995.
Average prices received for field production for the 1996 year were $20.49
per bbl and $2.40 per mcf for oil and natural gas, respectively. After taking
into account the effects of 1996 hedging activities entered into to guarantee a
certain level of cash flow from production, specifically a $12.8 million
reduction in oil revenue and a $7.7 million reduction in gas revenue, net
realized prices were reduced to $17.07 per bbl and $2.16 per mcf for oil and
natural gas, respectively. Average realized prices for 1995 were $17.23 per bbl
of oil and $1.59 per mcf of gas. Effects of hedging activities were not
significant in the year ended December 31, 1995.
Lease Operating Expenses. Lease operating expenses were $38.8 million in
1996 compared to the $24.5 million reported for 1995, an increase primarily due
to new fields acquired during 1995 and 1996 and to workover-type repair and
maintenance activities in 1996. On an equivalent unit of production basis,
expenses decreased to $.68 per Mcfe in 1996 from $.70 per mcf in 1995, a
decrease attributable primarily to increased production levels on existing
properties during the latter part of 1996.
Depletion, Depreciation and Amortization ("DD&A"). DD&A expense increased
to $58.5 million in 1996 from the $31.3 million reported for 1995, an increase
attributable to higher production levels and to an increase in the DD&A rate per
unit of production to $1.03 per Mcfe, compared to $.88 per mcf in 1995.
General and Administrative. General and administrative costs were $8.0
million in 1996 compared with $5.7 million reported in 1995, an increase due to
the overall growth of Forcenergy during the latter half of 1995 and through
1996. On an equivalent Mcf produced basis, general and administrative expenses
decreased to $.14 per Mcfe in 1996 from a rate of $.16 per Mcfe in 1995,
primarily due to the higher production levels in 1996.
Income Tax Provision (Benefit). Income tax expense increased to $6.7
million in 1996, from a benefit of $1.1 million in 1995, due to the improvement
in results of operations compared to 1995.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1995 AND DECEMBER 31, 1994
Operating and Net Income. Operating income increased 304%, to $9.3 million
in 1995 from $2.3 million in 1994. Forcenergy's net loss for 1995 was $1.9
million compared with a net loss of $4.1 million in 1994. These improvements
were attributable to higher oil and gas production and lower per unit lease
operating costs.
Production. Net liquid production increased by 34%, to 2,343 Mbbls in 1995
from 1,753 Mbbls in 1994 and net gas production increased by 23%, to 21.1 Bcf in
1995 from 17.1 Bcf in 1994. Forcenergy's total net equivalent production
increased to 35.2 Bcfe in 1995, a 28% improvement over the 27.6 Bcfe produced in
1994, due primarily to the acquisition of additional offshore properties in late
1994 and in early 1995 and the addition of new production attained from the
successful 1995 drilling program.
Revenues. Total revenues increased 24% to $72.6 million in 1995 compared
with $58.7 million in 1994, primarily because of higher production volumes,
which in turn resulted from acquisitions closed during 1995 and Forcenergy's
successful drilling program. Oil revenues for the year increased by 47%, to
$38.6 million in 1995 from $26.3 million in the prior year. Average net realized
liquid prices of $16.46 per barrel in 1995 were
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<PAGE> 83
9% higher than the $15.04 per barrel received in 1994. Gas revenues rose to
$33.6 million in 1995, 5% more than the $31.9 million in 1994; however, average
net realized gas prices declined to $1.59 per Mcf in 1995, 15% below the $1.87
average per Mcf received in 1994.
Lease Operating Expenses. Lease operating expenses increased by $763,000,
or 3%, in 1995 compared to 1994 because of the addition of new properties;
however, on an Mcfe produced basis, costs declined 19% from $.86 per Mcfe in
1994 to $.70 per Mcfe in 1995. This decline in the per unit cost was
attributable to Forcenergy's success in adding new production through
development of new reserves from existing properties and facilities and through
acquiring new properties that provide operating synergies with existing
properties.
Depletion, Depreciation and Amortization. Total DD&A increased 27% to $31.3
million during 1995 compared with $24.6 million during 1994, primarily as a
result of higher production volumes in 1995 as the DD&A rate was substantially
the same for both years.
General and Administrative. General and administrative expenses declined to
$5.7 million in 1995, 12% less than the $6.5 million incurred in 1994. The costs
for 1994 reflected higher third-party engineering and consulting fees associated
with several acquisition possibilities that never materialized. Additionally,
Forcenergy billed more general and administrative expenses, as provided for in
joint operating agreements, to joint interest owners in 1995 due to the
increased drilling activity.
Interest Expense. Interest expense, net of amounts capitalized, increased
23% to $11.7 million, compared to $9.5 million in 1994. This increase was
primarily attributable to the acquisition related increases in Forcenergy's debt
levels prior to the repayment of a portion of that debt with proceeds from the
initial public offering.
Interest and Other Income. Interest and other income (loss) reflected a net
charge of $561,000 in 1995 compared with income of $789,000 in 1994. The 1995
charge included a non-cash adjustment to certain balance sheet items associated
with activities in previous years. Interest income was $474,000 in 1995 compared
with $454,000 in the prior year.
Income Tax Provision (Benefit). The income tax benefit decreased to $1.1
million in 1995, from $2.4 million in 1994, due to the improvement in the
results of operations.
LIQUIDITY AND CAPITAL RESOURCES
Forcenergy has historically funded its operations, acquisitions, capital
expenditures and working capital requirements through cash flow from operations,
bank borrowings and private and public placements of debt and equity securities.
Forcenergy's primary sources of funds for each of the periods indicated herein
were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------
1997 1996 1996 1995 1994
-------- ------- --------- -------- -------
<S> <C> <C> <C> <C> <C>
Net cash provided by operating
activities......................... $ 87,609 $27,052 $ 65,228 $ 28,574 $22,433
Borrowings under the Senior Credit
Facility........................... 81,262 85,377 255,968 35,709 6,872
Repayments under the Senior Credit
Facility........................... (16,094) (42,313) (250,091) (38,666)
Proceeds from issuance of common
stock.............................. 46,318 55,753 31,800
Issuance of long-term debt, net of
expenses........................... 193,414 -- 169,114 -- --
</TABLE>
Forcenergy had negative working capital of $33.1 million at June 30, 1997
as compared to working capital of $6.7 million at December 31, 1996. The
decrease in working capital was mainly attributable to an increase in accounts
payable and accrued liabilities associated with Forcenergy's second quarter 1997
drilling and workover activities and, to a lesser extent, accrued interest,
which was partially offset by an increase in other current assets as a result of
prepayments for drilling activities and operations.
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<PAGE> 84
Forcenergy generated approximately $87.6 million in cash from operations
during the first six months of 1997. Forcenergy's cash flow from operations has
increased significantly in 1997 due to the acquisition of producing properties,
the successful 1996/1997 drilling programs, and to a lesser extent, higher net
realized oil and gas prices.
Total capital expenditures were $190.0 million for the six months ended
June 30, 1997, including $92.7 million for acquisitions. Funding for these
expenditures was provided through Forcenergy's existing Senior Credit Facility,
the 8 1/2% Senior Subordinated Notes (discussed below), and cash generated from
operations. Capital expenditures were $284.0 million including acquisitions of
$152.5 million during 1996. Funding for these expenditures was provided through
Forcenergy's existing Senior Credit Facility, net proceeds from the 1996
offerings (discussed below) and funds from operations. Capital expenditures,
including acquisitions, were $144.7 million and $58.2 million in 1995 and 1994,
respectively.
Total long-term debt at June 30, 1997 was $375.1 million as compared to
$272.9 million at December 31, 1996. During February 1997, Forcenergy completed
a private placement of $200 million in 8 1/2% Senior Subordinated Notes priced
at $99.338 for a yield to maturity of 8.6%. Forcenergy received approximately
$194.0 million in net proceeds and used the majority of those proceeds to repay
all outstanding indebtedness under Forcenergy's Senior Credit Facility and to
pay for a portion of producing property acquisitions that occurred during June
1997.
During November 1996, Forcenergy sold, in concurrent public offerings (the
"1996 Offerings"), $175 million aggregate principal amount of 9 1/2% Senior
Subordinated Notes due 2006 and 1,635,408 shares of Common Stock. Concurrently
with the 1996 Offerings, all of the outstanding 7% Exchangeable Subordinated
Notes were converted into Common Stock, and options to purchase 214,866 shares
of common stock were exercised by certain holders of the 7% Exchangeable
Subordinated Notes. Forcenergy received approximately $210 million in aggregate
net proceeds (after underwriting fees, commissions and estimated offering
expenses), a substantial portion of which were used to retire all outstanding
borrowings under Forcenergy's Senior Credit Facility. The balance of the net
proceeds were utilized for general corporate purposes, including capital
expenditures and acquisitions.
On March 31, 1997, at the discretion of Forcenergy, the borrowing base
under the Senior Credit Facility was reduced to $50 million to reduce the
commitment fees associated with undrawn amounts under the Senior Credit
Facility. At July 31, 1997, Forcenergy had approximately $31 million available
under the facility. The Senior Credit Facility contains certain covenants which
include maintenance of a minimum tangible net worth, certain financial ratios,
restrictions on asset sales, affiliated transactions and compensation and
certain limitation on dividends and additional debt or liens. Forcenergy is in
compliance with these covenants, or has received waivers in the event of
non-compliance.
Forcenergy's capital expenditure budget for 1997, exclusive of
acquisitions, is estimated to be approximately $195 million. Forcenergy will
continue to evaluate its capital spending plans throughout the year. Actual
levels of capital expenditures may vary significantly due to a variety of
factors, including drilling results, oil and gas prices, industry conditions and
outlook, future acquisitions of properties and the availability of capital.
Although the 1997 budget does not incorporate any acquisitions, Forcenergy will
continue to selectively seek acquisition opportunities where it believes
significant exploration and development potential exists.
Forcenergy utilizes, from time to time, forward sales contracts and
commodity swaps for portions of its current oil and gas production to achieve
more predictable cash flows and to reduce its exposure to fluctuations in oil
and gas prices. The remaining portion of current production is not hedged so as
to provide Forcenergy the opportunity to benefit from increases in prices on
that portion of the production, should price increases materialize. Forcenergy
has entered into forward sales and swap arrangements with respect to
approximately 24% of its estimated net natural gas production through the third
quarter of 1997 at a weighted average price of approximately $2.37 per Mcf.
Forcenergy has also hedged through swaps approximately 5% of its estimated net
oil production through the second quarter of 1997 at a weighted average price of
$18.25 per Bbl. In addition, Forcenergy has hedged another 19% of its current
net oil production through the end of the year using collar arrangements with a
floor of $18.00 per Bbl and ceilings of $23.90 and $26.30 per Bbl.
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<PAGE> 85
Effective June 18, 1997, Forcenergy was accepted for listing with the New
York Stock Exchange. Forcenergy's common stock began trading under the symbol
FEN on that day.
Management believes that cash flows from operations and borrowing capacity
under Forcenergy's Senior Credit Facility will be adequate to meet currently
anticipated liquidity needs, including funding Forcenergy's financial
obligations and capital expenditure program.
80
<PAGE> 86
INFORMATION REGARDING EDISTO
BUSINESS OF EDISTO
Edisto's operating activities include only oil and gas exploration and
production, which is conducted through its 72% interest in Convest.
Prior to December 10, 1996, Edisto was engaged in the purchase and resale
of natural gas to a diversified customer base, primarily industrial/commercial
companies, local distribution companies, and industry partners. Edisto conducted
its gas marketing operations (i) in the United States through its subsidiary
Energy Source, Inc. ("Energy Source"), and (ii) in Western Canada through its
subsidiary Energy Source Canada, Inc. ("Energy Source Canada"). Energy Source
aggregated natural gas supplies from producing basins in the United States and
Canada, arranged transportation through pipelines from points of purchase to
points of sale, and resold natural gas volumes to customers under a variety of
standard and customized arrangements. These arrangements included a variety of
short-term and long-term market sensitive and fixed priced contracts and
financial instruments. On December 10, 1996, Energy Source and Energy Source
Canada sold substantially all of their assets to two subsidiaries of Pacific Gas
Transmission Company.
Prior to the completion of Edisto's acquisition of a majority interest in
Convest on June 26, 1995, Edisto's oil and gas operations were conducted through
its subsidiary, Edisto E&P. Edisto E&P was formed in June 1993, upon the
emergence from bankruptcy of Edisto and certain of its exploration and
production subsidiaries.
In April 1996, Edisto sold an 11% interest in the Zarat Permit covering
approximately 246,000 acres offshore Tunisia for $1.4 million which resulted in
a gain of approximately $0.3 million. This was Edisto's last remaining
international oil and gas property.
On November 18, 1994, Edisto purchased 1,321,371 shares of Common Stock of
Convest from two subsidiaries of Windsor Energy Corp. The purchased shares
constituted approximately 31% of the outstanding Convest Common Stock. The
purchase price was $8.9 million in cash, or $6.74 per share.
On June 26, 1995, Convest purchased the stock of Edisto's oil and gas
exploration and production subsidiary, Edisto E&P, in consideration for
6,185,400 newly issued shares of Convest Common Stock and $10,000 in cash. These
newly issued shares increased Edisto's interest in Convest from 31% to 72% of
the outstanding Common Stock of Convest. Upon the closing of the transaction
with Convest, the Convest Board of Directors was restructured so that affiliates
of Edisto constituted a majority of Convest's Board of Directors. In April 1996,
Edisto purchased an additional 92,000 shares of Convest Common Stock on the open
market which increased its interest in Convest to 73%. Edisto owns 7,598,771
shares of Convest Common Stock.
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<PAGE> 87
EDISTO
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth selected consolidated financial information
for Edisto as of the dates and for the periods indicated. The following selected
historical consolidated financial information for each of the years ended
December 31, 1992 through 1996 have been derived from Edisto's Consolidated
Financial Statements, which have been audited by Arthur Andersen LLP,
independent public accountants. The selected consolidated financial information
for the six months ended June 30, 1996 and 1997 have been derived from the
unaudited consolidated financial statements of Edisto, which have been prepared
on the same basis as that of the Consolidated Financial Statements of Edisto
and, in the opinion of Edisto, reflect and include all adjustments (consisting
only of normal recurring adjustments) necessary for a fair presentation of the
financial position and results of operations of Edisto for such periods.
Edisto's results of operations for the periods after June 30, 1993 are not
comparable in all respects to its results of operations for the periods prior to
June 30, 1993 due to the adoption of fresh-start reporting in conjunction with
Edisto's emergence from bankruptcy on June 29, 1993. Prior periods for the
predecessor entity have not been restated to reflect the discontinued
transmission, marketing and manufacturing segments. The selected consolidated
financial information should be reviewed in conjunction with the consolidated
financial statements of Edisto and the notes thereto and Edisto's Management's
Discussion and Analysis of Financial Condition and Results of Operations set
forth elsewhere in this Joint Proxy Statement/Prospectus. See "Information
Regarding Edisto." The information set forth in the table below is not covered
by the report of Edisto's independent public accountants included elsewhere in
this Joint Proxy Statement/Prospectus. No cash dividends have been declared for
any of the periods presented.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED SIX MONTHS SIX MONTHS
JUNE 30, YEAR ENDED DECEMBER 31, ENDED ENDED YEAR ENDED
------------------ ------------------------------ JUNE 30, JUNE 30, DECEMBER 31,
1997 1996 1996 1995 1994 1993 1993 1992
-------- ------- -------- -------- -------- ------------ ---------- ------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Oil and gas production
revenues....................... $ 25,917 $22,033 $ 47,222 $ 51,450 $ 46,788 $ 29,520 $ 35,419 $ 64,941
Gas marketing revenues........... -- -- -- -- -- -- 172,514 315,070
Total revenues................... 25,917 22,033 47,222 51,450 46,788 29,520 212,282 385,469
Income (loss) from continuing
operations..................... 6,755 1,471 5,603 (3,174) 8,735 8,934 (71,188) (40,341)
Net income (loss) attributable to
Common Stock................... 6,755 2,943 20,154 (6,597) 7,151 5,600 (66,217) (46,124)
Net income (loss) per common
share:
Continuing operations.......... .48 .11 .41 (.25) .68 .70 (52.77) (35.25)
Discontinued operations........ -- .12 1.08 (.26) (.13) (.26) (4.85) (4.65)
Extraordinary gain............. -- -- -- -- -- -- 8.53 --
-------- ------- -------- -------- -------- -------- -------- --------
Net income (loss) per common
share........................ $ .48 $ .23 $ 1.49 $ (.51) $ .55 $ .44 $ (49.09) $ (39.90)
======== ======= ======== ======== ======== ======== ======== ========
Weighted average common shares
outstanding.................... 14,019 12,930 13,496 12,954 12,926 12,848 1,349 1,156
Current assets................... $ 86,532 $69,177 $ 84,459 $ 58,669 $ 66,542 $ 50,601 $ 48,596 $104,911
Total assets..................... 143,281 128,212 141,437 125,852 116,463 111,877 131,855 325,769
Current liabilities.............. 17,691 17,254 21,816 19,232 28,705 27,620 55,250 117,429
Long-term liabilities............ 20,085 31,707 22,898 39,092 13,576 18,167 16,115 57,082
Pre-petition liabilities:
Subject to compromise --
long-term.................... -- -- -- -- -- -- -- 112,726
Not subject to compromise --
long-term.................... -- -- -- -- -- -- -- 13,046
Stockholders' equity............. 105,505 79,250 96,723 67,528 74,182 66,090 60,490 25,486
</TABLE>
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<PAGE> 88
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Edisto conducts its oil and gas operations through its 72% ownership
interest in Convest. Edisto owns 7,598,771 shares of Convest Common Stock.
During December 1996, Edisto sold substantially all of the assets of its gas
marketing affiliates, Energy Source and Energy Source Canada (collectively
"Energy Source") for approximately $43.3 million. Subsequent to the sale of
Energy Source, Edisto's only significant line of business is its oil and gas
operations conducted through its ownership in Convest.
FINANCIAL RESULTS
The significant events during the six months ended June 30, 1997 are
described below:
Results of Operations. Edisto had net income of $6.8 million for the six
months ended June 30, 1997. See "Results of Operations" below. The following
table summarizes Edisto's income between its investment in Convest and other
corporate income:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, 1997
--------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C>
Convest Energy Corporation, net of minority interest........ $6,182
Corporate and other......................................... 573
------
Total Operating Income............................ $6,755
======
</TABLE>
Proposed Merger with Forcenergy Inc. On June 19, 1997, Edisto, Convest,
Forcenergy, and a Forcenergy subsidiary executed the Merger Agreement providing
for Edisto and Convest to be merged into Forcenergy.
Under the Merger Agreement, (a) each issued and outstanding share of Edisto
Common Stock will be converted into the right to receive (i) $4.886 in cash and
(ii) a fractional interest in a share of Forcenergy Common Stock equal to $5.064
divided by the Weighted Average Trading Price of Forcenergy Common Stock, and
(b) each issued and outstanding share of Convest Common Stock will be converted
into the right to receive a fractional interest in a share of Forcenergy Common
Stock equal to $8.88 divided by the Weighted Average Trading Price of Forcenergy
Common Stock; provided, however, that in no event will the Weighted Average
Trading Price of Forcenergy Common Stock be less than $28.96 nor more than
$34.96. Cash will be paid in lieu of fractional shares of Forcenergy Common
Stock. The mergers are expected to close in early October.
The majority shareholders of Edisto and Convest have agreed to vote their
respective shares in favor of the transaction thereby assuring the required
shareholder approval of the Merger Agreement. In addition, investment funds and
accounts managed by TCW Special Credits and Oaktree Capital Management, L.L.C.,
which hold approximately 51% of Edisto's Common Stock, have agreed to vote for
the transaction. In addition, such investment funds and accounts have
contractually agreed not to sell 80% of the Forcenergy Common Stock received in
the transaction for a period of six months after the closing. Edisto currently
owns approximately 72% of the outstanding shares of Common Stock of Convest, and
has agreed in the Merger Agreement to vote its shares of Convest Common Stock in
favor of the transaction.
High Island Block 195 Drilling. During January 1997, Convest participated
in the drilling of an exploratory well on Block 195 of the High Island area of
the Gulf of Mexico to test a prospect identified by 3-D seismic. The 195 #3 well
was directionally drilled to approximately 13,000' and discovered productive
gas sands in the Upper Rob "M." Total cost of the well was approximately $1.1
million net to Convest's 23.4% working interest.
During March 1997 Convest participated in an additional exploratory test
well on Block 195 to test a deeper prospect on the block. The 195 #4 well was
directionally drilled to approximately 15,200' and
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<PAGE> 89
encountered productive gas sands in the Lower Rob "M." Total cost of the well
was approximately $1.4 million net to Convest's 23.4% working interest.
Gas production from the producing wells on Block 195 is being processed
from an existing platform located on High Island Block 176. During the second
quarter of 1997, Convest participated in the installation of flowlines and
certain facility enhancements on the platform on Block 176 at an aggregate cost
to date of approximately $200,000. The four wells on Block 195 are currently
producing in excess of 60 MMCF of gas per day. Convest has a net revenue
interest of 19.5% in the production from the block. In addition, it is
anticipated that the operator of the High Island Block 195 will propose drilling
an additional well during 1997.
West Cameron Block 607 Drilling. In March 1997, Convest participated in the
drilling of an exploratory test well which was drilled from the existing
platform on Block 607 of the West Cameron area of the Gulf of Mexico. The 607
A-4 exploratory well successfully discovered gas reserves in three new sands and
was dually completed. Initial production from the well averaged approximately 20
MMCF of gas per day; however, the well has experienced mechanical problems
allowing water to channel into the wellbore restricting the gas flow to
approximately 7 MMCF per day. During July 1997, Convest participated in an
unsuccessful operation to restrict the inflow of water. Convest and the operator
of the property are currently evaluating other operations to minimize the
effects of the water channeling. Convest owns a 49.6% working interest in the
block and a 36.0% net revenue interest. Total cost of the well was approximately
$2.2 million net to Convest's working interest.
Repayment of Outstanding Debt. During the first quarter of 1997, Convest
repaid the remaining $4.0 million of outstanding debt under its long-term
facility. Following the debt repayment, the credit facility will continue to be
available for future borrowings if needed. As of August 1, 1997, the borrowing
base under the credit facility was $10.7 million. See"Liquidity and Capital
Resources -- Credit Facility and Long-Term Debt" below.
OVERVIEW AND ANALYSIS OF KNOWN TRENDS
Summary of Significant Developments
Set forth below is a summary of the major events which occurred during
1996.
Results of Operations in 1996. Edisto had net income for 1996 of $20.2
million. Set forth below is a table summarizing Edisto's results of operations
during 1996 by business segment:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
-----------------
(IN THOUSANDS)
<S> <C>
Convest Energy Corporation, net of minority interest........ $ 5,880
Corporate and other......................................... (277)
-------
Net Income From Continuing Operations..................... 5,603
Discontinued Natural Gas Marketing Operations............... (761)
Gain on Sale of Gas Marketing Assets........................ 15,312
-------
NET INCOME................................................ $20,154
=======
</TABLE>
At the end of 1996, Edisto had $72.1 million in cash and cash equivalents
(including restricted cash), which includes $4.0 million in cash and cash
equivalents (including restricted cash) at Convest.
Sale of Natural Gas Marketing Operations. Until December 10, 1996, Edisto's
gas marketing operations were conducted through its subsidiaries, Energy Source
in the United States, and Energy Source Canada in Canada. On December 10, 1996,
Edisto sold substantially all of the assets of its natural gas marketing
operations to subsidiaries of Pacific Gas Transmission Company ("PGT"), a
subsidiary of Pacific Gas and Electric Company. The sales price was $23.3
million in cash, plus the working capital of Energy Source at July 31, 1996
(approximately $20.0 million). The sales price, however, is subject to
adjustment after the
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<PAGE> 90
closing by the adjusted consolidated net income or loss of Energy Source from
August 1, 1996 to November 30, 1996. Edisto and PGT have not yet finalized the
purchase price adjustment because it has taken longer than expected to resolve
the remaining issues, all of which are relatively minor. The parties expect to
resolve this matter in September 1997. As a condition of the sale, Edisto also
retained certain assets and liabilities of Energy Source which are explained in
more detail below. In connection with this sale, Edisto recognized a gain of
approximately $15.3 million, net of approximately $700,000 of income tax.
The sales price was reduced by approximately $5.3 million from the original
sales price in the definitive Purchase Agreement when two of Energy Source
Canada's gas trading partners, NESI Energy Marketing Canada, Ltd. (formerly
Chandler Energy Company) ("NESI") and Tarpon Gas Marketing ("Tarpon"), sought
protection from creditors under Canadian bankruptcy law. When these trading
partners defaulted on their gas purchase and supply contracts, Energy Source
Canada was forced to replace such contracts with new contracts with other
suppliers at the then higher market prices. Since the losses on these contracts
were approximately $5.3 million, Edisto agreed to reduce the sales price by this
amount. Of this price reduction, $4.5 million related to the contracts with NESI
and $.8 million related to the contracts with Tarpon.
Retained Assets and Liabilities. In connection with the sale, Edisto
retained the contracts with NESI and Tarpon, together with all related rights
and liabilities. On December 20, 1996, Edisto filed a lawsuit in Calgary against
certain affiliates of NESI, NIPSCO Industries, Inc., NIPSCO Energy Services Inc.
and NIPSCO Energy Services Canada Inc., claiming that, among other things, these
affiliates induced Energy Source Canada to extend credit to NESI on an unsecured
basis. The lawsuit seeks to recover the losses incurred by Energy Source Canada
on the NESI contracts and is in the very preliminary stages.
Edisto retained the contracts of Energy Source Canada with MultiEnergies,
Inc., another gas trading partner of Energy Source Canada that went bankrupt in
October 1996, together with all related rights and liabilities. Edisto sustained
a loss of approximately $165,000 on these contracts and is pursuing its claims
in the MultiEnergies bankruptcy proceeding.
Edisto also retained certain liabilities and counterclaims against
PanEnergy Corporation and Panhandle Eastern Pipe Line Company that are the
subject of a lawsuit filed in December 1996 in the District Court of Harris
County, Texas. The lawsuit relates to (i) a contract dispute involving
approximately $1.5 million in disputed Annual Revenue Amount and other charges
which PanEnergy and Panhandle Eastern claim are owed by Energy Source under two
gas transportation agreements between the companies, (ii) a claim by Energy
Source that PanEnergy overbilled Energy Source by approximately $1.0 million for
services under such transportation contracts which PanEnergy has refused to
refund, (iii) $216,000 in gas balancing penalties paid by Energy Source under
protest for which Edisto is seeking a refund, (iv) a claim by Energy Source
under Texas antitrust laws that PanEnergy exerted unlawful monopoly power and
engaged in anticompetitive conduct to the detriment of Energy Source, and (v) a
claim by Energy Source that PanEnergy tortiously interfered with a prospective
contractual relationship between Energy Source and its largest customer at that
time. Edisto believes that it has meritorious defenses to PanEnergy's claims and
plans to vigorously assert such defenses and its counterclaims against PanEnergy
in the lawsuit.
Separate from the lawsuit with PanEnergy, Edisto retained as an asset all
rights to receive a refund from PanEnergy of approximately $1.0 million under a
proposed settlement of certain rate cases pending before the Federal Energy
Regulatory Commission. In April 1997, the settlement was finalized and Panhandle
acknowledged Edisto's right to receive a refund of approximately $1.0 million,
but offset it against amounts which Panhandle claims are owed to it by Edisto.
This refund is included in Accounts Receivable on the accompanying Consolidated
Balance Sheet of Edisto at June 30, 1997 and December 31, 1996.
Edisto also retained as an asset approximately 1.2 Bcf of natural gas
stored by Energy Source in a storage facility operated by Midwest Storage, Inc.
in the Carbon Field in Indiana. Edisto filed suit in August 1996 against Midwest
Storage and other affiliates in the Circuit Court of Cook County, Illinois to
recover the gas and other damages sustained by Energy Source when Midwest
Storage failed to deliver the gas under the agreements with Energy Source. This
lawsuit is in the very preliminary stages.
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See Note 4 "Consolidating Balance Sheets" in the Notes to Edisto's
Consolidated Financial Statements for consolidating balance sheets of Edisto and
its consolidated subsidiary, Convest, at December 31, 1996 which set forth the
remaining assets and liabilities of Edisto at such date.
Other Matters Relating to the Sale of Gas Marketing Operations. In
connection with the sale to PGT, all employees of Edisto and Energy Source
became employees of the purchaser, other than Michael Y. McGovern, the Chairman
and CEO of Edisto. Mr. McGovern continued as the Chairman and CEO of both Edisto
and Convest. Subsequent to the closing with PGT, the corporate headquarters of
Edisto were moved to Convest's offices, and Mr. McGovern and four other
employees of Convest have divided their time between Edisto and Convest.
Upon closing of the PGT sale, Edisto vested in full approximately 453,000
stock options outstanding to the Energy Source employees who became employees of
the purchaser. Under the terms of the stock option plan, the former employees
have one year to exercise their stock options.
Engagement of Investment Banker for Edisto and Convest. On January 8, 1997,
Edisto and Convest jointly engaged the investment banking firm of Petrie Parkman
& Co., Inc. to make recommendations for strategic alternatives to enhance
shareholder value for both Edisto and Convest. Petrie Parkman's engagement
included identifying and evaluating potential strategic partners in the oil and
gas industry for a sale or merger of Edisto and Convest.
Exercise of Warrants. Warrants for the purchase of 918,070 shares of Edisto
Common Stock were exercised prior to the June 28, 1996 expiration date. These
Warrants were issued in connection with the consummation of Edisto's bankruptcy
on June 29, 1993 and entitled the holder to purchase Edisto Common Stock for
$9.74 per share. Edisto received $8.9 million from the exercise of the Warrants,
which adds to its existing working capital.
Sale of Offshore Tunisian Property. In April 1996, Edisto sold its 11%
interest in the Zarat Permit offshore of Tunisia for $1.4 million which resulted
in a gain of approximately $0.3 million. This was Edisto's last remaining
international oil and gas property.
RESULTS OF OPERATIONS
Six Months Ended June 30, 1997 and 1996.
CONVEST ENERGY CORPORATION:
Revenues. Oil and gas revenue increased by approximately $3.6 million or
17% between the six months ended June 30, 1997 and 1996. The average price
Convest received for its oil and gas sales increased by 13% and 30%,
respectively, between the corresponding periods. Oil production increased by 7%
between the periods while gas production decreased by 11%. During 1996 and early
1997, Convest participated in 21 new exploratory and development wells of which
16 were successful. As a result of this drilling, production from several of
Convest's properties increased substantially. The additional production
associated with Convest's drilling success was partially offset by the sale or
abandonment of a number of marginal properties during 1996 and early 1997 and
the effects of depletion on Convest's offshore Gulf of Mexico gas producing
properties. Also, Convest's offshore gas properties are subject to inherent
steep production declines. These declines were partially offset during 1996 and
early 1997 by the drilling success mentioned above. In order to minimize the
future effects of such declines, Convest must replace its reserves through its
exploratory and development drilling and acquisition activities. Convest's gas
plant revenue increased by $298,000 or 42% between the corresponding periods due
primarily to higher prices received for output from the plant.
Price Risk Management/Hedging. Convest uses a combination of futures
contracts traded on the NYMEX and over the counter price swaps with major
financial institutions to hedge against the volatility of natural gas and oil
prices. Gains and losses recognized upon settlement of Convest's hedge positions
are deferred and recognized as oil and gas sales revenue in the month of the
underlying physical production being hedged. As a result of Convest's hedging
activities, Convest recorded hedging income of approximately $313,000 for the
six month period ended June 30, 1997 and a hedging loss of approximately $4.5
million for the corresponding period of 1996. Such amounts were recorded as oil
and gas sales revenue in the
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accompanying statements of operations, and accordingly, such amounts are
reflected in the per unit price Convest received for its oil and gas sales.
Production Expenses. Production expenses decreased by approximately $2.0
million or 24% between the corresponding periods. The decrease in lease
operating expenses was primarily due to the aforementioned sale or abandonment
of a number of marginal producing properties during 1996 and early 1997 which
tended to have high operating expense. Production expenses per barrel of oil
equivalent ("BOE") was $4.11 for the six months ended June 30, 1997 compared to
$5.07 for the corresponding period of 1996.
Abandonment and Exploration Costs. Abandonment and exploration costs
increased by approximately $226,000 due to (i) the aforementioned abandonment of
several offshore properties during the first quarter of 1997 and (ii) the write
off of approximately $757,000 associated with two unsuccessful exploratory wells
drilled during the first quarter of 1997 in accordance with the successful
efforts method of accounting. During the second quarter of 1996, Convest
expensed approximately $750,000 of drilling costs associated with two
unsuccessful exploratory test wells.
General and Administrative Expense. General and administrative expense
decreased by approximately 4% between the corresponding periods due primarily to
the resignation of the former President and Chief Operating Officer and the
former Chief Financial Officer during late 1996. Subsequent to the resignation
of the two former executive officers, neither position has been replaced
resulting in lower salary expense for 1997.
Interest Expense. Interest expense decreased by $602,000 or 89% between the
corresponding periods due to the repayment of all outstanding borrowing under
the Company's credit facility during early 1997.
Depreciation, Depletion and Amortization ("DD&A"). DD&A on oil and gas
properties decreased by approximately $632,000 or 8% between the corresponding
periods. The decrease in DD&A was primarily due to a 6% decline in overall
production volumes on a per BOE basis. DD&A per BOE was $4.74 for the six months
ended June 30, 1997 compared to $4.83 for the corresponding period of 1996.
Impairment of Oil and Gas Properties. During the second quarter of 1996,
Convest recorded an impairment of $1.1 million on one of its offshore gas
properties. During the second quarter of 1996, the producing well on the
property experienced permanent mechanical difficulties and, accordingly, the
property was written off in accordance with SFAS 121. No such provision has been
required in 1997.
Gain on Asset Sales. In January 1996, Convest completed the sale of an
offshore oil and gas property for sale proceeds of approximately $2.0 million.
As a result of the sale, Convest recorded a gain on the property sale of
approximately $620,000 during the first quarter of 1996. Convest has continued
to review its properties with a focus on profitability and as a result has sold
several non-strategic properties with marginal profitability during 1997.
Aggregate sale proceeds totaled approximately $740,000 and resulted in a gain of
approximately $63,000 for the six months ended June 30, 1997.
CORPORATE AND OTHER:
Interest Income. Interest income increased by $1.4 million between the
corresponding periods due primarily to Edisto having higher cash balances
available for investment. The higher cash balances are a result of the sale of
Energy Source completed in December 1996. Edisto invests its available cash
balances in high grade short-term debt issues, money market accounts and
overnight investments with major financial institutions.
General and Administrative Expense. General and administrative expense
increased by $363,000 between the corresponding periods. The increase in general
and administrative is primarily due to higher legal fees associated with the
litigation retained by Edisto in connection with the Energy Source asset sale.
In addition, Mr. McGovern received a bonus of $110,000 pursuant to the 1996
bonus plan. The bonus, which was paid one-half in cash and one-half in Edisto
Common Stock, was recorded during the second quarter of 1997.
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Discontinued Operations. As previously stated, Edisto sold substantially
all of the assets of Energy Source during December 1996. For the six months
ended June 30, 1996, income from Energy Source's gas marketing operations
totaled approximately $1.5 million.
Years Ended December 31, 1996 and 1995
Edisto had net income of $20.2 million for the year ended December 31, 1996
compared to a net loss of $6.6 million for the corresponding period of 1995.
Results for 1996 include an after-tax gain of approximately $15.3 million from
the sale of Edisto's natural gas marketing operations. Income from continuing
operations totaled $5.6 million primarily from Edisto's 73% ownership in
Convest. The results of Edisto's business segments are discussed in more detail
below. See "Information Regarding Convest -- Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Result of
Operations."
Discontinued Natural Gas Marketing Operations
On December 10, 1996, Edisto sold substantially all of the assets of its
gas marketing operations to subsidiaries of PGT. The sales price was $23.3
million in cash, plus the working capital of Energy Source and Energy Source
Canada at July 31, 1996 (approximately $20.0 million). The sales price, however,
is subject to adjustment after the closing by the adjusted consolidated net
income or loss of Energy Source and Energy Source Canada from August 1, 1996 to
November 30, 1996. Edisto and PGT have not yet finalized the purchase price
adjustment. Pursuant to the Purchase Agreement, Edisto retained certain assets
and liabilities of Energy Source and Energy Source Canada. The gain on the sale
was approximately $15.3 million after taxes.
For the year ended December 31, 1996, Edisto recorded a net loss from
discontinued gas marketing operations of $761,000. Gross margin was $8.7 million
for 1996 compared to $1.2 million in 1995. The increase in gross margin was
primarily due to the volatility in the natural gas markets experienced during
early 1996 as a result of harsh winter conditions over much of the United
States. Additional improvement in 1996 resulted from the termination of any
further expense in 1996 under the price protection provision of a gas sales
agreement with Laclede Gas Company for 55 Mmcf of gas per day. In 1995, Edisto's
gross margin reflected the price protection liability of $3.5 million under the
Laclede agreement.
Other Consolidated Income and Expenses
General and administrative expenses decreased by approximately 25% due
primarily to the transfer of all of Edisto's employees to its wholly-owned gas
marketing subsidiary effective January 1, 1996. As previously stated, the gas
marketing subsidiary was sold during December 1996, and accordingly, such amount
is included under discontinued operations.
Interest income decreased by $66,000 primarily due to Edisto having lower
available cash balances since these funds were being used in the natural gas
marketing operations.
Interest expense decreased by approximately 48% due primarily to the
decrease in outstanding borrowings under Convest's long-term credit facility.
During 1996, Convest repaid approximately $15.2 million under its credit
facility.
In addition to the Convest property sales previously discussed, Edisto
recognized a gain of $342,000 related to the sale of its Tunisian property
during 1996.
Years Ended December 31, 1995 and 1994
Edisto had a net loss of $6.6 million for the year ended December 31, 1995
compared to net income of $7.2 million for the year ended December 31, 1994. Of
the net loss recorded in 1995, the discontinued gas marketing operations had a
net loss of $9.8 million, Convest had a net loss of $940,000, and corporate and
other entities had a net loss of $2.2 million. These operating losses were
partially offset by the gains of $2.6 million and $3.8 million, respectively,
from the sale of the gas transmission operations and manufacturing operations.
These results are discussed in more detail below. See "Information Regarding
Convest --
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Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Result of Operations."
Discontinued Natural Gas Marketing Operations
Edisto's discontinued gas marketing operations had a net loss from
operations of $9.8 million for the year ended December 31, 1995. Included in the
results for 1995 are approximately $10.5 million of non-recurring expenses which
are described as follows: (i) the settlement of $6.0 million and litigation
expenses of approximately $1.0 million from its lawsuit with NOARK Pipeline
System and Southwestern Energy, and (ii) an operating expense of approximately
$3.5 million for the price protection requirement in the gas sales agreement
with Laclede Gas Company. On December 31, 1995, Edisto accrued the full amount
of the price protection credit for the contract year ended October 31, 1996
based on the current economics of the Laclede agreement.
Edisto's gas marketing revenues and associated gas purchases for the year
ended December 31, 1995 increased by 54% and 56%, respectively, compared to
1994. Volumes sold increased by 91% during the same period. The corresponding
gross profit margin was $1.2 million in 1995 compared to a gross profit margin
of $3.8 million in 1994. This gross margin decrease reflects the price
protection liability of $3.5 million to Laclede Gas Company discussed above. Gas
prices were higher during 1995, but the costs associated with the Laclede
agreement and low margins associated with building market share resulted in the
decrease in margin.
Other Consolidated Income and Expenses
General and administrative expense increased by $3.8 million for the year
ended December 31, 1995 compared to 1994. The increase is primarily attributable
to the acquisition of the interest in Convest.
Abandonment expense increased by $0.7 million for 1995 compared to 1994.
Abandonment expense for 1995 includes $0.6 million related to the drilling of
the Zarat #2, a delineation well in Edisto's Zarat Permit in Tunisia. The well
tested oil and gas, but Edisto believes that the fault block in which the well
was drilled is unlikely to be commercially developed.
Interest income increased from $1.3 million in 1994 to $1.6 million in
1995. The increase was due to increased cash balances available for investment
from cash earned from operations and the net proceeds from the sale of the
transmission operations.
Interest expense increased by $1.3 million for the year ended December 31,
1995 compared to 1994. The increase was attributable to interest on debt
associated with the Convest credit facility.
Gain on asset sales for 1994 included a $4.8 million gain on the sale of
certain Gulf Coast properties. During 1995, Convest realized a loss of
approximately $660,000 related to the sale of another offshore property.
The preacquisition loss of subsidiary is the loss attributable to the
shares of Convest not owned by Edisto prior to the effective date of the Convest
transaction on June 26, 1995.
Edisto recognized a gain from the sale of its Missouri pipeline of $2.6
million in the first quarter of 1995. The sale of this pipeline closed in
January 1995. Edisto also recorded a gain on the sale of its MINT subsidiaries
of $3.8 million in the first quarter of 1995.
Effects of Inflation
Edisto is affected by the volatility of the prices of crude oil and natural
gas on the open market, which results from fluctuations in supply and demand.
The price that Edisto and its subsidiaries received for crude oil and natural
gas sales increased significantly during calendar 1996 compared to the price
received in calendar year 1995. Edisto is unable to predict the future effects
of such volatility of crude oil and natural gas prices; however, such volatility
could have a significant impact on Edisto's future earnings.
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CAPITAL RESOURCES AND LIQUIDITY
Edisto Working Capital
At June 30, 1997, Edisto had cash and cash equivalents of approximately
$77.2 million, which included $7.4 million of cash and cash equivalents
(including restricted cash) at Convest. In addition, Convest had assets from
risk management activities of $56,000, which consisted primarily of cash on
deposit at brokerage houses, including margin accounts, and receivables from
counterparties in swap transactions. The cash and cash equivalents at Edisto are
invested in short-term, highly liquid investments which are readily convertible
into cash and have original maturities of three months or less.
At June 30, 1997, Edisto had net working capital totaling $67.6 million
(excluding the $1.2 million working capital deficit of Convest) comprised
primarily of $69.8 million of cash and cash equivalents. As previous stated, the
substantial increase in available cash balances was primarily attributable to
the sale of Edisto's gas marketing operations in December 1996. Proceeds from
the sale of the gas marketing operations totaled $15.3 million (gross proceeds
of $43.3 million less approximately $27.9 million of cash balances held by the
gas marketing subsidiary on the closing date of the sale).
Convest Working Capital
Convest had working capital of $1.2 million at June 30, 1997 compared to a
working capital deficit of $2.6 million at December 31, 1996. The primary
contributor to the improvement in Convest's working capital position during 1997
was an overall increase in the price Convest received for its oil and gas
production. The higher oil and gas prices coupled with the additional production
associated with Convest's exploratory and development program enabled Convest to
reduce its current liabilities and accumulate higher cash balances.
Based on the cash flow from Convest's oil and gas properties, management
believes that Convest has the financial capability to satisfy its 1997 capital
expenditures program while meeting operating needs arising in the ordinary
course of business.
Convest Capital Expenditures
Convest has budgeted capital expenditures totaling $9.7 million for the
remainder of 1997. In addition, Convest anticipates that the operator for the
High Island Block 195 will propose drilling an additional well for which no
costs are currently included in Convest's capital budget. As previously stated,
management believes that the cash flow generated from Convest's properties
coupled with the available borrowings under Convest's credit facility will be
adequate to fund the anticipated capital expenditures for 1997.
Convest Credit Facility and Long-Term Debt
On June 26, 1995, Convest entered into a new credit agreement which
terminates January 1, 1999. This facility is secured by a first lien on
substantially all of Convest's assets, including its oil and gas properties and
gas plant. The borrowing base under the credit facility is subject to
redetermination semi-annually (on May 31 and November 30) using engineering
determinations and pricing and other assumptions designated by the bank group.
Effective December 1, 1996, the new borrowing base under the credit facility was
$19.2 million, based on the lending banks' semi-annual redetermination, which
began reducing by $1.0 million per month beginning January 1, 1997. Effective
January 28, 1997 and June 12, 1997, the borrowing base was reduced by $300,000
and $200,000, respectively, to give effect to the sale of oil and gas properties
securing the credit facility. Pursuant to the terms of the credit facility,
Convest is required to provide the banks with semi-annual estimates of its
reserves on or before April 1 and October 1 of each year. Due to the proposed
merger with Forcenergy, the banks have agreed to extend the report due on
October 1, 1997 until December 1, 1997. As a result, Convest's borrowing base
will continue to reduce by $1.0 million per month until the updated reports are
provided and the borrowing base has been redetermined. After giving effect to
the monthly borrowing base reductions and the reduction resulting from the
property sales, Convest's borrowing base under the credit facility was
approximately $10.7 million on August 1, 1997. Based on the scheduled borrowing
base reductions, the Company will have no borrowing capacity under the credit
facility after June 1, 1998 unless the
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lending banks provide a subsequent redetermination of the borrowing base based
on the reserve estimates to be provided on December 1, 1997.
During 1997, Convest repaid the outstanding balance of $4.0 million under
the credit facility. The credit facility, however, will remain available for
future credit needs.
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INFORMATION REGARDING CONVEST
BUSINESS OF CONVEST
Convest is an independent oil and gas exploration and production company.
At December 31, 1996, Convest held interests in approximately 965 producing
wells consisting of working interests, royalty interests and overriding royalty
interests. The producing wells are primarily located in Alabama, Kansas,
Louisiana, Nebraska, Oklahoma, Texas, Utah, Wyoming and offshore Gulf of Mexico.
Approximately 49% of Convest's oil and gas reserves are oil and approximately
51% are gas, measured in energy equivalent barrels of oil basis (natural gas
being converted to oil equivalent at the rate of six Mcf of gas for each barrel
of oil). In addition to its interests in producing oil and gas properties,
Convest owns an undivided interest of approximately 13% in the Altamont Gas
Plant. Producing and nonproducing acreage holdings aggregate approximately
105,966 net acres as of December 31, 1996. Convest serves as the operator of
approximately 30% of the producing wells in which it owns a working interest,
and the remaining 70% are operated by other working interest owners in the
properties.
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CONVEST
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
On June 26, 1995, Convest purchased from Edisto all of the capital stock of
Edisto E&P. The consideration paid to Edisto was shares of newly issued Convest
Common Stock and combined with Edisto's existing 31% interest, gave Edisto
approximately 72% of the outstanding shares of Convest Common Stock. This
transaction (the "Edisto Transaction" resulted in a "reverse acquisition" by
Edisto E&P of Convest (e.g., as an acquisition of Convest by Edisto E&P) since
Edisto's interest in Convest increased to 72% and Edisto's affiliates became a
majority of the Convest Board of Directors. Accordingly, under applicable
accounting rules, Edisto E&P's historical financial statements replaced
Convest's financial statements as the historical financial statements of Convest
for periods prior to June 26, 1995.
The following selected consolidated financial information for each of the
years ended December 31, 1992 through 1996 have been derived from Convest's
Consolidated Financial Statements, which have been audited by Arthur Andersen
LLP, independent public accountants. The selected consolidated financial
information for the six months ended June 30, 1996 and 1997 have been derived
from the unaudited consolidated financial statements of Convest, which have been
prepared on the same basis as the Consolidated Financial Statements of Convest
and, in the opinion of Convest, reflect and include all adjustments (consisting
only of normal recurring adjustments) necessary for a fair presentation of the
financial position and results of operations of Convest for such periods. The
accompanying historical financial information is that of Edisto E&P and NRM
Energy Company, L.P. (the predecessor to Edisto E&P) ("NRM Energy"). Edisto
E&P's results of operations are not comparable in all respects to the results of
NRM Energy for the periods prior to June 30, 1993 due to the adoption of
fresh-start reporting in conjunction with Edisto's emergence from bankruptcy on
June 29, 1993. Further, because of the accounting treatment used for a reverse
acquisition, Convest's financial information for the years ended December 31,
1995 and 1996 is not comparable to the financial information for prior periods.
No cash dividends have been declared for any of the periods presented.
This financial information should be reviewed in conjunction with the
consolidated financial statements of Convest and the notes thereto and Convest's
Management's Discussion and Analysis of Financial Condition and Results of
Operations set forth elsewhere in this Joint Proxy Statement/Prospectus. See
"Information Regarding Convest." This information set forth in the tables is not
covered by the report of Convest's independent public accountants included
elsewhere in this Joint Proxy Statement/Prospectus.
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<TABLE>
<CAPTION>
CONVEST NRM ENERGY
-------------------------------------------------------------- -------------------------
SIX MONTHS SIX MONTHS SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31, ENDED ENDED YEAR ENDED
----------------- --------------------------- DECEMBER 31, JUNE 30, DECEMBER 31,
1997 1996 1996 1995 1994 1993 1993 1992
------- ------- ------- ------- ------- ------------ ---------- ------------
(UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues........................ $26,194 $23,055 $49,745 $50,980 $51,868 $31,980 $ 32,768 $ 59,392
Reorganization items............ -- -- -- -- (51,335) (12,365)
Income (loss) from continuing
operations.................... 8,819 1,449 8,070 (940) 11,266 7,696 (52,526) (41,733)
Net income (loss)............... 8,819 1,449 8,070 (940) 11,266 7,696 (41,018) (45,603)
Net income (loss) per weighted
average common share(1)(2).... .84 .14 .78 (.11) 1.82 1.24 -- --
Net income (loss) per unit(2):
Continuing operations......... -- -- -- -- -- -- (20.49) (16.28)
Discontinued operations....... -- -- -- -- -- -- -- (1.51)
Extraordinary gain............ -- -- -- -- -- -- 4.49 --
------- ------- ------- ------- ------- ------- -------- --------
Net income (loss) per unit.... $ -- $ -- $ -- $ -- $ -- $ -- $ (16.00) $ (17.79)
======= ======= ======= ======= ======= ======= ======== ========
Weighted average common shares
outstanding(1)(2)............. 10,472 10,413 10,413 8,374 6,185 6,185 -- --
Weighted average common units
outstanding................... -- -- -- -- -- -- 2,563 2,563
Current assets.................. $15,317 15,254 $14,784 $15,440 $11,514 $27,317 $ 24,198 $ 33,406
Total assets.................... 72,517 74,675 72,212 81,957 58,178 88,592 97,979 157,771
Current liabilities............. 14,069 15,929 17,342 17,597 26,463 31,909 28,009 10,890
Long-term liabilities........... 6,038 22,280 29,343 12,088 18,167 15,496 12,125
Pre-petition liabilities:
Subject to compromise --
long-term................... -- -- -- -- -- -- -- 112,726
Not subject to compromise --
long-term................... -- -- -- -- -- -- -- 26,733
Equity:
Stockholders'................. 52,410 36,466 43,138 35,017 19,627 38,516 -- --
Partners'..................... -- -- -- -- -- -- 54,474 (4,703)
</TABLE>
- ---------------
(1) In accordance with the rules of accounting for a reverse acquisition, Edisto
E&P's capital structure was retroactively restated for periods prior to the
Edisto Transaction as more fully discussed under Notes 1 and 3 under "Notes
to Consolidated Financial Statements" included elsewhere herein.
(2) Convest considers net income per share information for periods prior to June
30, 1995 to be of limited value since Edisto E&P was a wholly-owned
subsidiary of Edisto prior to the Edisto Transaction.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
Convest's consolidated financial statements and the notes thereto.
OVERVIEW AND SIGNIFICANT DEVELOPMENTS
Summary of Significant Developments
THE SIGNIFICANT EVENTS DURING THE SIX MONTHS ENDED JUNE 30, 1997 ARE
DESCRIBED BELOW:
Results of Operations. Convest had net income for the quarter ended June
30, 1997 of $4.3 million compared to a net loss of $.6 million for the prior
year quarter. Convest had net income of approximately $8.8 million for the six
months ended June 30, 1997 compared to net income of $1.4 million for the
corresponding six months of 1996. See "Results of Operations" below.
Proposed Merger with Forcenergy Inc. On June 19, 1997, Convest, Edisto,
Forcenergy Inc ("Forcenergy") (NYSE "FEN"), and a Forcenergy subsidiary executed
a definitive Agreement and Plan of Merger (the "Merger Agreement") providing for
Convest and Edisto to be merged into Forcenergy.
Under the Merger Agreement, (a) each issued and outstanding share of
Convest Common Stock will be converted into the right to receive a fractional
interest in a share of Forcenergy Common Stock equal to $8.88 divided by the
Weighted Average Trading Price of Forcenergy Common Stock, and (b) each issued
and outstanding share of Edisto Common Stock will be converted into the right to
receive (i) $4.886 in cash and (ii) a fractional interest in a share of
Forcenergy Common Stock equal to $5.064 divided by the Weighted Average Trading
Price of Forcenergy Common Stock; provided, however, that in no event will the
Weighted Average Trading Price of Forcenergy Common Stock be less than $28.96
nor more than $34.96. The "Weighted Average Trading Price" of Forcenergy Common
Stock will be calculated by taking the average of the following daily
calculations for each of the ten trading days ending two trading days prior to
the closing date for the Merger: (i) grouping together all shares of Forcenergy
Common Stock traded on such day at the same trading price, (ii) multiplying the
aggregate number of shares in each price group by the trading price for such
group to calculate a product (the total sold shares value) for each group, (iii)
adding all of such products from each group, and (iv) dividing the resulting
total by the aggregate number of shares traded on such trading day. Cash will be
paid in lieu of fractional shares of Forcenergy Common Stock. The transaction is
expected to close in October 1997.
The majority shareholders of Convest and Edisto have agreed to vote their
respective shares in favor of the transaction thereby assuring the required
shareholder approval for the Merger Agreement. Edisto currently owns
approximately 72% of the outstanding shares of Common Stock of Convest, and has
agreed in the Merger Agreement to vote its shares of Convest Common Stock in
favor of the transaction. In addition, investment funds and accounts managed by
TCW Special Credits and Oaktree Capital Management, L.L.C., which hold slightly
in excess of 51% of Edisto's Common Stock, have agreed to vote for the
transaction. Also, such investment funds and accounts have contractually agreed
not to sell 80% of the Forcenergy Common Stock received in the transaction for a
period of six months after the closing.
High Island Block 195 Drilling. During January 1997, Convest participated
in the drilling of an exploratory well on Block 195 of the High Island area of
the Gulf of Mexico to test a prospect identified by 3-D seismic. The 195 #3 well
was directionally drilled to approximately 13,000' and discovered productive gas
sands in the Upper Rob "M". Total cost of the well was approximately $1.1
million net to Convest's 23.4% working interest.
During March 1997, Convest participated in an additional exploratory test
well on Block 195 to test a deeper prospect on the block. The 195 #4 well was
directionally drilled to approximately 15,200' and encountered productive gas
sands in the Lower Rob "M". Total cost of the well was approximately $1.4
million net to Convest's 23.4% working interest.
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Gas production from the producing wells on Block 195 is being processed
from an existing platform located on High Island Block 176. During the second
quarter of 1997, Convest participated in the installation of flowlines and
certain facility enhancements on the platform on Block 176 at an aggregate cost
to date of approximately $200,000. The four wells on Block 195 are currently
producing in excess of 60 Mmcf of gas per day. Convest has a net revenue
interest of 19.5% in the production from the block. In addition, it is
anticipated that the operator of the High Island Block 195 will propose drilling
an additional well during 1997.
West Cameron Block 607 Drilling. In March 1997, Convest participated in the
drilling of an exploratory test well which was drilled from the existing
platform on Block 607 of the West Cameron area of the Gulf of Mexico. The 607
A-4 exploratory well successfully discovered gas reserves in three new sands and
was dually completed. Initial production from the well averaged approximately 20
MMcf of gas per day; however, the well has experienced mechanical problems
allowing water to channel into the wellbore restricting the gas flow rate to
approximately 7 Mmcf per day. During July 1997, Convest participated in an
unsuccessful operation to restrict the inflow of water. Convest and the operator
of the property are currently evaluating other operations to minimize the
effects of the water channeling. Convest owns a 49.6% working interest in the
block and a 36.0% net revenue interest. Total cost of the well was approximately
$2.2 million net to Convest's working interest.
Repayment of Outstanding Debt. During the first quarter of 1997, Convest
repaid the remaining $4.0 million of outstanding debt under its long-term credit
facility. Following the debt repayment, the credit facility will continue to be
available for future borrowings if needed. As of August 1, 1997, the borrowing
base under the credit facility was $10.7 million. See "Liquidity and Capital
Resources -- Credit Facility and Long-Term Debt" below.
THE MOST SIGNIFICANT EVENTS DURING 1996 AND EARLY 1997 WERE:
Results of Operations. Convest had net income of $8.1 million for 1996
compared to a net loss of $0.9 million in 1995. These results for 1996 included
(i) a $1.2 million gain on the sale of properties during the year, (ii) a $1.3
million gain from the favorable settlements of two lawsuits filed by Convest
against third parties, (iii) a $2.6 million impairment loss under Statement of
Financial Accounting Standard No. 121 "Accounting For the Impairment of
Long-Lived Assets to be Disposed Of" ("SFAS 121") with respect to Convest's oil
and gas properties, as explained further below, and (iv) a $7.8 million hedging
loss, as explained in more detail below. Convest's results were aided
significantly by the high oil and gas prices received by Convest during the
fourth quarter of 1996 (average prices of $20.35 per barrel of oil and $2.63 per
Mcf of gas). Convest's net income during the fourth quarter of 1996 was
approximately $5.5 million. This substantial increase in net income during the
quarter was attributable to (i) substantially higher oil and gas prices received
by Convest in the fourth quarter (average prices of $20.35 per barrel of oil and
$2.63 per Mcf of gas) relative to the first nine months of 1996 (average prices
of $17.83 per barrel of oil and $1.88 per Mcf of gas), and (ii) the $1.3 million
gain from the favorable settlements of two lawsuits during the quarter.
Drilling Results. Convest was very active in 1996 and early 1997,
especially on its offshore properties in the Gulf of Mexico. Convest has
interests in 43 offshore blocks, many of which have presented attractive
drilling opportunities during the past year and which continue to present
drilling opportunities. Convest's total capital expenditures during 1996 were
$10.9 million, the bulk of which was devoted to drilling offshore wells. Eleven
of the fifteen wells drilled in 1996 were successful, with successful wells at
High Island Block 195, Eugene Island Block 281, South Timbalier Block 221, Grand
Isle Block 82 and Eugene Island Blocks 313 and 333. Of the eleven successful
wells, only one had been quantified in the year-end 1995 reserve report as
proved reserves, therefore, ten of these wells represent new additions to
Convest's reserves in 1996. As outlined in more detail below, Convest's drilling
success in late 1995 and 1996 has mitigated the steep production decline from
Convest's offshore gas properties.
Oil and Gas Reserves. Based on Convest's reserve report at December 31,
1996, Convest had total estimated proved reserves at such date of 6,344 Mbbl of
crude oil and 37,582 Mmcf of natural gas. While this represents a decline from
Convest's reserves at December 31, 1995 of 6,523 Mbbl of crude oil and 40,546
Mmcf of natural gas, Convest's production during 1996 was 960 MBbls of crude oil
and 13,162 Mmcf of natural gas.
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Also based on Convest's reserve reports at December 31, 1996, Convest had
approximately $146.0 million of pre-tax estimated discounted future net revenues
from its proved oil and gas reserves, as determined in accordance with
Securities and Exchange Commission Guidelines. This amount is almost double the
$74.5 million of pre-tax estimated discounted future net revenues reported at
December 31, 1995. Convest cautions, however, that under Commission guidelines,
this reserve estimate was made using average prices at December 31, 1996 which
were $26.01 per barrel of oil and $3.87 per Mcf of gas, whereas the average
prices at December 31, 1995 were $19.48 per barrel of oil and $2.16 per Mcf of
gas. Accordingly, a substantial portion of the increase in the estimated future
net revenues is due to the increase in prices between the two dates. Since oil
and gas prices have dropped substantially since year-end 1996, such reserve
estimates may not be indicative of the fair market value of Convest's oil and
gas reserves. See "Liquidity and Capital Resources -- Working Capital" below for
a more detailed analysis of Convest's estimated future net revenues at December
31, 1995 and 1996.
1997 Capital Expenditures. During 1997, Convest plans to continue investing
a substantial portion of its cash flow in drilling operations on its offshore
properties. The capital expenditure budget for 1997 will be approximately $16
million.
Price Risk Management/Hedging. Convest uses a combination of futures
contracts traded on the NYMEX and price swaps with major financial institutions
to hedge against the volatility of natural gas and oil prices. Gains and losses
recognized upon settlement of Convest's hedge positions are deferred and
recognized as oil and gas sales revenue in the month of the underlying physical
production being hedged. As a result of Convest's hedging activities, Convest
recorded a hedging loss of approximately $7.8 million for 1996. This amount was
recorded as a reduction in oil and gas sales revenue in the accompanying
statements of operations, and accordingly, is reflected in the per unit price
Convest received for its oil and gas sales.
The hedges affecting 1996 were implemented early in the fourth quarter of
1995 when oil and gas prices were substantially lower, and were made as a
defensive measure to assure stable cash flows in 1996. The harsh winter at the
beginning of 1996, however, drove prices up substantially. These high prices
have continued during most of 1996 which caused the hedging losses. Convest has
substantially decreased its hedging activities for 1997.
At December 31, 1996, Convest had NYMEX futures contracts hedging
approximately 90 Mbls of oil and 3,300 Mmcf of natural gas (or approximately 10%
and 27% of Convest's estimated 1997 oil and gas production, respectively). The
contracts for natural gas range from approximately $2.34 to $3.09 per Mcf for
the period February 1997 to November 1997 with an average price of $2.53 per
Mcf. The contracts for oil range from $20.73 to $24.64 for the period February
1997 to October 1997 with an average price of $22.50 per Bbl.
SFAS 121 Impairment Loss. Convest recorded a $2.6 million impairment loss
in 1996 as a result of Convest's evaluation of its proved oil and gas properties
under SFAS 121 regarding accounting for long-lived assets. Under SFAS 121,
Convest is required to recognize an impairment loss with respect to its proved
oil and gas properties if the carrying value of such properties (i.e.,
capitalized costs less accumulated depreciation and depletion) exceeds the
undiscounted expected future cash flows attributable to such oil and gas
properties. SFAS 121 requires Convest to assess the need for an impairment of
capitalized costs of oil and gas properties on a property-by-property basis.
$1.1 million of the impairment loss was recognized in the second quarter of 1996
and the remaining $1.5 million was recognized in the fourth quarter of 1996.
Convest assessed the need for an impairment at December 31, 1996 using the
prices of $22.73 per barrel of oil and $2.21 per Mcf of gas.
Repayment of Outstanding Debt. During 1996, Convest has repaid a net $15.2
million of outstanding debt under its long-term line of credit facility. The
amount of debt at December 31, 1996 was $4.0 million which has been repaid in
full in February 1997. This credit facility, however, will remain available for
future credit needs.
Property Sales. During January 1996, Convest sold its interest in Vermilion
Block 284 for approximately $2.0 million. Convest also sold other nonstrategic
oil and gas properties during 1996 for aggregate sales
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proceeds of approximately $991,000. As a result of these sales, Convest recorded
a gain of approximately $1.2 million during 1996.
Lawsuit Settlements. Convest favorably settled two lawsuits in 1996. In the
first lawsuit, a ship collided with an offshore platform for one of Convest's
offshore properties in which Convest had a 21% working interest. In addition to
the damage to the platform, the economic life of the property was impaired.
Convest's share of the net settlement proceeds was $1.3 million, and Convest
recognized an $873,000 gain. In the second lawsuit, Convest and other parties
had sued the buyer under certain gas purchase contracts alleging that the buyer
had not paid the correct amounts under the gas purchase contracts. Under the
settlement, Convest's share of the net settlement proceeds, and its gain, was
$437,000.
Volatility of Natural Gas and Oil Prices
The revenues generated from operations are highly dependant upon the prices
of oil and natural gas. Historically, the markets for natural gas and oil have
been volatile and are likely to continue to be volatile in the future. Prices
for natural gas and oil are subject to wide fluctuation in response to
relatively minor changes in the supply of and demand for natural gas and oil,
market uncertainty and a variety of additional factors that are beyond the
control of Convest. These factors include the level of consumer product demand,
weather conditions, domestic and foreign governmental regulations, the price and
availability of alternative fuels, political conditions in the Middle East, the
foreign supply of natural gas and oil, the price of foreign imports and overall
economic conditions. It is impossible to predict future natural gas and oil
price movements with any certainty. Declines in natural gas and oil prices may
adversely affect Convest's financial condition, liquidity and results of
operations. Lower natural gas and oil prices also may reduce the amount of
Convest's natural gas and oil that can be produced economically.
Hedging Activities
From time to time, Convest has utilized hedging transactions with respect
to a portion of its oil and gas production to achieve a more predictable cash
flow, as well as to reduce its exposure to price fluctuations. While the use of
these hedging arrangements limits the downside risk of adverse price movements,
they may also limit future revenues from favorable price movements. See "Price
Risk Management/Hedging" above and Note 5 to the Consolidated Financial
Statements.
As a result of the hedging activities, Convest is exposed to credit losses
in the event of nonperformance by the counterparties to its hedging agreements.
Convest has evaluated such risks and believes that overall business risk is
minimized since these hedging contracts are with major investment-grade
financial institutions.
Convest will continue to monitor energy prices and may enter into
subsequent hedging transactions in the ordinary course of business as management
deems appropriate.
LIQUIDITY AND CAPITAL RESOURCES
Credit Facility and Long-Term Debt
On June 26, 1995, Convest entered into a new credit agreement which
terminates January 1, 1999. This facility is secured by a first lien on
substantially all of Convest's assets, including its oil and gas properties and
gas plant. The borrowing base under the credit facility is subject to
redetermination semi-annually (on May 31 and November 30) using engineering
determinations and pricing and other assumptions designated by the bank group.
Effective December 1, 1996, the new borrowing base under the credit facility was
$19.2 million, based on the lending banks' semi-annual redetermination, which
began reducing by $1.0 million per month beginning January 1, 1997. Effective
January 28, 1997 and June 12, 1997, the borrowing base was reduced by $300,000
and $200,000, respectively, to give effect to the sale of oil and gas properties
securing the credit facility. Pursuant to the terms of the credit facility,
Convest is required to provide the banks with semi-annual estimates of its
reserves on or before April 1 and October 1 of each year. Due to the proposed
merger with Forcenergy, the banks have agreed to extend the report due on
October 1, 1997 until December 1, 1997. As a
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result, Convest's borrowing base will continue to reduce by $1.0 million per
month until the updated reports are provided and the borrowing base has been
redetermined. After giving effect to the monthly borrowing base reductions and
the reduction resulting from the property sales, Convest's borrowing base under
the credit facility was approximately $10.7 million on August 1, 1997. Based on
the scheduled borrowing base reductions, Convest will have no borrowing capacity
under the credit facility after June 1, 1998 unless the lending banks provide a
subsequent redetermination of the borrowing base based on the reserve estimates
to be provided on December 1, 1997.
During 1997, Convest repaid the outstanding balance of $4.0 million under
the credit facility. The credit facility, however, will remain available for
future credit needs.
Working Capital
Convest had working capital of $1.2 million at June 30, 1997 compared to a
working capital deficit of $2.6 million at December 31, 1996. The primary
contributor to the improvement in Convest's working capital position during 1997
was an overall increase in the price Convest received for its oil and gas
production. The higher oil and gas prices coupled with the additional production
associated with Convest's exploratory and development program enabled Convest to
reduce its current liabilities and accumulate higher cash balances.
Based on the cash flow from Convest's oil and gas properties, management
believes that Convest has the financial capability to satisfy its 1997 capital
expenditures program while meeting operating needs arising in the ordinary
course of business.
Capital Expenditures
Convest has budgeted capital expenditures totaling $9.7 million for the
remainder of 1997. In addition, Convest anticipates that the operator for the
High Island Block 195 will propose drilling an additional well for which no
costs are currently included in the Company's capital budget. As previously
stated, management believes that the cash flow generated from Convest's
properties coupled with the available borrowings under Convest's credit facility
will be adequate to fund the anticipated capital expenditures for 1997.
Volatility of Natural Gas and Oil Prices
The revenues generated from operations are highly dependant upon the prices
of oil and natural gas. Historically, the markets for natural gas and oil have
been volatile and are likely to continue to be volatile in the future. Prices
for natural gas and oil are subject to wide fluctuation in response to
relatively minor changes in the supply of and demand for natural gas and oil,
market uncertainty and a variety of additional factors that are beyond the
control of Convest. These factors include the level of consumer product demand,
weather conditions, domestic and foreign governmental regulations, the price and
availability of alternative fuels, political conditions in the Middle East, the
foreign supply of natural gas and oil, the price of foreign imports and overall
economic conditions. It is impossible to predict future natural gas and oil
price movements with any certainty. Declines in natural gas and oil prices may
adversely affect Convest's financial condition, liquidity and results of
operations. Lower natural gas and oil prices also may reduce the amount of
Convest's natural gas and oil that can be produced economically.
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RESULTS OF OPERATIONS
The following table highlights certain statements of operations data of
Convest and production expenses for the six months ended June 30, 1997 and 1996
and for the years ended December 31, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDING JUNE 30, YEARS ENDING DECEMBER 31,
------------------ -----------------------------
1997 1996 1996 1995(2) 1994(2)
------- ------- ------- ------- -------
(IN THOUSANDS EXCEPT FOR BARREL DATA)
<S> <C> <C> <C> <C> <C>
Production Volumes:
Oil (MBbls)............................ 490 460 960 1,219 584
Gas (including NGLs) (Mmcf)............ 6,213 7,006 13,537 18,488 19,295
BOE (MBbls)(1)......................... 1,526 1,627 3,216 4,300 3,800
Prices:
Oil ($/Bbl)............................ $ 19.29 $ 17.05 $ 18.47 $ 17.20 $ 15.51
Gas ($/Mcf)............................ $ 2.49 $ 1.92 $ 2.06 $ 1.57 $ 1.96
Gross Oil and Gas Revenue:
Oil.................................... $ 9,457 $ 7,845 $17,735 $20,963 $ 9,056
Gas (including NGLs)................... 15,448 13,484 27,887 28,954 37,732
------- ------- ------- ------- -------
Total Oil and Gas Revenue...... $24,905 $21,329 $45,622 $49,917 $46,788
======= ======= ======= ======= =======
Production Expenses:
Lease Operating Expenses............... $ 5,744 $ 7,636 $12,998 $16,790 $12,033
Production Taxes....................... 533 617 1,272 1,167 247
------- ------- ------- ------- -------
Total Production Expenses...... $ 6,277 $ 8,253 $14,270 $17,957 $12,280
======= ======= ======= ======= =======
Abandonment and Exploration Costs........ $ 1,147 $ 921 $ 1,775 $ 2,279 $ 2,135
======= ======= ======= ======= =======
General and Administrative Expenses...... $ 2,188 $ 2,281 $ 4,792 $ 4,882 $ 4,588
======= ======= ======= ======= =======
Interest Expense......................... $ 72 $ 674 $ 1,065 $ 2,015 $ 747
======= ======= ======= ======= =======
Depreciation, Depletion and Amortization
of Oil and Gas Properties.............. $ 7,225 $ 7,857 $16,364 $19,886 $18,222
======= ======= ======= ======= =======
Production Expense per BOE............... $ 4.11 $ 5.07 $ 4.44 $ 4.18 $ 3.23
======= ======= ======= ======= =======
Depreciation, Depletion and Amortization
per BOE................................ $ 4.74 $ 4.83 $ 5.09 $ 4.62 $ 4.80
======= ======= ======= ======= =======
</TABLE>
- ---------------
(1) Natural gas is converted into oil equivalents at a rate of six Mcf per
barrel of oil.
(2) Convest acquired Edisto E&P on June 26, 1995 in a transaction that was
accounted for as a "reverse acquisition" because Edisto became the majority
shareholder of Convest. See Note 1 to the Notes to Convest's Consolidated
Financial Statements. Accordingly, the information presented for 1994
includes only Edisto E&P while the information presented for 1995 and 1996
includes both Convest and Edisto E&P.
Six Months Ended June 30, 1997 and 1996
Revenues. Oil and gas revenue increased by approximately $3.6 million or
17% between the six months ended June 30, 1997 and 1996. The average price
Convest received for its oil and gas sales increased by 13% and 30%,
respectively, between the corresponding periods. Oil production increased by 7%
between the periods while gas production decreased by 11%. During 1996 and early
1997, Convest participated in 21 new exploratory and development wells of which
16 were successful. As a result of this drilling, production from several of
Convest's properties increased substantially. The additional production
associated with Convest's drilling success was partially offset by the sale or
abandonment of a number of marginal properties during 1996 and early 1997 and
the effects of depletion on Convest's offshore Gulf of Mexico gas producing
properties.
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Also, Convest's offshore gas properties are subject to inherent steep production
declines. These declines were partially offset during 1996 and early 1997 by the
drilling success mentioned above. In order to minimize the future effects of
such declines, Convest must replace its reserves through its exploratory and
development drilling and acquisition activities. Convest's gas plant revenue
increased by $298,000 or 42% between the corresponding periods due primarily to
higher prices received for output from the plant.
Price Risk Management/Hedging. Convest uses a combination of futures
contracts traded on the NYMEX and over the counter price swaps with major
financial institutions to hedge against the volatility of natural gas and oil
prices. Gains and losses recognized upon settlement of Convest's hedge positions
are deferred and recognized as oil and gas sales revenue in the month of the
underlying physical production being hedged. As a result of Convest's hedging
activities, Convest recorded hedging income of approximately $313,000 for the
six month period ended June 30, 1997 and a hedging loss of approximately $4.5
million for the corresponding period of 1996. Such amounts were recorded as oil
and gas sales revenue in the accompanying statements of operations, and
accordingly, such amounts are reflected in the per unit price Convest received
for its oil and gas sales.
Production Expenses. Production expenses decreased by approximately $2.0
million or 24% between the corresponding periods. The decrease in lease
operating expenses was primarily due to the aforementioned sale or abandonment
of a number of marginal producing properties during 1996 and early 1997 which
tended to have high operating expense. Production expenses per barrel of oil
equivalent ("BOE") was $4.11 for the six months ended June 30, 1997 compared to
$5.07 for the corresponding period of 1996.
Abandonment and Exploration Costs. Abandonment and exploration costs
increased by approximately $226,000 due to (i) the aforementioned abandonment of
several offshore properties during the first quarter of 1997 and (ii) the write
off of approximately $757,000 associated with two unsuccessful exploratory wells
drilled during the first quarter of 1997 in accordance with the successful
efforts method of accounting. During the second quarter of 1996, Convest
expensed approximately $750,000 of drilling costs associated with two
unsuccessful exploratory test wells.
General and Administrative Expense. General and administrative expense
decreased by approximately 4% between the corresponding periods due primarily to
the resignation of the former President and Chief Operating Officer and the
former Chief Financial Officer during late 1996. Subsequent to the resignation
of the two former executive officers, neither position has been replaced
resulting in lower salary expense for 1997.
Interest Expense. Interest expense decreased by $602,000 or 89% between the
corresponding periods due to the repayment of all outstanding borrowing under
the Company's credit facility during early 1997.
Depreciation, Depletion and Amortization ("DD&A"). DD&A on oil and gas
properties decreased by approximately $632,000 or 8% between the corresponding
periods. The decrease in DD&A was primarily due to a 6% decline in overall
production volumes on a per BOE basis. DD&A per BOE was $4.74 for the six months
ended June 30, 1997 compared to $4.83 for the corresponding period of 1996.
Impairment of Oil and Gas Properties. During the second quarter of 1996,
Convest recorded an impairment of $1.1 million on one of its offshore gas
properties. During the second quarter of 1996, the producing well on the
property experienced permanent mechanical difficulties and, accordingly, the
property was written off in accordance with SFAS 121. No such provision has been
required in 1997.
Gain on Asset Sales. In January 1996, Convest completed the sale of an
offshore oil and gas property for sale proceeds of approximately $2.0 million.
As a result of the sale, Convest recorded a gain on the property sale of
approximately $620,000 during the first quarter of 1996. Convest has continued
to review its properties with a focus on profitability and as a result has sold
several non-strategic properties with marginal profitability during 1997.
Aggregate sale proceeds totaled approximately $740,000 and resulted in a gain of
approximately $63,000 for the six months ended June 30, 1997.
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Comparison of the Years Ended December 31, 1996 and 1995
Overview. Convest had net income of $8.1 million for 1996 compared to a net
loss of $0.9 million in 1995. These results for 1996 included (i) a $1.2 million
gain on the sale of properties during the year, (ii) a $1.3 million gain from
the favorable settlements of two lawsuits filed by Convest against third
parties, and (iii) a $2.6 million impairment loss under SFAS 121 with respect to
Convest's oil and gas properties, as explained further below. Convest's results
were aided significantly by the high oil and gas prices received by Convest
during the fourth quarter of 1996 (average prices of $20.35 per barrel of oil
and $2.63 per Mcf of gas). Convest's net income during the fourth quarter of
1996 was approximately $5.5 million.
Revenues. Oil and gas revenue decreased by approximately $4.3 million or 9%
between the twelve month periods ended December 31, 1996 and 1995. The average
price Convest received for its oil and gas sales increased by 7% and 31%,
respectively, between the corresponding periods. Oil and gas production
decreased by 21% and 27%, respectively. The decrease in production volumes was
due primarily to the sale of producing oil and gas properties coupled with the
steep production decline associated with Convest's offshore Gulf of Mexico
properties. The effects of these production declines were partially offset by
the additional drilling on Convest's South Timbalier Block 144 property
completed in late 1995 and the addition of the Sensor properties purchased in
mid 1995. As previously stated, Convest's offshore properties are subject to
inherent steep production declines. In order to minimize the future effects of
such declines, Convest must replace its reserves through exploratory and
development drilling and acquisition activities.
Price Risk Management/Hedging. Convest uses a combination of futures
contracts traded on the NYMEX and over the counter price swaps with major
financial institutions to hedge against the volatility of natural gas and oil
prices. Gains and losses recognized upon settlement of Convest's hedge positions
are deferred and recognized as oil and gas sales revenue in the month of the
underlying physical production being hedged. As a result of Convest's hedging
activities, Convest recorded hedging losses of approximately $7.8 million and
$421,000 for the twelve month periods ended December 31, 1996 and 1995,
respectively. Such amounts were recorded as oil and gas sales revenue in the
accompanying statements of operations, and accordingly, such amounts are
reflected in the per unit price Convest received for its oil and gas sales.
The hedges affecting 1996 were implemented early in the fourth quarter of
1995 when oil and gas prices were substantially lower. These hedges were made as
a defensive measure to assure stable cash flows in 1996. The past harsh winter,
however, drove prices up substantially and these high prices have continued
during most of 1996 which caused the hedging losses in 1996. Convest has
substantially decreased its hedging activities for 1997.
Production Expenses. Production expenses decreased by approximately $3.7
million or 20% between the corresponding periods. The decrease in production
expenses is primarily due to a decrease in workover activity during the twelve
months ended December 31, 1996, and the sale of producing oil and gas properties
during 1995 and early 1996. The decline in production expenses was offset by the
incremental operating expenses associated with the Sensor properties. Production
expenses per BOE was $4.44 and $4.18 for the twelve months ended December 31,
1996 and 1995, respectively. The increase in production expense per BOE is
caused by the decreased offshore production without a corresponding decrease in
production expense.
Abandonment and Exploration Costs. Abandonment and exploration costs
decreased by approximately $500,000 between the corresponding periods. The
decrease in abandonment and exploration costs is primarily due to Convest
accruing its estimated cost of abandonment of its offshore properties in prior
periods. Based upon a review of the reserve for abandonment, it was determined
that Convest had substantially provided for its future abandonment liability,
and accordingly, no additional accrual was provided for 1996.
Impairment of Oil and Gas Properties Under SFAS 121. Prior to 1995, Convest
provided an impairment reserve for proved oil and gas properties to the extent
that total capitalized costs less accumulated depreciation and depletion,
exceeded undiscounted future revenues attributable to proved oil and gas
reserves on an overall basis. During March 1995, the Financial Accounting
Standards Board issued SFAS 121 which requires Convest to provide an impairment
reserve for proved oil and gas properties to the extent that total capitalized
costs, less accumulated depreciation and depletion, exceed undiscounted expected
future cash flows attributa-
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ble to proved oil and gas reserves on a property-by-property basis. Convest
adopted the provisions of SFAS 121 and was required to record an impairment loss
of approximately $5.9 million during the fourth quarter of 1995.
Convest recorded a $2.6 million impairment loss in 1996 as a result of
Convest's evaluation of its proved oil and gas properties under SFAS 121
regarding accounting for long-lived assets. Under SFAS 121, Convest is required
to recognize an impairment loss with respect to its proved oil and gas
properties if the carrying value of such properties (i.e., capitalized costs
less accumulated depreciation and depletion) exceeds the undiscounted expected
future cash flows attributable to such oil and gas properties. SFAS 121 requires
Convest to assess the need for an impairment of capitalized costs of oil and gas
properties on a property-by-property basis. $1.1 million of the impairment loss
was recognized in the second quarter of 1996 and the remaining $1.5 million was
recognized in the fourth quarter of 1996. Convest assessed the need for an
impairment at December 31, 1996 using the prices of $22.73 per barrel of oil and
$2.20 per Mcf of gas.
General and Administrative Expenses. General and administrative expenses
decreased by approximately $90,000 between the corresponding periods. The
primary contributor to the decrease in general and administrative expense as the
inclusion of employee severance cost in 1995 subsequent to Convest's
reorganization upon closing of the Edisto Transaction. In addition, Convest
incurred lower office rent expense after Edisto E&P terminated its existing
office lease in mid 1995.
Interest Expense. Interest expense decreased by approximately 47% due to
the repayment of a short-term promissory note issued in connection with
Convest's purchase of the oil and gas assets of a former affiliate. The
short-term promissory note was repaid simultaneously with the closing of the
Edisto Transaction. In addition, Convest repaid a substantial portion of its
outstanding borrowings under its long-term credit facility during 1996.
Depreciation, Depletion and Amortization. DD&A on oil and gas properties
decreased by approximately $3.5 million or 18% between the corresponding
periods. The decrease in DD&A was due primarily to the production declines
discussed above. DD&A per BOE was $5.09 for the twelve month period ended
December 31, 1996, compared to $4.62 for the corresponding period of 1995.
Gain on Asset Sales. In mid-January 1996, Convest completed the sale of an
offshore oil and gas property for sale proceeds of approximately $2.0 million,
which resulted in a gain of approximately $620,000. In addition, Convest sold
several other nonstrategic oil and gas properties during 1996 for aggregate sale
proceeds of approximately $991,000 which resulted in a gain of approximately
$619,000.
Comparison of the Years Ended December 31, 1995 and 1994.
As previously explained, because of the Edisto transaction that occurred on
June 26, 1995 and the reverse acquisition method of accounting used to account
for such transaction, the results of operations for the year ended December 31,
1995 are not comparable to the results of operations for the year ended December
31, 1994. Accordingly, management of Convest does not believe that the
comparisons set forth below of these two years provides meaningful information.
All references below to "CEC" refer to Convest prior to the Edisto Transaction.
Overview. Results for the year ended December 31, 1995 include the results
of CEC from January 1, 1995 and the results of the Sensor acquisition from the
acquisition dates (May 1, 1995 and June 14, 1995), whereas results for the year
ended December 31, 1994 represent Edisto E&P only. Convest recorded a net loss
for 1995 of $0.9 million, or ($0.11) per share, compared to net income of $11.3
million, or $1.82 per share, for the corresponding period of 1994. In computing
net income for 1995, CEC's loss of approximately $1.7 million for the period
preceding the Edisto Transaction (the six months ended June 30, 1995) was added
back to Convest's net income (see Note 1 under "Notes to Consolidated Financial
Statements" included elsewhere herein). During the fourth quarter of 1995,
Convest recorded a charge of $5.9 million resulting from a change in Convest's
method of accounting for impairment of oil and gas properties. Total revenue
decreased by approximately 2% between the periods primarily due to a $4.8
million gain on the sale of oil and gas properties
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recorded during 1994. Production expenses increased by approximately $6.2
million primarily due to the inclusion of the CEC properties following the
Edisto Transaction and are discussed further below.
Revenues. Oil and gas revenue increased by approximately $3.1 million or 7%
between the year ended December 31, 1995 and the corresponding period of 1994.
The average price Convest received for its crude oil sales increased by $1.69
per barrel between the corresponding periods while the average price Convest
received for its gas sales decreased by $0.39 per mcf. Oil production increased
by 97% while gas production decreased by only 3% between the periods due
primarily to the inclusion of CEC revenues and expenses in the consolidated
revenues and expenses of Convest (See Notes 1 and 3 under "Notes to Consolidated
Financial Statements" included herein). Oil and gas production from the existing
Edisto E&P properties decreased by approximately 5% and 17%, respectively. The
decrease in volumes was due in part to the sale of certain offshore properties
during 1994 coupled with the inherent steep production declines associated with
offshore properties. The aforementioned decline in Edisto E&P's oil production
was partially offset by the additional production added through Edisto E&P's
acquisition of the Sensor Properties.
Production Expenses. Production expenses increased by approximately $5.7
million between the corresponding periods. Operating expenses associated with
the CEC properties totaled approximately $6.4 million for the year ended
December 31, 1995. As the CEC properties consist of several large waterflood
units, these properties tend to have higher operating expenses than
non-waterflood properties. In addition, substantially all of CEC's properties
are onshore properties and therefore are subject to severance taxes by state
taxing authorities while substantially all of Edisto E&P's properties are
offshore and are not subject to severance tax. Production expenses on Edisto
E&P's existing properties decreased by approximately 6% due primarily to the
sale of certain properties and the production declines previously discussed.
Abandonment and Exploration Costs. Abandonment and exploration costs
increased by approximately $144,000 due primarily to Edisto E&P's abandonment of
an offshore property during 1995. During 1995, the operator of one of Edisto
E&P's offshore properties proposed an operation on the property and Convest
elected not to participate. The operation subsequently proved unsuccessful and
Edisto E&P abandoned its interest.
General and Administrative Expenses. General and administrative expenses
increased by 6% between the corresponding periods due primarily to the inclusion
of approximately $500,000 of employee severance costs during 1995 associated
with its restructuring following the Edisto Transaction. In addition, CEC and
Edisto E&P entered into a management agreement effective January 1, 1995,
whereby CEC managed the oil and gas property interest owned by Edisto E&P in
exchange for $50,000 per month. As a result, Edisto E&P incurred limited general
and administrative expense for the period prior to the Edisto Transaction. The
Edisto E&P amounts reflect the $50,000 per month management fee as general and
administrative expense while CEC amounts reflect the management fee as a
reduction of its general and administrative expense. The management agreement
terminated upon closing of the Edisto Transaction.
Interest Expense. Interest expense increased by approximately $1.3 million
between the corresponding periods. Interest expense is comprised of interest on
a short-term promissory note issued to an affiliate of CEC related to a property
acquisition and interest on CEC's outstanding bank debt which was outstanding
prior to the Edisto Transaction. The short-term promissory note was repaid at
closing of the Edisto Transaction.
Depreciation, Depletion and Amortization. DD&A on oil and gas properties
increased by approximately $1.7 million or 9% between the corresponding periods.
DD&A attributable to CEC's properties totaled approximately $6.1 million for the
year ended December 31, 1995. DD&A attributable to Edisto E&P's oil and gas
properties decreased by approximately $4.5 million due to an upward revision in
estimated recoverable reserves at December 31, 1995, and the lower production
volumes previously discussed. DD&A per equivalent unit of oil production was
$4.62 and $4.80 for the year ended December 31, 1995 and 1994, respectively.
Impairment of Oil and Gas Properties. Prior to 1995, Convest provided an
impairment reserve for proved oil and gas properties to the extent that total
capitalized costs less accumulated depreciation and depletion, exceed
undiscounted future net revenues attributable to proved oil and gas reserves on
an overall basis. The provisions of SFAS 121 require Convest to provide an
impairment reserve for proved oil and gas properties to the extent that total
capitalized costs less accumulated depreciation and depletion, exceed
undiscounted
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expected future cash flows attributable to proved oil and gas reserves on a
property-by-property basis. Convest adopted the provisions of SFAS 121 during
the fourth quarter of 1995. Upon the adoption of SFAS 121, Convest was required
to record an impairment of approximately $5.9 million during the fourth quarter
of 1995.
Equity in Loss of Affiliate. The $1.7 million equity in earnings (loss) of
affiliates for 1994 reflects a $1.7 million loss from CEC. Edisto E&P acquired
its 31% interest in CEC at the end of November 1994 and accounted for such
interest using the equity method of accounting. Accordingly, since CEC suffered
a $5.5 million loss in December 1994, Edisto E&P's equity in CEC's loss was $1.7
million. During January 1995, Edisto E&P transferred the purchased shares of CEC
Common Stock to Edisto.
Gain/Loss on Asset Sale. Edisto E&P realized a $4.8 million gain primarily
related to the sale of an offshore property during the year ended December 31,
1994. During 1995, Edisto E&P realized a loss of approximately $660,000 related
to the sale of another offshore property.
Additional information concerning Convest and its subsidiaries is included
in the Convest documents filed with the Commission, which are incorporated by
reference herein. See "Incorporation of Certain Documents by Reference."
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DESCRIPTION OF FORCENERGY CAPITAL STOCK
Forcenergy's authorized capital stock consists of 50,000,000 shares of
Common Stock and 5,000,000 shares of Preferred Stock, par value $0.01 per share.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share in the election
of directors and on all other matters submitted to a vote of common stockholders
and do not have cumulative voting rights. Holders of Common Stock are entitled
to receive ratably such dividends, if any, as may be declared by the Board of
Directors out of funds legally available therefore, subject to any preferential
dividend rights of holders of outstanding Preferred Stock. Upon the liquidation,
dissolution or winding up of Forcenergy, the holders of Common Stock are
entitled to receive ratably the net assets of Forcenergy available after payment
of all debts and other liabilities, subject to the prior rights of any
outstanding shares of Preferred Stock. Holders of Common Stock have no
preemptive, subscription, redemption or conversion rights.
PREFERRED STOCK
The Board of Directors of Forcenergy is empowered, without approval of the
stockholders, to cause shares of Preferred Stock to be issued in one or more
series, with the numbers of shares of each series to be determined by it. The
Board of Directors is authorized to fix and determine variations in the
designations, preferences, and relative, participating, optional or other
special rights (including, without limitation, special voting rights to receive
dividends or assets upon liquidation, rights of conversion into Common Stock or
other securities, redemption provisions and sinking fund provisions) between
series and between the Preferred Stock or any series thereof and the Common
Stock, and the qualifications, limitations or restrictions of such rights; and
the shares of Preferred Stock or any series thereof may have full or limited
voting powers, or be without voting powers.
Although Forcenergy has no present intention to issue shares of Preferred
Stock, the issuance of shares of Preferred Stock, or the issuance of rights to
purchase such shares, could be used to discourage an unsolicited acquisition
proposal. For instance, the issuance of a series of Preferred Stock might impede
a business combination by including class voting rights that would enable the
holders to block such a transaction; or such issuance might facilitate a
business combination by including voting rights that would provide a required
percentage vote of the stockholders. In addition, under certain circumstances,
the issuance of Preferred Stock could adversely affect the voting power of the
holders of the Common Stock. Although the Board of Directors is required to make
any determination to issue such stock based on its judgment as to the best
interests of the stockholders of Forcenergy, the Board of Directors could act in
a manner that would discourage an acquisition attempt or other transaction in
that some or a majority of the stockholders might believe to be in their best
interest or in which stockholders might receive a premium for their stock over
the then market price for such stock. The Board of Directors does not at present
intend to seek stockholder approval prior to any issuance of currently
authorized stock, unless otherwise required by law or the regulations of the
exchange on which its Common Stock is listed.
WARRANTS
In connection with a previous offering of debt securities, Donaldson,
Lufkin & Jenrette Securities Corporation ("DLJ") was granted warrants to
purchase 98,337 shares of Forcenergy's Common Stock at an exercise price of
$14.51 per share. The warrants are currently exercisable and have an expiration
date of September 14, 1998. DLJ exercised 49,168 warrants on April 1, 1997.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Forcenergy Common Stock is
American Stock Transfer & Trust Company.
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COMPARATIVE RIGHTS OF FORCENERGY AND EDISTO STOCKHOLDERS
If the Edisto Merger is consummated, the stockholders of Edisto will become
stockholders of Forcenergy. The rights of the stockholders of both Forcenergy
and Edisto are governed by and subject to the provisions of the DGCL. The rights
of current Edisto stockholders following the Edisto Merger will be governed by
the Forcenergy Amended and Restated Certificate of Incorporation (the
"Forcenergy Charter") and Forcenergy Bylaws rather than the provisions of the
Edisto Certificate of Incorporation (the "Edisto Charter") and Edisto Bylaws.
The following is a brief summary of certain differences between the rights of
Forcenergy stockholders and the rights of Edisto stockholders, and is qualified
in its entirety by reference to the relevant provisions of the DGCL, the
Forcenergy Charter and Bylaws and the Edisto Charter and Bylaws.
NUMBER, CLASSIFICATION AND REMOVAL OF DIRECTORS
The Forcenergy Bylaws authorize that the number of directors to serve on
its Board of Directors may be increased or decreased with the approval of a
majority of the then-authorized number of directors. Newly created directorships
resulting from any increase in the authorized number of directors and any vacant
directorships may be filled by the affirmative vote of a majority of the
directors then in office. This provision of the Forcenergy Bylaws may be
altered, amended, or repealed by the affirmative vote of the majority of either
the Forcenergy Board of Directors or the outstanding shares of capital stock of
Forcenergy entitled to vote.
The Edisto Bylaws authorize no fewer than one (1) and no more than thirteen
(13) persons to serve on its Board of Directors. Edisto presently has five
directors. The number of directors may be increased or decreased within the
authorized range by resolution approved by the unanimous vote of the
then-authorized directors. Vacancies and newly created directorships resulting
from any such increase may be filled by a majority of the directors then in
office though less than a quorum, or by a sole remaining director. This
provision of the Edisto Bylaws may be altered, amended, or repealed by the
affirmative vote of the majority of either the Edisto Board of Directors or the
outstanding shares of capital stock of Edisto entitled to vote.
The Forcenergy Charter provides that a director may be removed with or
without cause by the affirmative vote of the holders of a majority of the stock
entitled to vote for the election of directors. Under Section 141(k) of the
DGCL, Edisto directors may be removed with or without cause by an affirmative
vote of a majority of the stockholders entitled to vote for the election of
directors.
VOTING RIGHTS
The Forcenergy Charter does not provide for cumulative voting rights for
the election of directors or otherwise. Therefore, Forcenergy shareholders elect
directors by straight voting. Under section 216 of the DGCL Forcenergy directors
are elected by a plurality of the votes of the shares present in person or
represented by proxy at the meeting and entitled to vote on the election of
directors.
The Edisto Charter provides for cumulative voting for directors if 120 days
prior to a stockholder's meeting in which directors will be elected, a holder or
holders of not less than 20% of the outstanding shares of stock entitled to vote
upon the election of directors furnish written notice to the corporation
electing to cumulate their votes.
Upon the consummation of the Edisto Merger, former Edisto stockholders will
not have the right to vote cumulatively for Forcenergy directors.
POWER TO CALL SPECIAL MEETINGS
The Forcenergy Charter provides that a special meeting of stockholders may
be called only by the Forcenergy Board of Directors or the President. Written
notice of a special meeting must be mailed not fewer than 10 nor more than 60
days before the meeting to each stockholder of record entitled to vote.
The Edisto Charter provides that a special meeting of stockholders may be
called by the Chairman, the President, any Vice President, the Secretary or any
Assistant Secretary at the written request of a majority of the Board of
Directors, or by a holder or holders of not less than 20% of the Edisto capital
stock entitled to
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vote by requesting such meeting in writing not less than 10 nor more than 60
days before such meeting. Such request shall state the purpose or purposes of
such meeting. If the Edisto Merger is consummated, Edisto stockholders will not
have the right to call a special meeting of stockholders.
STOCKHOLDER VOTE REQUIRED FOR CERTAIN TRANSACTIONS
The Forcenergy Charter requires for approval of certain business
combinations and transactions with certain stockholders or with corporations
which are affiliated therewith, an affirmative vote of 75% of the votes which
the holders of the then outstanding shares of capital stock of Forcenergy
excluding those shares beneficially owned by such stockholder unless such
transaction is approved by a majority of disinterested stockholders. The
Forcenergy Charter also provides that a 75% approval of disinterested
stockholders is required to amend the provisions concerning interested
transactions.
The Edisto Charter permits Edisto to enter into interested transactions or
transactions with a Related Person (as defined in the Edisto Charter) provided
that the holders of at least 80% of the capital stock entitled to vote together
with the holders of at least a majority of the capital stock not beneficially
owned by a Related Person approve such transaction. Notwithstanding this
required vote of stockholders, such a transaction may be entered into if it has
been approved by at least a majority vote of the nonrelated directors.
If the Edisto Merger is consummated, the Edisto stockholders shall be
subject to the provisions for approving interested transactions provided in the
Forcenergy Charter.
ACTION BY WRITTEN CONSENT
Both the Forcenergy Charter and the Edisto Charter provide that no action
required or permitted to be taken by the stockholders of the corporation may be
effected by consent in writing. Such action must be effected at an annual or
special meeting of stockholders.
AMENDMENTS OF BYLAWS
Both the Forcenergy Bylaws and the Edisto Bylaws may be amended, altered or
repealed either by their respective Boards of Directors or by the holders of a
majority of the then outstanding shares of their respective capital stock
present and entitled to vote at a meeting as provided in their respective
Charters and Bylaws.
COMPARATIVE RIGHTS OF FORCENERGY AND CONVEST STOCKHOLDERS
If the Convest Merger is consummated, the stockholders of Convest will
become stockholders of Forcenergy. The rights of stockholders of Convest are
governed by and subject to the provisions of the TBCA and the Convest
Certificate of Incorporation (the "Convest Charter") and Convest Bylaws. The
rights of current Convest stockholders following the Convest Merger will be
governed by the Forcenergy Charter and Forcenergy Bylaws and the provisions of
the DGCL rather than the Convest Charter and Bylaws and the provisions of the
TBCA. The following is a brief summary of certain differences between the rights
of Forcenergy stockholders and the rights of Convest stockholders, and is
qualified in its entirety by reference to the relevant provisions of the DGCL
and the TBCA, the Forcenergy Charter and Bylaws and the Convest Charter and
Bylaws.
NUMBER, CLASSIFICATION AND REMOVAL OF DIRECTORS
The Forcenergy Bylaws authorize that the number of directors to serve on
its Board of Directors may be increased or decreased with the approval of a
majority of the then authorized number of directors. Newly created directorships
resulting from any increase in the authorized number of directors and any vacant
directorships may be filled by the affirmative vote of a majority of the
directors then in office. This provision of the Forcenergy Bylaws may be
altered, amended, or repealed by the affirmative vote of the majority of either
the Forcenergy Board of Directors or the outstanding shares of capital stock of
Forcenergy entitled to vote.
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The Convest Bylaws authorizes no fewer than three and no more than 13
persons to serve on its Board of Directors, but the number of directors may be
increased or decreased from time to time by amendment to the Bylaws or by
resolution of the Board of Directors. Vacancies may be filled by the affirmative
vote of a majority of the remaining directors though less than a quorum of the
Board of Directors. Passage of a resolution requires approval by a majority of a
voting quorum of Directors. This provision of the Convest Bylaws may be altered,
amended or repealed by the affirmative vote of the majority of either the
Convest Board of Directors present at a meeting satisfying quorum, or the
outstanding shares of Convest capital stock entitled to vote.
VOTING RIGHTS
Neither the Forcenergy Charter nor the Convest Charter expressly provides
for cumulative voting rights for the election of directors or otherwise.
Forcenergy stockholders elect directors by straight voting. Under section
216 of the DGCL, unless otherwise specified in the certificate of incorporation,
Forcenergy directors are elected by a plurality of the votes of the shares
present in person or represented by proxy at the meeting and entitled to vote on
the election of directors.
Under Article 2.29, section D of the TBCA and subject to the written notice
requirements therein, a Convest stockholder may cumulate his votes by giving one
candidate as many votes as the number of such directors multiplied by his shares
shall equal, or by distributing such votes on the same principle among any
number of such candidates.
If the Convest Merger is consummated Convest stockholders will not have the
right to cumulate their votes in the election of directors.
POWER TO CALL SPECIAL MEETINGS
The Forcenergy Charter provides that a special meeting of stockholders may
be called by the Forcenergy Board of Directors or the President. Written notice
of a special meeting must be mailed not fewer than 10 nor more than 60 days
before the meeting to each stockholder of record entitled to vote.
The Convest Charter provides that special meetings of the stockholders of
the corporation may be called by the President of the corporation, the Board of
Directors, such person as may be authorized by the Bylaws, or the holders of at
least 50% of all the shares entitled to vote at the proposed special meeting.
STOCKHOLDER VOTE REQUIRED FOR CERTAIN TRANSACTIONS
The Forcenergy Charter requires for approval of certain business
combinations and transactions with certain stockholders or with corporations
which are affiliated therewith, an affirmative vote of 75% of the votes which
the holders of the then outstanding shares of capital stock of Forcenergy
excluding those shares beneficially owned by such stockholder unless such
transaction is approved by a majority of disinterested stockholders. The
Forcenergy Charter also provides that a 75% approval of disinterested
stockholders is required to amend the provisions concerning interested
transactions.
The Convest Charter requires the approval of a majority of disinterested
directors to enter into certain transactions with interested or affiliated
parties. Unless approved by a majority of disinterested directors, Convest may
not enter into transactions with Affiliates (as defined) of Convest involving 5%
or more of the corporation's total assets or involving the issuance of
securities representing an aggregate of more than 5% of Convest voting
securities in any 12-month period to any Affiliate of the corporation. Affiliate
is defined in the Convest Charter as any person, directly or indirectly the
beneficial owner of more than 10% of the common stock or other class of voting
equity of the corporation, or who is a director or an officer of the
corporation, or any person otherwise, directly or indirectly, controlling or
controlled by or under direct or indirect common control with the corporation.
Upon the consummation of the Convest Merger, the Convest stockholders will
have the power to approve interested and other transactions by an affirmative
vote of 75% of the disinterested stockholders.
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ACTION BY WRITTEN CONSENT
The Forcenergy Charter provides that no action required or permitted to be
taken by the stockholders of the corporation may be effected by consent in
writing. Such action must be effected at an annual or special meeting of
stockholders.
The Convest Charter provides that any action permitted or required to be
taken by the stockholders of the corporation may be taken without a meeting,
without prior notice, and without a vote, if a consent or consents in writing
shall have been signed by the holder or holders of shares having the number of
votes required to take such action at a meeting at which the holders of all
shares entitled to vote on the action were present and voted.
If the Convest Merger is consummated, the present Convest stockholders will
not be permitted to effect action by written consent once their shares are
exchanged for shares of Forcenergy Common Stock.
AMENDMENTS OF BYLAWS
Both the Forcenergy Bylaws and the Convest Bylaws may be amended, altered
or repealed either by their respective Boards of Directors or by the holders of
a majority of the outstanding shares of their respective capital stock present
and entitled to vote at a meeting as provided in their respective Charters and
Bylaws.
See "Description of Forcenergy Capital Stock."
LEGAL MATTERS
The validity of the Forcenergy Common Stock to be issued in the Mergers has
been passed upon for Forcenergy by Vinson & Elkins L.L.P., Houston, Texas.
EXPERTS
The consolidated financial statements of Forcenergy for the years ended
December 31, 1995 and 1996, incorporated by reference to the Annual Report on
Form 10-K of Forcenergy for the year ended December 31, 1996, have been so
incorporated in reliance on the report of Coopers & Lybrand L.L.P., independent
accountants, given on authority of said firm as experts in accounting and
auditing.
The historical statement of revenues and direct operating expenses of the
properties acquired by Forcenergy from Amerada Hess Corporation for the year
ended December 31, 1995, incorporated herein by reference to the current report
on Form 8-K/A of Forcenergy, have been so incorporated in reliance on the report
of Coopers & Lybrand L.L.P., independent accountants, given on the authority of
that firm as experts in accounting and auditing.
The historical statements of revenues and direct operating expenses of the
properties acquired by Forcenergy from Marathon Oil Company for the years ended
December 31, 1996 and 1995, incorporated herein by reference to the current
report on Form 8-K/A of Forcenergy, have been so incorporated in reliance on the
report of Coopers & Lybrand L.L.P., independent accountants, given on the
authority of that firm as experts in accounting and auditing.
The consolidated financial statements of Forcenergy for the year ended
December 31, 1994 incorporated herein by reference to the Annual Report on Form
10-K of Forcenergy for the year ended December 31, 1996 have been so
incorporated in reliance on the report of Price Waterhouse LLP, independent
accountants, given on authority of said firm as experts in auditing and
accounting.
The consolidated financial statements and schedules of Edisto and Convest
included in this Registration Statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in accounting and auditing in giving said reports.
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The estimates of Forcenergy's net proved oil and natural gas reserves as of
January 1, 1996 and 1997, incorporated herein by reference to Forcenergy's
Annual Report on Form 10-K, have been prepared by Collarini Engineering, Inc.
and Netherland, Sewell & Associates, Inc. and by Collarini Engineering, Inc. and
Joe C. Neal & Associates as of January 1, 1995 and 1994. The reserve estimates
prepared by such firms as of January 1, 1995 have also been audited by
Netherland, Sewell & Associates, Inc.
Certain of Convest's estimates of net proved oil and natural gas reserves
as of December 31, 1996, 1995 and 1994 were prepared by Ryder Scott Company
Petroleum Engineers. Additional estimates of Convest's net proved oil and
natural gas reserves as of January 1, 1997 and 1996, were prepared by
Netherland, Sewell & Associates, Inc. The aforementioned reserve estimates are
incorporated by reference herein to Convest's Annual Report on Form 10-K for the
year ended December 31, 1996.
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EDISTO FINANCIAL STATEMENTS
INDEX TO EDISTO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
YEAR ENDED DECEMBER 31, 1996:
FINANCIAL STATEMENTS
Report of Independent Public Accountants............... F-2
Consolidated Balance Sheets at December 31, 1996 and
1995.................................................. F-3
Consolidated Statements of Operations -- Years Ended
December 31, 1996, 1995 and 1994...................... F-4
Consolidated Statements of Stockholders'
Equity -- Years Ended December 31, 1996, 1995
and 1994............................................. F-5
Consolidated Statements of Cash Flows -- Years Ended
December 31, 1996, 1995 and 1994...................... F-6
Notes to Consolidated Financial Statements............. F-7
FINANCIAL STATEMENT SCHEDULES
Schedule I -- Edisto Resources Corporation (Parent
Company) Condensed Financial Statements:
Balance Sheets at December 31, 1996 and 1995.............. F-26
Statements of Operations -- Years Ended December 31, 1996,
1995 and 1994.......................................... F-27
Statements of Cash Flows -- Years Ended December 31, 1996,
1995 and 1994.......................................... F-28
Schedule II -- Edisto Resources Corporation -- Valuation
and Qualifying Accounts -- Years Ended December 31,
1996, 1995 and 1994.................................... F-29
QUARTER ENDED JUNE 30, 1997
Consolidated Balance Sheets at June 30, 1997 and December
31, 1996............................................... F-30
Consolidated Statements of Operations -- Three and Six
Months Ended June 30, 1997 and 1996.................... F-31
Consolidated Statements of Stockholders' Equity -- Six
Months Ended June 30, 1997............................. F-33
Consolidated Statements of Cash Flows -- Six Months Ended
June 30, 1997 and 1996................................. F-34
Notes to Consolidated Financial Statements................ F-35
</TABLE>
F-1
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Edisto Resources Corporation:
We have audited the accompanying consolidated balance sheets of Edisto
Resources Corporation, a Delaware corporation, and subsidiaries as of December
31, 1996 and 1995, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements and the schedules referred
to below are the responsibility of Edisto Resources Corporation's management.
Our responsibility is to express an opinion on these financial statements and
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Edisto
Resources Corporation and subsidiaries as of 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.
As discussed in Note 1, as of October 1, 1995, Edisto Resources Corporation
changed its method of accounting for the impairment of long-lived assets to
conform with Statement of Financial Accounting Standards No. 121.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedules listed in the index of
financial statement schedules are presented for purposes of complying with the
Securities and Exchange Commission's rules and are not part of the basic
financial statements. These schedules have been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly state in all material respects the financial data required to be
set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Houston, Texas
March 20, 1997
F-2
<PAGE> 119
EDISTO RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 71,765 $ 19,506
Restricted cash........................................... 333 333
Margin deposits........................................... 979 5,123
Accounts receivable....................................... 9,835 7,959
Net assets of discontinued gas marketing operations....... -- 23,979
Other current assets...................................... 1,547 1,769
-------- --------
Total current assets.............................. 84,459 58,669
Property and equipment:
Oil and gas properties using the successful efforts method
of accounting.......................................... 117,306 115,250
Other..................................................... 641 644
Less -- accumulated depreciation, depletion and
amortization........................................... (63,147) (50,358)
-------- --------
54,800 65,536
Other assets................................................ 2,178 1,647
-------- --------
$141,437 $125,852
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt...................... $ -- $ 1,723
Accounts payable.......................................... 9,840 9,609
Accrued liabilities and other............................. 9,863 5,890
Deferred revenue.......................................... 2,113 2,010
-------- --------
Total current liabilities......................... 21,816 19,232
Long-term liabilities:
Long-term debt, net of current maturities................. 4,003 17,635
Deferred revenue.......................................... 559 691
Minority interest......................................... 10,850 9,092
Other noncurrent liabilities.............................. 7,486 11,674
-------- --------
22,898 39,092
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, 50,000,000 shares
authorized, 13,930,052 issued at December 31, 1996 and
12,977,960 issued at December 31, 1995................. 139 130
Additional paid-in capital................................ 70,675 61,528
Retained earnings......................................... 26,308 6,154
Foreign currency translation.............................. (37) (95)
Treasury stock, at cost, 52,214 shares at December 31,
1996, and 23,714 shares at December 31, 1995........... (362) (189)
-------- --------
Total stockholders' equity........................ 96,723 67,528
-------- --------
$141,437 $125,852
======== ========
</TABLE>
See the accompanying notes to the consolidated financial statements.
F-3
<PAGE> 120
EDISTO RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Oil and gas revenues.................................... $47,222 $51,450 $46,788
Costs and expenses:
Lease operating and production taxes.................. 14,988 18,689 12,229
Abandonment and exploration costs..................... 2,021 2,871 2,135
Restructuring......................................... -- -- 2,684
Depreciation, depletion and amortization.............. 16,541 20,402 19,118
Impairments of oil and gas properties................. 2,633 5,911 --
General and administrative............................ 6,376 8,536 4,751
------- ------- -------
42,559 56,409 40,917
------- ------- -------
Operating income (loss)............................ 4,663 (4,959) 5,871
------- ------- -------
Other income (expense):
Interest income....................................... 1,549 1,615 1,320
Interest expense...................................... (1,068) (2,036) (747)
Equity in earnings (loss) of affiliates............... -- -- (1,731)
Gain (loss) on asset sales............................ 1,586 (652) 4,754
Minority interest..................................... (2,190) 726 (69)
Other, net............................................ 1,450 1,260 (516)
------- ------- -------
1,327 913 3,011
------- ------- -------
Income (loss) before income taxes....................... 5,990 (4,046) 8,882
Preacquisition loss of subsidiary....................... -- 1,478 --
Income tax (provision) benefit.......................... (387) (606) (147)
------- ------- -------
Income (loss) from continuing operations................ 5,603 (3,174) 8,735
------- ------- -------
Discontinued operations:
Income (loss) from gas marketing operations........... (761) (9,804) (1,083)
Gain on sale of gas marketing operations.............. 15,312 -- --
Loss from transmission operations..................... -- -- (501)
Gain on sale of transmission operations............... -- 2,557 --
Gain on sale of manufacturing operations.............. -- 3,824 --
------- ------- -------
Net income (loss)............................. $20,154 $(6,597) $ 7,151
======= ======= =======
Net income (loss) per common share:
Continuing operations................................. $ .41 $ (.25) $ .68
Discontinued operations............................... 1.08 (.26) (.13)
------- ------- -------
Net income (loss) per common share............ $ 1.49 $ (.51) $ .55
======= ======= =======
Weighted average common shares outstanding.............. 13,496 12,954 12,926
======= ======= =======
</TABLE>
See the accompanying notes to the consolidated financial statements.
F-4
<PAGE> 121
EDISTO RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
NUMBER OF ADDITIONAL FOREIGN
COMMON COMMON PAID-IN RETAINED CURRENCY TREASURY
SHARES STOCK CAPITAL EARNINGS TRANSLATION STOCK TOTAL
--------- ------ ---------- -------- ----------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993............. 12,848 $128 $60,362 $ 5,600 $ -- $ -- $66,090
Issuance of common stock............... 141 2 1,166 -- -- -- 1,168
Foreign currency translation........... -- -- -- -- (38) -- (38)
Treasury stock, at cost................ -- -- -- -- -- (189) (189)
Net income............................. -- -- -- 7,151 -- -- 7,151
------ ---- ------- ------- ---- ----- -------
Balance at December 31, 1994............. 12,989 130 61,528 12,751 (38) (189) 74,182
Cancellation of untendered Common Stock
pursuant to the Plan of
Reorganization....................... (11) -- -- -- -- -- --
Foreign currency translation........... -- -- -- -- (57) -- (57)
Net loss............................... -- -- -- (6,597) -- -- (6,597)
------ ---- ------- ------- ---- ----- -------
Balance at December 31, 1995............. 12,978 130 61,528 6,154 (95) (189) 67,528
Exercise of warrants................... 918 9 8,932 -- -- -- 8,941
Exercise of options.................... 34 -- 215 -- -- -- 215
Foreign currency translation........... -- -- -- -- 58 -- 58
Treasury stock, at cost................ -- -- -- -- -- (173) (173)
Net income............................. -- -- -- 20,154 -- -- 20,154
------ ---- ------- ------- ---- ----- -------
Balance at December 31, 1996............. 13,930 $139 $70,675 $26,308 $(37) $(362) $96,723
====== ==== ======= ======= ==== ===== =======
</TABLE>
See the accompanying notes to the consolidated financial statements.
F-5
<PAGE> 122
EDISTO RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)..................................... $ 20,154 $ (6,597) $ 7,151
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization........... 17,236 17,204 22,595
Impairments of oil and gas properties.............. 2,633 5,911 --
Abandonment and exploration cost................... 1,592 2,390 1,810
Gains on sales of assets and investments........... (16,901) (5,729) (4,732)
Restructuring expense.............................. -- -- 2,684
Equity in (income) loss of affiliates.............. (444) (316) 1,658
Minority interest.................................. 2,190 (726) (69)
Other.............................................. 951 (32) 1,147
Changes in assets and liabilities:
Accounts receivable.............................. (151,225) (32,796) 34,001
Accounts payable and accrued liabilities......... 168,560 22,774 (20,221)
Increase (decrease) in gas storage inventory..... (1,778) (5,126) --
Other............................................ (5,894) 66 (595)
--------- -------- --------
Net cash provided (used) by operating
activities.................................. 37,074 (2,977) 45,429
--------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of gas marketing operations........ 15,350 -- --
Proceeds from sales of assets, including discontinued
transportation and manufacturing operations........ 4,389 72,034 8,446
Proceeds from sales of investments.................... -- -- 9,000
Investment in subsidiaries............................ (419) -- --
Purchase (sale) of assets from risk management
activities......................................... 764 (9,428) (9,648)
Acquisition, exploration and development costs........ (10,949) (10,648) (6,398)
Gas transmission expenditures......................... -- (10) (673)
Acquisitions.......................................... -- -- (9,347)
Cash from acquisition of Convest...................... -- 716 --
Advances from affiliates.............................. -- 51 106
Purchase of other current and noncurrent assets....... (1,740) (3,527) (5,114)
--------- -------- --------
Net cash provided (used) by investing
activities.................................. 7,395 49,188 (13,628)
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on short and long-term debt and capital
leases............................................. 3,100 6,575 7,806
Payments on long-term debt and capital leases......... (18,209) (60,229) (12,665)
Stock issue on exercise of warrants and options....... 9,156 -- --
Repurchase of common shares........................... (173) -- --
Currency translation.................................. 58 57 38
--------- -------- --------
Net cash used by financing activities......... (6,068) (53,597) (4,821)
Net increase (decrease) in cash and cash equivalents.... 38,401 (7,386) 26,980
Cash and cash equivalents, at beginning of period....... 33,697 41,083 14,103
--------- -------- --------
Cash and cash equivalents, at end of period............. $ 72,098 $ 33,697 $ 41,083
========= ======== ========
SUPPLEMENTAL DISCLOSURES
CASH PAID (RECEIVED) DURING THE PERIOD FOR:
Interest........................................... $ 1,506 $ 1,568 $ 4,816
========= ======== ========
Taxes.............................................. $ 358 $ 1,465 $ 294
========= ======== ========
</TABLE>
See the accompanying notes to the consolidated financial statements.
F-6
<PAGE> 123
EDISTO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND PRESENTATION
The accompanying consolidated financial statements include the accounts of
Edisto Resources Corporation, a Delaware corporation ( the "Company" or
"Edisto"), and its wholly and majority owned subsidiaries. Since the sale of the
Company's gas marketing operations on December 10, 1996, the Company's only line
of business has been oil and gas exploration and production which is conducted
through a 73% interest in Convest Energy Corporation ("Convest"), an independent
oil and gas exploration and production company listed on the American Stock
Exchange. Edisto owns 7,598,771 shares of Convest Common Stock. Prior to
acquiring its interest in Convest, the Company conducted its oil and gas
activities through Edisto Exploration & Production Company ("Edisto E&P"). See
Note 3 -- "Acquisitions -- Convest Energy Corporation."
Prior to December 10, 1996, the Company conducted gas marketing operations
through its subsidiaries, Energy Source, Inc. in the United States, and Energy
Source Canada, Inc. in Canada (collectively, "Energy Source"). On December 10,
1996, Energy Source sold substantially all of its assets to two subsidiaries of
Pacific Gas Transmission Company. See Note 2 -- "Discontinued Operations" for a
discussion of the sale of the gas marketing operations.
References to the "Company" or "Edisto" shall refer to Edisto Resources
Corporation and all of its consolidated subsidiaries, including Convest.
References to "Convest" shall refer to Convest and the oil and gas activities
conducted through Edisto E&P prior to acquiring the interest in Convest.
Edisto conducted gas transmission activities from July 1990 through the
first quarter of 1994 when Edisto executed a definitive agreement to sell its
intrastate natural gas pipeline. The sale was subject to regulatory approval and
was closed in January 1995. Accordingly, at December 31, 1994, Edisto reported
its investment in the pipeline operations as "Net Assets of Discontinued
Transmission Operations." In March 1994, Edisto's 80% subsidiary, Multiflex
International, Inc., sold all the stock of its operating subsidiaries to
Oceaneering International, Inc., at which time the corporate name was changed to
MINT Holding Company ("MINT"). See Note 2 -- "Discontinued Operations" for a
discussion of both the sale of the pipeline and the MINT subsidiaries.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of short-term highly liquid investments which are
readily convertible into cash and have original maturities of three months or
less. The Company's investment policy for its available cash balances allows for
investment in high grade short-term debt issues as well as investments in money
market accounts and overnight investments with major financial institutions. At
December 31, 1996, the Company had cash and cash equivalents, including
restricted cash, of $72.1 million of which $4.0 million of cash and cash
equivalents (including restricted cash) was held at Convest.
For purposes of the Consolidated Balance Sheets, approximately $13.9
million of the ending cash balance as of December 31, 1995 was reclassified to
"Net Assets of Discontinued Gas Marketing Operations."
NET INCOME PER SHARE
Income (loss) per share is based on the weighted average number of common
shares outstanding. The effect of common share equivalents was immaterial and
not dilutive for 1996, 1995 or 1994.
INCOME TAXES
Edisto records income taxes in accordance with the Financial Accounting
Standards Board -- Statement of Financial Accounting Standards No. 109 ("SFAS
109"), "Accounting for Income Taxes." SFAS 109
F-7
<PAGE> 124
EDISTO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
requires the balance sheet approach of income tax accounting whereby deferred
income taxes are provided at the balance sheet date for the differences existing
in the tax basis of assets and liabilities and their financial statement
carrying amounts.
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 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.
RECLASSIFICATIONS AND CONSOLIDATION
Certain reclassifications have been made to the 1995 and 1994 consolidated
financial statements to conform to the presentation for 1996. All significant
intercompany balances and transactions have been eliminated.
CHANGES IN ACCOUNTING PRINCIPLES
Edisto adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" ("SFAS 121"), in the fourth quarter of 1995. Convest took a $5.9
million write-down in the value of its oil and gas properties in 1995 due to the
adoption of SFAS 121. See "Property and Equipment" below for a more detailed
explanation of this accounting change and write-down.
CONVEST ENERGY CORPORATION
Restricted Cash. Restricted cash consists of $333,000 of certificates of
deposit held by various financial institutions. The certificates of deposit are
held in escrow as collateral for letters of credit issued for (i) lease payments
on certain offshore platforms and (ii) estimated plugging and abandonment costs
expected to be incurred on certain onshore oil and gas properties.
Property and Equipment. Convest follows the successful efforts method of
accounting for its oil and gas properties. Costs of productive wells,
developmental drilling expenditures, including developmental dry holes, and
productive leases are capitalized. Exploratory drilling costs, including
stratigraphic test wells, are initially capitalized, but charged to expense if
and when the well is determined to be unsuccessful. The capitalized costs of oil
and gas properties are charged to operations as depreciation, depletion and
amortization using the unit-of-production method based on the ratio of current
production to proved recoverable oil and gas reserves (as defined by the
Securities and Exchange Commission) on a lease by lease basis. Reserve estimates
for Convest's properties were prepared or audited by independent petroleum
engineering firms at year end. Gas is converted to equivalent barrels of oil on
an energy content basis of 6 Mcf of gas to 1 barrel of oil. Depreciation,
depletion and amortization per equivalent unit of oil production was $5.09,
$4.62 and $4.80 for the years ended December 31, 1996, 1995 and 1994,
respectively. Oil and gas leasehold costs are capitalized when incurred.
Unproved properties are assessed periodically on a property-by-property basis
and impairments in value are charged to expense. Exploratory expenses, including
geological and geophysical expenses and annual delay rentals, are charged to
expense as incurred.
Prior to 1995, Convest provided an impairment reserve for proved oil and
gas properties to the extent that total capitalized costs less accumulated
depreciation and depletion, exceed expected undiscounted future net revenues
attributable to proved oil and gas reserves on an overall basis. During March
1995, the Financial Accounting Standards Board issued SFAS 121 which requires
Convest to recognize an impairment loss for
F-8
<PAGE> 125
EDISTO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
proved oil and gas properties if the carrying value of such properties (i.e.,
total capitalized costs less accumulated depreciation and depletion) exceeds the
undiscounted expected future cash flows attributable to such properties. Under
SFAS 121, Convest must assess the need each quarter for an impairment of
capitalized costs of oil and gas properties on a property-by-property basis. If
an impairment is indicated based on undiscounted expected future cash flows,
then an impairment loss is recognized to the extent that net capitalized costs
exceed discounted expected future cash flows.
During the fourth quarter of 1995, Convest adopted SFAS 121 which required
Convest to recognize an impairment loss in 1995 of approximately $5.9 million.
Convest assessed the need for an impairment of its proved oil and gas properties
at December 31, 1995 using the prices of $17.42 per barrel of oil and $1.61 per
Mcf of gas. In 1996, Convest recognized an impairment loss of $2.6 million.
Convest assessed the need for an impairment at December 31, 1996 using the
prices of $22.73 per barrel of oil and $2.21 per Mcf of gas.
Other Property, Plant and Equipment. Other fixed assets are recorded at
cost and depreciated over their estimated useful lives using the straight-line
method of depreciation.
Abandonment Reserve. Convest records its estimate of future abandonment
costs of offshore properties. Such costs are accrued using a unit-of-production
method based upon estimated proved recoverable reserves. Abandonment costs are
estimated under current regulations using current costs and are reviewed
periodically and adjusted as new information becomes available. Abandonment
costs on onshore properties are typically nominal due to the salvage value of
well equipment.
Upon emerging from bankruptcy in July 1993, Edisto E&P entered into a
settlement with the United States Minerals Management Service relating to
estimated plugging and abandonment costs for 14 Gulf of Mexico OCS leases in
which Edisto E&P owned interests. Pursuant to this settlement, the operator of
the leases, Edisto E&P and other co-lessees were required to provide security
for payment of such costs through quarterly payments to an Abandonment Fund.
Subsequent to the Edisto Transaction, Convest continues to be subject to the
Abandonment Fund payments. As of December 31, 1996 and 1995, Convest was subject
to total Abandonment Fund payments of $4.2 million and $4.3 million,
respectively.
As of December 31, 1996 and 1995, Convest had made payments totaling $4.2
million and $3.7 million to the Abandonment Fund, respectively. These payments
were applied to the total long-term abandonment reserve of $7.7 million and
$10.2 million, as of December 31, 1996 and 1995, respectively, resulting in a
net long-term abandonment reserve of $3.5 million and $6.5 million as of those
dates. The current portion of the abandonment reserve was $2.3 million and
$556,000 as of December 31, 1996 and 1995, respectively. The current portion of
the abandonment reserve is included in "Accrued Liabilities and Other" and the
noncurrent portion is included in "Other Noncurrent Liabilities" in the
consolidated financial statements.
Lease Operating Expenses. In connection with a 1992 sale of certain future
production volumes of oil to Enron Reserve Acquisition Corp., Convest
established a reserve for the expenses associated with the volumes sold and
amortizes this reserve as the volumes are delivered. As of December 31, 1996 and
1995, the current balance of this reserve was $1.6 million and $1.8 million,
respectively, and the long-term balance was $3.7 million and $4.6 million,
respectively, and were presented in "Accrued Liabilities and Other" and "Other
Noncurrent Liabilities," respectively, in the consolidated financial statements.
Gas Balancing. Convest uses the entitlement method of accounting for gas
imbalances. Receivables resulting from undertakes of gas production at December
31, 1996 and 1995 were $2.3 million and $1.4 million, respectively, and are
included in "Oil and Gas Production Accounts Receivables" and "Other Noncurrent
Assets" in the consolidated financial statements. Deferred revenue and payables
resulting from overtakes of gas production at December 31, 1996 and 1995 were
$2.7 million and $2.7 million, respectively, and are included in "Deferred
Revenue" and "Other Noncurrent Liabilities" in the consolidated financial
statements.
F-9
<PAGE> 126
EDISTO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Accounting for Income Taxes. Convest records income taxes in accordance
with SFAS 109, "Accounting for Income Taxes." SFAS 109 requires the balance
sheet approach of income tax accounting whereby deferred income taxes are
provided at the balance sheet date for the differences existing in the tax basis
of assets and liabilities and their financial statement carrying amounts.
Concentration of Credit Risk. Convest's oil and gas production revenues are
derived principally from uncollateralized sales to customers in the oil and gas
industry. The concentration of credit risk in a single industry affects
Convest's overall exposure to credit risk because customers may be similarly
affected by changes in economic and other conditions. Convest has not
experienced significant credit losses on receivables from such sales.
Risk Management/Hedging Activities. Convest from time to time engages in
commodity hedging activities to minimize the risk of market fluctuations
associated with the price of crude oil and natural gas production. The hedging
objectives include assurance of stable and known cash flows and fixed favorable
prices. The hedges are effected through the purchase and sale of futures
contracts on the New York Mercantile Exchange ("NYMEX") and over the counter
price swap agreements. The credit risk of futures contracts is limited due to
the daily cash settlement of the net change in the value of open contracts and
because of certain NYMEX procedures. Gains or losses on Convest's hedging
agreements are deferred and recognized when the hedged transaction occurs, and
are recorded as oil and gas sales revenue.
(2) DISCONTINUED OPERATIONS
Sale of Gas Marketing Operations. From 1990 until December 1996, Edisto
conducted natural gas marketing operations through Energy Source. On December
10, 1996, Energy Source sold substantially all of the assets of its gas
marketing operations to subsidiaries of Pacific Gas Transmission Company
("PGT"), a subsidiary of Pacific Gas and Electric Company (NYSE "PGE"). The
sales price was $23.3 million in cash, plus the working capital of Energy Source
at July 31, 1996 (approximately $20.0 million). The sales price, however, is
subject to adjustment after the closing by the adjusted consolidated net income
or loss of Energy Source from August 1, 1996 to November 30, 1996. The Company
and PGT have not yet finalized the purchase price adjustment. Under the Purchase
Agreement, Edisto also retained certain assets and liabilities of Energy Source
which are explained in more detail below. In connection with this sale, Edisto
recognized a gain of approximately $15.3 million, net of approximately $700,000
of income tax.
With certain exceptions, PGT assumed substantially all of the liabilities
of Energy Source as of November 30, 1996, the effective date of the sale. The
assumed liabilities included all existing leases for office space being used by
Energy Source.
As a condition to the sale, Edisto retained the rights and liabilities
associated with the gas purchase and supply contracts with three of Energy
Source's Canadian trading partners, each of whom defaulted under their contracts
and sought protection under Canadian bankruptcy laws. Edisto also retained as
assets approximately 1.2 Bcf of natural gas in storage which the storage
operator failed to deliver. Edisto is pursuing its claims in each of these
matters.
Pursuant to the Purchase Agreement, Edisto also retained the liabilities
and counterclaims against PanEnergy Corporation and Panhandle Eastern Pipe Line
Company under a lawsuit in the District Court of Harris County, Texas. This
lawsuit is described in Note 12 -- "Commitments and Contingencies" herein.
Separate from the lawsuit with PanEnergy, Edisto retained as an asset all
rights to receive a refund from PanEnergy of approximately $1.0 million under a
proposed settlement of certain rate cases pending before the Federal Energy
Regulatory Commission. The proposed settlement has been reflected on the
Consolidated Balance Sheet as of December 31, 1996 and is included in "Accounts
Receivable." This settlement relates to rates that Energy Source was charged for
transportation during 1991 and 1992 by PanEnergy. The settlement proceeds are
scheduled to be paid to Edisto by the end of the second quarter of 1997.
F-10
<PAGE> 127
EDISTO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
See Note 4 -- "Consolidating Balance Sheets" for consolidating balance
sheets of Edisto and its consolidated subsidiary, Convest, at December 31, 1996,
which set forth the remaining assets and liabilities of Edisto at such date.
Gross revenues from the gas marketing operations for the years ended
December 31, 1996, 1995 and 1994 were $847.0 million, $418.8 million and $249.4
million, respectively. Net assets of the discontinued gas marketing operations
at December 31, 1995 consisted of the following:
NET ASSETS OF DISCONTINUED GAS MARKETING OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1995
------------
<S> <C>
Cash and cash equivalents................................... $ 13,858
Accounts receivable......................................... 71,041
Net assets from price risk management activities............ 9,267
Accounts payable............................................ (73,797)
Property and equipment, net................................. 1,281
Other assets................................................ 8,717
Other liabilities........................................... (6,388)
--------
$ 23,979
========
</TABLE>
Gas Transmission Operations/Sale of Pipeline. Edisto conducted gas
transmission activities from July 1990 through the execution of a definitive
agreement in February 1994 for the sale of the Company's 218-mile Missouri
intrastate natural gas pipeline to UtiliCorp United Inc. The sale was subject to
regulatory approval and was closed in January 1995. The Company continued to
operate the pipeline from the date of the definitive agreement until the close
of the sale, and reported assets, liabilities and results of operations as
discontinued operations.
The gross sales price, including adjustments for net working capital and
capital expenditures, was $78.1 million in cash. $45.6 million of the proceeds
was used to pay outstanding debt, including interest and prepayment penalties,
to three lenders. Edisto recorded a gain on the sale of the pipeline of
approximately $2.6 million in the first quarter of 1995.
Gross revenues from transmission operations for the twelve months ended
December 31, 1994 were $11.4 million. For the same period, the Company reported
a net loss of $.5 million for transmission operations under discontinued
operations.
Manufacturing Operations/Sale of Mint Subsidiaries. From 1990 until March
1994, Edisto's 80% subsidiary, Multiflex International, Inc. (now called MINT
Holding Company ["MINT"]), manufactured subsea umbilical connections used in the
offshore oil and gas industry. In March 1994, MINT sold the stock of its
operating subsidiaries to Oceaneering International, Inc. for a purchase price
of $12.6 million in cash. After the payment of approximately $3.6 million to
third party lenders to retire debt of MINT and certain expenses associated with
the sale, the net proceeds were approximately $9 million. Under the terms of the
purchase agreement, MINT retained $9 million in cash for the one year
indemnification period to settle any possible indemnification claims after the
sale. After the indemnification period ended in March 1995 with no claims being
made, MINT repaid $8.8 million of its outstanding debt owed to Edisto.
Approximately $450,000 was left in MINT at such time to cover potential
remaining liabilities of MINT. Edisto recognized a gain on the MINT sale of $3.8
million in March 1995.
F-11
<PAGE> 128
EDISTO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) ACQUISITIONS
CONVEST ENERGY CORPORATION
On June 26, 1995, Edisto and Convest closed the purchase (the "Convest
Transaction") by Convest of all of the capital stock of Edisto's oil and gas
exploration and production subsidiary, Edisto E&P. Prior to the closing, Edisto
owned approximately 31% of the outstanding Common Stock of Convest and had three
representatives on Convest's Board of Directors. The consideration paid to
Edisto in the Convest Transaction was 6,185,400 newly issued shares of Common
Stock of Convest and $10,000 in cash. These newly issued shares, combined with
Edisto's existing 31% interest in Convest, increased Edisto's interest in
Convest to approximately 72% of the outstanding Common Stock of Convest. Upon
the closing of the Convest Transaction, the Convest Board of Directors was
restructured so that affiliates of Edisto constituted a majority of Convest's
Board of Directors. In April 1996, Edisto purchased an additional 92,000 shares
of Convest Common Stock on the open market which increased its interest in
Convest to 73%.
Since Edisto acquired control of Convest through its 72% stock ownership
and majority of the Convest Board, the Convest Transaction was accounted for as
a reverse acquisition. Under the accounting rules for a reverse acquisition,
Edisto E&P is considered the acquiring entity and Convest is considered the
acquired entity. As a result, Edisto E&P's historical financial statements
became the historical financial statements of Convest and the purchase price was
allocated to the assets and liabilities of Convest based on their respective
fair values at the acquisition date.
Edisto accounted for the Convest Transaction using the purchase method of
accounting. Edisto's Consolidated Statement of Operations for the year ended
December 31, 1995 includes the results of operations for Convest as if Convest
was consolidated beginning January 1, 1995. However, the share of the Convest
loss attributable to the interest not owned by Edisto prior to the date of the
Convest Transaction has been added back as a preacquisition loss in the
accompanying Consolidated Statement of Operations for such period. Periods prior
to January 1, 1995 have not been restated to include the Convest results of
operations, and therefore are not comparable to the 1995 results of operations.
SENSOR PROPERTIES ACQUIRED BY CONVEST
On May 1, 1995 and June 14, 1995, prior to the closing of the Convest
Transaction, Edisto E&P and Convest acquired from Sensor Oil & Gas, Inc.
("Sensor") certain oil and gas properties located in Kansas, Oklahoma and
Nebraska (the "Sensor Properties"). The aggregate purchase price was $7.4
million plus the assumption of approximately $250,000 of net liabilities
primarily related to real estate taxes. Additionally, Edisto E&P and Convest
incurred approximately $332,000 of aggregate transaction costs in connection
with the purchase. Since Edisto E&P and Convest each acquired identical
interests in the Sensor Properties, the purchase of such properties did not
affect the purchase price of the Convest Transaction.
F-12
<PAGE> 129
EDISTO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) CONSOLIDATING BALANCE SHEETS
Set forth below are the Consolidating Balance Sheets of Edisto and its
consolidated subsidiary, Convest, at December 31, 1996.
CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONSOLIDATED
EDISTO(1) CONVEST ELIMINATIONS EDISTO
--------- ------- ------------ ------------
<S> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents................... $ 68,087 $ 4,011 $ -- $ 72,098
Margin deposits............................. -- 979 -- 979
Accounts receivable......................... 1,996 8,506 (667) 9,835
Other current assets........................ 259 1,288 -- 1,547
-------- ------- -------- --------
Total current assets................ 70,342 14,784 (667) 84,459
-------- ------- -------- --------
Property and equipment, net................. 76 54,724 -- 54,800
-------- ------- -------- --------
Investment in Convest....................... 32,288 -- (32,288) --
-------- ------- -------- --------
Other assets................................ 24 2,704 (550) 2,178
-------- ------- -------- --------
$102,730 $72,212 $(33,505) $141,437
======== ======= ======== ========
LIABILITIES AND EQUITY:
Accounts payable............................ $ 1,320 $ 9,187 $ (667) $ 9,840
Accrued liabilities and other............... 3,822 6,041 -- 9,863
Deferred revenue............................ -- 2,113 -- 2,113
-------- ------- -------- --------
Total current liabilities........... 5,142 17,341 (667) 21,816
-------- ------- -------- --------
Long-term debt.............................. -- 4,003 -- 4,003
Minority interest........................... -- -- 10,850 10,850
Other noncurrent liabilities................ 315 7,730 -- 8,045
-------- ------- -------- --------
Total long-term liabilities......... 315 11,733 10,850 22,898
-------- ------- -------- --------
Stockholders' equity........................ 97,273 43,138 (43,688) 96,723
-------- ------- -------- --------
$102,730 $72,212 $(33,505) $141,437
======== ======= ======== ========
</TABLE>
- ---------------
(1) Includes Edisto and its wholly owned subsidiaries.
(5) HEDGING ACTIVITIES
As previously stated, Convest conducts its hedging activities through major
financial institutions. Set forth below is the contract amount and term of all
futures contracts held for price risk management purposes by Convest at December
31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
---------------------- -----------------------
OIL GAS OIL GAS
-------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Quantity Sold.................. 90 Mbbls 3,300 Mmcf 285 MBbls 8,220 MMcf
Maximum Term................... 9 Months 10 Months 11 Months 10 Months
Average Price.................. $22.50 $2.53 $17.23 $1.86
</TABLE>
F-13
<PAGE> 130
EDISTO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1996, Convest had hedged approximately 10% and 27% of its
projected 1997 oil and gas production, respectively. Convest will continue its
hedging activities during 1997 in order to mitigate the volatility of its crude
oil and natural gas prices. Gains and losses realized upon the settlement of
Convest's hedge positions are deferred and recognized as oil and gas sales
revenue in the month of the underlying physical production being hedged.
Convest's losses from hedging were $7.8 million and $421,000 during 1996 and
1995, respectively. The fair value of Convest's open positions at December 31,
1996 was $728,230. The fair value of the Company's hedges was based on the cost
that would have been incurred to buy out those hedges in a loss position and the
consideration that would have been received to terminate those hedges in a gain
position. The cash margin required by the counterparts to Convest's hedging
activities totaled $1.0 and $5.1 million as of December 31, 1996 and 1995,
respectively, and are included in margin deposits.
(6) RELATED PARTY TRANSACTIONS
As described in Note 3 herein, Edisto and Convest consummated the Convest
Transaction on June 26, 1995. As also described in Note 3, Edisto E&P and
Convest purchased the Sensor Properties in May and June 1995.
In the Convest Transaction, Edisto retained the tax benefits of the net
operating loss carryforwards ("NOL's") of Edisto E&P. The tax benefits included
a $3.3 million NOL usable for regular taxable income and a $3.6 million NOL
usable for alternative minimum taxable income. Convest determined that the use
of these NOLs would reduce Convest's taxes for 1995 by approximately $437,000.
In addition, based on projections of Convest's future taxable income, Convest
determined that the remaining NOLs of Edisto E&P would be a valuable asset that
could be utilized by Convest in the future. Accordingly, Edisto allowed Convest
to utilize the NOLs of Edisto E&P in consideration for the payment by Convest of
$550,000.
Since January 1995, Convest has had a gas marketing arrangement with Energy
Source, Inc. ("Energy Source"), which until December 1996 was a wholly-owned
subsidiary of Edisto. Under this arrangement, Energy Source markets a
substantial portion of Convest's gas production and assumes certain related
administrative functions. Energy Source marketed approximately 84% of Convest's
1996 gas production. During 1996, Convest received a minimum price of 98% of the
index price for the applicable pipeline. Under the agreement, Energy Source
takes title to the gas before reselling it, thereby creating an account
receivable from Energy Source for the sold gas. At December 31, 1996, the
account receivable from Energy Source was $3.6 million, which is included in
"Accounts Receivable" on the Consolidated Balance Sheet. Convest sells such gas
to Energy Source on open credit without requiring a letter of credit or other
security.
In December 1996, Energy Source was sold by Edisto to an unrelated third
party. See Note 2 -- "Discontinued Operations" for a description of this
transaction. In connection with the sale, Convest and Energy Source agreed to
extend the gas marketing agreement to December 31, 1997 and to increase the
minimum price from 98% to 100% of the index price for the applicable pipeline.
Prior to the sale of Energy Source, Edisto had provided Convest with access
to an AS400 computer system to run its accounting system and had provided MIS
support. The monthly cost to Convest was approximately $12,555 per month. In
connection with the sale of Energy Source, Edisto sold the AS400 computer system
and its MIS personnel became employees of the purchaser of Energy Source. Since
Convest continued to need an AS400 computer system to run its accounting system,
the Energy Source purchaser agreed to provide Convest with access to the AS400
computer system and MIS support through December 31, 1997. The cost to Convest
is $12,645 per month. This agreement may be terminated by Convest at any time
after June 30, 1997 upon 90 days notice.
Energy Source executes trades of futures contracts on the New York
Mercantile Exchange on behalf of Convest. In this regard, Energy Source acts
solely in a ministerial capacity to purchase or sell the futures contracts at
price levels directed by Convest's management. Energy Source charges a
commission of $.0025
F-14
<PAGE> 131
EDISTO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
per Mcf of gas or barrel of crude oil for each trade executed to cover Energy
Source's administrative costs to perform such service.
Edisto and Convest have a directors' and officers' fiduciary insurance
policy that covers both companies. The annual insurance premium was allocated
68% to Edisto, for a cost of $204,000, based on the relative percentage that the
total assets of Edisto bear to the total assets of both Edisto and Convest.
Each of the affiliated party transactions described above was approved by
either a special committee of the Convest Board, which was composed of outside
directors with no affiliation to Edisto, or the unanimous consent of the Convest
Board.
Effective July 1, 1995, the Company and Convest agreed to share certain
administrative costs to reduce the overall cost that would otherwise be incurred
by each of them in the absence of such an arrangement. Under the arrangement,
certain costs associated with shareholder communication services and certain
administrative staff who perform duties on behalf of both entities are shared by
Edisto and Convest based on their respective utilization. In addition, the
salary of Michael Y. McGovern, who serves as the Chairman and Chief Executive
Officer of Edisto and Convest is apportioned equally between the two entities.
Edisto and Convest may enter into additional cost sharing arrangements in the
future.
(7) LONG-TERM DEBT
Long-term debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Convest Credit Agreement................................... $4,000 $19,175
Capital leases............................................. -- 175
Other...................................................... 3 8
------ -------
Total debt....................................... 4,003 19,358
Less current maturities.................................... -- (1,723)
------ -------
$4,003 $17,635
====== =======
</TABLE>
CONVEST ENERGY CORPORATION CREDIT AGREEMENT
On June 26, 1995, simultaneous with the closing of the Convest Transaction,
Convest entered into an Amended and Restated Secured Revolving Credit Agreement
(the "Agreement") with Bank One, Texas, N.A. ("Bank One"), and Compass
Bank-Houston. This facility, which terminates January 1, 1999, combined the
existing credit facilities of Convest and Edisto E&P. Bank One serves as agent
bank of the Agreement. The Agreement is secured by a first lien on all of
Convest's assets, including its oil and gas properties and gas plant. The
borrowing base is redetermined semi-annually on May 31 and November 30 of each
year by the lending banks based on engineering criteria established by the
banks. Interest on borrowings under the Agreement is computed at (i) the agent
bank's prime lending rate (the "Base Rate") plus 3/4% or (ii) the London Inter
Bank Offering Rate ("LIBOR") plus 2 3/4%. In addition, Convest pays a commitment
fee equal to 1/2% on any commitment amount in excess of outstanding borrowings.
The Agreement contains certain covenants regarding Convest's consolidated
net worth and cash flow to debt service. In addition, the Agreement places
certain limitations on Convest's ability to incur certain types of additional
debt.
During December 1996, Convest was notified by its lending banks that its
redetermined borrowing base was $19.2 million effective December 1, 1996 and
will reduce by $1.0 million monthly beginning January 1, 1997 based on the
lending banks estimate of production. As of December 31, 1996 and 1995, Convest
had outstanding borrowing under its credit facility totaling $4.0 million and
$19.2 million, respectively. In addition,
F-15
<PAGE> 132
EDISTO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Convest had an additional $200,000 of letters of credit outstanding at December
31, 1996, primarily related to performance bonds issued for oil and gas
operations. As of December 31, 1996, all of Convest's outstanding borrowings
were subject to Base Rate interest at an effective rate of 9% per annum.
(8) COMMON STOCK AND STOCK OPTIONS
The Company's Common Stock has a par value of $.01 per share. At December
31, 1996, there were 50,000,000 shares authorized, of which 13,930,052 shares
were issued. Treasury stock held by the Company at such date was 52,214 shares.
In December 1995, the Company's Board of Directors authorized the Company
to repurchase up to 1,000,000 shares of Edisto's Common Stock. In the first
quarter of 1996, the Company repurchased 28,500 shares. At March 14, 1997, the
Company had 14,034,674 issued and outstanding shares of Common Stock.
In 1993, the Company adopted the 1993 Stock Option Plan and the 1993
Director Stock Option Plan. The aggregate number of shares that may be issued
under options granted under these plans is 1,200,000 shares for the 1993 Stock
Option Plan and 150,000 shares for the 1993 Director Stock Option Plan. The
following table summarizes the activity in options under the 1993 Stock Option
Plan and the 1993 Director Stock Option Plan:
<TABLE>
<CAPTION>
1996 1995 1994
------------------ ------------------ -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding,
Beginning of year.......... 696,002 $6.38 397,806 $6.29 284,000 $9.75
Granted.................... 138,890 8.88 339,067 6.27 391,806 6.23
Exercised.................. (27,286) 6.39 -- -- -- --
Canceled................... (90,139) 6.18 (40,871) 6.24 (278,000) 9.75
------- ------- --------
End of year................ 717,467 $6.79 696,002 $6.38 397,806 $6.29
------- ------- --------
Exercisable, end of year..... 595,133 $6.89 111,712 $6.92 2,000 $9.75
Weighted average fair value
of options granted......... $ 1.73 $ 1.53
</TABLE>
Edisto applies Accounting Principles Board (APB) Opinion 25 and related
interpretations in accounting for its stock option plans. In accordance with APB
Opinion 25, no compensation expense has been recognized for stock options
granted for the years 1996, 1995 and 1994. Had compensation costs for these
plans been determined based on the fair value for awards under those plans,
consistent with the method of Statement of Financial Accounting Standards No.
123 ("SFAS 123") "Accounting for Stock-Based Compensation," Edisto's net income
and earnings per share would have been as follows:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Net Income/(Loss)
As Reported............................................... $20,154 $(6,597)
Pro Forma................................................. 19,171 (7,132)
Earnings Per Share
As Reported............................................... $ 1.49 $ (0.51)
Pro Forma................................................. $ 1.42 $ (0.55)
</TABLE>
F-16
<PAGE> 133
EDISTO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1996 and 1995, respectively: risk-free interest
rates of 5.49% and 5.85%; expected lives of one year and two years; expected
volatility of 43.51% and 34.87%. No dividends are expected. The pro forma
amounts above include approximately $700,000 and $25,000 of compensation expense
for 1996 and 1995, respectively, which relate to Convest's stock option plan,
had grants related to Convest's plan been recorded at fair value.
574,351 of the 717,467 options outstanding at December 31, 1996 have
exercise prices between $6.00 and $6.75 with a weighted average exercise price
of $6.22. 455,017 of these options are exercisable. The remaining 143,116 option
have exercise prices between $7.33 and $10.69 with a weighted average exercise
price of $9.08. 128,116 of these options are exercisable; their weighted average
exercise price is $9.25. As a result of the sale of the gas marketing
operations, completed on December 10, 1996, virtually all options, other than
those held by Directors of the Company and the Chairman of the Company, vested
upon closing of the sale and have a remaining contractual life of one year.
(9) PROPERTY SALES
1996 ASSET SALES
In April 1996, Edisto sold its 11% interest in the Zarat Permit offshore of
Tunisia for $1.4 million which resulted in a gain of approximately $0.3 million.
This was Edisto's last remaining international oil and gas property.
In mid-January 1996, Convest completed the sale of an offshore oil and gas
property for sale proceeds of approximately $2.0 million, which resulted in a
gain of approximately $620,000. In addition, Convest sold several other
nonstrategic oil and gas properties during 1996 for aggregate sale proceeds of
approximately $991,000 which resulted in a gain of approximately $619,000.
1994 ASSET SALES
During 1994, Edisto E&P sold its interest in two areas of its Gulf Coast
oil and gas properties. The sales price for the combined properties was
approximately $9.4 million, and the net gain on the sales was approximately $4.7
million. The properties sold were estimated to have reserves of approximately 8
Bcf, one-half of which were undeveloped and would have required significant
capital resources to develop for production. The amount of assets sold did not
exceed 10% of the total assets of the Company so the pro forma effect of these
sales is not presented.
(10) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value. Changes in the assumptions or estimation methodologies may have a
material effect on these estimated fair values.
CASH AND CASH EQUIVALENTS
The fair value approximates carrying value because of the short maturity of
these investments.
BANK DEBT
The fair value approximates carrying value based on floating interest rates
associated with such debt or on recent negotiations with lending institutions.
HEDGING
See Note 5 -- "Hedging Activities" herein for a description of Convest's
hedging activities.
F-17
<PAGE> 134
EDISTO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OTHER
The carrying amount approximates fair value based on the short maturity of
these instruments.
(11) INCOME TAXES
The Company accounts for income taxes in accordance with the provisions of
SFAS 109 which requires that deferred tax assets and liabilities be recorded for
temporary differences between the financial statement and tax bases of assets
and liabilities using the currently enacted tax rate expected to be in effect
when the taxes are actually paid.
The provision for income taxes for the years ended December 31, 1996, 1995
and 1994 consists of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Current
Federal....................................... $142 $347 $ --
State......................................... 245 259 147
---- ---- ----
Income tax provision............................ $387 $606 $147
==== ==== ====
</TABLE>
A reconciliation of the Company's effective tax rate to the statutory tax
rate follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Federal statutory rate........................ 34% (34)% 34%
Foreign tax provision......................... -- -- --
State tax provision........................... 4 10 2
Utilization of net deferred tax asset......... (34) -- (34)
Tax benefit reserved.......................... -- 34 --
Federal alternative minimum tax............... 2 14 --
--- --- ---
Effective rate................................ 6% 24% 2%
=== === ===
</TABLE>
Temporary differences and carryforwards, which give rise to deferred income
tax assets and liabilities, consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
-------- --------
<S> <C> <C>
Deferred tax liabilities.................................... $ (127) $ --
Deferred tax assets:
Net operating loss carryforwards.......................... 36,396 49,304
Tax credit carryforwards.................................. 410 --
Property and equipment differences........................ 724 2,008
Abandonment reserves...................................... -- 1,456
Other..................................................... 1,013 2,618
-------- --------
Total............................................. 38,543 55,386
Valuation Allowance......................................... (38,416) (55,386)
-------- --------
Net deferred tax asset (liability).......................... $ -- $ --
======== ========
</TABLE>
At December 31, 1996 and 1995, the Company recognized valuation allowances
for the net deferred tax assets including net operating loss carryforwards for
which the Company believes it is more likely than not that the assets are not
realizable.
F-18
<PAGE> 135
EDISTO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1996, the Company had consolidated net operating loss
carryforwards of approximately $137 million for regular tax purposes and $96
million for alternative minimum tax reporting purposes. These carryforwards
expire (if not utilized) in the years 2005 to 2010.
Due to a change of more than 50% of ownership in the Company that occurred
on the effective date of the Plan of Reorganization, the Company's ability to
utilize its existing net operating losses to offset future taxable income became
significantly limited under Section 382 of the Internal Revenue Code of 1986, as
amended (the "Code"). The Company will be able to utilize approximately $6.1
million of its net operating loss carryforwards each year for the next 15 years.
To the extent gains are recognized subsequent to the reorganization, which
constitute built-in gains within the meaning of Section 382(h) of the Code, the
annual limitation may be increased to the extent of a portion or all of such
gains recognized.
(12) COMMITMENTS AND CONTINGENCIES
LITIGATION
Bruce W. McConkey, et al v. James R. McNab, Jr., et al. (Cause No.
93-002587 in the 125th District Court of Harris County, Texas). In January 1993,
Bruce W. McConkey and two other shareholders of MINT, who collectively hold 20%
of the outstanding MINT common stock, filed a lawsuit against Edisto, MINT and
certain of its former directors who were former officers of Edisto. The lawsuit,
among other things, (i) alleges that MINT constructively terminated Mr.
McConkey's employment as the President and CEO of MINT, thereby breaching his
employment agreement; (ii) alleges that certain directors of MINT breached their
fiduciary duties to the plaintiffs, in their capacity as minority shareholders,
and (iii) asserts derivative claims on behalf of MINT against certain directors
for alleged mismanagement of MINT. The plaintiffs seek actual damages in an
unspecified amount, punitive damages and attorney's fees. In October 1996, the
trial court granted an interlocutory summary judgment in favor of Edisto, MINT
and the individual defendants on all claims other than the claim against MINT
that it constructively terminated Mr. McConkey's employment. Based on
developments of the case to date, the Company's management does not believe the
outcome of this lawsuit will have a material adverse effect on the Company's
consolidated financial position.
Panhandle Eastern Pipe Line Company v. Energy Source, Inc. (Cause No.
96-60925 in the 152nd District Court of Harris County, Texas). The lawsuit,
which was filed in December 1996, relates to (i) a contract dispute involving
approximately $1.5 million in disputed Annual Revenue Amount and other charges
which PanEnergy and Panhandle Eastern claim are owed by Energy Source under two
gas transportation agreements between the companies, (ii) a claim by Energy
Source that PanEnergy over billed Energy Source by approximately $1.0 million
for services under such transportation contracts which PanEnergy has refused to
refund, (iii) $216,000 in gas balancing penalties paid by Energy Source under
protest for which Edisto is seeking a refund, (iv) a claim by Energy Source
under Texas antitrust laws that PanEnergy exerted unlawful monopoly power and
engaged in anticompetitive conduct to the detriment of Energy Source, and (v) a
claim by Energy Source that PanEnergy tortiously interfered with a prospective
contractual relationship between Energy Source and its largest customer at that
time. Edisto believes that it has meritorious defenses to PanEnergy's claims and
plans to vigorously assert such defenses and its counterclaims against PanEnergy
in the lawsuit. Based on developments of the case to date, the Company's
management does not believe the outcome of this lawsuit will have a material
adverse effect on the Company's consolidated financial position.
Potential Retained Liabilities from Sale of Gas Marketing Operations. As a
condition to the sale of the natural gas marketing operations in December 1996,
Edisto retained the rights and liabilities associated with the gas purchase and
supply contracts with three of Energy Source's Canadian trading partners. Each
of these trading partners defaulted under their contracts and sought protection
under Canadian bankruptcy laws. Edisto is pursuing its claims in these matters.
F-19
<PAGE> 136
EDISTO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LEASE COMMITMENTS
Minimum future payments under operating leases are $275,000 during 1997,
$21,000 during 1998, $10,000 during 1999, $4,000 during 2000 and zero
thereafter.
(13) RESTRUCTURING ITEMS
Restructuring expense in 1994 includes the costs of the Company's
implementation of a restructuring and consolidation plan. Thirty-one (31)
employees who were involved primarily in corporate administration and
exploration and production operations in the Dallas office were laid off as part
of the Company's restructuring and its associated move to Houston, Texas.
Pursuant to this plan, Edisto recorded the following restructuring expenses at
December 31, 1994 (in thousands):
<TABLE>
<S> <C>
Consolidation of office space requirements.................. $1,821
Reduction in workforce...................................... 863
------
$2,684
======
</TABLE>
The liability remaining under the Company's restructuring plan as of
December 31, 1996 and 1995, relates to the consolidation of the Company's office
lease requirements. As of December 31, 1996 and 1995, the Company had made
payments totaling $1.9 million and $1.5 million associated with its
restructuring plan, respectively. These payments were applied to the total
restructuring liability of $2.7 million. The current portion of the
restructuring liability was $538,000 and $619,000 as of December 31, 1996 and
1995, respectively. The current portion of the restructuring liability is
included in "Accrued Liabilities and Other" and the long-term portion is
included in "Other Noncurrent Liabilities."
(14) EMPLOYEE BENEFITS
Edisto has an Employee Profit Sharing Retirement Plan and Trust which is
available to all full-time employees of Edisto and certain of its affiliates.
Under the terms of the Plan, an employee may contribute up to a maximum of 15%
of their pre-tax annual compensation and Edisto will make matching contributions
to the account of the participant equal to 6% of the participant's annual
compensation up to a maximum limit of $1,864 per year. In addition, the Board of
Directors of Edisto may determine, on a year-by-year basis, to contribute an
additional amount which would be allocated to participating employees based on
their relative compensation. During 1996, Edisto made matching contributions of
$117,377 and additional contributions of $159,235. During 1995, Edisto made
matching contributions of $103,625 and additional contributions of $140,016.
During 1994, Edisto made matching contributions of $147,545 and additional
contributions of $226,744.
In connection with the sale of the gas marketing operations on December 10,
1996 (see Note 2 -- "Discontinued Operations"), all of the employees of Edisto,
other than the Chairman of Edisto, became employees of the purchaser. Since
Edisto no longer has any active employees, the Edisto Board of Directors on
December 31, 1996 approved terminating the Plan. This termination is expected to
occur by the end of 1997.
During 1995, Convest maintained a plan qualified under Section 401(k) of
the Internal Revenue Code (the "Plan"). All qualified employees of Convest were
entitled to participate in the Plan upon completion of twelve months of service.
Effective, January 1, 1994, a participant could contribute up to 15% of their
compensation to the Plan on a pre-tax basis and Convest contributed matching
contributions to the account of the participant equal to 75% of the
participant's contribution, not to exceed 4.5% of the participant's
compensation. Contributions by Convest vested over five years of service at a
rate of 20% per year. During 1995, Convest made matching contributions of
approximately $70,000 in accordance with the Plan.
F-20
<PAGE> 137
EDISTO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During December 1995, Convest amended and restated the Plan effective
January 1, 1996. Under the amended Plan, all qualified employees of Convest are
entitled to participate, regardless of time of service with Convest; however, a
new entrant to the Plan may only do so on January 1 and July 1. Under the terms
of the Plan, an employee may contribute up to a maximum of 15% of their pre-tax
annual compensation and Convest will make matching contributions to the account
of the participant equal to 6% of the participant's annual compensation up to a
maximum limit of $1,864 per year. In addition, the Board of Directors may
determine, on a year-by-year basis, to contribute an additional amount which
would be allocated to participating employees based on their relative
compensation. During 1996, Convest made matching contributions of $178,000.
(15) CONVEST OIL AND GAS RESERVES INFORMATION (UNAUDITED)
The provisions of Statement of Financial Accounting Standards No. 69
require the disclosure of the following information relative to Convest's oil
and gas reserves and producing activities.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CAPITALIZED COSTS RELATING TO OIL AND GAS PRODUCING
ACTIVITIES
Proved oil and gas properties............................ $114,063 $110,373 $ 66,617
Unproved oil and gas properties.......................... 3,244 3,828 997
-------- -------- --------
117,307 114,201 67,614
Accumulated depreciation, depletion and amortization..... (62,847) (50,144) (29,289)
-------- -------- --------
Net capitalized costs.................................... $ 54,460 $ 64,057 $ 38,325
======== ======== ========
COSTS INCURRED IN OIL AND GAS PROPERTY ACQUISITION,
EXPLORATION AND DEVELOPMENT ACTIVITIES
Acquisition of producing properties and leasehold costs:
Proved................................................ $ 163 $ 3,069 $ 15
Unproved.............................................. -- -- 17
Reverse Acquisition of Convest........................... -- 40,935 --
Exploratory drilling costs............................... 3,907 -- 210
Development drilling costs............................... 9,249 6,406 3,812
-------- -------- --------
$ 13,319 $ 50,410 $ 4,054
======== ======== ========
</TABLE>
F-21
<PAGE> 138
EDISTO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
UNAUDITED RESERVE QUANTITY INFORMATION
The following table sets forth the estimates of Convest's share of net
quantities of proved reserves of oil and gas and a reconciliation of the changes
in such quantities, developed or audited by independent petroleum engineers in
accordance with guidelines established by the Securities and Exchange Commission
and the Financial Accounting Standards Board. Convest emphasizes that reserve
quantity estimates are inherently imprecise. Accordingly, these estimates are
expected to change as future information becomes available. Changes in reserve
quantities or prices and costs in future reserve estimates could have a
significant effect on future depreciation, depletion and amortization or
impairments of oil and gas properties. All reserves are located in the United
States.
<TABLE>
<CAPTION>
OIL AND
CONDENSATE NATURAL GAS
(MBBLS) (MMCF)
---------- -----------
<S> <C> <C>
Proved reserves, December 31, 1993.......................... 1,012 59,340
Revisions of previous estimates........................... 220 10,134
Sales of minerals in place................................ (11) (7,236)
Extensions, discoveries and other additions............... -- --
Production................................................ (584) (19,295)
------ -------
Proved reserves, December 31, 1994.......................... 637 42,943
Revision of previous estimates............................ 872 (5,797)
Sale of minerals in place................................. (50) (133)
Reverse acquisition of Convest............................ 5,474 17,509
Acquisition of Sensor Properties (a)...................... 756 172
Extensions, discoveries and other additions............... 140 3,820
Production................................................ (1,306) (17,968)
------ -------
Proved reserves, December 31, 1995.......................... 6,523 40,546
Revisions of previous estimates........................... 889 5,757
Sales of minerals in place................................ (341) (2,105)
Extensions, discoveries and other additions............... 296 6,546
Production................................................ (1,023) (13,162)
------ -------
Proved reserves, December 31, 1996.......................... 6,344 37,582
====== =======
Proved developed reserves:
December 31, 1993......................................... 949 49,111
December 31, 1994......................................... 607 42,540
December 31, 1995......................................... 5,818 39,231
December 31, 1996......................................... 5,493 35,075
</TABLE>
- ---------------
(a) Reserve additions associated with the Sensor Properties acquisition
represents only the reserves associated with Edisto E&P's interest as
Convest's interest in the Sensor Properties was considered to have been
acquired by Edisto E&P in the Edisto Transaction.
F-22
<PAGE> 139
EDISTO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
UNAUDITED STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS AND CHANGES
THEREIN RELATING TO PROVED OIL AND GAS RESERVES
The following table presents the standardized measure of discounted future
net cash flows and changes therein relating to proved oil and gas reserves
pursuant to Securities and Exchange Commission Regulation S-X, Rule 4-10 and
Statement of Financial Accounting Standards No. 69. In computing this data,
assumptions other than those required by the Securities and Exchange Commission
and the Financial Accounting Standards Board could produce different results.
Accordingly, the data may not be construed as representative of the fair market
value of Convest's proved oil and gas reserves.
Future cash flow estimates were derived by applying year-end prices and
costs to estimated future production. Convest's gas production is either sold at
fixed prices contracted for with given purchasers or at prevailing spot market
prices. Future production and development costs were computed by estimating the
expenditures to be incurred in developing and producing the proved oil and gas
reserves, based on year-end costs and continued existing economic conditions.
The standardized measure of discounted future net cash flows represents the
present value of estimated future net cash flows, discounted at a rate of 10%
per year.
Numerous uncertainties are inherent in estimating quantities of proved
reserves, projecting future rates of production and the timing of development
expenditures. Future prices received for such production and future production
costs may vary, perhaps significantly, from the prices and costs assumed for
purposes of these estimates. Estimates of economically recoverable oil and gas
reserves and of the future net revenues therefrom are based upon a number of
variable factors and assumptions, all of which may in fact vary considerably
from actual results. All such estimates are to some degree speculative, and
classifications of reserves are only attempts to define the degree of
speculation involved. Convest emphasizes that the actual production, revenues,
severance and excise taxes, development expenditures and operating expenditures
with respect to its reserves will likely vary from such estimates, and such
variances may be material.
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------
1996 1995 1994
--------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Future cash inflows......................................... $ 310,591 $ 214,687 $ 79,331
Future production and development costs..................... (117,030) (116,343) (48,733)
Future income taxes......................................... (33,366) (2,925) --
--------- --------- --------
Future net cash flows....................................... 160,195 95,419 30,598
10% annual discount for estimated timing.................... (38,841) (23,452) (3,143)
--------- --------- --------
Standardized measure of discounted future net cash flows.... $ 121,354 $ 71,967 $ 27,455
========= ========= ========
Beginning of period......................................... $ 71,967 $ 27,455 $ 75,020
Changes resulting from:
Sales of oil and gas produced, net of production
costs................................................ (32,360) (32,763) (34,559)
Net changes in prices and production costs............. 55,216 9,443 (26,666)
Extensions and discoveries, less related costs......... 23,442 8,601 --
Reverse acquisition of Convest......................... -- 53,102 --
Acquisition of Sensor Properties(a).................... -- 4,838 --
Sales of reserves in place............................. (4,091) (519) (8,434)
Revisions of previous quantity estimates............... 23,015 (622) 9,809
Accretion of discount.................................. 7,197 2,746 7,502
Changes in future development costs.................... (24) 1,905 3,379
Net change in income taxes............................. (22,181) (2,509) --
Changes in timing and other............................ (827) 290 1,404
--------- --------- --------
End of period............................................... $ 121,354 $ 71,967 $ 27,455
========= ========= ========
</TABLE>
F-23
<PAGE> 140
EDISTO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------
AVERAGE PRICES 1996 1995 1994
-------------- --------- --------- --------
<S> <C> <C> <C>
Oil (per Bbl)............................................... $ 26.01 $ 19.48 $ 14.67
Gas (per Mcf)............................................... $ 3.87 $ 2.16 $ 1.63
</TABLE>
- ---------------
(a) Discounted future net revenues associated with the Sensor Properties
acquisition represents only the discounted future net revenues associated
with Edisto E&P's interest as Convest's interest in the Sensor Properties
was considered to have been acquired by Edisto E&P in the Edisto
Transaction.
Subsequent to the reserve valuation date of December 31, 1996, prices for
oil and natural gas have decreased substantially. The average prices received
for February 1997 were $20.75 per barrel and $2.85 per Mcf. Prices have
continued to decline since then so the Company expects that the prices it will
receive in March 1997 will be lower than in the prior month. This decrease in
prices would have had an effect on the Standardized Measure of Discounted Cash
Flows of the Company's proved reserves at January 1, 1997.
F-24
<PAGE> 141
EDISTO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(16) SELECTED QUARTERLY DATA (UNAUDITED)
The following tables set forth certain quarterly results of operations of
Edisto (in thousands, except per share data):
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH YEAR TO
QUARTER QUARTER QUARTER QUARTER DATE
1996 1996 1996 1996 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenues............................. $11,520 $10,513 $11,601 $13,588 $47,222
Operating income (loss).............. 1,013 (401) 1,003 3,048 4,663
Income (loss) from continuing
operations......................... 1,344 127 464 3,668 5,603
Income (loss) from discontinued gas
marketing and trading operations... 2,759 (1,287) (2,170) (63) (761)
Gain from discontinued gas marketing
operations......................... -- -- -- 15,312 15,312
Net income (loss).................... 4,103 (1,160) (1,706) 18,917 20,154
Net income (loss) per common share:
Continuing operations.............. .11 .01 .03 .26 .41
Discontinued operations............ .21 (.10) (.15) 1.10 1.08
Net income (loss) per common share... .32 (.09) (.12) 1.36 1.49
Weighted average common shares
outstanding........................ 12,934 13,440 13,846 13,856 13,496
</TABLE>
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH YEAR TO
QUARTER QUARTER QUARTER QUARTER DATE
1996 1996 1996 1996 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenues............................. $13,221 $13,323 $11,786 $13,120 $51,450
Operating income (loss).............. (26) (642) 223 (4,514) (4,959)
Income (loss) from continuing
operations......................... (61) (328) (349) (2,436) (3,174)
Income (loss) from discontinued gas
marketing and trading operations... (2,068) 1,033 (106) (8,663) (9,804)
Gain from discontinued transmission
operations......................... 2,557 -- -- -- 2,557
Gain from discontinued manufacturing
operations......................... 3,824 -- -- -- 3,824
Net income (loss).................... 4,252 705 (455) (11,099) (6,597)
Net income (loss) per common share:
Continuing operations.............. -- (.03) (.03) (.19) (.25)
Discontinued operations............ .33 .08 (.01) (.66) (.26)
Net income (loss) per common share... .33 .05 (.04) (.85) (.51)
Weighted average common shares
outstanding........................ 12,966 12,966 12,954 12,954 12,954
</TABLE>
F-25
<PAGE> 142
SCHEDULE I
EDISTO RESOURCES CORPORATION (PARENT COMPANY)
CONDENSED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1995
------- -------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $67,626 $18,318
Accounts receivable....................................... 4,800 69
Notes receivable from affiliates.......................... -- 9,502
Other..................................................... 380 237
------- -------
Total current assets.............................. 72,806 28,126
------- -------
Property and equipment
Other..................................................... -- 1,395
Less accumulated depreciation............................. -- (823)
------- -------
-- 572
------- -------
Investment in subsidiaries.................................. 25,842 41,327
------- -------
Total assets...................................... $98,648 $70,025
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt...................... $ -- $ 96
Accounts payable.......................................... 947 1,130
Accrued liabilities and other............................. 738 619
------- -------
1,685 1,845
------- -------
Long-term liabilities:
Long-term debt, net of current maturities................. -- 80
Other noncurrent liabilities.............................. 240 572
------- -------
240 652
------- -------
Stockholders' equity:
Common stock.............................................. 139 130
Additional paid-in capital................................ 70,675 61,528
Retained earnings......................................... 26,308 6,154
Foreign currency translation.............................. (37) (95)
Treasury stock............................................ (362) (189)
------- -------
Total stockholders' equity............................. 96,723 67,528
------- -------
$98,648 $70,025
======= =======
</TABLE>
See "Notes to Consolidated Financial Statements" of the Edisto Resources
Corporation Consolidated Financial Statements included in this report.
F-26
<PAGE> 143
SCHEDULE I
(CONTINUED)
EDISTO RESOURCES CORPORATION (PARENT COMPANY)
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Costs and expenses:
General and administrative............................ $ 1,584 $ 3,628 $ 363
Depreciation and amortization......................... 66 314 2,508
------- ------- -------
1,650 3,942 2,871
------- ------- -------
Operating loss........................................ (1,650) (3,942) (2,871)
------- ------- -------
Other income (expense):
Interest income....................................... 1,253 1,197 420
Minority interest..................................... (2,190) 726 --
Other................................................. 407 1,119 (361)
------- ------- -------
(530) 3,042 59
------- ------- -------
Income (loss) before equity in income (loss) of
subsidiaries.......................................... (2,180) (900) (2,812)
------- ------- -------
Equity in income (loss) of subsidiaries:
Convest............................................... 8,070 (1,125) 11,366
MINT.................................................. 20 135 339
Tunisia............................................... 342 (599) --
Edisto Gas Storage.................................... (425) (83) (132)
------- ------- -------
8,007 (1,672) 11,573
------- ------- -------
Income (loss) before income taxes....................... 5,827 (2,572) 8,761
Income tax provision.................................. (224) (602) (26)
------- ------- -------
Income (loss) from continuing operations.............. 5,603 (3,174) 8,735
Discontinued operations:
Loss from gas marketing and trading operations........ (761) (9,804) (1,083)
Loss from transmission operations..................... -- -- (501)
Gain on sale of gas marketing and trading
operations......................................... 15,312 -- --
Gain on sale of transmission operations............... -- 2,557 --
Gain on sale of manufacturing operations.............. -- 3,824 --
------- ------- -------
Net income (loss)....................................... $20,154 $(6,597) $ 7,151
======= ======= =======
</TABLE>
See "Notes to Consolidated Financial Statements" of the Edisto Resources
Corporation Consolidated Financial Statements included in this report.
F-27
<PAGE> 144
SCHEDULE I
(CONTINUED)
EDISTO RESOURCES CORPORATION (PARENT COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)..................................... $ 20,154 $ (6,597) $ 7,151
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation and amortization...................... 66 314 --
Gain on sales of assets and investments............ (15,312) (6,381) --
Equity in (income) loss of subsidiaries............ (7,246) 11,476 (9,989)
Restructuring expense.............................. -- -- 2,508
Amortization of goodwill........................... -- -- 206
Minority interest.................................. 2,190 (726) (69)
Other.............................................. -- 14 100
Changes in assets and liabilities affecting operating
activities:
Accounts receivable................................ (4,225) (984) 4,351
Accounts payable................................... (396) (1,075) 431
-------- -------- --------
Net cash provided (used) by operations........ (4,769) (3,959) 4,689
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of property, equipment,
investments and other assets....................... -- 244 --
(Advances to) payments from affiliates................ 3,134 9,302 (973)
Acquisition of Enex................................... -- -- (686)
Dividends from (contributions to) subsidiaries........ 43,293 20,386 (3,137)
Acquisition of Convest................................ (419) (7,230) --
Other................................................. (796) (473) --
-------- -------- --------
Net cash provided (used) by investing
activities.................................. 45,212 22,229 (4,796)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Stock issue on exercise of warrants and options....... 9,156 -- --
Repurchase of common shares........................... (173) -- --
Payments of long-term capital leases.................. (176) (114) --
Foreign currency translation.......................... 58 57 38
-------- -------- --------
Net cash provided (used) by financing
activities.................................. 8,865 (57) 38
Net increase (decrease) in cash and cash equivalents.... 49,308 18,213 (69)
Cash and cash equivalents, at beginning of period....... 18,318 105 174
-------- -------- --------
Cash and cash equivalents, at end of period............. $ 67,626 $ 18,318 $ 105
======== ======== ========
</TABLE>
See "Notes to Consolidated Financial Statements" of the Edisto Resources
Corporation Consolidated Financial Statements included in this report.
F-28
<PAGE> 145
SCHEDULE II
EDISTO RESOURCES CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND OTHER AT END
OF PERIOD EXPENSES CHANGES(1) OF PERIOD
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Year ended December 31, 1996
Reserves and allowances:
Accounts receivable........................... $1,483 $ 768 $ (162) $2,089
Inventory..................................... -- 2,127 -- 2,127
------ ------ ------- ------
$1,483 $2,895 $ (162) $4,216
====== ====== ======= ======
Year ended December 31, 1995
Reserves and allowances:
Accounts receivable........................... $1,345 $ 163 $ (25) $1,483
====== ====== ======= ======
Year ended December 31, 1994
Reserves and allowances:
Accounts receivable........................... $3,031 $ -- $(1,686) $1,345
Other......................................... 120 -- (120) --
------ ------ ------- ------
$3,151 $ -- $(1,806) $1,345
====== ====== ======= ======
</TABLE>
- ---------------
(1) Primarily reflects write-offs of amounts expensed in previous periods.
F-29
<PAGE> 146
EDISTO RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
JUNE 30, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 76,905 $ 71,765
Restricted cash........................................... 333 333
Margin deposits........................................... 56 979
Accounts receivable....................................... 8,472 9,835
Other current assets...................................... 766 1,547
-------- --------
Total current assets.............................. 86,532 84,459
Property and equipment:
Oil and gas properties using the successful efforts method
of accounting.......................................... 118,117 117,306
Other..................................................... 685 641
Less -- accumulated depreciation, depletion and
amortization........................................... (64,148) (63,147)
-------- --------
54,654 54,800
Other noncurrent assets..................................... 2,095 2,178
-------- --------
$143,281 $141,437
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 7,711 $ 9,840
Accrued liabilities and other............................. 8,075 9,863
Deferred revenue.......................................... 1,905 2,113
-------- --------
Total current liabilities......................... 17,691 21,816
Long-term liabilities:
Long-term debt............................................ 3 4,003
Deferred revenue.......................................... 530 559
Minority interest......................................... 13,996 10,850
Other noncurrent liabilities.............................. 5,556 7,486
-------- --------
20,085 22,898
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, 50,000,000 shares
authorized, 14,238,551 issued at June 30, 1997 and
13,930,052 issued at December 31, 1996................. 142 139
Additional paid-in capital................................ 72,699 70,675
Retained earnings......................................... 33,063 26,308
Foreign currency translation.............................. (37) (37)
Treasury stock, at cost, 52,214 shares at June 30, 1997
and December 31, 1996.................................. (362) (362)
-------- --------
Total stockholders' equity........................ 105,505 96,723
-------- --------
$143,281 $141,437
======== ========
</TABLE>
See the accompanying notes to the consolidated financial statements.
F-30
<PAGE> 147
EDISTO RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
1997 1996
---------- ----------
<S> <C> <C>
Oil and gas revenues........................................ $25,917 $22,033
Costs and expenses:
Lease operating and production taxes...................... 6,573 8,502
Abandonment and exploration costs......................... 1,252 921
Depreciation, depletion and amortization.................. 7,305 9,100
General and administrative................................ 3,168 2,898
------- -------
18,298 21,421
------- -------
Operating income.................................. 7,619 612
------- -------
Other income (expense):
Interest income........................................... 2,044 589
Interest expense.......................................... (72) (677)
Gain on asset sales....................................... 87 1,165
Minority interest......................................... (2,637) (379)
Other, net................................................ (30) 438
------- -------
(608) 1,136
------- -------
Income before income taxes.................................. 7,011 1,748
Income tax provisions....................................... (256) (277)
------- -------
Income from continuing operations........................... 6,755 1,471
------- -------
Discontinued operations:
Income from gas marketing operations...................... -- 1,472
------- -------
Net income........................................ $ 6,755 $ 2,943
======= =======
Net income per common share:
Continuing operations..................................... $ .48 $ .11
Discontinued operations................................... -- .12
------- -------
Net income per common share............................... $ .48 $ .23
======= =======
Weighted average common shares outstanding.................. 14,019 12,930
======= =======
</TABLE>
See the accompanying notes to the consolidated financial statements.
F-31
<PAGE> 148
EDISTO RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
1997 1996
------------ ------------
<S> <C> <C>
Oil and gas revenues........................................ $12,247 $10,513
Costs and expenses:
Lease operating and production taxes...................... 3,105 4,109
Abandonment and exploration costs......................... 161 879
Depreciation, depletion and amortization.................. 3,682 4,896
General and administrative................................ 1,621 1,030
------- -------
8,569 10,914
------- -------
Operating income.................................. 3,678 (401)
------- -------
Other income (expense):
Interest income........................................... 1,052 285
Interest expense.......................................... (16) (307)
Gain on asset sales....................................... (35) 352
Minority interest......................................... (1,301) 203
Other, net................................................ 43 102
------- -------
(257) 635
------- -------
Income before income taxes.................................. 3,421 234
Income tax provisions....................................... (158) (107)
------- -------
Income from continuing operations........................... 3,263 127
------- -------
Discontinued operations:
Income from gas marketing operations...................... -- (1,287)
------- -------
Net income........................................ $ 3,263 $(1,160)
======= =======
Net income per common share:
Continuing operations..................................... $ .23 $ .01
Discontinued operations................................... -- (.10)
------- -------
Net income per common share............................... $ .23 $ (.09)
======= =======
Weighted average common shares outstanding.................. 14,091 13,440
======= =======
</TABLE>
See the accompanying notes to the consolidated financial statements.
F-32
<PAGE> 149
EDISTO RESOURCES CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NUMBER OF ADDITIONAL FOREIGN
COMMON COMMON PAID-IN RETAINED CURRENCY TREASURY
SHARES STOCK CAPITAL EARNINGS TRANSLATION STOCK TOTAL
--------- ------ ---------- -------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Stockholder's equity,
December 31, 1996..... 13,930 $139 $70,675 $26,308 $(37) $(362) $ 96,723
Net income.............. -- -- -- 6,755 -- -- 6,755
Common stock issued
pursuant to 1996 bonus
plan.................. 6 -- 55 -- -- -- 55
Exercise of employee
stock options......... 303 3 1,969 -- -- -- 1,972
------ ---- ------- ------- ---- ----- --------
Stockholder's equity,
June 30, 1997......... 14,239 $142 $72,699 $33,063 $(37) $(362) $105,505
====== ==== ======= ======= ==== ===== ========
</TABLE>
See the accompanying notes to the consolidated financial statements.
F-33
<PAGE> 150
EDISTO RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
1997 1996
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 6,755 $ 2,943
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation, depletion and amortization............... 7,305 8,337
Impairment of oil and gas properties................... -- 1,120
Abandonments and exploration costs..................... 665 781
Gains on sales of assets............................... (87) (1,167)
Equity in income of affiliates......................... -- (241)
Minority interest expense.............................. 2,637 379
Other.................................................. 110 807
Changes in assets and liabilities:
Accounts receivable and inventory.................... 1,754 (15,760)
Accounts payable and accrued liabilities............. (3,690) 14,780
Other................................................ (518) 1,377
------- --------
Net cash provided by operating activities......... 14,931 13,356
------- --------
Cash flows from investing activities:
Net proceeds from sales of assets......................... 768 3,874
(Purchase) sale of hedging instruments.................... 1,110 (2,647)
Acquisition, exploration and development costs............ (9,534) (4,721)
Payments to affiliates.................................... -- 79
Purchase of other current and noncurrent assets........... (107) (820)
------- --------
Net cash used in investing activities............. (7,763) (4,235)
------- --------
Cash flows from financing activities:
Payments on long-term debt and capital leases............. (4,000) (7,945)
Exercised employee stock options.......................... 1,972 --
Repurchase of common shares............................... -- (173)
Stock issue on exercise of warrants....................... -- 8,941
Currency translation...................................... -- 11
------- --------
Net cash provided by (used in) financing
activities...................................... (2,028) 834
------- --------
Net increase in cash and cash equivalents................... 5,140 9,955
Cash and cash equivalents, including restricted cash, at
beginning of period....................................... 72,098 33,697
------- --------
Cash and cash equivalents, including restricted cash, at end
of period................................................. $77,238 $ 43,652
======= ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest.................................................. $ 238 $ 888
======= ========
Taxes..................................................... $ 606 $ 410
======= ========
</TABLE>
See the accompanying notes to the consolidated financial statements.
F-34
<PAGE> 151
EDISTO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JUNE 30, 1997 AND 1996
(1) ORGANIZATION AND PRESENTATION
The accompanying consolidated financial statements include the accounts of
Edisto Resources Corporation, a Delaware corporation ( the "Company" or
"Edisto"), and its consolidated subsidiaries. On December 10, 1996, the Company
sold substantially all of the assets of its gas marketing subsidiaries, Energy
Source, Inc. and Energy Source Canada, Inc. (collectively "Energy Source"), to
two subsidiaries of Pacific Gas Transmission Company. Since this sale, the
Company's only line of business has been oil and gas exploration and production
which is conducted through a 72% interest in Convest Energy Corporation
("Convest"), an independent oil and gas exploration and production company
listed on the American Stock Exchange. Edisto owns 7,598,771 shares of Convest
Common Stock.
References to the "Company" or "Edisto" shall refer to Edisto Resources
Corporation and all of its consolidated subsidiaries, including Convest.
References to "Convest" shall refer only to Convest.
These financial statements should be read in conjunction with the audited
financial statements and the notes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1996. Reference also is made
to the "Management's Discussion and Analysis of Financial Condition and Results
of Operations" included elsewhere in this report.
The information presented in this Form 10-Q is unaudited, but in the
opinion of management reflects all adjustments (all of which were normal and
recurring) necessary to fairly present such information. Interim results are not
necessarily indicative of a full year of operations.
(2) PROPOSED MERGER WITH FORCENERGY INC
On June 19, 1997, Edisto, Convest, Forcenergy Inc ("Forcenergy") (NYSE
"FEN"), and a Forcenergy subsidiary executed a definitive Agreement and Plan of
Merger (the "Merger Agreement") providing for Edisto and Convest to be merged
into Forcenergy.
Under the Merger Agreement, (a) each issued and outstanding share of Edisto
Common Stock will be converted into the right to receive (i) $4.886 in cash and
(ii) a fractional interest in a share of Forcenergy Common Stock equal to $5.064
divided by the Weighted Average Trading Price of Forcenergy Common Stock and (b)
each issued and outstanding share of Convest Common Stock will be converted into
the right to receive a fractional interest in a share of Forcenergy Common Stock
equal to $8.88 divided by the Weighted Average Trading Price of Forcenergy
Common Stock; provided, however, that in no event will the Weighted Average
Trading Price of Forcenergy Common Stock be less than $28.96 nor more than
$34.96. The "Weighted Average Trading Price" of Forcenergy Common Stock will be
calculated by taking the average of the following daily calculations for each of
the ten trading days ending two trading days prior to the closing date for the
Merger: (i) grouping together all shares of Forcenergy Common Stock traded on
such day at the same trading price, (ii) multiplying the aggregate number of
shares in each price group by the trading price for such group to calculate a
product (the total sold shares value) for each group, (iii) adding all of such
products from each group, and (iv) dividing the resulting total by the aggregate
number of shares traded on such trading day. Cash will be paid in lieu of
fractional shares of Forcenergy Common Stock. The transaction is expected to
close in October 1997.
The majority shareholders of Edisto and Convest have agreed to vote their
respective shares in favor of the transaction thereby assuring the required
shareholder approval for the Merger Agreement. Investment funds and accounts
managed by TCW Special Credits and Oaktree Capital Management, L.L.C., which
hold slightly in excess of 51% of Edisto's Common Stock, have agreed to vote for
the transaction. In addition, such investment funds and accounts have
contractually agreed not to sell 80% of the Forcenergy Common Stock received in
the transaction for a period of six months after the closing. Edisto currently
owns approximately
F-35
<PAGE> 152
EDISTO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
72% of the outstanding shares of Common Stock of Convest, and has agreed in the
Merger Agreement to vote its shares of Convest Common Stock in favor of the
transaction.
The accompanying financial statements have been prepared on a going concern
basis and do not reflect any adjustments related to the proposed merger.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
EDISTO
Cash and Cash Equivalents. Cash equivalents consist of short-term highly
liquid investments which are readily convertible into cash and have original
maturities of three months or less. The Company's investment policy for its
available cash balances allows for investment in high grade short-term debt
issues as well as investments in money market accounts and overnight investments
with major financial institutions. At June 30, 1997, the Company had cash and
cash equivalents, including restricted cash, of $77.2 million of which $7.4
million was held at Convest.
Net Income Per Share. Net income per share is computed based on the
weighted average number of shares outstanding which were 14,019,317 and
12,929,661 for the six months ended June 30, 1997 and 1996, respectively, and
14,090,803 and 13,440,269 for the three months ended June 30, 1997 and 1996,
respectively. No effect has been given to options outstanding under the
Company's stock option plans because their effect is antidilutive or immaterial.
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 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.
Income Taxes. Edisto records income taxes in accordance with the Financial
Accounting Standards Board -- Statement of Financial Accounting Standards No.
109 ("SFAS 109"), "Accounting for Income Taxes." SFAS 109 requires the balance
sheet approach of income tax accounting whereby deferred income taxes are
provided at the balance sheet date for the differences existing in the tax basis
of assets and liabilities and their financial statement carrying amounts.
Principles of Consolidation and Reclassifications. All significant
intercompany balances and transactions have been eliminated. Certain
reclassifications have been made to the 1996 consolidated financial statements
to conform to the presentation for 1997.
CONVEST
Reclassifications and Consolidation. Certain reclassifications have been
made to prior year financial statements to conform to the presentation for 1997.
All significant intercompany accounts and activities have been eliminated.
Restricted Cash. Restricted cash consists of $333,000 of certificates of
deposit held by various financial institutions. The certificates of deposit are
held in escrow as collateral for letters of credit issued for (i) lease payments
on certain offshore platforms and (ii) estimated plugging and abandonment costs
expected to be incurred on certain onshore oil and gas properties.
Property and Equipment. Convest follows the successful efforts method of
accounting for its oil and gas properties. Costs of productive wells,
developmental drilling expenditures, including developmental dry holes, and
productive leases are capitalized. Exploratory drilling costs, including
stratigraphic test wells, are initially capitalized, but charged to expense if
and when the well is determined to be unsuccessful. The capitalized
F-36
<PAGE> 153
EDISTO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
costs of oil and gas properties are charged to operations as depreciation,
depletion and amortization using the unit-of-production method based on the
ratio of current production to proved recoverable oil and gas reserves (as
defined by the Securities and Exchange Commission) on a lease by lease basis.
Reserve estimates for Convest's properties were prepared or audited by
independent petroleum engineering firms at year end. Gas is converted to
equivalent barrels of oil on an energy content basis of 6 Mcf of gas to 1 barrel
of oil. Depreciation, depletion and amortization per equivalent unit of oil
production was $4.74 and $4.83 for the six month periods ended June 30, 1997 and
1996, respectively, and $4.51 and $4.60 for the three month periods ended June
30, 1997 and 1996, respectively. Oil and gas leasehold costs are capitalized
when incurred. Unproved properties are assessed periodically on a
property-by-property basis and impairments in value are charged to expense.
Exploratory expenses, including geological and geophysical expenses and annual
delay rentals, are charged to expense as incurred.
Under Statement of Financial Accounting Standards No. 121 ("SFAS 121")
regarding accounting for the impairment of long-lived assets, Convest is
required to recognize an impairment loss for its proved oil and gas properties
if the carrying value of such properties (i.e., total capitalized costs less
accumulated depreciation and depletion) exceeds the undiscounted expected future
cash flows attributable to such properties. Convest must assess the need for an
impairment of capitalized costs of oil and gas properties on a
property-by-property basis. If an impairment is indicated based on undiscounted
expected future cash flows, then an impairment loss is recognized to the extent
that net capitalized costs exceed expected future cash flows. During the second
quarter of 1996, it was determined that one of Convest's offshore properties had
experienced a permanent decline in production. Accordingly, Convest recorded an
impairment loss of approximately $1.1 million during the second quarter of 1996.
No such provision has been required during 1997.
Other Property, Plant and Equipment. Other fixed assets are recorded at
cost and depreciated over their estimated useful lives using the straight-line
method of depreciation.
Abandonment Reserve. Convest records its estimate of future abandonment
costs of offshore properties. Such costs are accrued using a unit-of-production
method based upon estimated proved recoverable reserves. Abandonment costs are
estimated under current regulations using current costs and are reviewed
periodically and adjusted as new information becomes available. Abandonment
costs on onshore properties are typically nominal due to the salvage value of
well equipment.
Convest is a party to a settlement with the United States Minerals
Management Service relating to estimated plugging and abandonment costs for 14
Gulf of Mexico OCS leases. Pursuant to this settlement, the operator of the
leases, Convest and other co-lessees were required to provide security for
payment of such costs through quarterly payments to an Abandonment Fund. During
the first quarter of 1997, Convest made its final scheduled payment under the
Abandonment Fund, and accordingly, is no longer subject to additional future
payments.
As of June 30, 1997 and December 31, 1996, Convest had made payments
totaling approximately $4.8 million and $4.2 million to the Abandonment Fund,
respectively. These payments were applied to the total long-term abandonment
reserve of $7.5 million and $7.7 million, as of June 30, 1997 and December 31,
1996, respectively, resulting in a net long-term abandonment reserve of $2.7
million and $3.5 million as of those dates. The current portion of the
abandonment reserve was $2.1 million and $2.3 million as of June 30, 1997 and
December 31, 1996, respectively. The current portion of the abandonment reserve
is included in "Accrued Liabilities and Other" and the noncurrent portion is
included in "Other Noncurrent Liabilities" in the consolidated financial
statements.
Lease Operating Expenses. In connection with a 1992 sale of certain future
production volumes of oil to Enron Reserve Acquisition Corp., Convest
established a reserve for the expenses associated with the volumes sold and
amortizes this reserve as the volumes are delivered. As of June 30, 1997 and
December 31, 1996, the
F-37
<PAGE> 154
EDISTO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
current balance of this reserve was $1.6 million, respectively, and the
long-term balance was $2.8 million and $3.7 million, respectively, and were
presented in "Accrued Liabilities and Other" and "Other Noncurrent Liabilities,"
respectively, in the consolidated financial statements.
Gas Balancing. Convest uses the entitlement method of accounting for gas
imbalances. Receivables resulting from undertakes of gas production at June 30,
1997 and December 31, 1996 were $2.4 million and $2.3 million, respectively, and
are included in "Accounts Receivable -- Oil and Gas Production" and "Other
Noncurrent Assets" in the consolidated financial statements. Deferred revenue
and payables resulting from overtakes of gas production at June 30, 1997 and
December 31, 1996 were $2.4 million and $2.7 million, respectively, and are
included in "Current Liabilities -- Deferred Revenue" and "Long-Term
Liabilities -- Deferred Revenue" in the consolidated financial statements.
Accounting for Income Taxes. Convest records income taxes in accordance
with the Financial Accounting Standards Board -- Statement of Financial
Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes." SFAS
109 requires the balance sheet approach of income tax accounting whereby
deferred income taxes are provided at the balance sheet date for the differences
existing in the tax basis of assets and liabilities and their financial
statement carrying amounts.
Concentration of Credit Risk. Convest's oil and gas production revenues are
derived principally from uncollateralized sales to customers in the oil and gas
industry. The concentration of credit risk in a single industry affects
Convest's overall exposure to credit risk because customers may be similarly
affected by changes in economic and other conditions. Convest has not
experienced significant credit losses on receivables from such sales.
Net Income Per Share. Net income per share is computed based on the
weighted average number of shares outstanding which were 10,472,100 and
10,412,722 for the six months ended June 30, 1997 and 1996, respectively, and
10,508,115 and 10,412,722 for the three months ended June 30, 1997 and 1996,
respectively. No effect has been given to options outstanding under Convest's
stock option plans because their effect is antidilutive or immaterial.
Risk Management/Hedging Activities. Convest from time to time engages in
commodity hedging activities to minimize the risk of market fluctuations
associated with the price of crude oil and natural gas production. The hedging
objectives include assurance of stable and known cash flows and fixed favorable
prices. The hedges are effected through the purchase and sale of futures
contracts on the New York Mercantile Exchange ("NYMEX") and over the counter
price swap agreements. The credit risk of futures contracts is limited due to
the daily cash settlement of the net change in the value of open contracts and
because of certain NYMEX procedures. Gains or losses on Convest's hedging
agreements are deferred and recognized as oil and gas sales revenue when the
hedged transaction occurs.
Statement of Cash Flows. For purposes of the consolidated statements of
cash flows, Convest considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
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 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.
All significant estimates are discussed herein.
(4) DISCONTINUED OPERATIONS
From 1990 until December 1996, Edisto conducted natural gas marketing
operations through Energy Source. On December 10, 1996, Energy Source sold
substantially all of its assets to Pacific Gas Transmission Company, a
subsidiary of PG&E Corporation (NYSE "PCG"). The sales price was $23.3 million
in cash,
F-38
<PAGE> 155
EDISTO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
plus the working capital of Energy Source at July 31, 1996 (approximately $20.0
million). The sales price, however, is subject to adjustment after the closing
by the adjusted consolidated net income or loss of Energy Source from August 1,
1996 to November 30, 1996. The Company and PGT have not yet finalized the
purchase price adjustment. Under the Purchase Agreement, Edisto also retained
certain assets and liabilities of Energy Source. In connection with this sale,
Edisto recognized a gain of approximately $15.3 million during 1996, net of
approximately $700,000 of income tax.
As a condition to the sale, Edisto retained the rights and liabilities
associated with the gas purchase and supply contracts with three of Energy
Source's Canadian trading partners, each of whom defaulted under their contracts
and sought protection under Canadian bankruptcy laws. Edisto also retained as
assets approximately 1.2 Bcf of natural gas in storage which the storage
operator failed to deliver. Edisto is pursuing its claims in each of these
matters.
Pursuant to the Purchase Agreement, Edisto also retained the liabilities
and counterclaims against PanEnergy Corporation and Panhandle Eastern Pipe Line
Company under a lawsuit in the District Court of Harris County, Texas. This
lawsuit is described in Note 10 -- "Commitments and Contingencies" herein.
Separate from the lawsuit with Panhandle, Edisto retained as an asset all
rights to receive a refund from Panhandle under a proposed settlement of certain
rate cases pending before the Federal Energy Regulatory Commission. In April
1997, the settlement was finalized and Panhandle acknowledged Edisto's right to
receive a refund of approximately $1.0 million, but offset it against amounts
which Panhandle claims are owed to it by the Company. This refund is included in
Accounts Receivable on the accompanying Consolidated Balance Sheet at June 30,
1997 and December 31, 1996.
F-39
<PAGE> 156
EDISTO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) CONSOLIDATING BALANCE SHEETS
Set forth below are the Consolidating Balance Sheets of Edisto and its
consolidated subsidiary, Convest, at June 30, 1997.
CONSOLIDATING BALANCE SHEETS
JUNE 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONSOLIDATED
EDISTO(1) CONVEST ELIMINATIONS EDISTO
--------- ------- ------------ ------------
<S> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents....................... $ 69,869 $ 7,369 $ -- $ 77,238
Margin deposits................................. -- 56 -- 56
Accounts receivable............................. 1,714 7,130 (372) 8,472
Other current assets............................ 4 762 -- 766
-------- ------- -------- --------
Total current assets.................... 71,587 15,317 (372) 86,532
-------- ------- -------- --------
Property and equipment, net..................... 72 54,582 -- 54,654
-------- ------- -------- --------
Investment in Convest........................... 38,414 -- (38,414) --
-------- ------- -------- --------
Other assets.................................... 27 2,618 (550) 2,095
-------- ------- -------- --------
$110,100 $72,517 $(39,336) $143,281
======== ======= ======== ========
LIABILITIES AND EQUITY:
Accounts payable................................ $ 615 $ 7,467 $ (372) $ 7,710
Accrued liabilities and other................... 3,379 4,696 -- 8,075
Deferred revenue................................ -- 1,906 -- 1,906
-------- ------- -------- --------
Total current liabilities............... 3,994 14,069 (372) 17,691
-------- ------- -------- --------
Long-term debt.................................. -- 3 -- 3
Minority interest............................... -- -- 13,996 13,996
Other noncurrent liabilities.................... 51 6,035 -- 6,086
-------- ------- -------- --------
Total long-term liabilities............. 51 6,038 13,996 20,085
-------- ------- -------- --------
Stockholders' equity............................ 106,055 52,410 (52,960) 105,505
-------- ------- -------- --------
$110,100 $72,517 $(39,336) $143,281
======== ======= ======== ========
</TABLE>
- ---------------
(1) Includes Edisto and its subsidiaries other than Convest.
(6) HEDGING ACTIVITIES
As previously stated, Convest conducts its hedging activities through major
financial institutions. Set forth below is the contract amount and term of all
futures contracts held for price risk management purposes by Convest at June 30,
1997 and December 31, 1996:
<TABLE>
<CAPTION>
JUNE 30, 1997 DECEMBER 31, 1996
-------------------- ----------------------
OIL GAS OIL GAS
-------- -------- -------- ----------
<S> <C> <C> <C> <C>
Quantity Sold................ 30 Mbbls 740 MMCF 90 Mbbls 3,300 MMcf
Maximum Term................. 3 Months 3 Months 9 Months 10 Months
Average Price................ $21.07 $2.38 $22.50 $2.53
</TABLE>
F-40
<PAGE> 157
EDISTO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Convest will continue its hedging activities during 1997 in order to
mitigate the volatility of its crude oil and natural gas prices. Gains and
losses realized upon the settlement of Convest's hedge positions are deferred
and recognized as oil and gas sales revenue in the month of the underlying
physical production being hedged. The fair value of Convest's open positions at
June 30, 1997 were $182,150. As a result of fluctuations in the price of crude
oil and natural gas subsequent to June 30, 1997, the stated fair value of
Convest's open positions is not indicative of the value which would be received
if the positions were closed at current prices. The fair value of Convest's
hedges was based on the cost that would have been incurred to buy out those
hedges in a loss position and the consideration that would have been received to
terminate those hedges in a gain position. The cash margin required by the
counterparties to Convest's hedging activities totaled $56,000 and $1.0 million
as of June 30, 1997 and December 31, 1996, respectively, and are included in
other current assets.
(7) RELATED PARTY TRANSACTIONS
During December 1996, Edisto sold substantially all of the assets of its
wholly owned gas marketing subsidiary, Energy Source, Inc., to an unrelated
third party. From January 1995 until its sale in December 1996, Energy Source
had marketed a substantial portion of Convest's gas production. Under the gas
marketing arrangement, Convest received a minimum price of 98% of the index for
the applicable pipeline. In connection with the sale of Energy Source, Convest
and Energy Source agreed to extend the gas marketing arrangement to December 31,
1997. Effective January 1, 1997, the gas marketing arrangement was amended to
increase the price received by Convest from 98% to 100% of the index price for
the applicable pipeline.
In connection with the Energy Source sale, all Edisto employees other than
Michael Y. McGovern, the Chairman and Chief Executive Officer of Convest and
Edisto, became employees of the purchaser. Subsequently, Edisto's corporate
headquarters were moved to Convest's offices, and Mr. McGovern and four other
employees of Convest have divided their time between Edisto and Convest.
Effective December 1, 1996, Mr. McGovern's base salary and benefits have been
apportioned 70% to Convest and 30% to Edisto. The base salary and benefits of
the other Convest employees who perform work for Edisto also are apportioned
based on the approximate amount of time they work for each company.
Prior to the sale of Energy Source, Edisto had provided Convest with access
to an AS400 computer system to run its accounting system and had provided MIS
support. The monthly cost to Convest was approximately $12,555 per month. In
connection with the sale of Energy Source, Edisto sold the AS400 computer system
and its MIS personnel became employees of the purchaser of Energy Source. Since
Convest continued to need an AS400 computer system to run its accounting system,
the Energy Source purchaser agreed to provide Convest with access to the AS400
computer system and MIS support through December 31, 1997. The cost to Convest
is $12,645 per month. This agreement may be terminated by Convest at any time
after June 30, 1997 upon 90 days notice.
In addition, Convest and Edisto have a directors' and officers' fiduciary
insurance policy that covers both companies. The annual insurance premium was
allocated 32% to Convest, for a cost of $96,000 based on the relative percentage
that the assets of Convest bear to the total assets of both Convest and Edisto.
Each of the affiliated party transactions described above was approved by
either a special committee of Convest's Board, which was composed of outside
directors with no affiliation to Edisto, or the unanimous consent of Convest's
Board.
(8) INCOME TAXES
The Company records current income taxes based on its estimated actual tax
liability for the year. The Company provides for deferred income taxes under
SFAS No. 109 based upon differences between the tax basis of the Company's
assets and liabilities and their financial statement carrying amounts multiplied
by the Company's expected future effective tax rate.
F-41
<PAGE> 158
EDISTO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company recorded current income tax expense of $256,000 and $277,000
for the six months ended June 30, 1997 and 1996, respectively, and $158,000 and
$107,000 for the three months ended June 30, 1997 and 1996, respectively. The
Company has provided a valuation allowance against substantially all of its net
deferred tax assets as the "more-likely-than-not" criteria for recognition under
SFAS No. 109 has not been met.
(9) CONVEST CREDIT FACILITY AND LONG-TERM DEBT
Convest has a revolving credit facility with Bank One, Texas, N.A. ("Bank
One"), and Compass Bank-Houston which terminates on January 1, 1999. Bank One
serves as agent bank of the facility. The facility is secured by a first lien on
all of Convest's assets, including its oil and gas properties and gas plant. The
borrowing base is redetermined semi-annually on May 31 and November 30 of each
year by the lending banks based on engineering criteria established by the
banks. Interest on borrowings under the facility is computed at (i) the agent
bank's prime lending rate (the "Base Rate") plus 3/4% or (ii) the London
Interbank Offering Rate ("LIBOR") plus 2 3/4%. In addition, Convest pays a
commitment fee equal to 1/2% on any commitment amount in excess of outstanding
borrowings.
Effective December 1, 1996, the borrowing base was $19.2 million which
reduces by $1.0 million per month beginning January 1, 1997 based on the lending
banks' estimate of production. Effective January 28, 1997 and June 12, 1997, the
borrowing base was reduced by $300,000 and $200,000, respectively, to give
effect to the sale of oil and gas properties securing the credit facility.
Pursuant to the terms of the credit facility, Convest is required to provide the
banks with semi annual estimates of its oil and gas reserves on or before April
1 and October 1 of each year. Due to the proposed merger with Forcenergy, the
banks have agreed to extend the report required on October 1, 1997 until
December 1, 1997. As a result, Convest's borrowing base will continue to reduce
by $1.0 million per month until the updated reports are provided and the
borrowing base has been redetermined.
After giving effect to the monthly borrowing base reductions and the
reductions resulting from the property sales, Convest's borrowing base under the
credit facility was $12.7 million on June 30, 1997. Convest had no outstanding
borrowings under its credit facility at June 30, 1997 and $4.0 million
outstanding at December 31, 1996. In addition, Convest had $200,000 of letters
of credit outstanding at June 30, 1997 and December 31, 1996, primarily related
to performance bonds issued for oil and gas operations.
(10) COMMITMENTS AND CONTINGENCIES
Bruce W. McConkey, et al v. James R. McNab, Jr., et al. (Cause No.
93-002587 in the 125th District Court of Harris County, Texas). In January 1993,
Bruce W. McConkey and two other shareholders of MINT Holding Company ("MINT"),
who collectively hold 20% of the outstanding MINT common stock, filed a lawsuit
against Edisto, MINT and certain of its former directors who were former
officers of Edisto. Edisto owns the remaining 80% of MINT. The lawsuit, among
other things, (i) alleged that MINT constructively terminated Mr. McConkey's
employment as the President and CEO of MINT, thereby breaching his employment
agreement; (ii) alleged that certain directors of MINT breached their fiduciary
duties to the plaintiffs, in their capacity as minority shareholders, and (iii)
asserted derivative claims on behalf of MINT against certain directors for
alleged mismanagement of MINT. Edisto and MINT asserted certain counterclaims
against Mr. McConkey based on an unpaid guaranteed debt and an unpaid promissory
note.
In October 1996, the trial court granted an interlocutory summary judgment
in favor of Edisto, MINT and the individual defendants on all claims other than
the claims against MINT, including the claim that it constructively terminated
Mr. McConkey's employment. In mid-July 1997, this lawsuit was tried before a
jury and resulted in the following findings: (i) the court found that Mr.
McConkey was constructively discharged by MINT which owes Mr. McConkey
approximately $32,000 for damages and interest; (ii) Mr. McConkey owes
approximately $26,000 to Multiflex on an unpaid promissory note, and (iii) Mr.
McConkey owes
F-42
<PAGE> 159
EDISTO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
approximately $400,000 to Edisto for breaching a guaranty issued to Edisto. All
other relief sought by Mr. McConkey and the other plaintiffs against Edisto,
MINT and the individual defendants was expressly denied. The final judgment was
granted by the trial court on July 29, 1997. It is unknown at this time whether
the plaintiffs will appeal this judgment.
Panhandle Eastern Pipe Line Company v. Energy Source, Inc. (Cause No.
96-60925 in the 152nd District Court of Harris County, Texas). The lawsuit,
which was filed in December 1996, relates to (i) a contract dispute involving
approximately $1.5 million in disputed Annual Revenue Amount and other charges
which PanEnergy and Panhandle Eastern claim are owed by Energy Source under two
gas transportation agreements between the companies, (ii) a claim by Energy
Source that PanEnergy over billed Energy Source by approximately $1.0 million
for services under such transportation contracts which PanEnergy has refused to
refund, (iii) $216,000 in gas balancing penalties paid by Energy Source under
protest for which Edisto is seeking a refund, (iv) a claim by Energy Source
under Texas antitrust laws that PanEnergy exerted unlawful monopoly power and
engaged in anticompetitive conduct to the detriment of Energy Source, and (v) a
claim by Energy Source that PanEnergy tortiously interfered with a prospective
contractual relationship between Energy Source and its largest customer at that
time. Edisto believes that it has meritorious defenses to PanEnergy's claims and
plans to vigorously assert such defenses and its counterclaims against PanEnergy
in the lawsuit. Based on developments of the case to date, the Company's
management does not believe the outcome of this lawsuit will have a material
adverse effect on the Company's consolidated financial position or results of
operations.
Potential Retained Liabilities from Sale of Gas Marketing Operations. As a
condition to the sale of the natural gas marketing operations in December 1996,
Edisto retained the rights and liabilities associated with the gas purchase and
supply contracts with three of Energy Source Canada's trading partners. Each of
these trading partners defaulted under their contracts and sought protection
under Canadian bankruptcy laws. Edisto is pursuing its claims in these matters.
In addition, the Company is named as defendant in several lawsuits arising
in the ordinary course of business. While the outcome of lawsuits and other
proceedings against the Company cannot be predicted with certainty, management
does not expect these matters to have a material adverse effect on the Company's
financial position or results of operations.
F-43
<PAGE> 160
CONVEST FINANCIAL STATEMENTS
INDEX TO CONVEST FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
YEAR ENDED DECEMBER 31, 1996:
Report of Independent Public Accountants of Convest Energy
Corporation............................................ F-45
Consolidated Balance Sheets of Convest Energy Corporation
at December 31, 1996 and 1995.......................... F-46
Consolidated Statements of Operations of Convest Energy
Corporation for the Years Ended December 31, 1996, 1995
and 1994............................................... F-47
Consolidated Statements of Stockholders' Equity of Convest
Energy Corporation for the Years Ended December 31,
1996, 1995 and 1994.................................... F-48
Consolidated Statements of Cash Flows of Convest Energy
Corporation for the Years Ended December 31, 1996, 1995
and 1994............................................... F-49
Notes to Consolidated Financial Statements of Convest
Energy Corporation..................................... F-50
QUARTER ENDED JUNE 30, 1997:
Consolidated Balance Sheets at June 30, 1997 and December
31, 1996............................................... F-65
Consolidated Statements of Operations -- Three and Six
Months Ended June 30, 1997 and 1996.................... F-66
Consolidated Statement of Stockholders' Equity -- Six
Months Ended June 30, 1997............................. F-68
Consolidated Statement of Cash Flows -- Six Months Ended
June 30, 1997 and 1996................................. F-69
Notes to Consolidated Financial Statements................ F-70
</TABLE>
F-44
<PAGE> 161
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Convest Energy Corporation:
We have audited the accompanying consolidated balance sheets of Convest
Energy Corporation (a Texas corporation) and subsidiaries as of December 31,
1996 and 1995, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Convest
Energy Corporation and subsidiaries as of December 31, 1996 and 1995, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
As discussed in Note 2, as of October 1, 1995, the Company changed its
method of accounting for the impairment of long-lived assets to conform with
Statement of Financial Accounting Standards No. 121.
ARTHUR ANDERSEN LLP
Houston, Texas
March 20, 1997
F-45
<PAGE> 162
CONVEST ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 3,678 $ 674
Restricted cash........................................... 333 333
Accounts receivable:
Oil and gas production -- less allowance for doubtful
accounts of $657 and $820, respectively............... 7,908 7,958
Other.................................................. 598 252
Other current assets...................................... 2,267 6,223
-------- --------
Total current assets.............................. 14,784 15,440
-------- --------
Property and equipment:
Oil and gas properties, successful efforts method......... 117,307 114,201
Other..................................................... 478 364
Less accumulated depreciation, depletion and
amortization........................................... (63,061) (50,225)
-------- --------
54,724 64,340
-------- --------
Other assets................................................ 2,704 2,177
-------- --------
$ 72,212 $ 81,957
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt...................... $ -- $ 1,625
Accounts payable:
Oil and gas production................................. 8,521 9,609
Affiliates............................................. 667 550
Accrued liabilities and other............................. 6,041 3,803
Deferred revenue.......................................... 2,113 2,010
-------- --------
Total current liabilities......................... 17,342 17,597
-------- --------
Long-term liabilities:
Long-term debt, net of current maturities................. 4,003 17,553
Deferred revenue.......................................... 559 691
Other noncurrent liabilities.............................. 7,170 11,099
-------- --------
11,732 29,343
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $1 par value; authorized 5 million
shares; none issued or outstanding.....................
Common stock $.01 par value; 20,000,000 shares authorized,
10,428,602 and 10,412,722 issued and outstanding at
December 31, 1996 and 1995, respectively............... 104 104
Additional paid-in capital................................ 47,849 47,798
Retained earnings (deficit)............................... (4,815) (12,885)
-------- --------
43,138 35,017
-------- --------
$ 72,212 $ 81,957
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-46
<PAGE> 163
CONVEST ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Revenues:
Oil and gas sales......................................... $45,622 $49,917 $46,788
Gas plant revenues........................................ 1,517 1,295 --
Gain (loss) on asset sale................................. 1,239 (660) 4,754
Other, net................................................ 1,367 428 326
------- ------- -------
49,745 50,980 51,868
------- ------- -------
Expenses:
Production:
Lease operating expense................................ 12,998 16,790 12,033
Production taxes....................................... 1,272 1,167 247
Gas plant operating expense............................ 510 492 --
Abandonment and exploration costs......................... 1,775 2,279 2,135
General and administrative expenses....................... 4,792 4,882 4,588
Interest expense.......................................... 1,065 2,015 747
Depreciation, depletion and amortization.................. 16,473 20,039 18,911
Impairment of oil and gas properties...................... 2,633 5,911 --
Equity in loss of affiliates.............................. -- -- 1,731
------- ------- -------
41,518 53,575 40,392
------- ------- -------
Income (loss) before elimination of preacquisition net loss
and income taxes.......................................... 8,227 (2,595) 11,476
Elimination of preacquisition net loss of
predecessor.......................................... -- 1,664 --
------- ------- -------
Net income (loss) before income taxes..................... 8,227 (931) 11,476
Income tax provision (benefit):
Current................................................ 157 559 210
Deferred............................................... -- (550) --
------- ------- -------
157 9 210
------- ------- -------
Net income (loss)........................................... $ 8,070 $ (940) $11,266
======= ======= =======
Net income (loss) per share (See Note 2).................... $ 0.77 $ (0.11) $ 1.82
======= ======= =======
Weighted average common shares outstanding.................. 10,413 8,374 6,185
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-47
<PAGE> 164
CONVEST ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON COMMON ADDITIONAL
SHARES STOCK, PAID-IN RETAINED
OUTSTANDING $.01 PAR CAPITAL EARNINGS TOTAL
----------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993.......... 6,185 $ 62 $30,758 $ 7,696 $ 38,516
Capital contributions............... -- -- 100 -- 100
Dividends........................... -- -- -- (30,255) (30,255)
Net income.......................... -- -- -- 11,266 11,266
------ -------- ------- -------- --------
Balance at December 31, 1994.......... 6,185 62 30,858 (11,293) 19,627
Distribution of certain assets and
liabilities to affiliates in
accordance with the stock purchase
agreement........................... -- -- -- (652) (652)
Stock issuance -- reverse
acquisition of CEC by Edisto
E&P.............................. 4,227 42 16,940 -- 16,982
Net loss............................ -- -- -- (940) (940)
------ -------- ------- -------- --------
Balance at December 31, 1995.......... 10,412 104 47,798 (12,885) 35,017
Exercise of employee stock
options.......................... 16 -- 51 -- 51
Net income.......................... -- -- -- 8,070 8,070
------ -------- ------- -------- --------
Balance at December 31, 1996.......... 10,428 $ 104 $47,849 $ (4,815) $ 43,138
====== ======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-48
<PAGE> 165
CONVEST ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 8,070 $ (940) $ 11,266
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation, depletion and amortization............... 16,496 16,503 18,911
Impairment of oil and gas properties................... 2,633 5,911 --
(Gain) loss on sale of assets and investments.......... (1,239) 660 (4,754)
Abandonment and exploration costs...................... 1,592 1,797 1,810
(Increase) decrease in accounts receivable............. (354) (4,284) 6,064
Decrease in accounts payable and accrued liabilities... (4,361) (3,969) (3,198)
Other.................................................. 176 (121) 295
-------- -------- --------
Net cash flow provided by operating activities.... 23,013 15,557 30,394
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash received in reverse acquisition of CEC by Edisto
E&P.................................................... -- 716 --
Acquisition, exploration and development of oil and gas
properties............................................. (10,949) (10,232) (6,298)
Advances to working interest owners....................... (1,225) -- --
Proceeds from the sale of oil and gas properties.......... 2,991 384 8,444
(Purchase) sale of investment in affiliates............... -- 7,351 (9,183)
(Purchase) sale of natural gas hedging contracts.......... 4,412 (4,225) (898)
Increase in other current and noncurrent assets........... (114) (1,123) (4,339)
-------- -------- --------
Net cash used in investing activities............. (4,885) (7,129) (12,274)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on long-term debt and capital leases........... 3,100 6,575 7,788
Payments on long-term debt and capital leases............. (18,275) (12,750) (9,578)
Payment of note payable................................... -- (5,212) --
Cash dividends............................................ -- -- (25,015)
Distribution of certain assets and liabilities to
affiliate.............................................. -- (652) --
Exercised employee stock options.......................... 51 -- --
Other..................................................... -- (338) 25
-------- -------- --------
Net cash used by financing activities............. (15,124) (12,377) (26,780)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents........ 3,004 (3,949) (8,660)
Cash and cash equivalents, beginning of period.............. 1,007 4,956 13,616
-------- -------- --------
Cash and cash equivalents, end of period.................... $ 4,011 $ 1,007 $ 4,956
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest.................. $ 1,305 $ 1,413 $ 410
======== ======== ========
Cash paid during the period for taxes..................... $ 157 $ 46 $ 80
======== ======== ========
Non-cash transactions -- property dividend................ $ -- $ -- $ 5,240
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-49
<PAGE> 166
CONVEST ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
GENERAL
Convest Energy Corporation ("Convest" or the "Company"), a Texas
corporation whose common stock is traded on the American Stock Exchange, is an
active independent oil and gas exploration and production company. The Company
was formed in June 1990 to participate in a series of mergers and other
transactions consummated in December 1990 pursuant to which the company
succeeded to the assets, liabilities, operations and common management of
ConVest Energy Partners, Ltd., a former publicly-held Texas limited partnership,
and certain of its affiliates.
EDISTO TRANSACTION
On June 26, 1995, Convest acquired all of the outstanding capital stock of
Edisto Exploration & Production Company, a Delaware corporation ("Edisto E&P")
from Edisto Resources Corporation ("Edisto") in exchange for 6,185,400 newly
issued shares of Convest's common stock and $10,000 in cash (the "Edisto
Transaction"). The newly issued shares of Convest common stock increased
Edisto's interest in Convest from 31% to 72%. Upon closing of the Edisto
Transaction, Convest's Board was restructured so that affiliates of Edisto
constituted a majority of the directors. Edisto subsequently increased its
interest in Convest to 73% through the purchase of 92,000 additional shares of
Convest common stock on the open market. The Edisto Transaction resulted in a
reverse acquisition by Edisto E&P of Convest, as further described below.
Accordingly, all future references to "Convest" or the "Company" will apply to
Edisto E&P. Any references to "CEC" are intended to apply solely to Convest
Energy Corporation prior to the reverse acquisition.
REVERSE ACQUISITION METHOD OF ACCOUNTING FOR EDISTO TRANSACTION
Since Edisto acquired control of CEC through its 72% stock ownership and
majority of the CEC Board, the acquisition of Edisto E&P by CEC has been
accounted for as a reverse acquisition. Under accounting rules for a reverse
acquisition, Edisto E&P is considered the acquiring entity and CEC is considered
the acquired entity. As a result, the historical financial statements of CEC for
periods prior to the date of the Edisto Transaction are no longer presented.
Instead, the historical financial statements of the Company for periods prior to
the date of the Edisto Transaction are those of Edisto E&P. Therefore, in
accordance with the accounting rules for a reverse acquisition, the following
should be noted with respect to the consolidated financial statements presented
herein:
(i) The Consolidated Statements of Operations of the Company for the
year ended December 31, 1995 set forth the combined results of operations
of CEC and Edisto E&P as if the Edisto Transaction had occurred on January
1, 1995, with the preacquisition net loss of CEC being eliminated for
purposes of determining net income. The Consolidated Statements of
Operations for the year ended December 31, 1994 are those of Edisto E&P and
do not include the historical results of CEC for such period;
(ii) The Consolidated Statements of Stockholders' Equity of the
Company for the years ended December 31, 1995 and 1994 have been
retroactively restated to reflect the number of shares of CEC common stock
received by Edisto in the Edisto Transaction, as if such shares had been
issued as of the beginning of the period, and to reflect the CEC shares
outstanding prior to the Edisto Transaction as being issued on the date of
the Edisto Transaction; and
(iii) The Consolidated Statements of Cash Flows of the Company for the
years ended December 31, 1995 and 1994 do not include the cash flows of CEC
for periods prior to the Edisto Transaction. For purposes of the
Consolidated Statements of Cash Flows, the Edisto Transaction was
substantially excluded since it was completed primarily with CEC Common
Stock and accordingly resulted in a noncash transaction. Instead, only the
cash balances of CEC at June 26, 1995 have been included as cash received
by Edisto E&P as a result of the reverse acquisition.
F-50
<PAGE> 167
CONVEST ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EDISTO E&P PRIOR TO THE EDISTO TRANSACTION
On October 26, 1992, Edisto and certain of its affiliates, including Edisto
E&P, filed voluntary petitions for reorganization pursuant to Chapter 11 of the
United States Bankruptcy Code in the United States Bankruptcy Court for the
District of Delaware. On June 29, 1993, Edisto's plan of reorganization became
effective, and Edisto substantially consummated its restructuring. Edisto E&P's
historical financial statements have been presented in conformity with the
AICPA's Statement of Position 90-7, "Financial Reporting By Entities in
Reorganization Under the Bankruptcy Code", issued November 1990 ("SOP 90-7"). In
accordance with SOP 90-7, Edisto E&P adopted fresh start reporting as of June
30, 1993, which provides for the allocation of the reorganization value of the
entity among the reorganized assets on the basis of the purchase method of
accounting.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation. All significant intercompany accounts and
activities have been eliminated.
Restricted Cash. Restricted cash consists of $333,000 of certificates of
deposit held by various financial institutions. The certificates of deposit are
held in escrow as collateral for letters of credit issued for (i) lease payments
on certain offshore platforms and (ii) estimated plugging and abandonment costs
expected to be incurred on certain onshore oil and gas properties.
Property and Equipment. The Company follows the successful efforts method
of accounting for its oil and gas properties. Costs of productive wells,
developmental drilling expenditures, including developmental dry holes, and
productive leases are capitalized. Exploratory drilling costs, including
stratigraphic test wells, are initially capitalized, but charged to expense if
and when the well is determined to be unsuccessful. The capitalized costs of oil
and gas properties are charged to operations as depreciation, depletion and
amortization using the unit-of-production method based on the ratio of current
production to proved recoverable oil and gas reserves (as defined by the
Securities and Exchange Commission) on a lease by lease basis. Reserve estimates
for the Company's properties were prepared or audited by independent petroleum
engineering firms at year end. Gas is converted to equivalent barrels of oil on
an energy content basis of 6 Mcf of gas to 1 barrel of oil. Depreciation,
depletion and amortization per equivalent unit of oil production was $5.09,
$4.62 and $4.80 for the years ended December 31, 1996, 1995 and 1994,
respectively. Oil and gas leasehold costs are capitalized when incurred.
Unproved properties are assessed periodically on a property-by-property basis
and impairments in value are charged to expense. Exploratory expenses, including
geological and geophysical expenses and annual delay rentals, are charged to
expense as incurred.
Prior to 1995, the Company provided an impairment reserve for proved oil
and gas properties to the extent that total capitalized costs less accumulated
depreciation and depletion, exceed expected undiscounted future net revenues
attributable to proved oil and gas reserves on an overall basis. During March
1995, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of" ("SFAS 121"). SFAS 121 requires the
Company to recognize an impairment loss for proved oil and gas properties if the
carrying value of such properties (i.e., total capitalized costs less
accumulated depreciation and depletion) exceeds the undiscounted expected future
cash flows attributable to such properties. Under SFAS 121, the Company must
assess the need for an impairment of capitalized costs of oil and gas properties
on a property-by-property basis. If an impairment is indicated based on
undiscounted expected future cash flows, then an impairment loss is recognized
to the extent that net capitalized costs exceed discounted expected future cash
flows.
During the fourth quarter of 1995, the Company adopted SFAS 121 which
required the Company to recognize an impairment loss in 1995 of approximately
$5.9 million. The Company assessed the need for an impairment of its proved oil
and gas properties at December 31, 1995 using the prices of $17.42 per barrel of
F-51
<PAGE> 168
CONVEST ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
oil and $1.61 per Mcf of gas. In 1996, the Company recognized an impairment loss
of $2.6 million. The Company assessed the need for an impairment at December 31,
1996 using the prices of $22.73 per barrel of oil and $2.21 per Mcf of gas.
Other Property, Plant and Equipment. Other fixed assets are recorded at
cost and depreciated over their estimated useful lives using the straight-line
method of depreciation.
Abandonment Reserve. The Company records its estimate of future abandonment
costs of offshore properties. Such costs are accrued using a unit-of-production
method based upon estimated proved recoverable reserves. Abandonment costs are
estimated under current regulations using current costs and are reviewed
periodically and adjusted as new information becomes available. Abandonment
costs on onshore properties are typically nominal due to the salvage value of
well equipment.
Upon emerging from bankruptcy in July 1993, Edisto E&P entered into a
settlement with the United States Minerals Management Service relating to
estimated plugging and abandonment costs for 14 Gulf of Mexico OCS leases in
which Edisto E&P owned interests. Pursuant to this settlement, the operator of
the leases, Edisto E&P and other co-lessees were required to provide security
for payment of such costs through quarterly payments to an Abandonment Fund.
Subsequent to the Edisto Transaction, the Company continues to be subject to the
Abandonment Fund payments. During the second quarter of 1995, the Company sold
its interest in one of the offshore properties covered by the settlement
agreement and as such, is no longer subject to the Abandonment Fund payments
associated with the property. As of December 31, 1996 and 1995, the Company was
subject to total Abandonment Fund payments of $4.2 million and $4.3 million,
respectively.
As of December 31, 1996 and 1995, the Company had made payments totaling
$4.2 million and $3.7 million to the Abandonment Fund, respectively. These
payments were applied to the total long-term abandonment reserve of $7.7 million
and $10.2 million, as of December 31, 1996 and 1995, respectively, resulting in
a net long-term abandonment reserve of $3.5 million and $6.5 million as of those
dates. The current portion of the abandonment reserve was $2.3 million and
$556,000 as of December 31, 1996 and 1995, respectively. The current portion of
the abandonment reserve is included in "Accrued Liabilities and Other" and the
noncurrent portion is included in "Other Noncurrent Liabilities" in the
consolidated financial statements.
Lease Operating Expenses. In connection with a 1992 sale of certain future
production volumes of oil to Enron Reserve Acquisition Corp., the Company
established a reserve for the expenses associated with the volumes sold and
amortizes this reserve as the volumes are delivered. As of December 31, 1996 and
1995, the current balance of this reserve was $1.6 million and $1.8 million,
respectively, and the long-term balance was $3.7 million and $4.6 million,
respectively, and were presented in "Accrued Liabilities and Other" and "Other
Noncurrent Liabilities," respectively, in the consolidated financial statements.
Gas Balancing. The Company uses the entitlement method of accounting for
gas imbalances. Receivables resulting from undertakes of gas production at
December 31, 1996 and 1995 were $2.3 million and $1.4 million, respectively, and
are included in "Oil and Gas Production Accounts Receivables" and "Other
Noncurrent Assets" in the consolidated financial statements. Deferred revenue
and payables resulting from overtakes of gas production at December 31, 1996 and
1995 were $2.7 million and $2.7 million, respectively, and are included in
"Deferred Revenue" and "Other Noncurrent Liabilities" in the consolidated
financial statements. The Company assumed a nominal gas imbalance liability from
CEC in the Edisto Transaction.
Accounting for Income Taxes. The Company records income taxes in accordance
with the Financial Accounting Standards Board -- Statement of Financial
Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes." SFAS
109 requires the balance sheet approach of income tax accounting whereby
deferred income taxes are provided at the balance sheet date for the differences
existing in the tax basis of assets and liabilities and their financial
statement carrying amounts.
F-52
<PAGE> 169
CONVEST ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Concentration of Credit Risk. The Company's oil and gas production revenues
are derived principally from uncollateralized sales to customers in the oil and
gas industry. The concentration of credit risk in a single industry affects the
Company's overall exposure to credit risk because customers may be similarly
affected by changes in economic and other conditions. The Company has not
experienced significant credit losses on receivables from such sales. See Note
10 herein for a discussion of major purchasers of the Company's oil and gas
production.
Net Income Per Share. Net income per share is computed based on the
weighted average number of shares outstanding which were 10,412,826 for the year
ended December 31, 1996, 8,374,342 for the year ended December 31, 1995 and
6,185,400 for the year ended December 31, 1994. No effect has been given to
options outstanding under the Company's stock option plans because their effect
is antidilutive or immaterial. See Notes 1 and 8 herein which discuss the
restated capital structure of the Company. The Company considers net income per
share information for periods prior to June 30, 1995 to be of limited value
since Edisto E&P was a wholly-owned subsidiary of Edisto prior to the Edisto
Transaction.
Risk Management/Hedging Activities. The Company from time to time engages
in commodity hedging activities to minimize the risk of market fluctuations
associated with the price of crude oil and natural gas production. The hedging
objectives include assurance of stable and known cash flows and fixed favorable
prices. The hedges are effected through the purchase and sale of futures
contracts on the New York Mercantile Exchange ("NYMEX") and over the counter
price swap agreements. The credit risk of futures contracts is limited due to
the daily cash settlement of the net change in the value of open contracts and
because of certain NYMEX procedures. Gains or losses on the Company's hedging
agreements are deferred and recognized when the hedged transaction occurs, and
are recorded as oil and gas sales revenue.
Statement of Cash Flows. For purposes of the consolidated statements of
cash flows, the Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
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 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.
All significant estimates are discussed herein.
(3) ACQUISITIONS
EDISTO TRANSACTION
The Edisto Transaction is described in Note 1 herein. As described therein,
the Edisto Transaction has been accounted for as a reverse acquisition since
Edisto acquired control of CEC.
The total purchase price of the Edisto Transaction was $17.3 million which
was allocated to the CEC assets acquired and liabilities assumed based on their
estimated fair values as of June 26, 1995. Assets acquired and liabilities
assumed were assumed to have fair values equal to their historic book values
except for oil and gas properties. The purchase price of $17.3 million was
computed by totaling (i) Edisto's net cost basis of $7.0 million as of June 26,
1995 incurred to acquire 31.3% of the issued and outstanding shares of CEC in
November 1994, (ii) the fair market value of the 6,185,400 newly issued shares
of CEC Common Stock which was calculated as 40.8% of the market capitalization
of CEC immediately prior to the closing of the Edisto Transaction on June 26,
1995, using the $3.25 market price per share of CEC Common Stock on such date,
and (iii) the historical value of CEC's equity of $4.7 million attributable to
non-Edisto shareholders of CEC subsequent to the Edisto Transaction.
F-53
<PAGE> 170
CONVEST ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Since the Edisto Transaction was completed primarily with the issuance of
newly issued shares of CEC common stock, the Company's Consolidated Balance
Sheet following the Edisto Transaction reflects the reverse acquisition of CEC,
but such noncash activity is excluded from the accompanying Consolidated
Statement of Cash Flows for the period prior to the Edisto Transaction. The
following table summarizes the noncash activity associated with the Edisto
Transaction:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Working Capital (Deficit), net of $716,000 cash acquired.... (6,631)
Property and Equipment...................................... 41,085
Long-term debt.............................................. (17,850)
</TABLE>
SENSOR PROPERTIES ACQUISITION
On May 1, 1995 and June 14, 1995, prior to the closing of the Edisto
Transaction, CEC and Edisto E&P acquired from Sensor Oil & Gas ("Sensor")
certain oil and gas properties located in Kansas, Oklahoma and Nebraska (the
"Sensor Properties"). CEC and Edisto E&P each paid one half of the aggregate
purchase price of $7.7 million (including approximately $332,000 of transaction
costs) plus the assumption of approximately $250,000 of net liabilities. The
bulk of the Sensor Properties were acquired on May 1, 1995, and the remaining
property interests, which were subject to limited partnerships, were acquired on
June 14, 1995. Since Edisto E&P and CEC each acquired identical interests in the
Sensor Properties, the purchase of such properties did not affect the purchase
price of the Edisto Transaction.
Edisto E&P recorded its share of the Sensor Properties acquisition at cost,
and accordingly, such amounts are included in the accompanying Consolidated
Statements of Cash Flows. However, the Sensor Properties acquired by CEC were
considered to have been acquired by Edisto E&P in the Edisto Transaction, and
accordingly have been excluded from the Statement of Cash Flows as a noncash
transaction. See Note 1 for a discussion of the reverse acquisition method of
accounting used for the Edisto Transaction.
The accompanying Consolidated Statements of Operations for the year ended
December 31, 1995 includes revenues of approximately $3.5 million and direct
operating expenses of approximately $1.4 million attributable to both CEC's and
Edisto E&P's interests in the Sensor Properties from the dates of the
acquisitions.
(4) RELATED PARTY TRANSACTIONS
On June 26, 1995, CEC and Edisto consummated the Edisto Transaction as
described in Note 1 herein. In connection with the Edisto Transaction, CEC
granted registration rights to Edisto for the 7,506,771 shares of CEC common
stock owned by Edisto. On May 1, 1995 and June 14, 1995, CEC and Edisto E&P each
purchased one half of the Sensor Properties as described in Note 3 herein.
In the Edisto Transaction, Edisto retained the tax benefits of the net
operating loss carryforwards ("NOL's") of Edisto E&P. The tax benefits include a
$3.3 million NOL usable for regular taxable income and a $3.6 million NOL usable
for alternative minimum taxable income. The Company determined that the use of
these NOLs would reduce its taxes for 1995 by approximately $437,000. In
addition, based on current projections of the Company's future taxable income,
it was determined that the remaining NOLs of Edisto E&P would be a valuable
asset that could be utilized by Convest in the near future. Accordingly, Edisto
allowed Convest to utilize the NOLs of Edisto E&P in consideration for the
payment by Convest of $550,000. At December 31, 1995 and 1996, the Company
recorded a deferred tax asset of $550,000 and a corresponding accounts payable
to Edisto which is presented in "Other Noncurrent Assets" and "Accounts Payable
Affiliates," respectively, in the consolidated financial statements.
F-54
<PAGE> 171
CONVEST ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Since January 1995, Convest has had a gas marketing arrangement with Energy
Source, Inc. ("Energy Source"), which until December 1996 was a wholly-owned
subsidiary of Edisto. Under this arrangement, Energy Source markets a
substantial portion of the Company's gas production and assumes certain related
administrative functions. Energy Source marketed approximately 84% of the
Company's 1996 gas production. During 1996, Convest received a minimum price of
98% of the index for the applicable pipeline. Under the agreement, Energy Source
takes title to the gas before reselling it, thereby creating an account
receivable from Energy Source for the sold gas. At December 31, 1996, the
account receivable from Energy Source was $3.6 million, which is included in
"Accounts Receivable -- Oil and Gas Production" on the Consolidated Balance
Sheet. Convest sells such gas to Energy Source on open credit without requiring
a letter of credit or other security. Management believes the terms of the
Energy Source gas marketing arrangement are no less favorable to the Company
than those available from unaffiliated third parties.
In December 1996, Energy Source was sold by Edisto to an unrelated third
party. In connection with the sale, Convest and Energy Source agreed to extend
the gas marketing agreement to December 31, 1997. Effective January 1, 1997, the
gas marketing agreement with Energy Source was amended to increase the minimum
price received by the Company from 98% to 100% of the index price for the
applicable pipeline.
Prior to the sale of Energy Source, Edisto had provided Convest with access
to an AS400 computer system to run its accounting system and had provided MIS
support. The monthly cost to Convest was approximately $12,555 per month. In
connection with the sale of Energy Source, Edisto sold the AS400 computer system
and its MIS personnel became employees of the purchaser of Energy Source. Since
Convest continued to need an AS400 computer system to run its accounting system,
the Energy Source purchaser agreed to provide Convest with access to the AS400
computer system and MIS support through December 31, 1997. The cost to Convest
is $12,645 per month. This agreement may be terminated by Convest at any time
after June 30, 1997 upon 90 days notice.
The Company and Edisto have a directors' and officers' fiduciary insurance
policy that covers both companies. During 1996 the annual insurance premium was
allocated 32% to the Company, for a cost of $96,000 based on the relative
percentage that the assets of the Company bear to the total assets of both the
Company and Edisto.
Each of the affiliated party transactions described above was approved by
either a special committee of the Company's Board, which was composed of outside
directors with no affiliation to Edisto, or the unanimous consent of the
Company's Board.
Effective July 1, 1995, the Company and Edisto agreed to share certain
administrative costs to reduce the overall cost that would otherwise be incurred
by each of them in the absence of such an arrangement. Under the arrangement,
certain costs associated with shareholder communication services and certain
administrative staff who perform duties on behalf of both entities are shared by
Convest and Edisto based on their respective utilization. In addition, the
salary of Michael Y. McGovern, who serves as the Chairman and Chief Executive
Officer of Edisto and Convest, is apportioned equally between the two entities.
The Company and Edisto may enter into additional cost sharing arrangements
in the future. In order to avoid conflicts of interest in reaching any such
arrangements, the Company's Board of Directors established an Affiliate
Transaction Review Committee initially comprised of two non-employee directors
having no affiliation with Edisto. The Affiliate Transaction Review Committee is
responsible for conducting an appropriate review and unanimously approving all
affiliate party transactions, including, without limitation, all transactions
between the Company and Edisto and approving the method or basis for allocating
any shared administrative expenses between Edisto and the Company.
Energy Source also executes trades of futures contracts on the New York
Mercantile Exchange on behalf of the Company. In this regard, Energy Source acts
solely in a ministerial capacity to purchase or sell the futures contracts at
price levels directed by the Company's management. Energy Source charges a
F-55
<PAGE> 172
CONVEST ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
commission of $.0025 per Mcf of gas or barrel of crude oil for each trade
executed to cover Energy Source's administrative costs to perform such service.
(5) HEDGING ACTIVITIES
As previously stated, the Company conducts its hedging activities through
major financial institutions. Set forth below is the contract amount and term of
all futures contracts held for price risk management purposes by the Company at
December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
--------------------- ----------------------
OIL GAS OIL GAS
-------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Quantity Sold..................... 90 MBbls 3,300 Mmcf 285 MBbls 8,220 Mmcf
Maximum Term...................... 9 Months 10 Months 11 Months 10 Months
Average Price..................... $22.50 $2.53 $17.23 $1.86
</TABLE>
At December 31, 1996, the Company had hedged approximately 10% and 27% of
its projected 1997 oil and gas production, respectively. The Company will
continue its hedging activities during 1997 in order to mitigate the volatility
of its crude oil and natural gas prices. Gains and losses realized upon the
settlement of the Company's hedge positions are deferred and recognized as oil
and gas sales revenue in the month of the underlying physical production being
hedged. The Company's losses from hedging were $7.8 million and $421,000 during
1996 and 1995, respectively. The fair value of the Company's open positions at
December 31, 1996 were $728,230. The fair value of the Company's hedges was
based on the cost that would have been incurred to buy out those hedges in a
loss position and the consideration that would have been received to terminate
those hedges in a gain position. The cash margin required by the counterparts to
the Company's hedging activities totaled $1.0 and $5.1 million as of December
31, 1996 and 1995, respectively, and are included in other current assets.
(6) INCOME TAXES
The Company records current income taxes based on its estimated actual tax
liability for the year. The Company provides for deferred income taxes under
SFAS 109 based upon differences between the tax basis of the Company's assets
and liabilities and their financial statement carrying amounts multiplied by the
Company's expected future effective tax rate.
The following table summarizes the Company's deferred tax assets and
liabilities and related valuation allowances as of December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $ 5,025 $ 6,688
Plugging & abandonment reserve............................ 4,461 4,218
Depreciation of property & equipment...................... 2,611 3,409
Other..................................................... 1,123 2,571
-------- --------
13,220 16,886
Deferred tax liabilities.................................... (1,630) (1,889)
Valuation allowance......................................... (11,040) (14,447)
-------- --------
Net deferred income tax asset............................... $ 550 $ 550
======== ========
</TABLE>
At December 31, 1996, the Company had net operating loss carryforwards of
$12.7 million, which expire (if not utilized) in the years 1997 to 2010. Due to
the Edisto transaction, the amount of CEC's separate
F-56
<PAGE> 173
CONVEST ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
company net operating loss carryforward which can be utilized in any year is
limited to approximately $800,000 per year due to the change in control.
The deferred tax assets are due principally to previous write downs
incurred on oil and gas properties for book purposes which were not recorded for
tax purposes and accruals which were made for abandonment costs for book
purposes which were not made for tax purposes. The deferred tax liability
relates principally to prepaid costs being expensed for tax purposes and
capitalized for financial reporting purposes.
The Company has provided a valuation allowance against deferred tax assets
which do not meet the "more-likely-than-not" criteria for recognition of a
deferred tax asset under SFAS 109. At December 31, 1995, the Company purchased
approximately $3.3 million of NOL tax benefits from Edisto. See Footnote 4 under
"Notes to Consolidated Financial Statements."
The following summarizes the major differences between the Company's
statutory and effective tax rates for each of the three years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Statutory tax rate.......................................... 35% 35% 35%
Utilization of net operating losses......................... (33) (35) (33)
--- --- ---
Effective rate.............................................. 2% --% 2%
=== === ===
</TABLE>
(7) LONG-TERM DEBT
On June 26, 1995, simultaneous with the closing of the Edisto Transaction,
the Company entered into an Amended and Restated Secured Revolving Credit
Agreement (the "Agreement") with Bank One, Texas, N.A. ("Bank One"), and Compass
Bank-Houston. This facility, which terminates January 1, 1999, combined the
existing credit facilities of CEC and Edisto E&P. Bank One serves as agent bank
of the Agreement. The Agreement is secured by a first lien on all of the
Company's assets, including its oil and gas properties and gas plant. The
borrowing base is redetermined semi-annually on May 31 and November 30 of each
year by the lending banks based on engineering criteria established by the
banks. Interest on borrowings under the Agreement is computed at (i) the agent
bank's prime lending rate (the "Base Rate") plus 3/4% or (ii) the London Inter
Bank Offering Rate ("LIBOR") plus 2 3/4%. In addition, the Company pays a
commitment fee equal to 1/2% on any commitment amount in excess of outstanding
borrowings.
The Agreement contains certain covenants regarding the Company's
consolidated net worth and cash flow to debt service. In addition, the Agreement
places certain limitations on the Company's ability to incur certain types of
additional debt.
During December 1996, the Company was notified by its lending banks that
its redetermined borrowing base was $19.2 million effective December 1, 1996 and
will reduce by $1.0 million monthly beginning January 1, 1997 based on the
lending banks estimate of production. As of December 31, 1996 and 1995, the
Company had outstanding borrowing under its credit facility totaling $4.0
million and $19.2 million, respectively. In addition, the Company had an
additional $200,000 of letters of credit outstanding at December 31, 1996,
primarily related to performance bonds issued for oil and gas operations. As of
December 31, 1996, all of the Company's outstanding borrowings were subject to
Base Rate interest at an effective rate of 9% per annum.
(8) CAPITAL STOCK
In accordance with the accounting rules for a reverse acquisition, Edisto
E&P has assumed CEC's capital structure as of the date of the Edisto Transaction
(June 26, 1995) and prior period equity balances and
F-57
<PAGE> 174
CONVEST ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
earnings per share have been retroactively adjusted to reflect this change. See
Note 1 for a more detailed description of the capital structure changes.
At December 31, 1996, the Company's authorized capital consists of (i)
5,000,000 shares of preferred stock, $1 par value per share, none of which are
issued and outstanding, and (ii) 20,000,000 shares of common stock, $.01 par
value per share, 10,428,602 of which were issued and outstanding at such date.
In 1990, CEC adopted the 1990 Employee Stock Option Plan (the "1990 Plan")
pursuant to which CEC could grant options for up to 260,000 shares of common
stock. In 1993, CEC adopted the 1993 Incentive Stock Plan (the "1993 Plan")
pursuant to which CEC could grant options and stock bonuses for up to 95,000
shares of common stock, no more than 15,000 of which could be issued as stock
bonuses. Options granted under both the 1990 Plan and the 1993 Plan vest at 25%
per year on each anniversary of the grant while stock bonuses granted under the
1993 Plan may be granted at such time and subject to such conditions as
determined by the Compensation Committee of the Board of Directors.
On October 3, 1995, the Board of Directors approved, subject to shareholder
approval, (i) the 1995 Stock Incentive Plan (the "1995 Plan") pursuant to which
up to 1,000,000 shares of common stock may be issued and which includes formula
grants to the outside directors, (ii) the issuance of 405,000 options to
employees at an exercise price of $3.25, subject to certain conditions, and
(iii) the issuance of 50,000 options to the outside directors at an exercise
price of $3.25. The Company's shareholders approved the 1995 Plan on June 3,
1996. Certain of the options granted to the employees required their agreement
to cancel any options outstanding under the 1990 Plan and the 1993 Plan.
Accordingly, as of December 31, 1996, all of the options under the 1990 Plan and
the 1993 Plan have either expired or been canceled, and the 1990 Plan and the
1993 Plan have been terminated.
The following table summarizes the activity in options under the 1990 Plan,
the 1993 Plan and the 1995 Plan. As of December 31, 1996, the only options
outstanding were under the 1995 Plan.
<TABLE>
<CAPTION>
1996 1995 1994
------------------- ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
-------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, Beginning of
year..................... 259,250 $6.38 302,500 $6.64 211,750 $5.81
Granted.................... 477,932 3.41 17,500 3.44 107,500 8.25
Exercised.................. (15,880) 3.25 -- -- (5,000) 5.55
Canceled................... (264,250) 6.32 (60,750) 6.85 (11,750) 6.77
-------- ------- -------
End of year................ 457,052 $3.42 259,250 $6.38 302,500 $6.64
-------- ------- -------
Exercisable, end of year... 269,029 $3.25 206,625 $6.21 250,750 $5.78
Weighted average fair value
of options granted....... $ 2.13 $ 1.99
</TABLE>
Convest applies Accounting Principles Board (APB) Opinion 25 and related
interpretations in accounting for its stock option plans. In accordance with APB
Opinion 25, no compensation expense has been recognized for stock options
granted for the years 1996, 1995 and 1994. Had compensation costs for these
plans been determined based on the fair value for awards under those plans,
consistent with the method of
F-58
<PAGE> 175
CONVEST ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation," Convest's net income and earnings per share would have been as
follows:
<TABLE>
<CAPTION>
1996 1995
------- ------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Net Income/(Loss) As Reported............................... 8,070 (940)
Pro Forma................................................. 7,053 (975)
Earnings Per Share As Reported.............................. .77 (.11)
Pro Forma................................................. .68 (.12)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1996 and 1995, respectively: risk-free interest
rates of 6.18% and 6.10% and expected volatility of 37.89% and 37.68%. The
expected lives of the options are 10 years and no dividends are expected.
410,581 of the 457,052 options have an exercise price of $3.25 and a
remaining contractual life of 9 years. 269,029 of these options are exercisable
at December 31, 1996. The remaining 46,471 options have exercise prices between
$5.18 and $5.32, with a weighted average exercise price of $5.26 and a weighted
average contractual life of 9.5 years. None of these options are exercisable at
December 31, 1996.
(9) EMPLOYEE BENEFITS
During 1995, the Company maintained a plan qualified under Section 401(k)
of the Internal Revenue Code (the "Plan"). All qualified employees of the
Company were entitled to participate in the Plan upon completion of twelve
months of service with the Company. As previously amended by the Board of
Directors, effective January 1, 1994, a participant could contribute up to 15%
of their compensation to the Plan on a pre-tax basis and the Company contributed
matching contributions to the account of the participant equal to 75% of the
participant's contribution, not to exceed 4.5% of the participant's
compensation. Contributions by the Company vested over five years of service at
a rate of 20% per year. During the year ended December 31, 1995, the Company
expensed approximately $70,000 associated with matching contributions in
accordance with the Plan.
The Plan was amended and restated effective January 1, 1996. Under the
amended Plan, all qualified employees of the Company are entitled to
participate, regardless of time of service with the Company; however, a new
entrant to the Plan may only do so on January 1 and July 1. Under the terms of
the Plan, an employee may contribute up to a maximum of 15% of their pre-tax
annual compensation and the Company will make matching contributions to the
account of the participant equal to 6% of the participant's annual compensation
up to a maximum limit of $1,864 per year. In addition, the Board of Directors
may determine, on a year-by-year basis, to contribute an additional amount which
would be allocated to participating employees based on their relative
compensation. The Board of Directors of the Company approved an additional
matching contribution of 5% for the 1996 plan year.
(10) MARKETING ARRANGEMENTS AND MAJOR CUSTOMERS
During May 1995, the Company entered into a marketing agreement with a
third party to market a substantial portion of the Company's crude oil
production. While the percentage of the Company's oil production marketed under
this agreement will vary from time to time, the percentage marketed in 1996 was
approximately 53% of the Company's crude oil production. Under the agreement,
the Company receives no less than the amount it would have received by selling
its crude oil production volumes based on the posted field price. The Company
requires the third party to post a letter of credit each month to secure the
crude oil
F-59
<PAGE> 176
CONVEST ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
production volumes sold, which is canceled upon receipt of the sale proceeds.
This agreement continues on a month-to-month basis subject to cancellation upon
sixty days written notice.
The Company marketed approximately 84% of its 1996 gas production under an
agreement with Energy Source, Inc. See Note 4 herein for a description of this
agreement.
The following customers individually accounted for 10% of the oil and gas
sales of Convest during one or more of the three years ended December 31, 1996:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Natural Gas Clearinghouse................................... --% 1% 21%
Energy Source, Inc.......................................... 49 37 --
Chevron USA, Inc............................................ 1 2 17
Texon....................................................... 20 9 --
-- -- --
70% 49% 38%
== == ==
</TABLE>
Since oil and gas are readily marketable commodities, management believes
the loss of any of these major purchasers would not have a significant impact on
the Company's operations.
(11) COMMITMENTS AND CONTINGENCIES
Legal Proceedings. Elizabeth Holt, et al. v. Sun E & P Company, et al., No.
3,217 in the 84th District Court, Hansford County, Texas. This suit was
originally filed in August 1984, seeking to cancel a 13-section lease because
there was no gas production for a period of approximately 120 days in 1983 when
the gas purchaser's pipeline was shutdown for repairs. The plaintiff sought to
terminate the lease by reason of non-production as of September 23, 1983. If the
plaintiff is successful, the Company would be liable for damages on past
production in the range of $300,000 to $350,000, plus pre-judgment interest and
attorneys fees, which would total approximately $400,000 to $450,000. The court
entered a judgment on December 20, 1996 denying all relief sought by the
plaintiffs against Convest. This judgment is being appealed by the plaintiffs.
The predecessor in interest to Convest has indemnified Convest to a maximum of
$357,000 in value for the well provided that total damages exceed $250,000.
In addition, the Company is named as defendant in several lawsuits arising
in the ordinary course of business. While the outcome of lawsuits and other
proceedings against the Company cannot be predicted with certainty, management
does not expect these matters to have a material adverse effect on the Company's
financial position or results of operations.
Lease Commitments. Minimum future payments under operating leases are
$275,000 during 1997, $21,000 during 1998, $10,000 during 1999, $4,000 during
2000 and zero thereafter.
F-60
<PAGE> 177
CONVEST ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(12) SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996 1996 1996 1996
--------- -------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues................................ $12,436 $10,619 $11,440 $15,250
Oil & gas sales, net of production
costs................................. $ 7,126 $ 6,421 $ 8,024 $10,789
Impairment of oil and gas properties.... $ -- $ 1,120 $ -- $ 1,513
Net income (loss)....................... $ 2,087 $ (638) $ 1,149 $ 5,472
Net income (loss) per weighted average
share outstanding..................... $ 0.20 $ (0.06) $ 0.11 $ 0.52
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996 1996 1996 1996
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues................................ $13,286 $13,056 $11,482 $13,156
Oil & gas sales, net of production
costs................................. $ 8,471 $ 8,108 $ 7,115 $ 9,069
Impairment of oil and gas properties.... $ -- $ -- $ -- $(5,911)
Elimination of preacquisition net loss
of CEC................................ $ 640 $ 1,024 $ -- $ --
Net income (loss)....................... $ 1,872 $(1,029) $ 46 $(3,887)
Net income (loss) per weighted average
share outstanding..................... $ 0.30 $ (0.16) $ -- $ (0.37)
</TABLE>
(13) SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION
The provisions of Statement of Financial Accounting Standards No. 69
require the disclosure of the following information relative to Convest's oil
and gas reserves and producing activities.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CAPITALIZED COSTS RELATING TO OIL AND GAS PRODUCING
ACTIVITIES
Proved oil and gas properties............................ $114,063 $110,373 $ 66,617
Unproved oil and gas properties.......................... 3,244 3,828 997
-------- -------- --------
117,307 114,201 67,614
Accumulated depreciation, depletion and amortization..... (62,847) (50,144) (29,289)
-------- -------- --------
Net capitalized costs.................................... $ 54,460 $ 64,057 $ 38,325
======== ======== ========
COSTS INCURRED IN OIL AND GAS PROPERTY ACQUISITION,
EXPLORATION AND DEVELOPMENT ACTIVITIES
Acquisition of producing properties and leasehold costs:
Proved................................................ $ 163 $ 3,069 $ 15
Unproved.............................................. -- -- 17
Reverse Acquisition of CEC............................... -- 40,935 --
Exploration costs........................................ 3,907 -- 210
Development costs........................................ 9,249 6,406 3,812
-------- -------- --------
$ 13,319 $ 50,410 $ 4,054
======== ======== ========
</TABLE>
F-61
<PAGE> 178
CONVEST ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RESERVE QUANTITY INFORMATION (UNAUDITED)
The following table sets forth the estimates of Convest's share of net
quantities of proved reserves of oil and gas and a reconciliation of the changes
in such quantities, developed or audited by independent petroleum engineers in
accordance with guidelines established by the Securities and Exchange Commission
and the Financial Accounting Standards Board. Convest emphasizes that reserve
quantity estimates are inherently imprecise. Accordingly, these estimates are
expected to change as future information becomes available. Changes in reserve
quantities or prices and costs in future reserve estimates could have a
significant effect on future depreciation, depletion and amortization or
impairments of oil and gas properties. All reserves are located in the United
States.
<TABLE>
<CAPTION>
OIL AND
CONDENSATE NATURAL GAS
(MBBLS) (MMCF)
---------- -----------
<S> <C> <C>
Proved reserves, December 31, 1993.......................... 1,012 59,340
Revisions of previous estimates........................... 220 10,134
Sales of minerals in place................................ (11) (7,236)
Extensions, discoveries and other additions............... -- --
Production................................................ (584) (19,295)
------ -------
Proved reserves, December 31, 1994.......................... 637 42,943
Revision of previous estimates............................ 872 (5,797)
Sale of minerals in place................................. (50) (133)
Reverse acquisition of CEC................................ 5,474 17,509
Acquisition of Sensor Properties (a)...................... 756 172
Extensions, discoveries and other additions............... 140 3,820
Production................................................ (1,306) (17,968)
------ -------
Proved reserves, December 31, 1995.......................... 6,523 40,546
Revisions of previous estimates........................... 889 5,757
Sales of minerals in place................................ (341) (2,105)
Extensions, discoveries and other additions............... 296 6,546
Production................................................ (1,023) (13,162)
------ -------
Proved reserves, December 31, 1996.......................... 6,344 37,582
====== =======
Proved developed reserves:
December 31, 1993......................................... 949 49,111
December 31, 1994......................................... 607 42,540
December 31, 1995......................................... 5,818 39,231
December 31, 1996......................................... 5,493 35,075
</TABLE>
- ---------------
(a) Reserve additions associated with the Sensor Properties acquisition
represents only the reserves associated with Edisto E&P's interest as CEC's
interest in the Sensor Properties was considered to have been acquired by
Edisto E&P in the Edisto Transaction.
F-62
<PAGE> 179
CONVEST ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS AND CHANGES THEREIN
RELATING TO PROVED OIL AND GAS RESERVES (UNAUDITED)
The following table presents the standardized measure of discounted future
net cash flows and changes therein relating to proved oil and gas reserves
pursuant to Securities and Exchange Commission Regulation S-X, Rule 4-10 and
Statement of Financial Accounting Standards No. 69. In computing this data,
assumptions other than those required by the Securities and Exchange Commission
and the Financial Accounting Standards Board could produce different results.
Accordingly, the data should not be construed as representative of the fair
market value of Convest's proved oil and gas reserves.
Future cash flow estimates were derived by applying year-end prices and
costs to estimated future production. Convest's gas production is either sold at
fixed prices contracted for with given purchasers or at prevailing spot market
prices. Future production and development costs were computed by estimating the
expenditures to be incurred in developing and producing the proved oil and gas
reserves, based on year-end costs and continued existing economic conditions.
The standardized measure of discounted future net cash flows represents the
present value of estimated future net cash flows, discounted at a rate of 10%
per year.
Numerous uncertainties are inherent in estimating quantities of proved
reserves, projecting future rates of production and the timing of development
expenditures. Future prices received for such production and future production
costs may vary, perhaps significantly, from the prices and costs assumed for
purposes of these estimates. Estimates of economically recoverable oil and gas
reserves and of the future net revenues therefrom are based upon a number of
variable factors and assumptions, all of which may in fact vary considerably
from actual results. All such estimates are to some degree speculative, and
classifications of reserves are only attempts to define the degree of
speculation involved. The Company emphasizes that the actual production,
revenues, severance and excise taxes, development expenditures and operating
expenditures with respect to its reserves will likely vary from such estimates,
and such variances may be material.
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------
1996 1995 1994
--------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Future cash inflows......................................... $ 310,591 $ 214,687 $ 79,331
Future production and development costs..................... (117,030) (116,343) (48,733)
Future income taxes......................................... (33,366) (2,925) --
--------- --------- --------
Future net cash flows....................................... 160,195 95,419 30,598
10% annual discount for estimated timing of cash flows...... (38,841) (23,452) (3,143)
--------- --------- --------
Standardized measure of discounted future net cash flows.... $ 121,354 $ 71,967 $ 27,455
========= ========= ========
Beginning of period......................................... $ 71,967 $ 27,455 $ 75,020
Changes resulting from:
Sales of oil and gas produced, net of production
costs................................................ (32,360) (32,763) (34,559)
Net changes in prices and production costs............. 55,216 9,443 (26,666)
Extensions and discoveries, less related costs......... 23,442 8,601 --
Reverse acquisition of CEC............................. -- 53,102 --
Acquisition of Sensor Properties (a)................... -- 4,838 --
Sales of reserves in place............................. (4,091) (519) (8,434)
Revisions of previous quantity estimates............... 23,015 (622) 9,809
Accretion of discount.................................. 7,197 2,746 7,502
Changes in future development costs.................... (24) 1,905 3,379
Net change in income taxes............................. (22,181) (2,509) --
Changes in timing and other............................ (827) 290 1,404
--------- --------- --------
End of period............................................... $ 121,354 $ 71,967 $ 27,455
========= ========= ========
</TABLE>
F-63
<PAGE> 180
CONVEST ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------
AVERAGE PRICES 1996 1995 1994
-------------- --------- --------- --------
<S> <C> <C> <C>
Oil (per Bbl)............................................... $ 26.01 $ 19.48 $ 14.67
Gas (per Mcf)............................................... $ 3.87 $ 2.16 $ 1.63
</TABLE>
- ---------------
(a) Discounted future net revenues associated with the Sensor Properties
acquisition represents only the discounted future net revenues associated
with Edisto E&P's interest as CEC's interest in the Sensor Properties was
considered to have been acquired by Edisto E&P in the Edisto Transaction.
Subsequent to the reserve valuation date of December 31, 1996, prices for
oil and natural gas have decreased substantially. The average prices received
for February 1997 were $20.75 per barrel and $2.85 per Mcf. Prices have
continued to decline since then so the Company expects that the prices it will
receive in March 1997 will be lower than in the prior month. This decrease in
prices would have had an effect on the Standardized Measure of Discounted Cash
Flows of the Company's proved reserves at January 1, 1997.
F-64
<PAGE> 181
CONVEST ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
JUNE 30, DECEMBER 31,
1997 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 7,036 $ 3,678
Restricted cash........................................... 333 333
Accounts receivable:
Oil and gas production -- less allowance for doubtful
accounts of $596 and $657, respectively............... 5,753 7,908
Other.................................................. 1,377 598
Other current assets...................................... 818 2,267
-------- --------
Total current assets.............................. 15,317 14,784
-------- --------
Property and equipment:
Oil and gas properties, successful efforts method......... 118,117 117,307
Other..................................................... 533 478
Less accumulated depreciation and depletion............... (64,068) (63,061)
-------- --------
54,582 54,724
-------- --------
Other noncurrent assets..................................... 2,618 2,704
-------- --------
$ 72,517 $ 72,212
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable:
Oil and gas production................................. $ 7,095 $ 8,521
Affiliates............................................. 372 667
Accrued liabilities and other............................. 4,696 6,041
Deferred revenue.......................................... 1,906 2,113
-------- --------
Total current liabilities......................... 14,069 17,342
-------- --------
Long-term liabilities:
Long-term debt............................................ 3 4,003
Deferred revenue.......................................... 530 559
Other noncurrent liabilities.............................. 5,505 7,170
-------- --------
6,038 11,732
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $1 par value; authorized 5 million
shares; none issued or outstanding..................... -- --
Common Stock $.01 par value; 20,000,000 shares authorized,
10,550,878 and 10,428,602 issued and outstanding at
June 30, 1997 and December 31, 1996, respectively...... 105 104
Additional paid-in capital................................ 48,301 47,849
Retained earnings (deficit)............................... 4,004 (4,815)
-------- --------
52,410 43,138
-------- --------
$ 72,517 $ 72,212
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-65
<PAGE> 182
CONVEST ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------
1997 1996
------- -------
(UNAUDITED)
<S> <C> <C>
Revenues:
Oil and gas sales......................................... $24,905 $21,329
Gas plant revenues........................................ 1,002 704
Gain on asset sale........................................ 63 817
Other, net................................................ 224 205
------- -------
26,194 23,055
------- -------
Expenses:
Production:
Lease operating expense................................ 5,744 7,636
Gas plant operating expense............................ 230 232
Production taxes....................................... 533 617
Abandonment and exploration costs......................... 1,147 921
General and administrative expenses....................... 2,188 2,281
Interest expense.......................................... 72 674
Depreciation, depletion and amortization.................. 7,305 7,908
Impairment of oil and gas properties...................... -- 1,120
------- -------
17,219 21,389
------- -------
Net income before income taxes.............................. 8,975 1,666
Income tax provision........................................ 156 217
------- -------
Net income.................................................. $ 8,819 $ 1,449
======= =======
Net income per share........................................ $ 0.84 $ 0.14
======= =======
Weighted average common shares outstanding.................. 10,472 10,413
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-66
<PAGE> 183
CONVEST ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
--------------------
1997 1996
------- -------
UNAUDITED)
<S> <C> <C>
Revenues:
Oil and gas sales......................................... $11,843 $10,170
Gas plant revenues........................................ 400 343
Gain (loss) on asset sale................................. (59) 5
Other, net................................................ 119 101
------- -------
12,303 10,619
------- -------
Expenses:
Production:
Lease operating expense................................ 2,789 3,675
Gas plant operating expense............................ 56 110
Production taxes....................................... 240 307
Abandonment and exploration costs......................... 56 878
General and administrative expenses....................... 1,058 1,042
Interest expense.......................................... 16 307
Depreciation, depletion and amortization.................. 3,682 3,770
Impairment of oil and gas properties...................... -- 1,120
------- -------
7,897 11,209
------- -------
Net income (loss) before income taxes....................... 4,406 (590)
Income tax provision........................................ 59 48
------- -------
Net income (loss)........................................... $ 4,347 $ (638)
======= =======
Net income (loss) per share................................. $ 0.41 $ (0.06)
======= =======
Weighted average common shares outstanding.................. 10,508 10,413
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-67
<PAGE> 184
CONVEST ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON COMMON ADDITIONAL RETAINED
SHARES STOCK, PAID-IN EARNINGS
OUTSTANDING $.01 PAR CAPITAL (DEFICIT) TOTAL
----------- -------- ---------- --------- -------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996............... 10,428 $104 $47,849 $(4,815) $43,138
Exercised employee stock options........... 107 1 347 -- 348
Stock issued pursuant to 1996 bonus plan... 18 -- 105 -- 105
Retirement of stock issued in connection
with the conversion of the stock of
Convest's predecessor entity into stock
of Convest............................... (2) -- -- -- --
Net income................................. -- -- -- 8,819 8,819
------ ---- ------- ------- -------
Balance at June 30, 1997................... 10,551 $105 $48,301 $ 4,004 $52,410
====== ==== ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-68
<PAGE> 185
CONVEST ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------
1997 1996
------- -----------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 8,819 $ 1,449
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation, depletion and amortization............... 7,305 7,908
Impairment to oil and gas properties................... -- 1,120
Gain on sale of oil and gas properties................. (63) (797)
Abandonment and exploration costs...................... 665 781
Decrease in accounts receivable........................ 1,031 560
Decrease in accounts payable and accrued liabilities... (2,980) (345)
Other.................................................. 24 184
------- -------
Net cash flow provided by operating activities......... 14,801 10,860
------- -------
Cash flows from investing activities:
Acquisition, exploration and development of oil and gas
properties............................................. (9,534) (4,721)
Proceeds from sales of oil and gas properties............. 740 2,210
Sale of short-term investments............................ 1,110 1,257
Increase in other current and noncurrent assets........... (107) (88)
------- -------
Net cash used in investing activities............. (7,791) (1,342)
------- -------
Cash flows from financing activities:
Payments on long-term debt................................ (4,000) (7,900)
Exercised employee stock options.......................... 348 --
------- -------
Net cash used in financing activities............. (3,652) (7,900)
------- -------
Net increase in cash and cash equivalents................... 3,358 1,618
Cash and cash equivalents, beginning of period.............. 4,011 1,007
------- -------
Cash and cash equivalents, end of period.................... $ 7,369 $ 2,625
======= =======
Supplemental disclosure of cash flow information:
Cash paid during the period for interest.................. $ 238 $ 844
======= =======
Cash paid during the period for taxes..................... $ 156 $ 296
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-69
<PAGE> 186
CONVEST ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
GENERAL
Convest Energy Corporation ("Convest" or the "Company"), a Texas
corporation whose Common Stock is traded on the American Stock Exchange, is an
active independent oil and gas exploration and production company. On June 26,
1995, Convest acquired all of the outstanding capital stock of Edisto
Exploration & Production Company, a Delaware corporation ("Edisto E&P"), from
Edisto Resources Corporation ("Edisto") in exchange for 6,185,400 newly issued
shares of Convest's Common Stock and $10,000 in cash (the "Edisto Transaction").
The newly issued shares of Convest Common Stock increased Edisto's interest in
Convest from 31% to 72%. During April 1996, Edisto purchased an additional
92,000 shares of Convest Common Stock on the open market.
These financial statements should be read in conjunction with the audited
financial statements and the notes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1996. Reference also is made
to the "Management's Discussion and Analysis of Financial Condition and Results
of Operations" included elsewhere in this report. The information presented in
this Form 10-Q is unaudited, but in the opinion of management reflects all
adjustments (all of which were normal and recurring) necessary to fairly present
such information. Interim results are not necessarily indicative of a full year
of operations.
(2) PROPOSED MERGER WITH FORCENERGY INC
On June 19, 1997, Convest, Edisto, Forcenergy Inc ("Forcenergy") (NYSE
"FEN"), and a Forcenergy subsidiary executed a definitive Agreement and Plan of
Merger (the "Merger Agreement") providing for Convest and Edisto to be merged
into Forcenergy.
Under the Merger Agreement, (a) each issued and outstanding share of
Convest Common Stock will be converted into the right to receive a fractional
interest in a share of Forcenergy Common Stock equal to $8.88 divided by the
Weighted Average Trading Price of Forcenergy Common Stock, and (b) each issued
and outstanding share of Edisto Common Stock will be converted into the right to
receive (i) $4.886 in cash and (ii) a fractional interest in a share of
Forcenergy Common Stock equal to $5.064 divided by the Weighted Average Trading
Price of Forcenergy Common Stock; provided, however, that in no event will the
Weighted Average Trading Price of Forcenergy Common Stock be less than $28.96
nor more than $34.96. The "Weighted Average Trading Price" of Forcenergy Common
Stock will be calculated by taking the average of the following daily
calculations for each of the ten trading days ending two trading days prior to
the closing date for the Merger: (i) grouping together all shares of Forcenergy
Common Stock traded on such day at the same trading price, (ii) multiplying the
aggregate number of shares in each price group by the trading price for such
group to calculate a product (the total sold shares value) for each group, (iii)
adding all of such products from each group, and (iv) dividing the resulting
total by the aggregate number of shares traded on such trading day. Cash will be
paid in lieu of fractional shares of Forcenergy Common Stock. The transaction is
expected to close in October 1997.
The majority shareholders of Convest and Edisto have agreed to vote their
respective shares in favor of the transaction thereby assuring the required
shareholder approval for the Merger Agreement. Edisto currently owns
approximately 72% of the outstanding shares of Common Stock of Convest, and has
agreed in the Merger Agreement to vote its shares of Convest Common Stock in
favor of the transaction. In addition, investment funds and accounts managed by
TCW Special Credits and Oaktree Capital Management, L.L.C., which hold slightly
in excess of 51% of Edisto's Common Stock, have agreed to vote for the
transaction. Also, such investment funds and accounts have contractually agreed
not to sell 80% of the Forcenergy Common Stock received in the transaction for a
period of six months after the closing.
The accompanying financial statements have been prepared on a going concern
basis and do not reflect any adjustments related to the proposed merger.
F-70
<PAGE> 187
CONVEST ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reclassifications and Consolidation. Certain reclassifications have been
made to prior year financial statements to conform to the presentation for 1997.
All significant intercompany accounts and activities have been eliminated.
Restricted Cash. Restricted cash consists of $333,000 of certificates of
deposit held by various financial institutions. The certificates of deposit are
held in escrow as collateral for letters of credit issued for (i) lease payments
on certain offshore platforms and (ii) estimated plugging and abandonment costs
expected to be incurred on certain onshore oil and gas properties.
Property and Equipment. The Company follows the successful efforts method
of accounting for its oil and gas properties. Costs of productive wells,
developmental drilling expenditures, including developmental dry holes, and
productive leases are capitalized. Exploratory drilling costs, including
stratigraphic test wells, are initially capitalized, but charged to expense if
and when the well is determined to be unsuccessful. The capitalized costs of oil
and gas properties are charged to operations as depreciation, depletion and
amortization using the unit-of-production method based on the ratio of current
production to proved recoverable oil and gas reserves (as defined by the
Securities and Exchange Commission) on a lease by lease basis. Reserve estimates
for the Company's properties were prepared or audited by independent petroleum
engineering firms at year end. Gas is converted to equivalent barrels of oil on
an energy content basis of 6 Mcf of gas to 1 barrel of oil. Depreciation,
depletion and amortization per equivalent unit of oil production was $4.74 and
$4.83 for the six month periods ended June 30, 1997 and 1996, respectively, and
$4.51 and $4.60 for the three month periods ended June 30, 1997 and 1996,
respectively. Oil and gas leasehold costs are capitalized when incurred.
Unproved properties are assessed periodically on a property-by-property basis
and impairments in value are charged to expense. Exploratory expenses, including
geological and geophysical expenses and annual delay rentals, are charged to
expense as incurred.
Under Statement of Financial Accounting Standards No. 121 ("SFAS 121")
regarding accounting for the impairment of long-lived assets, the Company is
required to recognize an impairment loss for its proved oil and gas properties
if the carrying value of such properties (i.e., total capitalized costs less
accumulated depreciation and depletion) exceeds the undiscounted expected future
cash flows attributable to such properties. Convest must assess the need for an
impairment of capitalized costs of oil and gas properties on a
property-by-property basis. If an impairment is indicated based on undiscounted
expected future cash flows, then an impairment loss is recognized to the extent
that net capitalized costs exceed expected future cash flows. During the second
quarter of 1996, it was determined that one of the Company's offshore properties
had experienced a permanent decline in production. Accordingly, the Company
recorded an impairment loss of approximately $1.1 million during the second
quarter of 1996. No such provision has been required during 1997.
Other Property, Plant and Equipment. Other fixed assets are recorded at
cost and depreciated over their estimated useful lives using the straight-line
method of depreciation.
Abandonment Reserve. The Company records its estimate of future abandonment
costs of offshore properties. Such costs are accrued using a unit-of-production
method based upon estimated proved recoverable reserves. Abandonment costs are
estimated under current regulations using current costs and are reviewed
periodically and adjusted as new information becomes available. Abandonment
costs on onshore properties are typically nominal due to the salvage value of
well equipment.
The Company is a party to a settlement with the United States Minerals
Management Service relating to estimated plugging and abandonment costs for 14
Gulf of Mexico OCS leases. Pursuant to this settlement, the operator of the
leases, Convest and other co-lessees were required to provide security for
payment of such costs through quarterly payments to an Abandonment Fund. During
the first quarter of 1997, the Company
F-71
<PAGE> 188
CONVEST ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
made its final scheduled payment under the Abandonment Fund, and accordingly, is
no longer subject to additional future payments.
As of June 30, 1997 and December 31, 1996, the Company had made payments
totaling approximately $4.8 million and $4.2 million to the Abandonment Fund,
respectively. These payments were applied to the total long-term abandonment
reserve of $7.5 million and $7.7 million, as of June 30, 1997 and December 31,
1996, respectively, resulting in a net long-term abandonment reserve of $2.7
million and $3.5 million as of those dates. The current portion of the
abandonment reserve was $2.1 million and $2.3 million as of June 30, 1997 and
December 31, 1996, respectively. The current portion of the abandonment reserve
is included in "Accrued Liabilities and Other" and the noncurrent portion is
included in "Other Noncurrent Liabilities" in the consolidated financial
statements.
Lease Operating Expenses. In connection with a 1992 sale of certain future
production volumes of oil to Enron Reserve Acquisition Corp., the Company
established a reserve for the expenses associated with the volumes sold and
amortizes this reserve as the volumes are delivered. As of June 30, 1997 and
December 31, 1996, the current balance of this reserve was $1.6 million,
respectively, and the long-term balance was $2.8 million and $3.7 million,
respectively, and were presented in "Accrued Liabilities and Other" and "Other
Noncurrent Liabilities," respectively, in the consolidated financial statements.
Gas Balancing. The Company uses the entitlement method of accounting for
gas imbalances. Receivables resulting from undertakes of gas production at June
30, 1997 and December 31, 1996 were $2.4 million and $2.3 million, respectively,
and are included in "Accounts Receivable -- Oil and Gas Production" and "Other
Noncurrent Assets" in the consolidated financial statements. Deferred revenue
and payables resulting from overtakes of gas production at June 30, 1997 and
December 31, 1996 were $2.4 million and $2.7 million, respectively, and are
included in "Current Liabilities -- Deferred Revenue" and "Long-Term
Liabilities -- Deferred Revenue" in the consolidated financial statements.
Accounting for Income Taxes. The Company records income taxes in accordance
with the Financial Accounting Standards Board -- Statement of Financial
Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes." SFAS
109 requires the balance sheet approach of income tax accounting whereby
deferred income taxes are provided at the balance sheet date for the differences
existing in the tax basis of assets and liabilities and their financial
statement carrying amounts.
Concentration of Credit Risk. The Company's oil and gas production revenues
are derived principally from uncollateralized sales to customers in the oil and
gas industry. The concentration of credit risk in a single industry affects the
Company's overall exposure to credit risk because customers may be similarly
affected by changes in economic and other conditions. The Company has not
experienced significant credit losses on receivables from such sales.
Net Income Per Share. Net income per share is computed based on the
weighted average number of shares outstanding which were 10,472,100 and
10,412,722 for the six months ended June 30, 1997 and 1996, respectively, and
10,508,115 and 10,412,722 for the three months ended June 30, 1997 and 1996,
respectively. No effect has been given to options outstanding under the
Company's stock option plans because their effect is antidilutive or immaterial.
Risk Management/Hedging Activities. The Company from time to time engages
in commodity hedging activities to minimize the risk of market fluctuations
associated with the price of crude oil and natural gas production. The hedging
objectives include assurance of stable and known cash flows and fixed favorable
prices. The hedges are effected through the purchase and sale of futures
contracts on the New York Mercantile Exchange ("NYMEX") and over the counter
price swap agreements. The credit risk of futures contracts is limited due to
the daily cash settlement of the net change in the value of open contracts and
because of certain NYMEX procedures. Gains or losses on the Company's hedging
agreements are deferred and recognized as oil and gas sales revenue when the
hedged transaction occurs.
F-72
<PAGE> 189
CONVEST ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Statement of Cash Flows. For purposes of the consolidated statements of
cash flows, the Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
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 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.
All significant estimates are discussed herein.
(4) RELATED PARTY TRANSACTIONS
During December 1996, Edisto sold substantially all of the assets of its
wholly owned gas marketing subsidiary, Energy Source, Inc. , to an unrelated
third party. From January 1995 until its sale in December 1996, Energy Source
had marketed a substantial portion of the Company's gas production. Under the
gas marketing arrangement, Convest received a minimum price of 98% of the index
for the applicable pipeline. In connection with the sale of Energy Source,
Convest and Energy Source agreed to extend the gas marketing arrangement to
December 31, 1997. Effective January 1, 1997, the gas marketing arrangement was
amended to increase the price received by the Company from 98% to 100% of the
index price for the applicable pipeline.
In connection with the Energy Source sale, all Edisto employees other than
Michael Y. McGovern, the Chairman and Chief Executive Officer of Convest and
Edisto, became employees of the purchaser. Subsequently, Edisto's corporate
headquarters were moved to Convest's offices, and Mr. McGovern and four other
employees of Convest have divided their time between Edisto and Convest.
Effective December 1, 1996, Mr. McGovern's base salary and benefits have been
apportioned 70% to Convest and 30% to Edisto. The base salary and benefits of
the other Convest employees who perform work for Edisto also are apportioned
based on the approximate amount of time they work for each company.
Prior to the sale of Energy Source, Edisto had provided Convest with access
to an AS400 computer system to run its accounting system and had provided MIS
support. The monthly cost to Convest was approximately $12,555 per month. In
connection with the sale of Energy Source, Edisto sold the AS400 computer system
and its MIS personnel became employees of the purchaser of Energy Source. Since
Convest continued to need an AS400 computer system to run its accounting system,
the Energy Source purchaser agreed to provide Convest with access to the AS400
computer system and MIS support through December 31, 1997. The cost to Convest
is $12,645 per month. This agreement may be terminated by Convest at any time
after June 30, 1997 upon 90 days notice.
In addition, the Company and Edisto have a directors' and officers'
fiduciary insurance policy that covers both companies. The annual insurance
premium was allocated 32% to the Company, for a cost of $96,000 based on the
relative percentage that the assets of the Company bear to the total assets of
both the Company and Edisto.
Each of the affiliated party transactions described above was approved by
either a special committee of the Company's Board, which was composed of outside
directors with no affiliation to Edisto, or the unanimous consent of the
Company's Board.
F-73
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CONVEST ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) HEDGING ACTIVITIES
As previously stated, the Company conducts its hedging activities through
major financial institutions. Set forth below is the contract amount and term of
all futures contracts held for price risk management purposes by the Company at
June 30, 1997 and December 31, 1996:
<TABLE>
<CAPTION>
JUNE 30, 1997 DECEMBER 31, 1996
-------------------- ----------------------
OIL GAS OIL GAS
-------- -------- -------- ----------
<S> <C> <C> <C> <C>
Quantity Sold..................... 30 Mbbls 740 Mmcf 90 Mbbls 3,300 Mmcf
Maximum Term...................... 3 Months 3 Months 9 Months 10 Months
Average Price..................... $21.07 $2.38 $22.50 $2.53
</TABLE>
The Company will continue its hedging activities during 1997 in order to
mitigate the volatility of its crude oil and natural gas prices. Gains and
losses realized upon the settlement of the Company's hedge positions are
deferred and recognized as oil and gas sales revenue in the month of the
underlying physical production being hedged. The fair value of the Company's
open positions at June 30, 1997 were $182,150. As a result of fluctuations in
the price of crude oil and natural gas subsequent to June 30, 1997, the stated
fair value of the Company's open positions is not indicative of the value which
would be received if the positions were closed at current prices. The fair value
of the Company's hedges was based on the cost that would have been incurred to
buy out those hedges in a loss position and the consideration that would have
been received to terminate those hedges in a gain position. The cash margin
required by the counterparties to the Company's hedging activities totaled
$56,000 and $1.0 million as of June 30, 1997 and December 31, 1996,
respectively, and are included in other current assets.
(6) INCOME TAXES
The Company records current income taxes based on its estimated actual tax
liability for the year. The Company provides for deferred income taxes under
SFAS No. 109 based upon differences between the tax basis of the Company's
assets and liabilities and their financial statement carrying amounts multiplied
by the Company's expected future effective tax rate.
The Company recorded current income tax expense of $156,000 and $217,000
for the six months ended June 30, 1997 and 1996, respectively and $59,000 and
$48,000 for the three months ended June 30, 1997 and 1996, respectively. The
Company has provided a valuation allowance against substantially all of its net
deferred tax assets as the "more-likely-than-not" criteria for recognition under
SFAS No. 109 was not met. During 1995, the Company purchased approximately $3.3
million of NOL tax benefits from Edisto for $550,000 which is included in "Other
Noncurrent Assets" in the accompanying balance sheets. No valuation allowance
has been taken against such amount under SFAS No. 109 since the Company
anticipates that the purchased NOLs will be utilized against the Company's near
term income tax.
(7) CREDIT FACILITY AND LONG-TERM DEBT
The Company has a revolving credit facility with Bank One, Texas, N.A.
("Bank One"), and Compass Bank-Houston which terminates on January 1, 1999. Bank
One serves as agent bank of the facility. The facility is secured by a first
lien on all of the Company's assets, including its oil and gas properties and
gas plant. The borrowing base is redetermined semi-annually on May 31 and
November 30 of each year by the lending banks based on engineering criteria
established by the banks. Interest on borrowings under the facility is computed
at (i) the agent bank's prime lending rate (the "Base Rate") plus 3/4% or (ii)
the London InterBank Offering Rate ("LIBOR") plus 2 3/4%. In addition, the
Company pays a commitment fee equal to 1/2% on any commitment amount in excess
of outstanding borrowings.
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CONVEST ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Effective December 1, 1996, the borrowing base was $19.2 million which
reduces by $1.0 million per month beginning January 1, 1997 based on the lending
banks' estimate of production. Effective January 28, 1997 and June 12, 1997, the
borrowing base was reduced by $300,000 and $200,000, respectively, to give
effect to the sale of oil and gas properties securing the credit facility.
Pursuant to the terms of the credit facility, the Company is required to provide
the banks with semi annual estimates of its oil and gas reserves on or before
April 1 and October 1 of each year. Due to the proposed merger with Forcenergy,
the banks have agreed to extend the report required on October 1, 1997 until
December 1, 1997. As a result, the Company's borrowing base will continue to
reduce by $1.0 million per month until the updated reports are provided and the
borrowing base has been redetermined.
After giving effect to the monthly borrowing base reductions and the
reductions resulting from the property sales, the Company's borrowing base under
the credit facility was $12.7 million on June 30, 1997. The Company had no
outstanding borrowings under its credit facility at June 30, 1997 and $4.0
million outstanding at December 31, 1996. In addition, the Company had $200,000
of letters of credit outstanding at June 30, 1997 and December 31, 1996,
primarily related to performance bonds issued for oil and gas operations.
(8) COMMITMENTS AND CONTINGENCIES
Legal Proceedings. Elizabeth Holt, et al. v. Sun E & P Company, et al., No.
3,217 in the 84th District Court, Hansford County, Texas. This suit was
originally filed in August 1984, seeking to cancel a 13-section lease because
there was no gas production for a period of approximately 120 days in 1983 when
the gas purchaser's pipeline was shutdown for repairs. The plaintiff sought to
terminate the lease by reason of non-production as of September 23, 1983. If the
plaintiff is successful, the Company would be liable for damages on past
production in the range of $300,000 to $350,000, plus pre-judgment interest and
attorneys fees, which would total approximately $400,000 to $450,000. The court
entered a judgment on December 20, 1996 denying all relief sought by the
plaintiffs against Convest. This judgment is being appealed by the plaintiffs.
The predecessor in interest to Convest has indemnified Convest to a maximum of
$357,000 in value for the well provided that total damages exceed $250,000.
In addition, the Company is named as defendant in several lawsuits arising
in the ordinary course of business. While the outcome of these lawsuits and
other proceedings against the Company cannot be predicted with certainty,
management does not expect these matters to have a material adverse effect on
the Company's financial position or results of operations.
F-75
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APPENDIX A
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
AMONG
FORCENERGY INC,
EDI ACQUISITION CORPORATION,
EDISTO RESOURCES CORPORATION
AND
CONVEST ENERGY CORPORATION
JULY 15, 1997
<PAGE> 193
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
Section 1. Definitions.......................................................
Section 2. The Mergers and the Dissolution...................................
(a) Merger 1....................................................
(b) Effective Time of Merger 1..................................
(c) Dissolution.................................................
(d) Effective Time of Dissolution...............................
(e) Merger 2....................................................
(f) Effective Time of Merger 2..................................
(g) Consummation................................................
Section 3. The Surviving Corporations........................................
(a) Certificate of Incorporation; Articles of Incorporation.....
(b) By-Laws.....................................................
(c) Directors...................................................
(d) Officers....................................................
</TABLE>
Section 4. Conversion of Shares; Closing.....................................
(a) Conversion of Sellers' Capital Stock........................
(b) Other Conversions...........................................
(c) Sellers Options.............................................
(d) Exchanges...................................................
(e) No Fractional Securities....................................
(f) Closing.....................................................
(g) Closing of Transfer Books...................................
(h) Appraisal Rights............................................
Section 5. Representations and Warranties of the Sellers.....................
(a) Organization, Qualification, and Corporate Power............
(b) Capitalization..............................................
(c) Authorization of Transaction................................
(d) Non-Contravention...........................................
(e) Approvals...................................................
(f) Reports and Financial Statements............................
(g) Absence of Undisclosed Liabilities..........................
(h) Absence of Certain Changes or Events........................
(i) Litigation..................................................
(j) Registration Statement and Information Statement............
(k) No Violation of Law.........................................
(l) Compliance with Agreements..................................
(m) Taxes.......................................................
(n) Employee Benefit Plans; ERISA...............................
(o) Labor Controversies.........................................
(p) Environmental Matters.......................................
(q) Non-competition Agreements..................................
(r) Reserve Report and Exploration Project Information..........
(s) Title.......................................................
(t) Insurance...................................................
(u) Allowable Production Quotas.................................
(v) Gas Payments; Balancing.....................................
(w) No Prepayments Made or Refunds Owed.........................
(x) Drilling Obligations........................................
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<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
(y) Development Operations......................................
(z) Regulatory Authority........................................
(aa) Full Disclosure.............................................
(bb) Certain Agreements..........................................
(cc) Shareholders Agreement......................................
(dd) Brokers and Finders.........................................
(ee) Opinion of Financial Advisor................................
(ff) Edisto Cash Balance.........................................
(gg) Affiliate Transactions......................................
(hh) WARN........................................................
(ii) Cumulative Representations..................................
Section 6. Representations and Warranties of Purchasers......................
(a) Organization, Qualification, and Corporate Power............
(b) Capitalization..............................................
(c) Authorization of Transaction................................
(d) Non-Contravention...........................................
(e) Approvals...................................................
(f) Reports and Financial Statements............................
(g) Absence of Undisclosed Liabilities..........................
(h) Absence of Certain Changes or Events........................
(i) Litigation..................................................
(j) Registration Statement and Proxy Statements.................
(k) No Violation of Law.........................................
(l) Compliance with Agreements..................................
(m) Taxes.......................................................
(n) Employee Benefit Plans; ERISA...............................
(o) Labor Controversies.........................................
(p) Environmental Matters.......................................
(q) Reserve Report and Exploration Project Information..........
(r) Title.......................................................
(s) Insurance...................................................
(t) Allowable Production Quotas.................................
(u) Gas Payments; Balancing.....................................
(v) No Prepayments Made or Refunds Owed.........................
(w) Drilling Obligations........................................
(x) Development Operations......................................
(y) Regulatory Authority........................................
(z) Full Disclosure.............................................
(aa) Affiliate Transactions......................................
(bb) Cumulative Representations..................................
Section 7. Conduct of Business Pending the Mergers...........................
(a) Conduct of Business by the Sellers Pending the Mergers......
(b) Control of the Sellers' Operations..........................
(c) Acquisition Transactions....................................
(d) Subsidiaries................................................
Section 8. Additional Agreements.............................................
(a) Access to Information.......................................
(b) Registration Statement and Proxy Statements.................
(c) Stockholders' Approvals.....................................
(d) Employee Matters............................................
</TABLE>
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<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
(e) Quotation...................................................
(f) Agreement to Cooperate......................................
(g) Public Statements...........................................
(h) Notification of Certain Matters.............................
(i) Corrections to the Joint Proxy Statements/Prospectus and
Registration Statement......................................
(j) Indemnification; Directors' and Officers' Insurance.........
(k) Shareholders Agreement; Compliance with the Securities
Act.........................................................
(l) Convest Shares..............................................
(m) Credit Agreement............................................
Section 9. Conditions........................................................
(a) Conditions to Each Party's Obligation to Effect the
Mergers.....................................................
(b) Conditions to Obligation of the Sellers to Effect the
Mergers.....................................................
(c) Conditions to Obligations of Purchasers to Effect the
Mergers.....................................................
Section 10. Termination, Amendment and Waiver.................................
(a) Termination.................................................
(b) Expenses and Fees...........................................
(c) Effect of Termination.......................................
(d) Amendment...................................................
(e) Waiver......................................................
Section 11. General Provisions................................................
(a) Non-Survival of Representations and Warranties..............
(b) Notices.....................................................
(c) Interpretation..............................................
(d) Miscellaneous...............................................
(e) Counterparts................................................
(f) Parties In Interest.........................................
</TABLE>
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AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
This Amended and Restated Agreement and Plan of Merger, dated as of July
15, 1997 (the "Agreement"), is entered into by and among Forcenergy Inc, a
Delaware corporation ("Parent"), EDI Acquisition Corporation, a Delaware
corporation and wholly owned subsidiary of Parent ("EDI-Sub"), Edisto Resources
Corporation, a Delaware corporation ("Edisto"), and Convest Energy Corporation,
a Texas corporation ("Convest"). Parent and EDI-Sub are each sometimes referred
to herein as a "Purchaser" and collectively as the "Purchasers." Edisto and
Convest and their respective Subsidiaries are each sometimes referred to herein
as a "Seller" and collectively as the "Sellers." The Purchasers and the Sellers
are sometimes collectively referred to herein as the "Parties."
WHEREAS, previously the Boards of Directors of Parent, EDI-Sub, Edisto and
Convest have approved (i) the merger of EDI-Sub with and into Edisto ("Merger
1"), (ii) the merger of the surviving corporation of Merger 1 with and into
Parent ("Parent/Edisto Merger") and (iii) the merger of Convest with and into
Parent ("Merger 2") on the terms set forth in the Agreement and Plan of Merger,
dated as of June 19, 1997 (the "Merger Agreement");
WHEREAS, the Parties no longer wish to carry out the Parent/Edisto Merger
and, instead, Parent, as sole stockholder of Edisto immediately after Merger 1
will dissolve Edisto pursuant to Section 275(c) of the DGCL (the "Dissolution,"
and, collectively with Merger 1 and Merger 2, the "Mergers") with all assets of
Edisto being distributed upon the Dissolution to Parent;
WHEREAS, to reflect the above-mentioned changes, the Parties wish to amend
and restate the Merger Agreement in full;
WHEREAS, the Parties intend Merger 2 to qualify as a tax-free
reorganization under the provisions of Section 368 of the Internal Revenue Code
of 1986, as amended (the "Code"), and the regulations thereunder;
WHEREAS, in connection with the Mergers and as an inducement to Parent to
enter into the Merger Agreement, (i) Parent, Edisto and a principal shareholder
of Edisto have executed a voting agreement in favor of Parent with respect to,
among other things, the voting of shares of capital stock of Edisto held or to
be held by such shareholder in favor of Merger 1, and (ii) Parent, Edisto and
Convest have executed a voting agreement in favor of Parent with respect to,
among other things, the voting of shares of capital stock of Convest held or to
be held by Edisto in favor of Merger 2.
NOW, THEREFORE, in consideration of the premises and the representations,
warranties, covenants and agreements contained herein, the Parties hereto,
intending to be legally bound, hereby amend and restate the Merger Agreement as
follows:
SECTION 1. DEFINITIONS.
"Affiliate" of, or a person "affiliated" with, a specified person means a
person that directly, or indirectly through one or more intermediaries,
controls, or is controlled by, or is under common control with, the person
specified.
"Affiliate Agreement" has the meaning set forth in Section 8(k).
"Agreement" means this Agreement as executed as of the date first above
written or, if amended as provided herein, as amended.
"Claim" has the meaning set forth in Section 8(j).
"Closing" has the meaning set forth in Section 4(f).
"Closing Date" has the meaning set forth in Section 4(f).
"Code" means the Internal Revenue Code of 1986, as amended.
"Convest" has the meaning set forth in the first paragraph of this
Agreement.
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<PAGE> 197
"Convest Certificates" has the meaning set forth in Section 4(d)(i).
"Convest Common Stock" means the common stock, par value $0.01 per share,
of Convest.
"Convest Option" has the meaning set forth in Section 4(c)(ii).
"Convest Stockholder" means any Person who or which holds any of the
Convest Common Stock.
"Default" has the meaning set forth in Section 10(a)(i)(F).
"DGCL" means the General Corporation Law of the State of Delaware, as
amended.
"Dissolution" has the meaning set forth in the second recital above.
"Dissolution Certificate" means the Certificate of Dissolution for the
Dissolution, in substantially the form as shall be agreed upon by the Parties.
"Dissolution Effective Time" has the meaning set forth in Section 2(d).
"Dissolution Filing" has the meaning set forth in Section 2(d).
"Dollar" or "$" shall mean one dollar of the currency of the United States
of America.
"Edisto" has the meaning set forth in the first paragraph of this
Agreement.
"Edisto Certificates" has the meaning set forth in Section 4(d)(i).
"Edisto Common Stock" means the common stock, par value $0.01 per share, of
Edisto.
"Edisto E&P" has the meaning set forth in Section 7(d).
"Edisto Option" has the meaning set forth in Section 4(c)(i).
"Edisto Stockholder" means any Person who or which holds any of the Edisto
Common Stock.
"EDI-Sub" has the meaning set forth in the first paragraph of this
Agreement.
"EDI-Sub Common Stock" means the Common Stock, par value $0.01 per share,
of EDI-Sub.
"Environmental Laws" has the meaning set forth in Section 5(p)(ii).
"ERISA" means the Employer Retirement Income Security Act of 1974, as
amended.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Agent" means American Stock Transfer and Trust Company.
"Exchange Fund" has the meaning set forth in Section 4(d)(iii).
"GAAP" means United States generally accepted accounting principles as in
effect from time to time.
"Hazardous Substance" has the meaning set forth in Section 5(p)(iii).
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended.
"Including" means "including, but not limited to."
"Indemnified Parties" has the meaning set forth in Section 8(j).
"IRS" means the Internal Revenue Service.
"Joint Proxy Statements/Prospectus" has the meaning set forth in Section
5(j).
"Knowledge" means the actual knowledge of the president or any vice
president of the affected entity.
"Material Adverse Change" means an adverse change in the business,
operations, assets, liabilities, properties, condition (financial or other) or
results of operations which (i), in the case of Sellers and their respective
Subsidiaries, taken as a whole, may result in an aggregate change or liability
of $2.0 million or
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<PAGE> 198
greater or (ii), in the case of Parent and its Subsidiaries, taken as a whole,
may result in an aggregate change or liability of $15.0 million or greater.
"Material Adverse Effect" means an adverse effect on the business,
operations, assets, liabilities, properties, condition (financial or other), or
results of operations which (i), in the case of Sellers and their respective
Subsidiaries, taken as a whole, may result in an aggregate change or liability
of $2.0 million or greater or (ii), in the case of Parent and its Subsidiaries,
taken as a whole, may result in an aggregate change or liability of $15.0
million or greater.
"Merger Agreement" has the meaning set forth in the second recital above.
"Merger Certificates" means, collectively, the Merger 1 Certificate, Merger
2 Certificate and Merger 2 Articles.
"Merger 1 Certificate" means the Certificate of Merger for Merger 1, in
substantially the form as shall be agreed upon by the Parties.
"Merger 2 Certificate" means the Certificate of Merger for Merger 2, in
substantially the form as shall be agreed upon by the Parties.
"Merger 2 Articles" means the Articles of Merger for Merger 2, together
with the Plan of Merger attached as Annex A thereto, in substantially the form
attached hereto as Exhibit A.
"Merger Filings" has the meaning set forth in Section 2(f).
"Merger 1" has the meaning set forth in the first recital above.
"Merger 1 Cash Consideration" has the meaning set forth in Section
4(a)(i)(A).
"Merger 1 Consideration" has the meaning set forth in Section 4(a)(i)(A).
"Merger 1 Effective Time" has the meaning set forth in Section 2(b).
"Merger 1 Exchange Ratio" has the meaning set forth in Section 4(a)(i)(A).
"Merger 1 Filing" has the meaning set forth in Section 2(b).
"Merger 2" has the meaning set forth in the first recital above.
"Merger 2 Consideration" has the meaning set forth in Section 4(a)(ii)(A).
"Merger 2 Effective Time" has the meaning set forth in Section 2(f).
"Merger 2 Exchange Ratio" has the meaning set forth in Section 4(a)(ii)(A).
"Merger 2 Delaware Filing" has the meaning set forth in Section 2(f).
"Merger 2 Texas Filing" has the meaning set forth in Section 2(f).
"Mergers" has the meaning set forth in the second recital above.
"New Shares" has the meaning set forth in Section 8(l).
"NYSE" means The New York Stock Exchange, Inc.
"Ordinary Course of Business" means the ordinary course of business
consistent with past custom and practice (including with respect to quantity and
frequency).
"Parent" has the meaning set forth in Section 4(b)(iii).
"Parent Common Stock" means the common stock, par value $0.01 per share, of
Parent.
"Parent/Edisto Merger" has the meaning set forth in the first recital
above.
"Parent Financial Statements" has the meaning set forth in Section 6(f).
"Parent Representatives" has the meaning set forth in Section 8(a)(i).
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<PAGE> 199
"Parent SEC Reports" has the meaning set forth in Section 6(f).
"Parties" has the meaning set forth in the first paragraph of this
Agreement.
"Person" means an individual, a partnership, a corporation, an association,
a joint stock company, a trust, a joint venture, an unincorporated organization,
or a governmental entity (or any department, agency, or political subdivision
thereof).
"Petrie Parkman" means Petrie Parkman & Co., Inc.
"Proxy Statement" has the meaning set forth in Section 5(j).
"Purchaser" and "Purchasers" have the meanings set forth in the first
paragraph of this Agreement.
"Purchasers Plans" has the meaning set forth in Section 6(n).
"Purchasers Assets" has the meaning set forth in Section 6(r)(v).
"Purchasers Disclosure Schedule" means the disclosure schedule delivered by
the Purchasers concurrently with this Agreement, which shall specifically modify
the lettered and numbered paragraphs hereof to which it expressly refers.
"Purchasers Evaluated Properties" has the meaning set forth in Section
6(q).
"Purchasers Permits" has the meaning set forth in Section 6(k).
"Purchasers Petroleum Engineers" has the meaning set forth in Section
6(q)(i).
"Purchasers Project Information" has the meaning set forth in Section
6(q)(iii).
"Purchasers Projects" has the meaning set forth in Section 6(q)(iii).
"Purchasers Required Statutory Approvals" has the meaning set forth in
Section 6(e).
"Purchasers Reserve Reports" has the meaning set forth in Section 6(q)(i).
"Rauscher Pierce" means Rauscher, Pierce, Refsnes, Inc.
"Registration Statement" has the meaning set forth in Section 5(j).
"Requisite Stockholder Approvals" has the meaning set forth in Section
5(c)(ii).
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Seller" and "Sellers" have the meanings set forth in the first paragraph
of this Agreement.
"Seller Representatives" has the meaning set forth in Section 8(a)(i).
"Sellers Assets" has the meaning set forth in Section 5(s)(v).
"Sellers Disclosure Schedule" means the disclosure schedule delivered by
the Sellers concurrently with this Agreement, which shall specifically modify
the numbered paragraphs hereof to which it expressly refers.
"Sellers Evaluated Properties" has the meaning set forth in Section
5(r)(i).
"Sellers Financial Statements" has the meaning set forth in Section 5(f).
"Sellers Permits" has the meaning set forth in Section 5(k).
"Sellers Plans" has the meaning set forth in Section 5(n)(i).
"Sellers Project Information" has the meaning set forth in Section
5(r)(iii).
"Sellers Projects" has the meaning set forth in Section 5(r)(iii).
"Sellers Required Statutory Approvals" has the meaning set forth in Section
5(e).
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"Sellers Reserve Reports" has the meaning set forth in Section 5(r)(i).
"Sellers SEC Reports" has the meaning set forth in Section 5(f).
"Shareholders Agreement" has the meaning set forth in Section 5(cc).
"Shares" has the meaning set forth in Section 5(b)(i).
"Subsidiary" means any corporation with respect to which a specified Person
(or a Subsidiary thereof) owns a majority of the common stock or has the power
to vote or direct the voting of sufficient securities to elect a majority of the
directors.
"Surviving Corporation 1" has the meaning set forth in Section 2(a).
"Surviving Corporation 2" has the meaning set forth in Section 2(e).
"TBCA" means the Business Corporation Act of the State of Texas, as
amended.
"Tax Return" has the meaning set forth in Section 5(m)(iii).
"Taxes" has the meaning set forth in Section 5(m)(ii).
"WARN" means the Federal Worker Adjustment and Retraining Notification Act
of 1988.
"Weighted Average Trading Price" has the meaning set forth in Section
4(a)(iii).
SECTION 2. THE MERGERS AND THE DISSOLUTION.
(a) Merger 1. Upon the terms and subject to the conditions of this
Agreement, at the Merger 1 Effective Time (as defined in Section 2(b)) in
accordance with the DGCL, EDI-Sub shall be merged with and into Edisto, the
separate existence of EDI-Sub shall thereupon cease, and Edisto shall be the
surviving corporation in Merger 1, hereinafter sometimes referred to as
"Surviving Corporation 1."
(b) Effective Time of Merger 1. Merger 1 shall become effective at such
time (the "Merger 1 Effective Time") as the Merger 1 Certificate is filed with
the Secretary of State of the State of Delaware in accordance with the DGCL (the
"Merger 1 Filing"). The Merger 1 Filing shall be made simultaneously with or as
soon as practicable after the Closing of the transactions contemplated by this
Agreement in accordance with Section 4(f).
(c) Dissolution. Upon the terms and subject to the conditions of this
Agreement, at the Dissolution Effective Time (as defined in Section 2(d)) in
accordance with the DGCL, Surviving Corporation 1 shall be dissolved and the
separate existence of Surviving Corporation 1 shall thereupon cease.
(d) Effective Time of the Dissolution. The Dissolution shall become
effective at such time (the "Dissolution Effective Time") as the Dissolution
Certificate is filed with the Secretary of State of the State of Delaware in
accordance with the DGCL (the "Dissolution Filing"). The Dissolution Filing
shall be made as soon as practicable following the Merger 1 Effective Time.
(e) Merger 2. Upon the terms and subject to the conditions of this
Agreement and the Merger 2 Articles, at the Merger 2 Effective Time (as defined
in Section 2(f)) in accordance with the DGCL and the TBCA, Convest shall be
merged with and into Parent, the separate existence of Convest shall thereupon
cease, and Parent shall be the surviving corporation in Merger 2 and is
hereinafter sometimes referred to as "Surviving Corporation 2."
(f) Effective Time of Merger 2. Merger 2 shall become effective at such
time (the "Merger 2 Effective Time") as is the later to occur of (i) the time
that the Merger 2 Certificate is filed with the Secretary of State of the State
of Delaware in accordance with the DGCL (the "Merger 2 Delaware Filing"), and
(ii) the time that the Merger 2 Articles are filed with the Secretary of State
of the State of Texas and a certificate of merger is issued thereby in
accordance with the TBCA (the "Merger 2 Texas Filing" and, together with the
Merger 2 Delaware Filing, the "Merger 2 Filings"). The Merger 2 Filings shall be
made as soon as practicable following
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the Dissolution Effective Time. The Merger 1 Filing, the Dissolution Filing and
the Merger 2 Filings are collectively referred to herein as the "Merger
Filings."
(g) Consummation. The Parties acknowledge that it is their mutual desire
and intent to consummate the Mergers as soon as practicable after the date
hereof. Accordingly, the parties shall, subject to the provisions hereof and to
the fiduciary duties of their respective boards of directors, use all reasonable
efforts to consummate, as soon as practicable, the transactions contemplated by
this Agreement in accordance with Section 4(d).
SECTION 3. THE SURVIVING CORPORATIONS.
(a) Certificate of Incorporation; Articles of Incorporation. The
Certificate of Incorporation of EDI-Sub as in effect immediately prior to the
Merger 1 Effective Time shall be the Certificate of Incorporation of Surviving
Corporation 1 after the Merger 1 Effective Time, and thereafter may be amended
in accordance with its terms and as provided in the DGCL. The Certificate of
Incorporation of Parent as in effect immediately prior to the Merger 2 Effective
Time shall be the Certificate of Incorporation of Surviving Corporation 2 after
the Merger 2 Effective Time, and thereafter may be amended in accordance with
its terms and as provided in the DGCL.
(b) By-Laws. The By-laws of EDI-Sub as in effect immediately prior to the
Merger 1 Effective Time shall be the By-laws of Surviving Corporation 1 after
the Merger 1 Effective Time, and thereafter may be amended in accordance with
their terms and as provided by the Certificate of Incorporation of Surviving
Corporation 1 and the DGCL. The By-laws of Parent as in effect immediately prior
to the Merger 2 Effective Time shall be the Bylaws of Surviving Corporation 2
after the Merger 2 Effective Time, and thereafter may be amended in accordance
with their terms and as provided by the Certificate of Incorporation of
Surviving Corporation 2 and the DGCL.
(c) Directors. The directors of EDI-Sub in office immediately prior to the
Merger 1 Effective Time shall be the directors of Surviving Corporation 1 after
the Merger 1 Effective Time, and such directors shall serve in accordance with
the By-laws of Surviving Corporation 1 until their respective successors are
duly elected or appointed and qualified. The directors of Parent in office
immediately prior to the Merger 2 Effective Time shall be the directors of
Surviving Corporation 2 after the Merger 2 Effective Time, and such directors
shall serve in accordance with the By-laws of Surviving Corporation 2 until
their respective successors are duly elected or appointed and qualified.
(d) Officers. The officers of EDI-Sub in office immediately prior to the
Merger 1 Effective Time shall be the officers of Surviving Corporation 1 after
the Merger 1 Effective Time, and such officers shall serve in accordance with
the By-laws of Surviving Corporation 1 until their respective successors are
duly elected or appointed and qualified. The officers of Parent in office
immediately prior to the Merger 2 Effective Time shall be the officers of
Surviving Corporation 2 after the Merger 2 Effective Time, and such officers
shall serve in accordance with the By-laws of Surviving Corporation 2 until
their respective successors are duly elected or appointed and qualified.
SECTION 4. CONVERSION OF SHARES; CLOSING.
(a) Conversion of Sellers' Capital Stock
(i) Conversion of Edisto Shares in Merger 1. At the Merger 1 Effective
Time, by virtue of Merger 1 and without any action on the part of any
holder of any capital stock of Parent or Edisto:
(A) each share of Edisto Common Stock shall, subject to Sections
4(c) and 4(d), be converted into the right to receive the following
(hereinafter referred to as the "Merger 1 Consideration"), without
interest: (x) a fractional interest in a share of Parent Common Stock
equal to $5.064 divided by the Weighted Average Trading Price (the
"Merger 1 Exchange Ratio"); provided, however, (i) if such Weighted
Average Trading Price exceeds $34.96, then the Merger 1 Exchange Ratio
shall be equal to $5.064 divided by $34.96 and (ii) if such Weighted
Average
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Trading Price is less than $28.96, then the Merger 1 Exchange Ratio
shall be equal to $5.064 divided by $28.96, and (y) $4.886 cash (the
"Merger 1 Cash Consideration"); and
(B) each share of capital stock of Edisto, if any, owned by Parent
or any Subsidiary of Parent or held in treasury by Edisto or any
Subsidiary of Edisto immediately prior to the Merger 1 Effective Time
shall be canceled and no consideration shall be paid in exchange
therefor and shall cease to exist from and after the Merger 1 Effective
Time.
(ii) Conversion of Convest Shares in Merger 2. At the Merger 2
Effective Time, by virtue of Merger 2 and without any action on the part of
any holder of any capital stock of Parent or Convest:
(A) each share of Convest Common Stock shall, subject to Sections
4(c) and 4(d), be converted into the right (hereinafter referred to as
the "Merger 2 Consideration") to receive, without interest, a fractional
interest in a share of Parent Common Stock equal to $8.88 divided by the
Weighted Average Trading Price (the "Merger 2 Exchange Ratio");
provided, however, (i) if such Weighted Average Trading Price exceeds
$34.96, then the Merger 2 Exchange Ratio shall be equal to $8.88 divided
by $34.96 and (ii) if such Weighted Average Trading Price is less then
$28.96, then the Merger 2 Exchange Ratio shall be equal to $8.88 divided
by $28.96; and
(B) each share of capital stock of Convest, if any, owned by Parent
or any Subsidiary of Parent or held in treasury by Convest or any
Subsidiary of Convest immediately prior to the Merger 2 Effective Time
shall be canceled and no consideration shall be paid in exchange
therefor and shall cease to exist from and after the Merger 2 Effective
Time.
(iii) The "Weighted Average Trading Price" of Parent Common Stock
shall be calculated by (a) making the following calculation for each of the
ten trading days ending on the day that is two trading days prior to the
Closing Date: (i) grouping together all shares of Parent Common Stock
traded on such day at the same trading price, (ii) multiplying the
aggregate number of shares in each price group by the trading price for
such group to calculate a product (the total sold shares value) for each
group, (iii) adding all of such products from each group and (iv) dividing
the resulting total by the aggregate number of shares traded on such
trading day, and (b) calculating the arithmetic mean of the resulting ten
amounts.
(b) Other Conversions.
(i) At the Merger 1 Effective Time, by virtue of Merger 1 and without
any action on the part of Parent as the sole stockholder of EDI-Sub, each
issued and outstanding share of EDI-Sub Common Stock shall be converted
into one share of common stock, par value $.01 per share, of Surviving
Corporation 1.
(ii) At the Dissolution Effective Time, by virtue of the Dissolution
and without any action on the part of Parent as the sole stockholder of
Surviving Corporation 1, each issued and outstanding share of the common
stock of Surviving Corporation 1 shall be retired and canceled.
(iii) Notwithstanding the provisions of paragraph (ii) hereof,
Surviving Corporation 1 shall continue, pursuant to Section 278 of the
DGCL, solely for the purposes of suit and winding up affairs and Parent
shall remain the sole stockholder of Surviving Corporation 1 entitled to
receive all distributions of assets made pursuant to Section 281 of the
DGCL.
(c) Sellers Options.
(i) Edisto Options. Each outstanding stock option or warrant granted
to employees and directors of Edisto and its Subsidiaries or to any other
Persons with respect to Edisto Common Stock (an "Edisto Option") shall be
either (A) redeemed by Edisto or (B) exercised or canceled in accordance
with its terms, in each case, prior to Merger 1. If any Edisto Option is
redeemed pursuant to this provision, such redemption shall be at a price no
greater than the amount (if any) by which $9.95 exceeds the exercise price
of such Edisto Option (unless otherwise consented to by Parent). The total
amount that may be expended to effect any such redemptions may not exceed
$1,500,000.
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(ii) Convest Options. Each outstanding stock option or warrant granted
to employees and directors of Convest and its Subsidiaries or to any other
Persons with respect to Convest Common Stock (a "Convest Option") shall be
either (A) redeemed by Convest or (B) exercised or canceled in accordance
with its terms, in each case, prior to Merger 1. If any Convest Option is
redeemed pursuant to this provision, such redemption shall be at a price no
greater than the amount (if any) by which $8.88 exceeds the exercise price
of such Convest Option. The total amount that may be expended to effect any
such redemptions may not exceed $2,300,000.
(d) Exchanges.
(i) From and after the Merger 1 Effective Time, each holder of an
outstanding certificate which immediately prior to the Merger 1 Effective
Time represented shares of Edisto Common Stock (an "Edisto Certificate")
shall be entitled to receive in exchange therefor, upon surrender thereof
to the Exchange Agent, a certificate or certificates representing the
number of whole shares of Parent Common Stock to which such holder is
entitled pursuant to Section 4(a)(i)(A) and the amount of Merger 1 Cash
Consideration to which such holder is entitled. From and after the Merger 2
Effective Time, each holder of an outstanding certificate which immediately
prior to the Merger 2 Effective Time represented shares of Convest Common
Stock (a "Convest Certificate") shall be entitled to receive in exchange
therefor, upon surrender thereof to the Exchange Agent, a certificate or
certificates representing the number of whole shares of Parent Common Stock
to which such holder is entitled pursuant to Section 4(a)(ii)(A).
Notwithstanding any other provision of this Agreement, (A) until holders or
transferees of Edisto Certificates or Convest Certificates have surrendered
them for exchange as provided herein, no dividends shall be paid with
respect to any shares represented by such certificates and no payment for
fractional shares shall be made and (B) without regard to when such Edisto
Certificates or Convest Certificates are surrendered for exchange as
provided herein, no interest shall be paid on any dividends or any payment
for fractional shares. Upon surrender of an Edisto Certificate or a Convest
Certificate, respectively, there shall be paid to the holder of such
certificate the amount of any dividends which theretofore became payable,
but which were not paid by reason of the foregoing, with respect to the
number of whole shares of Parent Common Stock represented by the
certificate or certificates issued upon such surrender.
(ii) If any certificate for shares of Parent Common Stock is to be
issued in a name other than that in which the Edisto Certificate or Convest
Certificate surrendered in exchange therefor is registered, it shall be a
condition of such exchange that the person requesting such exchange shall
pay any applicable transfer or other taxes required by reason of such
issuance.
(iii) Promptly after the Merger 2 Effective Time, Parent shall make
available to the Exchange Agent (A) the certificates representing shares of
Parent Common Stock required to effect the exchanges referred to in
paragraphs (d)(i) and (ii) above and (B) funds sufficient for the payment
of the aggregate Merger 1 Cash Consideration required to effect the
exchange referred to in paragraph (i) above and for payment of any
fractional shares referred to in Section 4(e) (the "Exchange Fund"), it
being understood that any and all interest earned on funds made available
to the Exchange Agent pursuant to this Agreement shall be for the account
of, and shall remain the property of, Parent.
(iv) (A) Promptly after the Merger 2 Effective Time, but in no event
later than ten business days, the Exchange Agent shall mail to each holder
of record of an Edisto Certificate (x) a letter of transmittal (which shall
specify that delivery shall be effected, and risk of loss and title to the
Edisto Certificates shall pass, only upon actual delivery of the Edisto
Certificates to the Exchange Agent) and (y) instructions for use in
effecting the surrender of the Edisto Certificates in exchange for
certificates representing shares of Parent Common Stock and Merger 1 Cash
Consideration. Upon surrender of Edisto Certificates for cancellation to
the Exchange Agent, together with a duly executed letter of transmittal and
such other documents as the Exchange Agent shall reasonably require, the
holder of such Edisto Certificates shall be entitled to receive in exchange
therefor (1) a certificate representing that number of whole shares, if
any, of Parent Common Stock into which the shares of Edisto Common Stock
theretofore represented by the Edisto Certificates so surrendered shall
have been converted pursuant to the provisions of Section 4(a)(i)(A)(x),
and (2) the amount of Merger 1 Cash Consideration into
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which the number of shares of Edisto Common Stock previously represented by
such Edisto Certificates so surrendered shall have been converted pursuant
to the provisions of Section 4(a)(i)(A)(y), and the Edisto Certificates so
surrendered shall be canceled. Notwithstanding the foregoing, neither the
Exchange Agent nor any party hereto shall be liable to a holder of shares
of Edisto Common Stock for any shares of Parent Common Stock or dividends
or distributions thereon delivered to a public official pursuant to
applicable abandoned property, escheat or similar laws.
(B) Promptly after the Merger 2 Effective Time, but in no event later
than ten business days, the Exchange Agent shall mail to each holder of
record of a Convest Certificate (x) a letter of transmittal (which shall
specify that delivery shall be effected, and risk of loss and title to the
Convest Certificates shall pass, only upon actual delivery of the Convest
Certificates to the Exchange Agent) and (y) instructions for use in
effecting the surrender of the Convest Certificates in exchange for
certificates representing shares of Parent Common Stock. Upon surrender of
Convest Certificates for cancellation to the Exchange Agent, together with
a duly executed letter of transmittal and such other documents as the
Exchange Agent shall reasonably require, the holder of such Convest
Certificates shall be entitled to receive in exchange therefor a
certificate representing that number of whole shares, if any, of Parent
Common Stock into which the shares of Convest Common Stock theretofore
represented by the Convest Certificates so surrendered shall have been
converted pursuant to the provisions of Section 4(a)(ii)(A), and the
Convest Certificates so surrendered shall be canceled. Notwithstanding the
foregoing, neither the Exchange Agent nor any party hereto shall be liable
to a holder of shares of Convest Common Stock for any shares of Parent
Common Stock or dividends or distributions thereon delivered to a public
official pursuant to applicable abandoned property, escheat or similar
laws.
(v) Promptly following the date which is one year after the Closing
Date, the Exchange Agent shall deliver to Parent all cash (including any
remaining balance in the Exchange Fund), certificates (including any Parent
Common Stock) and other documents in its possession relating to the
transactions described in this Agreement, and the Exchange Agent's duties
shall terminate. Thereafter, each holder of an Edisto Certificate or a
Convest Certificate may surrender such certificate to Parent and (subject
to applicable abandoned property, escheat and similar laws) receive in
exchange therefor the Parent Common Stock and Merger 1 Cash Consideration
(if applicable), without any interest thereon. If outstanding Edisto
Certificates or Convest Certificates are not surrendered prior to six years
after the Merger 2 Effective Time (or, in any particular case, prior to
such earlier date on which any Merger 1 Consideration issuable in respect
of such Edisto Certificates or Merger 2 Consideration issued in respect of
such Convest Certificates or the dividends and other distributions, if any,
described below would otherwise escheat to or become the property of any
governmental unit or agency), the Merger 1 Consideration issuable in
respect of such Edisto Certificates or Merger 2 Consideration issuable in
respect of such Convest Certificates, and the amount of dividends and other
distributions, if any, which have become payable and which thereafter
become payable thereon as provided herein shall, to the extent permitted by
applicable law, become the property of Parent, free and clear of all claims
or interest of any Person previously entitled thereto. Notwithstanding the
foregoing, neither the Exchange Agent or the Parties shall be liable to a
holder of shares of Edisto Common Stock or Convest Common Stock for any
shares of Parent Common Stock or Merger 1 Cash Consideration delivered to a
public official pursuant to applicable abandoned property, escheat or
similar laws.
(vi) In the event any Edisto Certificate or Convest Certificate shall
have been lost, stolen or destroyed, upon the making of an affidavit of
that fact by the person claiming such Edisto Certificate or Convest
Certificate to be lost, stolen or destroyed and, subject to the following
sentence, Surviving Corporation 2 shall issue in exchange for such lost,
stolen or destroyed Edisto Certificate or Convest Certificate the Merger 1
Consideration or Merger 2 Consideration, respectively, deliverable in
respect thereof determined in accordance with this Section 4. Surviving
Corporation 2 may, in its discretion and as a condition precedent to the
issuance thereof, require the owner of such lost, stolen or destroyed
certificate to give such corporation such indemnity, bond or insurance as
it may reasonably direct as protection against any claim that may be made
against such corporation with respect to the certificate alleged to have
been lost, stolen or destroyed.
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(e) No Fractional Securities. Notwithstanding any other provision of this
Agreement, no certificates or scrip for fractional shares of Parent Common Stock
shall be issued in the Mergers and no Parent Common Stock dividend, stock split
or interest shall relate to any fractional security, and such fractional
interests shall not entitle the owner thereof to vote or to any other rights of
a security holder. In lieu of any such fractional share, each holder of shares
of Edisto Common Stock or Convest Common Stock who would otherwise have been
entitled to receive a fraction of a share of Parent Common Stock upon surrender
of Edisto Certificates or Convest Certificates for exchange pursuant to this
Section 4 shall be entitled to receive from the Exchange Agent a cash payment
equal to such fraction multiplied by either (i) the Weighted Average Trading
Price, (ii) $34.96 or (iii) $28.96, depending on which of the foregoing prices
is used for the ratio calculations pursuant to Section 4(a).
(f) Closing. The closing (the "Closing") of the transactions contemplated
by this Agreement shall take place at a location mutually agreeable to Parent,
Edisto and Convest as promptly as practicable following the date on which the
last of the conditions set forth in Section 9 is fulfilled or waived, or at such
other time and place as Parent, Edisto and Convest shall agree. The date on
which the Closing occurs is referred to in this Agreement as the "Closing Date."
(g) Closing of Transfer Books.
(i) Edisto. At and after the Merger 1 Effective Time, holders of
Edisto Certificates shall cease to have any rights as stockholders of
Edisto, except for the right to receive shares of Parent Common Stock and
Merger 1 Cash Consideration pursuant to Section 4(a)(i) and the right to
receive cash for payment of fractional shares pursuant to Section 4(e). At
the Merger 1 Effective Time, the stock transfer books of Edisto shall be
closed and no transfer of shares of Edisto Common Stock which were
outstanding immediately prior to the Merger 1 Effective Time shall
thereafter be made. If, after the Merger 1 Effective Time, subject to the
terms and conditions of this Agreement, Edisto Certificates formerly
representing shares of Edisto Common Stock are presented to Parent, they
shall be canceled and exchanged for shares of Parent Common Stock in
accordance with this Section 4.
(ii) Convest. At and after the Merger 2 Effective Time, holders of
Convest Certificates shall cease to have any rights as stockholders of
Convest, except for the right to receive shares of Parent Common Stock
pursuant to Section 4(a)(ii) and the right to receive cash for payment of
fractional shares pursuant to Section 4(e). At the Merger 2 Effective Time,
the stock transfer books of Convest shall be closed and no transfer of
shares of Convest Common Stock which were outstanding immediately prior to
the Dissolution Effective Time shall thereafter be made. If, after the
Merger 2 Effective Time, subject to the terms and conditions of this
Agreement, Convest Certificates formerly representing shares of Convest
Common Stock are presented to Parent, they shall be canceled and exchanged
for shares of Parent Common Stock in accordance with this Section 4.
(h) Appraisal Rights. Notwithstanding anything in this Agreement to the
contrary, in the event that appraisal rights are available in connection with
Merger 1 pursuant to Section 262 of the DGCL, shares of Edisto Common Stock that
are issued and outstanding immediately prior to the Merger 1 Effective Time and
that are held by Edisto Stockholders who did not vote in favor of Merger 1 and
who comply with all of the relevant provisions of Section 262 of the DGCL (the
"Dissenting Shares") shall not be converted into or be exchangeable for the
right to receive the Merger 1 Consideration, unless and until such Edisto
Stockholders shall have failed to perfect or shall have effectively withdrawn or
lost such right, and such Edisto Stockholders' shares of Edisto Common Stock
shall thereupon be deemed to have been converted into and to have become
exchangeable for the right to receive, as of the Merger 1 Effective Time, the
Merger 1 Consideration without any interest thereon. Edisto shall give Parent
(i) prompt notice of any written demands for appraisal of shares of Edisto
Common Stock received by Edisto and (ii) the opportunity to direct all
negotiations and proceedings with respect to any such demands. Edisto shall not,
without the prior consent of Parent, voluntarily make any payment with respect
to, or settle or offer to settle, any such demands.
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SECTION 5. REPRESENTATIONS AND WARRANTIES OF THE SELLERS.
Except for those matters included in the Sellers Disclosure Schedule, which
inclusion will not be deemed an admission by Sellers that any such matter is
material or has or would have a Material Adverse Effect or represents a Material
Adverse Change, each Seller represents and warrants to the Purchaser as follows:
(a) Organization, Qualification, and Corporate Power. Each of the Sellers
and their respective Subsidiaries is a corporation duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation. Set forth on the Sellers Disclosure Schedule is a list of all
Subsidiaries of each Seller, and a list of those jurisdictions where each of the
Sellers and their respective Subsidiaries are qualified to conduct business.
Each of the Sellers and its respective Subsidiaries is duly authorized to
conduct business and is in good standing under the laws of each jurisdiction
where such qualification is required, except for failures that would not have a
Material Adverse Effect. The Sellers Disclosure Schedule correctly sets forth
the name of each Subsidiary of each Seller, the jurisdiction of its
incorporation and the Persons owning its outstanding capital stock.
(b) Capitalization.
(i) (x) The entire authorized capital stock of Edisto consisted of
50,000,000 shares of Edisto Common Stock and 10,000,000 shares of preferred
stock, of which 14,138,274 shares (excluding treasury shares) of Edisto
Common Stock and no shares of preferred stock were issued and outstanding
as of June 16, 1997, and (y) the entire authorized capital stock of Convest
consisted of 20,000,000 shares of Convest Common Stock and 5,000,000 shares
of preferred stock, of which 10,544,411 shares (excluding treasury shares)
of Convest Common Stock and no shares of preferred stock were issued and
outstanding as of June 16, 1997. Edisto is the beneficial owner of
7,598,771 shares of Convest Common Stock (the "Shares"), free and clear of
any liens, claims, options, charges or other encumbrances.
(ii) Except for employee and director stock options disclosed on
Sellers Disclosure Schedule, there are no outstanding or authorized
options, warrants, purchase rights, subscription rights, conversion rights,
exchange rights, or other contracts or commitments that could require
either Seller to issue, sell, or otherwise cause to become outstanding any
of its capital stock or any other securities convertible into or evidencing
the right to subscribe for any of its capital stock. There are no
outstanding or authorized stock appreciation, phantom stock, profit
participation, or similar rights with respect to either Seller. At and as
of the Closing, neither Seller will be a party to any agreement relating to
the registration under the Securities Act of shares of capital stock of
such Seller or any successor entity. The Sellers Disclosure Schedule shall
indicate, by holder, the shares of capital stock of each Seller subject to
any options, warrants or similar rights, and the exercise price, expiration
date and vesting period thereof.
(c) Authorization of Transaction.
(i) Each Seller has corporate power and authority to execute and
deliver this Agreement, and, subject to the Requisite Stockholder
Approvals, to consummate the transactions contemplated hereby. The Board of
Directors of Edisto, has approved this Agreement and Merger 1 in accordance
with the applicable provisions of the DGCL and (A) recommended approval of
this Agreement and Merger 1 by the Edisto Stockholders, and (B) duly and
validly authorized the execution and delivery of this Agreement by Edisto
and the consummation by Edisto of the transactions contemplated hereby. The
Board of Directors of Convest has approved this Agreement and Merger 2 in
accordance with the applicable provisions of the TBCA and (A) recommended
approval of this Agreement and Merger 2 by the Convest Stockholders, and
(B) duly and validly authorized the execution and delivery of this
Agreement by Convest and the consummation by Convest of the transactions
contemplated hereby. Except for the Requisite Stockholder Approvals, no
other corporate proceedings on the part of either Seller are necessary to
authorize this Agreement or to consummate the transactions so contemplated.
This Agreement has been duly executed and delivered on behalf of each
Seller and, subject to the Requisite Stockholder Approvals, constitutes the
valid and legally binding obligation of each Seller, enforceable against
each Seller in accordance with its terms and conditions, except that (A)
such enforcement may be subject to bankruptcy, insolvency, reorganization,
moratorium or other similar laws
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now or hereafter in effect relating to creditors' rights generally and (B)
the remedy of specific performance and injunctive and other forms of
equitable relief may be subject to equitable defenses and to the discretion
of the court before which any proceeding therefor may be brought.
(ii) The only votes of Edisto Stockholders required to adopt the
Agreement and approve Merger 1 are the affirmative vote of the holders of a
majority of Edisto Common Stock pursuant to Section 216 of the DGCL,
Edisto's Restated Certificate of Incorporation, as amended, and Section 5
of Edisto's By-laws, represented in person or by proxy, at a stockholder
meeting called by Edisto for the purpose of considering and voting upon the
Agreement and Merger 1 or by written consent in lieu of a meeting pursuant
to Section 228 of the DGCL and in accordance with Edisto's Restated
Certificate of Incorporation, as amended; the only votes of Convest
Stockholders required to adopt the Agreement and approve Merger 2 are the
affirmative vote of the holders of two-thirds of the outstanding shares of
Convest Common Stock pursuant to Article XII.A. of Convest's Articles of
Incorporation and Article 5.03 of the TBCA, represented in person or by
proxy, at a stockholder meeting called by Convest for the purpose of
considering and voting upon the Agreement and Merger 2 or by written
consent in lieu of a meeting pursuant to Article XII.B. of Convest's
Articles of Incorporation and Article 9.10.A. of the TBCA (collectively,
the "Requisite Stockholder Approvals"). The Convest Stockholders will not
have any appraisal or dissenter's rights under the TBCA as a result of the
transactions contemplated by this Agreement.
(d) Non-Contravention. The execution and delivery of this Agreement by each
Seller do not violate, conflict with or result in a breach of any provision of,
or constitute a default (or an event which, with notice or lapse of time or
both, would constitute a default) under, or result in the termination of, or
accelerate the performance required by, or result in a right of termination or
acceleration under, or result in the creation of any lien, security interest,
charge, encumbrance or preferential right to purchase upon any of the properties
or assets of either Seller or any of its respective Subsidiaries under any of
the terms, conditions or provisions of (i) the respective charters or by-laws of
either Seller or any of its respective Subsidiaries, (ii) any statute, law,
ordinance, rule, regulation, judgment, decree, order, injunction, writ, permit
or license of any court or governmental authority applicable to either Seller or
any of its respective Subsidiaries or any of their respective properties or
assets or (iii) any note, bond, mortgage, indenture, deed of trust, license,
franchise, permit, concession, contract, lease or other instrument, obligation
or agreement of any kind to which either Seller or any of its respective
Subsidiaries is now a party or by which either Seller or any of its respective
Subsidiaries or any of their respective properties or assets may be bound or
affected. The consummation by the Sellers of the transactions contemplated
hereby will not result in any violation, conflict, breach, termination,
acceleration or creation of liens or preferential right to purchase under any of
the terms, conditions or provisions described in clauses (i) through (iii) of
the preceding sentence, subject (x) in the case of the terms, conditions or
provisions described in clause (ii) above, to obtaining (prior to the Merger 1
Effective Time) the Requisite Stockholder Approvals and (y) in the case of the
terms, conditions or provisions described in clause (iii) above, to obtaining
(prior to the Merger 1 Effective Time) consents required from commercial
lenders, lessors or other third parties as specified on the Sellers Disclosure
Schedule. Excluded from the foregoing sentences of this paragraph (d), insofar
as they apply to the terms, conditions or provisions described in clauses (ii)
and (iii) of the first sentence of this paragraph (d), are such violations,
conflicts, breaches, defaults, terminations, accelerations or creations of
liens, security interests, charges or encumbrances that would not, in the
aggregate, have a Material Adverse Effect.
(e) Approvals. Except for (i) the filing of the Joint Proxy
Statement/Prospectus with the SEC pursuant to the Exchange Act and the
Securities Act, and the declaration of the effectiveness thereof by the SEC and
any filings with various state blue sky authorities and, (ii) the making of the
Merger Filings with the Secretaries of State of the States of Delaware and Texas
in connection with the Mergers (the filings and approvals referred to in clauses
(i) and (ii) are collectively referred to as the "Sellers Required Statutory
Approvals"), no declaration, filing or registration with, or notice to, or
authorization, consent or approval of, any governmental or regulatory body or
authority is necessary for the execution and delivery of this Agreement by
either Seller or the consummation by either Seller of the transactions
contemplated hereby, including pursuant to the HSR Act, other than such
declarations, filings, registrations, notices, authorizations, consents
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or approvals which, if not made or obtained, as the case may be, would not, in
the aggregate, have a Material Adverse Effect.
(f) Reports and Financial Statements. Each Seller has filed with the SEC
all forms, statements, reports and documents (including all exhibits,
post-effective amendments and supplements thereto) required to be filed by it
under each of the Securities Act, the Exchange Act and the respective rules and
regulations thereunder, all of which, as amended if applicable, complied when
filed in all material respects with all applicable requirements of the
appropriate act and the rules and regulations thereunder. Each Seller has
previously delivered to Parent copies (including all exhibits, post-effective
amendments and supplements thereto) of its (a) Annual Reports on Form 10-K for
the fiscal year ended December 31, 1996 and for the two immediately preceding
fiscal years, as filed with the SEC, (b) proxy and information statements
relating to (i) all meetings of its stockholders (whether annual or special) and
(ii) actions by written consent in lieu of a stockholders' meeting from January
1, 1994, until the date hereof, and (c) all other reports and registration
statements filed by each Seller with the SEC since January 1, 1994 (the
documents referred to in clauses (a), (b) and (c) filed prior to the date hereof
are collectively referred to as the "Sellers SEC Reports"). The Sellers SEC
Reports are identified on the Sellers Disclosure Schedule. As of their
respective dates, the Sellers SEC Reports did not contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading. The audited
consolidated financial statements and unaudited interim consolidated financial
statements of each Seller included in such reports (collectively, the "Sellers
Financial Statements") have been prepared in accordance with GAAP applied on a
consistent basis (except as may be indicated therein or in the notes thereto)
and fairly present the financial position of each Seller and their respective
Subsidiaries as of the dates thereof and the results of their operations and
changes in financial position for the periods then ended, subject, in the case
of the unaudited interim financial statements, to normal year-end and audit
adjustments and any other adjustments described therein.
(g) Absence of Undisclosed Liabilities. Except as disclosed in the Sellers
SEC Reports or the Sellers Disclosure Schedule, neither Seller nor any of their
respective Subsidiaries had at December 31, 1996, or has incurred since that
date, any liabilities or obligations (whether absolute, accrued, contingent or
otherwise) of any nature, except liabilities, obligations or contingencies
which: (i) are accrued or reserved against in the Sellers Financial Statements
or reflected in the notes thereto, (ii) would not, in the aggregate, have a
Material Adverse Effect, (iii) have been discharged or paid in full prior to the
date hereof, or (iv) are of a nature not required to be reflected in the
consolidated financial statements of either Seller and their respective
Subsidiaries prepared in accordance with GAAP consistently applied and which
were incurred in the Ordinary Course of Business.
(h) Absence of Certain Changes or Events. Since the date of the most recent
Sellers SEC Report for each Seller that contains consolidated financial
statements of such Seller, there has not been any Material Adverse Change.
(i) Litigation. Except as disclosed in the Sellers SEC Reports or in the
Sellers Disclosure Schedule, there are no claims, suits, actions or proceedings
pending or, to the knowledge of either Seller, threatened against, relating to
or affecting either Seller or any of its respective Subsidiaries, before any
court, governmental department, commission, agency, instrumentality or
authority, or any arbitrator that seek to restrain or enjoin the consummation of
any of the Mergers or which if decided adversely to either Seller or its
respective Subsidiary could, either alone or in the aggregate with all such
claims, actions or proceedings, have a Material Adverse Effect. Except as set
forth in the Sellers SEC Reports, neither Seller nor any of its Subsidiaries is
subject to any judgment, decree, injunction, rule or order of any court,
governmental department, commission, agency, instrumentality or authority or any
arbitrator which prohibits or restricts the consummation of the transactions
contemplated hereby or which if decided adversely to either Seller or its
respective Subsidiary could, either individually or in the aggregate, have a
Material Adverse Effect.
(j) Registration Statement and Information Statement. None of the
information to be supplied by either Seller or its Subsidiaries for inclusion in
(a) the Registration Statement on Form S-4 to be filed under the Securities Act
with the SEC by Parent in connection with the Mergers for the purpose of
registering the
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shares of Parent Common Stock to be issued in the Mergers (the "Registration
Statement") or (b) the proxy statements to be distributed in connection with the
approval of this Agreement and the transactions contemplated hereby by the
stockholders of the respective Sellers (the "Proxy Statements" and, together
with the prospectus included in the Registration Statement, the "Joint Proxy
Statements/Prospectus") will, in the case of the Proxy Statement or any
amendments thereof or supplements thereto, at the time of the mailing of the
Proxy Statement and any amendments or supplements thereto, and at the time of
any action by the stockholders of the respective Sellers in connection with the
transactions contemplated by this Agreement, or, in the case of the Registration
Statement, as amended or supplemented, at the time it becomes effective and at
the time of such action by the stockholders of the respective Sellers, 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 the light of the circumstances under which they are made, not
misleading. The Joint Proxy Statements/Prospectus will, as of its mailing date,
comply as to form in all material respects with all applicable laws, including
the provisions of the Securities Act and the Exchange Act and the rules and
regulations promulgated thereunder, except that no representation is made by
either Seller with respect to information supplied by any Purchaser for
inclusion therein.
(k) No Violation of Law. Except as disclosed in the Sellers SEC Reports or
in the Sellers Disclosure Schedule, neither Seller nor any of its respective
Subsidiaries is in violation of, or has been given notice or been charged with
any violation of, any law, statute, order, rule, regulation, ordinance, or
judgment (including, without limitation, any applicable environmental law,
ordinance or regulation) of any governmental or regulatory body or authority,
except for violations which, in the aggregate, could not have a Material Adverse
Effect. Except as disclosed in the Sellers SEC Reports or in the Sellers
Disclosure Schedule, as of the date of this Agreement, to the knowledge of
either Seller, no investigation or review by any governmental or regulatory body
or authority is pending or threatened, nor has any governmental or regulatory
body or authority indicated an intention to conduct the same, other than, in
each case, those the outcome of which, either individually or in the aggregate,
will not have a Material Adverse Effect. Each Seller and its respective
Subsidiaries has all permits, licenses, franchises, variances, exemptions,
orders and other governmental authorizations, consents and approvals necessary
to conduct its businesses as presently conducted (collectively, the "Sellers
Permits"), except for permits, licenses, franchises, variances, exemptions,
orders, authorizations, consents and approvals the absence of which, alone or in
the aggregate, would not have a Material Adverse Effect. Each Seller and its
respective Subsidiaries is not in violation of the terms of any Sellers Permit,
except for delays in filing reports or violations which, alone or in the
aggregate, would not have a Material Adverse Effect.
(l) Compliance with Agreements. Except as disclosed in the Sellers SEC
Reports, neither Seller nor any of its respective Subsidiaries is in breach or
violation of or in default in the performance or observance of any term or
provision of, and no event has occurred which, with lapse of time or action by a
third party, could result in a default under (i) the respective charter, by-laws
or other similar organizational instruments of either Seller or any of its
Subsidiaries or (ii) any contract, commitment, agreement, indenture, mortgage,
loan agreement, note, lease, bond, license, approval or other instrument to
which either Seller or any of its Subsidiaries is a party or by which any of
them is bound or to which any of their property is subject, other than, in the
case of clause (ii) of this paragraph (l), breaches, violations and defaults
which would not have, either individually or in the aggregate, a Material
Adverse Effect.
(m) Taxes.
(i) Each Seller and its respective Subsidiaries have (A) duly filed
with the appropriate governmental authorities all Tax Returns required to
be filed by them for all periods ending on or prior to the Merger 1
Effective Time, other than those Tax Returns the failure of which to file
would not, either individually or in the aggregate, have a Material Adverse
Effect, and such Tax Returns are true, correct and complete in all material
respects and (B) duly paid in full or made adequate provision for the
payment of all Taxes for all past and current periods, except for those
Taxes, the failure to have paid would not, either individually or in the
aggregate, have a Material Adverse Effect. The liabilities and reserves for
Taxes reflected in each Seller's balance sheet included in such Seller's
latest Sellers SEC Reports are adequate to cover all Taxes for all periods
ending at or prior to the date of such balance sheet and there is no
liability for Taxes for any period beginning after such date other than
Taxes arising in the
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Ordinary Course of Business. There are no material liens for Taxes upon any
property or assets of either Seller or any Subsidiary thereof, except for
liens for Taxes not yet due. Except as set forth on the Sellers Disclosure
Schedule, neither Seller nor its respective Subsidiaries has received
notice of an audit from any taxation authority There are no unresolved
issues of law or fact arising out of a notice of deficiency, proposed
deficiency or assessment from the IRS or any other governmental taxing
authority with respect to Taxes of either Seller or any of its Subsidiaries
which, if decided adversely, singly or in the aggregate, would have a
Material Adverse Effect. Neither Seller nor its respective Subsidiaries has
waived any statute of limitations in respect of Taxes or agreed to any
extension of time with respect to a Tax assessment or deficiency other than
waivers and extensions which are no longer in effect. Neither Seller nor
any of its respective Subsidiaries is a party to any agreement providing
for the allocation or sharing of Taxes with any entity that is not,
directly or indirectly, a wholly owned corporate Subsidiary of such Seller
other than agreements the consequences of which are fully and adequately
reserved for in the Sellers Financial Statements. Neither Seller nor any of
its respective corporate Subsidiaries has, with regard to any assets or
property held, acquired or to be acquired by any of them, filed a consent
to the application of Section 341(f) of the Code.
(ii) For purposes of this Agreement, the term "Taxes" shall mean all
taxes, including, without limitation, income, gross receipts, excise,
property, sales, withholding, social security, occupation, use, service,
license, payroll, franchise, transfer and recording taxes, fees and
charges, windfall profits, severance, customs, import, export, employment
or similar taxes, charges, fees, levies or other assessments imposed by the
United States, or any state, local or foreign government or subdivision or
agency thereof, whether computed on a separate, consolidated, unitary,
combined or any other basis, and such term shall include any interest,
fines, penalties or additional amounts and any interest in respect of any
additions, fines or penalties attributable or imposed or with respect to
any such taxes, charges, fees, levies or other assessments.
(iii) For purposes of this Agreement, the term "Tax Return" shall mean
any return, report or other document or information required to be supplied
to a taxing authority in connection with Taxes.
(n) Employee Benefit Plans; ERISA.
(i) Except as disclosed in the Sellers SEC Reports or Sellers
Disclosure Schedule, at the date hereof, Sellers and their Subsidiaries do
not maintain or contribute to or have any obligation or liability to or
with respect to any material employee benefit plans, including employee
benefit plans within the meaning set forth in Section 3(3) of ERISA,
programs, arrangements, practices or other similar material arrangements
for the provision of benefits (such plans, programs, arrangements or
practices of Sellers and their Subsidiaries being referred to as the
"Sellers Plans"), but excluding any "Multiemployer Plan" within the meaning
of Section 3(37) of ERISA or a "Multiple Employer Plan" within the meaning
of Section 413(c) of the Code. The Sellers Disclosure Schedule lists all
Multiemployer Plans to which any of them makes contributions or has any
obligation or liability to make contributions. Neither Seller nor any of
its respective Subsidiaries maintains or has any liability with respect to
any Multiple Employer Plan, which, individually or in the aggregate, could
have a Material Adverse Effect. Neither Seller nor any of its respective
Subsidiaries has any obligation to create or contribute to any additional
such plan, program, arrangement or practice or to amend any such plan,
program, arrangement or practice so as to increase benefits or
contributions thereunder, except as required under the terms of the Sellers
Plans or to comply with applicable law.
(ii) Except as disclosed in the Sellers SEC Reports or Sellers
Disclosure Schedule, (A) there have been no prohibited transactions within
the meaning of Section 406 or 407 of ERISA or Section 4975 of the Code with
respect to any of the Sellers Plans that could result in penalties, taxes
or liabilities which, singly or in the aggregate, could have a Material
Adverse Effect, (B) except for premiums due, there is no outstanding
material liability, whether measured alone or in the aggregate, under Title
IV of ERISA with respect to any of the Sellers Plans, (C) neither the
Pension Benefit Guaranty Corporation nor any plan administrator has
instituted proceedings to terminate any of the Sellers Plans subject to
Title IV of
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ERISA other than in a "standard termination" described in Section 4041(b)
of ERISA, (D) none of the Sellers Plans has incurred any "accumulated
funding deficiency" (as defined in Section 302 of ERISA and Section 412 of
the Code), whether or not waived, as of the last day of the most recent
fiscal year of each of the Sellers Plans ended prior to the date of this
Agreement, (E) the current present value of all projected benefit
obligations under each of the Sellers Plans which is subject to Title IV of
ERISA did not, as of its latest valuation date, exceed the then current
value of the assets of such plan allocable to such benefit liabilities by
more than the amount, if any, disclosed in the Sellers SEC Reports as of
March 31, 1997, based upon reasonable actuarial assumptions currently
utilized for such Sellers Plan, (F) each of the Sellers Plans has been
operated and administered in all material respects in accordance with
applicable laws during the period of time covered by the applicable statute
of limitations, (G) each of the Sellers Plans which is intended to be
"qualified" within the meaning of Section 401(a) of the Code has been
determined by the IRS to be so qualified and such determination has not
been modified, revoked or limited by failure to satisfy any condition
thereof or by a subsequent amendment thereto or a failure to amend, except
that it may be necessary to make additional amendments retroactively to
maintain the "qualified" status of such Sellers Plans, and the period for
making any such necessary retroactive amendments has not expired, (H) with
respect to Multiemployer Plans, neither Seller nor any of its respective
Subsidiaries has made or suffered a "complete withdrawal" or a "partial
withdrawal," as such terms are respectively defined in Sections 4203, 4204
and 4205 of ERISA and, to the best knowledge of each Seller and its
respective Subsidiaries, no event has occurred or is expected to occur
which presents a material risk of a complete or partial withdrawal under
said Sections 4203, 4204 and 4205, (I) to the best knowledge of each Seller
and its respective Subsidiaries, there are no material pending, threatened
or anticipated claims involving any of the Sellers Plans other than claims
for benefits in the ordinary course, (J) each Seller and its respective
Subsidiaries have no current material liability under Title IV of ERISA,
and each Seller and its respective Subsidiaries do not reasonably
anticipate that any such liability will be asserted against either Seller
or any of its Subsidiaries, and (K) no act, omission or transaction
(individually or in the aggregate) has occurred with respect to any Sellers
Plan that has resulted or could result in any material liability (direct or
indirect) of either Seller or any respective Subsidiary under Sections 409
or 502(c)(i) or (l) of ERISA or Chapter 43 of Subtitle (A) of the Code.
None of the Sellers Plans has an "accumulated funding deficiency" (as
defined in Section 302 of ERISA and Section 412 of the Code) or is required
to provide security to a Sellers Plan pursuant to Section 401(a)(29) of the
Code. Each Sellers Plan can be unilaterally terminated by a Seller or a
Subsidiary at any time without material liability, other than for amounts
previously reflected in the financial statements (or notes thereto)
included in the Sellers SEC Reports.
(iii) The Sellers SEC Reports or the Sellers Disclosure Schedule
contain a true and complete summary or list of or otherwise describe all
material employment contracts and other employee benefit arrangements with
"change of control" or similar provisions and all severance agreements with
executive officers (including, in each case, the amount of any payments
which may be due as a result of the transactions contemplated by this
Agreement). Section 5(n)(iii) of the Sellers Disclosure Schedule sets forth
in reasonable detail all severance pay, vacation pay, stay bonuses or other
payments arising out of or otherwise relating or due to the termination or
resignation of any officers, directors or employees of either Seller or
their Subsidiaries or otherwise arising out of or relating or due to the
transactions contemplated by this Agreement. Any payments described in the
foregoing sentence have been approved by all necessary corporate action by
the Board of Directors of each Seller.
(iv) Except as set forth in the Sellers Disclosure Schedule, there are
no agreements which will or may provide payments to any officer, employee,
stockholder, or highly compensated individual which will be "parachute
payments" under Code Section 280G that are nondeductible to the Sellers or
subject to tax under Code Section 4999 for which a Seller or any ERISA
Affiliate would have withholding liability.
(o) Labor Controversies. Except as disclosed in the Sellers SEC Reports,
(i) there are no significant controversies pending or, to the knowledge of
either Seller, threatened between either Seller or its Subsidiaries and any
representatives of any of their employees and (ii) to the knowledge of either
Seller, there are no material organizational efforts presently being made
involving any of the presently unorganized employees of
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either Seller and its Subsidiaries except for such controversies and
organizational efforts which, singly or in the aggregate, could not reasonably
be expected to have a Material Adverse Effect.
(p) Environmental Matters.
(i) Except as disclosed in the Sellers SEC Reports or the Sellers
Disclosure Schedule, (A) each Seller and its respective Subsidiaries have
conducted their respective businesses in compliance with all applicable
Environmental Laws, including, without limitation, having all permits,
licenses and other approvals and authorizations necessary for the operation
of their respective businesses as presently conducted, (B) none of the
properties owned by either Seller or any of its respective Subsidiaries
contain any Hazardous Substance as a result of any activity of either
Seller or any of its respective Subsidiaries in amounts exceeding the
levels permitted by applicable Environmental Laws, (C) neither Seller nor
any of its respective Subsidiaries has received any notices, demand letters
or requests for information from any Federal, state, local or foreign
governmental entity or third party indicating that either Seller or any of
its respective Subsidiaries may be in violation of, or liable under, any
Environmental Law in connection with the ownership or operation of their
businesses, (D) there are no civil, criminal or administrative actions,
suits, demands, claims, hearings, investigations or proceedings pending or
threatened, against either Seller or any of its respective Subsidiaries
relating to any violation, or alleged violation, of any Environmental Law,
(E) no reports have been filed, or are required to be filed, by either
Seller or any of its respective Subsidiaries concerning the release of any
Hazardous Substance or the threatened or actual violation of any
Environmental Law, (F) no Hazardous Substance has been disposed of,
released or transported in violation of any applicable Environmental Law
from any properties owned by either Seller or any of its respective
Subsidiaries as a result of any activity of either Seller or any of its
respective Subsidiaries during the time such properties were owned, leased
or operated by either Seller or any of its respective Subsidiaries, (G)
there have been no environmental investigations, studies, audits, tests,
reviews by or which are in the possession of either Seller or its
respective Subsidiaries relating to the activities of a Seller or its
respective Subsidiaries which have not been delivered to Parent prior to
the date hereof, (H) there are no underground storage tanks on, in or under
any properties owned by either Seller or any of its respective Subsidiaries
and no underground storage tanks have been closed or removed from any of
such properties during the time such properties were owned, leased or
operated by either Seller or any of its respective Subsidiaries, (I) there
is no asbestos or asbestos containing material present in any of the
properties owned by either Seller and its respective Subsidiaries, and no
asbestos has been removed from any of such properties during the time such
properties were owned, leased or operated by such Seller or any of its
respective Subsidiaries, and (J) neither Seller, its respective
Subsidiaries nor any of their respective properties are subject to any
liabilities or expenditures (fixed or contingent) relating to any suit,
settlement, court order, administrative order, regulatory requirement,
judgment or claim asserted or arising under any Environmental Law, except
for violations of the foregoing clauses (A) through (J) that, singly or in
the aggregate, would not reasonably be expected to have a Material Adverse
Effect.
(ii) As used herein, "Environmental Law" means any Federal, state,
local or foreign law, statute, ordinance, rule, regulation, code, license,
permit, authorization, approval, consent, legal doctrine, order, judgment,
decree, injunction, requirement or agreement with any governmental entity
relating to (x) the protection, preservation or restoration of the
environment (including, without limitation, air, water vapor, surface
water, groundwater, drinking water supply, surface land, subsurface land,
plant and animal life or any other natural resource) or to human health or
safety or (y) the exposure to, or the use, storage, recycling, treatment,
generation, transportation, processing, handling, labeling, production,
release or disposal of Hazardous Substances, in each case as amended and as
in effect on the Closing Date. The term "Environmental Law" includes,
without limitation, (A) the Federal Comprehensive Environmental Response
Compensation and Liability Act of 1980, the Superfund Amendments and
Reauthorization Act, the Federal Water Pollution Control Act of 1972, the
Federal Clean Air Act, the Federal Clean Water Act, the Federal Resource
Conservation and Recovery Act of 1976 (including the Hazardous and Solid
Waste Amendments thereto), the Federal Solid Waste Disposal Act and the
Federal Toxic Substances Control Act, the Federal Insecticide, Fungicide
and Rodenticide Act, and the Federal Occupational Safety and Health Act of
1970, each as amended and as in effect on the Closing Date, and
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(B) any common law or equitable doctrine (including, without limitation,
injunctive relief and tort doctrines such as negligence, nuisance, trespass
and strict liability) that may impose liability or obligations for injuries
or damages due to, or threatened as a result of, the presence of, effects
of or exposure to any Hazardous Substance.
(iii) As used herein, "Hazardous Substance" means any substance
presently or hereafter listed, defined, designated or classified as
hazardous, toxic, radioactive, or dangerous, or otherwise regulated, under
any Environmental Law. Hazardous Substance includes any substance to which
exposure is regulated by any government authority or any Environmental Law
including, without limitation, any toxic waste, pollutant, contaminant,
hazardous substance, toxic substance, hazardous waste, special waste,
industrial substance or petroleum or any derivative or by-product thereof,
radon, radioactive material, asbestos, or asbestos containing material,
urea formaldehyde foam insulation, lead or polychlorinated biphenyls.
(q) Non-competition Agreements. Except as disclosed in the Sellers
Disclosure Schedule, neither Seller nor any respective Subsidiary thereof is a
party to any agreement which purports to restrict or prohibit in any material
respect any of them from, directly or indirectly, engaging in any material
business currently engaged in by either Seller or Parent, or any corporations
affiliated with either of them. None of the Sellers' officers, directors or key
employees is a party to any agreement which, by virtue of such person's
relationship with a Seller, restricts in any material respect either Seller or
any respective Subsidiary thereof from, directly or indirectly, engaging in any
of the businesses described above.
(r) Reserve Report and Exploration Project Information.
(i) The Sellers have made available to the Purchasers certain reports
dated February 25, 1997 prepared by the independent petroleum engineering
firm of Ryder Scott Company (with respect to offshore properties of Convest
as of December 31, 1996) and dated February 24, 1997 by the independent
petroleum engineering firm of Netherland Sewell & Associates, Inc. (with
respect to onshore properties of Convest as of January 1, 1997), true and
correct copies of which have been previously provided to the Parent
(together, the "Sellers Reserve Reports"). The Sellers Reserve Reports are
the latest reserve reports available to the Sellers relating to their and
their Subsidiaries' reserves of oil and gas. The oil and gas properties
evaluated in the Sellers Reserve Reports are referred to herein as the
"Sellers Evaluated Properties." The Sellers have provided no false or
misleading information to and have not withheld any material information
from Ryder Scott Company or Netherland Sewell and Associates, with respect
to the preparation of the Sellers Reserve Reports.
(ii) Except as set forth on Sellers Disclosure Schedule, the Sellers
are not aware of any facts or circumstances that should reasonably cause
the Sellers to conclude that any of the information that was supplied by
the Sellers to Ryder Scott Company or Netherland Sewell and Associates, in
connection with their preparation of the Sellers Reserve Reports is not
currently correct in all material respects (other than normal depletion by
production in the ordinary course), and to the Sellers' knowledge the
information utilized in preparing the Sellers Reserve Reports is correct in
all material respects.
(iii) The Sellers have made available to Parent certain information
(the "Sellers Project Information") with respect to exploration projects in
which the Sellers are currently engaged (the "Sellers Projects"), which
information and Sellers Projects are set forth on the Sellers Disclosure
Schedule. The Sellers Project Information provided by the Sellers does not
contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements contained therein not misleading.
(s) Title.
(i) The leasehold, royalty, mineral and similar interests owned by
each Seller and their respective Subsidiaries entitle it to receive not
less than the interest set forth in the Sellers Reserve Reports as the Net
Revenue Interest from all oil and gas and associated minerals produced,
saved and marketed in respect of each Sellers Evaluated Property listed in
the Sellers Reserve Reports, and obligate it to bear costs and expenses
relating to the maintenance and development of, and the operations with
respect to, each such Sellers Evaluated Property in an amount not greater
than the Working Interest set forth in the
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Sellers Reserve Reports (unless there is a corresponding increase in the
Net Revenue Interest), except for such deficiencies which, individually or
in the aggregate, would not have a Material Adverse Effect. Except as noted
in the Sellers Reserve Reports, the Net Revenue Interest and the Working
Interest with respect to each such Sellers Evaluated Property are not
subject to change or adjustment upon the occurrence of payout or any
similar or other event.
(ii) The Sellers and their Subsidiaries have, and on the Closing Date
will have, good and valid title to all of their leasehold, royalty, mineral
and similar interests in the Sellers Evaluated Properties, other than the
properties disposed of since January 1, 1997 as disclosed on the Sellers
Disclosure Schedule or since the date hereof with the written consent of
the Parent, free and clear of all encumbrances and title defects except for
(A) the encumbrances and title defects specifically described in the
Sellers Disclosure Schedule, (B) statutory liens not yet delinquent, (C)
imperfections of title, easements, liens (including operator's liens) and
encumbrances, the character, amount or extent of which, individually or in
the aggregate, would not have a Material Adverse Effect, (D) contracts and
agreements for the sale of oil and gas entered into in the Ordinary Course
of Business, (E) lessor's royalties, overriding royalties, and division
orders, reversionary interests and similar burdens and all existing
operating agreements and unit agreements, if the net cumulative effect of
the same does not operate to reduce the Net Revenue Interests of the
Sellers Evaluated Properties to less than the Net Revenue Interests set
forth in the Sellers Reserve Report or increase the Working Interests of
the Sellers Evaluated Properties to more than the Working Interests set
forth in the Sellers Reserve Report (unless there is a corresponding
increase in the Net Revenue Interests); (F) any and all federal and state
regulatory orders and rules to which the Sellers Evaluated Properties are
presently subject; (G) preferential rights to purchase and required
third-party consents to assignments and similar agreements (none of which
arise or are required in connection with the transactions contemplated by
this Agreement); (H) liens for Taxes not due or not delinquent at the time
of Closing or the validity of which are being contested in good faith by
appropriate actions; (I) all rights to consent by, required notices to,
filings with, or other actions by governmental entities in connection with
the sale or conveyance of oil, gas and mineral leases or interests therein
if the same are customarily obtained after such sale or conveyance; (J)
easements, rights-of-way, servitudes, permits, surface leases and other
rights in respect of surface operations, pipelines, grazing, logging,
canals, ditches, reservoirs or the like; and easements for streets, alleys,
highways, pipelines, telephone lines, power lines, railways and other
easements and rights-of-way, on, over or in respect of any of the Sellers
Evaluated Properties; (K) liens of operators relating to obligations not
yet due or not delinquent; and (L) title deficiencies commonly encountered
in the oil and gas business which would not be considered material by a
reasonable and prudent person engaged in the business of the ownership,
development and operating of oil and gas properties with knowledge of all
the facts and appreciation of their legal significance.
(iii) Except where the failure would not have a Material Adverse
Effect, (A) neither Seller nor its respective Subsidiaries are dependent
with respect to the Sellers Evaluated Properties on the right to use the
properties of others, except under valid and enforceable leases, contracts,
pooling or unitization agreements, rights or other arrangements, (B) the
Sellers and their respective Subsidiaries own, or have the right to use
under valid and enforceable leases, contracts, rights or other
arrangements, all gas processing facilities necessary for the current
operations of the Sellers and their respective Subsidiaries, (C) all
buildings, machinery and equipment currently used in the operations related
to the Sellers Evaluated Properties are adequate for their normal operation
consistent with industry practice, are in good working order and conform
with all applicable Environmental Laws and (D) there is no pending or
threatened condemnation or expropriation of any part of the Sellers
Evaluated Properties.
(iv) Except where the failure would not have a Material Adverse
Effect, the Sellers Evaluated Properties are being developed, operated and
maintained in compliance in all material respects with all leases,
contracts and commitments to which either Seller or any respective
Subsidiary is a party or by which either Seller or any respective
Subsidiary or any of the Sellers Evaluated Properties is bound.
(v) The Sellers and the Subsidiaries have good and valid title to all
the properties and assets of every kind, character and description (real,
personal or mixed, tangible and intangible), including, without limitation,
all parcels of real property, pipelines, rights-of-way and easements and
other
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incidental rights and permits, but excluding the Sellers Evaluated
Properties, reflected in the Sellers Financial Statements or which would
have been reflected in the Sellers Financial Statements if acquired prior
to March 31, 1997, (the "Sellers Assets") free and clear of all
encumbrances of any nature except for (A) the encumbrances and title
defects specifically described in the Sellers Disclosure Schedule; (B)
mortgages and encumbrances which secure indebtedness or obligations which
are properly reflected in the Sellers Financial Statements; (C) liens for
Taxes not yet payable or any Taxes being contested in good faith; (D) liens
arising as a matter of law in the ordinary course of business, provided
that the obligations secured by such liens are not delinquent or are being
contested in good faith; (E) such imperfections of title and encumbrances
which, individually or in the aggregate, would not have a Material Adverse
Effect; (F) any and all federal and state regulatory orders and rules to
which the Sellers Assets are presently subject; (G) preferential rights to
purchase and required third-party consents to assignments and similar
agreements, none of which arise or are required in connection with the
transactions contemplated by this Agreement; (H) statutory liens not yet
delinquent; (I) all rights to consent by, required notices to, filings
with, or other actions by governmental entities in connection with the sale
or conveyance of oil, gas and mineral leases or interests therein if the
same are customarily obtained after such sale or conveyance; (J) easements,
rights-of-way, servitude, permits, surface leases and other rights in
respect of surface operations, pipelines, grazing, logging, canals,
ditches, reservoirs or the like; and easements for streets, alleys,
highways, pipelines, telephone lines, power lines, railways and other
easements and rights-of-way, on, over or in respect of any of the Sellers
Assets; (K) liens of operators relating to obligations not yet due or not
delinquent; and (L) title deficiencies commonly encountered in the oil and
gas business which will not have a Material Adverse Effect. The Sellers and
the Subsidiaries have valid leasehold interests in all leases reflected as
capital leases in the Sellers Financial Statements and, to the knowledge of
the Sellers, generally have the right to use all other property and assets
as to which they do not have title but which are currently being used in
the conduct of each Seller's business, except any rights of use the loss of
which would not have a Material Adverse Effect.
(t) Insurance. The Sellers Disclosure Schedule lists all material insurance
policies covering the Sellers Assets, the Sellers Evaluated Properties,
employees and operations of the Sellers and their respective Subsidiaries as of
the date hereof (other than insurance owned or held by operators for those
Sellers Assets or Sellers Evaluated Properties where a party other than a Seller
or one of its Subsidiaries is the operator). Such policies are in full force and
effect, there are no defaults thereunder. Except for claims previously made, to
the knowledge of either Seller or its respective Subsidiaries, there is no basis
for any action or claim nor any facts which would reasonably be anticipated to
give rise to such action or claim. To the knowledge of either Seller or its
respective Subsidiaries, there does not exist any event that, with the giving of
notice or the lapse of time or both, would constitute such a default. Neither
Seller nor any of its respective Subsidiaries is a co-insurer under any such
policies of insurance except to the extent of the amount of the deductible,
self-retention or similar amounts applicable to such policies.
(u) Allowable Production Quotas. To the knowledge of either Seller, no
production from any of the Sellers Evaluated Properties prior to the date hereof
was in excess of allowable production quotas allowed or permitted by any
governmental body having jurisdiction thereover so as to subject any production
from such Sellers Evaluated Property on or after the date hereof to restrictions
or penalties except as will not have a Material Adverse Effect.
(v) Gas Payments; Balancing. (i) There are no material claims asserted or
material disputes evidenced in writing under any contract to which either Seller
or any Subsidiary thereof is a party regarding payments for natural gas not
taken pursuant to any "take or pay" or similar arrangement; (ii) the Sellers and
their respective Subsidiaries have not received any material quantity of natural
gas or liquids to be paid for thereafter other than in the normal cycle of
billing or received prepayments, advance payments or loans which will require a
Seller or any of its respective Subsidiaries to perform services or deliver
hydrocarbons under such contracts on or after the Closing Date without being
currently paid therefor; (iii) no sales contract obligates either Seller or any
Subsidiary thereof to deliver specific minimum volumes of gas; (iv) no contract
obligates either Seller or any Subsidiary thereof to sell gas at prices
substantially lower than the prevailing
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market prices or to purchase gas at prices substantially higher than prevailing
market prices; (v) the Sellers and their respective Subsidiaries have made or
will, prior to the Closing Date, make all payments due to producers or others
for all gas and liquids delivered into any of their respective plants for which
payment for same is due prior to the Closing Date, including, without
limitation, all payments due for the purchase of gas and liquids under any
contract; (vi) to the knowledge of either Seller or any of its respective
Subsidiaries, all gas delivered into any of the plants has been purchased, and
all residue gas from the plants has been sold, in compliance with the Natural
Gas Policy Act of 1978, all orders, rules and regulations of the Federal Energy
Regulatory Commission and all other applicable laws, orders, rules and
regulations; (vii) to the knowledge of either Seller or any of its respective
Subsidiaries, there exists no material claim or dispute with respect to the
purchase, or the failure to purchase, or pay for whether or not purchased, gas
under any gas purchase contracts to which either Seller or any Subsidiary
thereof is a party or the applicable price to be paid for gas delivered, or
residue gas or liquids or products sold from the plants; and (viii) none of the
Sellers Evaluated Properties or the Sellers Assets is subject to requirements to
make Btu adjustments or affect gas or liquids balancing in favor of third
parties which would result in either Seller or any Subsidiary thereof being
required to deliver material volumes of gas or liquids after the Closing Date or
otherwise to compensate a third party for gas or liquids receipts into, or
deliveries from, the plants which occurred prior to the Closing Date. The
Sellers Disclosure Schedule sets forth an estimate of the amount of any net
imbalances and is within ten percent (10%) of the actual amount.
(w) No Prepayments Made or Refunds Owed. Sellers and their respective
Subsidiaries have not received any prepayment, advance payment, deposits or
similar payments, and have no refund obligation, other than obligations in the
aggregate of less than $250,000 incurred in the Ordinary Course of Business,
with respect to any gas or products purchased, sold, gathered, processed or
marketed through their plants. The Sellers and their respective Subsidiaries
have not received any compensation for gathering or processing services relating
to the plants which would be subject to any refund or create any repayment
obligation, other than obligations of less than $250,000 incurred in the
Ordinary Course of Business, either by or to the Sellers and their respective
Subsidiaries, and the Sellers and their respective Subsidiaries are not aware of
any basis for a claim that a refund is due.
(x) Drilling Obligations. The Sellers and their respective Subsidiaries do
not have any material drilling obligations or other development commitments that
are not terminable at will by the Seller or the Subsidiary party thereto without
penalty, other than commitments and obligations that arose in the Ordinary
Course of Business where the sole consequence to the Seller or the Subsidiary
party thereto for a failure to participate is to suffer a "non-consent" penalty
or forfeit an interest in the undeveloped lands subject to the commitment or
obligation.
(y) Development Operations. To the knowledge of either Seller or its
respective Subsidiaries, there are in existence no facts or circumstances that
should reasonably cause a Seller or a Subsidiary to conclude that any
development operations on the Sellers Evaluated Properties that are contemplated
by the Sellers Reserve Report will not be permitted under applicable laws and
governmental rules and regulations or that any third party may have a reasonable
basis to cause any court or governmental agency with jurisdiction over such
operations to cause the suspension or termination of such operations.
(z) Regulatory Authority. As of the date hereof, neither Seller nor any of
its respective Subsidiaries is subject to regulation as (a) a "holding company,"
an "affiliate" of a "holding company" or a "subsidiary company" of a "holding
company" or a "public utility," as each of such terms is defined in the Public
Utility Holding Company Act of 1935, as amended, and the rules and regulations
thereunder; (b) a gas utility or utility under applicable state law; and (c) an
"investment company," or a company "controlled" by an "investment company,"
within the meaning of the Investment Company Act of 1940, as amended.
(aa) Full Disclosure. To the knowledge of either Seller, the
representations, warranties or other statements by the Sellers in this Agreement
or in the Sellers Disclosure Schedule or Exhibits hereto or any documents
distributed generally to the Edisto Stockholders or the Convest Stockholders,
taken as a whole, do not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements contained therein not
misleading. There is, to the knowledge of either Seller, no fact pertaining
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particularly to Sellers Evaluated Properties or the Sellers Assets (as opposed
to public information concerning general industry or economic conditions or
governmental policies) which has a Material Adverse Effect on or in the future
would be reasonably expected to have a Material Adverse Effect on the Sellers
Evaluated Properties or the Sellers Assets or the ownership, operation or
maintenance of any of the Sellers Evaluated Properties or the Sellers Assets
that has not been disclosed to the Purchaser.
(bb) Certain Agreements. There are no contracts, agreements, arrangements
or understandings to which either Seller or any of their Subsidiaries is a party
which create, govern or purport to govern the right of another party (other than
Purchasers) to acquire either Seller or any of their Subsidiaries.
(cc) Shareholders Agreement. Set forth on the Form 10-K/A of each Seller,
as filed with the SEC on April 30, 1997, is a list of the officers, directors
and owners of 5% or more of the capital stock of the respective Sellers. Edisto
has obtained from The TCW Group, Inc. and its affiliates and delivered to Parent
(i) a written agreement (a "Shareholders Agreement") to the effect that such
person will vote shares of Edisto Common Stock and Convest Common Stock
beneficially owned by such person in favor of the Mergers, and (ii) an Affiliate
Agreement.
(dd) Brokers and Finders. Except for the fees and expenses payable to
Petrie Parkman and Rauscher Pierce, which fees are reflected in their agreements
with Sellers (a copy of which has been delivered to the Parent), Sellers have
not entered into any contract, arrangement or understanding with any person or
firm which may result in the obligation of either Seller to pay any finder's
fees, brokerage or agent commissions or other like payments in connection with
the transactions contemplated hereby. Except for the fees and expenses paid or
payable to Petrie Parkman and to Rauscher Pierce, there is no claim for payment
by either Seller of any investment banking fees, finder's fees, brokerage or
agent commissions or other like payments in connection with the negotiations
leading to this Agreement or the consummation of the transactions contemplated
hereby.
(ee) Opinion of Financial Advisor. The financial advisor of Edisto,
Rauscher Pierce, has rendered a written opinion to the Board of Directors of
Edisto to the effect that the Merger 1 Consideration is fair from a financial
point of view to the Edisto Stockholders. The financial advisor of Convest,
Petrie Parkman, has rendered a written opinion to the Board of Directors of
Convest to the effect that the Merger 2 Consideration is fair from a financial
point of view to the Convest Stockholders.
(ff) Edisto Cash Balance. As of the date of this Agreement and as of the
Closing Date, Edisto will have at least $68.0 million in cash on hand (the
"Edisto Cash Balance"); provided, however, that (i) the Edisto Cash Balance may
be reduced by an amount not to exceed an aggregate of $1,500,000 in order to
effect the redemption or cancellation of any Edisto Option prior to Merger 1 in
accordance with the terms of Section 4(c)(i), and (ii) Edisto and Convest may
collectively expend an amount not to exceed an aggregate of $2,300,000 in order
to effect the severance payments set forth in Section 5(n)(iii) of the Sellers
Disclosure Schedule. The Edisto Cash Balance is not, and at the Closing Date
will not be, subject to any pledge, encumbrance, lien or other limitation
prohibiting its free use or distribution by Edisto or its successors.
(gg) Affiliate Transactions. To Sellers knowledge there are no transactions
between (i) the Sellers or any of their Subsidiaries and (ii) any of their
Affiliates, which are required to be disclosed in the Sellers SEC Reports which
are not disclosed.
(hh) WARN. Sellers Disclosure Schedule sets forth the total number of
employees of the Sellers and their Subsidiaries and independent contractors as
determined in accordance with WARN or any similar applicable law. The
obligations of Sellers and their Subsidiaries under this Agreement, including,
without limitation, Section 8(d), will not give rise to any notice requirement
or payment obligation or liability under WARN on the part of Sellers or
Purchasers or their respective Subsidiaries.
(ii) Cumulative Representations. To the extent the representations and
warranties of Sellers set forth herein are modified by the terms Material
Adverse Change or Material Adverse Effect or similar terms, the effect of the
occurrence of all such effects or changes would not in the aggregate cause a
Material Adverse Change or Material Adverse Effect on Sellers and their
respective Subsidiaries taken as a whole.
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SECTION 6. REPRESENTATIONS AND WARRANTIES OF PURCHASERS.
Except for those matters included in the Purchasers Disclosure Schedule,
which inclusion will not be deemed an admission by Purchasers that any such
matter is material or has or would have a Material Adverse Effect or represents
a Material Adverse Change, each Purchaser represents and warrants to the Sellers
as follows:
(a) Organization, Qualification, and Corporate Power. Each of the
Purchasers is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation. Each of the
Purchasers is duly authorized to conduct business and is in good standing under
the laws of each jurisdiction where such qualification is required, except for
failures that would not have a Material Adverse Effect, and has not received
notice of an audit from any state taxation authority.
(b) Capitalization. The entire authorized capital stock of Parent consisted
of 50,000,000 shares of Parent Common Stock and 5,000,000 shares of preferred
stock, of which 22,673,749 shares of Parent Common Stock and no shares of
preferred stock were issued and outstanding as of May 31, 1997. The shares of
Parent Common Stock to be issued pursuant to this Agreement will, when issued,
be duly authorized, validly issued, fully paid and nonassessable.
(c) Authorization of Transaction. Each Purchaser has corporate power and
authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. No other corporate proceedings on the part of
the Purchasers are necessary to authorize this Agreement or to consummate the
transactions so contemplated. The Parent, as sole shareholder of Edisto, will
take the necessary action to effect the Dissolution immediately following the
Merger 1 Effective Time. This Agreement has been duly executed and delivered on
behalf of each Purchaser and constitutes the valid and legally binding
obligation of each Purchaser, enforceable against each Purchaser in accordance
with its terms and conditions, except that (i) such enforcement may be subject
to bankruptcy, insolvency, reorganization, moratorium or other similar laws now
or hereafter in effect relating to creditors' rights and (ii) the remedy of
specific performance and injunctive and other forms of equitable relief may be
subject to equitable defenses and to the discretion of the court before which
any proceeding therefor may be brought.
(d) Non-Contravention. Except as disclosed in the Purchasers Disclosure
Schedule, the execution and delivery of this Agreement by each Purchaser do not
violate, conflict with or result in a breach of any provision of, or constitute
a default (or an event which, with notice or lapse of time or both, would
constitute a default) under, or result in the termination of, or accelerate the
performance required by, or result in a right of termination or acceleration
under, or result in the creation of any lien, security interest, charge,
encumbrance or preferential right to purchase upon any of the properties or
assets of either Purchaser under any of the terms, conditions or provisions of
(i) the respective charters or by-laws of either Purchaser, (ii) any statute,
law, ordinance, rule, regulation, judgment, decree, order, injunction, writ,
permit or license of any court or governmental authority applicable to either
Purchaser or any of their respective properties or assets or (iii) any note,
bond, mortgage, indenture, deed of trust, license, franchise, permit,
concession, contract, lease or other instrument, obligation or agreement of any
kind to which either Purchaser is now a party or by which either Purchaser or
any of their respective properties or assets may be bound or affected. Except as
disclosed in the Purchasers Disclosure Schedule, the consummation by the
Purchasers of the transactions contemplated hereby will not result in any
violation, conflict, breach, termination, acceleration or creation of liens or
preferential right to purchase under any of the terms, conditions or provisions
described in clauses (i) through (iii) of the preceding sentence. Excluded from
the foregoing sentences of this paragraph (d), insofar as they apply to the
terms, conditions or provisions described in clauses (ii) and (iii) of the first
sentence of this paragraph (d), are such violations, conflicts, breaches,
defaults, terminations, accelerations or creations of liens, security interests,
charges or encumbrances that would not, in the aggregate, have a Material
Adverse Effect.
(e) Approvals. Except for (i) the filing of the Joint Proxy
Statements/Prospectus with the SEC pursuant to the Exchange Act and the
Securities Act, and the declaration of the effectiveness thereof by the SEC and
filings with various state blue sky authorities, and (ii) the making of the
Merger Filings with the Secretaries of State of the States of Delaware and Texas
in connection with the Mergers (the filings and
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approvals referred to in clauses (i) and (ii) are collectively referred to as
the "Purchasers Required Statutory Approvals"), no declaration, filing or
registration with, or notice to, or authorization, consent or approval of, any
governmental or regulatory body or authority is necessary for the execution and
delivery of this Agreement by either Purchaser or the consummation by either
Purchaser of the transactions contemplated hereby, including pursuant to the HSR
Act, other than such declarations, filings, registrations, notices,
authorizations, consents or approvals which, if not made or obtained, as the
case may be, would not, in the aggregate, have a Material Adverse Effect.
(f) Reports and Financial Statements. Since August 2, 1995, Parent has
filed with the SEC all forms, statements, reports and documents (including all
exhibits, post-effective amendments and supplements thereto) required to be
filed by it under each of the Securities Act, the Exchange Act and the
respective rules and regulations thereunder (collectively the "Parent SEC
Reports"), all of which, as amended if applicable, complied when filed in all
material respects with all applicable requirements of the appropriate act and
the rules and regulations thereunder. As of their respective dates, the Parent
SEC Reports did not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading. The audited consolidated financial statements and
unaudited interim consolidated financial statements of Parent included in such
reports (collectively, the "Parent Financial Statements") have been prepared in
accordance with GAAP applied on a consistent basis (except as may be indicated
therein or in the notes thereto) and fairly present the financial position of
each Seller and their respective Subsidiaries as of the dates thereof and the
results of their operations and changes in financial position for the periods
then ended, subject, in the case of the unaudited interim financial statements,
to normal year-end and audit adjustments and any other adjustments described
therein.
(g) Absence of Undisclosed Liabilities. Except as disclosed in the Parent
SEC Reports or the Purchasers Disclosure Schedule, neither Purchaser had at
December 31, 1996, or has incurred since that date, any liabilities or
obligations (whether absolute, accrued, contingent or otherwise) of any nature,
except liabilities, obligations or contingencies which (i) are accrued or
reserved against in the Purchasers Financial Statements or reflected in the
notes thereto, (ii) would not, in the aggregate, have a Material Adverse Effect,
(iii) have been discharged or paid in full prior to the date hereof, or (iv) are
of a nature not required to be reflected in the consolidated financial
statements of Parent prepared in accordance with GAAP consistently applied and
which were incurred in the Ordinary Course of Business.
(h) Absence of Certain Changes or Events. Since the date of the most recent
Parent SEC Report that contains consolidated financial statements, there has not
been any Material Adverse Change.
(i) Litigation. Except as disclosed in the Parent SEC Reports or in the
Purchasers Disclosure Schedule, there are no claims, suits, actions or
proceedings pending or, to the knowledge of either Purchaser, threatened
against, relating to or affecting either Purchaser, before any court,
governmental department, commission, agency, instrumentality or authority, or
any arbitrator that seek to restrain or enjoin the consummation of any of the
Mergers or which if decided adversely to such Purchaser could, either alone or
in the aggregate with all such claims, actions or proceedings, have a Material
Adverse Effect. Except as set forth in the Parent SEC Reports, neither Purchaser
is subject to any judgment, decree, injunction, rule or order of any court,
governmental department, commission, agency, instrumentality or authority or any
arbitrator which prohibits or restricts the consummation of the transactions
contemplated hereby or which if decided adversely to such Purchaser could,
either individually or in the aggregate, have a Material Adverse Effect.
(j) Registration Statement and Proxy Statements. None of the information to
be supplied by either Purchaser for inclusion in (a) the Registration Statement
or (b) the Proxy Statements will, in the case of the Proxy Statements or any
amendments thereof or supplements thereto, at the time of the mailing of the
Proxy Statements and any amendments or supplements thereto, and at the time of
any action by the stockholders of the respective Sellers in connection with the
transactions contemplated by this Agreement, or, in the case of the Registration
Statement, as amended or supplemented, at the time it becomes effective and at
the time of such action by the stockholders of the respective Sellers, 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
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therein, in the light of the circumstances under which they are made, not
misleading. The Joint Proxy Statements/Prospectus will, as of its mailing date,
comply as to form in all material respects with all applicable laws, including
the provisions of the Securities Act and the Exchange Act and the rules and
regulations promulgated thereunder, except that no representation is made by
either Purchaser with respect to information supplied by any Seller or the
stockholders of any Seller for inclusion therein.
(k) No Violation of Law. Except as disclosed in the Parent SEC Reports or
in the Purchasers Disclosure Schedule, neither Purchaser is in violation of, or
has been given notice or been charged with any violation of, any law, statute,
order, rule, regulation, ordinance, or judgment (including, without limitation,
any applicable environmental law, ordinance or regulation) of any governmental
or regulatory body or authority, except for violations which, in the aggregate,
could not have a Material Adverse Effect. Except as disclosed in the Parent SEC
Reports or in the Purchasers Disclosure Schedule, as of the date of this
Agreement, to the knowledge of either Purchaser, no investigation or review by
any governmental or regulatory body or authority is pending or threatened, nor
has any governmental or regulatory body or authority indicated an intention to
conduct the same, other than, in each case, those the outcome of which, either
individually or in the aggregate, will not have a Material Adverse Effect. Each
Purchaser has all permits, licenses, franchises, variances, exemptions, orders
and other governmental authorizations, consents and approvals necessary to
conduct its businesses as presently conducted (collectively, the "Purchasers
Permits"), except for permits, licenses, franchises, variances, exemptions,
orders, authorizations, consents and approvals the absence of which, alone or in
the aggregate, would not have a Material Adverse Effect. Each Purchaser is not
in violation of the terms of any Purchasers Permit, except for delays in filing
reports or violations which, alone or in the aggregate, would not have a
Material Adverse Effect.
(l) Compliance with Agreements. Except as disclosed in the Parent SEC
Reports, neither Purchaser is in breach or violation of or in default in the
performance or observance of any term or provision of, and no event has occurred
which, with lapse of time or action by a third party, could result in a default
under (i) the respective charter, by-laws or other similar organizational
instruments of either Purchaser or (ii) any contract, commitment, agreement,
indenture, mortgage, loan agreement, note, lease, bond, license, approval or
other instrument to which either Purchaser is a party or by which any of them is
bound or to which any of their property is subject, other than, in the case of
clause (ii) of this paragraph (l), breaches, violations and defaults which would
not have, either individually or in the aggregate, a Material Adverse Effect.
(m) Taxes. Each Purchaser has (A) duly filed with the appropriate
governmental authorities all Tax Returns required to be filed by them for all
periods ending on or prior to the Merger 1 Effective Time, other than those Tax
Returns the failure of which to file would not, either individually or in the
aggregate, have a Material Adverse Effect, and such Tax Returns are true,
correct and complete in all material respects and (B) duly paid in full or made
adequate provision for the payment of all Taxes for all past and current
periods, except for those Taxes, the failure to have paid would not, either
individually or in the aggregate, have a Material Adverse Effect. The
liabilities and reserves for Taxes reflected in Parent's balance sheet included
in the latest Parent SEC Reports are adequate to cover all Taxes for all periods
ending at or prior to the date of such balance sheet and there is no liability
for Taxes for any period beginning after such date other than Taxes arising in
the Ordinary Course of Business. There are no material liens for Taxes upon any
property or assets of either Purchaser, except for liens for Taxes not yet due.
Except as set forth on the Purchasers Disclosure Schedule, neither Purchaser nor
its respective Subsidiaries has received notice of an audit from any taxation
authority which could reasonably be expected to have a Material Adverse Change.
There are no unresolved issues of law or fact arising out of a notice of
deficiency, proposed deficiency or assessment from the IRS or any other
governmental taxing authority with respect to Taxes of either Purchaser which,
if decided adversely, singly or in the aggregate, would have a Material Adverse
Effect. Neither Purchaser has waived any statute of limitations in respect of
Taxes or agreed to any extension of time with respect to a Tax assessment or
deficiency other than waivers and extensions which are no longer in effect.
Neither Purchaser is a party to any agreement providing for the allocation or
sharing of Taxes with any entity that is not, directly or indirectly, a wholly
owned corporate Subsidiary of such Purchaser other than agreements the
consequences of which are fully and adequately reserved for in the Parent
Financial Statements. Neither Purchaser has, with regard to
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any assets or property held, acquired or to be acquired by any of them, filed a
consent to the application of Section 341(f) of the Code.
(n) Employee Benefit Plans; ERISA.
(i) Except as disclosed in the Parent SEC Reports or Purchasers
Disclosure Schedule, at the date hereof, Purchasers do not maintain or
contribute to or have any obligation or liability to or with respect to any
material employee benefit plans, including employee benefit plans within
the meaning set forth in Section 3(3) of ERISA, programs, arrangements,
practices or other similar material arrangements for the provision of
benefits (such plans, programs, arrangements or practices of Purchasers
being referred to as the "Purchasers Plans"), but excluding any
"Multiemployer Plan" within the meaning of Section 3(37) of ERISA or a
"Multiple Employer Plan" within the meaning of Section 413(c) of the Code.
The Purchasers Disclosure Schedule lists all Multiemployer Plans to which
any of them makes contributions or has any obligation or liability to make
contributions. Neither Purchaser maintains or has any liability with
respect to any Multiple Employer Plan, which, individually or in the
aggregate, could have a Material Adverse Effect. Neither Purchaser has any
obligation to create or contribute to any additional such plan, program,
arrangement or practice or to amend any such plan, program, arrangement or
practice so as to increase benefits or contributions thereunder, except as
required under the terms of the Purchasers Plans, under existing collective
bargaining agreements or to comply with applicable law.
(ii) Except as disclosed in the Parent SEC Reports or Purchasers
Disclosure Schedule, (A) there have been no prohibited transactions within
the meaning of Section 406 or 407 of ERISA or Section 4975 of the Code with
respect to any of the Purchasers Plans that could result in penalties,
taxes or liabilities which, singly or in the aggregate, could have a
Material Adverse Effect, (B) except for premiums due, there is no
outstanding material liability, whether measured alone or in the aggregate,
under Title IV of ERISA with respect to any of the Purchasers Plans, (C)
neither the Pension Benefit Guaranty Corporation nor any plan administrator
has instituted proceedings to terminate any of the Purchasers Plans subject
to Title IV of ERISA other than in a "standard termination" described in
Section 4041(b) of ERISA, (D) none of the Purchasers Plans has incurred any
"accumulated funding deficiency" (as defined in Section 302 of ERISA and
Section 412 of the Code), whether or not waived, as of the last day of the
most recent fiscal year of each of the Purchasers Plans ended prior to the
date of this Agreement, (E) the current present value of all projected
benefit obligations under each of the Purchasers Plans which is subject to
Title IV of ERISA did not, as of its latest valuation date, exceed the then
current value of the assets of such plan allocable to such benefit
liabilities by more than the amount, if any, disclosed in the Parent SEC
Reports as of March 31, 1997, based upon reasonable actuarial assumptions
currently utilized for such Purchasers Plan, (F) each of the Purchasers
Plans has been operated and administered in all material respects in
accordance with applicable laws during the period of time covered by the
applicable statute of limitations, (G) each of the Purchasers Plans which
is intended to be "qualified" within the meaning of Section 401(a) of the
Code has been determined by the IRS to be so qualified and such
determination has not been modified, revoked or limited by failure to
satisfy any condition thereof or by a subsequent amendment thereto or a
failure to amend, except that it may be necessary to make additional
amendments retroactively to maintain the "qualified" status of such
Purchasers Plans, and the period for making any such necessary retroactive
amendments has not expired, (H) with respect to Multi-employer Plans,
neither Purchaser has made or suffered a "complete withdrawal" or a
"partial withdrawal," as such terms are respectively defined in Sections
4203, 4204 and 4205 of ERISA and, to the best knowledge of each Purchaser,
no event has occurred or is expected to occur which presents a material
risk of a complete or partial withdrawal under said Sections 4203, 4204 and
4205, (I) to the best knowledge of each Purchaser, there are no material
pending, threatened or anticipated claims involving any of the Purchasers
Plans other than claims for benefits in the ordinary course, (J) each
Seller and its Subsidiaries have no current material liability under Title
IV of ERISA, and Purchasers do not reasonably anticipate that any such
liability will be asserted against either Purchaser, and (K) no act,
omission or transaction (individually or in the aggregate) has occurred
with respect to any Purchasers Plan that has resulted or could result in
any material liability (direct or indirect) of either Purchaser under
Sections 409 or 502(c)(i) or (l) of ERISA or Chapter 43 of Subtitle
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(A) of the Code. None of the Purchasers Plans has an "accumulated funding
deficiency" (as defined in Section 302 of ERISA and Section 412 of the
Code) or is required to provide security to a Purchasers Plan pursuant to
Section 401(a)(29) of the Code. Each Purchasers Plan can be unilaterally
terminated by a Purchaser at any time without material liability, other
than for amounts previously reflected in the financial statements (or notes
thereto) included in the Parent SEC Reports.
(iii) The Parent SEC Reports or the Purchasers Disclosure Schedule
contain a true and complete summary or list of or otherwise describe all
employment contracts and other employee benefit arrangements with "change
of control" or similar provisions and all severance agreements with
directors, executive officers or employees.
(o) Labor Controversies. Except as disclosed in the Parent SEC Reports or
the Purchasers Disclosure Schedule, (i) there are no significant controversies
pending or, to the knowledge of either Purchaser, threatened between either
Purchaser and any representatives of any of their employees and (ii) to the
knowledge of either Purchaser, there are no material organizational efforts
presently being made involving any of the presently unorganized employees of
either Purchaser except for such controversies and organizational efforts which,
singly or in the aggregate, could not reasonably be expected to have a Material
Adverse Effect.
(p) Environmental Matters. Except as disclosed in the Parent SEC Reports or
in the Purchasers Disclosure Schedule, (A) each Purchaser has conducted its
respective businesses in compliance with all applicable Environmental Laws,
including, without limitation, having all permits, licenses and other approvals
and authorizations necessary for the operation of their respective businesses as
presently conducted, (B) none of the properties owned by Purchasers contain any
Hazardous Substance as a result of any activity of either Purchaser in amounts
exceeding the levels permitted by applicable Environmental Laws, (C) neither
Purchaser has received any notices, demand letters or requests for information
from any Federal, state, local or foreign governmental entity or third party
indicating that either Purchaser may be in violation of, or liable under, any
Environmental Law in connection with the ownership or operation of their
businesses, (D) there are no civil, criminal or administrative actions, suits,
demands, claims, hearings, investigations or proceedings pending or threatened,
against either Purchaser relating to any violation, or alleged violation, of any
Environmental Law, (E) no reports have been filed, or are required to be filed,
by either Purchaser concerning the release of any Hazardous Substance or the
threatened or actual violation of any Environmental Law, (F) no Hazardous
Substance has been disposed of, released or transported in violation of any
applicable Environmental Law from any properties owned by either Purchaser as a
result of any activity of either Purchaser during the time such properties were
owned, leased or operated by either Purchaser, (G) there have been no
environmental investigations, studies, audits, tests, reviews by or which are in
the possession of either Purchaser relating to the activities of a Purchaser
which have not been delivered to Sellers prior to the date hereof, (H) there are
no underground storage tanks on, in or under any properties owned by either
Purchaser and no underground storage tanks have been closed or removed from any
of such properties during the time such properties were owned, leased or
operated by either Purchaser, (I) there is no asbestos or asbestos containing
material present in any of the properties owned by either Purchaser, and no
asbestos has been removed from any of such properties during the time such
properties were owned, leased or operated by Purchasers, and (J) neither
Purchaser nor any of their respective properties are subject to any liabilities
or expenditures (fixed or contingent) relating to any suit, settlement, court
order, administrative order, regulatory requirement, judgment or claim asserted
or arising under any Environmental Law, except for violations of the foregoing
clauses (A) through (J) that, singly or in the aggregate, would not reasonably
be expected to have a Material Adverse Effect.
(q) Reserve Report and Exploration Project Information.
(i) The Purchasers have made available to the Sellers certain reports
dated March 3, 1997, prepared by the independent petroleum engineering firm
of Netherland, Sewell & Associates, Inc., with respect to onshore
properties, and dated February 7, 1997, prepared by the independent
petroleum engineering firm of Collarini Engineering Inc., with respect to
offshore properties (collectively, the "Purchasers Petroleum Engineers")
true and correct copies of which have been previously provided to the
Sellers (together, the "Purchasers Reserve Reports"). The Purchasers
Reserve Reports are the latest
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reserve reports available to the Purchasers relating to their and their
Subsidiaries reserves of oil and gas. The oil and gas properties evaluated
in the Purchasers Reserve Reports are referred to herein as the "Purchasers
Evaluated Properties." The Purchasers have provided no materially false or
misleading information to and have not withheld any material information
from the Purchasers Petroleum Engineers, with respect to the preparation of
the Purchasers Reserve Reports.
(ii) Except as set forth on the Purchasers Disclosure Schedule, the
Purchasers are not aware of any facts or circumstances that should
reasonably cause the Purchasers to conclude that any of the information
that was supplied by the Purchasers to the Purchasers Petroleum Engineers,
in connection with their preparation of the Purchasers Reserve Reports is
not currently correct in all material respects (other than normal depletion
by production in the ordinary course), and to the Purchasers' knowledge the
information utilized in preparing the Reserve Reports is correct in all
material respects.
(iii) The Purchasers have made available to Sellers certain
information (the "Purchasers Project Information") with respect to certain
exploration projects in which the Purchasers are currently engaged (the
"Purchasers Projects"), which information and Purchasers Projects are set
forth on the Purchasers Disclosure Schedule. The Purchasers Project
Information provided by the Purchasers does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements contained therein not misleading.
(r) Title.
(i) The leasehold, royalty, mineral and similar interests owned by the
Purchasers and their respective Subsidiaries entitle them to receive not
less than the interest set forth in the Purchasers Reserve Reports as the
Net Revenue Interest from all oil and gas and associated minerals produced,
saved and marketed in respect of each Purchasers Evaluated Property listed
in the Purchasers Reserve Reports, and obligate it to bear costs and
expenses relating to the maintenance and development of, and the operations
with respect to, each such Purchasers Evaluated Property in an amount not
greater than the Working Interest set forth in the Purchasers Reserve
Reports (unless there is a corresponding increase in the Net Revenue
Interest), except for such deficiencies which, individually or in the
aggregate, would not have a Material Adverse Effect. Except as noted in the
Purchasers Reserve Reports, the Net Revenue Interest and the Working
Interest with respect to each such Purchasers Evaluated Property are not
subject to change or adjustment upon the occurrence of payout or any
similar or other event.
(ii) The Purchasers have, and on the Closing Date will have, good and
valid title to all of their leasehold, royalty, mineral and similar
interests in the Purchasers Evaluated Properties, other than the properties
disposed of since the date hereof, free and clear of all encumbrances and
title defects except for (A) the encumbrances and title defects
specifically described in the Parent Financial Statements or Purchasers
Disclosure Schedule, (B) statutory liens not yet delinquent, (C)
imperfections of title, easements, liens (including operator's liens) and
encumbrances, the character, amount or extent of which, individually or in
the aggregate, would not have a Material Adverse Effect, (D) contracts and
agreements for the sale of oil and gas entered into in the Ordinary Course
of Business, (E) lessor's royalties, overriding royalties, and division
orders, reversionary interests and similar burdens and all existing
operating agreements and unit agreements, if the net cumulative effect of
the same does not operate to reduce the Net Revenue Interests of the
Purchasers Evaluated Properties to less than the Net Revenue Interests set
forth in Purchasers Reserve Report or increase the Working Interests of the
Purchasers Evaluated Properties to more than the Working Interests set
forth in the Purchasers Reserve Report (unless there is a corresponding
increase in the Net Revenue Interests); (F) any and all federal and state
regulatory orders and rules to which the Purchasers Evaluated Properties
are presently subject; (G) preferential rights to purchase and required
third-party consents to assignments and similar agreements; (H) liens for
Taxes not due or not delinquent at the time of Closing or the validity of
which are being contested in good faith by appropriate actions; (I) all
rights to consent by, required notices to, filings with, or other actions
by governmental entities in connection with the sale or conveyance of oil,
gas and mineral leases or interests therein if the same are customarily
obtained after such sale or conveyance;
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(J) easements, rights-of-way, servitudes, permits, surface leases and other
rights in respect of surface operations, pipelines, grazing, logging,
canals, ditches, reservoirs or the like; and easements for streets, alleys,
highways, pipelines, telephone lines, power lines, railways and other
easements and rights-of-way, on, over or in respect of any of the
Purchasers Evaluated Properties; (K) liens of operators relating to
obligations not yet due or not delinquent; and (L) title deficiencies
commonly encountered in the oil and gas business which would not be
considered material by a reasonable and prudent person engaged in the
business of the ownership, development and operating of oil and gas
properties with knowledge of all the facts and appreciation of their legal
significance.
(iii) Except where the failure would not have a Material Adverse
Effect, (A) neither Purchaser is dependent with respect to the Purchasers
Evaluated Properties on the right to use the properties of others, except
under valid and enforceable leases, contracts, pooling or unitization
agreements, rights or other arrangements, (B) the Purchasers own, or have
the right to use under valid and enforceable leases, contracts, rights or
other arrangements, all gas processing facilities necessary for the current
operations of the Purchasers, (C) all buildings, machinery and equipment
currently used in the operations related to the Purchasers Evaluated
Properties are adequate for their normal operation consistent with industry
practice, are in good working order and substantially conform with all
applicable Environmental Laws and (D) to the knowledge of either Purchaser
there is no pending or threatened condemnation or expropriation of any part
of the Purchasers Evaluated Properties.
(iv) Except where the failure would not have a Material Adverse
Effect, the Purchasers Evaluated Properties are being developed, operated
and maintained in compliance in all material respects with all leases,
contracts and commitments to which either Purchaser is a party or by which
either Purchaser or any of the Purchasers Evaluated Properties is bound.
(v) The Purchasers have good and valid title to all the properties and
assets of every kind, character and description (real, personal or mixed,
tangible and intangible), including, without limitation, all parcels of
real property, pipelines, rights-of-way and easements and other incidental
rights and permits, but excluding the Purchasers Evaluated Properties,
reflected in the Parent Financial Statements or which would have been
reflected in the Parent Financial Statements if acquired prior to March 31,
1997, (the "Purchasers Assets") free and clear of all encumbrances of any
nature except for (A) the encumbrances and title defects specifically
described in the Purchasers Disclosure Schedule; (B) mortgages and
encumbrances which secure indebtedness or obligations which are properly
reflected in the Parent Financial Statements; (C) liens for Taxes not yet
payable or any Taxes being contested in good faith; (D) liens arising as a
matter of law in the ordinary course of business, provided that the
obligations secured by such liens are not delinquent or are being contested
in good faith; (E) such imperfections of title and encumbrances which,
individually or in the aggregate, would not have a Material Adverse Effect;
(F) any and all federal and state regulatory orders and rules to which the
Purchasers Assets are presently subject; (G) preferential rights to
purchase and required third-party consents to assignments and similar
agreements; (H) statutory liens not yet delinquent; (I) all rights to
consent by, required notices to, filings with, or other actions by
governmental entities in connection with the sale or conveyance of oil, gas
and mineral leases or interests therein if the same are customarily
obtained after such sale or conveyance; (J) easements, rights-of-way,
servitude, permits, surface leases and other rights in respect of surface
operations, pipelines, grazing, logging, canals, ditches, reservoirs or the
like; and easements for streets, alleys, highways, pipelines, telephone
lines, power lines, railways and other easements and rights-of-way, on,
over or in respect of any of the Purchasers Assets; (K) liens of operators
relating to obligations not yet due or not delinquent; and (L) title
deficiencies commonly encountered in the oil and gas business which will
not have a Material Adverse Effect. The Purchasers have valid leasehold
interests in all leases reflected as capital leases in the Parent Financial
Statements and, to the knowledge of the Purchasers, generally have the
right to use all other property and assets as to which they do not have
title but which are currently being used in the conduct of the Purchasers'
business, except any rights of use the loss of which would not have a
Material Adverse Effect.
(s) Insurance. The Purchasers Disclosure Schedule lists all material
insurance policies covering the Purchasers Assets, the Purchasers Evaluated
Properties, employees and operations of the Purchasers as of the
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date hereof (other than insurance owned or held by operators for those
Purchasers Assets or Purchasers Evaluated Properties where a party other than a
Purchaser is the operator). Such policies are in full force and effect, there
are no defaults thereunder. Except for claims previously made, to the knowledge
of either Purchaser there is no basis for any action or claim nor any facts
which would reasonably be anticipated to give rise to such action or claim. To
the knowledge of either Purchaser, there does not exist any event that, with the
giving of notice or the lapse of time or both, would constitute such a default.
Neither Purchaser is a co-insurer under any such policies of insurance except to
the extent of the amount of the deductible, self-retention or similar amounts
applicable to such policies.
(t) Allowable Production Quotas. To the knowledge of either Purchaser, no
production from any of the Purchasers Evaluated Properties prior to the date
hereof was in excess of allowable production quotas allowed or permitted by any
governmental body having jurisdiction thereover so as to subject any production
from such Purchasers Evaluated Property on or after the date hereof to
restrictions or penalties except as will not have a Material Adverse Effect.
(u) Gas Payments; Balancing. (i) There are no material claims asserted or
material disputes evidenced in writing under any contract to which either
Purchaser is a party regarding payments for natural gas not taken pursuant to
any "take or pay" or similar arrangement; (ii) the Purchasers have not received
any material quantity of natural gas or liquids to be paid for thereafter other
than in the normal cycle of billing or received prepayments, advance payments or
loans which will require a Purchaser to perform services or deliver hydrocarbons
under such contracts on or after the Closing Date without being currently paid
therefor; (iii) no sales contract obligates either Purchaser to deliver specific
minimum volumes of gas; (iv) no contract obligates either Purchaser to sell gas
at prices substantially lower than the prevailing market prices or to purchase
gas at prices substantially higher than prevailing market prices; (v) the
Purchasers have made or will, prior to the Closing Date, make all payments due
to producers or others for all gas and liquids delivered into any of their
respective plants for which payment for same is due prior to the Closing Date,
including, without limitation, all payments due for the purchase of gas and
liquids under any contract; (vi) to the knowledge of either Purchaser, all gas
delivered into any of the plants has been purchased, and all residue gas from
the plants has been sold, in compliance with the Natural Gas Policy Act of 1978,
all orders, rules and regulations of the Federal Energy Regulatory Commission
and all other applicable laws, orders, rules and regulations; (vii) to the
knowledge of either Purchaser, there exists no material claim or dispute with
respect to the purchase, or the failure to purchase, or pay for whether or not
purchased, gas under any gas purchase contracts to which either Purchaser is a
party or the applicable price to be paid for gas delivered, or residue gas or
liquids or products sold from the plants; and (viii) none of the Purchasers
Evaluated Properties or the Purchaser Assets is subject to requirements to make
Btu adjustments or affect gas or liquids balancing in favor of third parties
which would result in either Purchaser being required to deliver material
volumes of gas or liquids after the Closing Date or otherwise to compensate a
third party for gas or liquids receipts into, or deliveries from, the plants
which occurred prior to the Closing Date. The Purchasers Disclosure Schedule
sets forth an estimate of the amount of any material net imbalances and is
within ten percent (10%) of the actual amount.
(v) No Prepayments Made or Refunds Owed. Purchasers have not received any
prepayment, advance payment, deposits or similar payments, and have no refund
obligation, other than obligations in the aggregate of less than $500,000
incurred in the Ordinary Course of Business, with respect to any gas or products
purchased, sold, gathered, processed or marketed through their plants. The
Purchasers have not received any compensation for gathering or processing
services relating to the plants which would be subject to any refund or create
any repayment obligation, other than obligations of less than $500,000 incurred
in the Ordinary Course of Business, either by or to the Purchasers, and the
Purchasers are not aware of any basis for a claim that a refund is due.
(w) Drilling Obligations. The Purchasers do not have any material drilling
obligations or other development commitments that are not terminable at will by
the Purchaser party thereto without penalty, other than commitments and
obligations that arose in the Ordinary Course of Business where the sole
consequence to the Purchaser party thereto for a failure to participate is to
suffer a "non-consent" penalty or forfeit an interest in the undeveloped lands
subject to the commitment or obligation.
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(x) Development Operations. To the knowledge of either Purchaser, there are
in existence no facts or circumstances that should reasonably cause a Purchaser
to conclude that any development operations on the Purchasers Evaluated
Properties that are contemplated by the Purchasers Reserve Report will not be
permitted under applicable laws and governmental rules and regulations or that
any third party may have a reasonable basis to cause any court or governmental
agency with jurisdiction over such operations to cause the suspension or
termination of such operations.
(y) Regulatory Authority. As of the date hereof, neither Purchaser is
subject to regulation as (a) a "holding company," an "affiliate" of a "holding
company" or a "subsidiary company" of a "holding company" or a "public utility,"
as each of such terms is defined in the Public Utility Holding Company Act of
1935, as amended, and the rules and regulations thereunder; (b) a gas utility or
utility under applicable state law; and (c) an "investment company," or a
company "controlled" by an "investment company," within the meaning of the
Investment Company Act of 1940, as amended.
(z) Full Disclosure. To the knowledge of either Purchaser, the
representations, warranties or other statements by the Purchasers in this
Agreement or in the Purchasers Disclosure Schedule or Exhibits hereto or any
documents distributed generally to the Edisto Stockholders or the Convest
Stockholders, taken as a whole, do not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
contained therein not misleading. There is, to the knowledge of either
Purchaser, no fact pertaining particularly to Purchasers Evaluated Properties or
the Purchasers Assets (as opposed to public information concerning general
industry or economic conditions or governmental policies) which has a Material
Adverse Effect on or in the future would be reasonably expected to have a
Material Adverse Effect on the Purchasers Evaluated Properties or the Purchasers
Assets or the ownership, operation or maintenance of any of the Purchasers
Evaluated Properties or the Purchasers Assets that has not been disclosed to the
Sellers.
(aa) Affiliate Transactions. To Purchasers knowledge there are no
transactions between (i) the Purchasers or any of their Subsidiaries and (ii)
any of their Affiliates which are required to be disclosed in the Parent SEC
Reports which are not disclosed.
(bb) Cumulative Representations. To the extent the representations and
warranties of Purchasers set forth herein are modified by the terms Material
Adverse Change or Material Adverse Effect or similar terms, the effect of the
occurrence of all such effects or changes would not in the aggregate cause a
Material Adverse Change or Material Adverse Effect on the Purchasers and their
respective Subsidiaries taken as a whole.
SECTION 7. CONDUCT OF BUSINESS PENDING THE MERGERS.
(a) Conduct of Business by the Sellers Pending the Mergers. Except as
otherwise contemplated by this Agreement or disclosed in the Sellers Disclosure
Schedule, after the date hereof and prior to the Closing Date or earlier
termination of this Agreement, unless Parent shall otherwise agree in writing,
each Seller shall, and shall cause its Subsidiaries to:
(i) conduct their respective businesses in the Ordinary Course of
Business;
(ii) not (A) amend or propose to amend their respective charter or
by-laws, (B) split, combine or reclassify their outstanding capital stock
or (C) declare, set aside or pay any dividend or distribution payable in
cash, stock, property or otherwise, except for the payment of dividends or
distributions by a wholly owned Subsidiary;
(iii) not issue, sell, pledge or dispose of, or agree to issue, sell,
pledge or dispose of, any additional shares of, or any options, warrants or
rights of any kind to acquire any shares of their capital stock of any
class or any debt or equity securities convertible into or exchangeable for
such capital stock, except that a Seller may issue shares upon conversion
of convertible securities and exercise of options and warrants outstanding
on the date hereof;
(iv) not (A) incur or become contingently liable with respect to any
indebtedness for borrowed money other than (x) borrowings in the Ordinary
Course of Business or (y) borrowings to refinance
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existing indebtedness on terms which are reasonably acceptable to Parent,
(B) except as contemplated by Section 4(c) hereof, redeem, purchase,
acquire or offer to purchase or acquire any shares of its capital stock or
any options, warrants or rights to acquire any of its capital stock or any
security convertible into or exchangeable for its capital stock, (C) take
or fail to take any action which action or failure to take action would
cause either Seller or its stockholders (except to the extent that any
stockholders receive cash) to recognize gain or loss for federal income tax
purposes as a result of the consummation of Merger 2 or would otherwise
cause Merger 2 not to qualify as a reorganization under Section 368 of the
Code, (D) make any acquisition of any assets or businesses other than
expenditures for current assets in the ordinary course of business, (E)
sell, pledge, dispose of or encumber any assets or businesses without the
approval of Parent or (F) enter into any binding contract, agreement,
commitment or arrangement with respect to any of the foregoing;
(v) use all reasonable efforts to preserve intact their respective
business organizations and goodwill, keep available the services of their
respective present officers and key employees, and preserve the goodwill
and business relationships with customers and others having business
relationships with them and not engage in any action, directly or
indirectly, with the intent to adversely impact the transactions
contemplated by this Agreement;
(vi) subject to restrictions imposed by applicable law, confer on a
regular and frequent basis with one or more representatives of Parent to
report operational matters of materiality and the general status of ongoing
operations;
(vii) not enter into or amend any employment, severance, special pay
arrangement with respect to termination of employment or other similar
arrangements or agreements with any directors, officers or employees;
(viii) not adopt, enter into or amend any bonus, profit sharing,
compensation, stock option, pension, retirement, deferred compensation,
health care, employment or other employee benefit plan, agreement, trust,
fund or arrangement for the benefit or welfare of any employee or retiree,
except as required to comply with changes in applicable law;
(ix) use commercially reasonable efforts to maintain with financially
responsible insurance companies insurance on its tangible assets and its
businesses in such amounts and against such risks and losses as are
consistent with past practice;
(x) not make, change or revoke any material Tax election or make any
material agreement or settlement regarding Taxes with any taxing authority;
(xi) not change any method of accounting or accounting practice,
except for any such change required by GAAP; and
(xii) not enter into any future, hedge, swap, collar, put, call,
floor, cap, option or other contracts that are intended to benefit from or
reduce or eliminate the risk of fluctuations in the price of commodities,
including hydrocarbons, or securities, other than such as are entered into
in the Ordinary Course of Business solely for the purpose of terminating an
existing hedge.
(b) Control of the Sellers' Operations. Nothing contained in this Agreement
shall give to Parent, directly or indirectly, rights to control or direct the
operations of Edisto or Convest or their respective Subsidiaries prior to the
Merger 1 Effective Time or the Merger 2 Effective Time, respectively. Prior to
such Effective Times, the Sellers shall exercise, consistent with the terms and
conditions of this Agreement, complete control and supervision of their
respective operations.
(c) Acquisition Transactions.
(i) After the date hereof and prior to the Merger 2 Effective Time or
earlier termination of this Agreement, the Sellers shall not, and shall not
permit any of their Subsidiaries to, initiate, solicit, negotiate,
encourage or provide confidential information to facilitate, and the
Sellers shall, and shall cause each of their Subsidiaries to, cause any
officer, director or employee of, or any attorney, accountant,
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investment banker, financial advisor or other agent retained by them, not
to initiate, solicit, negotiate, encourage or provide non-public or
confidential information to facilitate, any proposal or offer to acquire
all or any substantial part of the business and properties of either Seller
or any of their Subsidiaries or any capital stock of either Seller or any
of their Subsidiaries, whether by merger, purchase of assets, tender offer
or otherwise, whether for cash, securities or any other consideration or
combination thereof (any such transactions being referred to herein as an
"Acquisition Transaction").
(ii) Notwithstanding the provisions of subsection (i) above, (A)
either Seller may, in response to an unsolicited written proposal or
unsolicited written indication of interest with respect to a potential or
proposed Acquisition Transaction ("Acquisition Proposal"), furnish (subject
to the execution of a confidentiality agreement and standstill agreement in
substantially the form executed by Parent) confidential or non-public
information to a financially capable corporation, partnership, person or
other entity or group (a "Potential Acquirer") and negotiate with such
Potential Acquirer if the Board of Directors of such Seller after
consulting with its outside legal counsel, determines in good faith that
the failure to provide such confidential or non-public information to or
negotiate with such Potential Acquirer would constitute a breach of its
fiduciary duty to its stockholders and (B) such Seller's Board of Directors
may take and disclose to its stockholders a position contemplated by Rule
14e-2 under the Exchange Act. It is understood and agreed that negotiations
conducted in accordance with this subsection (ii) shall not constitute a
violation of subsection (i) of this Section 7(c).
(iii) The Sellers shall immediately notify Parent after receipt of any
Acquisition Proposal or any request for nonpublic information relating to a
Seller or its Subsidiaries in connection with an Acquisition Proposal or
for access to the properties, books or records of a Seller or any
Subsidiary by any person or entity that informs the Board of Directors of a
Seller or such Subsidiary that it is considering making, or has made, an
Acquisition Proposal. Such notice to Parent shall be made orally and in
writing and shall indicate in reasonable detail the identity of the offeror
and the terms and conditions of such proposal, inquiry or contact. Seller
shall immediately provide Parent a copy of all information provided to a
third party.
(iv) Each Party (i) acknowledges that a breach of any of its covenants
contained in this Section 7(c) will result in irreparable harm to the other
Party which will not be compensable in money damages, and (ii) agrees that
such covenant shall be specifically enforceable and that specific
performance and injunctive relief shall be a remedy properly available to
the other Party for a breach of such covenant. In any event, if a Seller
enters into an Acquisition Transaction, it will immediately pay to Parent
the sums described in Section 10(b) below.
(d) Subsidiaries. Each Seller will, following direction from Parent,
dissolve all inactive Subsidiaries (other than MINT Holding Company) prior to
Merger 1. Prior to Merger 1, Sellers will cause the merger of Edisto Exploration
& Production Company ("Edisto E&P") into Convest.
SECTION 8. ADDITIONAL AGREEMENTS.
(a) Access to Information.
(i) The Sellers and their Subsidiaries shall afford to Purchasers and
their respective accountants, counsel, financial advisors and other
representatives (the "Parent Representatives") and Parent and its
Subsidiaries shall afford to the Sellers and their accountants, counsel,
financial advisors and other representatives (the "Seller Representatives")
full access during normal business hours throughout the period prior to the
Merger 1 Effective Time to all of their respective properties, books,
contracts, commitments and records (including, but not limited to, Tax
Returns) and, during such period, shall furnish promptly to one another (A)
a copy of each report, schedule and other document filed or received by any
of them pursuant to the requirements of federal or state securities laws or
filed by any of them with the SEC in connection with the transactions
contemplated by this Agreement and (B) such other information concerning
their respective businesses, properties and personnel as a Purchaser or
Seller, as the case may be, shall reasonably request; provided, however,
that no investigation pursuant to this Section 8(a) shall amend or modify
any representations or warranties made herein or the conditions to
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the obligations of the respective parties to consummate the Mergers. Parent
and its Subsidiaries shall hold and shall use their reasonable best efforts
to cause the Parent Representatives to hold, and the Sellers and their
Subsidiaries shall hold and shall use their reasonable best efforts to
cause the Seller Representatives to hold, in strict confidence all
non-public documents and information furnished to a Purchaser or Seller, as
the case may be, in connection with the transactions contemplated by this
Agreement, except that (x) a Purchaser or Seller may disclose such
information as may be necessary in connection with seeking the Purchasers
Required Statutory Approvals, the Sellers Required Statutory Approvals and
the Requisite Stockholder Approvals and (y) a Purchaser or Seller may
disclose any information that it is required by law or judicial or
administrative order to disclose.
(ii) In the event that this Agreement is terminated in accordance with
its terms, each Party shall promptly redeliver to the other all non-public
written material provided pursuant to this Section 8(a) and shall not
retain any copies, extracts or other reproductions in whole or in part of
such written material. In such event, all documents, memoranda, notes and
other writings prepared by a Purchaser or Seller based on the information
in such material shall be destroyed (and Parent and the Sellers shall use
their respective reasonable best efforts to cause their advisors and
representatives to similarly destroy their documents, memoranda and notes),
and such destruction (and reasonable best efforts) shall be certified in
writing by an authorized officer supervising such destruction.
(iii) The Sellers shall promptly advise Parent and Parent shall
promptly advise the Sellers in writing of any change or the occurrence of
any event after the date of this Agreement having, or which, insofar as can
reasonably be foreseen, in the future may have, either individually or in
the aggregate, any Material Adverse Effect.
(b) Registration Statement and Proxy Statements. Parent and the Sellers
shall file with the SEC as soon as is reasonably practicable after the date
hereof the Joint Proxy Statements/Prospectus and shall use all reasonable
efforts to have the Registration Statement declared effective by the SEC as
promptly as practicable. Parent shall also take any action reasonably required
to be taken under applicable state blue sky or securities laws in connection
with the issuance of Parent Common Stock pursuant hereto. Parent and the Sellers
shall promptly furnish to each other all information, and take such other
actions, as may reasonably be requested in connection with any action by any of
them in connection with the preceding sentence. The information provided and to
be provided by Parent and the Sellers, respectively, for use in the Joint Proxy
Statements/Prospectus shall not contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading.
(c) Stockholders' Approvals. Each Seller shall, as promptly as practicable,
submit this Agreement and the transactions contemplated hereby for the approval
of its stockholders at a meeting of stockholders or by written consent and shall
use its best efforts to obtain the Requisite Stockholder Approvals and adoption
of this Agreement and the transactions contemplated hereby. Such meeting of
stockholders shall be held or written consent effected as soon as practicable
following the date upon which the Registration Statement becomes effective. The
Sellers shall, through their respective Boards of Directors, recommend to their
stockholders approval of the transactions contemplated by this Agreement. Each
Seller (i) acknowledges that a breach of its covenant contained in this Section
8(c) to convene a meeting of its stockholders and call for a vote thereat with
respect to the approval of this Agreement and the Mergers will result in
irreparable harm to Parent which will not be compensable in money damages and
(ii) agrees that such covenant shall be specifically enforceable and that
specific performance and injunctive relief shall be a remedy properly available
to Parent for a breach of such covenant.
(d) Employee Matters.
(i) Not less than five business days prior to the Closing Date each
Seller and their Subsidiaries shall provide Parent a current list of their
respective officers, directors and employees. Except as otherwise
designated by Parent, at least five business days prior to the Closing,
each Seller and their Subsidiaries shall obtain the resignation or shall
terminate each of their respective officers, directors and employees
effective not later than the Merger 2 Effective Time. At or immediately
prior to Closing, the Sellers shall
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pay any severance pay, stay bonuses or similar payments required to be paid
pursuant to the terms of the agreements described on Section 5(n)(iii) of
the Sellers Disclosure Schedule. Without limiting the foregoing, this
provision will cause a termination of Michael Y. McGovern under the
employment agreement between him and Edisto, a copy of which has been
previously provided to the Purchasers.
(ii) Parent agrees that, following the Merger 2 Effective Time, it
will provide continuation coverage, as required by the Consolidated Omnibus
Budget Reconciliation Act of 1985 ("COBRA"), to be given to any employee of
Sellers or their respective Subsidiaries whose employment has been or will
be terminated. The parties understand that COBRA may require that such
continuation coverage be provided for a period of up to thirty-six months
as provided in Section 4980B of the Code at the qualified beneficiary's
expense.
(iii) Prior to the Merger 1 Effective Time, Edisto and Convest shall
have taken all steps, subject to Parent's approval, necessary or
appropriate so that the Convest Savings and Investment Plan and Trust, the
Edisto Savings and Investment Plan and Trust and any other Sellers Plan
that is or is intended to be a "qualified" plan under Section 401(a) of the
Code shall have been terminated.
(e) Quotation. Parent shall use its reasonable best efforts to effect, at
or before the Merger 1 Effective Time, authorization for listing on the NYSE or
such other exchange on which Parent Common Stock is then primarily traded, upon
official notice of issuance, of the shares of Parent Common Stock to be issued
pursuant to the Mergers.
(f) Agreement to Cooperate.
(i) Subject to the terms and conditions herein provided and subject to
the fiduciary duties of the respective boards of directors of the Parent
and the Sellers, each of the Parties hereto shall use all reasonable
efforts to take, or cause to be taken, all action and to do, or cause to be
done, all things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective the transactions contemplated
by this Agreement, including using its reasonable efforts to obtain all
necessary or appropriate waivers, consents or approvals of third parties
required in order to preserve material contractual relationships of the
Sellers and their respective Subsidiaries, all necessary or appropriate
waivers, consents and approvals and SEC "no-action" letters to effect all
necessary registrations, filings and submissions and to lift any injunction
or other legal bar to the Mergers (and, in such case, to proceed with the
Mergers as expeditiously as possible).
(ii) In the event any litigation is commenced by any person or entity
relating to the transactions contemplated by this Agreement, including any
Acquisition Transaction, Parent shall have the right, at its own expense,
to participate therein, and the Sellers will not settle any such litigation
without the consent of Parent, which consent will not be unreasonably
withheld.
(g) Public Statements. The Parties shall consult with each other prior to
issuing any press release or any written public statement with respect to this
Agreement or the transactions contemplated hereby and shall not issue any such
press release or written public statement prior to such consultation.
(h) Notification of Certain Matters. Each of the Purchasers and the Sellers
agrees to give prompt notice to each other of, and to use their respective
reasonable best efforts to prevent or promptly remedy, (A) the occurrence or
failure to occur or the impending or threatened occurrence or failure to occur,
of any event which occurrence or failure to occur would be likely to cause any
of its representations or warranties in this Agreement to be untrue or
inaccurate in any material respect at any time from the date hereof to the
Merger 1 Effective Time and (B) any material failure on its part 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 Paragraph 8(h) shall not limit or otherwise affect the remedies available
hereunder to the party receiving such notice.
(i) Corrections to the Joint Proxy Statements/Prospectus and Registration
Statement. Prior to the date of approval of the Mergers by the Sellers'
respective stockholders, each of the Purchasers and Sellers shall correct
promptly any information provided by it to be used specifically in the Joint
Proxy Statements/
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Prospectus and Registration Statement that shall have become false or misleading
in any material respect and shall take all steps necessary to file with the SEC
and have declared effective or cleared by the SEC any amendment or supplement to
the Joint Proxy Statements/Prospectus or the Registration Statement so as to
correct the same and to cause the Joint Proxy Statements/Prospectus as so
corrected to be disseminated to the stockholders of the Sellers, in each case to
the extent required by applicable law.
(j) Indemnification; Directors' and Officers' Insurance.
(i) From and after the Merger 1 Effective Time, with respect to
Edisto, and the Merger 2 Effective Time, with respect to Convest, Parent
agrees that it will indemnify and hold harmless each present and former
director and/or officer of a Seller, determined as of such effective time
(the "Indemnified Parties"), that is made a party or threatened to be made
a party to any threatened, pending or completed, action, suit, proceeding
or claim, whether civil, criminal, administrative or investigative, by
reason of the fact that he or she was a director or officer of a Seller or
any subsidiary of a Seller prior to such effective time and arising out of
actions or omissions of the Indemnified Party in any such capacity
occurring at or prior to such effective time (a "Claim") against any costs
or expenses (including reasonable attorneys' fees), judgments, fines,
losses, claims, damages or liabilities reasonably incurred in connection
with any Claim, whether asserted or claimed prior to, at or after such
effective time, to the fullest extent that such Seller would have been
permitted under Delaware law, the respective charters or by-laws of such
Seller or written indemnification agreements in effect at the date hereof,
including provisions therein relating to the advancement of expenses
incurred in the defense of any action or suit.
(ii) Any Indemnified Party wishing to claim indemnification under
paragraph (i) of this Section 8(j) upon learning of any such Claim, shall
promptly notify Parent thereof, but the failure to so notify shall not
relieve Parent of any liability it may have to such Indemnified Party if
such failure does not materially prejudice the indemnifying party. In the
event of any such Claim (whether arising before or after the Merger 1
Effective Time or the Merger 2 Effective Time, as the case may be), (A)
Parent shall have the right to assume the defense thereof and Parent shall
not be liable to such Indemnified Parties for any legal expenses of other
counsel or any other expenses subsequently incurred by such Indemnified
Parties in connection with the defense thereof, except that if Parent
elects not to assume such defense, the Indemnified Parties may retain
counsel reasonably satisfactory to Parent, and Parent shall pay reasonable
fees and expenses of such counsel for the Indemnified Parties; provided,
however, that Parent shall be obligated pursuant to this paragraph (ii) to
pay for only one firm or counsel for all Indemnified Parties unless the use
of one counsel for such Indemnified Parties would present such counsel with
a conflict of interest, (B) the Indemnified Parties will cooperate in the
defense of any such matter and (C) Parent shall not be liable for any
settlement effected without its prior written consent, which consent will
not be unreasonably withheld; and provided, further, however, that Parent
shall not have any obligation hereunder to any Indemnified Party when and
if a court of competent jurisdiction shall ultimately determine, and such
determination shall have become final and non-appealable, that the
indemnification of such Indemnified Party in the manner contemplated hereby
is prohibited by applicable law. If such indemnity is not available with
respect to any Indemnified Party, then Parent and the Indemnified Party
shall contribute to the amount payable in such proportion as is appropriate
to reflect relative faults and benefits, with any respect of "fault"
otherwise allocable to a Seller being allocated to Parent.
(iii) For a period of six years after the Merger 1 Effective Time and
the Merger 2 Effective Time, respectively, Purchasers shall maintain the
Sellers' existing directors and officers liability insurance or equivalent
liability insurance, which will provide coverage for those persons who are
directors and officers of the Sellers as of such effective time, so long as
the annual premium therefor is not in excess of 150% of the last annual
premium paid by the Sellers prior to the date hereof.
(iv) In lieu of the insurance arrangement referred to in clause (iii)
of this Section 8(j), Purchasers may, on or before the Closing, enter into
alternative insurance arrangements, providing that such arrangements are
approved by each of the Sellers and are no less advantageous to the
Indemnified Parties so long as no lapse in coverage occurs as a result of
such substitution.
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(v) The obligations of Purchasers under this Section 8(j) are intended
to benefit, and be enforceable against Purchasers directly by the
Indemnified Parties, and shall be binding on all respective successors of
Purchasers.
(k) Shareholders Agreement; Compliance with the Securities Act. Each Seller
shall each use their reasonable best efforts to cause each principal executive
officer, each director and each other person who is an Affiliate of either
Seller to deliver to Parent on or prior to the Merger 1 Effective Time (i) a
written agreement (an "Affiliate Agreement") to the effect that such person will
not offer to sell, sell or otherwise dispose of any shares of Parent Common
Stock issued in the Mergers, except, in each case, pursuant to an effective
registration statement or in compliance with Rule 145, as amended from time to
time, or in a transaction which, in the opinion of legal counsel satisfactory to
Parent, is exempt from the registration requirements of the Securities Act and
(ii) a Shareholders Agreement. Parent shall be entitled to place appropriate
legends on the certificates evidencing any Parent Common Stock to be received by
such Affiliates pursuant to the terms of this Agreement, and to issue
appropriate stop transfer instructions to the transfer agent for the Parent
Common Stock, consistent with the terms of the Affiliate Agreements.
(1) Convest Shares.
(i) Transfer and Encumbrance. Edisto agrees not to transfer, sell,
exchange, pledge or otherwise dispose of or encumber the Shares or any New
Shares (as hereinafter defined) or to make any offer or agreement relating
thereto, at any time prior to the Expiration Date. As used herein, the term
"Expiration Date" shall mean the earlier to occur of (A) such date and time
as each of the Mergers shall have become effective in accordance with the
terms and provisions of the Merger Agreement, (B) the termination of this
Merger Agreement in accordance with its terms.
(ii) New Shares. Edisto agrees that any shares of capital stock of
Convest that Edisto purchases or with respect to which Edisto otherwise
acquires beneficial ownership after the date of this Agreement and prior to
the Expiration Date ("New Shares") shall be subject to the terms and
conditions of this Agreement to the same extent as if they constituted
Shares.
(iii) Agreement to Vote Shares. Unless this Merger Agreement is
terminated pursuant to its terms, at every meeting of the stockholders of
Convest held prior to the Merger 2 Effective Time called with respect to
any of the following, and at every adjournment thereof, and on every action
or approval by written consent of the stockholders of Convest with respect
to any of the following, Edisto shall vote the Shares and any New Shares:
(A) in favor of approval of this Agreement, the Merger 2 Articles and the
Mergers and any matter that could reasonably be expected to facilitate the
Mergers; and (B) against approval of any proposal made in opposition to the
consummation of the Mergers, this Agreement or the Merger 2 Articles,
against any merger, consolidation, sale of assets, reorganization or
recapitalization with any party other than Parent and its Affiliates and
against any liquidation or winding up of Convest (each of the foregoing is
referred to as an "Opposing Proposal"). To the extent inconsistent with the
provisions of this Agreement, Edisto hereby revokes any and all proxies
with respect to the Shares or any other voting securities of Convest.
(m) Credit Agreement. Sellers agree, if requested by Parent, to cooperate
with Parent to cause the termination of the Amended and Restated Secured
Revolving Credit Agreement, dated June 23, 1995, by and among Convest, Edisto
E&P, BankOne, Texas, National Association, as Agent, and Compass Bank -- Houston
and BankOne, Texas, National Association, as Banks, including the termination
and release of any security arrangements or other obligations of any nature
thereunder.
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SECTION 9. CONDITIONS.
(a) Conditions to Each Party's Obligation to Effect the Mergers. The
respective obligations of each party to effect the Mergers shall be subject to
the fulfillment at or prior to the Closing Date of the following conditions:
(i) this Agreement and the transactions contemplated hereby shall have
been approved and adopted by the Requisite Stockholder Approvals of the
Sellers under applicable law and applicable listing requirements;
(ii) the shares of Parent Common Stock issuable in the Mergers and
those to be reserved for issuance upon exercise of stock options or
warrants or the conversion of convertible securities shall have been
authorized for quotation on the NYSE, or such other exchange on which
Parent Common Stock is then primarily traded, upon official notice of
issuance;
(iii) the Registration Statement shall have become effective in
accordance with the provisions of the Securities Act, and no stop order
suspending such effectiveness shall have been issued and remain in effect
and no proceeding for that purpose shall have been instituted by the SEC or
any state regulatory authorities;
(iv) no preliminary or permanent injunction or other order or decree
by any federal or state court which prevents the consummation of any of the
Mergers shall have been issued and remain in effect (each party agreeing to
use its reasonable efforts to have any such injunction, order or decree
lifted);
(v) no action shall have been taken, and no statute, rule or
regulation shall have been enacted, by any state or federal government or
governmental agency in the United States which would prevent the
consummation of any of the Mergers or make the consummation of any of the
Mergers illegal;
(vi) all governmental waivers, consents, orders and approvals legally
required for the consummation of the Mergers and the transactions
contemplated hereby, and all consents from lenders required to consummate
the Mergers, shall have been obtained and be in effect at the Merger 1
Effective Time, except where the failure to obtain the same would not be
reasonably likely to have a Material Adverse Effect following the Merger 1
Effective Time; and
(vii) the Sellers and Purchasers shall have received an opinion of
Coopers & Lybrand L.L.P., in form and substance reasonably satisfactory to
the Sellers and Purchasers, dated the Closing Date, to the effect that (A)
Merger 2 will qualify as a reorganization under Section 368 of the Code and
(B) Parent and Convest will each be a "party to a reorganization" within
the meaning of 368(b) of the Code with respect to Merger 2.
(b) Conditions to Obligation of the Sellers to Effect the Mergers. Unless
waived by the Sellers, the obligation of the Sellers to effect the Mergers shall
be subject to the fulfillment at or prior to the Closing Date of the following
additional conditions:
(i) Purchasers shall have performed in all material respects their
agreements contained in this Agreement required to be performed on or prior
to the Closing Date and the representations and warranties of Purchasers
contained in this Agreement shall be true and correct in all material
respects on and as of the date made and (except to the extent that such
representations and warranties speak as of an earlier date) on and as of
the Closing Date as if made at and as of such date, and the Sellers shall
have received a certificate of the President or a Vice President of Parent
and of the President or a Vice President of EDI-Sub to that effect;
(ii) since the date hereof, there shall have been no changes that
constitute, and no event or events (including, without limitation,
litigation developments) shall have occurred which have resulted in or
constitute, either individually or in the aggregate, a Material Adverse
Change;
(iii) all governmental waivers, consents, orders, and approvals
legally required for the consummation of the Mergers and the transactions
contemplated hereby shall have been obtained and be in effect at the
Closing Date except for such waivers, consents, orders and approvals the
failure of which to have been
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obtained would not have, either individually or in the aggregate, a
Material Adverse Effect, and no governmental authority shall have
promulgated after the date hereof any statute, rule or regulation which,
when taken together with all such promulgations, would cause a Material
Adverse Change; and
(iv) each Seller shall have received the bring-down opinion of its
respective financial advisor, dated as of the date of the definitive Joint
Proxy Statement/Prospectus, to the effect that the consideration to be
received in the Mergers by the respective holders of the Convest Common
Stock and the Edisto Common Stock is fair to such holders from a financial
point of view.
(c) Conditions to Obligation of Purchasers to Effect the Mergers. Unless
waived by Parent, the obligations of Purchasers to effect the Mergers shall be
subject to the fulfillment at or prior to the Merger 1 Effective Time of the
additional following conditions:
(i) the Sellers shall have performed in all material respects their
agreements contained in this Agreement required to be performed on or prior
to the Closing Date and the representations and warranties of the Sellers
contained in this Agreement shall be true and correct in all material
respects on and as of the date made and on and as of the Closing Date as if
made at and as of such date, and Parent shall have received a Certificate
of the Chairman and Chief Executive Officer, President or of a Vice
President of each Seller to that effect;
(ii) the Affiliate Agreements and Shareholders Agreements required to
be delivered to Parent pursuant to Section 8(k) shall have been furnished
as required by Section 8(k);
(iii) each Edisto Option and each Convest Option shall have either
been redeemed, exercised or canceled in accordance with Section 4(c);
(iv) since the date hereof, there shall have been no changes that
constitute, and no event or events (including, without limitation,
litigation developments) shall have occurred which have resulted in or
constitute, either individually or in the aggregate, a Material Adverse
Change;
(v) all governmental waivers, consents, orders and approvals legally
required for the consummation of the Mergers and the transactions
contemplated hereby shall have been obtained and be in effect at the
Closing Date except for such waivers, consents, orders and approvals the
failure of which to have been obtained would not have, either individually
or in the aggregate, a Material Adverse Effect, and no governmental
authority shall have promulgated after the date hereof any statute, rule or
regulation which, when taken together with all such promulgations, would
cause a Material Adverse Change;
(vi) the number of Dissenting Shares shall not exceed three percent of
the total number of shares of Edisto Common Stock outstanding on the date
hereof;
(vii) with respect to that certain letter agreement, dated May 1,
1995, among Convest, Edisto E&P and Coral Reserves Energy Corp. ("Coral"),
and the preferential purchase right of Coral contained therein, Sellers
shall have obtained (a) the written waiver of such right by Coral, or (b)
the exercise of such right by Coral in accordance with the terms of such
agreement for a price of $14,000,000; and
(viii) with respect to that certain Conveyance of Production Payment
dated February 4, 1992, between NRM Operating Company, L.P. and Enron
Reserve Acquisition Corp. ("ERAC"), Sellers shall have obtained the express
written consent of ERAC to (a) the transfer of the interest of Edisto E&P
in the subject property pursuant to this Agreement, and (b) the succession,
by Parent or by any Subsidiary of Parent selected from time to time by
Parent in its sole discretion, to Edisto E&P's interests and obligations
under such agreement; provided, however, that such successor shall not be
required to assume any obligations, other than those currently borne by
Edisto E&P, in order for Sellers to obtain such consent.
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SECTION 10. TERMINATION, AMENDMENT AND WAIVER.
(a) Termination. This Agreement may be terminated at any time prior to the
Closing Date, whether before or after approval by the stockholders of the
Sellers, by the mutual written consent of the Parent and the Sellers or as
follows:
(i) The Sellers shall have the right to terminate this Agreement:
(A) if the representations and warranties of Purchasers shall fail
to be true and correct in all material respects on and as of the date
made or, except in the case of any such representations and warranties
made as of a specified date, on and as of any subsequent date as if made
at and as of such subsequent date and such failure shall not have been
cured in all material respects within 30 days after written notice of
such failure is given to Parent by the Sellers;
(B) if the Mergers are not completed by October 31, 1997 (unless
due to a delay or default on the part of a Seller);
(C) if any of the Mergers is enjoined by a final, unappealable
court order not entered at the request or with the support of a Seller
and if the Sellers shall have used reasonable efforts to prevent the
entry of such order;
(D) if (w) a Seller receives an offer or proposal from any
Potential Acquirer (excluding any Affiliate of a Seller or any group of
which any Affiliate of a Seller is a member) with respect to a merger,
sale of substantial assets or other business combination involving such
Seller, (x) such Seller's Board of Directors determines, in good faith
and after consultation with an independent financial advisor, that such
offer or proposal (if consummated pursuant to its terms) would result in
an Acquisition Transaction more favorable to such Seller's stockholders
from a financial point of view than the relevant Merger (any such offer
or proposal being referred to as a "Superior Proposal") and resolves to
accept such Superior Proposal, (y) the Board of Directors of the Seller
shall conclude in good faith after consultation with its legal counsel
that such action is necessary in order for the Board of Directors of the
Seller to act in a manner that is consistent with its fiduciary
obligations under applicable law and (z) the Seller shall have furnished
the Parent with a copy of the definitive agreement at least five
business days prior to its execution and Parent shall have failed within
such five business day period to offer to amend the terms of this
Agreement so that the Mergers would be, in the good faith determination
of the Board of Directors of the Seller, at least as favorable to the
Seller's stockholders from a financial point of view as the Acquisition
Transaction; provided, however, that such termination shall not be
effective until such time as the payment required by Section 10(b)(ii)
shall have been received by Parent;
(E) if (w) a tender or exchange offer is commenced by a Potential
Acquirer (excluding any Affiliate of a Seller or any group of which any
Affiliate of a Seller is a member) for all outstanding shares of such
Seller's common stock, (x) such Seller's Board of Directors determines,
in good faith and after consultation with an independent financial
advisor, that such offer constitutes a Superior Proposal and resolves to
accept such Superior Proposal or recommend to the stockholders that they
tender their shares in such tender or exchange offer, (y) the Board of
Directors of the Seller shall conclude in good faith after consultation
with its legal counsel that such action is necessary in order for the
Board of Directors of the Seller to act in a manner that is consistent
with its fiduciary obligations under applicable law and (z) the Seller
shall have furnished the Parent with a copy of the definitive agreement
at least five business days prior to its execution and Parent shall have
failed within such five business day period to offer to amend the terms
of this Agreement so that the Mergers would be, in the good faith
determination of the Board of Directors of the Seller, at least as
favorable to the Seller's stockholders from a financial point of view as
the Acquisition Transaction; provided, however, that such termination
shall not be effective until such time as the payment required by
Section 10(b)(ii) shall have been received by Parent; or
(F) if (x) Parent fails to perform in any material respect any of
its material covenants in this Agreement ("Default"), (y) Parent does
not cure such Default in all material respects within
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30 days after notice of such Default is given to Parent by the Sellers
and (z) neither Seller is itself in Default.
(ii) Parent shall have the right to terminate this Agreement:
(A) if the representations and warranties of the Sellers shall fail
to be true and correct in all material respects on and as of the date
made or, except in the case of any such representations and warranties
made as of a specified date, on and as of any subsequent date as if made
at and as of such subsequent date and such failure shall not have been
cured in all material respects within 30 days after written notice of
such failure is given to the Sellers by Parent;
(B) if the Mergers are not completed by October 31, 1997 (unless
due to a delay or default on the part of Parent);
(C) if any of the Mergers is enjoined by a final, unappealable
court order not entered at the request or with the support of Parent and
if Parent shall have used reasonable efforts to prevent the entry of
such order;
(D) if the Board of Directors of a Seller shall have resolved to
accept a Superior Proposal or shall have recommended to the stockholders
of such Seller that they tender their shares in a tender or an exchange
offer commenced by a third party (excluding any Affiliate of Parent or
any group of which any Affiliate of Parent is a member);
(E) if (A) a Seller is in Default, (B) such Seller does not cure
such Default in all material respects within 30 days after notice of
such Default is given to such Seller by Parent, and (C) Parent is not
itself in Default; or
(F) if the Sellers fail to receive the Requisite Stockholder
Approvals.
(iii) As used in this Section 10(a) "group" has the meaning set forth
in Section 13(d) of the Exchange Act and the rules and regulations
thereunder.
(iv) Each party (i) acknowledges that a breach of any of its
requirements for a termination pursuant to Section 10(a)(i)(D) and
10(a)(i)(E) will result in irreparable harm to the other party which will
not be compensable in money damages, and (ii) agrees that such requirements
shall be specifically enforceable and that specific performance and
injunctive relief shall be a remedy properly available to the other party
for a breach of such requirements. In any event, if a Seller enters into an
Acquisition Transaction, it will immediately pay to Parent the sums
described in Section 10(b) below.
(b) Expenses and Fees.
(i) All costs and expenses incurred in connection with this Agreement
and the transactions contemplated hereby shall be paid by the party
incurring such expenses, except that those expenses incurred in connection
with printing and filing the Joint Proxy Statements/Prospectus shall be
shared equally by Parent and the Sellers.
(ii) The Sellers agree to immediately pay to Parent a fee equal to
$3,000,000, if:
(A) either Seller terminates this Agreement pursuant to clause (D)
or (E) of Section 10(a)(i);
(B) Parent terminates this Agreement pursuant to clause (D) of
Section 10(a)(ii); or
(C) Parent terminates this Agreement pursuant to clause (F) of
Section 10(a)(ii) as a result of a failure of Convest to receive the
Requisite Stockholder Approvals.
(iii) Parent agrees to pay to the Sellers, as liquidated damages and
as the sole remedy and payment for any damages, a fee equal to $3,000,000
if Sellers are not in breach or violation of this Agreement and Parent
terminates this Agreement for any reason other than pursuant to Section
10(a)(ii).
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(c) Effect of Termination. In the event of termination of this Agreement by
either Parent or the Sellers pursuant to the provisions of Section 10(a), this
Agreement shall forthwith become void and there shall be no further obligation
on the part of any Party or their respective officers or directors (except as
set forth in this Section 10(c), in the second sentence of Section 8(a)(i) and
in Sections 8(a)(ii) and 10(b), all of which shall survive the termination).
Nothing in this Section 10(c) shall relieve any Party from liability for any
willful or intentional breach of this Agreement; provided, however, that any
termination of this Agreement in accordance with the procedures and payments set
forth in Section 10(b) shall relieve the terminating Party of any such
liability.
(d) Amendment. This Agreement may not be amended except by an instrument in
writing signed on behalf of each of the parties hereto and in compliance with
applicable law. Such amendment may take place at any time prior to the Closing
Date, whether before or after approval by the stockholders of the Sellers.
(e) Waiver. At any time prior to the Merger 1 Effective Time, the
Dissolution Effective Time or Merger 2 Effective Time, as the case may be, the
Parties hereto may (i) extend the time for the performance of any of the
obligations or other acts of the other Parties hereto, (ii) waive any
inaccuracies in the representations and warranties contained herein or in any
document delivered pursuant thereto and (iii) waive compliance with any of the
agreements or conditions contained herein. Any agreement on the part of a Party
hereto to any such extension or waiver shall be valid if set forth in an
instrument in writing signed on behalf of such Party.
SECTION 11. GENERAL PROVISIONS.
(a) Non-Survival of Representations and Warranties. No representations or
warranties in this Agreement or in any instrument delivered pursuant to this
Agreement shall survive the Mergers. The covenants and agreements of the parties
to be performed after the Closing contained in this Agreement shall survive the
Closing.
(b) Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally, mailed by registered
or certified mail (return receipt requested) or sent via facsimile to the
parties at the following addresses (or at such other address for a Party as
shall be specified by like notice):
(i) If to Parent or EDI-Sub to:
Forcenergy Inc
2730 SW 3rd Avenue
Suite 800
Miami, Florida 33129-2237
Attention: Stig Wennerstrom
Telecopy: (305) 856-4300
with a copy to:
Andrews & Kurth L.L.P.
4200 Texas Commerce Tower
Houston, Texas 77002
Attention: John F. Wombwell
Telecopy: (713) 220-4285
(ii) If to the Sellers, to:
Edisto Resources Corporation
2401 Fountain View Drive
Suite 700
Houston, Texas 77057
Attention: Michael Y. McGovern
Telecopy: (281) 290-9665
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with a copy to:
Snell & Smith, P.C.
1000 Louisiana, Suite 3650
Houston, Texas 77002
Attention: Paul E. Pryzant
Telecopy: (713) 651-8010
(c) Interpretation. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. In this Agreement, unless a contrary intention
appears, (i) the words "herein," "hereof" and "hereunder" and other words of
similar import refer to this Agreement as a whole and not to any particular
Article, Section or other subdivision and (ii) reference to any Article or
Section means such Article or Section hereof. No provision of this Agreement
shall be interpreted or construed against any party hereto solely because such
party or its legal representative drafted such provision.
(d) Miscellaneous. This Agreement (including the documents and instruments
referred to herein) (i) constitutes the entire agreement and supersedes all
other prior agreements and understandings, both written and oral, among the
parties, or any of them, with respect to the subject matter hereof, (ii) is not
intended to confer upon any other person any rights or remedies hereunder and
(iii) shall not be assigned by operation of law or otherwise, except that
EDI-Sub may assign this Agreement to any other wholly owned subsidiary of
Parent. THIS AGREEMENT SHALL BE GOVERNED IN ALL RESPECTS, INCLUDING VALIDITY,
INTERPRETATION AND EFFECT, BY THE LAWS OF THE STATE OF DELAWARE APPLICABLE TO
CONTRACTS EXECUTED AND TO BE PERFORMED WHOLLY WITHIN SUCH STATE.
(e) Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
shall constitute one and the same agreement.
(f) Parties In Interest. This Agreement shall be binding upon and inure
solely to the benefit of each Party hereto, and nothing in this Agreement,
express or implied, is intended to confer upon any other person any rights or
remedies of any nature whatsoever under or by reason of this Agreement.
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<PAGE> 239
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the date first above written.
FORCENERGY INC
By:
----------------------------------
Name: Stig Wennerstrom
Title: President and Chief
Executive Officer
EDI ACQUISITION CORPORATION
By:
----------------------------------
Name: Stig Wennerstrom
Title: President and Chief
Executive Officer
EDISTO RESOURCES CORPORATION
By:
----------------------------------
Name: Michael Y. McGovern
Title: Chairman and Chief
Executive Officer
CONVEST ENERGY CORPORATION
By:
----------------------------------
Name: Michael Y. McGovern
Title: Chairman and Chief
Executive Officer
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<PAGE> 240
APPENDIX B
PLAN AND AGREEMENT OF MERGER
THIS PLAN AND AGREEMENT OF MERGER (the "Merger Agreement") is made and
entered into as of , 1997, by and among Forcenergy Inc, a Delaware
corporation (the "Company") and Convest Energy Corporation, a Texas corporation
("Convest").
WITNESSETH
WHEREAS, the Company is a corporation duly organized and validly existing
under the laws of the State of Delaware, with authorized capital stock
consisting of 50,000,000 shares of Common Stock, $0.01 par value per share
("Company Common Stock"), of which shares are issued and outstanding
on the date hereof, and 5,000,000 shares of preferred stock, of which no shares
are issued and outstanding as of the date hereof;
WHEREAS, Convest is a corporation duly organized, validly existing and in
good standing in the State of Texas, with authorized capital stock consisting of
20,000,000 shares of common stock, $0.01 par value ("Convest Common Stock"), of
which shares were issued and outstanding on the date hereof, and
5,000,000 shares of preferred stock, of which no shares are issued and
outstanding on the date hereof;
WHEREAS, the respective Boards of Directors of the Company and Convest have
determined that it is advisable and to the advantage of such corporations and
their shareholders that Convest merge with and into the Company (the "Merger")
upon the terms and conditions herein provided; and
WHEREAS, the Boards of Directors of the Company and Convest have approved
this Merger Agreement.
NOW, THEREFORE, in consideration of the mutual agreements and covenants set
forth herein, it is agreed as follows:
1. Merger. Convest shall be merged with and into the Company on the terms
and conditions hereinafter expressed (the "Merger"). At the Effective Time (as
defined hereinafter), the separate existence of Convest shall cease and the
Company shall be the surviving entity (the "Surviving Entity"). The Merger shall
become effective at such time (the "Effective Time") as is the later to occur of
(i) the time that the Articles of Merger, together with a copy of this Merger
Agreement, are filed with the Secretary of State of the State of Texas and a
certificate of merger is issued thereby in accordance with the Texas Business
Corporation Act ("TBCA"), and (ii) the time that a Certificate of Merger is
filed with the Secretary of State of the State of Delaware in accordance with
the Delaware General Corporate Law ("DGCL").
2. Governing Documents and Directors and Officers. The Certificate of
Incorporation of the Company in effect immediately prior to the Effective Time
shall continue to be the Certificate of Incorporation of the Surviving Entity
after the Effective Time without change or amendment. The Bylaws of the Company
in effect immediately prior to the Effective Time shall continue to be the
Bylaws of the Surviving Entity after the Effective Time without change or
amendment. The directors and officers of the Company immediately prior to the
Effective Time shall be the directors and officers of the Surviving Entity after
the Effective Time, and shall serve until their successors have been duly
appointed or elected in accordance with the Certificate of Incorporation and
Bylaws of the Surviving Entity.
3. Succession. At the Effective Time, the Surviving Entity shall succeed to
Convest in the manner of and as more fully set forth in Section 259 of the DGCL.
All rights, title and interests to all real estate and other property owned by
Convest shall be allocated to and vested in the Surviving Entity without
reversion or impairment, without further act or deed, and without any transfer
or assignment having occurred, but subject to any existing liens or other
encumbrances thereon. All liabilities and obligations of Convest shall be
allocated to the Surviving Entity and the Surviving Entity shall be the primary
obligor therefor and, except as otherwise provided by law or contract, no other
party to the Merger shall be liable therefor.
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4. Conversion of Shares. At the Effective Time, by virtue of the Merger and
without any action by the holder of any capital stock of the Company or Convest:
(a) Each share of Convest Common Stock shall be converted into the
right to receive, without interest, a fractional interest in a share of
Company Common Stock equal to $8.88 divided by the Weighted Average Trading
Price (as defined below) (the "Exchange Ratio"); provided, however, (i) if
such Weighted Average Trading Price exceeds $34.96, then the Exchange Ratio
shall be equal to $8.88 divided by $34.96 and (ii) if such Weighted Average
Trading Price is less than $28.96, then the Exchange Ratio shall be equal
to $8.88 divided by $28.96. Only whole shares of Company Common Stock shall
be issued. In lieu of any fractional share of Company Common Stock, each
holder of shares of Convest Common Stock who would otherwise have been
entitled to receive a fraction of a share of Company Common Stock shall be
entitled to receive a cash payment equal to such fraction multiplied by
either (i) the Weighted Average Trading Price, (ii) $34.96 or (iii) $28.96,
depending on which of the foregoing prices is used for the above
calculation of the Exchange Ratio.
(b) Each share of capital stock of Convest, if any, owned by the
Company or any subsidiary of the Company or held in treasury by Convest or
any subsidiary of Convest immediately prior to the Effective Time shall be
canceled and no consideration shall be paid in exchange therefor and shall
cease to exist from and after the Effective Time.
(c) Each share of Company Common Stock issued and outstanding
immediately prior to the Merger shall, upon consummation of the Merger, be
converted into one share of common stock of the Surviving Entity.
(d) The "Weighted Average Trading Price" of Company Common Stock shall
be calculated by (x) making the following calculation for each of the ten
trading days ending on the day that is two days prior to the Closing Date
of the Merger: (i) grouping together all shares of Company Common Stock
traded on such day at the same trading price, (ii) multiplying the
aggregate number of shares in each price group by the trading price for
such group to calculate a product (the total sold shares value) for each
group, (iii) adding all of such products from each group and (iv) dividing
the resulting total by the aggregate number of shares traded on such
trading day, and (y) calculating the arithmetic mean of the resulting ten
amounts.
5. Surrender of Stock Certificates; Payment. From and after the Effective
Time, each holder of an outstanding certificate which prior to that time
represented shares of Convest Common Stock, shall be entitled to receive in
exchange therefor, upon surrender to , the Exchange Agent for the
Merger, a certificate or certificates representing the number of whole shares of
Company Common Stock, and cash in lieu of any fractional share, in each case to
which such holder is entitled pursuant to Section 4(a) above.
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<PAGE> 242
IN WITNESS WHEREOF, this Merger Agreement, having first been duly approved
by resolutions of the Boards of Directors of the Company and Convest and by the
shareholders of Convest, is hereby executed on behalf of each of said
corporations by their respective officers thereunto duly authorized.
CONVEST ENERGY CORPORATION
A Texas corporation
By:
----------------------------------
Name:
Title:
ATTEST:
By:
--------------------------------
Secretary
FORCENERGY INC
A Delaware corporation
By:
----------------------------------
Name:
Title:
ATTEST:
By:
--------------------------------
Secretary
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<PAGE> 243
APPENDIX C
JUNE 19, 1997
Board of Directors
Edisto Resources Corporation
2401 Fountain View Drive
Suite 700
Houston, Texas 77057
Gentlemen:
You have advised Rauscher Pierce Refsnes, Inc. ("RPR") that Forcenergy Inc,
a Delaware corporation ("Forcenergy"), has proposed to acquire the outstanding
common stock of Edisto Resources Corporation ("Edisto") at a price of
approximately $9.95 per Edisto share payable in (1) shares of common stock of
Forcenergy to have a current market value of $5.064, based on the average market
price of Forcenergy's common stock for ten trading days prior to closing
(subject to certain "floor" and "ceiling" provisions) plus (2) $4.886 in cash.
You have requested that RPR issue an opinion ("Opinion") as to the fairness from
a financial point of view to the stockholders of Edisto of the financial terms
of the proposed transaction as set forth in the draft Agreement and Plan of
Merger dated June 19, 1997, which we understand is the latest draft.
RPR, as part of its investment banking business, is continually engaged in
the valuation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, secondary distributions of listed and
unlisted securities, private placements, and valuations for estate, corporate
and other purposes.
In arriving at our opinion, we have, among other things:
1. Reviewed the draft "Agreement and Plan of Merger" dated June 19,
1997 between Edisto and Forcenergy;
2. Reviewed Forcenergy's May 16, 1997 offer letter written by Mr. Stig
Wennerstrom, President and CEO;
3. Reviewed Edisto's 10-K report for the year ended December 31, 1996
with Financial Statements audited by Arthur Andersen L.L.P.;
4. Reviewed Edisto's 10-Q report for the quarter ended March 31, 1997;
5. Reviewed an internal monthly financial package prepared by Edisto
as of March 31, 1997;
6. Reviewed Convest Energy Corporation's ("Convest's") 10-K report for
the year ended December 31, 1996 with Financial Statements audited by
Arthur Andersen, L.L.P. (Edisto owns 73% of Convest's common stock);
7. Reviewed Convest's 10-Q report for the quarter ended March 31,
1997;
8. Reviewed an internal monthly financial package prepared by Convest
as of March 31, 1997;
9. Reviewed "Estimate of Revenues and Future Reserves to the Convest
Energy Corporation" as of January 1, 1997 prepared by Netherland, Sewell &
Associates, Inc.;
10. Reviewed a reserve report prepared by Ryder Scott Company as of
12/31/96 for Convest;
11. Reviewed Forcenergy's Annual Report and 10-K for the year ending
December 31, 1996 with financial statements audited by Coopers & Lybrand,
L.L.P.;
12. Reviewed Forcenergy's 10-Q report for the quarter ending March 31,
1997;
13. Reviewed Forcenergy's reserve report prepared by Netherland,
Sewell & Associates, Inc. prepared as of 1/1/97 and reports on the Stewart
Petroleum Acquisition, dated 2/18/97;
14. Reviewed Forcenergy's 1997 Budget prepared on April 7, 1997;
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15. Reviewed Forcenergy's offering memorandum dated 2/11/97 for its
issuance of $200,000,000 senior subordinates notes;
16. Reviewed several research reports on Forcenergy written by various
brokerage firms in 1997;
17. Reviewed confidential information memorandum for Edisto and
Convest prepared by Petrie Parkman & Co. in February, 1997;
18. Considered such other information, financial studies, analyses and
investigations as we deemed relevant under the circumstances; and
19. Discussed with management of Edisto and Convest the outlook for
future operating results, the assets and liabilities of the companies,
material in the foregoing documents, and other matters we considered
relevant to our inquiry.
In our review and in arriving at our opinion, we have, with your
permission, (i) not independently verified any of the foregoing information and
have relied upon its being complete and accurate in all material respects and
(ii) not made an independent evaluation or appraisal of specific assets of
Edisto or Convest. Our opinion is provided to you pursuant to the terms of our
engagement letter dated June 9, 1997.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the consideration to be received pursuant to the proposed
transaction is fair to the stockholders of Edisto from a financial point of
view.
RAUSCHER PIERCE REFSNES, INC.
By: /s/ G. CLYDE BUCK
-----------------------------------
G. Clyde Buck
Managing Director
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<PAGE> 245
APPENDIX D
OPINION OF PETRIE PARKMAN
PETRIE PARKMAN & CO.
6350 TEXAS COMMERCE TOWER
HOUSTON, TEXAS 77002
713/650-3383 -- FAX: 713/650-8461
JUNE 19, 1997
The Board of Directors
Convest Energy Corporation
2401 Fountain View Drive
Suite 700
Houston, Texas 77057
Dear Directors:
You have asked us to advise you with respect to the fairness, from a
financial point of view, to the stockholders of Convest Energy Corporation, a
Texas corporation ("Convest") of the merger consideration (the "Merger
Consideration") consisting of a fraction of a share of Forcenergy Inc
("Forcenergy") common stock, par value $0.01 per share ("Forcenergy Common
Stock"), equal to $8.88 divided by the average of the Weighted Average Daily
Trading Price (as defined in the Merger Agreement) of Forcenergy Common Stock
for the ten trading days ending two trading days prior to the Closing Date (as
defined in the Merger Agreement); provided, however, (i) if such average of the
Weighted Average Daily Trading Price of Forcenergy Common Stock exceeds $34.96,
then the Convest Exchange Ratio (as defined in the Merger Agreement) shall be
equal to 0.25400 and (ii) if such average of the Weighted Average Daily Trading
Price of Forcenergy Common Stock is less than $28.96, then the Convest Exchange
Ratio shall be equal to 0.30663, in exchange for each share of outstanding
Convest common stock, par value $0.01 per share ("Convest Common Stock"),
pursuant to the terms of the Agreement and Plan of Merger, dated as of June 19,
1997 (the "Merger Agreement"), among Forcenergy, a Delaware corporation, EDI
Acquisition Corporation, a Delaware corporation and wholly-owned subsidiary of
Forcenergy, Edisto Resources Corporation, a Delaware corporation, and Convest.
The Merger Agreement provides for, among other things, the merger (the "Merger")
of Convest with a subsidiary of Forcenergy pursuant to which each issued and
outstanding share of Convest Common Stock will be converted into a fraction of a
share of Forcenergy Common Stock as described above.
In arriving at our opinion, we have, among other things:
(i) reviewed (i) certain publicly available business and financial
information relating to Convest and Forcenergy, including the audited
financial statements on Form 10-K for Convest and Forcenergy as of December
31, 1996, and the unaudited financial statements on Form 10-Q for Convest
and Forcenergy as of March 31, 1997, and (ii) the audited financial
statements of Great Western Resources Inc. ("Great Western") as of
September 30, 1996, and (iii) the unaudited consolidated statement of
operations of Great Western for the six month period ending March 31, 1996
and the three month, 21 day period ending January 21, 1997;
(ii) reviewed certain estimates of reserves including: (i) estimates
of proved, probable, and possible oil and gas reserves of Convest, as
prepared by Ryder Scott Company Petroleum Engineers as of December 31, 1996
and Netherland Sewell & Associates, Inc. as of January 1, 1997, (ii)
certain estimates of oil and gas reserves of Convest in the Gulf of Mexico
as prepared by the management and staff of Convest as of March 31, 1997,
(iii) estimates of proved oil and gas reserves of Forcenergy in the Gulf of
Mexico and onshore United States including Alaska, as prepared by
Netherland Sewell & Associates, Inc. as of January 1, 1997, (iv) estimates
of proved, probable, and possible reserves of Forcenergy in the Gulf of
Mexico, as prepared by Collarini Engineering Inc. as of January 1, 1997;
(v) certain estimates of oil and gas reserves of Great Western in the Gulf
of Mexico and onshore United
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States as prepared by Ryder Scott Company Petroleum Engineers as of
September 30, 1996, and (vi) certain estimates of oil and gas reserves of
Stewart Petroleum Company in Alaska as prepared by the management and staff
of Forcenergy as of January 1, 1997;
(iii) analyzed certain financial and operating data and budgets
concerning Convest and Forcenergy, all of which were prepared or provided
by the managements of Convest and Forcenergy, as the case may be;
(iv) discussed the current operations and prospects of Convest and
Forcenergy with the managements and operating staffs of Convest and
Forcenergy, as the case may be;
(v) reviewed the historical trading histories and prices of the shares
of Forcenergy Common Stock and Convest Common Stock;
(vi) compared recent stock market capitalization indicators for
Forcenergy and Convest with the recent stock market capitalization
indicators for certain other publicly-traded independent energy companies;
(vii) compared the financial terms of the Merger with the financial
terms of certain other transactions which we deemed to be relevant;
(viii) reviewed the Merger Agreement and the form of Shareholder
Agreement between Forcenergy and the Stockholder party thereto, both dated
June 19, 1997; and
(ix) made such other analyses and examinations as we have deemed
necessary or appropriate.
We have assumed and relied upon, without assuming any responsibility for
verification, the accuracy and completeness of such information, including
without limitation, the statements made in the discussions referred to above. We
have further relied upon the assurances of the managements of both Convest and
Forcenergy that they are unaware of any facts that would make the information
provided to us incomplete or misleading in any material respect. With respect to
financial and operating data and budgets, we have assumed that they have been
reasonably prepared on bases reflecting the best currently available estimates
and judgments relating to the future financial and operational performance of
Convest and Forcenergy (including taking into account the impact of the Merger).
With respect to the estimates of oil and gas reserves, we have assumed that they
have been reasonably prepared on bases reflecting the best available estimates
and judgments relating to Convest's and Forcenergy's oil and gas properties. In
addition, we have not made an independent evaluation or appraisal of the assets
or liabilities of Convest or Forcenergy nor, except for the estimates of oil and
gas reserves referred to above, have we been furnished with such an evaluation
or appraisal. Consistent with the Merger Agreement, we have assumed that the
Merger will be treated for federal income tax purposes as a reorganization
within the meaning of Section 368 of the Internal Revenue Code of 1986, as
amended.
Our opinion relates solely to the fairness from a financial point of view
to the holders of Convest Common Stock of the Merger Consideration pursuant to
the Merger. Our opinion does not constitute a recommendation to any stockholder
as to how such stockholder should vote on the proposed Merger or any matter
related thereto. We have not been requested to, and do not, express any opinion
regarding the fairness of the Merger Consideration to Forcenergy, or any
stockholder of Forcenergy. Our engagement and the opinion expressed herein are
solely for the benefit of the Convest Board of Directors and are not on behalf
of, and are not intended to confer rights or remedies upon, Forcenergy, any
holder of Convest Common Stock or Forcenergy Common Stock, or any person other
than the Convest Board of Directors. In addition, we have not been asked to
consider, and this opinion does not address, the price at which the Forcenergy
Common Stock will actually trade following the announcement or consummation of
the Merger. This letter may not be used for any other purpose without our prior
written consent; provided, however, that this letter may be reproduced in fall
in a proxy statement/prospectus relating to the Merger. As you are aware, we
have acted as financial advisor to Edisto Resources Corporation ("Edisto") and
we will receive fees from Convest and Edisto that are contingent upon the
consummation of the Merger and the merger of Edisto as described in the Merger
Agreement.
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<PAGE> 247
Our opinion is rendered on the basis of conditions in the securities
markets and the oil and gas markets prevailing as of the date hereof and the
condition and prospects, financial and otherwise, of Convest and Forcenergy as
they have been represented to us as of the date hereof or as they were reflected
in the materials and discussions described above.
Based upon and subject to the foregoing, and based upon such other matters
as we consider relevant, it is our opinion that, as of the date hereof, the
Merger Consideration is fair from a financial point of view to the holders of
Convest Common Stock.
Very truly yours,
/s/ JOHN C. HUGHES
------------------------------------
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<PAGE> 248
APPENDIX E
SECTION 262 OF THE
DELAWARE GENERAL CORPORATION LAW
262 APPRAISAL RIGHTS -- (a) Any stockholder of a corporation of this State
who holds shares of stock on the date of the making of a demand pursuant to
subsection (d) of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or consolidation, who
has otherwise complied with subsection (d) of this section and who has neither
voted in favor of the merger or consolidation nor consented thereto in writing
pursuant to Section 228 of this title shall be entitled to an appraisal by the
Court of Chancery of the fair value of the stockholder's shares of stock under
the circumstances described in subsections (b) and (c) of this section. As used
in this section, the word "stockholder" means a holder of record of stock in a
stock corporation and also a member of record of a nonstock corporation; the
words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a nonstock
corporation; and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Section 251 (other than a merger effected pursuant to
Section 251(g) of this title), Section 252, Section 254, Section 257, Section
258, Section 263 or Section 264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to Section
251, Section 252, Section 254, Section 257, Section 258, Section 263 or
Section 264 of this title to accept for such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock or depository receipts at the
effective date of the merger or consolidation will be either listed on a
national securities exchange or designated as a national market system
security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or held of record by more than 2,000
holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of his paragraph.
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(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under Section 253 of this title is not owned by
the parent corporation immediately prior to the merger, appraisal rights
shall be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available for any or all of the shares of the constituent
corporations and shall include in such notice a copy of this section. Each
stockholder electing to demand the appraisal of his shares shall deliver to
the corporation, before the taking of the vote on the merger or
consolidation, a written demand for appraisal of his shares. Such demand
will be sufficient if it reasonably informs the corporation of the identity
of the stockholder and that the stockholder intends thereby to demand the
appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing to
take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to Section
228 or Section 253 of this title, each constituent corporation, either
before the effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within 20 days after the date of mailing
of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall be
not more than 10 days prior to the date the notice is given, provided, that
if the notice is given on or after the
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<PAGE> 250
effective date of the merger or consolidation, the record date shall be
such effective date. If no record date is fixed and the notice is given
prior to the effective date, the record date shall be the close of business
on the day next preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
his written request for such a statement is receiving by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted his
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is fully determined that he is not
entitled to appraisal rights under this section.
E-3
<PAGE> 251
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for nay purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the court, and
such approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
E-4
<PAGE> 252
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Section 145 of the General Corporation Law of the State of
Delaware (the "DGCL"), a Delaware corporation has the power, under specified
circumstances, to indemnify its directors, officers, employees and agents in
connection with threatened, pending or completed actions, suits or proceedings,
whether civil, criminal, administrative or investigative (other than an action
by or in right of the corporation), brought against them by reason of the fact
that they were or are such directors, officers, employees or agents, against
expenses, judgments, fines and amounts paid in settlement actually and
reasonably incurred in any such action, suit or proceeding. Article XII of the
Forcenergy's Amended and Restated Certificate of Incorporation together with
Article VII of its Bylaws provide for indemnification of each person who is or
was made a party to any actual or threatened civil, criminal, administrative or
investigative action, suit or proceeding because such person is or was an
officer or director of the Forcenergy or is a person who is or was serving at
the request of the Forcenergy as a director, officer, employee or trustee of
another corporation or of a partnership, joint venture trust or other
enterprise, including service relating to employee benefit plans, to the
fullest extent permitted by the DGCL as it existed at the time the
indemnification provisions of the Forcenergy's Certificate of Incorporation and
the Bylaws were adopted or as may be thereafter amended. Article VII of the
Forcenergy's Bylaws expressly provides that it is not the exclusive method of
indemnification.
Article VII of the Bylaws provides that the Forcenergy may maintain
insurance, at its own expense, to protect itself and any director, officer,
employee or agent of the Forcenergy or of another entity against any expense,
liability or loss, regardless of whether the Forcenergy would have the power to
indemnify such person against such expense, liability or loss under the DGCL.
Section 102(b)(7) of the DGCL provides that a certificate of
incorporation may contain a provision eliminating or limiting the personal
liability of a director to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, provided that such
provision shall not eliminate or limit the liability of a director (i) for any
breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174
of the DGCL (relating to liability for unauthorized acquisitions or redemptions
of, or dividends on, capital stock) or (iv) for any transaction from which the
director derived an improper personal benefit. Article XII of the Forcenergy's
Amended and Restated Certificate of Incorporation contains such a provision.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibits
- ------ -----------------------
<S> <C>
2.1 Agreement and Plan of Merger dated as of June 19, 1997, as amended,
by and among Forcenergy, EDI-Sub, Edisto and Convest (included
as Appendix A to the Joint Proxy Statement/Prospectus).
2.2* Shareholder Agreement dated as of June 19, 1997 by and among
Forcenergy and TCW Entities.
2.3* Form of Shareholder Agreement by and among Forcenergy and certain
officers and directors of Edisto and Convest.
4.1 Amended and Restated Certificate of Incorporation of Forcenergy
dated July 25, 1995 (filed as Exhibit 3.1 to the Quarterly Form on
10-Q filed on November 14, 1995 for the nine month period ending
September 30, 1995 and is included herein by reference (File No.
0-26444)) and Amendment No. 1 thereto (filed with Amendment No. 2
to the Registration Statement on Form S-1 filed on June 6, 1996 and
is included herein by reference (File No. 333-4600)
</TABLE>
II-1
<PAGE> 253
<TABLE>
<S> <C>
4.2 Bylaws of Forcenergy (filed as Exhibit 3.2 to the Registration
Statement on Form S-1 filed on June 2, 1995, as amended on July 6,
1995 and July 25, 1995 and is included herein by reference (File
No. 33-93020)).
5.1** Opinion of Vinson & Elkins L.L.P. regarding the legality of the
securities.
8.1** Form of Opinion of Coopers & Lybrand L.L.P. regarding tax matters.
11.1 Computation of Earnings per Share dated as of March 31, 1997 and
December 31, 1996 (set forth in the Quarterly Report on Form 10-Q
for the quarter ended March 31, 1997 and the Annual Report on Form
10-K for the fiscal year December 31, 1996, respectively. These
reports have been incorporated herein by reference).
12.1** Computation of Ratios.
23.1 Consent of Vinson & Elkins L.L.P. (set forth in Exhibit 5.1).
23.2** Consent of Coopers & Lybrand L.L.P.
23.3A** Consent of Arthur Andersen LLP (Edisto).
23.3B** Consent of Arthur Andersen LLP (Convest).
23.4** Consent of Price Waterhouse LLP (Forcenergy).
23.5** Consent of Netherland, Sewell & Associates, Inc. (Edisto and
Convest).
23.6** Consent of Collarini Engineering, Inc.
23.7** Consent of Joe C. Neal & Associates.
23.8** Consent of Ryder Scott Company (Edisto and Convest).
23.9** Consent of Netherland, Sewell & Associates, Inc. (Forcenergy).
24.1 Powers of Attorney (set forth on signature page).
99.1** Form of Edisto Proxy.
99.2** Form of Convest Proxy.
99.3** Consent of Rauscher Pierce Refsnes, Inc.
99.4** Consent of Petrie Parkman & Co.
</TABLE>
- ----------
* Previously filed
** Filed herewith
II-2
<PAGE> 254
Financial Statement Schedules:
Not applicable.
ITEM 22. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required in Section 10(a) (3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement;
provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the Registrant pursuant to
section 13 or section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the Registration Statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof;
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
the offering;
(4) That, for purposes of determining any liability under the Securities
Act of 1933, each filing of the Registrant's annual report pursuant to section
13(a) or section 15(d) of the Securities Exchange Act of 1934 that is
incorporated by reference in the Registration Statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
tide offering thereof;
(5) 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;
(6) That, prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this Registration
Statement, by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus
will contain the information called for by the applicable registration form
with respect to reofferings by persons who may be deemed underwriters, in
addition to the information called for by the other Items of the applicable
form;
(7) That every prospectus (i) that is filed pursuant to paragraph (6)
immediately preceding, or (ii) that purports to meet the requirements of
section 10(a)(3) of the Securities Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act, each such post-
II-3
<PAGE> 255
effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof; and
(8) 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.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 20 above, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer
or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
II-4
<PAGE> 256
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Miami, State of Florida,
on the 29th day of August, 1997.
Forcenergy Inc
By: /s/ E. JOSEPH GRADY
----------------------------------------
E. Joseph Grady
Vice President - Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this
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>
*
- ------------------------------- President and Chief Executive Officer August 29, 1997
Stig Wennerstrom (Principal Executive Officer)
/s/ E. JOSEPH GRADY
- ------------------------------- Vice President - Chief Financial Officer August 29, 1997
E. Joseph Grady (Principal Financial and Accounting Officer)
*
- ------------------------------- Director August 29, 1997
Bruce L. Burnham
*
- ------------------------------- Director August 29, 1997
Eric Forss
*
- ------------------------------- Chairman of the Board of Directors August 29, 1997
Robert Issal
*
- ------------------------------- Director August 29, 1997
William F. Wallace
*By: /s/ E. JOSEPH GRADY
- -------------------------------
E. Joseph Grady
As Attorney-in-Fact
</TABLE>
II-5
<PAGE> 257
EXHIBIT INDEX
Exhibit
Number Description of Exhibits
- ------ -----------------------
2.1 Agreement and Plan of Merger dated as of June 19, 1997, as amended,
by and among Forcenergy, EDI-Sub, Edisto and Convest (included
as Appendix A to the Joint Proxy Statement/Prospectus).
2.2* Shareholder Agreement dated as of June 19, 1997 by and among
Forcenergy and TCW Entities.
2.3* Form of Shareholder Agreement by and among Forcenergy and certain
officers and directors of Edisto and Convest.
4.1 Amended and Restated Certificate of Incorporation of Forcenergy
dated July 25, 1995 (filed as Exhibit 3.1 to the Quarterly Form on
10-Q filed on November 14, 1995 for the nine month period ending
September 30, 1995 and is included herein by reference (File No.
0-26444)) and Amendment No. 1 thereto (filed with Amendment No. 2
to the Registration Statement on Form S-1 filed on June 6, 1996 and
is included herein by reference (File No. 333-4600)
4.2 Bylaws of Forcenergy (filed as Exhibit 3.2 to the Registration
Statement on Form S-1 filed on June 2, 1995, as amended on July 6,
1995 and July 25, 1995 and is included herein by reference (File
No. 33-93020)).
5.1** Opinion of Vinson & Elkins L.L.P. regarding the legality of the
securities.
8.1** Form of Opinion of Coopers & Lybrand L.L.P. regarding tax matters.
11.1 Computation of Earnings per Share dated as of June 30, 1997 and
December 31, 1996 (set forth in the Quarterly Report on Form 10-Q
for the quarter ended June 30, 1997 and the Annual Report on Form
10-K for the fiscal year December 31, 1996, respectively. These
reports have been incorporated herein by reference).
12.1** Computation of Ratios.
23.1 Consent of Vinson & Elkins L.L.P. (set forth in Exhibit 5.1).
23.2** Consent of Coopers & Lybrand L.L.P.
23.3A** Consent of Arthur Andersen LLP (Edisto).
23.3B** Consent of Arthur Andersen LLP (Convest).
23.4** Consent of Price Waterhouse LLP (Forcenergy).
23.5** Consent of Netherland, Sewell & Associates, Inc. (Edisto and
Convest).
23.6** Consent of Collarini Engineering, Inc.
23.7** Consent of Joe C. Neal & Associates.
23.8** Consent of Ryder Scott Company (Edisto and Convest).
23.9** Consent of Netherland, Sewell & Associates, Inc. (Forcenergy).
24.1 Powers of Attorney (set forth on signature page).
99.1** Form of Edisto Proxy.
99.2** Form of Convest Proxy.
99.3** Consent of Rauscher Pierce Refsnes, Inc.
99.4** Consent of Petrie Parkman & Co.
- ----------
* Previously filed
** Filed herewith
<PAGE> 1
EXHIBIT 5.1
[VINSON & ELKINS LETTERHEAD]
WRITER'S TELEPHONE WRITER'S FAX
(713) 758-3622 (713) 615-5522
August 29, 1997
Forcenergy Inc
2730 SW 3rd Avenue, Suite 800
Miami, FL 33129-2237
Ladies and Gentlemen:
We have acted as counsel to Forcenergy Inc, a Delaware corporation (the
"Company"), in connection with the preparation of the Company's Registration
Statement on Form S-4, File No. 333-31675 (as amended, the "Registration
Statement") filed by the Company with the Securities and Exchange Commission
(the "Commission") pursuant to the Securities Act of 1933, as amended (the
"Act"), which Registration Statement relates to the proposed issuances by the
Company of certain shares of the Company's Common Stock, par value $.01 per
share (the "Common Stock"), in accordance with the Agreement and Plan of Merger
dated as of June 19, 1997, as amended, among Edisto Resources Corporation
("Edisto"), Convest Energy Corporation ("Convest"), the Company and a subsidiary
of the Company and the related Plan and Agreement of Merger (collectively, the
"Merger Agreement") among the Company and Convest which Merger Agreement
provides for the acquisition by the Company of Edisto and Convest by means of
mergers described therein (the "Mergers"). In such connection, we are passing on
certain legal matters in connection with the foregoing issuances of the Common
Stock. At your request, this opinion is being furnished to you for filing as an
exhibit to the Registration Statement.
In connection with rendering this opinion, we have examined the
Registration Statement and such certificates, instruments and documents and
reviewed such questions of law as we have considered necessary or appropriate
for the purposes of this opinion. In addition, we have relied as to factual
matters on certificates of certain public officials and officers of the Company.
Based upon the foregoing examination and review, we are of the opinion
that when the conditions to the Mergers set forth in the Merger Agreement have
been satisfied (including that the Registration Statement has become effective
under the Act) and the Mergers have been effected in accordance therewith, the
shares of Common Stock to be issued in exchange for shares of common stock of
Edisto and shares of common stock of Convest pursuant to the Merger Agreement
will be validly issued, fully paid and non-assessable.
<PAGE> 2
Forcenergy Inc
Page 2
August 29, 1997
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the references to us under the caption "Legal
Matters" in the Joint Proxy Statement/Prospectus forming a part of the
Registration Statement. In giving this consent, however, we do not hereby admit
that we are within the category of persons whose consent is required under
Section 7 of the Act and the rules and regulations of the Commission thereunder.
Very truly yours,
/s/ VINSON & ELKINS L.L.P.
<PAGE> 1
EXHIBIT 8.1
FORM OF TAX OPINION
OF
INDEPENDENT ACCOUNTANTS
, 1997
Forcenergy Inc
2730 SW 3rd Avenue
Suite 800
Miami, Florida 33129-2237
Ladies and Gentlemen:
We have acted as tax advisors to Forcenergy Inc, a corporation duly
organized in Delaware ("Forcenergy"), in connection with its proposed
acquisition of Edisto Resources Corporation, a Delaware corporation ("Edisto"),
and Edisto's 73% owned subsidiary, Convest Energy Corporation, a Texas
corporation ("Convest"). To effectuate the acquisition, Forcenergy will
establish EDI Acquisition Corporation, a Delaware corporation ("EDI-Sub"),
which will merge with and into Edisto with Edisto being the surviving
corporation ("Edisto Merger"), and with each share of Edisto common stock
("Edisto Common Stock") being converted into (i) $4.886 in cash and (ii) a
fractional interest in a share of Forcenergy common stock ("Forcenergy Common
Stock"). After the Edisto Merger, there will be a complete liquidation of
Edisto into Forcenergy with Forcenergy receiving Edisto's ownership interest in
Convest ("Edisto Liquidation"). After the Edisto Liquidation, Convest will
merge with and into Forcenergy with Forcenergy being the surviving corporation
and with each share of Convest stock being converted into a fractional interest
in a share of Forcenergy Common Stock ("Convest Merger"). The above steps
(collectively referred to as "The Mergers") are more fully described in the
Joint Proxy Statement/Prospectus which is included in the Registration
Statement to be filed with the Securities and Exchange Commission under the
Securities Exchange Act of 1934.
In rendering our opinion(1), we have examined the Joint Proxy
Statement/Prospectus, the Merger Agreement and such other documents as we have
deemed relevant. In our examination, we have assumed the genuineness of all
signatures, the legal capacity of all natural persons, the authenticity of all
documents submitted to us as originals, the conformity to original documents of
all documents submitted to us as certified, conformed or photostatic copies,
and the authenticity of the originals of such copies. This opinion is subject
to
- --------------
(1) Unless otherwise indicated, all defined terms used herein shall have the
meanings assigned to them in the Registration Statement.
<PAGE> 2
Forcenergy Inc
, 1997
Page 2
our receipt prior to the Effective Times of the Mergers of certain written
representations of Forcenergy, Edisto and Convest.
In rendering our opinion, we have assumed that the Mergers will be
consummated in the manner described in the Joint Proxy Statement/Prospectus and
the Merger Agreement dated June 19, 1997, and that none of the terms and
conditions contained therein will have been waived or modified in any respect
prior to the Effective Times. We have also assumed that the Joint Proxy
Statement/Prospectus reflects all the material facts relating to Forcenergy,
Edisto, Convest and the Mergers. Our opinion is expressly conditioned on, among
other things, the accuracy as of the date hereof, and the continuing accuracy,
of all of such facts and representations. Any material changes thereto may
affect our conclusions stated herein.
In rendering our opinion, we have considered applicable provisions of
the Internal Revenue Code of 1986, as amended (the "Code"), the Treasury
Regulations promulgated thereunder (the "Regulations"), pertinent judicial
authorities, rulings of the Internal Revenue Service (the "Service") and such
other authorities as we considered relevant. It should be noted that such laws,
Code, Regulations, judicial decisions and administrative interpretations are
subject to change at any time and, in some circumstances, with retroactive
effect. A material change in any of the authorities upon which our opinion is
based could affect our conclusions herein.
Based upon and subject to the foregoing, the discussion contained in
the Joint Proxy Statement/Prospectus included as part of the Registration
Statement under the caption "The Mergers -- Certain Federal Income Tax
Consequences," except as otherwise indicated, expresses our opinion as to the
material federal income tax consequences of the Edisto Merger and the Convest
Merger applicable to Forcenergy, Edisto, Convest and the holders of Edisto
Common Stock and Convest Common Stock.
This opinion is not binding on the Service or a court and, therefore,
there can be no assurance that the Service will not change the conclusions
herein or that a court will not sustain such challenge.
Except as expressly set forth above, we express no other opinion. We
disclaim any undertaking to advise you of any subsequent changes of the facts
stated or assumed herein or any subsequent changes in applicable law. This
opinion is for your benefit and is not to be used, circulated quoted or
otherwise referred to for any purpose, except that we consent to the filing of
this opinion as an Exhibit to the Joint Proxy Statement/Prospectus and to the
reference to this opinion under the caption "The Mergers -- Certain Federal
Income Tax Consequences" and elsewhere in the Joint Proxy Statement/Prospectus
and the Registration Statement. In giving such consent, we do not thereby admit
that we are in the category of persons whose consent is required under Section
7 of the Securities Act.
Very truly yours,
<PAGE> 1
EXHIBIT 12.1
FORCENERGY INC
COMPUTATION OF RATIOS
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, March 31,
-------------------------------------------------------------------------
1992 1993 1994 1995 1996 1996 1997
---------- --------- ---------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges:
Net income before income taxes . . $ 4,394 $ 3,199 $ (6,478)$ (2,928)$ 17,989 $ 5,868 $ 24,040
Fixed Charges(1) . . . . . . . . . 2,303 6,192 9,529 11,668 13,367 5,913 14,760
---------- --------- ---------- ---------- --------- ---------- ---------
Earnings . . . . . . . . . . $ 6,697 $ 9,391 $ 3,051 $ 8,740 $ 31,356 $ 11,781 $ 38,800
========== ========= ========== ========== ========= ========== =========
Fixed Charges(2) . . . . . . $ 2,303 $ 6,549 $ 11,058 $ 14,234 $ 15,594 $ 6,970 $ 16,746
========== ========= ========== ========== ========= ========== =========
Ratio of Earnings to Fixed Charges(3) 2.9x 1.4x -- -- 2.0x 1.7x 2.3x
========== ========= ========== ========== ========= ========== =========
</TABLE>
- -------------------
(1) Includes interest expense exclusive of amounts capitalized.
(2) Includes interest expense prior to capitalization.
(3) Earnings were not adequate to cover fixed charges in the years ended
December 31, 1994 and 1995 by $8.0 million and $5.5 million, respectively.
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the Incorporation by reference in this registration statement on
Form S-4 of our report dated February 17, 1997, on our audits of the
consolidated financial statements of Forcenergy Inc as of December 31, 1996 and
1995 and for the years then ended, which report is included in the annual
report on Form 10-K filed with the Securities and Exchange Commission pursuant
to the Securities Exchange Act of 1934. We consent to the incorporation by
reference in this registration statement on Form S-4 of our report dated August
30, 1996, on our audit of the historical statement of revenues and direct
operating expenses of the properties acquired by Forcenergy Inc from Amerada
Hess Corporation for the year ended December 31, 1995, which report is included
in the Form 8-K/A filed with the Securities and Exchange Commission pursuant to
the Securities Exchange Act of 1934. We consent to the Incorporation by
reference in this registration statement on Form S-4 of our report dated March
13, 1997, on our audits of the historical statements of revenues and direct
operating expenses of the properties acquired by Forcenergy Inc from Marathon
Oil Company for the years ended December 31, 1996 and 1995, which report is
included in the Form 8-K/A filed with the Securities and Exchange Commission
pursuant to the Securities Exchange Act of 1934. We also consent to the
reference to our firm under the captions "Experts" and "Selected Financial
Data".
Coopers & Lybrand L.L.P.
Miami, Florida
August 29, 1997
<PAGE> 1
EXHIBIT 23.3A
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
included in or made a part of this registration statement and to the
incorporation by reference in this registration statement of our report dated
March 20, 1997 included in Edisto Resources Corporation's Form 10-K for the
year ended December 31, 1996 and to all references to our Firm included in this
registration statement.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Houston, Texas
August 29, 1997
<PAGE> 1
EXHIBIT 23.3B
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
included in or made a part of this registration statement and to the
incorporation by reference in this registration statement of our report dated
March 20, 1997 included in Convest Energy Corporation's Form 10-K for the year
ended December 31, 1996 and to all references to our Firm included in this
registration statement.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Houston, Texas
August 29, 1997
<PAGE> 1
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
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 Forcenergy Inc of our report dated June 1, 1995, except as to the common
stock reclassification and conversion described in Note 1 which is as of July
6, 1995, appearing on page F-3 of Forcenergy Inc's Annual Report on Form 10-K
for the year ended December 31, 1996. We also consent to the reference to us
under the headings "Experts" and "Selected Financial Data" in such Prospectus.
However, it should be noted that Price Waterhouse LLP has not prepared or
certified such "Selected Financial Data."
Price Waterhouse LLP
Houston, Texas
August 29, 1997
<PAGE> 1
EXHIBIT 23.5
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS AND GEOLOGISTS
We hereby consent to the use of our report dated February 25, 1997 and of
the estimates of net proved oil and natural gas reserves of Convest Energy
Corporation, and its wholly-owned subsidiary Edisto Exploration & Production
Company, and their present values, as of January 1, 1997 and 1996, respectively,
in this Form S-4 Registration Statement (Registration No. 333-31675 and the
prospectus incorporated therein, and all references to our firm therein.
NETHERLAND, SEWELL & ASSOCIATES, INC.
By: /s/ CLARENCE M. NETHERLAND
-------------------------------------
Clarence M. Netherland
Chairman
Dallas, Texas
August 29, 1997
<PAGE> 1
EXHIBIT 23.6
August 29 , 1997
To the Board of Directors of Forcenergy Inc:
We hereby consent to the use of our reports dated February 7, 1997,
February 9, 1996 and May 26, 1995, and our estimates of the net proved natural
gas and oil reserves of Forcenergy Inc (the "Company"), as of January 1, 1997,
1996 and 1995, and to all references to our estimates of the net proved natural
gas and oil reserves of the Company as of those dates, and to the references to
our firm under the heading "Experts" in the prospectus.
COLLARINI ENGINEERING INC.
Cheryl R. Collarini, P.E.
President
<PAGE> 1
EXHIBIT 23.7
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
As independent petroleum engineers, we hereby consent to the use of our
reports dated February 24, 1994 and May 24, 1995 and our estimates of net proved
oil and natural gas reserves of Forcenergy Inc. as of January 1, 1994 and 1995
and to all references to our firm included in this Registration Statement.
Joe C. Neal & Associates
Midland, Texas
August 29, 1997
<PAGE> 1
EXHIBIT 23.8
CONSENT OF RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
We hereby consent to the use of our report dated February 24, 1997 and of
the estimates of net proved oil and material gas reserves of Convest Energy
Corporation, and its wholly-owned subsidiary Edisto Exploration & Production
Company, and their present values, as of December 31, 1996, 1995 and 1994,
respectively, in this Form S-4 Registration Statement and the prospectus
incorporated therein, and all references to our firm therein.
Ryder Scott Company Petroleum Engineers
By: /s/ RYDER SCOTT COMPANY PETROLEUM ENGINEERS
--------------------------------------------
Houston, Texas
August 29, 1997
<PAGE> 1
EXHIBIT 23.9
CONSENT OF NETHERLAND, SEWELL & ASSOCIATES, INC.
To the Board of Directors of Forcenergy Inc:
We hereby consent to the use of our reports dated March 3, 1997 and March
1, 1996, of the estimates of net proved oil and natural gas reserves of
Forcenergy Inc, and their present values, as of January 1, 1997 and 1996, and
the inclusion of our audit report dated May 25, 1995, of the estimates of the
net proved oil and natural gas reserves of Forcenergy Inc and their present
values, as of January 1, 1995, in this Form S-4 Registration Statement and the
prospectus incorporated therein, and all references to our firm therein.
NETHERLAND, SEWELL & ASSOCIATES, INC.
By: /s/ DANNY D. SIMMONS
-----------------------------------
Danny D. Simmons
Senior Vice President
Houston, Texas
August 29, 1997
<PAGE> 1
Form of Proxy Card
EDISTO RESOURCES CORPORATION
PROXY SOLICITED BY THE BOARD OF DIRECTORS
FOR SPECIAL MEETING OF STOCKHOLDERS ON OCTOBER ___, 1997
The undersigned, hereby revoking all prior proxies, hereby appoints
Michael Y. McGovern and Steven G. Ives, and each of them, his true and lawful
agents and proxies, with full power of substitution, to represent and vote, as
designated below, all shares of Common Stock of EDISTO RESOURCES CORPORATION
owned by the undersigned at the Special Meeting of Stockholders of EDISTO
RESOURCES CORPORATION to be held on October __, 1997, and at any adjournment
thereof, on all matters coming before said meeting, hereby revoking all
previous proxies. Either of the proxies or their respective substitutes, who
shall be present and acting, shall have and may exercise all the powers hereby
granted.
1. PROPOSAL TO APPROVE THE AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
dated as of July 15, 1997 among Edisto Resources Corporation, Convest Energy
Corporation, Forcenergy Inc and a Forcenergy subidiary.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
The Board of Directors recommends a vote FOR this proposal
UNLESS OTHERWISE SPECIFIED, THIS PROXY WILL BE VOTED FOR THE LISTED PROPOSAL.
2. In their discretion, the Proxies are authorized to vote upon any other
business as may properly come before the meeting or any adjournment thereof.
Dated _______________________________, 1997
_____________________________________
Signature
_____________________________________
Print Name
<TABLE>
<S> <C>
PLEASE MARK, SIGN, DATE AND RETURN THE (Please sign exactly as your name appears at left. For
PROXY CARD PROMPTLY BY USING THE joint accounts, each joint owner should sign.
ENCLOSED ENVELOPE. Executors, administrators, trustees, etc. should also so
indicate when signing).
</TABLE>
<PAGE> 1
Form of Proxy Card
CONVEST ENERGY CORPORATION
PROXY SOLICITED BY THE BOARD OF DIRECTORS
FOR SPECIAL MEETING OF STOCKHOLDERS ON OCTOBER ___, 1997
The undersigned, hereby revoking all prior proxies, hereby appoints
Michael Y. McGovern and Steven G. Ives, and each of them, his true and lawful
agents and proxies, with full power of substitution, to represent and vote, as
designated below, all shares of Common Stock of CONVEST ENERGY CORPORATION
owned by the undersigned at the Special Meeting of Stockholders of CONVEST
ENERGY CORPORATION to be held on October __, 1997, and at any adjournment
thereof, on all matters coming before said meeting, hereby revoking all
previous proxies. Either of the proxies or their respective substitutes, who
shall be present and acting, shall have and may exercise all the powers hereby
granted.
1. PROPOSAL TO APPROVE THE AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
dated as of July 15, 1997 among Edisto Resources Corporation, Convest Energy
Corporation, Forcenergy Inc and a Forcenergy subidiary.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
The Board of Directors recommends a vote FOR this proposal
UNLESS OTHERWISE SPECIFIED, THIS PROXY WILL BE VOTED FOR THE LISTED PROPOSAL.
2. In their discretion, the Proxies are authorized to vote upon any other
business as may properly come before the meeting or any adjournment thereof.
Dated ______________________________, 1997
__________________________________________
Signature
__________________________________________
Print Name
<TABLE>
<S> <C>
PLEASE MARK, SIGN, DATE AND RETURN THE (Please sign exactly as your name appears at left. For
PROXY CARD PROMPTLY BY USING THE joint accounts, each joint owner should sign.
ENCLOSED ENVELOPE. Executors, administrators, trustees, etc. should also so
indicate when signing).
</TABLE>
<PAGE> 1
EXHIBIT 99.3
CONSENT
OF
RAUSCHER PIERCE REFSNES, INC.
We hereby consent to the (i) inclusion of our opinion letter to the Board
of Directors of Edisto Resources Corporation ("Edisto") as Annex C to the Joint
Proxy Statement/Prospectus of Edisto, Convest Energy Corporation ("Convest")
and Forcenergy Inc ("Forcenergy") relating to the proposed merger transactions
involving Edisto, Convest and Forcenergy, and (ii) references made to our firm
and such opinion in such Joint Proxy Statement/Prospectus under the captions
entitled "SUMMARY -- Opinions of Financial Advisors" and "THE MERGERS --
Opinions of Financial Advisors." In giving such consent, we do not admit that
we come within the category of persons whose consent is required under, and we
do not admit that we are "experts" for purposes of, the Securities Act of 1933,
as amended, and the rules and regulations promulgated thereunder.
/s/ RAUSCHER PIERCE REFSNES, INC.
-----------------------------------
RAUSCHER PIERCE REFSNES, INC.
Houston, Texas
August 29, 1997
<PAGE> 1
EXHIBIT 99.4
CONSENT
OF
PETRIE PARKMAN
The undersigned hereby consents to the use of its opinion letter to the
Board of Directors of Convest Energy Corporation in the Joint Proxy
Statement/Prospectus forming a part of this Registration Statement on Form S-4
and to the references to such opinion in this Registration Statement on Form
S-4. In giving such consent, we do not admit that we come within the category
of persons whose consent is required under Section 7 of the Securities Act of
1933, as amended, or the rules and regulations of the Securities and Exchange
Commission thereunder, nor do we hereby admit that we are experts with respect
to any part of the Registration Statement within the meaning of the term
"expert" as used in the Securities Act of 1933, as amended, or the rules and
regulations of the Securities and Exchange Commission promulgated thereunder.
/s/ PETRIE PARKMAN & CO.
-----------------------------
PETRIE PARKMAN & CO.
August 29, 1997
